<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 June 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 -
9,845,082 shares outstanding as of July 28, 1998.
<PAGE> 2
INDEX
<TABLE>
<S> <C>
PART 1. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 .............................................................. 3
Condensed Consolidated Statements of Income for the Three Month
Periods Ended June 30, 1998 and 1997 (unaudited) ............................................... 4
Condensed Consolidated Statements of Income for the Six Month
Periods Ended June 30, 1998 and 1997 (unaudited) ............................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................ 21
ITEM 5. OTHER INFORMATION .......................................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................................... 21
SIGNATURES .......................................................................................... 22
EXHIBITS
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
JAMESON INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Property and equipment, at cost $137,493,329 $117,515,375
Less accumulated depreciation (14,200,279) (12,584,189)
------------------- -----------------
123,293,050 104,931,186
Cash 15,139 338,581
Lease revenue receivable 1,626,057 1,457,672
Prepaid expenses 185,726 6,280
Deferred finance costs, net 857,548 781,472
Other assets 287,506 90,505
------------------- -----------------
$126,265,026 $107,605,696
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable $ 23,225,899 $ 29,624,889
Accounts payable and accrued expenses 199,689 213,411
Accounts payable to affiliates 1,172,555 2,185,884
Accrued interest 127,951 164,757
Accrued property taxes 422,525 255,874
------------------- -----------------
25,148,619 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, 9,843,153 (9,774,075 in
1997) shares issued and outstanding 984,315 977,408
Additional paid-in capital 99,959,083 75,210,464
Retained deficit (1,026,991) (1,026,991)
------------------- -----------------
Total stockholders' equity 101,116,407 75,160,881
------------------- -----------------
$126,265,026 $ 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
JUNE 30
-----------------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
Lease revenue $ 4,742,604 $ 3,242,524
Expenses:
Property tax expense 213,044 167,099
Insurance expense 115,138 102,251
Depreciation 1,363,976 928,522
General and administrative expenses 150,443 86,048
Loss on disposal of furniture and equipment 160,697 48,238
Loss on impairment of property 2,507,000 --
------------- ------------
Total expenses 4,510,298 1,332,158
Income from operations 232,306 1,910,366
Interest expense, net of capitalized amounts 165,965 21,305
------------- ------------
Income before extraordinary loss 66,341 1,889,061
Extraordinary loss 78,014 --
------------- ------------
Net (loss) income $ (11,673) $ 1,889,061
Cumulative preferred stock dividends 693,750 --
------------- ------------
Net (loss) income attributable to common
stockholders $ (705,423) $ 1,889,061
============= ============
Per common share:
(Loss) income before extraordinary loss:
Basic $ (.06) $ .20
Diluted $ (.06) $ .19
Net (loss) income:
Basic $ (.07) $ .20
Diluted $ (.07) $ .19
Dividends paid on common stock $ .23 $ .22
</TABLE>
See accompanying notes.
4
<PAGE> 5
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
------------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
Lease revenue $ 8,595,282 $ 5,978,067
Expenses:
Property tax expense 430,948 294,169
Insurance expense 228,179 195,655
Depreciation 2,659,247 1,784,388
General and administrative expenses 288,480 158,080
Loss on disposal of furniture and equipment 267,460 78,124
Loss on impairment of property 2,507,000 --
-------------- --------------
Total expenses 6,381,314 2,510,416
Income from operations 2,213,968 3,467,651
Interest expense, net of capitalized amounts 682,213 367,721
-------------- --------------
Income before extraordinary loss 1,531,755 3,099,930
Extraordinary loss 106,050 689,542
-------------- --------------
Net income 1,425,705 2,410,388
Cumulative preferred stock dividends 800,550 --
-------------- --------------
Net income attributable to common stockholders $ 625,155 $ 2,410,388
============== ==============
Per common share:
Income before extraordinary loss:
Basic $ .08 $ .35
Diluted $ .07 $ .35
Net income:
Basic $ .06 $ .28
Diluted $ .06 $ .27
Dividends paid on common stock $ .46 $ .44
</TABLE>
See accompanying notes.
