ITEM 1. BUSINESS.
GENERAL
Jameson Inns, Inc., a Georgia corporation, (the "Company") is a self-administered real estate investment trust ("REIT") headquartered in Atlanta, Georgia which develops and owns limited service hotel properties ("Inns") operating in the southeastern United States under the trademark "The Jameson Inn(R)." At December 31, 1996, the Company had a total of 64 Inns either in operation or under development, including 43 Inns in operation (2,107 available rooms), 11 Inns under construction and contracts to acquire 10 parcels of land on which additional Inns are expected to be constructed during 1997. In addition, at that date, one of the Inns in operation was undergoing a 20-room expansion. Upon completion of these projects, the Company expects to have 2,967 available rooms.
The Company focuses on developing Inns in communities in the southeastern United States which have a strong and growing industrial or commercial base and a shortage of quality hotel rooms. Generally, the Inns are rooms-only facilities designed to appeal to price and quality conscious business travelers, such as sales representatives, government officials and others who travel to these communities on business, as well as family and leisure travelers attending activities in the communities such as college and university sponsored events, fairs, festivals and other cultural events and family reunions. The standard Inn is initially built as a 40-unit, two-story, Colonial-style structure constructed on a one- to two-acre tract with an outdoor swimming pool, fitness center and parking area. As initially constructed, the standard Inn has 38 guest rooms and two executive suites and features amenities such as remote-controlled television with access to cable programming, including HBO, free local calls, complimentary continental breakfast and newspaper, king-sized or double beds, attractive decor, quality furnishings and, in select rooms, whirlpool baths and small refrigerators.
The lodging industry is generally divided into three broad categories based on the type of services provided. The first of these categories, full service hotels and resorts, offer their guests rooms, food and beverage services, meeting rooms, room service and similar guest services, and, in some cases, resort entertainment and activities. The second category is the limited service hotel, which generally offers rooms-only facilities and amenities such as swimming pools, continental breakfast and similar, limited services. The third category is the all-suite hotel which offers guests more spacious accommodations and usually kitchen facilities in the suite and common laundry facilities. Each of these categories is generally subdivided into classifications based on price and quality. The terminology generally used in the hotel industry describes properties as luxury at the high end, economy in the middle and budget at the low end of the scale. Prices for each of these categories vary by region and locale. The Inns fall within the category of small, limited service, economy hotels.
The hotel industry is seasonal in nature. Occupancy rates are generally higher in the second and third calendar quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the Company's revenues.
All of the Inns are leased to Jameson Operating Company (the "Operator") under the terms of a master lease (the "Lease"). See --The Lease below. The Operator was formed to conduct the operation of the Inns and entered into the Lease with the Company for that purpose.
The Company's executive offices are located at 8 Perimeter Center East, Suite 8050, Atlanta, Georgia 30346-1603. The Company's telephone number is (770) 901-9020.
DEVELOPMENT OF BUSINESS
The Company was formed in 1988 to develop, own and operate Inns and elected to be taxed for federal income tax purposes as a real estate investment trust ("REIT") beginning January 1, 1994, and in 1994 became a publicly held company upon consummation of its initial public offering of the Company's common stock, par value $.10 per share ("Common Stock").
THE LEASE
The Company has entered into the Lease with the Operator which covers all of the existing Inns. Furthermore, new Inns developed by the Company during the term of the Lease will become subject to the Lease upon completion of construction. See Item 13. Certain Relationships and Related Transactions--The Lease. The following is a summary description of the terms and conditions of the Lease as so amended.
Pursuant to an amendment to the Lease effective January 1, 1997 (the "Lease Amendment"), the Lease term expires on December 31, 2006, subject to earlier termination upon the occurrence of certain events. During the term of the Lease, the Operator is obligated to pay to the Company base rent based 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 by certain percentages. Under the 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 equals the following:
39% of the first $20.50 of average daily per room rental revenues; plus
65% of all additional average daily per room rental revenues; less
100% of base rent paid for the same period.
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 the Operator under the Lease each calendar year, however, is limited to 47% of room revenues.
Effective January 1, 1997, the $20.50 amount referred to above was increased to $21.05 for 1997 based on the 2.7% 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, 1996. Similar adjustments will be made on each subsequent January 1 for the year then beginning based on the changes experienced over the most recently completed calendar year.
Average daily per room rental revenues are determined by dividing room revenues realized by the Operator 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 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 taxes. On or before March 1 of each year, the Operator 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 the Company's financial statements, on the amount of room revenues and percentage rent. Total rent, including both base rent and percentage rent, earned by the Company for the years ended December 31, 1994, 1995 and 1996 was $4.0 million, $6.3 million and $9.4 million, respectively.
In addition to paying base rent and, if applicable, percentage rent, the Lease requires the Operator to pay workers' compensation insurance premiums, and all costs and expenses incurred in the operation of the Inns. The Company is responsible for paying real and personal property taxes, casualty, liability and other types of insurance, the costs of replacing or refurbishing furniture, fixtures and equipment, and the maintenance of structural elements, roofs and underground utilities.
The Operator was formed in 1993 to conduct the operation of the Inns and entered into the Lease with the Company for that purpose. The Operator is owned 9.9% by Thomas W. Kitchin, Chairman, President and Chief Executive Officer of the Company, and 90.1% by a grantor trust of which Steven A. Curlee, General Counsel and Secretary of the Company, is the trustee and beneficiary. The Operator has only nominal assets and a limited net worth.
The Company's members of the Board of Directors of the Company who are not also officers or employees of the Company and who are not affiliated with the Operator or the Contractor ("Independent Directors") (see --Growth Plans for 1997--The Contractor, below), approved the Lease Amendment and determined that the Lease, as amended, is fair to the Company.
Trademark. The Operator is the owner of the registered trademark, The Jameson Inn(R). The Lease requires the Operator to operate the Inns using the trademark and not to use the trademark (or license its use to any other parties) for the operation of lodging facilities other than the Inns if the Company objects to such unrelated use. The Company has an option to purchase the trademark from the Operator 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.
Maintenance and Modifications. Under the Lease, the Company is required to maintain the underground utilities and the structural elements of the improvements and the roof of each Inn.
The Operator 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.
The Operator, 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 the Company and in accordance with plans and specifications approved by the Company. All alterations, replacements and improvements are subject to all the terms and provisions of the Lease and become the property of the Company upon termination of the Lease. Through January 31, 1997, the Operator 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. The Company seeks to control such costs through the construction of new Inns rather than the purchase and renovation of existing hotel properties. Nonetheless, the Inns require periodic replacement of furniture, fixtures and equipment and the Lease requires that the Company pay the costs of such refurbishment. The Company has 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 the Operator's total aggregate room revenues since July 1, 1995, less the amounts actually expended since that date. While management believes that such amount is adequate to support proper refurbishment of the Inns, the actual amounts necessary to pay such costs could exceed the Company's estimate. In such case, expenditure of additional funds for furniture, fixtures and equipment could have an adverse effect on the Company's ability to make the full amount of expected distributions to shareholders. See Item 7. Management's Discussion and Analysis of Operations--Liquidity and Capital Resources. As of December 31, 1996, the reserve contained approximately $263,000.
Insurance and Property Taxes. The Lease provides that the Company is responsible for paying or reimbursing the Operator 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 the Operator.
Indemnification. The Lease requires the Operator to indemnify the Company and its affiliates from and against all liabilities, costs and expenses (including reasonable attorneys' fees and expenses) incurred by, imposed upon or asserted against the Company or its affiliates, on account of, among other things, (i) any accident or injury to person or property on or about the Inns, (ii) any misuse by the Operator, or any of its agents, of the leased property, (iii) taxes and assessments in respect of the Inns (other than real and personal property taxes and income taxes of the Company on income attributable to the Inns), or (iv) any breach of the Lease by Operator. The Lease does not, however, require the Operator to indemnify the Company against the Company's gross negligence or willful misconduct. The Company is required to indemnify the Operator against any environmental liabilities other than those caused by the acts or negligent failures of the Operator (for which the Operator will indemnify the Company).
Assignment and Subleasing. Under the terms of the Lease, the Operator is not permitted to sublet all or any part of any of the Inns or assign its interest under the Lease, other than to an affiliate of the Operator controlled by Mr. Kitchin, without the prior written consent of the Company. No assignment or subletting will release the Operator from any of its obligations under the Lease.
Events of Default. Events of default under the Lease include, among others, the following:
(i) the Operator's continuing failure to pay rent for a period of 10 days after receipt by the Operator of written notice of nonpayment from the Company;
(ii) except under certain circumstances, continued failure by the Operator to observe or perform any other term of the Lease for a period of 30 days after the Operator receives notice of the failure from the Company;
(iii) the Operator's bankruptcy, insolvency or similar event;
(iv) the Operator's voluntary discontinuation of operations at an Inn for more than five days, without the consent of the Company, except as a result of damage, destruction or condemnation.
If an event of default occurs and continues beyond any curative period, the Company has the option of terminating the Lease as to any individual Inn (which would not affect the Lease as to the remainder of the Inns) or as to all of the Inns by giving the Operator 10 days written notice of the termination date.
Termination of Lease on Disposition of the Inns. If the Company enters into an agreement to sell or otherwise transfer an Inn, the Company may terminate the Lease as to that Inn. However, if, during the first five years of the Lease term, the Lease is terminated as to Inns comprising at least 25% of the total rooms of all of the Inns within a period of 12 consecutive months, the Operator must be compensated for the loss of its leasehold interest or offered substitute Inns. Most of the Inns have been mortgaged to secure indebtedness of the Company. See Item 2.
ITEM 2. PROPERTIES.
INNS. The Company focuses on developing Inns in communities in the southeastern United States which have a strong and growing industrial or commercial base and a shortage of quality
hotel rooms. Generally, the Inns are rooms-only facilities designed to appeal to price and quality conscious business travelers, such as sales representatives, government officials and others who travel to these communities on business, as well as family and leisure travelers attending activities in the communities such as college and university sponsored events, fairs, festivals and other cultural events and family reunions. The standard Inn is initially built as a 40-unit, two-story, Colonial-style structure constructed on a one- to two-acre tract with an outdoor swimming pool, fitness center and parking area. As initially constructed, the standard Inn has 38 guest rooms, and two executive suites and features amenities such as remote-controlled television with access to cable programming, including HBO, free local calls, complimentary continental breakfast and newspaper, king-sized or double bed, attractive decor, quality furnishings and, in select rooms, whirlpool baths and small refrigerators.
