<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended
December 31, 1998 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition from ________________ to ________________
Commission File Number: 0-23256
JAMESON INNS, INC.
(Exact name of Registrant as specified in its Articles)
Georgia 58-2079583
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8 Perimeter Center East, Suite 8050, Atlanta, Georgia 30346-1603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 901-9020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
9.25% Series A Cumulative Preferred Stock, par value $1.00 per share.
Title of Each Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 22, 1999: $74,599,636
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON
MARCH 22, 1999 - 9,910,896
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to
be held May 7, 1999 are incorporated by reference into Part III.
<PAGE>
FORM 10-K
JAMESON INNS, INC.
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
----
PART I
<C> <S> <C>
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 24
Item 3. Legal Proceedings............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders........... 26
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters........................................... 26
Item 6. Selected Financial Data....................................... 27
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 29
Item 7A. Quantitative and Qualitative Disclosure about Market Risks.... 34
Item 8. Financial Statements and Supplementary Data................... 34
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant............ 34
Item 11. Executive Compensation........................................ 34
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 34
Item 13. Certain Relationships and Related Transactions................ 34
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K........................................................... 35
</TABLE>
<PAGE>
JAMESON INNS, INC.
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
PART I
ITEM 1. BUSINESS
General
Jameson Inns, Inc. ("Jameson") is a self-administered real estate investment
trust ("REIT") headquartered in Atlanta, Georgia which develops and owns
limited service hotel properties ("Jameson Inns") operating in the southeastern
United States under the trademark "The Jameson Inn(R)." At December 31, 1998,
Jameson had a total of 114 Jameson Inns either in operation or under
development, including 81 Jameson Inns in operation (3,748 available rooms), 20
Jameson Inns under construction and contracts to acquire 13 parcels of land on
which additional Jameson Inns are expected to be constructed during 1999. In
addition, at December 31, 1998, eight of the Jameson Inns in operation were
undergoing 20-room expansions. Upon completion of these projects, Jameson
expects to have 6,000 available rooms.
Jameson focuses on developing Jameson Inns in communities in the
southeastern United States which have a strong and growing industrial or
commercial base and a shortage of quality hotel rooms. Generally, Jameson Inns
are rooms-only facilities designed to appeal to price and quality conscious
business travelers, as well as family and leisure travelers. The typical
Jameson Inn developed through the end of 1998 is a two-story, Colonial-style
structure with exterior access to the guest rooms and constructed on a one- to
two-acre tract with an outdoor swimming pool, fitness center and parking area.
Jameson Inns feature amenities such as remote-controlled television with access
to cable programming, including HBO, free local calls, complimentary
continental breakfast and newspaper, king-sized or double beds, attractive
decor, quality furnishings and, in select rooms, whirlpool baths and small
refrigerators. In late 1998, Jameson designed and began building a new three-
story, interior corridor structure with 56 to 80 rooms, depending on the
location, and elevator access to each floor. The amenities in the new building
are comparable to those of the current Jameson Inns. Based on local market
demand, some of the Jameson Inns have been expanded one or more times since
their initial construction.
The lodging industry is generally divided into three broad categories based
on the type of services provided. The first of these categories, full service
hotels and resorts, offers their guests rooms, food and beverage services,
meeting rooms, room service and similar guest services, and, in some cases,
resort entertainment and activities. The second category is the limited service
hotel, which generally offers rooms-only facilities and amenities such as
swimming pools, continental breakfast and similar, limited services. The third
category is the all-suite hotel which offers guests more spacious
accommodations and usually kitchen facilities in the suite and common laundry
facilities. Each of these categories is generally subdivided into
classifications based on price and quality. The terminology generally used in
the hotel industry describes properties as luxury at the high end, economy in
the middle and budget at the low end of the scale. Prices for each of these
categories vary by region and locale. Jameson Inns typically fall within the
category of small, limited service, economy hotels.
The hotel industry is seasonal in nature. Occupancy rates are generally
higher in the second and third calendar quarters than in the first and fourth
quarters. This seasonality can be expected to cause quarterly fluctuations in
Jameson's revenues.
All Jameson Inns are leased to Jameson Hospitality, LLC and, prior to 1998,
were leased to Jameson Hospitality's predecessors, Jameson Operating Company,
Jameson Operating Company, LLC, and Jameson Operating Company, II, LLC,
successively. References to Jameson Hospitality throughout this Annual Report
on Form 10-K refer to either Jameson Hospitality or its predecessors, as the
context requires.
1
<PAGE>
In order to reduce Jameson's state franchise tax liability, Jameson Inns
located in certain states are owned by subsidiaries of Jameson which conduct
business only in the respective states. Jameson owns 99.8% of each of these
subsidiaries and various companies wholly-owned by Jameson's chairman and chief
executive officer and his spouse, own the remaining 0.2% of the subsidiaries.
Each such Jameson subsidiary leases all of the Jameson Inns which it owns to
Jameson Hospitality under the terms of master leases substantially the same as
the lease between Jameson and Jameson Hospitality. We sometimes refer to all of
the master leases collectively or individually as the "Jameson Lease."
Jameson was formed in 1988 to develop, own and operate Jameson Inns and
elected to be taxed for federal income tax purposes as a REIT beginning January
1, 1994. In 1994 Jameson became a publicly held company upon consummation of an
initial public offering of its common stock. Jameson's executive offices are
located at 8 Perimeter Center East, Suite 8050, Atlanta, Georgia 30346-1603.
Jameson's telephone number is (770) 901-9020.
Recent Developments
Proposed Merger with Signature Inns, Inc. On January 27, 1999, Jameson
entered into a plan and agreement of merger with Signature Inns, Inc. Under the
merger agreement, Signature would merge with and into Jameson, with Jameson
being the sole surviving entity. Signature owns and operates 25 hotels and
manages one additional hotel, all of which are located in the midwestern United
States. Signature's hotels operate under the name Signature Inns(R). On March
10, 1999, Jameson filed a Registration Statement on Form S-4 relating to the
proposed merger. Jameson and Signature will hold meetings of their stockholders
to vote on approval of the merger and the merger agreement.
In connection with the merger, the holders of Signature common stock will
receive one-half share of Jameson common stock plus cash in the amount of $1.50
for each share of Signature common stock owned. A portion of the $1.50 cash
payment may be paid in the form of a dividend declared and paid by Signature
immediately before the merger is completed. Holders of Signature Series A
Preferred Stock will receive one share of Jameson $1.70 Series S Cumulative
Convertible Preferred Stock for each outstanding share of Signature Series A
Preferred Stock owned. The Jameson Series S Preferred Stock will have
substantially the same terms and conditions as are applicable to the Signature
Series A Preferred Stock, adjusted to reflect the conversion of Signature
common stock into Jameson common stock and cash in the merger.
Prior to the merger, Jameson Hospitality will acquire certain of the assets
and assume certain liabilities related to operation of the Signature Inns. As a
REIT, Jameson is precluded from operating hotel properties, including the
Signature Inns. As a result, upon completion of the merger, Jameson will lease
the Signature Inns to Jameson Hospitality under a master lease with
substantially the same terms and conditions, except for the calculation of the
amount of rent, as the current master leases between Jameson and Jameson
Hospitality related to the Jameson Inns. See The Jameson Lease, below. Under
the lease covering the Signature Inns, base rent will be $394 per room and
percentage rent will equal 37% of the first $35.00 of average daily per room
rental revenues, plus 65% of the next $10.00 of average daily room rentals,
plus 70% of all additional average daily room rentals, less 100% of base rent
and room rental revenues will be reduced by long distance telephone expenses .
Purchase of Outdoor Advertising Assets. On November 3, 1998, the Board of
Directors approved the proposed acquisition by Jameson of the outdoor
advertising assets of Jameson Hospitality. These assets consist of
approximately 100 road side billboards on which Jameson Inn advertising 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, one of the entities which merged into Jameson
Hospitality on March 31, 1998. Jameson plans to lease these assets back to
Jameson Hospitality and the assets will continue to used for the same type of
advertising. Jameson Hospitality is wholly-owned by Thomas W. Kitchin, chief
executive officer of Jameson, and his spouse.
2
<PAGE>
As consideration for the outdoor advertising assets, Jameson will (a) issue
72,727 shares of Jameson Series A Preferred Stock, (b) pay $400,000 in cash,
and (c) assume indebtedness of approximately $735,000 which is secured by
mortgages on the billboards and the revenues generated therefrom. Jameson
anticipates that this transaction will close in April 1999. The amount and
nature of the consideration was negotiated by Thomas W. Kitchin and the other
members of the Jameson Board of Directors with the advice and assistance of an
independent investment banking firm engaged by the Jameson Board of Directors.
Such firm also rendered its opinion to the Jameson 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 stockholders of Jameson. Jameson anticipates that Jameson
Hospitality will distribute the shares of Jameson Series A Preferred Stock
which it receives in the transaction to Mr. & Mrs. Kitchin.
The Jameson Lease
Jameson has entered into the Jameson Lease with Jameson Hospitality covering
all of the completed and operating Jameson Inns. Furthermore, new Jameson Inns,
and Signature Inns if the merger is completed, developed by Jameson during the
term of the Jameson Lease will become subject to the Jameson Lease upon
completion of construction or, as the case may be, of the merger. The following
is a summary description of the material terms and conditions of the Jameson
Lease.
Term; Rent. The Jameson Lease term expires on December 31, 2007, subject to
earlier termination upon the occurrence of certain events. During the term of
the Jameson Lease, Jameson Hospitality is obligated to pay to Jameson base rent
calculated on the number of rooms in operation on the first day of the month
and, where required under the formula described below, percentage rent based on
room revenues. In general, percentage rent is calculated by multiplying average
daily per room rental revenues for all of the Jameson Inns under each master
lease comprising the Jameson Lease by certain percentages. Under the Jameson
Lease, base rent is payable monthly and equals $264.00 per room per month
multiplied by the number of rooms available to rent at the beginning of the
month. Percentage rent is payable quarterly and equals the following:
39% of the first $22.18 of average daily per room rental revenues; plus
65% of all additional average daily per room rental revenues; less
100% of base rent paid for the same period.
Percentage rent is based on the total number of rooms available to rent
during the period, rather than the number of rooms available to rent at the
beginning of each month. The total base rent plus percentage rent payable by
Jameson Hospitality is limited to 47% of room revenues. For purposes of
calculating base rent and percentage rent, each master lease under which
Jameson or one of its subsidiaries is lessor is treated as a separate Jameson
Lease; that is, only the number of rooms and amount of room revenue
attributable to Jameson Inns under a particular master lease are considered
when determining the amount of base rent and percentage rent Jameson
Hospitality is obligated to pay under such Jameson Lease.
Effective January 1, 2000, the $22.18 amount referred to above will be
increased for 2000 based on the percentage increase in the Consumer Price Index
for all Urban Consumers published by the U.S. Department of Labor Bureau of
Labor Statistics for the year ended December 31, 1999. Similar adjustments will
be made on each subsequent January 1 for the year then beginning based on the
changes the Consumer Price Index experienced over the most recently completed
calendar year.
Average daily per room rental revenues are determined by dividing room
revenues realized by Jameson Hospitality over any given period by the sum of
the number of rooms available for rent on each day during the period. Room
revenues as defined in the Jameson Lease include revenues from telephone
charges, vending machine payments and other miscellaneous revenues and exclude
all credits, rebates and refunds, sales taxes and other excise taxes. On or
before March 1 of each year, Jameson Hospitality is required to provide a
3
<PAGE>
calculation of the percentage rent payable for the preceding year, together
with a report by the same independent accounting firm serving as auditors of
Jameson's financial statements, on the amount of room revenues and percentage
rent. Total rent, including both base rent and percentage rent, earned by
Jameson for the years ended December 31, 1996, 1997 and 1998 was $9.4 million,
$13.0 million and $18.2 million, respectively.
Operating Expenses. In addition to paying base rent and, if applicable,
percentage rent, the Jameson Lease requires Jameson Hospitality to pay workers'
compensation insurance premiums, and all costs and expenses incurred in the
operation of the Jameson Inns. Jameson is responsible for other types of
insurance, real and personal property taxes, the costs of replacing or
refurbishing furniture, fixtures and equipment, and the maintenance of
structural elements, roofs and underground utilities.
Approval of Jameson Lease. Jameson's independent directors are members of
the Jameson Board of Directors who are not also officers or employees of
Jameson and who are not affiliated with Jameson Hospitality. The Jameson
independent directors determined that the Jameson Lease, as amended, is fair to
Jameson. The independent directors also consented to the purchase of Jameson
Hospitality by Thomas W. Kitchin and the transfer of the Jameson Lease to
Jameson Hospitality as required by the terms of the Jameson Lease.
Trademark. Jameson Hospitality is the owner of the registered trademark, The
Jameson Inn(R). The Jameson Lease requires Jameson Hospitality to operate the
Jameson Inns using the trademark and not to use the trademark (or license its
use to any other parties) for the operation of lodging facilities other than
the Jameson Inns if Jameson objects to such unrelated use. Jameson has an
option to purchase the trademark from Jameson Hospitality at the end of the
Jameson Lease or upon the earlier termination of the Jameson Lease with respect
to all Jameson hotel properties for $25,000.
Maintenance and Modifications. Under the Jameson Lease, Jameson is required
to maintain the underground utilities and the structural elements of the
improvements and the roof of each Jameson Inn. Jameson Hospitality is required,
at its expense, to maintain the Jameson Inns in good order and repair and to
make non-structural, foreseen and unforeseen, and ordinary and extraordinary
repairs which may be necessary and appropriate to keep the Jameson Inns in good
order and repair.
Jameson Hospitality, at its expense, may make non-capital and capital
additions, modifications or improvements to the Jameson Inns which do not
significantly alter the character or purposes, or significantly detract from
the value or operating efficiencies, of the Jameson Inns. Modifications or
improvements estimated to cost in excess of $100,000 must be done under the
supervision of a qualified architect, engineer or contractor satisfactory to
Jameson and in accordance with plans and specifications approved by Jameson.
All alterations, replacements and improvements are subject to all the terms and
provisions of the Jameson Lease and become the property of Jameson upon
termination of the Jameson Lease. Through February 28, 1999, Jameson
Hospitality had not undertaken any significant capital or non-capital
alterations, replacements or improvements to the Jameson Inns.
Hotels in general, including the Jameson Inns, have an ongoing need for
renovation and refurbishment. Jameson seeks to control such costs through the
construction of new Jameson Inns rather than the purchase and renovation of
existing hotel properties. A significant number of Jameson Inns have been
constructed within the past two years and generally do not require any
renovation or refurbishment. Jameson Inns older than two years require periodic
replacement of furniture, fixtures and equipment and the Jameson Lease requires
that Jameson pay the costs of such refurbishment. Jameson has adopted a policy
of maintaining sufficient cash or available borrowings (collectively the
"Reserve") to fund expenditures for replacement and refurbishment of furniture,
fixtures and equipment for the Jameson Inns up to an amount equal to 4% of
Jameson Hospitality's total aggregate room revenues since July 1, 1995, less
the amounts actually expended since that date.
4
<PAGE>
Insurance and Property Taxes. The Jameson Lease provides that Jameson is
responsible for paying or reimbursing Jameson Hospitality for real and personal
property taxes as well as for all insurance coverage on the Jameson Inns except
workers' compensation coverage which is an obligation of Jameson Hospitality.
Indemnification. The Jameson Lease requires Jameson Hospitality to indemnify
Jameson and its affiliates from and against all liabilities, costs and expenses
(including reasonable attorneys' fees and expenses) incurred by, imposed upon
or asserted against Jameson or its affiliates, on account of, among other
things, (a) any accident or injury to person or property on or about the
Jameson Inns, (b) any misuse by Jameson Hospitality, or any of its agents, of
the leased property, (c) taxes and assessments in respect of the Jameson Inns
(other than real and personal property taxes and income taxes of Jameson on
income attributable to the Jameson Inns), or (d) any breach of the Jameson
Lease by Jameson Hospitality. The Jameson Lease does not, however, require
Jameson Hospitality to indemnify Jameson against Jameson's gross negligence or
willful misconduct. Jameson is required to indemnify Jameson Hospitality
against any environmental liabilities other than those caused by the acts or
negligent failures of Jameson Hospitality (for which Jameson Hospitality will
indemnify Jameson).
Assignment and Subleasing. Under the terms of the Jameson Lease, Jameson
Hospitality is not permitted to sublet all or any part of any of the Jameson
Inns or assign its interest under the Jameson Lease, other than to an affiliate
of Jameson Hospitality controlled by Mr. Kitchin, without the prior written
consent of Jameson. No assignment or subletting will release Jameson
Hospitality from any of its obligations under the Jameson Lease.
Events of Default. Events of default under the Jameson Lease include, among
others, the following:
(a) Jameson Hospitality's continuing failure to pay rent for a period of 10
days after receipt by Jameson Hospitality of written notice of nonpayment from
Jameson;
(b) except under certain circumstances, continued failure by Jameson
Hospitality to observe or perform any other term of the Jameson Lease for a
period of 30 days after Jameson Hospitality receives notice of the failure from
Jameson;
(c) Jameson Hospitality's bankruptcy, insolvency or similar event; and
(d) Jameson Hospitality's voluntary discontinuation of operations at an Inn
for more than five days, without the consent of Jameson, except as a result of
damage, destruction or condemnation.
If an event of default occurs and continues beyond any curative period,
Jameson has the option of terminating the Jameson Lease as to any individual
Jameson Inn (which would not affect the Jameson Lease as to the remainder of
the Jameson Inns) or as to all of the Jameson Inns by giving Jameson
Hospitality 10 days written notice of the termination date.
Termination of Jameson Lease on Disposition of the Jameson Hotel Properties.
If Jameson enters into an agreement to sell or otherwise transfer a hotel
property, Jameson may terminate the Jameson Lease as to that property. However,
if the Jameson Lease is terminated as to hotels comprising at least 25% of the
total rooms of all of Jameson's hotel properties within a period of 12
consecutive months, Jameson Hospitality must be compensated for the loss of its
leasehold interest or offered substitute hotels. Most of the Jameson Inns have
been mortgaged to secure indebtedness of Jameson. In the event of a foreclosure
sale (or transfer in lieu of foreclosure) of any hotel property, the Jameson
Lease will terminate with respect to such hotel property.
Inventory. The Jameson Lease requires all inventory required in the
operation of the Jameson Inns to be acquired and replenished by Jameson
Hospitality. Inventory includes items such as cleaning supplies, linens, towels
and paper goods.
5
<PAGE>
Forward-Looking Statements
This report, including documents incorporated by reference, contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements about Jameson's and
Signature's expansion plans, acquisition or leasing of additional land parcels,
construction of new hotels and expansion of existing hotels, availability of
debt financing and capital, payment of quarterly dividends and other matters.
These and other statements which are not historical facts are hereby identified
as "forward-looking statements" for purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These statements are based on
certain assumptions and analyses made by senior management of Jameson and
Signature in light of their and the companies' experience and perception of
historical trends, current conditions, expected further developments and other
factors. Whether actual results and developments will conform to managements'
and the companies' expectations and predictions is, however, subject to a
number of risks and uncertainties. These include but are not limited to:
. Jameson's ability to:
. integrate the Signature Inns into its ownership and administrative
structure;
. secure construction and permanent financing for future expansion on
favorable terms and conditions;
. assess accurately the market demand for new hotels and expansions of
existing hotels;
. identify and purchase or lease new sites which meet Jameson's
various criteria, including reasonable land prices and ground lease
terms;
. contract for the construction of new hotels and expansions of
existing hotel properties in a manner which produces hotels
consistent with its present quality and standards at a reasonable
cost and without significant delay;
. provide ongoing renovation and refurbishment of its hotels
sufficient to maintain consistent quality throughout the chain; and
. manage its business in a cost-effective manner given the increase in
the number of hotels and the geographic area in which the hotels
operate.
. Jameson Hospitality's ability to manage the hotels profitably.
. General economic, market and business conditions, particularly those in
the lodging industry generally and in the geographic markets Jameson
Inns and Signature Inns are located.
. The business opportunities (or lack of opportunities) that may be
presented to and pursued by Jameson.
. Availability of qualified managers and employees necessary for Jameson's
planned growth, particularly in light of current low rates of
unemployment.
. Changes in laws or regulations.
. Jameson's continued qualification as a REIT and continuation of
favorable income tax treatment for REITs under federal tax laws.
The words "estimate," "project," "intend," "expect," "anticipate," "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
report and the documents incorporated into it by reference. We caution you not
to place undue reliance on these forward-looking statements, which speak only
as of the date of this report. Neither Jameson nor Signature undertakes any
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
6
<PAGE>
Growth Plans for 1999
Jameson's objective is to enhance stockholder value by increasing funds from
operations and cash available for distribution by developing additional Jameson
Inns, expanding existing hotel properties and participating, through the
Jameson Lease, in increased room revenues generated through operation of its
hotel properties by Jameson Hospitality. For definitions and calculation of
funds from operations and cash available for distributions, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Development of New Hotels. Jameson believes that attractive opportunities
exist for the development of new Jameson Inns in certain markets in the
southeastern United States. Accordingly, Jameson intends to continue developing
new Jameson Inns in targeted communities. With operating Jameson Inns in
Alabama, Georgia, Mississippi, North Carolina, South Carolina and Tennessee,
Jameson plans to continue developing Jameson Inns in those states as well as in
Florida, Kentucky, Louisiana and Virginia. At December 31, 1998, Jameson had a
total of 33 Jameson Inns under development, including 20 Jameson Inns under
construction, and contracts to acquire 13 parcels of land on which additional
Jameson Inns are expected to be constructed during 1999. In addition, Jameson
currently has and will consider long-term ground leases for future Jameson Inn
locations. As of December 31, 1998, four of the operating Jameson Inns are
built on leased land, with terms up to 30 years. Twenty new Jameson Inns were
under construction at December 31, 1998; one had opened prior to February 28,
1999, and the remainder are expected to open in 1999.
