<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
March 9, 1999 (December 31, 1998)
SIGNATURE INNS, INC.
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(Exact name of registrant as specified in its charter)
Indiana 0-9659 35-1426996
- ---------------------------- ---------------- ------------------------
(State or other jurisdiction (Commission File (I.R.S. Employer Number)
of incorporation) Identification No.)
250 East 96th Street, Suite 450
Indianapolis, Indiana 46240
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (317) 581-1111
Not Applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5.
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This Current Report on Form 8-K is being filed to provide the
historical financial statements of Signature Inns, Inc., an Indiana corporation
("Signature" or the "Company"), as of the year ended December 31, 1998. In
addition, the Company has included Selected Financial Information (pursuant to
Item 301 of Regulation S-K) and Management's Discussion and Analysis of
Financial Condition and Results of Operations for (i) the year ended December
31, 1998 compared to the year ended December 31, 1997 and (ii) the year ended
December 31, 1997 compared to the year ended December 31, 1996 (pursuant to Item
303 of Regulation S-K).
Item 7 (c).
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The following exhibits are included as part of this Current Report on
Form 8-K in connection with the filing of the Company's financial statements:
23.1 Consent of KPMG LLP Independent Certified Public Accountants
27 Financial Data Schedule (for SEC use only)
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<PAGE>
SIGNATURE
SELECTED FINANCIAL INFORMATION
(dollars in thousands, except per share data, ADR and REVPAR)
In the table below, is the selected historical consolidated financial data of
Signature for each of the five years in the period ended December 31, 1998. You
should read the following information in conjunction with the consolidated
financial statements, including the notes thereto and management's discussion
and analysis of financial condition and results of operations included herewith.
We derived the consolidated historical financial data from the audited
consolidated financial statements of Signature.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Property and equipment
(before accumulated
depreciation).......... $ 9,736 $ 13,796 $ 15,685 $ 118,873 $ 123,708
Property and equipment.. 6,543 8,764 10,358 108,671 108,825
Total assets............ 14,094 18,014 20,611 124,828 124,010
Total debt.............. 10,314 12,360 12,317 71,218 69,650
Stockholders' equity.... 3,104 4,791 6,662 48,989 49,033
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Data:
Hotel revenues.......... $ 3,842 $ 3,470 $ 5,504 $ 39,938 $ 42,404
Management and franchise
fees................... 3,022 3,127 3,062 208 94
-------- -------- ---------- ---------- ----------
Total revenues......... 6,864 6,597 8,566 40,146 42,498
Operating costs and ex-
penses................. 4,686 4,394 6,085 28,862 31,498
-------- -------- ---------- ---------- ----------
Operating income....... 2,178 2,203 2,481 11,284 11,000
Other income (net of ex-
pense)................. 708 415 430 846 666
Interest expense........ (1,275) (981) (1,035) (5,805) (6,264)
-------- -------- ---------- ---------- ----------
Income before income
tax expense and
extraordinary gain
from debt
extinguishment........ 1,611 1,637 1,876 6,325 5402
Income tax expense...... -- 20 217 1,150 1,525
-------- -------- ---------- ---------- ----------
Income before
extraordinary gain
from debt
extinguishment........ 1,611 1,617 1,659 5,175 3,877
Extraordinary gain from
debt extinguishment.... 495 -- -- -- --
-------- -------- ---------- ---------- ----------
Net income............. 2,106 1,617 1,659 5,175 3,877
Preferred stock divi-
dends.................. -- -- -- 3,621 3,835
-------- -------- ---------- ---------- ----------
Net income available to
common stockholders... 2,106 1,617 1,659 1,554 42
Basic and fully diluted
earnings per common
share.................. 0.92 0.77 0.79 0.74 0.02
Other Data:
Occupancy rate(1)....... 67.8% 67.2% 65.9% 64.6% 62.0%
ADR(1).................. $ 53.45 $ 55.81 $ 57.02 $ 58.12 $ 60.40
REVPAR(1)............... $ 36.24 $ 37.50 $ 37.55 $ 37.53 $ 37.46
Guest room revenues(1).. $ 36,177 $ 37,440 $ 38,329 $ 39,588 $ 40,659
Room nights available(1) 998,275 998,275 1,020,758 1,054,829 1,085,395
Operating hotels (at pe-
riod end)(1)........... 23 23 24 25 25
Rooms available (at pe-
riod end)(1)........... 2,735 2,735 2,859 2,978 2,978
Ratio of earnings to
fixed charges and
preferred stock
dividends(2)........... 1.83 1.90 2.93 1.27 1.00
</TABLE>
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(1) Represents information for the 25 wholly owned Signature Inns as if they
were wholly owned since the beginning of 1994 (as a result of the January
1997 purchase of Signature's interests in 20 hotels previously held in
unconsolidated partnerships and three hotels previously held in
consolidated joint ventures) and excludes the 40% owned Signature Inn in
Carmel, Indiana.
(2) For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest and preferred stock
dividends) to income before extraordinary gain from debt extinguishment.
Fixed charges consist of interest costs, amortization of debt discounts and
issue costs whether expensed or capitalized and preferred stock dividends
in applicable periods. Signature paid preferred stock dividends in 1997 and
1998.
