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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition
from ________________ to ________________
Commission File Number: 0-23256
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JAMESON INNS, INC.
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(Exact name of Registrant as specified in its Articles)
Georgia 58-2079583
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Perimeter Center East, Suite 8050,
Atlanta, Georgia 30346-1603
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 901-9020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
9.25% Series A Cumulative Preferred Stock, par value $1.00 per share
$1.70 Series S Cumulative Convertible Preferred Stock, par value $1.00 per share
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(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for the past 90 days. [X] Yes [ ] No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity
stock held by nonaffiliates of the registrant as of March 14, 2000:
$70,060,505.
Number of shares of common stock outstanding on March 14, 2000 - 11,419,935.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders
to be held June 17, 2000 are incorporated by reference into Part III.
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FORM 10-K
JAMESON INNS, INC.
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
PAGE
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PART I
Item 1. Business 2
Item 2. Properties 40
Item 3. Legal Proceedings 46
Item 4. Submission of Matters to a Vote of Security Holders 46
PART II
Item 5. Market for Jameson's Common Equity and Related Stockholder Matters 46
Item 6. Selected Financial Data 47
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 51
Item 7A. Quantitative and Qualitative Disclosure about Market Risks 60
Item 8. Financial Statements and Supplementary Data 60
Item 9. Changes in and Disagreements with Accountants on Accounting 60
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Jameson 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and Management 61
Item 13. Certain Relationships and Related Transactions
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
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JAMESON INNS, INC.
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FORWARD-LOOKING STATEMENTS
This report, including the documents incorporated in this report by
reference, contains certain forward-looking statements. These include
statements about our expansion plans, acquisition or leasing of additional land
parcels, construction of new hotels and expansion of existing hotels, access to
debt financing and capital, payment of quarterly dividends and other matters.
These statements are not historical facts but are expectations or projections
based on certain assumptions and analyses made by our senior management in
light of their experience and perception of historical trends, current
conditions, expected further developments and other factors. Whether actual
results and developments will conform to our expectations and predictions is,
however, subject to a number of risks and uncertainties. These include, but are
not limited to:
- our ability to:
- raise additional equity capital adequate to sustain
our growth plans;
- integrate the Signature Inns, which we recently
acquired, into our ownership and administrative
structure;
- secure construction and permanent financing for new
Inns on favorable terms and conditions;
- assess accurately the market demand for new Inns and
expansions of existing Jameson Inns;
- identify and purchase or lease new sites which meet
our various criteria, including reasonable land
prices or ground lease terms;
- contract for the construction of new Inns and
expansions of existing Jameson Inns in a manner
which produces Inns consistent with our present
quality and standards at a reasonable cost and
without significant delay;
- provide ongoing renovation and refurbishment of the
Inns sufficient to maintain consistent quality
throughout the chain; and
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- manage our business in a cost-effective manner given
the increase in the number of Inns we own and the
geographic areas in which they are located.
- The ability of our lessee, Jameson Hospitality, LLC, to
manage the Inns profitably.
- General economic, market and business conditions,
particularly those in the lodging industry and in the
geographic markets in which the Inns are located.
- The business opportunities (or lack of opportunities) that
may be presented to and pursued by us.
- Availability of qualified managers and employees necessary to
execute our growth strategy, particularly in light of current
low rates of unemployment.
- Changes in laws or regulations.
- Our continued qualification as a real estate investment
trust, or REIT, and continuation of favorable income tax
treatment for REITs under federal tax laws.
The words "estimate," "project," "intend," "expect," "anticipate,"
"believe" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places
throughout this report and the documents incorporated in this report by
reference as well as in other written materials, press releases and oral
statements issued by us or on our behalf. We caution you not to place undue
reliance on these forward-looking statements, which speak only as of the date
that they are made. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date of this report.
PART I
ITEM 1. BUSINESS
GENERAL
We are a self-administered real estate investment trust, commonly
called a REIT, headquartered in Atlanta, Georgia. We develop and own limited
service hotel properties ("Inns") in the southeastern United States under the
trademark "The Jameson Inn(R)." In addition, as a result of our acquisition of
Signature Inns, Inc. in May of 1999, we own Inns in the Midwest operating under
the trademark "Signature Inn(R)." In this report, we sometimes refer separately
to the Inns operating under the Jameson trademark as "Jameson Inns" and to
those operating under the Signature trademark as "Signature Inns."
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We focus on developing Inns in communities which have a strong and
growing industrial or commercial base and a shortage of quality hotel rooms.
Generally, our Inns are rooms-only facilities designed to appeal to price and
quality conscious travelers. Our target customers are business travelers, such
as sales representatives and government employees, as well as families and
leisure travelers attending events in our markets, such as college or cultural
gatherings, fairs, festivals and family reunions.
As a REIT, we are prohibited from operating our properties.
Accordingly, all of the Inns are leased to Jameson Hospitality, LLC under
master leases. The master leases require Jameson Hospitality to pay us base
rent based on the number of rooms in operation on the first day of each month
and, where required under the formulas in the master leases, percentage rent
based on room revenues as defined in the master leases. Percentage rent is
designed to allow us to participate in any growth in revenues at the Inns. The
master leases generally provide that a portion of aggregate room revenues in
excess of specified amounts will be paid to us as percentage rent.
Jameson Hospitality is wholly owned by Thomas W. Kitchin, our
chairman and chief executive officer, and members of his family. References
to Jameson Hospitality throughout this report refer to either Jameson
Hospitality or its predecessors, Jameson Operating Company, Jameson Operating
Company, LLC and Jameson Operating Company II, LLC, as appropriate.
Our mailing address is: Jameson Inns, Inc., 8 Perimeter Center East,
Suite 8050, Atlanta, Georgia 30346-1604. Our telephone number is: (770)
901-9020.
MATERIAL DEVELOPMENTS IN 1999
On May 7, 1999, we concluded a merger with Indianapolis-based
Signature Inns, Inc. Through the Signature merger, we acquired 25
wholly-owned Signature Inns (2,978 available rooms) and a 40% general
partnership interest in a limited partnership which owned one additional
Signature Inn located in Carmel, Indiana (81 available rooms). In December
1999 we acquired the remaining 60% partnership interest in this partnership
and took direct ownership of the Signature Inn-Carmel. All of the Signature
Inns are located in six Midwestern states and, like our Jameson Inns, are
limited service hotels serving both business and leisure travelers. At the
conclusion of the Signature merger, we leased all of the Signature Inns
except the Signature Inn-Carmel to Jameson Hospitality which operates all of
the Jameson Inns. We leased the Carmel Signature Inn to Jameson Hospitality
in December 1999 when we acquired direct ownership of the property.
As consideration for the merger, Signature common stockholders
received one-half share of Jameson common stock and a cash payment of $1.22 in
exchange for each share of Signature common stock, as well as a dividend of
$.28 per share. Holders of outstanding shares of Signature $1.70 Cumulative
Convertible Preferred Stock, Series A, received an equal number of shares of
Jameson $1.70 Series S Cumulative Convertible Preferred Stock having
substantially the same terms as the Signature Series A preferred stock.
The acquisition of Signature Inns increased the total number of rooms
in our hotels by approximately 73%. The acquisition also provided us additional
geographic diversity by expanding our operations from the southeastern United
States into the Midwest.
Effective April 2, 1999, our subsidiary, Jameson Outdoor Advertising
Company, acquired certain assets of Jameson Hospitality consisting of
billboards, ground leases for sites on which the billboards are erected and
other related assets. As consideration for these assets we issued 72,727 shares
of our 9.25% Series A preferred stock, paid cash in the amount of $400,000 and
assumed liabilities in the amount of approximately $700,000. We obtained an
opinion from Interstate/Johnson Lane Corporation that the terms of the
transaction were fair from a financial standpoint to us and to our
shareholders. In order to maintain our REIT status, these assets are leased to
and operated by Jameson Hospitality which pays us annual rentals on each of the
billboards. In 1999, rental payments from these assets totaled approximately
$412,000.
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In December 1999 and January 2000, we refinanced approximately
$15,800,000 of indebtedness secured by five Signature Inns, including the
issuance of adjustable rate economic development revenue refunding bonds in the
aggregate principal amount of $12,115,000 secured by four Signature Inns.
During 1999, we opened eight new Jameson Inns (397 total additional
rooms) and 11 expansions of existing Jameson Inns (217 total additional rooms).
In October 1999, we opened our first Jameson Inn in the state of Florida and
are further extending our geographic presence in the Southeast through
development of Jameson Inns in Kentucky, Louisiana and Virginia.
RISK FACTORS
Risks Which are Specific to Jameson
The following risks relate specifically to the conduct of our
business. You should also refer to the information under the heading Forward
Looking Statements on page 1.
Our rapid expansion creates financial and operating risks. Our growth
strategy contemplates a rapid and continuous development of new Inns and
expansions of existing properties. We plan to borrow 100% of the related
development and expansion costs. The successful implementation of this strategy
depends on numerous factors, including those unique to us and those generally
associated with overall hotel, real estate and general economic conditions.
Those factors specific to us include our ability to:
- raise additional equity capital adequate to sustain our
growth plans;
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- secure construction and permanent financing to finance such
development on terms and conditions favorable to us;
- assess accurately the market demand for new Inns and
expansions of existing properties;
- identify and purchase or lease new sites which meet our
various criteria, including reasonable land prices and ground
lease terms;
- contract for the construction of new Inns and expansions in a
manner which produces hotel properties consistent with
present quality and standards at a reasonable cost and
without significant delays; and
- manage our business in a cost-effective manner given the
increase in the number and geographic dispersion of our Inns.
In addition, risk factors affecting our profitability include Jameson
Hospitality's ability both to manage our Inns and to attract, develop and
retain the personnel, procedures and practices necessary to generate the room
revenues which we anticipate will result from development and expansions of
Inns.
Some or all of the factors discussed above could preclude or at least
delay the development of new Inns and the expansion of existing properties.
Similarly, the terms of financing available to us or the operating results of
any new or expanded Inns could have a negative economic effect on us and reduce
the amount of cash available for distribution as dividends.
Potential conflicts of interest exist among us and our chief executive
officer and Jameson Hospitality. In addition to his positions with and stock
ownership interest in us, Thomas W. Kitchin, our chairman and chief executive
officer, and members of his family are the owners of Jameson Hospitality, which
constructs and operates all of the Inns and pays and allocates all of our
administrative overhead expenses. These relationships create conflicts of
interest in our dealings with Jameson Hospitality under the master leases and
the various construction agreements, and with regard to allocation and payment
of our overhead expenses. In that regard, the master leases, the form of the
construction agreements and the cost reimbursement agreement under which Jameson
Hospitality pays and allocates our overhead were not negotiated on an
arm's-length basis.
We depend exclusively on Jameson Hospitality for lease revenues.
Certain rules relating to the qualification of REITs prohibit us from operating
the Inns. To comply with these rules, we have leased the Inns to Jameson
Hospitality. As a result, we depend exclusively on Jameson Hospitality for
lease revenues. Jameson Hospitality's obligations under the master leases are
unsecured. Jameson Hospitality has few liquid assets, a history of operating
losses and limited
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net worth. As a result, Jameson Hospitality has very limited resources to
perform certain of its financial obligations under the Jameson Lease. These
include indemnifying us against various claims, damages and losses and making
payments of base rent.
Also, under the master leases, Jameson Hospitality controls the daily
operations of the Inns and we have no ability to participate in those
decisions. Thus, even if Jameson Hospitality were managing the Inns
inefficiently or in a manner which failed to maximize the amount of percentage
rent we receive, we would be unable to require a change in operating
procedures. The master leases limit us to seeking redress only if Jameson
Hospitality violates the lease terms, and then only to the extent of the
remedies set forth in the master leases. Those remedies include our ability to
terminate the master leases upon certain limited events of default, including
Jameson Hospitality's failure to pay base rent.
We will need to obtain additional debt financing on favorable terms to
carry out our expansion plans. We intend to borrow 100% of the funds required
to finance the development of new Inns and the expansion of existing Jameson
Inns. We also may need to borrow funds to pay the costs of replacement and
refurbishment of furniture, fixtures and equipment of the Inns that we are
required to pay under the master leases. We are not certain that we will be
able to obtain this financing, either through commercial borrowings or the
issuance of corporate debt securities. If we are able to borrow needed funds,
we may not be able to continue to meet our debt service obligations. To the
extent that we cannot, we risk the loss of some or all of our assets, including
the Inns, to foreclosure.
Interest rate increases could increase our cost of current and future
debt. A significant portion of our indebtedness is subject to adjustable
interest rates and is secured by a substantial number of our Inns and
billboards. Because of the current relative unavailability and high cost of
fixed interest rate long-term financing, we anticipate that our future
borrowings will be at interest rates which adjust with certain indices.
Therefore, our cost of financing will vary subject to events beyond our
control. Adverse economic conditions could result in higher interest rates
which would increase debt service requirements on floating rate debt and could
reduce cash available for distribution. Adverse economic conditions could also
cause the terms on which borrowings are available to us to be unfavorable. In
those circumstances, if we needed capital to repay indebtedness, we could be
required to sell one or more Inns at times which might not permit realization
of the maximum return on our investment.
Cross-collateralization of the Inns increases our risk of loss. A
significant number of our current loan agreements provide for
cross-collateralization and cross-default with respect to our debt, and future
loan agreements will likely contain similar provisions. The results of a
cross-default provision are that all of the loans with this provision
effectively secure repayment of our other loans and a default on one loan
results in a default on the other loans. In general, these provisions in our
loans may place our assets at a greater risk of foreclosure.
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The foreclosure of a mortgage on an Inn could have material adverse
tax effects on us. If a mortgage lender foreclosed on an Inn to enforce its
lien in satisfaction of non-recourse debt, we might be required to recognize
income. If the amount of the debt discharged exceeded that property's fair
market value, the amount of debt discharge income to be recognized would be
equal to the excess of the amount of such debt over the fair market value of
the property. In addition, we would recognize a capital gain to the extent, if
any, that the fair market value of the property exceeded our basis in it. We
also could recognize gain if a mortgage lender foreclosed on a recourse debt.
The debt discharge income would be subject to the 95% distribution requirement
described below in under the heading --Taxation of Jameson--Annual Distribution
Requirements, even though we would receive no cash with which to make a
distribution.
Debt repayment terms could reduce our ability to make cash
distributions. If our debt service obligations continue to be based primarily
on 15- to 20-year amortizations, the portion of our cash flow necessary to make
principal payments on obligations to finance future Inns may exceed the cost
recovery deductions, which are based on 39-year useful lives, we can take on
our federal income tax return. As a result, our cash available for distribution
to our shareholders may not be adequate to allow distribution of 95% of our
taxable income. In that case, we might be forced to borrow to fund a
distribution to shareholders. If we were unable to borrow the money, and as a
result did not make the requisite distribution, our status as a REIT would be
jeopardized.
We could become more highly leveraged which would increase our debt
service requirements and our risk of default. We currently have a policy of
limiting our outstanding indebtedness to 65% of the aggregate appraised value
of the Inns. However, our organizational documents do not limit the amount of
indebtedness that we may incur. Accordingly, our Board of Directors could
change the current policies and we could become more highly leveraged. This
would increase our debt service requirements and also the risk of our
defaulting on our obligations. An increase in our debt service requirements
could adversely affect our financial condition and results of operations, as
well as our ability to make dividend distributions to our shareholders. This
could, as a result, jeopardize our status as a REIT. See --Taxation of Jameson,
below.
Our lack of industry diversification makes us more vulnerable to
economic downturns. We currently, and intend in the future to, invest only in
Inns. This concentration of our investments in narrow segments of a single
industry makes us more vulnerable to adverse effects of occurrences such as
economic downturns. A weakness in the economy could have a more significant
effect on the operation of the Inns and, therefore, on lease revenues and cash
available for distribution than if our investments were more economically
diverse.
The Inns' geographic concentration increases our risks from local and
regional economic downturns and other events. All currently operating Jameson
Inns are located in the Southeast and approximately 40% of our Jameson Inns'
rooms are located in Georgia. All Signature Inns are in the Midwest and
approximately 50% of Signature Inns' rooms are located in Indiana. For the
foreseeable future we will continue to restrict development of new Inns to
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those two regions of the country. This geographic concentration makes us more
vulnerable to local and regional occurrences such as economic downturns,
seasonal factors and natural disasters. Any of these could adversely affect our
lease revenues and cash available for distribution.
We rely heavily on the services of Thomas W. Kitchin. We and Jameson
Hospitality have relied and will continue to rely heavily upon the services and
expertise of Thomas W. Kitchin, our chairman, and chief executive officer and
the chief executive officer and manager of Jameson Hospitality, for strategic
business direction. In addition, certain of our loan agreements provide for a
default upon a change of management. The occurrence of any event which would
cause us to lose the services of Mr. Kitchin could have a material adverse
effect on us. We have purchased a $1.0 million key-man life insurance policy on
the life of Mr. Kitchin. There is no assurance, however, that we will continue
to maintain such insurance policy in effect or that any proceeds thereof would
be sufficient to compensate us for the loss of Mr. Kitchin's services.
Shares issued under our stock incentive plans could dilute
shareholders' investments. We maintain certain stock option and stock grant
plans to provide incentive compensation to our directors, officers and key
employees and to those of Jameson Hospitality. The availability for resale of
shares of our common stock issued or issuable under our stock incentive plans
may depress the market price of the our common stock. In addition, to the
extent stock options and other incentive awards which may be granted under our
stock incentive plans vest and are exercised at prices below the net book value
of the our common stock, the resulting issuance of shares of our common stock
will cause an immediate dilution of the interests of our other shareholders.
Rising interest rates and limited trading volume may depress the price
of our capital stock. An increase in market interest rates may result in higher
yields on other financial instruments than our shareholders realize from
distributions and dividends paid on our common and preferred stock. This could
adversely affect the market price of the our common and preferred stock. In
addition, the trading volume of equity interests in REITs is generally not as
high as in equity interests in other entities. Accordingly, our status as a
REIT may also adversely affect the trading volume of shares of our common and
preferred stock. This would reduce the liquidity of an investment in Jameson.
Our corporate documents have certain antitakeover provisions that tend
to reduce the likelihood of our acquisition by another company. Certain
provisions of our articles of incorporation and bylaws may have the effect of
discouraging a third party from making an acquisition proposal for us without
the approval of the our Board of Directors. This will tend to reduce the
likelihood of a change in control of Jameson, even when the holders of our
stock could have the opportunity to realize a premium over the then prevailing
market prices. For example, a provision of our articles of incorporation
creates our classified Board. Under that provision, our Board of Directors is
made up of three classes of directors with staggered terms of office. Directors
for each class are elected for a three-year term upon the expiration of their
then
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current class term. This makes it more difficult for our shareholders to change
control of Jameson even if a change of control were in the shareholders'
interest. In addition, to comply with the various restrictions imposed on
REITs, our articles of incorporation contain a provision limiting the amount of
our voting stock which a shareholder or group of shareholders may own. This
limit may also have the effect of precluding an acquisition of control of
Jameson without the approval of our Board of Directors.
Our articles of incorporation also authorize the Board of Directors to
issue up to 10,000,000 shares of preferred stock and to establish the
preferences and rights of any shares so issued. Accordingly, our Board of
Directors is authorized, without shareholder approval, to issue preferred stock
with distribution, dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
shares of our common stock. Issuance of preferred stock could have the effect
of delaying or preventing a change of control of Jameson even if a change of
control were in our shareholders' interest. To date, our Board has approved the
issuance of the 9.25% Series A Cumulative Preferred Stock ("Series A Preferred
Stock") and the $1.70 Series S Cumulative Convertible Preferred Stock ("Series
S Preferred Stock") totaling 3,528,727 shares.
We could make changes in our investment and financing policies which
could adversely affect our financial condition and/or results of operations.
Our Board of Directors determines our investment and financing policies and our
policies with respect to certain other activities, including growth, debt
capitalization, distributions, operating policies and our qualification as a
REIT. Among other things, our Board of Directors could make financing decisions
which could result in the creation of interests in Jameson and/or the Inns with
priority over the interests of the shareholders, and/or make equity investments
in concerns with debt superior to our equity interest. Our Board of Directors
has no present intention to amend or revise these policies. However, except
with respect to our qualification as a REIT, our Board of Directors may do so
at any time without the approval of the shareholders. Any decision by our Board
of Directors to relinquish our status as a REIT is subject to the approval of a
majority of our voting stock present at a meeting of our shareholders. A change
in these policies could adversely affect our financial condition or results of
operations.
Risks of Hotel Investments Generally
The following are risks which affect hotel investments generally which
could significantly affect our results of operations.
General economic and regulatory conditions in the hotel industry will
affect our business. Our ownership of the Inns is subject to varying degrees of
risk generally incident to the ownership and operation of real property and, in
particular, hotels. Our ownership of the Inns may be adversely affected by a
number of factors, including:
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- the national, regional or local economic climate (which may
be adversely impacted by plant closings, industry slowdowns,
inflation and other factors);
- local hotel market conditions (such as an oversupply of guest
rooms);
- perceptions by travelers of the safety, convenience and
attractiveness of the Inns;
- changes in governmental regulations, zoning or tax laws;
- operating cost increases, labor problems, potential
environmental or other legal liabilities, and changes in
interest rate levels.
We face significant competition and the supply of hotel rooms is
growing faster than demand in some of the markets in which Inns are located. A
strong national economy and readily available debt and equity financing during
the past several years has prompted the construction of a significant number of
new hotels and motels in certain markets where we operate. Demand for lodging
in the travel industry, however, has generally not kept up with the growth in
the supply of rooms. As a result, occupancy rates for hotels, including the
Inns, have tended to remain constant or to decline. This condition is unlikely
to change in the foreseeable future and may have a negative impact on our
results of operations. In addition, there are numerous hotels, including those
that are part of major chains with substantial advertising budgets, national
reservation systems, marketing programs and greater name recognition than we
have, that compete with the Inns in attracting travelers. Further, many of the
Inns are located in smaller communities where the entry of even one additional
competitor into the market may materially affect the financial performance of
the Inn in that community. In several of the larger communities where Inns are
located, significant numbers of additional hotel rooms are currently under
construction.
We incur significant renovation and refurbishment costs. Hotels in
general, including the Inns, have an ongoing need for renovation and
refurbishment. We have adopted a policy of maintaining sufficient cash or
available borrowings to fund expenditures for replacement and refurbishment of
furniture, fixtures and equipment for the Inns up to an amount equal to 4% of
Jameson Hospitality's total aggregate room revenues since July 1, 1995, less
the amounts actually expended since that date.
We may not be adequately insured. The ownership of hotel properties by
its nature presents risks of liability resulting from injuries to guests and
resulting litigation. Under the terms of the master leases, we carry
comprehensive liability, fire, extended coverage, rental loss and business
interruption insurance covering all of the Inns with policy specifications and
insured limits customarily carried for similar properties. However, our
insurance coverage could be insufficient to fully protect our business and
assets from all claims or liabilities, including environmental liabilities.
Further, we may not always be able to obtain additional insurance at
commercially reasonable rates. In the event losses or claims are beyond the
limits or scope of our insurance coverage, our business and assets could be
materially adversely affected. In
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addition, certain types of losses (such as certain environmental liabilities)
are not generally insured because they are either uninsurable or not
economically insurable. If an uninsured loss or a loss in excess of insured
limits occurs, we could lose our capital invested in the affected Inn, as well
as anticipated future revenues from that Inn, while remaining obligated for any
mortgage indebtedness or other financial obligations related to that Inn. Any
such loss could have a material adverse effect on our financial condition and
results of operations.
We must comply with the Americans with Disabilities Act. The Americans
with Disabilities Act of 1990 (the "ADA") requires that all public
accommodations meet certain federal requirements related to access and use by
disabled persons. If we were required to make modifications to comply with the
ADA, our ability to make expected distributions to our shareholders could be
adversely affected. In addition to remedial costs, noncompliance with the ADA
could result in imposition of fines or an award of damages in private
litigation.
Our business is subject to seasonal fluctuations. The hotel industry
is seasonal in nature. Hotel revenues are generally greater in the second and
third calendar quarters than in the first and fourth quarters. This seasonality
will cause quarterly fluctuations in our lease revenues.
Risks of Real Estate Investments Generally
The following are risks which are inherent in real estate investments
generally and which could also significantly impact our results of operations.
Real estate investments, including the Inns, are typically very
illiquid. Equity real estate investments, including our investments in the Inns,
are relatively illiquid. The illiquidity of our investment in the Inns is
further increased by the location of many of the Inns in smaller communities.
As a result, our ability to sell or otherwise dispose of any Inn in response to
changes in economic or other conditions, or if necessitated by the need to fund
a required distribution to shareholders, may be limited.
Environmental laws and regulations could increase our costs or reduce
the value of one or more of the Inns. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. These laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In addition,
the presence of hazardous or toxic substances, or the failure to properly
remediate the property, may adversely affect the owner's ability to borrow
using that real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of those substances at the disposal or treatment
facility, whether or not that facility is owned or operated by that person. We
cannot be certain that
- there are no material claims or liabilities related to our
ownership of the Inns;
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- future laws, ordinances or regulations will not impose any
material environmental liability on us; and
- the current environmental condition of the Inns will not be
affected by operation of the Inns, by the condition of
properties in the vicinity of the Inns (such as the presence
of underground storage tanks) or by third parties.
Under the terms of the master leases, we indemnify Jameson Hospitality
against environmental liabilities, except those caused by the acts or negligent
failures of Jameson Hospitality. In addition, the master leases provide that
Jameson Hospitality will indemnify us against environmental liabilities caused
by Jameson Hospitality's acts or negligent failures. Jameson Hospitality's
financial condition may limit the value of its indemnity and, in any event, the
indemnity will not apply to or protect us against past unknown violations and
related liabilities.
Tax Risks
The following risks relate to our status as a REIT under federal
income tax laws.
Failure to qualify as a REIT would reduce the amount of cash available
to distribute to our shareholders. We intend to continue to operate in a manner
so as to qualify as a REIT under the Internal Revenue Code. A REIT generally is
not taxed at the corporate level on income it currently distributes to its
shareholders, so long as it distributes at least 95% of its taxable income and
satisfies certain other technical and complex requirements. Because our
qualification as a REIT in our current and future taxable years depends upon
our meeting the requirements of the Internal Revenue Code in future periods, we
cannot be certain that we will continue to qualify as a REIT. If, in any
taxable year, we were to fail to qualify as a REIT for federal income tax
purposes, we would not be allowed a deduction for distributions to shareholders
in computing taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. In addition, unless entitled to relief under certain
statutory provisions, we would be disqualified from treatment as a REIT for
federal income tax purposes for the four taxable years following the year
during which qualification was lost. The additional tax liability resulting
from the failure to so qualify would significantly reduce the amount of funds
available for distribution to our shareholders.
We may need to borrow funds in order to make the distributions to
shareholders which the tax laws require. To obtain the favorable tax treatment
associated with REITs, we generally will be required each year to distribute to
our shareholders at least 95% of our net taxable income (excluding any net
capital gain). In addition, we will be subject to tax on our undistributed net
taxable income and net capital gain, and a 4% nondeductible excise tax on the
amount, if any, by
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which certain distributions which we pay with respect to any calendar year are
less than the sum of 85% of our ordinary net income plus 95% of our capital
gain net income for the calendar year.
We intend to make distributions to our shareholders to comply with the
distribution provisions of the Internal Revenue Code and to avoid or minimize
income taxes and the nondeductible excise tax. Our income and cash flow will
consist primarily of the rents received from Jameson Hospitality under the
master leases. Differences in timing between the receipt of income and the
payment of expenses in arriving at our taxable income and the effect of
required debt amortization payments could make it necessary for us to borrow
funds on a short-term basis to meet the distribution requirements that are
necessary to achieve the tax benefits associated with qualifying as a REIT even
if we believe that then prevailing market conditions are not generally
favorable for such borrowings or that such borrowings would not be advisable in
the absence of such tax considerations.
