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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-9659
SIGNATURE INNS, INC.
(Exact name of small business issuer in its charter)
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<S> <C>
Indiana 35-1426996
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
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250 East 96th Street, Suite 450, Indianapolis, Indiana 46240
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (317) 581-1111
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
Cumulative Convertible Preferred Stock, Series A
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form. No disclosure will be contained, to the
best of Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference herein. [ X ]
Issuer's revenues for the most recent fiscal year: $ 8,461,730
Aggregate Market Value of Voting Stock Held by Non-Affiliates:
(Computed on average price as of March 21, 1997.) $8,904,063.
Total Shares of Common Stock Outstanding as of March 21, 1997: 2,102,408
Documents Incorporated By Reference: The Proxy Statement to be mailed to
shareholders on or about April 15, 1997, is incorporated by reference into Part
III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Signature Inns, Inc. (the "Company") was incorporated under the laws of
the State of Indiana on March 31, 1978. The Company operates 26 hotels, 24 under
the Signature Inn name, located in six midwestern states. The Signature Inn
chain of hotels is classified in the upper-economy/limited service segment of
the hotel industry. The Company has five, wholly-owned subsidiary corporations.
Prior to January 24, 1997, the Company, directly or through a
wholly-owned subsidiary, was the general partner of a total of 21 Indiana
limited partnerships and joint venture partnerships. The partnerships owned an
aggregate of 24 Signature Inn hotels, 23 of which were open and operating on
January 24, 1997. The open hotels were operated under long-term management and
franchise agreements with the Company, from which the Company derived
substantial fee revenue.
On January 24, 1997, the Company completed a public offering (the
"Offering") of 2,000,000 shares of its $1.70 Cumulative Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"). An additional 256,000 shares
of Series A Preferred Stock was sold on January 31, 1997, and February 6, 1997,
pursuant to over-allotment options granted to the underwriters. Net proceeds to
the Company from the Offering were approximately $40,800,000.
On January 24, 1997, using a portion of the proceeds of the Offering,
other sources of funds and the assumption of debt, the Company acquired 23 of
the hotel properties previously owned by affiliated partnerships.
The aggregate purchase price paid by the Company for the 23 hotel
properties was $84.1 million. Of that amount, $28.3 million was paid in cash at
the time of closing from the net proceeds of the Offering, and $3.6 million was
used to pay outstanding second mortgage indebtedness on three of the hotels. The
$52.2 million balance of the purchase price was paid through the assumption or
replacement by the Company of outstanding first mortgage debt on the hotels.
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The P & N Corporation ("P & N") subsidiary was organized in 1993 and
acts as the general partner of the Peoria/Normal Signature Limited Partnership,
which owns and operates the Normal and Peoria, Illinois, Signature Inn hotel
properties, the Knoxville Signature Limited Partnership which owns and operates
the Knoxville, Tennessee, Signature Inn hotel property and Meridian Signature
Limited Partnership which owns and operates the Carmel, Indiana, Signature hotel
property.
The S.I.E. Corporation subsidiary was organized in 1995 and owns the
Indianapolis East Signature Inn hotel property. SI Kokomo Corporation, an
Indiana corporation organized in 1996, owns the Kokomo, Indiana, Signature Inn
hotel property. SI South Bend Corporation, an Indiana corporation organized in
1996, owns the South Bend, Indiana, Signature Inn hotel property. SI Springfield
Corporation, an Indiana corporation organized in 1996, owns a hotel property
located in Springfield, Illinois.
The principal offices and place of business of the Company consist of
approximately 9,100 square feet of leased office space at 250 East 96th Street,
Suite 450, Indianapolis, Indiana 46240.
THE COMPANY'S HOTEL PROPERTIES
The Company owns, directly or through wholly-owned subsidiaries or
limited partnerships, 25 hotel properties (23 acquired on January 24, 1997, and
one, in Springfield, Illinois, acquired on August 27, 1996, and one in
Louisville, Kentucky, acquired on February 19, 1997) and is the general partner
of a limited partnership which owns an eighty-one room hotel property in Carmel,
Indiana. The 26 hotel properties operated by the Company comprise an aggregate
of 3,071 rooms.
Listed on the following table are the location, year opened and number
of rooms of each of the Company's hotel properties.
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NO.
YEAR OF
PROPERTY LOCATION OPENED ROOMS
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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 1-465 & Allison 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) (-75 & Sharonville Road, Sharonville, Ohio 1985 130
Signature Inn - Cincinnati (Northeast) 1-71 & Mason-Montgomery Road, Cincinnati, Ohio 1985 99
Signature Inn - Southport I-65 & Southport Road, Indianapolis, Indiana 1985 101
Signature Inn - Indianapolis East I-465 & East Washington Street, Indianapolis, Indiana1985 101
Signature Inn - Indianapolis West I-456 & 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, 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
Signature Inn - Louisville East* I-64 & Blankenbaker Road, Louisville, Kentucky 1997** 119
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3,071
<FN>
* Upon completion of conversion to a Signature, Inn.