At December 31, 1996, the Company owned 43 operating Inns and had an additional 11 Inns under construction. The Company owns the land upon which 53 of these Inns are built or being built and has a 58-year ground lease on the land on which one Inn is currently under construction. At December 31, 1996, the Company also had one Inn expansion in progress and sites under contract for an additional 10 Inns to be developed. The locations of those Inns is set forth under Item 1. Business--Growth Plans for 1997. All 43 of the operating Inns are, and all future Inns developed by the Company are expected to be, leased to and operated by the Operator which is responsible for the day-to-day management, operation and marketing of the Inns. See Item 1. Business--The Lease.
The following table sets forth certain information about the 43 operating Inns at December 31, 1996.
(1) As to Inns opened or expanded during 1996, room nights available reflects all rooms available from the opening date of the Inn or its expansion but does not include periods during which rooms may have been unavailable due to repairs or renovations.
(2) A 20-room expansion of this Inn was under construction at December 31, 1996, and is expected to open in 1997.
At December 31, 1996, 24 of the Company's 43 operating Inns were pledged to secure indebtedness under the Company's $29 million credit facility. In addition, 14 operating Inns were pledged to secure other mortgage indebtedness and 9 of the 11 Inns under construction at December 31, 1996, were pledged to secure construction loans.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation which, in the judgment of the Company, would have a material adverse effect on its operations or financial condition if adversely determined. However, due to the nature of its business, it is, from time to time, and is currently, a party to certain legal proceedings arising in the ordinary course of its business.
ITEM 4.
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 1996 which required the solicitation of any proxies.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of January 31, 1997, the Company had approximately 319 holders of record of its Common Stock and, the Company estimates, approximately 4,168 beneficial holders of its Common Stock.
The Company paid total cash dividends of $.69 per share of Common Stock for the period February 3, 1994, through December 31, 1994, and $.76 per share of Common Stock for the period February 3, 1994 to February 2, 1995. The following table summarizes each of the dividends declared and paid on the Common Stock by the Company for the fiscal years ended December 31, 1995 and 1996.
On February 6, 1995, the Company also declared a dividend of $7.60 per share of Preferred stock, par value $1.00 per share ("Preferred Stock"), which was paid on February 27, 1995, to holders of record of the Preferred Stock on February 16, 1995. The dividend on the Preferred Stock was for the period February 3, 1994, through February 2, 1995. On March 1, 1995, holders of the Preferred Stock converted 64,467 shares of Preferred Stock into 644,670 shares of Common Stock, resulting in no shares of Preferred Stock remaining outstanding. All further dividends declared and paid by the Company have been and will be declared and paid on a pro rata basis to all shareholders.
The Company intends to continue making regular quarterly distributions to its shareholders. The Company's cash available for distribution is generally an amount equal to its net income from operations plus the amount of non-cash expenses recorded by the Company, such as amortization, depreciation and stock compensation expenses, less amounts the Company believes should be retained for working capital purposes, debt service or anticipated capital expenditures.
MARKET INFORMATION
The Company's Common Stock commenced trading on The Nasdaq Stock Market National Market System on January 27, 1994. Prior thereto there was no public market for the Common Stock. The table below sets forth the range of high and low sales prices for the Common Stock from January 1, 1995, through December 31, 1996, for the periods indicated.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating information on a pro forma and historical basis for the Company. The following information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The consolidated historical financial data has been derived from the audited historical Consolidated Financial Statements. The pro forma data assumes the Company's 1994 initial public offering and all related transactions occurred on January 1, 1993, and the
Company qualified as a REIT, distributed all of its taxable income and, therefore, incurred no income tax expense during the period.
Historical financial and operating information of the Company includes all Inns owned by the Company, including both those under development as well as operating Inns; however, due to the Company's development of new Inns and expansion of existing Inns, the information is not comparable between periods. See Item 2. Properties. Historical operating results, including net income, may not be comparable to future operating results.
JAMESON INNS, INC. SELECTED FINANCIAL INFORMATION
(1) Revenues for each historical period prior to 1994 include room revenues of the Inns and other revenue of the Company. Revenues in 1994, 1995 and 1996 and the 1993 and 1994 pro forma periods consist solely of lease
payments from the Operator calculated using the provisions in the Lease applied to the historical room revenues of the Inns.
(2) Corporate administration expenses for the Company consist of amounts allocated from Kitchin Investments, Inc. for salaries for the management and overhead of the Company, office, audit, legal and printing expenses, etc.
(3) Pro forma earnings per share assume 3,883,346 shares of Common Stock outstanding after the Company's initial public offering in February 1994 and the stock options granted at exercise prices below the offering price were exercised and shares issued pursuant to such exercise were outstanding for the entire period, using the treasury stock method. See Notes 2 and 5 to the consolidated financial statements. Historical earnings per share for periods prior to 1994 are not presented as they are not meaningful due to the November 15, 1993 reincorporation, similar to a recapitalization, and the Company's initial public offering described in Note 1 to the consolidated financial statements.
(4) Represents amounts paid during the year and does not equate to dividends declared for the year due to the lag between the end of the period and payment of dividends.
(5) 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. The Company has made adjustments to its net income (loss) consisting only of depreciation, loss on disposals and the extraordinary item for debt restructuring. The Company notes that industry analysts use Funds from Operations as another tool to evaluate and compare equity REITs. The Company also believes it is meaningful as an indicator of net income excluding most non-cash items. Other non-cash expenses such as stock option 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 the Company'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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's historical and pro forma consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. Such financial statements and information reflect the historical operations of the Company through December 31, 1996.
The Company has grown from a hotel chain with four Inns, or 162 rooms, at January 1, 1990, to 43 Inns, or 2,107 rooms, in operation at December 31, 1996. From its inception in 1988 until December 31, 1993, the Company was engaged in the business of developing, owning and managing Inns. As part of its development activities, the Company engaged in development and construction of new Inns. On December 31, 1993, the Company reorganized by divesting itself of the subsidiary corporations through which it conducted its construction activities, securities brokerage activities and aviation operations. In addition, the Company transferred its outdoor advertising business to the predecessor to Jameson Outdoor Advertising Company, L.L.C., which is wholly owned by the Company's chairman and largest stockholder and his wife. The Company no longer manages or operates the Inns upon their completion, but limits its activities to developing and owning the Inns. The Operator leases the Inns from the Company and operates them.
The 1993 and 1994 pro forma financial information has eliminated those businesses which the Company has not been engaged in since it divested itself of these businesses on December 31,
1993 so as to be comparable to the 1995 and 1996 historical financial information. Although in 1994, 1995 and 1996, room revenues were earned by the Operator, not the Company, they are the basis upon which the percentage rent paid to the Company by the Operator under the Lease is determined and, accordingly, such revenues are discussed below. The term "Same Inn Room Revenues" refers to revenues earned with respect to Inns which were operating during both comparison periods and include revenues attributable to rooms added to existing Inns by virtue of expansion of such Inns.
Effective January 1, 1994, the Company's primary source of revenue became Lease payments by the Operator under the Lease, and prior thereto under the predecessor leases with the partnerships which previously owned certain of the Inns. The expenses of the Company consist of property taxes, insurance, corporate overhead, compensation expense (or income) related to certain stock options, interest on mortgage debt and depreciation of the Inns. The Lease provides for the payment of base rent and percentage rent. For the year ended December 31, 1996, base rent and percentage rent in the aggregate amount of $9.4 million was earned by the Company. The principal determinant of percentage rent under the Lease is room revenues of the Inns. Therefore, management believes that a review of the historical performance of the operations of the 43 operating Inns, particularly with respect to occupancy, ADR and REVPAR, is appropriate for understanding the Lease revenue (see --Funds from Operations; Cash Available for Distribution, below, for the calculation of ADR and REVPAR).
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1996 to the Year Ended December 31, 1995. Lease revenue for the Company for 1996 increased 49% to $9.4 million as compared to $6.3 million for 1995. The increase was due to the increase in the Operator's room revenues, partially offset by the effect of a change in the percentage rent formula under the Lease amendment effective July 1, 1995.
The number of room nights available increased from 448,906 in 1995 to 634,549 in 1996, or 41%, due to the opening from January 1996 through December 1996 of 11 new 40-room Inns and six 20- to 26-room expansions of existing Inns. The occupancy rate decreased from 67.5% for 1995 to 66.9% for 1996. However, ADR increased 7% from $42.80 in 1995 to $45.80 in 1996. As a result of these three factors, room revenues rose 50%, from $13.3 million for 1995 to $20 million in 1996. Same Inn Room Revenues for 1996 versus 1995 grew to $13.8 million from $12.1 million, or 14%. The growth is due to an increase in ADR from $42.73 to $45.76 for these Inns and an increase in room nights available (due to expansions of certain of these Inns) from 400,187 to 445,451, partially offset by a decrease in the occupancy rate from 68.8% to 66.1% for these Inns for 1996 compared to 1995. The decrease in overall occupancy of the Inns is attributable primarily to (i) the expansion of several high occupancy Inns which then experienced lower occupancy rates because of the additional rooms available in the marketplace, and (ii) the opening of new Inns which typically require several months of operations before realizing higher occupancy rates. During 1996, the Lease revenue was affected by the limitation equal to 47% of room revenues for the year.
General and administrative expense includes overhead charges for management, accounting and legal services for the corporate home office. General and administrative expense for 1996 was $499,000, as compared to $622,000 for 1995, due to relatively less time spent on the REIT as compared to the Operator, Contractor and other related entities. See Item 1. Business--Employees, and - --Policies and Objectives with Respect to Certain Activities--Conflicts of Interest; and Item 13. Certain Relationships and Related Transactions--Cost Reimbursement Agreement.
Property taxes and insurance expenses totaled $733,000 in 1996, compared with $514,000 for 1995. The increase is attributable to the increase in the number of Inns and, to a lesser extent, the expansion of existing Inns.
