-----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, KAcypqwEF2CGQ5pUUBU/O9MAazu1mSXG9hD+4YeMkh/GNj70mvH6whOL8Cx8q0Zc B8oopCxcP5OT/F2ITA6JsA== 0000950144-97-003014.txt : 19970328 0000950144-97-003014.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950144-97-003014 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: AMEX 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11342 FILM NUMBER: 97564829 BUSINESS ADDRESS: STREET 1: 1601 BELVEDERE RD STE 501 S CITY: WEST PALM BEACH STATE: FL ZIP: 33406 BUSINESS PHONE: 4076899970 MAIL ADDRESS: STREET 1: 1601 BELVEDERE ROAD CITY: WEST PALM BEACH STATE: FL ZIP: 33406 10-K405 1 SERVICO, INC. 10-K405 12-31-96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission File No. 1-11342 ------- SERVICO, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-0350241 - ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 1601 Belvedere Road, West Palm Beach, FL 33406 - ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (561) 689-9970 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock American Stock Exchange $.01 par value per share Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the registrant as of March 14, 1997, was $122,296,300 based on the closing price of $19.75 per share of the Common Stock as reported by the American Stock Exchange on such date. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ---- ---- The registrant had 9,396,005 shares of Common Stock, par value $.01, outstanding as of March 14, 1997. Documents incorporated by reference: Definitive Proxy Statement for the Company's 1997 Annual Meeting of Shareholders (incorporated in Part III to the extent provided in Items 10, 11, 12 and 13 hereof). 2 PART I ITEM 1. BUSINESS General Servico, Inc., its wholly-owned subsidiaries and consolidated partnerships (collectively, the "Company") is one of the leading hotel companies in the United States. At December 31, 1996, the Company had ownership interests in 57 hotels containing 11,059 rooms and managed four additional hotels for third parties. These 61 hotels, located in 22 states, contain a total of 11,979 rooms and substantially all of the hotels are "full service" properties offering lodging, food, beverage and meeting facilities. At December 31, 1996, the Company was the largest franchisee of Holiday Inns in the United States. The Company's business strategy is to seek to maximize the value and income potential of its wholly owned, partially owned and third party managed hotels through increases in occupancy, room rate and food and beverage revenues. Additionally, the Company seeks to pursue growth of its operations through the identification and acquisition of properties where there is a significant opportunity for potential growth. The Company has historically achieved growth by repositioning its hotel properties through operational improvements, renovation of physical facilities and changes in franchise affiliations. During the period from 1991 through 1994, the Company devoted significant resources and efforts to renovating and repositioning its existing hotel properties. Approximately $6,700 per room was spent on hotel renovations and upgrading of hotel operating systems and equipment. Fourteen of the Company's hotels underwent changes in franchise affiliations to enhance their competitive position in their respective markets. These efforts resulted in hotels with increased room revenue per available room ("RevPAR"), while increasing the desirability of the hotels to potential guests. Having stabilized its core base of hotels (the "Stabilized Hotels"), the Company embarked on an aggressive program of external growth through the acquisition, repositioning and renovation of additional hotel properties (the "Reposition Hotels"). Since August 1993, the Company has acquired ownership interests in 29 additional hotel properties. The following table sets forth information concerning the acquisition of ownership interests in hotels during 1995 and 1996: 1 3
Wholly Partially Total Owned Owned ------------------- ------------------- ------------------- Number Number Number Number Number Number of of of of of of Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- Fiscal Year-End 1994 34 6,912 28 5,561 6 1,351 1995 Additions 12 2,119 7 1,012 5 1,107 -- ------ -- ----- -- ----- Fiscal Year-End 1995 46 9,031 35 6,573 11 2,458 1996 Additions 11 2,028 8 1,377 3 651 -- ------ - ----- - ----- Fiscal Year-End 1996 57 11,059 43 7,950 14 3,109 == ====== == ===== == =====
The Company purchased 15 hotels and purchased majority partnership interests in 9 hotels during 1995 and 1996. The average purchase price of these hotels was $32,940 per room and the Company expects to spend approximately $7,100 per room in renovations and capital assets for a total cost per room of $40,040. The Company believes this cost per room is significantly below replacement cost, which the Company estimates to be between $75,000 and $90,000 per room for new construction of hotels with similar facilities in the respective markets. The Company recognizes that, although contributing to the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") and net income, during the repositioning period (generally 12 to 36 months) hotels will usually experience lower operating results such as RevPAR and profit margins. The following table displays key hospitality performance measures for 1994, 1995 and 1996 for both the Stabilized Hotels and Reposition Hotels included in the Company's consolidated financial statements:
Number Number of of Average Hotels(a) Rooms(a) Occupancy Daily Rate RevPAR --------- -------- --------- ---------- ------ 1994 Stabilized Hotels 30 5,974 66.7% $64.26 $42.86 Reposition Hotels 2 490 53.3% $50.02 $26.66 -- ------ ---- ------ ------ Total 32 6,464 66.3% $63.93 $42.39 == ====== ==== ====== ====== 1995 Stabilized Hotels 32 6,464 67.7% $66.72 $45.17 Reposition Hotels 11 1,876 67.6% $58.42 $39.49 -- ------ ---- ------ ------ Total 43 8,340 67.7% $65.99 $44.68 == ====== ==== ====== ====== 1996 Stabilized Hotels 32 6,464 68.1% $70.39 $47.94 Reposition Hotels 24 4,355 61.8% $62.78 $38.80 -- ------ ---- ------ ------ Total 56 10,819 66.0% $68.01 $44.89 == ====== ==== ====== ======
(a) Excludes a 240 room hotel in which the Company has a minority ownership interest. 2 4 For the year ended December 31, 1996, the operating performance of the Stabilized Hotels improved significantly, as demonstrated by a 5.5% increase in revenues, a 20.0% increase in net operating income and a 6.1% increase in RevPAR over the comparable prior year period. The operating performance at all of the Company's hotels during the same period does not reflect the same significant increases primarily because of the lower operating results of the Reposition Hotels. Management believes that the Reposition Hotels were acquired at attractive prices and represent significant opportunities for improved operating results in the future. The Company is in the process of repositioning and renovating the Reposition Hotels based on strategic plans designed to address the opportunities presented by each hotel and the hotel's particular market. Renovations are chosen based on anticipated returns on investment. These renovations include enhancing lobbies, restaurants and public areas, upgrading guest rooms and converting unprofitable lounge areas to meeting rooms to accommodate the needs of business travelers. In certain instances, hotel properties are reflagged with different franchise brands to further identify the improved property to the community. As a fully integrated owner and manager, Servico seeks to capitalize on its management experience and expertise by continuing to acquire underperforming full service hotels and improving the operating performance of hotels after acquisition. The Company's management team has successfully managed hotels in all segments of the hotel industry. Management believes that the Company's past success and future performance depend on its ability (i) to identify underperforming hotels and quickly implement successful turnaround plans; (ii) to develop and implement marketing plans that particularly position each hotel property within its local market and (iii) to develop management plans that focus on guest satisfaction, revenue yield, cost control and labor productivity. The Company's management culture stresses entrepreneurship and creativity. Franchise Affiliations In recent years, operators of hotels not owned or managed by major lodging companies have affiliated their hotels with national hotel franchisors as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Franchisors provide a number of services to hotel operators which can positively contribute to the improved financial performance of their properties, including national reservation systems, marketing and advertising programs and direct sales programs. The Company believes that hotel franchisors with larger numbers of hotels enjoy greater brand awareness among potential hotel guests than those with fewer numbers of hotels. Hotels typically operate with high fixed costs, and increases in revenues generated by affiliation with a national franchisor can, at times, contribute positively to a hotel's financial performance. As reported by Smith Travel Research, approximately 930 hotel properties changed their affiliation in 1995, the latest date such information was available. 77% of these affiliation changes converted from independent status to affiliation with a national franchisor or converted from one national franchisor to another, while only 23% canceled or were required to cancel their franchise affiliation. 3 5 At December 31, 1996, all of the Company's owned or managed hotels were affiliated with national hotel franchises, including Holiday Inn, Best Western, Clarion, Crowne Plaza, Days Inn, Embassy Suites, Hampton Inn, Hilton, Howard Johnson, Omni, Quality Inn, Radisson, Sheraton and Westin as set forth in the following table:
Wholly Partially Third Party Total Owned Owned Managed ----------------- ------------------ ----------------- ---------------- Number Number Number Number Number Number Number Number of of of of of of of of Franchise Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms - --------- ------ ------ ------ ------ ------ ------- ------ ------- Holiday Inn 38 7,245 25 4,379 11 2,453 2 413 Best Western 5 799 5 799 - - - - Hilton Inn 3 624 2 431 1 193 - - Radisson 3 660 1 163 1 244 1 253 Hampton Inn 2 237 2 237 - - - - Howard Johnson 2 255 2 255 - - - - Omni 2 605 1 386 1 219 - - Other 6 1,554 5 1,300 - - 1 254 --- ------ --- ----- --- ----- --- --- Total 61 11,979 43 7,950 14 3,109 4 920 === ====== === ===== === ===== === ===