** Year acquired
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Signature Inn-Carmel is managed by the Company pursuant to a
Management Agreement entered between the Company and Meridian Signature Limited
Partnership, an Indiana limited partnership, of which a wholly-owned subsidiary
of the Company is the general partner. Under the terms of the Management
Agreement, the Company establishes policies for the partnership's employees,
establishes room rates, directs promotional activity, supervises the purchase
and replacement of equipment, supplies and inventories, supervises maintenance
activities and selects vendors, suppliers and independent contractors. In
addition, the Company performs all bookkeeping and administrative duties in
connection with the Carmel hotel and administers payments and reports to the
limited partner. For its services to the partnership, Signature receives
management fees averaging approximately 5% of the gross receipts per month for
the hotel. In addition, the Company receives reimbursement of certain expenses
which it incurs in connection with the Management
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Agreement, including reimbursement for salaries and related costs of the hotel
general and assistant general managers, who are employed by the Company, but who
devote all of their time to the partnership hotel property. The term of the
Management Agreement is ten years and is renewable on the mutual agreement of
the parties.
In addition, the Carmel Signature Inn is operated as a franchise of the
Company under a Signature Inn Individual Hotel License Agreement ("Franchise
Agreement"). By the terms of the Franchise Agreement, the partnership pays to
the Company monthly franchise fees (I.E., royalties) equal to 4% of the gross
receipts of the hotel. In addition, the partnership contributes 3.5% of gross
receipts to an advertising and reservation fund administered by the Company to
fund chain wide advertising programs and a toll-free centralized reservation
system. The initial term of the Franchise Agreement is ten years, and the
partnership has an option to renew the agreement for an additional five-year
term. Under the terms of the Franchise Agreement, the partnership is authorized
to use the name "Signature Inn" as well as other trademarks and logos associated
with the Signature system, and the Company provides various services in relation
to that system.
OTHER REAL ESTATE INTERESTS
The Company is the owner of two parcels totaling 9.7 acres of
unimproved real estate located adjacent to the Signature Elkhart hotel site. The
Company plans to sell these parcels to restaurant and other developers.
The Company is the owner of a 5.9 acre parcel of unimproved real estate
located in Nashville, Tennessee. The Company plans to develop a Signature Inn
hotel on a portion of the property, and sell the remaining portion to a
restaurant or other developer.
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.
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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 Association ("AAA") rating which is based upon the quality
of a hotel's facilities, services and amenities. This is the highest rating
afforded to limited service hotels.
Complimentary services and amenities offered by all Signature Inn
hotels include:
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* 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 telephone * Interview centers
* Express check-out service * The Wall Street Journal
* Swimming pool * Local telephone calls
</TABLE>
Additional features include fitness centers at twelve hotels and
airport shuttle service at eight 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."
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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 continually 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 restaurant 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.
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. According to
Coopers & Lybrand Hospitality Directions, the rate of room demand growth
exceeded the rate of room supply growth by 2.6%, 1.0% and .5% in 1994, 1995 and
1996, respectively. Occupancy and ADR have increased consistently throughout the
lodging industry from 1994 through 1996. In 1994, 1995 and 1996, Occupancy grew
2.5% , 1.1% and .9%, respectively, while ADR increased 3.8%, 4.8% and 6.4%,
respectively.
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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.
Occupancy, ADR and RevPAR Comparisons. The Initial Hotels consist of
the 23 hotels comprising the Signature chain during 1996, 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.
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 "East North Central Region"). The East North Central 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 East North Central
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 East North Central
Region and all hotels in the East North Central Region for the period from 1992
through 1996:
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<CAPTION>
OCCUPANCY(1)
EAST NORTH EAST NORTH
SIGNATURE INNS COMPARABLE CENTRAL REGION: CENTRAL REGION:
YEAR INITIAL HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
- ---- -------------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
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%
1996.........65.7% 64.5% 63.9% 62.0%
<FN>
(1) Occupancy represents total rooms sold (i.e., occupied by 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 month.
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<CAPTION>
ADR(2)
EAST NORTH EAST NORTH
SIGNATURE INNS COMPARABLE CENTRAL REGION: CENTRAL REGION:
YEAR INITIAL HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
- ---- -------------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
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
1996.........$57.85 $57.07 $62.29 $65.64
<FN>
(2) ADR represents total room revenues divided by the total number of rooms sold.
</TABLE>
<TABLE>
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REVPAR(3)
EAST NORTH EAST NORTH
SIGNATURE INNS COMPARABLE CENTRAL REGION: CENTRAL REGION:
YEAR INITIAL HOTELS GROUP MID-PRICE HOTELS ALL HOTELS
- ---- -------------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
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
1996.........$38.01 $36.83 $39.83 $40.70
<FN>
(3) RevPAR represents Occupancy multiplied by ADR for the reported period.
</TABLE>
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The Initial Hotels have performed favorably as compared to the
Comparable Group since the beginning of 1992. The Initial Hotels' Occupancy has
exceeded the Comparable Group's Occupancy for each of the last four calendar
years. The Initial Hotels' ADR has exceeded the Comparable Group's ADR for each
of the last five calendar years. The Initial Hotels' RevPAR has exceeded the
Comparable Group's RevPAR for each of the last five calendar years. Since 1992,
the Initial Hotels have consistently operated at higher Occupancies than all
hotels and mid-price hotels in the East North Central Region. The Initial
Hotels' ADR growth has exceeded the annual rate of inflation since the beginning
of 1993.
