<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the securities Exchange
Act of 1934 For the Period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the securities Exchange
Act of 1934 for the Period From to .
--------------- ---------------
Commission file number 0-23256
JAMESON INNS, INC.
(Exact name of registrant as specified in its Articles)
-----------------
Georgia 58-2079583
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8 Perimeter Center East, Suite 8050
Atlanta, Georgia 30346-1603
(Address of principal executive offices including zip codes)
(770) 901-9020
(Registrant's telephone number, including area code)
-----------------------------
(Former name, former address and former
fiscal year, if changed since last report)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date Common Stock, $.10 Par Value -
9,860,458 shares outstanding as of November 2, 1998.
<PAGE> 2
INDEX
PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997................................... 3
Condensed Consolidated Statements of Income for the Three Month
Periods Ended September 30, 1998 and 1997 (unaudited)............... 4
Condensed Consolidated Statements of Income for the Nine Month
Periods Ended September 30, 1998 and 1997 (unaudited)............... 5
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1998 and 1997 (unaudited)............... 6
Notes to Condensed Consolidated Financial Statements (unaudited).... 8
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................23
SIGNATURES............................................................24
EXHIBITS
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
JAMESON INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, at cost $ 151,972,310 $ 117,515,375
Less accumulated depreciation (15,417,352) (12,584,189)
------------- -------------
136,554,958 104,931,186
Cash 449,509 338,581
Lease revenue receivable 2,033,249 1,457,672
Prepaid expenses 167,473 6,280
Deferred finance costs, net 964,779 781,472
Other assets 327,473 90,505
------------- -------------
$ 140,497,441 $ 107,605,696
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 36,374,270 $ 29,624,889
Accounts payable and accrued expenses 164,236 213,411
Accounts payable to affiliates 2,321,376 2,185,884
Accrued interest 225,552 164,757
Accrued property taxes 622,289 255,874
------------- -------------
39,707,723 32,444,815
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000
shares authorized, 1,200,000 shares
of 9.25% Series A Cumulative Preferred Stock ($25
liquidation value) issued and outstanding 1,200,000 --
Common stock, $.10 par value, 40,000,000
shares authorized, 9,857,731 (9,774,075 in
1997) shares issued and outstanding 985,773 977,408
Additional paid-in capital 99,630,936 75,210,464
Retained deficit (1,026,991) (1,026,991)
------------- -------------
Total stockholders' equity 100,789,718 75,160,881
------------- -------------
$ 140,497,441 $ 107,605,696
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
--------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Lease revenue $5,032,808 $3,554,015
Expenses:
Property tax expense 241,918 187,979
Insurance expense 124,004 109,270
Depreciation 1,420,901 979,002
General and administrative expenses 172,723 103,893
Loss on disposal of furniture and equipment 89,656 33,839
Loss on impairment of property -- --
---------- ----------
Total expenses 2,049,202 1,413,983
Income from operations 2,983,606 2,140,032
Interest expense, net of capitalized amounts 377,040 127,769
---------- ----------
Income before extraordinary loss 2,606,566 2,012,263
Extraordinary loss 27,901 --
---------- ----------
Net income 2,578,665 2,012,263
Cumulative preferred stock dividends 693,750 --
---------- ----------
Net income attributable to common
stockholders $1,884,915 $2,012,263
========== ==========
Per common share:
Income before extraordinary loss:
Basic $ 0.20 $ 0.21
Diluted $ 0.19 $ 0.20
Net income:
Basic $ 0.19 $ 0.21
Diluted $ 0.19 $ 0.20
Dividends paid on common stock $ 0.24 $ 0.23
</TABLE>
See accompanying notes.
4
<PAGE> 5
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Lease revenue $13,628,090 $9,532,082
Expenses:
Property tax expense 672,866 482,148
Insurance expense 352,183 304,925
Depreciation 4,080,148 2,763,390
General and administrative expenses 461,203 261,973
Loss on disposal of furniture and equipment 357,116 111,963
Loss on impairment of property 2,507,000 --
----------- ----------
Total expenses 8,430,516 3,924,399
Income from operations 5,197,574 5,607,683
Interest expense, net of capitalized amounts 1,059,253 495,490
----------- ----------
Income before extraordinary loss 4,138,321 5,112,193
Extraordinary loss 133,951 689,542
----------- ----------
Net income 4,004,370 4,422,651
Cumulative preferred stock dividends 1,494,300 --
----------- ----------
Net income attributable to common stockholders $ 2,510,070 $4,422,651
=========== ==========
Per common share:
Income before extraordinary loss:
Basic $ 0.27 $ 0.56
Diluted $ 0.27 $ 0.55
Net income:
Basic $ 0.26 $ 0.49
Diluted $ 0.25 $ 0.48
Dividends paid on common stock $ 0.70 $ 0.67
</TABLE>
See accompanying notes.