Interest expense decreased from $1.6 million in 1995 to $1.4 million in 1996 due to the repayment of approximately $30.8 million in debt in April 1996 with proceeds from the sale of 3.3 million shares of Common Stock. As a result of the early extinguishment of debt in 1996, the Company had a loss of $989,376, comprised of the write-offs of deferred finance costs, which are reflected as extraordinary items.
Depreciation expense increased from $1.8 million in 1995 to $2.7 million in 1996, due to an increase in the number of operating Inns and, to a lesser extent, the expansion of existing Inns.
Comparison of the Year Ended December 31, 1995 to the Year Ended December 31, 1994. Lease revenue for the Company for 1995 increased 60% to $6.3 million as compared to $4.0 million for 1994. The increase was due to the increase in the Operator's room revenues, partially offset by the effect of a change in the percentage rent formula under the Lease amendment effective July 1, 1995.
The number of room nights available increased from 295,193 in 1994 to 448,906 in 1995, or 52%, due to the opening from February 1994 through December 1995 of 17 new 40-room Inns, seven 20-room expansions of existing Inns and one 16-room expansion of an existing Inn. The occupancy rate decreased from 70.1% to 67.5% for 1994 and 1995, respectively. In addition, ADR increased 9% from $39.43 in 1994 to $42.80 in 1995. As a result of these three factors, room revenues rose 58%, from $8.4 million for 1994 to $13.3 million in 1995. Same Inn Room Revenues for 1995 versus 1994 grew to $8.4 million from $7.4 million, or 14%. The growth is due to an increase in ADR from $39.22 to $42.55 for these Inns and an increase in room nights available (due to expansions of certain of these Inns) from 258,752 to 281,583, partially offset by a decrease in the occupancy rate from 71.1% to 68.4% for these Inns for 1995 compared to 1994. The decrease in the overall occupancy of the Inns is attributable primarily to (i) the expansion of several high occupancy Inns which then experienced lower occupancy rates because of the additional rooms available in the marketplace, and (ii) the opening of new Inns which typically require several months of operations before realizing higher occupancy rates.
General and administrative expense includes overhead charges for management, accounting and legal services for the corporate home office. General and administrative expense for 1995 was $622,000, as compared to $479,000 for 1994, due to the increase in cost of third party services incurred as a result of being a public company, the increase in the number of the Company's employees and the Company's relocation to a larger office space.
Property taxes and insurance expenses totaled $514,000 in 1995, compared with $412,000 for 1994. The increase is attributable to the increase in the number of Inns and, to a lesser extent, the expansion of existing Inns.
Interest expense increased from $339,000 in 1994 to $1.6 million in 1995 due to the greater amount of principal indebtedness outstanding combined with higher average interest rates in 1995. In addition, the Company repaid approximately $18 million in debt in February 1994 with proceeds from its initial public offering of Common Stock. As a result of the early extinguishment of debt in 1995 and 1994, the Company had a loss of $19,000 and $250,000, respectively, largely comprised of the write-offs of deferred finance costs, which are reflected as extraordinary items.
Depreciation expense increased from $1.4 million in 1994 to $1.8 million in 1995, due to an increase in the number of operating Inns and, to a lesser extent, the expansion of existing Inns.
FUNDS FROM OPERATIONS; CASH AVAILABLE FOR DISTRIBUTION
The following table illustrates the Company's calculation of Funds from Operations and Cash Available for Distribution on an historical basis for the years ended December 31, 1994, 1995 and 1996 and on a pro forma basis for the year ended December 31, 1994. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") published a new interpretation of Funds from Operations which the Company retroactively adopted at that time.
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(1) Pro forma results assume (i) the Company's initial public offering and all related transactions had occurred on January 1, 1993, and (ii) the Company qualified as a REIT, distributed all of its taxable income and, therefore, incurred no income tax expense during the pro forma period.
(2) Prior to July 1, 1995 the Operator was responsible for the replacement and refurbishment of furniture, fixtures and equipment. After that date and in conjunction with the Lease amendment, the Company assumed this responsibility.
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. The Company has made adjustments to its net income (loss) consisting only of depreciation, loss on disposals and the extraordinary item for debt restructuring. The Company notes that industry analysts use Funds from Operations as another tool to evaluate and compare equity REITs. The Company also believes it is meaningful as an indicator of net income excluding most non-cash items. Other non-cash expenses such as stock option 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 the Company'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.
Cash Available for Distribution is calculated as Funds from Operations plus non-cash stock option expense and loan fee amortization, less amounts estimated for future replacement and refurbishment of furniture, fixtures and equipment and required loan principal repayments. On July 1, 1995, the Company adopted a policy of maintaining cash or sufficient access to borrowings equal to 4% of the 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 the Operator's. For the period July 1, 1995 through December 31, 1996, 4% of room revenues equalled $1,066,000 and the Company expended $803,000 on such items in that same period. In addition, the Company expects to retain some portion of the Cash Available for Distribution for working capital and capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since its election to be taxed as a REIT, the Company has financed and currently intends to continue financing the construction of new Inns entirely with bank borrowings. At December 31, 1996, the Company had approximately $22.3 million in outstanding debt. It is management's intention to continue to borrow from some or all of its previous lenders to finance future projects.
The Company has a $29 million line of credit (the "Line") convertible in June 1998 to a term note. At December 31, 1996, the Company had drawn down $7.1 million under the Line with $21.9 million remaining available credit. Loans made under the Line bear interest at rates initially ranging from 8.5% to 8.75%, which are adjustable annually to equal a major lender's prime rate as published in the Wall Street Journal plus .25 or .5 percentage points. The minimum annual interest rate payable under the Line is 7% and the maximum is 13%. The annual interest rates at December 31, 1996 ranged from 8.5% to 8.75%. Loans made under the Line are secured by mortgages on 24 of the Inns. Payments of interest are due monthly, and monthly
payments of principal commence in June 1998. Principal on loans under the Line is amortized using a 15-year period and is payable in full in May 2006.
Construction and long-term mortgage financing are expected to be available to fund the balance of construction costs not funded under the Line. For each new Inn developed by the Company, generally a construction loan for approximately $1.1 million has been obtained. Each construction loan converts to a long-term mortgage financing upon completion of the Inn without any further action by the Company. Each of the mortgage and construction loans outstanding at December 31, 1996, is amortized over 15 years and is payable in full 7 years from its inception. The interest rate on each of such loans is adjusted annually, after an 18-month interest-only period, to the prime rate then prevailing plus .25% to 1.5% with a floor of 7% and a cap of 12%, with no annual change greater than 1%.
The Company believes it can continue to finance new Inns with these construction and long-term mortgage loans. As of December 31, 1996, the Company had five Inns which were debt free and could be used as collateral should the Company need additional borrowing capacity. Generally, Inn expansions are also financed through construction loans. Management believes the Company can adequately meet its financing needs for the next year through the traditional debt financing methods available to the Company. Since the Company presently intends to rely primarily on borrowings for construction and permanent financing of new Inns and the expansion of existing Inns, the lack of sufficient financing on favorable terms and conditions could prevent or significantly deter the Company from constructing new Inns or expanding existing Inns. The availability of such financing depends on a number of factors over which the Company has 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. The Company also is considering possible additional long-term debt or equity financing that would be available to fund its ongoing development activities.
In January 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission that provides for the issuance of an aggregate of up to $100 million in Common Stock, Preferred Stock and Common Stock warrants to be offered and sold from time to time. The Company intends to use the net proceeds, if any, from any sale of securities under such registration statement for the repayment of existing indebtedness, working capital and general corporate purposes.
The Company expects to continue to develop additional Inns as suitable opportunities arise, and the Company will not undertake investments unless adequate sources of financing are available. As of December 31, 1996, the Company had also borrowed approximately $2.1 million to finance the construction of new Inns at Auburn and Oxford, Alabama; Oakwood, Georgia; Forest City, Laurinburg and Wilson, North Carolina; Union, South Carolina; Decherd and Tullahoma, Tennessee. In addition, the Company is negotiating construction loans for the construction of new Inns at Tuscaloosa, Alabama and Sanford, North Carolina. Total construction costs of these 11 Inns, excluding land and closing costs, is expected to be $13.5 million when complete. The Company is also currently expanding the Inn in Gaffney, South Carolina. The expansion is being financed under the Line. The Company may in the future expand additional
Inns if management determines that sufficient market demand exists and financing is available for any such expansion.
As with most real estate investments, the Company's investments in the Inns are relatively illiquid and such illiquidity is further increased by the Inns' location in small communities. As a result, the ability of the Company to sell or otherwise dispose of any Inn to provide liquidity will be very limited.
In connection with its initial public offering in 1994, the Company sold to Commonwealth Associates, for an aggregate of $260, warrants to purchase up to 260,000 shares of Common Stock at an exercise price of $14.85 per share exercisable at any time until January 27, 1999.
The Company has three stock incentive plans in place. As of December 31, 1996, 853,949 shares were reserved for future grants and 492,644 options were outstanding (including 292,077 which were exercisable).
INFLATION
Operators of hotels in general possess the ability to adjust room rates quickly. Although the Operator raised its room rates by approximately 5% in July 1994 and April 1995, competitive pressures have limited, and may in the future limit, the Operator's ability to raise rates in the face of inflation.
SEASONALITY
The Inns' historical operations have been seasonal in nature, reflecting higher occupancy rates in the second and third quarters. This seasonality can be expected to cause fluctuations in the Company's Lease revenue that it receives from the Operator.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are indexed in Item 14 hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's Board of Directors currently consists of four directors serving staggered terms. Except for those Class I and Class II directors whose initial terms were set at the lengths required to establish a classified Board of Directors, each newly elected director holds office for a period of three years and until his successor is duly elected and qualified. Officers serve at the discretion of the Board of Directors. The directors and executive officers of the Company and their ages at January 31, 1997, are as follows:
Set forth below is certain information concerning the Company's directors and executive officers.
