<PAGE> 1
ANNUAL REPORT
[PICTURE OF SIGNATURE INN]
97 SIGNATURE
INN
<PAGE> 2
To Our Shareholders:
The year 1997 was a profitable and productive one for our Company with a
number of significant accomplishments. We added two Company-owned and one
venture-owned Signature Inns during 1997. The Signature Inn & Conference Center
located in Springfield, Illinois became fully operational in October 1997. We
purchased this hotel in the third quarter of 1996 and completed a substantial $2
million renovation and conversion. Additionally, the Company acquired a second
hotel located in Louisville, Kentucky during the first quarter of 1997. This
hotel was two years old and required minimal capital to convert to a Signature
Inn. The newly constructed Signature Inn hotel in Carmel, Indiana is owned by a
venture in which our Company is the 40% general partner.
For 1997, total pro forma revenues increased 3.2% to $41.4 million compared
with $40.1 million reported in 1996. Pro forma pre-tax income increased 6.8% to
$6.2 million from $5.8 million a year ago. Pro forma earnings per common share
increased to $0.59 per share in 1997 compared to $0.26 per share in the prior
year. The hotels ADR (average daily rate) increased to $58.35 in 1997 compared
to $57.02 in 1996 while the occupancy rate declined to 64.7% in 1997 from 65.9%
in 1996.
With new hotel competition in many of our markets, we focused significant
energies during 1997 toward improving our product. We added in-room hospitality
centers which include a microwave and refrigerator/freezer, coffee makers, irons
and ironing boards, a 2nd telephone and complimentary popcorn in the lobby
during the evening hours. The combination of our existing product and these new
amenities creates a unique "suite like" Guest room at a moderate price. We
believe these improvements will position us to maintain and grow market share in
our respective markets. Additionally, we enclosed the swimming pools at two
hotels and converted one hotel to a "Signature Inn and Suites" by converting a
number of Guest rooms to suites, adding a convenience store and a guest laundry.
To improve operating margins, during 1997 we initiated several new
programs. We implemented a "pay by room" incentive program for our housekeepers
as opposed to compensation on an hourly basis. We redesigned the presentation of
our "Breakfast Express" which allows greater opportunity for bulk purchasing of
breakfast items. Additionally, to reduce energy consumption costs we retrofitted
our hotel commercial areas with energy efficient lighting and we reduced our
hotel laundry volume by providing our stayover Guests with optional levels of
daily housekeeping and linen services.
We entered 1998 in sound financial condition. At December 31, 1997 we had
total assets of $125 million, including cash of $11 million, and $50 million of
shareholders equity. In January 1997, the Company completed a public offering of
cumulative convertible preferred stock and utilized a portion of the $40.8
million net proceeds, along with other sources of funds, to acquire the 23
existing Signature Inns previously owned by affiliated partnerships.
While the strong economy is promoting travel and demand for hotel rooms, it
is also generating significant new room supply as evidenced by a small decline
in occupancy. In the face of this challenge, we are committed to maintaining a
competitive edge and a fundamentally strong company through improving our
product, maintaining a solid balance sheet and investing in growth opportunities
on a very selective basis.
Thank you for your continued support.
Sincerely,
JOHN D. BONTREGER SIGNATURE
John D. Bontreger
President and Chairman
April, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- --------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1997 1996
------------------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Hotel revenues................................ $ 39,938,000 5,504,000 41,325,000 40,123,000
Fee income.................................... 208,000 3,062,000 76,000 --
Total revenues................................ 40,146,000 8,566,000 41,401,000 40,123,000
EBITDA........................................ 15,306,000 3,275,000 15,518,000 14,530,000
Pretax net income............................. 6,325,000 1,876,000 6,162,000 5,767,000
Net income before preferred stock dividends... 5,175,000 1,659,000 5,070,000 4,389,000
Net income applicable to common stock......... 1,554,000 1,659,000 1,235,000 554,000
EPS........................................... 0.74 0.79 0.59 0.26
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents..................... 11,127,000 1,995,000
Property and equipment, net................... 108,671,000 10,358,000
Total assets.................................. 124,828,000 20,611,000
Total debt.................................... 71,218,000 12,317,000
Shareholders' equity.......................... 49,948,000 6,662,000
Interest coverage (EBITDA to interest
expense).................................... 2.91 3.95
Debt to total assets.......................... 57% 60%
</TABLE>
<PAGE> 3
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, 1997
COMMISSION FILE NUMBER 0-9659
SIGNATURE INNS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
INDIANA
------------------------------------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
35-142996
------------------------------------------------------
(I.R.S. EMPLOYER IDENTIFICATION NO.)
250 EAST 96TH STREET, SUITE 450,
INDIANAPOLIS, INDIANA
------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
46240
------------------------------------------------------
(ZIP CODE)
Registrant's telephone number (317) 581-1111
-------------------------------------------------------------
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 [ ]
Check of 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: $40,146,000
Aggregate Market Value of Voting Stock Held by Non-Affiliates: (Computed on
average price as of March 24, 1998.) $8,621,669.
Total Shares of Common Stock Outstanding as of March 24, 1998: 2,105,203
Documents Incorporated By Reference: The Signature Inns, Inc. 1998 Annual
Meeting of Shareholders Notice and Proxy Statement is incorporated by reference
into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 4
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 owns and operates a total of 26
Signature Inn hotels located in six Midwestern states. The Signature Inn chain
of hotels is classified in the "mid-scale chain without food and beverage"
segment of the hotel industry. The Company has three, wholly-owned subsidiary
corporations, each of which is described briefly below.
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, in the
aggregate, a total of 24 Signature Inn hotels (having a total of 2,816 rooms),
23 of which were open and operating on January 24, 1997. All hotels were
operated under long-term management and franchise agreements between the
affiliated partnerships and 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 the exercise of over-allotment options granted to the underwriters.
Net proceeds to the Company from the Offering were $40.8 million.
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 24
hotel properties previously owned by affiliated partnerships. The Company
continues as the general partner of the partnership which owns the 24th hotel.
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 represented by the assumption or
replacement by the Company of outstanding first mortgage debt on the hotels.
During 1997, the Company completed the acquisition and renovation of two
additional hotels, both Best Westerns, located in Springfield, Illinois and
Louisville (East), Kentucky. Both hotels have been converted to Signature Inns,
but the Louisville (East) hotel continues to be a member of the Best Western
reservation system. The addition of these two hotels increased the chain to 26
hotels.
Currently, the Company has no hotels under construction and only one site
under contract.