2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL. The consolidated financial statements include the accounts of
Signature and its wholly-owned subsidiaries. The equity method is used for
investments in hotel limited partnerships in which Signature is a partner with
50% or less ownership and does not exercise legal, financial and operations
control.
During 1996 and through January 1997, Signature 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 Signature's
consolidated financial statements.
In January 1997, Signature completed a public offering of 2,256,000 shares
of Series A Preferred Stock at $20 per share. Using a portion of the proceeds
of the offering, other sources of funds and the assumption of debt, Signature
acquired the 23 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 Signature-owned hotels which were acquired from non-
affiliates 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 1997 to July 1997 to undergo the conversion to a
Signature Inn. The Signature Inn Carmel, owned by an unconsolidated limited
partnership, began operations in February 1997, and is the only hotel property
not wholly owned by Signature.
Merger Agreement. On January 27, 1999, Signature and Jameson entered into
the merger agreement pursuant to which Signature will merge with and into
Jameson. The holders of Signature common stock will receive one-half share of
Jameson common stock and a cash payment of $1.50 in exchange for each share of
Signature common stock owned. The amount of the cash payment will be reduced if
a dividend is declared and paid to the holders of the Signature common stock
prior to the consummation of the merger. Such a dividend distribution may be
required to distribute all accumulated earnings and profits, as defined under
federal tax law, of Signature prior to the merger to protect the REIT status of
Jameson. Holders of the outstanding shares of Signature Series A Preferred
Stock will receive one share of Jameson Series S Preferred Stock having
substantially the same terms as Signature Series A Preferred Stock, including
an annual preferred dividend right of $1.70 per share and a liquidation
preference of $20.00 per share, for each share of Signature Series A Preferred
Stock outstanding at the effective time of the merger. Upon conversion of each
share of the new Jameson Series S Preferred Stock (at any time in the future),
holders will be entitled to receive 1.04 shares of Jameson common stock and a
cash payment of $3.125.
The merger is subject to (a) approval by Signature's common and preferred
shareholders, each voting separately as a single class, (b) approval by the
Jameson common shareholders and (c) certain other conditions. It is currently
anticipated that the merger will be consummated in the second quarter of 1999.
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<PAGE>
Results of Operations.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997.
Hotel Revenues. Revenues are principally derived from the rental of
guestrooms. Other hotel revenues consist of meeting room rentals, charges to
guests for long-distance telephone service and vending commissions. Hotel
revenues of $42,404,000 for 1998 represented a $2,466,000 increase compared to
1997. Hotel revenues increased primarily as a result of a full year of
operations in 1998 for Signature owned hotels compared to a partial year in
1997 because the acquisition of twenty previously unconsolidated Signature Inns
occurred on January 24, 1997, the acquisition of the Louisville East hotel
occurred in February 1997 and the opening of the Springfield hotel occurred in
July 1997.
Management and Franchise Fees. Revenue from management and franchise fees
were earned from the unconsolidated partnership owned hotels prior to the
acquisition by Signature in January 1997, plus the Signature Inn Carmel which
opened in February 1997. Fees decreased $114,000 for 1998 to $94,000 compared
to $208,000 in 1997 as a result of the absence of fees from acquired hotels
subsequent to January 24, 1997. This was offset partially by fee income
increases from the sole remaining affiliated limited partnership owned hotel
(Carmel) which began operations February 1997.
Direct Hotel Expenses. Direct hotel expenses include costs associated with
the operations of the hotels including: compensation and benefit costs, room
supplies, certain administrative costs, maintenance, marketing, utilities and
property taxes. Direct hotel expenses for 1998 increased $1,263,000 to
$23,777,000 compared to $22,514,000 for 1997, primarily as a result of a full
twelve months of operating results during 1998 from the hotels acquired and
opened during 1997. As a percent of hotel revenues, direct hotel expenses
decreased from 56.4% to 56.1%.
Depreciation, Amortization and Retirements. Depreciation, amortization and
retirements increased $1,034,000 to $4,752,000 for 1998 compared to $3,718,000
for 1997, resulting from the acquisitions of the affiliate hotels and
Louisville East, the opening of the Springfield hotel and additions to property
and equipment for refurbishing and other hotel improvements during 1998.
Corporate Expenses. Corporate expenses include the costs of general
management, office rent, professional fees and other administrative expenses.
Corporate expenses for 1998 were $2,745,000 which represented a $115,000
increase compared to 1997. This 4.4% increase is attributable to increased
professional fees and employee costs.
Merger Transaction Costs. In connection with the proposed Jameson merger,
and prior strategic alternative transactions which were not consummated,
Signature recorded in 1998 merger transaction costs of $224,000 ($161,000 after
taxes, or $.08 per common share) for direct and other merger-related costs.
Equity in Income of Hotel Limited Partnerships. Equity in income of hotel
limited partnerships represents Signature's share of the unconsolidated
partnerships' income or loss. The 1998 increase in income of $72,000 resulted
from the absence of Signature's pro rata share of the acquired hotels
subsequent to January 24, 1997, offset slightly by Signature's pro rata share
of earnings from the Carmel partnership.
Interest Income and Expense. Interest income for 1998 increased to $590,000
from $543,000 in 1997 as a result of increased cash balances maintained during
1998. The increase in interest expense for 1998 to $6,264,000 from $5,805,000
resulted from additional debt assumed by Signature during 1997 in connection
with the acquired hotels.