TRADEMARKS
The mark "Signature Inn" with related logo was registered by the
Company with the Indiana Secretary of State effective on October 8, 1980. In
addition, on October 4, 1982, the mark "Signature Inn" (with logo) was
registered on the principal register of the United States Patent and Trademark
Office. On September 18, 1984, the mark "Signature Inn", only, and the stylized
"S" logo, only, were registered on the principal register of the United States
Patent and Trademark Office. On February 14, 1990, the declarations of five
years use for each of the marks was accepted by the United States Patent and
Trademark Office. These registrations are now in effect until a renewal date of
September 18, 2004. Another mark, "We Help You Get Down to Business," which is
used by Signature Inns in its hotel operations, was registered with the United
States Patent and Trademark Office on October 12, 1982. An additional mark,
"Sincerely Yours," was registered in 1990 with the United States Patent and
Trademark Office. The mark "Breakfast Express" was registered with the U.S.
Patent and Trademark Office on November 3, 1992. The Mark "There's Something
Personal About a Signature" was registered with the U.S. Patent and Trademark
Office on April 30, 1991.
On June 1, 1989, Signature Inns, Inc. entered into an agreement with a
Canadian group which had owned the Canadian trademark registration of "Signature
Inn." Under the agreement, the Canadian registration of the mark "Signature Inn"
became the property of Signature Inns, Inc.
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.
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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.
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.
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All Signature Inn hotels feature an outdoor swimming pool (or indoor
pool at five locations), 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.
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EMPLOYEES
Including its five executive officers, the Company employs 30 full-time
employees at its corporate office. In addition, the Company employs
approximately 500 full-time employees and 250 part-time employees at its hotel
properties. The Company believes it has an excellent relationship with its
employees.
SEASONALITY
Demand for hotel accommodations varies seasonally in the Company's
current market areas. Typically, demand for hotel accommodations and,
correspondingly, occupancy rates for each of the Signature Inn hotels within the
Signature chain will be higher during the period from March through October and
lower during the period from November through February.
COMPETITION
The operation of hotels is an extremely competitive business. Signature
Inns are in competition with numerous hotel management companies and hotel
chains in their respective areas of operation of varying quality and size,
including national and regional chains, and companies which have available to
them greater name recognition and financial resources than the Company. The
Company believes its management possesses adequate experience and that the
Signature Inn concept is sufficiently recognized to enable the chain to compete
successfully against its competitors.
REFURBISHING
To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their anticipated
useful lives. If such expenditures are not made, the value and profitability of
the property may be diminished. Prior to the Company's acquisition of 23 hotel
properties from affiliated partnerships in January, 1997, each affiliated hotel
partnership established reserve funds in connection with the operation of its
hotel for refurbishing which were generally based upon specified percentages of
hotel revenues. The Company plans to continue maintaining these reserve funds
and making expenditures, as needed, to maintain the value and profitability of
its hotel properties.
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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 affect adversely 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 partnerships
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.
AMERICANS WITH DISABILITIES ACT AND OTHER GOVERNMENTAL REGULATIONS
The Company believes that all Signature Inn hotels currently are in
compliance 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 is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. Further increases in the minimum wage rate, employee
benefit costs or the costs associated with employees could affect the Company.
MISCELLANEOUS
The Company is not dependent upon a single customer or a very few
customers, the loss of any one of which would not have a material adverse effect
on the Company. All raw materials utilized by the Company and its affiliated
limited partnerships in the construction or refurbishing of their respective
hotels are believed to be readily available at competitive prices. The Company
is not engaged in any material research or development activities.
-13-
<PAGE> 15
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter
was submitted to a vote of the security holders of the Company during the fourth
quarter of the fiscal year covered by this Form 10-KSB Report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS. On January 21, 1997, the shares of the Company's Common Stock were
listed on the NASDAQ National Market System under the symbol SGNS. Prior to
January 21, 1997,
-14-
<PAGE> 16
shares of the Company's Common Stock were not actively traded in any established
market and Paragon Capital Corporation of Boca Raton, Florida, undertook to make
a market in and to provide quotes for the Company's Common Stock.
The range of high and low bids for the Company's Common Stock, as
adjusted for a 1-for-3.7 share reverse stock split effective as of January 21,
1997, for each quarter within the last two fiscal years is set forth below:
<TABLE>
<CAPTION>
Quarter
Ended High Bid(1) Low Bid(1)
----- ----------- ----------
<S> <C> <C>
12/31/96 $12.950 $7.400
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
<FN>
(1) Quotations may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
</TABLE>
As of the date of this Form 10-KSB, there are approximately 4,300
holders of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its Common
Stock. The Company's ability to pay cash dividends on its Common Stock is
restricted under the terms of loan greements between the Company and its banks.
-15-
<PAGE> 17
ITEM 6. 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 December 31, 1996, the Company managed a chain of 23
Signature Inn hotels located in six states. Three hotels were owned by
consolidated affiliates and 20 additional hotels were owned by limited
partnerships in which the Company was the general partner. Also, in August 1996
the Company purchased a hotel in Springfield, Illinois and began the renovation
and conversion to a Signature Inn. Additionally, the Company aquired a hotel in
Louisville, Kentucky in February 1997.
The historical consolidated financial statements include the operations
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 in which the Company is a partner with 50% or less ownership and
does not exercise legal, financial and operational control.
On January 24, 1997, the Company completed a public offering ("the
Offering") of 2,000,000 shares of $1.70 cumulative convertible preferred stock.
