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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1996.
REGISTRATION NO. 333-12735
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
AMENDMENT NO. 2 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SIGNATURE INNS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Indiana
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7011
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER
35-1426996
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
250 East 96th Street, Suite 450, Indianapolis, Indiana 46240
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
John D. Bontreger, 250 East 96th Street, Suite 450, Indianapolis, Indiana 46240
(317) 581-1111
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: JANUARY 15, 1997
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C>
$ Cumulative Convertible Preferred Stock,
Series A............................... $20.00 $46,000,000 $15,703.45(1)
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Common Stock(2)............................
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Non-Cumulative Preferred Stock, Series One
Purchase Rights(2).......................
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(1) Estimated solely for the purpose of computing the registration fee. The
registration fee was calculated and paid at the time of the original filing
of this Registration Statement based on an assumed offering of 3,795,000
shares of Common Stock at a maximum offering price of $13.00 per share.
(2) Such indeterminate number of shares as are issuable on conversion of the
Preferred Stock, including such additional shares as may be issuable as a
result of adjustments to the conversion price. Additionally, certain
Non-Cumulative Preferred Stock, Series One Purchase Rights (the "Rights")
will be evidenced by the certificates for the shares of Common Stock and
trade automatically with the Common Stock. Any value attributable to the
Rights will be reflected in the market price of the Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 9(A),
MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
PROSPECTUS
2,000,000 SHARES
SIGNATURE INNS, INC.
$ CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
Dividends on the $ Cumulative Convertible Preferred Stock, Series A,
without par value (the "Series A Preferred Stock"), are cumulative from the date
of original issuance and are payable on January 15, April 15, July 15 and
October 15 of each year, commencing April 15, 1997. The Series A Preferred Stock
has a liquidation preference of $20.00 per share. See "Description of Capital
Stock -- Series A Preferred Stock."
The Series A Preferred Stock is convertible at the option of the holder at
any time, unless previously redeemed, into shares of Common Stock, without par
value (the "Common Stock"), of Signature Inns, Inc. (the "Company") at an
initial conversion price of $ per share of Common Stock (equivalent to
shares of Common Stock for each share of Series A Preferred Stock converted),
subject to adjustment upon certain events as described herein.
Prior to this offering (the "Offering"), no Series A Preferred Stock has
been outstanding, and there has been only a limited public market for the Common
Stock of the Company. See "Underwriting" for a discussion of the factors
considered in determining the initial conversion price.
The Series A Preferred Stock is not redeemable prior to February 1, 2000,
but will be redeemable on that date or thereafter for cash at the election of
the Company, in whole or in part, at the prices set forth under "Description of
Capital Stock -- Series A Preferred Stock."
Application has been made for quotation of the Series A Preferred Stock on
the NASDAQ National Market System under the symbol "SGNSP."
------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF THE SERIES A
PREFERRED STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................
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Total(3).....................................
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters options, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 300,000
additional shares of Series A Preferred Stock at the price to public less
underwriting discount for the purpose of covering over-allotments, if any.
If the Underwriters exercise those options in full, the total price to
public, underwriting discount and total net proceeds to the Company will be
$ $ and $ , respectively.
------------------------------------
The shares of Series A Preferred Stock are offered by the Underwriters
subject to receipt and acceptance of the shares by them. The Underwriters
reserve the right to reject any order in whole or in part. It is expected that
delivery of the shares of Series A Preferred Stock will be made against payment
therefor at the offices of McDonald & Company Securities, Inc. on or about
, 1997.
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
THE OHIO COMPANY
The date of this Prospectus is , 1997.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES A
PREFERRED STOCK OR THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Therefore, a prospective investor should read this Prospectus in its entirety.
The information contained herein assumes (i) no currently outstanding
options to purchase Common Stock of the Company will be exercised prior to the
Offering, and (ii) no exercise of the Underwriters' over-allotment option. In
addition, except where otherwise indicated, information in this Prospectus has
been adjusted to reflect a 1-for-3.7 share reverse stock split to be effected by
the Company prior to the Offering. Unless the context otherwise requires, the
words "Company," "Signature Inns" or "Signature" refer to Signature Inns, Inc.,
together with its wholly-owned subsidiaries. The mark "Signature" is a
registered trademark of Signature Inns, Inc.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in the "Risk
Factors" section of this Prospectus.
Market data relating to hotel operations used throughout this Prospectus
were obtained from Smith Travel Research, other industry publications and
internal guest surveys. Smith Travel Research has not provided any form of
consultation, advice or counsel regarding any aspects of, and is in no way
whatsoever associated with, the Offering. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. The Company and the Underwriters have not independently verified
this market data, and they make no representation as to the accuracy of such
data. Similarly, the Company's internal guest surveys, while believed to be
reliable, have not been independently verified.
THE COMPANY
The Company is a leader in the mid-price, limited service segment of the
lodging industry, having developed its "Signature" concept to meet the specific
needs of the business traveler. The Company became a pioneer in the mid-price,
limited service segment with the opening of its first Signature Inn hotel in
March 1981. During the last five years, Signature Inn hotels consistently have
been ranked as one of the premier mid-price, limited service chains of hotels in
terms of overall guest satisfaction, considering price, value, service and
facilities. Signature Inn hotels ranked higher in overall customer satisfaction
than every other mid-price hotel chain in the "moderately priced" group surveyed
by Consumer Reports for its July 1994 issue, ahead of nationally recognized
chains such as Hampton Inn, Comfort Inn and Courtyard by Marriott.
The Company has operated primarily as a management company and has derived
a substantial portion of its revenues from management and other fees paid by a
group of 21 entities (the "Affiliated Entities") which own a total of 23
Signature Inn hotels (the "Initial Hotels") having a total of 2,747 guest rooms.
The Initial Hotels are located in the states of Illinois (2), Indiana (13), Iowa
(1), Kentucky (2), Ohio (4) and Tennessee (1). The Company is a substantial
equity owner in, and the general partner of, the Affiliated Entities, and it
manages and franchises the Initial Hotels under agreements with the Affiliated
Entities.
The Company will become the sole owner of the Initial Hotels by purchasing
interests in the Initial Hotels and in the Affiliated Entities in connection
with the Offering. See "The Purchase Transactions." The Company believes that
the consummation of the purchase transactions will provide several benefits.
First, the purchase transactions will enhance the Company's ability to fund
growth through internal cash flow generated by the consolidated properties.
Second, the purchase transactions will simplify the Company's operating
structure and systems, thereby providing the Company with administrative cost
savings. Third, the Purchase Transactions will improve the Company's access to
capital markets and its ability to gain additional financing by consolidating
its operations and properties into a single financial entity.
<PAGE> 5
Signature Inn hotels are designed to attract business and leisure travelers
who seek exceptional room quality and comfort at moderate room rates. Signature
Inn hotels provide spacious, well appointed guest rooms, swimming pools,
exercise facilities and a complimentary Breakfast Express(R) for their guests,
as well as other amenities offered by full service hotels. However, unlike
full-service hotels, Signature Inn hotels do not provide management-intensive
facilities and services, such as restaurants or cocktail lounges. Because
approximately 65% of Signature Inn guests are business travelers, the Company
emphasizes services designed for the business traveler, such as large, in-room
desks, voice mail and business centers.
COMPETITIVE STRENGTHS
The Company believes that its primary competitive strengths include the
following:
Strong Regional Brand Identity. Since its inception in 1981,
Signature has gained a strong regional brand awareness, as evidenced by its
15,000 Signature Club members and continuous RevPAR growth.
Consistency and Quality of Services and Facilities. Signature Inn
hotels provide their guests with "Legendary Service," Signature style
facilities and specialized amenities that ensure uniform quality throughout
the Signature chain.
Experienced and Effective Hotel Management. Senior management of the
Company has an average of 15 years of experience in the lodging industry,
covering the entire spectrum of hotel development and operations including
financing, site selection, construction and management.
Special Marketing and Personal Sales Emphasis. The Company's success
is, in part, due to the development of personal, "one-on-one" relationships
with individuals responsible for travel arrangements of businesses and
organizations and relationships with over 250 regional and national
corporations.
GROWTH STRATEGY
The Company intends to expand the Signature chain by constructing new
hotels and by acquiring and converting other hotels. The Company intends to add
hotels in markets outside the perimeter of its current six-state geographic base
of operations as well as filling in markets within that base. The Company's
management believes there are ample opportunities for growth and initially has
identified 23 cities in 17 states as potential markets for expansion. The
Company believes that capital from the Offering proceeds, internal cash flow and
external financing will provide adequate funding over the next several years for
the construction or conversion of two or more Signature Inn hotels annually.
The Company currently has under construction an 81 room Signature Inn hotel
in Carmel, Indiana which is expected to open in January 1997. The Company is
also converting to a Signature Inn a 124 room hotel in Springfield, Illinois,
and it expects to complete that conversion by May of 1997. In addition, the
Company expects to begin development of a 75 room Signature Inn hotel on a site
that it owns in Nashville, Tennessee, following the completion of the Offering.
The Company has contracted to acquire a 120 room hotel in Louisville, Kentucky,
and expects to acquire and convert it to a Signature Inn hotel by June of 1997.
The Company believes that adding Signature Inn hotels in its current markets and
in contiguous areas will lead to increases in occupancy in the Initial Hotels.
PERFORMANCE
Signature's financial results reflect both the successful implementation of
its business strategy and improvements in the lodging industry. During the
period from 1991 through 1995, the Initial Hotels' aggregate revenue increased
from $31.7 million to $38.6 million, a compound annual growth rate of 5.0%.
Operating results for Signature Inn hotels in the first nine months of 1996
versus the same period of 1995 continued on a positive trend, with RevPAR and
hotel revenues each increasing 1.8%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The following graphs depict the Signature Inn hotels' Occupancy, ADR and
RevPAR performance versus its Comparable Group (the group of hotels identified
by Signature's management as primary
2
<PAGE> 6
competitors of the Initial Hotels in their respective markets), which includes
in most markets one or more nationally recognized chains such as Hampton Inns,
Courtyard by Marriott, Comfort Inns, Holiday Inns and Fairfield Inns.
<TABLE>
<CAPTION>
Measurement Period Comparable Signature
(Fiscal Year Covered) Group Inns
<S> <C> <C>
1991 63.1 62.6
1992 64.0 63.9
1993 63.8 66.2
1994 65.9 67.8
1995 65.6 67.2
</TABLE>
<TABLE>
<CAPTION>
Measurement Period Comparable Signature
(Fiscal Year Covered) Group Inns
<S> <C> <C>
1991 48.15 48.48
1992 48.56 48.95
1993 49.51 50.48
1994 51.58 53.45
1995 54.45 55.81
</TABLE>
<TABLE>
<CAPTION>
Measurement Period Comparable Signature
(Fiscal Year Covered) Group Inns
<S> <C> <C>
1991 30.38 30.35
1992 31.08 31.28
1993 31.59 33.42
1994 33.99 36.24
1995 35.72 37.50
</TABLE>
From 1991 through 1995, the Initial Hotels achieved a compound annual
growth rate of 3.6% in ADR and 5.4% in RevPAR while the Comparable Group
achieved a compound annual growth rate of 3.1% in ADR and 4.1% in RevPAR.
3
<PAGE> 7
The principal executive offices of the Company are located at 250 East 96th
Street, Suite 450, Indianapolis, Indiana 46240, telephone (317) 581-1111.
THE OFFERING
Preferred Stock Offered.... 2,000,000 shares of $ Cumulative
Convertible Preferred Stock, Series A, without par
value (the "Series A Preferred Stock"). In
addition, the Company has granted the Underwriters
an option to purchase up to 300,000 additional
shares to cover over-allotments, if any. See
"Description of Capital Stock -- Series A Preferred
Stock" and "Underwriting."
Dividends.................. $ annually per share, cumulative from the
date of issuance and payable quarterly, on January
15, April 15, July 15 and October 15 of each year,
commencing April 15, 1997. See "Description of
Capital Stock -- Series A Preferred
Stock -- Dividends."
Liquidation Preference..... $20.00 per share, plus all accrued and unpaid
dividends. See "Description of Capital
Stock -- Series A Preferred Stock -- Liquidation."
Conversion................. Convertible at the option of the holder at any
time, unless previously
redeemed, into shares of Common Stock, without par
value (the "Common Stock"), of the Company at an
initial conversion price of $ per share of
Common Stock (equivalent to shares of
Common Stock for each share of Series A Preferred
Stock converted), subject to adjustment upon
certain events. See "Description of Capital
Stock -- Series A Preferred
Stock -- Convertibility."
Optional Redemption........ Redeemable on and after February 1, 2000, in whole
or in part, at the election of the Company, at the
redemption prices set forth herein, plus all
accrued and unpaid dividends. See "Description of
Capital Stock -- Series A Preferred
Stock -- Redemption."
Voting Rights.............. The Series A Preferred Stock will be nonvoting
except that holders of the Series A Preferred Stock
will have the right, together with the holders (if
any) of other series of the Company's preferred
stock, to elect two of the nine members of the
Board of Directors of the Company if dividends on
any series of the Company's preferred stock remain
unpaid for six quarters. See "Description of
Capital Stock -- Series A Preferred Stock -- Voting
Rights."
Ranking.................... The Series A Preferred Stock will rank on a parity
with other series of cumulative preferred stock
that may be issued. No class of preferred stock
senior to the Series A Preferred Stock may be
authorized without the consent of the holders of
two-thirds of the Series A Preferred Stock and of
any other series of preferred stock of the Company
ranking on a parity with the Series A Preferred
Stock then outstanding. See "Description of Capital
Stock -- Series A Preferred Stock -- Ranking."
Use of Proceeds............ The Company intends to use the net proceeds of this
Offering to (i) pay the $27.0 million cash portion
of the purchase prices of the asset and limited
partnership interest acquisitions described under
"The Purchase Transactions" below; (1) (ii) pay
$3.6 million of second mortgage indebtedness on
certain of the Initial Hotels; (iii) pay the
remaining balance of the Company's line of credit;
and (iv) provide funds for the acquisition,
development and renovation of, and working capital
for,
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additional Signature Inn hotels in accordance with
the Company's growth plan.
Proposed NASDAQ National
Market System Symbol..... SGNSP
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(1) The balance of the purchase prices will be paid through the assumption or
replacement of approximately $53.2 million of first mortgage indebtedness of
the Initial Hotels.
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SUMMARY FINANCIAL DATA
The following table sets forth certain financial information of the
Company, its wholly-owned subsidiaries and its consolidated partnerships and
joint ventures and is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, the notes thereto and
other financial, pro forma and statistical information included in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
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PRO PRO
FORMA(1) FORMA(1)
1993 1994 1995 1995 1995 1996 1996
------- ------- ------- ----------- ------- ------- -----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Hotel revenues(2).............. $ 9,227 $ 3,842 $ 3,470 $38,591 $ 2,688 $ 4,089 $ 30,593
Management and franchise
fees......................... 2,569 3,022 3,127 -- 2,405 2,380 --
------- ------- ------- ------- ------- ------- -------
Total revenues............... 11,796 6,864 6,597 38,591 5,093 6,469 30,593
Total operating expenses....... 9,484 4,686 4,414 26,384 3,309 4,365 20,908
------- ------- ------- ------- ------- ------- -------
Operating income............. 2,312 2,178 2,183 12,207 1,784 2,104 9,685
Interest expense............... 3,456 1,275 981 6,345 752 770 4,287
Other income (expense)......... 595 708 415 (62) 227 487 188
Income taxes(3)................ -- -- -- 1,900 -- 150 1,900
Extraordinary gains(4)......... 21,314 495 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income................... 20,765 2,106 1,617 3,900 1,259 1,671 3,686
Less preferred stock
dividend..................... -- -- -- 3,400 -- -- 2,550
------- ------- ------- ------- ------- ------- -------
Net income applicable to common
stock........................ $20,765 $ 2,106 $ 1,617 $ 500 $ 1,259 $ 1,671 $ 1,136
======= ======= ======= ======= ======= ======= =======
Earnings per common share(5)... $ (0.59) $ 0.92 $ 0.77 $ 0.24 $ 0.60 $ 0.79 $ 0.54
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common shares outstanding.... 926 1,747 2,104 2,104 2,104 2,104 2,104
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents...... $ 1,944 $ 4,237
Total assets................... 20,139 108,740
Total debt..................... 11,939 62,342
Total shareholders' equity..... 6,673 42,173
OTHER FINANCIAL DATA:
EBITDA(6)...................... $ 4,363 $ 3,089 $ 3,093 $15,965 $ 2,481 $ 2,637 $ 12,250
Capital expenditures........... 484 126 130 1,786 104 2,042 3,478
Cash provided (used) by:
Operating activities......... 2,541 1,996 2,661 2,387 2,580
Investing activities......... (694) 3,989 (462) (313) (2,304)
Financing activities......... (2,501) (5,169) (1,619) (1,661) (291)
Ratio of earnings to fixed
charges(7)................... 0.91 2.05 2.52 1.07 2.65 3.54 1.21
INITIAL HOTELS OPERATING DATA:
Total hotel revenues........... $34,508 $37,536 $38,591 $38,591 $29,927 $30,488 $ 30,488
Occupancy(8)................... 66.2% 67.8% 67.2% 67.2% 69.4% 68.2% 68.2%
ADR(9)......................... $ 50.48 $ 53.45 $ 55.81 $ 55.81 $ 55.98 $ 57.97 $ 57.97
RevPAR(10)..................... 33.42 36.24 37.50 37.50 38.85 39.54 39.54
GOP%(11)....................... 47.5% 48.5% 47.9% 47.9% 49.3% 48.2% 48.2%
</TABLE>
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(1) The pro forma information was calculated assuming the completion of the
Offering and the Purchase Transactions.
(2) Hotel revenues during 1993, 1994, and 1995 include revenues from
consolidated partnerships which own two hotels. For the nine-month period
ended September 30, 1996, a third consolidated partnership which owns one
hotel is included. Additionally, 1993 and 1994 hotel revenues include
revenues from six Company-owned hotels which were sold during these
periods; five were sold during 1993 and the sixth was sold in 1994.
(3) As a result of available tax net operating loss carryforwards, the Company
did not pay any federal income tax during the periods presented. At
December 31, 1995, the remaining tax net operating loss carryforwards were
$5.5 million. After the completion of the Offering, the Company will be
limited to the annual use of approximately $900,000 of tax net operating
loss carryforwards. Accordingly, income tax expense has been provided for
in the pro forma financial
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<PAGE> 10
statements to the extent income before income tax expense exceeds the
limitation. See Note 5 to the Company's Consolidated Financial Statements
included in this Prospectus.
(4) The extraordinary gain from debt extinguishment in 1993 and 1994 resulted
from the relinquishment of ownership of six hotels. See Note 4 to the
Company's Consolidated Financial Statements included in this Prospectus.
(5) Earnings per common share are computed using net income applicable to
Common Stock before extraordinary gains on the basis of the weighted
average number of common shares outstanding after giving effect to the
1-for-3.7 share reverse stock split. The effects of the assumed conversion
of the Series A Preferred Stock are anti-dilutive and, accordingly, are not
considered in the calculation of per common share earnings.
(6) EBITDA is operating income plus the sum of interest income, other income,
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations as defined by generally accepted accounting
principles, and such information should not be considered as an alternative
to net income, cash flow from operations or any other measure of
performance prescribed by generally accepted accounting principles. EBITDA
is included herein because management believes that certain investors find
it to be a useful tool for measuring the ability to service debt.
(7) The ratio of earnings to fixed charges is computed by dividing the sum of
income before income taxes and extraordinary gains (adjusted for
undistributed earnings of affiliated partnerships) and interest, by fixed
charges. Fixed charges represent interest expense and preferred stock
dividends increased to an amount representing the pre-tax earnings which
would be required to cover the dividends. Prior to this Offering, the
Company had not issued any preferred stock; accordingly, the historical
ratios include no amounts with respect to preferred stock dividends.
(8) Occupancy represents the average occupancy percentage calculated as total
rooms sold divided by total available rooms. Total available rooms
represents the number of rooms available multiplied by the number of days
in the reported period.
(9) ADR represents total room revenues (after discounts) divided by the total
number of rooms sold.
(10) RevPAR represents the average occupancy percentage multiplied by the
average daily room rate for the reported period.
(11) GOP% represents gross operating profit calculated as a percentage of hotel
revenues. Gross operating profit is the sum of hotel revenues less hotel
operating expenses, exclusive of insurance expenses, real estate taxes,
management fees, interest, depreciation and taxes.
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<PAGE> 11
RISK FACTORS
Any person contemplating the purchase of the shares being offered hereby
should fully and carefully consider the risk factors described below:
RISKS OF THE LODGING INDUSTRY
The Company's business is subject to all of the risks inherent in the
lodging industry. These risks include, among other factors, varying levels of
demand for rooms and related services, adverse effects of general and local
economic and market conditions (particularly in areas where the Company has a
high concentration of Signature Inn hotels), changes in travel patterns, changes
in governmental regulations that influence wages, prices or construction costs,
changes in interest rates, the availability of credit and changes in real estate
taxes and other operating expenses and the recurring need for renovations,
refurbishment and improvements of hotel properties. Also, values of hotel
properties are sensitive to changes in local market and economic conditions and
to fluctuations in the economy as a whole. In addition, because of the high
level of fixed costs required to operate hotels, certain significant
expenditures cannot generally be reduced when circumstances cause a reduction of
revenue. In addition to general risks that are associated with real property
ownership and development, investments in limited purpose facilities, such as a
hotel, typically involve greater risk than do investments in multi-purpose
properties, some of which risks are as follows:
Over-building. Over-construction of lodging facilities previously has
resulted in an excess supply of available rooms. A period of over-building
occurred in the 1980s, and the resulting over-supply of rooms adversely affected
occupancy levels and room rates in the lodging industry. Although much of the
over-supply of rooms has been absorbed largely as a result of the growth in
demand during the past several years, there can be no assurance that an
over-supply of rooms will not exist again in the future.
Competition for Market Share. The operation of hotels is a highly
competitive business. Each Signature Inn hotel is in competition with several
hotels in its market area. These competitive hotels are of varying quality and
size, may be part of national or regional chains and may have available to them
greater financial resources than those available to the Company. However, there
is no single competitor or small number of competitors which dominate the hotel
industry. Demographic, economic or other changes in one or more markets could
adversely affect the competitive status of the Company's hotels in those
markets, which, in turn, would affect the overall operations of the Company. In
addition, there can be no assurance that the opening of new competing hotels or
the reduction of room rates in any particular market will not lead to greater
competition for any or all of the Signature Inn hotels than presently exists.
Requirements for Capital and Labor. Hotels are capital intensive. In order
to remain competitive, hotel facilities must be continually maintained,
modernized and refurbished. This increases the need for capital funds (whether
from reserves, current cash flow or external financing) and thereby increases
the sensitivity of the investment to the cost and availability of such funds. In
addition, hotels are management and labor intensive and are especially
susceptible to the impact of economic and other conditions outside the control
of the hotel owner.
Competition for Expansion Opportunities. The Company will compete for the
acquisition of sites and hotels with entities which have greater financial
resources than the Company. The recent recovery in the lodging industry and the
resulting increase in funds available for hotel acquisition may cause an
increase in hotel acquisition costs and greater competition for quality sites
and existing hotels. The Company's inability to acquire desirable sites or
facilities could impede the continued implementation of the Company's growth
plans.
Inflation. Inflationary pressures can increase operating expenses,
including labor and energy costs, for the Company and its Signature Inn hotels
above expected levels and beyond the Company's ability to pass such costs on to
customers through increased room charges. Inflation can have secondary effects
on occupancy rates by increasing the expense or decreasing the popularity of
travel. Although the inflation rate has been low recently, it could increase
significantly during the useful lives of the Company's hotels.
8
<PAGE> 12
Energy and Environmental Factors. Present and future regulations issued to
meet federal or local anti-pollution standards, limitations on or rationing of
gasoline usage, gasoline shortages or other effects of any future energy crisis
or shortage of natural resources may adversely affect utilization of Signature
Inn hotels by travelers or increase the cost of constructing and operating the
Company's hotels, and thus affect adversely the Company's operations and its
ability to meet its obligations. Further, environmental studies required to be
performed by the Company in connection with the acquisition of properties in
order to avoid potential liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Super Fund
Amendments and Reauthorization Act of 1986, add to the costs and risks of
acquisition of real estate sites generally.
Uninsured or Underinsured Liability Risks. The Company may be exposed to
potential liability arising from such matters as employment and property laws,
labor difficulties and personal injuries. Many businesses, including those in
the lodging industry, periodically have experienced increases in insurance costs
while availability of coverage has decreased. Any such occurrence could render
certain types of desired coverage unavailable at commercially reasonable rates,
with the consequence that any related claims might then exceed coverage.
EXPANSION RISKS
The Company's ability to expand depends upon a number of factors, including
the selection and availability of suitable locations at acceptable prices, the
hiring and training of sufficiently skilled management and other personnel and
the availability of financing. There can be no assurance that desirable
locations for acquisition or new development or financing will be available at
all or on terms acceptable to the Company. Although the Company believes that it
has adequate personnel and systems to accommodate its expansion plans, the
Company's corporate management expenses will increase as the number of Signature
Inn hotels grows, which could adversely affect the Company's financial
performance. There can be no assurance that the Company's expansion plans will
be executed successfully or that the nature of such expansion will not be
modified to reflect future economic conditions. It can be expected that newly
acquired or renovated Signature Inn hotels may differ from the Company's
existing hotels in construction, number of rooms, room size, building
configuration, signage and decor, and there can be no assurance that any such
differences will achieve guest acceptance. The Company's inability to implement
its expansion plans would limit the Company's ability to increase its revenues.
HOTEL CONSTRUCTION, CONVERSION AND RENOVATION RISK
The Company intends either to acquire undeveloped land and construct new
Signature Inn hotels or to purchase existing hotels and redevelop or renovate
those hotels as Signature Inn hotels. The construction, conversion and
renovation of hotels involves risks, including the possibility of construction
cost over-runs and delays due to various factors (including regulatory
approvals, inclement weather, labor or material shortages, and the availability
of construction and permanent financing), market or site deterioration after
acquisition or renovation, uncertainties as to market potential and the
emergence of competition from unanticipated sources. See "Business -- Legal
Proceedings" for a discussion of the Company's previous financial difficulties
resulting, in part, from the unavailability of acceptable financing. Also, newly
opened hotels (whether newly developed or renovated) begin with lower occupancy
and room rates than established hotels. In addition, the Company will be
entering new geographic markets and will be required to integrate those hotels
and markets into the regional and national marketing programs developed by the
Company. Although the Company will endeavor to manage its construction,
acquisition and conversion activities so as to minimize these risks, there can
be no assurance that new or renovated Signature Inn hotels will perform in
accordance with the Company's expectations. Moreover, any unanticipated delays,
expenses or disturbances of hotels being constructed or redeveloped could have
an adverse effect on the results of operations and financial condition of the
Company. Finally, as the number of the Company's hotels grows, the number of the
Company's employees will increase substantially, requiring expansion of the
Company's management resources. With the expansion of the scope and geographic
areas of the Company's operations, there can be no assurance that the Company
will be able to maintain the same high operating standards and efficiencies
which it has achieved historically.
9
<PAGE> 13
NUMBER AND GEOGRAPHIC CONCENTRATION OF THE COMPANY'S HOTELS
Because of the limited number of operating Signature Inn hotels and its
limited area of operations, the Signature Inn chain is not recognized
nationally. Further, 13 of the Company's Initial Hotels, representing 57.1% of
the Company's pro forma revenues for the nine months ended September 30, 1996,
are located in Indiana, and five of those, representing 21.4% of the Company's
pro forma revenues for that period, are located in the Indianapolis, Indiana
metropolitan area. Therefore, the Company's results of operations and financial
condition are substantially affected by economic conditions in Indiana
(particularly Indianapolis).
RELIANCE UPON KEY PERSONNEL
The Company will place substantial reliance on the knowledge and experience
and continued services of John D. Bontreger, founder, President and Chief
Executive Officer of the Company. The Company's future success and its ability
to manage growth will depend in large part upon the efforts of Mr. Bontreger and
on the Company's ability to attract and retain other highly qualified personnel.
The loss of the services of Mr. Bontreger or the Company's inability to attract
and retain other highly qualified personnel could adversely affect the results
of operation and financial condition of the Company.
LEVERAGE AND AVAILABILITY OF FINANCING
The Company's total long-term indebtedness (including current maturities)
and shareholders' equity, as of September 30, 1996, on a pro forma basis after
giving effect to the Offering and the application of the proceeds therefrom and
the Purchase Transactions, were $62.3 million and $42.2 million, respectively.
See "Capitalization." Of such indebtedness, $20.4 million bears interest which
is subject to interest rate adjustment during the next 12 months, and the
Company's long-term indebtedness matures at various times between 1997 and 2016.
The Company will incur additional indebtedness in connection with its expansion
plans. While the Company will need to refinance certain of its long-term
indebtedness from time to time, the Company expects that its operating cash flow
and available financing will be sufficient to cover its obligations, including
fixed charges, and the dividends payable on the Series A Preferred Stock. See
"Risk Factors -- Expansion Risks." There can be no assurance, however, that
additional financing will be available on terms acceptable to the Company or
that refinancings will be completed successfully. The Company's bank credit
facility and certain mortgage indebtedness agreements may, in certain
circumstances, limit the Company's ability to incur indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Capital Resources and Liquidity." The Company's ability to satisfy
its obligations will be dependent upon its future performance, which is subject
to prevailing economic conditions and financial, business and other factors,
including factors beyond the Company's control.
LIMITED PUBLIC TRADING MARKET FOR THE SHARES
Immediately before the Offering, there was no public trading market for the
Series A Preferred Stock, and the Company's Common Stock has not been actively
traded in any established public trading market. Accordingly, the market values
of the Series A Preferred Stock and of the Company's Common Stock are not
readily ascertainable. As of the date of this Prospectus, there were
approximately 4,800 holders of the Company's Common Stock. See "Price Range of
Capital Stock."