The Company's license agreements with the national hotel franchises typically authorize the operation of a hotel under the licensed name, at a specific location or within a specific area, and require that the hotel be operated in accordance with standards specified by the licensor. The license agreements also permit the Company to utilize the licensor's reservation system. Generally, the license agreements require the Company to pay a royalty fee, an advertising/marketing fee, a fee for the use of the licensor's nationwide reservation system and certain ancillary charges. Royalty fees under the Company's various license agreements generally range from three percent to five percent of gross room revenues, while advertising/marketing fees provided for in the agreements generally are one and one half percent of gross room revenues and reservation system fees generally are one percent of gross room revenues. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specifications of the licensor. The license agreements generally have an original ten year term, although certain license agreements provide for original 15 and 20 year terms. The majority of the Company's license agreements have five to nine years remaining on the term. The licensor may require the Company to upgrade its facilities at any time to comply with the licensor's then current standards. The licensee may apply for a license renewal as existing licenses expire. In connection with license renewals, the licensor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facility or the licensor may elect not to renew the license. It is the Company's policy to review individual property franchise affiliations at the time of property acquisition and, thereafter, on a regular basis. These reviews may result in changes in such affiliations. Management Agreements At December 31, 1996, the Company managed four hotels for third parties. All hotels managed for third parties are done so in accordance with written management agreements. These management agreements provide that the Company be paid a base fee calculated as a percentage of gross 4 6 revenues, and generally provide for an accounting services fee and an incentive management fee. The incentive fees are generally a percentage of gross operating profits exceeding negotiated amounts. All operating and other expenses are paid by the owner. The management agreements provide for original terms of from one to five years. Fees payable to the Company under the management agreements range from one and one half to three percent of gross sales, and accounting fees range from $1,600 to $2,500 per month. One of the Company's hotels, the Westin William Penn Hotel located in Pittsburgh, Pennsylvania, is managed by an unaffiliated third party. The terms of this management agreement provide for the manager to receive the greater of a base fee of three percent of gross revenues or an incentive fee based on profits available for debt service. The agreement also provides for the Company to make funds available for capital improvements. Hotel Operations Each of the hotels owned or managed by the Company has its own on-site management and staff which are employed at the hotel level. These employees are, in turn, supervised by regional managers and the Company's senior management. The Company also has centralized corporate departments which support the on-site management in the following areas: accounting and finance, payroll, data processing and management information services, interior design, purchasing, food and beverage services, human resources, recruiting and training, corporate sales and marketing, legal, advertising, insurance and telecommunications. The Company seeks to attract conventions, business meetings and other large groups to the Company's hotels. To this end, the Company maintains corporate sales and marketing departments, which, together with the regional managers assist the individual hotels in the solicitation, organization and planning of major guest functions. Executive Officers The Company believes it has a strong management team which is capable of leading the Company as it pursues its business strategy. Information regarding the executive officers of Servico at December 31, 1996, follows: David Buddemeyer has been the Chief Executive Officer of Servico since December 1995, a director since April 1994 and its President since May 1993. Mr. Buddemeyer served as the Chief Operating Officer of the Company from May 1993 to December 1995 and its Executive Vice President from June 1990 to May 1993. Prior to such time, from 1987 to June 1990, he served as Vice President-Operations of Prime Motor Inns, Inc., a hotel management company. 5 7 Warren M. Knight has been Vice President-Finance of Servico and its Chief Financial Officer since December 1991. Prior to such time, from March 1988 to November 1991, Mr. Knight served as Director of Finance for W.A. Taylor & Co., an importer of distilled spirits into the United States. Robert D. Ruffin has been Vice President-Administration of Servico since June 1991 and Secretary of Servico since January 1992. Mr. Ruffin joined Servico in November 1990, and, prior to such time, Mr. Ruffin was employed by Kendavis Holding Company for 29 years, and served as its Vice President-Industrial Relations from 1986 through 1990. Peter J. Walz has been Vice President-Acquisitions of Servico since February 1996. Prior to such time, from December 1994 to January 1996, he was a consultant to the Company. From October 1993 to November 1994, Mr. Walz was an executive officer of Hospitality Investment Trust, Inc., a development stage lodging real estate investment trust. Prior to such time, from April 1987 to September 1993, Mr. Walz was Executive Vice President of CMS Development, Inc., a developer of office buildings, condominiums and hotels. Financing Arrangements Substantially all of the Company's hotels are subject to mortgage financing, which at December 31, 1996, totaled approximately $284 million. Approximately $24 million of the mortgage financing collateralized by the Company's hotels, and entered into by the various subsidiaries, is guaranteed by Servico, Inc. Servico, Inc.'s guarantees of mortgage financing generally provide for direct recourse by the lender against Servico, Inc., without requiring the lender to seek recourse against either the applicable subsidiary or the hotel property securing the mortgage financing. As a consequence, if payments under mortgage financing guaranteed by Servico, Inc. are not timely made, Servico, Inc. may be required to make payments in accordance with its guarantees. In April 1996, the Company refinanced certain long-term obligations on twenty of its hotels. This transaction is more fully discussed in "Item 7. Liquidity and Capital Resources". Competition and Seasonality The hotel business is highly competitive. The demand for accommodations and the resulting cash flow vary seasonally. The off-season tends to be the winter months for properties located in colder weather climates and the summer months for properties located in warmer weather climates. Levels of demand are dependent upon many factors including general and local economic conditions and changes in levels of tourism and business-related travel. The Company's hotels depend upon both commercial and tourist travelers for revenues. Generally, the Company's hotels operate in areas that contain numerous other competitive lodging facilities, including hotels associated with franchisors which may have more extensive reservation networks than those which may be available to the Company. The Company competes with other facilities on various bases, including room prices, quality, service, location and amenities customarily offered to the traveling public. 6 8 Employees At December 31, 1996, the Company had 4,249 full time and 2,272 part time employees. There are 79 full time employees and 2 part time employees of the Company engaged in administrative and executive activities and the balance of the Company's employees manage, operate and maintain the Company's properties. At December 31, 1996, 908 of the Company's full and part time employees located at four hotels were covered by collective bargaining agreements. Management considers its relations with its employees to be satisfactory. Insurance The Company maintains insurance covering liabilities for personal injuries and property damage. The Company also maintains, among other types of insurance coverage, real and personal property insurance, directors and officers liability insurance, liquor liability insurance, workers' compensation insurance, travel accident insurance for certain of its employees, fiduciary liability insurance and business automobile insurance. The Company believes it maintains sufficient insurance coverage for the operation of its business. Regulation The Company's hotels are subject to state and local regulations with respect to the sale of alcoholic beverages, and the Company must obtain and maintain various licenses and permits. All such licenses and permits must be periodically renewed and may be revoked or suspended for cause at any time. Certain of these licenses and permits are material to the Company's business and the loss of such licenses could have a material adverse effect on the Company's financial condition and results of operations. The Company is not aware of any reason why it should not be in a position to maintain its licenses. The Company is also subject in certain states to dramshop statutes, which may give an injured person the right to recover damages from any establishment which wrongfully served alcoholic beverages to the person who, while intoxicated, caused the injury. The Company believes that its insurance coverage with respect to any such liquor liability is adequate. The Company is subject to certain federal and state labor laws and regulations such as minimum wage requirements, regulations relating to working conditions, laws restricting the employment of illegal aliens and the Americans with Disabilities Act. As a provider of restaurant services, the Company is also subject to certain federal, state and local health laws and regulations. The Company believes it complies with such laws and regulations in all material respects. To date, federal and state environmental regulations have not had a material effect on the Company's operations. However, such laws potentially impose cleanup costs for hazardous waste contamination on property owners. If any material hazardous waste contamination problems do exist on any of the Company's properties, the Company may be exposed to liability for the costs associated with the cleanup of such sites. 7 9 Background The Company's predecessor was incorporated in 1956 under the laws of the state of Delaware. From 1956 through 1990, the Company engaged in the ownership and operation of hotels under a series of different ownerships. In September 1990, the Company's predecessor filed for protection under Chapter 11 of the United States Bankruptcy Code. The Company emerged from reorganization proceedings in August 1992 and, in accordance with the Company's Plan of Reorganization, the Company's creditors were issued 7,000,000 shares of the Company's common stock. ITEM 2. PROPERTIES At December 31, 1996, the Company had ownership interests in 57 hotels containing 11,059 rooms. The Company's hotels generally target commercial, convention, association and vacation travelers as customers. Substantially all of the hotels are "full service" properties with lodging, food, beverage and meeting facilities, and are subject to financing as described in "Item 1. Financing Arrangements". Set forth below is information regarding the Company's hotels at December 31, 1996:
Wholly Partially Total Owned Owned(a) ------------------- ------------------- ------------------- Number Number Number Number Number Number of of of of of of State Hotels Rooms Hotels Rooms Hotels Rooms ----- ------ ------ ------ ------ ------ ------ Alabama 4 559 4 559 - - Arizona 4 705 3 407 1 298 California 1 129 1 129 - - Colorado 1 216 1 216 - - Florida 6 1,166 4 654 2 512 Georgia 3 564 2 325 1 239 Indiana 3 640 2 432 1 208 Iowa 3 443 2 250 1 193 Kansas 3 541 1 152 2 389 Louisiana 2 448 1 204 1 244 Maryland 1 140 1 140 - - Massachusetts 1 243 - - 1 243 Michigan 3 602 2 425 1 177 Minnesota 1 156 1 156 - - Nebraska 2 381 2 381 - - New Mexico 1 130 1 130 - - New York 1 386 1 386 - - North Carolina 2 400 2 400 - - Ohio 2 459 - - 2 459 Pennsylvania 8 1,797 7 1,650 1 147 South Carolina 3 537 3 537 - - Texas 2 417 2 417 - - ---- ------ --- ----- ---- ----- Total 57 11,059 43 7,950 14 3,109 ==== ====== === ===== ==== =====
8 10 (a) Partially owned hotels are owned by partnerships of which Company subsidiaries, in most instances, are the general partner. The Company's partially owned hotels consist of 30% ownership of one hotel containing 240 rooms, 50% ownership of four hotels containing 903 rooms and 51% ownership of nine hotels containing 1,966 rooms. Four of the Company's hotels are located on land subject to long-term leases, and four are subject to leases covering the land and improvements. Three of the Company's hotels are leased with Industrial Revenue Bond financing from the municipalities in which they are located. Generally, the leases are for terms in excess of the depreciable lives of the improvements or contain a purchase option and provide for fixed rents. In certain instances, additional rents based on a percentage of revenue or cash flow may be payable. The leases generally require the Company to pay the cost of repairs, insurance and real estate taxes. ITEM 3. LEGAL PROCEEDINGS The Company is a party to legal proceedings arising in the ordinary course of its business, the impact of which would not, either individually or in the aggregate, in management's opinion, have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended December 31, 1996, no matter was submitted to a vote of the Company's shareholders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Servico's common stock is listed on the American Stock Exchange and its trading symbol is SER. The following table sets forth the high and low sales prices for Servico's common stock on the American Stock Exchange on a quarterly basis for the past two years.