Distributions are determined by our Board of Directors and depend on a
number of factors, including the amount of cash available for distribution, our
financial condition, any decision to reinvest rather than to distribute such
funds, our capital expenditures, the annual distribution requirements under the
REIT provisions of the Internal Revenue Code and such other factors as our
Board of Directors considers important. Accordingly, we cannot assure you that
we will be able to maintain our required distribution rate. See --Taxation of
Jameson--Requirements for Qualification and -- Annual Distribution
Requirements, below.
THE MASTER LEASES
We entered into master leases with Jameson Hospitality covering all of
the completed and operating Jameson Inns (the "Jameson Lease") and a separate
master lease covering the Signature Inns (the "Signature Lease"). New Inns
which we develop during the term of the master leases will become subject to
the respective master leases upon their completion of construction. The Jameson
Lease and the Signature Lease are substantially the same except regarding the
term and the calculation of rent. The following is a summary description of the
material terms and conditions of both the Jameson Lease and the Signature
Lease.
TERM. The Jameson Lease term expires on December 31, 2007, subject to
earlier termination upon the occurrence of certain events. The Signature Lease
expires December 31, 2012, also subject to earlier termination upon the
occurrence of certain events.
RENT. During the terms of each of the master leases, Jameson
Hospitality is obligated to pay to us base rent calculated on the number of
rooms in operation on the first day of the month and, where required under the
formula described below, percentage rent based on room revenues. In general,
percentage rent is calculated by multiplying average daily per room rental
revenues for all of the Inns under each master lease by certain percentages and
then subtracting the amount of the base rent paid for the same period.
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Under the Jameson Lease, base rent is payable monthly and equals
$264.00 per room per month multiplied by the number of rooms available to rent
at the beginning of the month. Percentage rent is payable quarterly and, at
January 1, 2000, is based on the following formula:
39% of the first $23.16 of average daily per room rental revenues;
plus
65% of all additional average daily per room rental revenues; less
100% of the base rent paid for the same period.
Under the Signature Lease, base rent is $ 394 per room per month
multiplied by the number of rooms available to rent at the beginning of the
month. Percentage rent is payable quarterly and, at January 1, 2000, is based
on the following formula:
37% of the first $37.38 of average daily per room rental revenues;
plus
65% of the next $10.00 of average daily per person rental values; plus
70% of all additional average daily per room rental revenues; less
100% of base rent paid for the same period.
Under the master leases, percentage rent is based on the total number
of rooms available to rent during the period, rather than the number of rooms
available to rent at the beginning of each month. The total base rent plus
percentage rent payable by Jameson Hospitality under the Jameson Lease is
limited to 47% of room revenues. For purposes of calculating base rent and
percentage rent, each master lease under which Jameson or one of its
subsidiaries is lessor is treated as a separate Jameson Lease or Signature
Lease; that is, only the number of rooms and amount of room revenue
attributable to Inns under a particular master lease are considered when
determining the amount of base rent and percentage rent Jameson Hospitality is
obligated to pay under that master lease.
Effective January 1, 2001, the $23.16 amount referred to above under
the Jameson Lease and the $37.38 amount referred to under the Signature Lease
will be increased based on the percentage increase in the Consumer Price Index
for all Urban Consumers published by the U.S. Department of Labor Bureau of
Labor Statistics for the year ended December 31, 2000. Similar adjustments will
be made on each subsequent January 1 for the year then beginning based on the
changes the Consumer Price Index experienced over the most recently completed
calendar year.
Average daily per room rental revenues are determined by dividing room
revenues realized by Jameson Hospitality over any given period by the sum of
the number of rooms available for rent on each day during the period. Room
revenues as defined in the Jameson Lease include revenues from telephone
charges, vending machine payments and other miscellaneous revenues and exclude
all credits, rebates and refunds, sales taxes and other excise
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taxes. Room revenues as defined in the Signature Lease are substantially the
same as in the Jameson Lease. On or before March 1 of each year, Jameson
Hospitality is required to provide a calculation of the percentage rent payable
for the preceding year, together with a report by the same independent
accounting firm serving as auditors of Jameson's financial statements, on the
amount of room revenues and percentage rent. Total rent, including both base
rent and percentage rent, which we earned under the Jameson Lease for the years
ended December 31, 1997, 1998 and 1999 was $13.0 million, $18.2 million and
$22.7 million, respectively. Total rent, including both base rent and
percentage rent we earned under the Signature Lease for the period May 7, 1999,
through December 31, 1999 was $11.5 million.
OPERATING EXPENSES. In addition to paying base rent and, if
applicable, percentage rent, the master leases require Jameson Hospitality to
pay all costs and expenses incurred in the operation of the Inns, including
workers' compensation insurance premiums. We are responsible for other types of
insurance, real and personal property taxes, the costs of replacing or
refurbishing furniture, fixtures and equipment, and the maintenance of
structural elements, roofs and underground utilities.
APPROVAL OF MASTER LEASES. Our independent directors are members of
our Board of Directors who are not also officers or employees of Jameson and
who are not affiliated with Jameson Hospitality. Our independent directors
determined that the master leases, as amended, are fair to us.
TRADEMARKS. Jameson Hospitality owns the registered trademarks, The
Jameson Inn(R) and Signature Inns(R). The master leases require Jameson
Hospitality to operate the Inns using the trademarks and not to use the
trademarks (or license their use to any other parties) for the operation of
lodging facilities other than the Inns if we object to the unrelated use. We
have an option to purchase The Jameson Inn(R) and Signature Inns(R) trademarks
from Jameson Hospitality at the end of each master lease or upon the earlier
termination of the master lease with respect to all of the Inns for $25,000 for
The Jameson Inn(R) trademark and $50,000 for the Signature Inns(R) trademark.
MAINTENANCE AND MODIFICATIONS. Under the master leases, we are
required to maintain the underground utilities and the structural elements of
the improvements and the roof of each Inn. Jameson Hospitality is required, at
its expense, to maintain the Inns in good order and repair and to make
non-structural, foreseen and unforeseen, and ordinary and extraordinary repairs
which may be necessary and appropriate to keep the Inns in good order and
repair.
Jameson Hospitality, at its expense, may make non-capital and capital
additions, modifications or improvements to the Inns which do not significantly
alter the character or purposes, or significantly detract from the value or
operating efficiencies, of the Inns. Modifications or improvements estimated to
cost in excess of $100,000 must be done under the supervision of a qualified
architect, engineer or contractor satisfactory to us and in accordance with
plans and specifications which we approve.
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All alterations, replacements and improvements are subject to all the
terms and provisions of the master leases and become the property of Jameson
upon termination of a master lease. Through March 1, 2000, Jameson Hospitality
had not undertaken any significant capital or non-capital alterations,
replacements or improvements to the Inns.
Hotels in general, including the Inns, have an ongoing need for
renovation and refurbishment. A significant number of Jameson Inns have been
constructed within the past two years and generally do not require any
renovation or refurbishment. However, Inns older than two years require
periodic replacement of furniture, fixtures and equipment and the master leases
require that we pay the costs of the refurbishment. We have adopted a policy of
maintaining sufficient cash or available borrowings to fund expenditures for
replacement and refurbishment of furniture, fixtures and equipment for the Inns
up to an amount equal to 4% of Jameson Hospitality's total aggregate room
revenues since July 1, 1995, less the amounts actually expended since that
date.
INSURANCE AND PROPERTY TAXES. The master leases provide that we are
responsible for paying or reimbursing Jameson Hospitality for real and personal
property taxes as well as for all insurance coverage on the Inns except
workers' compensation coverage, which is an obligation of Jameson Hospitality.
INDEMNIFICATION. The master leases require Jameson Hospitality to
indemnify us and our affiliates from and against all liabilities, costs and
expenses (including reasonable attorneys' fees and expenses) incurred by,
imposed upon or asserted against us or our affiliates, on account of, among
other things, (1) any accident or injury to person or property on or about the
Inns, (2) any misuse by Jameson Hospitality, or any of its agents, of the
leased property, (3) taxes and assessments in respect of the Inns (other than
our real and personal property taxes and income taxes on income attributable to
the Inns), or (4) any breach of a master lease by Jameson Hospitality. The
master leases do not, however, require Jameson Hospitality to indemnify us
against our gross negligence or willful misconduct. We are required to
indemnify Jameson Hospitality against any environmental liabilities other than
those caused by the acts or negligent failures of Jameson Hospitality (for
which Jameson Hospitality will indemnify us).
ASSIGNMENT AND SUBLEASING. Under the terms of the master leases,
Jameson Hospitality is not permitted to sublet all or any part of any of the
Inns or assign its interest under the master leases, other than to an affiliate
of Jameson Hospitality controlled by Mr. Kitchin, without the prior written
consent of Jameson. No assignment or subletting will release Jameson
Hospitality from any of its obligations under the master leases.
EVENTS OF DEFAULT. Events of default under the master leases include,
among others, the following:
(1) Jameson Hospitality's continuing failure to pay rent
for a period of 10 days after receipt by Jameson Hospitality from us
of written notice of nonpayment;
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(2) except under certain circumstances, continued failure by
Jameson Hospitality to observe or perform any other term of the master
leases for a period of 30 days after Jameson Hospitality receives
notice from us of the failure;
(3) Jameson Hospitality's bankruptcy, insolvency or
similar event; and
(4) Jameson Hospitality's voluntary discontinuation of
operations at an Inn for more than five days, without our consent,
except as a result of damage, destruction or condemnation.
If an event of default occurs and continues beyond any curative
period, we have the option of terminating the master leases as to any
individual Inn (which would not affect the master leases as to the remainder of
the Inns) or as to all of the Inns by giving Jameson Hospitality 10 days
written notice of the termination date.
TERMINATION OF MASTER LEASES ON DISPOSITION OF INNS. If we enter into
an agreement to sell or otherwise transfer an Inn, we may terminate the
applicable master lease as to that Inn. However, if a master lease is
terminated as to Inns comprising 25% or more of the total rooms of all of the
Inns within a period of 12 consecutive months, we must compensate Jameson
Hospitality for the loss of its leasehold interest or offered substitute
hotels. Most of the Inns have been mortgaged to secure our indebtedness. In the
event of a foreclosure sale (or transfer in lieu of foreclosure) of any Inn,
the applicable master lease will terminate with respect to that Inn.
INVENTORY. The master leases require all inventory required in the
operation of the Inns to be acquired and replenished by Jameson Hospitality.
Inventory includes: (1) cleaning supplies, (2) linens, (3) towels and (4) paper
goods.
GROWTH PLANS FOR 2000
We plan to enhance stockholder value by increasing funds from
operations and cash available for distribution by developing additional Inns,
expanding existing Jameson Inns and participating, through the master leases,
in increased room revenues generated through operation of the Inns by Jameson
Hospitality. For definitions and calculation of funds from operations and cash
available for distributions, see Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
DEVELOPMENT OF NEW INNS. We believe that attractive opportunities
exist for the development of new Jameson Inns in certain markets in the
southeastern United States. Accordingly, we intend to continue developing new
Jameson Inns in targeted communities. With operating Jameson Inns in Alabama,
Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee, we
plan to continue developing Jameson Inns in those states as well as in
Kentucky, Louisiana and Virginia. At December 31, 1999, Jameson had a total of
24 Jameson
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Inns under development, including 20 Jameson Inns under construction, and
contracts to acquire 2 parcels of land on which additional Jameson Inns are
expected to be constructed during 2000 and 2001. In addition, we currently have
and will consider long-term ground leases for our future Jameson Inn locations.
We believe that Jameson has benefitted significantly from its strategy
of developing new Jameson Inns because of the experience and track record of
Jameson and Jameson Hospitality in the development, construction and operation
of Jameson Inns.
In evaluating potential development sites, we target communities with
strong industrial bases sufficient to attract business travelers. These
communities typically have significant manufacturing facilities, state and
federal government installations, or colleges and universities. We strive to
locate our Inns in proximity to family-style restaurants and targets markets
which offer local community events (e.g. annual festivals, fishing tournaments,
collegiate football games and other athletic events, graduation ceremonies,
etc.) and/or tourist and recreational facilities (e.g. lakes, golf courses,
hunting areas, etc.) attracting groups and individual discretionary and leisure
travelers.
Although we have no specific plans to construct new Signature Inns, we
will consider developing new Signature Inns according to assessment of market
demand, cost and other relevant factors.
EXPANSION OF EXISTING JAMESON INNS. We intend to continue to expand
existing Jameson Inns whenever market conditions warrant. To date, we have
expanded 33 Jameson Inns and, at December 31, 1999, one additional Jameson Inn
was undergoing a 20-room expansion which we expect to open in July 2000. Since
Jameson Inns built prior to 1999 were initially constructed with the office and
lobby, swimming pool and fitness center on sites generally large enough for
future expansions, the incremental cost per room of expansions is lower than
for new Inns. Accordingly, Jameson has been able to earn attractive returns on
its investment by expanding Jameson Inns in markets with strong room demand.
Also, as compared to the development of new Inns, expansion of existing Jameson
Inns is a relatively lower risk growth strategy since we have an opportunity to
assess local room demand and market trends based on our direct experience in
developing and owning the existing hotel. We expect to employ substantially the
same strategy regarding expansion of our currently operating Jameson Inns. The
sites for new, interior-corridor Jameson Inns, however, and all of the current
Signature Inn sites are fully developed and these properties cannot be
expanded. In these markets, expansions will occur, if at all, through the
acquisition of additional sites and the construction of new Inns.
JAMESON HOSPITALITY AS CONTRACTOR. We anticipate that Jameson
Hospitality will act as general contractor for new Inns we build and for
expansions of existing Jameson Inns. Each construction contract for a new Inn
or a group of Inns provides for a turnkey price for all work performed under
the contract subject to reduction, however, if Jameson Hospitality's profits
(as defined in the construction contract) exceed 10%. The contract price
excludes the cost of the
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land and closing costs, but includes the costs of constructing and equipping
the Inns, including interest charges we incur on the associated construction
debt during construction and working with Jameson Hospitality to staff the Inn
prior to opening. An independent architectural firm reviews each construction
contract and each is also subject to approval by a majority of our independent
directors. The average price charged by Jameson Hospitality for the eight new
Jameson Inns opened during 1999 and the 11 expansions of Jameson Inns opened in
1999 was approximately $42,000 per room.
INTERNAL GROWTH. Through percentage rent, we participate in any
increases in room revenues generated through increases in occupancy rates and
average daily room rates or ADR of the Inns by Jameson Hospitality. Total rent
payable under the Jameson Lease, including base rent and percentage rent, is
limited, however, for each calendar year to 47% of Jameson Hospitality's room
revenues. See --The Master Leases, above. Jameson Hospitality practices
aggressive market-sensitive pricing, increasing room rates at particular Inns
as market conditions in the specific communities warrant. The Inns' site
managers receive a significant portion of their compensation based on achieving
specified monthly room revenues and annual expense controls.
MARKETING. Jameson Hospitality is responsible for marketing the Inns.
It focuses on local efforts directed to the business community in the city or
town where the particular Inn is located. Jameson Hospitality currently employs
15 direct sales managers, each of whom conducts and supervises direct sales
for designated Inns. In addition, one of the key responsibilities of an Inn's
manager is to make sales calls on local chambers of commerce, businesses,
factories, government installations and colleges and universities. The goal of
the sales call is to familiarize local business people with the Inn in their
community and solicit their recommendation of the Inn to business travelers
visiting communities where Inns are located, including both individual
discretionary travelers as well as groups attending family or community events.
Jameson Hospitality employs billboards and other similar types of advertising
and has an "800" number to facilitate reservations for the Jameson Inns. Since
our acquisition of Signature, Jameson Hospitality has maintained the
reservation system previously used for the Signature Inns. This system utilizes
an "800" number, but also interfaces with major electronic reservation systems
such as Sabre, Apollo, Worldspan, System One and Amadeus. This interface
connects the Signature Inns with travel agents nationally and internationally.
In addition to billboard advertising which Jameson Hospitality has
traditionally utilized and will continue to utilize, Jameson Hospitality places
advertisements for the Inns in regional and special event publications and in
newspapers. Jameson Hospitality also markets the Inns through two websites:
www.jamesoninns.com and www.signature-inns.com.
COMPETITION. The hotel industry is highly competitive. Each of the
Inns is located in an area that has competing hotels. The number of competitive
hotels in a particular area could have a material adverse effect on occupancy,
ADR, and revenue per available room, or REVPAR, of the Inns. Many of the
Jameson Inns are located in smaller communities where the entry of even
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one additional competitor into the market could materially affect the financial
performance of the Jameson Inn in that community. Many of the Signature Inns
are located in larger cities and communities in which significant new hotel and
motel development is occurring.
The Inns compete on the basis of price, quality and value. Competition
for the Inns is made up primarily of limited service hotels in the southeastern
and midwestern United States operating under national franchises which have
greater financial resources than we do, substantial advertising budgets,
national reservation systems, marketing programs and greater name recognition.
REGULATIONS
ENVIRONMENTAL MATTERS. Under various federal, state, and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
properly remediate such property, may adversely affect the owner's ability to
borrow using the real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person.
While we have not incurred any such costs in connection with our
ownership of the Inns, we may be potentially liable for such costs. We are not
aware of any potential material liability or claims for which we may be
responsible. However, we cannot be certain that (1) there are no material
claims or liabilities related to real property which we own; (2) future laws,
ordinances or regulations will not impose any material environmental liability
on us; or (3) the current environmental condition of the Inns will not be
affected by their operations, by the condition of properties in the vicinity of
the Inns (such as the presence of underground storage tanks) or by third
parties.
Under the terms of the master leases, we indemnify Jameson Hospitality
against environmental liabilities, except those caused by the acts or negligent
failures of Jameson Hospitality. In addition, the master leases provide that
Jameson Hospitality will indemnify us against environmental liabilities caused
by Jameson Hospitality's acts or negligent failures, although Jameson
Hospitality's financial condition may limit the value of such indemnity and, in
any event, such indemnity will not apply to or protect us against past unknown
violations and related liabilities. See --The Master Leases, above.
We believe that the Inns are in compliance in all material respects
with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances and do not anticipate that we will be required in
the foreseeable future to expend any material amounts in
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order to comply with such ordinances and regulations. We have not been notified
by any governmental authority, and are not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of our present or former properties.
AMERICANS WITH DISABILITIES ACT. Under the Americans with Disabilities
Act of 1990 or the ADA, all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. In addition
to remedial costs, noncompliance with the ADA could result in imposition of
fines or an award of damages to private litigants. We believe that all existing
Inns are substantially in compliance with these requirements and we intend to
construct future Inns in accordance with such requirements as well. In 1993, we
engaged a disabilities consultant to make recommendations regarding compliance
of the then existing Jameson Inns with the ADA. The consultant submitted a
report recommending a number of improvements for access to and use by disabled
persons with respect to certain of the Jameson Inns then in operation, which
improvements were made. We have also incorporated the consultant's
recommendation into the construction of new Jameson Inns and will continue to
do so.
EMPLOYEES
At December 31, 1999, we employed 18 persons. Our employees are also
employees of Jameson Hospitality. Under a cost reimbursement agreement between
Jameson and Jameson Hospitality, we reimburse Jameson Hospitality for the time
that these shared employees spend on our business. For the year ended December
31, 1999, our reimbursement to Jameson Hospitality (or its predecessor) totaled
approximately $360,000. None of our or Jameson Hospitality's employees is
represented by a union or labor organization, nor have our or Jameson
Hospitality's operations ever been interrupted by a work stoppage. We consider
relations with our employees to be excellent.
JAMESON HOSPITALITY. Jameson Hospitality leases and operates all
completed Inns under the terms of the master leases. See --The Master Leases,
above. Jameson Hospitality has also acted as contractor for the initial
construction and expansion of all Jameson Inns. We expect Jameson Hospitality
to serve as construction contractor for any further expansions of Jameson Inns
and for construction of all new Jameson Inns and Signature Inns.
The names and certain other information concerning the executive
officers of Jameson Hospitality are set forth below. At December 31, 1999,
Jameson Hospitality had a total of 2,600 full- and part-time employees engaged
in day-to-day management, marketing and construction of the Inns.
Jameson Hospitality and its predecessor companies have a history of
operating losses and a limited net worth. The audited financial statements of
Jameson Hospitality appear elsewhere in this annual report and should be
referred to for additional financial information concerning Jameson
Hospitality. Although it has not done so to date, Jameson Hospitality may
engage in
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activities other than as lessee and construction contractor of the Inns,
subject to restrictions under the master leases.
Predecessors of Jameson Hospitality include Jameson Operating Company,
Jameson Operating Company II, LLC and Jameson Development Company, LLC which,
on May 7, 1998, changed its name to Jameson Hospitality, LLC. In December 1999,
Kitchin Investments, Inc. ("KI") merged into Jameson Hospitality. KI was a
company wholly owned by Thomas W. Kitchin, our chairman and chief executive
officer, which paid, and was reimbursed for, the salaries of our employees as
well as our rent and other administrative and overhead expenses.
The executive officers and key employees of Jameson Hospitality are
the following:
Name Position
----------------- ---------------------------------------------------
Thomas W. Kitchin President and Chief Executive Officer
William D. Walker Vice President--Development
Craig R. Kitchin Vice President--Finance and Chief Financial Officer
Steven A. Curlee Vice President--Legal, General Counsel, Secretary
Gregory W. Winey Director of Operations
Martin D. Brew Treasurer and Corporate Controller
Joseph H. Rubin President of Jameson Development Company
Set forth below is certain information concerning Jameson
Hospitality's executive officers, managers and key employees.
Thomas W. Kitchin is the founder and owner with other family members of
Jameson Hospitality. He is also the founder and has been an officer and director
of Jameson since its incorporation in 1988. Prior to founding Jameson and the
predecessors of Jameson Hospitality, he spent 10 years in the oil and gas
industry and served as chief executive officer of an oil and gas company listed
on the American Stock Exchange. Mr. Kitchin serves as a director of the
Association of Publicly Traded Companies, an association that represents public
companies that trade on The Nasdaq Stock Market, New York Stock Exchange and
American Stock Exchange; a director of the Georgia Hospitality and Travel
Association; director of the American Hotel & Motel Association; director of the
Georgia State University Cecil B. Day School of Hospitality Administration;
director of a private school; and director of the Northside Hospital Advisory
Board. In addition, he has served on the board of directors of several banks and
oil companies and numerous other civic, charitable and social service agencies.
Mr. Kitchin is the father of Craig R. Kitchin, president and chief financial
officer of Jameson.
William D. Walker is vice president--development of Jameson as well as
of Jameson Hospitality. He has been an officer of Jameson since its inception
in 1988 and served as a director from 1988 through October 29, 1993. He has
been an officer of Jameson Hospitality and its predecessors since their
inception. Prior to joining us, he worked in various financial
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management positions for twelve years. Mr. Walker received a B.B.A. degree in
finance from Texas Tech University in 1975.
Craig R. Kitchin has been an officer of Jameson Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became chief
financial officer of Jameson in February 1994, vice president--finance in
November 1997, and president in November 1998. He joined Jameson as its
controller and treasurer on June 15, 1992, upon receiving his M.B.A. degree
from the University of Chicago with concentrations in accounting and finance.
Before attending the University of Chicago, he was a financial analyst with FMC
Corporation in Santa Clara, California, from 1989 to 1990, where his primary
responsibilities included budgeting and forecasting overhead expenses. Mr.
Kitchin graduated from Santa Clara University with a B.S. degree in finance in
1989. Craig Kitchin is the son of Thomas W. Kitchin, the chairman and chief
executive officer of Jameson.
Steven A. Curlee has been an officer of Jameson Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became
general counsel and secretary of Jameson on January 1, 1993 and vice
president--legal in November 1997. From April 1985 to July 1992, he was general
counsel of an oil and gas company listed on the American Stock Exchange. Prior
thereto, he was engaged in the private practice of law in Tulsa, Oklahoma for
five years. From 1976 to 1980, Mr. Curlee served on active duty in the U.S.
Navy as a Judge Advocate. He continues to serve in the Navy Reserves, having
attained the rank of Commander. Mr. Curlee received a B.A. degree in political
science and his J.D. from the University of Arkansas. He received a Master of
Law in Taxation degree from Georgetown University. Mr. Curlee is admitted to
practice law in Arkansas, the District of Columbia, Oklahoma, Texas and
Georgia.
Gregory W. Winey is director of operations of Jameson Hospitality. He
joined Jameson Hospitality in April 1998 as a regional manager supervising the
operations of 17 Jameson Inns. In October 1998 he became the director of
operations supervising the operations of all Jameson Inns. Before joining
Jameson Hospitality, he was with Promus Hotel Corporation from May 1991 to
December 1997 serving in several capacities in hotel operations, most recently
as a senior area manager overseeing the daily operations of 17 hotel
properties, including Hampton Inns, Hampton Inn & Suites and Home Suites
Hotels. Prior to that he was a food and beverage manager for a 300-room Days
Inn Hotel in Charlotte, North Carolina for one year, and prior to that he was
employed for six years by Traveler's Management Corporation as an innkeeper and
rooms division manager of a 432-room convention hotel.
Martin D. Brew has been an officer of Jameson Hospitality and of
Jameson since we acquired Signature in May 1999. Prior to joining Jameson
Hospitality, he was employed by Signature Inns for 13 years, first as
controller and later as treasurer. Mr. Brew was also employed by KPMG LLP
before prior to his employment with Signature Inns. Mr. Brew has a B. S. degree
in business from Indiana University and is a member of the American Institute
of Certified Public Accountants.
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Joseph H. Rubin became president of Jameson Development Company, the
construction division of Jameson Hospitality, LLC, in October 1999. Prior to
joining Jameson, Mr. Rubin was president and chief executive officer of Abrams
Industries, Inc., an Atlanta based commercial real estate developer and
construction company, where he had been employed since 1979. Mr. Rubin earned a
B.A. degree in economics at Guilford College and a J.D. degree at the
University of North Carolina. He is a Certified Public Accountant and is
licensed to practice law in Georgia and North Carolina.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies may be amended or revised from time to time at the
sole discretion of our Board of Directors. We can give no assurance that we
will attain our investment objectives or that the value of Jameson will not
decrease.
INVESTMENT OBJECTIVES AND POLICIES. Our investment objective is to
provide quarterly cash distributions and achieve long-term capital appreciation
through increases in cash flow and the value of Jameson. We will seek to
accomplish these objectives through the ownership and leasing of the Inns to
Jameson Hospitality, selective development of additional Inns, Jameson
Hospitality's increases in the Inns' room revenues and, where deemed
appropriate, renovations and expansions of the Inns. A key criterion for new
investments will be the opportunity they offer for growth in funds from
operations and cash available for distribution. For definitions and calculation
of funds from operations and cash available from operations, see Item
7--Jameson Management's Discussion and Analysis of Financial Condition and
Results of Operations.
We anticipate that we will conduct all of our activities directly,
although Inns located in certain states are owned by our subsidiaries and we
may participate with other entities in property ownership, through joint
ventures, partnerships or other types of co-ownership.
We currently intend to invest only in Jameson Inns and Signature Inns,
although we may also hold temporary cash investments from time to time pending
investment or distribution to stockholders. Through the Signature merger in May
1999, we acquired 25 wholly-owned Signature Inns and an interest as a general
partner in a limited partnership which owned one additional Signature Inn in
Carmel, Indiana. In December 1999, we acquired all of the interest of the
limited partner in that partnership, dissolved the partnership and took direct
ownership of the Signature Inn-Carmel which we now wholly own.
We may purchase or lease properties for long-term investment, expand
and improve properties, or sell such properties, in whole or in part, when
circumstances warrant. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over our equity interest.
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While we emphasize equity real estate investments, we may, in our
discretion, invest in mortgages, stock of other REITs and other real estate
interests. Mortgage investments may include participating or convertible
mortgages. However, we have not invested previously in mortgages or stock of
other REITs, and do not presently intend to do so.
DISPOSITIONS. In July 1999 we sold the Jameson Inn in Milledgeville,
Georgia. We also sold the Jameson Inn in Clinton, Tennessee, in February 2000.
Except for these properties, we have no current intention to dispose of any of
the Inns, although we reserve the right to do so if, based upon management's
periodic review of our portfolio, the Board of Directors determines that this
action would be in our best interests.
