<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Period Ended September 30, 1997
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. Employer
incorporation or organization) Identification No.)
1601 Belvedere Road, West Palm Beach, FL 33406
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (561) 689-9970
--------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of November 10, 1997
----- -----------------------------------
Common 20,945,995
1
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SERVICO, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Income for the Three and Nine Months Ended
September 30, 1997 and 1996 4
Condensed Consolidated Statements of
Stockholders' Equity for the Nine Months
Ended September 30, 1997 and for the Year
Ended December 31, 1996 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,142 $ 19,473
Accounts receivable, net of allowances 10,851 7,742
Other current assets 13,701 10,765
-------- --------
Total current assets 62,694 37,980
Property and equipment, net 432,517 364,922
Other assets, net 25,837 36,884
-------- --------
$521,048 $439,786
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,202 $ 6,369
Accrued liabilities 26,629 23,100
Current portion of long-term obligations 5,928 22,719
-------- --------
Total current liabilities 39,759 52,188
Long-term obligations, less current portion 222,096 284,880
Deferred income taxes 9,048 8,353
Commitments and contingencies
Minority interests 13,742 19,627
Stockholders' equity:
Common Stock, $.01 par value--25,000,000
shares authorized; 20,911,677 shares and
9,369,605 shares issued and outstanding 209 94
Additional paid-in capital 211,029 55,136
Retained earnings 25,165 19,508
-------- --------
Total stockholders' equity 236,403 74,738
-------- --------
$521,048 $439,786
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE> 4
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 46,193 $ 42,052 $ 134,186 $ 118,350
Food and beverage 18,279 15,968 55,955 48,705
Other 4,119 3,483 12,273 10,347
--------- --------- --------- ---------
68,591 61,503 202,414 177,402
--------- --------- --------- ---------
Operating expenses:
Direct:
Rooms 12,593 11,946 35,981 32,347
Food and beverage 14,165 13,069 42,948 38,062
General and administrative 2,306 2,116 6,598 6,992
Depreciation and amortization 5,764 4,917 16,663 13,397
Other 21,428 19,271 64,282 56,909
--------- --------- --------- ---------
56,256 51,319 166,472 147,707
--------- --------- --------- ---------
Income from operations 12,335 10,184 35,942 29,695
Other income (expenses):
Other income, net 534 500 1,206 1,263
Gain on litigation settlement -- -- -- 3,615
Interest expense (4,360) (8,247) (20,562) (21,402)
Minority interests (252) (162) (908) (1,753)
--------- --------- --------- ---------
Income before income taxes
and extraordinary item 8,257 2,275 15,678 11,418
Provision for income taxes 3,302 909 6,270 4,566
--------- --------- --------- ---------
Income before extraordinary item 4,955 1,366 9,408 6,852
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $2,500
in 1997 and $134 in 1996 -- -- (3,751) (202)
--------- --------- --------- ---------
Net income $ 4,955 $ 1,366 $ 5,657 $ 6,650
========= ========= ========= =========
Earnings per common and common equivalent share:
Income before extraordinary item $ .23 $ .14 $ .69 $ .70
Extraordinary item -- -- (.27) (.02)
--------- --------- --------- ---------
Net income $ .23 $ .14 $ .42 $ .68
========= ========= ========= =========
Weighted average shares outstanding 21,137 9,847 13,702 9,728
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE> 5
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 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
401(k) Plan contribution 43,172 -- 167 -- 167
Exercise of stock options 30,100 -- 179 -- 179
Issuance of common stock 11,500,000 115 156,085 -- 156,200
Purchase of common stock (31,200) -- (538) -- (538)
Net income -- -- -- 5,657 5,657
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 20,911,677 $ 209 $ 211,029 $ 25,165 $ 236,403
=========== =========== =========== =========== ===========
</TABLE>
The data for the nine months ended September 30, 1997 is unaudited.
SEE ACCOMPANYING NOTES.