Jameson believes that it has benefited significantly from its strategy of
developing new Jameson Inns rather than acquiring existing properties and
rehabilitating, refurbishing or re-flagging them because of the experience and
track record of Jameson and Jameson Hospitality in the development,
construction and operation of Jameson Inns. If the merger is completed, Jameson
will consider developing new Signature Inns according to its assessment of
market demand, cost and other relevant factors. In any such cases, Jameson
expects that Jameson Hospitality will act as general contractor. See --Jameson
Hospitality as Contractor below in this section.
In evaluating potential development sites, Jameson targets communities with
strong industrial bases sufficient to attract business travelers. These
communities typically have significant manufacturing facilities, state and
federal government installations, or colleges and universities. Jameson strives
to locate its hotels in proximity to family-style restaurants and targets
markets which offer local community events (e.g. annual festivals, fishing
tournaments, collegiate football games and other athletic events, graduation
ceremonies, etc.) and/or tourist and recreational facilities (e.g. lakes, golf
courses, hunting areas, etc.) attracting groups and individual discretionary
and leisure travelers.
Expansion of Existing Hotel Properties. Jameson intends to continue to
expand existing Jameson Inns whenever market conditions warrant. To date, 22
Jameson Inns have undergone expansion and, at December 31, 1998, eight
additional Jameson Inns were undergoing 20-room expansions. As of February 28,
1999, seven of these expansions were completed. Since Jameson Inns built prior
to 1999 were initially constructed with the office and lobby, swimming pool and
fitness center on sites generally large enough for future expansions, the
incremental cost per room of expansions is lower than for new hotels.
Accordingly, Jameson has been able to earn attractive returns on its investment
by expanding Jameson Inns in markets with strong room demand. Also, as compared
to the development of new Jameson Inns, expansion of existing Jameson Inns is a
relatively lower risk growth strategy since Jameson has an opportunity to
assess local room demand and market trends based on its direct experience in
developing and owning the existing hotel. If the merger is completed, Jameson
expects to employ substantially the same strategy regarding expansion of its
currently operating Jameson Inns. The sites for new, interior-corridor Jameson
Inns and all of the current Signature Inns are fully developed and these
properties cannot be expanded. In those markets, expansions will occur through
the acquisition of additional sites and the construction of new hotels.
7
<PAGE>
Jameson Hospitality as Contractor. We anticipate that Jameson Hospitality
will act as general contractor for new Jameson Inns built by Jameson and
expansions of existing Jameson Inns and, if the merger is completed, Signature
Inns. Each construction contract for a new Jameson hotel or a group of hotels
provides for a turnkey price for all work performed under the contract subject
to reduction, however, if Jameson Hospitality's profits (as defined in the
construction contract) exceed 10%. The contract price excludes the cost of the
land and closing costs, but includes the costs of constructing and equipping
the Jameson hotels and related fitness centers, including interest charges
incurred by Jameson on the associated construction debt during construction and
working with Jameson Hospitality to staff the hotel prior to opening. Each such
construction contract is reviewed by an independent architectural firm and
subject to approval by a majority of Jameson's independent directors. The
average price charged by Jameson Hospitality for the 19 new Jameson Inns opened
during 1998 and the expansions opened in 1998 was approximately $37,000 per
room.
Internal Growth. Through percentage rent, Jameson participates in any
increases in room revenues generated through increases in occupancy rates and
average daily room rates ("ADR") of the Jameson Inns by Jameson Hospitality.
Total rent payable under the Jameson Lease, including base rent and percentage
rent, is limited, however, for each calendar year to 47% of Jameson
Hospitality's room revenues. See --The Jameson Lease, above. Jameson
Hospitality practices aggressive market-sensitive pricing, increasing room
rates at particular Jameson Inns as market conditions in the specific
communities warrant. The Jameson Inns' site managers receive a significant
portion of their compensation based on achieving specified monthly room
revenues and annual expense controls. Jameson Hospitality promotes an
aggressive marketing program which focuses on local efforts directed to the
business community in each Jameson Inn's market.
Marketing
The marketing of the Jameson Inns is the responsibility of Jameson
Hospitality and focuses on local efforts directed to the business community in
the city or town where the particular Jameson Inn is located. In 1998 Jameson
Hospitality hired six direct sales managers, each of whom conducts and
supervises direct sales for designated Jameson Inns. In addition, one of the
key responsibilities of a Jameson Inn's manager is to make sales calls on local
chambers of commerce, businesses, factories, government installations and
colleges and universities. The goal of the sales call is to familiarize local
business people with the Jameson Inn in their community and solicit their
recommendation of the Jameson Inn to business travelers visiting communities
where Jameson Inns are located, including both individual discretionary
travelers as well as groups attending family or community events. Jameson
Hospitality employs billboards and other similar types of advertising and has
an "800" number to facilitate reservations.
In addition to billboard advertising which Jameson Hospitality has
traditionally utilized and will continue to utilize, Jameson Hospitality places
advertisements for the Jameson Inns in regional and special event publications
and in newspapers.
Competition
The hotel industry is highly competitive. Each of the Jameson Inns is
located in an area that includes competing hotels. The number of competitive
hotels in a particular area could have a material adverse effect on occupancy,
ADR and revenue per available room ("REVPAR") of the Jameson Inns. Many of the
Jameson Inns are located in smaller communities where the entry of even one
additional competitor into the market may materially affect the financial
performance of the Jameson Inn in that community.
Jameson competes on the basis of price, quality and value. Jameson's
competition is made up primarily of limited service hotels in the southeastern
United States operating under national franchises which have greater financial
resources than Jameson, substantial advertising budgets, national reservation
systems, marketing programs and greater name recognition.
8
<PAGE>
Regulations
Environmental Matters. Under various federal, state, and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of
hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
properly remediate such property, may adversely affect the owner's ability to
borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. While Jameson has not incurred any such costs in connection with its
ownership of the Jameson Inns, Jameson may be potentially liable for such
costs. Jameson generally develops Inns in areas where the historical use of the
land is well known and often agricultural. Management is not aware of any
potential material liability or claims for which Jameson may be responsible.
However, no assurances can be given that (i) there are no material claims or
liabilities related to real property ownership by Jameson; (ii) future laws,
ordinances or regulations will not impose any material environmental liability
on Jameson; or (iii) the current environmental condition of the Jameson Inns
will not be affected by the operation of the Inns, by the condition of
properties in the vicinity of the Jameson Inns (such as the presence of
underground storage tanks) or by third parties. Under the terms of the Jameson
Lease, Jameson indemnifies Jameson Hospitality against environmental
liabilities, except those caused by the acts or negligent failures of Jameson
Hospitality. In addition, the Lease provides that Jameson Hospitality will
indemnify the Company against environmental liabilities caused by Jameson
Hospitality's acts or negligent failures, although Jameson Hospitality's
financial condition may limit the value of such indemnity and, in any event,
such indemnity will not apply to or protect Jameson against past unknown
violations and related liabilities. See --The Jameson Lease.
Jameson believes that the Jameson Inns are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances and does not anticipate that it will be required
in the foreseeable future to expend any material amounts in order to comply
with such ordinances and regulations. The Company has not been notified by any
governmental authority, nor is it otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its present or former properties.
Americans with Disabilities Act. Under the Americans with Disabilities Act
of 1990 (the "ADA"), all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. In addition
to remedial costs, noncompliance with the ADA could result in imposition of
fines or an award of damages to private litigants. The Company believes that
all existing Inns are substantially in compliance with these requirements and
intends to construct future Inns in accordance with such requirements as well.
In 1993, the Company engaged a disabilities consultant to make recommendations
to the Company regarding the Inns' compliance with the ADA. The consultant
submitted a report recommending a number of improvements for access to and use
by disabled persons with respect to certain of the Inns then in operation,
which improvements were made. The Company has also incorporated such
consultant's recommendation into the construction of new Inns.
Employees
At December 31, 1998, Jameson employed 17 persons. Employees of Jameson are
also employees of Kitchin Investments, Inc., a company wholly owned by Thomas
W. Kitchin and his spouse, and Jameson Hospitality. Under a cost reimbursement
agreement, Jameson reimburses Kitchin Investments for the time that their
shared employees spend on Jameson's business. For the year ended December 31,
1998, Jameson's reimbursement to Kitchin Investments totaled approximately
$200,000. None of Jameson's or Jameson Hospitality's employees is represented
by a union or labor organization, nor have Jameson's or Jameson
9
<PAGE>
Hospitality's operations ever been interrupted by a work stoppage. Jameson
considers relations with its employees to be excellent.
Jameson Hospitality. Jameson Hospitality leases and operates all completed
Jameson Inns owned by Jameson under the terms of the Jameson Lease. See --The
Jameson Lease. We also expect that Jameson Hospitality will lease and operate
all Signature Inns if the merger is completed. The names and certain other
information concerning the executive officers of Jameson Hospitality are set
forth below. At December 31, 1998, Jameson Hospitality had a total of 1,685
employees, including an administrative staff of 90 employees, 102 Inn managers
and assistant managers and 1,493 other full- and part-time employees engaged in
day-to-day management and marketing of the Jameson Inns. Jameson Hospitality
and its predecessor companies have a history of operating losses and a limited
net worth. The audited financial statements of Jameson Hospitality appear
elsewhere in this Annual Report on Form 10-K and should be referred to for
additional financial information concerning Jameson Hospitality. Although it
has not done so to date, Jameson Hospitality may engage in activities other
than as lessee of the Jameson Inns, subject to restrictions under the Jameson
Lease.
Jameson Operating Company, a predecessor of Jameson Hospitality, was formed
in 1993 to operate the Jameson Inns and entered into the Jameson Lease with
Jameson for that purpose. Effective September 12, 1997 and until December 28,
1997, Jameson Operating Company was wholly owned by Thomas W. Kitchin, chairman
and chief executive officer of Jameson. On December 28, 1997, Jameson Operating
Company II, LLC acquired all of the assets, liabilities and operations of
Jameson Operating Company and succeeded Jameson Operating Company as lessee and
operator of the Jameson Inns under the Jameson Lease. Jameson Operating Company
II, LLC was also wholly owned by Thomas W. Kitchin and his spouse. Effective
March 31, 1998, Jameson Operating Company, II merged into Jameson Development
Company, LLC which, on May 7, 1998, changed its name to Jameson Hospitality,
LLC.
The executive officers and key employees of Jameson Hospitality are the
following:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Thomas W. Kitchin.......... President and Chief Executive Officer
William D. Walker.......... Vice President--Development
Craig R. Kitchin........... Vice President--Finance, Treasurer,
Chief Financial Officer
Steven A. Curlee........... Vice President--Legal, General Counsel, Secretary
Gregory Winey.............. Director of Operations
</TABLE>
Set forth below is certain information concerning Jameson Hospitality's
executive officers, directors and key employees.
Thomas W. Kitchin is the founder and owner with his spouse of Jameson
Hospitality. He is also the founder and has been an officer and director of
Jameson since its incorporation in 1988. Prior to founding Jameson and the
predecessors of Jameson Hospitality, he spent 10 years in the oil and gas
industry and served as chief executive officer of an oil and gas company listed
on the American Stock Exchange. Mr. Kitchin serves as a director of the
Association of Publicly Traded Companies, an association that represents public
companies that trade on The Nasdaq Stock Market, New York Stock Exchange and
American Stock Exchange; a director of the Georgia Hospitality and Travel
Association; director of the American Hotel & Motel Association; director of
the Georgia State University Cecil B. Day School of Hospitality Administration;
director of a private school; and director of the Northside Hospital Advisory
Board. In addition, he has served on the board of directors of several banks
and oil companies and numerous other civic, charitable and social service
agencies. Mr. Kitchin is the father of Craig R. Kitchin, president, chief
financial officer and treasurer of Jameson.
William D. Walker is vice president--development of Jameson as well as of
Jameson Hospitality. He has been an officer of Jameson since its inception in
1988 and served as a director from 1988 through October 29, 1993. He has been
an officer of Jameson Hospitality and its predecessors since their inception.
Prior to joining
10
<PAGE>
Jameson, he worked in various financial management positions for twelve years.
Mr. Walker received a B.B.A. degree in finance from Texas Tech University in
1975.
Craig R. Kitchin has been an officer of Jameson Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became chief
financial officer of Jameson in February 1994, vice president--finance in
November 1997, and president in November 1998. He joined Jameson as its
controller and treasurer on June 15, 1992, upon receiving his M.B.A. degree
from the University of Chicago with concentrations in accounting and finance.
Before attending the University of Chicago, he was a financial analyst with FMC
Corporation in Santa Clara, California, from 1989 to 1990, where his primary
responsibilities included budgeting and forecasting overhead expenses. Mr.
Kitchin graduated from Santa Clara University with a B.S. degree in finance in
1989. Craig Kitchin is the son of Thomas W. Kitchin, the chairman and chief
executive officer of Jameson.
Steven A. Curlee has been an officer of Jameson Hospitality and its
predecessors since their inception. Also an officer of Jameson, he became
general counsel and secretary of Jameson on January 1, 1993 and vice
president--legal in November 1997. From April 1985 to July 1992, he was general
counsel of an oil and gas company listed on the American Stock Exchange. Prior
thereto, he was engaged in the private practice of law in Tulsa, Oklahoma for
five years. From 1976 to 1980, Mr. Curlee served on active duty in the U.S.
Navy as a Judge Advocate. He continues to serve in the Navy Reserves, having
attained the rank of Commander. Mr. Curlee received a B.A. degree in political
science and his J.D. from the University of Arkansas. He received a Master of
Law in Taxation degree from Georgetown University. Mr. Curlee is admitted to
practice law in Arkansas, the District of Columbia, Oklahoma, Texas and
Georgia.
Gregory Winey is director of operations of Jameson Hospitality. He joined
Jameson Hospitality in April 1998 as a regional manager supervising the
operations of 17 Jameson Inns. In October 1998 he became the director of
operations supervising the operations of all Jameson Inns. Before joining
Jameson Hospitality, he was with Promus Hotel Corporation from May 1991 to
December 1997 serving in several capacities in hotel operations, most recently
as a senior area manager overseeing the daily operations of 17 hotel
properties, including Hampton Inns, Hampton Inn & Suites and Home Suites
Hotels. Prior to that he was a food and beverage manager for a 300-room Days
Hotel in Charlotte, North Carolina for one year, and prior to that he was
employed for six years by Traveler's Management Corporation as an innkeeper and
rooms division manager of a 432-room convention hotel.
Policies and Objectives with Respect to Certain Activities
The following is a discussion of Jameson's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies may be amended or revised from time to time at the
sole discretion of the Board of Directors of Jameson. No assurance can be given
that Jameson's investment objectives will be attained or that the value of
Jameson will not decrease.
Investment Objectives and Policies. Jameson's investment objective is to
provide quarterly cash distributions and achieve long-term capital appreciation
through increases in cash flow and the value of Jameson. Jameson will seek to
accomplish these objectives through the ownership and leasing of the Jameson
Inns and, if the merger is completed, Signature Inns, to Jameson Hospitality,
selective development of additional Jameson hotels in the United States,
Jameson Hospitality's increases in the hotels' room revenues and, where deemed
appropriate, renovations and expansions of these properties. A key criterion
for new investments will be that they offer the opportunity for growth in funds
from operations and cash available for distribution. For definitions and
calculation of funds from operations and cash available from operations, see
Item 7. --Jameson Management's Discussion and Analysis of Financial Condition
and Results of Operations. Jameson anticipates that all of its activities will
be conducted directly, although Jameson Inns located in certain states are
owned by subsidiaries of Jameson and Jameson may participate with other
entities in property ownership, through joint ventures, partnerships or other
types of co-ownership. Jameson currently intends to invest only in Jameson Inns
and Signature Inns (if the merger is completed), although Jameson may also hold
temporary cash investments from time to time pending investment or distribution
to stockholders.
11
<PAGE>
Jameson may purchase or lease properties for long-term investment, expand
and improve properties, or sell such properties, in whole or in part, when
circumstances warrant. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the equity interest
of Jameson.
While Jameson emphasizes equity real estate investments, it may, in its
discretion, invest in mortgages, stock of other REITs and other real estate
interests. Such mortgage investments may include participating or convertible
mortgages. However, Jameson has not invested previously in mortgages and stock
of other REITs, and does not presently intend to do so.
Dispositions. Jameson has no current intention to dispose of any of the
Jameson Inns, except the Jameson Inn at Milledgeville, Georgia, although it
reserves the right to do so if, based upon management's periodic review of
Jameson's portfolio, the Board of Directors of Jameson determines that such
action would be in the best interests of Jameson.
Financing. In January 1997, Jameson filed a shelf registration statement on
Form S-3 (the "1997 Registration Statement") with the Securities and Exchange
Commission (the "SEC") that provides for the issuance of an aggregate of up to
$100 million in Jameson common stock, preferred stock and common stock warrants
to be offered and sold from time to time. On March 10, 1997, Jameson completed
the sale of 2,300,000 newly issued shares of Jameson common stock. Net proceeds
of approximately $26 million were used to repay certain existing mortgage
indebtedness at that date. In February 1998, Jameson stockholders approved an
amendment to the Jameson articles of incorporation to increase the number of
authorized shares of Jameson common stock from 20 million to 40 million shares
and the authorized shares of preferred stock from 100,000 to 10 million shares.
Later in 1998 Jameson sold, under the 1997 Registration Statement,
1,200,000 shares of Jameson preferred stock at an offering price of $25 per
share. Jameson used the approximately $28.5 million in net proceeds from the
offering to repay indebtedness and for general corporate purposes. Jameson
intends to use additional net proceeds, if any, from any sale of securities
under the 1997 Registration Statement for the repayment of existing
indebtedness, working capital and general corporate purposes.
In the event that the Jameson Board of Directors determines to raise
additional equity capital, the Jameson Board of Directors has the authority,
without stockholder approval, to issue additional shares of Jameson common
stock or other capital stock of Jameson in any manner (and on such terms and
for such consideration) it deems appropriate, including in exchange for
property. Existing stockholders would have no preemptive right to purchase
shares issued in any offering, and any such offering might cause a dilution of
a stockholder's investment in Jameson.
It is anticipated that any additional borrowings will be made directly by
Jameson. Indebtedness incurred by Jameson may be in the form of bank
borrowings, secured and unsecured, and publicly and privately placed debt
instruments. Such indebtedness may be recourse to all or any part of the
property of Jameson or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by Jameson may be used
for the payment of distributions, working capital, to refinance existing
indebtedness or to finance acquisitions, expansions or development of new
hotels.
At December 31, 1998, Jameson had outstanding an aggregate of approximately
$53.7 million of mortgage debt, including approximately $2.4 million in
construction debt. The construction debt provides for total borrowings of $16.6
million and is secured by mortgages on 10 Jameson Inns. Jameson has adopted a
policy of limiting its outstanding indebtedness to 65% of aggregate appraised
value of the Jameson Inns. The management of Jameson estimates that the
outstanding indebtedness at December 31, 1998, represented approximately 35% of
the aggregate appraised value of the Jameson Inns. Jameson's organizational
documents do not limit the amount or percentage of indebtedness that Jameson
may incur. Accordingly, the Jameson Board of Directors could change the current
policies of Jameson and Jameson could become more highly leveraged, resulting
in an increased risk of default on the obligations of Jameson and in an
increase in debt service requirements. Such an increase could adversely affect
the financial condition and results of operations
12
<PAGE>
of Jameson, Jameson's ability to make dividend distributions to its
stockholders and could, as a result, jeopardize Jameson's status as a REIT.
Working Capital Reserves. Jameson's policy is to maintain working capital
reserves (and when not sufficient, access to borrowings) in amounts that the
Jameson Board of Directors determines to be adequate to meet normal
contingencies in connection with the operation of Jameson's business and
investments.
Policy Regarding Capital Expenditures. On July 1, 1995, Jameson adopted a
policy of maintaining cash or sufficient access to borrowings equal to 4% of
the Jameson Inns' aggregate room revenues since July 1, 1995, less amounts
actually spent from that date forward. Prior to this date, the obligation to
fund replacement and refurbishment of furniture, fixtures and equipment was
Jameson Hospitality's. For the period July 1, 1995, through December 31, 1998,
4% of room revenues equaled $3.69 million and Jameson expended $4.68 million on
such items in that same period. Jameson is reviewing this matter and may
consider changing its policy to increase this percentage.
Other Policies. Jameson intends to operate in a manner that will not subject
it to regulation under the Investment Company Act of 1940. Jameson does not
intend to (a) invest in the securities of other issuers for the purpose of
exercising control over such issuer, (b) underwrite securities of other issuers
or (c) actively trade in loans or other investments.
