<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, 1998
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 (I.R.S. Employer
of 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 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 12, 1998
----- -----------------------------------
Common 18,439,809
1
<PAGE> 2
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, 1998 and December 31, 1997 3
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of
Stockholders' Equity for the Nine Months
Ended September 30, 1998 and for the Year
Ended December 31, 1997 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</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,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,257 $ 15,243
Accounts receivable, net of allowances 16,150 11,023
Inventories 5,776 4,485
Prepaid expenses 9,665 7,469
Other current assets 4,306 3,684
-------- --------
Total current assets 62,154 41,904
Property and equipment, net 681,439 534,080
Deposits for capital expenditures 12,553 30,901
Other assets, net 30,502 20,766
-------- --------
$786,648 $627,651
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,531 $ 7,543
Accrued liabilities 34,303 27,355
Current portion of long-term obligations 4,511 5,728
-------- --------
Total current liabilities 50,345 40,626
Long-term obligations, less current portion 330,062 323,320
Deferred income taxes 15,213 10,615
Commitments and contingencies
Minority interests:
Preferred redeemable securities 175,000 --
Other 14,763 13,555
Stockholders' equity:
Common Stock, $.01 par value--25,000,000
shares authorized; 18,460,268 shares and
20,974,852 shares issued and outstanding 184 210
Additional paid-in capital 177,292 210,998
Retained earnings 23,789 28,327
-------- --------
Total stockholders' equity 201,265 239,535
-------- --------
$786,648 $627,651
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE> 4
SERVICO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rooms $ 72,512 $ 46,193 $ 197,273 $ 134,186
Food and beverage 24,133 18,279 74,673 55,955
Other 4,715 4,119 14,683 12,273
--------- --------- --------- ---------
101,360 68,591 286,629 202,414
--------- --------- --------- ---------
Operating expenses:
Direct:
Rooms 19,943 12,593 54,015 35,981
Food and beverage 19,115 14,165 57,575 42,948
General and administrative 2,408 2,306 7,237 6,598
Depreciation and amortization 7,769 5,764 22,528 16,663
Other 34,751 21,428 93,703 64,282
--------- --------- --------- ---------
83,986 56,256 235,058 166,472
--------- --------- --------- ---------
Income from operations 17,374 12,335 51,571 35,942
Other income (expenses):
Interest income, and other 335 534 1,035 1,206
Loss on asset disposition -- -- (432) --
Interest expense (5,761) (4,360) (21,893) (20,562)
Settlement on swap transactions (31,492) -- (31,492) --
Minority interests:
Preferred Redeemable Securities (3,012) -- (3,323) --
Other (303) (252) (1,126) (908)
--------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary item (22,859) 8,257 (5,660) 15,678
Provision for (benefit from) income taxes (9,144) 3,302 (2,264) 6,270
--------- --------- --------- ---------
Income (loss) before extraordinary item (13,715) 4,955 (3,396) 9,408
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $761
in 1998 and $2,500 in 1997 (47) -- (1,142) (3,751)
--------- --------- --------- ---------
Net income (loss) $ (13,762) $ 4,955 $ (4,538) $ 5,657
========= ========= ========= =========
Earnings per common share:
Income (loss) before extraordinary item $ (.71) $ .24 $ (.17) $ .71
Extraordinary item -- -- (.06) (.28)
--------- --------- --------- ---------
Net income (loss) $ (.71) $ .24 $ (.23) $ .43
========= ========= ========= =========
Earnings per common share - assuming dilution:
Income (loss) before extraordinary item $ (.71) $ .23 $ (.17) $ .69
Extraordinary item -- -- (.06) (.27)
--------- --------- --------- ---------
Net income (loss) $ (.71) $ .23 $ (.23) $ .42
========= ========= ========= =========
</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, 1996 9,369,605 $ 94 $ 55,136 $ 19,508 $ 74,738
401(k) Plan contribution 49,847 -- 282 -- 282
Exercise of stock options 86,600 1 437 -- 438
Tax benefit from exercise of stock
options -- -- 175 -- 175
Adjustment from foreign
currency translation -- -- (579) -- (579)
Issuance of common stock 11,500,000 115 156,085 -- 156,200
Repurchase of common stock (31,200) -- (538) -- (538)
Net income -- -- -- 8,819 8,819
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 20,974,852 210 210,998 28,327 239,535
401(k) Plan contribution 11,416 -- 57 -- 57
Exercise of stock options 134,900 1 978 -- 979
Adjustment from foreign
currency translation -- -- (696) -- (696)
Repurchase of common stock (2,660,900) (27) (34,045) -- (34,072)
Net loss -- -- -- (4,538) (4,538)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998 18,460,268 $ 184 $ 177,292 $ 23,789 $ 201,265
=========== =========== =========== =========== ===========
</TABLE>
The data for the nine months ended September 30, 1998 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,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Settlement on swap transactions $ 31,492 $ --
Other 20,659 32,407
--------- ---------
52,151 32,407
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures, net (53,923) (59,797)
Acquisitions of property and equipment (58,395) (23,857)
Net deposits for capital expenditures 17,492 (669)
Net proceeds from sale of assets 2,373 --
Other 731 487
--------- ---------
Net cash used in investing activities (91,722) (83,836)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term obligations (167,254) (158,121)
(Distributions to) contributions from minority interests 82 (6,792)
Payments of deferred loan costs (7,554) (1,839)
Repurchase of common stock (34,072) --
Net proceeds from issuance of common stock 979 155,841
Proceeds from issuance of long-term obligations and preferred
redeemable securities 258,404 81,009
--------- ---------
Net cash provided by financing activities 50,585 70,098
--------- ---------
Net increase in cash and cash equivalents 11,014 18,669
Cash and cash equivalents at beginning of period 15,243 19,473
--------- ---------
Cash and cash equivalents at end of period $ 26,257 $ 38,142
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 20,211 $ 17,739
========= =========
Income taxes paid, (refunded), net $ 592 $ (513)
========= =========
Non-cash acquisition of property:
Addition to property and equipment $ 58,061 $ --
========= =========
Addition to long-term debt $ 58,061 $ --
========= =========
</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 75 hotels) and partnerships (owning 8
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 managed for third party owners during the nine months
ended September 30, 1998, 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, 1997.