5
<PAGE> 6
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32,407 $ 21,494
INVESTING ACTIVITIES:
Capital expenditures, net (59,797) (18,514)
Acquisitions of property and equipment (23,857) (64,407)
Net deposits for capital expenditures (669) (8,338)
Payments on notes receivable from related parties 470 320
Decrease in investment in unconsolidated entities 17 2,172
Net proceeds from litigation settlement -- 3,868
Notes receivable issued to related parties -- (1,670)
Other -- 560
--------- ---------
Net cash used in investing activities (83,836) (86,009)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term obligations (158,121) (89,437)
(Distributions to) contributions from minority interests (6,792) 5,228
Payments of deferred loan costs (1,839) (5,865)
Net proceeds from issuance of common stock 155,841 2,838
Proceeds from issuance of long-term obligations 81,009 160,707
--------- ---------
Net cash provided by financing activities 70,098 73,471
--------- ---------
Net increase in cash and cash equivalents 18,669 8,956
Cash and cash equivalents at beginning of period 19,473 11,401
--------- ---------
Cash and cash equivalents at end of period $ 38,142 $ 20,357
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 17,739 $ 16,839
========= =========
Income taxes paid, net of refunds $ (513) $ 2,762
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE> 7
SERVICO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The financial statements consolidate the accounts of Servico, Inc. ("Servico"),
its wholly-owned subsidiaries (owning 49 hotels) and partnerships (owning 9
hotels) in which Servico exercises control over the partnerships' assets and
operations (collectively, the "Company"). An unconsolidated entity (owning 1
hotel) in which the Company exercises significant influence over operating and
financial policies is accounted for using the equity method. The accounts of two
hotels which the Company manages for third party owners are not included in the
consolidation. However, management fee income received from these hotels is
included in other revenues. All significant intercompany accounts and
transactions have been eliminated.
The accounting policies followed for quarterly financial reporting are the same
as those disclosed in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting primarily of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of September 30, 1997, and the results of its operations and its cash
flows for the three and nine months then ended. While management believes that
the disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
The accompanying condensed consolidated balance sheet at September 30, 1997 and
the condensed consolidated statement of stockholders' equity for the nine month
period ended September 30, 1997, the condensed consolidated statements of income
for the three and nine months ended September 30, 1997 and 1996 and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 1997 and 1996 have been reviewed in accordance with standards
established by the American Institute of Certified Public Accountants, by Ernst
& Young LLP, Independent Certified Public Accountants, whose review report, with
respect thereto, is filed as Exhibit 15.1 in Item 6. (a) of this Form 10-Q.
Certain amounts in the prior period condensed consolidated financial statements
have been reclassified to conform to the current period presentation.
7
<PAGE> 8
2. DEFERRED COSTS
Deferred franchise, financing and other deferred costs are stated at cost, net
of accumulated amortization of $2.1 million and $4.1 million at September 30,
1997 and December 31, 1996, 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.
3. LONG-TERM OBLIGATIONS
During the nine months ended September 30, 1997, the Company repaid, prior to
maturity, approximately $128 million of long-term debt on 21 hotels. The
repayment of the debt was funded with the proceeds from the sale of common stock
as more fully discussed in Note 5 below. In addition, the Company generated
approximately $34.4 million of proceeds from the refinancing of 14 of its hotels
and issued approximately $20.3 million in new debt relating to the acquisition
of two hotels. As a result of the refinancings and repayment of debt, the
Company has no long-term debt maturing during the next 12 months.
4. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings arising in the ordinary course of
its business, the impact of which would not, either individually or in the
aggregate, in management's opinion, based upon facts currently known by it and
discussions with counsel, have a material adverse effect on the Company's
financial condition or results of operations.
5. ISSUANCE OF COMMON STOCK
In June 1997 Servico completed an offering of 10 million shares of common stock
at $14.50 per share. An additional 1.5 million shares were issued in July 1997
upon exercise by the underwriters of the over-allotment option. The sale of
these shares generated net proceeds to Servico of $156 million which were used
to repay $128 million of debt, to purchase the minority interests in three
majority owned hotels for $11.3 million and as additional working capital.
