<PAGE>
===============================================================================
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, 1998
Commission File Number 0-9659
SIGNATURE INNS, INC.
(Exact name of small business issuer in its charter)
Indiana 35-142996
------- ---------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
250 East 96th Street, Suite 450, Indianapolis, Indiana 46240
-------------------------------------------------------------
(Address of principal executive offices) (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
(title of class)
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 if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form. No disclosure will be contained, to the
best of Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference herein.[X]
Issuer's revenues for the most recent fiscal year: $42,498,000
Aggregate Market Value of Voting Stock Held by Non-Affiliates: (Computed on
closing price as of March 23, 1999.) $6,750,000.
Total Shares of Common Stock Outstanding as of March 23, 1999: 2,105,703
Transitional Small Business Disclosure Format (check one):
Yes ; No X
----- ------
===============================================================================
<PAGE>
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 25
Signature Inn hotels and manages one additional Signature Inn hotel, all of
which are 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.
P & N Corporation ("P&N"), a wholly-owned subsidiary of the Company, was
organized in 1993 and acts as the sole general partner and forty percent (40%)
owner of the Signature Meridian Limited Partnership, which owns and operates the
Carmel, Indiana, Signature hotel property. Prior to December 1998, P & N also
acted as the general partner of (a) the Peoria/Normal Signature Limited
Partnership ("Peoria/Normal LP"), which owned and operated the Normal and
Peoria, Illinois, Signature Inn hotel properties, and (b) the Knoxville
Signature Limited Partnership ("Knoxville LP"), which owned and operated the
Knoxville, Tennessee, Signature Inn hotel property. On December 23, 1998, the
Normal and Peoria, Illinois, and Knoxville, Tennessee, Signature Inn hotel
properties were conveyed and transferred to the Company, as part of an effort to
simplify the Company's organizational structure. Following the transfer, the
Peoria/Normal LP and Knoxville LP were dissolved.
The Company's other wholly-owned subsidiaries are SIE Corporation, which
owns and operates the Indianapolis East Signature Inn hotel property, and SI
Springfield Corporation, which owns and operates the Springfield, Illinois,
Signature Inn hotel property. All three subsidiaries are organized under the
laws of the State of Indiana. Management of those subsidiaries is essentially
the same as the Company.
The principal offices and places of business of the Company, its
subsidiaries and the Signature Meridian partnership 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 two of its' wholly-owned
subsidiaries, 25 hotel properties (23 acquired on January 24, 1997; one on
August 27, 1996; and, one on February 19, 1997) and, through a third subsidiary,
is the general partner and forty percent (40%) owner of an Indiana limited
partnership which owns an 81 room Signature Inn hotel property in Carmel,
Indiana. The 26 hotel properties operated by the Company comprise an aggregate
of 3,059 guestrooms.
2
<PAGE>
Listed on the following table are the location, year opened and number of
rooms of each of the Company's hotel properties.
Year No. of
Property Location Opened Rooms
- -------- -------- ------ ------
Indiana:
Indianapolis Northwest I-465 & Michigan Road............... 1981 141
Fort Wayne I-69 & State Road 3................. 1982 102
Castleton I-465 & Allison Road................ 1983 125
Lafayette I-65 & State Road 26................ 1983 121
Muncie McGaillard Road & Chadam Lane....... 1984 101
Southport I-65 & Southport Road............... 1985 101
Indianapolis East I-465 & East Washington Street...... 1985 101
Indianapolis West I-465 & West 38th Street............ 1985 101
Kokomo U.S. 31 & Alto Road................. 1986 101
Evansville Green River Road & Vogel Road....... 1986 125
Terre Haute I-70 & U.S. 41...................... 1987 150
Elkhart Indiana Toll Road & State Road 19... 1987 125
South Bend Indiana Toll Road & U.S. 31......... 1987 123
Carmel I-465 & U.S. 31..................... 1997 81
Ohio:
Cincinnati (North) I-75 & Sharonville Road............. 1985 130
Cincinnati (Northeast) I-71 & Mason-Montgomery Road........ 1985 99
Columbus I-270 & Cleveland Road.............. 1986 125
Dayton I-75 State Road, 725................ 1987 125
Kentucky
Florence Turfway Road & I-71................. 1987 125
Louisville South I-65 & Fern Valley Road............. 1988 123
Louisville East (1) I-64 & Blankenburger Road........... 1997 119
Illinois:
Normal 101 South Veterans Parkway.......... 1988 124
Peoria 4112 North Brandywine............... 1988 124
Springfield I-55 & Stevenson Drive.............. 1997 124
Iowa:
Bettendorf I-74 & Spruce Hill Drive............ 1989 119
Tennessee:
Knoxville I-75 & Cedar Bluff Road............. 1989 124
TOTAL: 26 Signature Inns................... 3,059
=====
- ------------
(1) Operates as both a Best Western and a Signature Inn.