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, 1998, 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, 1997.
2. DEFERRED COSTS
Deferred franchise, financing and other deferred costs of $23.8 million and
$16.4 million at September 30, 1998 and December 31, 1997, respectively, are
included in other assets, net of accumulated amortization of $3.9 million and
$2.5 million at September 30, 1998 and December 31, 1997, 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, 1998, the Company borrowed $83.4
million, primarily secured by mortgage notes on ten hotels. The funds were used
to purchase four hotels (included in the ten above) for an aggregate purchase
price of $35.4 million; to fund escrow accounts of $10.8 million for future
renovations on the four hotels purchased; and $13.5 million for the acquisition
of an additional 14 hotels; to purchase two land parcels (for future
development) $4.9 million; and $18.8 million to repurchase the Company's common
stock. The Company also assumed an additional $58 million of existing mortgage
notes as part of the acquisition of the 14 hotels.
7
<PAGE> 8
Additionally, the Company repaid $161.6 million of long-term obligations
(including the $58 million assumed) with the proceeds of the issuance of the
securities discussed in Note 4 below. In connection with the swap transactions
discussed in note 8 below, the Company has recorded a liability of $31.5 million
as long-term obligation.
The Company has obtained a $265 million financing commitment from Lehman
Brothers Holdings Inc. ("Lehman") in connection with the Merger, which includes
funds necessary to make payment of approximately $31.5 million due as a result
of two swap transactions. The $31.5 million, however, is payable regardless of
whether the Merger is consummated.
4. PREFERRED REDEEMABLE SECURITIES
In June 1998, the Company issued $175 million of Convertible Redeemable Equity
Structured Trust Securities ("CRESTS"). The CRESTS bear interest at 7% and are
convertible into shares of the Company's common stock at an initial conversion
price of $21.42 per share. The sale of the CRESTS generated $168.5 million in
net proceeds, substantially all of which were used to repay existing debt. In
the event that the Merger is terminated or is not consummated by December 31,
1998, each holder of CRESTS will have the right to require the Company to
repurchase the CRESTS at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest thereon, to the date
of repurchase.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary items $(13,715) $ 4,955 $ (3,396) $ 9,408
Effect of dilutive securities:
Minority interest - preferred
redeemable securities -- -- -- --
-------- -------- -------- --------
Numerator for diluted earnings per share $(13,715) $ 4,955 $ (3,396) $ 9,408
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share-
weighted average shares 19,318 20,672 20,261 13,238
-------- -------- -------- --------
Effect of dilutive securities:
Employee stock options -- -- -- --
Preferred redeemable securities -- 464 -- 459
-------- -------- -------- --------
Dilutive potential common shares -- 464 -- 459
-------- -------- -------- --------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 19,318 21,136 20,261 13,697
======== ======== ======== ========
Basic earnings (loss) per share $(.71) $.24 $(.17) $.71
Diluted earnings per share $(.71) $.23 $(.17) $.69
</TABLE>
All prior-period earnings per share amounts have been restated to conform to
Financial Accounting Standards Board Statement No. 128 "Earnings Per Share". No
effect has been given to employee stock options and preferred redeemable
securities for the 1998 periods as they are anti-dilutive.
8
<PAGE> 9
6. 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.
7. COMPREHENSIVE INCOME
Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. The adoption of this statement does not have
a material impact on the financial statements of the Company.
8. OTHER EVENTS
On July 22, 1998, the Company entered into an Amended and Restated Agreement and
Plan of Merger (the "Merger Agreement") with Impac Hotel Group, L.L.C. ("Impac")
pursuant to which the Company and Impac agreed, subject to certain conditions,
to combine their respective businesses (the "Merger"), as previously announced,
into a newly formed company to be called Lodgian, Inc. ("Lodgian"). Under the
terms of the Merger Agreement, the Company's existing shareholders will receive
one share of Lodgian common stock for each share of Servico stock held by them
(approximately 18.4 million shares). On September 16, 1998, the Company and
Impac amended the Merger Agreement (the "Amendment") by fixing the Merger
consideration based on the ten consecutive trading-day period preceding
September 15, 1998 and providing that $15 million of the Merger consideration
payable to Impac unitholders will be in cash rather than in shares of Lodgian
common stock. As a result of the Amendment, the owners of Impac will initially
receive 8 million shares of common stock of Lodgian and an additional 1.4
million shares upon the completion of construction of five hotels. The
shareholders of the Company approved the Merger at the annual meeting on
September 18, 1998. On November 16, 1998, the Company supplemented its proxy
statement to reflect the terms of the Amendment and provide shareholders
entitled to vote at that meeting with an opportunity during a limited period to
change their vote with respect to the Merger. The Merger will be accounted for
under the purchase method of accounting with Servico being the acquiring
company, and is expected to close during the fourth quarter of 1998 subject to
customary conditions. In the event that the Merger is not consummated, it would
be necessary for the Company to repay the CRESTS. In the event the $265 million
financing commitment obtained from Lehman in connection with the Merger is not
funded, alternative means of paying Lehman $31.5 million would have to be
pursued. The Company presently does not have sufficient funds available to repay
either of these two items and would seek to renegotiate with the holders of the
CRESTS and Lehman. In the event the Company is unable to successfully
renegotiate the terms of either of these two items, it would consider all
alternatives including relief under federal bankruptcy provisions.