VOLATILITY OF MARKET PRICE
After completion of the Offering, the market price of the Series A
Preferred Stock could be subject to fluctuations because of variations in
quarterly operating results and other factors, such as changes in the market
price of the Company's Common Stock, changes in general conditions in the
economy, the financial markets or the lodging industry, natural disasters or
other developments affecting the Company or its competitors. In addition, the
securities markets have experienced significant price and volume fluctuations
from time to time in recent years. This volatility has had a significant effect
on the market prices of securities issued by many companies for reasons
unrelated to their operating performance, and these broad fluctuations may
materially adversely affect the market price of the Series A Preferred Stock.
10
<PAGE> 14
DETERMINATION OF OFFERING PRICE AND CONVERSION RATIO
The public offering price and initial conversion ratio for the shares
offered by this Prospectus have been determined by negotiations between the
Company and the representatives of the Underwriters. The public offering price
for the Series A Preferred Stock may not be indicative of any trading price of
the Series A Preferred Stock after the Offering. See "Underwriting." There can
be no assurance that an active trading market for the Series A Preferred Stock
ultimately will develop and continue upon consummation of the Offering or that
the price of the Series A Preferred Stock will not decline below the initial
public offering price.
LIMITATIONS ON DIVIDENDS
The Company's bank credit facility prohibits the Company from making a
dividend payment on the Series A Preferred Stock if there exists a default
(either matured or unmatured) thereunder, including a default upon one of a
number of financial covenants such as the requirement that the Company maintain,
for each calendar quarter, a ratio of earnings before interest, taxes,
depreciation and amortization to debt service obligations and other fixed
charges plus dividend payments on the Series A Preferred Stock of at least 1:1.
The Company expects that any future credit arrangement will impose similar
restrictions. The issuance by the Company of any additional preferred stock that
ranks on a parity with the Series A Preferred Stock with respect to dividends
would effectively reduce the amount of funds otherwise available for the payment
of dividends on the Series A Preferred Stock. The Company does not currently
anticipate issuing any such additional preferred stock.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale will have on the market
price of the Series A Preferred Stock prevailing from time to time. Sales of
substantial amounts of Series A Preferred Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Series A Preferred Stock. See "Shares Available for Future Sale" and
"Underwriting."
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND ITS AFFILIATED ENTITIES
Transactional Conflicts. The Company will use a substantial portion of the
net proceeds of the Offering to acquire ownership of all of the Initial Hotels.
Each of those hotels currently is owned by an Affiliated Entity in which the
Company acts as general partner and whose affairs the Company effectively
controls through management and franchise agreements. By virtue of its dual
position as the general partner of the selling Affiliated Entities and as the
purchaser in the Purchase Transactions, the Company has conflicts of interest
that could give rise to claims that the Company has breached its fiduciary
duties to the Affiliated Entities and their respective limited partners in
connection with the Purchase Transactions. The Company has endeavored to address
these conflicts by engaging on behalf of the Syndicated Affiliated Entities (as
defined under "The Purchase Transactions") a qualified, independent appraiser to
appraise the fair market value of the hotel properties to be acquired in order
to assist in the determination of the purchase prices to be paid by the Company.
Further, the Company has endeavored to structure commercially reasonable sales
pursuant to purchase agreements containing terms which are fair and reasonable
both to the Company and to the Affiliated Entities, and has engaged independent
counsel on behalf of the Affiliated Entities to negotiate the terms of the
definitive hotel purchase agreements. Several investors in the Syndicated
Affiliated Entities have questioned the fairness of the Purchase Transactions.
One investor has demanded consideration for his limited partnership unit that
exceeds the amount that he would receive in connection with the Purchase
Transactions, and he has threatened to take legal action unless his demand is
satisfied. The Company is unable to predict whether any legal action will be
taken by this or any other investor.
Continuing Relationship Conflicts. On completion of the Offering and the
closing of the Purchase Transactions, one of the Signature Inn hotels will be
owned by a partnership in which a third party owns an interest. A subsidiary of
the Company, as the general partner of this partnership, will owe fiduciary
duties to the third party, and may encounter conflicts between the interests of
the Company and the third party. In such
11
<PAGE> 15
cases, the subsidiary and its management may not be free to act solely in the
best interests of the Company and its shareholders.
CONTROL BY MANAGEMENT GROUP
Management owns beneficially 860,682 shares of the Company's Common Stock,
representing approximately 40.9% of the outstanding shares of Common Stock. See
"Principal Stockholders." As a result of such ownership, the Company's
management, although not owning a majority of the shares of Common Stock, owns a
sufficient percentage of those shares to afford it substantial control over the
operations and affairs of the Company.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that all
Signature hotels are in compliance in all material respects with these
requirements, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines or an award of damages. In addition,
changes in governmental rules and regulations or enforcement policies affecting
the use and operation of the facilities, including changes to building codes and
fire and life-safety codes, may occur. If the Company were required to make
substantial modifications at its facilities to comply with the ADA or other
changes in governmental rules and regulations, the Company's financial condition
and ability to develop new facilities could be materially adversely affected.
THE PURCHASE TRANSACTIONS
Each Signature Inn hotel is currently owned by a partnership in which the
Company owns a substantial equity interest and acts as the general partner (the
"Affiliated Entities"). Each hotel is operated by the Company under management
and franchise agreements. Seventeen hotels are owned by Affiliated Entities each
of which has 20 or more limited partners (the "Syndicated Affiliated Entities"),
and six of the hotels are owned by Affiliated Entities each of which has one
limited partner (the "Joint Ventures"). The Company will purchase all of the
hotel properties owned by the Syndicated Affiliated Entities and will acquire
all of the limited partnership interests in the Joint Ventures, except for the
Joint Venture that owns the Carmel, Indiana hotel. The purchases of the hotel
properties and partnership interests are referred to collectively as the
"Purchase Transactions." The Company's obligation to consummate the Purchase
Transactions is subject to a number of conditions, including a financing
condition which contemplates the satisfactory completion of the Offering.
The aggregate purchase price to be paid by the Company in the Purchase
Transactions is $83.8 million. Of that amount, $27.0 million will be paid in
cash at the time of closing from the net proceeds of the Offering, and $3.6
million will be used to pay off outstanding second mortgage indebtedness on
three of the Initial Hotels. The $53.2 million balance of the purchase price
will be paid through the assumption or replacement by the Company of outstanding
first mortgage debt on the Initial Hotels.
REAL ESTATE PURCHASE TRANSACTIONS WITH SYNDICATED AFFILIATED ENTITIES
The purchase prices to be paid to the Syndicated Affiliated Entities are
supported by written appraisals of the related hotel properties. The appraisals
have been issued by a nationally recognized, qualified and independent appraisal
firm. The Company has entered into a binding Asset Purchase Agreement with each
Syndicated Affiliated Entity, under the terms of which the Company will acquire
an undivided fractional interest in the real estate, improvements, fixtures,
furnishings, furniture, equipment and all other tangible and intangible personal
property comprising the hotel properties. The fractional interest to be acquired
by the Company in the assets of each Syndicated Affiliated Entity will be
proportionate to the aggregate percentage of all limited partnership interests
in such entity. Immediately following the Purchase Transaction with each
Syndicated Affiliated Entity, the entity will be dissolved, and the remaining
fractional interest in the entity's assets will be distributed, in-kind, to the
Company. The effect of the Purchase Transactions and the
12
<PAGE> 16
subsequent dissolution of the Syndicated Affiliated Entities, with the
associated distributions of all remaining partnership assets, will be to convey
to the Company ownership of 100% of the hotel properties previously owned by the
Syndicated Affiliated Entities.
Under the terms of the Company's limited partnership agreement with each
Syndicated Affiliated Entity, the Company is required to obtain consents from
the holders of a majority of the limited partnership interests in order to
consummate the Purchase Transactions. The Company solicited such consents by
means of the distribution to each limited partner of a Solicitation and
Information Statement and a form of Irrevocable Consent. The solicitation was
successful, and holders of a majority of the limited partnership interests in
each of the Syndicated Affiliated Entities have consented to the Purchase
Transactions.
PURCHASES OF LIMITED PARTNERSHIP INTERESTS OF THE JOINT VENTURES
The purchase price for each Joint Venture interest was determined through
direct, arm's-length negotiations between the Company and its Joint Venture
partner. The Company and its Joint Venture partners have entered into binding
agreements under the terms of which the Company will purchase 100% of the
partnership interests of each partner. Three of the Joint Ventures will be
dissolved immediately after the Purchase Transactions. The existence of the
other two Joint Ventures will be continued in order to avoid the necessity of
refinancing the mortgage indebtedness on their respective hotel properties. The
effect of the Purchase Transactions will be to convey to the Company ownership
or control of 100% of the hotel properties previously owned by the Joint
Ventures.
BENEFITS OF THE PURCHASE TRANSACTIONS
The Company believes that the consummation of the Purchase Transactions
will serve to streamline its operations and enhance its revenues. By replacing
the current system of 21 legally distinct and separate operating entities with a
simplified, unified Company-owned hotel structure, the Company expects to:
- Retain earnings from hotel operations to fund future growth, rather
than paying all cash available for distribution to partners under the
current partnership agreements;
- Enhance its ability to access the capital markets for the purpose of
obtaining financing for new hotels and for refinancings of existing hotels;
- Achieve combined revenues which will afford greater income stability
and predictability than is derived from the current system of essentially
separate hotel operating entities;
- Increase value for its shareholders by reducing the legal risks,
liabilities and obligations which attend the general partner's exercise of
its duties under the existing partnership, management and franchise system;
and
- Pool the furniture, fixture and equipment reserves associated with
the hotel properties so as to provide additional flexibility in utilizing
the Company's financial resources to maintain and improve its hotels.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $35.5 million ($41.1 million if the over-allotment option is
exercised in full), assuming an initial offering price of $20.00 per share and
after reduction for estimated underwriting discounts and offering expenses
payable by the Company.
The Company intends to use the net proceeds of the Offering to (i) pay the
$27.0 million cash portion of the purchase prices of the asset and limited
partnership interest acquisitions described in "The Purchase Transactions" above
(with the assumption or replacement of approximately $53.2 million of first
mortgage indebtedness on hotel properties constituting the balance of the
purchase prices); (ii) pay $3.6 million of second mortgage indebtedness on
certain of the Initial Hotels; (iii) pay the remaining balance of the
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<PAGE> 17
Company's line of credit; and (iv) provide funds for the acquisition,
development and renovation of, and working capital for, additional Signature Inn
hotels in accordance with the Company's growth plan.
DIVIDEND POLICY
Dividends on the Series A Preferred Stock will accrue at an annual rate of
$ per share, will be cumulative from the date of issue and will be payable
quarterly, if declared, on the fifteenth day of January, April, July and October
to shareholders of record on the applicable record date, which will be the first
day of the calendar month in which the applicable dividend payment date falls or
another date designated by the board of directors of the Company that is not
more than 30 nor less than 10 days prior to such dividend payment date. The
first dividend on the Series A Preferred Stock will be payable on April 15,
1997, when and as declared by the board of directors of the Company, at the rate
of $ per share per annum from the date of issue through March 31, 1997. The
Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future.
The Company's bank credit facility prohibits the Company from making a
dividend payment on the Series A Preferred Stock if there exists a default
(either matured or unmatured) thereunder, including a default upon one of a
number of financial covenants such as the requirement that the Company maintain,
for each calendar quarter, a ratio of earnings before interest, taxes,
depreciation and amortization to debt service obligations and other fixed
charges plus dividend payments on the Series A Preferred Stock of at least 1:1.
The credit facility also prohibits the payment of cash dividends on the Common
Stock without the lender's consent. The Company anticipates that any future
credit facility will contain similar restrictions.
The issuance by the Company of any additional preferred stock that ranks on
a parity with the Series A Preferred Stock with respect to dividends would
effectively reduce the amount of funds otherwise available for the payment of
dividends on the Series A Preferred Stock and the Common Stock. The Company does
not currently anticipate issuing any such additional preferred stock.
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<PAGE> 18
CAPITALIZATION
The following table sets forth cash and cash equivalents, short term
borrowings and current installments of long term debt and the capitalization of
the Company as of September 30, 1996, actual and pro forma to reflect the
Offering and the Purchase Transactions. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, the notes thereto, and
the other financial, pro forma and statistical information included in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
ACTUAL PRO FORMA
------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.................................... $ 1,944 $ 4,237
======= =======
Short-term borrowings and current portion of long term
debt....................................................... 228 1,504
------- -------
Long-term debt, excluding current portion:
Mortgage loans, maturing 1999 through 2016................. 8,961 60,838
Bank secured line of credit, maturing May 1997............. 2,750 --
------- -------
Total long-term debt......................................... 11,711 60,838
------- -------
Shareholders' Equity:
Preferred Stock, no par value per share, 5,000,000 shares
authorized; no shares issued and outstanding: 2,000,000
shares issued and outstanding, pro forma................ -- 35,500
Common Stock, no par value per share, 13,513,514 shares
authorized; 2,104,413 shares issued and outstanding..... 10,016 10,016
Accumulated deficit........................................ (3,343) (3,343)
------- -------
Total shareholders' equity................................... 6,673 42,173
------- -------
Total capitalization....................................... $18,384 $103,011
======= =======
</TABLE>
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<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain financial information of the
Company, its wholly-owned subsidiaries and its consolidated partnerships and
joint ventures and is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, the notes thereto and
other financial and statistical information included in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Hotel revenues(1).......................... $ 9,227 $ 3,842 $ 3,470 $ 2,688 $ 4,089
Management and franchise fees.............. 2,569 3,022 3,127 2,405 2,380
------- ------- ------- ------- -------
Total revenues.......................... 11,796 6,864 6,597 5,093 6,469
------- ------- ------- ------- -------
Hotel expenses............................. 5,473 2,033 1,758 1,323 2,146
General and administrative................. 2,382 2,142 2,237 1,669 1,837
Depreciation and amortization.............. 1,474 511 420 317 382
Valuation allowances....................... 155 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses................ 9,484 4,686 4,414 3,309 4,365
Operating income........................... 2,312 2,178 2,183 1,784 2,104
Interest expense........................... 3,456 1,275 981 752 770
Other income (expense)..................... 595 708 415 227 487
Income taxes(2)............................ -- -- -- -- 150
------- ------- ------- ------- -------
Income before extraordinary gain........ (549) 1,611 1,617 1,259 1,671
Extraordinary gain from debt
extinguishment(3)....................... 21,314 495 -- -- --
------- ------- ------- ------- -------
Net income.............................. $20,765 $ 2,106 $ 1,617 $ 1,259 $ 1,671
======= ======= ======= ======= =======
Earnings per share(4)...................... $ (0.59) $ 0.92 $ 0.77 $ 0.60 $ 0.79
======= ======= ======= ======= =======
Weighted average number of shares
outstanding............................. 926 1,747 2,104 2,104 2,104
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................. $ 1,220 $ 2,036 $ 2,615 $ 2,449 $ 1,944
Total assets............................... 17,415 14,094 18,014 14,690 20,139
Total debt................................. 16,189 10,314 12,360 9,318 11,939
Total shareholders' equity................. 497 3,104 4,791 4,433 6,673
OTHER FINANCIAL DATA:
EBITDA(5).................................. $ 4,363 $ 3,089 $ 3,093 $ 2,481 $ 2,637
Capital expenditures....................... 484 126 130 104 2,042
Cash provided (used) by:
Operating activities.................... 2,541 1,996 2,661 2,388 2,580
Investing activities.................... (694) 3,989 (462) (313) (2,304)
Financing activities.................... (2,501) (5,169) (1,619) (1,661) (291)
INITIAL HOTELS OPERATING DATA:
Total hotel revenues....................... $34,508 $37,536 $38,591 $29,927 $30,488
Occupancy(6)............................... 66.2% 67.8% 67.2% 69.4% 68.2%
ADR(7)..................................... $ 50.48 $ 53.45 $ 55.81 $ 55.98 $ 57.97
RevPAR(8).................................. 33.42 36.24 37.50 38.85 39.54
GOP%(9).................................... 47.5% 48.5% 47.9% 49.3% 48.2%
</TABLE>
- ---------------
(1) Hotel revenues during 1993, 1994, and 1995 include revenues from
consolidated partnerships which own two hotels. For the nine-month period
ended September 30, 1996, a third consolidated partnership which
16
<PAGE> 20
owns one hotel is included. Additionally, 1993 and 1994 hotel revenues
include revenues from six Company-owned hotels which were sold during these
periods; five were sold during 1993 and the sixth was sold in 1994.
(2) As a result of available tax net operating loss carryforwards, the Company
did not pay any federal income tax during the periods presented. At December
31, 1995, the remaining tax net operating loss carryforwards were $5.5
million. After the completion of the Offering, the Company will be limited
to the annual use of approximately $900,000 of tax net operating loss
carryforwards. Accordingly, income tax expense has been provided for in the
pro forma financial statements to the extent income before income tax
expense exceeds the limitation. See Note 5 to the Company's Consolidated
Financial Statements included in this Prospectus.
(3) The extraordinary gain from debt extinguishment in 1993 and 1994 resulted
from the relinquishment of ownership of six hotels. See Note 4 to the
Company's Consolidated Financial Statements included in this Prospectus.
(4) Earnings per common share are computed using income before extraordinary
gains on the basis of the weighted average number of common shares
outstanding after giving effect to the 1-for-3.7 share reverse stock split.
(5) EBITDA is operating income plus the sum of interest income, other income,
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles, and
such information should not be considered as an alternative to net income,
cash flow from operations or any other measure of performance prescribed by
generally accepted accounting principles. EBITDA is included herein because
management believes that certain investors find it to be a useful tool for
measuring the ability to service debt.
(6) Occupancy represents the average occupancy percentage calculated as total
rooms sold divided by total available rooms. Total available rooms
represents the number of rooms available multiplied by the number of days in
the reported period.
(7) ADR represents total room revenues (after discounts) divided by the total
number of rooms sold.
(8) RevPAR represents the average occupancy percentage multiplied by the average
daily room rate for the reported period.
(9) GOP% represents gross operating profit calculated as a percentage of hotel
revenues. Gross operating profit is the sum of hotel revenues less hotel
operating expenses, exclusive of insurance expenses, real estate taxes,
management fees, interest, depreciation and taxes.
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<PAGE> 21
SELECTED PRO FORMA FINANCIAL DATA
The unaudited selected pro forma condensed statement of operations and
balance sheet data presented below reflect the statement of operations and
balance sheet data as reported for the year ended December 31, 1995, and for the
nine months ended September 30, 1996, adjusted to reflect the Offering and the
Purchase Transactions as if the transactions had occurred on January 1, 1995 or
at the balance sheet date, respectively. The following table is qualified in its
entirety by, and should be read in conjunction with, the pro forma financial
statements and the combined financial statements of certain affiliated
partnerships and the consolidated financial statements of the Company, the notes
thereto and other financial, pro forma and statistical information included in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues(1)............................................ $ 38,591 $ 30,593
Operating costs and expenses:
Direct and corporate...................................... 23,175 18,531
Depreciation and amortization............................. 3,209 2,377
-------- --------
Total operating costs................................ 26,384 20,908
-------- --------
Operating income..................................... 12,207 9,685
Other (income) expenses:
Net interest expense...................................... 6,525 4,055
Other..................................................... (118) 44
-------- --------
Earnings before income taxes.............................. 5,800 5,586
Income taxes(2).............................................. 1,900 1,900
-------- --------
Net income................................................ 3,900 3,686
Less preferred stock dividends............................ 3,400 2,550
-------- --------
Net income applicable to common stock..................... $ 500 $ 1,136
======== ========
Earnings per common share(3)................................. $ 0.24 $ 0.54
======== ========
Weighted average number of common shares outstanding(3)...... 2,104 2,104
======== ========
OTHER FINANCIAL DATA:
EBITDA(4).................................................... $ 15,965 $ 12,250
Capital expenditures......................................... 1,786 3,478
Ratio of earnings to fixed charges(5)........................ 1.07 1.21
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT
SEPTEMBER 30,
1996
-----------------
<S> <C>
BALANCE SHEET DATA:
Total assets................................................. $ 108,740
Short-term borrowings and current portion of long-term
debt...................................................... 1,504
Long-term debt, excluding current portion.................... 60,838
Shareholders' equity......................................... 42,173
</TABLE>
- ---------------
(1) Hotel revenues during 1995 include revenues from consolidated partnerships
which own two hotels. For the nine-month period ended September 30, 1996, a
third consolidated partnership which owns one hotel is included.
(2) As a result of available tax net operating loss carryforwards, the Company
did not pay any federal income tax during the periods presented. At December
31, 1995, the remaining tax net operating loss carryforwards were $5.5
million. After the completion of the Offering, the Company will be limited
to the annual use of approximately $900,000 of tax net operating loss
carryforwards. Accordingly, income tax expense has been provided for in the
pro forma financial statements to the extent income before income tax
expense exceeds the limitation. See Note 5 to the Company's Consolidated
Financial Statements included in this Prospectus.
(3) Earnings per common share are computed using net income applicable to Common
Stock on the basis of the weighted average number of common shares
outstanding after giving effect to the 1-for-3.7 share reverse stock split.
The effects of the assumed conversion of the Series A Preferred Stock are
anti-dilutive and, accordingly, are not considered in the calculation of per
common share earnings.
(4) EBITDA is operating income plus the sum of interest income, other income,
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations as defined by generally accepted accounting
principles, and such information should not be considered as an alternative
to net income, cash flow from operations or any other measure of
performance prescribed by generally accepted accounting principles. EBITDA
is included herein because management believes that certain investors find
it to be a useful tool for measuring the ability to service debt.
(5) The ratio of earnings to fixed charges is computed by dividing the sum of
income before income taxes and extraordinary gains (adjusted for
undistributed earnings of affiliated partnerships) and interest, by fixed
charges. Fixed charges represent interest expense and preferred stock
dividends increased to an amount representing the pre-tax earnings which
would be required to cover the dividends. Prior to this Offering, the
Company had not issued any preferred stock; accordingly, the historical
ratios include no amounts with respect to preferred stock dividends.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the development, ownership and operation of
Signature Inn hotels. As of September 30, 1996, the Company managed a chain of
23 Signature Inn hotels located in six states. Three hotels are owned by
consolidated affiliates and 20 hotels are owned by limited partnerships in which
the Company is the general partner.
The historical consolidated financial statements include the operation of
the Company and three 50% owned consolidated hotel affiliates (Signature Inn
Indianapolis South, Elkhart and, effective December 29, 1995, Indianapolis
East). The equity method is used for investments in other hotel limited
partnerships.
RESULTS OF OPERATIONS
The following is a discussion of the results of the Company's continuing
operations for the nine months ended September 30, 1996 and for the three fiscal
years ended December 31, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH SEPTEMBER 30, 1995
Hotel Operations. Hotel revenues of $4,089,000 for the nine months ended
September 30, 1996 represented a 52.2% increase compared to the same period of
1995. Hotel revenues from Indianapolis South and Elkhart increased $30,000 for
the period, with the remainder of the increase attributable to the consolidation
of Indianapolis East and the results of operation of the Springfield hotel
acquired in August 1996. The increased revenues of Indianapolis South and
Elkhart resulted from an increase in average daily rates.
Hotel costs and expenses for the nine months ended September 30, 1996
represented an $823,000 increase compared to 1995. Hotel costs and expenses from
Indianapolis South and Elkhart increased $95,000 for the period, with the
remainder of the increase attributable to the consolidation of Indianapolis East
and the Springfield hotel acquired in August 1996.
Hotel depreciation and amortization expense increased $113,000 for the nine
months ended September 30, 1996 compared to 1995 due primarily to the
consolidation of Indianapolis East.
Corporate Operations. Management and franchise fees decreased $26,000 for
the nine months ended September 30, 1996 compared to the same period of 1995.
The decrease in fee income is due to $101,000 of fee income recognized from
Indianapolis East during the first nine months of 1995 prior to its
consolidation. This decrease is offset partially by a $75,000 increase in fees
during the first nine months of 1996 compared to 1995 from the unconsolidated
partnership owned hotels. During the first nine months of 1996, revenues from
these twenty hotels increased $441,000, or 1.7%, due to average daily rate
increases offset by a slight decrease in occupancy.
General and administrative expenses for the nine months ended September 30,
1996 increased $168,000 due primarily to the establishment of additional hotel
regional director positions late in 1995.
Other Income (Expense). Equity in income of hotel limited partnerships
represents the Company's share of the unconsolidated partnerships' income or
loss. For the nine months ended September 30, 1996 compared to 1995, the equity
in income of hotel limited partnerships is flat due to a slight increase of
income before extraordinary gains of the partnership owned hotels in 1996 and an
increased ownership percentage in one partnership.
Interest income for the nine months ended September 30, 1996 decreased
compared to 1995 as a result of lower interest income from invested cash
balances. Interest expense -- hotels increased for the nine months ended
September 30, 1996 compared to 1995 due to the consolidation of Indianapolis
East. The consolidated affiliate loan classified as current at December 31, 1995
was restructured in June 1996 after reaching an agreement with the current
lender. Interest expense -- corporate for the nine months ended September 30,
19
<PAGE> 23
1996 decreased compared to 1995 due to decreased average outstanding
indebtedness, and a decrease in the interest rates on the Company's borrowing
arrangements. In May 1996, the bank term note with an outstanding balance of
$1,422,000 was paid in full. Simultaneously with this paydown, the Company's
available line of credit was increased to $3,100,000 with interest at prime plus
one-half percent.
The Company paid a Capital Appreciation Fee on September 1, 1995. During
the nine months ended September 30, 1995, related expense of $610,990 was
recorded.
Based on the results of a routine examination by the Indiana Department of
Revenue, the Company accrued $150,000 of state income tax expense during the
quarter ended September 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Hotel Operations. Hotel operations of two hotels owned by consolidated
affiliates (Indianapolis South and Elkhart) are included in the statement of
operations for all of 1995 and 1994. Effective December 29, 1995, the operating
results of a third consolidated affiliate (Indianapolis East) are included in
the 1995 statement of operations. The operating results of the Company-owned
Knoxville hotel are reflected through May 1994, when the hotel was sold to an
Affiliated Entity.
Hotel revenues of $3,470,000 for the year ended December 31, 1995
represented a $372,000 decrease compared to 1994. Hotel revenues from
Indianapolis South and Elkhart increased $245,000 for the year, offsetting the
decrease from the sale of the Company-owned Knoxville hotel in May 1994. The
increased revenues of Indianapolis South and Elkhart resulted from a 2.7%
increase in occupancy and a 4.1% increase in average room rates for the year.
Hotel costs and expenses of $1,758,000 for the year ended December 31, 1995
represented a $276,000 decrease compared to 1994. Hotel costs and expenses from
Indianapolis South and Elkhart increased $76,000 for the year, due primarily to
the increase in the number of rooms sold, offsetting the decrease from the sale
of the Company-owned Knoxville hotel in May 1994.
Hotel depreciation and amortization expense decreased $117,000 for the year
ended December 31, 1995 compared to 1994 due primarily to the hotel sale in May
1994. Hotel depreciation and amortization includes $272,000 and $289,000 for
1995 and 1994, respectively, relating to Indianapolis South and Elkhart.
Corporate Operations. Management and franchise fees earned from all
sources increased $105,000 for the year ended December 31, 1995 compared to
1994. Fees earned from affiliated limited partnerships increased $169,000 for
the year ended December 31, 1995 compared to 1994. Management and franchise fees
from the three hotels sold to affiliated limited partnerships in 1994 and 1993
amounted to $419,000 and $318,000 in 1995 and 1994, respectively, an increase of
$102,000. During 1995, the Company began recognizing management and franchise
fee income from a partnership upon the reduction of a fee subordination
limitation and the restructuring of the debt of the partnership; these
recognized fees totaled $49,000 in 1995. The remaining increase in fee income is
due to increased revenues at the other partnership hotels. Through late 1994,
the Company earned fees from managing Signature Inn hotels owned by non-
affiliates, primarily lenders that had taken possession of a Signature Inn hotel
as part of the Company or Affiliated Entities' financial restructuring during
1993 and 1992. Fees earned from nonaffiliates under short-term agreements
amounted to $64,000 in 1994.
General and administrative expenses for the year ended December 31, 1995
were $2,237,000, which represented a $95,000 increase compared to 1994. The
increase is attributable to increased employee compensation and professional
fees incurred during the ordinary course of business.
Other Income (Expense). Equity in income of hotel limited partnerships
represents the Company's share of the partnerships' income or loss. The increase
of $34,000 for the year ended December 31, 1995 is attributable to increased
profitability of the partnership owned hotels in 1995 and an increased ownership
percentage in one hotel. In addition, one time gains totaling $92,000 and
$118,000 were recognized by the Company in 1995 and 1994, respectively (based
upon its ownership share) upon debt restructuring of partnerships.
20
<PAGE> 24
Interest income for the year ended December 31, 1995 increased $86,000
compared to 1994. The increase was a result of higher investable cash balances
earning a higher yield and interest income earned for a full year in 1995 from
the Company's loan participation agreements. Interest income recognized from the
notes due from the operating management of the Company was $14,000 and $12,000
for 1995 and 1994, respectively.
Interest expense for the year ended December 31, 1995 represents a $294,000
decrease compared to 1994 due to decreased average outstanding indebtedness and
the retirement of a higher rate variable note with a term note on September 1,
1995, offset slightly by the increased cost of borrowings due to the increase in
the prime lending rate on the line of credit throughout the year compared to
1994 and a variable rate subordinate note through August 1995.
The Company paid the Capital Appreciation Fee by a cash payment of $900,000
on September 1, 1995. During 1994, $289,000 of related expense was accrued
representing the present value of the estimated amount due the lender based on a
current estimate of the Company's value and payment date.
Based on the preliminary results of a routine examination by the Indiana
Department of Revenue the Company accrued $150,000 of state income tax expense
during the quarter ended September 30, 1996.