5
<PAGE> 6
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,004,370 $ 4,422,651
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary item 133,951 689,542
Depreciation and amortization 4,162,601 2,820,437
Loss on disposal of furniture and equipment 357,116 111,963
Loss on impairment of property 2,507,000 --
Stock option and other expenses -- 37,424
Changes in assets and liabilities increasing
(decreasing) cash:
Lease revenue receivable (575,577) (1,159,205)
Prepaid expenses and other assets (398,162) 77,362
Accounts payable and accrued expenses (49,175) 26,423
Accounts payable to affiliates 135,491 1,434,097
Accrued interest 60,795 (43,466)
Accrued property taxes 366,415 313,070
------------ ------------
Net cash provided by operating activities 10,704,825 8,730,298
INVESTING ACTIVITIES
Additions to property and equipment (38,568,036) (23,422,211)
------------ ------------
Net cash used in investing activities (38,568,036) (23,422,211)
</TABLE>
See accompanying notes.
6
<PAGE> 7
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 28,527,933 --
Common stock dividends paid (7,675,639) (5,997,060)
Proceeds from issuance of common stock 446,637 26,051,969
Proceeds from exercise of stock options 325,539 331,490
Proceeds from long-term debt 36,544,609 20,920,546
Payment of deferred finance costs (399,712) (217,510)
Payments on long-term debt (29,795,228) (26,431,532)
Prepayment penalties on early extinguishment of
debt -- (93,016)
------------ ------------
Net cash provided by financing activities 27,974,139 14,564,887
------------ ------------
Net increase (decrease) in cash 110,928 (127,026)
Cash at beginning of period 338,581 208,912
------------ ------------
Cash at end of period $ 449,509 $ 81,886
============ ============
</TABLE>
See accompanying notes.
7
<PAGE> 8
JAMESON INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF FINANCIAL STATEMENTS
Jameson Inns, Inc. (the "Company") is a self-administered real estate investment
trust ("REIT") headquartered in Atlanta which develops and owns limited service
hotel properties ("Inns") operating in the southeastern United States under the
trademark "The Jameson Inn (R)." At September 30, 1998, the Company had a total
of 117 Inns either in operation or under development, including 78 Inns in
operation (3,614 available rooms), 16 Inns under construction, two tracts of
land on which construction will begin in 1999 and contracts to acquire 21
parcels of land on which additional Inns are expected to be constructed. In
addition, at that date, four of the Inns in operation were undergoing 20-room
expansions. Upon completion of these projects, the Company will have 6,138
available rooms.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounted principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The condensed consolidated balance sheet at December 31, 1997,
has been derived from the audited consolidated financial statements at that
date. Operating results for the three month period or nine month period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998, or any other interim period. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the annual report on Form 10-K for the year ended
December 31, 1997.
2. STOCKHOLDERS' EQUITY
On March 18, 1998, the Company completed the sale of 1,200,000 newly issued
shares of 9.25% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock") at $25 per share before underwriting discounts and expenses. Net
proceeds of approximately $28.5 million were used to repay certain existing
mortgage indebtedness at that date. The Company recorded an extraordinary loss
of $28,036 due to the write off of unamortized deferred finance costs. Declared
and undeclared dividends on the Series A Preferred Stock earned to date have
been considered in determining net income attributable to common stockholders.
The first dividends on the Series A Preferred Stock were declared in April 1998
and paid in May 1998.
Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly in arrears on or about the 20th day of
January, April, July and October to shareholders of record on the last business
day of December, March, June and September at the fixed rate of 9.25% per annum
of the liquidation preference of $25 per share (equivalent to a fixed annual
rate of $2.3125 per share).
8
<PAGE> 9
On March 10, 1997, the Company completed the sale of 2,300,000 newly issued
shares of common stock at $12 per share before underwriting discounts and
expenses. Net proceeds of approximately $26 million were used to repay certain
existing mortgage indebtedness at that date. The Company recorded an
extraordinary loss of $689,542 due to prepayment penalties and the write off of
unamortized deferred finance costs.
3. EARNINGS PER SHARE
Earnings per share has been calculated, and restated in the case of fiscal
quarters ending prior to December 31, 1997, in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings per Share ("FAS 128") and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB
98").