Jameson may make investments other than as previously described, although it
does not currently intend to do so. Jameson has authority to repurchase or
otherwise reacquire Jameson common stock or any of its other securities and may
engage in such activities in the future. During the past four years Jameson has
not issued Jameson common stock or any other securities in exchange for
property, nor has it reacquired any of its common stock or any other
securities; however, Jameson has authority to engage in such activities and may
do so in the future. Prior to January 1, 1994, Jameson made loans to Jameson
officers in connection with Jameson's formation of partnerships to finance
development of new Jameson Inns. All such loans were repaid in full at the time
such partnerships were liquidated. Jameson may in the future make additional
loans to such persons and entities, including, without limitation, its
officers, and to joint ventures in which it participates. During the last four
years, except in connection with formation of partnerships which, prior to
their liquidation in early 1994 in conjunction with Jameson's initial public
offering, were formed by Jameson to finance the development of Jameson Inns,
Jameson has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers, and Jameson does not intend to do so in the
future. Jameson's policies with respect to such activities may be reviewed and
modified from time to time by the Board of Directors of Jameson without the
vote of the stockholders.
At all times, Jameson intends to make investments in such a manner as to be
consistent with the requirements of the Internal Revenue Code to qualify as a
REIT unless, because of circumstances or changes in the Internal Revenue Code
(or in the Treasury Regulations), the Board of Directors of Jameson, with the
consent of a majority of Jameson's stockholders, determines to revoke Jameson's
REIT election.
Jameson may, under certain circumstances, purchase shares of Jameson common
stock in the open market or otherwise. Jameson has not repurchased any shares
and the Board of Directors of Jameson has no present intention of causing
Jameson to repurchase any of the shares of Jameson common stock.
Conflicts of Interest. Because of Thomas W. Kitchin's ownership in and
positions with Jameson, Jameson Hospitality and Kitchin Investments, Inc.,
there are inherent conflicts of interest in the construction of new Jameson
Inns and expansion of existing Jameson Inns by Jameson Hospitality and in
Jameson's dealings with Jameson Hospitality, under the Jameson Lease and with
Kitchin Investments, Inc. under the Cost Reimbursement Agreement. See The
Jameson Lease, Growth Plans for 1999, Jameson Hospitality as Contractor and
Employees. In an effort to reduce the conflicts of interest, any material
transaction or arrangement involving Jameson and Jameson Hospitality, or an
affiliate of either (including Kitchin Investments, Inc.), is subject to
approval by a majority of the independent directors of Jameson. Further,
13
<PAGE>
Jameson Hospitality has agreed that neither it nor any of its affiliates will
(a) operate or manage a hotel property in which Jameson has not invested that
is within a 20-mile radius of a Jameson Inn, or (b) own or have any interest in
any hotel property in which Jameson or an affiliate does not have an interest.
In addition, Mr. Kitchin is prohibited under the terms of his employment
agreement with Jameson from owning, managing or operating, directly or
indirectly, any hotel property other than the Jameson Inns during the term of
his employment by Jameson or, for two years following such employment, any
hotel property within a 20-mile radius of a Jameson Inn.
In addition, the Board of Directors has a policy that any contract or
transaction between Jameson and one or more directors or officers of Jameson,
or between Jameson and any other entity in which one or more of its directors
or officers are directors or officers, or have a financial interest, must be
approved by a majority of either the independent directors of Jameson or
disinterested shareholders after the material facts as to the relationship or
interest and as to the contract or transaction are disclosed or are known to
them. The Board of Directors may change this policy without the consent of the
shareholders upon the affirmative vote of a majority of the independent
directors of Jameson.
Federal Income Taxation Of REITS And REIT Stockholders
Jameson made an election to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code, commencing with its taxable year beginning
January 1, 1994. Jameson made such election at the time of the filing of its
federal income tax return for 1994. Jameson believes that commencing with such
taxable year, it was organized and has operated in such a manner as to qualify
for taxation as a REIT under the Internal Revenue Code. Jameson intends to
continue to operate in such a manner, but no assurance can be given that it has
qualified or will operate in a manner so as to remain qualified as a REIT.
The sections of the Internal Revenue Code relating to qualification and
operation as a REIT are highly technical and complex. The following discussion
describes generally the most significant provisions of the Internal Revenue
Code sections relating to the federal income tax treatment of a REIT and its
stockholders. This discussion is qualified in its entirety by applicable
Internal Revenue Code provisions, Treasury Regulations and administrative and
judicial interpretations thereof.
Commencing with Jameson's taxable year beginning January 1, 1994, Jameson
was organized and believes it has operated in conformity with the requirements
for qualification as a REIT, its proposed method of operations will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under current Internal Revenue Code provisions, and the merger of Signature
with and into Jameson, if completed, will not cause Jameson to cease to qualify
as a REIT. Jameson's qualification and taxation as a REIT depends upon its
ability to meet, through actual annual operating results, distribution levels,
stock ownership requirements and various qualification requirements imposed
under the Internal Revenue Code and discussed below. No assurance can be given
that the actual results of Jameson's operations for any particular taxable year
will satisfy such requirements. For a discussion of the tax consequences of the
failure to qualify as a REIT, see --Failure to Qualify below.
Taxation of Jameson. A REIT, such as Jameson, generally is not subject to
federal corporate income tax on its net income that is currently distributed to
its stockholders because the REIT provisions of the Internal Revenue Code
generally allow a REIT to deduct dividends paid to its stockholders. This
treatment substantially eliminates the "double taxation" (at the corporate and
stockholder levels) that generally results from investment in a corporation.
However, Jameson will be subject to federal income or excise tax as follows.
First, Jameson will be taxed at regular corporate rates on its REIT taxable
income, which is defined generally as taxable income (subject to certain
adjustments), including net capital gains, less dividends to stockholders.
Second, Jameson will generally be subject to the "alternative minimum tax" if
REIT taxable income plus any tax adjustments and preferences is greater than
dividends paid to stockholders. Third, if Jameson has (a) net income from the
sale or other disposition of "foreclosure property" (generally, property
acquired by reason of
14
<PAGE>
a default on a loan or an indebtedness held by a REIT) which is held primarily
for sale to customers in the ordinary course of a trade of business or (b)
other nonqualifying net income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if Jameson has net
income from "prohibited transactions" (generally certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if Jameson should fail to satisfy the 75% or 95%
gross income tests discussed below and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which Jameson fails the 75% or 95% gross income tests, multiplied
by a fraction intended to reflect Jameson's profitability. Sixth, generally, if
Jameson should fail to distribute to its stockholders during each calendar year
an amount equal to its required distribution, it will be subject to a 4%
nondeductible excise tax on the excess of such required distribution amount
over the amount actually distributed for the year. The amount of required
distribution is equal to the sum of (a) 85% of its ordinary income for such
year, (b) 95% of its REIT capital gain net income for such year and (c) the
amount, if any, of the required distribution for the previous year over the
amount actually distributed for that year.
In addition, if during the 10-year period beginning on the first day of the
first taxable year for which Jameson qualified as a REIT (the "Recognition
Period"), Jameson recognizes gain on the disposition of any asset held by
Jameson as of the beginning of such Recognition Period, then, to the extent of
the excess of (a) the fair market value of such asset as of the beginning of
such Recognition Period over (b) Jameson's adjusted basis in such asset as of
the beginning of the Recognition Period (the "Built-In Gain"), such Built-In
Gain, which may be reduced by certain net operating loss carryforwards of
Jameson, will be subject to tax at the highest regular corporate rate. The
Recognition Period began January 1, 1994, and will expire December 31, 2003.
Further, if Jameson acquires any asset from a C corporation in a transaction in
which Jameson's basis in the asset is determined by reference to the C
corporation's basis in the asset or any other property (such as the proposed
merger of Signature into Jameson), and Jameson recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by Jameson, then, to the extent of the Built-In
Gain, such gain will be subject to tax at the highest regular corporate rate.
The amount of Jameson's Built-In-Gain based on the appraisals obtained in
connection with the initial public offering of Jameson's stock ("IPO") is
approximately $8.1 million and will discourage a disposition by Jameson of any
Inn held at the time of the IPO until after 2003.
Requirements for Qualification. The Internal Revenue Code defines a REIT as
a corporation, trust or association (a) which is managed by one or more
trustees or directors; (b) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial interest; (c)
which would be taxable as a domestic corporation, but for Sections 856 through
860 of the Internal Revenue Code; (d) which is neither a financial institution
nor an insurance company; (e) the beneficial ownership of which is held by 100
or more persons; (f) at any time during the last half of each taxable year not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities); (g) which makes an election to be a REIT and
satisfies all relevant filing and other administrative requirements established
by the IRS to elect and maintain REIT status; (h) which uses a calendar year
for federal income tax purposes and complies with the record keeping
requirements of the Internal Revenue Code and Treasury Regulations promulgated
thereunder; and (i) which meets certain other tests, described below, regarding
the nature of its income and assets. The Internal Revenue Code provides that
conditions (a) to (d), inclusive, must be met during the entire taxable year
and that condition (e) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a taxable year of less than 12
months. Jameson has represented that it has met since the closing of the IPO,
and currently does meet, all of such definitional requirements.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross
15
<PAGE>
income of the partnership will retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, Jameson's
proportionate share of the assets, liabilities and items of income of several
limited liability companies in which Jameson owns an interest (such limited
liability companies are treated as partnerships for federal income tax
purposes) will be treated as assets, liabilities and items of income of Jameson
for purposes of applying the requirements described herein.
Income Tests. In order for Jameson to maintain its qualification as a REIT,
it must satisfy two gross income tests annually. First, at least 75% of
Jameson's gross income (excluding gross income from prohibited transactions)
for each taxable year must consist of defined types of income derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and certain mortgage interest)
or "qualified temporary investment income" (generally, income attributable to
the temporary investment of new capital received by Jameson). Second, at least
95% of Jameson's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from the foregoing sources
or from dividends, interest and gain from the sale or disposition of stock or
securities.
Rents received by Jameson under the Jameson Lease will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above only if several conditions are met. First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Therefore, the percentage rent
provisions of the Lease should not disqualify rental income received from
Jameson Hospitality. Second, the Internal Revenue Code provides that rents
received from a tenant, directly or indirectly, will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or a direct or
indirect owner of 10% or more of the REIT, directly or constructively owns 10%
or more of the voting power or total number of outstanding shares of a
corporate tenant, or 10% or more of the assets or net profits of a noncorporate
tenant (a "Related Party Tenant"). Jameson has represented and covenanted that
it has satisfied this requirement since its election to be taxed as a REIT and
will use its best efforts to continue to satisfy this requirement. Furthermore,
Jameson Hospitality is not and should not become a Related Party Tenant of
Jameson by reason of Jameson's adherence to certain restrictions in its bylaws
which void transactions in Jameson's stock which would result in violations of
this requirement. Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." Applicable
Internal Revenue Code provisions provide that with respect to each lease, rent
attributable to the personal property for the taxable year is that amount which
bears the same ratio to total rent as the average of a REIT's adjusted bases of
all personal property at the beginning and at the end of each taxable year
bears to the average of the REIT's aggregate adjusted bases of all real and
personal property at the beginning and at the end of such taxable year. Jameson
has represented that the resulting rental income attributable to personal
property since January 1, 1994, has been, and will continue to be less than 15%
(including rental income attributable to the personal property it will receive
from Signature); however, should the resulting rental income attributable to
personal property exceed 15% of all rental income, a portion of the personal
property may be sold by Jameson to Jameson Hospitality, with the lease payments
adjusted accordingly.
Finally, for rents received to qualify as "rents from real property," a REIT
generally must not operate or manage the leased property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue. Jameson has represented that
it has not, does not and will not knowingly (a) charge rent for any property
that is based in whole or in part on the income or profits of any person
(except by reason of being based on a percentage of receipts or sales, as
described above); (b) rent any property to a Related Party Tenant; (c) lease
personal property in connection with the rental of the Inns which would cause
the rental income attributable to such personal property to exceed 15% of the
amount of total rental income; or (d) perform services considered to be
rendered for the occupants of the Inns other than through an independent
contractor.
16
<PAGE>
Under the Jameson Lease, Jameson Hospitality has leased the land, buildings,
improvements, furnishings, and equipment comprising the Inns from Jameson for a
10-year term and pays Jameson rent. If the merger with Signature is completed,
Jameson Hospitality will lease the Signature hotel properties which will then
be owned by Jameson under a master lease with terms and conditions (other than
the calculation of the amount of rent) substantially the same as the Jameson
Lease. (For purposes of the following discussion, that lease will also be
referred to as the Jameson Lease and both Jameson Inns and Signature Inns will
be referred to as Inns.) In order for such rent to constitute "rents from real
property," the Jameson Lease must be viewed as a true lease for federal income
tax purposes and not treated as a service contract, joint venture or some other
type of arrangement. The determination of whether the Jameson Lease is a true
lease depends on an analysis of all of the surrounding facts and circumstances.
In addition, pursuant to Internal Revenue Code Section 7701(e), a service
contract, partnership agreement, or some other type of arrangement may be
treated instead as a lease of property if the contract, agreement or
arrangement is properly treated as a lease of property, taking into account all
relevant factors, including whether or not: (a) the service recipient is in
physical possession of the property, (b) the service recipient controls the
property, (c) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the service recipient shares the risk that the property will decline
in value, the service recipient shares in any appreciation in the value of the
property, the service recipient shares in savings in the property's operating
costs, or the service recipient bears the risk of damage to or loss of the
property), (d) the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if there is
nonperformance under the lease, (e) the service provider does not use the
property concurrently to provide significant services to entities unrelated to
the service recipient and (f) the contract price does not substantially exceed
the rental value of the property for the term of the lease.
Under the Jameson Lease, (a) Jameson Hospitality has the right to exclusive
possession, use and quiet enjoyment of the Inns during the term of the Jameson
Lease, (b) Jameson Hospitality bears the cost of, and is responsible for daily
maintenance and repair of the Inns, other than the cost of maintaining
underground utilities and structural elements (including the roofs) of the
improvements, (c) Jameson Hospitality dictates how the Inns are operated,
maintained, and improved and bears all of the costs and expenses of operating
the Inns (including the cost of any inventory used in their operation) during
the term of the Jameson Lease (other than real and personal property taxes,
casualty, liability and other types of insurance and equipment and the
maintenance of structural elements, roofs and underground utilities), (d)
Jameson Hospitality benefits from any savings in the costs of operating the
Inns during the term of the Jameson Lease, (e) in the event of damage or
destruction to an Inn, Jameson Hospitality is at economic risk because it will
be obligated to restore the property to its prior condition and bear all costs
of such restoration in excess of any insurance proceeds (except, under certain
circumstances, during the last six months of the term of the Jameson Lease),
(f) Jameson Hospitality has indemnified Jameson against all liabilities imposed
on Jameson during the term of the Jameson Lease by reason of injury to persons
or damage to property occurring at the Inns or due to Jameson Hospitality's
use, management, maintenance or repair of the Inns, and (g) Jameson Hospitality
is obligated to pay substantial fixed rent for the term of the Jameson Lease.
In addition, Jameson has represented that the total amount of rent provided
under the Jameson Lease does not substantially exceed the fair rental value of
the Inns.
Pursuant to IRS Revenue Ruling 55-540, if one or more of the following
conditions are present, the Jameson Lease will instead be considered as a
conditional contract for purchase and sale of the Inns: (a) portions of the
periodic payments are made specifically applicable to an equity interest in the
property to be acquired by the lessee, (b) the lessee will acquire title upon
the payment of a stated amount of "rentals" under the contract which it is
required to make, (c) the total amount which the lessee is required to pay for
a relatively short period of use constitutes an inordinately large proportion
of the total sum required to be paid to secure the transfer of the title, (d)
the agreed "rental" payments materially exceed the current fair rental value,
(e) the property may be acquired under a purchase option at a price which is
nominal in relation to the value of
17
<PAGE>
the property at the time when the option may be exercised, as determined at the
time of entering into the original agreement, or which is a relatively small
amount when compared with the total payments which are required to be made and
(f) some portion of the periodic payments is specifically designated as
interest or is otherwise readily recognizable as the equivalent of interest.
Under the Jameson Lease, (a) no portion of the rent has been or will be
applied to any equity interest in the Inns to be acquired by Jameson
Hospitality, (b) Jameson Hospitality has not acquired and will not be acquiring
title to the Inns upon the payment of a stated amount of rent, (c) the rent
does not and will not materially exceed the current fair rental value of the
Inns (according to Jameson's representation), (d) the Inns may not be acquired
by Jameson Hospitality under a purchase option and (e) no portion of the rent
under the Jameson Lease has been or will be specifically designated as interest
or will be recognizable as the equivalent of interest. Based on the foregoing
Jameson believes that the Jameson Lease will be treated as a true lease for
federal income tax purposes. Such conclusion is based, in part, on the
following facts: (a) Jameson and Jameson Hospitality intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by the Jameson Lease; (b) Jameson Hospitality will have the right to
exclusive possession and use and quiet enjoyment of the Inns during the term of
the Jameson Lease; (c) Jameson Hospitality will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Inns, other than the
cost of maintaining underground utilities and structural repairs, and will
dictate how the Inns are operated, maintained and improved; (d) Jameson
Hospitality will bear all of the costs and expenses of operating the Inns
(including the cost of any inventory used in their operation) during the term
of the Jameson Lease (other than real property taxes, and the cost of
replacement or refurbishment of furniture, fixtures and equipment, to the
extent such costs do not exceed the allowance of such costs provided under the
Jameson Lease); (e) Jameson Hospitality will benefit from any savings in the
costs of operating the Inns during the term of the Jameson Lease; (f) Jameson
Hospitality will indemnify Jameson against all liabilities imposed on Jameson
during the term of the Jameson Lease by reason of (A) injury to persons or
damage to property occurring at the Inns, or (B) Jameson Hospitality's use,
management, maintenance or repair of the Inns; (g) Jameson Hospitality is
obligated to pay substantial fixed rent for the period of use of the Inns; and
(h) Jameson Hospitality stands to incur substantial losses (or reap substantial
gains) depending on how successfully it operates the Inns.
There are no controlling Treasury Regulations, published rulings, or
judicial decisions involving leases with terms substantially the same as the
Jameson Lease that discuss whether such a lease constitutes a true lease for
federal income tax purposes. Therefore, the foregoing conclusions with respect
to the relationship between Jameson and Jameson Hospitality are based upon all
of the facts and circumstances and upon rulings and judicial decisions
involving situations that are considered to be analogous. There can be no
assurance that the IRS will not successfully assert a contrary position. If the
Jameson Lease is recharacterized as a service contract, partnership agreement,
or some other type of arrangement rather than a true lease, part or all of the
payments that Jameson receives from Jameson Hospitality may not satisfy the
various requirements for qualification as "rents from real property." In that
case, Jameson likely would not be able to satisfy either the 75% or 95% gross
income tests and, as a result, would fail to qualify as a REIT.
If Jameson fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Internal Revenue Code.
These relief provisions generally will be available if (a) Jameson's failure to
meet such tests is due to reasonable cause and not due to willful neglect, (b)
Jameson attaches a schedule of the sources of its gross income to its return,
and (c) any incorrect information on such schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances Jameson would be entitled to the benefit of these relief
provisions. As discussed above, even if these relief provisions apply, a 100%
tax would be imposed with respect to the excess net income.
Asset Tests. For Jameson to qualify as a REIT, at the close of each quarter
of its taxable year it must also satisfy three tests relating to the nature of
its assets. First, at least 75% of the value of Jameson's total assets must be
represented by "real estate assets" which means (a) real property (including
interests in real property and interests in mortgages on real property), (b)
shares in other REIT's and (c) stock or debt
18
<PAGE>
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of Jameson, and
(d) cash, cash items (including receivables) and government securities. Second,
not more than 25% of Jameson's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by Jameson
may not exceed 5% of the value of Jameson's total assets and Jameson may not
own more than 10% of such issuer's outstanding voting securities. Jameson's
ownership of an interest in several limited liability companies are treated for
purposes of the asset tests as ownership of a proportionate part of such
limited liability companies' assets. Jameson's investment in the Inns through
its interests in such limited liability companies constitutes qualified assets
for purposes of the 75% asset test. As such, Jameson expects that more than 75%
of the value of its assets will be real estate assets. Jameson has represented
that it has satisfied these asset tests since December 31, 1993, and has
covenanted that it will use its best efforts to continue to satisfy such tests
in the future.
After meeting the assets tests at the close of any quarter, Jameson will not
lose its status as a REIT for failure to satisfy the asset tests at the end of
a later quarter solely by reason of changes in asset values. If the failure to
satisfy the asset tests results from an acquisition of securities or other
property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
Jameson has represented that it maintains adequate records of the value of its
assets to ensure compliance with the asset test and intends to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance. However, there can be no assurance that such action will always
be successful.