Gain on Disposition of Hotels and Land, and Extinguishment of Debt. In May
1994, the Company sold the Knoxville hotel to an affiliated limited partnership
resulting in the extinguishment of approximately $4,900,000 of hotel debt and
other obligations. The difference of $223,000 between the debt extinguished and
the selling price of the hotel is reflected as extraordinary gain on
extinguishment of debt in 1994. The excess of the net book value of the hotel
and the sales price of $13,000 is reflected as gain on disposition of hotel in
1994. In November 1994, proceeds of $333,000 were received and a gain of
$132,000 was recognized upon the sale of a tract of land.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Hotel Operations. Hotel operations of two hotels owned by consolidated
affiliates (Indianapolis South and Elkhart) are included in the statement of
operations for all of 1994 and 1993. The operating results of the Company-owned
Knoxville hotel and two other Company-owned hotels (Peoria and Normal) are
reflected through May 1994 and December 1993, respectively, when these hotels
were sold to Affiliated Entities. The operating results of three additional
Company-owned hotels are reflected through the second quarter of 1993, when
ownership of these hotels was transferred to lenders.
Hotel revenues of $3,842,000 for the year ended December 31, 1994
represented a $5,385,000 decrease compared to 1993. Hotel revenues from
Indianapolis South and Elkhart increased $340,000 for the year offsetting the
decrease from the disposition of the Company-owned Knoxville hotel in May 1994
and the five Company-owned hotels in 1993. The increased revenues of
Indianapolis South and Elkhart resulted from a 5.5% increase in occupancy and a
5.2% increase in average room rates for the year.
Hotel costs and expenses of $2,033,000 for the year ended December 31, 1994
represented a $3,439,000 decrease compared to 1993. Hotel costs and expenses
from Indianapolis South and Elkhart increased $119,000 for the year, due
primarily to the increase in the number of rooms sold, offsetting the decrease
from the disposition of the Company-owned Knoxville hotel in May 1994 and the
five Company-owned hotels in 1993.
Hotel depreciation and amortization expense decreased $960,000 for the year
ended December 31, 1994 compared to 1993 due primarily to the hotel dispositions
in 1993 and in May 1994. Hotel depreciation and amortization includes $289,000
and $321,000 for 1994 and 1993, respectively, relating to Indianapolis South and
Elkhart.
Corporate Operations. Management and franchise fees increased $453,000 for
the year ended December 31, 1994 compared to 1993. The Company began recognizing
management and franchise fees under agreements with two hotels sold to an
Affiliated Entity in December 1993 and with another hotel sold to an Affiliated
Entity in May 1994. The remaining increase in fee income is due to increased
revenues at the other hotels. Chain-wide occupancy and average daily rate for
1994 increased 1.7 percentage points and $2.97, respectively.
21
<PAGE> 25
Through late 1994, the Company earned fees from managing Signature Inn
hotels owned by non-affiliates, primarily lenders that had taken possession of a
Signature Inn hotel as part of the Company or Affiliated Entities' financial
restructuring during 1993 and 1992. Fees earned from non-affiliates under short-
term agreements amounted to $64,000 and $197,000 in 1994 and 1993, respectively.
General and administrative expenses for the year ended December 31, 1994
were $2,142,000 which represented a $240,000 decrease compared to 1993. The
decrease is attributable to reduced labor and legal costs.
Other Income (Expense). Equity in income of hotel limited partnerships
represents the Company's share of the partnerships' income or loss. The increase
of $519,000 for the year ended December 31, 1994 is attributable to increased
profitability of the partnership owned hotels in 1994 from increased occupancy
and room rates, increased ownership percentages in two hotels and the
recognition of nonrecurring gains of $118,000.
Interest income for the year ended December 31, 1994 increased $96,000
compared to 1993. The increase was a result of higher investable cash balances
earning a higher yield, interest income recognized from the notes due from the
Operating Management of the Company executed in April 1994, and interest income
earned from the Company's loan participation agreements in connection with the
three hotels sold to affiliated limited partnerships in December 1993 and May
1994.
Interest expense for the year ended December 31, 1994 represents a
$2,181,000 decrease compared to 1993. Interest ceased to accrue on hotel loans
upon the transfer of ownership of three hotels to lenders during May and June of
1993, the sale of two hotels in December 1993 and the sale of the Knoxville
hotel in May 1994. Additionally, the refinancing of corporate debt obligations
in December 1993 resulted in a substantial reduction of the outstanding
interest-bearing indebtedness of the Company.
Gain on Disposition of Hotels and Land, and Extinguishment of Debt. In May
1994, the Company sold the Knoxville hotel to an affiliated limited partnership
resulting in the extinguishment of approximately $4,900,000 of hotel debt and
other obligations. The difference of $223,000 between the debt extinguished and
the selling price of the hotel is reflected as extraordinary gain on
extinguishment of debt in 1994. The excess of $13,000 of the net book value of
the hotel over the sales price is reflected as gain on disposition of hotel in
1994. In November 1994, proceeds of $333,000 were received and a gain of
$132,000 recognized upon the sale of a tract of land.
During 1993, the Company relinquished ownership of five Company-owned
hotels, resulting in the extinguishment of approximately $28,100,000 of hotel
debt obligations and related other obligations. The difference between the total
debt extinguished and the estimated value of the five hotels at the date of
conveyance is reflected as an extraordinary gain on extinguishment of debt. The
excess of the estimated value (based upon appraisals and on firm purchase
contracts) of the five hotels and the net book value of $273,000 is reflected as
gain on disposition of hotels. The discount of the primary lender's debt
obligations in excess of the $6,000,000 payoff achieved in December 1993 is
recorded as gain from debt extinguishment.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its operations principally through
cash flow from operations and borrowings under certain credit facilities.
During 1995, the Company generated net cash flow from operations of
$2,661,000 compared to $1,995,000 in 1994, an increase of $665,000. Although
1995 income before extraordinary gains was relatively flat compared to 1994,
additional accrued expenses of $322,000 were incurred in 1995 in connection with
the payment of the capital appreciation fee arrangement. During 1994, cash flow
from operations of $1,995,000 represented a $545,000 decrease compared to 1993,
due primarily to a lower income before extraordinary gain in 1993.
During 1995, the Company used a net of $462,000 in investing activities
compared to a net of $3,989,000 provided in 1994. The primary element of the
change from 1994 is the proceeds of $4,643,000 from the sale of a hotel to an
affiliated limited partnership in 1994. During 1994, cash provided from
investing activities of $3,989,000 represented a $4,683,000 increase compared to
1993 due to the sale of the hotel.
22
<PAGE> 26
During 1995, the Company used a net of $1,619,000 in financing activities
compared to a net of $5,169,000 during 1994. The decrease is due primarily to
additional borrowings in 1995 of $1,700,000 under the term note and lower
repayments of long-term debt during 1995 compared to 1994. During 1994, cash
used in financing activities of $5,169,000 represented a $2,668,000 increase
over 1993 due mainly to additional proceeds of long-term debt received in 1993.
The Company believes that the cash generated from operations, along with
additional borrowing capabilities and cash balances, will provide adequate
liquidity to meet its operating needs and debt service requirements over the
next twelve months.
In August 1996, the Company purchased an operating hotel with funds from
cash balances and a borrowing under the existing line of credit arrangement.
Approximately $1,900,000 will be spent to convert the hotel to a Signature Inn.
The Company has secured $1,900,000 of long-term mortgage financing for this
hotel.
The Company has obtained a bank commitment for an $6,000,000 Credit
Facility to be established upon consummation of this Offering and the Purchase
Transactions. Under the Credit Facility, borrowings will be advanced for new
hotel construction projects and hotel acquisitions and conversions. Borrowings
will bear interest at the prime rate plus 1/2 percent. The Credit Facility has a
two year term, and funds will be advanced under separate mortgage notes, each
with a 60 month term and secured by the related hotel project. The facility is
structured to provide only construction and start-up financing for new projects,
and the Company will be required to replace the Credit Facility financings with
long-term permanent financing.
With anticipated new hotel development cost funded at the rate of 60% from
permanent financing and 40% from internally generated cash flow or Offering
proceeds, the Company believes it will have the financial capacity to fund over
the next several years the construction or conversion of two or more Signature
Inn hotels annually. It is expected that the cost to develop a new hotel will
vary significantly by geographic location and size. The Company anticipates
developing or acquiring hotels ranging in size from 75 rooms to 125 rooms.
The Company may seek to increase the amount of its Credit Facility, obtain
additional credit facilities or issue corporate debt or equity securities in
order to raise additional capital. Any debt incurred or issued by the Company
may be secured or unsecured, bear interest at a fixed or variable rate, and be
subject to such other terms as the Board of Directors of the Company considers
appropriate.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation Plans" was issued in October 1995. The Statement is
effective for fiscal years beginning after December 15, 1995. As allowed by the
new Statement, the Company plans to continue to use Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for
stock options. Certain pro forma and other information will be disclosed as if
the Company had measured compensation costs in a manner consistent with the new
Statement.
SEASONALITY
Demand for hotel accommodations varies seasonally in the Signature Inns
hotels' market areas. Typically, demand for hotel accommodations and
correspondingly, occupancy rates for the hotels, will be higher during the
period from March through October and lower during the period from November
through February.
INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the Company's financial condition or
results of operations for the periods presented.
23
<PAGE> 27
LODGING INDUSTRY OVERVIEW
U.S. LODGING INDUSTRY
The U.S. lodging industry, as a whole, has shown significant improvement
since the beginning of 1992. The Company believes that the key elements
underlying the improvements in the industry's operating performance and
profitability are favorable economic conditions and a rate of room demand growth
which exceeded the growth rate of room supply. The rate of room demand growth
exceeded the rate of room supply growth by 2.6%, 2.8% and 1.3% in 1993, 1994 and
1995, respectively. Occupancy and ADR have increased consistently throughout the
lodging industry from 1993 through 1995. In 1993, 1994 and 1995, Occupancy grew
1.6%, 2.5% and 1.2%, respectively, while ADR increased 2.8%, 4.8% and 4.8%,
respectively.
According to Coopers & Lybrand's "Hospitality Directions," both
industry-wide room demand and supply are projected to increase 2.4% annually
from 1996 to 1999. This supply/demand position is projected to lead to growth of
5.0% to 6.0% in industry-wide ADR annually through 1999 (a rate that is
projected to exceed inflation), coupled with industry-wide Occupancy remaining
above 65.5% through 1999. Industry-wide RevPAR is expected to increase 5.8%
annually from 1996 to 1999.
MID-PRICE SEGMENT OF LODGING INDUSTRY
Smith Travel Research divides the lodging industry into five segments based
on the pricing of individual hotels in urban markets. These segments are: luxury
(top 15% room rates); upscale (next 15% room rates); mid-price (next 30% room
rates); economy (next 20% room rates); and budget (lowest 20% room rates).
Signature Inn hotels are in the mid-price, limited service segment of the hotel
industry, as are such other hotel chains as Hampton Inn, Courtyard by Marriott,
Holiday Inn Express, LaQuinta Inn, Drury Inn and Ramada Limited.
The mid-price, limited service segment of the lodging industry emerged in
the mid-1980s. In contrast to full service hotels, the midprice, limited service
segment eliminated or substantially reduced food and beverage services, and
featured minimal meeting space and fewer amenities, all at a reduced price.
Strong consumer acceptance of this type of hotel product led to significant
growth in the number of midprice, limited service hotels throughout the U.S.
Although traditionally associated with "budget" accommodations, the limited
service hotel concept has evolved into different classes of product type, which
now encompass upscale, mid-price, economy and budget properties.
According to data compiled by Smith Travel Research, the mid-price, limited
service segment in which Signature operates has experienced more favorable
operating results during the 1992 through 1995 period than were experienced by
the lodging industry generally. During the period from 1993 through 1995, demand
growth exceeded supply growth in this segment by a wider margin than in any
other lodging industry segment except luxury hotels. In addition, RevPAR grew by
6.9% in the mid-price segment in 1994 versus 1993 and by 6.5% in 1995 versus
1994. Only the luxury segment experienced higher RevPAR growth in 1994 and 1995.
The mid-price, limited service segment continued to have strong RevPAR growth in
the first eight months of 1996, with RevPAR increasing 4.4% over the comparable
eight-month period in 1995.
According to Coopers & Lybrand's "Hospitality Directions," demand in the
mid-price segment is projected to increase 3.0% annually from 1996 to 1998
compared to only 2.6% annual growth in supply. This favorable trend is projected
to lead to growth of 4.1% in ADR annually through 1998. In addition, Occupancy
is projected to increase from 66.9% in 1996 to 67.6% in 1998.
OCCUPANCY, ADR AND REVPAR COMPARISONS
The Initial Hotels consist of the 23 hotels currently comprising the
Signature chain, all of which have been operational since 1991 or before. The
"Comparable Group" represents the group of hotels identified by Signature's
management as primary competitors of the Signature Inn hotels in their
respective markets. Management utilizes Comparable Group information for
competitive analysis, employee performance evaluations and incentive
compensation purposes.
24
<PAGE> 28
Smith Travel Research groups U.S. hotels by nine geographic regions. All
but four of Signature's Initial Hotels are located in the region which Smith
Travel Research defines as the states of Illinois, Indiana, Michigan, Ohio and
Wisconsin (the "Region"). The Region is used as the basis for the comparisons
below because over 95% of the Company's hotels are located within or immediately
adjacent to the Region and because the Company believes that regional
comparisons are more relevant than comparisons based upon the entire U.S. hotel
industry.
The following tables compare the Occupancy, ADR and RevPAR of the Initial
Hotels, the Comparable Group, mid-price hotels in the Region and all hotels in
the Region for the period from 1991 through 1995 and for the nine-month
comparative periods ended September 30, 1995 and 1996:
OCCUPANCY(1)
<TABLE>
<CAPTION>
SIGNATURE INN
INITIAL COMPARABLE REGION: REGION:
HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
YEAR
1991................... 62.6% 63.1% 58.1% 57.6%
1992................... 63.9% 64.0% 59.4% 58.6%
1993................... 66.2% 63.8% 61.3% 59.5%
1994................... 67.8% 65.9% 64.2% 62.2%
1995................... 67.2% 65.6% 65.1% 62.7%
NINE MONTHS
1995................... 69.4% 67.8% 67.1% 64.6%
1996................... 68.2% 66.8% 65.9% 63.7%
</TABLE>
- ---------------
(1) Occupancy represents total rooms sold (i.e., occupied by a paying guest)
divided by total available rooms. Total available rooms represents the
number of saleable rooms multiplied by the number of days in the reported
period.
ADR(2)
<TABLE>
<CAPTION>
SIGNATURE INN
INITIAL COMPARABLE REGION: REGION:
HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
YEAR
1991................... $ 48.48 $48.15 $51.96 $54.08
1992................... $ 48.95 $48.56 $52.13 $54.89
1993................... $ 50.48 $49.51 $53.46 $56.42
1994................... $ 53.45 $51.58 $55.95 $58.62
1995................... $ 55.81 $54.45 $58.85 $61.56
NINE MONTHS
1995................... $ 55.98 $54.75 $58.82 $61.16
1996................... $ 57.97 $57.24 $62.30 $65.15
</TABLE>
- ---------------
(2) ADR represents total room revenues divided by the total number of rooms
sold.
REVPAR(3)
<TABLE>
<CAPTION>
SIGNATURE INN
INITIAL COMPARABLE REGION: REGION:
HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
YEAR
1991................... $ 30.35 $30.38 $30.19 $31.15
1992................... $ 31.28 $31.08 $30.97 $32.17
1993................... $ 33.42 $31.59 $32.77 $33.57
1994................... $ 36.24 $33.99 $35.92 $36.46
1995................... $ 37.50 $35.72 $38.31 $38.60
NINE MONTHS
1995................... $ 38.85 $37.10 $39.49 $39.54
1996................... $ 39.54 $38.24 $41.07 $41.53
</TABLE>
- ---------------
(3) RevPAR represents Occupancy multiplied by ADR for the reported period.
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The Initial Hotels have performed favorably as compared to the Comparable
Group since the beginning of 1991. The Initial Hotels' Occupancy has exceeded
the Comparable Group's Occupancy for each of the last three calendar years and
for the nine-month period ended September 30, 1996. The Initial Hotels' ADR has
exceeded the Comparable Group's ADR for each of the last five calendar years and
for the nine-month period ended September 30, 1996. The Initial Hotels' RevPAR
has exceeded the Comparable Group's RevPAR for each of the last four calendar
years and for the nine-month period ended September 30, 1996. Since 1991, the
Initial Hotels have consistently operated at higher Occupancies than all hotels
and mid-price hotels in the Region. The Initial Hotels' ADR growth has exceeded
the annual rate of inflation since the beginning of 1993, increasing by over
4.0% annually during this period.
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<PAGE> 30
BUSINESS
THE COMPANY
The Company is a leader in the mid-price, limited service segment of the
hotel industry, having developed its "Signature" concept to meet the specific
needs of the business traveler. The Company became a pioneer in the mid-price,
limited service segment with the opening of its first Signature Inn hotel in
March 1981. During the last five years, Signature Inn hotels consistently have
been ranked as one of the premier mid-price, limited service chains of hotels in
terms of overall guest satisfaction, considering price, value, service and
facilities. Signature Inn hotels ranked higher in overall customer satisfaction
than every other mid-price hotel chain in the "moderately priced" group surveyed
by Consumer Reports for its July 1994 issue, ahead of nationally recognized
chains such as Hampton Inn, Comfort Inn and Courtyard by Marriott.
The Company has operated primarily as a management company and has derived
a substantial portion of its revenues from management and other fees paid by the
Affiliated Entities that own the Initial Hotels, which have a total of 2,747
guest rooms. The Initial Hotels are located in the states of Illinois (2),
Indiana (13), Iowa (1), Kentucky (2), Ohio (4) and Tennessee (1). The Company is
a substantial equity owner in, and the general partner of, the Affiliated
Entities, and it manages and franchises the Initial Hotels under agreements with
the Affiliated Entities.
The Company will become the sole owner of the Initial Hotels by purchasing
interests in the Initial Hotels and in the Affiliated Entities in connection
with the Offering. The Company believes that the consummation of the purchase
transactions will provide several benefits. First, the purchase transactions
will enhance the Company's ability to fund growth through internal cash flow
generated by the consolidated properties. Second, the purchase transactions will
simplify the Company's operating structure and systems, thereby providing the
Company with administrative cost savings. Third, the Purchase Transactions will
improve the Company's access to capital markets and its ability to gain
additional financing by consolidating its operations and properties into a
single financial entity.
The Company currently has under construction an 81 room Signature Inn hotel
in Carmel, Indiana which is expected to open in January 1997. The Company is
also converting to a Signature Inn a 124 room hotel in Springfield, Illinois,
and it expects to complete that conversion by May of 1997. In addition, the
Company expects to begin development of a 75 room Signature Inn hotel on a site
that it owns in Nashville, Tennessee, following the completion of the Offering.
The Company has contracted to acquire a 120 room hotel in Louisville, Kentucky,
and expects to acquire and convert it to a Signature Inn hotel by June of 1997.
The Company believes that adding Signature Inn hotels in its current markets and
in contiguous areas will lead to increases in occupancy in the Initial Hotels.
SIGNATURE INN CONCEPT, FACILITIES AND SERVICES
Signature Inn hotels are designed to attract business and leisure travelers
who seek exceptional room quality and comfort at moderate room rates. Signature
Inn hotels provide spacious, well appointed guest rooms, swimming pools,
exercise facilities and a complimentary Breakfast Express(R) for their guests,
as well as other amenities offered by full service hotels. However, unlike
full-service hotels, Signature Inn hotels do not provide management-intensive
facilities and services, such as restaurants or cocktail lounges. Because
approximately 65% of Signature Inn guests are business travelers, the Company
emphasizes services designed for the business traveler, such as large, in-room
desks, voice mail and business centers.
The hallmarks of the Signature chain are the friendliness of Signature Inn
hotel staffs and the cleanliness of Signature Inn hotel rooms and related
facilities. The Company's Legendary Service Program is designed to ensure the
selection, training and continuous supervision of a capable, well-groomed and
highly motivated staff of hotel employees who, at all levels, exemplify the
"whatever it takes" attitude toward serving the needs of Signature Inn hotel
guests. The Company's ongoing refurbishing efforts, guest comment card
evaluations and "mystery guest inspection" programs all combine to ensure a high
level of consistency and quality. The attractive architectural design and
landscaping of Signature Inn hotels combine to enhance the experience of the
Company's hotel guests. Signature Inn hotels qualify for the "Three Diamond"
American Automobile
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<PAGE> 31
Association ("AAA") rating which is based upon the quality of a hotel's
facilities, services and amenities. This is the highest AAA rating afforded to
limited service hotels.
Complimentary services and amenities offered by all Signature Inn hotels
include:
<TABLE>
<S> <C>
* Business center with PC and printer * Cable TV and a movie channel
* Breakfast Express(R) * USA Today delivered to the room
* Individual storage facilities for
guests * Large, well-lighted desks
* Guest room voice mail * FAX and copy services
* Modem ports on telephones * Interview centers
* Express check-out service * The Wall Street Journal
* Swimming pool * Local telephone calls
</TABLE>
Additional features include fitness centers at nine hotels, airport shuttle
service at seven hotels, and VCRs and new release movies at all hotels.
Signature Inn hotels without fitness centers negotiate arrangements with nearby
health clubs and fitness centers for the use of their facilities by hotel
guests. In addition, hotel management typically makes arrangements with nearby
restaurants for the hotel's guests to qualify for discounts by showing their
guest room key card.
Designed with the convenience and comfort of its guests in mind, a typical
Signature Inn hotel incorporates a large two-story atrium, and a bright,
well-appointed and richly decorated lobby and registration area. Most Signature
Inn hotels contain approximately 120 spacious, quiet and comfortably furnished
guest rooms, averaging 312 square feet in size. Signature Inn hotels are located
near interstate highways, restaurants and business and leisure travelers'
destination points, such as business parks, office buildings and local
attractions.
Approximately 50% of the rooms in a typical Signature Inn are "Signature
Rooms," which are designed specifically for the business traveler. These rooms
feature a queen or king sized bed, a well-lighted 12-foot work center and a
recliner. All other rooms feature two double beds or two queen sized beds and
appeal primarily to families and other leisure travelers. Over 70% of the rooms
in a typical Signature Inn hotel are designated as "non-smoking."
Each Signature Inn hotel devotes an average of 2,000 square feet to meeting
rooms, which management believes substantially exceeds the meeting room space
offered by most of the Company's competitors. Consistent with Signature's
value-oriented approach, a TV monitor, VCR, projection screen, flip chart and
meeting room "survival kit" containing essential supplies such as pencils, name
tags and extension cords, are provided free of charge.
The Company has long recognized the importance of guest safety and security
in the design of Signature Inn hotels and in the special services offered by
Signature's hotel staff. All Signature Inn hotels have interior corridors,
electronic key locks, a deadbolt lock system in all guest rooms and security
cameras which continuously monitor activities at the front desk and hotel
entrances. Twenty-four hour front desk service is also standard in all Signature
Inn hotels. Each hotel is equipped with a centralized smoke, heat and fire
detector system which is hard-wired to each hotel guest room.
The Company believes that not providing full service management-intensive
facilities and services, such as restaurants or cocktail lounges, banquet
centers and room service, enables it to deliver a product that addresses its
guests' needs while meeting their price expectations. Signature Inn hotels are
conveniently located adjacent to or near popular restaurants such as Bob Evans,
Cracker Barrel, Frisch's, Shoney's, Olive Garden, Red Lobster and Outback
Steakhouse. Because Signature Inn hotels do not have restaurant facilities,
Signature Inn hotels, like other limited service hotels, generally have
significantly lower break-even thresholds and are not as labor and management
intensive as full service hotels.
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<PAGE> 32
COMPETITIVE STRENGTHS
The Company believes that its primary competitive strengths include the
following:
Strong Regional Brand Identity. The Company has achieved a strong brand
name awareness in the Midwest. The Company believes that its name recognition in
the Midwest will enhance the performance of both existing and newly acquired
hotel properties in the Midwest, and will provide a strong base for expansion of
the Signature chain. In addition, the Company's frequent stay program, the
Signature Club, has 15,000 members and accounted for approximately 8% of 1996
chain-wide room nights.
Consistency and Quality of Services and Facilities. Since 1981, the
Company has pursued a strategy of offering its guests a high level of
consistency and quality in Signature services, facilities and amenities. Each
Signature Inn hotel provides its guests with "Legendary Service,"
Signature-style facilities and specialized amenities that ensure uniform quality
throughout the Signature chain. The Company has achieved this consistency
through its ties of equity ownership and franchise and management relationships
with the Affiliated Entities. The Company endeavors to achieve consistency and
quality in the construction of its facilities in order to attract customers,
minimize maintenance costs and extend the useful life of Signature Inn hotels.
Management believes the Company has a wide and substantial base of loyal,
satisfied and value conscious guests/customers who view the Company's hotels as
being conveniently located and as providing clean, comfortable rooms and
attractive facilities. Approximately 90% of all 1996 respondents to the
Company's guest comment card program indicated overall favorable responses.
Experienced and Effective Hotel Management. Signature's senior management
has substantial experience in the lodging industry, covering the entire spectrum
of hotel development and operations including financing, site selection,
construction and management. Several of Signature's key officers have been
employed by the Company since the inception of hotel operations in 1981. Senior
management of the Company has an average of 15 years of experience in the
industry. During this period, the Company's management has guided the Company
through a number of cycles in the lodging industry.
Special Marketing and Personal Sales Emphasis. The Company places special
emphasis on direct personal selling through its corporate sales staff and each
hotel's management. This effort is at the heart of the Company's comprehensive
marketing and advertising program. The Company believes that one of the keys to
its success has been the development of personal "one-on-one" relationships with
individual representatives of businesses and organizations in each of the
Signature Inn hotel markets and communities, and on a regional and national
basis. The Company's sales staff has developed relationships with over 250
regional and national corporations and most of the major travel agency
consortiums. The Company's incentive compensation for hotel management is based,
in part, on the successful implementation of the personal sales program.
GROWTH STRATEGY
The Company plans to grow by developing additional Signature Inn hotels.
The Company also anticipates achieving continued growth in the operating
performance of the Initial Hotels and its newly acquired hotels and hotels
currently under development.
Expansion Plans. Following the completion of the Offering and the closings
of the Purchase Transactions, the Company will wholly own and operate all of the
Initial Hotels.
The Company anticipates developing or acquiring hotels ranging in size from
75 rooms to 125 rooms. Management believes that the current development cost of
a new Signature Inn hotel will be approximately $45,000 to $55,000 per room,
depending on the location of the hotel, size of the hotel (number of rooms),
cost of land, local zoning and permitting cost, construction period and local
building costs which are affected by the cost of building materials and
construction labor. The cost to acquire and convert an existing hotel to a
Signature Inn hotel may vary significantly from new development. Management will
consider acquisitions in
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<PAGE> 33
situations when a hotel is available for sale in a desirable market, and when
the cost to acquire and convert is more beneficial than the cost of new
development.
A portion of each new hotel project will be funded by cash flow generated
from operations. With anticipated new development costs funded at the rate of
60% from permanent financing and 40% from internally generated cash flow or
Offering proceeds, the Company believes it will have the financial capacity to
fund over the next several years the construction or conversion of two or more
Signature Inn hotels annually. The Company has secured a commitment for a $6.0
million line of credit to provide funds for interim construction financing and
working capital needs. See "Management's Discussion and Analysis of Financial
Condition and Result of Operations -- Capital Resources and Liquidity."
The Company believes that there are ample opportunities to add Signature
Inn hotels on the perimeter of, and within, its current markets. The Company
intends to add Signature Inn hotels by constructing new hotels, and will
continue to evaluate opportunities to acquire and convert other hotels. The
Company's management currently has identified 23 cities in 17 states as
potential markets for expansion. In identifying cities for possible expansion,
the Company typically targets markets with populations of 50,000 or more and
with high levels of business development and multiple sources of room demand.
Within these markets the Company seeks locations near travelers' destination
points, which have good highway visibility and accessibility and are near
popular restaurants. The Company currently has four hotel development projects
underway.
Carmel, Indiana. An 81 room Signature Inn hotel located in Carmel,
Indiana, is currently under construction and is expected to open in January
1997. The Carmel hotel is owned by an Affiliated Entity in which the
Company acts as the sole general partner. The hotel will be operated by the
Company under long-term management and franchise agreements. The estimated
development cost, including land, is $3.9 million.
Springfield, Illinois. In August 1996, the Company purchased a 124
room hotel located in Springfield, Illinois. The Company expects to convert
this hotel to a Signature Inn hotel by May of 1997. The estimated
acquisition and development cost, excluding land, is $3.5 million. The
hotel is located on a six acre site which is leased under a long-term
ground lease.
Nashville, Tennessee. The Company also plans to undertake development
of a 75 room Signature Inn hotel in Nashville, Tennessee following the
completion of the Offering. The hotel will be situated on approximately
three acres of this site. The remaining acreage is intended to be sold to a
restaurant operator or other commercial user.
Louisville, Kentucky. The Company has contracted to acquire a 120 room
hotel located in Louisville, Kentucky. The Company expects to acquire and
convert the hotel to a Signature Inn by June of 1997. There can be no
assurance that this transaction will be consummated.
The Company has developed prototype plans and specifications for Signature
Inn hotels which include both two-story and three-story building designs, each
with interior corridors, which will allow for the inclusion of a select number
of rooms as suites. Future Signature Inn hotels are expected to contain between
75 and 125 guest rooms, an indoor or outdoor swimming pool, a fitness room and
at least two meeting rooms.
The construction phase of a hotel development generally requires seven to
twelve months after the site and all approvals and permits have been obtained.
The Company's experience in selection and acquisition of sites has varied and
generally averages three to six months. The approval and permitting phase can
occur simultaneously with site acquisition and generally requires from two to
six months. The entire development process generally ranges from twelve to
twenty-four months.
The Company uses independent contractors for the construction of its
hotels, each of whom is selected on the basis of a competitive bidding process.