6. EXTRAORDINARY ITEM
As a result of the early extinguishment of debt as discussed in Note 3 above,
the Company wrote off approximately $6.2 million in unamortized deferred loan
costs. This transaction was recorded as an extraordinary loss of $3.8 million,
net of a benefit for income taxes of approximately $2.5 million.
8
<PAGE> 9
7. 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. Primary and fully diluted shares were the same for
both periods.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". SFAS
128 requires companies with complex capital structures that have publicly-held
common stock or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS currently required by
Accounting Principles Board Opinion No. 15 ("APB No. 15"), "Earnings Per Share".
Basic EPS is calculated as income available to common stockholders divided by
the weighted average number of common shares outstanding during the period.
Diluted EPS (previously referred to as fully diluted EPS) is calculated using
the "if converted" method for convertible securities and the treasury stock
method for options and warrants as prescribed by APB No. 15. This statement is
effective for financial statements issued for interim and annual periods ending
after December 15, 1997. The Company does not believe the adoption of SFAS 128
in fiscal 1997 will have a significant impact on the Company's reported EPS.
8. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company, in a series of transactions,
purchased four hotels for an aggregate consideration of approximately $33
million. Additionally, on November 7, 1997, the Company entered into an
agreement to purchase a 99% interest in a partnership which owns 15 hotels for
approximately $8 million in cash and assumption of approximately $63 million of
debt. This transaction is subject to the approval of the limited partners of the
parent partnership at a meeting anticipated to be held in the first quarter of
1998. However, there is no assurance that this acquisition will be consummated.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
In evaluating hotel performance and hotel property values, the Company considers
many performance measures including earnings before interest, taxes,
depreciation and amortization ("EBITDA"), occupancy levels, average daily rate
and revenue per available room ("RevPAR"). In addition to revenues generated by
its guest rooms, food and beverage revenues at the Company's full service
hotels, although not reflected in RevPAR, contribute significantly to the
Company's EBITDA. These performance measures are impacted by a variety of
factors including national, regional and local economic conditions, the degree
of competition with other hotels in the area, the level of renovation activity
and, in the case of occupancy levels, changes in travel patterns. The demand for
accommodations is also affected by normally recurring seasonal patterns and most
Company hotels experience lower occupancy levels in the fall and winter
(September through February) which may result in lower revenues, EBITDA, net
income and less cash flow during these months.
The Company's growth strategy includes the acquisition of under-performing
hotels and the implementation of the Company's operational initiatives as well
as repositioning and renovation programs to achieve revenue and margin
improvements. Such initiatives typically require between 12 and 36 months before
newly acquired hotels are repositioned and stabilized. During this period, the
revenues and earnings of newly acquired hotels may be adversely affected and may
negatively impact consolidated EBITDA, RevPAR, average daily rate, and occupancy
rate performance as well as consolidated earnings. The Company purchased 26
hotels during the period from January 1995 through September 30, 1997 and,
accordingly, the impact of such activities is material. Properties are referred
to herein as either "Reposition Hotels" or "Stabilized Hotels" depending on
their status. In order to better illustrate underlying trends of the Company's
hotels, the Company tracks the performance of both Stabilized and Reposition
Hotels. The Stabilized Hotels include the hotels which were acquired by the
Company through 1994 and certain hotels acquired since January 1, 1995 which,
based on management's determination, have achieved normalized operations.
Reposition Hotels include the hotels acquired in 1995, 1996 and 1997 which are
still the subject of management's continuing post-acquisition repositioning and
renovating initiatives.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 QUARTER") AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 QUARTER")
During the 1997 Quarter, the Company owned 58 hotels, managed 2 hotels for third
party owners and had a minority investment in 1 hotel, compared with 55 hotels
owned, 5 managed and 1 minority investment during the 1996 Quarter. The Company
generated EBITDA of $18.2 million ($4.1 million from food and beverage
operations) for the 1997 Quarter, a 19.7% increase over the $15.2 million ($2.9
million from food and beverage operations) for the 1996 Quarter. Occupancy and
average daily
10
<PAGE> 11
rate for owned hotels for the 1997 Quarter were 71.8% and $70.47, respectively,
compared with 69.4% and $67.71, respectively, for the 1996 Quarter.