5
<PAGE> 6
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
---------------------------------------------------
1998 1997
------------------------ ----------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,425,705 $ 2,410,388
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary item 106,050 689,542
Depreciation and amortization 2,712,544 1,820,732
Loss on disposal of furniture and equipment 267,460 78,123
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 (168,385) (860,179)
Prepaid expenses and other assets (376,447) 134,305
Accounts payable and accrued expenses (13,723) (5,354)
Accounts payable to affiliates (1,013,329) 448,855
Accrued interest (36,806) (79,088)
Accrued property taxes 166,651 168,065
----------------- --------------
Net cash provided by operating activities 5,576,720 4,842,813
INVESTING ACTIVITIES
Additions to property and equipment (23,795,572) (14,610,530)
----------------- --------------
Net cash used in investing activities (23,795,572) (14,610,530)
</TABLE>
See accompanying notes.
6
<PAGE> 7
JAMESON INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
----------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 28,527,933 --
Common stock dividends paid (4,619,069) (3,755,491)
Proceeds from issuance of common stock 304,896 25,997,681
Proceeds from exercise of stock options 316,064 276,308
Proceeds from long-term debt 23,314,066 13,979,682
Payment of deferred finance costs (235,424) (198,775)
Payments on long-term debt (29,713,056) (26,421,530)
Prepayment penalties on early extinguishment of debt -- (93,016)
-------------- --------------
Net cash provided by financing activities 17,895,410 9,784,859
-------------- --------------
Net increase (decrease) in cash (323,442) 17,142
Cash at beginning of period 338,581 208,912
-------------- --------------
Cash at end of period $ 15,139 $ 226,054
============== ==============
</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 June 30, 1998, the Company
had a total of 104 Inns either in operation or under development, including 72
Inns in operation (3,377 available rooms), 17 Inns under construction and
contracts to acquire 15 parcels of land on which additional Inns are expected
to be constructed during 1998 or 1999. 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 5,293 available rooms.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting 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 six month period ended June 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
8
<PAGE> 9
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).
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
JUNE 30
----------------------------------------
1998 1997
------------ -----------
Numerator:
<S> <C> <C>
Income before extraordinary loss $ 66,341 $1,889,061
Extraordinary loss (78,014) --
----------- ----------
Net (loss) income (11,673) 1,889,061
Less: Cumulative preferred stock dividends 693,750 --
----------- ----------
Numerator for basic and diluted earnings per
share-(loss) income available to common
stockholders $ (705,423) $1,889,061
=========== ==========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
JUNE 30
----------------------------------
1998 1997
------------- -------------
Denominator:
<S> <C> <C>
Weighted average shares outstanding 9,835,984 9,706,959
Less: Unvested restricted shares of Common
stock (64,401) (63,201)
------------- ------------
Denominator for basic earnings per share 9,771,583 9,643,758
Plus: Effect of dilutive securities
Employee and director stock options -- 136,975
Unvested restricted shares of Common Stock -- 48,243
------------- ------------
Total dilutive potential common shares -- 185,218
------------- ------------
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions 9,771,583 9,828,976
============= ============
Basic Earnings (Loss) Per Common Share:
(Loss) income before extraordinary loss $ (.06) $ .20
Extraordinary loss (.01) --
------------- ------------
Net (loss) income per common share $ (.07) $ .20
============= ============
Diluted Earnings (Loss) Per Common Share:
(Loss) income before extraordinary loss $ (.06) $ .19
Extraordinary loss (.01) --
------------- ------------
Net (loss) income per common share $ (.07) $ .19
============= ============
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
------------------------------------------
1998 1997
----------------- ---------------
Numerator:
<S> <C> <C>
Income before extraordinary loss $ 1,531,755 $ 3,099,930
Extraordinary loss (106,050) (689,542)
----------------- ---------------
Net income 1,425,705 2,410,388
Less: Undeclared and declared cumulative
preferred stock dividends 800,550 --
----------------- ---------------
Numerator for basic and diluted earnings per
share-income available to common
stockholders $ 625,155 $ 2,410,388
================= ===============
Denominator:
Weighted average shares outstanding 9,813,795 8,811,702
Less: Unvested restricted shares of Common
stock (64,401) (63,122)
----------------- ---------------
Denominator for basic earnings per share 9,749,394 8,748,580
Plus: Effect of dilutive securities
Employee and director stock options 117,233 164,055