For the three and nine month periods ended September 30, 1998, the Company has
recognized a $31.5 million loss ($18.9 million net of a tax benefit) as a result
of two separate swap transactions that were entered into by the Company in an
effort to manage the interest rate risk associated with its financing for the
Merger.
In accordance with previously announced share buyback programs, the Company has
repurchased in open market transactions 2,488,700 shares of its common stock as
of November 12, 1998.
9
<PAGE> 10
ITEM 2. 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, revenue per available room ("RevPAR") and earnings from operations before
interest, taxes, depreciation and amortization ("EBITDA"). 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 and weather
conditions. 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 1997 and 1998, the Company purchased a total of 30 hotels (28 subsequent
to September 1997) containing a total of 6,430 guest rooms and acquired 100%
ownership in three hotels owned by partnerships in which the Company previously
had majority ownership. The Company intends to sell four of the purchased
hotels, containing a total of 526 rooms, two of which have been sold. The
average purchase price of the remaining 26 hotels was $40,557 per room and the
Company expects to spend approximately $12,000 per room in renovations and
capital assets for a total cost per room of $52,557. 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 renovation
activities. In order to better illustrate underlying trends of the Company's
hotel base, the Company categorizes its hotels as either stabilized ("Stabilized
Hotels") or repositioned ("Reposition Hotels") and tracks their respective
performance. The Stabilized Hotels currently include 52 hotels which were
acquired by the Company through 1997 which, based on management's determination,
have achieved normalized operations. The Reposition Hotels currently include two
of the hotels acquired prior to 1997, 12 hotels acquired during 1997 and 17
hotels acquired during 1998, all of which are still the subject of management's
post acquisition repositioning and renovation initiatives. Since 28 of the
hotels acquired during 1997 and 1998 were acquired subsequent to September 1997,
the performance measures for the Reposition Hotels are not comparable to the
prior period.
10
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 QUARTER") AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 QUARTER")
At September 30, 1998, the Company owned 83 hotels and had a minority investment
in one hotel compared with 58 hotels owned, two managed for third party owners
and a minority investment in one hotel at September 30, 1997. Occupancy and
average daily rate for owned hotels for the 1998 Quarter was 73.4% and $73.77,
respectively, compared with 71.8% and $70.58, respectively, for the 1997
Quarter.
RevPAR for the Stabilized Hotels increased 3.3% during the 1998 Quarter to
$53.41 from $51.71 during the 1997 Quarter. The occupancy level and average
daily rate for the Stabilized Hotels during the 1998 Quarter was 74.4% and
$71.79, respectively, compared with 72.5% and $71.33, respectively, for the 1997
Quarter. The increase in occupancy for the Stabilized Hotels during the quarter
was attributable to successful yield management and marketing strategies
primarily in those hotels that recently completed major renovations. RevPAR,
occupancy and average daily rate for the Reposition Hotels during the 1998
Quarter were $55.57, 71.8% and $71.40, respectively. The Company is currently
implementing new marketing strategies and operational improvements at all of the
Reposition Hotels and expects to complete significant renovations at many of
these hotels during the remainder of 1998 and 1999. 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 $101.4 million for the 1998 Quarter, a 47.8%
increase over revenues of $68.6 million for the 1997 Quarter. This increase in
revenues is primarily attributable to the Reposition Hotels.
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 $39.1
million for the 1998 Quarter and $26.8 million for the 1997 Quarter. This
increase was primarily related to the revenues generated by the Reposition
Hotels. Other operating expenses for the Company were $34.8 million for the 1998
Quarter and $21.4 million for the 1997 Quarter. This $13.4 million increase was
primarily attributable to the Reposition Hotels. Depreciation and amortization
expense for the Company was $7.8 million for the 1998 Quarter and $5.8 million
for the 1997 Quarter. This $2 million increase was primarily associated with the
Reposition Hotels.
As a result of the above, income from operations was $17.4 million for the 1998
Quarter as compared to $12.3 million for the 1997 Quarter, an increase of 41%.
11
<PAGE> 12
Interest expense, net of interest income, was $5.4 million for the 1998 Quarter,
a $1.6 million increase from the $3.8 million for the 1997 Quarter. The hotels
acquired during 1997 and 1998 had $.9 million of interest expense during the
1998 Quarter, an increase of $.5 million over the 1997 Quarter. Interest expense
for hotels acquired prior to 1997 increased by $.7 million.
During the 1998 Quarter, the Company recognized a $31.5 million loss ($18.9
million net of a tax benefit) as a result of two swap transactions that were
entered into by the Company in an effort to manage the interest rate risk
associated with its financing for the Impac merger.
During the 1997 Quarter, the Company repaid, prior to maturity, approximately
$5.9 million in debt and, as a result, recorded as an extraordinary item, a loss
on early extinguishment of debt of approximately $.1 million (net of income
taxes) relating to the write-off of unamortized loan costs associated with the
debt.
After a benefit for income taxes of $9.1 million for the 1998 Quarter and a
provision for income taxes of $3.3 million for the 1997 Quarter, the Company had
a loss before extraordinary items of $13.7 million ($.71 per share) for the 1998
Quarter and income before extraordinary items of $5 million ($.23 per share) for
the 1997 Quarter.
The following table summarizes certain operating data for the Company's hotels
for the three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------------------------------- ------------------
Average
Number of Daily
Hotels Occupancy Rate RevPAR RevPAR
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Pre 1997 Hotels
Stabilized 52 74.4% $ 71.79 $ 53.41 $ 50.95
Reposition 2 62.1% $ 57.91 $ 35.96 $ 38.05
1997 Acquisitions
Stabilized -- -- -- -- *
Reposition* 12 72.7% $ 78.57 $ 57.12 *
Total Stabilized 52 74.4% $ 71.79 $ 53.41 $ 50.95
Total Reposition** 14 71.6% $ 76.63 $ 54.87 $ 44.67
-----
Total** 66 73.7% $ 72.81 $ 53.66 $ 50.60
=====
</TABLE>
* Hotels not comparable in prior year.
