| JAMESON INNS INC ITEM 1A RISK FACTORS Risks Relating to Our Business Due to the geographic concentration of our Inns, our results of operations and financial condition are subject to fluctuations in regional economic conditions |
| All of our Inns are located in the southeastern and midwestern United States |
| At December 31, 2005, approximately 20dtta4prca of our total rooms were located in Georgia (all of which are Jameson Inns) and approximately 17dtta2prca of our total rooms were located in Indiana (this includes both Jameson Inns and Signature Inns) |
| For the foreseeable future we will continue to have a concentration in those two regions of the country |
| As a result, our Inns are subject to the effects of adverse economic and competitive conditions and trends in those regions and markets, and we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions than other areas in the United States |
| The concentration of Inns in one region or in a limited number of markets may expose us to risks of adverse economic developments which are greater than if our portfolio were more geographically diverse |
| These economic developments include regional economic downturns, significant increases in the number of our competitors’ properties in these markets and higher local property, sales and income taxes in the geographic markets in which we are concentrated |
| This geographic concentration also makes us more vulnerable to local and regional occurrences such as seasonal factors and natural disasters |
| Our hotel refurbishment and rebranding for our Signature Inns may be more costly than we anticipate |
| We intend to refurbish and rebrand all of our Signature Inns in continuing operations |
| These projects are subject to a number of risks, including construction delays and cost overruns |
| Also, we may elect to expand the scope of the refurbishment as we did on certain of the recently completed rebranding projects, which would increase the costs |
| In this regard, we expanded our original capital budget for 2005 by dlra5dtta0 million, to dlra19dtta0 8 ______________________________________________________________________ [32]Table of Contents million from dlra14dtta0 million, to cover the costs of the additional work we decided to do in connection with the Signature Inns that we converted in 2005 |
| Additional financing for future refurbishments and conversions may not be available or, even if available, may not be on favorable terms |
| Any unanticipated delays or expenses incurred in connection with the refurbishment or rebranding of the Signature Inns could impact expected revenues, negatively affect our reputation among hotel guests and otherwise adversely impact our results of operations and financial condition |
| We have incurred a substantial amount of debt, and we may incur additional indebtedness in the future, all of which increases our expenses and the risks of unprofitable operations |
| Our outstanding indebtedness as of December 31, 2005 was approximately dlra195dtta0 million, of which approximately dlra94dtta1 million has adjustable rates |
| Most of our outstanding indebtedness is secured by individual or a group of Inns |
| For the year ended December 31, 2005, our outstanding indebtedness had a weighted average annual interest rate of 6dtta3prca |
| Our ratio of long-term debt (including current portion) to equity was 2dtta41 to 1 |
| Neither our articles of incorporation nor our bylaws limit the amount of indebtedness that we may incur |
| Subject to limitations in our debt instruments, we may incur additional debt in the future to finance renovations and acquisitions and for general corporate purposes |
| Our board of directors has adopted a policy of limiting our mortgage debt to 65prca of the aggregate value of the Inns we own, based on the most recent appraisals we have, however that policy could be changed at any time |
| Accordingly, we could become more highly leveraged, resulting in an increase in debt service that could reduce our operating cash flow |
| Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise |
| Our indebtedness is, and will likely continue to be, secured primarily by mortgages on our owned Inns |
| We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, including our owned Inns, to foreclosure |
| Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable to us |
| In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more owned Inns at times that may not permit realization of the maximum return on our investments |
| Economic conditions could result in higher interest rates, which would increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes |
| We have a substantial amount of debt maturing in the next three years |
| At December 31, 2005, we had scheduled aggregate principal payments and maturing loans of approximately dlra6dtta1 million, dlra25dtta9 million, and dlra12dtta6 million, respectively, for each of the next three years |
| If we are unable to successfully negotiate renewal or extensions of that debt or obtain refinancing on favorable terms, we may be forced to sell assets or lose Inns to foreclosure |
| Our lack of industry diversification makes us more vulnerable to economic downturns |
| We currently, and intend in the future to, invest primarily in lodging properties |
| This concentration of our investments in a single industry segment makes us more vulnerable to adverse effects of occurrences such as economic downturns |
| A weakness in the economy or a downturn in the lodging industry in general or in the economy and mid-scale segment in particular could have a more significant effect on the operations of our Inns and, therefore, on revenues and cash flow than if our investments were more economically diverse |
| Our franchising program depends upon third party owners/operators who may not fulfill their franchising obligations, including failing to make timely payments to us and failing to maintain quality control consistent with the Jameson Inn standards |