Thomas W. Kitchin is a Class III director whose term expires in 1999. He is the founder and has been an officer and director of the Company since its incorporation in 1988. Prior to founding the Company, 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; chairman 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 the Georgia Southern University Restaurant, Hotel and Institutional Administration Academic Advisory Board; and director of the Northside Hospital Advisory Board. In addition, he has served on the board of directors of a private school, several banks and oil companies and numerous other civic, charitable and social service agencies. Mr. Kitchin is the father of Craig R. Kitchin, Chief Financial Officer and Treasurer of the Company.
William D. Walker is a Vice President of the Company. He has been an officer of the Company since its inception in 1988 and served as a director from 1988 through October 29, 1993. Prior to joining the Company, he worked in various financial management positions for
twelve years. Mr. Walker received a B.B.A. degree in finance from Texas Tech University in 1975.
Craig R. Kitchin became Chief Financial Officer of the Company in February 1994. He joined the Company 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 degree in finance in 1989. Craig Kitchin is the son of Thomas W. Kitchin, the President of the Company.
Steven A. Curlee became General Counsel and Secretary of the Company on January 1, 1993. From April 1985 to July 1992, he was general counsel for Geodyne Resources, Inc. of Tulsa, Oklahoma, a public oil and gas company. 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.
Robert D. Hisrich, Ph. D., who became a director in October 1993, is a Class I director whose term expires in 1997. Dr. Hisrich has held the A. Malachi Mixon III Chair in Entrepreneurial Studies and has been a professor at the Weatherford School of Management, Case Western Reserve University, Cleveland, Ohio, since September 1993. From 1985 until his appointment at Case Western Reserve University, Dr. Hisrich held the Bovaird Chair of Entrepreneurial Studies and Private Enterprise and was a Professor of marketing at The University of Tulsa, Tulsa, Oklahoma, and was a Director of the Enterprise Development Center at The University of Tulsa. In the spring of 1992, Dr. Hisrich was a Visiting Professor of Entrepreneurship Studies at the University of Limerick, Limerick, Ireland, and from 1990 through 1991, he was a Fulbright Professor and holder of the Alexander Hamilton Chair in Entrepreneurship at the Foundation for Small Enterprise Economic Development, Budapest, Hungary. In the spring of 1989, Dr. Hisrich was a Fulbright Professor at the International Management Center, Budapest, Hungary. In addition, since 1974 Dr. Hisrich has been Director of H & B Associates, a marketing and management consulting firm. He has also held a number of other academic positions and is widely published in the areas of marketing, management and entrepreneurship. Dr. Hisrich has a B.A. degree in English and science from DePauw University, an M.B.A. degree in marketing from the University of Cincinnati and a Ph.D. degree in business administration from the University of Cincinnati.
Thomas J. Kearns, who became a director in July 1994, is a Class I director whose term expires in 1997. Since April 1995, he has been Director of Financial Services, Investment Banking, Josephthal, Lyon & Ross, Inc. He is also president of Thomas J. Kearns Inc., a financial consulting firm, and has been in the securities business for 30 years. Until 1990, Mr. Kearns was a first vice president of Merrill Lynch Capital Markets, where he was employed for
16 years. Since 1990 he has been a director of CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage Investments, Inc)., a publicly-held real estate mortgage investment company. From April 1994 to January 1995 he was a managing director of Commonwealth Associates, an investment banking firm. Mr. Kearns was nominated and serves on the Board of Directors as the designee of Commonwealth Associates pursuant to an agreement between Commonwealth Associates and the Company.
Michael E. Lawrence, who became a director in April 1994, is a Class II director whose term expires in 1998. Since March 1994, he has been a director of Sea Pines Associates, Inc., a publicly held corporation with approximately $35 million in annual revenues which owns and operates real estate and recreational properties on Hilton Head Island, South Carolina. Mr. Lawrence is president and chief executive officer of Sea Pines Company and Sea Pines Real Estate Company. Prior to joining Sea Pines Associates, Inc., Mr. Lawrence was a management consultant with Ernst & Young from 1969 through 1989 and was a partner in that firm from 1982 through 1989. Mr. Lawrence is a certified public accountant with a B.S. from Washington and Lee University and an M.B.A. degree from Emory University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers and persons who own more than ten percent of the Company's equity securities to report their initial ownership of such securities and any subsequent changes in that ownership to the Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market, and to furnish the Company with a copy of each such report. SEC regulations impose specific due dates for such reports, and the Company is required to disclose in this report any failure to file by these dates during and for fiscal 1996.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during and for fiscal 1996, its officers, directors and shareholders who hold more than ten percent of the Company's equity securities complied with all applicable Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Each director other than Mr. Kitchin receives from the Company an annual fee of $10,000 and reimbursement of expenses incurred in attending Board or Committee meetings. Payment of the annual fee is not contingent upon attendance at Board or Committee meetings.
Under the Jameson Inns, Inc. Director Stock Option Plan, each director of the Company who is not otherwise an employee of the Company or any of its subsidiaries or affiliates (an "independent director") is granted an option ("New Director Option") to purchase 25,000 shares of Common Stock upon his initial election as a director of the Company. Such options are fully vested when granted and have an exercise price equal to the fair market value of a share of the
Common Stock on the date the New Director Option is granted. New Director Options are first exercisable as to all or any part of the shares of Common Stock covered thereby six months after the date of grant and until three months after a director's resignation, one year after a director becomes disabled and 15 months after a director's death.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the compensation of Thomas W. Kitchin, the Company's Chief Executive Officer, for services in all capacities to the Company during the fiscal years ended December 31, 1994, 1995 and 1996. No other executive officer of the Company had an annual salary and bonus in excess of $100,000 during such year. No information is given as to any person for any fiscal year during which such person was not an executive officer of the Company.
SUMMARY COMPENSATION TABLE
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(1) Represents allocation from Kitchin Investments, Inc. based on records of actual time spent related to the Company.
(2) Consists of 150,000 free standing stock appreciation rights granted under Mr. Kitchin's employment agreement (see --Employment Agreement, below) and options to purchase 50,000 shares of Common Stock under the Jameson 1993 Stock Incentive Plan. These stock appreciation rights were cancelled effective March 31, 1996.
(3) Consists of options to purchase 25,000 shares of Common Stock at $7.25 per share granted under the Jameson 1993 Stock Incentive Plan.
(4) Consists of shares of restricted Common Stock granted under the Jameson 1996 Stock Incentive Plan. Such shares vest 10 years after the date of grant, assuming continuous employment with the Company through the date of vesting.
OPTION AND SAR EXERCISES IN LAST FISCAL YEAR; AGGREGATE FISCAL YEAR-END VALUES OF OPTIONS AND SARS
The named executive officer did not exercise any options during fiscal 1996. The following table sets forth the values as of December 31, 1996, of all options and restricted stock held by the named executive officer during fiscal 1996.
EMPLOYMENT AGREEMENT
In connection with the initial public offering, the Company entered into an employment agreement with Thomas W. Kitchin as Chief Executive Officer and President of the Company. Under the agreement, the Board of Directors sets the maximum amount of annual salary for which the Company reimburses Kitchin Investments, Inc., under the Cost Reimbursement Agreement between the Company and Kitchin Investments, Inc. based on the amount of time Mr. Kitchin devotes to the Company's business. See Item 1. Business--Employees, and --Policies and Objectives with Respect to Certain Activities--Conflicts of Interest; and Item 13. Certain Relationships and Related Transactions--Cost Reimbursement Agreement. In addition, the agreement granted Mr. Kitchin stock appreciation rights ("SARs") based on 150,000 shares of Common Stock which entitled Mr. Kitchin to receive the difference between the market value of such shares as of the exercise date and $9.00 per share, the initial public offering price of the Common Stock. These SARs were rescinded by agreement of Mr. Kitchin and the Company effective March 31, 1996.
The employment agreement can be terminated by Mr. Kitchin upon giving 60 days' notice. The Company may terminate the agreement at any time. If the Company terminates Mr. Kitchin's employment without cause, however, and elects to continue the non-compete provisions of the agreement (see below), the Company must pay Mr. Kitchin an amount equal to 300% of his annual compensation by the Company in equal monthly installments over the 24-month term of the non-compete provisions.
The agreement includes a non-compete provision whereby Mr. Kitchin is prohibited from owning, operating or managing, directly or indirectly, any hotel property during the term of his employment, or, for two years following such employment, any hotel property within a 20-mile radius of any hotel property owned by the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial ownership of Common Stock by each director and the named executive officer of the Company, by all directors and officers of the Company as a group and by each person who is known to the Company at January 31, 1997 to be the beneficial owner of 5% or more of the outstanding Common Stock. Except as otherwise noted, each person identified in the table has sole voting and investment power over the shares shown as beneficially owned, subject to community property laws where applicable.
- ------------------
* Less than one percent (1%)
(1) The total number includes shares issued and outstanding as of January 31, 1997, plus shares which the owner shown above has the right to acquire within 60 days after January 31, 1997. For purposes of calculating the percent of the class outstanding held by each owner shown above with a right to acquire additional shares, the total number of shares excludes the shares which all other persons have the right to acquire within 60 days after January 31,1997, pursuant to the exercise of outstanding stock options.
(2) Includes 46,938 shares owned by Kitchin Children's Trust, the beneficiaries of which are members of the family of Mr. Kitchin and of which Mr. Kitchin serves as trustee, 50,000 shares issuable upon the exercise of currently vested stock options and 140,000 shares owned jointly with Mr. Kitchin's spouse.
(3) Includes 25,000 shares issuable upon the exercise of currently vested stock options.
(4) Includes 192,752 shares issuable upon the exercise of currently vested stock options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TURNKEY CONSTRUCTION CONTRACTS
New Inns under construction are, and it is anticipated that any additional Inns developed by the Company will be, constructed by the Contractor on a turnkey basis pursuant to construction agreements between the Company and the Contractor. The Contractor is a company beneficially
owned entirely by Thomas W. Kitchin. See Item 1. Business--Growth Plans for 1997--The Contractor. The Contractor also performs all of the construction work for expansions and renovations of existing Inns and, in addition, constructed fitness centers for Inns constructed prior to their becoming a standard feature of new Inns. The Company paid the Contractor an aggregate of $18.9 million for turnkey construction of new Inns, expansions and renovations during the year ended December 31, 1996. Under the construction agreements, if the contract price for a new Inn or group of Inns or an Inn expansion exceeds the Contractor's costs plus 10%, the Contractor is required to refund the excess amount to the Company. The contract price as well as the other terms of each construction agreement submitted by the Contractor are subject to approval by the members of the Board of Directors of the Company who are not also officers or employees of the Company and who are not affiliated in any way with the Operator or the Contractor.