The Company's management oversees the progress of construction on a regular
basis. The Company has effective working relationships with several
architectural and engineering firms as well as independent contractors. The
Company believes that these relationships and experiences will facilitate the
effective development of additional hotels.
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<PAGE> 34
The Company believes that the experience of its management has been and
will continue to be an important factor in enabling it to execute its growth
strategy. John D. Bontreger, the Company's founder, President, Chief Executive
Officer and Chairman of the Board, was the innovator of the "Signature" idea,
which was one of the industry's first limited service hotel concepts. He has
guided the Company in the development of all Signature Inn hotels. Additionally,
the Company's Vice President of Hotel Operations and Executive Director of
Marketing both have been employed by the Company since the opening of the first
Signature Inn in 1981. The Company's management has substantial experience in
all phases of hotel development, including the selection and acquisition of
hotel sites, the design and supervision of hotel construction and the operation
of hotel properties.
Internal Growth. Management believes that the operating performance of the
Initial Hotels will be enhanced by building new Signature Inn hotels and
acquiring hotels in new "feeder" markets beyond the perimeter of the Company's
existing markets, which will increase Signature name recognition and the number
of reservations generated through the reservation system. The Company believes
that increases in RevPAR will be achieved through the implementation of various
strategies, including periodic increases in ADR consistent with industry and
local economic conditions, maximizing the number of rooms sold during low
occupancy periods by effective management of room rate discounts, and increases
in Occupancy as a result of continual refinement of advertising and promotional
strategies with emphasis on database target marketing.
Portfolio Opportunities, Franchising and Management Contracts. The Company
has pursued and will continue to pursue opportunities to acquire a portfolio of
hotel properties to operate as Signature Inn hotels in its targeted markets. The
Company does not currently intend to actively market franchise and management
services to independent hotel developers or operators, but the Company will
consider franchising to third parties when it can maintain management control
and ensure consistency of services, facilities and amenities. These select
situations most likely would involve contractual franchise and management
arrangements with a "passive" investor or owner. The Company believes its
management system and consistency of services are competitive advantages which
could be jeopardized if management control of hotel operations is relinquished
through truly independent franchising. The Company is not currently engaged in
any discussions regarding the acquisition of a portfolio of hotel properties or
franchising to independent hotel developers or operators.
HOTEL OPERATIONS
Each Signature Inn hotel is operated by a staff of approximately 25
employees, including a General Manager who is responsible for day-to-day
operations. The General Manager is also responsible for developing operating
budgets and implementing hotel policies and procedures. All hotel expenditures,
including payroll, accounts payable and travel agent commissions, are
centralized for approval and payment in the corporate office headquarters.
Standardized property management system software facilitates the capture of
information chain-wide in an efficient and consistent manner. Policies and
procedures for hotel operations are contained in the Signature Inn Confidential
Operations Manual.
Legendary Service Program. The Company believes that its Legendary Service
Program, a unique Company-wide commitment to friendly and helpful guest
services, is a key competitive strength for Signature Inns. To underscore the
importance of the Legendary Service Program, the Company requires each new
employee to sign a written commitment to deliver Legendary Service to the
Company's guests. In addition, each employee receives extensive training in
employee/guest interaction and carries a Legendary Service Card as a reminder of
the four steps of the Legendary Service Program: (1) Big smile and hello; (2)
"How do you feel about your stay?"; (3) Go the extra mile; and (4) Listen,
apologize and correct the problem immediately. The Company has produced a
Legendary Service video and a Signature Inn corporate and hotel information
video which describe Signature Inns' hotel concept and services, corporate
culture and philosophies. Each employee participates in both classroom and
on-the-job training, and must pass various tests before being permitted to serve
guests. Depending on the employee's position, the initial training period can
extend from two to six weeks. Follow-up training, including the introduction of
new policies and procedures, is carried out through a series of weekly and
monthly meetings which assure consistent service is being delivered throughout
the chain.
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<PAGE> 35
The Company reinforces its commitment to Legendary Service with a money
back guarantee to its guests. The General Manager, Assistant General Manager and
Guest Service Coordinator of each Signature Inn hotel are authorized to return a
guest's money when the circumstance warrants in order to insure the guest's
confidence in the Company's commitment to guest satisfaction.
During new employee orientation, weekly departmental awards meetings and
monthly hotel awards meetings, the Legendary Service Program is reviewed and
employees are recognized for delivering Legendary Service to the Company's
guests. General Managers maintain a monthly Legendary Service log which records
guest feedback through comment cards, guest letters, notes and phone calls which
serve to identify the Legendary Service award winners. In addition, each hotel
recognizes a monthly white glove winner for the top housekeeper, and a guest of
the month which is selected by hotel employees. Also, the Company sponsors an
annual chain-wide awards convention to recognize employees for performance and
achievement.
Management believes that the cleanliness and quality of the Company's hotel
facilities, combined with the Legendary Service provided by its hotel staff,
have enabled the Company to provide its guests with value higher than its
competition, as demonstrated by the high levels of chain-wide Occupancy, ADR and
RevPAR achieved by Signature Inn hotels.
HOTEL MANAGEMENT
Hotel operations are under the direction of the Vice President of Hotel
Operations and three Regional Directors, each of whom supervises the operations
of approximately eight hotels. The Vice President of Hotel Operations has 25
years of hotel experience. The Regional Directors each have at least nine years
of hotel experience, all having started their careers as a General Manager of a
Signature Inn hotel. The General Managers of the Signature Inn hotels have an
average of four years of hotel experience.
The Company has implemented a comprehensive cash bonus program to create
incentives for Regional Directors, General Managers and other key hotel staff
members. The bonus amounts are based on specific criteria for each position,
with emphasis on hotel operating performance. Regional Directors and hotel
General Managers are also eligible to participate in the Company's stock option
program. In addition, monthly cash incentives are provided to front desk
personnel for effectiveness in booking reservations to achieve their hotel's
monthly revenue goal.
Budgeting/Information Systems. Each General Manager prepares an annual
business plan including a budget for his or her respective hotel. This process
includes the manager's assessment of the local market and the hotel's
competitive advantages and disadvantages. Each business plan includes sales and
marketing initiatives and other action steps to achieve revenue and expense
goals for the year. Annual business plans for all Signature Inn hotels are
coordinated and approved by corporate management.
Each Signature Inn hotel is equipped with an automated property management
system and related software programs, including a payroll and sales tracking
system, to manage the day-to-day operations of the hotel. Financial and
operating data is electronically transmitted daily to corporate headquarters.
Daily, weekly, monthly, quarterly and year-to-date reports are produced and
reviewed by management to monitor and maintain close control over the Company's
hotel operations.
Quality Control Programs. To ensure compliance with Company policies and
governmental regulations, the Director of Human Resources visits each hotel on
an annual basis. Each applicant for a key hotel staff position is required to
visit the Company's headquarters and take a variety of psychological career
assessment tests to ensure his or her personality is conducive to the
hospitality business. All employees in the chain (including Company headquarters
employees) must pass a drug screening test to become employed and are subject to
random testing thereafter. Additionally, all prospective employees must pass
credit, criminal and automobile driving record background checks.
The Company develops qualifications and a job description for each
position, including General Managers and other hotel employees. The typical
General Manager of a Signature Inn hotel is a college graduate, between 25 and
35 years of age, who possesses a positive mental attitude and strong work ethic.
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General Managers are required to attend a Dale Carnegie course to enhance their
human relations skills and to be actively involved in at least one local civic
organization.
The Company conducts a preventive maintenance program to maintain the
condition of, and to maximize the useful life of, furnishings and equipment. To
ensure sufficient funds are available to refurbish and upgrade facilities when
the need arises, the Company deposits 4.0% of revenue into a separate furniture,
fixture and equipment cash account. The Company believes these expenditures are
necessary to build and maintain goodwill with its guests and to enhance the
value and profitability of Signature Inns. The Company has secured competitive
contract pricing for its purchases of supplies and services and for purchases
associated with its refurbishing program.
Each Signature Inn hotel undergoes a two-day, on-site inspection by its
Regional Director at least twice each quarter, and is also formally inspected by
a member of corporate management at least twice each year. The Company also
regularly receives detailed written evaluations of hotel operations from a
guest's perspective through quarterly visits by independent, unannounced
inspectors.
A guest comment card, with pre-paid postage to corporate headquarters, is
placed in each Signature Inn guest room. Responses are quantified for each hotel
and for the chain as a whole for management review. During 1996, the Company
received approximately 4,000 comment cards with over 90% rating Signature Inn
hotels and services favorably overall. Each guest who submits a comment card
receives a personal letter of appreciation for taking the time to evaluate the
Company's performance. The Company adds and refines hotel amenities and services
as a direct result of input by guests from the Company's comment card program.
SALES, MARKETING AND RESERVATIONS
Guest Profile. During 1996, approximately 65% of Signature Inn guests were
business travelers and approximately 35% were leisure and other nonbusiness
travelers. Business travelers constitute the primary source of weekday room
sales throughout the year while leisure travel is generally the major source of
room sales on weekends. However, during the summer vacation months, leisure
travel demand is also strong throughout the week.
The Company offers a frequent stay program, the Signature Club, to business
travelers who may otherwise not qualify for a volume discount offered to
corporations and travel agency consortiums. The membership is extended free of
charge to travelers who have stayed at least 10 nights at a Signature Inn hotel.
Club benefits include 10% off standard rates, free stay for the guest's spouse,
express hotel reservations, express check-in and special check cashing
privileges. The Company currently has over 15,000 Signature Club members.
Approximately 8% of the Company's chain-wide room nights for 1996 were derived
from Signature Club members.
Sales and Marketing. Since the opening of its first hotel, Signature Inns
has placed a strong emphasis on developing new business relationships through an
aggressive personal sales calling program. Hotel management of each Signature
Inn hotel is responsible for sales in the local market. The Company, through the
development of annual and quarterly corporate and hotel business and sales
plans, establishes a targeted number of sales calls, open-houses and direct
mailings. Incentive compensation for corporate sales and hotel management
personnel is awarded based upon achievement of the goals established in these
plans. The corporate sales staff is responsible for regional and national sales
and the development of relationships with the travel planners of large companies
and large travel agency consortiums. The Company currently has negotiated rate
arrangements with over 250 companies and with most major travel agency
consortiums. Because the Company has management control over all hotels, it can
offer negotiated chain-wide room rate pricing based upon volume for all hotels
in the Signature Inns chain.
To complement these sales efforts, the Company is active with various
national organizations such as the American Society of Association Executives,
the National Business Travel Association, the American Society for Travel
Agents, the National Tour Association, the American Bus Association and the
Ontario Motor Coach Association.
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To attract the individual senior traveler and capitalize on the growing
senior citizen market, the Company offers a 10% discount to all American
Association of Retired Persons members. Additionally, the Company offers special
motorcoach rates to attract overnight business from the growing senior group
tour market. The Company promotes this business through its development of
prepackaged tours marketed to senior group tour planners and operators. These
competitively priced tour packages available in each Signature Inn market
include popular attractions, theaters, museums, specialty restaurants and
discounted overnight accommodations at a Signature Inn hotel.
To appeal to the 35 million membership of the AAA, which consists primarily
of leisure travelers, Signature Inn hotels offer "special value" rates (10%
discount) and each hotel subscribes to the Official Appointment Designation in
all of the applicable AAA Tour Books. Approximately 6% of 1996 chain-wide room
nights came from AAA members.
All Signature Inn hotels feature an outdoor swimming pool (or indoor pool
at South Bend, Indiana and Kokomo, Indiana), free stays for children age 17 and
under, complimentary all-you-can-eat Breakfast Express(R) and clean, comfortable
accommodations to appeal to value conscious leisure travelers and families.
These travelers include leisure groups such as overnight guests for weddings,
anniversaries, reunions, athletic teams and group motorcoach tours for senior
citizens.
Signature Inns has utilized the services of a full-service advertising
agency to assist in developing advertising and marketing programs on a local,
regional and national basis. National exposure has been generated by placing
advertisements in targeted business travel publications such as Business Travel
News and Travel Weekly. Regional and local advertising primarily focuses on
radio, business publications, direct mail to travel agencies and corporate
travel planners, the Yellow Pages, billboards and local program advertising.
The Company enlists the services of a full service public relations agency
to assist the Company in generating public awareness of Signature Inns within
its markets. During 1996, the Signature Inn chain was the official hotel of the
Indiana State Fair and the Hoosier State Games. Signature Inns sponsors an
annual golf classic for the benefit of Habitat for Humanity, a non-profit
organization which builds homes for the working poor. Funds raised from this
effort, along with funds raised by local hotel fundraisers and other efforts,
have assisted in the building of eight Habitat homes in Indianapolis, Indiana.
As a community service, during the holiday season, each Signature Inn hotel
provides two complimentary rooms per night to families visiting a hospitalized
family member.
Reservations. Signature Inns utilizes TeleServices Resources, Inc., a
subsidiary of AMR Corporation and a sister company of American Airlines, to
provide central reservation services. The chain's toll free number,
1-800-822-5252, can be accessed across the continental U.S., Canada and the
Virgin Islands. The Company believes its system is comparable to systems used by
large national hotel chains. The system is interfaced with the airlines' Global
Distribution System including electronic reservation systems such as Sabre,
Apollo, Worldspan, System One and Amadeus, which are used by travel agencies.
This sophisticated electronic system connects Signature Inns to over 35,000
travel agencies and over 250,000 travel agents in the U.S. and Canada and is
also accessible to travel agents in Central and South America and Europe.
Over 20% of Signature Inns' 1996 chain-wide revenue was generated through
the central reservation system. The Company believes that the availability of
its reservation system, in combination with the increased awareness of its
hotels that is expected to result from its geographic expansion, will contribute
to occupancy growth in its Initial Hotels and new hotels.
SIGNATURE INN HOTEL PROPERTIES
On the completion of the Offering and the closing of the Purchase
Transactions, the Company will own 24 of the 25 Signature Inn hotels listed in
the table below. Signature Inn-Carmel will continue to be owned by an Indiana
limited partnership in which the Company is the general partner and owns a 40%
equity interest. The hotels will have a total of 2,952 guest rooms located in
six states.
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<TABLE>
<CAPTION>
YEAR NO. OF
PROPERTY LOCATION OPENED ROOMS
- ------------------------------------- ---------------------------------------------------- ------ ------
<S> <C> <C> <C>
Signature Inn -- Indianapolis (North) I-465 & Michigan Road, Indianapolis, Indiana 1981 141
Signature Inn -- Fort Wayne I-69 & State Road 3, Fort Wayne, Indiana 1982 102
Signature Inn -- Castleton I-465 & Allisonville Road, Indianapolis, Indiana 1983 125
Signature Inn -- Lafayette I-65 & State Road 26, Lafayette, Indiana 1983 121
Signature Inn -- Muncie McGaillard Road & Chadam Lane, Muncie, Indiana 1984 101
Signature Inn -- Cincinnati (North) I-75 & Sharonville Road, Sharonville, Ohio 1985 130
Signature Inn -- Cincinnati
(Northeast) I-71 & Mason-Montgomery Road, Cincinnati, Ohio 1985 99
Signature Inn -- Southport I-65 & Southport Road, Indianapolis, Indiana 1985 101
I-465 & East Washington Street, Indianapolis,
Signature Inn -- Indianapolis (East) Indiana 1985 101
Signature Inn -- Indianapolis (West) I-465 & West 38th Street, Indianapolis, Indiana 1985 101
Signature Inn -- Columbus I-270 & Cleveland Road, Columbus, Ohio 1986 125
Signature Inn -- Kokomo U.S. 31 & Alto Road, Kokomo, Indiana 1986 101
Signature Inn -- Evansville Green River Road & Vogel Road, Evansville, Indiana 1986 125
Signature Inn -- Terre Haute I-70 & U.S. 41, Terre Haute, Indiana 1987 157
Signature Inn -- Elkhart Indiana Toll Road & State Road 19, Elkhart, Indiana 1987 125
Signature Inn -- Florence Turfway Road & I-71/75, Florence, Kentucky 1987 125
Signature Inn -- Dayton I-75 & State Road 725, Miamisburg, Ohio 1987 125
Signature Inn -- South Bend Indiana Toll Road & U.S. 31, South Bend, Indiana 1987 123
Signature Inn -- Louisville I-65 & Fern Valley Road, Louisville, Kentucky 1988 123
Signature Inn -- Normal 101 South Veterans Parkway, Normal, Illinois 1988 124
Signature Inn -- Peoria 4112 North Brandywine, Peoria, Illinois 1988 124
Signature Inn -- Bettendorf I-74 & Spruce Hill Drive, Bettendorf, Iowa 1989 124
Signature Inn -- Knoxville I-75 & Cedar Bluff Road, Knoxville, Tennessee 1989 124
Signature Inn -- Springfield* I-55 & Stevenson Drive, Springfield, Illinois 1996** 124
Signature Inn -- Carmel*** I-465 & U.S. 31, Carmel, Indiana 1997 81
</TABLE>
- ---------------
* Upon completion of conversion to a Signature Inn.
** Year acquired.
*** Expected to open January 1997.
TRADEMARKS
The trademarks "Signature Inn," "We Help You Get Down to Business,"
"Sincerely Yours," "Breakfast Express(R)," "There's Something Personal about a
Signature" and related marks and logos are actively used by the Company, are
material to the Company's business and are registered with U.S. Patent and
Trademark Office.
EMPLOYEES
On the completion of the Offering and the closing of the Purchase
Transactions, the Company will have approximately 600 employees, including 30 in
the Company's corporate office. The Company's employees are not represented by a
labor union. The Company considers its relationship with its employees to be
good.
COMPETITION
The lodging industry is an extremely competitive business. The Company and
its Signature Inn hotels are each in competition with numerous management
companies and hotel chains of varying quality and size, including national and
regional chains and hotels which have available to them greater name recognition
and financial resources than the Company. Chains such as Hampton Inn, Courtyard
by Marriott, Holiday Inn Express, LaQuinta Inn, Drury Inn and Ramada Limited are
direct competitors of the Company. There is no single competitor or group of
competitors of the Company that is dominant in the lodging industry. Competitive
factors in the industry include reasonableness of room rates, quality of
accommodations, degree of service and convenience of locations. The lodging
industry in general, including the Company, may be adversely affected by
national and regional economic conditions and government regulations. The demand
for accommodations at a particular hotel may be adversely affected by many
factors including changes in travel
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<PAGE> 39
patterns, local and regional economic conditions and the degree of competition
with other lodging establishments in the area. The Company believes its
management possesses adequate experience and that the Signature Inn concept is
sufficiently recognized to enable the Company to compete successfully against
its competitors.
ENERGY AND ENVIRONMENTAL FACTORS
Present and future regulations issued to meet federal or local
antipollution standards, limitations on or rationing of gasoline usage, gasoline
shortages or other effects of any future energy crisis or shortage of natural
resources may adversely affect utilization of one or more of the Signature Inn
hotel properties by travelers or increase the cost of operating such properties
and thus adversely affect the Company's operations. Further, environmental
studies required to be performed by the Company and its Affiliated Entities in
connection with the acquisition of properties in order to avoid potential
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Super Fund Amendments and
Reauthorization Act of 1986, add to the costs of acquisition of real estate
generally.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment of
hazardous substance at a property owned by another may be liable for the costs
of removal or remediation of hazardous substances released into the environment
at that property. The cost of the remediation or removal of such substances may
be substantial, and the presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. In connection
with the operation of the hotel properties, the Company may be potentially
liable for such costs.
The Company has obtained Phase I environmental site assessments ("Phase I
Surveys") on existing Signature Inn properties, and intends to obtain Phase I
Surveys prior to the purchase of any properties after the Purchase Transactions.
The Phase I Surveys are intended to identify potential environmental
contamination and regulatory compliance concerns. Phase I Surveys generally
include historical reviews of the properties, reviews of certain public records,
preliminary investigations of the sites and surrounding properties and the
preparation and issuance of written reports. Phase I Surveys generally do not
include invasive procedures, such as soil sampling or ground water analysis.
The Company is not aware of any environmental liability or compliance
concern that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity. Nevertheless, it
is possible that Phase I Surveys will not reveal all environmental liabilities
or compliance concerns or that there will be material environmental liabilities
or compliance concerns of which the Company will not be aware. Moreover, no
assurances can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability, or (ii) the current environmental
condition of the Company's or Affiliated Entities' existing and future
properties will not be affected by the condition of neighboring properties or by
unaffiliated third parties.
AMERICANS WITH DISABILITIES ACT AND OTHER GOVERNMENTAL REGULATIONS
The Company believes that all hotels within the Signature Inn chain
currently are in compliance in all material respects with the Americans With
Disabilities Act and does not anticipate that future compliance with this
regulation will require substantial cash resources.
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements and compliance with specific standards of
conduct. The Company believes that each Signature Inn hotel has the necessary
permits and approvals to operate its respective business and the Company intends
to continue to obtain such permits and approvals for its new facilities. In
addition, the Company and its Affiliated Entities are subject to laws governing
their relationship with employees, including minimum wage requirements,
overtime,
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<PAGE> 40
working conditions and work permit requirements. Further increases in the
minimum wage rate, employee benefit costs or the costs associated with employees
could adversely affect the Company.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's business, assets, financial
condition or results of operations.
In October 1989, the Company's primary development lender and lead bank on
its line of credit refused to renew on normal terms the Company's line of
credit, which had previously been routinely renewed on an annual basis. In March
1990, the bank refused to further renew the line of credit at all. The bank's
refusal to renew the line of credit, together with other factors, caused the
Company to terminate two ongoing public offerings of affiliated limited
partnership interests and prevented the Company from structuring and syndicating
any such offerings after 1989. As a result, nine hotels in their "start-up"
phase were not adequately financed, and their operation caused the Company to
exhaust substantially all of its cash resources and historically adequate
working capital reserves. In early 1990, the Company was forced to suspend
interest payments to its lenders and, after unsuccessfully attempting to
negotiate an out-of-court debt restructuring with its lenders, filed for
protection under Chapter 11 of the Bankruptcy Code on April 23, 1990. Although a
reorganization plan ultimately was confirmed on March 28, 1991, the confirmed
plan proved unfeasible, requiring the Company again to suspend debt service
payments to its lenders as of January 1, 1992.
During 1992 and 1993, the Company conveyed to its lenders a total of six
Company-owned hotels in lieu of foreclosure and in full release and discharge of
the substantial deficiency obligations (representing the negative difference
between the estimated fair market value of the properties and the indebtedness
owing thereon) owing to those lenders. In addition, on December 23, 1992, the
Company negotiated a substantial restructuring of its indebtedness to its former
primary lender. On December 16, 1993, the Company completed a total
extinguishment at a discount of the Company's indebtedness and warrant
obligations then owing to its former primary lender, pursuant to a comprehensive
refinancing package. In 1995, the Company paid most of the indebtedness incurred
in connection with the 1993 refinancing, including a $900,000 Capital
Appreciation Fee. As of September 30, 1996, other than non-recourse hotel
mortgage loans to its consolidated Affiliated Entities, the Company had $2.75
million outstanding on its line of credit facility.
Several investors in the Syndicated Affiliated Entities have questioned the
fairness of the Purchase Transactions. One investor has demanded consideration
for his limited partnership unit that exceeds the amount that he would receive
in connection with the Purchase Transactions, and he has threatened to take
legal action unless his demand is satisfied. The Company is unable to predict
whether any legal action will be taken by this or any other investor. The
Company believes that the purchase prices to be paid in, and the terms of, the
Purchase Transactions are fair and reasonable.
INSURANCE
The Company has commercial general liability insurance with an occurrence
limit of $1.0 million, including bodily injury and property damage, personal and
advertising injury, and products and completed operations coverage, with an
aggregate limit of $2.0 million per hotel, for these coverages and additional
excess umbrella liability insurance with a coverage limit of $25.0 million over
and above the underlying occurrence limit. The Company believes these coverages
and limits are appropriate for its business. While management believes that its
insurance coverage is adequate, if the Company were held liable for amounts and
claims exceeding the limits of its insurance coverage or outside the scope of
its insurance coverage, the Company's business, results of operations and
financial condition could be materially and adversely affected.
HEADQUARTERS
The Company's corporate headquarters in Indianapolis, Indiana, is occupied
pursuant to a lease that expires in November 1997. Management believes that such
offices are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional space, as needed, on terms acceptable to the
Company.
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<PAGE> 41
MANAGEMENT
The following chart lists the names, ages and current positions with the
Company of each of the Company's current directors and executive officers. Each
director named below has served as a director of the Company for five or more
years, except for Messrs. Carney and Hagood, who became directors in November
1993, Mr. Huse, who became a director in August 1994, and Mr. Watson, who became
a director in October 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------- -----------------------------------------------------------
<S> <C> <C>
President, Chief Executive Officer and Chairman of the
John D. Bontreger 47 Board
Vice President Finance, Chief Financial Officer and
Mark D. Carney 39 Director
Bo L. Hagood 47 Vice President Hotel Operations and Director
Secretary, Executive Director Sales and Marketing and
David R. Miller 55 Director
Martin D. Brew 36 Treasurer and Controller
Stephen M. Huse 54 Director
George A. Morton 59 Director
Richard L. Russell 61 Director
Richard E. Shank 63 Director
William S. Watson 52 Director
Orus E. Weaver 72 Director Emeritus
</TABLE>
A brief description of the business experience and educational background
of each of the current directors and executive officers is as follows:
John D. Bontreger is the founder of the Company and has served as its
President, Chief Executive Officer, and Chairman of the Board since the
Company's inception in March 1978. He is responsible for the overall management
of the business affairs of the corporation. Prior to founding the Company, Mr.
Bontreger served from 1975 to 1978 as a vice president for an Indiana-based
hotel company. Mr. Bontreger holds a Bachelor of Science Degree from Goshen
College, Goshen, Indiana where he was graduated in 1972.
Mark D. Carney joined the Company in 1992 as the Vice President of
Finance/Chief Financial Officer and is responsible for the financial operations
and finance functions of the Company and affiliated entities. Prior to joining
the Company, Mr. Carney was employed by KPMG Peat Marwick, in Indianapolis,
Indiana. He was responsible for services to public and privately owned real
estate developers and operators, hospitality companies and financial
institutions. Mr. Carney is a 1979 graduate of Indiana University, with a
Bachelor of Science Degree from the School of Business and is a member of the
American Institute of Certified Public Accountants.
Bo L. Hagood has been employed by the Company since December 1980 starting
as a hotel General Manager. In January 1984, he was promoted to Director of
Hotel Operations and then to Vice President Hotel Operations in 1987. Mr. Hagood
has been employed in the hospitality industry for 25 years, having managed
several hotels for national chains prior to joining Signature Inns. Mr. Hagood
was graduated from Appalachian State University in 1971 with a Bachelor of
Science Degree in Business Administration.
David R. Miller has been employed by the Company since August 1978 and has
served as the Secretary (and Treasurer until May 1986) of the Company since
September 1978. Since 1990, Mr. Miller has been the Executive Director Sales and
Marketing responsible for assisting in the development and implementation of the
Company's advertising, marketing and public relation programs. He has served as
liaison with the Company's advertising and public relations agencies and has
directed the local, regional and national hotel room sales program and the
central reservation system. Mr. Miller is a 1965 graduate of Ashland University,
Ashland, Ohio, with a B.S. in Business Administration.
Martin D. Brew has been employed by the Company since April 1986. In
December 1987, Mr. Brew assumed the position of Controller and, in April 1992,
he began serving as Treasurer. Mr. Brew is responsible
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<PAGE> 42
for the Accounting and Information Systems Department and the functions of:
Financial Reporting, Investor Reporting, Cash Management, Property and Casualty
Insurance, Legal Compliance, Automation concepts of the chain, Tax Planning and
Audit Coordination. Prior to his employment with Signature Inns, Mr. Brew was
employed by KPMG Peat Marwick. Mr. Brew is a 1982 graduate of Indiana
University, with a Bachelor of Science Degree from the School of Business and is
a member of the American Institute of Certified Public Accountants.
Stephen M. Huse is Chairman and Chief Executive Officer, Huse Food Group,
Inc., Bloomington, Indiana. In addition, Mr. Huse is President of St. Elmo,
Incorporated, which operates the St. Elmo Steak House in downtown Indianapolis,
and Chief Executive Officer of Beef Corporation of America, franchisee of 12
Arby's Roast Beef Restaurants in Central and Southern Indiana. Previously, Mr.
Huse was President and Chief Executive Officer of Consolidated Products, Inc.,
operator of Steak 'n' Shake restaurants. He is also the founder of Noble Romans
Incorporated, a publicly traded franchisor of pizza parlors in the Midwest. Mr.
Huse is also a director of Marsh Supermarkets, Inc., and a member of the
Advisory Board of KeyBank of Central Indiana, Indianapolis, Indiana. Mr. Huse is
a 1965 graduate of Indiana University.
George A. Morton has been manager, operator and part owner of Morton Farms,
Inc. since 1962, and serves as Vice President and Secretary of that company.
From April 1987 to January 1989, Mr. Morton served as Deputy Commissioner of
Agriculture for the State of Indiana. He served as the Indiana Director of
Farmers Home Administration from 1989 to 1993. Mr. Morton is a 1958 graduate of
Purdue University.
Richard L Russell has been the Executive Director, Direct Regions of the
National Retail Hardware Association, and has been involved in the hardware
industry for nearly thirty years. He has also served as president or director of
several community and civic organizations. Mr. Russell is a 1958 graduate of
Purdue University.
Richard E. Shank has been self-employed in the real estate business since
1961. Mr. Shank was an elected representative in the Indiana General Assembly
for 21 years, and was a State Senator from 1976 to 1987. He served as Executive
Director of the Indiana Professional Licensing Agency during 1988. Mr. Shank
attended Hesston College in Hesston, Kansas.
William S. Watson currently provides hotel industry consulting services
through WSRW Enterprise, which is affiliated with Stratus Management Group, Inc.