| The success of our franchising program is in large part dependent upon the manner in which our franchisees adhere to their respective franchise agreements and our operating standards, which include: • timely payment of royalties and other fees; 9 ______________________________________________________________________ [33]Table of Contents • commitment to our “Perfect Stay Guarantee” and frequent guest loyalty program; • ongoing capital expenditures and maintenance; and • proper usage and protection of the Jameson Inn brand and related trademarks |
| At December 31, 2005, we were not aware of any defaults by franchisees in their contracts with us |
| In addition, while we have contractual controls over each franchisee, we do not have control over the day-to-day operations of franchisees |
| As a result, third party franchisees may not appropriately use and protect our Jameson Inn brand, which may decrease its value or expose it to legal challenges, which, in turn, could subject us to substantial loss and expense |
| Approximately 6dtta1prca of the total rooms in our system are owned and operated by our franchisees |
| The fees and other revenues we received from our franchising operations during 2005 represent less than 1prca of our total revenues for that period |
| Our business could be harmed if key personnel terminate their employment with us |
| Our success is dependent on the efforts of our management team |
| Our seven senior executives have more than 117 years of combined experience in the lodging industry |
| While we believe we could find replacements for these key personnel, the loss of their services could hurt our efforts to conduct our operations in an effective and efficient manner |
| We currently own and are the beneficiary of key person life insurance in the amount of dlra1cmam000cmam000 for Thomas W Kitchin, our chairman and chief executive officer |
| We have common stock ownership limitations in our articles of incorporation which could restrict the marketability or liquidity of our common stock |
| In connection with our election in 1994 to be taxed as a REIT we included certain ownership restrictions in our articles of incorporation to assist us in our efforts to qualify as a REIT When we were subject to the REIT rules, not more than 50prca of our common stock could be owned by five or fewer individuals |
| Our articles of incorporation were prepared to assure compliance with these rules and provide that Thomas W Kitchin cannot own more than 20dtta75prca of our outstanding shares of common stock, American Real Estate Company cannot own more than 9prca of outstanding shares and no other stockholder may own more than 6dtta75prca of our outstanding shares |
| These restrictions apply to ownership by individuals, so ownership by an entity is attributed to the individual owners of the entity in proportion to their ownership in the entity |
| In order to comply with REIT rules regarding related party relationships, any person owning 10prca or more of an entity from whom we derive gross income may not own more than 9dtta9prca of our common stock |
| The board of directors has the power to grant a waiver of the ownership limit or the related party limit upon application by a stockholder |
| Since our status as a REIT has been relinquished, these stock ownership restrictions are no longer needed |
| Our board of directors approved an amendment to our articles of incorporation to remove all of these provisions to the extent they are applicable to shares of our common stock |
| However, the proposed amendment was not approved by our stockholders at our annual meeting on June 4, 2004 |
| Consequently, the ownership restrictions remain in place |
| It is possible that these restrictions could be enforced in the future in a manner that might discourage a change of control |
| Provisions in our charter documents may make it difficult for a third party to acquire us and could limit the price of our common stock |
| Our articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change of control of the Company |
| These provisions could make it more difficult for shareholders to elect directors and take other corporate actions |
| These provisions include: • the authority of the board of directors to issue preferred stock and to fix the relative rights and preferences of the preferred stock without additional shareholder approval; 10 ______________________________________________________________________ [34]Table of Contents • the division of our board of directors into three classes of directors with three-year staggered terms; and • advance notice procedures to be complied with by shareholders in order to make shareholder proposals or nominate directors |
| Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition |
| Our business is seasonal in nature, with the months from April through September generally accounting for a greater portion of annual revenues than the months from October through March |
| During the most recently completed three fiscal years, the lodging revenues we received during these months represented an average of 54prca of our revenues for the entire year |
| Our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year |
| The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems |
| Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, natural disaster, regional economic downturn or poor weather conditions should occur during the months of April through September, the adverse impact to our revenues could likely be greater as a result of our seasonal business |
| The costs of defending and paying claims asserted against us could be substantial and reduce the funds we would otherwise have available to meet our other working capital needs |
| At any given time, we are subject to claims and actions incidental to the operation of our business |
| The outcome of these proceedings and potential for insurance carrier coverage cannot be predicted |
| If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money |
| If this were to occur, it could weaken our financial condition and reduce our prospects for profitability |