Unvested restricted shares of Common Stock 44,589 46,138
----------------- ---------------
Total dilutive potential common shares 161,822 210,193
----------------- ---------------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 9,911,216 8,958,773
================= ===============
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
-----------------------------------
1998 1997
---------------- -------------
Basic Earnings Per Common Share:
<S> <C> <C>
Income before extraordinary loss $ .08 $ .35
Less: Extraordinary loss (.02) (.07)
------------- -------------
Net income per common share $ .06 $ .28
============= =============
Diluted Earnings Per Common Share:
Income before extraordinary loss $ .07 $ .35
Less: Extraordinary loss (.01) (.08)
------------- -------------
Net income per common share $ .06 $ .27
============= =============
</TABLE>
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 June 30, 1998, the Company
had a total of 104 Inns either in operation or under development, including 72
Inns in operation (3,377 available rooms), 17 Inns under construction and
contracts to acquire 15 parcels of land on which additional Inns are expected
to be constructed during 1998 or 1999. In addition, at that date, four of the
Inns in operation were undergoing 20-room expansions. Upon completion of these
projects, the Company expects to have 5,293 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,
12
<PAGE> 13
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 June 30, 1998, base rent and percentage rent in the
aggregate amount of $4.7 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
JUNE 30
----------------------------------------------
1998 1997
---------------------- -------------------
<S> <C> <C>
Occupancy rate 68.00% 68.79%
ADR $ 49.89 $ 47.32
REVPAR $ 33.93 $ 32.55
Room Revenues (000s) $ 9,895 $ 6,899
Room nights available 291,661 207,188
Room nights occupied 198,336 142,516
Operating Inns (at period end) 72 50
Rooms available (at period end) 3,377 2,407
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
----------------------------------------------
1998 1997
--------------------- -------------------
<S> <C> <C>
Occupancy rate 64.84% 66.23%
ADR $ 48.94 $ 46.50
REVPAR $ 31.73 $ 30.80
Room Revenues (000s) $ 17,902 $ 12,719
Room nights available 564,142 402,667
Room nights occupied 365,789 266,706
Operating Inns (at period end) 72 50
Rooms available (at period end) 3,377 2,407
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1998 to the Three Months Ended
June 30, 1997.
Revenue from the Leases for the Company for the three month period ended June
30, 1998, increased 47% to $4.7 million as compared to $3.2 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 207,188 in 1997 to 291,661
in 1998, or 41%, due to the opening from January 1, 1997 through June 30, 1998,
of 29 new Inns (totaling 1,196 rooms), and three expansions of existing Inns
(adding 53 rooms). ADR increased 5% from $47.32 in the second quarter of 1997
to $49.89 in the same period in 1998. The occupancy rate decreased from 68.79%
during the second quarter of 1997 to 68.00% during the second quarter of 1998.
As a result of these three factors, second quarter Room Revenues rose 43% from
$6.9 million for the second quarter of 1997 to $9.9 million in the second
quarter of 1998. Same Inn Room Revenues in the second quarter of 1998 versus
the second quarter of 1997 grew to $7.0 million from $6.5 million, or 8%. The
same Inn growth is due to an increase in ADR from $47.34 to $49.59 for these
Inns, an increase in room nights available (due to expansions of certain of
these Inns) from 195,638 to 197,894, and an increase in the occupancy rate from
69.05% to 70.20% for these Inns for the second 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 June 30, 1998, was $150,443,
as compared to $86,048 for the three months ended June 30, 1997. The 1997
expense is lower than 1998 due to less time spent by shared employees on the
Company's business matters as compared to other related entities and ground
lease expense on two Inns which was greater in 1998 than 1997 due to the 1997
mid-year commencement date.
Property taxes and insurance expenses totaled $328,182 for the three month
period ended June 30, 1998, compared with $269,350 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 will be recorded on this asset.
14
<PAGE> 15
Interest expense increased from $21,305 for the three-month period ended June
30, 1997, to $165,965 for the same period ended June 30, 1998, due to the
greater amounts of average principal indebtedness outstanding in the second
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 second quarter of 1998, the Company had a loss of $78,014 comprised of the
write-offs of deferred finance costs, which is reflected as an extraordinary
item.
Depreciation expense increased from $928,522 to $1,363,976 for the three month
periods ended June 30, 1997 and 1998, respectively, due to an increase in the
number of operating Inns and the expansion of existing Inns.
Comparison of the Six Months Ended June 30, 1998 to the Six Months Ended June
30, 1997.