Other. Land sales resulted in the recognition of gains of $53,000 in 1998
and $353,000 for 1997.
Income Tax Expense. The effective income tax rate for 1998 of 28.2% is
higher than the income tax rate of 18.2% in 1997 because the reduction in the
deferred tax valuation allowance was lower in 1998 than 1997.
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<PAGE>
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996.
Hotel Revenues. Hotel revenues of $39,938,000 for 1997 represented a
$34,434,000 increase compared to 1996. Hotel revenues increased as a result of
the acquisition of twenty previously unconsolidated Signature Inns 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. These fees decreased $2,854,000 for 1997
compared to 1996 as a result of the absence of fee income earned subsequent to
January 24, 1997, offset by fee income from a new unconsolidated limited
partnership owned hotel (Carmel) which began operations February 1997.
Direct Hotel Expenses. Direct hotel expenses for 1997 increased $19,311,000
to $22,514,000 from $3,203,000 for 1996. Direct hotel expenses primarily
increased as a result of the acquisition of twenty previously unconsolidated
Signature Inns on January 24, 1997, the acquisition of the Louisville East
hotel in February 1997 and the acquisition of the Springfield hotel in August
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 to $3,718,000 from $570,000 for 1996
resulting from the property and equipment and deferred cost increases
associated with the acquired hotels.
Corporate 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.
Equity in Income of Hotel Limited Partnerships. Equity in income of hotel
limited partnerships represents Signature's share of the unconsolidated
partnerships' income or loss. The 1996 equity in income of hotel limited
partnerships of $596,000 was attributable to the acquired hotels. The 1997
decrease in income of $645,000 to a loss of $49,000 was the result of the
absence of Signature's pro rata share of the acquired hotels subsequent to
January 24, 1997, offset slightly by Signature's pro rata share of earnings
from Carmel.
Interest Income and Expense. Interest income for 1997 increased to $543,000
from $207,000 in 1996 as a result of increased cash balances maintained during
1997 resulting mainly from the public offering of Series A Preferred Stock,
offset by the absence of $77,000 of interest earned from Signature's loan
participation agreements in three hotels during 1996. The increase in interest
expense for 1997 to $5,805,000 from $1,035,000 was the result of additional
debt assumed by Signature in connection with the acquired hotels.
Other. Land sales resulted in the recognition of a gain of $353,000 in 1997
compared to a loss of $27,000 in 1996. Also, in 1996 minority interest in
earnings of consolidated partnerships was $345,000.
Income Tax Expense. Signature's annual utilization of its net operating loss
carryforwards was limited due to the Series A Preferred Stock offering in
January 1997. Accordingly, the effective income tax rate for 1997 of 18.2% was
higher than the income tax rate of 11.5% in 1996.
Capital Resources and Liquidity.
Historically, Signature has funded its operations principally through cash
flow from operations and borrowings under certain credit facilities. At
December 31, 1998, Signature had $10,047,000 of cash and cash equivalents
compared to $11,127,000 at December 31, 1997.
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<PAGE>
Net cash provided by operating activities increased to $8,643,000 in 1998
compared to $8,290,000 in 1997, an increase of $353,000. The increase was
primarily a net result of earnings, a reduction of income taxes receivable and
an increase in deferred income taxes.
Net cash used by investing activities decreased to $4,271,000 in 1998
compared to $37,670,000 in 1997. The primary element of change from 1997 was
the cash used in the 1997 acquisitions.
Net cash used by financing activities were $5,452,000 in 1998 compared to a
net cash provided of $38,512,000 in 1997. The change was primarily the result
of net proceeds from the issuance of the Series A Preferred Stock during 1997
of $41,200,000, offset partially by the payment of a full year of preferred
stock dividends in 1998.
The hotel mortgages are secured by hotels and land and bear interest at
rates ranging from 7.5% to 10.0% (8.75% and 8.90% weighted average interest
rates at December 31, 1998 and 1997, respectively) through maturity dates
ranging from 2000 to 2016. The annual scheduled principal payments during the
next five years are $1,811,000 in 1999, $7,810,000 in 2000, $6,212,000 in 2001,
$1,758,000 in 2002 and $1,919,000 in 2003.
Signature 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.
Signature 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 Signature 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
Signature considers appropriate.
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 growth of available rooms compared to the growth
in demand, and the excess of supply growth had an adverse effect on occupancy
levels and room rates in the industry. The lodging industry may be adversely
affected in the future by (i) an excess in supply growth 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.
Inflation.
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on Signature's financial condition or
results of operations for the periods presented.
Year 2000.
Signature has completed an assessment of its computer and other operating
systems to identify those which could be affected by the "Year 2000" issue. The
assessment included the review of corporate and hotel applications, hardware,
and software (information technology or "IT"), non-IT areas such as
microprocessors and embedded chips, and 3rd parties, including providers of
supplies and services. Signature has established a time line for assuring
compliance and is monitoring progress toward that end. On going testing of
existing
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<PAGE>
systems to determine compliance will be completed by the end of August 1999.
Systems that are determined to be non-compliant will be repaired or replaced
between May and September.