P & N Corporation ("P&N"), a wholly-owned subsidiary of the Company, was
organized in 1993 and acts as the sole general partner of: (a) the Peoria/Normal
Signature Limited Partnership, which owns and operates the Normal and Peoria,
Illinois, Signature Inn hotel properties; (b) the Knoxville Signature Limited
Partnership, which owns and operates the Knoxville, Tennessee, Signature Inn
hotel property; and, (c) Signature Meridian Limited Partnership, which owns and
operates the Carmel, Indiana, Signature hotel property. The Company is the sole
limited partner in each of those partnerships, except for Signature Meridian
Limited Partnership, whose sole limited partner is unrelated to the Company.
S.I.E. Corporation, a wholly owned subsidiary of the Company, was organized
in 1995 and owns the Indianapolis East Signature Inn hotel property. SI
Springfield Corporation, a wholly-owned subsidiary of the Company, was organized
in 1996 and owns the Springfield, Illinois Signature Inn hotel property.
Each of the Company's subsidiaries is an Indiana Corporation. Management of
those subsidiaries is essentially the same as the Company's.
2
<PAGE> 5
The principal offices and places of business of the Company and its
subsidiaries 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 and limited
partnerships, 25 hotel properties (23 acquired on January 24, 1997; one in
Springfield, Illinois, acquired on August 27, 1996; and, one in Louisville,
Kentucky, acquired on February 19, 1997) and, through a subsidiary, is the
general partner of an Indiana limited partnership which owns an eighty-one room
Signature Inn hotel property in Carmel, Indiana. The 26 hotel properties
operated by the Company comprise an aggregate of 3,059 rooms.
Listed on the following table are the location, year opened and number of
rooms of each of the Company's hotel properties.
<TABLE>
<CAPTION>
NO.
YEAR OF
PROPERTY LOCATION OPENED ROOMS
-------- -------- ------ -----
<S> <C> <C> <C>
Signature Inn -- Indianapolis
Northwest................... I-465 & Michigan Road, Indianapolis, Indiana 1981 141
Signature Inn -- Fort Wayne... I-69 & State Road 3, Fort Wayne, Indiana 1982 102
Signature Inn -- Castleton.... I-465 & 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)..................... I-75 & Sharonville Road, Sharonville, Ohio 1985 130
Signature Inn -- Cincinnati
(Northeast)................. I-71 & Mason-Montgomery Road, Cincinnati, Ohio 1985 99
Signature Inn -- Southport.... I-65 & Southport Road, Indianapolis, Indiana 1985 101
Signature Inn -- Indianapolis
East........................ I-465 & East Washington Street, Indianapolis, 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 150
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
South....................... 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 119
Signature Inn -- Knoxville.... I-75 & Cedar Bluff Road, Knoxville, Tennessee 1989 124
Signature
Inn -- Springfield.......... I-55 & Stevenson Drive, Springfield, Illinois 1997 124
Signature Inn -- Carmel....... I-465 & U.S. 31, Carmel, Indiana 1997 81
Signature Inn -- Louisville
East........................ I-64 & Blankenburger Road, Louisville, Kentucky 1997 119
-----
3,059
</TABLE>
Signature Inn-Carmel is managed by the Company pursuant to a Management
Agreement entered between the Company and Signature Meridian 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 activities, 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 Agreement, including
reimbursement for
3
<PAGE> 6
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 3.3 acre parcel of unimproved real estate
located in Nashville, Tennessee.
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, speaker phones with data ports and business centers.
The hallmarks of the Signature chain are the friendliness of Signature Inn
hotel staffs and the cleanliness of Signature Inn hotel rooms and related
facilities. The Company's Legendary Service Program is designed to ensure the
selection, training and continuous supervision of a capable, well-groomed and
highly motivated staff of hotel employees who, at all levels, exemplify the
"whatever it takes" attitude toward serving the needs of Signature Inn hotel
guests. The Company's ongoing refurbishing efforts, guest comment card
evaluations and "mystery guest inspection" programs all combine to ensure a
high-level of consistency and quality. The attractive architectural design and
landscaping of Signature Inn hotels 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:
<TABLE>
<S> <C>
* Business center with PC and printer * Cable TV and a movie channel
* Breakfast Express(R) * USA Today delivered to the room
* Individual storage facilities for guests * Large, well-lighted desks
* Guest room voice mail * FAX and copy services
* Modem ports on telephones * Interview centers
* Second in-room phone with speaker * The Wall Street Journal
* Express check-out service * Free local telephone calls
* Swimming pool * In-room coffee makers
* In-room hospitality centers with microwave * Iron and ironing boards
and mini-refrigerator/freezer * Complimentary popcorn
</TABLE>
Additional features include fitness centers at twelve hotels and airport
shuttle service at seven hotels. Signature Inn hotels without fitness centers
negotiate arrangements with nearby health clubs and fitness centers
4
<PAGE> 7
for the use of their facilities by hotel guests. In addition, hotel management
typically makes arrangements with nearby restaurants for the hotel's guests to
qualify for discounts by showing their guest room key card.
Designed with the convenience and comfort of its guests in mind, a typical
Signature Inn hotel incorporates a large two-story atrium and a bright,
well-appointed and richly decorated lobby and registration area. Most Signature
Inn hotels contain approximately 120 spacious, quiet and comfortably furnished
guest rooms, averaging 312 square feet in size. Signature Inn hotels are located
near interstate highways, restaurants and business and leisure travelers'
destination points, such as business parks, office buildings and local
attractions.
Approximately 50% of the rooms in a typical Signature Inn are "Signature
Rooms," which are designed specifically for the business traveler. These rooms
feature a queen or king sized bed, a well-lighted 12-foot work center and a
recliner. All other rooms feature two double beds or two queen sized beds and
appeal primarily to families and other leisure travelers. Over 70% of the rooms
in a typical Signature Inn hotel are designated as "non-smoking."
Each Signature Inn hotel devotes an average of 2,000 square feet to meeting
rooms, which management believes substantially exceeds the meeting room space
offered by most of the Company's competitors. Consistent with Signature's
value-oriented approach, a TV monitor, VCR, projection screen, flip chart and
meeting room "survival kit" containing essential supplies such as pencils, name
tags and extension cords, are provided free of charge.