Annual Distribution Requirements. To qualify as a REIT, Jameson is required
to distribute dividends (other than capital gain dividends) to its stockholders
in an amount at least equal to (a) the sum of (1) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and any net
capital gain) and (2) 95% of the net income (after tax), if any, from
foreclosure property, minus (b) the sum of certain items of noncash income. In
addition, if Jameson disposes of any asset during the Recognition Period (or,
if the proposed merger with Signature is completed, during the ten-year period
beginning on the effective date of the merger in the case of assets received
from Signature), Jameson will be required to distribute at least 95% of the
Built-In Gain (after tax), if any, recognized on the disposition of such asset.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before Jameson timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that Jameson does not distribute
all of its net capital gain or distributes at least 95%, but less than 100% of
its "REIT taxable income," as adjusted, it will be subject to tax on the
undistributed portion at regular corporate tax rates. Furthermore, if Jameson
should fail to distribute its required distribution during each calendar year,
Jameson would be subject to a 4% nondeductible excise tax on the excess of such
required distribution over the amounts actually distributed.
Since January 1, 1994, Jameson has made, and hereafter intends to make,
timely distributions sufficient to satisfy all annual distribution
requirements. However, it is possible that, from time to time, Jameson may
experience timing differences between (a) the actual receipt of income and
actual payment of deductible expenses and (b) the inclusion of that income and
deduction of such expenses in arriving at its REIT taxable income. In addition,
in the event of the foreclosure of an Inn by a mortgage lender, any debt
discharge income would be subject to the annual 95% distribution requirement
even though Jameson would receive no cash as a consequence of a foreclosure.
Therefore, Jameson could have less cash available for distribution than would
be necessary to meet its annual 95% distribution requirement or to avoid
federal corporate income tax with respect to capital gain or the 4%
nondeductible excise tax imposed on certain undistributed income. To meet the
95% distribution requirement or to avoid federal income tax with respect to
capital gain or the excise tax, it could be necessary for Jameson to borrow
funds.
Under certain circumstances in which an adjustment is made by the IRS that
affects the amount that should have been distributed for a prior taxable year,
Jameson may be able to rectify the failure to meet the distribution requirement
by paying "deficiency dividends" to stockholders in the later year, which may
be included in Jameson's deduction for dividends paid for the earlier year.
Thus, Jameson may be able to avoid
19
<PAGE>
being taxed on deficiency dividends. However, Jameson will be required to pay
interest based upon the amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements. Jameson must maintain certain records and
request on an annual basis certain information from its stockholders designed
to disclose the actual ownership of its outstanding shares. If Jameson failed
to comply with these requirements for any of its taxable years ended on or
before December 31, 1998, its REIT status would be in jeopardy. If Jameson
failed to comply with these requirements for its taxable year ending
December 31, 1998, or fails to comply with these requirements for subsequent
years, it will be required to pay (on notice and demand by the Secretary of the
Treasury and in the same manner as a tax) a penalty of $25,000. If a failure to
comply were attributable to intentional disregard of the aforementioned
requirements, the amount of the penalty would be increased to $50,000. Upon
failure to comply with these requirements, the Secretary of the Treasury may
require Jameson to take such actions as it determines appropriate to ascertain
actual ownership of its outstanding shares. If Jameson were to fail to take
such actions, then Jameson would be required to pay (on notice and demand by
the Secretary of the Treasury and in the same manner as a tax) an additional
penalty equal to the penalty previously paid. None of these penalties would be
imposed if it were shown that the failure to comply was due to reasonable cause
and not to willful neglect. Jameson has represented that it has in the past and
has covenanted that it will in the future comply with such requirements.
Failure to Qualify. If Jameson fails to qualify for taxation as a REIT in
any taxable year, and the relief provisions do not apply, Jameson will be
subject to tax (including any applicable corporate alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders in
any year in which Jameson fails to qualify will not be deductible by Jameson
nor will they be required to be made by Jameson. In such event, to the extent
of current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and, subject to certain
limitations, a corporate distributee may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions,
Jameson will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. Whether Jameson
would be entitled to such statutory relief cannot be foreseen.
Taxation of U.S. Stockholders. As used herein, the term "U.S. Stockholder"
means a holder of shares of Jameson common stock or preferred stock that (for
United States federal income tax purposes) (a) is a citizen or resident of the
United States, (b) is a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (c) is an estate the income of which is subject to United
States federal income taxation regardless of its source, or (d) is a trust if a
United States court is able to exercise primary supervision over the
administration of the trust. For any taxable year of which Jameson qualifies
for a taxation as a REIT, amounts distributed to taxable U.S. Stockholders will
be taxed as set forth below.
Distributions Generally. Distributions to U.S. Stockholders, other than
capital gain dividends discussed below, will be taxable as ordinary income to
such holders up to the amount of Jameson's current or accumulated earnings and
profits. Such distributions generally are not eligible for the dividends
received deduction for corporations. To the extent that Jameson makes
distributions in excess of its current or accumulated earnings and profits,
such distributions will first be treated as a tax-free return of capital,
reducing the tax basis of the U.S. Stockholders' Jameson common stock or
preferred stocks as the case may be and second as gain realized from the sale
of such stock. Dividends declared by Jameson in October, November or December
of any year payable to a U.S. Stockholder of record on a specified date in any
such month will be treated as paid by Jameson and received by the U.S.
Stockholder on December 31 of such year, provided that the dividend is actually
paid by Jameson during January of the following calendar year. U.S.
Stockholders may not include in their own income tax returns any tax losses of
Jameson.
Jameson will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by Jameson up to the greater of its current or
accumulated earnings and profits. As a result, U.S. Stockholders may be
required to treat certain distributions that would otherwise result in a tax-
free return of capital as taxable
20
<PAGE>
dividends. Moreover, any "deficiency dividends" will be treated as an ordinary
dividend or a capital gain dividend, as the case may be, regardless of
Jameson's earnings and profits.
Capital Gain Dividends. Dividends to U.S. Stockholders that are properly
designated by Jameson as capital gain dividends will be treated as gain from
the sale or exchange of a capital asset held for more than one year (to the
extent they do not exceed Jameson's actual net capital gain) without regard to
the period for which the U.S. Stockholder has held the Jameson stock. Corporate
U.S. Stockholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Capital gain dividends are not
eligible for the dividends received deduction generally available to
corporations.
Individual U.S. Stockholders and U.S. Stockholders that are estates and
trust are subject to federal income tax on net capital gains at different tax
rates depending upon the nature of the gain and the holding period of the asset
disposed of. In Notice 97-64, the IRS has provided guidance for REITs to report
information necessary for U.S. Stockholders to compute the appropriate tax in
respect of capital gain dividends. In general, capital gain dividends will be
designated in a written notice to U.S. Stockholders as a 20% rate gain
distribution, an unrecaptured Section 1250 gain distribution or a 28% rate gain
distribution.
Although a REIT is taxed on its undistributed net capital gains, a REIT may
elect to include all or a portion of such undistributed net capital gains in
the income of its U.S. Stockholders. In such event, the U.S. Stockholders will
receive a credit or refund for the amount of tax paid by the REIT on such
undistributed net capital gains.
Passive Activity and Loss; Investment Interest Limitations. Distributions
from Jameson and gain from the disposition of shares of Jameson stock
ordinarily will not be treated as "passive activity income" for federal income
tax purposes, and therefore, U.S. Stockholders generally will not be able to
apply any "passive losses" against such income. Dividends from Jameson (to the
extent they do not constitute a return or capital) generally will be treated as
investment income for purposes of the investment interest limitation. Net
capital gain from the disposition of shares of Jameson stock and capital gain
dividends generally will be excluded from investment income unless the taxpayer
elects to have the gain taxed at ordinary rates.
Dispositions of Jameson Stock. A U.S. Stockholder will recognize gain or
loss on the sale or exchange of shares of Jameson stock to the extent of the
difference between the amount realized on such sale or exchange and the
holder's tax basis in such shares. Such gain or loss generally will constitute
long-term capital gain or loss if the U.S. Stockholder has held such shares for
more than one year and in case of an individual, will be taxed at a lower rate
in such instance. Losses incurred on the sale or exchange of shares of Jameson
stock held for six months or less (after applying certain holding period
rules), however, generally will be deemed long-term capital losses to the
extent of any long-term capital gain dividends received by the U.S. Stockholder
with respect to such shares.
Taxation of Tax-Exempt Stockholders. Distributions by Jameson to a U.S.
stockholder that is a tax-exempt entity should not constitute "unrelated
business taxable income" as defined in Section 512(a) of the Internal Revenue
Code ("UBTI"), provided that the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
Section 514(c) of the Internal Revenue Code and the shares are not otherwise
used in an unrelated trade or business of the tax-exempt entity. In addition,
if Jameson is considered to be a pension-held REIT, then a portion of the
dividends paid to qualified trusts (any trust defined under Section 401(a) and
exempt from tax under Section 501(a)) that owns more than 10 percent by value
in the REIT may be considered UBTI. In general, a pension-held REIT is a REIT
that is held by at least one qualified trust holding more than 25% by value of
the interests in the REIT or by one or more qualified trusts (each of whom owns
more than 10% by value) holding in the aggregate more than 50% by value of the
interests in the REIT. Based on its annual effort to monitor ownership of its
stock, Jameson does not believe that it is a pension-held REIT.
Taxation of Non-U.S. Stockholders. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders
21
<PAGE>
(collectively, "Non-U.S. Stockholders") are complex and no attempt will be made
herein to provide more than a summary of such rules. NON-U.S. STOCKHOLDERS
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL,
STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO THEIR INVESTMENT IN JAMESON
STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by Jameson of United States real property interests and
not designated by Jameson as capital gains dividends will be treated as
ordinary income dividends to the extent their source is current or accumulated
earnings and profits of Jameson. Such distributions will ordinarily be subject
to a withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However, if
income from a Non-U.S. Stockholder's investment in Jameson stock is treated as
"effectively connected" with the Non-U.S. Stockholder's conduct of a United
States trade or business, the Non-U.S. Stockholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. Stockholders are taxed
with respect to such distributions (and may also be subject to the 30% branch
profits tax in the case of a stockholder that is a foreign corporation).
Jameson expects to withhold United States income tax at the rate of 30% on the
gross amount of any such distributions made to a Non-U.S. Stockholder unless
(a) a lower treaty rate applies and the required form evidencing eligibility
for that reduced rate is filed with Jameson or (b) the Non-U.S. Stockholder
files an IRS Form 4224 with Jameson claiming that the distribution is
"effectively connected" income. Distributions in excess of current and
accumulated earnings and profits of Jameson will not be taxable to a Non-U.S.
Stockholder to the extent that such distributions do not exceed the adjusted
basis of the Non-U.S. Stockholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's shares, such distributions will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the
sale or disposition of his shares in Jameson, as described below. If it cannot
be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at a 30% rate. Further, Jameson
will be required to withhold 10% of any distribution in excess of current and
accumulated earnings and profits. However, amounts withheld may be refundable
if it is subsequently determined that such distribution was in excess of
current and accumulated earnings and profits of Jameson and the amount withheld
exceeded the Non-U.S. Stockholder's U.S. tax liability.
For any year in which Jameson qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by Jameson of United States real
property interests will be taxed to a Non-U.S. Stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of United States real
property interests are taxed to a Non-U.S. Stockholder as if such gain were
"effectively connected" with a United States trade or business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. Stockholders (subject to any applicable alternative minimum tax).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
in the case of a foreign corporate stockholder not entitled to treaty
exemption. Jameson is required by Treasury Regulations to withhold 35% of any
distribution to a Non-U.S. Stockholder that could be designated by Jameson as a
capital gains dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Unless the shares of Jameson stock constitute a "United States real property
interest" within the meaning of FIRPTA or are "effectively connected" with a
U.S. trade or business, a sale of such shares by a Non-U.S. Stockholder
generally will not be subject to United State taxation. The shares of Jameson
stock will not constitute a United States real property interest if Jameson is
a "domestically controlled REIT," which is defined generally as a REIT in which
at all times during a specified testing period less than 50% in value of the
REIT's stock was held directly or indirectly by foreign persons. Jameson
believes that it is and will continue to be a "domestically controlled REIT"
and therefore that sales of the Shares by Non-U.S. Stockholders should not be
subject to U.S. taxation. Notwithstanding the foregoing, capital gain not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a "nonresident alien individual" who was
22
<PAGE>
present in the United States for a period or periods aggregating 183 days or
more during the taxable year and certain other conditions apply, in which case
such person would be subject to a 30% tax on such individual's capital gains.
Information Reporting Requirements and Backup Withholding Tax. Jameson will
report to its U.S. Stockholders and the IRS the amount of distributions paid
during each calendar year and the amount of tax withheld, if any. Under certain
circumstances, U.S. Stockholders may be subject to backup withholding at a rate
of 31% with respect to distributions paid. Backup withholding will apply only
if the stockholder (a) fails to furnish its taxpayer identification number
("TIN") (which, for an individual, would be such individual's Social Security
Number), (b) furnishes an incorrect TIN, (c) is notified by the IRS that it has
failed to properly report payments of interest and dividends, or (d) under
certain circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is subject
to backup withholding for failure to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations. U.S.
Stockholders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. Stockholder will be allowed as a credit against such U.S. Stockholder's
United States federal income tax liability and may entitle such U.S.
Stockholder to a refund, provided that the required information is furnished to
the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. Non-U.S. Stockholders should
consult their tax advisor with respect to any such information reporting and
backup withholding requirements.
Federal Income Tax Proposals. On February 1, 1999, the Clinton
Administration announced its proposals for the fiscal year 2000 budget. These
proposals contain certain provisions that, if enacted, would significantly
modify the REIT-related provisions of the Internal Revenue Code. A summary of
the significant provisions is as follows:
Permit Taxable REIT Subsidiaries and Prohibit Preferred Stock
Subsidiaries. A REIT would be permitted to have taxable subsidiaries through
which the REIT could conduct activities such as providing "noncustomary"
services to REIT tenants, providing third party management services, providing
third party development services and engaging in dealer land sales. Many REITS
have set up preferred stock or non-voting common stock subsidiaries to conduct
such activities. This proposal would prohibit preferred stock or non-voting
common stock subsidiaries. The value of all taxable REIT subsidiaries would be
limited to 15% of the REIT's total assets, and the value of all qualified
independent contractor subsidiaries would be limited to 5% of the value to the
REIT's total assets.
Prohibit Closely Held REITs. REITs would be subject to an additional
requirement for REIT qualification which would prohibit certain closely held
structures. No entity or person would be permitted to own stock of a REIT
possessing 50% or more of the total combined voting power of all classes of
voting stock or 50% or more of the total value of all shares of all classes of
stock.
Recognition of Built-in Gain Upon Mergers of C Corporations into REITs. This
proposal would require immediate recognition of built-in gain of any C
corporation with a value of $5 million or more which converts to REIT status.
Other Tax Consequences
Jameson and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of Jameson and
its stockholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, JAMESON STOCKHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON OWNERSHIP OF
JAMESON STOCK.
23
<PAGE>
ITEM 2. PROPERTIES.
The Jameson Inns. The following table sets forth certain information about
the 81 operating Jameson Inns at December 31, 1998.
<TABLE>
<CAPTION>
Year Number 1998
Opened/ Of Room Nights
Location Expanded Rooms Available (1)
- -------- -------- ------ -------------
<S> <C> <C> <C>
ALABAMA:
Albertville...................................... 94 40 14,590
Alexander City................................... 94/95 60 21,900
Arab............................................. 95 40 14,600
Auburn........................................... 97 40 14,600
Decatur (3)...................................... 96 40 14,593
Eufaula.......................................... 96 40 14,586
Florence......................................... 96/96 65 23,725
Greenville....................................... 96 40 14,600
Jasper........................................... 97/98 58 15,516
Oxford........................................... 97 40 14,600
Ozark............................................ 95 40 14,539
Prattville (3)................................... 98 38 2,128
Scottsboro....................................... 98 40 3,720
Selma............................................ 92/95 60 21,571
Sylacauga........................................ 97 40 14,600
Trussville (3)................................... 98 40 9,120
Tuscaloosa (2)................................... 97 40 14,600
--- -------
Subtotal........................................ 761 243,588
--- -------
GEORGIA:
Albany........................................... 95/96 62 22,630
Americus......................................... 92/93/94 79 28,835
Bainbridge....................................... 94/95 60 21,900
Brunswick........................................ 95/96 60 21,902
Calhoun.......................................... 88/94 59 21,509
Carrollton....................................... 94/95 60 21,900
Commerce......................................... 96 40 14,600
Conyers (3)...................................... 96 39 14,238
Covington........................................ 90 40 13,870
Dalton (3)....................................... 98 39 3,901
Douglas.......................................... 95 40 14,602
Dublin (2)....................................... 97 40 14,602
Eastman.......................................... 89 41 14,964
Fitzgerald....................................... 94 40 14,600
Greensboro....................................... 90 41 14,655
Hartwell......................................... 92 40 14,600
Jesup............................................ 90/91 61 21,982
Kingsland........................................ 98 40 8,120
LaGrange......................................... 96/98 56 20,153
Macon............................................ 97 40 14,600
Milledgeville.................................... 91 100 36,500
Oakwood.......................................... 97 40 14,355
Perry............................................ 98 40 13,660
Statesboro....................................... 89 39 14,229
Thomaston........................................ 90/96 61 21,900
Thomasville (2).................................. 98 40 80
Valdosta......................................... 95/95 55 20,075
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Year Number 1998
Opened/ Of Room Nights
Location Expanded Rooms Available (1)
- -------- -------- ------ -------------
<S> <C> <C> <C>
Warner Robins.................................... 97 59 21,355
Washington....................................... 90 41 14,965
Waycross......................................... 93/96 60 21,959
Waynesboro....................................... 96 40 14,598
Winder........................................... 88 40 14,600
----- ---------
Subtotal........................................ 1592 546,439
----- ---------
MISSISSIPPI:
Tupelo........................................... 98/98 60 4,480
----- ---------
Subtotal........................................ 60 4,480
----- ---------
NORTH CAROLINA:
Asheboro......................................... 97 40 14,600
Dunn (2)......................................... 98 40 14,280
Eden............................................. 98 39 7,527
Forest City...................................... 97/98 59 20,651
Garner........................................... 98 40 4,520
Greenville....................................... 98 40 6,760
Hickory (3)...................................... 98 39 3,549
Laurinburg....................................... 97 40 14,600
Lenoir........................................... 98 39 9,087
Roanoke Rapids................................... 98 39 6,825
Sanford.......................................... 97 40 14,600
Smithfield....................................... 98 40 11,080
Wilson........................................... 97 39 14,230
----- ---------
Subtotal........................................ 534 142,309
----- ---------
SOUTH CAROLINA:
Anderson......................................... 93/94 60 21,900
Cheraw (3)....................................... 95 40 14,600
Duncan........................................... 98 40 11,040
Easley........................................... 95 40 14,604
Gaffney.......................................... 95/97 58 21,160
Georgetown....................................... 96 40 14,600
Greenwood........................................ 95/96 64 23,122
Lancaster........................................ 95 40 14,576
Orangeburg....................................... 95 40 14,587
Seneca........................................... 96 40 14,606
Simpsonville..................................... 96 40 14,662
Spartanburg...................................... 98 40 13,837
Union............................................ 97 40 14,600
----- ---------
Subtotal........................................ 582 207,894
----- ---------
TENNESSEE:
Cleveland(3)..................................... 98 40 7,560
Clinton.......................................... 97 40 14,602
Decherd.......................................... 97 40 14,596
Johnson City..................................... 97 59 20,930
Tullahoma........................................ 97 40 14,600
----- ---------
Subtotal........................................ 219 72,288
----- ---------
Total............................................. 3,748 1,216,998
===== =========
</TABLE>
25
<PAGE>
- --------
(1) As to Jameson Inns opened or expanded during 1998, room nights available
reflects all rooms available from the opening date of the Inn or its
expansion but does not include periods during which rooms may have been
unavailable due to repairs or renovations.
(2) Land is subject to a ground lease.
(3) A 20-room expansion of this Jameson Inn was under construction at December
31, 1998.
At December 31, 1998, 41 of the 81 operating Jameson Inns were pledged to
secure indebtedness under Jameson's $46.2 million credit facility. In addition,
24 operating Jameson Inns were pledged to secure other mortgage indebtedness
and 10 of the 20 Jameson Inns under construction at December 31, 1998, were
pledged to secure construction loans.
ITEM 3. LEGAL PROCEEDINGS.
Jameson is not a party to any litigation which, in the judgment of Jameson,
would have a material adverse effect on its operations or financial condition
if adversely determined. However, due to the nature of its business, it is,
from time to time, a party to certain legal proceedings arising in the ordinary
course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders for a vote during the fourth
quarter of fiscal year 1998 which required the solicitation of any proxies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 22, 1999, Jameson had approximately 680 holders of record of its
common stock and, Jameson estimates, approximately 8,500 beneficial holders of
its common stock.
Comparative Per Share Market Price and Dividend Information
The following table sets forth the high and low sale prices for Jameson
common stock for the periods indicated. The prices are as reported on the
Nasdaq National Market based on published financial sources. The table also
sets forth the cash dividends paid per share for the periods indicated for a
share of each of Jameson common stock.