Revenue from the Leases for the Company for the six month period ended June 30,
1998, increased 43% to $8.6 million as compared to $6.0 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 402,667 in 1997 to 564,142
in 1998, or 40%, due to the opening from January 1, 1997, through June 30,
1998, of 29 new Inns (totaling 1,196 rooms), and three expansions of existing
Inns (adding 53 rooms). ADR increased 5% from $46.50 in the first six months of
1997 to $48.94 in the same period in 1998. The occupancy rate decreased from
66.23% during the first half of 1997 to 64.84% during the same period in 1998.
As a result of these three factors, Room Revenues rose 41%, from $12.7 million
for 1997 to $17.9 million in the first half of 1998. Same Inn Room Revenues in
the first six months of 1998 versus the same period in 1997 grew to $13.0
million from $12.2 million, or 7%. The growth is due to an increase in ADR from
$46.50 to $48.58 for these Inns, an increase in room nights available (due to
expansions of certain of these Inns) from 386,821 to 393,227, and an increase
in the occupancy rate from 66.36% to 66.54% for these Inns for the first half
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 six months ended June 30, 1998, was $288,480, as
compared to $158,080 for the six months ended June 30, 1997. The 1997 expense
is lower than 1998 due to less time spent by shared employees on the Company's
business matters as compared to other related entities and ground lease expense
on two Inns which was greater in 1998 than 1997.
Property taxes and insurance expenses totaled $659,127 for the six month period
ended June 30, 1998, compared with $489,824 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 $367,721 for the six month period ended June
30, 1997, to $682,213 for the same period ended June 30, 1998, due to the
greater amounts of average principal indebtedness outstanding in the first six
months of 1998. Interest expense amounts
15
<PAGE> 16
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
$106,050 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 $1,784,388 to $2,659,247 for the six month
periods ended June 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 property 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
JUNE 30
---------------------------------------------------
1998 1997
----------------------- ---------------------
<S> <C> <C>
Net (loss) income attributable to common
stockholders $ (705,423) $ 1,889,061
Depreciation 1,363,976 928,522
Extraordinary loss 78,014 --
Loss on disposal of furniture and equipment 160,697 48,238
Loss on impairment of property 2,507,000 --
----------------------- ---------------------
Funds from Operations $ 3,404,264 $ 2,865,821
======================= =====================
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
---------------------------------------------
1998 1997
--------------------- -------------------
<S> <C> <C>
Net income attributable to common
stockholders $ 625,155 $ 2,410,388
Depreciation 2,659,247 1,784,388
Extraordinary loss 106,050 689,542
Loss on disposal of furniture and equipment 267,460 78,124
Loss on impairment of property 2,507,000 --
------------------ --------------------
Funds from Operations $ 6,164,912 $ 4,962,442
================== ====================
</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 June 30, 1998, the Company had approximately $23.2
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 June 30, 1998, the Company had a $40.3 million line of credit (the "Line")
convertible in June 1999 to a term note and $34 million was available for
borrowing under the Line. Loans made under the Line are secured by mortgages on
35 of the Inns. Construction and long-term mortgages 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 has
been obtained for a portion of the cost. The balance is funded under the Line.
Each construction loan converts to a long-term mortgage upon completion of the
Inn without any further action by the Company. As of June 30, 1998, the Company
had 19 Inns unencumbered and available to use as
17
<PAGE> 18
collateral for any additional financing. Subsequent to June 30, 1998, the Line
was increased to approximately $44.5 million, leaving 16 Inns unencumbered. The
Company has an agreement with its lenders to increase the Line to approximately
$45.5 million.
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, Georgia, Mississippi, North Carolina and
Tennessee. The total turnkey construction price for the Inns currently under
construction is $33.6 million, of which approximately $7.2 million had been
expended at June 30, 1998. 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.
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 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
18
<PAGE> 19
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, 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.