The Company has long recognized the importance of guest safety and security
in the design of Signature Inn hotels and in the special services offered by
Signature's hotel staff. All Signature Inn hotels have interior corridors,
electronic key locks, a deadbolt lock system in all guest rooms and security
cameras which 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, through the elimination of full service
management-intensive facilities and services, such as restaurant or cocktail
lounges, banquet centers and room service, the Company will be able to deliver a
hotel "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 a significantly lower break-even threshold 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 from 1992 to
1995. According to Coopers & Lybrand Hospitality Directions, room demand growth
and room supply growth have increased in 1995, 1996 and 1997. Occupancy has
remained relatively stable while ADR has increased consistently throughout the
lodging industry from 1995 through 1997. In 1995, 1996 and 1997, Occupancy
changed .5%, -.1% and -1.0%, respectively, while ADR increased 4.8%, 6.6% and
6.2% respectively.
Mid-Scale Chain 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: upper upscale; upscale ; mid-scale
with food and beverage; mid-scale without food and beverage; and economy .
Signature Inn hotels are in the mid-scale without food and beverage segment of
the hotel industry, as are such other hotel chains as Hampton Inn, Fairfield
Inn, Holiday Inn Express, LaQuinta Inn, Drury Inn and Comfort Inn.
The mid-price, limited service segment of the lodging industry emerged in
the mid-1980's. 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
5
<PAGE> 8
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, and economy properties.
Occupancy, ADR and RevPAR Comparisons. Smith Travel Research groups U.S.
hotels by nine geographical regions. All but five of Signature's 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 96% 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 Company's
26 hotels, mid-scale chains without food and beverage in the East North Central
Region and all hotels in the East North Central Region for the period from 1993
through 1997:
OCCUPANCY(1)
<TABLE>
<CAPTION>
EAST NORTH
CENTRAL REGION: EAST NORTH
SIGNATURE INN MID-SCALE CHAINS CENTRAL REGION
YEAR HOTELS WITHOUT FOOD & BEVERAGE ALL HOTELS
- ---- ------------- ----------------------- --------------
<S> <C> <C> <C>
1993 66.2% 69.2% 59.5%
1994 67.8% 72.1% 62.9%
1995 67.2% 70.7% 63.1%
1996 65.9% 67.8% 62.0%
1997 64.7% 66.2% 61.0%
</TABLE>
- ---------------
(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.
ADR(2)
<TABLE>
<CAPTION>
EAST NORTH
CENTRAL REGION: EAST NORTH
SIGNATURE INN MID-SCALE CHAINS CENTRAL REGION
YEAR HOTELS WITHOUT FOOD & BEVERAGE ALL HOTELS
- ---- ------------- ----------------------- --------------
<S> <C> <C> <C>
1993 $50.48 $47.43 $56.42
1994 $53.45 $49.92 $58.55
1995 $55.81 $53.67 $61.35
1996 $57.02 $57.03 $65.75
1997 $58.35 $59.81 $69.64
</TABLE>
- ---------------
(2) ADR represents total room revenues divided by the total number of rooms
sold.
6
<PAGE> 9
REVPAR(3)
<TABLE>
<CAPTION>
EAST NORTH
CENTRAL REGION: EAST NORTH
SIGNATURE INN MID-SCALE CHAINS CENTRAL REGION
YEAR HOTELS WITHOUT FOOD & BEVERAGE ALL HOTELS
- ---- ------------- ----------------------- --------------
<S> <C> <C> <C>
1993 $33.42 $32.81 $33.57
1994 $36.24 $35.99 $36.83
1995 $37.50 $37.95 $38.71
1996 $37.55 $38.65 $40.76
1997 $37.77 $39.62 $42.48
</TABLE>
- ---------------
(3) RevPAR represents Occupancy multiplied by ADR for the reported period.
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 5, 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.
Three other marks, which are used by the Company in its hotel operations,
namely, "We Help You Get Down to Business," "Sincerely Yours," and "There Is
Something Personal About a Signature," were registered with the United States
Patent and Trademark Office on October 12, 1982, October 23, 1990 and April 30,
1991, respectively. Most recently, the mark, "Breakfast Express," was registered
with the United States Patent Trademark Office on November 3, 1992.
Currently, the Company has two trademark applications pending before the
United States Patent and Trademark Office. Those applications are for
registration for the marks "Signature Suites" and "Signature Inn and Suites,"
both of which were filed on May 30, 1997. Patent office actions have been
received and responded to by the Company, and registration of the marks is
expected imminently.
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 1997, approximately 65% of Signature Inn guests were
business travelers and approximately 35% were leisure and other nonbusiness
travelers. Business travelers constitute the primary source of weekday room
sales throughout the year while leisure travel is generally the major source of
room sales on weekends. However, during the summer vacation months, leisure
travel demand is also strong throughout the week.
The Company offers a frequent stay program, the Signature Club, to business
travelers who may otherwise not qualify for a volume discount offered to
corporations and travel agency consortiums. The membership is extended free of
charge to travelers who have stayed at least 10 nights at a Signature Inn hotel.
Club benefits include 20% off rack 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 6% of the Company's chain-wide room nights for 1997 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
7
<PAGE> 10
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 Inn 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 20% 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 (20%
discount), and each hotel subscribes to the Official Appointment Designation in
all of the applicable AAA Tour Books. Approximately 4% of 1997 chain-wide room
nights came from AAA members.
All Signature Inn hotels feature an outdoor swimming pool (or indoor pool
at seven 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.
The Company 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 1997, 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. The Company 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 the
8
<PAGE> 11
Company's 26 Signature Inn hotels 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' 1997 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 existing hotels and new hotels.
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 200 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 Inn
hotels 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. The Company establishes reserve funds in
connection with the operation of its hotels for refurbishing which are 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.
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.
9
<PAGE> 12
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 customer would not have a material adverse effect
on the Company. All raw materials utilized by the Company 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.
EARLIER RESTRUCTURINGS
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 related
indebtedness) 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 3. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits arising in the normal course of
its 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.
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.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
On January 21, 1997(1), the shares of the Company's Common Stock were first
listed on the NASDAQ National Market System under the symbol "SGNS." Prior to
January 21, 1997, shares of the Company's Common Stock were not actively traded
in any established market, and Paragon Capital Corporation of Boca Raton,
Florida, was the only broker-dealer which undertook to make a market in and to
provide quotes for the Company's Common Stock.
The range reported of high and low bid (for 1996) and closing (for 1997)
prices per share 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(2) LOW(2)
------- ------- ------
<S> <C> <C>
12/31/97.............................................. $ 6.875 $4.50
9/30/97.............................................. $ 7.00 $5.00
6/30/97.............................................. $ 6.875 $5.375
3/31/97.............................................. $ 9.00 $6.875
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
</TABLE>
- ---------------
(1) On the same date, the shares of the Company's $1.70 Cumulative Convertible
Preferred Stock, Series A also were listed on the NASDAQ, National Market
System under the symbol "SGNSP."