FINANCING. In January 1997, we filed a shelf registration statement on
Form S-3 (the "1997 Registration Statement") with the Securities and Exchange
Commission (the "SEC") that provides for the issuance of an aggregate of up to
$100 million in our common stock, preferred stock and common stock warrants to
be offered and sold from time to time. On March 10, 1997, we completed the sale
of 2,300,000 newly issued shares of our common stock. We used net proceeds of
approximately $26 million to repay certain existing mortgage indebtedness at
that date. In February 1998, our stockholders approved an amendment to our
articles of incorporation to increase the number of authorized shares of our
common stock from 20 million to 40 million shares and the authorized shares of
preferred stock from 100,000 to 10 million shares. Following adoption of that
amendment, in 1998 we sold, under the 1997 Registration Statement, 1,200,000
shares of our Series A preferred stock at an offering price of $25 per share.
We used the approximately $28.5 million in net proceeds from the offering of
Series A preferred stock to repay indebtedness and for general corporate
purposes. In September 1999, we filed a post-effective amendment to the 1997
Registration Statement to permit us to sell up to 1,000,000 shares of our
common stock at prevailing market prices through our designated sales agent,
RCG Brinson Patrick, a division of Ramius Securities, LLC. Through December 31,
1999, we have sold a total of 61,100 shares of common stock at-the-market.
These sales raised approximately $493,000 in net proceeds which we used to
repay indebtedness and for general corporate purposes. We intend to use
additional net proceeds, if any, from any sale of securities under the 1997
Registration Statement for the repayment of existing indebtedness, working
capital and general corporate purposes.
In the event we desire to raise additional equity capital, our Board
of Directors has the authority, without stockholder approval, to issue
additional shares of Jameson common stock or other capital stock of Jameson in
any manner (and on such terms and for such consideration) it deems appropriate,
including in exchange for property. Existing stockholders would have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a stockholder's investment in Jameson.
We anticipate that any additional borrowings will be made directly by
Jameson. Indebtedness we incur may be in the form of bank borrowings, secured
and unsecured, and publicly and privately placed debt instruments. Indebtedness
may be recourse to all or any part
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of our Inns or may be limited to the Inn to which the indebtedness relates. We
may use the proceeds from any of our borrowings for the payment of
distributions, for working capital, to refinance existing indebtedness or to
finance acquisitions, expansions or development of new Inns.
At December 31, 1999, we had outstanding an aggregate of approximately
$174 million of mortgage debt, including approximately $10.4 million in
construction debt. The construction debt provides for total borrowings of $44.5
million and is secured by mortgages on 20 Inns. In December 1999 and January
2000, we refinanced approximately $15,800,000 of indebtedness secured by five
Signature Inns, including the issuance of adjustable rate economic development
revenue refunding bonds in the aggregate principal amount of $12,115,000
secured by four Signature Inns.
While our organizational documents do not limit the amount or
percentage of indebtedness that we may incur, we have adopted a policy of
limiting our outstanding indebtedness to 65% of the aggregate appraised values
of the Inns. Our Board of Directors could change our current policies and we
could become more highly leveraged, resulting in an increased risk of default
on our obligations and in an increase in debt service requirements. This
increase could adversely affect our financial condition and results of
operations, our ability to make dividend distributions to its stockholders and
could, as a result, jeopardize our status as a REIT.
WORKING CAPITAL RESERVES. Our policy is to maintain working capital
reserves (and when not sufficient, access to borrowings) in amounts that our
Board of Directors determines to be adequate to meet normal contingencies in
connection with the operation of our business and investments.
POLICY REGARDING CAPITAL EXPENDITURES. On July 1, 1995, we adopted a
policy of maintaining cash or sufficient access to borrowings equal to 4% of
the Jameson Inns' aggregate room revenues since July 1, 1995, less amounts
actually spent from that date forward. Prior to this date, the obligation to
fund replacement and refurbishment of furniture, fixtures and equipment was
Jameson Hospitality's. This policy now extends to the Signature Inns acquired
in May 1999. For the period July 1, 1995, through December 31, 1999, 4% of room
revenues equaled $6.8 million and we expended $10.8 million on items in that
same period.
OTHER POLICIES. We intend to operate in a manner that will not subject
us to regulation under the Investment Company Act of 1940. We do not intend to
(1) invest in the securities of other issuers for the purpose of exercising
control over such issuer, (2) underwrite securities of other issuers or (3)
actively trade in loans or other investments.
We may make investments other than as previously described, although
we do not currently intend to do so. We have the authority to repurchase or
otherwise reacquire our common stock or any of our other securities and may
engage in such activities in the future. We have not repurchased, and have no
present intention to repurchase, any shares of our common
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stock. During the past five years, except in connection with the acquisition of
billboard assets from Jameson Hospitality and the Signature merger, we have not
issued Jameson common stock or any other securities in exchange for property,
nor have we reacquired any of our common stock or any other securities;
however, Jameson has authority to engage in such activities and may do so in
the future. During the past five years, we have not made any loans to our
officers, directors or other affiliates. We may in the future make loans to
such persons and entities, including, without limitation, our officers, and to
joint ventures in which we participate. During the last five years, we have not
engaged in trading, underwriting or agency distribution or sale of securities
of other issuers, and we do not intend to do so in the future. Our Board of
Directors may review and modify our policies with respect to such activities
from time to time without the vote of the stockholders.
At all times, we intend to make investments in such a manner as to be
consistent with the requirements of the Internal Revenue Code to qualify as a
REIT unless, because of circumstances or changes in the Internal Revenue Code
(or in the Treasury Regulations), our Board of Directors, with the consent of a
majority of our stockholders, determines to revoke our REIT election.
CONFLICTS OF INTEREST. Because of Thomas W. Kitchin's ownership in and
positions with Jameson and Jameson Hospitality, there are inherent conflicts of
interest in the construction of new Jameson Inns and Signature Inns and
expansion of existing Inns by Jameson Hospitality. Conflicts of interest also
exist in our dealings with Jameson Hospitality under the master leases, the
construction contracts and under the cost reimbursement agreement between the
two companies. See --The Master Leases; -- Growth Plans for 2000; Jameson
Hospitality as Contractor; -- and Employees. In an effort to reduce the
conflicts of interest, we have adopted a policy of requiring that any material
transaction or arrangement between us and Jameson Hospitality, or an affiliate
of either, is subject to approval by a majority of our independent directors.
Further, Jameson Hospitality has agreed that neither it nor any of its
affiliates will (1) operate or manage a hotel property in which we have not
invested that is within a 20-mile radius of an Inn, or (2) own or have any
interest in any Inn in which we or affiliates do not have an interest.
Our Board of Directors also has a policy that any contract or
transaction between us and one or more of our directors or officers, or between
us and any other entity in which one or more of our directors or officers are
directors or officers or have a financial interest must be approved by a
majority of either our independent directors or disinterested shareholders
after the material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to them. The Board of
Directors may change this policy without the consent of the shareholders upon
the affirmative vote of a majority of our independent directors.
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TAXATION OF JAMESON
We made an election to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code, commencing with our taxable year beginning
January 1, 1994. We believe that commencing with the 1994 taxable year, we were
organized and we have operated in such a manner as to qualify for taxation as a
REIT under the Internal Revenue Code. We intend to continue to operate in such
a manner, but we cannot guarantee that we have operated in a manner, or will
operate in a manner in the future, so as to remain qualified as a REIT.
The sections of the Internal Revenue Code relating to qualification
and operation as a REIT are highly technical and complex. The following
discussion summarizes the material aspects of the Internal Revenue Code
sections that govern the federal income tax treatment of a REIT and its
shareholders. Because it is a summary, it does not cover all aspects of this
subject. In order to understand all of the rules and regulations applicable to
us as a REIT, you need to refer to the applicable Internal Revenue Code
provisions, Treasury Regulations and administrative and judicial
interpretations thereof.
As long as we qualify for taxation as a REIT, we generally will not be
subject to federal corporate income tax on our net income that is currently
distributed to our shareholders. This treatment substantially eliminates the
"double taxation" (at the corporate and shareholder levels) that generally
results from investment in a corporation. However, we will be subject to
federal income or excise tax as follows: First, we will be taxed at regular
corporate rates on our REIT taxable income, which is defined generally as
taxable income (subject to certain adjustments), including net capital gains,
less dividends (or certain deemed dividends) paid to shareholders. Second, we
will generally be subject to the "alternative minimum tax" if REIT taxable
income plus any tax adjustments and preferences is greater than dividends paid
to shareholders. Third, if we have (1) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of a trade of business or (2) other
nonqualifying net income from foreclosure property, we will be subject to tax
at the highest corporate rate on such income. Fourth, if we have net income
from prohibited transactions (generally certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business), this income will be subject to a 100% tax.
Fifth, if we should fail to satisfy the 75% or 95% gross income tests discussed
below and have nonetheless maintained our qualification as a REIT because
certain other requirements have been met, we will be subject to a 100% tax on
the net income attributable to the greater of the amount by which we fail the
75% or 95% gross income tests. Sixth, generally, if we fail to distribute to
our shareholders during each calendar year an amount equal to our required
distribution, we will be subject to a 4% nondeductible excise tax on the excess
of such required distribution amount over the amount actually distributed for
the year. The amount of required distribution is equal to the sum of (1) 85% of
our ordinary income for such year, (2) 95% of our REIT capital gain net income
for such year and (3) the amount, if any, of the required distribution for the
previous year over the amount actually distributed for that year.
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In addition, if during the 10-year period (the "Recognition Period")
beginning on the first day of the first taxable year for which we qualified as a
REIT, we recognize gain on the disposition of any asset held by us as of the
beginning of such Recognition Period, then, to the extent of the excess of (1)
the fair market value of such asset as of the beginning of such Recognition
Period over (2) our adjusted basis in such asset as of the beginning of the
Recognition Period (the "Jameson Built-In Gain"), such Jameson Built-In Gain,
which may be reduced by certain net operating loss carryforwards, will be
subject to tax at the highest regular corporate rate. The Recognition Period
began January 1, 1994, and will expire December 31, 2003. Further, if we acquire
any asset from a C corporation in a transaction in which the basis of the asset
in our hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation (such as our acquisition of
Signature Inns by reason of our acquisition of Signature Inns, Inc. on May 7,
1999, the "Signature Built-In Gain"), and we recognize gain on the disposition
of such asset during the ten-year period beginning on the date on which such
asset was acquired by us, then, to the extent of the Signature Built-In Gain,
such gain will be subject to tax at the highest regular corporate rate, pursuant
to regulations that have not yet been promulgated. The amount of our Jameson
Built-In-Gain based on the appraisals obtained in connection with our initial
public offering in 1994 is approximately $8.1 million and will discourage a
disposition by us of any Inn held at the time until after 2003. The amount of
our Signature Built-In Gain attributable to the Signature Inns acquisition is
less than $1.0 million.
REQUIREMENTS FOR QUALIFICATION
The Internal Revenue Code defines a REIT as a corporation, trust or
association (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Internal
Revenue Code; (4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6) at any time
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code to include certain
entities); (7) which makes an election to be a REIT and satisfies all relevant
filing and other administrative requirements established by the IRS that must
be met in order to elect and maintain REIT status; (8) which uses a calendar
year for federal income tax purposes and complies with the record keeping
requirements of the Internal Revenue Code and Treasury Regulations promulgated
thereunder; and (9) which meets certain other tests, described below, regarding
the nature of its income and assets. The Internal Revenue Code provides that
conditions (1) to (4), inclusive, must be met during the entire taxable year
and that condition (5) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a taxable year of less than 12
months. We have represented that we have met since we became a publicly held
company, and we currently do meet, all of such definitional requirements.
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INCOME TESTS
In order for us to maintain our qualification as a REIT, we must
satisfy two gross income tests annually.
- First, at least 75% of our gross income (excluding gross
income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or
indirectly from investments relating to real property or
mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or
qualified temporary investment income.
- Second, at least 95% of our gross income (excluding gross
income from prohibited transactions) for each taxable year
must be derived from such real property or temporary
investments, and from dividends and other types of interest
and gain from the sale or disposition of stock or securities.
Rents received by us under the master leases with Jameson Hospitality
will qualify as "rents from real property" in satisfying the gross income
requirements for a REIT described above only if several conditions are met.
- First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts
or sales. Therefore, the percentage rent provisions of the
master leases should not disqualify rental income received
from Jameson Hospitality.
- Second, the Internal Revenue Code provides that rents
received from a tenant, directly or indirectly, will not
qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or a direct or indirect owner of
10% or more of the REIT, directly or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). We believe
that since January 1, 1994, we have satisfied, and we will
use our best efforts to continue to satisfy this requirement.
Therefore, Jameson Hospitality is not and should not become a
Related Party Tenant of Jameson (by reason of our adherence
to the Ownership Limit and the Related Party Limit).
- Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15%
of the total rent received under the lease, then the portion
of rent attributable to such personal property will not
qualify as "rents from real property." Applicable Internal
Revenue Code provisions provide that with respect to each
lease, rent attributable to the personal property for the
taxable year is that amount which bears the same ratio to
total rent as the average of a
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REIT's adjusted bases of all personal property at the
beginning and at the end of each taxable year bears to the
average of the REIT's aggregate adjusted bases of all real
and personal property at the beginning and at the end of such
taxable year. We have confirmed by numerical testing that the
resulting rental income attributable to personal property
since January 1, 1994 has been less than 15%. We monitor
these tests regularly. If we project that for any Inn for any
taxable year the resulting rental income attributable to
personal property may exceed 15% of all rental income, a
portion of the personal property of that Inn may be sold by
us to Jameson Hospitality, with the lease payments adjusted
accordingly.
- Finally, for rents received to qualify as "rents from real
property," the REIT generally must not operate or manage the
leased property or furnish or render services to the tenants
of such property, other than through an independent
contractor from whom the REIT derives no revenue; provided,
however, we may directly perform certain services other than
services which are considered rendered to the occupant of the
property.
We have not, do not and will not knowingly (1) charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales,
as described above); (2) rent any property to a Related Party Tenant; (3) lease
personal property in connection with the rental of any Inn which would cause
the rental income attributable to such personal property to exceed 15% of the
amount of total rental income; or (iv) perform services considered to be
rendered for the occupants of the Inns other than through an independent
contractor.
Under the master leases, Jameson Hospitality has leased the land,
buildings, improvements, furnishings, and equipment comprising the Inns from
us. Jameson Hospitality pays us a per room rent ("Base Rent") plus additional
rent based on a percentage of the gross room rental revenues ("Percentage
Rent," with the total of the Base Rent and Percentage Rent being called "Total
Rent"). In order for the Total Rent to constitute "rents from real property,"
the leases must be respected as true leases for federal income tax purposes and
not treated as service contracts, joint venture or some other type of
arrangement. The determination of whether the leases are true leases depends on
an analysis of all of the surrounding facts and circumstances.
In addition, pursuant to Section 7701(e) of the Internal Revenue Code,
a service contract, partnership agreement, or some other type of arrangement
may be treated instead as a lease of property if the contract, agreement or
arrangement is properly treated as a lease of property, taking into account all
relevant factors, including whether or not: (1) the service recipient is in
physical possession of the property, (2) the service recipient controls the
property, (3) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the service recipient shares the risk that the property will decline
in value, the service
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recipient shares in any appreciation in the value of the property, the service
recipient shares in savings in the property's operating costs, or the service
recipient bears the risk of damage to or loss of the property), (4) the service
provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
lease, (5) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient and
(6) the contract price does not substantially exceed the rental value of the
property for the term of the lease.
Under the master leases, (1) Jameson Hospitality has the right to
exclusive possession, use and quiet enjoyment of the Inns during the term of
the master leases, (2) Jameson Hospitality bears the cost of, and is
responsible for daily maintenance and repair of the Inns, other than the cost
of maintaining underground utilities and structural elements (including the
roofs) of the improvements, (3) Jameson Hospitality dictates how the Inns are
operated, maintained, and improved and bears all of the costs and expenses of
operating the Inns (including the cost of any inventory used in their
operation) during the term of the leases (other than real and personal property
taxes, casualty, liability and other types of insurance and equipment and the
maintenance of structural elements, roofs and underground utilities), (4)
Jameson Hospitality benefits from any savings in the costs of operating the
Inns during the term of the leases, (5) in the event of damage or destruction
to an Inn, Jameson Hospitality is at economic risk because it will be obligated
to restore the property to its prior condition and bear all costs of such
restoration in excess of any insurance proceeds (except, under certain
circumstances, during the last six months of the term of the master leases),
(6) Jameson Hospitality has indemnified us against all liabilities imposed on
us during the term of the master leases by reason of injury to persons or
damage to property occurring at the Inns or due to Jameson Hospitality's use,
management, maintenance or repair of the Inns, and (7) Jameson Hospitality is
obligated to pay substantial fixed rent for the term of the leases. In
addition, we do not believe that the Total Rent under the leases materially, if
not all, exceeds the fair rental value of the Inns.
Pursuant to IRS Revenue Ruling 55-540, if one or more of the following
conditions are present, the master leases will instead be considered as
conditional contracts for purchase and sale of the Inns:
- portions of the periodic payments are made specifically
applicable to an equity interest in the property to be
acquired by Jameson Hospitality,
- Jameson Hospitality will acquire title upon the payment of a
stated amount of "rentals" under the contract which it is
required to make,
- the total amount which Jameson Hospitality is required to pay
for a relatively short period of use constitutes an
inordinately large proportion of the total sum required to be
paid to secure the transfer of the title,
- the agreed "rental" payments materially exceed the current
fair rental value,
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- the property may be acquired under a purchase option at a
price which is nominal in relation to the value of the
property at the time when the option may be exercised, as
determined at the time of entering into the original
agreement, or which is a relatively small amount when
compared with the total payments which are required to be
made, and
- some portion of the periodic payments is specifically
designated as interest or is otherwise readily recognizable
as the equivalent of interest.
Under the master leases, (1) no portion of the Total Rent has been or
will be applied to any equity interest in the Inns to be acquired by Jameson
Hospitality, (2) Jameson Hospitality has not acquired and will not be acquiring
title to the Inns upon the payment of a stated amount of either Base Rent or
Percentage Rent, (3) the Total Rent does not and will not materially exceed the
current fair rental value of the Inns, (4) the Inns may not be acquired by
Jameson Hospitality under a purchase option and (5) no portion of either Base
Rent or Percentage Rent has been or will be specifically designated as interest
or will be recognizable as the equivalent of interest. We believe that the
master leases will be treated as true leases for federal income tax purposes.
However, the IRS could challenge the tax treatment of the master leases, and,
if it does, it could be successful. If the master leases are recharacterized as
a service contract, partnership agreement, or some other type of arrangement
rather than a true lease, part or all of the payments that we receive from
Jameson Hospitality may not satisfy the various requirements for qualification
as "rents from real property." In that case, we likely would not be able to
satisfy either the 75% or 95% gross income tests and, as a result, would fail
to qualify as a REIT.
Any gross income derived from a prohibited transaction is subject to a
100% tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
None of our assets are or have been held for sale to customers in the ordinary
course of our business and we will not sell an Inn or associated property in
the ordinary course of our business. Whether property is held "primarily for
sale to customers in the ordinary course of a trade or business" depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. Nevertheless, we have since January 1,
1994 complied with and we will attempt to continue to comply with the terms of
the safe- harbor provisions in the Internal Revenue Code prescribing when asset
sales will not be characterized as prohibited transactions. Complete assurance
cannot be given, however, that we can comply with the safe-harbor provisions of
the Internal Revenue Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a
trade or business."
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for such year if we
are entitled to relief under certain provisions of the Internal Revenue Code.
These relief provisions will generally be
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available if (1) our failure to meet such tests is due to reasonable cause and
not due to willful neglect, (2) we attach a schedule of the sources of our
gross income to our return, and (3) any incorrect information on such schedule
was not due to fraud with intent to evade tax. We cannot state, however,
whether in all circumstances we would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
100% tax would be imposed which would be equal to the excess of 75% or 95% of
our gross income over our qualifying income in the relevant category, whichever
is greater, multiplied by the ratio that REIT taxable income bears to gross
income for the taxable year (with certain adjustments).
ASSET TESTS
At the close of each quarter of our taxable year, we must also satisfy
three tests relating to the nature of our assets. First, at least 75% of the
value of our total assets must be represented by "real estate assets" which
means (1) real property (including interests in real property and interests in
mortgages on real property), (2) shares in other REITs (3) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company,
and (4) cash, cash items (including receivables) and government securities.
Second, not more than 25% of our total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by us may
not exceed 5% of the value of our total assets and we may not own more than 10%
of such issuer's outstanding voting securities. We have satisfied these asset
tests since January 1, 1994, and we will use our best efforts to continue to
satisfy such tests in the future.
After meeting the assets tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy the asset tests at the end
of a later quarter solely by reason of changes in asset values. If the failure
to satisfy the asset tests results from an acquisition of securities or other
property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
We maintain adequate records of the value of our assets to ensure compliance
with the asset test and we intend to take such other action within 30 days
after the close of any quarter as may be required to cure any noncompliance.
However, this action may not always be successful.
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ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our shareholders in an amount at least
equal to (A) the sum of (1) 95% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and any net capital gain) and (2) 95% of
our net income (after tax), if any, from foreclosure property, minus (B) the
sum of certain items of noncash income. In addition, if we dispose of any asset
during our Recognition Period, we will be required to distribute at least 95%
of the Built-In Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before we timely file our
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that we do not distribute all of
our net capital gain or distribute at least 95%, but less than 100% of our
"REIT taxable income," as adjusted, we will be subject to tax thereon at
regular corporate tax rates. Furthermore, if we should fail to distribute our
required distribution during each calendar year, we would be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed.
Since January 1, 1994, we have made, and we hereafter will make,
timely distributions sufficient to satisfy all annual distribution
requirements. However, it is possible that, from time to time, we may
experience timing differences between (1) the actual receipt of income and
actual payment of deductible expenses and (2) the inclusion of that income and
deduction of such expenses in arriving at our REIT taxable income. Therefore,
we could have less cash available for distribution than would be necessary to
meet our annual 95% distribution requirement or to avoid federal corporate
income tax with respect to capital gain or the 4% nondeductible excise tax
imposed on certain undistributed income. To meet the 95% distribution
requirement necessary to qualify as a REIT or to avoid federal income tax with
respect to capital gain or the excise tax, it could be necessary for us to
borrow funds.
Under certain circumstances, we may be able to rectify a failure to
meet the distribution requirement for a year by paying dividends to
shareholders in a later year. If we declare a dividend before the date on which
our tax return is due for a taxable year (including extensions) and distribute
the amount of such dividend to shareholders in the 12-month period following
the close of such taxable year, such subsequent year dividend may be deductible
in computing our REIT taxable income for the immediately preceding year. The
distribution of such dividend must be made no later than the date of the first
regular dividend payment made after the declaration and distribution of such
dividend and we must elect such treatment in our return.
Shareholders receiving subsequent year distributions are taxable on
such distributions in the year of actual receipt except in the following case.
Any distributions we declare in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by us and received by the shareholder on December 31,
provided that the distribution is actually paid during January of the following
calendar year. However, if we actually pay the declared distributions before
December 31, the distributions will
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be treated as both paid by us and received by the shareholders on the actual
dates paid and received, respectively.
If, as a result of an audit by the IRS, the REIT taxable income for a
prior taxable year is increased, we may elect to distribute an additional
"deficiency dividend," as defined under Section 860 of the Internal Revenue
Code, and claim an additional deduction for dividends paid for such taxable
year in order to meet the annual distribution requirement. All deficiency
dividends must be distributed within 90 days after the final determination of
an audit, and the claim for such deficiency dividends must be filed within 120
days of such determination. We would also be liable for the payment of interest
charges on the amount of the deficiency dividend. However, the payment of such
dividends would ensure that our qualification as a REIT would not be
jeopardized due to a failure to meet our annual distribution requirement.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to shareholders in any year in which we fail to qualify
will not be deductible by us nor will they be required to be made. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and, subject
to certain limitations of the Internal Revenue Code, corporate distributees may
be eligible for the dividends received deduction (such deduction is not
available to corporate distributees so long as we qualify as a REIT). Unless
entitled to relief under specific statutory provisions, we will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which we ceased to qualify as a REIT.
TAXATION OF SHAREHOLDERS
TAX CONSEQUENCES TO NON TAX-EXEMPT U.S. SHAREHOLDERS. As long as we
qualify as a REIT, distributions made to our taxable U.S. shareholders from
current or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. shareholders as ordinary
income in the year they are received and will not be eligible for the dividends
received deduction for corporations. Such distributions will be treated as
portfolio income and not as income from passive activities. Accordingly,
shareholders will not be able to apply any passive losses against such income.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed our actual net
capital gain for the taxable year) without regard to the period for which a
shareholder has held our stock. However, corporate shareholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and
profits will not be taxable to a U.S. shareholder to the extent such
distributions do not exceed the adjusted basis of such U.S. shareholder's
shares, but rather will reduce the adjusted basis of such shares. To the
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extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a U.S. shareholder's shares, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are held as a capital asset by the U.S. shareholder.
Shareholders may not include in their income tax returns any net operating
losses or capital losses of the Company. Finally, in general, any loss upon a
sale or exchange of shares by a shareholder who has held such shares for more
than one year (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions from us required to be
treated by such shareholder as long-term capital gain.
In determining the extent to which a distribution on the Series A
Preferred Stock or Series S Preferred Stock constitutes a dividend for tax
purposes, our earnings and profits will be allocated, on a pro rata basis,
first to distributions with respect to the Series A Preferred Stock and the
Series S Preferred Stock, and then to the common stock.
Under the Internal Revenue Code we are permitted to make an election
to treat all or a portion of our undistributed net capital gain as if it had
been distributed to our shareholders. If we were to make such an election, our
shareholders would be required to include in their income as long-term capital
gain their proportionate share of our undistributed net capital gain, as we
designated. Each of our shareholders would be deemed to have paid his
proportionate share of our income tax with respect to such undistributed net
capital gain, and this amount would be credited or refunded to the shareholder.
In addition, the tax basis of the shareholder's stock would be increased by his
or her proportionate share of undistributed net capital gain included in his or
her income less his or her proportionate share of our income tax with respect
to such gains. With respect to distributions we designate as capital gain
dividends, we may designate (subject to certain limits) whether the dividend is
taxable to shareholders as a 20% rate gain distribution or as an unrecaptured
depreciation distribution taxed at a 25% rate.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING. We will
report to our U.S. shareholders and the IRS the amount of distributions paid
during each calendar year and the amount of tax withheld, if any. Under the
backup withholding rules, a U.S. shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide us with his correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to us. See below "-- Taxation of Non-U.S.
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS. Distributions to a U.S.
shareholder that is a tax-exempt entity should not constitute "unrelated
business taxable income" as defined in
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Section 512(a) of the Internal Revenue Code ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of our shares with
"acquisition indebtedness" within the meaning of Section 514(c) of the Internal
Revenue Code and the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity. In addition, if we are considered to be a
pension-held REIT, then a portion of the dividends paid to qualified trusts
(any trust defined under Section 401(a) and exempt from tax under Section
501(a)) that owns more than 10 percent by value in the REIT may be considered
UBTI. In general, a pension-held REIT is a REIT that is held by at least one
qualified trust holding more than 25% by value of the interests in the REIT or
by one or more qualified trusts (each of whom owns more than 10% by value)
holding in the aggregate more than 50% by value of the interests in the REIT.
We are not currently a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing United States
federal income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") are complex and we will make no attempt herein to provide more
than a summary of such rules. The Treasury Department issued new final
regulations relating to withholding, information reporting and backup
withholding on U.S. source income paid to foreign persons (including, for
example, dividends we pay to our foreign shareholders). These regulations
generally will be effective with respect to payments made after December 31,
2000, subject to certain transition rules. We urge prospective investors to
consult their own tax advisors as to the effect, if any, of the final
regulations on their purchase, ownership and disposition of shares of common
stock.
