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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] Amendment to Application or Report Filed Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 [No Fee Required]
FOR THE YEAR ENDED DECEMBER 31, 1997
Commission File Number
0-23444
SERVICO, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0350241
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 BELVEDERE ROAD
WEST PALM BEACH, FLORIDA 33406
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(Address of principal executive offices) (Zip Code)
(561) 689-9970
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(Registrant's telephone number, including area code)
AMENDMENT NO. 1 TO ANNUAL REPORT ON FORM 10-K
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The undersigned Registrant hereby amends its Annual Report on Form 10-K for
the year ended December 31, 1997 to amend Items 6 and 7 to Part II, as set forth
in the pages attached hereto:
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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 1997. 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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Revenues $276,657 $239,526 $178,480 $149,683 $128,998
Income before extraordinary items,
net of taxes 12,570 8,548 3,909 2,781 1,777
Net income 8,819 8,200 3,909 4,217 1,777
EBITDA (a) 69,559 57,915 36,894 26,376 19,697
Earnings per common share (b):
Income before extraordinary items,
net of taxes .83 .92 .45 .36 .25
Net income .58 .88 .45 .54 .25
Earnings per common share- assuming dilution:
Income before extraordinary items,
net of taxes .80 .88 .42 .33 .25
Net income .56 .84 .42 .51 .25
Basic weighted averages shares 15,183 9,295 8,651 7,827 7,061
Diluted weighted average shares 15,640 9,751 9,319 8,335 7,131
Cash dividends per common share -- -- -- -- --
End of period:
Total assets $627,651 $439,786 $324,202 $228,900 $191,270
Long-term obligations 323,320 284,880 210,242 143,830 114,841
Total stockholders' equity 239,535 74,738 62,820 46,740 35,008
</TABLE>
(a) Represents earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA"). EBITDA is a widely regarded industry measure of
lodging performance used in the assessment of hotel property values and
management believes it is a useful indicator of the Company's ability to
meet its debt service requirements. 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
("GAAP"). EBITDA is a non-GAAP measure and, therefore, it is not calculated
identically by all companies. The presentation herein may not be comparable
to other similarly titled measures as other companies. The following table
presents the Company's computations of EBITDA:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 8,819 $ 8,200 $ 3,909 $ 4,217 $ 1,777
Extraordinary items, net of taxes 3,751 348 -- (1,436) --
Income taxes 8,379 3,225 2,605 1,855 1,184
Interest and other income (1,720) (1,723) (1,197) (325) (399)
Interest expense 25,909 29,443 17,903 12,554 11,330
Depreciation 23,023 18,677 12,370 9,465 8,028
Amortization 438 375 139 197 2
Minority interest-other 960 2,060 572 171 (446)
Non-recurring items -- (2,690) 593 (322) (1,779)
-------- -------- -------- -------- --------
EBITDA $ 69,559 $ 57,915 $ 36,894 $ 26,376 $ 19,697
======== ======== ======== ======== ========
</TABLE>
(b) All prior-period earnings per share amounts have been restated to conform
to the Financial Accounting Standards Board Statement No. 128 "Earnings per
Share".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management believes that results of operations in the hotel industry are
best explained by four key performance measures: occupancy levels, average daily
rate, RevPAR and EBITDA margins. These measures are influenced 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 Company's business strategy includes the acquisition of underperforming
hotels and the implementation of the Company's operational initiatives and
repositioning and renovation programs to achieve revenue and margin
improvements. Such initiatives typically require a twelve to thirty-six month
period before newly acquired underperforming hotels are repositioned and
stabilized. During this period, the revenues and earnings of these hotels may be
adversely affected and may negatively impact consolidated RevPAR, average daily
rate, and occupancy rate performance as well as consolidated earnings margins.