Signature Inn-Carmel is managed by the Company pursuant to a management
agreement 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, determines room rates,
directs promotional activities, supervises the purchase and replacement of
equipment, supplies and inventories, conducts maintenance activities and selects
vendors, suppliers and independent contractors. In
3
<PAGE>
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 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. By the terms
of that 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 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 is also 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 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 for their guests, as well as
suite-like amenities including a microwave, refrigerator, in-room coffee, iron
and ironing board and hair dryer in all guest rooms. 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.
Management believes 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, will exemplify a "whatever it takes" attitude toward serving the
4
<PAGE>
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 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 * 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-fridge/freezer * Complimentary popcorn
</TABLE>
Additional features include fitness centers at thirteen hotels and airport
shuttle service at nine hotels. Signature Inn hotels without fitness centers
negotiate arrangements with nearby health clubs and fitness centers for the use
of their facilities by hotel guests. In addition, hotel management typically
makes arrangements with nearby restaurants for the hotel's guests to qualify for
discounts by showing their guest room key card.
Designed with the convenience and comfort of its guests in mind, a typical
Signature Inn hotel incorporates a large two-story atrium and a bright, well-
appointed and richly decorated lobby and registration area. Most Signature Inn
hotels contain approximately 120 spacious, quiet and comfortably furnished guest
rooms, averaging over 300 square feet in size. Signature Inn hotels are
generally 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 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
5
<PAGE>
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. 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 in profitability 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 continuation in the increase in demand for hotel rooms. The
U.S. lodging industry, as a whole, reported increases in annual room occupancy
each year from 1992 through 1995, increasing from approximately 62% in 1991 to
65% in 1995 and 1996. During the last two years, the U.S. lodging industry, as
a whole, has reported slight decreases in occupancy with occupancy for 1998 of
approximately 64%. During this same time period, the U.S. lodging industry has
reported annual increases in ADRs (total room revenues divided by the total
number of rooms sold) ranging from approximately a 1.5% increase in 1992 to a
high of approximately a 6.0% increase in 1996. The reported ADRs increased from
$59.61 in 1992 to $78.62 in 1998.
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, Sleep Inn, Wingate Inns 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 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
6
<PAGE>
(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 for the period from 1994 through 1998 the
Occupancy, ADR and RevPAR (occupancy multiplied by ADR) of (1) the Company's 25
wholly owned hotels as if they were wholly owned since the beginning of 1994,
(2) mid-scale chains without food and beverage in the East North Central Region
and (3) all hotels in the East North Central Region.
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>
1994 67.8% 72.1% 62.7%
1995 67.2% 70.7% 63.0%
1996 65.9% 67.9% 62.0%
1997 64.6% 66.4% 61.0%
1998 62.0% 65.8% 61.1%
</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 salable 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>
1994 $53.45 $49.94 $58.47
1995 $55.81 $53.69 $61.32
1996 $57.02 $56.94 $65.35
1997 $58.12 $59.68 $69.27
1998 $60.40 $62.82 $71.99
</TABLE>
(2) ADR represents total room revenues divided by the total number of rooms
sold.
7
<PAGE>
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>
1994 $36.24 $35.98 $36.69
1995 $37.50 $37.95 $38.65
1996 $37.55 $38.69 $40.53
1997 $37.53 $39.60 $42.28
1998 $37.46 $41.32 $43.96
</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. 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.
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 1998, 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.
8
<PAGE>
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 13,000 Signature Club members.
Approximately 5% of the Company's chain-wide room nights for 1998 were derived
from Signature Club members.
Sales and Marketing. Since the opening of its first hotel, the Company
has placed an emphasis on developing new business relationships through a
personal sales calling program. Hotel management of each Signature Inn hotel is
responsible for sales in the local market. The Company, through the development
of annual national sales programs and monthly hotel 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 (AARP) 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 37 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 8% of 1998 chain-wide room
nights came from AAA members.
All Signature Inn hotels feature a swimming pool (indoor pools at seven
locations, outdoor pools at the remainder), free stays for children age 17 and
under, complimentary all-you-can-eat Breakfast Express 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.
9
<PAGE>
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 leisure and business travel publications such as
regional issues of USA Today newspaper and corporate preferred directories.
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 1998, the Signature Inn chain was the official hotel of the
Indiana State Fair. The Company 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 9 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. to provide
central reservation services. The chain's toll free number, 1-800-822-5252, can
be accessed across the continental United States, 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 Company's 26 Signature Inn hotels
to over 35,000 travel agencies and over 250,000 travel agents in the United
States and Canada and is also accessible to travel agents in Central and South
America and Europe.
Over 23% of Signature Inns' 1998 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 a good relationship with its employees.
10
<PAGE>
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.
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.