Basic earnings per share is calculated using weighted average shares outstanding
less issued and outstanding but unvested restricted shares of Common Stock.
Diluted earnings per share is calculated using weighted average shares
outstanding plus the dilutive effect of outstanding restricted shares of Common
Stock and outstanding stock options, using the treasury stock method and the
average stock price during the period.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
--------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Numerator:
Income before extraordinary loss $ 2,606,566 $2,012,263
Extraordinary loss (27,901) --
----------- ----------
Net income 2,578,665 2,012,263
Less: Cumulative preferred stock dividends (693,750) --
----------- ----------
Numerator for basic and diluted earnings per
share-income available to common
stockholders $ 1,884,915 $2,012,263
=========== ==========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Denominator:
Weighted average shares outstanding 9,850,021 9,739,135
Less: Unvested restricted shares of Common
Stock (63,776) (63,984)
---------- ----------
Denominator for basic earnings per share 9,786,245 9,675,151
Plus: Effect of dilutive securities
Employee and director stock options 82,955 144,948
Unvested restricted shares of Common Stock 47,349 45,448
---------- ----------
Total potential dilutive common shares 130,304 190,396
---------- ----------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions 9,916,549 9,865,547
========== ==========
Basic Earnings Per Common Share:
Income before extraordinary loss
(net of cumulative preferred stock dividends) $ 0.20 $ 0.21
Extraordinary loss (0.01) --
---------- ----------
Net income per common share
(net of cumulative preferred stock dividends) $ 0.19 $ 0.21
========== ==========
Diluted Earnings Per Common Share:
Income before extraordinary loss
(net of cumulative preferred stock dividends) $ 0.19 $ 0.20
Extraordinary loss -- --
---------- ----------
Net income per common share
(net of cumulative preferred stock dividends) $ 0.19 $ 0.20
========== ==========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Numerator:
Income before extraordinary loss $ 4,138,321 $ 5,112,193
Extraordinary loss (133,951) (689,542)
----------- -----------
Net income 4,004,370 4,422,651
Less: Undeclared and declared cumulative
preferred stock dividends (1,494,300) --
----------- -----------
Numerator for basic and diluted earnings per
share-income available to common
stockholders $ 2,510,070 $ 4,422,651
=========== ===========
Denominator:
Weighted average shares outstanding 9,826,003 9,124,211
Less: Unvested restricted shares of Common
stock (64,128) (63,413)
----------- -----------
Denominator for basic earnings per share 9,761,875 9,060,798
Plus: Effect of dilutive securities
Employee and director stock options 105,807 152,020
Unvested restricted shares of Common Stock 43,861 45,822
----------- -----------
Total potential dilutive common shares 149,668 197,842
----------- -----------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 9,911,543 9,258,640
=========== ===========
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Basic Earnings Per Common Share:
Income before extraordinary loss
(net of cumulative preferred stock dividends) $ 0.27 $ 0.56
Less: Extraordinary loss (0.01) (0.07)
----------- -----------
Net income per common share
(net of cumulative preferred stock dividends) $ 0.26 $ 0.49
=========== ===========
Diluted Earnings Per Common Share:
Income before extraordinary loss
(net of cumulative preferred stock dividends) $ 0.27 $ 0.55
Less: Extraordinary loss (0.02) (0.07)
----------- -----------
Net income per common share
(net of cumulative preferred stock dividends) $ 0.25 $ 0.48
=========== ===========
</TABLE>
Options to purchase 530,833 and -0- shares of common stock for the three months
ended September 30, 1998 and 1997, respectively, were outstanding but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
Options to purchase 505,000 and -0- shares of common stock for the nine months
ended September 30, 1998 and 1997, respectively, were outstanding but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Jameson Inns,
Inc. condensed consolidated financial statements and notes thereto appearing
elsewhere in this quarterly report.
Jameson Inns, Inc. (the "Company") is a self-administered real estate investment
trust ("REIT") headquartered in Atlanta which develops and owns limited service
hotel properties ("Inns") operating in the southeastern United States under the
trademark "The Jameson Inn (R)." At September 30, 1998, the Company had a total
of 117 Inns either in operation or under development, including 78 Inns in
operation (3,614 available rooms), 16 Inns under construction, two tracts of
land on which construction will begin in 1999 and contracts to acquire 21
parcels of land on which additional Inns are expected to be constructed. In
addition, at that date, four of the
12
<PAGE> 13
Inns in operation were undergoing 20-room expansions. Upon completion of these
projects, the Company expects to have 6,138 available rooms.