1996 1995 ----------------------- ------------- High Low High Low ---- --- ---- --- First Quarter 13 7/8 10 1/2 11 1/8 9 1/4 Second Quarter 16 1/2 11 3/4 10 3/8 9 1/8 Third Quarter 17 13 1/2 16 9 3/4 Fourth Quarter 17 1/4 14 1/2 15 1/2 10 1/8
As of March 10, 1997, there were 3,040 shareholders of record of Servico's common stock. 9 11 The Company has not paid any cash dividends since its reorganization and has no current plans to initiate the payment of dividends. The Company currently anticipates that it will retain any future earnings for use in its business. The Board of Directors of the Company will determine future dividend policies based on the Company's financial condition, profitability, cash flow, capital requirements and business outlook, among other factors. There are no restrictions on the Company's ability to pay dividends. ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data The following table presents selected financial data derived from the Company's historical financial statements for the years ended December 31, 1993 through 1996. The Company changed its fiscal year from June 30 to December 31 during 1992, and in order to provide meaningful comparative data, unaudited 1992 financial data is being presented for the twelve months ended December 31. This financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included in this Form 10-K.
1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ---------- (In thousands, except share data) Revenues $ 239,526 $ 178,480 $ 149,683 $ 128,998 $ 127,189 Income (loss) before non-recurring items, net of taxes 5,398 4,264 2,588 710 (3,817) Non-recurring items, net of taxes 3,150 (356) 193 1,067 66,945 Income before extraordinary items, net of taxes 8,548 3,909 2,781 1,777 63,128 Extraordinary items, net of taxes (348) - 1,436 - - Net income 8,200 3,909 4,217 1,777 63,128 EBITDA (a) 57,915 36,894 26,376 19,697 17,558 Fully diluted per common share data: Income (loss) before non-recurring items, net of taxes .55 .46 .31 .10 (.55) Income before extraordinary items, net of taxes .87 .42 .33 .24 9.02 Net income $.84 $.42 $.50 $.24 $9.02 Weighted average shares 9,762,707 9,318,670 8,414,945 7,468,128 7,000,000 Cash dividends per common share - - - - - End of period: Total assets $ 439,786 $ 324,202 $ 228,900 $ 191,270 $ 180,115 Long-term obligations 284,880 210,242 143,830 114,841 119,939 Total stockholders' equity 74,738 62,820 46,740 35,008 32,869
(a) EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values. EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. 10 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Occupancy levels, average daily rate and RevPAR are important hospitality performance measures. These performance measures for the Company's hotels are impacted by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and, in the case of occupancy levels, changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most Company hotels experience lower occupancy levels in the fall and winter (November through February) which may result in lower revenues, lower net income and less cash flow during these months. The discussion of results of operations, income taxes and liquidity and capital resources that follows is derived from the Company's Audited Consolidated Financial Statements set forth in "Item 8. Financial Statements and Supplementary Data" included in this Form 10-K and should be read in conjunction with such financial statements and notes thereto. Results of Operations YEAR ENDED DECEMBER 31, 1996 ("1996") AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 ("1995") At December 31, 1996, the Company owned 56 hotels, managed 4 hotels for third party owners and had a minority investment in 1 hotel compared with 43 hotels owned, 9 managed for third party owners and 3 minority investments at December 31, 1995. Revenues in 1996 were $239.5 million, a 34.2% increase over 1995's revenues of $178.5 million. Of the $61 million increase, $9.3 million was attributable to the Stabilized Hotels and $51.7 million was attributable to the Reposition Hotels. The increase for the Stabilized Hotels was primarily the result of a 6.1% increase in RevPAR due to successful yield management and marketing strategies as well as the continued improvement in the hospitality industry generally. However, the increase in RevPAR for these hotels was impacted during 1996 by the loss of business associated with hurricane and storm activity in the southeastern United States during July and September. Operating expenses before depreciation and amortization were $182.9 million in 1996 (76.4% of revenue) compared with $142.3 million (79.7% of revenue) for 1995. The decrease in operating expenses as a percentage of revenues is a result of the combined effect of strong revenue growth and continued emphasis on cost controls. Depreciation and amortization expense in 1996 was $18.7 million, an increase over 1995 depreciation and amortization expense of $12.4 million. Of this increase, $2.1 and $4.2 million related to capital improvements made at the Stabilized Hotels and the Reposition Hotels, respectively. 11 13 As a result of the above, income from operations for 1996 was $37.9 million, an increase of 59.2% over 1995 income from operations of $23.8 million. Interest expense (net of interest income) was $27.8 million for 1996, a $10.9 million increase over the $16.9 million of interest expense for 1995. Included in the $10.9 million increase was $7 million of interest expense on mortgages related to the Reposition Hotels. The remaining $3.9 million increase for the Stabilized Hotels included a $1.7 million expense associated with the amortization of certain deferred loan costs related to a $123.2 million refinancing (See Note 5 of the Notes to Consolidated Financial Statements), with the balance related to new borrowings. Minority interests expense was $2.1 million for 1996 and $.6 million for 1995. Of this $1.5 million increase, $1.2 million related to nine of the Reposition Hotels which were acquired in partnership with third parties. Other income for 1996 includes a $3.6 million net settlement of a lawsuit received by the Company as more fully discussed in Note 10 of the Notes to Consolidated Financial Statements. The Company recognized an extraordinary charge of $.3 million, after taxes, in 1996 which related to early extinguishment of debt associated with the refinancing of certain hotels as more fully discussed under Liquidity and Capital Resources. After a provision for income taxes of $3.2 million and a loss on early extinguishment of debt of $.3 million, net of taxes, for 1996 and a provision for income taxes of $2.6 million for 1995, the Company had net income of $8.2 million ($.84 per share) for 1996 and $3.9 million ($.42 per share) for 1995. Without consideration of the non-recurring and extraordinary items, the Company had net income of $5.4 million ($.55 per share) for 1996 and $4.3 million ($.46 per share) for 1995. YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 ("1994") At December 31, 1995, the Company owned 43 hotels, managed 9 hotels for third party owners and had a minority investment in 3 hotels compared with 32 hotels owned, 10 managed for third party owners and 2 minority investments at December 31, 1994. Revenues in 1995 were $178.5 million, a 19.2% increase over 1994's revenues of $149.7 million. Of the $28.8 million increase, $11.1 million was generated by the Stabilized Hotels and $17.7 million was attributable to the Reposition Hotels acquired in 1994 and 1995. The increase for the Stabilized Hotels was primarily attributable to a 5.4% increase in RevPAR as a result of the renovations and changes in franchise affiliations made at many of the hotels. Also contributing to the increase were effective yield management and marketing strategies as well as continued improvement in the hospitality industry generally. Operating expenses before depreciation and amortization were $142.3 million in 1995 (79.7% of revenue) compared with $123.6 million (82.6% of revenue) for 1994. The decrease in operating expenses as a percentage of revenues was primarily a result of an emphasis on cost controls. Depreciation 12 14 and amortization expense in 1995 was $12.4 million, an increase over 1994 depreciation and amortization expense of $9.5 million. Of this increase, $1.6 and $1.3 million related to continuing capital improvements made at the Stabilized Hotels the Reposition Hotels, respectively. As a result of the above, income from operations for 1995 was $23.8 million, an increase of 43.4% over 1994's income from operations of $16.6 million. Other expenses in 1995 (primarily interest expense) of $18.5 million increased 43.4% over 1994's other expenses of $12.9 million. Of this increase, $2.6 million was related to interest associated with mortgages on the Reposition Hotels purchased in 1994 and 1995 and the remaining increase is primarily related to both the refinancing of 13 Stabilized Hotels and new borrowings for equipment purchases. The Company had other income (primarily interest income) of $1.2 million in 1995, an increase of 33.3% over 1994's other income of $.9 million which included a $.5 million gain on recovery of investments. After a provision for income taxes of $2.6 million in 1995 and $1.9 million in 1994, the Company had income before an extraordinary item of $3.9 million ($.42 per share) for 1995 and $2.8 million ($.34 per share) for 1994, an increase of 39.3%. In 1994, the Company had an extraordinary gain of $1.4 million ($.17 per share), net of income taxes of $1 million, related to a gain on discharge of indebtedness as more fully discussed in Note 5 of the Notes to Consolidated Financial Statements. Income Taxes As of December 31, 1996, the Company had a net operating loss carryforward of approximately $28.8 million for federal income tax purposes. During 1996, the Company realized a tax benefit relating to a litigation settlement which reduced the effective tax rate for 1996 as compared to prior years. The Company does not anticipate any similar tax benefit in the future. Liquidity and Capital Resources The Company's principal sources of liquidity are existing cash balances and cash flow from operations. The Company had EBITDA for 1996 of $57.9 million, a 56.9% increase from the $36.9 million for 1995. EBITDA is a widely regarded industry measure of lodging performance used in the assessment of hotel property values, although EBITDA is not indicative of and should not be used as an alternative to net income or net cash provided by operations as specified by generally accepted accounting principles. Net cash provided by operating activities for 1996 was $31.0 million compared to $20.7 million for 1995. In March 1996, the Company received a $3.6 million settlement (net of expenses) in connection with a 1992 lawsuit brought on behalf of Servico, against a bank group and law firm based on alleged breaches of their duties to the Company. 