(2) Quotations may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
As of the date of this Form 10-KSB, there are approximately 4,400 record
holders of the Company's Common Stock.
Since its inception in 1978, the Company has not declared or paid any cash
dividends on its Common Stock. Currently, the Company's ability to pay cash
dividends on its Common Stock is restricted under the terms of loan agreements
between the Company and its lendors as well as by the terms of the Company's
$1.70 Cumulative, Convertible Preferred Stock, Series A, as provided in the
Company's Articles of Incorporation, as amended.
ITEM 6. 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 investments in
hotel limited partnerships in which the Company is a partner with 50% or less
ownership and does not exercise legal, financial and operational control.
During 1996 and 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.
11
<PAGE> 14
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' interests in the unconsolidated hotel limited
partnerships and also the purchase of the remaining interests 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. A third newly developed Signature Inn (Carmel)
owned by an unconsolidated limited partnership began operations in February
1997.
During 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.
RESULTS OF OPERATIONS.
The following is a discussion of the results of the Company's operations
for the years ended December 31, 1997 and 1996.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
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 $39,938,000 for 1997 represented a $34,434,000 increase compared to
1996. Hotel revenues increased due to the acquisition of twenty previously
unconsolidated Signature Inn hotels on January 24, 1997, the acquisition of the
Louisville East hotel in February 1997 and the acquisition of the Springfield
hotel in August 1996. The three previously consolidated hotels experienced
decreased revenues of $328,000 resulting from a lower occupancy achieved during
1997, offset partially by increased average daily room rates.
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 $2,854,000 for 1997 compared to
1996 due to the absence of fee income earned subsequent to January 24, 1997,
offset by fee income from a new unconsolidated limited partnership owned hotel
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 1997 increased $19,311,000 compared to 1996.
Direct hotel expenses from the three consolidated hotels increased $183,000,
with the remainder of the increase attributable to the acquired hotels. As a
percent of hotel revenues, direct hotel expenses decreased from 58.2% to 56.4%.
Depreciation, Amortization and Retirements. Depreciation, amortization and
retirements increased $3,148,000 for 1997 compared to 1996 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 1997 were $2,630,000 which represented a $319,000
increase compared to 1996. This 13.8% increase is attributable to increased
employee costs and general office related expenses incurred during the ordinary
course of business.
12
<PAGE> 15
Equity in Income of Hotel Limited Partnerships. Equity in income of hotel
limited partnerships represents the Company's share of the unconsolidated
partnerships' income or loss. The 1996 equity in income of hotel limited
partnerships was attributable to the acquired hotels. The 1997 decrease in
income of $645,000 is due to the absence of the Company's pro rata share of the
acquired hotels subsequent to January 24, 1997, offset slightly by the Company's
pro rata share of earnings from Carmel.
Interest Income and Expense. Interest income for 1997 increased compared
to 1996 as a result of increased investable cash balances maintained during 1997
resulting mainly from the preferred stock sale proceeds, offset by the absence
of $77,000 of interest earned from the Company's loan participation agreements
in three hotels during 1996. The increase in interest expense for 1997 is due to
additional debt assumed by the Company in connection with the acquired hotels.
Other. Land sales resulted in the recognition of a gain of $353,000
compared to a loss of $27,000 for 1997 and 1996, respectively. Also, in 1996
minority interest in earnings of consolidated partnerships was $346,000.
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. Accordingly, the effective income tax rate for 1997 of 18.2% is
substantially higher than the income tax rate of 11.5% in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Hotel Revenues. 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.
Management and Franchise Fees. 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.
Direct Hotel Expenses. Direct hotel expenses for 1996 represented a
$1,342,000 increase compared to 1995. Direct 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, Amortization and Retirements. Depreciation, amortization and
retirements increased $151,000 for 1996 compared to 1995 due primarily to the
consolidation of Indianapolis East.
Corporate Expenses. Corporate expenses for 1996 increased $146,000 due
primarily to the establishment of additional hotel regional director positions
late in 1995.
Equity in Income of Hotel Limited Partnerships. 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 and Expense. 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.
13
<PAGE> 16
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its operations principally through
cash flow from operations and borrowings under certain credit facilities. At
December 31, 1997, the Company had $11,127,000 of cash and cash equivalents
compared to $1,995,000 at December 31, 1996.
Net cash provided by operating activities increased to $8,290,000 in 1997
compared to $2,870,000 in 1996, an increase of $5,420,000. The increase was a
result of earnings, excluding non-cash items (depreciation and amortization)
from the ownership of acquired hotels and an increase in distributions received
from hotel limited partnerships, offset by the reduction in management and
franchise fees.
Net cash used by investing activities increased to $37,670,000 in 1997
compared to $2,512,000 in 1996, an increase of $35,158,000. The primary element
of change from 1996 was the cash used in the acquisitions. Net cash used for
property and equipment additions of $4,166,000 in 1997, an increase of
$3,670,000 compared to 1996, included the 1997 hotel improvement program and
ongoing hotel refurbishing projects.
Net cash provided by financing activities was $38,512,000 in 1997 compared
to a net cash used of $382,000 in 1996. The change is due primarily to net
proceeds from the issuance of preferred stock during 1997 of $40,776,000, offset
partially by the payment of $2,662,000 of preferred stock dividends.
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.
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.
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, the 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.
SUPPLY AND DEMAND
In some years, construction of lodging facilities in the United States
resulted in an excess supply of available rooms, and the oversupply had an
adverse effect on occupancy levels and room rates in the industry. Although the
relationship between supply and demand has been favorable in recent years, the
lodging industry may be adversely affected in the future by (i) an oversupply of
available rooms, (ii) national and regional economic conditions, (iii) changes
in travel patterns, (iv) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and costs, and
(v) the availability of credit.
14
<PAGE> 17
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.
ITEM 7. FINANCIAL STATEMENTS.