Mr. Watson previously served as Vice-Chairman of Pegasus Systems, Inc., and
Chairman of THISCO (The Hotel Industry Switch Company). Mr. Watson previously
held positions with Best Western International as Senior Vice President
Worldwide Marketing and Executive Vice President. Mr. Watson was also employed
as a Vice President of ITT Sheraton Corporation, and held executive positions
with Bicoastal Air Service, Inc., Altair Airlines, Inc., and Pan American World
Airways. Mr. Watson holds a Mechanical Engineering degree from Croydon
Polytechnic in England.
Orus E. Weaver, who served as a Director of the Company from its inception
through October 1996, was designated a Director Emeritus by the Board of
Directors on October 22, 1996. As a Director Emeritus Mr. Weaver is invited to
attend meetings of the Board of Directors and receives the same compensation as
a Director, but has no vote with respect to any matter coming before the Board.
Mr. Weaver's invitation to attend Board meetings and his compensation therefor
terminate in May 1998. He has been an independent life insurance broker since
1981 and previously assisted in the sale of limited partnership interests in
limited partnerships formed to develop Signature Inn hotels. Mr. Weaver has been
a member of the Indiana and National Association of Life Underwriters for almost
20 years.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following Summary Compensation Table lists the cash compensation paid
to each of the four highest compensated executive officers of the Company during
the four year period from January 1, 1993 through December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
YEAR ENDED COMPENSATION
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY BONUS (1)
- ---------------------------------------- ------------ -------- ------------
<S> <C> <C> <C>
John D. Bontreger 1996 $153,317 $ 89,066
President & CEO 1995 147,833 61,685
1994 141,901 77,768
1993 136,250 --
Mark D. Carney 1996 92,663 56,679
V.P. Finance & CFO 1995 89,350 38,217
1994 85,782 47,003
1993 80,337 3,000
Bo L. Hagood 1996 92,663 56,679
V.P. Hotel Operations 1995 89,350 38,217
1994 85,792 47,003
1993 82,212 7,787
David R. Miller 1996 78,624 32,388
Secretary, Executive Director of 1995 75,911 24,124
Sales and Marketing 1994 72,795 28,487
1993 69,808 3,330
</TABLE>
- ---------------
(1) Represents amounts earned during the year preceding the year shown and
determined by the board of directors of the Company and paid in the year
shown. The Company anticipates that bonus amounts earned during 1996 will be
determined and paid in the first quarter of 1997.
OPTION AND RESTRICTED STOCK GRANTS
As of the date of this Prospectus, there are unexercised options to
purchase 2,297 shares of Common Stock under the 1986 Signature Inns, Inc.
Incentive Stock Option Plan (the "1986 Plan"). All of those unexercised options
expire in July 1997. Except for Mr. Brew, who holds options on a total of 540
shares, no other director or executive officer of the Company holds any options
under the 1986 Plan.
The following table sets forth the grants of options to be made to the four
highest compensated executive officers during fiscal 1997 under the Signature
Inns, Inc. 1996 Equity Incentive Plan, which is described more fully below.
OPTION GRANTS IN CURRENT FISCAL YEAR (1)(2)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL EXERCISE
UNDERLYING OPTIONS GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH)(3) DATE
- ------------------------- --------- ------------------ ----------- ------------
<S> <C> <C> <C> <C>
John D. Bontreger........ 25,000 27.5% January 2007
Mark D. Carney........... 12,500 13.7% January 2007
Bo L. Hagood............. 12,500 13.7% January 2007
David R. Miller.......... 7,500 8.2% January 2007
</TABLE>
40
<PAGE> 44
- ---------------
(1) The Company's Compensation Committee and Board of Directors have approved
the grant of the stock options listed in the foregoing table conditioned
upon the successful completion of the Offering. However, no stock option
agreements have yet been signed and no options have yet been granted.
(2) No options were granted during 1996.
(3) Based on the fair market value (as defined in the Signature Inns, Inc., 1996
Equity Incentive Plan) of the Common Stock.
COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee meets as necessary to (i) recommend
to the Board of Directors the retention, from time to time, of the independent
auditing firm to be engaged by the Company, (ii) coordinate the annual audit of
the Company between management and the auditing firm, (iii) meet with the
auditors at least two times during the year, including one meeting before the
audit is commenced and one meeting following the completion of the audit, and to
meet at such other times as the Board of Directors, in its discretion, directs
or as the Committee determines. Committee members serve one-year terms, from one
annual shareholders' meeting to the next. The current members of the Audit
Committee are Richard E. Shank, Chairman, and Richard L. Russell. The Audit
Committee met twice during 1996.
Compensation Committee. The members of the Compensation Committee serve
from year to year from one annual meeting of shareholders to the next. The
purposes and functions of the Compensation Committee are to (i) develop and
recommend to the Board of Directors for approval a compensation plan for the
president and chief executive officer and all other individuals within the
Company who are designated as "senior management," (ii) review benefit, bonus
and incentive plans and other corporate perquisites on an annual basis, (iii)
review and recommend to the Board suggested changes in compensation to be paid
to outside members of the Board, and (iv) review expense reimbursement policies
of the Company as they pertain to directors and management. The Compensation
Committee meets as determined necessary by the Board or by the Committee. The
current members of the Compensation Committee are George A. Morton, Chairman and
Stephen M. Huse. The Compensation Committee met twice during 1996.
EMPLOYMENT CONTRACTS
The Company has employment contracts with John D. Bontreger, Bo L. Hagood,
Mark D. Carney, David R. Miller and Martin D. Brew. The terms of the employment
contracts began in December 1993, and the contracts provide for base salaries of
the officers/employees, plus bonuses, as determined annually by the Company's
Board of Directors. In addition, the employment contracts provide for the
payment of other customary benefits, including medical, life and disability
insurance premiums. Mr. Bontreger's contract expires in June 1998. Messrs.
Hagood's and Carney's contracts expire in December 1997. Messrs. Miller's and
Brew's contracts expire in June 1997. The contracts are renewable for subsequent
terms: Mr. Bontreger's for one and one-half years; Messrs. Hagood's and Carney's
for one year; and Messrs. Miller's and Brew's for six months. The contracts are
not terminable by the Company except upon "just cause" as defined in the
contracts.
In the event the Company terminates an officer/employee's employment
without "just cause," or in the event an officer/employee resigns "with just
cause" (i.e., where the Company materially breaches the agreement), the
officer/employee is entitled to receive from the Company lump sum severance
payments equal to a multiple of yearly "regular compensation," as defined in the
contracts. In such events, Mr. Bontreger would receive severance benefits equal
to one and one-half times his "regular compensation," Messrs. Hagood and Carney
would receive severance benefits equal to one time such compensation, and
Messrs. Miller and Brew would each receive severance benefits equal to one-half
times such compensation.
In the event of the termination of an employment contract by the Company
"for just cause" or a resignation by an officer/employee "without just cause,"
the severance benefits would not be payable. In addition, in the event the
Company terminates an employment contract for "just cause" or the
officer/employee resigns "without just cause," the officer/employee must abide
by certain restrictive, non-compete provisions for the same period as the then
current term of the contract.
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<PAGE> 45
COMPENSATION OF DIRECTORS
Each of the Company's five non-employee directors (each, an "Outside
Director") is paid a retainer of $5,400 per year, payable quarterly. In
addition, each Outside Director receives a fee of $650 per Board meeting
attended (other than telephonic Board meetings which are covered by the
retainer, and receives a fee of $650 for each Committee meeting, unless such
Committee meeting is held "in conjunction with" a Board meeting, in which event,
the fee is $325. Under the terms of the 1996 Equity Incentive Plan, awards of
Restricted Stock to Outside Directors are automatically granted upon such
directors' election or re-election. Initially, each Outside Director was granted
167 shares, 333 shares or 500 shares of Restricted Stock depending on the number
of years then remaining in such director's term. Upon re-election, each Outside
Director is granted awards of 500 shares of Restricted Stock. Outside Directors
are also reimbursed for reasonable costs and expenses, including travel
expenses, incurred by them in connection with their attendance at any board or
committee meeting.
THE 1996 EQUITY INCENTIVE PLAN
Believing that the Company's earnings performance and growth depend on the
best possible management available, the Board of Directors of the Company
adopted a 10-year incentive plan entitled the "Signature Inns, Inc. 1996 Equity
Incentive Plan" (the "Plan") for directors, officers and employees of the
Company and its subsidiaries. The Board believes that the Plan will encourage
equity ownership in the Company by key employees, provide those individuals with
incentive and motivation to perform in the best interests of the Company and its
shareholders and aid in attracting and retaining high quality employees.
The Plan became effective when it was approved by the Company's
shareholders at their 1996 annual meeting. Awards granted under the Plan may be
in the form of Incentive Stock Options, Non-qualified stock options
(collectively referred to herein as "Stock Options"), Restricted Stock Grants or
any combination thereof within the limitations set forth in the Plan. For
purposes of awarding Stock Options and Restricted Stock Grants, the Plan will
remain in effect for a term of 10 years from the date of adoption of the Plan by
the Board of Directors on February 20, 1996 (the "Plan Term Commencement Date").
The Plan will continue in effect thereafter (i.e., beyond the 10 year term for
making awards) until all matters relating to the payment of awards and the
administration of the Plan have been fully settled. The principal features of
the Plan are summarized below.
The Plan is intended to supersede and replace the 1986 Signature Inns, Inc.
Incentive Stock Option Plan (the "1986 Plan"), which expired on March 26, 1996,
and will govern any outstanding unexercised stock options granted under the 1986
Plan. As of the date of this Prospectus, there are unexercised options to
purchase 2,297 shares of Common Stock under the 1986 Plan, at an exercise price
of $4.163, which expire in July 1997.
Administration. The Plan is administered by the Compensation Committee,
one of two standing committees appointed by the Board of Directors. The
Compensation Committee consists of two Directors of the Company, neither of whom
is an employee of the Company or its subsidiaries. The Compensation Committee
and the Plan are required always to possess characteristics required to comply
with Rule 16b-3 promulgated under the Securities Exchange Act of 1934. The
Compensation Committee has sole authority to administer and interpret the Plan
and to make recommendations for awards thereunder to the Board of Directors. No
awards may be granted other than those recommended by the Compensation
Committee.
Shares Available. The Plan provides that no more than 750,000 shares of
the Company's Common Stock may be awarded as either Stock Options or Restricted
Stock Grants, subject to adjustment in certain circumstances (the "Available
Shares"). Available Shares cannot exceed 10% of the total outstanding shares of
Common Stock of the Company at any time during the term of the Plan, and no more
than 5% of the Available Shares may be awarded in the form of Restricted Stock
Grants.
Eligibility. Only full-time officers and employees of the Company and its
subsidiaries are eligible for awards of Stock Options and Restricted Stock
Grants. Outside Directors are eligible only for awards of
42
<PAGE> 46
Restricted Stock Grants. Awards of Restricted Stock Grants to Outside Directors
will be on an automatic, non-discretionary basis, upon the election or
re-election of each Outside Director.
Stock Options. Stock Options granted under the Plan may be Incentive Stock
Options or Non-qualified Stock Options. Subject to the terms and provisions of
the Plan, options may be granted to officers or employees at any time and from
time to time as shall be recommended by the Compensation Committee and approved
by the Board of Directors. The Compensation Committee shall have discretion in
recommending to the Board the number of shares subject to options granted to
each Participant.
The option price at which the Participant can exercise each Stock Option
(the "Exercise Price") shall be recommended by the Compensation Committee and
approved by the Board of Directors, provided that the Exercise Price shall not
be less than the Fair Market Value (as such term is defined in the Plan) per
share of the Company's Common Stock at the time of the grant. No Stock Option
may be granted after ten years following the Plan Term Commencement Date. All
Stock Options granted under the Plan shall expire no later than ten years from
the date of the grant, subject to the limitations set forth in the Plan.
Stock Options awarded to Employees under the Plan shall be exercisable at
such times and be subject to such restrictions and conditions as the Committee
shall in each instance approve, which need not be the same for each award or for
each Employee. However, each Non-qualified Stock Option shall become exercisable
in respect of 33 1/3 percent of the shares subject to the option on the first,
second and third anniversary of grant. Notwithstanding any other provision of
the Plan, in no event may any Stock Option awarded under the Plan to an Employee
who is subject to the restrictions of Section 16 of the Exchange Act become
exercisable prior to six months following the date of its award. In addition,
the Plan places limitations on the exercise of options following termination of
employment or in the event of death, disability or retirement or termination
associated with a Change in Control (as defined in the Plan) of the Company.
Restricted Stock. The Plan provides for the award of shares of Common
Stock of the Company which are subject to certain restrictions provided in the
Plan or otherwise determined by the Compensation Committee ("Restricted Stock").
Restricted Stock issued pursuant to the Plan will be represented by Common Stock
certificates registered in the names of the Participants who receive such
awards. Upon the award of Restricted Stock, the Participant is entitled to vote
the Restricted Stock and to exercise other rights as a shareholder of the
Company, including the right to receive all dividends and other distributions
paid or made with respect to the Restricted Stock. However, the Participant may
not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the
Restricted Stock during the restriction period designated by the Compensation
Committee except by will or as may be determined by the Compensation Committee.
When the conditions of the Restricted Stock award established by the
Compensation Committee are satisfied, the Company will deliver at the end of the
restriction period stock certificates representing the shares of Common Stock
which are no longer subject to any restrictions, except those restrictions
required by applicable securities laws.
Federal Income Tax Treatment. The following is a brief summary of the
Federal income tax rules currently applicable to participation in the Plan. The
summary is not exhaustive and does not cover any state or local tax consequences
of participation in the Plan. The Company advises Participants to consult their
own tax advisors with respect to the consequences of their participation in the
Plan.
Income is not recognized by a Participant on receipt of an option. Upon the
exercise of a Non-qualified Stock Option, the Participant will recognize
ordinary income in an amount equal to the excess of the fair market value of the
shares of Common Stock on the date of the exercise over the Exercise Price paid
by the Participant. The Participant's tax basis in those shares will be the
Exercise Price paid plus the amount of recognized ordinary income, and the
Participant's holding period will commence on the date the shares are
transferred. Special rules apply in the event all or a portion of the Exercise
Price is paid in the form of shares of Common Stock of the Company. Other
special rules may also apply to a Participant who is subject to Section 16 of
the Securities Exchange Act of 1934.
The exercise of an Incentive Stock Option by payment of cash will generally
have no immediate tax consequences to the Participant (except to the extent it
is an adjustment in computing alternative minimum
43
<PAGE> 47
taxable income). A Participant who disposes of shares of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option after a certain holding
period will generally realize long-term capital gain or loss equal to the
difference between the amount realized upon the sale and the purchase price of
the shares (i.e., the exercise price paid by the Participant). However, a
Participant who disposes of shares acquired pursuant to exercise of an Incentive
Stock Option prior to the expiration of such holding period will recognize
ordinary income equal to the excess of the fair market value of the shares of
Common Stock on the date of exercise (or the proceeds of the disposition, if
less) over the Exercise Price. Special rules apply in the event all or a portion
of the Exercise Price is paid in the form of shares of Common Stock of the
Company.
With respect to Restricted Stock, the Participant will have ordinary income
equal to the fair market value of the Restricted Stock on the date those shares
are no longer subject to forfeiture, unless the Participant elects within 30
days of initial receipt of the Restricted Stock to include as ordinary income
the fair market value of the shares on the date of issuance.
Generally, to the extent a Participant recognizes ordinary income as
described above, the Company (or the subsidiary of the Company for which the
Participant performs services) will be entitled to a corresponding deduction,
provided that, among other things (i) the amount deductible (I) is an ordinary,
necessary and reasonable business expense; (II) is not an excess parachute
payment within the meaning of Section 280G of the Code; and (III) is not
disallowed by the $1.0 million limitation on certain highly compensated
executive compensation pursuant to Section 162(m) of the Code; and (ii) any
applicable reporting obligations are satisfied.
Amendment and Termination. The Compensation Committee may amend, alter or
discontinue the Plan, but no amendment, alteration or discontinuation shall be
made more than every six months. In addition, no such amendment shall be made
without the approval of the Company's shareholders to the extent such approval
is required by law, agreement or the rules of any exchange upon which the Common
Stock is listed or quoted.
44
<PAGE> 48
PRINCIPAL STOCKHOLDERS
Set forth in the following table are the beneficial holdings as of December
13, 1996 and as of the time of completion of the Offering, of the Company's
Common Stock (as adjusted for the 1-for-3.7 share reverse stock split) and the
Series A Preferred Stock of each of the current directors of the Company, which
include each person known to the Company who may be deemed to own more than 5%
of the Company's Common Stock, and all directors and officers as a group:
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK SERIES A PREFERRED
BENEFICIALLY BENEFICIALLY STOCK BENEFICIALLY
OWNED OWNED OWNED AFTER
PRIOR TO OFFERING(2) AFTER OFFERING(2) OFFERING(2)
---------------------- ------------------------ ----------------------
NAME AND NUMBER NUMBER NUMBER
ADDRESS(1) OF SHARES PERCENTAGE OF SHARES PERCENTAGE(3) OF SHARES PERCENTAGE
- ------------------------ --------- ---------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
John D. Bontreger....... 409,568 19.46% 409,568 6.44%
Mark D. Carney.......... 119,730 5.69% 119,730 1.88%
Bo L. Hagood............ 115,112 5.47% 115,112 1.81%
David R. Miller......... 80,946 3.85% 80,946 1.27%
Orus E. Weaver.......... 29,741(4) 1.41% 29,741(4) *
George A. Morton........ 27,703(5) 1.32% 27,703(5) *
Richard E. Shank........ 27,071(6) 1.29% 27,071(6) *
Richard L. Russell...... 16,351(7) * 16,351(7) *
Stephen M. Huse......... 45 * 45 *
William S. Watson....... 90 * 90 *
All directors, executive
officers as a group
(Includes 11
persons).............. 860,682 40.90% 860,682 13.53%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock
(1) The address of each beneficial owner is in care of Signature Inns, Inc., 250
East 96th Street, Suite 450, Indianapolis, Indiana, 46240.
(2) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise indicated.
(3) Percentages are calculated as if all of the Series A Preferred Stock had
been converted into Common Stock at the conversion price set forth on the
cover page of this Prospectus.
(4) Mr. Weaver holds 29,412 shares of Common Stock in his name of record and has
sole voting and investment power over such shares, and he owns 329 shares of
Common Stock jointly with his wife with whom he shares voting and investment
power over such shares.
(5) Mr. Morton holds 16,893 shares of Common Stock in his name of record and has
sole voting and investment power over such shares, and 10,810 shares of
Common Stock are held by trusts for which his wife acts as trustee with
investment power over such shares.
(6) Mr. Shank holds all shares of Common Stock as a joint tenant with his wife
with whom he shares voting and investment power over all such shares.
(7) Mr. Russell holds 6,892 shares of Common Stock in his name of record and has
sole voting and investment power over such shares and 9,459 shares of Common
Stock jointly with his wife with whom he shares voting and investment power
over such shares.
45
<PAGE> 49
MARKET FOR THE REGISTRANT'S CAPITAL STOCK AND
RELATED STOCKHOLDER MATTERS
No Series A Preferred Stock was outstanding prior to this Offering. The
Company's Common Stock is not listed on any securities exchange, and first
became subject to quotation on the "NASDAQ" National Market system on January
, 1997.
The range of high and low bids for Company's Common Stock for each quarter
within the last two fiscal years (as adjusted for the 1-for-3.7 share reverse
stock split) is set forth below:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
ENDED BID(1) BID(1)
- -------- ---------- ---------
<S> <C> <C>
9/30/96 $ 14.800 $ 1.850
6/30/96 3.700 1.850
3/31/96 4.163 1.850
12/31/95 2.775 1.850
9/30/95 2.775 1.850
6/30/95 1.850 1.850
3/31/95 1.850 .463
12/31/94 .925 .463
9/30/94 .925 .463
6/30/94 .463 .463
3/31/94 .925 .463
</TABLE>
- ---------------
(1) Quotations may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
46
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is an Indiana corporation originally organized in 1978. The
authorized capital stock of the Company consists of 13,513,514 shares of common
stock, no par value per share (the "Common Stock"), and 5,000,000 shares of
preferred stock, no par value per share (the "Preferred Stock"). Upon completion
of the Offering, 2,104,413 shares of Common Stock will be issued and outstanding
and 2,000,000 shares (2,300,000 shares if the Underwriters' over-allotment
option is exercised) of the Preferred Stock will be issued and outstanding. The
following description is a summary and is qualified in its entirety by reference
to the provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles"), and its By-Laws, as amended (the "By-Laws"),
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
PREFERRED STOCK
The authorized Preferred Stock consists of two classes, Cumulative
Convertible Preferred Stock and Non-Cumulative Preferred Stock, each of which
may be issued from time to time in one or more designated series. The Company's
Board of Directors, without approval of the shareholders, is authorized to
establish the attributes, designations, preferences and voting, dividend,
redemption, conversion, liquidation and other relevant terms of a particular
series of either class of Preferred Stock. Pursuant to its authority, the
Company's Board of Directors has designated as a series the Series A Preferred
Stock offered hereby, which is more fully described in the section below
entitled "-Series A Preferred Stock." The Company's Board of Directors also has
designated as a series of the Non-Cumulative Preferred Stock, the Series One
Non-Cumulative Preferred Stock, which is issuable upon the exercise of certain
Stock Purchase Rights pursuant to the Company's Shareholders' Rights Plan which
is more fully described below under the heading "-Stock Purchase Rights Under
Shareholders' Rights Plan."
SERIES A PREFERRED STOCK
The Series A Preferred Stock offered hereby is a single series consisting
of up to 2,300,000 shares (including shares issuable on exercise of the
Underwriters' over-allotment option). The holders of Series A Preferred Stock
have no preemptive rights. The Series A Preferred Stock, upon issuance against
full payment of the purchase price therefor, will be fully paid and
nonassessable. For a description of certain tax consequences relating to the
purchase and ownership of the Series A Preferred Stock, see "Certain Tax
Considerations."
Ranking. The Series A Preferred Stock will rank senior to the Common Stock
and Non-Cumulative Preferred Stock with respect to dividend rights and rights on
any liquidation, winding up and dissolution of the Company. The Series A
Preferred Stock will rank on a parity with other series of the Company's
Cumulative Preferred Stock with respect to dividends, liquidation and voting
rights. All of the Company's Preferred Stock is junior to all indebtedness and
other liabilities of the Company.
Dividends. The holders of Series A Preferred Stock are entitled to
cumulative dividends in the annual amount of $ per share, when, as and
if declared by the Board of Directors out of funds legally available therefor,
payable quarterly on the fifteenth day of January, April, July and October of
each year. Dividends on the Series A Preferred Stock will accrue and be
cumulative from the date of first issuance. The first dividend will be payable
on April 15, 1997, when and as declared by the Board of Directors of the
Company, at that rate from the date of issue through March 31, 1997. Unless all
prior dividends on the Series A Preferred Stock, and on any other class of
Cumulative Preferred Stock of the Company ranking on a parity with the Series A
Preferred Stock as to dividends (collectively "Parity Preferred Stock"), have
been paid in full or have been declared and a sum sufficient for payment thereof
has been set aside, (i) no cash dividend or distribution (other than in shares
of Common Stock or other securities ranking junior to the Series A Preferred
Stock as to dividends) may be declared or paid on the Common Stock or other
securities ranking junior to the Series A Preferred Stock, and (ii) the Company
may not purchase, retire or otherwise
47
<PAGE> 51
acquire any shares of its Common Stock or other securities ranking junior to the
Series A Preferred Stock as to dividends. The Company does not have outstanding
any Parity Preferred Stock.
Dividends paid on shares of Series A Preferred Stock in an amount less than
the total amount of the dividends at the time accumulated and payable on those
shares will be allocated pro rata among all such shares at the time outstanding.
If a dividend upon any shares of Series A Preferred Stock, or any other
outstanding Parity Preferred Stock, is in arrears, all dividends or other
distributions declared upon shares of each series of such stock (other than
dividends paid in Common Stock or in any other stock ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation, dissolution or
winding up) will be declared pro rata so that in all cases the amounts of
dividends or other distributions declared per share on each such series bear to
each other the same ratio that accumulated and unpaid dividends per share on
each such series bear to each other.
Convertibility. Holders of Series A Preferred Stock will have the right,
at their option, to convert any or all of their shares of Series A Preferred
Stock into shares of Common Stock, at any time or from time to time, at the
conversion price set forth on the cover page hereof (equivalent to a conversion
ratio of approximately shares of Common Stock for each share of Series A
Preferred Stock), subject to adjustment from time to time as described below.
The right to convert any share of Series A Preferred Stock called for redemption
will terminate at the close of business on the redemption date in respect
thereof.
Fractional shares of Common Stock will not be delivered upon any
conversion, but cash will be paid in respect of such fractional shares, based on
the applicable market price (as defined in the Articles) of the Common Stock.
Holders of shares of Series A Preferred Stock surrendered for conversion or
redemption after the record date for a dividend payment and prior to the next
succeeding dividend payment date are entitled to the declared dividend
notwithstanding such conversion or redemption.
The conversion price is subject to adjustments upon the occurrence of
certain events, including (i) dividends on the Common Stock payable in capital
stock and stock splits, combinations or reclassifications of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the surviving corporation), (ii) issuance to all
holders of Common Stock (not available on an equivalent basis to holders of the
Series A Preferred Stock on conversion) of rights or warrants to subscribe for
or purchase shares of Common Stock at less than the applicable market price (as
defined in the Articles), (iii) certain distributions of evidences of
indebtedness or assets (including securities but excluding cash dividends or
distributions paid out of retained earnings or dividends payable in Common
Stock) or of subscription rights and warrants (excluding those referred to in
(ii) above) to holders of Common Stock, and (iv) the events described in the
paragraph below. No adjustment in the conversion price will be made for the
issuance of shares of capital stock to employees pursuant to the Company's or
any of its subsidiaries' stock option, stock ownership or other benefit plans,
including the 1996 Equity Incentive Plan. No adjustment will be required to be
made in the conversion price until cumulative adjustments require an adjustment
of at least 1% of the conversion price as last adjusted.
In the case of any consolidation of the Company with, or merger of the
Company into, any other entity, any merger of another entity into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or any sale or
transfer of all or substantially all of the assets of the Company, each holder
of a share of Series A Preferred Stock then outstanding may thereafter convert
such share only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock into which such shares of Series A Preferred
Stock might have been converted immediately prior to such consolidation, merger,
sale or transfer, assuming such holder of Common Stock (i) is not an entity with
which the Company consolidated or into which the Company merged or which merged
into the Company or to which such sale or transfer was made, as the case may be,
or an affiliate of such an entity and (ii) failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer.
48
<PAGE> 52
Redemption. The Series A Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions. The Series A Preferred
Stock is not redeemable by the Company before February 1, 2000. The Series A
Preferred Stock is redeemable, in whole or in part, at the option of the Company
upon not less than 30 nor more than 60 days notice at any time on or after
February 1, 2000, at the redemption prices set forth below, plus accrued and
unpaid dividends.
<TABLE>
<CAPTION>
PERIOD REDEMPTION PREMIUM PRICE
- ------------------------------------- ------------------ ------
<S> <C> <C>
February 1, 2000 to January 31, 2001 104.8572% $20.97
February 1, 2001 to January 31, 2002 103.6429% $20.72
February 1, 2002 to January 31, 2003 102.4286% $20.49
February 1, 2003 to January 31, 2004 101.2143% $20.24
February 1, 2004 and thereafter 100.0000% $20.00
</TABLE>
If less than all the outstanding shares of Series A Preferred Stock are to
be redeemed, the Company will select those to be redeemed either on a pro rata
basis or by lot as determined in the discretion of the Company's Board of
Directors. On and after the redemption date, dividends will cease to accrue on
the shares of Series A Preferred Stock called for redemption and those shares
will be considered no longer outstanding, so long as the redemption price
(including any accrued and unpaid dividends to the date fixed for redemption)
has been duly paid or provided for.
Liquidation. On a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of the Series A Preferred
Stock will be entitled, subject to the rights of creditors, but before any
distribution or payment to the holders of Common Stock, any series of
Non-Cumulative Preferred Stock or any other shares ranking junior to the Series
A Preferred Stock on liquidation, to a liquidation preference of $20.00 per
share, plus accrued and unpaid dividends to the date of distribution. If, upon
any liquidation, dissolution or winding up of the Company, the amounts available
for distribution with respect to the Series A Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Series A Preferred
Stock upon liquidation are not sufficient to satisfy the full liquidation rights
of all of the outstanding Series A Preferred Stock and stock ranking on parity
therewith, then the holders of Series A Preferred Stock and each stock ranking
on a parity therewith will share ratably in any such distribution of assets in
proportion to the full respective preferential amount to which they are
entitled. After payment of the full amount of the liquidation preference, the
holders of shares of Series A Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Company.
Voting Rights. The Series A Preferred Stock is not entitled to vote,
except as described below and as required by applicable law. If the Company is
in default in the payment of the full dividends on the Series A Preferred Stock
or any other series of Parity Preferred Stock for six dividend payment periods
(whether or not consecutive), the holders of Series A Preferred Stock (together
with all other outstanding series of Parity Preferred Stock) become entitled to
vote as a separate class, at a meeting at which the holders of at least one-
third thereof are represented, to elect two of the nine directors of the Company
to serve until all accrued dividends thereon have been paid. The consent of the
holders of at least two-thirds of the Series A Preferred Stock and Parity
Preferred Stock will be necessary (i) to amend the Articles or the Bylaws of the
Company, whether in connection with a merger or consolidation or otherwise, in a
manner materially adversely affecting the preferences or the voting or other
rights of the holders of Series A Preferred Stock and Parity Preferred Stock;
but neither the amendment of the Articles to authorize, create or change the
authorized or outstanding number of shares of Preferred Stock or of any shares
of Parity Preferred Stock or shares ranking junior to the Preferred Stock nor
the amendment of the Bylaws so as to change the number of directors of the
Company is considered to have such an adverse effect, (ii) to authorize any
shares, or any security convertible into shares, in either case, ranking prior
to the Preferred Stock, or (iii) to purchase or redeem (for sinking fund
purposes or otherwise) less than all of the outstanding Preferred Stock, except
in accordance with an offer made to all holders of record of the Preferred
Stock, when there exists a default in the payment of dividends on any thereof or
in meeting any sinking fund requirement for any thereof.