13 15 At December 31, 1996, the Company's working capital deficit was $14.2 million which included mortgage notes payable which mature within twelve months of $15.3 million. The Company expects to refinance or extend these mortgage notes before their due dates. The Company's ratio of current assets to current liabilities at December 31, 1996, was .7:1 (1:1, without consideration of the mortgages due in 1997). This compares to a working capital deficit of $6.3 million and a ratio of current assets to current liabilities of .8:1 at December 31, 1995. During 1996, the Company purchased eight hotels, entered into three partnerships which purchased three hotels and increased its ownership interest from 25% to 51% in two of its existing partnerships (owning two hotels) for an aggregate consideration of $63.7 million by the delivery of mortgage notes totaling $40.6 million and cash for the balance of which approximately $2 million was contributed by the minority partners. The 13 hotels combined above, containing an aggregate of 2,479 guest rooms, are operated under license agreements with nationally recognized franchisors and are managed by the Company. At December 31, 1996, the Company's long-term obligations were $284.9 million compared to $210.2 million at December 31, 1995. This increase was primarily the result of the acquisition of hotels during 1996 as discussed above and the refinancing of 20 existing hotels. The Company issued approximately $123.2 million in new variable rate mortgage notes, satisfied approximately $84.5 million of existing obligations, paid approximately $5.0 million in fees and expenses, escrowed approximately $1.3 million for future use by the Company and generated approximately $32.4 million of net proceeds. In addition, the Company recorded approximately $7.4 million in non-cash deferred loan costs which are being amortized over 36 months. These deferred loan costs are payable in May 1999. As part of the acquisition of hotels in 1996 and 1995, certain property improvements were required by the licensors as a condition of granting a license to the Company. In addition, other improvements were required by the mortgagees. Further, in connection with the refinancing of other hotels, as more fully discussed in Note 5 of the Notes to Consolidated Financial Statements, the lenders required the Company to make additional property improvements. The Company estimates the balance remaining to complete the licensor's required improvements to be approximately $8 million and the lender's requirements to be approximately $10 million as of December 31, 1996. Approximately $13 million of these improvements are expected to be completed in 1997 with the balance to be done by 1999. The Company had approximately $12.3 million escrowed for such improvements at December 31, 1996. While the Company believes that cash on hand and cash flow from operations are sufficient to support its capital improvement program and current operations, it will require additional funds to continue its external growth strategy. There is no assurance the Company will be successful in these efforts or that such financing will be available in amounts required or on terms satisfactory to the Company. The Company does not currently have any lines of credit. The Company may, in the future, seek to refinance its properties or to raise funds from the issuance of equity or debt. 14 16 Inflation The rate of inflation has not had a material effect on the Company's revenues or costs and expenses in the three most recent fiscal years, and it is not anticipated that inflation will have a material effect on the Company in the near term. Forward-Looking Statements Statements in this Form 10-K which express "belief", "anticipation", or "expectation", as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. Moreover, there are important factors which include, but are not limited to, general and local economic conditions, risks relating to the operation and acquisition of hotels, government legislation and regulation, changes in interest rates, the impact of rapid growth, the availability of capital to finance growth, the historical cyclicality of the lodging industry and other factors described in Part I of this Form 10-K and other Servico, Inc. filings with the United States Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. Actual results could differ materially from these forward-looking statements. In light of the risks and uncertainties, there is no assurance that the forward-looking statements contained in this Form 10-K will in fact prove correct or occur. The Company does not undertake any obligation to publicly release the results of any revisions to these forward-looking statements to reflect future events or circumstances. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 for a list of the Servico, Inc. Consolidated Financial Statements and Schedules filed as part of this report. Supplementary Information-Quarterly Results of Operations. The following table summarizes the unaudited quarterly financial data (in thousands, except share data): 15 17
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- YEAR ENDED DECEMBER 31, 1996 Revenues $ 52,599 $ 63,300 $ 61,503 $ 62,124 Income from operations 6,742 12,770 10,184 8,245 Income before extraordinary item 2,236 3,250 1,366 1,696 Extraordinary item: Loss on extinguishment of indebtedness, net of income taxes of $134 in the second quarter and $98 in the fourth quarter, respectively - (202) - (146) Net income 2,236 3,048 1,366 1,550 Per share data: Primary Income before extraordinary item .24 .33 .14 .17 Extraordinary item - (.02) - (.01) Net income .24 .31 .14 .16 Fully diluted Income before extraordinary item .24 .33 .14 .17 Extraordinary item - (.02) - (.01) Net income .24 .31 .14 .16 YEAR ENDED DECEMBER 31, 1995 Revenues 39,481 44,808 45,628 48,563 Income from operations 4,144 7,423 7,073 5,152 Net income 148 2,191 1,568 2 Per share data: Primary income per share .02 .23 .16 - Fully diluted income per share .02 .23 .16 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III The information required in Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) is incorporated by reference to the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 1997. 16 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following are filed as part of this report: (1) (2) Financial Statements The financial statements, financial statement schedules and supplementary information listed in the accompanying Index to Financial Statements Covered by Report of Independent Certified Public Accountants. (3) Exhibits The exhibits listed in the accompanying Index to Exhibits. (b) Reports on Form 8-K: During the quarter ended December 31, 1996, the Company did not file any reports on Form 8-K. 17 19 Servico, Inc. and Subsidiaries Index to Financial Statements Covered by Report of Independent Certified Public Accountants [Item 14(a)(1) and (2)] Consolidated Financial Statements Report of Independent Certified Public Accountants..................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995........................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994................................................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994....................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 .................................................. F-6 Notes to Consolidated Financial Statements............................................. F-8
All schedules have been omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedules or because the information required is included in the consolidated financial statements or notes thereto. F-1 20 Report of Independent Certified Public Accountants The Shareholders and Board of Directors Servico, Inc. We have audited the accompanying consolidated balance sheets of Servico, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended, December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Servico, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP West Palm Beach, Florida February 13, 1997 F-2 21 Servico, Inc. and Subsidiaries Consolidated Balance Sheets
DECEMBER 31, 1996 1995 ---- ---- (In Thousands) ASSETS Current assets: Cash and cash equivalents $ 19,473 $ 11,401 Accounts receivable, net of allowances 7,742 6,652 Other receivables 855 794 Inventories 2,796 1,878 Deferred income taxes 2,067 2,067 Other current assets 5,047 2,641 -------- -------- Total current assets 37,980 25,433 Property and equipment, net 364,922 277,873 Investment in unconsolidated entities 906 3,591 Other assets, net 35,978 17,305 -------- -------- $439,786 $324,202 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,369 $ 5,723 Accrued liabilities 23,100 19,977 Current portion of long-term obligations 22,719 5,992 -------- -------- Total current liabilities 52,188 31,692 Long-term obligations, less current portion 284,880 210,242 Deferred income taxes 8,353 7,682 Commitments and contingencies Minority interests 19,627 11,766 Stockholders' equity: Common stock, $.01 par value-25,000,000 shares authorized; 9,369,605 and 8,846,269 shares issued and outstanding at December 31, 1996 and 1995, respectively 94 88 Additional paid-in capital 55,136 51,424 Retained earnings 19,508 11,308 -------- -------- Total stockholders' equity 74,738 62,820 -------- -------- $439,786 $324,202 ======== ========
SEE ACCOMPANYING NOTES. F-3 22 Servico, Inc. and Subsidiaries Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands, Except Share Data) Revenues: Rooms $ 156,564 $ 113,902 $ 93,720 Food and beverage 68,803 53,499 46,945 Other 14,159 11,079 9,018 --------- --------- --------- 239,526 178,480 149,683 Operating expenses: Direct: Rooms 43,667 32,140 26,848 Food and beverage 52,761 41,474 36,585 General and administrative 9,297 8,977 7,944 Other 77,183 59,727 52,205 Depreciation and amortization 18,677 12,370 9,465 --------- --------- --------- 201,585 154,688 133,047 --------- --------- --------- Income from operations 37,941 23,792 16,636 Other income (expenses): Other income 5,335 1,197 864 Interest expense (29,443) (17,903) (12,693) Minority interests (2,060) (572) (171) --------- --------- --------- Income before income taxes and extraordinary item 11,773 6,514 4,636 Provision for income taxes 3,225 2,605 1,855 --------- --------- --------- Income before extraordinary item 8,548 3,909 2,781 Extraordinary item: (Loss) gain on extinguishment of indebtedness, net of income tax (benefit) expense of ($232) in 1996 and $956 in 1994 (348) - 1,436 --------- --------- --------- Net income $ 8,200 $ 3,909 $ 4,217 ========= ========= ========= Earnings per common and common equivalent share: Primary: Income before extraordinary item $ .87 $ .42 $ .34 Extraordinary item (.03) - .17 --------- --------- --------- Net income $ .84 $ .42 $ .51 ========= ========= ========= Fully diluted: Income before extraordinary item $ .87 $ .42 $ .33 Extraordinary item (.03) - .17 --------- --------- --------- Net income $ .84 $ .42 $ .50 ========= ========= =========
See accompanying notes F-4 23 Servico, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