<TABLE>
<CAPTION>
Jameson
Common Stock(1)
-----------------------
Cash
Dividends
Per
High Low Share
------ ------ ---------
<S> <C> <C> <C>
1997
First Quarter........................................ $13.75 $11.25 $.22
Second Quarter....................................... 12.25 10.88 .22
Third Quarter........................................ 13.13 11.38 .23
Fourth Quarter....................................... 12.50 11.00 .23
1998
First Quarter........................................ 12.88 11.25 .23
Second Quarter....................................... 12.38 9.75 .23
Third Quarter........................................ 11.50 9.06 .24
Fourth Quarter....................................... 10.25 8.75 .24
1999
First Quarter (through March 22, 1999)............... 9.38 7.63 --
</TABLE>
- --------
(1) Jameson common stock trades on the Nasdaq National Market under the symbol
"JAMS."
26
<PAGE>
Jameson intends to continue making regular quarterly distributions to its
stockholders. Jameson's cash available for distribution is generally an amount
equal to its net income from operations plus the amount of non-cash expenses
recorded by Jameson, such as amortization, depreciation and stock compensation
expenses, less amounts Jameson believes should be retained for working capital
purposes, debt service or anticipated capital expenditures.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating information
on a pro forma and historical basis for Jameson. The following information
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Annual Report on Form 10-K. The
consolidated historical financial data has been derived from the audited
historical Consolidated Financial Statements. The pro forma data assumes
Jameson's 1994 initial public offering and all related transactions occurred on
January 1, 1993, and Jameson qualified as a REIT, distributed all of its
taxable income and, therefore, incurred no income tax expense during the
period.
Historical financial and operating information of Jameson includes all Inns
owned by Jameson, including both those under development as well as operating
Jameson Inns; however, due to Jameson's development of new Jameson Inns and
expansion of existing Jameson Inns, the information is not comparable between
periods. See Item 2. Properties. Historical operating results, including net
income, may not be comparable to future operating results.
JAMESON INNS, INC.
SELECTED FINANCIAL INFORMATION
(dollars in thousands, except per share data, ADR and REVPAR)
<TABLE>
<CAPTION>
Historical
-----------------------------------------
December 31,
-----------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investment in real estate (before
accumulated depreciation)......... $38,525 $57,370 $80,816 $117,515 $168,880
Net investment in real estate...... 33,760 50,780 71,611 104,931 152,125
Total assets....................... 35,074 52,806 73,985 107,606 156,329
Total mortgage debt................ 11,530 30,214 22,317 29,625 53,697
Stockholders' equity............... 23,282 21,754 50,763 75,161 98,869
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Pro
Forma Historical
-------- --------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1994 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Financial Data:
Gross revenues:
Lease revenue from
Jameson Hospitality.. $ 3,973 $ 3,973 $ 6,342 $ 9,376 $ 12,966 $ 18,230
Expenses:
Depreciation.......... 1,471 1,427 1,825 2,670 3,898 5,636
Property tax and
insurance expense.... 412 412 514 733 1,107 1,524
General and
administrative
expenses............. 479 479 622 499 445 592
Loss on disposal of
furniture
and equipment........ -- -- -- 48 144 508
Loss on impairment of
real estate.......... -- -- -- -- -- 2,507
-------- -------- -------- -------- -------- ----------
Income from operations.. 1,611 1,655 3,381 5,426 7,372 7,463
Other income (expense):
Interest expense, net
of amounts
capitalized.......... (187) (339) (1,590) (1,386) (778) (1,656)
Equity in income
(loss) of hotel lim-
ited
partnership.......... -- (5) -- -- -- --
Interest income....... -- -- -- -- -- --
-------- -------- -------- -------- -------- ----------
Income before
extraordinary item..... 1,424 1,311 1,791 4,040 6,595 5,807
Extraordinary loss...... -- 250 19 989 689 134
-------- -------- -------- -------- -------- ----------
Net income.............. 1,424 1,061 1,772 3,051 5,906 5,673
Preferred stock
dividends.............. -- -- 490 -- -- 2,788
-------- -------- -------- -------- -------- ----------
Net income attributable
to common
stockholders........... 1,424 1,061 1,282 3,051 5,906 3,485
Basic earnings before
extraordinary item..... 0.42 0.43 0.35 0.65 0.72 0.37
Diluted earnings before
extraordinary item..... 0.37 0.43 0.46 0.63 0.70 0.36
Basic earnings per
common share........... 0.42 0.35 0.34 0.49 0.64 0.36
Diluted earnings per
common share........... 0.37 0.34 0.45 0.48 0.63 0.35
Dividends paid per
common share........... -- 0.50 0.80 0.86 0.90 0.94
Cash flow provided by
operating activities... -- 2,528 4,181 6,626 11,911 13,845
Cash flow used in
investing activities... -- (10,845) (18,845) (23,548) (37,362) (55,845)
Cash flow provided by
financing activities... -- 8,592 14,546 16,895 25,581 42,161
Other Data:
Funds from
operations(1).......... $ 2,895 $ 2,738 $ 3,616 $ 6,758 $ 10,637 $ 12,270
Occupancy rate.......... 70.1% 70.1% 67.5% 66.9% 64.9% 61.7%
ADR..................... $ 39.43 $ 39.43 $ 42.80 $ 45.80 $ 47.25 $ 50.60
REVPAR.................. $ 27.64 $ 27.64 $ 28.89 $ 30.64 $ 30.68 $ 31.21
Room revenues(2)........ $ 8,373 $ 8,373 $ 13,310 $ 19,950 $ 27,588 $ 38,787
Room nights available... 295,193 295,193 448,906 634,549 878,056 1,216,998
Operating hotels (at
period end)............ 20 20 32 43 62 81
Rooms available (at
period end)............ 966 966 1,537 2,107 2,924 3,748
Ratio of earnings to
fixed charges and
preferred stock
dividends(3)........... 4.35 3.16 1.37 2.84 5.21 1.50
</TABLE>
- --------
(1) Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") according to the March 1995 interpretation as
net income (computed in accordance with generally accepted accounting
principles ("GAAP")) excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and after adjustments for
unconsolidated partnerships and joint ventures. Jameson has made
adjustments to its net income (loss) consisting only of depreciation, loss
on disposals, loss on impairment of real estate and the extraordinary item.
Jameson notes that industry analysts and investors use funds from
operations as another tool to evaluate and compare equity REITs. Jameson
also believes it is meaningful as an indicator of net income excluding most
non-cash items and provides information about Jameson's cash available for
distributions, debt service and capital
28
<PAGE>
expenditures. Other non-cash expenses such as deferred finance cost
amortization and stock-based compensation expense have not been added back
in funds from operations. Funds from operations does not represent cash flow
from operating activities in accordance with GAAP and is not indicative of
cash available to fund all of Jameson's cash needs. Funds from operations
should not be considered as an alternative to net income or any other GAAP
measure as an indicator of performance and should not be considered as an
alternative to cash flows as a measure of liquidity. In addition, Jameson's
funds from operations may not be comparable to other companies' funds from
operations due to differing methods of calculating funds from operations and
varying interpretations of the NAREIT definition.
(2) The Jameson Lease between Jameson and Jameson Hospitality with regard to
the Jameson Inns defines "Room Revenues" to include gross room rentals,
revenues from telephone charges, vending machine payments and other
miscellaneous revenues and excludes all credits, rebates and refunds, sales
taxes and other excise taxes.
(3) For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest and preferred stock
dividends) to income before extraordinary item. Fixed charges consist of
interest costs whether expensed or capitalized, amortization of debt
discounts and issue costs whether expensed or capitalized and preferred
stock dividends in applicable periods. Jameson paid preferred stock
dividends in 1995 and 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with the historical
consolidated financial statements of Jameson and Jameson Hospitality and the
accompanying notes which are included in this Annual Report on Form 10-K.
General
Jameson has grown from a hotel chain with four Jameson Inns, or 162 rooms,
at January 1, 1990, to 81 Jameson Inns, or 3,748 rooms, in operation at
December 31, 1998. From its inception in 1988 until December 31, 1993, Jameson
was engaged in the business of developing, owning and managing Jameson Inns. As
part of its development activities, Jameson engaged in development and
construction of new Jameson Inns. On December 31, 1993, Jameson reorganized by
divesting itself of the subsidiary corporations through which it conducted its
construction activities, securities brokerage activities and aviation
operations. In addition, Jameson transferred its outdoor advertising business
to Jameson Hospitality's predecessor, which is wholly owned by Jameson's
chairman and chief executive officer and his spouse. Jameson no longer manages
or operates the Jameson Inns upon their completion, but limits its primary
activities to developing and owning the properties. Effective January 1, 1994,
Jameson's primary source of revenue became lease payments by Jameson
Hospitality which leases and operates the Inns under the Jameson Lease.
The 1994 Jameson pro forma financial information has eliminated those
businesses in which Jameson has not been engaged in since it divested itself of
these businesses on December 31, 1993, so as to be comparable to the subsequent
years' historical financial information. Although room revenues are earned by
Jameson Hospitality, not Jameson, they are the basis upon which the percentage
rent paid to Jameson by Jameson Hospitality (under the Jameson Lease) is
determined and, accordingly, such revenues are discussed below. The term "Same
Inn Room Revenues" refers to revenues earned with respect to Jameson Inns which
were operating during all of both comparison periods and includes revenues
attributable to rooms added to existing Jameson Inns by virtue of expansion of
such Jameson Inns.
The Jameson Lease provides for the payment of base rent and percentage rent.
For the year ended December 31, 1998, combined base rent and percentage rent in
the aggregate amount of $18.2 million was earned by Jameson. The principal
determinant of percentage rent under the Jameson Lease is room revenues of the
Jameson Inns. Therefore, we believe that a review of the historical performance
of the operations of the 81 operating Jameson Inns, particularly with respect
to occupancy, ADR and REVPAR, is appropriate for
29
<PAGE>
understanding Jameson's lease revenue (see --Funds from Operations; Cash
Available for Distribution, below, for the calculation of ADR and REVPAR).
Results of Operations
Comparison of the Year Ended December 31, 1998 to the Year Ended December
31, 1997. Jameson's lease revenue for 1998 increased 40.0% to $18.2 million as
compared to $13.0 million for 1997. The increase was due to an increase in
Jameson Hospitality's room revenues.
As a result of three factors, Jameson Hospitality's room revenues rose 41%,
from $27.6 million for 1997 to $38.8 million in 1998.
. The number of room nights available at Jameson Inns increased from
878,056 in 1997 to 1,216,998 in 1998, or 38.6%, due to the opening from
January 1997 through December 1998 of 38 new 38- to 59-room Jameson
Inns, and five 16- to 19-room expansions of existing Jameson Inns.
. Jameson Inns' occupancy rate decreased from 64.9% for 1997 to 61.7% for
1998. The decrease in overall occupancy of the Jameson Inns is
attributable primarily to (a) the expansion of several high occupancy
Jameson Inns which then experienced lower occupancy rates because of the
additional rooms available, (b) the opening of new Jameson Inns which
typically require several months of operations before realizing higher
occupancy rates and (c) additional competition in certain markets.
. ADR increased 7.1% from $47.25 in 1997 to $50.60 in 1998.
Jameson Hospitality's Same Inn Room Revenues for 1998 versus 1997 grew to
$26.2 million from $25.1 million, or 4%. The growth is due to an increase in
ADR from $47.03 to $50.07 for these Jameson Inns and an increase in room nights
available (due to expansions of certain of these Jameson Inns) from 797,737 to
807,842 partially offset by a decrease in the occupancy rate from 65.4% to
63.4% for these Jameson Inns for 1997 compared to 1998. During 1998, Jameson's
lease revenue was affected by the limitation equal to 47% of room revenues for
the year.
Jameson's general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office.
Jameson's general and administrative expense for 1998 was $592,000, as compared
to $445,000 for 1997, due to additional costs resulting from the increased size
of Jameson and more time spent by shared employees on Jameson's business
matters as compared to Jameson Hospitality's and other related entities'.
Jameson's property taxes and insurance expenses totaled $1.5 million in
1998, compared with $1.1 million for 1997. The increase is attributable to the
increase in the number of Jameson Inns and the expansion of existing Jameson
Inns.
Jameson's interest expense increased from $0.8 million in 1997 to $1.7
million in 1998 due to the increase in its average outstanding debt balance in
1998. As a result of the early extinguishment of debt in 1998 and 1997, Jameson
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.
Jameson's depreciation expense increased from $3.9 million in 1997 to $5.6
million in 1998, due to an increase in the number of operating Jameson Inns and
the expansion of existing Jameson Inns.
Jameson's loss on disposal of furniture and equipment increased from
$144,000 in 1997 to $508,000 in 1998 due to an increase in replacement of
furniture, fixtures and equipment before the end of its depreciable life.
In 1996, Jameson adopted Financial Accounting Standards Board Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment
30
<PAGE>
losses to be recorded on long-lived assets used in operations or held for sale
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. During 1998, Jameson recognized a $2,507,000 loss on impairment of real
estate related to one of the hotel properties, which is being actively marketed
for sale. No other impairment losses have been recognized.
Comparison of the Year Ended December 31, 1997 to the Year Ended December
31, 1996. Lease revenue for Jameson for 1997 increased 38% to $13.0 million as
compared to $9.4 million for 1996. The increase was due to an increase in
Jameson Hospitality's room revenues.
As a result of three factors, Jameson Hospitality's room revenues rose 38%,
from $20 million for 1996 to $27.6 million in 1997.
. The number of room nights available at Jameson Inns increased from
634,549 in 1996 to 878,056 in 1997, or 38%, due to the opening from
January 1996 through December 1997 of 30 new 40-room Jameson Inns, two
new 60-room Jameson Inns and seven 20- to 26-room expansions of existing
Jameson Inns.
. Jameson Inns' occupancy rate decreased from 66.9% for 1996 to 64.9% for
1997. The decrease in overall occupancy of the Jameson Inns is
attributable primarily to (a) the expansion of several high occupancy
Jameson Inns which then experienced lower occupancy rates because of the
additional rooms available, (b) the opening of new Jameson Inns which
typically require several months of operations before realizing higher
occupancy rates and (c) additional competition in certain markets.
. ADR increased 3% from $45.80 in 1996 to $47.25 in 1997.
Jameson Hospitality's Same Inn Room Revenues for 1997 versus 1996 grew to
$18.4 million from $18.3 million, or 1%. The growth is due to an increase in
Jameson Hospitality's ADR from $45.62 to $46.60 for these Jameson Inns and an
increase in room nights available (due to expansions of certain of these
Jameson Inns) from 582,840 to 601,264 partially offset by a decrease in the
occupancy rate from 67.0% to 64.0% for these Jameson Inns for 1997 compared to
1996. During 1997, Jameson's lease revenue was affected by the limitation equal
to 47% of room revenues for the year.
Jameson's general and administrative expense includes overhead charges for
management, accounting and legal services for the corporate home office.
Jameson's general and administrative expense for 1997 was $445,000, as compared
to $499,000 for 1996, due to less time spent by shared employees on Jameson's
business matters as compared to Jameson Hospitality's and other related
entities'.
Jameson's property taxes and insurance expenses totaled $1.1 million in
1997, compared with $733,000 for 1996. The increase is attributable to the
increase in the number of Jameson Inns and the expansion of existing Jameson
Inns.
Jameson's interest expense decreased from $1.4 million in 1996 to $.8
million in 1997 due to the repayment of indebtedness of approximately $25.6
million in March 1997 and $30.8 million in April 1996. Proceeds to pay down
debt were generated by the sale of 2.3 million and 3.3 million shares of
Jameson common stock in March 1997 and April 1996, respectively. As a result of
the early extinguishment of debt in 1997 and 1996, Jameson had losses of
$689,542 in 1997 and $989,376 in 1996, comprised of the write-offs of deferred
finance costs and prepayment penalties, which are reflected as extraordinary
items.
31
<PAGE>
Jameson's depreciation expense increased from $2.7 million in 1996 to $3.9
million in 1997, due to an increase in the number of operating Jameson Inns and
the expansion of existing Jameson Inns.
Jameson's loss on disposal of furniture and equipment increased from $48,000
in 1996 to $144,000 in 1997 due to an increase in replacement of furniture,
fixtures and equipment before the end of its depreciable life.
Funds from Operations; Cash Available for Distribution
The following table illustrates Jameson's calculation of funds from
operations and cash available for distribution on a historical basis for the
years ended December 31, 1996, 1997 and 1998. In March 1995, NAREIT published a
new interpretation of funds from operations which Jameson retroactively adopted
at that time.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Net income available to common stockholders....... $ 3,051 $ 5,906 $ 3,485
Add:
Depreciation expense............................ 2,670 3,898 5,636
Loss on disposals............................... 48 144 508
Extraordinary item.............................. 989 689 134
Loss on impairment of real estate............... -- -- 2,507
------- -------- --------
Funds from operations, per March 1995 NAREIT
interpretation................................... 6,758 10,637 12,270
Add:
Loan fee amortization expense................... 93 80 114
Less:
Additions to reserve for furniture, fixtures and
equipment(1)................................... (778) (1,077) (1,551)
Required loan principal repayments.............. (319) (78) (146)
------- -------- --------
Cash available for distribution................... $ 5,754 $ 9,562 $ 10,687
======= ======== ========
</TABLE>
- --------
(1) This amount equals 4% of the aggregate room revenues of the Jameson Inns
for the period.
Liquidity and Capital Resources
Jameson expects to continue to develop additional Jameson Inns, Signature
Inns (if the merger is completed) and expand existing Jameson Inns, as suitable
opportunities arise. Jameson will not undertake such investments, however,
unless adequate sources of financing are available. Since its election to be
taxed as a REIT, Jameson has financed and currently intends to continue
financing the construction of new Jameson Inns and Signature Inns (if the
merger is completed) entirely with bank borrowings. Jameson believes it can
continue to finance new hotels and expansions, with these construction and
long-term mortgage loans. At December 31, 1998, Jameson had approximately $53.7
million in outstanding debt and Jameson had 16 operating Jameson Inns which
were debt free and could be used as collateral should Jameson need additional
borrowing capacity. After the January 1999 financing described below there are
two operating Jameson Inns which remain debt free.
Jameson has a $46.2 million line of credit (the "Line") convertible
beginning in 1998 to term notes. At December 31, 1998, Jameson had drawn down
$27.5 million under the Line with $18.7 million remaining available credit.
Loans made under the Line bear interest at rates initially ranging from 8.5% to
9.0%, which are adjustable annually to equal a major lender's prime rate as
published in the Wall Street Journal plus .25 or .5 percentage points. The
minimum annual interest rate payable under the Line is 7% and the maximum is
13%. The annual interest rates at December 31, 1998, ranged from 8.5% to 9.0%.
Loans made under the Line
32
<PAGE>
are secured by mortgages on 41 of the Jameson Inns. Payments of interest are
due monthly, and monthly payments of principal and interest commence at various
dates beginning in September 1998. Principal under each term loan under the
Line is amortized using a 15-year period and is payable in full at various
dates through 2007. Jameson uses the Line to finance construction costs, if
there is no construction loan in place, and certain other operating needs
including the payment of dividends and other operating expenses.
In the past, Jameson has employed construction and long-term mortgage
financing to fund the balance of construction costs not funded under the Line.
For each new Jameson Inn to be built, Jameson generally obtains a construction
loan for approximately $1.1 to $2.35 million depending on the size of the
Jameson Inn to be built. After an 18-month interest-only period, each of the
construction loans converts to a long-term mortgage financing upon completion
of the Jameson Inn without any further action by Jameson, amortized over 15
years and payable in full seven years from its inception. The interest rate on
each of such loans is adjusted annually, to rates ranging from the prime rate
then prevailing to prime plus .5%. As of December 31, 1998, the construction
loans are secured by mortgages on 10 of the Jameson Inns under construction.
As of December 31, 1998, Jameson had a total of 20 Jameson Inns and eight
expansions under construction with total construction costs, excluding land and
closing costs, expected to total $59.8 million when the projects are complete.
For ten of these properties, Jameson had obtained construction loans in 1998
totaling $16.6 million. In 1999, Jameson obtained additional financing
commitments for six more of the 20 Jameson Inns under construction. This
includes $4.7 million in loans for three Jameson Inns which loans are scheduled
to close when the properties open and $7.2 million for three other Jameson Inns
under construction. In 1999, Jameson also has obtained financing commitments
aggregating for $3.8 million for six expansions under construction at December
31, 1998. Other construction costs will be borrowed under the Line if property-
specific financing is not obtained.
On January 14, 1999, Jameson entered into an agreement with a bank to
provide $17 million in new financing, which is secured by 14 operating Jameson
Inns which were previously debt free. This bank note bears interest at the
weekly average yield on United States Treasury securities adjusted to the
constant maturity of one year plus 3.75% per annum and is payable in monthly
installments of principal and interest of $147,000 until January 2019 when the
note matures. In addition, each month $15,000 must be deposited into a
replacement reserve escrow until such time as the reserve account has a balance
not less than $200,000. The proceeds of this financing will be used to repay
amounts outstanding under the Line.
Since Jameson presently intends to rely primarily on borrowings for
construction and permanent financing of new Jameson Inns and the expansion of
existing properties, the lack of sufficient financing on favorable terms and
conditions could prevent or significantly deter Jameson from constructing new
hotels or expanding existing hotels. The availability of such financing depends
on a number of factors over which Jameson has no control, including general
economic conditions, the economic and competitive environments of the
communities in which Jameson's hotels are located and the level and stability
of long-term interest rates. Jameson also is considering possible additional
long-term debt or equity financing that would be available to fund its ongoing
development activities.