Signature relies on third party consultants and suppliers for a variety of
its corporate and hotel operations. The remediation phase includes modification
to, or replacement of, software, hardware or microprocessors and obtaining
assurances from third parties that they have addressed the Year 2000 issue.
Estimated total costs, excluding internal costs, to complete compliance are
$100,000 of which $50,000 or more is anticipated to be capitalized and $50,000
expensed. No material amounts have been expended as of December 31, 1998 for
year 2000 remediation. Signature does not track the internal costs incurred for
the Year 2000 project (principally the payroll and related costs for its
information systems group). The costs of the project have been and will
continue to be funded through operating cash flows.
Signature believes it has an effective program in place to resolve the year
2000 issue in a timely manner. Year 2000 risks include failure to obtain
successful testing of hardware/software, failed attempts to obtain vendor
compliance and failure on the part of suppliers and service providers.
Signature believes that under most reasonably likely worst case scenarios hotel
operations could be disrupted, a reduction in hotel occupancy due to lost
reservations, or Corporate financial functions could be impaired. Such an event
would cause certain processes to revert to manual systems and could have a
material adverse impact on Signature's operating results and financial
position. Contingency plans to address those risks have not been fully
developed, however Signature intends to finalize its contingency plan for those
risks by October 1999. Contingency plans will be implemented between October 1
and December 31 for systems that cannot be feasibly repaired or replaced.
Risk Factors.
Signature's business is subject to numerous risks and uncertainties which may
affect its results of operations in the future and may cause such future results
to differ materially and adversely from projections included in or underlying
any forward-looking statements made by or on behalf of Signature. Among the
factors that may adversely affect Signature's business are:
Risks of The Lodging Industry. Signature's business is subject to all of the
risks inherent in the lodging industry. These risks include, among other
factors, varying levels of demand for rooms and related services, adverse
effects of general and local economic and market conditions (particularly in
areas where Signature has a high concentration of Signature Inn hotels), changes
in travel patterns, changes in governmental regulations that influence wages,
prices or construction costs, changes in interest rates, the availability of
credit and changes in real estate taxes and other operating expenses and the
recurring need for renovations, refurbishment and improvements of hotel
properties. Also, values of hotel properties are sensitive to changes in local
market and economic conditions and to fluctuations in the economy as a whole.
In addition, because of the high level of fixed costs required to operate
hotels, certain significant expenditures cannot generally be reduced when
circumstances cause a reduction of revenue. In addition to general risks that
are associated with real property ownership and development, investments in
limited purpose facilities, such as a hotel, typically involve greater risk than
do investments in multi-purpose properties. Some limited purpose facilities
risks are as follows:
Competition for Market Share. The operation of hotels is a highly
competitive business. Each Signature Inn hotel is in competition with several
hotels in its market area. These competitive hotels are of varying quality and
size, may be part of national or regional chains and may have available to them
greater financial resources than those available to Signature. However, there
is no single competitor or small number of competitors which dominate the hotel
industry. Demographic, economic or other changes in one or more markets could
adversely affect the competitive status of Signature's hotels in those markets.
This, in turn, would affect the overall operations of Signature. In addition,
there can be no assurance that the opening of new competing hotels or the
reduction of room rates in any particular market will not lead to greater
competition for any or all of the Signature Inn hotels than presently exists.
Requirements for Capital and Labor. Hotels are capital intensive. In
order to remain competitive, hotel facilities must be continually maintained,
modernized and refurbished. This increases the need for capital funds (whether
from reserves, current cash flow or external financing) which increases the
sensitivity of the investment to the cost and availability of such funds. In
addition, hotels are management and labor intensive and are especially
susceptible to the impact of economic and other conditions outside the control
of the hotel owner.
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<PAGE>
Uninsured or Underinsured Liability Risks. Signature may be exposed to
potential liability arising from such matters as employment and property laws,
labor difficulties and personal injuries. Many businesses, including those in
the lodging industry, periodically have experienced increases in insurance costs
while availability of coverage has decreased. Any such occurrence could render
certain types of desired coverage unavailable at commercially reasonable rates,
with the consequence that any related claims might then exceed coverage.
Number and Geographic Concentration of Signature's Hotels. The Signature Inns
chain is not geographically represented nationally. The Signature Inns chain
consists of a limited number of hotels in the Midwest region. Therefore,
Signature's results of operations and financial condition are substantially
affected by economic conditions in the Midwest.
Volatility of Market Price. The market price of Signature's common stock and
Series A Preferred Stock are subject to fluctuations because of variations in
quarterly operating results and other factors, such as changes in the general
conditions of the economy, the financial markets or the lodging industry,
natural disasters or other developments affecting Signature and/or its
competitors. In addition, the securities markets have experienced significant
price and volume fluctuations from time to time in recent years. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
These broad fluctuations may materially adversely affect the market price of
Signature's common stock and Series A Preferred Stock.
Limitations on Dividends. Two of Signature's loan agreements prohibit Signature
from making a dividend payment on the Series A Preferred Stock if there exists a
default (either matured or unmatured) thereunder, including a default upon
financial covenants such as the requirement that Signature maintain a ratio of
earnings before interest, taxes, depreciation and amortization to fixed charges,
as defined.
Control by Management Group. Management beneficially owns 800,821 shares of
Signature's common stock, representing approximately 37.3% of the outstanding
shares of common stock. As a result of such ownership, Signature's management,
although not owning a majority of the shares of common stock, owns a sufficient
percentage of those shares to afford it substantial control over the operations
and affairs of Signature.
