<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998 Commission File Number 0-9659
-------------- ------
SIGNATURE INNS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1426996
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
250 EAST 96TH STREET, SUITE 450, INDIANAPOLIS, IN 46240
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (317) 581-1111
Check whether the Registrant (1) has filed all reports required to be filed by
Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
2,105,203 Common Shares were outstanding as of May 11, 1998.
<PAGE> 2
SIGNATURE INNS, INC.
INDEX
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 1
Three months ended March 31, 1998 and 1997
Consolidated Balance Sheets 2
March 31, 1998 and December 31, 1997
Consolidated Statements of Shareholders' Equity 3
Three months ended March 31, 1998 and
Year ended December 31, 1997
Consolidated Statements of Cash Flows 4
Three months ended March 31, 1998 and 1997
Note to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Part II - OTHER INFORMATION 10
SIGNATURES 11
</TABLE>
<PAGE> 3
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
ACTUAL
--------------------------- PRO FORMA
THREE MONTHS ENDED MARCH 31, 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Guestroom revenues $ 8,529,531 7,258,768 8,558,952
Other hotel revenues 463,051 360,600 447,229
Management and franchise fees 34,620 132,084 -
----------- ----------- -----------
Total revenues 9,027,202 7,751,452 9,006,181
----------- ----------- -----------
Operating costs and expenses:
Direct hotel expenses 5,403,192 4,103,110 5,215,488
Depreciation, amortization and retirements 1,135,174 718,510 861,510
Corporate expenses 722,124 674,399 674,399
----------- ----------- -----------
Total operating costs and expenses 7,260,490 5,496,019 6,751,397
----------- ----------- -----------
Operating income 1,766,712 2,255,433 2,254,784
----------- ----------- -----------
Other income (expense):
Equity in income of hotel limited partnerships (12,169) (72,023) (2,179)
Interest income 148,649 67,511 67,511
Interest expense (1,564,945) (1,197,659) (1,429,654)
Other 5,984 - -
----------- ----------- -----------
Income before income tax expense 344,231 1,053,262 890,462
Income tax expense 119,104 372,000 314,333
----------- ----------- -----------
Net income 225,127 681,262 576,129
Preferred stock dividends 958,800 744,480 958,800
=========== =========== ===========
Net income (loss) applicable to common stock $ (733,673) (63,218) (382,671)
=========== =========== ===========
Basic and diluted earnings (loss) per common share $ (0.35) (0.03) (0.18)
=========== =========== ===========
Weighted average common shares outstanding 2,105,203 2,102,878 2,102,878
=========== =========== ===========
</TABLE>
1
<PAGE> 4
SIGNATURE INNS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,865,368 11,126,602
Restricted cash 894,303 529,212
Accounts receivable 1,005,668 702,891
Federal income tax receivable - 517,553
Other current assets 390,903 373,141
------------- -------------
Total current assets 13,156,242 13,249,399
Property and equipment, net 108,619,280 108,670,976
Furniture and equipment cash reserves 792,977 1,395,557
Hotel limited partnership investment 780,138 833,107
Deferred costs and other assets, net 684,093 678,599
------------- -------------
$ 124,032,730 124,827,638
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 7,634,849 1,606,390
Accounts payable 842,533 743,086
Accrued property taxes 1,665,931 1,526,653
Accrued payroll 356,589 808,944
Income taxes 184,788 -
Other current liabilities 879,425 583,525
------------- -------------
Total current liabilities 11,564,115 5,268,598
Long-term debt, less current portion 63,254,755 69,611,507
------------- -------------
Total liabilities 74,818,870 74,880,105
------------- -------------
Shareholders' equity:
Cumulative convertible preferred stock (no par value;
5,000,000 shares authorized; 2,256,000 shares issued) 40,776,126 40,776,126
Common stock (no par value; 25,000,000 shares authorized;
2,105,203 shares issued and outstanding) 10,013,800 10,013,800
Accumulated deficit (1,576,066) (842,393)
------------- -------------
Total shareholders' equity 49,213,860 49,947,533
------------- -------------
$ 124,032,730 124,827,638