In January 1997, Jameson filed a shelf registration statement on Form S-3
with the SEC to provide additional financing. See Item 1. Business--Policies
and Objectives with Respect to Certain Activities--Financing for a description
of this registration statement.
As with most real estate investments, Jameson's investments in the Jameson
Inns are relatively illiquid and such illiquidity is further increased by the
location of many Jameson Inns in small communities. As a result, the ability of
Jameson to sell or otherwise dispose of any Jameson Inn to provide liquidity
will be very limited.
33
<PAGE>
Jameson has four stock incentive plans in place. As of December 31, 1998,
730,287 shares of Jameson common stock were reserved for future grants and
options to purchase 848,114 shares of Jameson common stock were outstanding
(including 417,714 which were exercisable). In addition, as of December 31,
1998, 84,297 shares of Jameson common stock issued to certain key employees of
Jameson and Jameson Hospitality are restricted as to sale until fully vested in
2006, 2007 and 2008.
Year 2000
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. Jameson has evaluated
its financial software and building operating systems of the Jameson 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 Jameson. Jameson believes that its current software and
operating systems are year 2000 compliant. Based on current information, costs
of addressing and solving year 2000 problems are not expected to have a
material effect on Jameson's financial position or results of operations. The
ability of third parties with whom the Company transacts business to address
adequately their Year 2000 issues is outside of Jameson's control. There can be
no assurance that the failure of Jameson, or such third parties, to address
adequately their respective Year 2000 issues will not have a material adverse
effect on Jameson's future financial condition or results of operations.
Jameson maintains contingency plans in its normal course of business
designed to be deployed in the event of various potential business
interruptions. These generally include manual workarounds and adjusting
staffing.
Inflation
Operators of hotels in general possess the ability to adjust room rates
quickly. Although Jameson Hospitality raised its room rates by approximately 7%
in 1996, 3% in 1997 and 7% in 1998, competitive pressures have limited, and may
in the future limit, Jameson Hospitality's ability to raise rates in the face
of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding this is included in Item 7 of this Annual Report on
Form 10-K under the caption Liquidity and Capital Resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are indexed in Item 14
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required to be contained in Items 10-13 of this Annual
Report on Form 10-K is incorporated by reference to the Company's definitive
proxy statement to be filed with respect to its 1999 annual meeting of
stockholders.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements of Jameson Inns, Inc.
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets as of December 31, 1998, and 1997............ F-2
Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1997 and 1996........................................ F-3
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1998, 1997 and 1996............................ F-4
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996........................................ F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
2. Financial Statement Schedules
<TABLE>
<S> <C>
Schedule III--Real Estate and Accumulated Depreciation................... F-17
Notes to Schedule III.................................................... F-21
</TABLE>
All other schedules have been omitted since the required information is not
present, or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
financial statements and notes thereto.
3. Financial Statements of Jameson Hospitality, LLC
<TABLE>
<S> <C>
Report of Independent Auditors.......................................... F-23
Consolidated Balance Sheets as of December 31, 1998, and 1997........... F-24
Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-25
Consolidated Statements of Members Capital for each of the three years
ended December 31, 1998, 1997 and 1996................................. F-26
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-27
Notes to Consolidated Financial Statements.............................. F-29
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1998.
35
<PAGE>
(c) The following exhibits are filed as part of this Annual Report on Form
10-K or incorporated herein by reference:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger between Jameson Inns, Inc. and Signature
Inns, Inc. incorporated by reference to Exhibit 2.1 to the Registration
Statement on S-4, File No. 333-74149.
3.1 Articles of Incorporation of Jameson Inns, Inc. incorporated by reference
to Exhibit 3.1.1 to the Registration Statement filed on Form S-11, File
No. 33-71160.
3.2 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. incorporated by reference to Exhibit 3.1.2 to the Registration
Statement filed on Form S-11, File No. 33-71160.
3.3 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. incorporated by reference to Exhibit 3.3.1 to Form 10-K/A2
(Amendment No. 2 to the Annual Report on Form 10-K) for the year ended
December 31, 1993.
3.4 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. setting forth, among other things, the Designation of the
Preferences, Rights, Privileges and Restrictions of the 9.25% Series A
Cumulative Preferred Stock incorporated by reference to Exhibit 2 to
Jameson Inns, Inc.'s Registration Statement on Form 8-A filed March 13,
1998 (File No. 23256).
3.5 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. amending the Designation of Preferences, Rights, Privileges and
Restrictions of the 9.25% Series A Cumulative Preferred Stock
incorporated by reference to Exhibit 3.5 to the Registration Statement on
S-4, File No. 333-74149.
3.6 Form of Articles of Amendment to the Articles of Incorporation of Jameson
Inns, Inc. setting forth the Designation of Preferences, Rights,
Privileges and Restrictions of Series S Preferred Stock of the Registrant
incorporated by reference to Exhibit 3.6 to the Registration Statement on
Form S-4, File No. 333-74149.
3.7 Bylaws of Jameson Inns, Inc. incorporated by reference to Exhibit 3.2.1
to the Registration Statement on Form S-11, File No. 33-71160.
3.8 Amendment No. 1 to Jameson Inns, Inc. Bylaws incorporated by reference to
Exhibit 3.2.2 to the Registration Statement on Form S-11, File No. 33-
71160.
3.9 Amendment No. 2 to Jameson Inns, Inc. Bylaws incorporated by reference to
Exhibit 3.8 to the Annual Report filed on Form 10-K for the year ended
December 31, 1995.
4.1 Specimen Certificate of Common Stock incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-11, File No. 33-71160.
4.2 Specimen Certificate of 9.25% Series A Cumulative Preferred Stock
incorporated by reference to Exhibit 1 to the Registration Statement on
Form 8-A filed March 13, 1998 (File No. 23256).
10.1 Master Lease Agreement incorporated by reference to Exhibit 10.1 to the
Annual Report filed on Form 10-K for the year ended December 31, 1993.
10.2 Amendment No. 1 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company (revised) incorporated by reference to Exhibit
10.2 to the Annual Report filed on Form 10-K for the year ended December
31, 1995.
10.3 Amendment No. 2 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.3 to
the Annual Report filed on Form 10-K for the year ended December 31,
1996.
10.4 Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.4 to
the Annual Report filed on Form 10-K for the year ended December 31,
1996.
10.5 Amendment No. 4 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.5 to
the Annual Report filed on Form 10-K for the year ended December 31,
1997.
10.6 Amendment No. 5 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Alabama, Inc., as lessor, and Jameson Development Company, LLC
incorporated by reference to Exhibit 10.6 to the Registration Statement
on Form S-4, File No. 333-74149.
10.7 Schedule of documents substantially similar to Exhibit 10.1 incorporated
by reference to Exhibit 10.7 to the Registration Statement on Form S-4,
File No. 333-74149.
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
10.8 Schedule of documents substantially similar to Exhibit 10.6 incorporated
by reference to Exhibit 10.8 to the Registration Statement on Form S-4,
File No. 333-74149.
10.9 Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin
Investments, Inc. incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-11, File No. 33-71160.
10.10 Form of Construction Contract between Jameson Inns, Inc. and Jameson
Construction Company for construction of Jameson Inns incorporated by
reference to Exhibit 10.7 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.11 Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit
10.22.1 to the Registration Statement on Form S-11, File No. 33-71160.
10.12 Form of Stock Option Agreement under Jameson Inns, Inc. Stock Incentive
Plan incorporated by reference to Exhibit 10.23 to the Registration
Statement on Form S-11, File No. 33-71160.
10.13 Amendment No. 1 to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.10 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.14 1994 Amendment to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.11 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.15 Amendment No. 3 to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.12 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.16 Jameson Inns, Inc. Director Stock Option Plan incorporated by reference
to Exhibit 10.13 to the Annual Report filed on Form 10-K for the year
ended December 31, 1995.
10.17 Jameson 1996 Stock Incentive Plan incorporated by reference to Exhibit
10.45 to the Annual Report filed on Form 10-K for the year ended
December 31, 1996.
10.18 Jameson 1997 Director Stock Option Plan incorporated by reference to
Exhibit 10.17 to the Annual Report filed on Form 10-K for the year ended
December 31, 1997.
10.19 Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
incorporated by reference to Exhibit 10.24 to the Registration Statement
on Form S-11, File No. 33-71160.
10.20 Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.15 to the
Annual Report filed on Form 10-K for the year ended December 31, 1995.
10.21 Amendment No. 2 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.16 to the
Annual Report filed on Form 10-K for the year ended December 31, 1995.
10.22 Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.46 to the
Annual Report filed on Form 10-K for the year ended December 31, 1996.
10.23 Indemnification and Hold Harmless Agreement between Jameson Inns, Inc.
and Jameson Operating Company incorporated by reference to Exhibit 10.25
to the Registration Statement on Form S-11, File No. 33-71160.
10.24 Indemnification and Hold Harmless Agreement between Jameson Inns, Inc.
and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.26
to the Registration Statement on Form S-11, File No. 33-71160.
10.25 Form of Indemnification agreement between Jameson Inns, Inc. and
Directors and Officers incorporated by reference to Exhibit 10.27 to the
Registration Statement on Form S-11, File No. 33-71160.
10.26 Form of Construction Loan Agreement, Indenture, Security Agreement and
Promissory Note for loan from Empire Financial Services, Inc. to Jameson
Inns, Inc. (formerly Jameson Company) for construction of Jameson Inn
incorporated by reference to Exhibit 10.39 to the Registration Statement
on Form S-11, File No. 33-71160.
10.27 Form of Loan Indenture, Security Agreement, Assignment of Fees and
Income, Promissory Note for $4.2 million revolving loan from Empire
Financial Services, Inc. to Jameson Inns, Inc. incorporated by reference
to Exhibit 10.21 to the Annual Report filed on Form 10-K for the year
ended December 31, 1993.
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
10.28 Form of Deed to Secure Debt, Security Agreement, Assignment of Operating
Lease, Assignment of Fees and Income, Promissory Note for loan from
Empire Financial Services, Inc. to Jameson Inns, Inc. incorporated by
reference to Exhibit 10.24 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.29 Loan Modification Agreement and Note increasing by $2.6 million the
revolving loan from Empire Financial Services, Inc. to Jameson Inns,
Inc. incorporated by reference to Exhibit 10.26 to the Annual Report
filed on Form 10-K for the year ended December 31, 1995.
10.30 Deeds to Secure Debt, Mortgages, Assignments and Security Agreements,
Assignment of Rents and Leases, Assignments of Income and Promissory
Note for $17,171,717 loan from Bank Midwest, N.A. to Jameson Inns, Inc.
secured by 14 separate Jameson Inns incorporated by reference to Exhibit
10.34 to the Registration Statement on Form S-4, File No. 333-74149.
10.31 Adjustable Rate Note dated June 30, 1996 in the amount of $1,050,000
from Jameson Inns, Inc. to Empire Financial Services, Inc. for loan on
Waynesboro, Georgia incorporated by reference to Exhibit 10.3 to the
Report for the quarter ended March 31, 1996.
12.1 Ratios of Earnings to Combined Fixed Charges and Preferred Stock
21.1 List of subsidiaries of Jameson Inns, Inc. incorporated by reference to
Exhibit 21.1 to the Registration Statement on Form S-4, File No. 333-
74149.
23.1 Consent of Ernst & Young LLP.
</TABLE>
38
<PAGE>
Report of Independent Auditors
The Board of Directors
Jameson Inns, Inc.
We have audited the accompanying consolidated balance sheets of Jameson
Inns, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Jameson Inns, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
February 12, 1999
F-1
<PAGE>
JAMESON INNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets
Property and equipment.............................. $168,880,042 $117,515,375
Less accumulated depreciation....................... (16,754,843) (12,584,189)
------------ ------------
152,125,199 104,931,186
Cash................................................ 500,377 338,581
Lease revenue receivable............................ 2,289,753 1,457,672
Deferred finance costs, net......................... 1,110,336 781,472
Other assets........................................ 303,497 96,785
------------ ------------
$156,329,162 $107,605,696
============ ============
Liabilities and stockholders' equity
Mortgage notes payable.............................. $ 53,697,435 $ 29,624,889
Accounts payable and accrued expenses............... 199,730 213,411
Accounts payable to affiliates...................... 2,087,106 2,185,884
Accrued interest payable............................ 350,436 164,757
Accrued property taxes.............................. 432,168 255,874
Preferred stock dividends payable................... 693,750 --
------------ ------------
57,460,625 32,444,815
Stockholders' equity:
Preferred stock, 10,000,000 shares authorized
9.25% Series A Cumulative Preferred Stock, $1 par
value, liquidation preference $25 per share,
1,200,000 shares (0 in 1997) issued and
outstanding..................................... 1,200,000 --
Common stock, $.10 par value, 40,000,000 shares
authorized,
9,895,810 shares (9,774,075 in 1997) issued and
outstanding...................................... 989,581 977,408
Additional paid-in capital........................ 97,705,947 75,210,464
Retained deficit.................................. (1,026,991) (1,026,991)
------------ ------------
Total stockholders' equity.......................... 98,868,537 75,160,881
------------ ------------
$156,329,162 $107,605,696
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Lease revenue.............................. $18,229,748 $12,966,185 $9,376,101
Expenses:
Property tax expense..................... 1,041,687 683,902 461,516
Insurance expense........................ 481,932 422,890 271,835
Depreciation............................. 5,636,079 3,898,091 2,669,574
General and administrative expenses...... 592,041 444,908 499,006
Loss on disposal of furniture and
equipment............................... 507,718 143,544 47,849
Loss on impairment of real estate........ 2,507,000 -- --
----------- ----------- ----------
Total expenses............................. 10,766,457 5,593,335 3,949,780
----------- ----------- ----------
Income from operations..................... 7,463,291 7,372,850 5,426,321
Interest expense, net of capitalized
amounts................................... 1,656,240 777,718 1,385,512
----------- ----------- ----------
Income before extraordinary loss........... 5,807,051 6,595,132 4,040,809
Extraordinary loss--early extinguishment of
debt...................................... 133,951 689,542 989,376
----------- ----------- ----------
Net income................................. 5,673,100 5,905,590 3,051,433
Less preferred stock dividends............. 2,188,050 -- --
----------- ----------- ----------
Net income attributable to common
stockholders.............................. $ 3,485,050 $ 5,905,590 $3,051,433
=========== =========== ==========
Per common share:
Income before extraordinary loss:
Basic.................................... $ .37 $ .72 $ .65
Diluted.................................. $ .36 $ .70 $ .63
Net income:
Basic.................................... $ .36 $ .64 $ .49
Diluted.................................. $ .35 $ .63 $ .48
</TABLE>
See accompanying notes.
F-3
<PAGE>
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Contributed Retained Stockholders'
Stock Stock Capital Deficit Equity
---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ -- $385,795 $22,395,546 $(1,026,991) $21,754,350
Issuance of common
stock, net of
offering expense..... -- 339,703 30,787,970 -- 31,127,673
Exercise of stock
options.............. -- 3,770 288,109 -- 291,879
Vesting of stock
options.............. -- -- 63,542 -- 63,542
Vesting of restricted
stock grant.......... -- 6,479 28,852 -- 35,331
Common stock dividends
($0.86 per share).... -- -- (2,509,817) (3,051,433) (5,561,250)
Net income............ -- -- -- 3,051,433 3,051,433
---------- -------- ----------- ----------- -----------
Balance at December 31,
1996................... -- 735,747 51,054,202 (1,026,991) 50,762,958
Issuance of common
stock, net of
offering expense..... -- 234,549 25,887,675 -- 26,122,224
Exercise of stock
options.............. -- 6,981 413,417 -- 420,398
Vesting of stock
options.............. -- -- 37,424 -- 37,424
Vesting of restricted
stock grant.......... -- 131 70,652 -- 70,783
Common stock dividends
($0.90 per share).... -- -- (2,252,906) (5,905,590) (8,158,496)
Net income............ -- -- -- 5,905,590 5,905,590
---------- -------- ----------- ----------- -----------
Balance at December 31,
1997................... -- 977,408 75,210,464 (1,026,991) 75,160,881
Issuance of preferred
and common stock, net
of offering expense.. 1,200,000 4,253 27,839,002 -- 29,043,255
Exercise of stock
options.............. -- 5,930 353,089 -- 359,019
Vesting of stock
options.............. -- -- -- -- --
Vesting of restricted
stock grant.......... -- 1,990 60,442 -- 62,432
Common stock dividends
($0.94 per share).... -- -- (3,784,845) (5,457,255) (9,242,100)
Preferred stock
dividends
($1.82 per share).... -- -- (1,972,205) (215,845) (2,188,050)
Net income............ -- -- -- 5,673,100 5,673,100
---------- -------- ----------- ----------- -----------
Balance at December 31,
1998................... $1,200,000 $989,581 $97,705,947 $(1,026,991) $98,868,537
========== ======== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
JAMESON INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income.......................... $ 5,673,100 $ 5,905,590 $ 3,051,433
Adjustments to reconcile net income
to cash provided by operating
activities:
Extraordinary loss................ 133,951 596,526 989,376
Depreciation and amortization..... 5,750,186 3,977,605 2,762,660
Loss on disposal of furniture and
equipment........................ 507,718 143,544 47,849
Stock-based compensation expense.. 62,432 108,207 98,873
Loss on impairment of real
estate........................... 2,507,000 -- --
Changes in assets and liabilities
increasing (decreasing) cash:
Lease revenue receivable........ (832,081) (773,048) (188,770)
Other assets.................... (206,712) 186,794 (202,130)
Accounts payable and accrued
expenses....................... (13,681) 193,290 (45,828)
Accounts payable to affiliates.. (98,778) 1,552,424 64,799
Accrued interest payable........ 185,679 44,214 (30,639)
Accrued property taxes and other
accrued liabilities............ 176,294 125,205 78,857
------------ ------------ ------------
Net cash provided by operating
activities......................... 13,845,108 12,060,351 6,626,480
Investing Activities
Additions to property and
equipment.......................... (55,844,810) (37,362,186) (23,548,156)
------------ ------------ ------------
Net cash used in investing
activities......................... (55,844,810) (37,362,186) (23,548,156)
Financing Activities
Common stock dividends paid......... (9,242,100) (8,158,496) (5,561,250)
Preferred stock dividends paid...... (1,494,300) -- --
Proceeds from issuance of preferred
and common stock, net of offering
expense............................ 29,043,255 26,122,224 31,127,673
Proceeds from exercise of stock
options............................ 359,019 420,398 291,879
Proceeds from mortgage notes
payable............................ 53,936,020 33,919,713 27,466,333
Payment of deferred finance costs... (576,922) (260,306) (1,066,270)
Payments on mortgage notes payable.. (29,863,474) (26,612,029) (35,363,031)
------------ ------------ ------------
Net cash provided by financing
activities......................... 42,161,498 25,431,504 16,895,334
Net increase (decrease) in cash..... 161,796 129,669 (26,342)
Cash at beginning of year........... 338,581 208,912 235,254
------------ ------------ ------------
Cash at end of year................. $ 500,377 $ 338,581 $ 208,912
============ ============ ============
Supplemental Information
Interest paid, net of interest
capitalized........................ $ 2,252,778 $ 733,504 $ 1,416,151
============ ============ ============
State income and franchise taxes
paid............................... $ 17,353 $ 16,752 $ 3,772
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Financial Statements
Jameson Inns, Inc. ("the Company") develops and owns limited service hotel
properties (the "Inns") operating under the trademark "The Jameson Inn(R)." The
Company focuses on developing Inns in communities in the southeastern United
States which have a strong and growing industrial or commercial base.
At December 31, 1998, there were 81 Inns in operation in six Southeastern
states with a total of 3,748 rooms and an additional 33 Inns under development,
including 20 under construction in these same six states as well as two new
states, and contracts to acquire 13 additional parcels of land on which
additional Inns are expected to be constructed in 1999. At December 31, 1998,
20-room expansions of eight existing Inns were also being constructed.
Intercompany transactions among the entities included in the consolidated
financial statements have been eliminated. As of December 31, 1998, the Company
had one wholly-owned and two 99.8%-owned qualified real estate investment trust
subsidiaries. Various companies wholly-owned by the Company's Chairman and CEO
and his spouse own the remaining 0.2% of these two subsidiaries.
The Company's principal business includes arranging construction and
permanent financing, land acquisition, ownership of the Inns, capital
improvements to the Inns, and acquisition and replacement of furniture,
fixtures and equipment for the Inns.
The Company has several business relationships with Jameson Hospitality, LLC
("JH") including contracts to construct the new Inns (see Note 8) and the lease
to operate the Inns (see Note 3). JH is the successor to Jameson Development
Company, LLC and Jameson Operating Company II, LLC which previously held the
contracts and the lease, respectively. JH is wholly-owned by Thomas W. Kitchin,
chairman and chief executive officer of the Company, and his wife.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Accounting Policies
Property and Equipment
Costs incurred to acquire and open new Inn locations or to renovate existing
Inns are capitalized as property costs and amortized over their depreciable
life. The Company also capitalizes construction period interest costs and real
estate taxes. Interest costs of $1,125,935, $637,290 and $526,130 were
capitalized in 1998, 1997 and 1996, respectively.