** Excludes 17 hotels purchased by the Company during 1998, 14 of which were
purchased in June 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD") AS COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 (THE "1997 PERIOD")
Occupancy and average daily rate for owned hotels for the 1998 Period was 69.7%
and $73.72, respectively, compared with 68.7% and $72.30, respectively, for the
1997 Period.
12
<PAGE> 13
RevPAR for the Stabilized Hotels increased 3.1% during the 1998 Period to $52.30
from $50.75 during the 1997 Period. The occupancy level and average daily rate
for the Stabilized Hotels during the 1998 Period was 71.6% and $73.04,
respectively, compared with 69.7% and $72.81, respectively, for the 1997 Period.
The increase in occupancy for the Stabilized Hotels during the quarter was
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 the 1998
Period were $51.32, 66.8% and $76.83, respectively.
Revenues for the Company were $286.6 million for the 1998 Period, a 41.6%
increase over revenues of $202.4 million for the 1997 Period. This increase in
revenues, is primarily attributable to the Reposition Hotels.
Direct operating expenses for the Company were $111.6 million for the 1998
Period and $78.9 million for the 1997 Period. This increase was primarily
related to the revenues generated by the Reposition Hotels. Other operating
expenses for the Company were $93.7 million for the 1998 Period and $64.3
million for the 1997 Period. This $29.4 million increase was attributable to the
Reposition Hotels. Depreciation and amortization expense for the Company was
$22.5 million for the 1998 Period and $16.7 million for the 1997 Period.
Included in this $5.8 million increase was $4.8 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 $51.6 million for the 1998
Period as compared to $35.9 million for the 1997 Period, an increase of 43.7%.
Interest expense, net of interest income, was $20.9 million for the 1998 Period,
as compared to $19.4 million for the 1997 Period. The hotels acquired during
1997 and 1998 accounted for $4.8 million of interest expense during the 1998
Period, an increase of $3.8 million over the 1997 Period. This interest expense
was offset, in part, by a $2.6 million decrease in interest expense for hotels
acquired prior to 1997. This decrease was primarily a result of a reduction in
the level of debt and effective interest rate related to debt which was repaid
with the proceeds of the common stock offering as more fully discussed in
Liquidity and Capital Resources.
During the 1998 Quarter, the Company recognized a $31.5 million loss ($18.9
million net of a tax benefit) as a result of two swap transactions that were
entered into by the Company in an effort to manage the interest rate risk
associated with its financing of the Impac merger.
During the 1997 Period, the Company repaid, prior to maturity, approximately
$110 million in debt and, as a result, recorded as an extraordinary item, a loss
on early extinguishment of debt of approximately $1.1 million (net of income
taxes of $.8 million) relating to the write-off of unamortized loan costs
associated with the debt.
13
<PAGE> 14
After an income tax benefit of $2.3 million for the 1998 Period and a provision
for income taxes of $6.3 million for the 1997 Period, the Company had a loss
before extraordinary items of $3.4 million ($.17 per share) for the 1998 Period
and income before extraordinary items of $9.4 million ($.69 per share) for the
1997 Period.
The following table summarizes certain operating data for the Company's hotels
for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
---------------------------------------------- ------------------
Average
Number of Daily
Hotels Occupancy Rate RevPAR RevPAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Pre 1997 Reposition
Stabilized 52 71.6% $ 73.04 $ 52.30 $ 50.75
Reposition 2 50.6% $ 70.63 $ 35.74 $ 39.00
1997 Acquisitions
Stabilized -- -- -- -- *
Reposition* 12 69.7% $ 77.64 $ 54.12 *
Total Stabilized 52 71.6% $ 73.04 $ 52.30 $ 50.75
Total Reposition** 14 66.8% $ 76.83 $ 51.32 $ 41.44
------
Total** 66 70.4% $ 73.94 $ 52.05 $ 50.24
======
</TABLE>
* Hotels not comparable in prior year.
** Excludes 17 hotels purchased by the Company during 1998, 14 of which were
purchased in June 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are existing cash balances and cash
flow from operations. The Company had earnings from operations before interest,
taxes, depreciation and amortization ("EBITDA") for the 1998 Period of $74.1
million, a 39.9% increase over the $52.9 million for the 1997 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 1998 Period was $52.1 million as compared to $32.4
million for the 1997 Period.
At September 30, 1998, the Company had working capital of $4.9 million as
compared to working capital of $1.3 million at December 31, 1997. The Company's
ratio of current assets to current liabilities was 1.1:1 at September 30, 1998
and 1.0:1 at December 31, 1997. At September 30, 1998, the Company's long-term
obligations were $330.1 million, not including $175 million of preferred
redeemable securities. The Company's long-term obligations were $323.3 million
at December 31, 1997.
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, 1998, has approximately $12.5 million escrowed for such
improvements. The Company estimates its remaining obligations for all of such
commitments to be approximately $42.6
14
<PAGE> 15
million, of which approximately $15.5 million is expected to be spent during the
remainder of 1998, and the balance is expected to be spent during 1999.
In June 1997, Servico completed a secondary offering of 10,000,000 shares of
common stock, at $14.50 per share. An additional 1,500,000 shares were issued in
July 1997 upon exercise by the underwriter of the over-allotment option. The
offering 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 as additional working capital.