THE LEASE
The Company is the lessor under the Lease with the Operator covering all of the existing Inns. All new Inns developed by the Company during the term of the Lease will become subject to the Lease upon completion of construction. See Item 1. Business--The Lease.
Total rent earned by the Company for the year ended December 31, 1996 was $9.4 million.
The Lease requires the Operator to pay base rent, percentage rent as applicable, workers' compensation insurance premiums, and all costs and expenses incurred in the operation of the Inns. The Company is responsible for paying real and personal property taxes, casualty, liability and other types of insurance, the costs of replacing or refurbishing furniture, fixtures and equipment, and the maintenance of structural elements, roofs and underground utilities.
The Operator was formed to conduct the operation of the Inns and entered into the Lease with the Company for that purpose. The Operator is owned 9.9% by Thomas W. Kitchin, Chairman, President and Chief Executive Officer of the Company, and 90.1% by a grantor trust of which Steven A. Curlee, General Counsel and Secretary of the Company, is the trustee and beneficiary. The Operator has only nominal assets, a history of operating losses and a limited net worth.
The Lease was amended effective January 1, 1997, to extend the Lease term. The members of the Board of Directors of the Company who are not also officers or employees of the Company and who are not affiliated in any way with the Operator or the Contractor approved such amendment and determined that the Lease, as amended, is fair to the Company.
COST REIMBURSEMENT AGREEMENT
The officers and employees of the Company are also employees of Kitchin Investments, Inc., a corporation wholly owned by Thomas W. Kitchin. Rather than duplicate payroll functions, the officers and employees of the Company receive their salaries, hourly wages and fringe benefits entirely from Kitchin Investments, Inc., which also pays the Company's office overhead and other general and administrative costs. Effective January 1, 1994, the Company entered into the Cost
Reimbursement Agreement with Kitchin Investments, Inc. providing that the Company will reimburse Kitchin Investments, Inc. on an actual cost basis for the employee compensation and overhead costs attributable to the Company. Under the Cost Reimbursement Agreement, the Company determines for each officer and employee the amount the Company would pay, in salary and benefits (including non-cash stock-based compensation awards), if such person devoted 100% of his or her time to Company business. Kitchin Investments, Inc. then determines, subject to review by the Company, the actual percentage of the person's time devoted to the Company's business and applies that percentage to the Company-established compensation amount. The resulting amount is the amount the Company reimburses Kitchin Investments, Inc. with respect to the officer's or employee's compensation. Office overhead and other general and administrative costs are also allocated to and borne by the Company based primarily on the amount of time spent by these officers and employees on Company business. In 1996, such allocation of salary, office overhead and other general and administrative costs totalled approximately $194,000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements of Jameson Inns, Inc.
5. Exhibits
EXHIBIT NUMBER
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 Preferred Stock of 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 - Article 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 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
3.6 - Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1 to the Registration Statement on Form S-11, File No. 33-71160
3.7 - 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
3.8 - Amendment No. 2 to Registrant's Bylaws incorporated by reference to Exhibit 3.8 to the Annual Report filed 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 Registration Statement on Form S-11, File No. 33-71160
4.2 - Warrant issued to Commonwealth Associates incorporated by reference to Exhibit 4.2.1 to the Registration Statement on Form S-11, File No. 33-71160
10.1 - Master Lease Agreement 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 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 between Jameson Inns, Inc. and Jameson Operating Company
10.4 - Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc. and Jameson Operating Company
10.5 - Addenda A-1 through A-17 to Master Lease Agreement between Jameson Inns, Inc. and Jameson Operating Company incorporated by reference to Exhibit 10.3
to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.6 - Schedule of Lease Supplement entered into during 1996 and substantially similar to Exhibit 10.5
10.7 - Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-11, File No. 33-71160
10.8 - Construction Contract between Jameson Inns, Inc. and Jameson Construction Company for construction of Inns in Alexander City, Decatur, Eufala and Florence, Alabama; Albany, Bainbridge, Brunswick, LaGrange, Thomaston, Waycross and Waynesboro, Georgia; and Union, South Carolina, incorporated by reference to Exhibit 10.7 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.9 - Schedule of documents substantially similar to Exhibit 10.8
10.10 - 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
10.11 - 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
10.12 - 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
10.13 - 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
10.14 - 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
10.15 - 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
10.16 - Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-11, File No. 33-71160
10.17 - Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.15 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.18 - Amendment No. 2 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.16 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.19 - Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Jameson Operating Company incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-11, File No. 33-71160
10.20 - Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-11, File No. 33-71160
10.21 - 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
10.22 - Dividend Subordination Agreement between the Company and Thomas W. Kitchin and Kitchin Children's Trust incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-11, File No. 33-71160
10.23 - Construction Loan Agreement, Indenture, Security Agreement and Promissory Note dated July 15, 1993 for $1,000,000 loan from Empire Financial Services, Inc. to Jameson Inns, Inc. (formerly Jameson Company) for construction of Jameson Inn in Carrollton, Georgia incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-11, File No. 33-71160
10.24 - Schedule of documents substantially similar to Exhibit 10.23
10.25 - 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 - Deed to Secure Debt, Security Agreement, Assignment of Operating Lease, Assignment of Fees and Income, Promissory Note for $1.6 million loan from Empire Financial Services, Inc. to Jameson Inns, Inc. secured by Inn at Jesup, Georgia incorporated by reference to Exhibit 10.24 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.27 - Schedule of documents substantially similar to Exhibit 10.26 incorporated by reference to Exhibit 10.25 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.28 - 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
10.29 - Loan Modification Agreement, Construction Agreement and Note dated April 13, 1995, increasing by $500,000 the loan from Empire Financial Services, Inc. to Jameson Inns, Inc. for construction of expansion of Inn at Carrollton, Georgia, incorporated by reference to Exhibit 10.27 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.30 - Schedule of documents substantially similar to Exhibit 10.29 incorporated by reference to Exhibit 10.28 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.31 - Promissory Note of Jameson Inns, Inc. payable to Bank Midwest, N.A. dated January 26, 1996, for $3.4 million, incorporated by reference to Exhibit 10.29 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.32 - Form of Security Agreement between Jameson Inns, Inc. and Bank Midwest, N.A., incorporated by reference to Exhibit 10.30 to the Annual Report filed on Form 10-K for the year ended December 31,
10.33 - Form of Deed to Secure Debt between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.31 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.34 - Schedule of documents substantially similar to Exhibit 10.31, incorporated by
reference to Exhibit 10.32 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.35 - Form of Assignment of Leases and Rents (General Commercial) between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.33 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.36 - Schedule of documents substantially similar to Exhibit 10.33, incorporated by reference to Exhibit 10.34 to the AnnualReport filed on Form 10-K for the year ended December 31, 1995
10.37 - Form of Assignment of Income between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.35 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.38 - Schedule of documents substantially similar to Exhibit 10.35, incorporated by reference to Exhibit 10.36 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.39 - Form of Estoppel and Subordination Agreement between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.37 to the Annual Report filed on Form 10-K for the year ended December 31,
10.40 - Schedule of documents substantially similar to Exhibit 10.39, incorporated by reference to Exhibit 10.38 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.41 - Loan Modification Agreement between Jameson Inns, Inc. and Empire Financial Services, Inc. dated June 30, 1996 for loan on Waynesboro, Georgia property, incorporated by reference to Exhibit 10.1 to the Report filed on Form 10-Q for the quarter ended March 31, 1996
10.42 - Schedule of documents substantially similar to Exhibit 10.41
10.43 - 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 property, incorporated by reference to Exhibit 10.3 to the Report filed on Form 10-Q for the quarter ended March 31, 1996
10.44 - Schedule of documents substantially similar to Exhibit 10.43
10.45 - Jameson 1996 Stock Incentive Plan
10.46 - Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
11.1 - Statement Re: Per Share Earnings
23.1 - Consent of Ernst & Young LLP
27.1 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1996.
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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jameson Inns, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia February 21, 1997
JAMESON INNS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes.
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
See accompanying notes.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS
Jameson Inns, Inc. ("the Company") is in the business of developing and owning limited service motel properties (the "Inns") operating under the trademark "The Jameson Inn(R)." The Company's focus has been and will continue to be on developing Inns in communities in the southeastern United States which have a strong and growing industrial or commercial base. The typical Inn is built as a 40-unit two-story, Colonial style Inn on a one to two-acre tract with a swimming pool, fitness center and parking area. Seventeen of the Inns have been or are in the process of being expanded to 55 or more rooms.
At December 31, 1996, there were 43 Inns in operation in Georgia, Alabama and South Carolina with a total of 2,107 rooms and an additional 21 Inns under development, including 11 under construction in these same states plus North Carolina and Tennessee. The Inns under development will add 840 rooms. At December 31, 1996, a 20-room expansion of one existing Inn was also being constructed.
Intercompany transactions among the entities included in the consolidated financial statements have been eliminated. As of December 31, 1996, the Company had one wholly-owned qualified real estate investment trust subsidiary.
PRIOR OPERATIONS
On December 31, 1993, the Company consummated a series of transactions to remove all assets not related to ownership of the Inns in contemplation of electing to qualify as a real estate investment trust ("REIT") for federal income tax purposes effective January 1, 1994. Effective January 1, 1994, all of the Inns were leased to Jameson Operating Company under the terms of leases which covered all of the Inns then owned by the Company and certain affiliated partnerships previously formed by the Company to construct and own Inns. See Note 3.
In early 1994, the Company consummated an initial public offering of 2,913,000 shares of Common Stock, par value $.10 per share (the "IPO").
The Company's principal business, before and after the IPO, includes identification of suitable inn locations, arranging construction and permanent financing, land acquisition, inn design and configuration, land preparation, acquisition of furniture, fixtures and equipment, and pre-marketing of properties prior to opening. Prior to the IPO, the Company also constructed the facilities and operated the properties.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. 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.