49
<PAGE> 53
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the Company's Common Stock
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of a majority of the shares of Common Stock represented
at a meeting can elect all of the directors standing for election at the meeting
(except in the limited circumstances described above). Common Stock shareholders
must follow an advance notification procedure for certain shareholder
nominations of candidates for the Board of Directors and for certain other
business to be conducted at any meeting of shareholders. Subject to preferences
that may be applicable to any outstanding Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution, or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive rights
and have no right to convert their Common Stock into any other securities. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon consummation of the Offering will be, fully paid and non-assessable.
STOCK PURCHASE RIGHTS UNDER SHAREHOLDERS' RIGHTS PLAN
Pursuant to the Company's Shareholders Rights Plan, each holder of shares
of the Company's Common Stock as of the close of business on February , 1996
(the "Record Date") will receive a distribution of one Stock Purchase Right (a
"Right") per share of the Company's Common Stock in accordance with and pursuant
to the Amended and Restated Rights Agreement, dated as of December , 1996,
between the Company and Harris Trust Savings Bank, as Rights Agent (the "Rights
Agreement"). A Right will also accompany each share of the Company's Common
Stock issued following the Record Date including upon conversion of the Series A
Preferred Stock. Each Right, when it first becomes exercisable, entitles the
holder to purchase from the Company one-hundredth of one share of the Company's
Series One Non-Cumulative Preferred Stock at an initial exercise price of
[$ ] per hundredth of a share (the "Exercise Price"), subject to
adjustment, or, under certain circumstances, Common Stock having a market value
equal to two times the Exercise Price of the Right. See "-- Flip-In Rights." The
Company has reserved 90,000 shares of Series One Non-Cumulative Preferred Stock
for issuance upon the exercise of the Rights.
Exercisability of Rights. Initially, the Rights will not be exercisable or
transferable apart from the shares of the Common Stock with respect to which
they are distributed, and will be evidenced only by the certificates
representing shares of Common Stock. The Rights will become exercisable and
transferable apart from the Common Stock on a date (the "Exercisability Date")
that is the earlier of (a) the close of business on the tenth day after the
Stock Acquisition Date, defined as the first date of a public announcement that
a person or group of affiliated or associated persons has become an Acquiring
Person (as defined below); or (b) the close of business on such date as a
majority of the Company's Board of Directors shall determine, which date may
occur only following the commencement of a tender or exchange offer that, if
consummated, would result in a person or group becoming an Acquiring Person. The
Rights will be exercisable from the Exercisability Date until the Expiration
Date (which is the earlier of (x) the close of business on the tenth anniversary
of the Record Date (the "Final Expiration Date") or (y) the date the Rights are
redeemed by the Company (the "Redemption Date")), at which time they will
expire.
With certain exceptions described in the Rights Agreement, a person or
group becomes an Acquiring Person when such person or group acquires or obtains
the rights to acquire beneficial ownership of 20% or more of the then
outstanding shares of the Common Stock (other than as a result of a Permitted
Offer, as defined below), or 10% or more of such shares if the Company's Board
of Directors, after reasonable inquiry and investigation, declares the acquiring
person an Adverse Person under guidelines set forth in the Rights Agreement.
Pursuant to the terms of the Rights Agreement, holders of the Series A Preferred
Stock will be deemed beneficial owners of shares of Common Stock since the
Series A Preferred Stock is convertible, at the option of the holders thereof,
into Common Stock. Immediately following the Offering, an acquiror of
50
<PAGE> 54
[ ] shares of Series A Preferred Stock may be deemed to be an Acquiring
Person under the Rights Agreement. Accordingly, management of the Company will
limit the amount of shares of Series A Preferred Stock that may be purchased by
any one person in the Offering to avoid inadvertently causing that result. A
"Permitted Offer" is a tender or exchange offer for all outstanding shares of
the Common Stock (or securities convertible into shares of Common Stock) upon
terms that a majority of the members of the Board of Directors who qualify as
Continuing Directors under the Rights Agreement determines to be adequate and in
the best interests of the Company and its shareholders. The Board of Directors
may declare any person to be an Adverse Person after it determines that (i) such
person, alone or together with its affiliates and associates, has become the
beneficial owner of 10% or more of the Company's Common Stock (or securities
convertible into shares of Common Stock) and (ii) after reasonable inquiry and
investigation, such Person's ownership in the Company is reasonably likely (x)
to cause the Company to take action that would provide such person with
short-term gain to the detriment of the long-term interests of the Company and
its shareholders, or (y) to have a material adverse impact on the business or
prospects of the Company.
Transferability of Rights. Prior to the Exercisability Date, the Rights
will not be transferable apart from the shares of the Common Stock to which they
are attached. Thus, the surrender or transfer of any Common Stock certificate
prior to that date will also constitute the transfer of the Rights associated
with the shares represented by such certificate. As soon as practicable after
the Exercisability Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to each record holder of shares of the Common
Stock as of the close of business on the Exercisability Date and, in certain
circumstances, holders of certain shares issued after the Exercisability Date.
Flip-In Rights. Upon the occurrence of an Exercisability Date (a "Flip-In
Event"), each holder of a Right will thereafter have the right (the "Flip-In
Right") to receive, upon exercise, the number of shares of the Common Stock (or,
in certain circumstances, at the discretion of the Company's Board of Directors,
cash, property, other securities of the Company or other consideration) having a
market value immediately prior to the Flip-In Event equal to two times the then
current Exercise Price of the Right; provided, however, that any Right that is
(or, in certain circumstances specified in the Rights Agreement, was)
beneficially owned by an Acquiring Person (or any of its affiliates or
associates) will become null and void upon the occurrence of the Flip-In Event.
Flip-Over Rights. If, at any time following a Stock Acquisition Date,
either (i) the Company is acquired in a merger or other business combination
transaction, or (ii) the Company sells or otherwise transfers more than 50% of
its aggregate assets, cash flow, or earning power, each holder of a Right
(except Rights previously voided as described above) will thereafter have the
right (the "Flip-Over Right") to receive, upon exercise, shares of common stock
of the Acquiring Person having a value equal to two times the then current
Exercise Price of the Right. The Flip-Over Right shall be exercisable apart
from, and regardless of the exercise or surrender of, the Flip-In Right.
Redemption of the Rights. At any time prior to the earlier of (i) the
close of business on the tenth business day following the Stock Acquisition
Date, or (b) the close of business on the Final Expiration Date, and in certain
other circumstances, the Company's Board of Directors may redeem the Rights, in
whole but not in part, at a Redemption Price of $.001 per Right.
Exchange of the Rights. At any time after any person becomes an Acquiring
Person, the Board of Directors may exchange the Rights (other than Rights owned
by such Acquiring Person which have become void), in whole or in part, at an
exchange ratio of one share of Common Stock per Right. Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such exchange
at any time after such Acquiring Person becomes the beneficial owner of 50% or
more of the shares of Common Stock then outstanding.
Amendment of the Rights Agreement. At any time prior to the Exercisability
Date, the Board of Directors may amend any provision of the Rights Agreement in
any manner. Thereafter, the Board may amend the Rights Agreement in certain
respects, including generally (a) to shorten or lengthen any time
51
<PAGE> 55
period under the Rights Agreement or (b) in any manner that the Company's Board
of Directors deems necessary or desirable, so long as such amendment is
consistent with and for the purpose of fulfilling the objectives of the Board in
originally adopting the Rights Plan. Certain amendments (including changes to
the Redemption Price, Exercise Price, Expiration Date, or number of shares for
which a Right is exercisable), whether prior to the Exercisability Date or
thereafter, are permitted only upon approval by a majority of the Board of
Directors.
Series One Non-Cumulative Preferred Stock. Each one hundredth of a share
of Series One Non-Cumulative Preferred Stock, if issued, will have one vote per
hundredth of a share and will vote on all matters submitted to a vote of the
Company's shareholders, except as otherwise required by law. Subject to prior
dividend rights and sinking fund or redemption or purchase rights which may be
applicable to any other series of Preferred Stock, the holders of the Series One
Non-Cumulative Preferred Stock will be entitled to share ratably in such
dividends, if any, as may be declared from time to time by the Company's Board
of Directors in its discretion out of funds legally available therefor with
respect to the Series One Non-Cumulative Preferred Stock and on a one
hundred-to-one basis with respect to the Common Stock. The holders of each
one-hundredth of a share of Series One Non-Cumulative Preferred stock are
entitled to share in any assets remaining after satisfaction of all prior claims
upon liquidation of the Company, including prior claims of any other series of
Preferred Stock, ratably with the holders of each share of the Company's Common
Stock. Holders of the Series One Non-Cumulative Preferred Stock will have no
preemptive or other subscription rights, and the Series One Non-Cumulative
Preferred Stock is not subject to call.
CERTAIN PROVISIONS OF INDIANA LAW AND THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following summary of certain provisions of Indiana law and the Articles
of Incorporation and Bylaws of the Company does not purport to be complete and
is subject to and qualified in its entirety by reference to Indiana law and the
Articles of Incorporation and Bylaws of the Company. Certain provisions of
Indiana law and the Articles of Incorporation and Bylaws are described elsewhere
in this Prospectus.
Staggered Board of Directors; Removal; Vacancies. The Articles of
Incorporation and Bylaws provide that the number of Directors of the Company may
be established by the Board of Directors but may not be fewer than two nor more
than nine. The Board of Directors is divided into three classes of directors
serving staggered three-year terms. The classification of directors has the
effect of making it more difficult for shareholders to change the composition of
the Board of Directors. The Company believes, however, that the longer time
required to elect a majority of a classified Board of Directors will help to
ensure continuity and stability of the Company's management and policies. The
classification provisions could also have the effect of discouraging a third
party from accumulating large blocks of the Company's stock or attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. Accordingly, shareholders could be deprived
of certain opportunities to sell their shares of Common Stock at a higher market
price than might otherwise be the case. See "Risk Factors -- Anti-Takeover
Considerations -- Staggered Board Terms."
Except in the limited circumstances described above under "Preferred
Stock," any vacancy in the Board of Directors, including newly created
directorships, will be filled at any regular meeting or at any special meeting
called for that purpose, by action of a majority of the remaining directors and
a vacancy resulting from an increase in the number of directors also must be
filled by action of a majority of the entire Board of Directors. The Articles of
Incorporation provide that directors may be removed at any time but only for
cause by the affirmative vote of the holders of at least 80% of the voting power
of all outstanding shares of Common Stock then entitled to vote on the election
of the directors, voting together as a single class at a special meeting called
for that purpose. This provision, when coupled with the provisions of the Bylaws
authorizing the Board of Directors to fill vacant directorships, precludes the
Company's shareholders from removing incumbent directors, except for cause and
upon the existence of a substantial affirmative vote, and filling the vacancies
created by such removal with their own nominees.
Amendment. Except in the limited circumstances described above under
"Preferred Stock," (i) the Articles of Incorporation may be amended by the
affirmative vote of the holders of at least 80% of the voting
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<PAGE> 56
power of all outstanding shares of Common Stock entitled to vote at a meeting at
which a quorum is present, with the shareholders voting as a class with one vote
per share and (ii) the Company's Bylaws may be amended by the affirmative vote
of a majority of the Board of Directors.
Business Combinations. The Company's Articles of Incorporation and Bylaws
require the affirmative vote of at least 80% of the voting power of all
outstanding Shares of Common Stock to approve any business combination involving
the Company which is not approved by the Board of Directors or which does not
result in a defined minimum valuation for the Company. In addition, the Company
is subject to both the Control Share Acquisition and Business Combinations
provisions of the Indiana Business Corporation Law, which, generally, impose
restrictions on the acquirors of 20% or more, or 10% of more, respectively, of
the Common Stock of an Indiana corporation. These statutes may delay, defer or
prevent a change of control of the Company.
Indemnification of Directors and Officers. The Articles of Incorporation
of the Company provide that the Company shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably by him
in connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, except that no
indemnification shall be made in relation to matters as to which he shall be
adjudged in such action, suit or proceeding to be liable for negligence or
misconduct in the performance of his duty to the Company. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company.
Any such director, officer, employee or agent who has been wholly
successful, on the merits or otherwise, with respect to any claim, suit or
proceeding of the character described herein shall be entitled to
indemnification as a matter of right. Except as provided in the preceding
sentence, any indemnification hereunder shall be made at the discretion of the
Company, but only if the Board of Directors, acting by a quorum consisting of
directors who are not parties to or who have been wholly successful with respect
to such claim, action, suit or proceeding, shall find that the director,
officer, employee or agent has met the standards of conduct set forth in the
first sentence of this section. The directors may request independent legal
counsel (who may be regular counsel of the Company) to deliver to them a written
opinion as to whether such director, officer, employee or agent has met such
standards.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and
53
<PAGE> 57
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Series A
Preferred Stock is Harris Trust and Savings Bank (Chicago).
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
2,104,413 shares of Common Stock and 2,000,000 shares of Series A Preferred
Stock. The 2,000,000 shares of Series A Preferred Stock sold in the Offering,
together with all shares of Common Stock outstanding as of the effective date of
the Offering, will be freely tradable without restriction or further
registration under the Securities Act, except for 860,682 shares of Common Stock
then held by "affiliates" of the Company and any Series A Preferred Stock
purchased by any affiliate of the Company in this Offering, which will be
subject to the limitations of Rule 144 promulgated under the Securities Act
("Rule 144").
The Company, its directors and executive officers have agreed with the
Underwriters not to sell any shares of Series A Preferred Stock or Common Stock,
except for shares purchased in the Offering or acquired thereafter in the public
market, for a period of 180 days following the date of the Prospectus, without
the prior written consent of McDonald & Company Securities, Inc., which it may
withhold in its sole discretion.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who holds shares of Restricted Securities as to
which a minimum of two years has elapsed since the later of the date of
acquisition from an issuer or from an affiliate of the issuer, and any person
who is an "affiliate" as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of that
class of shares or (ii) the average weekly trading volume of shares of that
class of shares during the four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. Under Rule 144, however, a person who holds shares of Restricted
Securities as to which a minimum of three years has elapsed since their
acquisition from the issuer or an affiliate of the issuer and who is not, and
for three months prior to the sale of such shares has not been, an affiliate of
the Company is free to sell such shares without regard to the volume,
manner-of-sale and certain other limitations contained in Rule 144.
On the closing date of the Offering, there will be outstanding options to
purchase 93,297 shares of Common Stock, and the Company is authorized to grant
options to purchase an additional 117,144 shares under the Company's 1996 Equity
Incentive Plan. The Company expects to file a registration statement under the
Securities Act after the date of this Prospectus to register the shares of
Common Stock that may be issued upon the exercise of options granted under the
1996 Plan. Shares issued under the Company's stock option plans after the
effective date of such registration statement will be freely tradeable in the
open market, subject, in the case of sales by affiliates, to the volume, manner
of sale, notice and public information requirements of Rule 144. See
"Management -- 1996 Equity Incentive Plan."
Prior to the Offering, there has been no public market for the Series A
Preferred Stock, and no prediction can be made as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the
prevailing market price of the Series A Preferred Stock. Nevertheless, sales of
substantial amounts of Series A Preferred Stock in the public market could have
an adverse effect on prevailing market prices.
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<PAGE> 58
CERTAIN TRANSACTIONS
In late 1993, the Company underwent a debt restructuring and refinancing.
As part of that restructuring and refinancing, management committed to invest a
minimum of $500,000 in equity capital in the Company. Immediately prior to the
Company's "Rights Offering" to its Shareholders which began on April 7, 1994,
management performed its commitment and purchased, at the same price per share,
i.e., $.74 per share, paid by public purchasers in the "Rights Offering," the
number of shares at the aggregate purchase prices shown in the table below:
PRIVATE PLACEMENT SHARES PURCHASED IN APRIL 1994 BY MANAGEMENT HOLDERS
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES NUMBER OF SHARES
SHARES HELD PURCHASED AT AGGREGATE PRICE HELD FOLLOWING
NAME BEFORE PURCHASE $.74 PER SHARE FOR THE SHARES(1) PURCHASE
- ----------------- --------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
John D.
Bontreger...... 134,704 274,864 $ 203,400 409,568
Mark D. Carney... 812 118,918 88,000 119,730
Bo L. Hagood..... 45 115,067 85,150 115,112
David R.
Miller......... 2,230 78,716 58,250 80,946
Paul A. Taylor... 35 67,702 50,100 67,737
Martin D. Brew... 0 33,784 25,000 33,784
------- ------- ------- -------
Total... 137,826 689,051 $ 509,900 826,877
======= ======= ======= =======
</TABLE>
- ---------------
(1) The purchasers were required to pay in cash at the time of their purchases a
total of $231,400. The $278,500 balance of the subscriptions was represented
by interest-bearing, recourse promissory notes which were executed by the
purchasers in favor of the Company and which have been paid in full.
Certain officers and directors of the Company are beneficial owners of
limited partnership interests in certain of the Company's Syndicated Affiliated
Entities. David R. Miller, Secretary, Executive Director of Sales and Marketing
and a Director of the Company, owns a one-half unit interest in each of two of
the Syndicated Affiliated Entities and will receive an aggregate of $10,556 in
the Purchase Transactions and subsequent liquidations in exchange for those
interests. Richard L. Russell, a Director of the Company, owns a two-unit
interest in one of the Syndicated Affiliated Entities, a one-unit interest in
each of three of the Syndicated Affiliated Entities, and a one-half unit
interest in one of the Syndicated Affiliated Entities, and will receive an
aggregate of $55,980 in the Purchase Transactions and subsequent liquidations in
exchange for those interests. George A. Morton, a Director of the Company, owns
a one-unit interest in one of the Syndicated Affiliated Entities and will
receive $2,000 in the Purchase Transactions and subsequent liquidations in
exchange for that interest. The officers and directors of the Company owning
limited partnership interests in the Company's Affiliated Entities have not
received, and will not receive, any extra or special benefit not shared
proportionally by all other holders of such limited partnership interests.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the opinion of Johnson, Smith,
Pence, Densborn, Wright & Heath, counsel to the Company, as to the expected
material U.S. Federal income tax consequences resulting from the purchase,
ownership and disposition of the Series A Preferred Stock. This summary does not
purport to consider all the possible U.S. Federal income tax consequences of
those transactions and is not intended to reflect the individual tax position of
any holder of Series A Preferred Stock. The actual tax consequences of those
transactions to any such holder will depend on that holder's own tax
circumstances. This summary deals with Series A Preferred Stock held as a
capital asset. It is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations as now in effect and as currently interpreted and
does not take into account possible changes in such laws or interpretations, any
of which may be applied retroactively. This summary does not include any
description of the tax laws of any state, local or foreign government possibly
55
<PAGE> 59
applicable to the purchase, ownership or disposition of the Series A Preferred
Stock. A copy of the opinion of Johnson, Smith, Pence, Densborn, Wright & Heath
has been or will be filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by reference thereto, including the assumptions set
forth therein.
POTENTIAL PURCHASERS OF SERIES A PREFERRED STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES TO THEM UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION
DIVIDENDS
Distributions paid on the Series A Preferred Stock will constitute
dividends taxable as ordinary income to the extent of the Company's current and
accumulated earnings and profits for tax purposes. To the extent that the amount
of distributions paid on the Series A Preferred Stock exceeds the Company's
current and accumulated earnings and profits, such distributions will be treated
first as a return of capital and will reduce the adjusted tax basis of the
Series A Preferred Stock in the hands of its holder, but not to below zero. Any
remaining amount will then be taxed as capital gain, and will be long-term
capital gain if the holder's holding period of the Series A Preferred Stock
exceeds one year. Domestic corporations in receipt of distributions taxable as
dividends will generally qualify for a 70% dividends-received deduction under
Section 243 of the Code, if (i) the holder has held the Series A Preferred Stock
for a sufficient time (more than 45 days, or 91 days in the case of a dividend
attributable to a period of more than 366 days); (ii) the holder is not under an
obligation with respect to substantially similar or related property to make
payments corresponding to the dividends received, (iii) the dividends-received
deduction does not exceed 70% of the holder's taxable income (with certain
adjustments); and (iv) the Series A Preferred Stock is not treated as acquired
with borrowed funds for purposes of Section 246A of the Code. However, in
certain circumstances, the benefit of a dividends-received deduction may be
reduced by the alternative minimum tax applicable to corporations.
Under Section 1059 of the Code, a corporate holder of Series A Preferred
Stock that received an "extraordinary dividend" will be required to reduce its
tax basis at the time it disposes of the Series A Preferred Stock by the portion
of the extraordinary dividend that was not taxed because of the dividends-
received deduction if the Series A Preferred Stock had not been held for more
than two years before the announcement or agreement in respect of either the
amount or the payment of such dividend. An "extraordinary dividend" with respect
to the Series A Preferred Stock would generally be a dividend that (a) equals or
exceeds 5% of the holder's basis in such stock, treating all dividends having
ex-dividend dates within an 85-day period as one dividend, or (b) exceeds 20% of
the holder's basis in such stock, treating all dividends having ex-dividend
dates within a 365-day period as one dividend, but in either case, market value,
if it can be established by the holder, may be substituted for stock basis. The
length of time that a taxpayer is considered to have held stock for purposes of
Section 1059 is determined under principles similar to those applied in respect
of the dividends-received deduction.
SALE OR EXCHANGE OF PREFERRED STOCK
Upon the sale or exchange of Series A Preferred Stock to or with a person
other than the Company, a holder will generally recognize gain or loss equal to
the difference between (i) the amount of cash and the fair market value of any
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the extent
of the Company's current and accumulated earnings and profits) and (ii) the
holder's adjusted tax basis in such shares. Such gain or loss will be a long-
term capital gain or loss if the Series A Preferred Stock has been held for more
than one year
REDEMPTION
Redemption of shares of the Series A Preferred Stock generally will be
taxable to each transferring holder as capital gain or loss, in an amount equal
to the difference between the proceeds received on redemption and the holder's
tax basis in the Series A Preferred Stock redeemed, provided the redemption is
described in
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<PAGE> 60
Section 302(b) of the Code. Generally, a redemption falls within Section 302(b)
if it (i) results in a "complete termination" of the holder's stock interest in
the Company under Section 302(b)(3) of the Code; (ii) is "substantially
disproportionate" with respect to the shareholder under Section 302(b)(2) of the
Code; or (iii) is "not essentially equivalent to a dividend" with respect to the
shareholder under Section 302(b)(1) of the Code. In determining whether any such
test has been met, shares considered to be owned by the holder by reason of the
constructive ownership rules set forth in Section 318 of the Code (pursuant to
which a shareholder will be deemed to own shares owned or deemed owned by
certain related individuals and entities and shares subject to option), as well
as shares actually owned, would generally be taken into account. The Internal
Revenue Service ("IRS") has formally ruled that a redemption is taxable as an
exchange of stock if (i) the holder's relative stock interest in the company is
minimal; (ii) the holder exercises no control over the company's affairs and
(iii) the holder experiences an actual reduction in proportionate interest in
the company (taking into account the constructive ownership rules mentioned
above and all related transactions in the issuing company's stock). Any capital
gain recognized from the redemption of the Series A Preferred Stock will be
long-term capital gain if the holding period for the Series A Preferred Stock
exceeds one year.
A redemption of Series A Preferred Stock not described in Section 302(b) is
treated as a distribution possibly taxable as a dividend, and the entire amount
of redemption proceeds may be taxed as ordinary income, subject to the dividends
received deduction. A Section 1059 "extraordinary dividend" will include
proceeds from the redemption of stock which is taxable as a dividend and non-pro
rata as to all shareholders. See the discussion of distributions, the
dividends-received deductions and Section 1059 in "-- Dividends" above.
REDEMPTION PREMIUM
Under Section 305 of the Code and applicable regulations, the excess of the
redemption price of the Series A Preferred Stock over the issue price of that
stock will be treated as a distribution potentially taxable as a dividend on an
economic accrual basis each year during the period during which the Series A
Preferred Stock cannot be redeemed unless (i) based on all facts and
circumstances as of the issue date, redemption at the Company's option is not
more likely than not to occur; or (ii) the redemption premium is solely in the
nature of a penalty for premature redemption. The Company has determined, based
on available guidance on constructive distributions arising from redemption
premiums, that exercise of its redemption rights in the Series A Preferred Stock
will not be treated as more likely than not to occur. That determination will be
binding on each holder of Preferred Stock unless such holder discloses a
different determination on its timely filed federal income tax return for the
year that includes the date such holder acquired the Preferred Stock.
CONVERSION BY HOLDERS INTO COMMON STOCK
As a general rule, no gain or loss will be recognized by a holder upon
conversion of Series A Preferred Stock into shares of Common Stock. Gain may be
recognized, however, to the extent such holder receives cash in lieu of
fractional shares of Common Stock. In addition, dividend income may result from
the conversion of Series A Preferred Stock with accrued but unpaid dividends not
previously included in income in the event the fair market value of the Common
Stock exceeds the issue price of the corresponding converted Series A Preferred
Stock. The aggregate tax basis for the shares of Common Stock received upon
conversion will generally be equal to the aggregate tax basis of the Series A
Preferred Stock converted (adjusted to reflect any income recognized on the
conversion). The holding period of the shares of such Common Stock will
generally include the holding period of the Series A Preferred Stock converted.
The holding period of any shares deemed to be received as a dividend will begin
on the date following the date of conversion.
ADJUSTMENT OF CONVERSION PRICE
Certain adjustments or failures to make adjustments to the conversion
price, based on the Company's making certain taxable distributions to holders of
Common Stock, may result in constructive distributions taxable as dividends to
the holders of the Series A Preferred Stock.
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<PAGE> 61
BACKUP WITHHOLDING
Under the "backup withholding" provisions of the Code, unless the
conditions in the next sentence are satisfied and except in the case of certain
foreign persons to whom regular withholding rules apply, non-corporate holders
of the Series A Preferred Stock may be subject to backup withholding at the rate
of 31 percent with respect to any dividends paid on the Series A Preferred Stock
and, under certain circumstances, on any proceeds realized on any redemption or
retirement of the Series A Preferred Stock. Backup withholding will not apply to
a payment if the payee provides his taxpayer identification number to the payor
and certifies under penalties of perjury that (i) such number is correct (or
that he is awaiting a taxpayer identification number) and (ii) that (x) the
payee is exempt from backup withholding, (y) the payee has not yet been notified
by the IRS that he is subject to backup withholding as a result of a failure to
report all interest or dividends, or (z) the IRS had notified the payee that he
is no longer subject to backup withholding.
UNDERWRITING
The Underwriters named below, represented by McDonald & Company Securities,
Inc., J.C. Bradford & Co. and The Ohio Company (the "Representatives"), have
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the number of shares of Series A
Preferred Stock indicated below opposite their respective names, at the public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares of Series A Preferred
Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
--------------------------------------------------------------------- ------------
<S> <C>
McDonald & Company Securities, Inc...................................
J.C. Bradford & Co...................................................
The Ohio Company.....................................................
Total..............................................................
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Series A Preferred Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $
per share to certain other dealers. After the Offering, the offering price and
other selling terms may be changed by the Underwriters. The Series A Preferred
Stock is offered subject to receipt and acceptance by the Representatives and to
certain other conditions, including the right to reject orders in whole or in
part. In addition to the underwriting discount identified on the cover page of
this Prospectus, the Company has agreed to pay to McDonald & Company Securities,
Inc. for financial advisory services a fee in an amount equal to one percent of
the difference between the current market capitalization of the Company and the
market capitalization of the currently outstanding shares immediately following
the Offering.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 300,000 additional shares of Series A Preferred Stock to cover
over-allotments, if any, at the same price per share as the initial 2,000,000
shares to be purchased by the Underwriters. To the extent that the Underwriters
exercise this option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
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<PAGE> 62
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company and each of its directors and executive officers have agreed
that for a period of 180 days from the date of this Prospectus they will not,
directly or indirectly, offer to sell, contract to sell or otherwise sell or
dispose of any shares of their Series A Preferred Stock or Common Stock or
options or warrants to acquire shares of Common Stock without the prior written
consent of McDonald & Company Securities, Inc.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Series A Preferred Stock
offered hereby.
At the request of the Company, up to 200,000 shares of Series A Preferred
Stock offered in the Offering have been reserved for sale to employees and
certain business associates of the Company and certain members of their
families. The price of such shares to such persons will be the public offering
price set forth on the cover of this Prospectus. The number of shares available
to the general public will be reduced to the extent those persons purchase
reserved shares. Any shares not so purchased will be offered in the Offering at
the public offering price set forth on the cover of this Prospectus.
Prior to the Offering, there has been no public trading market for the
Series A Preferred Stock and only a limited public trading market for the Common
Stock. Consequently, the public offering price and the initial conversion price
will be determined by negotiation between the Company and the Representatives.
Among the factors to be considered in such negotiations will be the history of,
and the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, the Company's past and present
operations, the prospects for future earnings of the Company, the present state
of the Company's development, the general condition of the securities markets at
the time of the Offering and the market prices of and demand for publicly traded
preferred stock and common stock of comparable companies in recent periods.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the years in the three-year period ended December
31, 1995, the combined financial statements of the Certain Affiliated
Partnerships as of December 31, 1995 and 1994, and for each of the years in the
two-year period ended December 31, 1995, and the Statement of Operations of
Signature Northwestern Ltd.-I Limited Partnership for each of the years in the
two-year period ended December 31, 1995, included in this Prospectus have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL OPINIONS
Certain legal matters relating to the shares of Series A Preferred Stock
are being passed upon for the Company by Johnson Smith Pence Densborn Wright &
Heath, Indianapolis, Indiana. Certain legal matters will be passed upon for the
Underwriters by Baker & Hostetler, Cleveland, Ohio.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the shares of Series A Preferred
Stock offered hereby. This Prospectus, which is a part of the Registration
Statement, omits certain information contained in the Registration Statement,
and reference is made to the Registration Statement and the exhibits thereto for
further information with respect to the Company and the Series A Preferred Stock
offered hereby. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits filed therewith, may be inspected
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<PAGE> 63
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also
be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the fees prescribed by the Commission. The Commission maintains a Web
site (address http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Application has been made for quotation of the Series A
Preferred Stock on the NASDAQ National Market System.