During 1996 and 1997, the Company purchased 23 hotels and acquired 100%
ownership in three hotels owned by partnerships in which the Company previously
had majority ownership. The average purchase price of the 23 hotels was $39,905
per room and the Company expects to spend approximately $8,500 per room in
renovations and capital assets for a total cost per room of $48,405. 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's operating results were materially impacted by these acquisition and
renovations activities. Accordingly, in order to better illustrate underlying
trends of the Company's core hotel base, the Company tracks the performance of
both Stabilized Hotels and Reposition Hotels. The Stabilized Hotels currently
include all hotels which were acquired by the Company through 1994 and 17 of the
hotels acquired during 1995 and 1996 which, based on management's determination,
have achieved normalized operations. The Reposition Hotels currently include
seven of the hotels acquired during 1995 and 1996 and the 12 hotels acquired
during 1997 (the "1997 Acquisitions"), all of which are still the subject of
management's post acquisition repositioning and renovation initiatives. Ten of
the hotels acquired during 1997 were acquired during the last quarter;
therefore, the performance measures for the Reposition Hotels are not comparable
to prior periods.
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, 1997 ("1997") AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996 ("1996")
At December 31, 1997, the Company owned 68 hotels, managed two hotels for
third party owners and had a minority investment in one hotel compared with 56
hotels owned, four managed for third party owners and a minority investment in
one hotel at December 31, 1996. Occupancy and average daily rate for owned
hotels for 1997 was 66.7% and $71.91, respectively, compared with 66.0% and
$68.01, respectively, for 1996.
RevPAR for the Stabilized Hotels increased 6.4% during 1997 to $50.71 from
$47.68 during 1996. The occupancy level and average daily rate for the
Stabilized Hotels during 1997 was 69.0% and $73.49 respectively, compared with
67.4% and $70.74 respectively for 1996. The increase in occupancy and average
daily rate for the Stabilized Hotels during 1997 is attributable to successful
yield management and marketing strategies primarily in those hotels that have
recently completed major renovations. RevPAR, occupancy and average daily rate
for the Reposition Hotels during 1997 were $39.52, 59.7% and $66.20
respectively. The Company is currently implementing new marketing strategies and
operational improvements at all of the
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Reposition Hotels and expects to complete significant renovations at many of
these hotels during 1998. In addition, the Company is currently negotiating to
obtain new franchise affiliations at certain of the properties.
Revenues are comprised of room, food and beverage and other revenues. Room
revenues are derived from guest room rentals, while food and beverage revenues
primarily include sales from the Company's hotel restaurants, room service and
hotel catering. Other revenues include charges for guests' long-distance
telephone service, laundry service, use of meeting facilities and fees earned by
the Company for services rendered in conjunction with managed properties.
Revenues for the Company were $276.7 million for 1997, a 15.5% increase over
revenues of $239.5 million for 1996. Of this $37.2 million increase in revenues,
approximately $9.2 million was attributable to the Stabilized Hotels primarily
as a result of the 6.4% increase in RevPAR discussed above. The Reposition
Hotels contributed approximately $28 million to the increase in revenues, of
which approximately $14.6 million related to the Reposition Hotels acquired in
1996 which were not operated for the full year of 1996 but were operated for the
full year of 1997. The 1997 Acquisitions contributed the remaining balance of
approximately $13.4 million.
Operating expenses are comprised of direct, general and administrative,
other hotel operating costs and depreciation and amortization. Direct expenses,
including both rooms and food and beverage operations, reflect expenses directly
related to hotel operations. General and administrative expenses represent
corporate salaries and other corporate operating expenses. Other expenses
include primarily property level expenses related to general operations such as
advertising, utilities, repairs and maintenance and other property
administrative costs. Direct operating expenses for the Company were $110.5
million for 1997 and $96.4 million for 1996. Of the $14.1 million increase,
$13.1 million is directly attributable to the Reposition Hotels with
approximately $5.9 million relating to 1997 Acquisitions. The direct operating
expenses for the Stabilized Hotels were $87.3 million (41.7% of related direct
revenues) for 1997 as compared to $86.2 million (42.9% of related direct
revenues) for 1996. The decrease in operating expenses as a percentage of
revenues was a result of the combined effect of strong revenue growth and
continued emphasis on cost controls. Other operating expenses for the Company
were $88 million for 1997 and $77.2 million for 1996. This increase of $10.8
million represents the expenses incurred by the Reposition Hotels associated
with the generation of the $28 million increase in revenues discussed above.