The Company's primary source of revenue is rent payments by Jameson Hospitality,
LLC ("JH") under master leases (the "Leases") covering all of the Inns in
operation. Prior to March 31, 1998, Jameson Operating Company, LLC was the
lessee. On this date Jameson Operating Company, LLC merged with Jameson
Development Company, LLC and several other related entities to form Jameson
Hospitality, LLC. The expenses of the Company consist of property taxes,
insurance, corporate overhead, interest on mortgage debt and depreciation of the
Inns. The Leases provide for the payment of base rent and percentage rent. For
the quarter ended September 30, 1998, base rent and percentage rent in the
aggregate amount of $5.0 million was earned by the Company. The principal
determinant of percentage rent is JH's Room Revenues of the Inns, as defined by
the Leases. Therefore, management believes that a review of the historical
performance of the operations of the operating Inns, particularly with respect
to occupancy, average daily rate ("ADR") and revenue per available room
("REVPAR") is appropriate for understanding revenue from the Leases.
The following table shows certain historical financial and other information for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
Occupancy rate 64.27% 68.81%
ADR $ 51.74 $ 47.93
REVPAR $ 33.25 $ 32.98
Room Revenues (000s) $ 10,708 $ 7,562
Room nights available 315,528 224,083
Room nights occupied 202,790 154,188
Operating Inns (at period end) 78 54
Rooms available (at period end) 3,614 2,567
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Occupancy rate 64.63% 67.16%
ADR $ 49.94 $ 47.02
REVPAR $ 32.28 $ 31.58
Room Revenues (000s) $ 28,996 $ 20,281
Room nights available 879,670 626,750
Room nights occupied 568,531 420,894
Operating Inns (at period end) 78 54
Rooms available (at period end) 3,614 2,567
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended
September 30, 1997.
Revenue from the Leases for the Company for the three month period ended
September 30, 1998, increased 39% to $5.0 million as compared to $3.6 million
for the same period in 1997. The increase was due to the increase in JH's Room
Revenues.
The number of room nights available increased from 224,083 in 1997 to 315,528 in
1998, or 41%, due to the opening from January 1, 1997 through September 30,
1998, of 35 new Inns (totaling 1,433 rooms), and three expansions of existing
Inns (adding 53 rooms). ADR increased 8% from $47.93 in the third quarter of
1997 to $51.74 in the same period in 1998. The occupancy rate decreased from
68.81% during the third quarter of 1997 to 64.27% during the third quarter of
1998. As a result of these three factors, third quarter Room Revenues rose 41%
from $7.6 million for the third quarter of 1997 to $10.7 million in the third
quarter of 1998. Same Inn Room Revenues in the third quarter of 1998 versus the
third quarter of 1997 grew to $7.2 million from $7.0 million, or 3 %. The same
Inn growth is due to an increase in ADR from $47.4 to $51.3 for these Inns, an
increase in room nights available (due to expansions of certain of these Inns)
from 206,123 to 209,116, offset by a decrease in the occupancy rate from 69.86%
to 65.57% for these Inns for the third quarter of 1998 compared to the same
period in 1997.
General and administrative expense includes overhead charges for management,
accounting and legal services for the corporate home office. General and
administrative expense for the three months ended September 30, 1998, was
$172,723, as compared to $103,893 for the three months ended September 30, 1997.
The 1997 expense is lower than 1998 due to less time spent in 1997 by shared
employees on the Company's business matters as compared to other related
entities.
Property taxes and insurance expenses totaled $365,922 for the three month
period ended September 30, 1998, compared with $297,249 for the same period in
1997. The increase is attributable to the increase in number of Inns and the
expansion of existing Inns.
Interest expense increased from $127,769 for the three-month period ended
September 30, 1997, to $377,040 for the same period ended September 30, 1998,
due to the greater amounts of average principal indebtedness outstanding in the
third quarter of 1998. Interest expense amounts exclude interest capitalized in
the cost of new Inn development. As a result of the early extinguishment of debt
in the third quarter of 1998, the Company had a loss of $27,901 comprised of the
write-offs of deferred finance costs, which is reflected as an extraordinary
item.
Depreciation expense increased from $979,002 to $1,420,901 for the three month
periods ended September 30, 1997 and 1998, respectively, due to an increase in
the number of operating Inns and the expansion of existing Inns.
14
<PAGE> 15
Comparison of the Nine Months Ended September 30, 1998 to the Nine Months Ended
September 30, 1997.