The Company is required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. The Company will
furnish its shareholders annual reports containing audited consolidated
financial statements and quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
60
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SIGNATURE INNS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996
(unaudited)..................................................................... F-2
Pro Forma Condensed Consolidated Statements of Operations (unaudited) for the nine
months ended September 30, 1996 and the year ended December 31, 1995............ F-3
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)......... F-4
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-5
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31,
1995 and 1994................................................................... F-6
Consolidated Statements of Operations for the nine months ended September 30, 1996
and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993....... F-7
Consolidated Statements of Shareholders' Equity for the nine months ended September
30, 1996 (unaudited) and the years ended December 31, 1995, 1994 and 1993....... F-8
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996
and 1995 (unaudited) and the years ended December 31, 1995, 1994 and 1993....... F-9
Notes to the Consolidated Financial Statements..................................... F-10
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-16
Combined Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995
and 1994........................................................................ F-17
Combined Statements of Operations for the nine months ended September 30, 1996 and
1995 (unaudited) and the years ended December 31, 1995 and 1994................. F-18
Combined Statements of Partners' Equity for the nine months ended September 30,
1996 (unaudited) and the years ended December 31, 1995 and 1994................. F-19
Combined Statements of Cash Flows for the nine months ended September 30, 1996 and
1995 (unaudited) and the years ended December 31, 1995 and 1994................. F-20
Notes to the Combined Financial Statements......................................... F-21
SIGNATURE NORTHWESTERN LTD. - I LIMITED PARTNERSHIP
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-24
Statements of Operations for the years ended December 31, 1995 and 1994............ F-25
Notes to the Statements of Operations.............................................. F-26
</TABLE>
F-1
<PAGE> 65
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements are presented assuming (i) the
completion of the Offering and (ii) the acquisition of the 23 hotels owned by
the Affiliated Entities. The pro forma balance sheet assumes that these
transactions were consummated on September 30, 1996, and the pro forma
statements of operations assume that these transactions were consummated on
January 1, 1995. The pro forma statement of operations for 1995 has also been
adjusted to include the operations of Signature Inn East for the entire year as
if the Company's equity interest in this hotel was consolidated as of January 1,
1995. In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments. The pro forma
statements do not purport to project the Company's financial position or results
of operations at any future date or for any future period, and should be read in
conjunction with the Company's consolidated financial statements and the
combined financial statements of the Certain Affiliated Partnerships.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
--------------------------- ----------------------------------------------------------
CERTAIN COMPLETION ACQUISITION ACQUISITION PRO FORMA
AFFILIATED OF OF OF OTHER TOTAL
PARTNERSHIPS OFFERING MINORITY HOTELS ------------ ------------
------------ ----------- INTERESTS ------------
THE (B) (C) ----------- (E) (F)
COMPANY (D)
-----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 1,944,269 $ 6,146,554 $32,750,000 $(2,382,000) $(28,177,329) $ (4,544,706)(1) $ 4,236,788
(1,500,000)(4)
Restricted
cash........... 403,661 579,669 983,330
Other current
assets......... 743,318 1,454,976 2,198,294
----------- ----------- -----------
TOTAL
CURRENT
ASSETS... 3,091,248 8,181,199 7,418,412
----------- ----------- -----------
Hotel limited
partnerships:
Equity
investments.... 2,106,270 (1,620,270)(2) 486,000
Receivables,
net............ 3,371,648 (3,371,648)(3) --
----------- -----------
5,477,918 486,000
----------- -----------
Property and
equipment, net... 10,460,081 67,808,979 2,106,707 18,314,903 (464,283)(2) 98,226,387
Furniture and
equipment
reserves......... 252,137 1,464,320 (1,464,320)(1) 1,752,137
1,500,000(4)
Deferred costs and
other assets..... 857,408 914,451 (914,451) 857,408
----------- ----------- ----------- -------- ---------- ---------- -----------
$20,138,792 $78,368,949 $33,178,000 $ (275,293) $(10,776,877) $(11,465,227) $108,740,344
=========== =========== =========== ======== ========== ========== ===========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current
liabilities:
Current portion
of long-term
debt........... $ 228,235 $ 1,275,486 $ 1,503,721
Other current
liabilities.... 1,251,483 2,973,981 4,225,464
----------- ----------- -----------
TOTAL
CURRENT
LIABILITIES.. 1,479,718 4,249,467 5,729,185
Long-term debt,
less current
portion.......... 8,960,536 59,435,833 $ (4,186,807) $ (3,371,648)(3) 60,837,914
Line of credit..... 2,750,000 $(2,750,000) --
Other partners'
equity........... 275,293 $ (275,293) --
----------- ----------- -----------
TOTAL
LIABILITIES... 13,465,547 63,685,300 66,567,099
----------- ----------- -----------
(6,009,026)(1)
Partners' equity... 14,683,649 (6,590,070) (2,084,553)(2) --
Shareholders'
equity:
Preferred
stock.......... -- 35,500,000 35,500,000
Common stock..... 10,016,515 10,016,515
Accumulated
deficit........ (3,343,270) (3,343,270)
----------- -----------
TOTAL
SHAREHOLDERS'
EQUITY... 6,673,245 42,173,245
----------- ----------- ----------- -------- ---------- ---------- -----------
$20,138,792 $78,368,949 $32,750,000 $ (275,293) $(10,776,877) $(11,465,227) $108,740,344
=========== =========== =========== ======== ========== ========== ===========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
F-2
<PAGE> 66
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------
CERTAIN SIGNATURE PRO FORMA PRO FORMA
AFFILIATED INN ADJUSTMENTS TOTAL
PARTNERSHIPS EAST ----------- -----------
------------ ----------
THE (B) (B)
COMPANY
----------
(A)
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenues:
Hotel revenues................................. $4,089,258 $ 26,504,084 $30,593,342
Management and franchise fees.................. 2,379,532 $(2,379,532)(G) --
---------- ---------- ----------
6,468,790 26,504,084 30,593,342
---------- ---------- ----------
Costs and expenses:
Hotel costs and expenses....................... 2,145,886 16,927,249 (2,379,532)(G) 16,693,603
Depreciation and amortization.................. 381,925 2,428,862 (433,787)(K) 2,377,000
General and administrative..................... 1,837,158 1,837,158
---------- ---------- ----------
4,364,969 19,356,111 20,907,761
---------- ---------- ----------
OPERATING INCOME............................. 2,103,821 7,147,973 9.685,581
---------- ---------- ----------
Other income (expenses):
Interest expense............................... (769,872) (4,119,321) 491,000(I) (4,287,193)
111,000(J)
Capital appreciation fee....................... -- --
Interest income................................ 162,872 180,033 (111,000)(J) 231,905
Equity in income of hotel limited
partnerships................................. 649,780 (649,780)(H) --
Other partners' equity in income............... (313,461) 313,461(H) --
Other, net..................................... (11,663) (32,581) (44,244)
---------- ---------- ----------
(282,344) (3,971,869) (4,099,532)
---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE............. 1,821,477 3,176,104 5,586,049
Income tax expense............................... 150,000 1,750,000(L) 1,900,000
---------- ---------- ----------
NET INCOME................................... 1,671,477 $ 3,176,104 3,686,049
==========
LESS: PREFERRED STOCK DIVIDEND............... -- (2,550,000)
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK........ $1,671,477 $ 1,136,049
========== ==========
Per common share................................. $0.79 $0.54
========== ==========
Weighted average common shares outstanding....... 2,104,091 2,104,091
========== ==========
YEAR ENDED DECEMBER 31, 1995
Revenues:
Hotel revenues................................. $3,470,062 $ 33,611,567 $1,512,874 $ (3,479)(G) $38,591,024
Management and franchise fees.................. 3,126,972 (3,126,972)(G) --
---------- ---------- --------- ----------
6,597,034 33,611,567 1,512,874 38,591,024
---------- ---------- --------- ----------
Costs and expenses:
Hotel costs and expenses....................... 1,757,515 21,376,292 934,871 (3,130,451)(G) 20,938,227
Depreciation and amortization.................. 419,576 3,429,710 135,076 (775,362)(K) 3,209,000
General and administrative..................... 2,236,622 2,236,622
---------- ---------- --------- ----------
4,413,713 24,806,002 1,069,947 26,383,849
---------- ---------- --------- ----------
OPERATING INCOME............................. 2,183,321 8,805,565 442,927 12,207,175
---------- ---------- --------- ----------
Other income (expenses):
Interest expense............................... (980,907) (5,814,798) (486,284) 778,000(I) (6,344,989)
159,000(J)
Capital appreciation fee....................... (610,990) (610,990)
Interest income................................ 276,423 302,167 11,129 (159,000)(J) 430,719
Equity in income of hotel limited
partnerships................................. 761,523 (761,523)(H) --
Other partners' equity in income............... (226,044) 226,044(H) --
Other, net..................................... 214,090 (90,176) (5,525) 118,389
---------- ---------- --------- ----------
(565,905) (5,602,807) (480,680) (6,406,871)
---------- ---------- --------- ----------
INCOME BEFORE INCOME TAX EXPENSE............. 1,617,416 3,203,758 (37,753) 5,800,304
Income tax expense............................... -- 1,900,000(L) 1,900,000
---------- ---------- --------- ----------
NET INCOME................................... 1,617,416 $ 3,202,758 $ (37,753) 3,900,304
========== =========
LESS: PREFERRED STOCK DIVIDEND............... -- (3,400,000)
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK........ $1,617,416 $ 500,304
========== ==========
Per common share................................. $0.77 $0.24
Weighted average common shares outstanding....... 2,103,872 2,103,872
========== ==========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
F-3
<PAGE> 67
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(A) Reflects the historical financial statements of the Company as of September
30, 1996 (which includes three hotels owned by consolidated affiliates) and
for the periods indicated. The weighted average common shares outstanding
have been adjusted to reflect a 1-for-3. share reverse stock split declared
by the Board of Directors of the Company on October 22, 1996, to be
effective on the effective date of the Offering.
(B) Reflects the historical financial statements of the Certain Affiliated
Partnerships as of September 30, 1996 (which includes 20 hotels) and for
the periods indicated and the 1995 operations of Signature Northwestern
Ltd. -- I Limited Partnership, which owns Signature Inn East. The Company
began consolidating the financial statements of this partnership into its
financial statements effective December 29, 1995.
(C) Reflects the estimated net proceeds of the Offering and a repayment of the
Company's line of credit.
(D) Reflects the estimated use of the proceeds to acquire the three hotels
owned by the consolidated affiliates.
(E) Reflects the estimated use of the proceeds to acquire the twenty hotels
owned by the seventeen Certain Affiliated Partnerships, the elimination of
the deferred financing costs and the payment of second mortgage loans,
including fees in the amount of $503,141, by Certain Affiliated
Partnerships, and the reduction of one mortgage loan of $1,091,107.
(F) Reflects the following other pro forma adjustments:
(1) The distribution to the limited partners of their portion of the
remaining cash balances, including amounts effectively reimbursed for
the furniture and equipment cash reserves, hotel inventories, supplies,
prepaid insurance and similar items.
(2) The elimination of the Company's investment in the Certain Affiliated
Partnerships. The remaining investment represents the Company's 40%
ownership interest in Signature Inn Carmel.
(3) The elimination of receivables and payables between the Company and the
Certain Affiliated Partnerships.
(4) Reflects the establishment of a furniture and fixture cash reserve for
the hotels acquired.
(G) Reflects the elimination of intercompany management and franchise fees and
elimination of revenues and expenses for Signature Northwestern Ltd. -- 1
Limited Partnership included in the Company's operating results after
December 29, 1995.
(H) Reflects the elimination of the Company's equity interest in the net income
of the Certain Affiliated Partnerships and the other partners' equity
interest in the net income of the consolidated affiliates.
(I) Reflects the elimination of the interest expense related to the bank line
of credit and the second mortgage loans of the Certain Affiliated
Partnerships.
(J) Reflects the elimination of the interest income and expense related to
advances by the Company to the Certain Affiliated Partnerships.
(K) Reflects adjustment to depreciation expense based on the Company's new
basis of the hotel properties acquired and the elimination of amortization
expense of the Certain Affiliated Partnerships related to previously
deferred financing costs.
(L) Reflects income tax expense at a combined federal and state statutory rate
after assuming the annual use of approximately $900,000 of net operating
loss carryforwards which is the expected maximum annual allowable amount
available for tax purposes after the completion of the Offering.
F-4
<PAGE> 68
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SIGNATURE INNS, INC.:
We have audited the accompanying consolidated balance sheets of Signature
Inns, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Signature
Inns, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 23, 1996
F-5
<PAGE> 69
SIGNATURE INNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER DECEMBER 31,
30, -------------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents
Corporate.......................................... $ 1,014,029 $ 1,213,078 $ 1,153,753
Consolidated hotels................................ 1,586,038 1,402,047 881,760
----------- ----------- -----------
2,600,067 2,615,125 2,035,513
Other current assets.................................. 743,318 500,492 491,886
----------- ----------- -----------
TOTAL CURRENT ASSETS.......................... 3,343,385 3,115,617 2,527,399
----------- ----------- -----------
Hotel limited partnerships (note 2):
Equity investments.................................... 2,106,270 2,224,857 1,377,930
Receivables, net...................................... 3,371,648 3,571,648 3,429,712
----------- ----------- -----------
5,477,918 5,796,505 4,807,642
----------- ----------- -----------
Property and equipment, net (notes 3 and 4)............. 10,460,081 8,763,787 6,543,205
Deferred costs and other assets, net of accumulated
amortization of $553,121, $530,114 and $452,990....... 857,408 338,542 215,721
----------- ----------- -----------
$20,138,792 $18,014,451 $14,093,967
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 4):
Corporate.......................................... -- 533,340 --
Consolidated hotels................................ 228,235 3,188,376 3,128,478
Other current liabilities............................. 1,251,483 822,961 527,037
----------- ----------- -----------
TOTAL CURRENT LIABILITIES..................... 1,479,718 4,544,677 3,655,515
----------- ----------- -----------
Long-term debt, less current portion (note 4):
Corporate............................................. 2,750,000 2,166,660 3,589,010
Consolidated hotels................................... 8,960,536 6,471,734 3,596,888
----------- ----------- -----------
11,710,536 8,638,394 7,185,898
Other partners' equity.................................. 275,293 40,154 148,369
----------- ----------- -----------
TOTAL LIABILITIES............................. 13,465,547 13,223,225 10,989,782
----------- ----------- -----------
Shareholders' equity (note 6):
Preferred stock, no par value. Authorized 5,000,000
shares............................................. -- -- --
Common stock, no par value. Authorized 50,000,000
shares............................................. 10,016,515 9,805,973 9,736,348
Accumulated deficit................................... (3,343,270) (5,014,747) (6,632,163)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................... 6,673,245 4,791,226 3,104,185
----------- ----------- -----------
$20,138,792 $18,014,451 $14,093,967
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
SIGNATURE INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Hotel revenues................ $ 4,089,258 $ 2,687,484 $ 3,470,062 $ 3,842,149 $ 9,226,870
Management and franchise
fees....................... 2,379,532 2,405,060 3,126,972 3,021,857 2,568,945
----------- ----------- ----------- ----------- -----------
6,468,790 5,092,544 6,597,034 6,864,006 11,795,815
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Hotel costs and expenses...... 2,145,886 1,322,526 1,757,515 2,033,395 5,472,837
Hotel depreciation and
amortization............... 309,358 196,317 272,290 389,255 1,348,993
General and administrative
expenses................... 1,837,158 1,668,903 2,236,622 2,141,792 2,382,219
Other depreciation and
amortization............... 72,567 120,451 147,286 121,614 124,940
Valuation allowances.......... -- -- -- -- 155,000
----------- ----------- ----------- ----------- -----------
4,364,969 3,308,197 4,413,713 4,686,056 9,483,989
----------- ----------- ----------- ----------- -----------
OPERATING INCOME...... 2,103,821 1,784,347 2,183,321 2,177,950 2,311,826
----------- ----------- ----------- ----------- -----------
Other income (expenses):
Equity in income of hotel
limited partnerships, net
(note 2)................... 649,780 649,072 761,523 727,398 208,744
Interest income (note 2)...... 162,872 195,748 276,423 190,717 94,666
Interest expense -- hotels
(note 4)................... (676,675) (477,682) (653,338) (834,626) (2,567,210)
Interest expense -- corporate
(note 4)................... (93,197) (274,050) (327,569) (440,376) (888,615)
Capital appreciation fee (note
4)......................... -- (610,990) (610,990) (289,010) --
Gain on disposition of hotels,
land and related assets
(note 3)................... -- 163,032 163,032 148,171 272,710
Other partners' equity in
income..................... (313,461) (191,349) (226,044) (130,336) (35,744)
Other......................... (11,663) 20,738 51,058 60,885 54,587
----------- ----------- ----------- ----------- -----------
(282,344) (525,481) (565,905) (567,177) (2,860,862)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE
AND EXTRAORDINARY
GAIN................ 1,821,477 1,258,866 1,617,416 1,610,773 (549,036)
Income tax expense.............. 150,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY
GAIN................ 1,671,477 1,258,866 1,617,416 1,610,773 (549,036)
Extraordinary gain from debt
extinguishment (note 4)....... -- -- -- 495,282 21,314,412
----------- ----------- ----------- ----------- -----------
NET INCOME............ $ 1,671,477 $ 1,258,866 $ 1,617,416 $ 2,106,055 $20,765,376
=========== =========== =========== =========== ===========
Per common share:
Income (loss) before
extraordinary gain......... $ 0.21 $ 0.16 $ 0.21 $ 0.25 $ (0.16)
Extraordinary gain............ -- -- -- 0.08 6.22
----------- ----------- ----------- ----------- -----------
NET INCOME............ $ 0.21 $ 0.16 $ 0.21 $ 0.33 $ 6.06
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding................... 7,785,136 7,784,327 7,784,327 6,464,688 3,426,307
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 71
SIGNATURE INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993................ 3,426,307 $ 9,235,445 $(29,503,594) $(20,268,149)
Net income.............................. -- -- 20,765,376 20,765,376
----------- ----------- ----------- -----------
Balance at December 31, 1993.............. 3,426,307 9,235,445 (8,738,218) 497,227
Net income.............................. -- -- 2,106,055 2,106,055
Common shares issued (note 6)........... 4,358,020 779,403 -- 779,403
Notes receivable (note 6)............... -- (278,500) -- (278,500)
----------- ----------- ----------- -----------
Balance at December 31, 1994.............. 7,784,327 9,736,348 (6,632,163) 3,104,185
Net income.............................. -- -- 1,617,416 1,617,416
Collection of notes receivable (note
6)................................... -- 69,625 -- 69,625
----------- ----------- ----------- -----------
Balance at December 31, 1995.............. 7,784,327 9,805,973 (5,014,747) 4,791,226
Net income (unaudited).................. -- -- 1,671,477 1,671,477
Collection of notes receivable
(unaudited) (note 6)................. -- 208,875 -- 208,875
Issuance of common stock (unaudited).... 1,667 1,667 -- 1,667
----------- ----------- ----------- -----------
Balance at September 30, 1996
(unaudited)............................. 7,785,994 $10,016,515 $ (3,343,270) $ 6,673,245
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 72
SIGNATURE INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------------- ---------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 1,671,477 $ 1,258,866 $ 1,617,416 $ 2,106,055 $20,765,376
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 373,095 316,768 419,576 510,869 1,473,933
Equity in income of hotel limited
partnerships, net of distributions
received of $783,761, $717,947,
$632,673, $456,489 and $450,557... 133,981 68,875 (128,850) (270,909) 241,813
Other partners' equity in income.... 313,461 191,347 226,044 130,336 35,744
Capital appreciation fee............ -- 610,990 610,990 289,010 --
Gain on disposition of hotels, land
and related assets................ -- (163,032) (163,032) (148,171) (272,710)
Gain from debt extinguishment....... -- -- -- (495,280) (21,314,412)
Valuation allowances................ -- -- -- -- 155,000
Other items......................... 87,578 103,770 78,423 (126,338) 1,456,136
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................... 2,579,592 2,387,584 2,660,567 1,995,572 2,540,880
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of hotels, land and
related assets...................... -- 163,032 163,032 4,643,452 --
Property and equipment additions....... (2,042,383) (104,359) (130,321) (126,369) (484,363)
Investment in hotel limited
partnerships........................ -- -- (486,000) (150) (150)
Loans to hotel limited partnerships.... -- -- -- (526,600) (19,700)
Advances to hotel limited partnerships,
net................................. 200,000 (201,000) (141,936) 50,000 (77,000)
Deferred costs and other assets........ (461,478) (171,007) (91,973) (50,934) (112,637)
Cash balance of consolidated hotel
limited partnership................. -- -- 224,927 -- --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES......... (2,303,861) (313,334) (462,271) 3,989,399 (693,850)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds of long-term debt............. -- -- 1,700,000 -- 4,300,000
Repayments of long-term debt........... (2,071,339) (3,707,812) (1,965,256) (4,662,807) (6,801,014)
Net borrowings (repayments) of
revolving line of credit............ 1,650,000 2,100,000 (400,000) (1,000,000) --
Payment of capital appreciation fee.... -- -- (900,000) -- --
Proceeds from issuance of common
stock............................... 208,875 69,625 69,625 500,903 --
Distributions to other partners by
consolidated hotel.................. (78,325) (123,053) (123,053) (7,500) --
----------- ----------- ----------- ----------- -----------
NET CASH USED BY FINANCING
ACTIVITIES................... (290,789) (1,661,240) (1,618,684) (5,169,404) (2,501,014)
----------- ----------- ----------- ----------- -----------
Net change in cash and cash
equivalents............................ (15,058) 413,010 579,612 815,567 (653,984)
Cash and cash equivalents at beginning of
period................................. 2,615,125 2,035,513 2,035,513 1,219,946 1,873,930
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 2,600,067 $ 2,448,523 $ 2,615,125 $ 2,035,513 $ 1,219,946
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 73
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF ACCOUNTING POLICIES
Business
The Company developed and currently manages a chain of 23 Signature Inn
hotels in the Midwest. Three hotels are owned by consolidated affiliates and 20
other hotels are owned by limited partnerships in which the Company is the
general partner. The partnership agreements provide for distributions of
available cash to the Company based on its ownership interest.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, the Company-owned hotels (Knoxville through May
1994, Peoria and Normal through December 1993) through the respective date these
hotels were sold to affiliated partnerships, and three 50% owned consolidated
hotel affiliates (Signature Inn South, Elkhart and effective December 29, 1995
Indianapolis East) in which the Company exercises legal, financial and
operational control. Effective December 29, 1995, the Company obtained effective
control of the Indianapolis East partnership with the repayment of the mortgage
loan provided by the 50% limited partner. Summary financial information of
Indianapolis East as of the date of consolidation is as follows: cash $224,927;
other net current liabilities $143,783; net property and equipment $2,492,273,
and long-term debt, net $2,945,516. The effects of all significant intercompany
accounts and transactions have been eliminated in consolidation. The equity
method is used for investments in hotel limited partnerships in which the
Company is a partner with 50% or less ownership and the Company does not
exercise legal, financial and operational control.
Certain reclassifications of prior year amounts have been made to conform
with current year presentations.
Revenues
Management and franchise fees are based on a percentage of revenues or
house profits of the hotels owned by hotel limited partnerships and are
recognized as hotel revenues and profits are earned.
Net Income Per Share
Net income per share is calculated using the weighted average number of
shares outstanding during the year. Common stock equivalents that in the
aggregate dilute income per share by less than 3% are not considered in
computing average shares outstanding.
Cash Equivalents
Cash equivalents represent highly liquid short-term investments with
original maturities of three months or less, stated at cost which approximates
market.
Investments in Hotel Limited Partnerships
Investments in hotel limited partnerships are recorded at the Company's
initial investment, increased or decreased by the Company's share of the
partnership's income or loss, less distributions received.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation
and includes interest incurred during construction. Depreciation is provided on
the straight-line basis over the estimated useful lives of the related assets as
follows: 40 years for buildings, 15 to 20 years for land improvements and 3 to
10 years for furniture and equipment.
Land held for sale or development is carried at the lower of cost or
estimated fair value.
F-10
<PAGE> 74
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Costs
Fees and other costs incurred in obtaining long-term financing are
amortized on the straight-line basis over the life of the related loan.
Unamortized costs are charged to expense upon the early payment of the related
financing.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
The Company evaluates its real estate and partnership investments
periodically to assess whether any impairment indications are present, including
recurring operating losses and significant adverse changes in legal factors or
business climate that affect the recovery of recorded value. If any real estate
or partnership investments are considered impaired, a loss is provided to reduce
the carrying value to its estimated fair value.
Fair Value of Financial Instruments
The carrying amount of long-term debt approximates its fair value because
the interest rates are currently at market. A reasonable estimate of the fair
value of the receivables from hotel limited partnerships is not practicable
without incurring excessive costs because there is no market for comparable
instruments. The carrying amounts of all other financial instruments approximate
fair value because of the short-term maturity of these items.
F-11
<PAGE> 75
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) HOTEL LIMITED PARTNERSHIPS
Summary financial information for the hotel limited partnerships reported
on the equity method is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Hotel properties........................... $ 69,588,332 $ 72,891,402 $ 70,378,113
Net current assets......................... 4,478,542 2,240,875 3,093,072
Deferred costs............................. 1,013,523 1,149,763 1,123,360
Long-term debt............................. (58,499,873) (63,055,671) (62,747,042)
----------- ----------- -----------
Net assets............................... 16,580,524 13,226,369 11,847,503
Less:
Equity of other partners................. 13,868,164 11,280,163 10,132,937
Income not recognized.................... 487,503 568,276 629,851
----------- ----------- -----------
Investments in hotel limited
partnerships.......................... $ 2,224,857 $ 1,377,930 $ 1,084,715
=========== =========== ===========
Revenues................................... 35,432,793 33,899,680 26,916,722
Operating expenses......................... (32,267,788) (31,153,735) (26,260,994)
Extraordinary gains........................ 1,835,952 683,020 --
----------- ----------- -----------
Net income............................ 5,000,957 3,428,965 655,728
Less other partners' share................. 4,239,434 2,701,567 446,984
----------- ----------- -----------
Equity in income......................... $ 761,523 $ 727,398 $ 208,744
=========== =========== ===========
</TABLE>
As of December 31, 1995 and 1994, net receivables from hotel limited
partnerships, classified as long-term investments, included $647,987 and
$506,051, respectively, of interest-bearing advances at the prime rate plus 1.0%
(9.5% at December 31, 1995 and 1994). The Company also has a $2,377,361
non-interest bearing note receivable from a partnership which is dependent on
future cash flows of the partnership for repayments and matures in 2004. In
1995, the Company contributed $486,000 for a 40% general partner interest in a
hotel limited partnership. This partnership-owned hotel is expected to open in
1996. In 1993, the Company established a reserve of $362,000 and a valuation
allowance of $70,000 based on estimated recoverability of advances due from two
partnerships.
In conjunction with the sale of the three Company-owned hotels to
affiliated limited partnerships in 1993 and 1994, the Company acquired
participations in partnership mortgage loans totaling $546,300 which bear
interest at 12% and mature in 1999.
Interest income on receivables from limited partnerships was $159,435 in
1995, $114,506 in 1994 and $39,868 in 1993.
F-12
<PAGE> 76
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment representing hotels, corporate office equipment and
land held for sale or development are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Land....................................................... $ 1,210,500 $ 710,500
Leasehold and land improvements............................ 759,890 451,559
Buildings.................................................. 7,394,047 5,200,170
Furniture and equipment.................................... 3,518,317 2,459,770
Land held for sale or development.......................... 913,739 913,739
----------- -----------
13,796,493 9,735,738
Accumulated depreciation................................... 5,032,706 3,192,533
----------- -----------
$ 8,763,787 $6,543,205
=========== ===========
</TABLE>
During 1995, the Company sold its easement rights of a billboard for net
proceeds of $163,032.
During 1994, the Company sold a hotel to an affiliated limited partnership
for $4.3 million, resulting in a $13,000 gain. Additionally, in 1994, the
Company sold a tract of land adjacent to a Signature Inn hotel to a restaurant
operator; net proceeds of $333,000 were received, resulting in a gain of
$132,000.
During 1993, the Company transferred ownership of three hotels to lenders
and sold two additional hotels to an affiliated limited partnership. The
combined net carrying value of the five hotels was $17.0 million at the time of
disposition, resulting in a gain of $273,000.
A valuation allowance of $85,000 was provided in 1993 to reduce the
carrying value of land held for sale to estimated net realizable value.
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Corporate:
Line of credit.......................................... $ 1,100,000 $ 1,500,000
Term note............................................... 1,600,000 --
Variable rate note...................................... -- 1,800,000
Capital appreciation fee................................ -- 289,010
----------- -----------
2,700,000 3,589,010
Consolidated hotels....................................... 9,660,110 6,725,366
----------- -----------
Total................................................... 12,360,110 10,314,376
Less current portion:
Corporate............................................... 533,340 --
Consolidated hotels..................................... 3,188,376 3,128,478
----------- -----------
Long-term portion....................................... $ 8,638,394 $ 7,185,898
=========== ===========
</TABLE>
At December 31, 1995 and 1994, respectively, the revolving line of credit
bears interest at prime plus .75% and 1.25% (9.25% and 9.75% at December 31,
1995 and 1994), matures on May 31, 1997, and is secured by substantially all
assets of the Company. The original $2.5 million available line of credit was
reduced to $1.6 million effective September 1, 1995.