Governmental Regulations
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 business, and the Company intends to
continue to obtain such permits and approvals for its new facilities. In
11
<PAGE>
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.
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.
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 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 following table sets forth the high and low sales prices for the
Company's Common Stock for the periods indicated:
Quarter
Ended High Low
------- ----- -----
12/31/98 $3.63 $2.00
9/30/98 $5.13 $3.13
6/30/98 $6.50 $4.75
3/31/98 $7.25 $4.50
12/31/97 $6.88 $4.50
9/30/97 $7.00 $5.00
6/30/97 $6.88 $5.38
3/31/97 $9.00 $6.88
12
<PAGE>
(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
under the symbol "SGNSP."
As of March 23, 1999, there were 4,173 holders of record of the Company's
Common Stock and approximately 4,700 beneficial owners.
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 lenders 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.
- ---------------------
This management's discussion and analysis of financial condition and
results of operations contains certain forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These include,
among others, statements regarding growth plans, availability of debt financing
and capital, market trends, anticipated expenses and other matters. The words
"estimate," "project," "intend" "expect," "anticipate," "believe," and similar
expressions are intended to identify forward-looking statements. These and other
statements are not historical facts. These statements are based on certain
assumptions and analysis made by management of the Company in light of their
experience and perception of historical trends, current conditions, expected
further developments and other factors. Actual results and developments will
differ and are subject to a number of risks and uncertainties. Do not place
undue reliance on these forward-looking statements. The Company undertakes no
obligation to publicly release any revisions to these forward-looking
statements.
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.
In January 1997, the Company 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, the
Company 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 Company-owned hotels, which were acquired from
nonaffiliates, 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 the Company.
Merger Agreement. On January 27, 1999, the Company and Jameson Inns, Inc.
entered into the merger agreement pursuant to which the Company 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
13
<PAGE>
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 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 the Company'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 May 1999.
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 the Company 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
14
<PAGE>
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, the
Company 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 the Company's share of the unconsolidated
partnerships' income or loss. The 1998 increase in income of $72,000 resulted
from 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 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 the Company 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.
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
15
<PAGE>
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 the Company'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 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 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 the Company'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 the Company 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 $346,000.
Income Tax Expense. The Company'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, the Company has funded its operations principally through
cash flow from operations and borrowings under certain credit facilities. At
December 31, 1998, the Company had $10,047,000 of cash and cash equivalents
compared to $11,127,000 at December 31, 1997.
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.
16
<PAGE>
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 was $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 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.
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.
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 the Company's financial condition or
results of operations for the periods presented.
17
<PAGE>
Year 2000
The Company 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. The Company has established a time line for assuring
compliance and is monitoring progress toward that end. On going testing of
existing 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.
The Company 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 or 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. The Company 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.
The Company 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. The
Company 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 the Company's operating results and financial
position. Contingency plans to address those risks have not been fully
developed, however the Company 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
The Company'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 the Company's business are:
Risks of The Lodging Industry. The Company's business is subject to all of
the risks inherent in the lodging industry. These risks include, among other
factors, varying levels of demand for rooms and related services, adverse
effects of general and local economic and market conditions (particularly in
areas where the Company has a high concentration of Signature Inn hotels),
changes in travel patterns, changes in governmental regulations that influence
wages, prices or
18
<PAGE>
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 the Company's hotels in those
markets. This, in turn, would affect the overall operations of the Company. In
addition, there can be no assurance that the opening of new competing hotels or
the reduction of room rates in any particular market will not lead to greater
competition for any or all of the Signature Inn hotels than presently exists.
Requirements for Capital and Labor. Hotels are capital intensive. In
order to remain competitive, hotel facilities must be continually maintained,
modernized and refurbished. This increases the need for capital funds (whether
from reserves, current cash flow or external financing) 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.
Uninsured or Underinsured Liability Risks. The Company may be exposed to
potential liability arising from such matters as employment and property laws,
labor difficulties and personal injuries. Many businesses, including those in
the lodging industry, periodically have experienced increases in insurance costs
while availability of coverage has decreased. Any such occurrence could render
certain types of desired coverage unavailable at commercially reasonable rates,
with the consequence that any related claims might then exceed coverage.
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,
the Company's results of operations and financial condition are substantially
affected by economic conditions in the Midwest.
Volatility of Market Price. The market price of the Company'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
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report........................................... 22
Consolidated Balance Sheets as of December 31, 1998, and 1997.......... 23
Consolidated Statements of Operations for each of the three years
ended December 31, 1998, 1997 and 1996............................... 24
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1998, 1997 and 1996......................... 25
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1998, 1997 and 1996......................... 26
Notes to Consolidated Financial Statements............................. 27
21
<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
22
<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.
23
<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.
24
<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.
25
<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 8,290,059 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.
26
<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.
27
<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>
28
<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.
29
<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>
30
<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 retroactively 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
31
<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.