An additional 256,000 shares of Series A Preferred Stock were sold on January
31, 1997, and February 6, 1997, pursuant to over-allotment options granted to
the underwriters. On January 24, 1997, using a portion of the proceeds of the
Offering, other sources of funds and the assumption of debt, the Company
acquired the 23 hotel properties previously owned by affiliated partnerships.
RESULTS OF OPERATIONS
The following is a discussion of the results of the Company's
operations for the years ended December 31, 1996 and 1995.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR END DECEMBER 31, 1995
Hotel Operations. Hotel revenues of $5,400,000 for 1996 represented a
55.6% increase compared to 1995. Hotel revenues from Indianapolis South and
Elkhart increased $51,000 for the year, with the remainder of the increase
attributable to the consolidation of Indianapolis East beginning December 29,
1995 and the revenue from 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 1996 represented a $1,342,000 increase
compared to 1995. Hotel costs and expenses from Indianapolis South and Elkhart
increased $133,000 for the year, with the remainder of the increase
attributable to the consolidation of Indianapolis East beginning December 29,
1995 and the Springfield hotel acquired in August 1996.
Depreciation and amortization expense increased $151,000 for 1996
compared to 1995 due primarily to the consolidation of Indianapolis East.
-16-
<PAGE> 18
Corporate Operations. Revenue from management and franchise fees
decreased $65,000 for 1996 compared to 1995. The decrease in fee income is due
to the absence of $140,000 of fee income from Indianapolis East during 1995
prior to its consolidation. This decrease is offset partially by a $75,000
increase in fees earned during 1996 compared to 1995 from the unconsolidated
partnership owned hotels. During 1996, revenues from these twenty hotels
increased due to average daily rate increases offset by a slight decrease in
occupancy.
Corporate administrative expenses for 1996 increased $146,000 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 1996 compared to 1995, the equity in income of hotel limited
partnerships decreased $165,000 which is attributable to a gain recognized by
the Company in 1995 (based upon its ownership share) upon a debt restructuring
of a partnership.
Interest income for 1996 decreased compared to 1995 as a result of
lower interest income from invested cash balances. Interest expense increased
for 1996 compared to 1995 due to the consolidation of Indianapolis East and the
related interest on its mortgage loan, offset by a decrease in corporate
interest 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 the Capital Appreciation Fee on September 1, 1995.
During 1995, related expense of $610,990 was recorded.
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 statement of operations.
Hotel revenues of $3,470,000 for 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 room rates for the year.
Hotel costs and expenses of $1,758,000 for 1995 represented a $276,000
decrease compared to 1994. Hotel costs and expenses from Indianapolis South and
Elkhart increase $76,000 for the year, due primarily to the increase in the
number of rooms sold, offsetting the decrease from the sale of the Knoxville
hotel in May 1994.
-17-
<PAGE> 19
Depreciation and amortization expense decreased $91,000 for 1995
compared to 1994 due primarily to the hotel sale in May 1994.
Corporate Operations. Management and franchise fees earned from all
sources increased $105,000 for 1995 compared to 1994. Fees earned from
affiliated limited partnerships increased $169,000 for 1995 compared to 1994.
Management and franchise fees from the hotel sold to an affiliated limited
partnership in 1994 amounted to $109,000 in 1994. 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.
Corporate administrative expenses for 1995 were $2,216,000 which
represented a $75,000 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 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.
Interest income for 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 expense for 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.
-18-
<PAGE> 20
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its operations principally through
cash flow from operations and borrowings under certain credit facilities.
During 1996, the Company generated net cash provided by operating
activities of $2,870,000 compared to $2,647,000 in 1995, an increase of
$223,000. Income before income taxes increased $239,000 compared to 1995.
During 1996, the Company used a net of $2,558,000 in investing
activities compared to a net of $602,000 used in 1995. The primary element of
the change from 1995 is the purchase of the Springfield hotel in 1996 and real
estate acquisition costs incurred during 1996 in conjunction with the January
1997 hotel purchases.
During 1996, the Company used a net of $336,000 in financing activities
compared to a net of $1,619,000 in financing activities during 1995. The
change is due primarily to lower net repayments of long-term debt during 1996
compared to 1995 and the increase of net borrowings under the line of credit.
In August 1996, the Company purchased an operating hotel in
Springfield, Illinois 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 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.
The Company obtained a $10,200,000 bank credit facility upon the
consummation of the January 1997 preferred stock offering. Under this facility,
borrowings of up to $6,000,000 will be available for new hotel construction
projects and hotel acquisitions after the Company has repaid the $10,200,000 of
borrowings which are secured by five Signature Inn hotels purchased by the
Company in January 1997. During 1997, management intends to repay the existing
facility balance through proceeds from refinancing of existing hotels or other
capital available to the Company. There can be no assurance that any such
refinancing or capital will be available. The facility is structured to provide
construction and start-up financing for new projects, and the Company will
replace the credit facility financing with long-term permanent financing.
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 fixed or variable rates, and be
subject to such other terms as the Board of Directors of the Company considers
appropriate.
-19-
<PAGE> 21
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experiences to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, and results of
the Company's business include the following: (i) the risk of adverse changes in
the future level of demand by the Company's customers and prospective customers
caused by regional or real estate-specific economic downturns, and (ii) other
risks detailed from time to time in the filings with the Securities and Exchange
Commission.
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.