F-13
<PAGE> 77
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 1, 1995, the Company repaid Banc One Capital Partners II the
$1.8 million variable rate note along with a $900,000 cash payment related to
the capital appreciation fee. The variable rate note agreement required a
capital appreciation fee equal to 25% of the value of the Company, as defined,
at a specific time in the future. The accrued fee at December 31, 1994
represented the present value of the estimated amount due the lender based on an
estimate of the Company's value and a December 1996 payment date. If a change of
control of the Company, as defined, occurs prior to December 1996, an additional
fee may be payable to the lender.
The source of funds for this transaction was provided by a new $1.7 million
term note from Bank One, Indianapolis along with an advance from the Company's
line of credit and corporate cash. The term note requires monthly principal
payments of $44,445 through December 1998 along with interest at the prime rate
plus 1.25% (9.75% at December 31, 1995).
The unsecured variable rate note carried an interest rate of 8.72% above
the 30-day "AA" commercial paper rate (14.79% at December 31, 1994).
Upon the sale of a Company-owned hotel in May 1994 to a limited
partnership, a $4.9 million hotel loan and related hotel obligations were
extinguished at a discount resulting in an extraordinary gain of $223,000.
Additionally, a tract of land was sold in November 1994, and the land loan notes
were extinguished at a discount, resulting in an extraordinary gain of $217,000.
In October 1993, the Company reached an agreement for a negotiated
discounted payoff of all obligations due to its previous primary lender. In
December 1993, the note payable to the lender of $9.6 million and other
obligations of $1.1 million were extinguished for a $6.0 million cash payment,
and a $4.4 million loan guarantee claim was cancelled, resulting in an
extraordinary gain of $8.2 million after certain related expenses. Concurrently,
two Company-owned hotels were sold to an affiliated limited partnership. The
related hotel loans of $9.7 million and other obligations of $572,000 were
extinguished resulting in an extraordinary gain of $3.2 million, with the
limited partnership assuming $7.0 million of hotel loans.
During 1993, ownership of three other Company-owned hotels was relinquished
resulting in the extinguishment of approximately $18.4 million of loans and
related hotel obligations of $497,000 resulting in an extraordinary gain of $9.8
million.
The consolidated hotel affiliates' mortgage loans are non-recourse to the
Company, bear interest at rates ranging from 9.25% to 9.80%, and mature in April
1996, 2006 and 2016. The Company anticipates extending the Indianapolis South
loan maturing in 1996 to 1999.
The aggregate annual scheduled principal payments of long-term debt during
the next five years are: $3,721,716 in 1996 (including a consolidated hotel
affiliate loan), $1,769,300 in 1997 (including the outstanding line of credit),
$668,829 in 1998, $146,832 in 1999 and $163,766 in 2000.
Interest paid amounted to $978,649, $1,295,394 and $2,704,516 in 1995, 1994
and 1993, respectively. Accrued interest of $2,099,538 was added to loan
obligations in 1993 under an agreement with a lender.
F-14
<PAGE> 78
SIGNATURE INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Hotel limited partnership investments................... $ 1,229,000 $ 1,572,000
Land held for sale or development....................... 600,000 600,000
Partnership advances.................................... 419,000 419,000
Net operating loss carry forwards....................... 1,869,000 2,433,000
Other................................................... 621,000 718,000
---------- ---------
Gross deferred tax assets............................... 4,738,000 5,742,000
Less valuation allowance................................ (2,111,000) (1,772,000)
---------- ---------
Net deferred tax assets.............................. $ 2,627,000 $ 3,970,000
========== =========
Deferred tax liabilities:
Depreciation............................................ 45,000 51,000
Hotel limited partnerships.............................. 2,582,000 3,919,000
---------- ---------
Deferred tax liabilities............................. $ 2,627,000 $ 3,970,000
========== =========
</TABLE>
At December 31, 1995, the tax net operating loss carry forwards, which
expire in 2007, are approximately $5.5 million.
(6) SHAREHOLDERS' EQUITY
On April 7, 1994, a private placement of 2,549,500 shares of common stock
at $.20 per share was completed with the operating management of the Company.
Cash proceeds of $231,400 along with $278,500 of recourse promissory notes were
received by the Company. The notes carried interest at 6.0% and were
collateralized by the stock issued. The outstanding balances of the notes were
repaid in 1996.
Net cash proceeds of $269,503 were received on May 12, 1994, from a rights
offering to existing shareholders and 1,808,520 shares of common stock were
issued at $.20 per share.
The 1986 Stock Option Plan provided for the granting of options to purchase
a maximum of 300,000 common shares to employees of the Company through March 26,
1996. The options granted to employees have an exercise price equal to the fair
value of the shares at the date of grant. As of December 31, 1995, there are
8,500 options outstanding at an exercise price of $1 1/8 which expire on July 1,
1997.
F-15
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SIGNATURE INNS, INC.:
We have audited the accompanying combined balance sheets of Signature Inn
Certain Affiliated Partnerships as of December 31, 1995 and 1994 and the related
combined statements of operations, partners' equity and cash flows for the years
then ended. These combined financial statements are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Signature Inn
Certain Affiliated Partnerships as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 23, 1996
F-16
<PAGE> 80
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994
------------- ----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 6,726,223 $ 7,173,679 $ 6,683,898
Accounts receivable............................... 728,285 594,559 547,099
Other current assets.............................. 726,691 667,815 743,688
------------ ----------- -----------
TOTAL CURRENT ASSETS........................... 8,181,199 8,436,053 7,974,685
------------ ----------- -----------
Property and equipment:
Land.............................................. 10,821,850 10,821,850 10,821,850
Land improvements................................. 4,588,571 4,574,274 4,562,831
Buildings......................................... 63,957,443 63,856,052 63,553,040
Furniture and equipment........................... 17,631,386 16,407,709 15,531,750
------------ ----------- -----------
96,999,250 95,659,885 94,469,471
Less accumulated depreciation..................... 29,190,271 26,975,922 24,098,075
------------ ----------- -----------
NET PROPERTY AND EQUIPMENT..................... 67,808,979 68,683,963 70,371,396
------------ ----------- -----------
Furniture and equipment cash reserve................ 1,464,320 1,462,770 1,116,087
Deferred costs, net of accumulated amortization of
$1,981,535, $1,800,153, and $1,851,417............ 914,451 971,951 1,145,221
------------ ----------- -----------
$ 78,368,949 $79,554,737 $80,607,389
============ =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt................. $ 1,275,486 $ 3,145,668 $ 1,175,261
Accounts payable.................................. 603,235 410,928 572,706
Accrued payroll and related taxes................. 254,258 351,335 302,299
State and local taxes............................. 1,776,567 1,550,977 1,452,157
Accrued interest.................................. 339,921 226,794 276,291
------------ ----------- -----------
TOTAL CURRENT LIABILITIES...................... 4,249,467 5,685,702 3,778,714
Long-term debt, less current portion................ 56,159,746 55,080,012 59,969,264
Amounts due general partner......................... 3,276,087 3,423,499 3,155,920
------------ ----------- -----------
TOTAL LIABILITIES.............................. 63,685,300 64,189,213 66,903,898
------------ ----------- -----------
Partners' equity:
Signature Inns, Inc............................... 2,084,553 2,226,361 2,104,083
Other partners.................................... 12,599,096 13,139,163 11,599,408
------------ ----------- -----------
14,683,649 15,365,524 13,703,491
------------ ----------- -----------
$ 78,368,949 $79,554,737 $80,607,389
============ =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-17
<PAGE> 81
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------- ---------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Guest room revenue.................. $25,753,099 $25,347,702 $32,671,596 $31,220,623
Other hotel revenue................. 750,985 715,699 939,971 959,212
Interest income..................... 180,033 187,766 302,167 197,020
----------- ----------- ----------- -----------
26,684,117 26,251,167 33,913,734 32,376,855
----------- ----------- ----------- -----------
Costs and expenses:
Hotel operations.................... 13,678,553 13,010,007 17,226,359 16,464,691
Management and franchise fees....... 2,324,505 2,312,346 2,977,971 2,859,269
Advertising and reservations........ 924,191 908,875 1,171,962 1,121,985
Interest expense.................... 4,119,321 4,357,521 5,814,798 5,739,201
Depreciation and amortization....... 2,428,862 2,449,959 3,429,710 3,374,081
Loss on disposal of equipment....... 32,581 91,604 90,176 61,253
----------- ----------- ----------- -----------
23,508,013 23,130,312 30,710,976 29,620,480
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY
GAIN........................... 3,176,104 3,120,855 3,202,758 2,756,375
Extraordinary gain from debt
restructuring....................... -- 1,835,952 1,835,952 683,020
----------- ----------- ----------- -----------
NET INCOME....................... 3,176,104 4,956,807 5,038,710 3,439,395
Signature Inns, Inc. share............ 600,487 670,760 695,755 636,343
----------- ----------- ----------- -----------
Other partners' share................. $ 2,575,617 $ 4,286,047 $ 4,342,955 $ 2,803,052
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-18
<PAGE> 82
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
COMBINED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
SIGNATURE OTHER
INNS, INC. PARTNERS TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993......................... $1,830,670 $10,714,541 $12,545,211
Net income......................................... 636,343 2,803,052 3,439,395
Capital contributions.............................. 150 850 1,000
Cash distributions................................. (363,080) (1,919,035) (2,282,115)
---------- ----------- -----------
Balance at December 31, 1994......................... 2,104,083 11,599,408 13,703,491
Net income......................................... 695,755 4,342,955 5,038,710
Capital contributions.............................. 3,018 17,099 20,117
Cash distributions................................. (576,495) (2,820,299) (3,396,794)
---------- ----------- -----------
Balance at December 31, 1995......................... 2,226,361 13,139,163 15,365,524
Net income (unaudited)............................. 600,487 2,575,617 3,176,104
Cash distributions (unaudited)..................... (742,295) (3,115,684) (3,857,979)
---------- ----------- -----------
Balance at September 30, 1996 (unaudited)............ $2,084,553 $12,599,096 $14,683,649
========= ========== ==========
</TABLE>
See accompanying notes to combined financial statements
F-19
<PAGE> 83
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ -----------------------
1996 1995 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 3,176,104 $4,956,807 $5,038,710 $3,439,395
Items which do not use cash:
Depreciation of property and
equipment............................. 2,271,430 2,181,771 3,220,405 3,165,529
Amortization of deferred costs.......... 157,432 157,013 209,304 208,552
Amortization of debt discount........... -- 131,189 131,189 224,896
Gain on debt extinguishment............. -- (1,835,952) (1,835,952) (683,020)
Loss on disposal of equipment........... 32,581 91,604 77,508 64,323
Write-off of deferred costs............. -- -- 12,668 --
Change in accrued management and
franchise fees........................ 52,588 119,997 70,274 108,587
Change in accrued interest payable...... 113,127 64,244 (47,730) 159,694
Accrued revenue and other expenses,
net................................... 128,218 151,655 99,481 110,224
----------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................... 5,931,480 6,018,328 6,975,857 6,798,180
----------- ---------- ---------- ----------
Cash flows from investing activities:
Additions to furniture and equipment cash
reserve................................. (1,060,163) (1,042,536) (1,422,747) (1,191,992)
Proceeds from disposal of equipment........ 6,597 21,602 14,387 1,320
Other additions to property and
equipment............................... (377,011) (369,997) (580,191) (185,327)
Additions to deferred costs................ (99,932) (36,036) -- (3,174)
Acquisition of hotel property and
equipment............................... -- -- -- (4,370,000)
----------- ---------- ---------- ----------
NET CASH USED IN INVESTING
ACTIVITIES......................... (1,530,509) (1,426,967) (1,988,551) (5,749,173)
----------- ---------- ---------- ----------
Cash flows from financing activities:
Scheduled payments on long-term debt....... (790,448) (758,780) (1,154,357) (1,261,238)
Retirement of long-term debt............... -- (1,972,977) (1,972,977) --
Proceeds from long-term debt............... -- 2,274,441 2,294,309 4,658,000
Advances from general partner.............. 80,000 320,000 270,000 --
Repayments of advances from general
partner................................. (280,000) (119,514) (128,065) (50,000)
Proceeds from installment note............. -- -- 18,943 --
Extinguishment of long-term debt........... -- (400,000) (400,000) --
Deferred financing costs................... -- -- (48,701) (236,305)
Partner contributions...................... -- -- 20,117 1,000
Distributions to partners.................. (3,857,979) (3,396,794) (3,396,794) (2,282,115)
----------- ---------- ---------- ----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES......................... (4,848,427) (4,053,624) (4,497,525) 829,342
----------- ---------- ---------- ----------
Change in cash and cash equivalents.......... (447,456) 537,737 489,781 1,878,349
Cash and cash equivalents at beginning of
period..................................... 7,173,679 6,683,898 6,683,898 4,805,549
----------- ---------- ---------- ----------
Cash and cash equivalents at end of period... $ 6,726,223 $7,221,635 $7,173,679 $6,683,898
========== ========= ========= =========
Additional disclosures:
Interest paid.............................. $ 4,006,194 $4,162,088 $5,733,619 $5,378,476
========== ========= ========= =========
Additions to property and equipment from
furniture and equipment cash reserve.... $ 1,058,613 $ 955,968 $1,076,064 $ 872,269
========== ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-20
<PAGE> 84
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The financial statements present the combined balance sheets, and statement
of operations, cash flows and partners' equity of 17 affiliated hotel limited
partnerships managed by Signature Inns, Inc. that own 20 Signature Inn hotels.
Signature Inns, Inc. is the general partner in each partnership with an
ownership interest varying from 5% to 50%. All of the hotels began operations
prior to 1994. The 20 hotels and their respective owners are as follows:
<TABLE>
<CAPTION>
SIGNATURE INN HOTEL OWNER
- ------------------- -----
<S> <C>
Fort Wayne Signature I Ltd. Limited Partnership
Castleton (Indianapolis) Signature II Ltd. Limited Partnership
Lafayette Signature III Ltd. Limited Partnership
Muncie Signature IV Ltd. Limited Partnership
Northeast (Cincinnati) Signature V Ltd. Limited Partnership
Indianapolis West Signature VI Ltd. Limited Partnership
Columbus Signature VII Ltd. Limited Partnership
Kokomo Signature VII Ltd. Limited Partnership
Evansville Signature VIII Ltd. Limited Partnership
Terre Haute Signature IX Ltd. Limited Partnership
Florence Signature X Ltd. Limited Partnership
Sharonville Signature X Ltd. Limited Partnership
Dayton Signature XI Ltd. Limited Partnership
South Bend Signature XII Ltd. Limited Partnership
Louisville Signature XIV Ltd. Limited Partnership
Indianapolis North Signature XVII Ltd. Limited Partnership
Bettendorf Signature XXI Ltd. Limited Partnership
Normal Peoria/Normal Signature Limited Partnership
Peoria Peoria/Normal Signature Limited Partnership
Knoxville Knoxville Signature Limited Partnership
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and include assets leased under
noncancelable agreements and construction loan interest and fees. Depreciation
is provided on the straight-line basis over the estimated useful lives of the
related assets as follows: 40 years for buildings, 15 to 20 years for land
improvements and 3 to 10 years for furniture and equipment.
Deferred Costs
Fees and other costs incurred in financing the hotels are amortized on the
straight-line basis over the life of the respective mortgages. Loan fees of
$48,502 in 1995 and $32,497 in 1994 were paid related to financings completed in
1995 and 1994, and unamortized loan fees of $12,668 in 1994 and relating to
retired loans were written.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on deposit with banks and highly
liquid short-term cash investments with original maturities of three months or
less.
F-21
<PAGE> 85
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Furniture and Equipment Cash Reserve
Each partnership contributes 4% of gross receipts, as defined, to
respective cash reserve accounts for refurbishings, replacements and major
repair contingencies, with the exception of Signature XI which contributes
$107,000 per year and Signature XVII which contributes $90,000 per year.
Income Taxes
As each of the combined entities are partnerships, the allocated share of
taxable income or loss is includable in the income tax returns of the partners;
accordingly, income taxes are not reflected in the combined financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Property and equipment is periodically evaluated to assess whether any
impairment indications are present, including recurring operating losses and
significant adverse changes in legal factors or business climate that affect the
recovery of recorded value. If any property and equipment is considered
impaired, a loss is provided to reduce the carrying value to its estimated fair
value.
Financial Instruments
The fair value of the $58,225,680 of long-term debt at December 31, 1995 is
estimated to be $57,890,000 by discounting the future cash flow payments at
rates which are believed to be currently available to the Partnerships for
similar debt instruments of comparable maturities. The carrying amount of the
advances from Signature Inns, Inc. approximate fair value because the interest
rate on the advances changes with market interest rates. Since there is no
market for instruments comparable to the note payable to Signature Inns, Inc.
and the timing of future payments is contingent on cash flow, a reasonable
estimate of the fair value of the note is not practicable without incurring
excessive costs. The carrying amount of all other financial instruments
approximate fair value because of the short-term maturity of these items.
(2) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
First mortgage loans...................................... $51,026,323 $51,638,649
Other debt, primarily second mortgage loans............... 7,199,357 9,505,876
----------- ----------
58,225,680 61,144,525
Less current portion...................................... 3,145,668 1,175,261
----------- ----------
$55,080,012 $59,969,264
=========== ==========
</TABLE>
Each hotel is encumbered by a separate non-recourse first mortgage loan.
The first mortgage loans generally require monthly payments of principal and
interest and mature at varying dates through 2016. At December 31, 1995, the
rates on the first mortgage loans ranged from 7.45% to 10.75%. The weighted
average interest rate at December 31, 1995 and 1994 was 9.22% and 9.21%,
respectively. Certain loans on three hotel properties require additional
interest payments based on the cash flow of the related hotel. Three of the
mortgage loans are related to economic development bonds which require the
maintenance of a debt service fund before cash distributions can be made to the
partners.
F-22
<PAGE> 86
SIGNATURE INN CERTAIN AFFILIATED PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Other debt obligations, which primarily consists of second mortgage loans,
have a weighted average interest rate at December 31, 1995 and 1994 of 8.25% and
8.95%, respectively, and mature through 2000.
In 1995, Signature XXI Ltd. recognized an extraordinary gain of $1,835,952
in connection with the an early extinguishment of its second and third
mortgages. During 1994, Peoria/Normal Signature retired certain obligations at a
discount and recorded an extraordinary gain of $22,336.
At December 31, 1995, aggregate scheduled maturities of all long-term debt
over the next five years are as follows: 1996 -- $3,145,668; 1997 -- $3,795,767;
1998 -- $7,247,673; 1999 -- $21,031,377; and 2000 -- $658,537.
(3) SIGNATURE INNS, INC.
Signature Inns, Inc. receives 9% of defined gross revenue from each hotel
for hotel management and franchise fees, with the exception of three hotels
which pay a 4% franchise fee and a incentive management fee based on the
achievement of defined operating income targets. Each Partnership pays an annual
fee ranging from $3,000 to $7,000 for partnership accounting and related
services. Each hotel contributes 3.5% of defined gross revenue to a cooperative
advertising and reservation fund administered by Signature Inns, Inc.
The advances from Signature Inns, Inc. bear interest at the prime rate plus
1.0% adjusted quarterly (9.75% and 9.5% at December 31, 1995 and 1994,
respectively). Interest expense on the advances from Signature Inns, Inc.
amounted to $64,358 and $47,524 in 1995 and 1994, respectively, and related
accrued interest amounted to $4,803 and $2,445 at December 31, 1995 and 1994,
respectively.
In 1994, a Signature X Ltd. note payable to Signature Inns, Inc. of
$3,038,045 was restructured, and the balance was reduced $2,377,361 resulting in
an extraordinary gain from restructuring of $660,684. The restructured note is
non-interest bearing and repayments are dependent on future cash flows of the
partnership through maturity in 2004.
Management and franchise fee payments to Signature Inns, Inc. from
Signature XXI Ltd. are subordinate to payments on its first mortgage loan. In
1995 and 1994, management and franchise fees of $70,274 and $108,587,
respectively, have been deferred until excess cash flow as defined in the debt
agreement becomes available.
P&N Corporation, a wholly-owned subsidiary of Signature Inns, Inc. owns 15%
of the second mortgage loans on three hotels which totaled $546,700 at December
31, 1995.
F-23
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SIGNATURE INNS, INC.:
We have audited the accompanying statements of operations of Signature
Northwestern Ltd. - I Limited Partnership for the years ended December 31, 1995
and 1994. These financial statements are the responsibility of the Partnership'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 results of operations of Signature Northwestern
Ltd. - I Limited Partnership for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 16, 1996
F-24
<PAGE> 88
SIGNATURE NORTHWESTERN LTD. - I LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Revenue:
Room revenue...................................................... $1,464,094 $1,467,728
Other hotel revenue............................................... 48,780 46,183
Interest.......................................................... 11,129 8,914
---------- ----------
1,524,003 1,522,825
---------- ----------
Costs and expenses:
Hotel operations.................................................. 399,214 401,052
Salaries and benefits............................................. 355,016 346,168
Management fees (note 3).......................................... 127,906 129,030
Advertising and reservations (note 3)............................. 52,735 52,849
Interest (note 2)................................................. 486,284 472,712
Loss on disposal of equipment..................................... 5,525 --
Depreciation and amortization..................................... 135,076 131,444
---------- ----------
1,561,756 1,533,255
---------- ----------
NET LOSS....................................................... $ 37,753 $ 10,430
========== ==========
</TABLE>
See accompanying notes to statements of operations.
F-25
<PAGE> 89
SIGNATURE NORTHWESTERN LTD. - I LIMITED PARTNERSHIP
NOTES TO STATEMENTS OF OPERATIONS
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Signature Northwestern Ltd. - I Limited Partnership (the "Partnership") was
organized on December 31, 1984 between Signature Inns, Inc. and Northwestern
National Life Insurance Company to operate as a franchisee of Signature Inns,
Inc. In July 1985, the Partnership completed construction and began operating
Signature Inn East in Indianapolis, Indiana.
Signature Inns, Inc., the general partner, is responsible for the overall
management and operation of the Partnership and received 30% of partner
distributions until the limited partner's cumulative cash distributions equaled
its original capital contributions in 1994. Subsequently, the general partner is
to receive 50% of partner distributions until disposition and liquidation at
which point it increases to 60%.
Property and Equipment
Property and equipment are recorded at cost and include assets leased under
noncancelable agreements and construction loan interest and fees. Depreciation
is provided on the straight-line basis over the estimated useful lives of the
related assets as follows: 40 years for buildings, 15 to 20 years for land
improvements and 3 to 10 years for furniture and equipment.
Deferred Costs
Fees and other costs incurred in financing the hotel are amortized on the
straight-line basis over the life of the mortgage. Loan fees of $104,014 were
paid in 1995 related to the new financing completed in 1995.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on deposit with banks and highly
liquid short-term cash investments with original maturities of three months or
less.
Furniture and Equipment Cash Reserve
Cash reserves for refurbishings, replacements and major repair
contingencies are established at amounts equal to 4% of gross receipts for 1995,
as defined. Starting in 1996, monthly payments are to be equal to 4% of the
prior year gross receipts, as defined. The monthly payment in 1996 is to be
$5,036. Related expenditures are disbursed from this account.
Income Taxes
As a partnership, the allocated share of taxable income or loss is
includable in the income tax returns of the partners; accordingly, income taxes
are not reflected in the Partnership's financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Financial Instruments
The carrying amount of the long-term debt approximates its fair value
because the interest rate approximates the current market interest rate. The
carrying amounts of all other financial instruments approximate fair value
because of the short-term maturity of these items.
F-26
<PAGE> 90
SIGNATURE NORTHWESTERN LTD. - I LIMITED PARTNERSHIP
NOTES TO STATEMENTS OF OPERATIONS -- (CONTINUED)
(2) LONG-TERM DEBT
In December 1995, a mortgage loan of $2,662,800 and the related accumulated
deferred interest note of $750,000, which required interest at 13.94%, were paid
in full from the proceeds of a nonrecourse mortgage loan of $3,000,000. The new
mortgage is secured by property and equipment and is payable in monthly
installments of $27,476, including interest at a fixed rate of 9.25% to maturity
at 2006.
The aggregate maturities of long-term debt for each of the next five years
range from $54,484 to $78,766.
(3) SIGNATURE INNS, INC.
The general partner receives management fees of 15% of house profits (gross
revenue less operating expenses, as defined) and $3,000 for annual partnership
accounting and related services. The Partnership contributes 3.5% of defined
gross revenue to a cooperative advertising and reservation fund administered by
the general partner.
F-27
<PAGE> 91
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SERIES A PREFERRED
STOCK OR COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 8
The Purchase Transactions.................. 12
Use of Proceeds............................ 13
Dividend Policy............................ 14
Capitalization............................. 15
Selected Historical Financial Data......... 16
Selected Pro Forma Financial Data.......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Lodging Industry Overview.................. 24
Business................................... 27
Management................................. 38
Principal Stockholders..................... 45
Market for the Registrant's Capital Stock
and Related Stockholder Matters.......... 46
Description of Capital Stock............... 47
Shares Eligible for Future Sale............ 54
Certain Transactions....................... 55
Federal Income Tax Considerations.......... 55
Underwriting............................... 58
Experts.................................... 59
Legal Opinions............................. 59
Additional Information..................... 59
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
2,000,000 SHARES
LOGO
SIGNATURE INNS, INC.
$ CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES A
------------------------
PROSPECTUS
------------------------
MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.
THE OHIO COMPANY
, 1997
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company provide that the Company shall
indemnify any person who has or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful, except that no indemnification shall be made in relation
to matters as to which he shall be adjudged in such action, suit or proceeding
to be liable for negligence or misconduct in the performance of duty to the
Company. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Company to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company.
Any such director, officer, employee or agent who has been wholly
successful, on the merits or otherwise, with respect to any claim, suit or
proceeding of the character described herein shall be entitled to
indemnification as of right. Except as provided in the preceding sentence, any
indemnification hereunder shall be made at the discretion of the Company, but
only if the Board of Directors, acting by a quorum consisting of directors who
are not parties to or who have been wholly successful with respect to such
claim, action, suit or proceeding, shall find that the director, officer,
employee or agent has met the standards of conduct set forth in the first
sentence of this section. The directors may request independent legal counsel
(who may be regular counsel of the Company) to deliver to it their written
opinion as to whether such director, officer, employee or agent has met such
standards.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
II-1
<PAGE> 93
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses to be borne by the Company in connection with the Offering are as
follows:
<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission................................ $15,703
NASD Fee........................................................................... *
Printing........................................................................... *
Legal Expenses..................................................................... *
Accounting Expenses................................................................ *
Blue Sky Expenses and Fees......................................................... *
Mailing, Postage, Certificates and Subscription Agent Fees......................... *
-------
Total Expenses................................................................... $ *
=======
</TABLE>
- ---------------
* Will be provided by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The information set forth under the heading "Certain Transactions" in the
Prospectus included in Part I of this Registration Statement is incorporated
herein by reference. The management purchase transactions described therein were
consummated in reliance on the exemption from registration set forth in Section
4(2) of the Securities Act of 1933, as amended.
ITEM 27. EXHIBITS
The exhibits to this Registration Statement required under Item 601 of
Regulation S-B are attached hereto together with an index of exhibits, listing
the exhibits in the same order as called for under Item 601(b) of Regulation
S-B.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Company hereby undertakes that
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of that
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 94
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Indianapolis, Indiana on the 23rd day
of December, 1996.
<TABLE>
<S> <C>
SIGNATURE INNS, INC.
By: /s/ JOHN D. BONTREGER
John D. Bontreger, President,
Chief Executive Officer and
Chairman of the Board
ATTEST:
/s/ DAVID R. MILLER
David R. Miller, Secretary
Date: December 23, 1996
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Company and in the capacities indicated on December 23, 1996.
<TABLE>
<S> <C>
/s/ JOHN D. BONTREGER
---------------------------------------
John D. Bontreger, President,
Chief Executive Officer and
Chairman of the Board
/s/ MARK D. CARNEY
---------------------------------------
Mark D. Carney, Vice President
Finance, Chief Financial Officer
and Director
/s/ BO L. HAGOOD
---------------------------------------
Bo L. Hagood, Vice President
Hotel Operations and Director
/s/ DAVID R. MILLER
---------------------------------------
David R. Miller, Secretary and Director
/s/ MARTIN D. BREW
---------------------------------------
Martin D. Brew, Treasurer and
Controller
</TABLE>
II-3
<PAGE> 95
<TABLE>
<S> <C>
/s/ WILLIAM S. WATSON
-----------------------------
William S. Watson, Director
/s/ RICHARD L. RUSSELL
-----------------------------
Richard L. Russell, Director
/s/ STEPHEN M. HUSE
-----------------------------
Stephen M. Huse, Director
/s/ RICHARD E. SHANK
-----------------------------
Richard E. Shank, Director
/s/ GEORGE A. MORTON
-----------------------------
George A. Morton, Director
</TABLE>
II-4
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<C> <S>
*1. Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of Signature Inns, Inc.
3.2 Code of Bylaws of Signature Inns, Inc.
*4.1 Specimen Common Stock Certificate
*4.2 Specimen Preferred Stock Certificate
4.3 Form of Rights Agreement adopted by the Board of Directors of Signature Inns, Inc.
*5. Legality Opinion of Johnson Smith Pence Densborn Wright and Heath.
*8. Tax Opinion of Johnson Smith Pence Densborn Wright and Heath
10.1 Form of Contract for Purchase of Real Estate to be used in connection with the
Purchase Transactions.
10.2 Employment Agreement between the Company and John D. Bontreger.
10.3 Employment Agreement between the Company and Mark D. Carney.
10.4 Employment Agreement between the Company and Bo L. Hagood.
10.5 Employment Agreement between the Company and David R. Miller.
10.6 Employment Agreement between the Company and Martin D. Brew.
10.7 The Company's 1996 Equity Incentive Plan.
21. Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 The consent of Johnson Smith Pence Densborn Wright & Heath is included in its
opinion filed as Exhibit 5 hereto.
27. Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
II-5