In June 1998 the Company completed the acquisition of an entity owning 14 hotels
containing 2,298 guest rooms. The Company has sold two of these hotels and
intends to sell two additional hotels, which aggregate 526 guest rooms, and will
spend approximately $26 million to renovate and reposition the remaining 10
hotels. The acquisition price for the 14 hotels was $75 million and was paid for
by the assumption of $58 million in existing debt and $1.5 million in other
liabilities and the balance with existing cash.
Additionally in June 1998, $175 million of Convertible Redeemable Equity
Structured Trust Securities ("CRESTS") were issued. The CRESTS bear interest at
7% and are convertible into shares of the Company's common stock at an initial
conversion price of $21.42 per share. The sale of the CRESTS generated $168.5
million in net proceeds, substantially all of which were used to repay existing
debt. In the event that the Merger is terminated or is not consummated by
December 31, 1998, each holder of CRESTS will have the right to require the
Company to repurchase the CRESTS at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, to
the date of repurchase.
On July 22, 1998, the Company entered into an Amended and Restated Agreement and
Plan of Merger (the "Merger Agreement") with Impac Hotel Group, L.L.C. ("Impac")
pursuant to which the Company and Impac agreed, subject to certain conditions,
to combine their respective businesses (the "Merger"), as previously announced,
into a newly formed company to be called Lodgian, Inc. ("Lodgian"). Under the
terms of the Merger Agreement, the Company's existing shareholders will receive
one share of Lodgian common stock for each share of Servico stock held by them
(approximately 18.4 million shares). On September 16, 1998, the Company and
Impac amended the Merger Agreement (the "Amendment") by fixing the Merger
consideration based on the ten consecutive trading-day period preceding
September 15, 1998 and providing that $15 million of the Merger consideration
payable to Impac unitholders will be in cash rather than shares of Lodgian
common stock. As a result of the Amendment, the owners of Impac will initially
receive 8 million shares of common stock of Lodgian and an additional 1.4
million shares upon the completion of construction of five hotels. The
shareholders of the Company approved the Merger at the annual meeting on
September 18, 1998. On November 16, 1998, the Company supplemented its proxy
statement to reflect the terms of the Amendment and provide shareholders
entitled to vote at the meeting with an opportunity during a limited period to
change their vote with respect to the Merger. The Merger will be accounted for
under the purchase method of accounting with Servico being the acquiring
company.
The Company has obtained a $265 million financing commitment from Lehman
Brothers Holding Inc. ("Lehman") in connection with the Merger. The financing
commitment includes funds necessary to pay the approximately $31.5 million due
as a result of two swap transactions. The commitment is subject to a number of
conditions including the completion of due diligence and upon funding, the
Company will be required to comply with various covenants and coverage ratios.
The $31.5 million, however, is payable regardless of whether the Merger is
consummated and regardless of whether the commitment is funded.
15
<PAGE> 16
The Merger is expected to close during the fourth quarter of 1998, subject to
customary conditions. In the event, however, that the Merger is not
consummated, it will be necessary for the Company to offer to repurchase the
CRESTS. In the event the $265 million financing commitment obtained from Lehman
in connection with the Merger is not funded, alternative financing for the
Merger and for payment to Lehman of the $31.5 million due pursuant to the swap
transactions would have to be pursued. There is no assurance that such
financing would be available. The Company presently does not have sufficient
cash to fund either the repurchase of the CRESTS or the $31.5 million payment.
In the event the Merger is not consummated or the financing commitment is not
funded, the Company would seek to renegotiate the terms of the Company's
obligations under the terms of the CRESTS and the interest rate swaps. In the
event the Company is unable to successfully renegotiate the terms of either
obligation, it would be forced to consider all alternatives available to it
including possible relief under federal bankruptcy provisions.
Continuation of the Company's previous growth strategy would require additional
financing which the Company does not believe, in the current environment, will
be available. Further, under the terms of the Lehman financing commitment,
future acquisitions would be subject to Lehman's prior approval. The Company
does not currently have any lines of credit although Lodgian has received a
commitment from Banc One Capital Markets, Inc. ("Banc One") to provide a $51
million loan to be secured by six properties that are currently owned by Impac
and which will be owned by Lodgian after the Merger. The Banc One commitment is
subject to a number of conditions including, but not limited to, the
consummation of the Merger and due diligence. The Company's financing 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.
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 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 $200,000, are
being expensed as incurred.
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 assurance that the systems
of the Company's or 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 assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.
Based on the modifications and conversions of software made to date and the
assessment of embedded devices that have been identified at its properties to
date, the Company does not believe that contingency planning is warranted at
this time. As discussed above, the assessment of third parties external to the
Company is ongoing and the results of this assessment, when completed, may
reveal the need for contingency planning at a later date. The Company intends to
regularly evaluate the need for contingency planning based on the progress and
findings of its internal and external Year 2000 compliance program.
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 merger with Impac, including
the failure to realize synergies or the benefits from the transaction,
renovation and operation of hotels, government legislation and regulation,
changes in interest rates, the impact of rapid growth, the significant levels of
indebtedness of the Company and the Company's ability to service such
indebtedness or to refinance such indebtedness, the availability of capital to
finance growth or reduce debt, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders of the Company held on September 18,
1998, the shareholders of the Company approved the Merger. On November 16, 1998,
the Company supplemented its proxy statement to reflect the terms of the
Amendment and provide shareholders entitled to vote at the meeting with an
opportunity during a limited period to change their vote with respect to the
Merger. At the annual meeting, the shareholders also approved the Lodgian 1998
Short-Term Incentive Compensation Plan, the Lodgian 1998 Stock Incentive Plan,
the Lodgian Non-Employee Directors' Stock Plan, elected one director to the
Board of Directors of Servico and approved an amendment to the Servico existing
Stock Option Plan to increase the number of shares issuable pursuant to the
Plan.