Distributions to Non-U.S. Shareholders that are not attributable to
gain from sales or exchanges by us of United States real property interests and
not designated by us as capital gains dividends will be treated as dividends of
ordinary income to the extent their source is our current or accumulated
earnings and profits. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from a
Non-U.S. Shareholder's investment in our stock is treated as effectively
connected with the Non-U.S. Shareholder's conduct of a United States trade or
business, the Non-U.S. Shareholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. Shareholders are taxed with respect
to such distributions (and may also be subject to the 30% branch profits tax in
the case of a shareholder that is a foreign corporation). We expect to withhold
United States income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (1) a lower treaty rate
applies or (2) the Non-U.S. Shareholder files an IRS Form 4224 with us claiming
that the distribution is "effectively connected" income within the meaning of
Section 871 of the Internal Revenue Code. Distributions in excess of our
current and accumulated earnings and profits will not be taxable to a Non-U.S.
Shareholder to the extent that such distributions do not exceed the adjusted
basis of the Non-U.S. Shareholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Shareholder's shares, such distributions will give rise to tax liability if the
Non-U.S. Shareholder
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would otherwise be subject to tax on any gain from the sale or disposition of
his shares in Jameson, as described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of our current and accumulated earnings and profits, the distribution will be
subject to withholding at a 30% rate. Further, pursuant to recently enacted
legislation, we will be required to withhold 10% of any distribution in excess
of our current and accumulated earnings and profits. However, amounts withheld
may be refundable if it is subsequently determined that such distribution was
in excess of our current and accumulated earnings and profits and the amount
withheld exceeded the Non-U.S. Shareholder's U.S. tax liability, if any.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of United States real property
interests are taxed to a Non-U.S. Shareholder as if such gain were "effectively
connected" with a United States business. Non-U.S. Shareholders would thus be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to any applicable alternative minimum tax). Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the case of a foreign
corporate shareholder not entitled to treaty exemption. We are required by
Treasury Regulations to withhold 35% of any distribution to a Non-U.S.
Shareholder that could be designated by us as a capital gains dividend. This
amount is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the REIT's stock was held directly or
indirectly by foreign persons. We believe that we are a "domestically
controlled REIT," and therefore the sale of our shares should not be subject to
taxation under FIRPTA. We anticipate that we will continue to be a
"domestically controlled REIT" and that sales of our shares by Non-U.S.
Shareholders will not be subject to U.S. taxation unless (1) the investment in
the shares is "effectively connected" with the Non-U.S. Shareholder's trade or
business in the United States, in which case such Non-U.S. Shareholder would be
taxed at the normal capital gain rates applicable to U.S. Shareholders (subject
to any applicable alternative minimum tax), or (2) in the case of a Non-U.S.
Shareholder who is a "nonresident alien individual", such Non-U.S. Shareholder
was present in the United States for a period or periods aggregating 183 days
or more during the taxable year and certain other conditions apply, in which
case such person would be subject to a 30% tax on his capital gains.
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OTHER TAX CONSEQUENCES
We and our shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of Jameson and
our shareholders may not conform to the federal income tax consequences
discussed above. Consequently, you should consult your own tax advisor regarding
the effect of state and local tax laws on an investment in us.
ITEM 2. PROPERTIES.
THE INNS. The following tables set forth certain information about our
114 operating Inns at December 31, 1999.
Jameson Inns
- ------------
Year Number
Opened/ Of
Expanded Rooms
-------- ------
ALABAMA:
Albertville 94 40
Alexander City 94/95 60
Arab 95 40
Auburn 97 40
Bessemer(1) 99 40
Decatur 96/99 58
Eufaula 96 40
Florence 96/96 63
Greenville 96 40
Jasper 97/98 58
Oxford 97 40
Ozark 95 39
Prattville 98/99 58
Scottsboro 98 40
Selma 92/95 59
Sylacauga 97 40
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Trussville 98/99 60
Tuscaloosa (2) 97 40
-----
Subtotal 855
=====
FLORIDA:
Lake City 99 55
-----
Subtotal 55
=====
GEORGIA:
Albany 95/96 62
Americus 92/93/94 77
Bainbridge 94/95 60
Brunswick 95/96 60
Calhoun 88/94 59
Carrollton 94/95 59
Commerce 96 40
Conyers 96/99 57
Covington 90 38
Dalton 98/99 59
Douglas 95 40
Dublin (2) 97 40
Eastman 89 41
Fitzgerald 94 40
Greensboro 90 40
Hartwell 92 40
Jesup 90/91 60
Kingsland 98 40
LaGrange 96/98 56
Macon 97 40
Oakwood 97 40
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Perry 98 40
Rome 99 67
Statesboro 89 39
Thomaston 90/96 60
Thomasville (2) 98 39
Valdosta 95/95 55
Warner Robins 97 59
Washington 90 41
Waycross 93/96 60
Waynesboro 96 40
Winder 88 39
-----
Subtotal 1,587
=====
MISSISSIPPI:
Grenada 99 39
Meridian 99/99 59
Tupelo 98/98 60
Vicksburg 99/99 59
-----
Subtotal 217
=====
NORTH CAROLINA:
Asheboro 97 40
Dunn (2) 98 40
Eden 98 39
Forest City 97/98 59
Garner 98 40
Greenville 98 40
Hickory 98/99 59
Laurinburg 97 40
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Lenoir 98 39
Roanoke Rapids 98 39
Sanford 97 40
Smithfield 98 40
Wilson 97 39
-----
Subtotal 554
=====
SOUTH CAROLINA:
Anderson 93/94 57
Cheraw 95/99 57
Duncan 98 40
Easley 95 40
Gaffney 95/97 58
Georgetown 96 40
Greenwood 95/96 64
Lancaster 95 40
Orangeburg 95 40
Seneca 96 40
Simpsonville 96 40
Spartanburg 98 40
Union 97 40
-----
Subtotal 596
=====
TENNESSEE:
Cleveland 98/99 60
Clinton (3) 97 40
Decherd 97 40
Gallatin 99/99 59
Johnson City 97 59
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Oak Ridge 99 79
Tullahoma 97 40
-----
Subtotal 377
=====
JAMESON INN TOTAL 4,241
=====
(1) A 20-Room expansion of this Inn was under construction at December 31,
1999.
(2) Land is subject to a ground lease.
(3) We sold this hotel property during the first quarter of 2000.
Signature Inns
- ---------------
Number
Year Of
Opened Rooms
-------- -----
INDIANA:
Indianapolis North 81 141
Fort Wayne 82 102
Castleton 83 125
Lafayette 83 121
Muncie 84 101
Southport 85 101
Indianapolis East 85 101
Indianapolis West 85 101
Kokomo 86 101
Evansville 86 125
Terre Haute 87 150
Elkhart 87 125
South Bend 87 123
Carmel(1) 97 81
-----
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Subtotal 1,598
=====
OHIO:
Cincinnati (North) 85 130
Cincinnati (Northeast) 85 99
Columbus 86 125
Dayton 87 125
-----
Subtotal 479
=====
KENTUCKY:
Florence 87 125
Louisville South 88 123
Louisville East (2) 97 119
-----
Subtotal 367
=====
ILLINOIS:
Normal 88 124
Peoria 88 124
Springfield 96 124
-----
Subtotal 372
=====
IOWA:
Bettendorf 89 119
=====
TENNESSEE:
Knoxville 89 124
=====
SIGNATURE INNS TOTAL 3,059
=====
- ----------------
(1) Signature Inn-Carmel was the only hotel not wholly owned by
Signature at the time of its merger with Jameson in May 1999. Signature served
as the general partner of Signature Meridian Limited Partnership, the limited
partnership that owned the Signature Inn-Carmel, and owned a 40% interest in the
limited partnership. In December 1999, we purchased the 60% interest of the
limited partner in the partnership, dissolved the partnership and took direct
ownership of the property which we now wholly own.
(2) Operates as both a Best Western and a Signature Inn.
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ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any litigation which, in our judgment, would have
a material adverse effect on our operations or financial condition if adversely
determined. However, due to the nature of our business, we are, from time to
time, a party to certain legal proceedings arising in the ordinary course of our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders for a vote during the
fourth quarter of fiscal year 1999 which required the solicitation of any
proxies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 15, 2000, there were approximately 2,600 holders of record
of our common stock and, we estimate, approximately 9,300 beneficial holders of
our common stock.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The following table sets forth the high and low sale prices for our
common stock for the periods indicated. The prices are as reported on the Nasdaq
National Market based on published financial sources. The table also sets forth
the cash dividends paid per share for the periods indicated for a share of each
of our common stock.
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Jameson Common Stock (1)
------------------------
(1) Cash
----- Dividends
High Low Per Share
---- --- ---------
1998
- ----
First Quarter $12.88 $11.25 $ .23
Second Quarter $12.38 $ 9.75 $ .23
Third Quarter $11.50 $ 9.06 $ .24
Fourth Quarter $10.25 $ 8.75 $ .24
1999
- ----
First Quarter $ 9.38 $ 7.63 $ .24
Second Quarter $10.00 $ 8.31 $ .24
Third Quarter $ 9.75 $ 8.25 $ .245
Fourth Quarter $ 8.88 $ 7.00 $ .245
- --------------
(1) Our common stock trades on the Nasdaq National Market under the symbol
"JAMS."
We intend to continue making regular quarterly distributions to our
stockholders. Our cash available for distribution is generally an amount equal
to our net income from operations plus the amount of non-cash expenses we
record, such as amortization, depreciation and stock compensation expenses, less
amounts we believe should be retained for working capital purposes, debt service
or anticipated capital expenditures.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial and operating
information on a pro forma and historical basis. The following information
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this report. The consolidated historical
financial data has been derived from our audited historical consolidated
financial statements.
Historical financial and operating information includes all Jameson
Inns owned by Jameson, including both those under development as well as
operating Jameson Inns; however, due to Jameson's development of new Jameson
Inns and expansion of existing Jameson Inns, the information is not comparable
between periods. Historical financial and operating information includes all
Signature Inns owned by Jameson as of December 31, 1999. See Item 2. Properties.
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Historical operating results, including net income, may not be comparable to
future operating results.
The historical financial data for Signature Inns was prepared from the
audited financial statements and filings of Signature for each of the years in
the period ended December 31, 1998. The information for the year ended December
31, 1999 assumes the Signature Inns were operated by Jameson Hospitality for the
entire year.
JAMESON INNS, INC.
SELECTED FINANCIAL INFORMATION
(dollars in thousands, except per share data, ADR and REVPAR)
Historical
-------------------------
December 31,
-------------------------
--------- --------- --------- --------- ---------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Balance Sheet Data:
Investment in real estate (before
accumulated depreciation) $57,370 $80,816 $117,515 $168,880 $321,134
Net investment in real estate 50,780 71,611 104,931 152,125 296,583
Total assets 52,806 73,985 107,606 156,329 322,852
Total mortgage debt 30,214 22,317 29,625 53,697 173,958
Stockholders' equity 21,754 50,763 75,161 98,869 136,303
Historical
-------------------------
Year Ended December 31,
-------------------------
--------- --------- --------- --------- ---------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Financial Data:
Gross revenues:
Lease revenue from
Jameson Hospitality $ 6,342 $ 9,376 $ 12,966 $ 18,230 $ 34,669
Expenses:
Depreciation 1,825 2,670 3,898 5,636 10,397
Property tax and
insurance expense 514 733 1,107 1,524 3,186
General and administrative
expenses 622 499 445 592 1,131
Loss on disposal of
furniture and equipment -- 48 144 508 755
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Write-off of offering
costs -- -- -- -- 100
Loss on impairment of
real estate -- -- -- 2,507 --
------ ------ ------ ------ ------
Income from operations 3,381 5,426 7,372 7,463 19,100
Other income (expense):
Interest expense, net of (1,590) (1,386) (778) (1,656) (8,429)
amounts capitalized
Equity in income (loss of
hotel limited partnership -- -- -- -- 76
Other income -- -- -- -- 24
------ ------ ------ ------ ------
Income before
extraordinary item 1,791 4,040 6,595 5,807 10,771
Extraordinary loss 19 989 689 134 -
Net income 1,772 3,051 5,906 5,673 10,771
Preferred stock dividends 490 -- -- 2,788 5,387
------ ------ ------ ------ ------
Net income attributable to
common stockholders 1,282 3,051 5,906 3,485 5,383
Basic earnings before
extraordinary item 0.35 0.65 0.72 0.37 0.51
Diluted earnings before
extraordinary item 0.46 0.63 0.70 0.36 0.51
Basic earnings per
common share 0.34 0.49 0.64 0.36 0.51
Diluted earnings per
common share 0.45 0.48 0.63 0.35 0.51
Dividends paid per
common share 0.80 0.86 0.90 0.94 0.97
Cash flow provided by
operating activities 4,181 6,626 11,911 13,845 23,202
Cash flow used in
investing activities (18,845) (23,548) (37,362) (55,845) (40,228)
Cash flow provided by
financing activities 14,546 16,895 25,581 42,161 19,057
OTHER DATA:
Funds from operations(1) $ 3,616 $ 6,758 $ 10,637 $ 12,270 $ 16,658
Ratio of earnings to fixed
charges and preferred stock
dividends(2) 1.37 2.84 5.21 1.50 1.25
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Jameson Inns:
Occupancy rate 67.5% 66.9% 64.9% 61.7% 60.0%
ADR $ 42.80 $ 45.80 $ 7.25 $ 50.60 $ 53.05
REVPAR $ 28.89 $ 30.64 $ 30.68 $ 31.21 $ 31.84
Room Revenues(3) $ 13,310 $ 19,950 $ 27,588 $ 38,787 $ 48,358
Room nights available 448,906 634,549 878,056 1,216,998 1,485,849
Operating hotels (at
period end) 32 43 62 81 88
Rooms available (at
period end) 1,537 2,107 2,924 3,748 4,241
Pro Forma(4)
-----------------------
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Signature Inns:
Occupancy rate 66.5% 65.2% 64.0% 61.5% 57.9%
ADR $ 56.37 $ 57.56 $ 58.68 $ 61.48 $ 63.41
REVPAR $ 37.50 $ 37.55 $ 37.53 $ 37.81 $ 36.73
Room Revenues(3) $ 38,903 $ 39,850 $ 42,960 $ 43,971 $ 42,013
Room nights available 998,275 1,020,758 1,080,263 1,114,960 1,116,535
Operating hotels (at
period end) 23 24 26 26 26
Rooms available (at
period end) 2,735 2,859 3,059 3,059 3,059
- ---------------
(1) Funds from operations is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") according to the March 1995
interpretation as net income (computed in accordance with generally
accepted accounting principles ("GAAP")) excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
after adjustments for unconsolidated partnerships and joint ventures.
Jameson has made adjustments to its net income (loss) consisting only
of depreciation, loss on disposals, loss on impairment of real estate
and the extraordinary item. Jameson notes that industry analysts and
investors use funds from operations as another tool to evaluate and
compare equity REITs. Jameson also believes it is meaningful as an
indicator of net income excluding most non-cash items and provides
information about Jameson's cash available for distributions, debt
service and capital expenditures. Other non-cash expenses such as
deferred finance cost amortization and stock-based compensation expense
have not been added back in funds from operations. Funds from
operations does not represent cash flow from operating activities in
accordance with GAAP and is not indicative of cash available to fund
all of Jameson's cash needs. Funds from operations should not be
considered as an alternative to net income or any other GAAP measure as
an indicator of performance and should not be considered as an
alternative to cash flows as a measure of liquidity. In addition,
Jameson's funds from operations may not be comparable to other
companies' funds from operations due to differing methods of
calculating funds from operations and varying interpretations of the
NAREIT definition.
In October 1999, NAREIT issued an additional clarification effective
as of January 1, 2000 stipulating that FFO should include both
recurring and non-recurring operating results. Consistent with this
clarification, non-recurring items that are not defined as
"extraordinary" under GAAP will be reflected in the calculation of FFO.
Gains and losses from the sale of depreciable operating property will
continue to be excluded from the calculation of FFO.
(2) For purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest and preferred
stock dividends) to income before
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extraordinary item. Fixed charges consist of interest costs whether
expensed or capitalized, amortization of debt discounts and issue costs
whether expensed or capitalized and preferred stock dividends in
applicable periods. Jameson paid preferred stock dividends in 1995,
1998 and 1999.
(3) The master leases between Jameson and Jameson Hospitality with regard
to the Jameson Inns and the Signature Inns define "Room Revenues" to
include gross room rentals, revenues from telephone charges, vending
machine payments and other miscellaneous revenues and excludes all
credits, rebates and refunds, sales taxes and other excise taxes.
(4) Assumes that the Signatures Inns were owned as of January 1 of the
respective year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our
historical consolidated financial statements and those of Jameson Hospitality
and the accompanying notes which are included in this report.
GENERAL
The following table shows certain historical financial and other
information for the years indicated.
Year Ended December 31
------------------------------------------
1999 1998 1997
----------- ----------- ---------
Occupancy rate 60.0% 61.7% 64.9%
ADR $ 56.36 $ 50.60 $ 47.25
REVPAR $ 33.83 $ 31.21 $ 30.68
Room rentals (000s) $ 74,246 $ 37,983 $ 26,937
Other Inn revenues (000s) $ 2,181 $ 804 $ 651
Room Revenues (000s) $ 76,427 $ 38,787 $ 27,588
Room nights available 2,194,613 1,216,998 878,056
Operating Inns (at period end) 114 81 62
Rooms available (at period end) 7,300 3,748 2,924
We have grown from a hotel chain with four Jameson Inns (162 rooms)
at January 1, 1990, to 88 Jameson Inns (4,241 rooms) and 26 Signature Inns
(3,059 rooms) in operation at December 31, 1999. From our inception in 1988
until December 31, 1993, we were engaged in the business of developing, owning
and managing Jameson Inns. As part of our development activities, we engaged in
development and construction of new Jameson Inns. On December 31,
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1993, we reorganized by divesting ourselves of the subsidiary corporations
through which we conducted our construction activities, securities brokerage
activities and aviation operations. In addition, we transferred our outdoor
advertising business to Jameson Hospitality's predecessor. We no longer manage
or operate our Inns upon their completion, but limit our primary activities to
developing and owning the properties. Effective January 1, 1994, our primary
source of revenue became lease payments by Jameson Hospitality which leases and
operates our Inns under the master leases.
Effective April 2, 1999, our subsidiary, Jameson Outdoor Advertising
Company, acquired certain assets of Jameson Hospitality consisting of
billboards, ground leases for the sites on which the billboards are erected and
other related assets. As consideration for these assets we issued 72,727 shares
of our 9.25% Series A preferred stock, paid cash in the amount of $400,000 and
assumed liabilities in the amount of approximately $700,000. We obtained an
opinion from Interstate/Johnson Lane Corporation that the terms of the
transaction were fair from a financial standpoint to us and to our shareholders.
In order to maintain our REIT status, these assets are leased to and operated by
Jameson Hospitality which pays us annual rentals on each of the billboards. In
1999, rental payments from these assets totaled approximately $412,000.
On May 7, 1999, we merged with Signature Inns, Inc. which owned and
operated a chain of limited service hotels in the Midwest. In this merger, we
acquired 25 Signature Inns and an interest in a limited partnership which owned
an additional Signature Inn. In December 1999, we acquired the outstanding
limited partnership interest in that partnership, dissolved the partnership and
took direct ownership of the hotel property. As a result of these transactions,
at December 31, 1999, we owned a total of 26 Signature Inns located in six
midwestern states. All of the Signature Inns are also leased to Jameson
Hospitality.
Although room revenues are earned by our lessee, Jameson Hospitality,
not by us, they are the basis upon which the percentage rent paid to us by
Jameson Hospitality (under the Jameson Lease) is determined and, accordingly, we
discuss those revenues below. The term "Same Inn Room Revenues" refers to
revenues earned with respect to our Inns which were operating during all of both
comparison periods and includes revenues attributable to rooms added to our
existing Inns by virtue of expansion of such Inns.
The master leases provide for the payment of base rent and percentage
rent. For the year ended December 31, 1999, we earned a combined base rent and
percentage rent in the aggregate amount of $22.7 million from rental of Jameson
Inns and $11.5 million from rental of Signature Inns. The principal determinant
of percentage rent under the master leases is room revenues of our Inns.
Therefore, we believe that a review of the historical performance of the
operations of our 88 operating Jameson Inns and 26 Signature Inns, particularly
with respect to occupancy, ADR and REVPAR, is appropriate for understanding our
lease revenue (see --Funds from Operations; Cash Available for Distribution,
below, for the calculation of ADR and REVPAR).
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RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED
DECEMBER 31, 1998.
Our lease revenue for 1999 increased 90% to $34.7 million as compared
to $18.2 million for 1998. The increase was due to an increase in Jameson
Hospitality's room revenues.
As a result of the following three factors, Jameson Hospitality's room
revenues rose 97.0%, from $38.8 million for 1998 to $76.4 million in 1999:
- The number of room nights available at our Inns increased from
1,216,998 in 1998 to 2,194,613 in 1999, or 80.3%, due
primarily to our acquisition of Signature in May 1999, which
accounted for 708,764 of the additional room nights available,
and to the opening from January 1998 through December 1999 of
27 new Jameson Inns (1,150 total additional rooms) and 15
expansions of existing Jameson Inns (290 total additional
rooms).
- The occupancy rate for all Inns decreased from 61.7% for 1998
to 60.0% for 1999. The decrease in overall occupancy of the
Inns is attributable primarily to:
- additional competition in certain markets, and
- the expansion of several high occupancy Jameson Inns
which then experienced lower occupancy rates because
of the additional rooms available.
- ADR increased 11.4% from $50.60 in 1998 to $56.36 in 1999 due
primarily to the addition of the Signature Inns which
experienced an ADR of $63.31 for the period of May 7, 1999,
through December 31, 1999.
Jameson Hospitality's Same Inn Room Revenues for Jameson Inns for 1999
compared to 1998 grew to $35.4 million from $33.7 million, or 5.0%. The growth
is due to an increase in ADR from $50.48 to $52.87 for these Inns and the
expansion of 11 of these Inns since January 1998, partially offset by a decrease
in the occupancy rate of these Inns from 63.6% in 1998 to 62.3% in 1999.
Our general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. Our
general and administrative expense for 1999 was $1.1 million, as compared to
$592,000 for 1998, due to additional costs resulting from our increased size and
more time spent by shared employees on our business matters as compared to
Jameson Hospitality's and other related entities'.
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Our property taxes and insurance expenses totaled $3.2 million in 1999,
compared with $1.5 million for 1998. The increase is attributable primarily to
the increase in the number of Inns as a result of the Signature acquisition in
May 1999 and to the construction and expansion of Jameson Inns.
Our interest expense increased from $1.7 million in 1998 to $8.4
million in 1999 due to the increase in our average outstanding debt balance in
1999. This was the result primarily of our assumption of an additional $67.1
million of indebtedness in connection with the Signature acquisition in May 1999
and increased indebtedness related to the development of new Jameson Inns.
Our depreciation expense increased from $5.6 million in 1998 to $10.4
million in 1999, due primarily to the Signature acquisition in May 1999 and to
an increase in the number of operating Jameson Inns and the expansion of
existing Jameson Inns during 1999.
Our loss on disposal of furniture and equipment increased from $508,000
in 1998 to $755,000 in 1999 due to an increase in replacement of furniture,
fixtures and equipment before the end of its depreciable life.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED
DECEMBER 31, 1997. Our lease revenue for 1998 increased 40.0% to $18.2 million
as compared to $13.0 million for 1997. The increase was due to an increase in
Jameson Hospitality's room revenues.
As a result of the following three factors, Jameson Hospitality's room
revenues rose 41%, from $27.6 million for 1997 to $38.8 million in 1998:
- The number of room nights available at Jameson Inns increased
from 878,056 in 1997 to 1,216,998 in 1998, or 38.6%, due to
the opening from January 1997 through December 1998 of 38 new
38- to 59-room Jameson Inns, and five 16- to 19-room
expansions of existing Jameson Inns.
- Jameson Inns' occupancy rate decreased from 64.9% for 1997 to
61.7% for 1998. The decrease in overall occupancy of the
Jameson Inns is attributable primarily to (a) the expansion of
several high occupancy Jameson Inns which then experienced
lower occupancy rates because of the additional rooms
available, (b) the opening of new Jameson Inns which typically
require several months of operations before realizing higher
occupancy rates and (c) additional competition in certain
markets.
- ADR increased 7.1% from $47.25 in 1997 to $50.60 in 1998.
Jameson Hospitality's Same Inn Room Revenues for 1998 versus 1997 grew
to $26.2 million from $25.1 million, or 4%. The growth is due to an increase in
ADR from $47.03 to
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$50.07 for these Jameson Inns and an increase in room nights available (due to
expansions of certain of these Jameson Inns) from 797,737 to 807,842 partially
offset by a decrease in the occupancy rate from 65.4% to 63.4% for these Jameson
Inns for 1997 compared to 1998.
Our general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office. Our
general and administrative expense for 1998 was $592,000, as compared to
$445,000 for 1997, due to additional costs resulting from our increased size and
more time spent by shared employees on our business matters as compared to
Jameson Hospitality's and other related entities'.
Our property taxes and insurance expenses totaled $1.5 million in 1998,
compared with $1.1 million for 1997. The increase is attributable to the
increase in the number of Jameson Inns and the expansion of existing Jameson
Inns.
Our interest expense increased from $0.8 million in 1997 to $1.7
million in 1998 due to the increase in its average outstanding debt balance in
1998. As a result of the early extinguishment of debt in 1998 and 1997, we had
losses of $133,951 and $689,542, respectively, comprised of the write-offs of
deferred finance costs and prepayment penalties, which are reflected as
extraordinary items.
Our depreciation expense increased from $3.9 million in 1997 to $5.6
million in 1998, due to an increase in the number of operating Jameson Inns and
the expansion of existing Jameson Inns.
Our loss on disposal of furniture and equipment increased from $144,000
in 1997 to $508,000 in 1998 due to an increase in replacement of furniture,
fixtures and equipment before the end of its depreciable life.
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FUNDS FROM OPERATIONS; CASH AVAILABLE FOR DISTRIBUTION
The following table illustrates our calculation of funds from
operations and cash available for distribution on a historical basis for the
years ended December 31, 1997, 1998 and 1999. In March 1995, NAREIT published a
new interpretation of funds from operations which we retroactively adopted at
that time.
In October 1999, NAREIT issued an additional clarification effective as
of January 1, 2000 stipulating that FFO should include both recurring and
non-recurring operating results. Consistent with this clarification,
non-recurring items that are not defined as "extraordinary" under GAAP will be
reflected in the calculation of FFO. Gains and losses from the sale of
depreciable operating property will continue to be excluded from the calculation
of FFO.
Year Ended December 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
(dollars in thousands)
Net income available to common stockholders $ 5,906 $ 3,485 $ 5,383
Add:
Depreciation expense 3,898 5,636 10,396
Adjustment for equity share of hotel limited
partnership -- -- 24
Loss on disposals 144 508 755
Write-off of offering costs -- -- 100
Extraordinary item 689 134 --
Loss on impairment of real estate -- 2,507 --
-------- -------- --------
Funds from operations, per March 1995 NAREIT
interpretation 10,637 12,270 16,658
Add:
Loan fee amortization expense 80 114 228
Less:
Additions to reserve for furniture, fixtures and
equipment(1) (1,077) (1,551) (3,057)
Required loan principal repayments (78) (146) (2,365)
-------- -------- --------
Cash available for distribution $ 9,562 $ 10,687 $ 11,464
======== ======== ========
- ---------------
(1) This amount equals 4% of the room revenues of our Inns for the
respective period.
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LIQUIDITY AND CAPITAL RESOURCES
We expect to continue to develop additional Jameson Inns and Signature
Inns and to expand existing Jameson Inns, as suitable opportunities arise. We
will not undertake such investments, however, unless adequate sources of
financing are available. Since our election to be taxed as a REIT, we have
financed construction of new Jameson Inns and currently intend to continue
financing the construction of new Jameson Inns and Signature Inns entirely with
bank borrowings. We believe we can continue to finance new Inns and expansions
with these construction and long-term mortgage loans. At December 31, 1999, we
had approximately $174 million in outstanding debt. At that date we had two
operating Jameson Inns and one Signature Inn which were debt free and could be
used as collateral if we need additional borrowing capacity.