32
<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.
33
<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.
34
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
------ ---------------------------------------------------------------
Financial Disclosure.
- --------------------
Not applicable.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
------- -------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
- --------------------------------------------------
(a) Identification of Directors and Executive Officers.
The names, ages, positions and offices held, principal occupations and
tenures as director of each of the directors and executive officers of the
Company, are set forth below:
<TABLE>
<CAPTION>
Names and Principal Elected as Term
Occupations (Ages) Office Held Director Expires
------------------ -------------- ---------- -------
<S> <C> <C> <C>
John D. Bontreger, President, Chief 3/31/78 5/18/99
President, Chief Executive Officer, Executive Officer,
Secretary and Chairman of the Board of Secretary and Chairman of
Signature Inns, Inc. (Age 50) the Board
Mark D. Carney, Senior Vice President 11/17/93 5/16/00
Senior Vice President Finance, Chief Finance, Chief Financial
Financial Officer and Assistant Secretary Officer, Assistant
of Signature Inns, Inc. (Age 42) Secretary and Director
Bo L. Hagood Senior Vice President 11/17/93 5/16/01
Senior Vice President Hotel Operations of Hotel Operations
Signature Inns, Inc. (Age 49) and Director
David R. Miller Vice President of Sales 9/23/78 5/16/01
Vice President and Marketing and Director
of Sales and Marketing of
Signature Inns, Inc. (Age 57)
Stephen M. Huse, Director 8/18/94 5/16/00
Chief Executive Officer, Huse Food Group,
Inc. (Age 56)
George A. Morton, Director 9/23/78 5/18/99
Agra businessman (Age 62)
Richard L. Russell, Director 5/21/91 5/18/99
Director of Advertising and Regional
Director of the National Retail Hardware
Association (Age 63)
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
William S. Watson Director 10/22/96 5/16/01
Hotel Industry Consultant,
WSRW Enterprise (Age 54)
</TABLE>
Except for Mr. Huse, who is a director of Marsh Supermarkets, Inc., no
director or nominee for director holds any directorship in any company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, or which is subject to the requirements of Section 15(d) of that
Act or which is a company registered as an investment company under the
Investment Company Act of 1940.
(b) Identification of Significant Employees.
None.
(c) Family Relationships.
No family relationship exists between any director and any other director,
executive officer or nominee for director of the Company.
(d) Involvement in Certain Proceedings.
No officer or director, and no affiliate or associate thereof, was a party
to any kind of proceeding, whether civil, criminal, administrative or bankruptcy
related, or the subject of any order, judgment or decree during the past five
years which would be material to an evaluation of the ability or integrity or
such person, nor has any such person been a party to any proceeding adverse to
the Company or its subsidiaries or affiliates, or has had any material interest
adverse to the Company or its subsidiaries or affiliates.
(e) Control Persons.
Mr. Bontreger is a "control person" of the Company as defined under
regulations promulgated by the Securities and Exchange Commission.
(f) Management of Subsidiaries.
The officers of each of the Company's three subsidiaries are: John D.
Bontreger, President, Chief Executive Officer and Secretary; Mark D. Carney,
Senior Vice President Finance and Chief Financial Officer; Martin D. Brew,
Treasurer and Controller. Messrs. Bontreger, Carney and Hagood are the
directors of each of the three subsidiaries. The subsidiaries are: P & N
Corporation, S.I.E. Corporation and SI Springfield Corporation.
(g) Committees of the Board.
1. Audit Committee. The Audit Committee meets as deemed necessary (a) to
recommend to the Board of Directors the retention, from time to time, of
independent auditing firms to be engaged by the Company, subject to shareholder
ratification, (b) to coordinate the annual audit of the Company between
management and the auditing firm, (c) to meet with the
36
<PAGE>
auditors at least two times during the year, including one meeting before the
audit is commenced and one meeting following the completion of the audit and to
meet at such other times as the Board of Directors, in its discretion, directs
or as the Committee, itself, determines. Committee members serve one-year terms
from one annual shareholders' meeting to the next. Current members of the Audit
Committee are Richard L. Russell, Chairman, and William S. Watson. The Audit
Committee met two times during the year ended December 31, 1998.
2. Compensation Committee. The purposes and functions of the Compensation
Committee are to (a) develop and recommend to the Board of Directors for
approval a compensation plan for the president/chief executive officer and all
other individuals within the Company who are designated as "senior management;"
(b) review benefit, bonus and incentive plans and other corporate perquisites on
an annual basis; (c) review and recommend to the Board suggested changes in
compensation to be paid to outside members of the Board; and, (d) review expense
reimbursement policies of the Company as they pertain to directors and
management. The Compensation Committee meets as determined necessary by the
Board or by the Committee. Current members of the Compensation Committee are
George A. Morton, Chairman, and Stephen M. Huse. The Compensation Committee met
three times during the year ended December 31, 1998.