16
<PAGE> 17
The number of votes cast for, against or abstain for each of the proposals were
as follows:
Votes associated with the proposal to approve the Merger:
For - 9,845,282
Against - 1,406,679
Abstain - 18,634
Votes associated with the proposal to approve the Lodgian 1998 Short-Term
Incentive Compensation Plan:
For - 9,627,270
Against - 1,594,553
Abstain - 48,772
Votes associated with the proposal to approve the Lodgian 1998 Stock Incentive
Plan:
For - 8,621,840
Against - 2,600,893
Abstain - 47,862
Votes associated with the proposal to approve the Lodgian Non-Employee
Directors' Stock Plan:
For - 8,967,346
Against - 2,268,560
Abstain - 34,689
Votes associated with the proposal to elect one director to the Board of
Directors of Servico:
For - 13,042,623
Against -0-
Abstain - 683,374
Votes associated with the proposal to approve an amendment of the Servico Stock
Option Plan:
For - 9,150,192
Against - 2,089,610
Abstain - 30,793
ITEM 5. OTHER INFORMATION
In November 1998, the Company completed a joint venture for the purchase of six
European hotel properties. The hotels will be renovated and the Company will
manage their day-to-day operations. The Company will account for this joint
venture under the equity method of accounting.
David Buddemeyer, former Chairman of the Board and Chief Executive Officer of
the Company, resigned from all of his positions with the Company effective as of
November 13, 1998. The Company and Mr. Buddemeyer entered into a severance
agreement dated November 10, 1998 in connection with his resignation. On
November 13, 1998 Joseph C. Calabro was named Acting Chairman of the Board and,
upon consummation of the Impac Merger, Robert S. Cole, currently the President
of Impac, will become Chief Executive Officer of Lodgian. Lodgian will also
establish an Office of the Chairman composed of directors Joseph C. Calabro,
John Lang and Michael A. Leven with Joseph C. Calabro serving as Acting Chairman
of the Office of the Chairman.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Amended and Restated Agreement and Plan of Merger,
dated as of July 22, 1998, among the Company and
Impac, incorporated by reference to the Company's
Definitive Proxy Statement on Schedule 14A filed July
23, 1998.
2.2 Amendment to Amended and Restated Agreement and Plan
of Merger, dated as of September 16, 1998,
incorporated by reference to the Company's Form 8-K
filed September 17, 1998.
10.1 Severance Agreement between the Company and David
Buddemeyer, dated as of November 10, 1998.
99.1 Press Release, dated November 9, 1998.
(b) Reports on Form 8-K
A report on Form 8-K was filed on September 17, 1998, relating
to an Amendment to Amended and Restated Agreement and Plan of
Merger, dated as of September 16, 1998, among the Company and
Impac.
18
<PAGE> 19
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 16, 1998 /s/ Joseph C. Calabro
-----------------------------------------
Joseph C. Calabro
Acting Chairman of the Board of Directors
DATE: November 16, 1998 /s/ Warren M. Knight
-----------------------------------------
Warren M. Knight
Vice President-Finance and
Chief Financial and Principal
Accounting Officer
19
<PAGE> 1
Exhibit 10.1
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT is entered into this 10th day of November,
1998, by and between SERVICO, INC. ("Company") and DAVID BUDDEMEYER
("Buddemeyer").
WHEREAS, Buddemeyer is employed by the Company pursuant to that certain
Employment Agreement dated May 14, 1993 and pursuant to such agreement serves as
President and Chief Operating Officer of the Company; and
WHEREAS, Buddemeyer and the Company desire to terminate Buddemeyer's
employment by the Company and to set forth their agreement with respect to such
termination and certain other matters.
NOW, THEREFORE, in consideration of the agreements and covenants
hereinafter set forth, the parties agree as follows:
1. TERMINATION OF EMPLOYMENT. Effective as of November 13th, 1998 (the
"Severance Date"), the employment of Buddemeyer by the Company will terminate
and Buddemeyer shall not have any further rights, whether to employment,
compensation or benefits, except as provided in this Agreement.
2. SEVERANCE COMPENSATION
(a) SEVERANCE PAY. The Company shall pay to Buddemeyer an aggregate
severance pay equal to $1,282,500.00 payable in two (2) equal installments on or
before November 13, 1998 and April 1, 1999, net of applicable withholding taxes
("Severance Pay").
(b) HEALTH INSURANCE BENEFITS. For a period of one (1) year after the
Severance Date, Buddemeyer shall be entitled to continue to participate, at the
Company's expense, in the Company's health insurance program. Such benefit will
be in full satisfaction of any rights which Buddemeyer may have to health
insurance continuation under the Consolidated Omnibus Budget Reconciliation Act
of 1985, as amended ("COBRA"). Benefits otherwise receivable by Buddemeyer
pursuant to this Subparagraph (b) shall be reduced to the extent comparable
benefits are actually received by Buddemeyer from a subsequent employer during
the period during which the Company is required to provide such benefits, and
Buddemeyer shall report any such benefits actually received by him to the
Company.
(c) OTHER BENEFITS. Provided that there are no adverse tax
consequences, the Company shall continue coverage for Buddemeyer, on the same
terms and conditions as would be applicable if Buddemeyer were an active
employee, under the Company's life insurance, group disability benefits and
similar welfare benefit plans for
<PAGE> 2
a period of one (1) year. Benefits otherwise receivable by Buddemeyer pursuant
to this Subparagraph (c) shall be reduced to the extent comparable benefits are
actually received by Buddemeyer from a subsequent employer during the period
during which the Company is required to provide such benefits, and Buddemeyer
shall report any such benefits actually received by him to the Company. In the
event that adverse tax consequences would result from the continuation of
benefits under this Subparagraph (c), the Company may pay to Buddemeyer an
amount equal to the annual cost to the Company (based on premium rates) of
providing such coverage; provided, however, that such amount shall be reduced to
the extent comparable benefits are actually received by Buddemeyer from a
subsequent comployer during the period during which the Company is required to
provide such benefits, and Buddemeyer shall report any such benefits actually
received by him to the Company. The payments provided for in this Subparagraph
(c) shall be made not later than the thirtieth (30th) day following the
Severance Date. At the time that payments are made under this Subparagraph (c),
the Company shall provide Buddemeyer with a written statement setting forth the
manner in which such payments were calculated and the basis for such
calculations.
3. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
(a) Buddemeyer acknowledges that he holds currently exercisable stock
options to purchase 423,500 shares of the Company's Common Stock which were
granted to him pursuant to the Company's Stock Option Plan and 100,000 stock
appreciation rights. To the extent any stock options or stock appreciation
rights are not vested, they will continue to vest at the same time they would
have vested had Buddemeyer remained an employee of the Company. A schedule of
such options and the exercise prices thereof are listed on Schedule A.
(b) The parties acknowledge and agree that when the Company completes
its merger with Lodgian, Inc., employees of the Company will cause Lodgian, Inc.
to issue to Buddemeyer stock options and stock appreciation rights in equal
amounts to Buddemeyer under the same terms and conditions of the stock option
plan of the Company and the stock appreciation rights of the Company.
4. RESTRICTIVE COVENANTS
(a) CONFIDENTIALITY. Buddemeyer agrees not to directly or indirectly
disclose to any person or entity, or cause or authorize, directly or indirectly,
any person or entity, to use any proprietary or confidential business
information of the Company, except as required by law. This paragraph shall not
apply, however, to any information that is already in the public domain or
becomes available to the public through any act or failure to take action by
Buddemeyer.
(b) NON-SOLICITATION. Buddemeyer agrees that he will not, for a period
of one (1) year following the Severance Date, directly or indirectly, on behalf
of himself
-2-
<PAGE> 3
or any other person or entity, offer employment to, or in any manner solicit the
services of Karyn Manasco, Mike Amaral or Bob Caron during the one year period.
(c) NON-DISPARAGEMENT AND FUTURE CONDUCT. Buddemeyer agrees that he
will not knowingly engage in any activity which is inimical, contrary or harmful
to the interests of the Company and shall not make any statements about or
relating to the Company, its officers, directors, shareholders, agents,
independent contractors, or counsel which are disparaging or likely to cause
embarrassment.
(d) COOPERATION WITH THE COMPANY. In consideration for Buddemeyer's
agreement to fully cooperate with respect to any reasonable request from the
Company on an ongoing basis, the Company shall provide to Buddemeyer the rights
and benefits set forth in this Agreement.
5. GENERAL RELEASES.
(a) Buddemeyer hereby releases, discharges and acquits the Company and
its subsidiaries, affiliates, representatives, agents, employees, officers,
directors, shareholders, counsel, assigns and successors (collectively referred
to as "Releasees"), of and from all claims, demands, sums of money, actions,
rights, causes of action, obligations and liabilities which Buddemeyer has
against the Releasees relating to or arising out of the Employment Agreement or
Buddemeyer's employment by the Company, including, but not limited to, wrongful
discharge, breach of contract, tort, the Civil Rights Act, Age Discrimination in
Employment Act, Employee Retirement Income Security Act or any other federal,
state or local legislation or common law relating to employment or
discrimination in employment or otherwise; provided, however, that nothing
contained herein shall release the Company from its obligation to Buddemeyer
pursuant to this Agreement, including any right he may have to corporate
indemnification.
(b) The Company hereby releases, discharges, and acquits Buddemeyer of
and from all claims, demands, sums of money, actions, rights, causes of action,
obligations and liabilities which the Company has or which the Company or any
successor or assign of the Company may have against Buddemeyer relating to,
arising out of or concerning Buddemeyer's negligent conduct, if any, in
connection with or concerning the Employment Agreement or his employment with
the Company; provided, however, that nothing herein shall release, discharge or
acquit Buddemeyer from any such claims, demands, sums of money, actions, rights,
causes of action, obligations or liabilities relating to, arising out of or
concerning Buddemeyer's conduct which rises to a level more culpable than
negligence, including, but not limited to, intentional misconduct or gross
negligence.
6. INDEMNITY OBLIGATION. The indemnity obligation of the Company to
Buddemeyer, as an officer and director of the Company, shall continue in
accordance with the terms and conditions of Article IX of the Company's Articles
of Incorporation and Article VII
-3-
<PAGE> 4
of the Company's Bylaws with respect to actions taken or allegedly taken
including, but not limited to, alleged acts, whether intentional or negligent,
and whether active, passive or vicarious in nature, on or prior to the Severance
Date notwithstanding the termination of Buddemeyer's employment to the extent
permitted by law and the Company will take no action to diminish or reduce
Buddemeyer's right to indemnification thereunder. If the Company and Lodgian,
Inc. implement their merger, the Company will cause Lodgian, Inc. to assume
Company's indeminity obligations and insurance obligations contained in this
paragraph and in the Articles of Incorporation and Bylaws referenced herein.
7. ADVICE OF COUNSEL. Buddemeyer represents and warrants that he has
independently consulted with legal counsel and financial or other advisors of
his choice with respect to this Agreement, that he has entered into this
agreement of his own free will, that he and such counsel have reviewed this
Agreement, and that Buddemeyer has been informed by such counsel that the terms
and provisions of this Agreement and the restrictive covenants contained herein
are reasonable, enforceable and proper in duration, scope and effect
8. MISCELLANEOUS.
(a) Each party will bear its own costs and expenses in connection with
the preparation, negotiation and execution of this Agreement; provided, however,
that the Company will reimburse Buddemeyer for the attorneys' fees actually and
reasonably incurred by him in connection therewith up to a maximum of $5,000.00
(b) This Agrement contains the entire understanding and agreement of
the parties relating to the subject matter hereof and supersedes all prior
communications, commitments and understandings, and this Severance Agreement may
not be amended or modified except in a writing signed by both parties hereto.