The following financial information is included on the following pages
indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations....................... 16
Consolidated Balance Sheets................................. 17
Consolidated Statements of Shareholders' Equity............. 18
Consolidated Statements of Cash Flows....................... 19
Notes to Consolidated Financial Statements.................. 20
Report of Independent Auditors.............................. 27
</TABLE>
15
<PAGE> 18
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------------------------- -------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Guestroom revenues..................... $38,287,318 $ 5,241,230 $39,587,502 $38,331,280
Other hotel revenues................... 1,650,611 262,656 1,737,233 1,791,920
Management and franchise fees.......... 208,166 3,061,958 76,082 --
----------- ----------- ----------- -----------
Total revenues................. 40,146,095 8,565,844 41,400,817 40,123,200
----------- ----------- ----------- -----------
Operating costs and expenses:
Direct hotel expenses.................. 22,513,790 3,203,180 23,626,161 23,254,996
Depreciation, amortization and
retirements......................... 3,718,483 570,454 3,861,483 3,470,000
Corporate expenses..................... 2,629,930 2,311,326 2,629,930 2,311,326
----------- ----------- ----------- -----------
Total operating costs and
expenses..................... 28,862,203 6,084,960 30,117,574 29,036,322
----------- ----------- ----------- -----------
Operating income............... 11,283,892 2,480,884 11,283,243 11,086,878
----------- ----------- ----------- -----------
Other income (expense):
Equity in income of hotel limited
partnerships........................ (49,065) 596,190 20,779 --
Interest income........................ 542,613 206,835 542,613 339,538
Interest expense....................... (5,804,796) (1,035,340) (6,036,791) (5,632,456)
Other.................................. 352,564 (372,450) 352,564 (26,938)
----------- ----------- ----------- -----------
Income before income tax
expense...................... 6,325,208 1,876,119 6,162,408 5,767,022
Income tax expense....................... 1,150,000 216,893 1,092,333 1,378,000
----------- ----------- ----------- -----------
Net income..................... 5,175,208 1,659,226 5,070,075 4,389,022
Preferred stock dividends................ 3,620,880 -- 3,835,200 3,835,200
----------- ----------- ----------- -----------
Net income applicable to common
stock........................ $ 1,554,328 $ 1,659,226 $ 1,234,875 $ 553,822
=========== =========== =========== ===========
Basic and diluted earnings per
common share................. $ 0.74 $ 0.79 $ 0.59 $ 0.26
=========== =========== =========== ===========
Weighted average common shares
outstanding............................ 2,103,993 2,104,167 2,103,993 2,104,167
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
SIGNATURE INNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,126,602 $ 1,994,751
Restricted cash........................................... 529,212 284,292
Accounts receivable....................................... 702,891 86,594
Federal income tax receivable............................. 517,553 --
Other current assets...................................... 373,141 559,483
------------ ------------
Total current assets.............................. 13,249,399 2,925,120
Property and equipment, net................................. 108,670,976 10,358,333
Furniture and equipment cash reserves....................... 1,395,557 184,708
Hotel limited partnership investments....................... 833,107 5,539,457
Deferred costs and other assets, net........................ 678,599 1,603,461
------------ ------------
$124,827,638 $ 20,611,079
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... 1,606,390 238,765
Accounts payable.......................................... 743,086 544,199
Accrued property taxes.................................... 1,526,653 282,347
Accrued payroll........................................... 808,944 359,905
Other current liabilities................................. 583,525 137,905
------------ ------------
Total current liabilities......................... 5,268,598 1,563,121
Long-term debt, less current portion........................ 69,611,507 12,078,622
Other partners' equity...................................... -- 307,343
------------ ------------
Total liabilities................................. 74,880,105 13,949,086
------------ ------------
Shareholders' equity:
Cumulative convertible preferred stock (no par value;
5,000,000 shares authorized; 2,256,000 shares
issued)................................................ 40,776,126 --
Common stock (no par value; 25,000,000 shares authorized;
2,105,203 and 2,104,413 shares issued)................. 10,013,800 10,017,514
Accumulated deficit....................................... (842,393) (3,355,521)
------------ ------------
Total shareholders' equity........................ 49,947,533 6,661,993
------------ ------------
$124,827,638 $ 20,611,079
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
----------------------- ----------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ----------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
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
========= =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,175,208 1,659,226
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment................. 3,669,251 538,274
Amortization of deferred costs......................... 46,805 32,180
Equity in income of hotel limited partnerships, net of
distributions received of $776,883 and $783,761....... 825,948 187,571
Other partners' equity in income....................... -- 345,512
(Gain) loss on sales of land........................... (352,564) 26,938
Increase in federal income tax receivable.............. (517,553) --
Change in accrued revenue and expenses, net............ (557,036) 80,514
----------- ----------
Net cash provided by operating activities............ 8,290,059 2,870,215
----------- ----------
Cash flows from investing activities:
Acquisition of hotels from affiliated entities............ (31,819,484) --
Acquisition and conversion costs of other operating
hotels................................................. (2,633,898) (1,788,304)
Property and equipment additions.......................... (4,165,978) (496,202)
Proceeds from sales of land............................... 521,701 210,018
Non-operating distributions from hotel limited
partnerships........................................... 791,481 --
Net repayments from (advances to) hotel limited
partnerships........................................... (238,831) 90,000
Deferred costs and other assets........................... (124,908) (527,543)
----------- ----------
Net cash used by investing activities................ (37,669,917) (2,512,031)
----------- ----------
Cash flows from financing activities:
Proceeds of long-term debt................................ 38,523,906 479,159
Repayments of long-term debt.............................. (35,302,356) (2,171,882)
(Repayments) advances on revolving line of credit......... (2,750,000) 1,650,000
Loan financing costs...................................... (491,044) (45,687)
Proceeds from issuance of preferred stock................. 41,199,997 --
Deferred offering costs................................... -- (423,871)
Cash dividends on preferred stock......................... (2,662,080) --
Issuance of common stock.................................. 9,553 208,875
Fractional common shares redeemed......................... (16,267) --
Distributions to other partners........................... -- (78,325)
----------- ----------
Net cash provided (used) by financing activities..... 38,511,709 (381,731)
----------- ----------
Net change in cash and cash equivalents..................... 9,131,851 (23,547)
----------- ----------
Cash and cash equivalents at beginning of year.............. 1,994,751 2,018,298
----------- ----------
Cash and cash equivalents at end of year.................... $11,126,602 1,994,751
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company developed and operates 26 Signature Inn hotels at December 31,
1997 located in six Midwestern states.
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 23 hotel properties previously owned by
affiliated entities.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The financial statements of three 50% owned
hotel affiliates are included in the Company's consolidated financial statements
through January 1997 (when the Company acquired the remaining 50% ownership
interests and liquidated the affiliates) and the results of the acquired hotel
properties since the date of acquisition. 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 does not exercise legal,
financial and operations control.
The affiliate owned hotels acquired by the Company in January 1997 were
accounted for as a purchase transaction. The Company's existing equity interests
were carried over at their historical basis. The aggregate purchase price was
$84.1 million, including the assumption or replacement of $52.2 million of
affiliate hotel debt.