COMMON STOCK ADDITIONAL TOTAL ---------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ---------- --------- ------------- (In Thousands, Except Share Data) Balance at December 31, 1993 7,046,617 $ 70 $ 31,756 $ 3,182 $ 35,008 Issuance of common stock 1,000,000 10 6,990 - 7,000 401(k) Plan contribution 43,555 1 434 - 435 Exercise of stock options 20,000 - 80 - 80 Net income - - - 4,217 4,217 --------- ------ -------- -------- -------- Balance at December 31, 1994 8,110,172 81 39,260 7,399 46,740 Issuance of common stock 830,000 8 8,157 - 8,165 Shares retired (159,532) (2) 2 - - 401(k) Plan contribution 38,829 1 331 - 332 Exercise of stock options 26,800 - 107 - 107 Reduction of valuation allowance - - 3,567 - 3,567 Net income - - - 3,909 3,909 --------- ------ -------- -------- -------- Balance at December 31, 1995 8,846,269 88 51,424 11,308 62,820 401(k) Plan contribution 25,536 1 465 - 466 Exercise of stock options 497,800 5 2,008 - 2,013 Tax benefit from exercise of stock options - - 1,239 - 1,239 Net income - - - 8,200 8,200 --------- ------ -------- -------- -------- Balance at December 31, 1996 9,369,605 $ 94 $ 55,136 $ 19,508 $ 74,738 ========= ====== ======== ======== ========
See accompanying notes. F-5 24 Servico, Inc. and Subsidiaries Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $ 8,200 $ 3,909 $ 4,217 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,677 12,370 9,465 Minority interests 2,060 572 171 401(k) Plan contributions 548 322 422 Deferred income taxes 1,252 1,328 2,005 Equity in loss of unconsolidated entities 63 85 89 Provision for losses (recoveries) on receivables 27 94 (49) Gain on litigation settlement (3,868) - - Gain on recovery of investments (134) - (539) Loss (gain) on extinguishment of indebtedness 580 - (2,392) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivables (824) (2,307) 87 Inventories (761) (399) (319) Other assets 1,875 272 (5,131) Accounts payable 200 (403) 1,071 Accrued liabilities 3,075 4,824 2,027 -------- --------- -------- Net cash provided by operating activities 30,970 20,667 11,124 -------- --------- -------- INVESTING ACTIVITIES Acquisitions of property and equipment (70,312) (73,038) (4,600) Capital improvements, net (26,323) (20,417) (15,558) Net deposits for capital expenditures (7,074) (6,105) - Notes receivable issued to related parties (1,670) - - Net proceeds from litigation settlement 3,868 - - Decrease (increase) in investment in unconsolidated entities 2,198 (2,118) (1,418) Payments on notes receivable issued to related parties 1,200 - - Net proceeds from recovery of investments 556 - 539 Other - - 250 -------- --------- -------- Net cash used in investing activities (97,557) (101,678) (20,787) -------- --------- --------
CONTINUED ON THE FOLLOWING PAGE F-6 25 Servico, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands) FINANCING ACTIVITIES Proceeds from issuance of long-term obligations 166,317 127,141 22,219 Contributions from minority interests 5,078 8,182 2,550 Net proceeds from issuance of common stock 2,013 8,272 7,080 Principal payments of long-term obligations (92,216) (59,498) (12,985) Payments of deferred loan costs (6,533) (4,657) - --------- --------- --------- Net cash provided by financing activities 74,659 79,440 18,864 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 8,072 (1,571) 9,201 Cash and cash equivalents at beginning of year 11,401 12,972 3,771 --------- --------- --------- Cash and cash equivalents at end of year $ 19,473 $ 11,401 $ 12,972 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest, net of amount capitalized $ 23,147 $ 11,935 $ 12,549 ========= ========= ========= Income taxes paid, net of refunds $ 2,531 $ 1,032 $ 438 ========= ========= ========= Non-cash capital lease obligations: Addition to property and equipment $ - $ - $ 2,085 ========= ========= ========= Addition to long-term obligations $ - $ - $ 2,085 ========= ========= =========
See Notes 5 and 6 for a description of other non-cash transactions. See accompanying notes. F-7 26 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Servico, Inc., its wholly-owned subsidiaries and consolidated partnerships (collectively, the "Company"), own or manage hotels in 22 states. At December 31, 1996 and 1995, the Company owned, either wholly or partially, or managed 61 and 55 hotels, respectively. PRINCIPLES OF CONSOLIDATION The financial statements consolidate the accounts of Servico, Inc. ("Servico"), its wholly-owned subsidiaries (owning 43 hotels) and partnerships in which Servico exercises control over the partnerships' assets and operations (owning 13 hotels). Servico believes it has control of partnerships when the Company manages and has control of the partnerships' assets and operations, has the ability and authority to enter into financing arrangements on behalf of the entity or to sell the assets of the entity within reasonable business guidelines. An unconsolidated entity (owning 1 hotel) in which the company exercises significant influence over operating and financial policies is accounted for on the equity method. The accounts of 9 hotels which the Company managed for third party owners during all or part of 1996 (4 at December 31, 1996) are not consolidated, however, management fee income earned from these hotels is included in other revenues. All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories consist primarily of food and beverage, linens, china, tableware and glassware and are valued at the lower of cost (computed on the first-in, first-out method) or market. MINORITY INTERESTS Minority interests represent the minority interests' proportionate share of equity or deficit of partnerships which are accounted for by the Company on a consolidated basis. The Company generally allocates to minority interests their share of any profits or losses in accordance with the provisions of the applicable agreements. However, if the loss applicable to a minority interest exceeds its total investment and advances, such excess is charged to the Company. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Property under capital leases is amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease term. The F-8 27 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT (CONTINUED) Company capitalizes interest costs incurred during the construction of capital assets. During the years ended December 31, 1996, 1995 and 1994, the Company capitalized $644,000, $632,000 and $506,000 of such costs, respectively. Management periodically evaluates the Company's property and equipment to determine if there has been any impairment other-than-temporary in the carrying value of the assets in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of " ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in 1995 and, such adoption has had no effect on the Company's financial position or results of operations. DEFERRED COSTS Deferred franchise, financing, and other deferred costs are stated at cost, net of accumulated amortization of $4,129,000 and $1,411,000 at December 31, 1996 and 1995, respectively, which is computed using the straight-line method, over the terms of the related franchise, loan or other agreements. The straight-line method of amortizing deferred financing costs approximates the interest method. CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts. The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. In the opinion of management, the carrying value of these instruments approximates market value as of December 31, 1996 and 1995. F-9 28 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Concentration of credit risk associated with cash and cash equivalents is considered low due to the credit quality of the issuers of the financial instruments held by the Company and due to their short duration to maturity. Accounts receivable are primarily from major credit card companies, airlines and other travel related companies. The Company performs ongoing evaluations of its significant customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. At December 31, 1996 and 1995, these allowances were $305,000 and $266,000, respectively. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per share is calculated based on the weighted average number of common shares and dilutive common equivalent shares outstanding during the periods. Earnings per common share include the Company's outstanding stock options, if dilutive, and common stock contributed or to be contributed by the Company to its employee 401(k) Plan (the "401(k)"). STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and, because the exercise price of the Company's employee stock options is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation", net income and earnings per share are not materially different from amounts reported, therefore, no pro forma information has been presented. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred $1,613,000, $1,194,000 and $928,000 in advertising costs during 1996, 1995 and 1994, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets F-10 29 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES (CONTINUED) and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. PROPERTY AND EQUIPMENT At December 31, 1996 and 1995, property and equipment consisted of the following:
USEFUL LIVES (YEARS) 1996 1995 ------- ---- ---- (In Thousands) Land - $ 32,246 $ 24,260 Buildings and improvements 10-30 295,858 219,437 Furnishings and equipment 3-10 72,762 46,281 Property under capital leases, buildings and improvements 10-30 8,530 8,530 -------- -------- 409,396 298,508 Less accumulated depreciation and amortization (52,955) (33,437) Construction in progress 8,481 12,802 -------- -------- $364,922 $277,873 ======== ========
During the year ended December 31, 1996, the Company purchased eight hotels and entered into three partnerships which purchased an additional three hotels. The aggregate purchase price for the eleven hotels was $60,700,000 and was paid for by the delivery of mortgage notes totaling $40,600,000 and cash for the balance, of which approximately $2,000,000 was contributed by the minority partners. In addition, in May 1996, the Company increased its ownership interests in two partnerships, owning two hotels, from 25% to 51% for approximately $3,000,000. As a result of the increase in ownership, the accounts of these two partnerships are included in the Company's consolidated financial statements. The minority partners in all five of the above partnerships are affiliates of Energy Management Corporation ("EMC") (see Note 8 for further information on EMC). The thirteen hotels combined above, containing an aggregate of 2,479 guest rooms, are operated under license agreements with nationally recognized franchisors and are managed by the Company. F-11 30 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. PROPERTY AND EQUIPMENT (CONTINUED) Unaudited pro forma results of operations assuming the 13 hotels were acquired on January 1, 1995, are as follows:
YEARS ENDED DECEMBER 31, 1996 1995 ---- ---- (In Thousands, Except Per Share Data) Revenues $255,077 $221,342 Income before extraordinary item 8,792 4,708 Net income 8,444 4,708 Income per share before extraordinary item .90 .51 Net income per share $ .87 $ .51 Weighted average common shares outstanding 9,763 9,319