(h) Number of Meetings.
During 1998, the Board of Directors of the Company held a total of eight
regularly scheduled meetings and two telephone meetings. All directors listed
above attended at least 75% of those meetings.
(i) Section 16(a) Beneficial Ownership Reporting Compliance.
No officer, director or beneficial owner of more than ten percent of any
class of equity securities of the Company who was required to file reports under
Section 16(a) of the Exchange Act failed to file such reports on a timely basis
during 1998.
(j) Officers/Directors Business Backgrounds.
A brief description of the business background and experience of each
officer and director of the Company is as follows:
JOHN D. BONTREGER, 50 President, Chief Executive Officer, Secretary and
Chairman of the Board
Mr. Bontreger is the founder of the Company and has served as its
President, Chief Executive Officer and Chairman of the Board since the Company's
inception in March 1978. He is responsible for the overall management of the
business affairs of the Company. Prior to founding the Company, Mr. Bontreger
served from 1975 to 1978 as a vice president for an Indiana-based hotel company.
Mr. Bontreger holds a Bachelor of Science Degree from Goshen College, Goshen,
Indiana, where he graduated in 1972.
36
<PAGE>
MARK D. CARNEY, 42 Senior Vice President Finance, Chief Financial Officer,
Assistant Secretary and Director
Mr. Carney joined the Company in 1992 as the Vice President of
Finance/Chief Financial Officer and is responsible for the financial operations
and finance functions of the Company and affiliated entities. In 1997, Mr.
Carney was named Senior Vice President of Finance. Prior to joining the
Company, Mr. Carney was employed by KPMG LLP, in Indianapolis, Indiana. He was
responsible for services to publicly and privately owned real estate developers
and operators, hospitality companies and financial institutions. Mr. Carney is
a 1979 graduate of Indiana University, with a Bachelor of Science Degree from
the School of Business and is a member of the American Institute of Certified
Public Accountants.
BO L. HAGOOD, 49 Senior Vice President Hotel Operations and Director
Mr. Hagood has been employed by the Company since December 1980 starting as
a hotel general manager. In January 1984, he was promoted to Director of Hotel
Operations and then to Vice President Hotel Operations in 1987, and Senior Vice
President Hotel Operation in 1997. Mr. Hagood has been employed in the
hospitality industry for 25 years, having managed several hotels for national
chains prior to joining Signature Inns, Inc. Mr. Hagood graduated from
Appalachian State University in 1971 with a Bachelor of Science Degree in
Business Administration.
DAVID R. MILLER, 57 Vice President - Sales and Marketing and Director
Mr. Miller has been employed by the Company since August 1978 and served as
the Secretary (until May, 1997) and Treasurer (until May 1986) of the Company.
From 1990 to 1997, Mr. Miller was the Executive Director of Sales and Marketing
and, after May 18, 1997, became Vice President - Sales and Marketing responsible
for assisting in the development and implementation of the Company's
advertising, marketing and public relations programs. He has served as liaison
with the Company's advertising and public relations agencies and has directed
the local, regional and national hotel room sales programs and the central
reservation system. Mr. Miller is a 1965 graduate of Ashland University,
Ashland, Ohio, with a B.S. in Business Administration.
MARTIN D. BREW, 38 Treasurer and Controller
Mr. Brew has been employed by the Company since April 1986. In December
1987, Mr. Brew became Controller and, in April 1992, he was designated
Treasurer. Mr. Brew is responsible for the Accounting and Information Systems
Department and the functions of: financial reporting, investor reporting, cash
management, property and casualty insurance, legal compliance, automation
concepts of the chain, tax planning and audit coordination. Prior to his
employment with Signature Inns, Inc., Mr. Brew was employed by KPMG LLP. Mr.
Brew is a 1982 graduate of Indiana University, with a Bachelor of Science Degree
from the School of Business and is a member of the American Institute of
Certified Public Accountants.
37
<PAGE>
GEORGE A. MORTON, 62 Director
Mr. Morton has been manager, operator and part owner of Morton Farms, Inc.
since 1962, and serves as Vice President and Secretary of that company. From
April 1987 to January 1989, Mr. Morton served as deputy Commissioner of
Agriculture for the State of Indiana. He served as the Indiana Director of
Farmers Home Administration from 1989 to 1993. Mr. Morton is a 1958 graduate of
Purdue University.
RICHARD L. RUSSELL, 63 Director
Mr. Russell is the Director of Advertising of the National Retail Hardware
Association ("NRHA") and the Executive Director of the Indiana, Kentucky and
Tennessee Region of the NRHA, and he has been involved in the hardware industry
for nearly thirty years. He is also serving as president or director of several
community and civic organizations. Mr. Russell is a 1958 graduate of Purdue
University.