The 1997 and 1996 unaudited pro forma statements of operations were
prepared assuming the completion of the Offering and the acquisition of the 23
hotels had occurred at the beginning of each year being presented. The unaudited
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 unaudited pro forma information also does not
purport to project the Company's 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 of the
hotels owned by hotel limited partnerships and are recognized as hotel revenues
are earned.
EARNINGS PER SHARE
In 1997, the Company adopted FAS 128 "Earnings Per Share" which provides
computation, presentation, and disclosure requirements for earnings per share
and supersedes Accounting Principles Board Opinion 15. Basic earnings per share
for 1997 and 1996 were computed by dividing net income applicable to common
stock by the weighted average shares of common stock outstanding (2,103,993 and
2,104,167 in 1997 and 1996, respectively). At December 31, 1997 and December 31,
1996, the Company had no dilutive securities.
CASH EQUIVALENTS
Cash equivalents represent highly liquid short-term investments with
initial maturities of three months or less.
20
<PAGE> 23
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
lives of 40 years for buildings, 15 to 20 years for land improvements and 3 to
10 years for furniture and equipment. Leasehold improvements are amortized on a
straight-line basis over the term of the related lease.
Land held for sale is carried at the lower of cost or estimated fair value
less selling costs.
HOTEL LIMITED PARTNERSHIP INVESTMENTS
Investments in hotel limited partnerships are recorded at the Company's
initial investment, increased by the Company's share of the partnership's
income, less distributions received.
DEFERRED COSTS
Fees and other costs incurred in obtaining long-term financing are
amortized on the straight-line basis over the term of the related loan.
Unamortized loan costs are charged to expense upon the early payment of the
related financing. Costs related to the issuance of the preferred stock were
charged to the related proceeds. Accumulated amortization amounted to $609,099
and $562,294 at December 31, 1997 and 1996, respectively.
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 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.
STOCK BASED COMPENSATION
In 1996, the Company adopted FAS 123 "Accounting for Stock Based
Compensation," which prescribes accounting and reporting standards for all
stock-based compensation plans. FAS 123 allows companies to continue using
existing methods for recognizing the expense of these plans and requires pro
forma disclosures in the financial statements of earnings per share using the
fair value method prescribed in the statement.
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.
IMPAIRMENT
The Company evaluates its real estate and partnership investments
periodically to assess whether any impairment indications are present, including
recurring operating losses and significant adverse changes in legal factors or
business climate that affect the recovery of recorded value. If any real estate
or partnership investments are considered impaired, a loss is provided to reduce
the carrying value to its estimated fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of long-term debt approximates its fair value because
the interest rates are currently at market. A reasonable estimate of the fair
value of the receivable from the hotel limited partnerships (note 3) is not
practicable without incurring excessive costs because there is no market for a
comparable instrument. The
21
<PAGE> 24
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying amounts of all other financial instruments approximate fair value
because of the short-term maturity of these items.
(2) PROPERTY AND EQUIPMENT
Property and equipment representing Company-owned hotels, corporate office
equipment and land held for sale or development are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Land........................................................ $ 14,514,555 1,210,500
Buildings................................................... 87,806,490 8,875,006
Leasehold and land improvements............................. 1,593,955 759,890
Furniture and equipment..................................... 14,269,631 4,164,663
Land held for sale or development........................... 698,450 674,833
------------ ----------
118,873,081 15,684,892
Accumulated depreciation.................................... 10,202,105 5,326,559
------------ ----------
$108,670,976 10,358,333
============ ==========
</TABLE>
(3) HOTEL LIMITED PARTNERSHIPS
Summary financial information for the hotel limited partnerships reported
on the equity method is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Hotel properties............................................ $ 3,894,265 67,833,883
Net current assets.......................................... 12,599 890,576
Deferred costs.............................................. 125,670 832,720
Long-term debt.............................................. (2,260,007) (56,760,169)
------------ ------------
Net assets................................................ 1,372,265 12,797,010
Less:
Equity of other partners............................... 823,358 10,503,698
Income not recognized..................................... -- 195,503
------------ ------------
Equity in limited partnerships.............................. 548,947 2,097,809
Receivables from limited partnerships, net.................. 284,200 3,441,648
------------ ------------
$ 833,107 5,539,457
============ ============
Revenues.................................................... 3,022,384 34,346,009
Operating expense........................................... (3,314,000) (31,479,752)
Nonrecurring items.......................................... 20,177,670 (2,890,000)
------------ ------------
Net income (loss)......................................... 19,886,054 (23,743)
Less other partners' share.................................. (19,935,119) (619,933)
------------ ------------
Equity in income (loss)................................ $ (49,065) 596,190
============ ============
</TABLE>
The nonrecurring items in 1997 represent the net gains from the sale of the
partnerships' hotels to the Company, which gains were allocated to the limited
partners. The nonrecurring items in 1996 represent write-downs of the hotel
properties of certain partnerships.
As of December 31, 1997 and 1996, net receivables from hotel limited
partnerships, classified as long-term investments, included $284,200 and
$517,987, respectively, of interest-bearing advances. At December 31, 1996, the
Company also had a $2,377,361 non-interest bearing note receivable from a
partnership which was dependent
22
<PAGE> 25
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on future cash flows of the partnership for repayment. In January 1997, upon
completion of the Offering and acquisition of hotel properties owned by
affiliated partnerships, the outstanding receivables from the partnerships were
satisfied in full.
Interest income on receivables from limited partnerships was $18,393 in
1997 and $142,640 in 1996.
(4) LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Hotel mortgages............................................. $71,165,741 9,556,169
Line of credit.............................................. -- 2,750,000
Other....................................................... 52,156 11,218
----------- -----------
71,217,897 12,317,387
Less current portion........................................ 1,606,390 238,765
----------- -----------
Long-term portion......................................... $69,611,507 12,078,622
=========== ===========
</TABLE>
The hotel mortgages are secured by hotels and land and bear interest at
rates ranging from 7.5% to 10.0% (8.9% weighted average interest rate at
December 31, 1997) through maturity dates ranging from 1999 to 2016.
At December 31, 1996, the revolving line of credit bears interest at prime
plus .50% (8.75% at December 31, 1996). The line of credit was paid in full in
January 1997 upon completion of the Offering.
The aggregate annual scheduled principal payments during the next five
years are: $1,606,000 in 1998, $10,079,000 in 1999, $1,533,000 in 2000,
$4,102,000 in 2001 and $1,742,000 in 2002.
Interest paid amounted to $5,723,000 and $1,040,000 in 1997 and 1996.