-20-
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
(Note 1)
PRO FORMA
DECEMBER 31 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,987,443 1,994,751 2,018,298
Restricted cash 543,913 284,292 279,943
Other current assets 2,496,540 646,077 541,975
------------ ---------- ----------
Total current assets 13,027,896 2,925,120 2,840,216
------------ ---------- ----------
Hotel limited partnerships:
Equity investments 526,000 2,097,809 2,224,857
Receivables, net -- 3,441,648 3,571,648
------------ ---------- ----------
526,000 5,539,457 5,796,505
------------ ---------- ----------
Property and equipment, net 98,303,555 10,358,333 8,763,787
Furniture and equipment cash reserves 1,248,578 184,708 275,401
Deferred costs and other assets, net of accumulated
amortization of $562,294 and $530,114 480,211 1,603,461 338,542
------------ ---------- ----------
$113,586,240 20,611,079 18,014,451
============ ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 1,949,275 238,765 3,721,716
Other current liabilities 3,773,672 1,324,356 822,961
------------ ---------- ----------
Total current liabilities 5,722,947 1,563,121 4,544,677
Long-term debt, less current portion 60,339,700 12,078,622 8,638,394
Other partners' equity -- 307,343 40,154
------------ ---------- ----------
Total liabilities 66,062,647 13,949,086 13,223,225
------------ ---------- ----------
Shareholders' equity:
Preferred stock, no par value. Authorized 5,000,000 shares. 40,861,600 -- --
Common stock, no par value. Authorized 13,513,314 shares. 10,017,514 10,017,514 9,805,973
Accumulated deficit (3,355,521) (3,355,521) (5,014,747)
------------ ---------- ----------
Total shareholders' equity 47,523,593 6,661,993 4,791,226
------------ ---------- ----------
$113,586,240 20,611,079 18,014,451
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 23
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
(Note 1)
PRO FORMA
YEARS ENDED DECEMBER 31 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Revenues:
Hotel revenues $39,470,078 5,399,772 3,470,062
Management and franchise fees -- 3,061,958 3,126,972
----------- --------- ---------
39,470,078 8,461,730 6,597,034
----------- --------- ---------
Costs and expenses:
Hotel costs and expenses 22,601,874 3,099,066 1,757,515
Depreciation and amortization 3,470,000 570,454 419,576
Corporate administrative expenses 2,363,440 2,363,440 2,216,985
----------- --------- ---------
28,435,314 6,032,960 4,394,076
----------- --------- ---------
Operating income 11,034,764 2,428,770 2,202,958
----------- --------- ---------
Other income (deductions):
Equity in income of hotel limited partnerships, net -- 596,190 761,523
Interest income 340,988 208,285 276,423
Interest expense (5,632,456) (1,035,340) (980,907)
Capital appreciation fee -- - (610,990)
Other partners' equity in income -- (345,512) (226,044)
Other, net 23,726 23,726 214,090
----------- --------- ---------
(5,267,742) (552,651) (565,905)
----------- --------- ---------
Income before income tax expense 5,767,022 1,876,119 1,637,053
Income tax expense 1,890,000 216,893 19,637
----------- --------- ---------
Net income 3,877,022 1,659,226 1,617,416
Preferred stock dividends 3,835,200 -- --
----------- --------- ---------
Net income applicable to common stock $ 41,822 1,659,226 1,617,416
=========== ========= =========
Earnings per share $ 0.02 0.79 0.77
=========== ========= =========
Weighted average common shares outstanding 2,104,167 2,104,167 2,103,872
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,659,226 1,617,416
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment 538,274 346,409
Amortization of deferred costs 32,180 73,167
Equity in income of hotel limited partnerships, net of
distributions received of $783,761 and $632,673 187,571 (128,850)
Other partners' equity in income 345,512 226,044
Capital appreciation fee -- 610,990
Loss (gain) on disposition of land and related assets 26,938 (163,032)
Other items 80,514 65,391
---------- ---------
Net cash provided by operating activities 2,870,215 2,647,535
---------- ---------
Cash flows from investing activities:
Proceeds from sale of land and related assets 210,018 163,032
Acquisition of operating hotel 1,788,304) --
Property and equipment additions (496,202) (189,689)
Investment in hotel limited partnerships (40,000) (486,000)
Repayments from (advances to) hotel limited partnerships, net 130,000 (141,936)
Deferred acquisition costs and other assets (573,230) (91,973)
Cash balance of consolidated hotel limited partnership -- 144,715
---------- ---------
Net cash used by investing activities 2,557,718) (601,851)
---------- ---------
Cash flows from financing activities:
Proceeds of long-term debt 479,159 1,700,000
Repayments of long-term debt 2,171,882) (1,965,256)
Net borrowings (repayments) on revolving line of credit 1,650,000 (400,000)
Payment of capital appreciation fee -- (900,000)
Proceeds from issuance of common stock 208,875 69,625
Deferred offering costs (423,871) --
Distributions to other partners by consolidated hotel, net (78,325) (123,053)
---------- ---------
Net cash used by financing activities (336,044) (1,618,684)
---------- ---------
Net change in cash and cash equivalents (23,547) 427,000
Cash and cash equivalents at beginning of year 2,018,298 1,591,298
---------- ---------
Cash and cash equivalents at end of year $1,994,751 2,018,298
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
-23-
<PAGE> 25
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock
------------------------------ Accumulated
Shares Amount Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,103,872 $ 9,736,348 (6,632,163) 3,104,185
Net income -- -- 1,617,416 1,617,416
Collection of notes receivable -- 69,625 -- 69,625
--------- ----------- ---------- ---------
BALANCE AT DECEMBER 31, 1995 2,103,872 9,805,973 (5,014,747) 4,791,226
Net income -- -- 1,659,226 1,659,226
Collection of notes receivable -- 208,875 -- 208,875
Common shares issued 541 2,666 -- 2,666
--------- ----------- ---------- ---------
BALANCE AT DECEMBER 31, 1996 2,104,413 $10,017,514 (3,355,521) 6,661,993
========= =========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF ACCOUNTING POLICIES
BUSINESS
The Company developed and currently operates a chain of 23 Signature Inn hotels
in the Midwest. As of December 31, 1996, three hotels were owned by consolidated
affiliates and 20 other hotels were owned by limited partnerships in which the
Company was the general partner. The partnership agreements provide for
distributions of available cash to the Company based on its ownership interest.