Revenue from the Leases for the Company for the nine month period ended
September 30, 1998, increased 43% to $13.6 million as compared to $9.5 million
for the same period in 1997. The increase was due to the increase in JH's Room
Revenues.
The number of room nights available increased from 626,750 in 1997 to 879,670 in
1998, or 40%, due to the opening from January 1, 1997, through September 30,
1998, of 35 new Inns (totaling 1,433 rooms), and three expansions of existing
Inns (adding 53 rooms). ADR increased 6% from $47.02 in the first nine months of
1997 to $49.94 in the same period in 1998. The occupancy rate decreased from
67.16% during the first nine months of 1997 to 64.63% during the same period in
1998. As a result of these three factors, Room Revenues rose 43%, from $20.3
million for 1997 to $29.0 million in the first nine months of 1998. Same Inn
Room Revenues in the first nine months of 1998 versus the same period in 1997
grew to $20.7 million from $19.6 million. The growth is due to an increase in
ADR from $46.80 to $49.48 for these Inns, an increase in room nights available
(due to expansions of certain of these Inns) from 604,462 to 619,378, offset by
a decrease in the occupancy rate from 67.54% to 65.93% for these Inns for the
first nine months of 1998 compared to the same period in 1997.
General and administrative expense includes overhead charges for management,
accounting and legal services for the corporate home office. General and
administrative expense for the nine months ended September 30, 1998, was
$461,203, as compared to $261,973 for the nine months ended September 30, 1997.
The 1997 expense is lower than 1998 due to less (i) time spent in 1997 by shared
employees on the Company's business matters as compared to other related
entities, and (ii) greater ground lease expense on two Inns in 1998.
Property taxes and insurance expenses totaled $1,025,049 for the nine month
period ended September 30, 1998, compared with $787,073 for the same period in
1997. The increase is attributable to the increase in number of Inns and the
expansion of existing Inns.
The loss on impairment of property of $2,507,000 relates to the Company's
decision to market its Milledgeville, Georgia location, as of June 30, 1998.
This location is only one of two acquisitions the Company has made of previously
developed properties and hence does not follow its signature style. In addition,
the Company does not believe this 100-room location has the potential to meet
the Company's performance expectations. Under the guidance of Financial
Accounting Standards Board Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company
recorded a loss equal to the difference between net carrying value of the
property and the estimated fair value less costs to sell. Effective July 1, 1998
and during the time period the property is being marketed for sale, no
depreciation expense has been recorded on this asset. As of November 3, 1998,
there is a letter of intent to purchase the property and, if consummated, the
sale is scheduled to close by February 1, 1999. No additional loss on impairment
is anticipated based on the price offered in the pending letter of intent.
Interest expense increased from $495,490 for the nine month period ended
September 30, 1997, to $1,059,253 for the same period ended September 30, 1998,
due to the greater amounts of average principal indebtedness outstanding in the
first nine months of 1998. Interest expense
15
<PAGE> 16
amounts exclude interest capitalized in the cost of new Inn development. As a
result of the early extinguishment of debt in 1998 and 1997, the Company had
losses of $133,951 and $689,542, respectively, comprised of the write-offs of
deferred finance costs and prepayment penalties, which are reflected as
extraordinary items.
Depreciation expense increased from $2,763,390 to $4,080,148 for the nine month
periods ended September 30, 1997 and 1998, respectively, due to an increase in
the number of operating Inns and the expansion of existing Inns.
FUNDS FROM OPERATIONS
The Company notes that industry analysts and investors 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 and
provides information about the Company's cash available for distributions, debt
service and capital expenditures. The Company follows the March 1995
interpretation of the National Association of Real Estate Investment Trusts
("NAREIT") definition of funds from operations ("Funds from Operations") which
is calculated (in the Company's case) as net income plus depreciation, loss on
disposal of furniture and equipment, loss on impairment of real estate and
extraordinary items, if applicable. Other non-cash expenses such as amortization
and 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 generally accepted accounting principles ("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. In addition, the Company's
Funds from Operations may not be comparable to other companies' Funds from
Operations due to differing methods of calculating Funds from Operations and
varying interpretations of the NAREIT definition.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income attributable to common
stockholders $1,884,915 $2,012,263
Depreciation 1,420,901 979,002
Extraordinary loss 27,901 --
Loss on disposal of furniture and equipment 89,656 33,839
---------- ----------
Funds from Operations $3,423,373 $3,025,104
========== ==========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income attributable to common
stockholders $2,510,070 $4,422,651
Depreciation 4,080,148 2,763,390
Extraordinary loss 133,951 689,542
Loss on disposal of furniture and equipment 357,116 111,963
Loss on impairment of property 2,507,000 --
---------- ----------
Funds from Operations $9,588,285 $7,987,546
========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
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. On March 18, 1998, the
Company completed the sale of 1,200,000 newly issued shares of 9.25% Series A
Cumulative Preferred Stock at $25 per share before underwriting discounts and
expenses. Net proceeds of approximately $28.5 million were used to repay certain
existing mortgage indebtedness at that date. On March 10, 1997, under the same
registration statement, the Company completed the sale of 2,300,000 newly issued
shares of common stock at $12 per share before underwriting discounts and
expenses. Net proceeds of approximately $26 million were used to repay certain
existing mortgage indebtedness at that date. The Company intends to use future
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.