Jameson has $33.7 million in lines of credit (the "Line") with some
convertible to term notes beginning in 2000. At December 31, 1999, we had drawn
down $13.3 million under the Line with $20.4 million remaining available credit.
Loans made under the Line bear interest at rates initially ranging from 8.5% to
9.0%, which are adjustable annually to a spread over the prime rate plus .25 to
.5 percentage points. The minimum annual interest rate payable is 7% and the
maximum is 13%. The annual interest rates at December 31, 1999, ranged from 8.0%
to 8.5%. Loans made under the Line are secured by mortgages on 27 of the Jameson
Inns. Payments of interest are due monthly, and monthly payments of principal
and interest commence at various dates beginning in April 2000. Principal under
each term loan under the Line is amortized using a 15-year period and is payable
in full at various dates through 2007. We use the Line to purchase land and to
supplement the financing of construction costs, and certain other operating
needs including the payment of dividends and other operating expenses.
In January 1999, we entered into an agreement with a bank to
provide $17.2 million in new financing, which is secured by 14 operating Jameson
Inns which were previously debt free. This bank note bears interest at the
weekly average yield on United States Treasury securities adjusted to the
constant maturity of one year plus 3.75% per annum and is adjusted annually.
Monthly installments of principal and interest are due through maturity in 2019.
Monthly deposits of $15,000 are required to be deposited into a replacement
reserve escrow account until a balance of $200,000 has been achieved.
The proceeds of this financing were used to repay amounts outstanding under the
Line.
In December 1999, we obtained a ten-year term loan in the principal
amount of $3.7 million to refinance the Signature Inn-Carmel and to provide
funds for our purchase of the remaining interest in the partnership which had
owned the property. The interest rate on the loan is the prime rate plus .5% and
adjusts annually. At December 31, 1999, the interest rate was 9.0%. Payments of
principal and interest are due monthly. Repayment of the loan is secured by
the Inn.
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In December 1999 and January 2000, we refinanced indebtedness secured
by four Signature Inns by issuance of adjustable rate economic development
revenue refunding bonds in the aggregate principal amount of $12,115,000. The
bonds mature on December 1, 2016, subject to prior optional and mandatory
redemption, and are subject to mandatory purchase under certain conditions. The
interest rates on the bonds adjust weekly and ranged from 3.4% to 5.7% in
December 1999.
Historically, we have utilized construction and long-term mortgage
financing to fund the balance of construction costs of Inns not funded under the
Line. For each new Jameson Inn to be built, we generally obtain a construction
loan for approximately $1.1 to $2.8 million depending on the size of the Inn to
be built. After an 18-month interest-only period, each construction loan
converts to a long-term mortgage financing upon completion of the Inn without
any further action by us, and is amortized over a 15 or 20 year period and
payable in full seven years from its inception. The interest rate on each of the
loans adjusts annually, to rates ranging from the then prevailing prime rate
plus .125% to prime plus .375%. As of December 31, 1999, the construction loans
are secured by mortgages on 20 of the Jameson Inns under construction.
As of December 31, 1999, we had a total of 22 new Jameson Inns and one
expansion of an existing Jameson Inn under construction with total remaining
construction costs, excluding land, expected to total $61.0 million when the
projects are complete. For 20 of these properties, we had obtained construction
loans during 1998 and 1999 totaling $44.5 million with remaining availability of
$34.1 million at December 31, 1999. To fund the completion of the properties
under construction we will use the remaining availability under the construction
loans, availability on the Line and proceeds from the financing of the two or
unencumbered Inns and the refinancing of Inns with increased borrowing capacity.
The availability on the Line at December 31, 1999 was $20.4 million.
Since we presently intend to rely primarily on borrowings for
construction and permanent financing of new Jameson Inns and Signature Inns and
for the expansion of existing Jameson Inns, the lack of sufficient financing on
favorable terms and conditions could prevent or significantly deter us from
constructing new Jameson Inns or expanding existing Jameson Inns. The
availability of such financing depends on a number of factors over which we have
no control, including general economic conditions, the economic and competitive
environments of the communities in which the Inns are located and the level and
stability of long-term interest rates. We are also considering possible
additional long-term debt or equity financing that would be available to fund
its ongoing development activities.
In January 1997, we filed a shelf registration statement on Form S-3
with the SEC to provide additional financing. In September 1999, we filed a
post-effective amendment to that registration statement. See Item 1.
Business--Policies and Objectives with Respect to Certain Activities--Financing
for a description of the registration statement and post-effective amendment.
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As with most real estate investments, our investments in the Inns are
relatively illiquid and such illiquidity is further increased by the location of
many Jameson Inns in small communities. As a result, the ability of Jameson to
sell or otherwise dispose of any Inn to provide liquidity will be very limited.
We have four stock incentive plans in place. As of December 31, 1999,
965,136 shares of our common stock were reserved for future stock option and
restricted stock grants and previously issued options to purchase 889,971 shares
of our common stock were outstanding (including 458,971 which were exercisable).
In addition, as of December 31, 1999, 84,270 shares of our common stock issued
to certain key employees of Jameson and Jameson Hospitality are restricted as to
sale until fully vested in 2006, 2007 and 2008.
YEAR 2000
A critical business issue has emerged regarding how existing
application software programs and operating systems can accommodate the year
2000 date value. Many existing application software products in the market place
were designed to accommodate only two-digit date entries. Beginning in the year
2000, these systems and products must be able to accept four-digit entries to
distinguish years beginning with 2000 from prior years. As a result, computer
systems and software used by many companies have required or still may require
to be upgraded to comply with such "Year 2000" requirements. Jameson and Jameson
Hospitality conducted an assessment of their 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"), and non-IT areas such as
microprocessors and embedded chips. On-going testing of existing systems, to
determine compliance, were completed by November 1999. Systems that were
determined to be non-compliant were repaired or replaced by November 1999. The
remediation phase included modification to, or replacement of, software, and
hardware or microprocessors.
Approximately $50,000 was expended by Jameson Hospitality for Year 2000
remediation. Neither we nor Jameson Hospitality tracked the internal costs
incurred for the Year 2000 project (principally the payroll and related costs
for our information systems group). The costs of the project were funded through
operating cash flows of the companies.
We and Jameson Hospitality rely on third party consultants and
suppliers for a variety of our corporate and Inn operations. The ability of
third parties to adequately address their Year 2000 issues is outside of our
control. There can be no assurance that the failure of Jameson and Jameson
Hospitality, or such third parties, to adequately address their respective Year
2000 issues will not have a material adverse effect on our future financial
condition or results of operations. Jameson and Jameson Hospitality believe
they have an effective program in place which will resolve the Year 2000 issues
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. Jameson and Jameson Hospitality
believe
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that under most reasonably likely worst case scenarios Inn operations could be
disrupted, a reduction in Inn occupancy could occur due to lost reservations, or
corporate financial functions could be impaired. This event would cause certain
processes to revert to manual systems and could have a material adverse impact
on Jameson and Jameson Hospitality's operating results and financial position.
Jameson and Jameson Hospitality maintain contingency plans in their normal
course of business designed to be deployed in the event of various potential
business interruptions. Contingency plans were implemented between December 1
and December 31, 1999, for systems that could not be feasibly repaired or
replaced. No material business disruptions have occurred to date for us or
Jameson Hospitality as a result of Year 2000 issues.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. Jameson Hospitality raised its room rates for Jameson Inns by
approximately 3% in 1997, 7% in 1998 and 4% in 1999 and by approximately 4% for
Signature Inns since May 1999. Nevertheless, competitive pressures have limited,
and may in the future limit, Jameson Hospitality's ability to raise rates in the
face of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding this, to the extent that it is relevant to our
business, is included in Item 1 of this report under the caption Risk Factors -
Interest Rate Increases Could Increase Our Cost of Current and Future Debt and
in Item 7 under the caption Liquidity and Capital Resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are indexed in Item 14
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2000 annual meeting under the headings "Proposal One -- Election of Directors,"
"Executive Officers" and "Certain Transactions."
ITEM 11. EXECUTIVE COMPENSATION
The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2000 annual meeting under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2000 annual meeting under the heading "Principal Stockholders and Security
Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be contained in this Item is incorporated
by reference to our definitive proxy statement to be filed with respect to our
2000 annual meeting under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements of Jameson Inns, Inc.
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the three years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1999, 1998 and 1997 F-5
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Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation F-33
Notes to Schedule III F-36
Report of Independent Auditors F-37
All other schedules have been omitted since the required information is
not present, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the financial statements and notes thereto.
3. Financial Statements of Jameson Hospitality, LLC
Report of Independent Auditors F-39
Consolidated Balance Sheets as of December 31, 1999, and 1998 F-40
Consolidated Statements of Operations for each of the three years ended
December 31, 1999, 1998 and 1997 F-41
Consolidated Statements of Members Capital for each of the three years
ended December 31, 1999, 1998 and 1997 F-42
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997 F-43
Notes to Consolidated Financial Statements F-45
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1999.
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(c) 1. The following exhibits are filed as part of this Annual
Report or incorporated herein by reference:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1-- Sales Agency Agreement by and among Jameson
Inns, Inc., RGC Brinson Patrick, a division of
Ramius Securities, LLC, and Jameson
Hospitality, LLC, dated September 3, 1999,
incorporated by reference to Exhibit 1.4 to
Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, File
No. 333-20143
3.1-- Articles of Incorporation of the Registrant
incorporated by reference to Exhibit 3.1.1 to
the Registration Statement filed on Form S-11,
File No. 33-71160
3.2-- Articles of Amendment to the Articles of
Incorporation of the Registrant incorporated by
reference to Exhibit 3.1.2 to the Registration
Statement filed on Form S-11, File No.
33-71160
3.3-- Articles of Amendment to the Articles of
Incorporation of the Registrant setting forth
the Designation of Preferences, Rights,
Privileges and Restrictions of the 9.25% Series
A Cumulative Preferred Stock the Registrant
incorporated by reference to Exhibit 2.1 to the
Registrant's Form 10-K/A1 (Amendment No. 1 to
the Registrant's Annual Report on Form 10-K)
for the year ended December 31, 1993
3.4-- Articles of Amendment to the Articles of
Incorporation of the Registrant incorporated by
reference to Exhibit 3.3.1 to Form 10-K/A2
(Amendment No. 2 to the Registrant's Annual
Report on Form 10-K) for the year ended
December 31, 1993
3.5-- Articles of Amendment to the Articles of
Incorporation of the Registrant amending the
Designation of Preferences, Rights, Privileges
and Restrictions of the 9.25% Series A
Cumulative Preferred Stock of the Registrant
incorporated by reference to Exhibit 3.6 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994
63
67
3.6-- Articles of Amendment to the Articles of
Incorporation of the Registrant amending the
Designation of Preferences, Rights, Privileges
and Restrictions of the 9.25% Series A
Cumulative Preferred Stock incorporated by
reference to Exhibit 3.5 to the Registration
Statement on Form S-4, File No. 333-74149
3.7-- Articles of Amendment to the Articles of
Incorporation of the Registrant setting forth
the Designation of Preferences, Rights,
Privileges and Restrictions of the $1.70 Series
S Cumulative Convertible Preferred Stock
incorporated by reference to Exhibit 3.7 of
Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, File No.
333-20143
3.8-- Bylaws of the Registrant incorporated by
reference to Exhibit 3.2.1 to the
Registration Statement on Form S-11, File
No. 33-71160
3.9-- Amendment to the Bylaws of the Registrant
incorporated by reference to Exhibit 3.2.2 to
the Registration Statement on Form S-11, File
No. 33-71160
3.10-- Amendment No. 2 to the Bylaws of Registrant
incorporated by reference to Exhibit 3.8 to the
Annual Report on Form 10-K for the year ended
December 31, 1995
4.1-- Specimen certificate of Common Stock
incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-11
(File No. 33-71160)
4.2-- Specimen certificate of 9.25% Series A
Cumulative Preferred Stock incorporated by
reference to Exhibit 1 to the Registration
Statement on Form 8-A filed March 13, 1998
(File No. 23256)
64
68
4.3-- Specimen certificate of $1.70 Series S
Cumulative Convertible Preferred Stock
incorporated by reference to Exhibit 1 to the
Registration Statement on Form 8-A filed March
26, 1999 (File no. 000-23256)
10.1-- Master Lease Agreement (relating to Jameson
Inns) incorporated by reference to Exhibit
10.1 to the Annual Report filed on Form 10-K
for the year ended December 31, 1993
10.2-- Amendment No. 1 to Master Lease Agreement
(relating to Jameson Inns) between Jameson
Inns., Inc. and Jameson Operating Company
(revised) incorporated by reference to Exhibit
10.2 to the Annual Report filed on Form 10-K
for the year ended
December 31, 1995
10.3-- Amendment No. 2 to Master Lease Agreement
(relating to Jameson Inns) between Jameson
Inns., Inc. and Jameson Operating Company
(revised) incorporated by reference to Exhibit
10.3 to the Annual Report filed on Form 10-K
for the year ended
December 31, 1996
10.4-- Amendment No. 3 to Master Lease Agreement
(relating to Jameson Inns) between Jameson
Inns., Inc. and Jameson Operating Company
(revised) incorporated by reference to Exhibit
10.4 to the Annual Report filed on Form 10-K
for the year ended
December 31, 1996
10.5-- Amendment No. 4 to Master Lease Agreement
(relating to Jameson Inns) between Jameson
Inns., Inc. and Jameson Operating Company
(revised) incorporated by reference to Exhibit
10.5 to the Annual Report filed on Form 10-K
for the year ended
December 31, 1997
10.6-- Amendment No. 5 to Master Lease Agreement
(relating to Jameson Inns) between Jameson
Inns., Inc. and Jameson
65
69
Alabama, Inc., as lessor, and Jameson
Development Company, LLC incorporated by
reference to Exhibit 10.6 to the
Registration Statement on Form S-4, File No.
33-74149
10.7-- Schedule of documents substantially similar
to Exhibit 10.1 incorporated by reference to
Exhibit 3.7 to the Registration Statement on
Form S-4, File No. 333-74149
10.8-- Schedule of documents substantially similar
to Exhibit 10.6 incorporated by reference by
Exhibit 10.8 to the Registration Statement on
Form S-4, File No. 333-74149
10.9-- Master Lease Agreement (relating to
Signature Inns) incorporated by reference to
Exhibit 10.9 to the Post-Effective Amendment
No. 1 to the Registration Statement on Form
S-3, File No. 333-20143
10.10-- Amendment No. 1 to Master Lease Agreement
(relating to Signature Inns) incorporated by
reference to Exhibit 10.11 to the
Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, File No.
333-20143
10.11-- Cost Reimbursement Agreement between
Jameson Inns., Inc. and Jameson Hospitality,
LLC (formerly Kitchin Investments, Inc.)
incorporated by reference to Exhibit 10.2 to
the Registration Statement on Form S-11,
File No. 33-71160
10.12-- Form of Construction Contract between
Jameson Inns., Inc., and Jameson Hospitality,
LLC (formerly Jameson Construction Company) for
construction of Jameson Inns incorporated by
reference to Exhibit 10.7 to the Annual Report
filed on Form 10-K for the year ended December
31, 1995
10.13-- Jameson 1993 Stock Incentive Plan
incorporated by reference to Exhibit 10.22.1 to
the Registration Statement on Form S-11, File
No. 33-71160
66
70
10.14-- Form of Stock Option Agreement under Jameson
Inns, Inc. Stock Incentive Plan incorporated by
reference to Exhibit 10.23 to the Registration
Statement on Form S-11, File No. 33-71160
10.15-- Amendment No. 1 to Jameson 1993 Stock
Incentive Plan incorporated by reference to
Exhibit 10.10 to the Annual Report filed on
Form 10-K for the year ended December 31, 1995
10.16-- 1994 Amendment to Jameson 1993 Stock
Incentive Plan incorporated by reference to
Exhibit 10.11 to the Annual Report filed on
Form 10-K for the year ended December 31, 1995
10.17-- Amendment No. 3 to Jameson 1993 Stock
Incentive Plan incorporated by reference to
Exhibit 10.12 to the Annual Report filed on
Form 10-K for the year ended December 31, 1995
10.18-- Jameson Inns., Inc. Director Stock Option
Plan incorporated by reference to Exhibit 10.13
to the Annual Report filed on Form 10-K for the
year ended December 31, 1995
10.19-- Jameson 1996 Stock Incentive Plan
incorporated by reference to Exhibit 10.45 to
the Annual Report filed on Form 10-K for the
year ended December 31, 1995
10.20-- Jameson 1997 Director Stock Option Plan
incorporated by reference to Exhibit 10.17 to
the Annual Report filed on Form 10-K for the
year ended December 31, 1997
67
71
10.21-- Indemnification and Hold Harmless Agreement
between Jameson Inns, Inc. and Jameson
Hospitality, LLC (formerly Jameson Operating
Company) incorporated by reference to Exhibit
10.25 to the Registration Statement on Form
S-11, File No. 33-71160
10.22-- Indemnification and Hold Harmless Agreement
between Jameson Inns, Inc. and Jameson
Hospitality, LLC (formerly Kitchin Investments,
Inc.) incorporated by reference to Exhibit 10.26
to the Registration Statement on Form S-11, File
No. 33-71160
10.23-- Form of Indemnification agreement between
Jameson Inns., Inc. and Directors and Officers
incorporated by reference to Exhibit 10.27 to
the Registration Statement on Form S-11, File
No. 33-71160
10.24-- Form of Construction Loan Agreement, Indenture,
Security Agreement and Promissory Note for loan
from Empire Financial Services, Inc. to Jameson
Inns., Inc. (formerly Jameson Company) for
construction of Jameson Inn incorporated by
reference to Exhibit 10.39 to the Registration
Statement on Form S-11, File No. 33-71160
10.25-- Form of Construction Loan Indenture,
Security Agreement, Assignment of Fees and
Income, Promissory Note for $4.2 million
revolving loan from Empire Financial Services,
Inc. to Jameson Inns., Inc. incorporated by
reference to Exhibit 10.21 to the Annual Report
filed on Form 10-K for the year ended December
31, 1993
10.26-- Form of Deed to Secure Debt, Security
Agreement, Assignment of Operating Lease,
Assignment of Fees and Income, Promissory Note
for loan from Empire Financial Services, Inc.
to Jameson Inns., Inc. incorporated by
reference to Exhibit 10.24 to the Annual Report
filed on Form 10-K for the year ended December
31, 1995
68
72
10.27-- Loan Modification Agreement and Note
increasing by $2.6 million the revolving loan
from Empire Financial Services, Inc. to Jameson
Inns., Inc. incorporated by reference to
Exhibit 10.26 to the Annual Report filed on
Form 10-K for the year ended December 31, 1995
10.28-- Deeds to Secure Debt, Mortgages, Assignments
and Security Agreements, Assignment of Rents
and Leases, Assignments of Income and
Promissory Note for $17,171,717 loan from Bank
Midwest, N.A. to Jameson Inns, Inc. secured by
14 separate Jameson Inns incorporated by
reference to Exhibit 10.34 to the Registration
Statement on Form S-4, File No. 333-74149
10.29-- Adjustable Rate Note dated June 30, 1996 in the
amount of $1,050,000 from Jameson Inns., Inc.
to Empire Financial Services, Inc. for loan on
Waynesboro, Georgia incorporated by reference
to Exhibit 10.3 to the Report for the quarter
ended March 31, 1996
10.30-- Asset Purchase Agreement by and among Jameson
Outdoor Advertising Company, Jameson Inns, Inc.
and Jameson Hospitality, LLC dated as of
April 2, 1999.
10.31-- Term Loan Agreement dated as of December 28,
1999, between Jameson Inns, Inc. and First
National Bank & Trust; Mortgage; Security
Agreement; Assignment of Rents and Leases;
Mortgage Note for $3.7 million
69
73
10.32-- Loan Agreement between the City of Elkhart,
Indiana and Jameson Inns, Inc. dated as of
December 1, 1999, relating to the issuance of
$3,305,000 of Adjustable Rate Economic
Development Revenue Refunding Bonds, Series
1999; Trust Indenture between City of Elkhart,
Indiana and Firstar Bank, N.A. as Trustee, dated
as of December 1, 1999; Escrow Deposit Agreement
dated December 22, 1999, by and among Jameson
Inns, Inc., the City of Elkhart, Indiana, Bank
One Trust Company, NA as Escrow Trustee and Bank
One Trust Company, NA as Prior Trustee; Specimen
Irrevocable Letter of Credit dated December 22,
1999, for the benefit of bondholders for
the account of Jameson Inns, Inc.; Reimbursement
Agreement between Jameson Inns, Inc. and Firstar
Bank, N.A. dated December 22, 1999; Mortgage,
Assignment of Rents and Security Agreement from
Jameson Inns, Inc. to Firstar Bank, N.A. dated
as of December 22, 1999; Assignment of Leases
and Rents from Jameson Inns, Inc. to Firstar
Bank, N.A. dated as of December 22, 1999;
Assignment and Subordination of Master Lease by
Jameson Inns, Inc. and Jameson Hospitality, LLC
for the benefit of Firstar Bank, N.A. dated as
of December 22, 1999; Environmental Indemnity
Agreement by Jameson Inns, Inc. to and for the
benefit of Firstar Bank, N.A. dated as of
December 22, 1999; Agreement with respect to
Pledged Bonds by and among Firstar Bank, N.A.,
as Trustee, Firstar Bank, N.A. as Letter of
Credit Bank and Jameson Inns, Inc. dated as of
December 1, 1999; Bond Purchase Agreement by and
among the City of Elkhart, Indiana, Jameson
Inns, Inc. and Banc One Capital Markets, Inc.
dated as of December 21, 1999; Remarketing
Agreement between Banc One Capital Markets,
Inc. and Jameson Inns, Inc. dated as of December
1, 1999
10.33-- Schedule of documents substantially similar to
Exhibit 10.32
23.1-- Consent of Ernst & Young LLP
27.1-- Financial Data Schedule (for SEC use only)
70
74
Jameson Inns, Inc.
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors......................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets.........................................F-3
Consolidated Statements of Operations...............................F-4
Consolidated Statements of Stockholders' Equity.....................F-5
Consolidated Statements of Cash Flows...............................F-6
Notes to Consolidated Financial Statements..........................F-7
F-1
75
Report of Independent Auditors
The Board of Directors
Jameson Inns, Inc.
We have audited the accompanying consolidated balance sheets of Jameson Inns,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
Jameson Inns, Inc. at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with auditing principles generally
accepted in the United States.
Atlanta, Georgia
February 8, 2000
F-2
76
Jameson Inns, Inc.
Consolidated Balance Sheets
DECEMBER 31
1999 1998
---------------------------------------
ASSETS
Operating property and equipment $ 318,601,921 $ 168,880,042
Property and equipment held for sale 2,532,131 --
Less accumulated depreciation (24,551,080) (16,754,843)
---------------------------------------
296,582,972 152,125,199
Cash 2,531,009 500,377
Restricted cash 12,616,482 --
Lease revenue receivable 6,941,315 2,289,753
Deferred finance costs, net 2,942,324 1,110,336
Other assets 1,237,643 303,497
---------------------------------------
$ 322,851,745 $ 156,329,162
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 173,957,998 $ 53,697,435
Accounts payable and accrued expenses 1,269,334 199,730
Accounts payable to affiliates 6,475,510 2,087,106
Accrued interest payable 972,544 350,436
Accrued property taxes 2,178,719 432,168
Preferred stock dividends payable 1,694,595 693,750
---------------------------------------
186,548,700 57,460,625
Stockholders' equity:
Preferred stock, 1,272,727 shares authorized,
9.25% Series A Cumulative Preferred Stock,
$1 par value, liquidation preference $25 per
share, 1,272,727 (1,200,000 in 1998) shares issued
and outstanding 1,272,727 1,200,000
Preferred stock, 2,256,000 shares authorized, 8.5%
Series S Cumulative Convertible
Preferred Stock, $1 par value, liquidation
preference $20 per share, 2,256,000 shares
(0 in 1998) issued and outstanding 2,256,000 --
Common stock, $.10 par value, 40,000,000 shares
authorized, 11,083,952 shares (9,895,810 in 1998)
issued and outstanding 1,108,395 989,581
Additional paid-in capital 132,692,914 97,705,947
Retained deficit (1,026,991) (1,026,991)
---------------------------------------
Total stockholders' equity 136,303,045 98,868,537
---------------------------------------
$ 322,851,745 $ 156,329,162
=======================================
See accompanying notes.
F-3
77
Jameson Inns, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
Lease revenue $ 34,668,532 $ 18,229,748 $ 12,966,185
Expenses:
Property tax expense 2,619,999 1,041,687 683,902
Insurance expense 566,351 481,932 422,890
Depreciation 10,396,468 5,636,079 3,898,091
General and administrative expenses 1,130,577 592,041 444,908
Loss on disposal of furniture and
equipment 755,214 507,718 143,544
Write off of offering costs 99,724 -- --
Loss on impairment of real estate -- 2,507,000 --
------------------------------------------------------
Total expenses 15,568,333 10,766,457 5,593,335
------------------------------------------------------
Income from operations 19,100,199 7,463,291 7,372,850
Interest expense, net of capitalized amounts 8,429,007 1,656,240 777,718
Equity in income of hotel limited partnership 75,462 -- --
Other income 23,913 -- --
------------------------------------------------------
Income before extraordinary loss 10,770,567 5,807,051 6,595,132
Extraordinary loss-early extinguishment of
debt -- 133,951 689,542
------------------------------------------------------
Net income 10,770,567 5,673,100 5,905,590
Less preferred stock dividends 5,387,248 2,188,050 --
======================================================
Net income attributable to common
stockholders $ 5,383,319 $ 3,485,050 $ 5,905,590
======================================================
Per common share:
Income before extraordinary loss:
Basic $ .51 $ .37 $ .72
Diluted $ .51 $ .36 $ .70
Net income:
Basic $ .51 $ .36 $ .64
Diluted $ .51 $ .35 $ .63
See accompanying notes.
F-4
78
Jameson Inns, Inc.
Consolidated Statements of Stockholders' Equity
PREFERRED PREFERRED
STOCK STOCK COMMON CONTRIBUTED RETAINED STOCKHOLDERS'
SERIES A SERIES S STOCK CAPITAL DEFICIT EQUITY
------------------------------------------------------------------------------------------
Balance at January 1, 1997 $ -- $ -- $ 735,747 $ 51,054,202 $ (1,026,991) $ 50,762,958
Issuance of common stock, net of
offering expense -- -- 234,549 25,887,675 -- 26,122,224
Exercise of stock options -- -- 6,981 413,417 -- 420,398
Vesting of stock options -- -- -- 37,424 -- 37,424
Vesting of restricted stock grants -- -- 131 70,652 -- 70,783
Common stock dividends ($0.90 per
share) -- -- -- (2,252,906) (5,905,590) (8,158,496)
Net income -- -- -- -- 5,905,590 5,905,590
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 977,408 75,210,464 (1,026,991) 75,160,881
Issuance of preferred and common
stock, net of offering expense 1,200,000 -- 4,253 27,839,002 -- 29,043,255
Exercise of stock options -- -- 5,930 353,089 -- 359,019
Vesting of restricted stock grants -- -- 1,990 60,442 -- 62,432
Common stock dividends ($0.94 per
share) -- -- -- (3,784,845) (5,457,255) (9,242,100)
Preferred stock dividends ($1.82
per share) -- -- -- (1,972,205) (215,845) (2,188,050)
Net income -- -- -- -- 5,673,100 5,673,100
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 1,200,000 -- 989,581 97,705,947 (1,026,991) 98,868,537
Issuance of preferred and common
stock, net of offering expense 72,727 2,256,000 117,341 39,585,070 -- 42,031,138
Exercise of stock options -- -- 1,501 100,302 -- 101,803
Vesting of restricted stock grants -- -- (28) 67,653 -- 67,625
Common stock dividends ($.97 per
share) -- -- -- (4,072,307) (6,077,070) (10,149,377)
Preferred stock dividends-Series S
($1.10 per share) -- -- -- -- (2,486,112) (2,486,112)
Preferred stock dividends-Series A
($2.28 per share) -- -- -- (693,751) (2,207,385) (2,901,136)
Net income -- -- -- -- 10,770,567 10,770,567
------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 1,272,727 $ 2,256,000 $ 1,108,395 $132,692,914 $ (1,026,991) $136,303,045
==========================================================================================
See accompanying notes.