In January 1997, The Company completed a public offering (the "Offering") of
2,256,000 shares of cumulative convertible preferred stock at $20 per share.
Using a portion of the proceeds of the Offering, other sources of funds and the
assumption of debt, the Company acquired the 23 hotel properties previously
owned by the affiliated partnerships.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
three 50% owned consolidated hotel affiliates in which the Company exercises
legal, financial and operational control (Signature Inn South, Elkhart and
effective December 29, 1995 Indianapolis East). 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.
For financial statement purposes, the affiliate hotels acquired in 1997 will be
accounted for as purchase transactions and, accordingly, the Company will
include the results of operations of the hotels in its financial statements
beginning on the acquisition date. The aggregate purchase price was
approximately $84.1 million, including the assumption or replacement of $52.2
million of existing affiliate hotel debt.
The unaudited 1996 pro forma financial information has been prepared assuming
the completion of the Offering and the acquisition of the 23 hotels owned by
the affiliated partnerships. The pro forma balance sheet information assumes
that these transactions were consummated on December 31, 1996, and the pro
forma statement of operations information assumes that these transactions were
consummated on January 1, 1996. The pro forma information is presented for
supplemental disclosure purposes and is not necessarily indicative of what
would have occurred if the acquisition had been made as of those dates. In
addition, the pro forma statements do not purport to project the Company's
financial position or results of operations at any future date or future
period.
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.
EARNINGS PER SHARE
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<PAGE> 27
Earnings per share are calculated using the weighted average number of shares
outstanding during the year. Common stock equivalents 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 initial
maturities of three months or less, stated at cost with 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 is carried at the lower of cost or estimated fair value.
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. The Company adopted this
accounting policy in 1995.
-26-
<PAGE> 28
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 the 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.
(2) HOTEL LIMITED PARTNERSHIPS
Summary of financial information for the hotel limited partnerships reported on
the equity method is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Hotel properties $67,833,853 69,588,332
Net current assets 890,576 4,478,542
Deferred costs 832,720 1,013,523
Long-term debt (56,760,169) (58,499,873)
----------- -----------
Net assets 12,797,010 16,580,524
Less:
Equity of other partners 10,503,698 13,868,164
Income not recognized 195,503 487,503
----------- -----------
Investments in hotel
limited partnerships $ 2,097,809 2,224,857
=========== ===========
Revenues 34,346,009 35,432,793
Operating expenses (31,479,752) (32,267,788)
Nonrecurring items (2,890,000) 1,835,952
----------- -----------
Net income (loss) (23,743) 5,000,957
Less other partners' share (619,933) 4,239,434
----------- -----------
Equity in income $ 596,190 761,523
=========== ===========
</TABLE>
The nonrecurring item in 1996 represents write-downs of the limited partners'
share of the hotel properties of certain partnerships. All of the write-downs
were allocated to the limited partners' share of net income because the Company
intends to hold these assets as long-term investments. The nonrecurring
items in 1995 represent the gain on a debt restructuring of a hotel mortgage
loan.
As of December 31, 1996 and 1995, net receivables from hotel limited
partnerships, classified as long-term investments, included $517,987 and
$647,987, respectively, of interest-bearing advances at the prime rate plus 1.0%
(9.25% and 9.5% at December 31, 1996 and 1995). 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 January 1997, upon completion of the Offering and acquisition of hotel
properties owned by affiliated partnerships, the receivables from the
partnerships were satisfied in full.
-27-
<PAGE> 29
Interest income on receivables from limited partnerships was $142,640 in 1996
and $159,435 in 1995.
(3) PROPERTY AND EQUIPMENT
Property and equipment representing consolidated and Company-owned hotels,
corporate office equipment and land held for sale or development are summarized
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Land - operating hotels $ 1,210,500 1,210,500
Leasehold and land improvements 759,890 759,890
Buildings 8,875,006 7,394,047
Furniture and Equipment 4,164,663 3,518,317
Land held for sale or development 674,833 913,739
----------- ----------
15,684,892 13,796,493
Accumulated depreciation 5,326,559 5,032,706
----------- ----------
$10,358,333 8,763,787
=========== ==========
</TABLE>
During 1996, the Company sold a tract of land adjacent to a Signature Inn hotel
to a restaurant operator, net proceeds of $210,018 were received, resulting in a
loss of $26,938. During 1995, the Company sold its easement rights in a
billboard for net proceeds of $163,032.