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 September 30, 1998, the Company had approximately $36.4 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.
At September 30, 1998, the Company had a $46.2 million line of credit (the
"Line") convertible in June 1999 to a term note and $31.1 million was available
for borrowing under the Line. Loans made under the Line are secured by mortgages
on 41 of the Inns. As of September 30, 1998, the Company had 17 Inns
unencumbered and available to use as collateral for any additional financing.
The Company has a commitment from its lenders to increase the Line to
approximately $47 million.
17
<PAGE> 18
In addition, as of November 4, 1998, the Company has a formal loan commitment
with Bank Midwest for a $17 million term mortgage loan, to be secured by 14
Inns. This loan is expected to be consummated by the end of 1998.
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. The Company has recently completed
designs for three larger Jameson Inn models, with an interior hallway and 56, 68
or 80 rooms. The Company currently is constructing new Inns ranging from 39 to
80 rooms each in Alabama, Florida, Georgia, Mississippi, North Carolina and
Tennessee. The total turnkey construction price for the Inns currently under
construction is $39.5 million, of which approximately $7.4 million had been
expended at September 30, 1998. For each new Inn developed by the Company,
generally a construction loan has been obtained for a portion of the cost. The
balance is funded under the Line. Historically, each construction loan converts
to a long-term mortgage upon completion of the Inn without any further action by
the Company. As of September 30, 1998, the Company had obtained similar
construction financing of $11.5 million and commitments for construction or
permanent financing of $6.575 million. The remaining costs are expected to be
funded by borrowings under the Line, the new term note from Bank Midwest or
additional construction loans. Future Inns are expected to range from 39 to 80
rooms each. 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 may be very limited.
RECENT DEVELOPMENT
On November 3, 1998, the Board of Directors approved the proposed acquisition by
the Company of the outdoor advertising assets and operations of JH. These assets
consist of approximately 100 road side billboards on which advertising for the
Company's hotel properties and, in certain instances, other services or products
for third parties is placed. These assets and operations were previously owned
and conducted by Jameson Outdoor Advertising, LLC, which is one of the entities
that merged into JH on March 31, 1998 (see "the Lessee"). It is anticipated that
these billboards will be leased back to JH and will continue to be used for the
same type of advertising. JH is wholly-owned by Thomas W. Kitchin, Chairman of
the Board of the Company, and his wife. The consideration payable to JH will
consist of (i) 72,727 newly issued shares of the Company's Series A Preferred
Stock, (ii) $400,000 in cash, and (iii) the assumption of indebtedness of
approximately $735,000 which is secured by mortgages on the billboards and the
revenues generated therefrom. It is currently anticipated that this transaction
will close in December of 1998. The amount and nature of the consideration was
negotiated by Thomas W. Kitchin and the other members of the Board of Directors
of the Company with the advice and assistance of an independent investment
banking firm engaged by the Board. Such firm also rendered its opinion to the
Company's Board of Directors that, based on its review of the proposed
transaction and the assumptions stated in the opinion, the proposed
consideration is fair, from a financial point of view, to the shareholders of
the Company. It is anticipated that JH will distribute the shares of the Series
A Preferred Stock it receives to Mr. & Mrs. Kitchin.