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. Interest costs of $526,130, $381,508 and $182,569 were capitalized in 1996, 1995 and 1994, respectively.
Jameson Construction Company or its successor Jameson Development Company, L.L.C. ("JDC") constructs the Inns for the Company. Jameson Construction Company was wholly-owned by Kitchin Investments, Inc. Kitchin Investments, Inc. is wholly-owned by the Company's chairman and largest stockholder. JDC is managed and majority-owned by the Company's chairman and largest stockholder. The Company paid Jameson Construction Company or JDC a total of $18,932,000 and $16,800,000 for turnkey construction of new Inn construction, expansions, fitness centers or renovations during the years ended December 31, 1996 and 1995, 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 five years (furniture, fixtures and equipment).
Property and equipment consists of the following at December 31:
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
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 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 was no effect of adoption.
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 operation of the Inn. Amortization of deferred finance costs is included in interest expense on the consolidated statement of operations. Accumulated amortization totaled $50,923 and $102,703 as of December 31, 1996 and 1995, 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.
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 8.
See Note 5 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").
EARNINGS PER SHARE
Earnings per share are calculated using weighted average common shares outstanding and assuming (i) the conversion of the preferred shares during periods when preferred stock was outstanding, (ii) the stock options granted prior to the IPO at exercise prices below the initial public offering price were exercised and shares issued pursuant to such exercise were outstanding for the entire period, using the treasury stock method, and (iii) the dilutive effects of outstanding stock options.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. THE LEASE
On January 1, 1994, the Company and the partnerships which previously owned the Inns entered into leases, whereby all of the operating Inns are leased to the Jameson Operating Company (the "Operator"), therefore all of the lease revenue and related receivables are derived from this lease. After the IPO and the liquidation of the partnerships in January 1994, the Company entered into a master lease in substantially the same form as the individual leases.
The lease, which expires December 31, 2006, provides for payment of Base Rent plus Percentage Rent. Base Rent, which is payable monthly, equals $264.00 per month 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 Operator over the relevant period. The percentage is 39% of such revenues up to $20.50 per day per room over the period, 65% of all additional average daily room rental revenues, provided, however, that total rent for any calendar year is not to exceed 47% of total room rental revenues for that year. The $20.50 per room amount used in calculating Percentage Rent is subject to adjustment each year end based on changes in the Consumer Price Index and as of January 1, 1997 was $21.05.
Prior to July 1, 1995, when the lease was amended, the lease provided for Base Rent equal to $240.00 per month and Percentage Rent was the same for the first $20.00 per day but included four different rates for additional average daily room rental revenues. The lease amendment also transferred the obligation to replace or refurbish the furniture, fixtures and equipment in the Inns to the Company.
Base rent totaled $5,469,288, $3,553,252 and $2,316,200 in 1996, 1995 and 1994, respectively, and assuming the same number of rooms in operation as at December 31, 1996, would total $6,674,976 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 the Operator, less amounts expended to date, to fund the Company's future capital expenditures for such replacements and refurbishments. The Operator is required to pay workers compensation insurance premiums, utility costs and all other costs and expenses incurred in the operations of the Inns.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MORTGAGE NOTES PAYABLE
As of December 31, long-term debt consists of:
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MORTGAGE NOTES PAYABLE (CONTINUED)
At December 31, 1996 and 1995, approximately $64.6 and $37.5 million, respectively, of the Company's net book value of property and equipment collateralized the long-term debt. At December 31, 1996 and 1995, 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, 1996:
As a result of the early extinguishment of certain debt in 1996, 1995 and 1994, the Company had extraordinary losses of $989,376, $19,328 and 249,770, respectively, largely comprised of the write-off of unamortized deferred finance costs.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On March 30, 1994, the Board of Directors approved the issuance of 64,467 shares of preferred stock, $1.00 par value (the "Preferred Stock"), to Thomas W. Kitchin and the Kitchin Children's Trust in exchange for their 644,669 shares of the Company's Common Stock. The stock conversion was effected on April 15, 1994 to carry out the provisions of the dividend subordination agreement executed at the time of the Offering.
The terms of the Preferred Stock provided that each share of preferred stock will have the same voting power as 10 shares of Common Stock and may, at any time after February 3, 1995, and at the election of the holder thereof, be converted into 10 shares of Common Stock. The Preferred Stock consists of two series, Series A issued to the Kitchin Children's Trust, and Series B, issued to Mr. Kitchin. After the holders of Common Stock receive dividends of $.76 per share with respect to the period from February 3, 1994 to February 2, 1995 (the "Subordination Period"), the holder of the Series A Preferred Stock may receive dividends of up to $7.60 per share with respect to the Subordination Period and then the holder of the Series B Preferred Stock may receive dividends up to $7.60 per share. After the holders of the Common Stock have received dividends of $.76 per share and the holders of both series of the Preferred Stock have received dividends of $7.60 per share (which is equivalent to the $.76 per share dividend on the Common Stock) attributable to the Subordination Period, all further dividends will be paid on a pro rata basis, with each share of Preferred Stock receiving a dividend equal to the dividend paid on 10 shares of Common Stock.
The terms of the Preferred Stock further provided that in the event of the liquidation, dissolution or winding up of the Corporation, the holders of the Common Stock will first be entitled to receive liquidating distributions of $1.00 per share to the extent funds are available for distribution. The holders of Preferred Stock will then be entitled to receive liquidating distributions of $10.00 per share (which is equivalent to the $1.00 per share distribution on the Common Stock). All further liquidating distributions will be paid on a pro rata basis to the holders of the Common and Preferred Stock, with each share of Preferred Stock receiving a distribution equal to the distribution paid on 10 shares of Common Stock.
On March 1, 1995, holders of the Preferred Stock converted all of their 64,467 shares of Preferred Stock into 644,670 shares of Common Stock and as a result there are no outstanding shares of Preferred Stock.
5. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDENDS
The Company declared and paid cash dividends to holders of Common Stock equal to $.86 per share in 1996, $.80 per share in 1995 and $.50 per share in 1994. On January 20, 1997, the Company declared cash dividends of $0.22 per share of Common Stock.
On February 6, 1995, the Company also declared and paid a cash dividend of $7.60 per share of Preferred Stock. Dividends declared and paid by the Company subsequent to the preferred stock conversion on March 1, 1995 were declared and paid on a pro rata basis to all shareholders.
STOCK OPTIONS
The Company adopted the 1993 Stock Incentive Plan and originally reserved 320,000 shares to provide incentives to attract and retain officers, key employees and directors of both the Company and Jameson Operating Company. The Company's 1993 Stock Incentive Plan provides for a number of shares equal to 10% of the Company's outstanding common shares to be available to provide incentives to retain key personnel at both the Company and Jameson Operating Company. In 1996, the Jameson 1996 Stock Incentive Plan was adopted and 500,000 shares were reserved for issuance. As of December 31, 1996 the Company had a total of 778,949 shares available for future grants under the 1993 and 1996 Stock Incentive Plans.
In May 1995, the Company reduced the exercise price of the then outstanding options to purchase a total of 263,500 shares of Common Stock to the then current market price of $7.25 per share. The options that were repriced previously had variable exercise prices ranging from $5.50 to $11.00 based on the amount of dividends the Company paid out for given periods. The vesting schedule of all the then outstanding options was also changed from five to three years with one-third vesting on May 4, 1995, one-third on May 4, 1996 and the remainder on May 4, 1997.
Prior to May 1995, the 1993 Stock Incentive Plan provided that the Company would grant to each future director an option to purchase 10,000 shares of Common Stock upon initial election as a Director of the Company. These director options were fully vested on the date of grant.
The Company adopted the Director Stock Option Plan ("Director Plan") in May 1995 to attract and retain qualified independent directors. The three independent directors surrendered their options to purchase an aggregate of 25,000 shares of Common Stock under the 1993 Stock Incentive Plan to participate in the Director Plan. Each director was granted an option to purchase 25,000 shares at $7.25 per share with all shares becoming fully vested on the date of grant. A total of 150,000 shares have been reserved for issuance under this plan, with 75,000 available to be granted at December 31, 1996.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Detail of the stock option activity in the 1993, 1996 and Director plans is as follows:
The weighted average exercise price of options outstanding at December 31, 1996 was $7.36. The weighted average exercise price of options exercisable at December 31, 1996 was $7.25. The average contractual life remaining on options outstanding at December 31, 1996 was 7.85 years.
As presented in the table above, the Company had a total of 427,843 options outstanding at December 31, 1996. A portion of these options (390,343) have exercise prices of $6.65 to $7.25, a weighted average exercise price of $7.10 and an average remaining contractual life of 7.7 years. Of this outstanding amount, 276,177 options were exercisable with a weighted average price per share of $7.11.
At December 31, 1996, the Company also had 37,500 options outstanding with an exercise price of $8.125 to $10.875, a weighted average exercise price of $10.14 and an average remaining contractual life of 9.6 years. Of this outstanding amount, 15,830 options were exercisable with a weighted average price per share of $9.72.
RESTRICTED STOCK
In 1996, the Company awarded 65,270 shares of Common Stock to certain officers and employees of the Company and Jameson Operating Company, under the provisions of the Jameson 1996
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
RESTRICTED STOCK (CONTINUED)
Incentive Stock Plan. The shares vest at the end of ten years, assuming the individual was continuously employed by one of the two companies at that date. Total compensation expense of $645,245 will be recorded over the ten-year vesting period using the straight line method, net of forfeitures. This amount represents the fair value of the restricted shares at the date of grant; the 1996 portion was $35,331.
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 a Black-Scholes option pricing model with the following assumptions for 1995 and 1996: risk-free interest rates of 6.04% to 6.43%; a dividend yield of 8%; a volatility factor of the expected market price of the Company's Common Stock of .208; and an expected life of the option of 3 to 10 years.
During 1996, the Company made certain stock-based awards whose exercise price was less than the then current market price. In 1996, 65,270 shares of restricted stock were granted, with a fair value of $4.26 per share. All other awards were made with exercise prices equal to the then current market price.