-28-
<PAGE> 30
(4) LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Corporate:
Line of credit $ 2,750,000 1,100,000
Term note -- 1,600,000
Company hotel 479,159 --
Consolidated hotels 9,088,228 9,660,110
----------- ----------
Total 12,317,387 12,360,110
Less current portion:
Corporate 2,902 533,340
Consolidated hotels 235,863 3,188,376
----------- ----------
Long-term portion $12,078,622 8,638,394
=========== ==========
</TABLE>
At December 31, 1996 and 1995, respectively, the revolving line of credit bears
interest at prime plus .50% and .75% (8.75% and 9.25% at December 31, 1996 and
1995), matures in May 1998, and is secured by substantially all assets of the
Company. The line of credit was paid in full in January 1997 upon completion of
the Offering.
The Company's term note was repaid in full in May 1996 and required 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).
In September 1995, the Company repaid its $1,800,000 unsecured 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, at a specific time in the future. The fee was
expensed $610,990 in 1995 and $289,010 in 1994.
The consolidated hotel affiliates' mortgage loans are non-recourse to the
Company, bear interest at rates ranging from 9.25% to 9.80%, and the aggregate
annual scheduled principal payments during the next five years are: $239,000 in
1997, $255,000 in 1998, $2,562,000 in 1999, $174,000 in 2000 and $189,000 in
2001.
In January 1997, one of the mortgage loans was refinanced and an additional
$52,200,000 of mortgage indebtedness was assumed in connection with the
acquisition of the 23 operating Signature Inn hotels. The aggregate annual
scheduled principal payments, including the assumed mortgage indebtedness,
during the next five years are: $1,949,000 in 1997, $5,992,000 in 1998,
$11,957,000 in 1999, $3,393,000 in 2000 and $9,797,000 in 2001.
Interest paid amounted to $1,039,966 and $978,649 in 1996 and 1995,
respectively.
-29-
<PAGE> 31
(5) INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Hotel limited partnership investments $ 1,229,000 1,229,000
Land held for sale or development 580,000 600,000
Partnership advances 419,000 419,000
Net operating loss
Carry forwards 1,486,000 1,869,000
Other 529,000 621,000
----------- ----------
Gross deferred tax assets 4,243,000 4,738,000
Less valuation allowance (1,611,000) (2,111,000)
----------- ----------
Net deferred tax assets $ 2,632,000 2,627,000
=========== =========
Deferred Tax Liabilities:
Depreciation 37,000 45,000
Hotel limited partnerships 2,595,000 2,582,000
----------- ----------
Deferred tax liabilities $ 2,632,000 2,627,000
=========== =========
</TABLE>
At December 31, 1996, the tax net operating loss carry forwards, which expire in
2007, are approximately $4.4 million.
-30-
<PAGE> 32
(6) SHAREHOLDERS' EQUITY
In January 1997, the Company completed the Offering of 2,256,000 shares of
cumulative convertible preferred stock at a price to the public of $20 per
share. The preferred shares require dividends at the annual rate of $1.70 per
share and are callable by the Company after three years. The net proceeds to the
Company, after expenses of the Offering and giving effect to the underwriter's
discount, were approximately $41 million. The proceeds were used for the
acquisition of hotel properties, limited partner interests or joint venture
interests in 23 operating Signature Inn hotels (approximately $28 million),
repayment of debt obligations (approximately $6.0 million) and to provide
working capital to the Company. Immediately prior to the consummation of the
Offering, the Board of Directors approved a 1-for-3.7 reverse Common Stock
split, decreasing the number of authorized shares from 50,000,000 to 13,513,513
and the number of outstanding shares from 7,786,327 to 2,104,413. In the
accompanying financial statements, all share and per share amounts have been
retroactively restated to reflect the reverse stock split
On January 17, 1997 the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right is to be
distributed for each outstanding share of the Company's common stock to
shareholders of record on March 18, 1997. Each right entitles the holder to buy
one-hundredth of one share of non-cumulative preferred stock at an exercise
price of $40 per hundredth of a share. The rights will be exercisable ten days
after a person or group acquires beneficial ownership of 20% or more of the
Company's common stock. The rights are nonvoting and will expire on March 18,
2007, unless exercised or previously redeemed by the Company at $.001 each. If
the Company is involved in a merger or certain other business combinations not
approved by the Board of Directors, each right entitles its holder, other than
the acquiring person or group, to purchase common stock of either the Company or
the acquirer having a value of twice the exercise price of the right.
On January 21, 1997, the Company granted options under the 1996 Equity Incentive
Plan to purchase 91,000 shares of common stock at an exercise price of $8.00 per
share, representing fair market value at the date of grant, to certain officers
and employees of the Company. Each of these options has a term of ten years and
vest at the rate of one-third in each of the first three years. There are also
unexercised options to purchase 2,297 shares of common stock granted under the
1986 Incentive Stock Option Plan at an exercise price of $4.163, which are to
expire in July 1997.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123"), effective for transactions entered into after
December 15, 1995. This statement defines a fair value method of accounting for
employee stock options and encourages entities to adopt that method of
accounting for its stock compensation plans. SFAS 123 allows an entity to
continue to measure compensation costs for these plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles Board Option
No. 25, "Accounting for Stock
-31-
<PAGE> 33
Issued to Employees" ("APB 25"). The Company has elected to continue to account
for its employee stock compensation plans as prescribed under APB 25 and make
the pro forma disclosures of net income and earnings per share required by SFAS
123. As no stock options were awarded in 1995 or 1996, the adoption of SFAS 123
had no impact on the Company's financial position or results of operations.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Signature Inns, Inc.:
We have audited the accompanying consolidated balance sheets of Signature Inns,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended. 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.
as of December 31, 1996 and 1995 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 21, 1997
-32-
<PAGE> 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. NOT APPLICABLE.