18
<PAGE> 19
YEAR 2000
As the year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. Many existing application software products in the marketplace
were designed to accommodate only two-digit date entries. Beginning in the year
2000, these systems and products will need to be able to accept four-digit
entries to distinguish years beginning with 2000 from prior years. As a result,
computer systems and software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. The Company has evaluated its
financial software and building operating systems of the Inns. Based on
assessments to date, management believes that the arrival of the year 2000 and
the potential related computer problems will not have a material adverse impact
on the Company or JH. The Company believes that its current software and
operating systems are year 2000 compliant. The ability of third parties with
whom the Company transacts business to address adequately their Year 2000 issues
is outside of the Company's control. There can be no assurance that the failure
of the Company, or such third parties, to address adequately their respective
Year 2000 issues will not have a material adverse effect on the Company's future
financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
There are a number of statements in this report which address activities, events
or developments which the Company expects or anticipates will or may occur in
the future, including such things as the Company's expansion plans, including
construction of new Inns and expansion of existing Inns, availability of debt
financing and capital, payment of quarterly dividends, expected Year 2000
compliance and other matters. These statements are based on certain assumptions
and analyses made by the Company in the light of its experience and its
perception of historical trends, current conditions and expected future
developments, as well as other factors it believes are appropriate under the
circumstances. However, whether actual results and developments will conform to
the Company's expectations and predictions is subject to a number of risks and
uncertainties, including (1) the Company's ability to (a) secure construction
and permanent financing to finance such development on terms and conditions
favorable to the Company, (b) assess accurately the market demand for new Inns
and expansions of existing Inns, (c) identify and purchase new sites which meet
its various criteria, including reasonable land prices, (d) contract for the
construction of new Inns and expansions of existing Inns in a manner which
produces Inns consistent with its present quality and standards at a reasonable
cost and without significant delays, (e) provide ongoing renovation and
refurbishment of the Inns sufficient to maintain consistent quality among the
Inns, and (f) manage its business in a cost-effective manner given the increase
in the number of Inns; (2) JH's willingness and ability to manage the Inns
profitably; (3) general economic, market and business conditions, particularly
those in the lodging industry generally and in the geographic markets where the
Inns are located; (4) the business opportunities (or lack thereof) that may be
presented to and pursued by the Company; (5) the availability of qualified
managers and employees necessary for the Company's planned growth; (6) changes
in laws or regulations and (7) other factors, most of which are beyond the
control of the Company. Consequently, all of the forward-looking statements made
in this report are qualified by these cautionary statements and there can be no
assurance that the actual results of developments anticipated by the Company
will be realized, or even if substantially realized,
19
<PAGE> 20
that they will have the expected consequences to or effects on the Company or
its business or operations.
THE LESSEE
The Company seeks to enhance Lease revenue by working in a collaborative manner
with JH, lessee of the Inns. Presently, JH also has an exclusive relationship
with the Company in that JH does not manage any hotel properties other than the
Inns. The Company believes this exclusive relationship ensures that the
Company's and JH's interests are well-aligned. JH is the successor to Jameson
Operating Company, LLC ("JOCLLC") and its predecessor Jameson Operating Company
("JOC"). These companies were both wholly owned by Thomas W. Kitchin, Chairman,
President and Chief Executive Officer of the Company, JOCLLC since its inception
and JOC since Mr. Kitchin's acquisition of the remaining 90.1% stock of JOC in
September 1997. Effective March 31, 1998, JOCLLC merged with Jameson Development
Company, LLC, the company which constructs the Inns, and other related Jameson
entities. The resulting company, which will construct and operate the Inns,
subsequently changed its name to Jameson Hospitality, LLC. Thomas W. Kitchin and
his spouse are the sole owners of Jameson Hospitality, LLC. While the Company
does not control the operations of JH or the day-to-day operation of the Inns,
the two companies work together to enhance both occupancy and ADR. The Leases'
formula allows the Company to benefit from increases in Room Revenues,
regardless of the mix between occupancy and ADR.