During the year ended December 31, 1995, the Company purchased seven hotels and entered into four partnerships with affiliates of EMC, which purchased four additional hotels. The aggregate purchase price for the eleven hotels was $70,800,000 and was paid for by the delivery of mortgage notes totaling $54,200,000 and cash for the balance, of which $5,400,000 was contributed by the minority partners. The eleven hotels combined above, containing an aggregate of 1,876 rooms, are operated under license agreements with nationally recognized franchisors and are managed by the Company. 3. INVESTMENTS IN UNCONSOLIDATED ENTITIES At December 31, 1996, the Company had an investment in one unconsolidated hotel. In addition, in May 1996, the Company increased its ownership interests in two partnerships, owning two hotels, from 25% to 51% for approximately $3,000,000. These hotels were accounted for by the Company on the equity method prior to May 1996. As a result of the increase in ownership, the accounts of these two partnerships are included in the Company's consolidated financial statements from May 1996. The minority partners in these partnerships are affiliates of EMC. F-12 31 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. ACCRUED LIABILITIES At December 31, 1996 and 1995, accrued liabilities consisted of the following:
1996 1995 ---- ---- (In Thousands) Salaries and related costs $ 9,117 $ 7,290 Real estate taxes 2,500 2,035 Interest 2,335 1,755 Advance deposits 1,842 1,452 Sales taxes 1,781 1,230 Other 5,525 6,215 ------- ------- $23,100 $19,977 ======= =======
5. LONG-TERM OBLIGATIONS At December 31, 1996 and 1995, long-term obligations consisted of the following:
1996 1995 ---- ---- (In Thousands) Mortgage notes payable with fixed rates ranging from 8.4% to 10.7%, variable rates ranging from Prime (8.25% at December 31, 1996) plus 1% to 4% and LIBOR (5.4% at December 31, 1996) plus 3.5%, payable through 2010 $ 284,180 $ 192,764 Installment loans payable, primarily unsecured, with fixed rates of 7% to 10% payable through 2019 10,299 8,489 Obligations under capital leases, payable in various monthly installments through 2015, net of interest imputed at 8% to 18.3%(a) 12,019 13,182 Pre-petition priority claims, payable in equal semi-annual installments plus interest on unpaid balances at 7.5% per annum, payable through 1998 1,101 1,799 --------- --------- 307,599 216,234 Less current portion of long-term obligations (22,719) (5,992) --------- --------- $ 284,880 $ 210,242 ========= =========
F-13 32 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. LONG-TERM OBLIGATIONS (CONTINUED) (a) The Company is obligated under long-term capital leases primarily for the lease of two hotel properties. The hotel leases provide for specific minimum annual payments. In addition, the Company is responsible for property tax, insurance and maintenance expenses. One hotel lease has a remaining term of less than one year and the other of 18 years at December 31, 1996. The hotel leases contain renewal options from 20 to 80 years and one of the hotel leases includes a purchase option. Substantially, all of the Company's property and equipment are pledged as collateral for long-term obligations. Certain of the mortgage notes are subject to a prepayment penalty if repaid prior to their maturity. During 1996, the Company refinanced certain long-term obligations on 20 of its hotels. The Company issued approximately $123,200,000 in new variable rate mortgage notes, satisfied approximately $84,500,000 of existing obligations, paid approximately $5,000,000 in fees and expenses, escrowed approximately $1,300,000 for future use by the Company and generated approximately $32,400,000 of net proceeds. In addition, the Company recorded approximately $7,400,000 in non-cash deferred loan costs which are being amortized over 36 months. These deferred loan costs are payable in May 1999. In connection with this refinancing the Company recorded a loss on early extinguishment of debt of $348,000 (net of income taxes of $232,000) as an extraordinary item. During 1995, the Company completed a series of transactions for the refinancing of certain long-term obligations on 11 of its hotels. The Company executed $64,400,000 in new fixed rate mortgages maturing in 15 years, satisfied approximately $43,700,000 of existing obligations, paid approximately $3,200,000 in fees and expenses, escrowed approximately $3,300,000 for future use by the Company and generated in excess of $14,200,000 of net proceeds. In 1994, the Company prepaid certain obligations at a reduced amount and recorded a gain on early extinguishment of debt of $1,436,000 (net of income taxes of $956,000). This transaction was recorded as an extraordinary item. Maturities of long-term obligations for each of the five years after December 31, 1996 and thereafter, are as follows (in thousands): 1997 $ 22,719 1998 7,707 1999 31,362 2000 101,770 2001 13,517 Thereafter 130,524 ----------- $ 307,599 ===========
F-14 33 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. LONG-TERM OBLIGATIONS (CONTINUED) Subsequent to December 31, 1996, the Company entered into financing agreements to refinance $12,000,000 in debt which would have matured in 1997. This debt is classified as long-term debt at December 31, 1996. 6. INCOME TAXES Provision for income taxes for the Company is as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994 --------------------------- -------------------------- --------------------------- CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL ------- -------- ----- ------- -------- ----- ------- -------- ----- (In Thousands) Federal $1,322 $1,170 $2,492 $ 751 $1,262 $2,013 $ 110 $1,323 $1,433 State and local 651 82 733 526 66 592 422 - 422 ------ ------ ------ ------ ------ ------ ------ ------ ------ $1,973 $1,252 $3,225 $1,277 $1,328 $2,605 $ 532 $1,323 $1,855 ====== ====== ====== ====== ====== ====== ====== ====== ======
The components of the cumulative effect of temporary differences in the deferred income tax liability and asset balances at December 31, 1996 and 1995, are as follows:
1996 1995 ---------------------------------- ------------------------------------ CURRENT NON-CURRENT CURRENT NON-CURRENT TOTAL ASSET LIABILITY TOTAL ASSET LIABILITY ----- ------- ----------- ------- ----------- ----------- (In Thousands) Property and equipment $ 20,201 $ - $ 20,201 $ 19,371 $ - $ 19,371 Net operating loss carryforward (10,286) (605) (9,681) (10,983) (605) (10,378) Alternative minimum tax credits (1,371) - (1,371) (918) - (918) Self-insurance reserve (928) (928) - (903) (903) - Vacation pay accrual (438) (438) - (472) (472) - Other (892) (96) (796) (480) (87) (393) -------- ------- -------- -------- ------- -------- $ 6,286 $(2,067) $ 8,353 $ 5,615 $(2,067) $ 7,682 ======== ======= ======== ======== ======= ========
F-15 34 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. INCOME TAXES (CONTINUED) The difference between income taxes using the effective income tax rate and the federal income tax statutory rate of 34% is as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands) Federal income tax at statutory rate $ 4,003 $2,215 $1,576 State income taxes, net 483 390 279 Tax benefit with respect to legal settlement (1,261) - - ------- ------ ------ $ 3,225 $2,605 $1,855 ======= ====== ======
As of December 31, 1996, the Company had a net operating loss carryforward of approximately $28,800,000 for federal income tax purposes which expires in the years 2005 through 2008. The full amount of the income tax benefit of this net operating loss carry forward has been reflected in the Consolidated Financial Statements of the Company in prior years. 7. COMMITMENTS AND CONTINGENCIES Four of the Company's hotels are subject to long-term ground leases expiring from 2014 through 2056 which provide for minimum payments as well as incentive rent payments and most of the Company's hotels have noncancellable operating leases, mainly for operating equipment. The land covered by one lease can be purchased by the Company for approximately $2,500,000. For the years ended December 31, 1996, 1995 and 1994, lease expense for the three noncancellable ground leases and noncancellable operating leases was approximately $1,381,000, $1,280,000 and $1,060,000, respectively. At December 31, 1996, the future minimum commitments for noncancellable leases are as follows (in thousands): 1997 $ 1,154 1998 1,069 1999 796 2000 625 2001 624 Thereafter 21,638 ---------- $ 25,906 ==========
F-16 35 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has entered into license agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have an original ten year term. The majority of the Company's license agreements have four to nine years remaining on the term. The licensor may require the Company to upgrade its facilities at any time to comply with the licensor's then current standards. Upon the expiration of the term of a license, the licensee may apply for a license renewal. In connection with the renewal of a license, the licensor may require payment of a renewal fee, increased license, reservation and advertising fees, as well as substantial renovation of the facility. The license agreements are subject to cancellation in the event of a default, including the failure to operate the hotel in accordance with the quality standards and specifications of the licensor. The Company believes that the loss of a license for any individual hotel would not have a material adverse effect on the Company's financial condition and results of operations. The Company believes it will be able to renew its current licenses or obtain replacements of a comparable quality. Payments made in connection with these agreements totaled approximately $12,401,000, $8,649,000 and $6,593,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Fourteen hotels which the Company owns are operated under license agreements that require the Company to make certain capital improvements in accordance with a specified time schedule. Further, in connection with the refinancing of the Company's hotels (see Note 5) and the acquisition of other hotels (see Note 2), the Company has agreed to make certain capital improvements and has approximately $12,300,000 escrowed for such improvements. The Company estimates its remaining obligations for all the above commitments to be approximately $18,000,000 of which approximately $13,000,000 is expected to be spent in 1997 and the balance by 1999. The Company has maintenance agreements, primarily on a one to three year basis, which resulted in expenses of approximately $2,106,000, $1,699,000 and $1,520,000 for the years ended December 31, 1996, 1995 and 1994, respectively. In accordance with the provisions of one mortgage payable, in the event the property is sold, the lender has the right to any appreciation in the property to the extent the appreciation does not exceed the difference between the then outstanding carrying amount of the mortgage payable and the lender's security interest. The difference between the carrying amount of the mortgage payable and the lender's security interest was approximately $1,300,000 at December 31, 1996. The Company is a party to legal proceedings arising in the ordinary course of its business, the impact of which would not, either individually or in the aggregate, in management's opinion, based upon the facts known by management and the advice of counsel, have a material adverse effect on the Company's financial condition or results of operations. F-17 36 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. RELATED PARTY TRANSACTIONS In March 1995, the Company issued 800,000 shares of its common stock at a price of $10 per share to an affiliate of EMC on terms similar to the EMC transaction described below. In connection with the acquisition of the 800,000 shares, an affiliate of EMC agreed to make an additional $8,000,000 equity investment in partnerships or joint ventures with the Company for the purpose of acquiring hotel properties. This obligation had been satisfied as of December 31,1995. In April 1994, the Company issued one million shares of its common stock to EMC for $7,000,000 in cash. In connection with a certain Stock Acquisition and Standstill Agreement (the "Acquisition Agreement"), the Company agreed, during the term of the Acquisition Agreement, to cause the nomination of one designee of EMC to the Company's Board of Directors. This event occurred in April 1994. In accordance with the Acquisition Agreement, as amended, EMC also agreed to certain standstill provisions generally prohibiting it from acquiring voting securities of the Company with voting rights in excess of 30% (on a fully diluted basis) of the voting rights of all outstanding voting securities of the Company. EMC is also generally restricted in the amount and manner by which it may transfer any of the Company's common stock which it owns. 9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN The Company makes contributions to several multi-employer pension plans for employees of various subsidiaries covered by collective bargaining agreements. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts. Certain withdrawal penalties may exist, the amount of which are not determinable at this time. The cost of such contributions during the years ended December 31, 1996, 1995 and 1994, was approximately $499,000, $433,000 and $438,000, respectively. The Company adopted, the 401(k) for the benefit of its non-union employees under which participating employees may elect to contribute up to 10% of their compensation. The Company may match an employee's elective contributions to the 401(k) subject to certain conditions with shares of the Company's common stock equal to up to 100% of the amount of such employee's elective contributions. These employer contributions vest at a rate of 20% per year beginning in the third year of employment. The cost of these contributions during the years ended December 31, 1996, 1995 and 1994, was $548,000, $322,000 and $422,000, respectively. The 401(k) does not require a contribution by the Company. F-18 37 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFITS PLANS AND STOCK OPTION PLAN (CONTINUED) The Company has also adopted the Servico, Inc. Stock Option Plan, as amended, (the "Option Plan"). In accordance with the Option Plan, options to acquire up to 1,425,000 shares of common stock may be granted to employees, directors, independent contractors and agents as determined by a committee appointed by the Board of Directors. Options may be granted at an exercise price not less than fair market value on the date of grant. These options will generally vest over five years. The following table indicates the options granted and their status as of December 31, 1996:
OPTION PRICE NUMBER RANGE OF SHARES PER SHARE --------- ------------ Balance December 31, 1993 1,000,000 $ 4.00 Granted 152,000 8.25 - 8.63 Exercised (20,000) 4.00 Forfeited (1,500) 8.63 --------- --------------- Balance December 31, 1994 1,130,500 4.00 - 8.63 Granted 50,000 9.50 Exercised (26,800) 4.00 Forfeited (16,500) 8.63 --------- --------------- Balance December 31, 1995 1,137,200 4.00 - 9.50 Granted 216,500 10.75 - 16.13 Exercised (497,800) 4.00 - 9.50 Forfeited (38,900) 8.63 - 10.75 --------- --------------- Balance December 31, 1996 817,000 $ 4.00 - 16.13 ========= ===============
At December 31, 1996, there were 576,000 options exercisable, of which 26,400 were subsequently exercised at prices between $4.00-$10.75 per share. The income tax benefit, if any, associated with the exercise of stock options is credited to additional paid-in capital. 10. CERTAIN NON-RECURRING EVENTS In January 1996, the Company entered into an agreement with its former Chief Executive Officer in connection with his resignation from the Company and its Board of Directors. This agreement provides for payments totaling approximately $830,000 over a twenty-four month period, the cost of which is included in other operating expenses for the year ended December 31, 1996. Additionally, in accordance with the terms of the agreement, the former Chief Executive Officer F-19 38 Servico, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. CERTAIN NON-RECURRING EVENTS (CONTINUED) exercised stock options to acquire 300,000 shares of the Company's common stock by delivery of a $1,200,000 promissory note payable to the Company. This note was repaid in full during 1996. In March 1996, the Company received approximately $3,900,000 in connection with the settlement of a lawsuit brought on behalf of Servico, against a bank group and law firm, based on alleged breaches prior to 1990 of their duties to the Company. This amount, less approximately $300,000 of associated expenses, is included in other income for the year ended December 31, 1996. F-20 39 INDEX TO EXHIBITS
Exhibit Number Description ------ ----------- 2 (I) Servico's Consolidated Third Restated Amended Plan of Reorganization 3.1 (II) Certificate of Incorporation of Servico, Inc. 3.2 (V) Amended and Restated By-laws of the Company (as of June 23, 1994) 10.1 (I) Employment Agreement between David E. Hawthorne and the Company, dated April 30, 1992 10.2 (I) Servico Stock Option Plan 10.3 (I) Key Executives Bonus Award Program 10.4 (I) Regional Vice President Bonus Award Program 10.5 (III) Servico, Inc. Amended and Restated 401(k) Plan 10.6 (IV) Employment Agreement between David Buddemeyer and the Company, dated May 14, 1993. 10.7 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and EMC Acquisition Corporation dated April 13, 1994. 10.8 (V) Agreement and Plan of Merger by and among Servico, Inc., EMC Acquisition Corporation, Energy Management Corporation and EMC Target Corporation dated April 13, 1994. 10.9 (V) Agreement of Limited Partnership of Fort Wayne Hospitality Associates II, Limited Partnership by and among Spire Realty Group, Servico Fort Wayne II, Inc. and SOLVation Inc. doing business as Smith Management Company. 10.10 (V) Stock Acquisition and Standstill Agreement between Servico, Inc. and Pengo Securities Corp. dated March 23, 1995. 10.11 (VI) Agreement of Limited Partnership of Worcester Hospitality Associates Limited Partnership by and among Worcester Hospitality Company, Inc., and Servico Worcester, Inc. and SOLVation Inc., doing business as Smith Management Company dated as of May 4, 1995.
18 40 10.12 (VI) Amended and Restated Agreement of Limited Partnership of Worcester Hospitality Associates Limited Partnership by and among Servico Worcester, Inc., and Worcester Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of June 9, 1995. 10.13 (VI) Agreement of Limited Partnership of Sioux City Hospitality, L.P. by and among Fourth Street Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.14 (VI) Agreement of Limited Partnership of Saginaw Hospitality Limited Partnership by and among Servico Saginaw, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 17, 1995. 10.15 (VI) Agreement of Limited Partnership of Brecksville Hospitality, L.P. by and among Brecksville Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.16 (VI) Agreement of Limited Partnership of East Washington Hospitality Limited Partnership by and among Servico East Washington, Inc., and East Washington Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of June 20, 1995. 10.17 (VI) Agreement of Limited Partnership of Lawrence Hospitality Associates, L.P. by and among Servico Lawrence, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 8, 1995. 10.18 (VI) Agreement of Limited Partnership of Manhattan Hospitality Associates, L.P. by and among Servico Manhattan, Inc., and Jayhawk Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of August 8, 1995. 10.19 (VI) Agreement of Limited Partnership of 1075 Hospitality, L.P. by and among Stevens Creek Hospitality, Inc., and Wolverine Hospitality Company, Inc., and SOLVation Inc., doing business as Smith Management Company dated as of January 16, 1996. 10.20 (VI) Severance Agreement between David E. Hawthorne and the Company, dated as of January 2, 1996. 10.21 (VI) Loan Agreement by and among Servico Fort Wayne, Inc., Washington Motel Enterprises, Inc., Servico Hotels I, Inc., Servico Hotels II, Inc., Servico Hotels III, Inc., Servico Hotels IV, Inc., New Orleans Airport Motel Associates, LTD., Wilpen, Inc., Hilton Head Motel Enterprises, Inc., and Moon Airport Motel, Inc., and Column Financial, Inc., dated as of January 31, 1995. 10.22 (VI) Credit Facility Agreement between DLJ Mortgage Capital, Inc. and Servico, Inc., dated as of June 9, 1995.
19 41 10.23 (VI) Loan Agreement by and between Apico Inns of Pittsburgh, Inc. and Column Financial, Inc., dated as of September 27, 1995 (sample loan agreement under the Credit Facility Agreement). 10.24 (VII) Loan Agreement by and between Servico Ft. Pierce, Inc. and Lehman Brothers Holdings Inc., dated April 29, 1996 (form of loan agreement executed in connection with a total refinancing of $123,185,000 secured by 20 hotels). 10.25 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and Pengo Securities Corp., dated April 26, 1996. 10.26 (VIII) First Amendment to Stock Acquisition and Standstill Agreement between Servico, Inc. and Energy Management Corporation, dated as of April 26, 1996. 11 Statement Re: Computation of Per Share Earnings 21 Subsidiaries of the Company 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule
(I) This exhibit is incorporated by reference to exhibits to the Company's Form 10 Registration Statement filed June 17, 1992. (II) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the fiscal year ended June 30, 1992, filed September 21, 1992. (III) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the transition period from July 1, 1992 to December 31, 1992, filed March 24, 1993. (IV) This exhibit is incorporated by reference to exhibits to the Company's Form 10-K for the year ended December 31, 1993, filed March 2, 1994. (V) This exhibit is incorporated by reference to the Company's Form 10-K for the year ended December 31, 1994, filed March 27, 1995. (VI) This exhibit is incorporated by reference to the Company's Form 10-K for the year ended December 31, 1995, filed March 27, 1996. (VII) This exhibit is incorporated by reference to the Company's Form 10-Q for the period ended March 31, 1996, filed May 10, 1996. (VIII) This exhibit is incorporated by reference to the Company's Form 10-Q for the period ended June 30, 1996, filed August 13, 1996. 20 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 1997. SERVICO, INC. By: /s/David Buddemeyer --------------------------- David Buddemeyer, President And Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities indicated, on March 26, 1997.