F-5
79
Jameson Inns, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------
OPERATING ACTIVITIES
Net income $ 10,770,567 $ 5,673,100 $ 5,905,590
Adjustments to reconcile net income to cash
provided by operating activities:
Extraordinary loss -- 133,951 596,526
Depreciation and amortization 10,624,136 5,750,186 3,977,605
Equity in income of hotel limited partnership (75,462) -- --
Write off of offering costs 99,724 -- --
Loss on disposal of furniture and equipment 755,214 507,718 143,544
Stock-based compensation expense 67,625 62,432 108,207
Loss on impairment of real estate -- 2,507,000 --
Changes in assets and liabilities increasing
(decreasing) cash:
Lease revenue receivable (4,651,562) (832,081) (773,048)
Restricted cash 882,592 -- --
Other assets (894,526) (206,712) 186,794
Accounts payable and accrued expenses 730,989 (13,681) 193,290
Accounts payable to affiliates 4,605,402 (98,778) 1,552,424
Accrued interest payable (7,893) 185,679 44,214
Accrued property taxes and other accrued
liabilities 295,263 176,294 125,205
------------------------------------------------
Net cash provided by operating activities 23,202,069 13,845,108 12,060,351
INVESTING ACTIVITIES
Acquisition of Signature Inns and billboards, net 92,092 -- --
Proceeds from disposition of property and equipment 1,441,586 -- --
Additions to property and equipment (41,761,690) (55,844,810) (37,362,186)
------------------------------------------------
Net cash used in investing activities (40,228,012) (55,844,810) (37,362,186)
FINANCING ACTIVITIES
Common stock dividends paid (10,149,377) (9,242,100) (8,158,496)
Preferred stock dividends paid (4,386,403) (1,494,300) --
Proceeds from issuance of preferred and
common stock, net of offering expense 977,230 29,043,255 26,122,224
Proceeds from exercise of stock options 101,803 359,019 420,398
Proceeds from mortgage notes payable 62,003,310 53,936,020 33,919,713
Payment of deferred finance costs (2,001,251) (576,922) (260,306)
Payments on mortgage notes payable (27,488,737) (29,863,474) (26,612,029)
------------------------------------------------
Net cash provided by financing activities 19,056,575 42,161,498 25,431,504
------------------------------------------------
Net increase in cash 2,030,632 161,796 129,669
Cash at beginning of year 500,377 338,581 208,912
------------------------------------------------
Cash at end of year $ 2,531,009 $ 500,377 $ 338,581
================================================
SUPPLEMENTAL INFORMATION
Interest paid, net of interest capitalized $ 8,746,028 $ 2,252,778 $ 733,504
================================================
State income and franchise taxes paid $ 11,824 $ 17,353 $ 16,752
================================================
See accompanying notes.
F-6
80
Jameson Inns, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS
Jameson Inns, Inc. ("the Company") develops and owns limited service hotel
properties (the "Inns") operating under the trademark "The Jameson Inn(R)." In
addition, as a result of the Company's acquisition of Signature Inns, Inc.
("Signature") in May of 1999, the Company owns Inns in the Midwest operating
under the trademark "Signature Inns(R)".
On May 7, 1999, the Company merged with Signature, a limited-service hotel
company based in Indiana with Inns located in Midwestern states. Through the
Signature merger, the Company acquired 25 wholly-owned Signature Inns (2,978
available rooms) and a 40% general partnership interest in a limited
partnership which owned one additional Signature Inn (81 available rooms). In
December 1999 the Company acquired the remaining partnership interest in this
partnership and took direct ownership of the hotel.
At December 31, 1999, there were 88 Jameson Inns in operation in seven
Southeastern states and 26 Signature Inns in operation in six Midwestern
states, with a total of 7,300 rooms and an additional 24 Jameson Inns under
development, including 22 under construction and contracts to acquire two
additional parcels of land on which additional Jameson Inns are expected to be
constructed during 2000 and 2001. At December 31, 1999, a 20-room expansion of
one existing Jameson Inn was also being constructed.
F-7
81
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES
The Company has several business relationships with Jameson Hospitality, LLC
("JH") including contracts to construct the new Inns (see Note 11) and the
lease to operate the Inns (see Note 6). JH is the successor to Jameson
Development Company, LLC and Jameson Operating Company II, LLC which previously
held the contracts and the lease, respectively and Kitchin Investments, Inc.,
which was merged into JH on December 31, 1999. JH is wholly-owned by Thomas W.
Kitchin, chairman and chief executive officer of the Company, and members of
his family.
The Company's principal business also includes arranging construction and
permanent financing, land acquisition, ownership of the Inns and billboards,
capital improvements to the Inns, and acquisition and replacement of furniture,
fixtures and equipment for the Inns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Costs incurred to acquire and open new Inn locations or to renovate existing
Inns are capitalized as property costs and amortized over their depreciable
life. The Company also capitalizes construction period interest costs and real
estate taxes. Interest costs of $1,596,925 and $1,125,935, were capitalized in
1999 and 1998, respectively.
Property and equipment used in Inn operations is depreciated using the
straight-line method generally over 31.5 to 39 years (buildings), 15 years
(land improvements) and three to five years (furniture, fixtures and
equipment). Billboards are depreciated over ten years (see Note 5).
F-8
82
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCE COSTS
Deferred finance costs represent fees and other expenses incurred to obtain
long-term debt financing on the Inn facilities and are amortized to expense
over the terms of the loans, beginning with the opening of the Inn.
Amortization of deferred finance costs is included in interest expense on the
consolidated statements of operations. Accumulated amortization totaled $408,578
and $180,910 as of December 31, 1999 and 1998, respectively.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), and has operated as such since January 1,
1994. As a result, the Company is not subject to federal income taxes to the
extent that it distributes annually at least 95% of its taxable income to its
shareholders and satisfies certain other requirements defined in the Code.
The Company uses the liability method of accounting for income taxes, which
amounts have not been material since the REIT election.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method for valuing its awards of stock
options, restricted stock and other stock awards and recording the related
compensation expense, if any. This compensation expense is included in general
and administrative expense which is allocated as part of the Cost Reimbursement
Agreement described in Note 11.
See Note 8 for pro forma disclosures using the fair value method as described
in Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ("FAS 123").
F-9
83
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Company considers its cash, restricted cash, and mortgage notes payable to
meet the definition of financial instruments as prescribed by Financial
Accounting Standards Board Statement No. 107, Disclosures about Fair Value of
Financial Instruments. At December 31, 1999 and 1998, the carrying value of the
Company's financial instruments approximated their fair value.
RESTRICTED CASH
Restricted cash represents amounts that have been funded from bond issuances,
held in trust, primarily to retire four outstanding bonds payable. In January
2000, $12,115,000 of the restricted cash was used to retire such bonds.
PRINCIPLES OF CONSOLIDATION
Intercompany transactions among the entities included in the consolidated
financial statements have been eliminated. As of December 31, 1999, the Company
had one wholly-owned and two 99.8%-owned qualified real estate investment trust
subsidiaries. Various companies wholly-owned by the Company's Chairman and CEO
and members of his family own the remaining 0.2% of these two subsidiaries.
The equity in income in hotel limited partnership represents the Company's 40%
general partnership interest in the Carmel, Indiana Signature Inn limited
partnership. The investment was accounted for using the equity method of
accounting whereby the Company recorded its proportionate share of the
partnership's income. On December 28, 1999, the Company purchased the remaining
60% partnership interest, therefore, the operations of the partnership from
December 28, 1999 to December 31, 1999 are consolidated in the Company's
financial statements.
F-10
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Net income attributable to common stock is reduced by all preferred stock
dividends declared through the end of the period.
Basic earnings per share is calculated using weighted average shares
outstanding less issued and outstanding but unvested restricted shares of
Common Stock.
Diluted earnings per share is calculated using weighted average shares
outstanding plus the dilutive effect of outstanding shares of Preferred Stock,
outstanding restricted shares of Common Stock and outstanding stock options,
using the treasury stock method and the average stock price during the period.
The potential conversion of the Redeemable Series S Preferred Stock has been
excluded from the dilutive earnings per share calculation as the effects of
redemption would be antidilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1999 1998
---------------------------------
Land and improvements $ 57,449,978 $ 34,671,144
Buildings 208,229,439 98,322,232
Furniture, fixtures and equipment 30,262,230 18,849,944
Billboards 2,537,437 -
Construction in process 20,122,837 17,036,722
---------------------------------
Operating property and equipment 318,601,921 168,880,042
Property and equipment held for sale 2,532,131 -
Accumulated depreciation (24,551,080) (16,754,843)
---------------------------------
$296,582,972 $152,125,199
=================================
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to
F-11
85
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
Be Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations or held for sale when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. During 1998, the Company
recognized a $2,507,000 loss on impairment of real estate related to one of its
properties. In 1999 the property was sold and the sales price approximated its
carrying value. No impairment losses have been recognized in 1999 or 1997.
F-12
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT (CONTINUED)
Based on a review of its investment portfolio at December 31, 1999, the Company
has determined that one property does not meet its investment criteria.
Accordingly, the Company has decided to sell the property and therefore the
property is classified as held for sale in the accompanying balance sheet. In
February 2000, the Company closed on the sale of this hotel property. The sales
price, less selling costs, approximated the carrying amount. In addition, the
Company owns several parcels of land adjacent to operating Inns which are held
for sale at December 31, 1999. The hotel property and parcels of land held for
sale are recorded at the lower of cost or fair value less anticipated selling
costs.
4. MERGER WITH SIGNATURE INNS, INC.
On May 7, 1999, the Company completed its merger with Signature Inns, Inc. In
the merger, the Company acquired 25 Signature Inns located in six Midwestern
states and a 40% general partnership interest in a partnership which owned one
Signature Inn. Immediately prior to the merger, the Signature operating assets
were sold to, and the liabilities pertaining to the operations of the Signature
Inns were assumed by JH in connection with the merger, the Company entered into
a new master lease with JH covering the 25 wholly-owned Signature Inns (See Note
6).
In the merger, holders of Signature common stock received one-half of a share
of Jameson common stock and $1.22 in cash for each share of Signature common
stock. Holders of Signature Series A Preferred Stock received one share of
Jameson Series S Preferred Stock for each share of Signature Series A Preferred
Stock. In the merger, the Company assumed all of the outstanding indebtedness
of Signature, except for $2.1 million which was repaid at closing with
additional borrowings under the Company's line of credit. As of May 7, 1999,
the debt assumed totaled $67.1 million and was secured by mortgages on
twenty-four of the Signature Inns.
F-13
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
4. MERGER WITH SIGNATURE INNS, INC. (CONTINUED)
The purchase price of Signature approximated $46.3 million, consisting of $2.6
million in cash, the issuance of 1,051,846 shares of Jameson Common Stock (at
$9.125 per share), 2,256,000 shares of Jameson Series S Preferred Stock (at
$13.375 per share), and merger related costs of approximately $4.0 million. The
purchase price has been allocated to the fair value of the net assets acquired
as follow:
Cash $ 6,721,951
Restricted cash 1,384,074
Hotel limited partnership 1,079,675
Property and equipment 108,332,245
Amount due from affiliates 398,447
Accounts payable and accrued expenses (277,580)
Accrued interest payable (630,001)
Accrued property taxes (1,411,796)
Mortgage notes payable (69,231,797)
------------
$ 46,365,218
============
The merger was accounted for as a purchase of Signature by Jameson as
prescribed by Accounting Principles Board Opinion No. 16, Business
Combinations. Accordingly, the historical results of Jameson include the
effects of the merger beginning May 8, 1999.
F-14
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
4. MERGER WITH SIGNATURE INNS, INC. (CONTINUED)
The following presents the unaudited pro forma results of operations as if the
purchase and all related transactions were consumed on January 1, of the
respective period for the year ended December 31. Such information reflects the
allocation of the purchase price.
1999 1998
------------------------------------
Pro forma:
Lease revenues $ 39,626,806 $ 35,081,173
Income before extraordinary items 10,616,738 9,481,780
Extraordinary items -- 133,951
------------------------------------
Net income 10,616,738 9,347,829
Preferred stock dividends 6,736,336 6,023,250
------------------------------------
Net income attributable to common stock $ 3,880,402 $ 3,324,579
=====================================
Pro forma earnings per share:
Basic earnings per common share:
Income before extraordinary items $ .36 $ .32
Extraordinary items -- (.01)
------------------------------------
Net income $ .36 $ .31
=====================================
Diluted earnings per common share:
Income before extraordinary items $ .35 $ .31
Extraordinary items -- (.01)
------------------------------------
Net income $ .35 $ .30
=====================================
F-15
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
5. ACQUISITION OF OUTDOOR ADVERTISING ASSETS OF JAMESON HOSPITALITY, LLC
On April 2, 1999, the Company completed the acquisition of the outdoor
advertising assets and certain operations of JH. These assets consist of
approximately 100 roadside billboards on which advertising for the Company's
hotel properties and, in certain instances, other services or products for third
parties, is placed. These billboards were leased to JH and continue to be used
for similar types of advertising. Consideration of $2,381,000 paid to JH
consisted of (i) 72,727 newly issued shares of the Company's Series A Preferred
Stock (at $17.625 per share), (ii) $400,000 in cash, and (iii) the assumption of
indebtedness of approximately $700,000 which is secured by mortgages on the
billboards and the revenues generated therefrom.
6. THE LEASES
The Company has entered into master leases, whereby all of the operating Inns
are leased to JH. Therefore, all of the lease revenue and related receivables
are derived from these leases.
The Jameson and Signature leases, which expire December 31, 2007 and 2012,
respectively, provide for payment of Base Rent plus Percentage Rent. Base Rent,
which is payable and recorded monthly, equals $264 and $394 per month for the
Jameson Inns and Signature Inns, respectively, for each rentable room in the
Inns at the beginning of the relevant month.
Percentage Rent, which is payable quarterly, is calculated as a percentage in
excess of Base Rent of the total amount of room rental and other miscellaneous
revenues realized by JH over the relevant period. For Jameson Inns, the
percentage is 39% of such revenues up to $22.18 per day per room in 1999 over
the period, plus 65% of all additional average daily room rental revenues. For
Signature Inns, the percentage is 37% of such revenues up to $35.80 per day per
room in 1999 over the period, plus 65% of all additional average daily room
rental revenues.
F-16
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
6. THE LEASES (CONTINUED)
Total rent for the Jameson Inns in any calendar year may not exceed 47% of total
room rental revenues for that year. The $22.18 and $35.80 per room amount, for
Jameson Inns and Signature Inns, respectively, used in calculating percentage
rent is subject to adjustment each year based on changes in the Consumer Price
Index and as of January 1, 2000 was $23.16 and $37.38 for Jameson Inns and
Signature Inns, respectively.
Base rent totaled $20,998,052, $10,501,920 and $7,532,712 in 1999, 1998 and
1997, respectively, and assuming the same number of rooms in operation as at
December 31, 1999, would total $27,898,440 per year until the Lease expires.
The Lease requires the Company to pay real and personal property taxes, casualty
and liability insurance premiums and the cost of maintaining structural
elements, including underground utilities and the cost of replacing or
refurbishing the furniture, fixtures and equipment in the Inns. The Company
intends to maintain cash reserves or sufficient access to borrowings equal to 4%
of room revenues of JH, less amounts expended to date, to fund the Company's
future capital expenditures for such replacements and refurbishments. JH is
required to pay workers compensation insurance premiums, utility costs and all
other costs and expenses incurred in the operations of the Inns.
F-17
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
7. MORTGAGE NOTES PAYABLE
As of December 31, long-term debt consists of:
1999 1998
---------------------------------
Notes payable on Inns:
Terms ranging from seven to twenty-one years, due in monthly installments of
principal and interest with remaining unpaid balances payable in full at
maturity, which range from 2000 to 2017. Interest rates are adjusted
annually and range from 7.785% to 10% and are mainly adjustable to a spread
above the prime rate or Treasury securities at December 31, 1999.
Secured by mortgages on 67 of the Inns as of December 31, 1999. $108,534,789 $23,843,114
Term of twenty years and interest accrues at a margin of 3.75% above a weekly
average yield on Treasury securities, adjusted annually (8.26% at December
31, 1999). Principal and interest payments are due monthly and are being
amortized through maturity in 2019. Secured by mortgages on 14 of the Inns. 16,780,358 --
Terms of 17 years, due in annual installments of principal and bi-annual
installments of interest with any remaining unpaid balances payable in full
December 2016. Interest rates are adjusted weekly and were 5.65% at
December 31, 1999. Secured by mortgages on 4 of the Inns. 12,115,000 --
Notes payable on Company owned billboards:
Terms of five years due in monthly installments of principal and interest
with remaining unpaid balances payable in full at maturity which range from
2000 to 2004. Interest rates are fixed and ranged from 9.50% to 11% at
December 31, 1999. Secured by the Company's billboards. 646,984 --
F-18
92
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
7. MORTGAGE NOTES PAYABLE (CONTINUED)
1999 1998
---------------------------------
Lines of credit:
$33.7 million line of credit convertible beginning in 2000 to term notes due
at various dates through 2007. At December 31, 1999, the Company had $20.4
million of availability. The Line bears interest at initial annual rates
ranging from 8.5% to 9.0%, adjusted annually to the prime rate plus .25% to
.5%, with a floor of 7% and a cap of 13% (8% to 8.5% at December 31, 1999).
Payments of interest are due monthly, and monthly payments of principal and
interest commence at various dates beginning April 2000. Principal under
each term loan will be amortized using a 15-year period and payable in full
at various dates from 2003 to 2007. Secured by mortgages on 27 of the Inns. 13,332,203 27,463,179
$600,000 line of credit secured by billboards. At December 31, 1999, the
Company had $576,918 available to borrow. The line bears interest at an
initial rate of 9.50%, which is adjusted periodically to the prime rate
plus 1%. Payments of interest are due monthly with the principal balance
payable in full upon maturity in December 2000. 23,082 --
Construction obligations:
$44.5 million total commitments. As of December 31, 1999, $34.1 million was
available for borrowing. The construction loans have terms of seven years
and are due in monthly installments of interest only for 18 months and
principal and interest using a 15- or 20-year amortization period until
maturity. Interest rates are adjusted annually to the then prevailing prime
rate plus .125% to prime plus .375%. Interest rates at December 31, 1999
ranged from 7.875% to 8.625%. Secured by 20 Inns under construction. 10,410,577 2,391,142
$12,115,000 of bonds payable maturing December 2016, secured by
restricted cash, with interest at 9.8%. In January 2000, all such
bonds were retired utilizing the Company's restricted cash. 12,115,000 --
---------------------------------
$173,957,998 $53,697,435
=================================
F-19
93
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
7. MORTGAGE NOTES PAYABLE (CONTINUED)
At December 31, 1999 and 1998, approximately $286.5 million and $119.0 million,
respectively, of the Company's net book value of property and equipment
collateralized the mortgage notes payable. At December 31, 1999 and 1998, the
carrying value of the long-term debt approximated its fair value.
The following table summarizes the scheduled aggregate principal payments for
the five years subsequent to December 31, 1999:
2000 $ 22,775,918
2001 7,630,953
2002 5,567,345
2003 19,861,256
2004 14,414,037
Thereafter 103,708,489
-------------
$ 173,957,998
=============
The Company used proceeds of its preferred stock offering in 1998 and common
stock offering in 1997 to early extinguish debt in those years. As a result of
the early extinguishment of certain debt in 1998 and 1997, the Company had
extraordinary losses of $133,951 and $689,542, respectively, comprised of the
write-off of unamortized deferred finance costs and prepayment penalties.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On May 7, 1999, in connection with the Signature merger, the Company issued
2,256,000 shares of 8.5% Series S Cumulative Convertible Preferred Stock
("Series S Preferred Stock") at $13.375 per share. The Series S Preferred Stock
is senior to all shares of the Company's common stock and is on a parity with
the Company's 9.25% Series A Preferred Stock ("Series A Preferred Stock").
F-20
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK (CONTINUED)
On March 18, 1998, the Company completed the sale of 1,200,000 newly issued
shares of 9.25% Series A Preferred Stock at $25 per share before underwriting
discounts and expenses. Net proceeds of approximately $28.5 million were used to
repay certain existing mortgage indebtedness at that date.
Dividends on the Series A and Series S Preferred Stock are cumulative from the
date of original issue and are payable quarterly in arrears on or about the 20th
day of January, April, July and October to shareholders of record on the last
business day of December, March, June and September at the fixed rate of 9.25%
per annum of the liquidation preference of $25 per share (equivalent to a fixed
annual rate of $2.3125 per share) for the Series A Preferred Stock and at the
fixed rate of 8.5% per annum of the liquidation preference of $20 per share
(equivalent to a fixed annual rate of $1.70 per share) for the Series S
Preferred Stock.
Holders of Series A and Series S Preferred Stock generally will have no voting
rights except as required by law. In addition, certain changes to the terms of
the Series A and Series S Preferred Stock that would be materially adverse to
the rights of holders of the Series A and Series S Preferred Stock cannot be
made without the affirmative vote of holders of at least a majority of the
outstanding Series A and a two-thirds vote of the Series S Preferred Stock.
The Series S Preferred Stock is convertible into the Company's common stock, at
the option of the holder at the stated Conversion Price (as defined).
Additionally, at any time on or after February 1, 2000, the Company has the
right to redeem any, or all, of the Series S Preferred Stock, plus accrued and
unpaid dividends, at the Redemption Price, as defined, which ranges from $20.00
to $20.97 per share (depending on the date of redemption). The holders do not
have the option to redeem the Series S Preferred Stock.
The Series A Preferred Stock is not convertible into or exchangeable for any
other property or securities.
F-21
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Upon the occurrence of a Change of Control Event, as defined, at any time prior
to March 18, 2003, the Company may redeem all of the outstanding Series A
Preferred Stock at a purchase price ranging from $25.05 to $26.05 per share
(depending on the date of the redemption), plus accrued and unpaid dividends (if
any) to the date of redemption. Except in certain circumstances relating to
preservation of the Company's status as a REIT and in connection with a change
of control of the Company, the Series A Preferred Stock is not redeemable prior
to March 18, 2003. On and after such date, the Series A Preferred stock will be
redeemable for cash at the option of the Company, in whole or in part, at a
redemption price of $25 per share, plus dividends accrued and unpaid to the
redemption date (whether or not declared) without interest.
STOCK OPTIONS
The Company has four stock option plans. The Company adopted the 1993 Stock
Incentive Plan ("1993 Plan") to provide incentives to attract and retain
officers and key employees of both the Company and JH. The 1993 Plan provides
for a number of shares equal to 10% of the Company's outstanding common shares
(excluding shares issued pursuant to exercises of options granted under the 1993
Plan). The Jameson 1996 Stock Incentive Plan ("1996 Plan") provides for 500,000
additional shares reserved for issuance. As of December 31, 1999 the Company had
a total of 1,505,107 shares reserved for issuance, including 735,136 shares
available for future option grants and restricted stock grants under the 1993
and 1996 Plans.
F-22
96
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The Director Stock Option Plan ("1995 Director Plan") reserved 150,000 shares of
Common Stock to attract and retain qualified independent directors. This plan
provides that, upon election to the Board of Directors, each director will
receive options to purchase 25,000 shares of common stock at the then current
market price; such options are fully vested upon issuance. In addition, the
Company adopted the 1997 Director Stock Option Plan ("1997 Director Plan") which
reserved 200,000 shares of Common Stock and provides that at time of the
Company's approval of the plan and subsequently upon each annual shareholders
meeting, each independent director will be granted an option to purchase 5,000
shares at the then current market price with all shares becoming fully vested
upon issuance. As of December 31, 1999, a total of 350,000 options are reserved
for issuance under the 1995 and 1997 Director Plans, including 230,000 options
available for future option grants.
F-23
97
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
A summary of the stock option activity in the four plans follows:
WEIGHTED
NUMBER RANGE OF AVERAGE
OF EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
----------------------------------------------------
Options outstanding December 31, 1996 427,843 $ 6.65 - $10.875 $ 7.36
Granted in 1997 497,000 $11.375 - $11.75 $11.63
Exercised in 1997 (86,992) $ 6.65 - $10.875 $ 7.11
Forfeited in 1997 (30,000) $ 7.25 - $11.75 $11.28
-------
Options outstanding December 31, 1997 807,851 $ 6.65 - $11.75 $ 9.87
Granted in 1998 175,000 $ 9.125 - $11.375 $10.63
Exercised in 1998 (50,737) $ 6.65 - $10.875 $ 7.07
Forfeited in 1998 (84,000) $ 10.00 - $11.75 $11.39
-------
Options outstanding December 31, 1998 848,114 $ 6.65 - $11.75 $10.04
Granted in 1999 231,835 $ 7.125 - $ 9.75 $ 7.91
Exercised in 1999 (14,758) $ 6.65 - $ 7.25 $ 7.11
Forfeited in 1999 (175,220) $ 7.25 - $11.75 $11.03
-------
Options outstanding December 31, 1999 889,971 $ 6.65 - $11.75 $ 9.38
=======
Options exercisable:
December 31, 1997 365,855 $ 6.65 - $11.62 $ 7.78
=======
December 31, 1998 417,714 $ 6.65 - $11.75 $ 8.71
=======
December 31, 1999 458,971 $ 6.65 - $11.75 $ 9.02
=======
The average contractual life remaining on options outstanding at December 31,
1999 was 6.88 years.
F-24
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
RESTRICTED STOCK
In 1999, 1998 and 1997, the Company awarded 4,750, 20,821 and 1,400 shares,
respectively of Common Stock to certain officers and employees of the Company
and JH, under the provisions of the 1996 Plan. The shares vest ten years after
date of grant, assuming the individual is continuously employed by one of the
two companies at that date. Holders are entitled to all dividends prior to
forfeiture or full vesting. As of December 31, 1999, 84,270 restricted shares of
common stock remain outstanding; the balance were forfeited and returned to the
Company.
Compensation expense resulting from the stock award is calculated as the fair
value of the restricted shares at the date of grant based on the market price at
date of grant; and is being recorded over the ten-year vesting period using the
straight line method, net of forfeitures. The expense recorded was $67,625 in
1999, $62,432 in 1998 and $62,389 in 1997.
F-25
99
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA EFFECTS OF STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required by
FAS 123, which also requires that the information be determined as if the
Company has accounted for its stock options and restricted stock granted
subsequent to December 31, 1994, using the fair value method prescribed by that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions for
1999, 1998 and 1997; risk-free interest rates of 4.10% to 6.69%; a dividend
yield of 8%; a volatility factor of the expected market price of the Company's
Common Stock of .151, .196 and .197, respectively; and an expected life of the
option of 3 to 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and shares which have no vesting restrictions and
are fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options and restricted stock have characteristics
significantly different from those of traded options or unrestricted shares, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options and restricted stock.
F-26
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA EFFECTS OF STOCK-BASED COMPENSATION (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period. The Company's pro forma
information follows:
1999 1998 1997
-------------------------------------
Pro forma net income (in 000's) $5,310 $3,419 $5,882
Pro forma earnings per share-basic $ .50 $ .35 $ .64
Pro forma earnings per share-diluted $ .50 $ .34 $ .62
DIVIDEND REINVESTMENT PLAN
In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. The plan
allows existing shareholders to reinvest their dividends in additional shares
purchased at a 5% discount from the average market price of the shares. The plan
also allows existing shareholders to make additional cash purchases at the
current market price of common stock of up to $5,000 per calendar quarter.
During 1999, 1998 and 1997, 60,459, 41,726 and 45,483 shares, respectively, were
purchased through dividend reinvestments and additional cash purchases.
WARRANTS
As a part of its initial public offering, the Company issued and had warrants
outstanding to purchase up to 260,000 shares of Common Stock at an exercise
price of $14.85 per share; the warrants were exercisable in whole or in part
from date of grant until January 26, 1999. The warrants expired on that date
with no exercises.