============= =============
</TABLE>
2
<PAGE> 5
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------------- -------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 2,104,413 $ 10,017,514 - $ - (3,355,521) 6,661,993
Net income - - - - 5,175,208 5,175,208
Fractional shares redeemed (2,005) (16,267) - - - (16,267)
Restricted stock grant 500 3,000 - - - 3,000
Exercise of stock options 2,295 9,553 - - - 9,553
Preferred shares issued, net - - 2,256,000 40,776,126 - 40,776,126
Preferred stock cash dividends
($1.18 per share) - - - - (2,662,080) (2,662,080)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 2,105,203 10,013,800 2,256,000 40,776,126 (842,393) 49,947,533
Net income - - - - 225,127 225,127
Preferred stock cash dividends
($.425 per share) - - - - (958,800) (958,800)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 1998 2,105,203 $ 10,013,800 2,256,000 $ 40,776,126 (1,576,066) 49,213,860
========== ============ ============ ============ ============ ============
</TABLE>
3
<PAGE> 6
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 225,127 681,262
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment 1,118,575 693,489
Amortization of deferred costs 16,599 20,000
Equity in income of hotel limited partnerships,
net of distributions received of $776,883 in 1997 12,169 848,906
Gain on sale of land (5,984) -
Decrease in federal income tax receivable 517,553 -
Change in accrued revenue and expenses, net (284,514) (100,219)
------------ ------------
Net cash provided by operating activities 1,599,525 2,143,438
------------ ------------
Cash flows from investing activities:
Property and equipment additions (681,329) (192,749)
Proceeds from sale of land 97,624 -
Non-operating distributions from hotel limited partnerships - 791,481
Net repayments from hotel limited partnerships 40,800 45,369
Deferred costs and other assets (22,095) (72,260)
Acquisition of hotels from affiliated entities - (29,283,605)
Acquisition and conversion costs of other operating hotels - (677,130)
------------ ------------
Net cash used by investing activities (565,000) (29,388,894)
------------ ------------
Cash flows from financing activities:
Proceeds of long-term debt - 10,277,749
Repayments of long-term debt (336,959) (14,550,036)
Repayments of revolving line of credit - (2,750,000)
Proceeds from issuance of preferred stock - 41,008,583
Cash dividends on preferred stock (958,800) -
Fractional common shares redeemed - (16,267)
------------ ------------
Net cash provided (used) by financing activities (1,295,759) 33,970,029
------------ ------------
Net change in cash and cash equivalents (261,234) 6,724,573
Cash and cash equivalents at beginning of year 11,126,602 1,994,751
------------ ------------
Cash and cash equivalents at end of period $ 10,865,368 8,719,324
============ ============
Supplemental information:
Interest paid $ 1,263,901 636,000
Income taxes paid $ - 23,000
Debt assumed to acquire property and equipment $ - 62,060,000
</TABLE>
4
<PAGE> 7
SIGNATURE INNS, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the interim period are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the financial statements included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
The 1997 pro forma statement of operations was prepared assuming the completion
of the Offering and the acquisition of the 23 hotels had occurred at the
beginning of 1997. The pro forma information is presented for supplemental
disclosure purposes and is not necessarily indicative of what would have
occurred if the acquisitions had taken place on that date. The pro forma
information also does not purport to project the Company's results of operations
for any future period.
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The equity method is used for the investment in a
hotel limited partnership in which the Company is a partner with 50% or less
ownership and does not exercise legal, financial and operation control.
Through January 1997, the Company used the equity method for its seventeen
unconsolidated hotel limited partnerships, which owned a total of twenty hotels.
Additionally, the financial statements of three 50% owned hotel affiliates,
which each owned one hotel, were included in the Company's consolidated
financial statements.