Property and equipment used in Inn operations is depreciated using the
straight-line method generally over 31.5 to 39 years (buildings), 15 years
(land improvements) and five years (furniture, fixtures and equipment).
F-6
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements.......................... $ 34,671,144 $ 21,525,941
Buildings...................................... 98,322,232 75,117,503
Furniture, fixtures and equipment.............. 18,849,944 14,018,665
Construction in process........................ 17,036,722 6,853,266
------------ ------------
168,880,042 117,515,375
Accumulated depreciation....................... (16,754,843) (12,584,189)
------------ ------------
$152,125,199 $104,931,186
============ ============
</TABLE>
In 1996, the Company adopted Financial Accounting Standards Board Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations or held for sale when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. During
1998, the Company recognized a $2,507,000 loss on impairment of real estate
related to one of the hotel properties, which is being actively marketed for
sale. No other impairment losses have been recognized.
Deferred Finance Costs
Deferred finance costs represent fees and other expenses incurred to obtain
long-term debt financing on the Inn facilities and are amortized to expense
over the terms of the loans, beginning with the opening of the Inn.
Amortization of deferred finance costs is included in interest expense on the
consolidated statement of operations. Accumulated amortization totaled $180,910
and $88,708 as of December 31, 1998 and 1997, respectively.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), and has operated as such since January
1, 1994. As a result, the Company is not subject to federal income taxes to the
extent that it distributes annually at least 95% of its taxable income to its
shareholders and satisfies certain other requirements defined in the Code.
The Company uses the liability method of accounting for income taxes, which
amounts have not been material since the REIT election.
Stock-Based Compensation
The Company uses the intrinsic value method for valuing its awards of stock
options, restricted stock and other stock awards and recording the related
compensation expense, if any. This compensation expense is included in general
and administrative expense which is allocated as part of the cost reimbursement
agreement described in Note 8.
See Note 5 for pro forma disclosures using the fair value method as
described in Financial Accounting Standards Board Statement No. 123, Accounting
for Stock-Based Compensation ("FAS 123").
Earnings Per Share
Net income attributable to common stock is reduced by all preferred stock
dividends declared through the end of the period.
F-7
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basic earnings per share is calculated using weighted average shares
outstanding less issued and outstanding but unvested restricted shares of
Common Stock.
Diluted earnings per share is calculated using weighted average shares
outstanding plus the dilutive effect of outstanding shares of Preferred Stock,
outstanding restricted shares of Common Stock and outstanding stock options,
using the treasury stock method and the average stock price during the period.
Recently Issued Accounting Standards
During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information
("Statement No. 131"). Statement No. 131 establishes standards for the way that
public business enterprises report information regarding reportable operating
segments. The adoption of Statement No. 131 did not affect the results of
operations or financial position of the Company.
The Company develops and owns limited service hotel Inns in the southeastern
United States which are all leased to JH (see Note 3). The Company separately
evaluates the performance of each of its Inns. However, because each of the
Inns have similar economic characteristics, facilities and services, the Inns
have been aggregated into a single dominant segment.
The Company evaluates performance and allocates resources primarily based on
estimated return on investment. Return on investment represents income divided
by average cost of the real estate asset. All other segment measurements are
disclosed in the Company's consolidated financial statements.
3. The Lease
The Company has entered into a master lease, whereby all of the operating
Inns are leased to JH. Therefore, all of the lease revenue and related
receivables are derived from this lease.
The Lease, which expires December 31, 2007, provides for payment of Base
Rent plus Percentage Rent. Base Rent, which is payable monthly, equals $264.00
per month for each rentable room in the Inns at the beginning of the relevant
month. Percentage Rent, which is payable quarterly, is calculated as a
percentage in excess of Base Rent of the total amount of room rental and other
miscellaneous revenues realized by JH over the relevant period. The percentage
is 39% of such revenues up to $21.62 per day per room in 1998 over the period,
plus 65% of all additional average daily room rental revenues, provided,
however, that total rent for any calendar year is not to exceed 47% of total
room rental revenues for that year. The $21.62 per room amount used in
calculating Percentage Rent is subject to adjustment each year end based on
changes in the Consumer Price Index and as of January 1, 1999 was $22.18.
Base rent totaled $10,501,920, $7,532,712, and $5,469,288 in 1998, 1997 and
1996, respectively, and assuming the same number of rooms in operation as at
December 31, 1998, would total $11,873,664 per year until the Lease expires.
The Lease requires the Company to pay real and personal property taxes,
casualty and liability insurance premiums and the cost of maintaining
structural elements, including underground utilities and the cost of replacing
or refurbishing the furniture, fixtures and equipment in the Inns. The Company
intends to maintain cash reserves or sufficient access to borrowings equal to
4% of room revenues of JH, less amounts expended to date, to fund the Company's
future capital expenditures for such replacements and refurbishments. JH is
required to pay workers compensation insurance premiums, utility costs and all
other costs and expenses incurred in the operations of the Inns.
F-8
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Mortgage Notes Payable
As of December 31, long-term debt consists of:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Notes payable on Inns:
Terms of seven years, due in monthly installments
of principal and interest with any remaining
unpaid balances payable in full on the
individual note's maturity date. Maturity dates
range from 2003 to 2005. Interest rates are
adjusted to a specified spread above the prime
rate, and ranged from 8.125% to 9.0% at December
31, 1998. Secured by mortgages on 24 of the
Inns............................................ $23,843,114 $15,557,415
Line of credit:
$46.2 million line of credit ("the Line")
convertible beginning in 1998 to term notes due
at various dates through 2007. At December 31,
1998, the Company had $18.7 million available to
borrow. The Line bears interest at initial
annual rates ranging from 8.5% to 9.0%, which is
adjusted annually to the prime rate plus .25% or
.5%, with a floor of 7% and a cap of 13% (8.5%
to 9.0% at December 31, 1998). Payments of
interest are due monthly, and monthly payments
of principal and interest commence at various
dates beginning September 1998. Principal under
each term loan under the Line is being amortized
using a 15-year period and is payable in full at
various dates from 2003 to 2007. Secured by
mortgages on 41 of the Inns..................... 27,463,179 11,286,332
Construction obligations:
$16.6 million, including pending draws on
construction loans. As of December 31, 1998,
$14.2 million was available for borrowing. The
construction loans have terms of seven years and
are due in monthly installments of interest only
for 18 months and principal and interest using a
15-year amortization schedule thereafter until
the individual note's maturity date. The notes'
interest rates are adjusted annually to a
specified rate above the prime rate. Interest
rates at December 31, 1998 ranged from 7.875% to
8.875%. Secured by 10 Inns under construction... 2,391,142 2,781,142
----------- -----------
$53,697,435 $29,624,889
=========== ===========
</TABLE>
At December 31, 1998 and 1997, approximately $119.0 and $80.4 million,
respectively, of the Company's net book value of property and equipment
collateralized the mortgage notes payable. At December 31, 1998 and 1997, the
carrying value of the long-term debt approximated its fair value.
F-9
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the scheduled aggregate principal payments
for the five years subsequent to December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,050,496
2000........................................................... 3,023,316
2001........................................................... 3,320,081
2002........................................................... 3,518,474
2003........................................................... 3,642,867
Thereafter..................................................... 39,142,201
-----------
$53,697,435
===========
</TABLE>
The Company used proceeds of its preferred stock offering in 1998 and
common stock offerings in 1997 and 1996 to early extinguish debt in those
years. As a result of the early extinguishment of certain debt in 1998, 1997,
and 1996, the Company had extraordinary losses of $133,951, $689,542 and
$989,376, respectively, comprised of the write-off of unamortized deferred
finance costs and prepayment penalties.
5. Stockholders' Equity
Preferred Stock
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.
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).
Holders of Series A Preferred Stock generally will have no voting rights
except as required by law. In addition, certain changes to the terms of the
Series A Preferred Stock that would be materially adverse to the rights of
holders of the Series A Preferred Stock cannot be made without the affirmative
vote of holders of at least a majority of the outstanding Series A Preferred
Stock.
The Series A Preferred Stock is not convertible into or exchangeable for
any other property or securities.
Upon the occurrence of a Change of Control Event, as defined, at any time
prior to March 18, 2003, the Company may redeem all of the outstanding Series
A Preferred Stock at a purchase price ranging from $25.05 to $26.05 per share
(depending on the date of the redemption), plus accrued and unpaid dividends
(if any) to the date of redemption. Except in certain circumstances relating
to preservation of the Company's status as a REIT and in connection with a
change of control of the Company, the Series A Preferred Stock is not
redeemable prior to March 18, 2003. On and after such date, the Series A
Preferred stock will be redeemable for cash at the option of the Company, in
whole or in part, at a redemption price of $25 per share, plus dividends
accrued and unpaid to the redemption date (whether or not declared) without
interest.
F-10
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company adopted the 1993 Stock Incentive Plan ("1993 Plan") and
originally reserved 320,000 shares of common stock to provide incentives to
attract and retain officers, key employees and directors of both the Company
and JH. The Company's 1993 Stock Incentive Plan provides for a number of
shares equal to 10% of the Company's outstanding common shares to be available
to provide incentives to retain key personnel at both the Company and JH. In
1996, the Jameson 1996 Stock Incentive Plan ("1996 Plan") was adopted and
500,000 shares were reserved for issuance. As of December 31, 1998 the Company
had a total of 1,337,698 shares reserved for future issuance, including
510,287 shares available for future option grants under the 1993 and 1996
Plans.
The Company's Director Stock Option Plan ("1995 Director Plan") initially
reserved 150,000 shares of Common Stock to attract and retain qualified
independent directors. This plan provides that, upon election to the Board of
Directors, each director will receive options to purchase 25,000 shares of
common stock at the then current market price; such options are fully vested
upon issuance. In addition, the Company adopted the 1997 Director Stock Option
Plan ("1997 Director Plan") in November 1997. The 1997 Director Plan initially
reserved 200,000 shares of Common Stock and provides that at time of the
Company's approval of the plan and subsequently upon each annual shareholders
meeting, each independent director will also be granted an option to purchase
5,000 shares at the then current market price with all shares becoming fully
vested upon issuance. As of December 31, 1998, a total of 325,000 shares are
reserved for future issuance under the 1995 Director Plan and the 1997
Director Plan, including 220,000 options available to be granted at December
31, 1998.
A summary of the stock option activity in the 1993, 1996, 1995 Director and
1997 Director Plans follows:
<TABLE>
<CAPTION>
Weighted
Number Range of Average
of Exercise Price Exercise Price
Shares Per Share Per Share
------- ----------------- --------------
<S> <C> <C> <C>
Options outstanding, January 1,
1996............................ 459,540 $ 6.65 - $ 8.75 $ 7.17
Granted in 1996................ 27,500 $10.875 $10.875
Exercised in 1996.............. (37,697) $ 6.65 - $ 7.25 $ 7.08
Forfeited in 1996.............. (21,500) $ 6.65 - $ 8.75 $ 8.27
-------
Options outstanding December 31,
1996............................ 427,843 $ 6.65 - $10.875 $ 7.36
Granted in 1997................ 497,000 $11.375 - $11.75 $11.63
Exercised in 1997.............. (86,992) $ 6.65 - $10.875 $ 7.11
Forfeited in 1997.............. (30,000) $ 7.25 - $11.75 $11.28
-------
Options outstanding December 31,
1997............................ 807,851 $ 6.65 - $11.75 $ 9.87
Granted in 1998................ 175,000 $ 9.125 - $11.375 $10.63
Exercised in 1998.............. (50,737) $ 6.65 - $10.875 $ 7.07
Forfeited in 1998.............. (84,000) $10.00 - $11.75 $11.39
-------
Options outstanding December 31,
1998............................ 848,114 $ 6.65 - $11.75 $10.04
=======
Options exercisable
December 31, 1996.............. 282,844 $ 6.65 - $ 8.125 $ 7.25
=======
December 31, 1997.............. 365,855 $ 6.65 - $11.62 $ 7.78
=======
December 31, 1998.............. 417,714 $ 6.65 - $11.75 $ 8.71
=======
</TABLE>
F-11
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average exercise price of the 848,114 options outstanding at
December 31, 1998 was $10.04. The weighted average exercise price of options
exercisable at December 31, 1998 was $8.71. The average contractual life
remaining on options outstanding at December 31, 1998 was 7.93 years.
As presented in the table above, the Company had a total of 848,114 options
outstanding at December 31, 1998. A portion of these options 251,781 have
exercise prices of $6.65 to $7.25, a weighted average exercise price of $7.12
and an average remaining contractual life of 5.66 years. All of the options
outstanding in this group were exercisable with a weighted average price per
share of $7.12. At December 31, 1998, the Company also had 596,333 options
outstanding with an exercise price of $8.125 to $11.75, a weighted average
exercise price of $11.28 and an average remaining contractual life of 8.89
years. Of this outstanding amount, 165,933 options were exercisable with a
weighted average price per share of $11.13.
Restricted Stock
In 1998, 1997 and 1996, the Company awarded 20,821, 1,400 and 65,270 shares,
respectively of Common Stock to certain officers and employees of the Company
and JH, under the provisions of the 1996 Plan. The shares vest ten years after
date of grant, assuming the individual is continuously employed by one of the
two companies at that date. Holders are entitled to all dividends prior to
forfeiture or full vesting. As of December 31, 1998, 84,297 restricted shares
of common stock remain outstanding; the balance were forfeited and returned to
the Company.
Compensation expense resulting from the stock award is calculated as the
fair value of the restricted shares at the date of grant based on the market
price at date of grant; and is being recorded over the ten-year vesting period
using the straight line method, net of forfeitures. The expense recorded was
$62,432 in 1998, $62,389 in 1997 and $35,331 in 1996.
Pro Forma Effects of Stock-based Compensation
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options and restricted stock granted
subsequent to December 31, 1994, using the fair value method prescribed by that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
1998, 1997 and 1996; risk-free interest rates of 4.10% to 6.69%; a dividend
yield of 8%; a volatility factor of the expected market price of the Company's
Common Stock of .196, .197 or .208, respectively; and an expected life of the
option of 3 to 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options and shares which have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options and restricted stock have characteristics
significantly different from those of traded options or unrestricted shares,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options and restricted stock.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pro forma net income (in 000's)...................... $3,419 $5,882 $3,049
Pro forma earnings per share--basic.................. $ .35 $ .64 $ .49
Pro forma earnings per share--diluted................ $ .34 $ .62 $ .48
</TABLE>
F-12
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividend Reinvestment Plan
In April 1995, the Company registered 200,000 shares of common stock for
purchase under the Dividend Reinvestment and Stock Purchase Plan. The plan
allows existing shareholders to reinvest their dividends in additional shares
purchased at a 5% discount from the average market price of the shares. The
plan also allows existing shareholders to make additional cash purchases of
common stock of up to $5,000 per calendar quarter. These additional cash
purchases from the Company are not sold at a discount from the market price.
During 1998, 1997 and 1996, 41,726, 45,483 and 21,331 shares, respectively,
were purchased either through dividend reinvestments or additional cash
purchases.
Warrants
As a part of its initial public offering, the Company issued and had
warrants outstanding to purchase up to 260,000 shares of Common Stock at an
exercise price of $14.85 per share; the warrants are exercisable in whole or in
part from date of grant until January 26, 1999. The warrants expired in 1999
with no exercises.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Income from continuing operations... $ 5,807,051 $6,595,132 $4,040,809
Extraordinary loss.................. (133,951) (689,542) (989,376)
----------- ---------- ----------
Net income.......................... 5,673,100 5,905,590 3,051,433
Preferred stock dividends........... (2,188,050) -- --
----------- ---------- ----------
Numerator for basic earnings per
share--income available to common
stockholders....................... $ 3,485,050 $5,905,590 $3,051,433
=========== ========== ==========
Denominator:
Weighted average shares
outstanding........................ 9,836,624 9,285,670 6,239,407
Less: Unvested restricted shares.... (64,734) (63,661) (61,505)
----------- ---------- ----------
Denominator for basic earnings per
share................................ 9,771,889 9,222,009 6,177,902
Plus: Effect of dilutive securities
Employee and director stock
options............................ 95,497 146,511 129,876
Unvested restricted shares.......... 61,509 44,999 57,979
----------- ---------- ----------
Total dilutive potential common
shares............................... 157,006 191,510 187,855
----------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions....... 9,928,895 9,413,519 6,365,757
=========== ========== ==========
Basic Earnings Per Common Share:
Income before extraordinary loss...... $ 0.37 $ 0.72 $ 0.65
Extraordinary loss.................... (.01) (.08) (.16)
----------- ---------- ----------
Net income per common share........... $ 0.36 $ 0.64 $ 0.49
=========== ========== ==========
Diluted Earnings Per Common Share:
Income before extraordinary loss...... $ 0.36 $ 0.70 $ 0.63
Extraordinary loss.................... (0.01) (.07) (.15)
----------- ---------- ----------
Net income............................ $ 0.35 $ 0.63 $ 0.48
=========== ========== ==========
</TABLE>
F-13
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options to purchase 503,833 and 27,500 shares of Common Stock during 1998,
1997 and 1996, respectively, warrants to purchase 260,000 shares of Common
Stock during 1998, 1997 and 1996 and stock appreciation rights to acquire
150,000 shares of Common Stock during 1996 were all outstanding but were not
included in the computation of diluted earnings per share because the
securities' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
7. Income Taxes
The Company recorded no provision for federal income taxes in 1998, 1997 or
1996 due to its REIT status. State tax expense, which is not material, is
included in general and administrative expenses. At December 31, 1998, the
Company had net operating loss carryforwards of approximately $1.2 million
available for federal income tax purposes, which begin to expire in 2005. As a
result of the REIT election and change in ownership resulting from the IPO,
future utilization of the net operating loss carryforwards by the Company, may
be limited.
The Company declared and paid dividends on its Common Stock of $.94, $.90
and $.86 per share in 1998, 1997 and 1996, respectively. Of these dividends,
$.72, $.73 and $.56 per share represents ordinary income and $.22, $.17 and
$.30 per share represents return of capital in 1998, 1997 and 1996,
respectively.
8. Additional Related Party Transactions
The Company shares employees and office space with Kitchin Investments,
Inc., which is wholly owned by Thomas W. Kitchin, the Company's chairman and
chief executive officer. Under the cost reimbursement agreement, Kitchin
Investments, Inc. charged the Company approximately $200,000, $220,000 and
$194,000 for its allocation of salary, office overhead, and other general and
administrative costs in 1998, 1997 and 1996, respectively. Accounts payable to
affiliates at December 31, 1998 and 1997 includes $118,861 and $54,251,
respectively, due to this related party.
JH identifies sites and constructs the Inns for the Company. The Company
paid JH and its predecessor companies a total of $41,055,000, $29,628,000 and
$18,932,000 for construction of new Inns, Inn expansions, fitness centers or
renovations during the years ended December 31, 1998, 1997 and 1996,
respectively.
9. Other Commitments and Contingencies
As of December 31, 1998, the Company had executed or expected to execute
construction contracts with JH, for new Inns or expansions totaling $59.8
million, of which $42.8 million had not been expended.
The Company leases its headquarters' office space in Atlanta, Georgia, and
land underlying certain of its Inns which are built or under construction. The
leases require future minimum payments as follows:
<TABLE>
<S> <C>
1999............................................................ $ 282,638
2000............................................................ 295,765
2001............................................................ 309,251
2002............................................................ 319,236
2003............................................................ 120,612
Thereafter...................................................... 3,210,502
----------
$4,538,003
==========
</TABLE>
F-14
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The rent expense under the office lease is paid by Kitchin Investments, Inc.
and is allocated under the cost reimbursement agreement described in Note 8. An
insignificant amount of allocated rent expense is included in general and
administrative expense in the Company's statement of operations.
The Company is a defendant or plaintiff in various legal actions which have
arisen in the normal course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
10. Subsequent Events
On January 14, 1999, the Company entered into an agreement with a bank to
provide $17 million in financing, which will be secured by 14 Inns with a net
book value of approximately $17,800,000 at December 31, 1998. The note bears
interest at the weekly average yield on United States Treasury securities
adjusted to the constant maturity of one year plus 3.75% per annum and is
payable in monthly installments of principal and interest of $147,000 until
January 2019 when the note matures. In addition, each month $15,000 must be
deposited into a replacement reserve account until such time as the reserve
account has a balance not less than $200,000.
11. Pending Events
On January 27, 1999, the Company announced plans to merge with Signature
Inns, Inc. ("Signature"). Signature owns and operates 25 hotels and manages one
additional hotel, all of which are located in the midwestern United States. The
Company and Signature have executed a merger agreement, currently pending
stockholder approval. Prior to the merger, JH will acquire certain of the
assets and assume certain liabilities related to the operation of the Inns such
that Signature will be able to merge with a REIT without disqualifying the
REIT's future tax status. Upon completion of the merger, the common
stockholders of Signature will receive half a share of the Company's common
stock plus $1.50 in cash for each share of Signature common stock. The amount
of cash payment will be reduced if a dividend is declared and paid to the
holders of Signature common stock prior to the consummation of the merger. The
holders of the outstanding shares of the Signature $1.70 Cumulative Convertible
Preferred Stock, Series A, would receive the equivalent number of shares of a
newly created $1.70 Cumulative Convertible Preferred Stock, Series S ("Series S
Preferred Stock"), of the Company which, upon conversion at the election of the
holder thereof, the holder would receive 1.04 shares of the Company's common
stock, plus a cash payment of $3.125 for each share of Series S Preferred Stock
converted. This transaction will be accounted for using the purchase method of
accounting.