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.
For purposes of pro forma disclosures, the estimated fair value of the options and restricted stock is amortized to expense over the vesting period. The Company's pro forma information follows:
Because FAS 123 is applicable only to options and restricted stock granted subsequent to December 31, 1994, its pro forma effects will not be fully reflected until 1997.
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
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 of common stock of up to $5,000 per calendar quarter. These additional cash purchases from the Company are not sold at a discount from the market price. During 1996 and 1995, 21,331 and 4,132 shares, respectively, were purchased either through dividend reinvestments or additional cash purchases.
WARRANTS
As a part of its IPO, the Company issued and has warrants outstanding to purchase up to 260,000 shares of Common Stock at an exercise price of $14.85 per share; the warrants are exercisable in whole or in part until January 26, 1999.
EMPLOYMENT AGREEMENT
In 1994, the Company's president and chief executive officer entered into an employment agreement providing for, among other things, an annual salary, stock appreciation rights ("SARs") based on 150,000 shares of Common Stock and a non-compete provision. The SARs entitled the president to receive the difference in the market value of such shares as of the exercise date and $9, the initial public offering price. In April 1996, the Company and its chief executive officer and president agreed to amend the Employment Agreement with Mr. Kitchin to cancel his stock appreciation rights effective March 31, 1996. No amount of compensation expense has been recorded in the accompanying financial statements relating to the SARs.
6. LIMITED PARTNERS' CAPITAL
Prior to 1994, the Company's normal Inn ownership structure involved the sale of 25% of each completed Jameson Inn at a fixed price in the form of limited partnership interests, with the Company retaining 75% ownership of the property. As a part of the IPO, the Company purchased the limited partners' interests and liquidated the partnerships in 1994. Activity in the limited partners' capital during 1994 consists of:
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The Company recorded no provision for federal income taxes in 1996, 1995 or 1994 due to its REIT status. State tax expense, which is not material, is included in general and administrative expenses. At December 31, 1996 and 1995, 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 Jameson Inns, Inc. may be limited.
The Company declared and paid dividends on its Common Stock of $.86, $.80 and $.50 per share in 1996, 1995 and 1994, respectively. Of these dividends, $.56, $.50 and $.46 per share represents ordinary income and $.30, $.30 and $.04 per share represents return of capital in 1996, 1995 and 1994, respectively.
8. ADDITIONAL RELATED PARTY TRANSACTIONS
The Company shares employees and office space with Kitchin Investments, Inc., which is wholly owned by the Company's chairman and largest stockholder. Per the cost reimbursement agreement, Kitchin Investments, Inc. charged Jameson Inns, Inc. approximately $194,000, $138,000 and $233,000 for its allocation of salary, office overhead, and other general and administrative costs in 1996, 1995 and 1994, respectively. Accounts payable to affiliates at December 31, 1996 and 1995 includes $(23,053) and $192,645, respectively, due to (from) this related party.
9. OTHER COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company had executed construction contracts with Jameson Development Company, L.L.C. for new Inns or expansions totaling $14 million, of which $10 million had not been expended.
Subsequent to December 31, 1996 and through February 15, 1997, the Company purchased sites for two additional new Inns for an aggregate purchase price of approximately $.5 million. Inn construction costs are estimated to be $2.4 million on these new sites.
The Company leases its headquarters' office space in Atlanta, Georgia, and land underlying one of its Inns under construction. The office operating lease was amended in 1997. The two leases, as amended, require future minimum payments as follows:
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
The rent expense under the office lease is paid by Kitchin Investments, Inc. and is allocated under the cost reimbursement agreement described in Note 8. An insignificant amount of rent expense is included in general and administrative expense in the Company's statement of operations.
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.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995:
JAMESON INNS, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (cont.)
See notes to Schedule III.
JAMESON INNS, INC.
NOTES TO SCHEDULE III
(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:
(e) Depreciation for 1993 and later additions is computed based on the following useful lives:
(f) This Inn is one of 24 Inns securing the Company's $29 million line of credit. Amount of debt listed as outstanding is an allocation.
JAMESON INNS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The Unaudited Pro Forma Financial Statements for 1994 are presented as if (i) the Offering and all related transactions, including the acquisition of interests from the other partners, had occurred on January 1, 1994 for the Unaudited Pro Forma Statement of Operations and (ii) the Company qualified as a REIT, distributed all of its taxable income and, therefore, incurred no income tax expense during the period. Such pro forma information has been derived from the historical Consolidated Financial Statements of Jameson Inns, Inc. and should be read in conjunction with such Consolidated Financial Statements of Jameson Inns, Inc. and the Notes thereto. In management's opinion, all necessary adjustments to reflect the nature of this transaction have been made. The Unaudited Pro Forma Financial Statements of the Company are not necessarily indicative of what the actual financial position or the results of operations of the Company would have been for the periods indicated, nor does it purport to represent the Company's future results of operations.
No pro forma statements are presented for 1995 or 1996 as all of the above events were in place for the entire year.
JAMESON INNS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
JAMESON INNS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994
Explanations of Pro Forma Adjustments:
(1) Net increase reflects additional depreciation on stepped-up asset basis.
(2) Decrease reflects the reduction in interest expense due to the repayment of debt with the proceeds from the Offering and reduced amortization due to deferred finance costs to be written off in connection with repayment of mortgage debt.
(3) Increase reflects elimination of the limited partners' share in profits and losses of the Inns, since partnership interests were acquired by Jameson Inns, Inc.
(4) Decrease represents exclusion of extraordinary loss.
(5) Earnings per share assume 3,883,346 shares outstanding after the Offering which assumes the stock options granted at exercise prices below the initial public offering price were exercised and shares issued pursuant to such exercise were outstanding for the entire period, using the treasury stock method. See Note 5 to the Consolidated Financial Statements.
Report of Independent Auditors
The Board of Directors Jameson Operating Company
We have audited the accompanying balance sheets of Jameson Operating Company as of December 31, 1996 and 1995, and the related statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of Jameson Operating 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jameson Operating Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia February 14, 1997
JAMESON OPERATING COMPANY
BALANCE SHEETS
See accompanying notes.
JAMESON OPERATING COMPANY
STATEMENTS OF OPERATIONS
See accompanying notes.
JAMESON OPERATING COMPANY
STATEMENTS OF STOCKHOLDERS' DEFICIT
See accompanying notes.
JAMESON OPERATING COMPANY
STATEMENTS OF CASH FLOWS
See accompanying notes.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS
Jameson Operating Company (the "Operator") was formed in October 1993 as a wholly owned subsidiary of Jameson Inns, Inc. ("Jameson" or "the REIT") although it had no operations until January 1, 1994. On December 31, 1993, Jameson Inns, Inc. consummated a series of transactions to divest itself of all assets not related to ownership of its limited service motels (the "Inns") in contemplation of its initial public offering of common stock and electing to qualify as a real estate investment trust ("REIT") for federal income tax purposes effective January 1, 1994. On December 31, 1993, Jameson sold all of the common stock of the Operator to its Chairman, President and largest stockholder and to a trust of which its General Counsel/Secretary is the trustee and beneficiary. Effective January 1, 1994, the Operator began leasing the Inns from the REIT and from the partnerships which previously owned the Inns, until the REIT acquired the interests of the partnerships in February 1994. Prior to 1994, the Operator's results of operations were included in the consolidated financial statements of Jameson Inns, Inc.
The Operator operates and controls advertising for the Inn properties using the trademark "The Jameson Inn." At December 31, 1996 and 1995, the Operator leased 43 Inns (2,107 rooms) and 32 Inns (1,537 rooms), respectively, in Georgia, Alabama and South Carolina.
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.
INVENTORY
Inventory, consisting of room linens and towels, is stated at the lower of fair value at date of contribution (see Note 6), cost (first-in, first-out method) or market. Replacements of inventory are expensed.
PROPERTY AND EQUIPMENT
Leasehold improvements relate to improvements made to the Inns prior to July 1, 1995 when this responsibility was transferred to the REIT. Leasehold improvements, which are stated at cost, 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). Accumulated depreciation totaled $128,753 and $64,330 as of December 31, 1996 and 1995, respectively.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1996, the Operator adopted the 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 was no impact of adoption.
INTANGIBLES
Intangibles consist of the registered trademark, "The Jameson Inn." The lease described in Note 3 requires the Operator to operate the Inns using the trademark and not to use the trademark (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 trademark from the Operator 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. The trademark is being amortized over 40 years. Accumulated amortization totaled $1,875 and $1,250 as of December 31, 1996 and 1995, respectively.
INCOME TAXES
The Operator uses the liability method of accounting for income taxes.
ADVERTISING
The Operator expenses advertising upon first showing.
3. THE LEASE
On January 1, 1994, the REIT and the partnerships, which previously owned the Inns, entered into individual leases whereby all of the operating Inns were leased to the Operator. After the REIT's initial public stock offering in early 1994 and the liquidation of the partnerships in January 1994, the Operator and the REIT entered into a master lease in substantially the same form as the individual leases (the "Lease"). Beginning January 1, 1994 all of the operating Inns are leased to the Operator 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 Lease expires December 31, 2006 and provides for payment of Base Rent plus Percentage Rent. Base Rent, which is payable monthly, equals $264.00 per month 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 ("Room Revenues") realized by the Operator over the relevant period.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. THE LEASE (CONTINUED)
The percentage is 39% of such revenues up to $20.50 per day per room over the period, 65% of all additional average daily room rental revenues, provided, however, that total rent for any calendar year is limited to 47% of total room rental revenues for that year. The $20.50 per room amount used in calculating Percentage Rent is subject to adjustment each year end, based on changes in the Consumer Price Index, and as of January 1, 1997 was $21.05. Prior to July 1, 1995 when the Lease was amended, the Lease provided for Base Rent equal to $240.00 per month and Percentage Rent was the same for the first $20.00 per day but included four different rates for additional average daily room rental revenues. In 1995, the Lease amendment also transferred the obligation to replace or refurbish the furniture, fixtures and equipment in the Inns from the Operator to the REIT.