Revenues for the 1997 Quarter were $68.6 million, an 11.5% increase over
revenues of $61.5 million for the 1996 Quarter. Of this $7.1 million increase in
revenues, approximately $3.3 million was attributable to the Reposition Hotels,
of which approximately $2.7 million was attributable to the hotels acquired
subsequent to September 30, 1996.
Direct operating expenses for the Company were $26.8 million for the 1997
Quarter and $25 million for the 1996 Quarter. Of this $1.8 million increase,
approximately $1.4 million was attributable to the Reposition Hotels, of which
approximately $1.3 million related to the hotels acquired subsequent to
September 30, 1996. Other operating expenses before depreciation and
amortization were $23.7 million for the 1997 Quarter compared to $21.4 million
for the 1996 Quarter. Of this $2.3 million increase approximately $1.2 million
related to the hotels acquired subsequent to September 30, 1996. Depreciation
and amortization expense for the Company was $5.8 million for the 1997 Quarter
and $4.9 million for the 1996 Quarter. Included in this $.9 million increase is
$.4 million associated with the improvements made at the Stabilized Hotels with
the balance primarily associated with the hotels acquired subsequent to
September 30, 1996.
As a result of the above, income from operations was $12.3 million for the 1997
Quarter as compared to $10.2 million for the 1996 Quarter.
Interest expense, net of interest income, was $3.8 million for the 1997 Quarter,
a $3.9 million decrease from the $7.7 million for the 1996 Quarter. This $3.9
million decrease was primarily the result of the decrease in debt which was
repaid with the proceeds of the common stock offering as more fully discussed in
Liquidity and Capital Resources, below.
After a provision for income taxes of $3.3 million for the 1997 Quarter and $.9
million for the 1996 Quarter, the Company had net income of $5 million ($.23 per
share) for the 1997 Quarter and $1.4 million ($.14 per share) for the 1996
Quarter.
Thirty-two of the Company's hotels acquired through 1994, seven hotels acquired
in 1995 and six hotels acquired in 1996, having achieved normalized operations,
comprised the Stablized Hotels in the 1997 Quarter. RevPAR for the Stablized
Hotels increased 8.1% on a 6.7% increase in revenues during the 1997 Quarter.
Three of the hotels acquired in 1995, eight of the hotels acquired in 1996 and
two hotels acquired in 1997 were in various stages of repositioning and
renovation during the 1997 Quarter and comprised the Reposition Hotels in the
1997 Quarter. As a result of the ongoing renovations at the Reposition Hotels,
occupancy and average daily rate were substantially below the Stablized Hotels.
Consistent with its strategy, the Company is in the process of implementing new
marketing strategies and operational improvements at the Reposition Hotels. In
addition, the Company is currently negotiating to obtain certain new franchise
affiliations for selected Reposition Hotels and expects to complete significant
renovations at the Reposition Hotels during the next 12 to 36 months.
11
<PAGE> 12
The following table summarizes certain operating data for the Company's hotels
for the three months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
---------------------------------------------------------------- ------------------
Average
Number of Daily
Hotels Occupancy Rate RevPAR RevPAR
---------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Pre 1995 Hotels 32 72.8% $ 73.70 $ 53.65 $ 49.77
1995 Acquisitions:
Stabilized 7 74.4% $ 67.12 $ 49.94 $ 47.12
Reposition 3 66.4% $ 55.60 $ 36.92 $ 39.18
1996 Acquisitions:
Stabilized 6 70.7% $ 69.50 $ 49.14 $ 43.81
Reposition 8 67.0% $ 60.77 $ 40.72 *
1997 Acquisitions:
Reposition 2 71.1% $ 68.56 $ 48.75 *
Total Stabilized 45 72.7% $ 72.26 $ 52.53 $ 48.60
Total Reposition 13 67.7% $ 61.15 $ 41.40 $ 36.60
--
Total Company 58 71.8% $ 70.47 $ 50.60 $ 46.99
==
</TABLE>
*Hotels not comparable in prior year
NINE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD") AS COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 (THE "1996 PERIOD")
During the 1997 Period, the Company owned 58 hotels, managed 4 hotels for third
party owners and had a minority investment in 1 hotel, compared with 55 hotels
owned, 9 managed and 1 minority investment during the 1996 Period. The Company
generated EBITDA of $52.9 million ($13 million from food and beverage
operations) for the 1997 Period, a 19.7% increase over the $44.2 million ($10.6
million from food and beverage operations) for the 1996 Period. Occupancy and
average daily rate for owned hotels for the 1997 Period was 68.3% and $72.26,
compared with 69.2% and $69.75 for the 1996 Period.