19
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
JUNE 30
-------------------------------------
1998 1997
----------------- --------------
<S> <C> <C>
Room Revenues as defined by Lease $ 10,090,919 $ 6,898,964
Construction and other revenues 9,441,648 8,106,560
------------- ------------
Total revenues 19,532,567 15,005,524
Inn operating expenses 5,247,989 3,324,521
Cost of construction and other revenues 8,769,975 7,366,345
Advertising 560,467 120,359
Lease expense to Jameson Inns, Inc. 4,742,604 3,242,524
------------- ------------
Income before income taxes $ 211,532 $ 951,775
============= ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
-------------------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Room Revenues as defined by Lease $ 18,288,107 $ 12,719,292
Construction and other revenues 16,384,895 11,151,485
--------------- -------------
Total revenues 34,673,002 23,870,777
Inn operating expenses 9,468,479 6,181,627
Cost of construction and other revenues 15,585,424 10,269,256
Advertising 1,165,810 246,859
Lease expense to Jameson Inns, Inc. 8,595,282 5,978,067
--------------- -------------
Income (loss) before income taxes $ (141,993) $ 1,194,968
=============== =============
</TABLE>
20
<PAGE> 21
PART II
OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders
At the annual stockholder's meeting held June 27, 1998, the following
matters were submitted to a vote of the Company's stockholders and the
stockholders voted as follows:
1. Michael E. Lawrence was elected as a director for a three year
term. The terms of office as directors for Robert D. Hisrich,
Thomas J. O'Haren and Thomas W. Kitchin continued after the
meeting. There were 8,883,278 votes cast in favor of the election
of Mr. Lawrence and 30,424 votes to withhold authority to vote
for Mr. Lawrence. There were no broker non-votes.
2. The selection of the accounting firm of Ernst & Young, LLP was
ratified as the independent auditor of the Company's financial
statements for the fiscal year ending December 31, 1998. There
were 8,873,538 votes cast in favor of the proposal, 15,219 votes
cast against the proposal and 24,944 votes abstained. There were
no broker non-votes.
Item 5. Other Information
As set forth in the Company's proxy statement for the 1998 Annual
Meeting of Stockholders, stockholders' proposals submitted pursuant to Rule
14a-8 for inclusion in the Company's proxy materials for the 1999 annual
Meeting of Stockholders must be received by the Company no later than January
12, 1999. The date by which the Company must receive notice of any person a
stockholder intends to nominate as a director or any business proposal a
stockholder intends to submit at the 1999 Annual Meeting is April 28, 1999 (but
it may not be received prior to March 29, 1999).
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 June 30, 1998.
EXHIBITS
<TABLE>
<S> <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>
21
<PAGE> 22
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: August 10, 1998 By: /s/ Thomas W. Kitchin
-----------------------------
Thomas W. Kitchin
President and Chief
Executive Officer
Dated: August 10, 1998 By: /s/ Craig R. Kitchin
-----------------------------
Craig R. Kitchin
Chief Financial Officer
(Principal Financial Officer)
22
<PAGE> 23
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
JUNE 30
-----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Consolidated income before extraordinary items $ 66,341 $ 1,889,061
Interest 138,436 7,314
Amortization 27,529 13,991
-------------- -------------
Earnings $ 232,306 $ 1,910,366
============== =============
Interest $ 138,436 $ 7,314
Amortization 27,529 13,991
Cumulative preferred stock dividends 693,750 --
Interest capitalized during the period 238,772 150,524
-------------- -------------
Fixed Charges $ 1,098,487 $ 171,829
============== =============
Ratio of earnings to fixed charges and preferred
stock dividends 0.21 11.12
============== =============
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED
JUNE 30
----------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
Consolidated income before extraordinary items $ 1,531,755 $ 3,099,930
Interest 628,916 331,377
Amortization 53,297 36,344
--------------- -------------
Earnings $ 2,213,968 $ 3,467,651
=============== =============
Interest $ 628,916 $ 331,377
Amortization 53,297 36,344
Cumulative 800,550 --
preferred stock dividends
Interest capitalized during the period 407,311 231,316
--------------- -------------
Fixed Charges $ 1,890,074 $ 599,037
=============== =============
Ratio of earnings to fixed charges and preferred
stock dividends 1.17 5.79
=============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF JAMESON INNS, INC. FOR THE SIX MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,139
<SECURITIES> 0
<RECEIVABLES> 1,626,057
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,114,428
<PP&E> 137,493,329
<DEPRECIATION> (14,200,279)
<TOTAL-ASSETS> 126,265,026
<CURRENT-LIABILITIES> 1,922,720
<BONDS> 23,225,899
0
1,200,000
<COMMON> 984,315
<OTHER-SE> 98,932,092
<TOTAL-LIABILITY-AND-EQUITY> 126,265,026
<SALES> 8,595,282
<TOTAL-REVENUES> 8,595,282
<CGS> 659,127
<TOTAL-COSTS> 659,127
<OTHER-EXPENSES> 3,062,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 682,213
<INCOME-PRETAX> 1,531,755
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,531,755
<DISCONTINUED> 0
<EXTRAORDINARY> 106,050
<CHANGES> 0
<NET-INCOME> 1,425,705
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