The following table summarizes the unaudited financial results of Jameson
Hospitality, LLC, the lessee. Since Jameson Operating Company, LLC and the other
companies which were parties to the March 1998 merger with Jameson Development
Company, LLC were under common control of Thomas W. Kitchin and his spouse at
the time of the merger, the financial statements present the financial position,
results of operations and cash flows of both Jameson Operating Company, LLC and
its predecessor Jameson Operating Company as well as other parties to the
merger. This merger has been accounted for in a manner similar to a pooling of
interests due to the common ownership and control of the companies. The
comparison of Inn Room Revenues of JH between the two periods is the same as
that described above for the Company.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Room Revenues as defined by Lease $10,708,195 $ 7,561,733
Construction and other revenues 10,824,936 8,119,399
----------- -----------
Total revenues 21,533,131 15,681,132
Inn operating expenses 5,612,616 3,730,109
Cost of construction and other revenues 9,901,093 8,062,998
Advertising 606,508 158,215
Lease expense to Jameson Inns, Inc. 5,032,808 3,554,015
----------- -----------
Income before income taxes $ 380,106 $ 175,795
=========== ===========
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Room Revenues as defined by Lease $28,996,302 $20,281,025
Construction and other revenues 27,209,831 19,270,884
----------- -----------
Total revenues 56,206,133 39,551,909
Inn operating expenses 15,081,095 9,911,736
Cost of construction and other revenues 25,486,517 18,332,253
Advertising 1,772,318 405,074
Lease expense to Jameson Inns, Inc. 13,628,090 9,532,082
----------- -----------
Income before income taxes $ 238,113 $ 1,370,764
=========== ===========
</TABLE>
21
<PAGE> 22
DISTRIBUTIONS TO STOCKHOLDERS
The table below sets forth, for the periods indicated, the cash distributions
declared per share since January 1, 1997.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
<S> <C> <C>
First Quarter, 1997 $ 0.22 $ n/a
Second Quarter, 1997 0.23 n/a
Third Quarter, 1997 0.23 n/a
Fourth Quarter, 1997 0.23 n/a
First Quarter, 1998 0.23 0.089**
Second Quarter, 1998 0.24 0.581
Third Quarter, 1998 0.24* 0.581***
</TABLE>
* On October 23, 1998, the Company declared this dividend, which is
payable on November 20, 1998, to shareholders of record on November 3,
1998.
** On April 20, 1998, the Company declared a dividend of $.089 per share
for the 9.25% Series A Cumulative Preferred Stock for the period March
18 to March 31, 1998. The dividend was paid on May 1, 1998 to
shareholders of record on March 31, 1998.
*** On September 15, 1998 the Company declared this dividend, which was
paid on October 20, 1998, to shareholders of record on September 30,
1998.
22
<PAGE> 23
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
EXHIBITS
12.1 Calculation of Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
27.1 Financial Data Schedule (for SEC use only)
23
<PAGE> 24
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: November 13, 1998 By: /s/ Craig R. Kitchin
------------------------------------
Craig R. Kitchin
President and Chief Financial Officer
(Principal Financial Officer)
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Page
- ------ ----
<S> <C> <C>
12.1 Calculation of Ratios of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends.......................................................
27.1 - Financial Data Schedule (for SEC use only)......................
</TABLE>
<PAGE> 1
EXHIBIT 12.1
JAMESON INNS, INC.
CALCULATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Consolidated income before extraordinary items $2,606,566 $2,012,263
Interest 347,884 107,066
Amortization 29,156 20,703
---------- ----------
Earnings $2,983,606 $2,140,032
========== ==========
Interest $ 347,884 $ 107,066
Amortization 29,156 20,703
Cumulative preferred stock dividends 693,750 --
Interest capitalized during the period 313,489 174,533
---------- ----------
Fixed Charges $1,384,279 $ 302,302
========== ==========
Ratio of earnings to fixed charges and preferred
stock dividends 2.15 7.08
========== ==========
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30
-----------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Consolidated income before extraordinary items $4,138,321 $5,112,193
Interest 976,800 438,443
Amortization 82,453 57,047
---------- ----------
Earnings $5,197,574 $5,607,683
========== ==========
Interest $ 976,800 $ 438,443
Amortization 82,453 57,047
Cumulative preferred stock dividends 1,494,300 --
Interest capitalized during the period 720,800 405,849
---------- ----------
Fixed Charges $3,274,353 $ 901,339
========== ==========
Ratio of earnings to fixed charges and preferred
stock dividends 1.59 6.22
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF JAMESON INNS INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 449,509
<SECURITIES> 0
<RECEIVABLES> 2,033,249
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,977,704
<PP&E> 151,972,309
<DEPRECIATION> (15,417,352)
<TOTAL-ASSETS> 140,497,441
<CURRENT-LIABILITIES> 3,333,453
<BONDS> 36,374,270
0
1,200,000
<COMMON> 985,773
<OTHER-SE> 98,603,945
<TOTAL-LIABILITY-AND-EQUITY> 140,497,441
<SALES> 13,628,090
<TOTAL-REVENUES> 13,628,090
<CGS> 1,025,049
<TOTAL-COSTS> 1,025,049
<OTHER-EXPENSES> 3,325,319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,059,253
<INCOME-PRETAX> 4,138,321
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,138,321
<DISCONTINUED> 0
<EXTRAORDINARY> 133,951
<CHANGES> 0
<NET-INCOME> 4,004,370
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