Revenues for the 1997 Period were $202.4 million, a 14.1% increase over revenues
of $177.4 million for the 1996 Period. Of this $25 million increase in revenues,
approximately $17.7 million was attributable to the Reposition Hotels, of which
approximately $5.5 million was attributable to the hotels acquired subsequent to
September 30, 1996.
Direct operating expenses for the Company were $78.9 million for the 1997 Period
and $70.4 million for the 1996 Period. This $8.5 million increase was
attributable to the Reposition Hotels, of which $2.4 million related to hotels
acquired subsequent to September 30, 1996. Other operating expenses before
depreciation and amortization were $70.9 million for the 1997 Period compared to
$63.9 million for the 1996 Period. This $7 million increase was primarily
attributable to the Reposition Hotels, of which approximately $2.3 million
related to the hotels acquired subsequent to September 30, 1996. Depreciation
and amortization expense for the Company was $16.7 million for the 1997 Period
and $13.4 million for the 1996 Period. Of this $3.3 million increase
approximately $2 million was associated with the Reposition Hotels, of which
approximately $.4 million was attributable to the hotels acquired subsequent to
September 30, 1996.
12
<PAGE> 13
As a result of the above, income from operations was $35.9 million for the 1997
Period as compared to $29.7 million for the 1996 Period.
Interest expense, net of interest income, was $19.4 million for the 1997 Period,
a $.7 million decrease from the $20.1 million for the 1996 Period. This decrease
was primarily the result of the decrease in debt which was repaid with the
proceeds of the common stock offering, as more fully discussed in Liquidity and
Capital Resources below, offset in part by $.8 million of interest related to
the hotels acquired after September 30, 1996.
During the 1997 Period, the Company repaid, prior to maturity, approximately
$128 million in debt and, as a result, recorded as an extraordinary item a loss
on early extinguishment of debt of approximately $3.8 million (net of income tax
benefit of $2.5 million) relating to the write-off of unamortized loan costs
associated with the debt.
Included in income for the 1996 Period was a non-recurring $3.6 million net gain
on a settlement of a law suit received by the Company in March 1996, offset in
part by an expense of $.8 million related to a severance agreement with the
Company's former chief executive officer.
After a provision for income taxes of $6.3 million for the 1997 Period and $4.6
million for the 1996 Period, the Company had income before extraordinary item of
$9.4 million ($.69 per share) for the 1997 Period and $6.9 million ($.70 per
share) for the 1996 Period. Without consideration of the non-recurring items in
1996 discussed above, the Company had recurring net income of $9.4 million ($.69
per share) for the 1997 Period and $5.2 million ($.53 per share) for the 1996
Period.
Thirty-two of the Company's hotels acquired through 1994, seven hotels acquired
in 1995 and six hotels acquired in 1996, having achieved normalized operations,
comprised the Stablized Hotels in the 1997 Period. RevPAR for the Stablized
Hotels increased 6.2% on a 4.8% increase in revenues during the 1997 Period.
Three of the hotels acquired in 1995, eight of the hotels acquired in 1996 and
two hotels acquired in 1997 were in various stages of repositioning and
renovation during the 1997 Period and comprised the Reposition Hotels in the
1997 Period. As a result of the ongoing renovations at the Reposition Hotels,
occupancy and average daily rate are substantially below the Stablized Hotels.
Consistent with its strategy, the Company is in the process of implementing new
marketing strategies and operational improvements at the Reposition Hotels. In
addition, the Company is currently negotiating to obtain certain new franchise
affiliations for selected Reposition Hotels and expects to complete significant
renovations at the Reposition Hotels during the next 12 to 36 months.