Depreciation and amortization expense for the Company was $23 million for 1997
and $18.7 million for 1996. Included in this $4.3 million increase was $2.7
million associated with the Reposition Hotels and the remaining increase was
related to equipment purchases and improvements made at the Stabilized Hotels.
As a result of the above, income from operations was $46.1 million for 1997
as compared to $37.9 million for 1996. (Included in 1996 was a non-recurring
charge of $.8 million relating to a severance payment.)
Interest expense, net of interest income, was $24.2 million for 1997, a
$3.6 million decrease from the $27.8 million for 1996. The decrease was offset
in part by a $1.2 million increase relating to the 1997 Acquisitions. The
decrease was primarily a result of a reduction in the level of debt and
effective interest rate in connection with certain debt which was repaid with
the proceeds of the common stock offering as more fully discussed in Liquidity
and Capital Resources.
Included in other income for 1996 was a non-recurring $3.6 million gain on
litigation settlement (net of expenses) in connection with a lawsuit brought on
behalf of the Company against a bank group and law firm based on alleged
breaches of their duties to the Company.
Minority interests in net income of consolidated partnerships were
approximately $1 million for 1997 and $2.1 million for 1996. Of this $1.1
million decrease, $.9 million related to three hotels in which the Company
increased its ownership from 51% to 100% during 1997.
During 1997 the Company repaid, prior to maturity, approximately $128
million in debt, and as a result recorded an extraordinary 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. The Company recognized an extraordinary loss on early
extinguishment of debt of $.3 million, after taxes in 1996 which related to the
refinancing of certain hotels as more fully discussed in Liquidity and Capital
Resources.
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After a provision for income taxes of $8.4 million for 1997 and $3.2
million for 1996, the Company had net income of $8.8 million ($.56 per share)
for 1997 and $8.2 million ($.84 per share) for 1996. Without consideration of
the non-recurring items discussed above, the Company had recurring income of
$12.6 million for 1997 ($.80 per share) and $5.4 million for 1996 ($.55 per
share).
YEAR ENDED DECEMBER 31, 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 was 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.
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 4 of the Notes to Consolidated Financial Statements), with
the balance related to new borrowings.
Minority interests in net income of consolidated partnerships 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.
INCOME TAXES
As of December 31, 1997, the Company had a net operating loss carryforward
of approximately $22.1 million for federal income tax purposes.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are existing cash balances and
cash flow from operations. Net cash provided by operating activities for 1997
was $42 million as compared to $31 million for 1996. The Company had earnings
before interest, taxes, depreciation and amortization ("EBITDA") for 1997 of
$69.6 million, a 20.2% increase over the $57.9 million for 1996. 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.
At December 31, 1997, the Company had working capital of $1.3 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 1:1 at December 31, 1997 and .7:1 at
December 31, 1996 (1:1 at December 1996 without consideration of the mortgages
due to mature in 1997).
At December 31, 1997, the Company's long-term obligations were $323.3
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 $11.8 million and to provide working capital.
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 December 31, 1997, has approximately $29.8 million escrowed for such
improvements. The Company estimates its remaining obligations for all of such
commitments to be approximately $32 million, of which approximately $29 million
is expected to be spent during 1998, and the balance is expected to be spent
during 1999.
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.
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.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of certain computer programs being
written using two digits rather than four to define the applicable year. Certain
of the Company's computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in miscalculations causing
disruptions of operations, including a temporary inability to process
transactions.
In 1995, the Company initiated the updating of its existing accounting
software to be year 2000 compliant. Management has determined that the year 2000
Issue will not pose significant operational problems for its computer systems.
As a result, all costs associated with this conversion, estimated to be less
than $150,000, are being expensed as incurred.
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The Company has initiated formal communications with its significant
suppliers to determine the Company's vulnerability to those third parties'
failure to remediate their own Year 2000 Issue. There can be no guarantee that
the systems of the Company's suppliers will be timely converted and would not
have an adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project within one year but not later than
September 30, 1999, which is prior to any anticipated impact on its operating
systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
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.
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Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
SERVICO, INC.
Date: June 8, 1998 By: /s/ Warren M. Knight
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Warren M. Knight
Vice President-Finance and Chief Financial Officer
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