(5) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current..................................................... $ 1,150,000 216,893
Deferred.................................................... 1,329,000 500,000
Valuation allowance decrease................................ (1,329,000) (500,000)
----------- -----------
Total income expense...................................... $ 1,150,000 216,893
=========== ===========
</TABLE>
23
<PAGE> 26
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1996
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Hotel limited partnership investments....................... $ -- 1,229,000
Land held for sale or development........................... 315,000 580,000
Partnership advances........................................ -- 419,000
Net operating loss carry forwards........................... 947,000 1,486,000
Other....................................................... 6,000 529,000
----------- -----------
Gross deferred tax assets................................. 1,268,000 4,423,000
Less valuation allowances................................. (282,000) (1,611,000)
----------- -----------
Net deferred tax assets................................... $ 986,000 2,632,000
=========== ===========
Deferred Tax Liabilities:
Hotel properties, primarily depreciation.................... 986,000 37,000
Hotel limited partnerships.................................. -- 2,595,000
----------- -----------
Deferred tax liabilities.................................. $ 986,000 2,632,000
=========== ===========
</TABLE>
The following reconciles income tax expense at the federal statutory tax
rate with the effective rate:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Income taxes at the federal statutory rate.................. 34.0% 34.0%
State taxes, net of federal tax benefit..................... 6.0% 4.3%
Decreases in valuation allowance, principally arising from
the utilization of net operating loss carryforwards....... (21.8%) (26.7%)
----- -----
Effective income tax rate................................... 18.2% 11.6%
===== =====
</TABLE>
Income taxes paid amounted to $1,618,000 and $145,500 in 1997 and 1996,
respectively. At December 31, 1997, the net operating loss carryforwards for
income taxes, which expire in 2007, are approximately $2,800,000.
(6) SHAREHOLDERS' EQUITY AND EMPLOYEE STOCK PLANS
Immediately prior to the consummation of the Offering, the Board of
Directors authorized a 1-for-3.7 reverse common stock split, decreasing the
number of outstanding shares from 7,786,327 to 2,104,413. All share and per
share amounts have been retroactively restated to reflect the reverse stock
split. Shareholders subsequently voted to amend the articles of incorporation
and increase the authorized common shares to 25,000,000.
PREFERRED STOCK
The holders of the outstanding preferred stock are entitled to cumulative
dividends in the annual amount of $1.70 per share, when declared by the Board of
Directors. The aggregate cumulative unpaid preferred stock dividends of
$958,000, or $.425 per share, at December 31, 1997, were paid in January 1998.
Holders have the right to convert their shares into shares of common stock, at
any time, at the conversion ratio of approximately 2.08 shares of common stock
for each share of preferred stock. The preferred stock is not entitled to vote,
unless
24
<PAGE> 27
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company is in default in the payment of full dividends for six dividend
quarters. The preferred stock is redeemable at the option of the Company on or
after February 1, 2000, at the following redemption prices:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
February 1, 2000 to January 31, 2001........................ $20.97
February 1, 2001 to January 31, 2002........................ $20.72
February 1, 2002 to January 31, 2003........................ $20.49
February 1, 2003 to January 31, 2004........................ $20.24
February 1, 2004 and thereafter............................. $20.00
</TABLE>
SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan under which a dividend of one
preferred stock purchase right ("Right") was 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 become 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 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.
EQUITY INCENTIVE PLAN
Awards granted to directors, officers and employees of the Company under
the 1996 Equity Incentive Plan may be in the form of incentive stock options,
non-qualified stock options, or restricted stock grants until February 2006. No
more than 750,000 shares of common stock may be awarded as either stock options
or restricted stock grants, subject to adjustment in certain circumstances (the
"Available Shares"). Available Shares cannot exceed 10% of the total outstanding
shares of common stock and no more than 5% of the Available Shares may be
awarded in the form of restricted stock grants. Outside Directors are eligible
only for awards of restricted stock grants. The exercise price of the stock
options shall not be less than the fair market value of the Company's common
stock at the time of the grant. Each stock option becomes exercisable in
installments on the first, second and third anniversary of the grant and expire
10 years from the date of the grant.
A summary of stock option activity under the 1996 Equity Incentive Plan is
as follows:
<TABLE>
<CAPTION>
PRICE OPTIONS
----- -------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996............................ --
Granted................................................... $8.00 91,500
Exercised................................................. --
Forfeited................................................. $8.00 (2,500)
------
OUTSTANDING AT DECEMBER 31, 1997............................ $8.00 89,000
======
</TABLE>
During 1997, options for 2,295 shares granted under the 1986 Incentive
Stock Option Plan were exercised at $4.16 per share. The 1986 Incentive Stock
Option Plan expired on March 26, 1996.
STOCK BASED COMPENSATION
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock
25
<PAGE> 28
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options. Because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information is required as if the Company had accounted for its
employee stock options under the fair value method of FAS 123. The fair value of
these options was estimated using a Black-Scholes option pricing model with the
following assumptions for 1997: a risk-free interest rate of 5.75%; no dividend
yield; a volatility factor of the expected market price of the Company's common
stock of .39; and a weighted-average expected life of the options for nine
years.
Had compensation cost for the Company's stock option grants been determined
based on the fair market value consistent with the method of FAS 123, the
Company's net income would have been reduced by $164,000 or $.08 per common
share for 1997.
26
<PAGE> 29
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, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of 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, 1997 and 1996 and the results of operations and
cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 20, 1998
27
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information called for by Items 9-12 is incorporated by reference from
the Signature Inns, Inc. 1998 Annual Meeting of the Shareholders -- Notice and
Proxy Statement -- (to be filed pursuant to Regulation 14A not later than 120
days after the close of the fiscal year).
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS, COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACTS.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Exhibit Index required by Item 601 of Regulation S-B is as follows:
<TABLE>
<C> <S>
(3)(i) Amended and Restated Articles of Incorporation of Signature
Inns, Inc. (incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form SB-2 of the Company,
Registration No. 333-12735 (the "Form SB-2").
(3)(ii) Amended and Restated Code of Bylaws of Signature Inns, Inc.
(incorporated by reference to Exhibit 3.2 to Form SB-2.)
(4)(i) Specimen of Common Stock Certificate of Signature Inns, Inc.
(incorporated by reference to Exhibit 4.1 to the Form SB-2).
(4)(ii) Specimen of Preferred Stock Certificate of Signature Inns,
Inc. (incorporated by reference to Exhibit 4.2 to the Form
SB-2).