STEPHEN M. HUSE, 56 Director
Mr. Huse is Chairman and Chief Executive Officer of Huse Food Group, Inc.,
Bloomington, Indiana. In addition, Mr. Huse is President of St. Elmo,
Incorporated, which operates the St. Elmo Steak House in downtown Indianapolis,
and Chief Executive Officer of Beef Corporation of America, franchisee of 14
Arby's Roast Beef Restaurants in central and southern Indiana. Previously, Mr.
Huse was President and Chief Executive Officer of Consolidated Products, Inc.,
operator of Steak 'n' Shake restaurants. He is also the founder of Noble
Romans, Inc., a franchiser of pizza parlors in the Midwest. Mr. Huse is also a
director of Marsh Supermarkets, Inc., and a member of the Advisory Board of
Keybank of Central Indiana, Indianapolis, Indiana. Mr. Huse is a 1965 graduate
of Indiana University.
WILLIAM S. WATSON, 54 Director
Mr. Watson currently provides hotel industry consulting services through
WSRW Enterprise, which is affiliated with Stratus Management Group, Inc. Mr.
Watson previously served as Vice-Chairman of Pegasus Systems, Inc., and Chairman
of THISCO (The Hotel Industry Switch Company). Mr. Watson previously held
positions with Best Western International as Senior Vice President Worldwide
marketing and Executive Vice President. Mr. Watson was also employed as a Vice
President of ITT Sheraton Corporation, and he held executive positions with
Bicoastal Air Service, Inc., Altair Airlines, Inc. and Pan American World
Airways. Mr. Watson holds a Mechanical Engineering degree from Croydon
Polytechnic in England.
38
<PAGE>
Item 10. Executive Compensation.
---------------------------------
EXECUTIVE COMPENSATION PHILOSOPHY
The Company believes that the primary objectives of the Company's executive
compensation policies should be:
. To attract and retain talented executives by providing compensation
opportunities that are competitive with the compensation provided to executives
at companies of comparable size and position, while maintaining compensation
within levels that are consistent with the Company's business plan, financial
objectives and operating performances;
. To provide meaningful annual incentive opportunities for executives to
work toward and achieve the Company's profit and other targets established in
the Company's business plan; and
. To align the interest of executives with those of shareholders by
providing substantial long-term incentive opportunities through stock options
and other forms of stock ownership.
The Company believes that its executive compensation program should be
reviewed periodically to insure its support of the Company's financial
performance and its business plan. It also should be compared to practices of,
and levels paid by, other companies with whom the Company competes for business
and human resources. The Company's intent is not simply to copy the practices
and levels of others, but rather to continually strive to have a program that
takes into account factors unique to the Company.
The Company believes that executive compensation should be comprised of:
(1) base compensation; (2) annual (short-term) compensation; and, (3) long-term
compensation. The Company believes that base compensation is currently set at
levels competitive with executives with similar responsibilities at other
companies similar in size and complexity to the Company.
The Company believes that annual incentive compensation should be utilized
to retain management, provide motivation, and move the Company in a positive
financial direction. Substantial incentive opportunities are provided to
executives based upon the level of
39
<PAGE>
achievement of targeted profit goals for the Company, and the level of
individual responsibility and achievement.
The Company believes that an integral part of the executive compensation
programs should be long term incentive. Through equity based compensation in
the form of Company common stock, the long-term interest of executives are
aligned with those of shareholders. Because the Company believes that
significant stock ownership by management is a catalyst in building shareholder
value, it will continue to utilize stock options and review and possibly use
other shareholder value related vehicles to provide long-term incentive
compensation.
The Company believes that its compensation philosophies further the
interests of the shareholders, since a significant part of executive
compensation is based upon obtaining results that increase the value of the
Company and are beneficial to all shareholders.
SUMMARY COMPENSATION TABLE
Annual Compensation
Year Ended ----------------------
Name and Principal Position December 31 Salary ($) Bonus ($)
- ---------------------------------------- ------------ ----------------------
John D. Bontreger 1998 164,477 84,354
President & Chief Executive Officer 1997 159,450 78,091
1996 153,317 80,110
Mark D. Carney 1998 99,408 53,680
Senior Vice President Finance & Chief 1997 96,370 49,695
Financial Officer 1996 92,663 52,797
Bo L. Hagood 1998 99,408 53,680
Senior Vice President Hotel Operations 1997 96,370 49,695
1996 92,663 50,797
David R. Miller 1998 84,347 31,802
Vice President Sales and Marketing 1997 81,769 26,213
1996 78,624 28,313
Martin D. Brew 1998 84,347 16,127
Treasurer and Controller 1997 81,890 13,925
1996 78,740 14,714
During 1998, none of the named officers received any option grant or
exercised any option.