F-27
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
--------------------------------------------------------
NUMERATOR
Income before extraordinary loss $ 10,770,567 $ 5,807,051 $ 6,595,132
Extraordinary loss -- (133,951) (689,542)
--------------------------------------------------------
Net income 10,770,567 5,673,100 5,905,590
Preferred stock dividends 5,387,248 (2,188,050) --
--------------------------------------------------------
Numerator for basic earnings per share-income
available to common stockholders $ 5,383,319 $ 3,485,050 $ 5,905,590
========================================================
DENOMINATOR
Weighted average shares outstanding 10,628,980 9,836,624 9,285,670
Less: Unvested restricted shares (85,685) (64,734) (63,661)
--------------------------------------------------------
Denominator for basic earnings per share 10,543,295 9,771,890 9,222,009
Plus: Effect of dilutive securities
Employee and director stock options 46,849 95,497 146,511
Unvested restricted shares 67,402 61,509 44,999
--------------------------------------------------------
Total dilutive potential common shares 114,251 157,006 191,510
--------------------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions 10,657,546 9,928,896 9,413,519
========================================================
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary loss $ .51 $ 0.37 $ 0.72
Extraordinary loss -- (.01) (.08)
--------------------------------------------------------
Net income per common share $ .51 $ 0.36 $ 0.64
========================================================
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary loss $ .51 $ 0.36 $ 0.70
Extraordinary loss -- (0.01) (.07)
--------------------------------------------------------
Net income $ .51 $ 0.35 $ 0.63
========================================================
F-28
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Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
9. EARNINGS PER SHARE (CONTINUED)
Options to purchase 521,833, 503,833, and 27,500 shares of Common Stock during
1999, 1998, and 1997, respectively, and warrants to purchase 260,000 shares of
Common Stock during 1998 and 1997 were all outstanding but were not included in
the computation of diluted earnings per share because the securities' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. Additionally, the potential
conversion of the Series S Preferred Stock was not included in the computation
of diluted earnings per share as the effect of conversion would be antidilutive.
10. INCOME TAXES
The Company recorded no provision for federal income taxes in 1999, 1998 or 1997
due to its REIT status. State tax expense, which is not material, is included in
general and administrative expenses. At December 31, 1999, the Company had net
operating loss carryforwards of approximately $1.2 million available for federal
income tax purposes, which begin to expire in 2005. As a result of the REIT
election and change in ownership resulting from the IPO, future utilization of
the net operating loss carryforwards by the Company, may be limited.
The Company declared and paid dividends on its Common Stock of $.97, $.94 and
$.90 per share in 1999, 1998 and 1997, respectively. Of these dividends, $.48,
$.72 and $.73 per share represents ordinary income and $.49, $.22 and $.17 per
share represents return of capital in 1999, 1998 and 1997, respectively.
11. ADDITIONAL RELATED PARTY TRANSACTIONS
JH identifies sites and constructs the Inns for the Company. The Company paid JH
and its predecessor companies a total of $27,342,000, $41,055,000 and
$29,628,000 for construction of new Inns, Inn expansions, fitness centers or
renovations during the years ended December 31, 1999, 1998 and 1997,
respectively.
F-29
103
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
11. ADDITIONAL RELATED PARTY TRANSACTIONS (CONTINUED)
The Company shared employees and office space with Kitchin Investments, Inc.,
which until December 31, 1999 was wholly owned by Thomas W. Kitchin, the
Company's chairman and chief executive officer. Under the Cost Reimbursement
Agreement, Kitchin Investments, Inc. charged the Company approximately $360,000,
$200,000 and $220,000 for its allocation of salary, office overhead, and other
general and administrative costs in 1999, 1998 and 1997, respectively. On
December 31, 1999, Kitchin Investments, Inc, merged with JH and the Cost
Reimbursement Agreement was assumed by JH effective December 31, 1999.
12. OTHER COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, the Company had executed or expected to execute
construction contracts with JH, for new Inns or expansions totaling $81.1
million, of which $63.8 million had not been expended.
The Company leases office space, land underlying certain of its Inns which
are built or under construction and land for each billboard location for terms
of five or ten years. Lease expense of $101,500, $71,600 and $12,900 in 1999,
1998, and 1997, respectively, is included in general and administrative expense
in the Company's statements of operations. The leases require future minimum
payments as follows:
2000 $ 613,891
2001 627,485
2002 611,483
2003 265,611
2004 162,694
Thereafter 6,625,890
---------------
$ 8,907,053
===============
The rent expense under the office lease was paid by Kitchin Investments, Inc.
and was allocated under the Cost Reimbursement Agreement described in Note 11.
F-30
104
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
12. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is a defendant or plaintiff in various legal actions which have
arisen in the normal course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 1998:
1999 QUARTERS
--------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------------------
Lease revenue $ 4,875,038 $ 9,322,064 $ 11,379,166 $ 9,092,264
Net income 1,627,806 3,811,516 3,983,628 1,347,617
Earnings per common share:
Net income:
Basic $ 0.10 $ 0.24 $ 0.21 $ (0.03)
Diluted $ 0.09 $ 0.24 $ 0.21 $ (0.03)
1998 QUARTERS
--------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------------------
Lease revenue $ 3,852,678 $ 4,742,604 $ 5,032,808 $ 4,601,658
Income before extraordinary loss 1,465,414 66,341 2,606,566 1,668,730
Net income (loss) 1,437,378 (11,673) 2,578,665 1,668,730
Earnings per common share:
Income before extraordinary loss:
Basic $ .14 $ (.06) $ .20 $ .10
Diluted $ .14 $ (.06) $ .19 $ .10
Net income:
Basic $ .14 $ (.07) $ .19 $ .10
Diluted $ .13 $ (.07) $ .19 $ .10
F-31
105
Jameson Inns, Inc.
Notes to Consolidated Financial Statements (continued)
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
Quarterly earnings per share do not sum to the annual earnings per share amounts
due to the effects of the timing of stock issuances and fluctuations in average
price during the period.
F-32
106
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1999
Cost Capitalization
Initial Cost Subsequent to Acquisition
------------------------- --------------------------
Buildings, Buildings,
Mortgage Equipment & Equipment &
Property Debt Land Improvements Land Improvements
- -------- ---- ---- ------------ ---- ------------
Georgia:
Albany (f) $ 1,001,000 $265,344 $ 0 $ 92,308 $ 1,742,571
Americus 1,055,867 131,629 0 222,297 2,554,507
Bainbridge 929,827 125,000 0 0 1,656,835
Brunswick (f) 600,606 175,275 0 (0) 1,678,670
Calhoun (f) 1,001,000 113,722 0 18,008 1,685,566
Carrollton (f) 2,000 225,000 0 50,029 1,654,307
Commerce (f) 501,000 304,809 0 1,300 1,317,911
Conyers 735,725 301,128 0 (0) 2,247,825
Covington (f) 967,000 141,452 0 22,399 1,348,390
Dalton 1,776,444 546,257 0 1,550 2,258,785
Douglas (f) 1,000 120,033 0 0 1,191,027
Dublin (f) 10,000 0 0 0 1,425,343
Eastman (g) 1,198,597 87,883 0 13,917 1,432,761
Fitzgerald (g) 1,198,597 133,515 0 0 1,110,516
Greensboro (g) 1,198,597 109,840 0 17,394 1,515,668
Hartwell 1,055,867 85,000 0 13,460 1,416,952
Jesup (f) 1,001,000 89,917 0 14,239 2,088,777
Kingsland 1,078,102 283,432 0 0 1,429,018
Lagrange (f) 1,001,000 200,073 0 (0) 1,972,948
Macon (f) 478,227 288,518 0 (0) 1,390,149
Milledgeville 0 575,582 4,826,285 (530,186) (4,235,220)
Oakwood (f) 328,369 258,903 0 (0) 1,354,759
Perry (f) 35,000 238,325 0 0 1,400,988
Rome 993,456 254,849 0 0 3,741,127
Statesboro 1,055,867 132,817 0 21,032 1,498,651
Thomaston (f) 967,000 157,181 0 24,890 2,111,635
Thomasville 1,150,000 331,161 0 0 1,512,088
Valdosta (f) 2,000 166,632 0 (0) 1,624,697
Warner Robins (f) 510,000 365,853 0 (0) 2,042,770
Washington 1,055,867 107,780 0 17,067 1,307,184
Waycross (f) 1,501,000 87,000 0 13,777 2,044,714
Waynesboro 1,029,569 142,501 0 0 1,264,888
Winder (f) 967,000 124,500 1,268,199 0 714,986
Alabama:
Albertville 790,189 174,000 0 418 1,100,339
Alexander City (g) 1,198,597 160,086 0 (0) 1,774,656
Arab 789,768 131,554 0 0 1,107,491
Auburn 669,787 227,000 0 0 1,378,337
Bessemer 1,117,000 327,192 0 0 1,511,051
Decatur 1,029,013 201,629 0 (0) 2,097,753
Eufaula (f) 1,000 228,869 0 5,575 1,219,203
Florence 621,159 313,579 0 1,202 1,903,313
Greenville (g) 1,198,597 228,511 0 0 1,493,135
Jasper 489,816 225,633 0 0 2,233,137
Oxford (g) 1,198,597 307,635 0 (340) 1,384,733
Ozark (g) 1,198,597 176,148 0 0 1,168,763
Prattville 1,681,765 319,736 0 (0) 2,259,182
Scottsboro 1,146,863 324,732 0 (0) 1,467,125
Selma 1,513,666 143,812 0 22,773 1,939,526
Sylacauga (f) 1,000 224,476 0 0 1,441,380
Trussville 1,580,518 425,438 0 1,377 2,262,439
Tuscaloosa 820,971 0 0 0 1,456,546
Florida:
Lake City 1,850,000 391,456 0 0 3,080,689
Gross Amount at Which Life on
Carried at Close of Which
Period Depreciation
------------------------ in Latest
Buildings, Income
Equipment & Accumulated Date Date of Statement
Property Land Improvements Total Depreciation Acquired Construction is Computed
- -------- ----- ------------ ---------- ------------ -------- ------------ -----------
Georgia:
Albany (f) $357,652 $1,742,571 $2,100,222 $345,522 1994 1995 (e)
Americus 353,926 2,554,507 2,908,433 690,237 1991 1992 (d)
Bainbridge 125,000 1,656,835 1,781,835 341,030 1994 1994 (e)
Brunswick (f) 175,275 1,678,670 1,853,945 254,401 1994 1995 (e)
Calhoun (f) 131,730 1,685,566 1,817,296 453,460 1988 1988 (d)
Carrollton (f) 275,029 1,654,307 1,929,336 329,970 1993 1994 (e)
Commerce (f) 306,109 1,317,911 1,624,020 207,044 1996 1996 (e)
Conyers 301,128 2,247,825 2,548,952 241,324 1996 1996 (e)
Covington (f) 163,851 1,348,390 1,512,241 404,453 1990 1990 (d)
Dalton 547,807 2,258,785 2,806,591 115,811 1998 1998 (e)
Douglas (f) 120,033 1,191,027 1,311,060 232,971 1995 1995 (e)
Dublin (f) 0 1,425,343 1,425,343 192,604 1997 1997 (e)
Eastman (g) 101,800 1,432,761 1,534,561 469,198 1989 1989 (d)
Fitzgerald (g) 133,515 1,110,516 1,244,031 256,196 1993 1994 (e)
Greensboro (g) 127,234 1,515,668 1,642,902 528,440 1989 1990 (d)
Hartwell 98,460 1,416,952 1,515,412 397,678 1991 1992 (d)
Jesup (f) 104,156 2,088,777 2,192,933 666,495 1990 1990 (d)
Kingsland 283,432 1,429,018 1,712,450 121,091 1997 1998 (e)
Lagrange (f) 200,073 1,972,948 2,173,021 273,102 1995 1996 (e)
Macon (f) 288,518 1,390,149 1,678,666 148,310 1997 1997 (e)
Milledgeville 45,396 591,065 636,461 378,466 1991 -- (d)
Oakwood (f) 258,903 1,354,759 1,613,661 195,891 1996 1997 (e)
Perry (f) 238,325 1,400,988 1,639,314 143,716 1997 1998 (e)
Rome 254,849 3,741,127 3,995,976 74,065 1998 1999 (e)
Statesboro 153,849 1,498,651 1,652,500 563,514 1988 1989 (d)
Thomaston (f) 182,071 2,111,635 2,293,706 630,176 1990 1990 (d)
Thomasville 331,161 1,512,088 1,843,249 82,535 1998 1998 (e)
Valdosta (f) 166,632 1,624,697 1,791,328 372,765 1994 1995 (e)
Warner Robins (f) 365,853 2,042,770 2,408,623 247,028 1997 1997 (e)
Washington 124,847 1,307,184 1,432,031 432,957 1989 1990 (d)
Waycross (f) 100,777 2,044,714 2,145,491 477,251 1992 1993 (e)
Waynesboro 142,501 1,264,888 1,407,389 220,239 1995 1996 (e)
Winder (f) 124,500 1,983,185 2,107,685 789,905 1988 -- (d)
Alabama:
Albertville 174,418 1,100,339 1,274,757 247,728 1994 1994 (e)
Alexander City (g) 160,086 1,774,656 1,934,742 332,798 1994 1994 (e)
Arab 131,554 1,107,491 1,239,045 217,588 1995 1995 (e)
Auburn 227,000 1,378,337 1,605,337 157,762 1996 1997 (e)
Bessemer 327,192 1,511,051 1,838,243 60,057 1998 1999 (e)
Decatur 201,629 2,097,753 2,299,382 259,644 1995 1996 (e)
Eufaula (f) 234,444 1,219,203 1,453,647 212,094 1995 1996 (e)
Florence 314,781 1,903,313 2,218,094 292,733 1995 1996 (e)
Greenville (g) 228,511 1,493,135 1,721,647 179,652 1996 1996 (e)
Jasper 225,633 2,233,137 2,458,770 219,242 1997 1997 (e)
Oxford (g) 307,295 1,384,733 1,692,028 183,688 1996 1997 (e)
Ozark (g) 176,148 1,168,763 1,344,911 269,722 1994 1995 (e)
Prattville 319,736 2,259,182 2,578,918 98,010 1998 1998 (e)
Scottsboro 324,732 1,467,125 1,791,857 100,581 1998 1998 (e)
Selma 166,585 1,939,526 2,106,111 477,788 1991 1992 (d)
Sylacauga (f) 224,476 1,441,380 1,665,856 171,344 1997 1997 (e)
Trussville 426,815 2,262,439 2,689,254 146,146 1997 1998 (e)
Tuscaloosa 0 1,456,546 1,456,546 172,112 1996 1997 (e)
Florida:
Lake City 391,456 3,080,689 3,472,145 38,108 1998 1999 (e)
F-33
107
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1999
Cost Capitalization
Initial Cost Subsequent to Acquisition
------------------------- --------------------------
Buildings, Buildings,
Mortgage Equipment & Equipment &
Property Debt Land Improvements Land Improvements
- -------- ---- ---- ------------ ---- ------------
Illinois:
Normal 3,092,571 1,076,916 5,163,743 0 157,394
Peoria 3,057,429 817,523 4,886,124 0 109,545
Springfield 0 0 1,494,985 0 109,207
Indiana:
Carmel 3,700,000 684,321 3,730,497 0 0
Elkhart (h) 6,610,000 637,753 5,834,950 0 99,475
Evansville 2,999,832 359,102 2,880,265 0 92,981
Ft. Wayne 2,490,620 473,564 3,062,301 0 102,215
Indy Castleton 3,119,739 584,039 5,241,877 0 118,986
Indy East 2,754,674 400,007 2,479,422 0 136,126
Indy Northwest 2,151,544 442,666 2,217,552 0 129,448
Indy South 2,264,200 180,071 1,824,161 0 87,166
Indy West 2,943,257 916,161 5,236,594 0 75,321
Kokomo 2,999,832 527,376 3,720,270 0 65,135
Lafayette 3,334,981 403,849 3,970,336 0 66,642
Muncie 2,399,866 407,065 3,392,767 0 37,024
South Bend 3,599,799 585,531 5,836,122 0 49,981
Terre Haute (h) 7,480,000 878,773 2,102,079 (0) 161,492
Iowa:
Bettendorf 1,358,220 974,058 3,073,596 0 130,644
Kentucky:
Florence (h) 5,040,000 524,289 2,293,556 0 68,410
Louisville East 3,860,091 585,491 6,973,653 0 79,919
Louisville South (h) 5,100,000 644,870 6,509,901 0 229,509
Mississippi:
Grenada 1,150,000 350,000 0 0 1,551,209
Meridian 1,785,133 419,856 0 930 2,354,193
Tupelo 1,577,566 427,924 0 1,360 2,242,159
Vicksburg 1,820,021 326,653 0 1,112 2,361,846
North Carolina:
Asheboro 997,923 278,841 0 (0) 1,472,466
Clayton/Garner 1,090,701 255,234 0 0 1,508,249
Dunn 0 202,052 0 (0) 1,487,078
Eden 1,090,701 197,468 0 26 1,507,341
Forest City 986,761 187,294 0 2,950 1,979,461
Greenville 1,143,712 310,006 0 0 1,484,713
Hickory 1,777,040 412,322 0 0 2,327,299
Laurinburg (f) 0 225,441 0 (181,525) 1,240,031
Lenoir 1,078,102 360,923 0 1,605 1,396,990
Roanoke Rapids 1,143,712 320,014 0 (4,812) 1,483,422
Sanford (f) 500,000 227,030 0 32,171 1,436,095
Smithfield 1,075,806 246,092 0 (0) 1,510,542
Wilson 994,033 237,712 0 20 1,509,639
Ohio:
Cincy North 2,315,465 521,588 2,220,586 0 84,992
Cincy Northeast 2,264,200 320,613 2,184,392 0 98,226
Columbus 2,574,163 782,254 3,905,175 0 120,223
Dayton 2,151,544 625,511 3,388,780 0 180,242
South Carolina:
Anderson 1,055,867 201,000 0 133,385 2,011,890
Cheraw (g) 1,198,597 168,458 0 0 1,906,296
Duncan 1,066,231 212,246 0 (0) 1,461,683
Easley (f) 1,000 266,753 0 2,710 1,135,569
Gaffney (g) 1,198,597 135,025 0 (0) 1,652,888
Gross Amount at Which Life on
Carried at Close of Which
Period Depreciation
------------------------ in Latest
Buildings, Income
Equipment & Accumulated Date Date of Statement
Property Land Improvements Total Depreciation Acquired Construction is Computed
- -------- ---- ------------ ----- ------------ -------- ------------ ------------
Illinois:
Normal 1,076,916 5,321,137 6,398,053 154,885 1999 -- (e)
Peoria 817,523 4,995,670 5,813,192 149,750 1999 -- (e)
Springfield 0 1,604,192 1,604,192 83,110 1999 -- (e)
Indiana:
Carmel 684,321 3,730,497 4,414,818 0 1999 -- (e)
Elkhart (h) 637,753 5,934,425 6,572,178 158,662 1999 -- (e)
Evansville 359,102 2,973,246 3,332,348 107,144 1999 -- (e)
Ft. Wayne 473,564 3,164,516 3,638,080 99,909 1999 -- (e)
Indy Castleton 584,039 5,360,863 5,944,902 149,654 1999 -- (e)
Indy East 400,007 2,615,548 3,015,555 98,868 1999 -- (e)
Indy Northwest 442,666 2,347,001 2,789,667 104,047 1999 -- (e)
Indy South 180,071 1,911,327 2,091,398 79,670 1999 -- (e)
Indy West 916,161 5,311,915 6,228,076 139,388 1999 -- (e)
Kokomo 527,376 3,785,405 4,312,781 107,941 1999 -- (e)
Lafayette 403,849 4,036,978 4,440,827 119,633 1999 -- (e)
Muncie 407,065 3,429,791 3,836,856 101,210 1999 -- (e)
South Bend 585,531 5,886,103 6,471,635 151,626 1999 -- (e)
Terre Haute (h) 878,773 2,263,571 3,142,344 107,218 1999 -- (e)
Iowa:
Bettendorf 974,058 3,204,240 4,178,298 114,675 1999 -- (e)
Kentucky:
Florence (h) 524,289 2,361,966 2,886,255 101,118 1999 -- (e)
Louisville East 585,491 7,053,572 7,639,063 171,226 1999 -- (e)
Louisville South (h) 644,870 6,739,410 7,384,280 167,352 1999 -- (e)
Mississippi:
Grenada 350,000 1,551,209 1,901,209 13,798 1998 1999 (e)
Meridian 420,786 2,354,193 2,774,979 77,561 1998 1999 (e)
Tupelo 429,284 2,242,159 2,671,443 134,208 1998 1998 (e)
Vicksburg 327,765 2,361,846 2,689,611 93,296 1998 1999 (e)
North Carolina:
Asheboro 278,841 1,472,466 1,751,307 169,337 1997 1997 (e)
Clayton/Garner 255,234 1,508,249 1,763,483 107,409 1998 1998 (e)
Dunn 202,052 1,487,078 1,689,130 141,760 1997 1998 (e)
Eden 197,494 1,507,341 1,704,835 118,976 1997 1998 (e)
Forest City 190,244 1,979,461 2,169,705 265,279 1996 1997 (e)
Greenville 310,006 1,484,713 1,794,719 113,527 1998 1998 (e)
Hickory 412,322 2,327,299 2,739,621 107,209 1998 1998 (e)
Laurinburg (f) 43,916 1,240,031 1,283,947 175,345 1996 1997 (e)
Lenoir 362,528 1,396,990 1,759,518 124,687 1997 1998 (e)
Roanoke Rapids 315,202 1,483,422 1,798,623 119,507 1997 1998 (e)
Sanford (f) 259,201 1,436,095 1,695,296 171,925 1996 1997 (e)
Smithfield 246,092 1,510,542 1,756,634 150,578 1997 1998 (e)
Wilson 237,732 1,509,639 1,747,371 161,367 1996 1997 (e)
Ohio:
Cincy North 521,588 2,305,577 2,827,165 105,145 1999 -- (e)
Cincy Northeast 320,613 2,282,617 2,603,231 89,564 1999 -- (e)
Columbus 782,254 4,025,398 4,807,653 124,716 1999 -- (e)
Dayton 625,511 3,569,022 4,194,534 119,367 1999 -- (e)
South Carolina:
Anderson 334,385 2,011,890 2,346,275 427,545 1993 1993 (e)
Cheraw (g) 168,458 1,906,296 2,074,754 238,923 1995 1995 (e)
Duncan 212,246 1,461,683 1,673,928 147,478 1997 1998 (e)
Easley (f) 269,463 1,135,569 1,405,033 232,752 1994 1995 (e)
Gaffney (g) 135,025 1,652,888 1,787,913 290,239 1995 1995 (e)
F-34
108
Jameson Inns, Inc.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1999
Cost Capitalization
Initial Cost Subsequent to Acquisition
------------------------- -------------------------
Buildings Buildings,
Mortgage Equipment & Equipment &
Property Debt Land Improvements Land Improvements
- -------- --------- -------- ------------- ------- ------------
Georgetown (g) 1,198,597 144,353 0 0 1,464,621
Greenwood (f) 1,001,000 140,231 0 20,741 1,763,498
Lancaster (g) 1,198,597 150,592 0 (0) 1,130,528
Orangeburg (g) 1,198,597 165,010 0 585 1,190,234
Seneca (g) 1,198,597 204,385 0 0 1,235,102
Simpsonville (f) 952,000 229,205 0 0 1,306,064
Spartanburg 1,072,792 247,838 0 0 1,459,299
Union (g) 1,198,597 178,006 0 746 1,288,082
Tennessee: 0
Cleveland 0 384,688 0 4,343 2,240,024
Decherd (f) 0 254,501 0 191 1,316,358
Gallatin 1,682,041 405,738 0 0 2,252,260
Johnson City 288,580 405,939 0 89 2,141,656
Knoxville 2,221,460 572,026 3,347,959 0 89,484
Oakridge 939,372 451,037 0 8 4,400,227
Tullahoma (f) 0 303,536 0 0 1,304,099
Construction in progress:
Alcoa, TN 142,966 427,803 0 0 225,422
Bessemer, AL 0 0 0 0 96,408
Columbia, TN 279,097 483,568 0 6,859 705,417
Crestview, FL 975,649 471,426 0 10 1,582,235
Goldsboro, NC 288,100 397,096 0 0 394,252
Greeneville, TN 980,861 406,055 0 155 1,968,500
Harrisonburg, VA 144,890 435,000 0 (700) 398,525
Henderson, NC 403,101 478,688 0 0 498,081
Jackson, MS 365,584 586,831 0 602 625,284
Jackson, TN 1,002,366 467,741 0 141 1,678,103
Jacksonville, FL 1,553,918 679,519 0 1,448 2,537,701
Kingsport, TN 327,774 425,481 0 0 280,627
Lafayette, LA 0 433,291 0 0 79,279
Lakeland, FL 291,911 618,636 0 0 379,150
Martinsville, VA 57,108 411,496 0 3,100 229,663
Newnan, GA 863,220 529,377 0 0 1,122,648
Ormond Beach, FL 1,449,938 497,099 0 10,859 2,583,456
Palm Bay, FL 197,716 418,745 0 0 362,396
Pearl, MS 0 564,932 0 0 2,296,251
Pooler, GA 787,582 501,223 0 (0) 1,475,308
Richmond, KY 63,405 607,095 0 0 166,184
Shreveport, LA 66,382 531,041 0 0 151,872
Wilmington, NC 169,009 685,078 0 0 220,090
Billboards (including CIP) 670,073 0 2,381,012 0 222,408
Property and equipment held for sale 1,050,101 1,094,514 0 0 1,437,617
------------ ----------- ------------ --------- ------------
Totals $173,957,998 $47,912,952 $105,447,139 $ 83,595 $167,690,366
============ =========== ============ ========= ============
Gross Amount at Which Life on
Carried at Close of Which
Period Depreciation
----------------------- in Latest
Buildings, Income
Equipment & Accumulated Date Date of Statement
Property Land Improvements Total Depreciation Acquired Construction is Computed
- -------- ---- ------------ ------ ------------ -------- ------------ ------------
Georgetown (g) 144,353 1,464,621 1,608,974 195,712 1996 1996 (e)
Greenwood (f) 160,972 1,763,498 1,924,470 282,339 1994 1995 (e)
Lancaster (g) 150,592 1,130,528 1,281,120 218,829 1994 1995 (e)
Orangeburg (g) 165,595 1,190,234 1,355,829 217,749 1995 1995 (e)
Seneca (g) 204,385 1,235,102 1,439,487 181,322 1996 1996 (e)
Simpsonville (f) 229,205 1,306,064 1,535,269 199,404 1996 1996 (e)
Spartanburg 247,838 1,459,299 1,707,137 153,434 1997 1998 (e)
Union (g) 178,752 1,288,082 1,466,834 186,183 1996 1997 (e)
Tennessee:
Cleveland 389,031 2,240,024 2,629,055 122,545 1997 1998 (e)
Decherd (f) 254,692 1,316,358 1,571,050 172,620 1996 1997 (e)
Gallatin 405,738 2,252,260 2,657,999 74,614 1998 1999 (e)
Johnson City 406,028 2,141,656 2,547,684 230,097 1997 1997 (e)
Knoxville 572,026 3,437,443 4,009,469 116,673 1999 -- (e)
Oakridge 451,045 4,400,227 4,851,272 69,623 1998 1999 (e)
Tullahoma (f) 303,536 1,304,099 1,607,635 161,363 1996 1997 (e)
Construction in progress
Alcoa, TN 427,803 225,422 653,225 0 -- -- --
Bessemer, AL 0 96,408 96,408 0 -- -- --
Columbia, TN 490,427 705,417 1,195,844 0 -- -- --
Crestview, FL 471,436 1,582,235 2,053,671 0 -- -- --
Goldsboro, NC 397,096 394,252 791,348 0 -- -- --
Greeneville, TN 406,210 1,968,500 2,374,710 0 -- -- --
Harrisonburg, VA 434,300 398,525 832,826 0 -- -- --
Henderson, NC 478,688 498,081 976,769 0 -- -- --
Jackson, MS 587,433 625,284 1,212,717 0 -- -- --
Jackson, TN 467,882 1,678,103 2,145,984 0 -- -- --
Jacksonville, FL 680,967 2,537,701 3,218,667 0 -- -- --
Kingsport, TN 425,481 280,627 706,108 0 -- -- --
Lafayette, LA 433,291 79,279 512,573 0 -- -- --
Lakeland, FL 618,636 379,150 997,787 0 -- -- --
Martinsville, VA 414,596 229,663 644,259 0 -- -- --
Newnan, GA 529,377 1,122,648 1,652,025 0 -- -- --
Ormond Beach, FL 507,958 2,583,456 3,091,413 0 -- -- --
Palm Bay, FL 418,745 362,396 781,141 0 -- -- --
Pearl, MS 564,932 2,296,251 2,861,183 0 -- -- --
Pooler, GA 501,223 1,475,308 1,976,531 0 -- -- --
Richmond, KY 607,095 166,184 773,278 0 -- -- --
Shreveport, LA 531,041 151,872 682,913 0 -- -- --
Wilmington, NC 685,078 220,090 905,168 0 -- -- --
Billboards (including CIP) 0 2,603,420 2,603,420 191,720 1999 1999 (e)
Property and equipment held for sale 1,094,514 1,437,617 2,532,131 173,627 1997 1997 (e)
----------- ------------ ------------ -----------
Totals $47,996,547 $273,137,505 $321,134,052 $24,551,080
=========== ============ ============ ===========
F-35
109
JAMESON INNS, INC.