Risk of Failure to Obtain Year 2000 Compliance. Year 2000 risks include failure
to obtain successful testing of hardware/software, failed attempts to obtain
vendor compliance and failure on the part of suppliers and service providers.
Signature believes that under most reasonably likely worst case scenarios hotel
operations could be disrupted, a reduction in hotel occupancy due to lost
reservations, or corporate financial functions could be impaired. Such an event
would cause certain processes to revert to manual systems and could have a
material adverse impact on Signature's operating results and financial position.
Contingency plans to address those risks have not been fully developed, however
Signature intends to finalize its contingency plan for those risks by October
1999.
-8-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1998, and 1997.......... F-3
Consolidated Statements of Operations for each of the three years
ended December 31, 1998, 1997 and 1996............................... F-4
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1998, 1997 and 1996......................... F-5
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1998, 1997 and 1996......................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
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, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Indianapolis, Indiana
February 18, 1999
F-2
<PAGE>
SIGNATURE INNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 10,046,626 $ 11,126,602
Restricted cash.................................. 758,127 529,212
Accounts receivable.............................. 1,014,550 702,891
Income taxes receivable.......................... 353,539 517,553
Other current assets............................. 716,306 373,141
------------ ------------
Total current assets........................... 12,889,148 13,249,399
Property and equipment, net........................ 108,825,365 108,670,976
Furniture and equipment cash reserves.............. 668,822 1,395,557
Hotel limited partnership investment............... 813,200 833,107
Deferred costs and other assets, net............... 813,522 678,599
------------ ------------
$124,010,057 $124,827,638
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 1,810,533 $ 1,606,390
Accounts payable................................. 587,798 743,086
Accrued property taxes........................... 1,510,191 1,526,653
Accrued payroll.................................. 910,490 808,944
Other current liabilities........................ 473,655 583,525
Preferred stock dividends........................ 958,800 958,800
------------ ------------
Total current liabilities...................... 6,251,467 6,227,398
Deferred income taxes.............................. 886,000 --
Long-term debt, less current portion............... 67,839,397 69,611,507
------------ ------------
Total liabilities.............................. 74,976,864 75,838,905
------------ ------------
Shareholders' equity:
Cumulative convertible preferred stock (no par
value; 5,000,000 shares authorized; 2,256,000
shares issued).................................. 40,776,126 40,776,126
Common stock (no par value; 25,000,000 shares
authorized; 2,105,703 and 2,105,203 shares
issued and outstanding)......................... 10,016,363 10,013,800
Accumulated deficit.............................. (1,759,296) (1,801,193)
------------ ------------
Total shareholders' equity..................... 49,033,193 48,988,733
------------ ------------
$124,010,057 $124,827,638
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues.................................
Guestroom revenues..................... $40,658,614 $38,287,318 $5,241,230
Other hotel revenues................... 1,745,294 1,650,611 262,656
Management and franchise fees.......... 94,224 208,166 3,061,958
----------- ----------- ----------
Total revenues....................... 42,498,132 40,146,095 8,565,844
----------- ----------- ----------
Operating costs and expenses:
Direct hotel expenses.................. 23,776,591 22,513,790 3,203,180
Depreciation, amortization and
retirements........................... 4,751,746 3,718,483 570,454
Corporate expenses..................... 2,745,162 2,629,930 2,311,326
Merger transaction costs............... 224,267 -- --
----------- ----------- ----------
Total operating costs and expenses... 31,497,766 28,862,203 6,084,960
----------- ----------- ----------
Operating income..................... 11,000,366 11,283,892 2,480,884
Other income (expense):
Equity in income of hotel limited
partnerships.......................... 23,021 (49,065) 596,190
Interest income........................ 589,897 542,613 206,835
Interest expense....................... (6,263,797) (5,804,796) (1,035,340)
Other.................................. 52,610 352,564 (372,450)
----------- ----------- ----------
Income before income tax expense..... 5,402,097 6,325,208 1,876,119
Income tax expense....................... 1,525,000 1,150,000 216,893
----------- ----------- ----------
Net income........................... 3,877,097 5,175,208 1,659,226
Preferred stock dividends................ 3,835,200 3,620,880 --
----------- ----------- ----------
Net income applicable to common
stock............................... $ 41,897 $ 1,554,328 $1,659,226
=========== =========== ==========
Basic and diluted earnings per common
share............................... $ 0.02 $ 0.74 $ 0.79
=========== =========== ==========
Weighted average common shares
outstanding............................. 2,105,513 2,103,993 2,104,167
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
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
dividends ($1.60 per
share)............... -- -- -- -- (3,620,880) (3,620,880)
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31,
1997................... 2,105,203 10,013,800 2,256,000 40,776,126 (1,801,193) 48,988,733
Net income............ -- -- -- -- 3,877,097 3,877,097
Restricted stock
grant................ 500 2,563 -- -- -- 2,563
Preferred stock cash
dividends ($1.70 per
share)............... -- -- -- -- (3,835,200) (3,835,200)
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31,
1998................... 2,105,703 $10,016,363 2,256,000 $40,776,126 (1,759,296) 49,033,193
========= =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SIGNATURE INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 3,877,097 $ 5,175,208 $ 1,659,226
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and
equipment......................... 4,682,814 3,669,251 538,274
Amortization of deferred costs..... 67,099 46,805 32,180
Equity in income of hotel limited
partnerships, net of distributions
received of $776,883 in 1997 and
$783,761 in 1996.................. (23,021) 825,948 187,571
(Gain) loss on sale of land........ (52,610) (352,564) 26,938
Change in restricted cash.......... (228,915) (244,920) (4,349)
Change in income taxes receivable.. 164,014 (517,553) --
Deferred income taxes.............. 886,000 -- --