PART III
The information required by Items 9 through 12 of Part III of this Form
10-KSB is hereby incorporated by reference from the Company's definitive proxy
statement to be filed in accordance with ss.240.14a-101, Schedule 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Exhibit Index required by Item 601 of Regulation S-B
is set forth on pages 36 and 37.
(b) The following reports on Form 8-K were filed by the
Company during the last quarter of the period covered by this report :
November 20, 1996; Common Stock offering postponed.
December 23, 1996; Filing of amended registration statement
for preferred stock offering.
-33-
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURE INNS, INC.
By: /s/ John D. Bontreger
--------------------------------
John D. Bontreger, President,
Chairman of the Board and
Chief Executive Officer
ATTEST:
/s/ David R. Miller
- --------------------------
David R. Miller, Secretary
Date: March 27, 1997
Pursuant to the requirements of the Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: March 27, 1997 /s/ John D. Bontreger
----------------------------------------------
John D. Bontreger, President, Chairman of the
Board and Chief Executive Officer and Director
of Signature Inns, Inc.
Date: March 27, 1997 /s/ David R. Miller
----------------------------------------------
David R. Miller, Secretary, Executive Director
of Sales and Marketing and Director of
Signature Inns, Inc.
Date: March 27, 1997 /s/ Mark D. Carney
----------------------------------------------
Mark D. Carney, Vice President Finance, Chief
Financial Officer and Director of Signature
Inns, Inc.
-34-
<PAGE> 36
Date: March 27, 1997 /s/ Bo L. Hagood
----------------------------------------------
Bo L. Hagood, Vice President Hotel Operations
and Director of Signature Inns, Inc.
Date: March 27, 1997 /s/ Martin D. Brew
----------------------------------------------
Martin D. Brew, Treasurer and Controller of
Signature Inns, Inc.
Date: March 27, 1997 /s/ Stephen M. Huse
----------------------------------------------
Stephen M. Huse, Director of Signature Inns,
Inc.
Date: March 27, 1997 /s/ George A. Morton
----------------------------------------------
George A. Morton, Director of Signature Inns,
Inc.
Date: March 27, 1997 /s/ Richard L. Russell
----------------------------------------------
Richard L. Russell, Director of Signature Inns,
Inc.
Date: March 27, 1997 /s/ Richard E. Shank
----------------------------------------------
Richard E. Shank, Director of Signature Inns,
Inc.
Date: March 27, 1997 /s/ William S. Watson
----------------------------------------------
William S. Watson, Director of Signature Inns,
Inc.
-35-
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Title of Exhibit Reference
- ---------------- ---------
<S> <C>
Plan of Acquisition,
Reorganization, etc. Not applicable
Amended and Restated Articles of
Incorporation and Amended and
Restated By-Laws of Company Incorporated by reference to the
exhibits to Company's Form SB-2
Registration Statement under the
Securities Act of 1933 filed with
the Commission on September 26,
1996, as amended, File No. 333-
12735
Instruments Defining Rights
of Security Holders Incorporated by reference to the
exhibits to Company's SB-2
Registration Statement under the
Securities Act of 1933 filed with
the Commission on September 26,
1996, as amended, File No. 333-
12735
Voting Trust Agreement Not applicable
Material Contracts Incorporated by reference to the
exhibits to Company's SB-2
Registration Statement under the
Securities Act of 1933 filed with
the Commission on September 26,
1996, as amended, File No. 333-
12735
Statement Regarding Computation
of Earnings Per Share Not applicable
</TABLE>
-36-
<PAGE> 38
<TABLE>
<CAPTION>
Title of Exhibit Reference
- ---------------- ---------
<S> <C>
Annual or Quarterly Reports,
Form 10-QSB Not applicable
Letter on Change in Certifying
Accounting Not applicable
Letter on Change in Accounting
Principals Not applicable
Subsidiaries of the Company Incorporated by reference to the
exhibits to Company's SB-2
Registration Statement under the
Securities Act of 1933 filed with
the Commission on September 26,
1996, as amended, File No. 333-
12735
Published Report Regarding
Matters Submitted to Vote Not applicable
Consent of Experts and Counsel Not applicable
Power of Attorney Not applicable
</TABLE>
-37-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,994,751
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,925,120
<PP&E> 15,684,892
<DEPRECIATION> 5,326,559
<TOTAL-ASSETS> 20,611,079
<CURRENT-LIABILITIES> 1,563,121
<BONDS> 12,078,622
<COMMON> 6,661,993
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,611,079
<SALES> 0
<TOTAL-REVENUES> 8,461,730
<CGS> 0
<TOTAL-COSTS> 6,032,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,035,340
<INCOME-PRETAX> 1,876,119
<INCOME-TAX> 216,893
<INCOME-CONTINUING> 1,659,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