NOTES TO SCHEDULE III
1999 1998 1997
--------------- --------------- ---------------
(a) Reconciliation of real estate
Balance at beginning of year $ 168,880,042 $ 117,515,375 $ 80,816,228
Additions during year:
Improvements 157,106,500 55,844,810 37,373,593
Deletions (4,852,490) (4,480,143) (674,446)
--------------- --------------- ---------------
Balance at end of year $ 321,134,052 $ 168,880,042 $ 117,515,375
=============== =============== ===============
(b) Reconciliation of accumulated depreciation
Balance at beginning of year $ 16,754,843 $ 12,584,189 $ 9,205,591
Depreciation for the year 10,396,468 5,636,079 3,898,091
Retirements (2,600,231) (1,465,425) (519,493)
--------------- --------------- ---------------
Balance at end of year $ 24,551,080 $ 16,754,843 $ 12,584,189
=============== =============== ===============
(c) The aggregate cost of the land, buildings, and furniture, fixtures and
equipment for federal income tax purposes approximates the book basis.
(d) Depreciation for 1992 and prior additions is computed based on the
following useful lives:
Buildings 31.5 years
Land Improvements 15 years
Furniture, fixtures and equipment 5 years
(e) Depreciation for 1993 and later additions is computed based on the
following useful lives:
Buildings 39 years
Land Improvements 15 years
Furniture, fixtures and equipment 3-5 years
Billboards 10 years
(f) This Inn is one of 27 Inns securing the Company's $33.7 million line of
credit. Amount of debt listed as outstanding is an allocation.
(g) This Inn is one of 14 Inns securing the Company's $17.2 million note
payable. Amount of debt listed as outstanding is an allocation.
(h) Mortgage debt listed includes portion of the $12,115,000 economic
development refunding bonds retired with restricted cash in January
2000.
F-36
110
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Jameson Inns, Inc.
We have audited the consolidated financial statements of Jameson Inns, Inc. as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated February 8,
2000 (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule in Item 14(a) of this Annual Report on
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
February 8, 2000
F-37
111
Jameson Hospitality, LLC
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors...........................................F-39
Consolidated Financial Statements
Consolidated Balance Sheets..............................................F-40
Consolidated Statements of Operations....................................F-41
Consolidated Statements of Members' Capital (Deficit)....................F-42
Consolidated Statements of Cash Flows....................................F-43
Notes to Consolidated Financial Statements...............................F-45
F-38
112
Report of Independent Auditors
The Members
Jameson Hospitality, LLC
We have audited the accompanying consolidated balance sheets of Jameson
Hospitality, LLC as of December 31, 1999 and 1998, and the related consolidated
statements of operations, members' capital (deficit) and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 consolidated financial position of Jameson
Hospitality, LLC at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Atlanta, Georgia
March 8, 2000
F-39
113
Jameson Hospitality, LLC
Consolidated Balance Sheets
DECEMBER 31
1999 1998
--------------------------------------
ASSETS
Current assets:
Cash $ 543,282 $1,077,579
Marketable securities 1,013,785 199,529
Accounts receivable 2,630,305 853,720
Accounts receivable from affiliates 7,231,418 2,755,513
Predevelopment costs 288,785 457,213
Prepaid expenses and other assets 363,668 357,975
Inventory 1,256,015 625,989
--------------------------------------
13,327,258 6,327,518
Property and equipment, net 833,585 2,992,093
Leasehold improvements, net 89,828 34,867
Intangibles, net 267,818 22,268
--------------------------------------
$ 14,518,489 $9,376,746
======================================
LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)
Current liabilities:
Subcontractors payable, including retainage of $1,195,267
and $1,104,960 at December 31, 1999 and 1998, respectively $ 3,040,499 $3,106,166
Accounts payable 1,293,239 1,089,067
Lease expense payable 6,941,315 2,289,753
Notes payable, current portion 9,010 650,804
Accrued interest 58,059 22,323
Other accrued liabilities 2,132,566 484,924
--------------------------------------
13,474,688 7,643,037
Deferred gain on sale of asset 883,394 --
Notes payable, long-term portion 315,638 1,664,382
--------------------------------------
Total liabilities 14,673,720 9,307,419
Members' capital (deficit) (155,231) 69,327
--------------------------------------
$ 14,518,489 $9,376,746
======================================
See accompanying notes.
F-40
114
Jameson Hospitality, LLC
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------------------
Revenues:
Room revenues $ 74,245,709 $37,982,374 $ 26,937,065
Telephone revenues 1,450,448 757,105 604,467
Other inn-related sales 730,866 47,220 46,096
Contract revenues 30,413,710 40,990,447 31,201,627
Billboard rentals 105,877 91,076 84,467
Other income 36,772 6,458 --
Gain on sale of asset 240,545 -- --
----------------------------------------------------
107,223,927 79,874,680 58,873,722
Expenses:
Lease expense 34,612,795 18,229,748 12,966,185
Cost of contract revenues 25,342,725 35,518,450 27,514,582
Room expenses 19,132,033 8,888,441 5,832,763
Utilities 4,029,937 3,346,327 2,283,090
General and administrative 7,995,065 3,886,264 2,700,432
Inn manager salaries 5,039,406 2,510,644 1,865,181
Maintenance 3,303,181 1,366,510 840,093
Advertising 2,706,089 2,195,759 576,516
Insurance 297,100 199,302 123,004
Management fee to affiliate 4,202,961 2,655,334 1,856,370
Prospective site expense 301,401 614,448 4,193
Interest, net of amounts capitalized 17,922 166,416 87,830
Depreciation and amortization 109,316 456,213 260,375
----------------------------------------------------
Total expenses 107,089,931 80,033,856 56,910,614
----------------------------------------------------
Net income (loss) $ 133,996 $ (159,176) $ 1,963,108
====================================================
See accompanying notes.
F-41
115
Jameson Hospitality, LLC
Consolidated Statements of Members' Capital (Deficit)
MEMBERS'
CAPITAL
(DEFICIT) COMPREHENSIVE LOSS
---------------------------------------------
Balance at December 31, 1996 $ 438,217
Capital contributions 198,615
Distributions (670,000)
Net income 1,963,108
--------------
Balance at December 31, 1997 1,929,940
Capital contributions 600,000
Distributions (2,234,718)
Net loss (159,176) $ (159,176)
Unrealized loss on marketable securities (66,719) (66,719)
----------
Comprehensive loss $ (225,895)
-------------- ==========
Balance at December 31, 1998 69,327
Capital contributions 105,764
Distributions (42,723)
Net income 133,996 $ 133,996
Unrealized loss on marketable securities (421,595) (421,595)
----------
Comprehensive loss $ (287,599)
-------------- ==========
Balance at December 31, 1999 $ (155,231)
==============
See accompanying notes.
F-42
116
Jameson Hospitality, LLC
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 133,996 $ (159,176) $ 1,963,108
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 109,316 456,213 260,375
Bad debt expense 264,684 72,409 46,124
Gain on sale of property and equipment (240,545) -- (96)
Changes in assets and liabilities increasing
(decreasing) cash:
Accounts receivable (775,833) (352,983) (168,469)
Accounts receivable from affiliates (5,220,190) (35,461) (2,661,298)
Predevelopment costs 168,428 (307,853) (64,331)
Costs and estimated earnings in excess
of billings on contracts in progress
-- 98,169 (98,169)
Prepaid advertising (56,190) 145,766 (145,766)
Prepaid expenses and other assets 59,537 (221,311) (77,692)
Inventory (108,876) (147,200) (145,941)
Subcontractors payable (65,667) (130,238) 2,813,020
Accounts payable (471,869) 913,054 (87,697)
Lease expense payable 4,651,562 832,082 773,046
Accrued interest (38,221) (12,697) 33,493
Other accrued liabilities 825,777 94,115 154,536
-------------------------------------------------------
Net cash (used in) provided by
operating activities (764,091) 1,244,889 2,594,243
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 592,707 -- 24,500
Purchase of property and equipment (103,819) (1,476,655) (878,532)
Purchase of Signature assets, net of cash acquired 17,500 -- --
Marketable securities -- (266,248) --
--------------------------------------------------------
Net cash provided by (used in) investing activities 506,388 (1,742,903) (854,032)
F-43
117
Jameson Hospitality, LLC
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------------------
FINANCING ACTIVITIES
Contributions from members $ 150,095 $ 600,000 $ 198,615
Distributions to members (243,479) (2,234,718) (670,000)
Proceeds from notes payable -- 1,104,415 842,615
Payments on notes payable (183,210) (212,590) (114,377)
-------------------------------------------------------
Net cash (used in) provided by financing activities (276,594) (742,893) 256,853
Net (decrease) increase in cash (534,297) (1,240,907) 1,997,064
Cash at beginning of year 1,077,579 2,318,486 321,422
-------------------------------------------------------
Cash at end of year $ 543,282 $ 1,077,579 $ 2,318,486
=======================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the year $ 1,576,626 1,326,782 $ 692,811
=======================================================
NON-CASH ACTIVITY
Unrealized loss on marketable securities $ 421,595 $ 66,719 $ --
=======================================================
Net non-cash items related to merger and
distribution activities $ 156,425 $ -- $ --
=======================================================
See accompanying notes.
F-44
118
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements
December 31, 1999
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS
Jameson Hospitality, LLC (the "Company") leases, operates, and develops Inns
owned by Jameson Inns, Inc. (the "REIT"). Jameson Inns, Inc. is a real estate
investment trust which owns the Jameson Inns and effective May 7, 1999,
Signature Inns properties (the "Inns"). Thomas W. Kitchin is the Chairman and
CEO of Jameson Inns, Inc. and of the Company.
Jameson Development Company, LLC was formed on March 22, 1996 and then changed
its name to Jameson Hospitality, LLC on May 7, 1998. Effective March 31, 1998,
three related companies merged into Jameson Development Company, LLC: Jameson
Operating Company, LLC, Jameson Outdoor Advertising Company II, LLC and Jameson
Aviation Company, LLC. Since these three companies were all wholly-owned by
Thomas W. Kitchin and his spouse, the merger was accounted for similar to a
pooling of interests.
On January 1, 1999, the Company distributed the ownership interest of Jameson
Aviation Company, LLC to its owners. The $200,756 excess of the liabilities over
the assets of Jameson Aviation Company, LLC were recorded as a non-cash
distribution.
On April 2, 1999, the Company completed the sale of the outdoor advertising
assets and certain operations of the Company to the REIT for consideration
totaling approximately $2.4 million. These assets consisted of approximately 100
roadside billboards on which advertising for the Jameson hotel properties and,
in certain instances, other services or products for third parties, is placed.
These billboards were leased to the Company and continue to be used for similar
types of advertising.
On May 7, 1999, the REIT merged with Signature Inns, Inc. As a part of this
transaction, the Company acquired all of the assets and assumed the liabilities
related to operation of the Signature Inn hotel properties, for total cash
consideration of $250,000. The Signature Inn employees became employees of the
Company and the Company entered into a lease with the REIT and began operating
these hotels effective May 7, 1999.
Prior to December 31, 1999, Kitchin Investments, Inc. was wholly-owned by Thomas
W. Kitchin and employed all of the individuals who provide services to both the
Company and the REIT. This company also provided the general office overhead
support for these other companies. Effective December 31, 1999, Kitchin
Investments, Inc. merged into the Company. Due to the common ownership of the
Company and Kitchin Investments, Inc., the merger was accounted for similar to a
pooling of interests.
F-45
119
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS (CONTINUED)
Intercompany transactions among the entities and the divisions included in the
consolidated financial statements have been eliminated. The Company and its
divisions perform the following activities:
- The Jameson Operating division leases the Inns from the REIT
(see Note 3) and operates the Inns in all respects including
staffing, advertising, housekeeping, and routine maintenance.
The Company is the exclusive lessee of Jameson Inns and
Signature Inns. At December 31, 1999 and 1998, the Company
leased 114 Inns (7,300 rooms) and 81 Inns (3,748 rooms),
respectively.
- The Jameson Development division develops Inns and Inn
expansions for the REIT, including identification of suitable
Inn locations, Inn design and configuration, land preparation,
construction, acquisition of initial furniture, fixtures and
equipment, and pre-marketing of properties prior to opening.
At the present time, the Company is the exclusive
developer/contractor for the REIT.
The members have no liability for any debt, obligations, or liabilities of the
Company (beyond his or her respective contributions) or for the acts of omission
of any other member, agent or employee of the Company, except as provided for by
section 14-11-408 of the Georgia Securities Act of 1973, as amended.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-46
120
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
The Company considers all of its marketable securities as available for sale and
hence records them at fair value with changes in unrealized gains or losses
being recorded directly to members' capital. Fair value is based on the closing
price of the securities on the last day of trading in the year.
CONTRACTS
Billings and costs applicable to construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost incurred to
date compared to estimated total cost for each contract. Revisions to estimated
contract profits or losses are made in the year in which circumstances requiring
such revisions become known. Any anticipated losses on construction contracts
are charged to operations as soon as such losses can be estimated.
PREDEVELOPMENT COSTS
The Company capitalizes direct costs related to specific future Inn sites when
they are deemed probable and until either the REIT purchases the land and actual
construction begins when the amounts are transferred to construction costs, or
until the site is no longer deemed probable at which time the costs are
expensed. Amounts expensed are reflected as "Prospective Site Expense" in the
accompanying statements of operations.
INVENTORY
Inventory, consisting of room linens and towels, is stated at the lower of cost
(first-in, first-out method) or market. Replacements of inventory are expensed.
F-47
121
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Billboards at December 31, 1998
include direct construction costs and capitalized interest, property taxes and
indirect costs such as salaries relating directly to the construction of
billboards. Interest capitalized during 1998 totaled $3,437. No interest was
capitalized in 1999.
Depreciation is calculated using the straight-line method over 39 years for the
building, using the straight-line method for the billboards with a half year
convention in year of acquisition over the estimated useful life of the asset,
10 years, using the MACRS method over five years for transportation equipment,
and using the MACRS method over three to seven years for furniture, fixtures and
equipment. Leasehold improvements at the Inns are being amortized using the
straight-line method over their estimated useful lives ranging from three to ten
years, not to exceed the remaining term of the lease (see Note 3), and the
corporate office leasehold improvements are being amortized over the life of the
lease.
The Company follows FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. There
were no impairment losses recorded for the periods presented.
F-48
122
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Intangibles consist primarily of the registered trademark, "The Jameson Inn(R)"
and goodwill associated with the Signature Inn transaction in May 1999. The
lease described in Note 3 requires the Company to operate the Inns using the
trademarks and not to use the trademarks (or license its use to any other
parties) for the operation of lodging facilities other than the Inns unless the
REIT does not object to such unrelated use. The REIT has an option to purchase
the The Jameson Inn(R) and Signature Inns(R) trademarks from the Company at the
end of the lease term (or upon the earlier termination of the lease with respect
to all of the Inns) for $25,000 and $50,000, respectively. The intangibles are
being amortized over 20 years. Accumulated amortization totaled $4,044 and
$3,125 as of December 31, 1999 and 1998, respectively.
INCOME TAXES
The Company has elected to be treated as a partnership for federal
and state income tax purposes. Accordingly, the members are to report their
proportionate share of the Company's taxable income or loss in their respective
tax returns; therefore, no provision for income taxes has been included in the
accompanying financial statements.
ADVERTISING
During 1999 and 1998, the Company contracted with an advertising agency for the
production and broadcast or printing of various radio, newspaper and television
ads for the Inns. The Company expenses advertising upon first showing.
F-49
123
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
3. LEASES
In January 1994, the Company entered into a master lease (the "Lease") with the
REIT whereby all of the operating Inns are leased to the Company under the Lease
and future Inns constructed by the REIT during the term of the Lease will be
added to the lease upon completion of each such Inn's construction.
The Jameson and Signature leases, which expire December 31, 2007 and 2012,
respectively, provide for payment of Base Rent plus Percentage Rent. Base Rent,
which is payable monthly, equals $264 and $394 per month for the Jameson Inns
and Signature Inns, respectively, for each rentable room in the Inns at the
beginning of the relevant month.
Percentage Rent, which is payable quarterly, is calculated as a percentage in
excess of Base Rent of the total amount of room rental and other miscellaneous
revenues realized by the Company over the relevant period. For the Jameson Inns,
the percentage is 39% of such revenues up to $22.18 per day per room in 1999
over the period, plus 65% of all additional average daily room rental revenues.
For the Signature Inns, the percentage is 37% of such revenues up to $35.80 per
day per room in 1999 over the period, plus 65% of all additional average daily
room rental revenues.
Total rent for the Jameson Inns for any calendar year may not exceed 47% of
total room rental revenues Jameson Inns for that year. The $22.18 and $35.80 per
room amount, for Jameson Inns and Signature Inns, respectively, used in
calculating percentage rent is subject to adjustment each year based on changes
in the Consumer Price Index and as of January 1, 2000 was adjusted to $23.16 and
$37.38 for Jameson Inns and Signature Inns, respectively.
F-50
124
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
3. LEASES (CONTINUED)
Base rent totaled $20,998,052, $10,501,920 and $7,532,712 in 1999, 1998 and
1997, respectively, and assuming the same number of rooms in operation as at
December 31, 1999, would total $27,898,440 per year until the Lease expires.
Under the Leases, the REIT is required to maintain the structural elements of
each Inn. The Company is required, at its expense, to maintain the Inns
(exclusive of furniture, fixtures and equipment) in good order and repair and to
make nonstructural, foreseen and unforeseen, and ordinary and extraordinary
repairs which may be necessary and appropriate and do not significantly alter
the character or purpose, or significantly detract from the value or operating
efficiencies of the Inns. All alterations, replacements and improvements are
subject to all the terms and provisions of the Lease and become the property of
the REIT upon termination of the Leases.
The Company has agreed that neither it nor any of its affiliates will (i)
operate or manage a hotel property in which the REIT has not invested that is
within a 20-mile radius of an Inn, or (ii) own or have any interest in any hotel
property in which the REIT or an affiliate does not have an interest.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1999 1998
---------------------------------
Land $ -- $ 100,000
Building -- 105,706
Billboards, including under construction -- 1,699,908
Transportation equipment -- 1,809,560
Furniture, fixtures and equipment 974,989 94,586
---------------------------------
974,989 3,809,760
Accumulated depreciation (141,404) (817,667)
---------------------------------
$ 833,585 $ 2,992,093
=================================
F-51
125
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT (CONTINUED)
On April 2, 1999, the Company completed the sale of the outdoor advertising
asset and certain operations of the Company to the REIT. These assets consisted
of approximately 100 roadside billboards on which advertising for the Jameson
hotel properties and, in certain instances, other services or products for third
parties, is placed. Consideration of $2,381,000 paid to the Company consisted of
(i) 72,727 newly issued shares of the Company's Series A Preferred Stock (at
$17.625 per share), (ii) $400,000 in cash, and (iii) the assumption of
indebtedness of approximately $700,000 which is secured by mortgages on the
billboards and the revenues generated therefrom.
During 1999, the Company recognized a gain of $279,704 resulting from sale of
the billboards to the REIT. The remaining gain of $883,394 is being recognized
over the remaining lease period.
5. CONTRACTS
Contracts consist of the following at December 31:
1999 1998
--------------------------------
Costs incurred on contracts $25,342,725 $35,518,450
Estimated earnings 5,070,985 5,471,997
--------------------------------
Contract revenues earned 30,413,710 40,990,447
Less: Billings 30,413,710 40,990,447
--------------------------------
Costs and estimated earnings in excess of
billings on contracts in progress $ -- $ --
================================
The Company records income on construction contracts on the
percentage-of-completion basis. Revisions to estimated contract profits are made
in the year in which circumstances requiring such revisions become known. The
effect of changes in the estimates of contract gross margins decreased net
income for the year ended December 31, 1999 and 1998 by approximately $789,000
and $155,000, respectively.
F-52
126
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE
Notes payable consist of the following at December 31:
1999 1998
------------------------------
Mortgage note payable, maturing October 2017, due in monthly installments of
$2,873 of principal and interest with remaining unpaid balances payable in
full on note's maturity date. Interest accrues at prime plus 1.25% (9.50% at
December 1999). This loan is guaranteed by the CEO and President of the
Company. $293,317 $ --
Notes payable, maturing, July 2009. Due in monthly installments of $160 and $265
of principal and interest with remaining unpaid balance payable in full on
note's maturity date. Interest accrues at a 10.00% per annum. 31,331 --
Notes payable to a bank with a term of five years.
The notes were repaid in 1999. -- 1,008,730
Note payable to a financial institution, maturing July 2017. Note was
distributed to the Company members on January 1, 1999 (see Note 1). -- 469,454
$600,000 line of credit. Note was distributed to the
Company members on January 1, 1999 (see Note 1). -- 428,342
Note payable maturing December 2002. The note was repaid - -- 248,804
in 1999.
F-53
127
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE (CONTINUED)
1999 1998
-------------------------------------
Term note, maturing July 2012. Interest accrued at an initial annual rate of
8.39% and was adjusted annually to equal the weekly average yield on
Treasury securities, adjusted to a constant maturity of five years, plus 2%.
This loan was paid in full in October 1999. -- 159,856
---------------------------------
Total 324,648 2,315,18
Less current portion 9,010 650,804
---------------------------------
$ 315,638 $1,664,382
=================================
At December 31, 1999 and 1998, $0 and $2,316,000, respectively, of the Company's
net book value of property and equipment collateralized the various notes
payable.
The following table summarizes the scheduled aggregate principal payments for
the notes payable for the five years subsequent to December 31, 1999 and
thereafter:
2000 $ 9,010
2001 9,916
2002 10,912
2003 12,009
2004 13,216
Thereafter 269,585
-------------
$ 324,648
=============
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128
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS
The Company shares office space and management with Kitchin Investments, Inc.
and the REIT. The Company had a Cost Reimbursement Agreement with Kitchin
Investments, Inc. whereby the Company paid for its share of the use of office
space, office equipment, telephones, file and storage space and other reasonable
and necessary office equipment and facilities and personnel costs. Kitchin
Investments, Inc. charged the Company $4,202,961, $2,655,334 and $1,856,370 in
1999, 1998, and 1997 respectively, pursuant to the Cost Reimbursement Agreement
and such amounts are reflected as management fees in the accompanying statements
of operations. On December 31, 1999, Kitchin Investments, Inc. merged with the
Company and the Cost Reimbursement Agreement was assumed by the Company
effective December 31, 1999.
The Company's construction contracts with the REIT are generally fixed price and
limit the Company's profit on each contract to 10% after considering costs of
construction and certain other amounts. The Company does not believe that there
were amounts in excess of such limitations at December 31, 1999 or 1998.
Although the REIT is the legal borrower of construction loans or related debt,
the Company is responsible for interest due on such financing during the
construction period as a part of its contract. Construction period interest
incurred during 1999, 1998 and 1997, which is included in cost of revenues
earned, totaled approximately $1,596,925, $1,125,935 and $637,290, respectively.
Interest paid includes amounts paid on behalf of the REIT.
F-55
129
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
The Company leases billboards from the REIT for initial terms of five years.
These leases expire at various dates but generally include 5-year automatic
renewal periods; the leases provide for future minimum payments by the Company
as follows:
Year ending December 31,
2000 $ 562,339
2001 562,339
2002 556,736
2003 555,616
2004 555,616
Thereafter 796,996
----------
$3,589,642
==========
The Company leases billboards from 3rd party companies for terms of 1 to 3
years. These leases expire at various dates then continue on a month-to-month
basis pending renewal or cancellation of the leases. The leases provide for
future minimum payments by the Company as follows:
Year ending December 31,
2000 $ 546,557
2001 105,203
2002 19,968
---------
$ 671,728
=========
From time to time, the Company becomes party to various claims and legal actions
arising during the ordinary course of business. Management, after reviewing with
legal counsel all actions and proceedings, believes that aggregate losses, if
any, would not have a material adverse effect on the Company's financial
position or results of operations.
F-56
130
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
9. YEAR 2000 (UNAUDITED)
A critical business issue has emerged regarding how existing application
software programs and operating systems can accommodate the year 2000 date
value. Many existing application software products in the market place were
designed to accommodate only two-digit date entries. Beginning in the year 2000,
these systems and products must be able to accept four-digit entries to
distinguish years beginning with 2000 from prior years. As a result, computer
systems and software used by many companies have required or still may require
to be upgraded to comply with such "Year 2000" requirements. The Company and the
REIT conducted an assessment of their 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"), and non-IT areas such as microprocessors and
embedded chips. Ongoing testing of existing systems, to determine compliance,
were completed by November 1999. Systems that were determined to be
non-compliant were repaired or replaced by November 1999. The remediation phase
included modification to, or replacement of, software and hardware or
microprocessors.
Approximately $50,000 was expended by the Company for Year 2000 remediation and
the costs of the project were funded through operating cash flows of the
Company.
The Company relies on third-party consultants and suppliers for a variety of
corporate and Inn operations. The ability of third parties to adequately address
their Year 2000 issues is outside of our control. There can be no assurance that
the failure of the Company, or such third parties, to adequately address their
respective Year 2000 issues will not have a material adverse effect on our
future financial condition or results of operations. The Company believes they
have an effective program in place which will resolve the Year 2000 issues. 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 Inn operations could be disrupted, a reduction in
Inn occupancy could occur due to lost reservations, or corporate financial
functions could be impaired.
F-57
131
Jameson Hospitality, LLC
Notes to Consolidated Financial Statements (continued)
9. YEAR 2000 (UNAUDITED) (CONTINUED)
This 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. The Company maintains contingency plans in their normal course of
business designed to be deployed in the event of various potential business
interruptions. Contingency plans were implemented between December 1 and
December 31, 1999, for systems that could not be feasibly repaired or replaced.
No material business disruptions have occurred to date for as a result of Year
2000 issues.
F-58
132
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on March 30, 2000.
JAMESON INNS, INC.
By: /s/ Craig R. Kitchin
----------------------
Craig R. Kitchin
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ Thomas W. Kitchin Chairman of the Board of Directors, March 30, 2000
- ----------------------- Chief Executive Officer (principal
Thomas W. Kitchin executive officer)
/s/ Craig R. Kitchin President and Chief Financial March 30, 2000
- ----------------------- Officer (principal financial officer)
Craig R. Kitchin
/s/ Martin D. Brew Treasurer and Corporate Controller March 30, 2000
- ----------------------- (principal accounting officer)
Martin D. Brew
Director March __, 2000
- -----------------------
Robert D. Hisrich
/s/ Michael E. Lawrence Director March 30, 2000
- -----------------------
Michael E. Lawrence
/s/ Thomas J. O'Haren Director March 30, 2000
- -----------------------
Thomas J. O'Haren