EMPLOYMENT CONTRACTS
The Company has employment contracts with John D. Bontreger, Bo L. Hagood,
Mark D. Carney, David R. Miller, and Martin D. Brew. The terms of the
employment contracts began in December 1993, and the contracts provide for base
salaries of the officers/employees, plus bonuses, as determined annually by the
Company's Board of Directors. In addition, the employment contracts provide for
the payment of other customary benefits, including medical, life and disability
insurance premiums. Messrs. Bontreger's Hagood's and Carney's contracts expire
in December 1999. Messrs. Miller's and Brew's contracts expire in June 1999.
The contracts are renewable for subsequent terms: Mr. Bontreger's for one and
one-half years;
40
<PAGE>
Messrs. Hagood's and Carney's for one year; and, Messrs. Miller's and Brew's for
six months. The contracts are not terminable by the Company except upon "just
cause' as defined in the contracts.
In the event the Company terminates an officer/employee's employment
without "just cause," or in the event an officer/employee resigns "with good
reason," the officer/employee is entitled to receive from the Company lump sum
severance payments equal to a multiple of yearly "regular compensation," as
defined in the contracts. "Good reason" is defined pursuant to amendments to
the employment agreements executed by Messrs. Bontreger, Hagood, Carney, Miller
and Brew on December 31, 1998, as a material breach by the Company of the
employment agreements or by the Company's execution of a "change of control"
agreement coupled with the employee's inability to execute an employment
agreement with the new entity upon terms acceptable to employee or similar to
those contained in the employee's current employment agreement. In such events,
Mr. Bontreger would receive severance benefits equal to one and one-half times
his "regular compensation," Messrs. Hagood and Carney would receive severance
benefits equal to one times such compensation, and Messrs. Miller and Brew would
receive severance benefits equal to one-half times such compensation.
In the event of the termination of an employment contract by the Company
"for just cause" or a resignation by an officer/employee "without good reason"
the severance benefits would not be payable. In addition, in the event the
Company terminates an employment contract for "just cause" or the
officer/employee resigns "without good reason," the officer/employee must abide
by certain restrictive, non-compete provisions for the same period as the then
current term of the contract.
COMPENSATION OF DIRECTORS
Each of the Company's non-employee directors (each, an "Outside Director")
is paid a retainer of $6,000 per year, payable quarterly. In addition, each
Outside Director receives a fee of $750 per Board meeting attended (other than
telephonic Board meetings which are covered by the retainer), and receives a fee
of $750 for each Committee meeting. Under the terms of the 1996 Equity
Incentive Plan, awards of Restricted Stock to Outside Directors are
automatically granted upon such directors' election or re-election. Initially,
each Outside Director was granted 167 shares, 333 shares or 500 shares of
Restricted Stock depending upon the number of years then remaining in such
director's terms. Upon re-election, each Outside Director is granted awards of
500 shares of Restricted Stock. Outside Directors are also reimbursed for
reasonable costs and expenses, including travel expenses, incurred by them in
connection with their attendance at any board or committee meeting.
OTHER INFORMATION
Except for the promissory notes executed and delivered to the Company by
members of operating management in connection with their purchase of shares in
1994, which were paid in full in 1996, no loans have ever been made by the
Company of its subsidiaries to any officer or director of the Company.
41
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
-------------------------------------------------------------------------
Set forth in the following table are the beneficial holdings as of
March 17, 1999 of the Company's common stock and Series A Preferred
Stock of each of the current named executive officers and directors of the
Company and nominees for director, which group includes each person known to the
Company who may be deemed to own more than 5% of any class of the Company's
voting securities ("5% holder") and all directors and officers as a group.
Unless otherwise indicated, each person owns all shares in his name of record
and has sole voting and investment power over such shares.
<TABLE>
<CAPTION>
BENEFICIAL HOLDINGS OF
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Amount of Beneficial
Ownership (1)
-----------------------------
Common Preferred Total
Name of Beneficial Owner Stock Stock Options Total Percent
- ------------------------ -------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
John D. Bontreger 409,566 16,675 426,241 19.85%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
Mark D. Carney 119,728 8,338 128,066 5.96%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
Bo. L. Hagood 115,111 8,338 123,449 5.75%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
David R. Miller 80,945 5,003 85,948 4.00%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
Stephen M. Huse 545 100 753(4) 0.04%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
George A. Morton 27,701 (2) 27,701 1.29%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
Richard L. Russell 16,351 (3) 16,351 0.76%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Amount of Beneficial
Ownership (1)
-----------------------------
Common Preferred Total
Name of Beneficial Owner Stock Stock Options Total Percent
- ------------------------ -------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
William S. Watson 589 589 0.03%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
Martin D. Brew 33,783 3,335 37,118 1.73%
250 E. 98th Street, Suite 450
Indianapolis, Indiana 46240
All Directors and Executive 804,319 100 41,689 846,216 39.40%
Officers as a Group
</TABLE>
(1) Information with respect to beneficial ownership is based upon information
supplied by each shareholder.