13
<PAGE> 14
The following table summarizes certain operating data for the Company's hotels
for the nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
---------------------------------------------------------------- ------------------
Average
Number of Daily
Hotels Occupancy Rate RevPAR RevPAR
---------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Pre 1995 Hotels 32 70.6% $ 74.82 $ 52.82 $ 50.02
1995 Acquisitions:
Stabilized 7 74.2% $ 69.16 $ 51.32 $ 48.18
Reposition 3 69.8% $ 66.71 $ 46.56 $ 47.74
1996 Acquisitions:
Stabilized 6 68.0% $ 72.59 $ 49.36 $ 43.72
Reposition 8 55.6% $ 64.91 $ 36.09 *
1997 Acquisitions:
Reposition 2 70.1% $ 68.21 $ 47.82 *
Total Stabilized 45 70.7% $ 74.07 $ 52.37 $ 49.30
Total Reposition 13 61.2% $ 65.83 $ 40.29 $ 42.39
--
Total Company 58 68.3% $ 72.26 $ 49.35 $ 48.27
==
</TABLE>
*Hotels not comparable in prior year
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are existing cash balances and cash
flow from operations. The Company had earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the 1997 Period of $52.9 million, a
19.7% increase over the $44.2 million for the 1996 Period. 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 the 1997 Period was $32.4 million as compared to $21.5 million
for the 1996 Period.
At September 30, 1997, the Company had working capital of $22.9 million as
compared to a working capital deficit of $14.2 million at December 31, 1996.
Included in the working capital deficit for 1996 was $15.3 million of mortgage
notes payable which were due to mature within twelve months. The Company
refinanced these mortgage notes before their due dates. The Company's ratio of
current assets to current liabilities was 1.6:1 at September 30, 1997 and .7:1
at December 31, 1996 (1:1 at December 1996 without consideration of the
mortgages due to mature in 1997).
At September 30, 1997, the Company's long-term obligations were $222.1 million
compared with $284.9 million at December 31, 1996.
In June 1997 Servico completed a secondary offering of 10 million shares of
common stock at $14.50 per share. An additional 1.5 million shares were issued
in July 1997 upon exercise by the underwriter of the over-allotment option.
These stock sales resulted in net proceeds to Servico of $156 million which were
used to repay $128 million of debt, to purchase the minority interests in three
majority owned hotels for $11.3 million and as additional working capital.
14
<PAGE> 15
Certain of the Company's hotels are operated under license agreements that
require the Company to make capital improvements in accordance with a specified
time schedule. Additionally, in connection with the refinancing and acquisition
of hotels, the Company has agreed to make certain capital improvements and, as
of September 30, 1997, has approximately $12 million escrowed for such
improvements. The Company estimates its remaining obligations for all of such
commitments to be approximately $12.2 million, of which approximately $7.5
million is expected to be spent during the remainder of 1997, and the balance is
expected to be spent during the 1998-1999 time period.
The Company may require additional financing to continue its growth strategy.
There is no assurance that such financing will be available in amounts required
or on terms satisfactory to the Company and the Company does not currently have
any lines of credit. The Company's financial position may, in the future, be
strengthened through an increase in revenues, the refinancing of its properties
or capital from equity or debt markets. There is no assurance the Company will
be successful in these efforts.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q 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 acquisition, renovation and
operation 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 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-Q
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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re: computation of per share earnings.
15.1 Independent Accountants' Review Report.
15.2 Letter from independent certified public accountants relating to
unaudited interim financial information.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Quarter ended September
30, 1997.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICO, INC.