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 twenty-three hotel properties
previously owned by affiliated entities. The acquisitions included the purchase
of the limited partners' interest in the unconsolidated hotel limited
partnerships and also the purchase of the remaining interest in the three 50%
owned and consolidated hotel affiliates.
Two additional company-owned hotels, which were acquired from nonaffiliates and
converted to Signature Inns, began operations in February 1997 (Louisville East)
and July 1997 (Springfield). The Springfield hotel was acquired in August 1996
and operations were closed from January to July 1997 to undergo the conversion
to a Signature Inn. The Signature Inn Carmel, owned by an unconsolidated limited
partnership, began operations in February 1997.
During the third and fourth quarters of 1997, the Company completed a hotel
improvement program designed to improve the competitive position of its
properties and certain operating cost efficiencies. The program included the
addition of hospitality centers, including a microwave and
mini-refrigerator/freezer, in over 50% of the guestrooms. Additionally, all
guestrooms were equipped with in room coffee makers, iron and ironing boards,
and a second telephone with a speaker phone and data port. Operating cost
efficiency programs included the redesign of the Breakfast Express area and the
replacement of commercial area lighting with high efficiency light fixtures.
6
<PAGE> 9
RESULTS OF OPERATIONS
The following is a discussion of the results of the Company's operations for the
three months ended March 31, 1998 and 1997.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Hotel Revenues. Revenues are principally derived from the rental of guestrooms.
Other hotel revenues consist of meeting room rentals, charges to guests for
long-distance telephone service and vending commissions. Hotel revenues of
$8,993,000 for 1998 represented a $1,373,000 increase compared to 1997. Hotel
revenues increased due to a full three months of operating results during 1998
from the twenty previously unconsolidated Signature Inn hotels acquired on
January 24, 1997, the addition of the Louisville East hotel in February 1997 and
the opening of the Springfield hotel in July 1997.
Management and Franchise Fees. Revenue from management and franchise fees were
earned from unconsolidated partnership owned hotels prior to the acquisition by
the Company. These fees decreased $127,000 for 1998 compared to 1997 due to the
absence of fee income earned subsequent to January 24, 1997 from the hotels
acquired by the Company, offset partially by fee income from Signature Inn
Carmel which began operations February 1997.
Direct Hotel Expenses. Direct hotel expenses include costs associated with the
operations of the hotels including: compensation and benefit costs, room
supplies, administrative costs, maintenance, marketing, utilities and property
taxes. Direct hotel expenses for 1998 increased $1,300,000 compared to 1997.
Direct hotel expenses increased due to a full three months of operating results
during 1998 from the twenty previously unconsolidated Signature Inn hotels
acquired on January 24, 1997, the addition of the Louisville East hotel in
February 1997 and the opening of the Springfield hotel in July 1997. As a
percent of hotel revenues, direct hotel expenses increased from 53.9% to 60.1%.
Depreciation, Amortization and Retirements. Depreciation, amortization and
retirements increased $417,000 for 1998 compared to 1997 resulting from the
property and equipment and deferred cost increases associated with the acquired
hotels.
Corporate Expenses. Corporate expenses include the costs of general management,
office rent, professional fees and other administrative expenses. Corporate
expenses for 1998 were $722,000 which represented a $48,000 increase compared to
1997. This 7.0% increase is attributable to increased professional fees and
general office related expenses incurred during the ordinary course of business.
Equity in Income of Hotel Limited Partnerships. Equity in income of hotel
limited partnership represents the Company's share of the unconsolidated
partnerships' income or loss. The 1998 increase of $60,000 is due to the absence
of the Company's pro rata share of the acquired hotels subsequent to January 24,
1997.
7
<PAGE> 10
Interest Income and Expense. Interest income for 1998 increased compared to 1997
as a result of increased investable cash balances maintained during 1998. The
increase in interest expense for 1998 is due to additional debt assumed by the
Company in connection with the acquired hotels.