Other partners' equity in income... -- -- 345,512
Change in accrued revenue and
expenses, net..................... (729,530) (312,116) 84,863
----------- ------------ -----------
Net cash provided by operating
activities...................... 8,642,948 8,243,254 2,870,215
----------- ------------ -----------
Cash flows from investing activities:
Property and equipment additions..... (4,320,401) (4,165,978) (496,202)
Proceeds from sale of land........... 147,624 521,701 210,018
Net change in loans to hotel limited
partnership......................... 40,800 (238,831) 90,000
Deferred costs and other assets...... (139,240) (124,908) (527,543)
Non-operating distributions from
hotel limited partnerships.......... -- 791,481 --
Acquisition of hotels from affiliated
entities............................ -- (31,819,484) --
Acquisition and conversion costs of
other operating hotels.............. -- (2,633,898) (1,788,304)
----------- ------------ -----------
Net cash used by investing
activities...................... (4,271,217) (37,669,917) (2,512,031)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds of long-term debt........... 6,150,000 38,523,906 479,159
Repayments of long-term debt......... (7,675,181) (35,302,356) (2,171,882)
Repayments of revolving line of
credit.............................. -- (2,750,000) 1,650,000
Loan financing costs................. (91,326) (491,044) (45,687)
Proceeds from issuance of preferred
stock, net.......................... -- 41,199,997 --
Preferred stock offering costs....... -- -- (423,871)
Cash dividends on preferred stock.... (3,835,200) (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............ (5,451,707) 38,511,709 (381,731)
----------- ------------ -----------
Net change in cash and cash
equivalents........................... (1,079,976) 9,131,851 (23,547)
Cash and cash equivalents at beginning
of year............................... 11,126,602 1,994,751 2,018,298
----------- ------------ -----------
Cash and cash equivalents at end of
year.................................. $10,046,626 $ 11,126,602 $ 1,994,751
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Business
The Company owns and operates 25 Signature Inn hotels at December 31, 1998
located in six Midwestern states and manages one additional Signature Inn
hotel owned by a non-consolidated affiliate partnership.
Basis of Presentation
In January 1997, the Company completed a public 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 in a purchase transaction 20 hotel
properties previously owned by affiliated entities and the remaining 50%
ownership interest in three other hotel properties which had previously been
consolidated. The aggregate purchase price was $84.1 million, including the
assumption or replacement of $52.2 million of affiliate hotel debt, excluding
the Company's existing equity interests which were recorded at their
historical cost basis.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The results of the acquired hotel
properties are included from 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 has 50% or less ownership and does not
exercise legal, financial and operational control.
Certain reclassifications of prior year amounts have been made to conform
with current year presentations.
Revenues
Guestroom and other hotel revenues are recognized on a daily basis as
services are provided. 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
Earnings per share are computed by dividing net income applicable to common
stock by the weighted average shares of common stock outstanding. The Company
has no dilutive securities.
Cash Equivalents
Cash equivalents represent highly liquid short-term investments with
initial maturities of three months or less.
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
the 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.
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 capital stock are charged
to the related proceeds. Accumulated amortization of deferred costs amounted
to $676,000 and $609,000 at December 31, 1998 and 1997, respectively.
F-7
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 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
Investments in real estate and partnerships are evaluated 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 currently approximate market. A reasonable estimate of the
fair value of the receivables from hotel limited partnerships (note 3) is not
practicable without incurring excessive costs because there is no market for a
comparable instrument. The 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>
1998 1997
------------ ------------
<S> <C> <C>
Land.............................................. $ 14,507,055 $ 14,514,555
Buildings......................................... 88,424,029 87,806,490
Leasehold and land improvements................... 1,807,447 1,593,955
Furniture and equipment........................... 18,259,654 14,269,631
Land held for sale or development................. 709,933 698,450
------------ ------------
123,708,117 118,873,081
Accumulated depreciation.......................... 14,882,752 10,202,105
------------ ------------
$108,825,365 $108,670,976
============ ============
</TABLE>
F-8
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Hotel Limited Partnerships
Summary financial information for the hotel limited partnerships reported on
the equity method is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Hotel properties.................. $ 3,809,631 $ 3,894,265 $ 67,833,883
Net current assets................ (226,290) (271,864) 890,576
Deferred costs.................... 98,850 125,670 832,720
Long-term debt.................... (2,252,373) (2,375,806) (56,760,169)
----------- ------------ ------------
Net assets...................... 1,429,818 1,372,265 12,797,010
Less:
Equity of other partners........ 860,018 823,358 10,503,698
Income not recognized........... -- -- 195,503
----------- ------------ ------------
Equity in limited
partnerships................. 569,800 548,947 2,097,809
Receivables from limited
partnerships, net................ 243,400 284,200 3,441,648
----------- ------------ ------------
Hotel limited partnership
investments.................. $ 813,200 $ 883,107 $ 5,539,457
=========== ============ ============
Revenues.......................... 1,567,188 3,022,384 34,346,009
Operating costs and expenses...... (1,509,635) (3,314,000) (31,479,752)
Nonrecurring items................ -- 20,177,670 (2,890,000)
----------- ------------ ------------
Net income (loss)............... 57,553 19,886,054 (23,743)
Less other partners' share........ (34,532) (19,935,119) (619,933)
----------- ------------ ------------
Equity in income (loss)....... $ 23,021 $ (49,065) $ 596,190
=========== ============ ============
</TABLE>
As of December 31, 1998 and 1997, the receivables from hotel limited
partnership carried an interest rate of 10.5%. Interest income on receivables
from limited partnerships was $26,700, $18,393 and $142,640 in 1998, 1997 and
1996, respectively.