Signature Title --------- ----- /s/ Warren M. Knight Vice President-Finance and - ---------------------------------- Chief Financial and Principal Warren M. Knight Accounting Officer /s/ John W. Adams Chairman of the Board of Directors - ---------------------------------- John W. Adams /s/ David Buddemeyer President, Chief Executive Officer - ---------------------------------- and Director David Buddemeyer /s/ Joseph C. Calabro Director - ---------------------------------- Joseph C. Calabro /s/ Howard M. Kahn Director - ---------------------------------- Howard M. Kahn /s/ Peter R. Tyson Director - ---------------------------------- Peter R. Tyson /s/ Richard H. Weiner Director - ---------------------------------- Richard H. Weiner
21 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---- ---- ---- (In Thousands, Except Per Share Data) PRIMARY Weighted average common shares outstanding 9,295 8,652 7,827 Net effect of dilutive stock options- based on the treasury stock method using the average market price 456 667 508 -------- --------- --------- 9,751 9,319 8,335 ======== ========= ========= Income before extraordinary item $ 8,548 $ 3,909 $ 2,781 Extraordinary item: (Loss) gain on extinguishment of indebtedness, net of income taxes (348) - 1,436 -------- --------- --------- Net income $ 8,200 $ 3,909 $ 4,217 ======== ========= ========= Per share data: Income before extraordinary item $ .87 $ .42 $ .34 Extraordinary item (.03) - .17 -------- --------- --------- Net income $ .84 $ .42 $ .51 ======== ========= ========= FULLY DILUTED Weighted average common shares outstanding 9,295 8,652 7,827 Net effect of dilutive stock options- based on the treasury stock method using the year-end market price, if higher than average market price 468 667 588 -------- --------- --------- 9,763 9,319 8,415 ======== ========= ========= Income before extraordinary item $ 8,548 $ 3,909 $ 2,781 Extraordinary item: (Loss) gain on extinguishment of indebtedness, net of income taxes (348) - 1,436 -------- --------- --------- Net income $ 8,200 $ 3,909 $ 4,217 ======== ========= ========= Per share data: Income before extraordinary item $ .87 $ .42 $ .33 Extraordinary item (.03) - .17 -------- --------- --------- Net income $ .84 $ .42 $ .50 ======== ========= =========
EX-21 3 SUBSIDIARIES 1 Exhibit 21 SUBSIDIARIES OF THE COMPANY
STATE OF CORPORATION NAME INCORPORATION - ---------------- ------------- 1st Classic Inns Corp. Delaware 1st Classic Inns Int'l. Inc. Florida 3401 Austin Beverage Corporation Texas Albany Hotel Inc. Florida Albany Motel Enterprises, Inc. Florida Apico Hills Inc. Penna. Apico Inn of Greentree Inc. Penna. Apico Inns of Penna. Inc. Penna. Apico Inns of Pittsburgh Inc. Penna. Apico Management Corp. Penna. Baltimore Enterprises of Florida Inc. Florida Bloomington Motel Ent. Inc. Indiana Bloomington Restaurant Inns Inc. Indiana Brecksville Hospitality, Inc. Ohio Bridgeport Motel Ent. Inc. Conn. Brunswick Motel Ent. Inc. Georgia Club Castile of Lufkin Texas Derry Motel Ent. Inc. Penna. Dothan Hospitality 3053, Inc. Alabama Dothan Hospitality 3071, Inc. Alabama East Texas Inns Inc. Texas Fayetteville Motel Ent. Inc. N. Carolina FCD Hospitality Inc. Delaware Fleet Beverage Corp. Texas Fourth Street Hospitality, Inc. Iowa Ft Laud Motel Associates Inc. Florida Ft Wayne Motel Ent. Inc. Indiana Gadsden Hospitality, Inc. Alabama Gaslight Club of Tyler Texas Groupers And Company Seafood Restaurant S. Carolina Harrisburg Motel Ent. Inc. Penna. Hilton Head Motel Ent. Inc. S. Carolina Hotel Management Associates Inc. Florida Hotels International III, Inc. Florida Island Motel Ent. Inc. Georgia KDS Corporation Nevada Kinser Motel Ent. Inc. Indiana LG Airport Hotel Associates Inc. New York Main Avenue Beverage Corporation Texas Management Corp. of Grossingers New York Marketing Design Force Inc. Florida McCoy Residential Associates Inc. Florida McKnight Motel Inc. Penna.
2 Minneapolis Motel Ent. Inc. Minn. Moon Airport Motel Inc. Penna. New Orleans Airport Motel Ent. Inc. Florida N.H. Motel Ent. Inc. Michigan Old Mill Of Nacogdoches Inc. Texas Palm Beach Motel Ent. Inc. Florida Penmoco Inc. Michigan Pompano Claim Service Inc. Florida Raleigh Entertainment Ent. Inc. N. Carolina Raleigh Motel Ent. Inc. N. Carolina Raleigh Triangle Motel Ent. Inc. N. Carolina Raleigh-Downtown Ent. Inc. N. Carolina Romulus Motel Ent. Inc. Michigan Royce Holding Corp Delaware Royce Hotel Corporation Delaware Royce Management Corp. Florida Royce Management Corp. of Ga. Georgia Royce Management Corp. of Huntington New York Royce Management Corp. of Lantern Bay Calif. Royce Management Corp. of Oxford Falls Penna. Santa Fe Continental Inn Inc. New Mexico Schenectady Motel Ent. Inc. New York Scranton Motel Ent. Inc. Penna. Second Fayetteville Motel Ent. Inc. N. Carolina Second Palm Beach Motel Ent. Inc. Florida Servico Acceptance Corporation Florida Servico Austin, Inc. Texas Servico Charlottesville Inc. Florida Servico Columbus Inc. Florida Servico Council Bluffs, Inc. Iowa Servico East Washington, Inc. Florida Servico Equity Inc. Florida Servico Flagstaff, Inc. Arizona Servico Fort Wayne II Inc. Florida Servico Fort Wayne Inc. Florida Servico Frisco, Inc. Colorado Servico Ft. Pierce, Inc. Delaware Servico Gainesville, Inc. Florida Servico Gulf Coast Hospitality Inc. Florida Servico Hilton Head, Inc. S. Carolina Servico Hospitality Inc. Florida Servico Hotels I Inc. Florida Servico Hotels II Inc. Florida Servico Hotels III Inc. Florida Servico Hotels IV Inc. Florida Servico Invest. Co. of Delaware Inc. Delaware Servico Lansing, Inc. Michigan Servico Lawrence, Inc. Kansas
3 Servico Lending Inc. Florida Servico Management Corp. Florida Servico Management Corp. (Texas) Texas Servico Manhattan, Inc. Kansas Servico Melbourne Inc. Florida Servico Metairie, Inc. Louisiana Servico Northwoods Inc. Florida Servico Omaha Central, Inc. Nebraska Servico Omaha, Inc. Nebraska Servico Operations Corporation Florida Servico Pensacola, Inc. Delaware Servico Pensacola 7200, Inc. Delaware Servico Pensacola 7330, Inc. Delaware Servico Pompano Inc. Florida Servico Raleigh Inc. Florida Servico Raleigh RTP Inc. Florida Servico Saginaw, Inc. Michigan Servico Silver Spring Inc. Florida Servico Summerville, Inc. S. Carolina Servico Watertown Inc. Florida Servico West Des Moines, Inc. Iowa Servico Wichita, Inc. Kansas Servico Worcester, Inc. Florida Sharon Motel Ent. Inc. Penna. SHC Of Delaware Inc. Delaware Sheffield Motel Ent. Inc. Alabama Singer Island Motel Ent. Inc. Florida SL Motel Ent. Inc. Missouri SMC Management Corp. of Ft Wayne Indiana SMC Management Corp. of Indianapolis Indiana Southfield Hospitality Inc. Michigan Southfield Hotel Ent. Inc. Michigan So. Carolina Interstate Motel Ent. Inc. S. Carolina Stevens Creek Hospitality, Inc. Georgia Street Road Motel Ent. Inc. Penna. Tyler Motel Assoc. Inc. Texas Washington Motel Ent. Inc. Penna. Wilpen Inc. Penna.
EX-23 4 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 Consent of Independent Certified Public Accountants We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-60088, Form S-8 No. 33-60090 and Form S-8 No. 33-81954) pertaining to the 401(k) Plan and the Stock Option Plan of Servico, Inc. and in Registration Statements (Form S-3 No. 33-78566 and Form S-3 No. 33-93658) of Servico, Inc. of our report dated February 13, 1997, with respect to the consolidated financial statements of Servico, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/Ernst & Young LLP West Palm Beach, Florida March 25, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. 1000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 19,473 0 8,597 0 2,796 37,980 364,922 0 439,786 52,188 284,880 0 0 94 74,644 439,786 0 239,526 0 201,585 (3,275) 0 29,443 11,773 3,225 8,548 0 (348) 0 8,200 .84 .84
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