(4)(iii) Form of Rights Agreement adopted by the Board of Directors
of Signature Inns, Inc. (incorporated by reference to
Exhibit 4.3 to the Form SB-2).
(9) Voting Trust Agreement: None.
(10) Material Contracts: None.
(11) Statement re: Computation of per share earnings.
(13) Annual or quarterly reports: Not applicable
(16) Letter on change in certifying accountant: Not applicable.
(18) Letter on change in accounting principles: Not applicable.
(21) Subsidiaries of the Registrant: See page 3 of this Form
10-KSB.
(22) Published Report regarding matters submitted to vote: Not
applicable.
(23) Consent of Experts and Counsel: Not applicable.
(24) Power of Attorney: Not applicable.
(27) Financial Data Schedule:
(99) Additional Exhibits: None.
</TABLE>
28
<PAGE> 31
The Financial Statements as set forth under Item 7 are filed as a part of
this Report (see page 15 et seq.). All financial statements schedules are
omitted as they are either not applicable or the required information is
included in the financial statements or the notes thereto.
(b) The following reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report : None
29
<PAGE> 32
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
Chairman of the Board, President
Chief Executive Officer and
Secretary
ATTEST:
/s/ Mark D. Carney
- ---------------------
Senior Vice President, Chief Financial Officer
and Assistant Secretary
Date: March 25, 1998
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.
<TABLE>
<S> <C>
Date: March 25, 1998 /s/ JOHN D. BONTREGER
------------------------------------------------------------
John D. Bontreger, Chairman of the Board, President and
Chief Executive Officer, Secretary and Director of Signature
Inns, Inc.
Date: March 25, 1998 /s/ MARK D. CARNEY
------------------------------------------------------------
Mark D. Carney, Senior Vice President Finance, Chief
Financial Officer, Assistant Secretary and Director of
Signature Inns, Inc.
Date: March 25, 1998 /s/ BO L. HAGOOD
------------------------------------------------------------
Bo L. Hagood, Senior Vice President Hotel Operations and
Director of Signature Inns, Inc.
Date: March 25, 1998 /s/ DAVID R. MILLER
------------------------------------------------------------
David R. Miller, Vice President Sales and Marketing and
Director of Signature Inns, Inc.
Date: March 25, 1998 /s/ MARTIN D. BREW
------------------------------------------------------------
Martin D. Brew, Treasurer and Controller of Signature Inns,
Inc.
Date: March 25, 1998 /s/ STEPHEN M. HUSE
------------------------------------------------------------
Stephen M. Huse, Director of Signature Inns, Inc.
Date: March 25, 1998 /s/ GEORGE A. MORTON
------------------------------------------------------------
George A. Morton, Director of Signature Inns, Inc.
Date: March 25, 1998 /s/ RICHARD L. RUSSELL
------------------------------------------------------------
Richard L. Russell, Director of Signature Inns, Inc.
Date: March 25, 1998 /s/ WILLIAM S. WATSON
------------------------------------------------------------
William S. Watson, Director of Signature Inns, Inc.
</TABLE>
30
<PAGE> 33
[THIS PAGE INTENTIONALLY LEFT BLANK]
31
<PAGE> 34
[THIS PAGE INTENTIONALLY LEFT BLANK]
32
<PAGE> 35
BOARD OF DIRECTORS, OFFICERS AND ASSOCIATES
JOHN D. BONTREGER
President, Chief Executive Officer, Secretary and
Chairman of the Board
MARK D. CARNEY
Senior Vice President Finance, Chief Financial Officer
and Director
BO L. HAGOOD
Senior Vice President Hotel Operations and Director
DAVID R. MILLER
Vice President Sales & Marketing and Director
STEPHEN M. HUSE
Director
GEORGE A. MORTON
Director
RICHARD L. RUSSELL
Director
WILLIAM S. WATSON
Director
RICHARD E. SHANK
ORUS E. WEAVER
Director Emeriti
MARTIN D. BREW
Treasurer and Controller
PAUL A. (PAT) TAYLOR
Real Estate & Franchising
MICHAEL J. DAVIS
SCOTT W. STUART
JOHN A. WICK
Hotel Operations Regionals
JAMES W. GETCHELL
Purchasing, Refurbishing & Maintenance
MONTE A. GARDNER
Construction
MARIE T. LEIDING
National Sales
JOHN P. (PAT) WALTER
Human Resources
INVESTOR INFORMATION
CORPORATE OFFICE
Signature Inns, Inc.
One Parkwood Crossing
250 E. 96th Street, Suite 450
Indianapolis, IN 46240
(317) 581-1111
www.signature-inns.com
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
ANNUAL REPORT ON FORM 10-KSB
A copy of Signature Inns, Inc.'s 1997 annual report on Form 10-KSB as filed with
the Securities and Exchange Commission is available without charge to
shareholders upon written request to Mark D. Carney at the corporate address.
GENERAL COUNSEL
Thomas N. Eckerle, Attorney
Henderson, Daily, Withroe & Devoe
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Any change in shareholder address or certificate registration should be directed
to:
Harris Trust & Savings Bank
311 W. Monroe Street, 14th Floor
Chicago, IL 60606
(312) 360-5300
DIVIDENDS
Dividends on the $1.70 Cumulative Convertible Preferred Stock will be paid, when
declared, normally in the months of January, April, July and October.
ANNUAL MEETING
The annual meeting of Shareholders will be held at 2:00 p.m., local time on
Tuesday, May 19, 1998.
STOCK INFORMATION
The Company's Common Stock (symbol: SGNS) and Cumulative Convertible Preferred
Stock (symbol: SGNSP) trade on the Nasdaq Stock Market.
SUITE-LIKE AMENITIES
The majority of Signature Inn rooms now include a Hospitality Center with a
microwave and refrigerator/freezer. Plus, Guests can enjoy lots of other
amenities usually only found in a suite-type hotel.
- - Free Breakfast Express(R) Buffet
- - In-room Coffeemaker
- - Free USA Today/Wall Street Journal [M-F]
- - Free Guest Voice Mail
- - Two In-room Telephones [one speakerphone]
- - Free Local Calls
- - In-room Iron & Ironing Board
- - Free Evening Popcorn
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SIGNATURE INN LOCATIONS
[MAP OF SIGNATURE INN LOCATIONS IN THE MIDWEST]
SIGNATURE 19
INNS
INC.
One Parkwood Crossing * 216 East 96th Street, Suite 450
Indianapolis, Indiana 46940 Telephone (317) 581-1111
Reservations, call 1-800-822-5252
your travel agent or visit our website at
www.signature-inns.com