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.
(4) Long-Term Debt
Long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Hotel mortgages.................................... $69,649,930 $71,165,741
Other.............................................. -- 52,156
----------- -----------
69,649,930 71,217,897
Less current portion............................... 1,810,533 1,606,390
----------- -----------
Long-term portion.................................. $67,839,397 $69,611,507
=========== ===========
</TABLE>
The hotel mortgages are secured by hotels and land and bear interest at
rates ranging from 7.5% to 10.0% (8.75% and 8.90% weighted average interest
rates at December 31, 1998 and 1997, respectively) through maturity dates
ranging from 2000 to 2016.
F-9
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The line of credit of $2,750,000 was paid off in full in January 1997 upon
completion of the preferred stock offering and not renewed.
The aggregate annual scheduled principal payments during the next five
years are: $1,811,000 in 1999, $7,810,000 in 2000, $6,212,000 in 2001,
$1,758,000 in 2002 and $1,919,000 in 2003.
Interest paid amounted to $6,260,000, $5,723,000 and $1,040,000 in 1998,
1997 and 1996, respectively.
(5) Income Taxes
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Current................................ $ 639,000 $ 1,150,000 $ 216,893
Deferred............................... 1,168,000 1,329,000 500,000
Valuation allowance decrease........... (282,000) (1,329,000) (500,000)
---------- ----------- ---------
Total income expense............... $1,525,000 $ 1,150,000 $ 216,893
========== =========== =========
</TABLE>
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>
1998 1997
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Land held for sale or development................. $ 315,000 $ 315,000
Net operating loss carry forwards................. 218,000 947,000
Other............................................. 6,000 6,000
---------- ----------
Gross deferred tax assets....................... 539,000 1,268,000
Less valuation allowances....................... -- (282,000)
---------- ----------
Net deferred tax assets......................... 539,000 986,000
---------- ----------
Deferred Tax Liabilities:
Deferred costs.................................... 41,000 --
Hotel properties, primarily depreciation.......... 1,384,000 986,000
---------- ----------
Deferred tax liabilities........................ 1,425,000 986,000
---------- ----------
Net deferred tax liability.................... $ 886,000 $ --
========== ==========
</TABLE>
The following reconciles income tax expense at the federal statutory tax
rate to the effective rate:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Income taxes at the federal statutory rate............ 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit............... 2.7 6.0 4.3
Decreases in valuation allowance, principally arising
from the utilization of net operating loss
carryforwards........................................ (4.0) (21.8) (26.7)
Reduction for overaccrual of prior year tax expense... (4.5) -- --
---- ----- -----
Effective income tax rate............................. 28.2% 18.2% 11.6%
==== ===== =====
</TABLE>
F-10
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes paid amounted to $1,349,000, $1,618,000 and $145,500 in 1998,
1997 and 1996, respectively. At December 31, 1998, the net operating loss
carryforwards for income taxes, which expire in 2007, are approximately
$640,000.
(6) Shareholders' Equity and Employee Stock Plans
In January 1997, 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 stock to
25,000,000.
Preferred Stock
The holders of the outstanding Series A cumulative preferred stock ("Series
A 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 dividends on preferred stock of $958,000, or $.425 per share,
were declared and accrued as of December 31, 1998 and paid in January 1999 and
the same amount was declared and accrued as of December 31, 1997 and paid in
January 1998. Holders have the right to convert their shares of Series A
Preferred Stock into shares of common stock, at any time, at the ratio of 2.08
shares of common stock for each share of preferred stock. The preferred stock is
not entitled to vote, unless the Company is in default in the payment of full
dividends for six dividend quarters. The Company can redeem the preferred stock
after January 31, 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>
Stockholder Rights Plan
The Company has a Stockholder 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 may be granted to directors, officers and employees of the Company
under the 1996 Equity Incentive Plan 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
F-11
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 common shares and prices of stock options granted and forfeited
under the 1996 Equity Incentive Plan is as follows:
<TABLE>
<CAPTION>
Price Shares
----- -------
<S> <C> <C>
Granted in 1997............................................. $8.00 91,500
Forfeited in 1997........................................... $8.00 (2,500)
-------
Outstanding at December 31, 1997............................ $8.00 89,000
Forfeited in 1998........................................... $8.00 (13,000)
-------
Outstanding at December 31, 1998............................ 76,000
=======
</TABLE>
During 1997, options for 2,295 shares granted under the 1986 Incentive Stock
Option Plan were exercised at $4.16 per share.