(2) Includes 10,810 shares owned by trusts of which Mr. Martin's wife is the
trustee with investment power over such shares.
(3) Includes 9,460 shares held by Mr. Russell jointly with his wife with whom
he shares voting and investment power over such shares.
(4) Includes the number of shares of common stock the beneficial owner has the
right to acquire upon conversion of all of the shares of Series A Preferred
Stock.
Item 12. Certain Relationships and Related Transactions. At no time
---------------------------------------------------------
during the last two years has any executive officer, member of the Board of
Directors of the Company, 5% holder of any class of securities, or any immediate
family member thereof, been a party to or had a direct or indirect material
interest in any transaction of any kind with the Company.
Item 13. Exhibits and Reports on Form 8-K.
------- --------------------------------
(a) The Exhibit Index required by Item 601 of Regulation S-B is as
follows:
(2) Agreement and Plan of Merger between Jameson Inns, Inc. and
Signature Inns, Inc. dated as of January 27, 1999 (incorporated
by reference to the Form S-4 Registration Statement of Jameson
Inns, Inc., Registration No. 333-74149).
(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).
43
<PAGE>
(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).
(10)(i) Employment Agreement between the Company and John D. Bontreger
(incorporated by reference to Exhibit 10.2 of the Registration
Statement on Form SB-2 of the Company, Registration No. 333-
12735 (the "Form SB-2")).
(10)(ii) Employment Agreement between the Company and Mark D. Carney
(incorporated by reference to Exhibit 10.3 of the Form SB-2).
(10)(iii) Employment Agreement between the Company and Bo L. Hagood
(incorporated by reference to Exhibit 10.4 of the Form SB-2).
(10)(iv) Employment Agreement between the Company and David R. Miller
(incorporated by reference to Exhibit 10.5 of the form SB-2).
(10)(v) Employment Agreement between the Company and Martin D. Brew
(incorporated by reference to Exhibit 10.6 of the Form SB-2).
(10)(vi) The Company's 1996 Equity Incentive Plan (incorporated by
reference to Exhibit 10.7 of the Form SB-2).
(21) Subsidiaries of the Registrant
(23) Consent of KPMG LLP.
The Financial Statements as set forth under Item 7 are filed as a part of
this Report (see page 20 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
44
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIGNATURE INNS, INC.
By: /s/ John D. Bontreger
--------------------------------
John D. Bontreger, President,
Chairman of the Board, President
Chief Executive Officer and Secretary
Date: March 26, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date: March 26, 1999 /s/ John D. Bontreger
-------------------------------------------------
John D. Bontreger, Chairman of the Board,
President and Chief Executive Officer, Secretary
and Director of Signature Inns, Inc. (Principal
Executive Officer)
Date: March 26, 1999 /s/ Mark D. Carney
-------------------------------------------------
Mark D. Carney, Senior Vice President Finance,
Chief Financial Officer, Assistant Secretary and
Director of Signature Inns, Inc. (Principal
Financial and Accounting Officer)
Date: March 26, 1999 /s/ Bo L. Hagood
-------------------------------------------------
Bo L. Hagood, Senior Vice President Hotel
Operations and Director of Signature Inns, Inc.
Date: March 26, 1999 /s/ David R. Miller
-------------------------------------------------
David R. Miller, Vice President Sales and
Marketing and Director of Signature Inns, Inc.
Date: March 26, 1999 /s/ Martin D. Brew
-------------------------------------------------
Martin D. Brew, Treasurer and Controller of
Signature Inns, Inc.
Date: March 26, 1999 /s/ Stephen M. Huse
-------------------------------------------------
Stephen M. Huse, Director of Signature Inns, Inc.
Date: March 26, 1999 /s/ George A. Morton
-------------------------------------------------
George A. Morton, Director of Signature Inns, Inc.
Date: March 26, 1999 /s/ Richard L. Russell
-------------------------------------------------
Richard L. Russell, Director of Signature Inns,
Inc.
Date: March 26, 1999 /s/ William S. Watson
-------------------------------------------------
William S. Watson, Director of Signature Inns,
Inc.
45
<PAGE>
EXHIBIT 21
----------
<TABLE>
<CAPTION>
Subsidiaries
------------
Name under which
Name of Subsidiary State of Incorporation Subsidiary does Business
- ------------------ ---------------------- ------------------------
<S> <C> <C>
P & N Corporation Indiana P & N Corporation of Indiana
SIE Corporation Indiana SIE Corporation
SI Springfield Corporation Indiana SI Springfield Corporation
</TABLE>
<PAGE>
EXHIBIT 23
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 December
31, 1998 annual report on Form 10-KSB of Signature Inns, Inc.
KPMG LLP
Indianapolis, Indiana
March 24, 1999