(c) This Agreement shall be governed by the laws of the State of
Florida without regard to the conflicts of laws principles thereunder.
(d) This Agreement may be executed in counterparts, each of which shall
be considered an original but which shall constitute one and the same agreement.
(e) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, assigns, heirs,
beneficiaries, estates, executors, personal representatives and legatees.
(f) Any notice herein required or permitted to be given to be effective
shall be given in writing and may be personally delivered (including delivery by
private courier services) or by telex, facisimile or telecopy, charges prepaid,
to the party entitled thereto addressed as set forth below (or to such other
address as may be specified by a party in accordance with this subsection), and
shall be deemed to be duly given or made when delivered by hand, unless such day
is not a business day in which case such delivery shall be deemed to be made or
given as of the next succeeding business day or, in the case of telex,
facisimile or telecopy, when sent, so long as it was
-4-
<PAGE> 5
received during normal business hours on a business day and otherwise such
delivery shall be deemed to be made or given as of the next succeeding
business day:
To: David Buddemeyer
4379B Willow Pond Road
West Palm Beach, FL 33417
with a copy to:
Wicker, Smith, Tutan, O'Hara, McCoy, Graham & Ford, P.A.
5th Floor Grove Plaza Building
2900 Middle Street (S.W. 28th Terrace)
Miami, FL 33133
Attention: Nicholas E. Christin, Esq.
To: Servico, Inc.
1601 Belvedere Road
West Palm Beach, FL 33406
Attention: President
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Attention: Dennis J. Block, Esq.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
SERVICO, INC.
/s/
---------------------------------------
Acting Chairman
/s/ David Buddemeyer
---------------------------------------
DAVID BUDDEMEYER
-6-
<PAGE> 7
SCHEDULE A
David Buddemeyer
<TABLE>
<CAPTION>
SHARES OF UNEXERCISED
DATE OF GRANT GRANTED GRANT PRICE EXERCISED OPTIONS
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8/5/92 100,000 $4.00 45,000 55,000
5/14/93 50,000 4.00 0 50,000
5/26/95 5,000 9.50 0 5,000
1/12/96 13,500 10.75 0 13,500
8/27/97 300,000 16.75 0 300,000
STOCK APPRECIATION RIGHTS
*8/27/97 100,000 16.75 0 100,000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED 09/30/1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN
THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING 09/30/1998.
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175,000
0
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<PAGE> 1
SERVICO
HOTELS & RESORTS
NEW YORK STOCK EXCHANGE SYMBOL SER
NEWS RELEASE
FOR IMMEDIATE RELEASE CONTACT: SERVICO, INC.
Warren M. Knight
Vice President-
Finance
November 9, 1998 (561) 689-9970
SERVICO ANNOUNCES EUROPEAN JOINT VENTURE,
FINANCING COMMITMENT FOR MERGER WITH IMPAC HOTEL GROUP
AND RESIGNATION OF DAVID BUDDEMEYER
WEST PALM BEACH, FLORIDA: Servico, Inc. (NYSE:SER), a nationwide owner
and operator of hotels, announced the completion of a joint venture with Lehman
Brothers for the purchase of several European hotel properties. The joint
venture acquired six hotel subsidiaries of City Hotels located in Belgium and
the Netherlands containing 1,200 rooms. As part of the joint venture, Servico
will manage the day-to-day operations of the European hotels and oversee their
renovation. This off-balance sheet transaction represents Servico's entrance
into the European market.
Servico also announced that it has obtained a financing commitment from
Lehman Brothers Holdings Inc. in connection with the previously announced merger
with Impac Hotel Group. The financing commitment is subject to the satisfaction
of customary conditions and the merger is expected to close before the end of
the year. The terms of the merger call for Servico and Impac to merge and form a
new company to be named Lodgian. Lodgian will own or manage 143 hotels with more
than 27,000 rooms in 35 states, Canada and Europe, making it one of the largest
multi-brand independent owners and operators of hotels.
The financing commitment from Lehman Brothers in the amount of $265
million will be used to complete the Impac merger and includes funds necessary
to make payment of approximately $31.5 million due as a result of two separate
swap transactions that were entered into by Servico in an effort to manage the
interest rate risk associated with its financing for the Impac merger.
David Buddemeyer, Chairman of the Board and Chief Executive Officer of
Servico, will resign from all his positions with Servico upon the consummation
of the merger.
<PAGE> 2
SERVICO, INC.
NEWS RELEASE, page 2
Once the merger is completed, Robert S. Cole, currently the President
of Impac, will become Chief Executive Officer of Lodgian. Lodgian will also
establish an Office of the Chairman composed of directors Joseph C. Calabro,
John Lang and Michael A. Leven, with Joseph C. Calabro serving as acting
chairman of the Office of the Chairman.
Servico currently owns or manages 90 hotels with more than 18,300 rooms
located in 24 states, Canada and Europe. The hotels are primarily full service,
providing food and beverage service as well as lodging and meeting facilities.
Substantially all of Servico's hotels are affiliated with nationally recognized
hospitality franchises, including Holiday Inn, Crowne Plaza, Hilton, Omni,
Radisson, Sheraton and Westin. With assets in excess of $750 million, Servico is
one of the largest hotel owner/operators in the United States.
Statements in this release may be construed to be forward looking and
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward looking
statements involve risks and uncertainties, including without limitation, risks
relating to the operation and acquisition of hotels, risks that the Impac
acquisition will not be completed, risks relating to the availability of capital
and the ability to refinance debt, risks relating to the historical cyclicality
of the lodging industry and other risks identified in Servico's SEC filings.