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 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 granted 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 $33,000
and $55,000 or $.02 and $.03 per common share for 1998 and 1997, respectively.
(7) Segment Reporting
The Company owns and operates 25 limited service hotels in six Midwestern
states. The Company assesses and measures operating results on an individual
property basis for each of its hotels, based on operating income. Since all of
the Company's hotels exhibit highly similar economic characteristics, cater to
the same market segments, and offer similar degrees of risk and opportunities
for growth, the hotels have been aggregated and reported as one operating
segment.
F-12
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant accounting policies of the segments are the same as those
described in note 1. There are no significant inter-segment transactions. The
revenues, hotel operating income, reconciliation of hotel operating income to
income before income tax expense, and total assets for each of the reportable
segments are summarized in the following table.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1998 1997 1996
--------- -------- -------
(in thousands)
<S> <C> <C> <C>
Hotel Operating Income
Total hotel revenue........................ $ 42,404 $ 39,938 $ 5,504
Direct hotel expenses...................... 23,777 22,514 3,203
--------- -------- -------
Hotel Operating Income................... 18,627 17,424 2,301
Non-Property Income (Expenses)
Management and franchise fees.............. 94 208 3,062
Equity in income of hotel limited
partnerships............................... 23 (49) 596
Corporate expenses......................... (2,745) (2,630) (2,311)
Interest expense........................... (6,264) (5,805) (1,035)
Depreciation, amortization and
retirements................................ (4,752) (3,718) (570)
Other, net................................. 419 895 (167)
--------- -------- -------
Income before income tax expense......... $ 5,402 $ 6,325 $ 1,876
========= ======== =======
<CAPTION>
As of December 31,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Total Assets
Hotel properties........................... $ 111,507 $111,026
Non-segment assets......................... 12,503 13,802
--------- --------
$ 124,010 $124,828
========= ========
</TABLE>
(8) Merger Agreement
On January 27, 1999, Signature Inns, Inc. and Jameson Inns, Inc. entered
into an agreement and plan of merger pursuant to which the Company will merge
with and into Jameson Inns, Inc. The holders of Company common stock (the
"Company Common Stock") will receive one-half share of Jameson common stock
(the "Jameson Common Stock") and a cash payment of up to $1.50 in exchange for
each share of Company Common Stock owned. The amount of the cash payment will
be reduced from $1.50 if a dividend is declared and paid to the holders of the
Company Common Stock prior to the consummation of the merger. Such a dividend
distribution may be required to distribute all accumulated earnings and
profits, as defined under federal tax law, of the Company prior to the merger
to protect the REIT status of Jameson. Holders of the outstanding shares of the
Series A Preferred Stock will receive an equal number of shares of a new Series
of Jameson cumulative convertible preferred stock (the "Jameson Series S
Preferred Stock") having substantially the same terms as the Series A Preferred
Stock, including an annual preferred dividend right of $1.70 per share and a
liquidation preference of $20.00 per share. Upon conversion of each share of
the new Jameson Series S Preferred Stock (at any time in the future), holders
will be entitled to receive 1.04 shares of Jameson Common Stock and a cash
payment of $3.125.
The Merger is subject to approval by the holders of the Company's common
stock and Series A Preferred Stock, each voting separately as a single class,
approval by the Jameson common shareholders and certain other conditions.
F-13
<PAGE>
SIGNATURE INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the merger and prior strategic alternative transactions
that were not consummated, the Company recorded in the fourth quarter a charge
to operating expenses of $224,000 ($161,000 after taxes, or $.08 per common
share) for direct and other related costs associated with the merger and other
transactions. These transaction costs consisted primarily of fees for
investment bankers, attorneys, accountants and other related charges.
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIGNATURE INNS, INC.
Date: March 9, 1999 By: /s/ John D. Bontreger
----------------------------------------------
John D. Bontreger
Chairman, President and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
No. Document
- --- --------
23.1 Consent of KPMG LLP Independent Certified Public Accountants
27 Financial Data Schedule (for SEC use only)
<PAGE>
EXHIBIT 23.1
The Board of Directors
Signature Inns, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-28605) on Form S-8 of Signature Inns, Inc. of our report dated February 18,
1999, relating to the consolidated balance sheets of Signature Inns, Inc. as of
December 31, 1998, and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the Form 8-K
of Signature Inns, Inc. to be filed on March 9, 1999.
KPMG LLP
Indianapolis, Indiana
March 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Signature Inns, Inc. for the year ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,046,626
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,889,148
<PP&E> 123,708,117
<DEPRECIATION> 14,882,752
<TOTAL-ASSETS> 124,010,057
<CURRENT-LIABILITIES> 6,251,467
<BONDS> 67,839,397
40,776,126
0
<COMMON> 10,016,363
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 124,010,057
<SALES> 0
<TOTAL-REVENUES> 42,498,132
<CGS> 0
<TOTAL-COSTS> 31,497,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,263,797
<INCOME-PRETAX> 5,402,097
<INCOME-TAX> 1,525,000
<INCOME-CONTINUING> 3,877,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,877,097
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