Registrant
DATE: November 12, 1997 /s/ David Buddemeyer
---------------------------
David Buddemeyer
President and
Chief Executive Officer
DATE: November 12, 1997 /s/ Warren M. Knight
---------------------------
Warren M. Knight
Vice President-Finance and
Chief Financial Officer
17
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average common
shares outstanding 20,673 9,355 13,239 9,264
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 452 466 463 453
-------- -------- -------- --------
Total 21,125 9,821 13,702 9,717
======== ======== ======== ========
Income before extraordinary item $ 4,955 $ 1,366 $ 9,408 $ 6,852
Extraordinary item:
Loss on early extinguishment of
debt, net of income tax benefit -- -- (3,751) (202)
-------- -------- -------- --------
Net income $ 4,955 $ 1,366 $ 5,657 $ 6,650
======== ======== ======== ========
Per share amount:
Income before extraordinary item $ .23 $ .14 $ .69 $ .70
Extraordinary item -- -- (.27) (.02)
-------- -------- -------- --------
Net income $ .23 $ .14 $ .42 $ .68
======== ======== ======== ========
FULLY DILUTED
Weighted average common shares
outstanding 20,673 9,355 13,239 9,264
Net effect of dilutive stock options -
based on the treasury stock method
using the period-end market price,
if higher than average market price 464 492 463 464
-------- -------- -------- --------
Total 21,137 9,847 13,702 9,728
======== ======== ======== ========
Income before extraordinary item $ 4,955 $ 1,366 $ 9,408 $ 6,852
Extraordinary item:
Loss on early extinguishment of
debt, net of income tax benefit -- -- (3,751) (202)
-------- -------- -------- --------
Net income $ 4,955 $ 1,366 $ 5,657 $ 6,650
======== ======== ======== ========
Per share amount:
Income before extraordinary item $ .23 $ .14 $ .69 $ .70
Extraordinary item -- -- (.27) (.02)
-------- -------- -------- --------
Net income $ .23 $ .14 $ .42 $ .68
======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15.1
Independent Accountants' Review Report
Board of Directors and
Shareholders
Servico, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Servico, Inc. and subsidiaries as of September 30, 1997, the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1997 and 1996, the condensed consolidated statement of
stockholders' equity for the nine-month period ended September 30, 1997 and the
condensed consolidated statement of cash flows for the nine-month periods ended
September 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Servico, Inc. and subsidiaries as
of December 31, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein) and in our report dated February 13, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1996 and the condensed consolidated statement of
stockholders' equity for the year ended December 31, 1996 is fairly stated, in
all material respects, in relation to the consolidated balance sheet and the
consolidated statement of stockholders' equity from which they have been
derived.
/s/ Ernst & Young LLP
October 28, 1997
<PAGE> 1
EXHIBIT 15.2
October 28, 1997
Board of Directors and Stockholders
Servico, Inc.
We are aware of the incorporation by reference in the Registration Statements
(Form S-4 No. 333-38975, Form S-3 No. 333-27303, Form S-8 No. 33-60088, Form S-8
No. 33-60090, Form S-8 No. 33-81954, Form S-3 No. 33-78566 and Form S-3 No.
33-92658) of Servico, Inc. and subsidiaries for the registration of 2,300,000,
11,500,000, 1,000,000, 150,000, 250,000, 1,620,100 and 800,000 shares,
respectively, of its common stock of our report dated October 28, 1997 relating
to the unaudited condensed consolidated interim financial statements of Servico,
Inc. and subsidiaries which is included in its Form 10-Q for the quarter ended
September 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or Section 11 of the Securities Act of 1933.
Very truly yours,
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING
SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 38,142
<SECURITIES> 0
<RECEIVABLES> 10,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,694
<PP&E> 432,517
<DEPRECIATION> 0
<TOTAL-ASSETS> 521,048
<CURRENT-LIABILITIES> 39,759
<BONDS> 222,096
0
0
<COMMON> 209
<OTHER-SE> 236,194
<TOTAL-LIABILITY-AND-EQUITY> 521,048
<SALES> 0
<TOTAL-REVENUES> 202,414
<CGS> 0
<TOTAL-COSTS> 166,472
<OTHER-EXPENSES> (298)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,562
<INCOME-PRETAX> 15,678
<INCOME-TAX> 6,270
<INCOME-CONTINUING> 9,408
<DISCONTINUED> 0
<EXTRAORDINARY> (3,751)
<CHANGES> 0
<NET-INCOME> 5,657
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
