-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AYf3Z4dnxqXdrOh9GCddcLWPXl9ydkOgN0wHTUjU4ktB1L/rO2pUMyOZE/yY9Tdt xD26rpLd59fLey3MIuGaIQ== 0000950144-97-011986.txt : 19971113 0000950144-97-011986.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950144-97-011986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICO INC CENTRAL INDEX KEY: 0000089121 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 650350241 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11342 FILM NUMBER: 97715206 BUSINESS ADDRESS: STREET 1: 1601 BELVEDERE RD STE 501 S CITY: WEST PALM BEACH STATE: FL ZIP: 33406 BUSINESS PHONE: 5616899970 MAIL ADDRESS: STREET 1: 1601 BELVEDERE ROAD CITY: WEST PALM BEACH STATE: FL ZIP: 33406 10-Q 1 SERVICO, INC. FORM 10-Q 9-30-97 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 2 SERVICO, INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page No. -------- 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
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SERVICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (UNAUDITED) 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 ======== ========
SEE ACCOMPANYING NOTES. 3 4 SERVICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1997 1996 1997 1996 --------- --------- --------- --------- 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 ========= ========= ========= =========
SEE ACCOMPANYING NOTES. 4 5 SERVICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL ----------------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ----------- ------------- 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 =========== =========== =========== =========== ===========
The data for the nine months ended September 30, 1997 is unaudited. SEE ACCOMPANYING NOTES. 5 6 SERVICO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ------------ ------------ 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 ========= =========
SEE ACCOMPANYING NOTES. 6 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 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 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 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 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 12 The following table summarizes certain operating data for the Company's hotels for the three months ended September 30, 1997 and 1996:
September 30, 1997 September 30, 1996 ---------------------------------------------------------------- ------------------ Average Number of Daily Hotels Occupancy Rate RevPAR RevPAR ---------------------------------------------------------------- ------------------ 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 ==
*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 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 14 The following table summarizes certain operating data for the Company's hotels for the nine months ended September 30, 1997 and 1996:
September 30, 1997 September 30, 1996 ---------------------------------------------------------------- ------------------ Average Number of Daily Hotels Occupancy Rate RevPAR RevPAR ---------------------------------------------------------------- ------------------ 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 ==
*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 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 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 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 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ----------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- 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 ======== ======== ======== ========
EX-15.1 3 ACCOUNTANTS REVIEW REPORT 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 EX-15.2 4 LETTER FROM INDEPENDENT CERTIFIED PUBLIC ACCTS 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 EX-27 5 FINANCIAL DATA SCHEDULE
5 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. 1000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 38,142 0 10,851 0 0 62,694 432,517 0 521,048 39,759 222,096 0 0 209 236,194 521,048 0 202,414 0 166,472 (298) 0 20,562 15,678 6,270 9,408 0 (3,751) 0 5,657 .42 .42
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