Base Rent totaled $5,469,288, $3,553,252 and $2,316,200 in 1996, 1995 and 1994, respectively, and assuming the same number of rooms in operation as of December 31, 1996, would total $6,674,976 per year until the Lease expires.
The Lease requires the REIT to pay real and personal property taxes, casualty and liability insurance premiums and the cost of maintaining structural elements, including underground utilities and effective July 1, 1995, the cost of replacing or refurbishing the furniture, fixtures and equipment in the Inns. Prior to July 1, 1995, the Operator was responsible for the cost of replacing or refurbishing furniture, fixtures and equipment and hence recorded these costs as leasehold improvements. The Operator is required to pay workers compensation insurance premiums, utility costs and all other costs and expenses incurred in the operation of the Inns.
Under the Lease, the REIT is required to maintain the structural elements of each Inn. The Operator is required, at its expense, to maintain the Inns (exclusive of furniture, fixtures and equipment) in good order and repair and to make non-structural, 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 lease.
The Operator 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.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The Operator recorded no provision for income taxes in 1994, 1995 and 1996 due to losses incurred or utilization of its net operating loss carryforwards. At December 31, 1996, the Operator had net operating loss carryforwards of approximately $417,000 and $351,000 available for regular federal income tax purposes and alternative minimum tax purposes, respectively, both of which begin to expire in 2009.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Operator's deferred tax assets and liabilities are as follows:
The valuation allowance decreased approximately $17,900 during the year ended December 31, 1996.
5. NOTES PAYABLE
Notes payable consist of the following:
December 31
1996 1995 ---- ----
One unsecured note payable maturing June 7, 1998 and three unsecured lines of credit with terms of one year. At December 31, 1996 and 1995 the Company had $75,145 and $28,764, respectively, available to borrow under these notes. Three of the notes have fixed interest rates ranging from 9.75% to 10.25% and 8.75% to 10.75% at December 31, 1996 and 1995, respectively. Payments of principal and interest are due at maturity. One note has a variable interest rate of prime plus 1% (10% at December 31, 1996 and 1995). Payments of principal and interest are due monthly.
$13,407 $46,361 ======= =======
The lines of credit are guaranteed by the Operator's chairman, president, chief executive officer and minority shareholder.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS
The Operator has a Cost Reimbursement Agreement with Kitchin Investments (a company wholly owned by the Operator's chairman, president, chief executive officer and minority stockholder) whereby the Operator agrees to pay 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. The agreement was amended effective January 1, 1996, to limit the reimbursement to a maximum of 2.4% of the Operator's total revenues, resulting in a reduction of $264,000 in general and administrative costs in 1996 as compared to its allocated share. The Cost Reimbursement Agreement expires on December 31, 1999. Kitchin Investments, Inc. charged the Operator $478,801, $261,666 and $218,339 in 1996, 1995 and 1994, respectively, pursuant to the Cost Reimbursement Agreement.
The Operator also leases space on outdoor billboards for periods of one to ten years from Jameson Outdoor Advertising Company, L.L.C. and its predecessor (both companies are majority owned by the Operator's chairman, president, chief executive officer and minority stockholder). During 1996, 1995 and 1994, such expense totaled $314,030, $174,200 and $94,000, respectively, and is reflected as advertising expense in the accompanying statements of operations. As of December 31, 1996, the leases require future minimum payments as follows:
Year ending December 31, 1997 $373,178 1998 373,178 1999 373,178 2000 373,178 2001 373,178 Thereafter 1,393,066 ---------- $3,258,956 ==========
In addition, Jameson Development Company, L.L.C. ("JDC") and its predecessor, Jameson Construction Company, coordinate services for certain repair and maintenance activities on the Inns, for which the Operator is not charged. Both companies are majority owned by the Operator's chairman, president, chief executive officer and minority stockholder. Invoices received for such repairs and maintenance, which are performed by third parties, are paid by the Operator.
The Lease between the REIT and the Operator requires the Operator to provide the room linens and towels and subsequent replacements. JDC or its predecessor has provided the Operator with the initial inventory for each Inn at no charge. The Operator records this inventory at JDC's cost and credits this income against room expenses. Such amounts totaled $123,000, $103,000 and $66,000 in 1996, 1995 and 1994, respectively.
JAMESON OPERATING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
From time to time, the Operator 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 Operator's financial position.
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.
Jameson Inns, Inc. ------------------ (Registrant)
Dated: February 16, 1997
By: /s/ Thomas W. Kitchin ---------------------- Thomas W. Kitchin President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Index to Exhibits
EXHIBIT
NUMBER
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 Preferred Stock of 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 - Article 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 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
3.6 - Bylaws of the Registrant incorporated by reference to Exhibit 3.2.1 to the Registration Statement on Form S-11, File No. 33-
3.7 - 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
3.8 - Amendment No. 2 to Registrant's Bylaws incorporated by reference to Exhibit 3.8 to the Annual Report filed 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 Registration Statement on Form S-11, File No. 33-71160
4.2 - Warrant issued to Commonwealth Associates incorporated by reference to Exhibit 4.2.1 to the Registration Statement on Form S-11, File No. 33-71160
10.1 - Master Lease Agreement 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 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 between Jameson Inns, Inc. and Jameson Operating Company
10.4 - Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc. and Jameson Operating Company
10.5 - Addenda A-1 through A-17 to Master Lease Agreement between Jameson Inns,
Inc. and Jameson Operating Company incorporated by reference to Exhibit 10.3 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.6 - Schedule of Lease Supplements entered into during 1996 and substantially similar to Exhibit 10.5
10.7 - Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-11, File No. 33-71160
10.8 - Construction Contract between Jameson Inns, Inc. and Jameson Construction Company for construction of Inns in Alexander City, Decatur, Eufala and Florence, Alabama; Albany, Bainbridge, Brunswick, LaGrange, Thomaston, Waycross and Waynesboro, Georgia; and Union, South Carolina, incorporated by reference to Exhibit 10.7 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.9 - Schedule of documents substantially similar to Exhibit 10.8
10.10 - 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
10.11 - 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
10.12 - 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
10.13 - 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
10.14 - 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
10.15 - 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
10.16 - Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-11, File No. 33-71160
10.17 - Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.15 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.18 - Amendment No. 2 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin incorporated by reference to Exhibit 10.16 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.19 - Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Jameson Operating Company incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-11, File No. 33-71160
10.20 - Indemnification and Hold Harmless Agreement between Jameson Inns, Inc. and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.26 to the Registration Statement on Form S-11, File No. 33-71160
10.21 - 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
10.22 - Dividend Subordination Agreement between the Company and Thomas W. Kitchin and Kitchin Children's Trust incorporated by reference to Exhibit 10.42 to the Registration Statement on Form S-11, File No. 33-71160
10.23 - Construction Loan Agreement, Indenture, Security Agreement and Promissory Note dated July 15, 1993 for $1,000,000 loan from Empire Financial Services, Inc. to Jameson Inns, Inc. (formerly Jameson Company) for construction of Jameson Inn in Carrollton, Georgia incorporated by reference to Exhibit 10.39 to the Registration Statement on Form S-11, File No. 33-71160
10.24 - Schedule of documents substantially similar to Exhibit 10.23
10.25 - 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 - Deed to Secure Debt, Security Agreement, Assignment of Operating Lease, Assignment of Fees and Income, Promissory Note for $1.6 million loan from Empire Financial Services, Inc. to Jameson Inns, Inc. secured by Inn at Jesup, Georgia incorporated by reference to Exhibit 10.24 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.27 - Schedule of documents substantially similar to Exhibit 10.26 incorporated by reference to Exhibit 10.25 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.28 - 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
10.29 - Loan Modification Agreement, Construction Agreement and Note dated April 13, 1995, increasing by $500,000 the loan from Empire Financial Services, Inc. to Jameson Inns, Inc. for construction of expansion of Inn at Carrollton, Georgia, incorporated by reference to Exhibit 10.27 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.30 - Schedule of documents substantially similar to Exhibit 10.29 incorporated by reference to Exhibit 10.28 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.31 - Promissory Note of Jameson Inns, Inc. payable to Bank Midwest, N.A. dated January 26, 1996, for $3.4 million, incorporated by reference to Exhibit 10.29 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.32 - Form of Security Agreement between Jameson Inns, Inc. and Bank Midwest, N.A., incorporated by reference to Exhibit 10.30 to the Annual Report filed on Form 10-K for the year ended December 31,
10.33 - Form of Deed to Secure Debt between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.31 to the Annual Report filed on Form 10-K for the year ended
December 31, 1995
10.34 - Schedule of documents substantially similar to Exhibit 10.31, incorporated by reference to Exhibit 10.32 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.35 - Form of Assignment of Leases and Rents (General Commercial) between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.33 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.36 - Schedule of documents substantially similar to Exhibit 10.33, incorporated by reference to Exhibit 10.34 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.37 - Form of Assignment of Income between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.35 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.38 - Schedule of documents substantially similar to Exhibit 10.35, incorporated by reference to Exhibit 10.36 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.39 - Form of Estoppel and Subordination Agreement between Jameson Inns, Inc. and Bank Midwest, N.A. (Jameson Inn at Fitzgerald, Georgia), incorporated by reference to Exhibit 10.37 to the Annual Report filed on Form 10-K for the year ended December 31,
10.40 - Schedule of documents substantially similar to Exhibit 10.39, incorporated by reference to Exhibit 10.38 to the Annual Report filed on Form 10-K for the year ended December 31, 1995
10.41 - Loan Modification Agreement between Jameson Inns, Inc. and Empire Financial Services, Inc. dated June 30, 1996 for loan on Waynesboro, Georgia property, incorporated by reference to Exhibit 10.1 to the Report filed on Form 10-Q for the quarter ended March 31, 1996
10.42 - Schedule of documents substantially similar to Exhibit 10.41
10.43 - 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 property, incorporated by reference to Exhibit 10.3 to the Report filed on Form 10-Q for the quarter ended March 31, 1996
10.44 - Schedule of documents substantially similar to Exhibit 10.43
10.45 - Jameson 1996 Stock Incentive Plan
10.46 - Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
11.1 - Statement Re: Per Share Earnings
23.1 - Consent of Ernst & Young LLP
27.1 - Financial Data Schedule (for SEC use only)