Other. A land sale of a tract of land adjacent to a hotel resulted in the
recognition of a gain of $6,000 in 1998.
Income Taxes. The Company's annual utilization of its net operating loss
carryforwards has been limited due to the preferred stock offering in January
1997. The effective income tax rate for 1998 is 34.6% compared to 35.3% for
1997.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its operations principally through cash
flow from operations. At March 31, 1998, the Company had $10,865,000 of cash and
cash equivalents compared to $11,127,000 at December 31, 1997.
Net cash provided by operating activities decreased to $1,600,000 in 1998
compared to $2,143,000 in 1997, a decrease of $543,000. This change was a result
of a $777,000 decrease in distributions received from hotel limited partnerships
offset by changes in other accrued revenue and expenses.
Net cash used by investing activities decreased to $565,000 in 1998 compared to
$29,389,000 in 1997, a decrease of $28,824,000. The primary element of change
from 1997 was the cash used in the hotel acquisitions during 1997 of
$29,284,000.
Net cash used by financing activities was $1,296,000 in 1998 compared to a net
cash provided of $33,970,000 in 1997. The change is due primarily to net
proceeds from the issuance of preferred stock during 1997 of $41,009,000 offset
partially by the $7,022,000 of net debt repayments during 1997.
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, debt service and preferred dividend
requirements over the next twelve months.
Included in current portion of long-term debt at March 31, 1998 is $6,237,000 of
mortgage obligations which mature in January 1999. The Company plans to
refinance these obligations with long-term mortgages prior to their maturity.
The Company may seek to obtain 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.
8
<PAGE> 11
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT.
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.
YEAR 2000
In 1997, the Company began the process of identifying and evaluating changes to
computer programs necessary to address the year 2000 issue. This issue affects
computer systems that have time-sensitive programs that may not properly
recognize the year 2000 which could result in system failures. The Company is
also communicating with software vendors and others with which it conducts
business to help identify and resolve the year 2000 issue. The total cost of
converting all internal systems has not been completely quantified, but it is
not expected to be a material cost to the Company. However, no estimates can be
made as to the potential adverse impact that may result from the failure of the
Company's software vendors and others with which it conducts business to become
year 2000 compliant. Costs related to the year 2000 issue are being expensed as
incurred.
9
<PAGE> 12
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
See note below
Item 2. Changes in Securities
See note below
Item 3. Default upon Senior Securities
See note below
Item 4. Submission of matters to a Vote of Security Holders
See note below
Item 5. Other information
See note below
Item 6. Exhibits and Report on Form 8-K
See note below
NOTE: The response to each of the above items 1, 2, 3, 4, 5 and 6 is not
applicable or is in the negative and does not require a response
pursuant to the instructions.
10
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURE INNS, INC.
Date May 11, 1998 By /s/ John D. Bontreger
---------------------- -----------------------------------
John D. Bontreger
President and C.E.O.
Date May 11, 1998 By /s/ Mark D. Carney
---------------------- -----------------------------------
Mark D. Carney
Senior Vice President Finance and C.F.O.
Date May 11, 1998 By /s/ Martin D. Brew
---------------------- -----------------------------------
Martin D. Brew
Treasurer and Controller
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,865,368
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,156,242
<PP&E> 119,939,960
<DEPRECIATION> 11,320,680
<TOTAL-ASSETS> 124,032,730
<CURRENT-LIABILITIES> 11,564,115
<BONDS> 63,254,755
40,776,126
0
<COMMON> 10,013,800
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 124,032,730
<SALES> 0
<TOTAL-REVENUES> 9,027,202
<CGS> 0
<TOTAL-COSTS> 7,260,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,564,945
<INCOME-PRETAX> 344,231
<INCOME-TAX> 119,104
<INCOME-CONTINUING> 225,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,127
<EPS-PRIMARY> (.35)
<EPS-DILUTED> 0
</TABLE>