On November 3, 1998, the Board of Directors approved the proposed
acquisition by the Company of the outdoor advertising assets 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. It is anticipated that these billboards
will be leased back to JH and will continue to be used for the same type of
advertising. 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 April of 1999 and
that JH will distribute the shares of the Series A Preferred Stock it receives
to Thomas W. Kitchin and his wife.
F-15
<PAGE>
JAMESON INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 Quarters
--------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Lease revenue..................... $3,852,678 $4,742,604 $5,032,808 $4,601,658
Income before extraordinary loss.. 1,465,414 66,341 2,606,566 1,668,730
Net income........................ 1,437,378 (11,673) 2,578,665 1,668,730
Earnings per common share:
Income before extraordinary
loss:
Basic......................... .14 (.06) .20 .10
Diluted....................... .14 (.06) .19 .10
Net income:
Basic......................... .14 (.07) .19 .10
Diluted....................... .13 (.07) .19 .10
<CAPTION>
1997 Quarters
--------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Lease revenue..................... $2,735,543 $3,242,524 $3,554,015 $3,434,103
Income before extraordinary loss.. 1,210,869 1,889,061 2,012,263 1,482,939
Net income........................ 521,327 1,889,061 2,012,263 1,482,939
Earnings per common share:
Income before extraordinary
loss:
Basic......................... 0.15 0.20 0.21 0.15
Diluted....................... 0.15 0.19 0.20 0.15
Net income:
Basic......................... 0.07 0.20 0.21 0.15
Diluted....................... 0.06 0.19 0.20 0.15
</TABLE>
Quarterly earnings per share do not sum to the annual earnings per share
amounts due to the effects of the timing of stock issuances and fluctuations in
average price during the period.
F-16
<PAGE>
Jameson Inns, Inc.
Schedule III--Real Estate and Accumulated Depreciation
As of December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalization Gross Amount at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
--------------------- --------------------- --------------------
Buildings, Buildings, Buildings,
Mortgage Equipment & Equipment & Equipment & Accumulated Date
Property Debt Land Improvements Land Improvement Land Improvement Total Depreciation Acquired
-------- ---------- -------- ------------ -------- ----------- -------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Georgia:
Albany (f)...... $1,300,000 $265,344 $ -- $ 92,308 $1,720,896 $357,652 $1,720,896 $2,078,548 $ 266,594 1994
Americus (f).... 1,060,668 131,629 -- 222,297 2,547,560 353,926 2,547,560 2,901,486 635,738 1991
Bainbridge (f).. 1,450,000 125,000 -- -- 1,648,821 125,000 1,648,821 1,773,821 309,628 1994
Brunswick (f)... 1,600,000 175,275 -- -- 1,668,783 175,275 1,668,783 1,844,057 215,371 1994
Calhoun (f)..... 501,000 113,722 -- 18,008 1,637,831 131,730 1,637,831 1,769,561 400,870 1988
Carrollton (f).. 2,000 225,000 -- 50,029 1,649,505 275,029 1,649,505 1,924,534 325,094 1993
Commerce (f).... 501,000 304,809 -- 1,300 1,311,933 306,109 1,311,933 1,618,042 137,834 1996
Conyers (f)..... 1,050,000 301,128 -- -- 1,421,668 301,128 1,421,668 1,722,796 154,149 1996
Covington (f)... 500,667 141,452 -- 22,399 1,321,622 163,851 1,321,622 1,485,472 399,448 1990
Dalton.......... 1,100,000 546,257 -- -- 1,494,173 546,257 1,494,173 2,040,430 14,621 1998
Douglas (f)..... 1,000,000 120,033 -- -- 1,183,407 120,033 1,183,407 1,303,440 188,509 1995
Dublin (f)...... 10,000 -- -- -- 1,410,670 -- 1,410,670 1,410,670 111,436 1997
Eastman......... -- 87,883 -- 13,917 1,414,861 101,800 1,414,861 1,516,661 441,227 1989
Fitzgerald...... -- 133,515 -- -- 1,087,492 133,515 1,087,492 1,221,007 240,773 1993
Greensboro...... -- 109,840 -- 17,394 1,475,529 127,234 1,475,529 1,602,763 486,765 1989
Hartwell (f).... 1,060,668 85,000 -- 13,460 1,398,752 98,460 1,398,752 1,497,212 360,275 1991
Jesup (f)....... 705,000 89,917 -- 14,239 2,054,759 104,156 2,054,759 2,158,915 625,785 1990
Kingsland....... 1,100,000 283,432 -- -- 1,428,008 283,432 1,428,008 1,711,440 44,786 1997
LaGrange (f).... 1,050,000 200,073 -- -- 1,969,706 200,073 1,969,706 2,169,779 185,115 1995
Macon (f)....... 478,227 288,518 -- -- 1,381,681 288,518 1,381,681 1,670,198 75,890 1997
Milledgeville... -- 575,582 4,826,285 (372,500) (1,900,770) 203,082 2,925,515 3,128,597 1,437,779 1991
Oakwood (f)..... 800,000 258,903 -- -- 1,345,171 258,903 1,345,171 1,604,074 132,524 1996
Perry (f)....... 35,000 238,325 -- -- 1,400,513 238,325 1,400,513 1,638,839 73,372 1997
Statesboro (f).. 1,060,668 132,817 -- 21,032 1,433,953 153,849 1,433,953 1,587,802 526,841 1988
Thomaston (f)... 500,667 157,181 -- 24,890 2,106,307 182,071 2,106,307 2,288,379 556,562 1990
Thomasville..... 596,356 331,161 -- -- 1,500,000 331,161 1,500,000 1,831,161 -- 1998
Valdosta (f).... 1,500,000 166,632 -- -- 1,609,988 166,632 1,609,988 1,776,620 305,942 1994
Warner Robins (f).. 510,000 365,853 -- -- 2,040,046 365,853 2,040,046 2,405,898 137,313 1997
Washington (f).. 1,060,668 107,780 -- 17,067 1,301,326 124,847 1,301,326 1,426,173 395,444 1989
Waycross (f).... 1,000 87,000 -- 13,777 2,041,452 100,777 2,041,452 2,142,229 425,343 1992
Waynesboro (f).. 1,050,000 142,501 -- -- 1,258,183 142,501 1,258,183 1,400,685 170,147 1995
Winder (f)...... 500,667 124,500 1,268,199 -- 698,220 124,500 1,966,419 2,090,919 720,794 1988
<CAPTION>
Life on
Which
Depreciation
in Latest
Income
Date of Statement is
Property Construction Computed
-------- ------------ ------------
<S> <C> <C>
Georgia:
Albany (f)...... 1995 (e)
Americus (f).... 1992 (d)
Bainbridge (f).. 1994 (e)
Brunswick (f)... 1995 (e)
Calhoun (f)..... 1988 (d)
Carrollton (f).. 1994 (e)
Commerce (f).... 1996 (e)
Conyers (f)..... 1996 (e)
Covington (f)... 1990 (d)
Dalton.......... 1998 (e)
Douglas (f)..... 1995 (e)
Dublin (f)...... 1997 (e)
Eastman......... 1989 (d)
Fitzgerald...... 1994 (e)
Greensboro...... 1990 (d)
Hartwell (f).... 1992 (d)
Jesup (f)....... 1990 (d)
Kingsland....... 1998 (e)
LaGrange (f).... 1996 (e)
Macon (f)....... 1997 (e)
Milledgeville... -- (d)
Oakwood (f)..... 1997 (e)
Perry (f)....... 1998 (e)
Statesboro (f).. 1989 (d)
Thomaston (f)... 1990 (d)
Thomasville..... 1998 (e)
Valdosta (f).... 1995 (e)
Warner Robins (f).. 1997 (e)
Washington (f).. 1990 (d)
Waycross (f).... 1993 (e)
Waynesboro (f).. 1996 (e)
Winder (f)...... -- (d)
</TABLE>
F-17
<PAGE>
Jameson Inns, Inc.
Schedule III--Real Estate and Accumulated Depreciation (continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalization Gross Amount at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- --------------------- -------------------
Buildings, Buildings, Buildings,
Mortgage Equipment & Equipment & Equipment & Accumulated Date
Property Debt Land Improvements Land Improvement Land Improvement Total Depreciation Acquired
-------- --------- ------- ------------ -------- ----------- ------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama:
Albertville
(f)............ 501,000 174,000 -- 418 1,087,609 174,418 1,087,609 1,262,027 209,692 1994
Alexander City.. -- 160,086 -- -- 1,750,657 160,086 1,750,657 1,910,743 329,235 1994
Arab (f)........ 1,000 131,554 -- -- 1,102,560 131,554 1,102,560 1,234,114 171,229 1995
Auburn.......... 695,944 227,000 -- -- 1,369,792 227,000 1,369,792 1,596,792 101,536 1996
Decatur (f)..... 1,000 201,629 -- -- 1,306,015 201,629 1,306,015 1,507,644 163,429 1995
Eufaula (f)..... 439,420 228,869 -- 5,575 1,215,719 234,444 1,215,719 1,450,163 162,848 1995
Florence (f).... 1,000 313,579 -- 1,202 1,844,748 314,781 1,844,748 2,159,529 214,361 1995
Greenville...... -- 228,511 -- -- 1,292,854 228,511 1,292,854 1,521,366 129,953 1996
Jasper (f)...... -- 225,633 -- -- 2,206,996 225,633 2,206,996 2,432,629 99,578 1997
Oxford.......... -- 307,635 -- -- 1,377,263 307,635 1,377,263 1,684,898 114,126 1996
Ozark........... -- 176,148 -- -- 1,158,334 176,148 1,158,334 1,334,482 212,430 1994
Prattville...... 1,100,000 319,736 -- -- 1,500,156 319,736 1,500,156 1,819,892 4,003 1998
Scottsboro...... 1,150,000 324,732 -- -- 1,465,636 324,732 1,465,636 1,790,368 20,135 1998
Selma (f)....... 1,570,304 143,812 -- 22,773 1,924,215 166,585 1,924,215 2,090,800 436,457 1991
Sylacauga (f)... 1,000,889 224,476 -- -- 1,420,415 224,476 1,420,415 1,644,890 97,050 1997
Trussville...... 1,100,000 425,438 -- 1,377 1,486,662 426,815 1,486,662 1,913,477 40,574 1997
Tuscaloosa...... 853,834 -- -- -- 1,442,921 -- 1,442,921 1,442,921 100,190 1996
Mississippi:
Tupelo.......... 1,600,000 427,924 -- -- 2,238,480 427,924 2,238,480 2,666,404 16,094 1998
North Carolina:
Asheboro........ 1,036,280 278,841 -- -- 1,462,752 278,841 1,462,752 1,741,593 93,307 1997
Clayton/Garner.. 1,100,000 255,234 -- -- 1,495,176 255,234 1,495,176 1,750,410 26,832 1998
Dunn............ 10,000 202,052 -- -- 1,467,652 202,052 1,467,652 1,669,704 76,654 1997
Eden............ 1,100,000 197,468 -- 26 1,501,729 197,494 1,501,729 1,699,223 39,792 1997
Forest City..... 1,024,606 187,294 -- 2,950 1,978,748 190,244 1,978,748 2,168,992 160,601 1996
Greenville...... 1,150,000 310,006 -- -- 1,477,097 310,006 1,477,097 1,787,103 33,617 1998
Hickory......... 1,150,000 412,322 -- -- 1,550,952 412,322 1,550,952 1,963,274 4,000 1998
Laurinburg (f).. -- 225,441 -- (181,525) 1,235,289 43,916 1,235,289 1,279,205 109,132 1996
Lenoir.......... 1,100,000 360,923 -- 1,605 1,392,471 362,528 1,392,471 1,754,999 49,849 1997
Roanoke Rapids.. 1,150,000 320,014 -- (4,812) 1,466,839 315,202 1,466,839 1,782,041 40,311 1997
Sanford (f)..... 500,000 227,030 -- 32,171 1,428,460 259,202 1,428,460 1,687,660 96,937 1996
Smithfield...... 1,100,000 246,092 -- -- 1,502,513 246,092 1,502,513 1,748,604 67,263 1997
Wilson.......... 1,033,256 237,712 -- -- 1,504,365 237,712 1,504,365 1,742,077 80,384 1996
<CAPTION>
Life on
Which
Depreciation
in Latest
Income
Date of Statement is
Property Construction Computed
-------- ------------ ------------
<S> <C> <C>
Alabama:
Albertville
(f)............ 1994 (e)
Alexander City.. 1994 (e)
Arab (f)........ 1995 (e)
Auburn.......... 1997 (e)
Decatur (f)..... 1996 (e)
Eufaula (f)..... 1996 (e)
Florence (f).... 1996 (e)
Greenville...... 1996 (e)
Jasper (f)...... 1997 (e)
Oxford.......... 1997 (e)
Ozark........... 1995 (e)
Prattville...... 1998 (e)
Scottsboro...... 1998 (e)
Selma (f)....... 1992 (d)
Sylacauga (f)... 1997 (e)
Trussville...... 1998 (e)
Tuscaloosa...... 1997 (e)
Mississippi:
Tupelo.......... 1998 (e)
North Carolina:
Asheboro........ 1997 (e)
Clayton/Garner.. 1998 (e)
Dunn............ 1998 (e)
Eden............ 1998 (e)
Forest City..... 1997 (e)
Greenville...... 1998 (e)
Hickory......... 1998 (e)
Laurinburg (f).. 1997 (e)
Lenoir.......... 1998 (e)
Roanoke Rapids.. 1998 (e)
Sanford (f)..... 1997 (e)
Smithfield...... 1998 (e)
Wilson.......... 1997 (e)
</TABLE>
F-18
<PAGE>
Jameson Inns, Inc.
Schedule III--Real Estate and Accumulated Depreciation (continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalization Gross Amount at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
-------------------- ------------------- -------------------
Buildings, Buildings, Buildings,
Mortgage Equipment & Equipment & Equipment & Accumulated Date
Property Debt Land Improvements Land Improvement Land Improvement Total Depreciation Acquired
-------- --------- ------- ------------ ------- ----------- ------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
South Carolina:
Anderson (f).... 1,060,668 201,000 -- 133,385 1,981,909 334,385 1,981,909 2,316,294 408,770 1993
Cheraw.......... -- 168,458 -- -- 1,136,138 168,458 1,136,138 1,304,597 182,809 1995
Duncan.......... 1,100,000 212,246 -- -- 1,450,536 212,246 1,450,536 1,662,782 64,900 1997
Easley (f)...... 1,000,000 266,753 -- 2,710 1,131,271 269,463 1,131,271 1,400,734 199,330 1994
Gaffney......... -- 135,025 -- -- 1,629,167 135,025 1,629,167 1,764,192 213,243 1995
Georgetown...... -- 144,353 -- -- 1,459,517 144,353 1,459,517 1,603,870 140,299 1996
Greenwood (f)... 1,050,000 140,231 -- 20,741 1,728,439 160,972 1,728,439 1,889,411 233,085 1994
Lancaster....... -- 150,592 -- -- 1,102,564 150,592 1,102,564 1,253,155 197,282 1994
Orangeburg...... -- 165,010 -- 585 1,182,215 165,595 1,182,215 1,347,810 183,884 1995
Seneca.......... -- 204,385 -- -- 1,227,424 204,385 1,227,424 1,431,809 127,284 1996
Simpsonville
(f)............ 1,050,000 229,205 -- -- 1,297,064 229,205 1,297,064 1,526,269 141,890 1996
Spartanburg..... 1,100,000 247,838 -- -- 1,457,684 247,838 1,457,684 1,705,522 76,745 1997
Union........... -- 178,006 -- 746 1,264,680 178,752 1,264,680 1,443,432 125,049 1996
Tennessee:
Cleveland....... -- 384,688 -- 4,343 1,493,867 389,031 1,493,867 1,882,898 31,057 1997
Clinton......... 1,093,598 244,514 -- -- 1,431,059 244,514 1,431,059 1,675,573 99,394 1997
Decherd (f)..... -- 254,501 -- 105 1,308,050 254,606 1,308,050 1,562,656 109,406 1996
Johnson City.... 299,241 405,939 -- 88 2,130,396 406,028 2,130,396 2,536,424 116,980 1997
Tullahoma (f)... -- 303,536 -- -- 1,291,079 303,536 1,291,079 1,594,615 99,866 1996
Construction in
progress:
Bessemer, AL.... 551,903 327,192 -- -- 1,343,638 327,192 1,343,638 1,670,830 -- --
Cheraw, SC-
Expansion...... -- -- -- -- 627,198 -- 627,198 627,198 -- --
Cleveland, TN-
Expansion...... -- -- -- -- 649,821 -- 649,821 649,821 -- --
Columbia, TN.... -- 483,568 -- -- 172,073 483,568 172,073 655,641 -- --
Conyers, GA-
Expansion...... -- -- -- -- 621,732 -- 621,732 621,732 -- --
Crestview, FL... 65,749 471,426 -- -- 130,631 471,426 130,631 602,057 -- --
Dalton, GA-
Expansion...... -- -- -- -- 648,542 -- 648,542 648,542 -- --
<CAPTION>
Life on
Which
Depreciation
in Latest
Income
Date of Statement is
Property Construction Computed
-------- ------------ ------------
<S> <C> <C>
South Carolina:
Anderson (f).... 1993 (e)
Cheraw.......... 1995 (e)
Duncan.......... 1998 (e)
Easley (f)...... 1995 (e)
Gaffney......... 1995 (e)
Georgetown...... 1996 (e)
Greenwood (f)... 1995 (e)
Lancaster....... 1995 (e)
Orangeburg...... 1995 (e)
Seneca.......... 1996 (e)
Simpsonville
(f)............ 1996 (e)
Spartanburg..... 1998 (e)
Union........... 1997 (e)
Tennessee:
Cleveland....... 1998 (e)
Clinton......... 1997 (e)
Decherd (f)..... 1997 (e)
Johnson City.... 1997 (e)
Tullahoma (f)... 1997 (e)
Construction in
progress:
Bessemer, AL.... -- --
Cheraw, SC-
Expansion...... -- --
Cleveland, TN-
Expansion...... -- --
Columbia, TN.... -- --
Conyers, GA-
Expansion...... -- --
Crestview, FL... -- --
Dalton, GA-
Expansion...... -- --
</TABLE>
F-19
<PAGE>
Jameson Inns, Inc.
Schedule III--Real Estate and Accumulated Depreciation (continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalization Gross Amount at Which
Subsequent to Carrier at Close of
Initial Cost Acquisition Period
------------------------ --------------------- ------------------------
Buildings, Buildings, Buildings,
Mortgage Equipment & Equipment & Equipment & Accumulated
Property Debt Land Improvements Land Improvement Land Improvement Total Depreciation
-------- ----------- ----------- ------------ -------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Decatur, AL-
Expansion -- -- -- -- 610,141 -- 610,141 610,141 --
Gallatin, TN.... 547,446 405,738 -- -- 1,593,616 405,738 1,593,616 1,999,354 --
Greeneville,
TN.............. 285,162 406,052 -- -- 489,658 406,052 489,658 895,710 --
Grenada, MS..... -- 350,000 -- -- 281,582 350,000 281,582 631,582 --
Harrisonburg,
VA.............. -- 435,000 -- -- 61,839 435,000 61,839 496,839 --
Hickory, NC-
Expansion...... -- -- -- -- 338,965 -- 338,965 338,965 --
Jackson, TN..... 65,016 467,741 -- -- 105,331 467,741 105,331 573,072 --
Jackson, MS..... -- 586,831 -- -- 84,417 586,831 84,417 671,248 --
Jacksonville,
FL.............. -- 679,519 -- -- 217,217 679,519 217,217 896,736 --
Lake City, FL... 61,159 391,456 -- -- 625,337 391,456 625,337 1,016,793 --
Martinsville,
VA.............. -- 411,496 -- -- 94,580 411,496 94,580 506,076 --
Meridian, MS.... -- 419,856 -- -- 1,816,826 419,856 1,816,826 2,236,682 --
Newnan, GA...... 71,670 529,377 -- -- 219,510 529,377 219,510 748,887 --
Oak Ridge, TN... 225,551 451,037 -- -- 1,095,900 451,037 1,095,900 1,546,937 --
Ormond Beach,
FL.............. -- 497,099 -- -- 100,580 497,099 100,580 597,679 --
Pearl, MS....... -- 564,932 -- -- 624,241 564,932 624,241 1,189,173 --
Pooler, GA...... 161,632 501,223 -- -- 421,001 501,223 421,001 922,224 --
Prattville, AL-
Expansion...... -- -- -- -- 706,437 -- 706,437 706,437 --
Rome, GA........ 355,855 254,849 -- -- 953,648 254,849 953,648 1,208,497 --
Trussville, AL-
Expansion...... -- -- -- -- 698,377 -- 698,377 698,377 --
Vicksburg, MS... -- 326,653 -- -- 1,703,882 326,651 1,703,882 2,030,537 --
----------- ----------- ---------- -------- ------------ ----------- ------------ ------------ -----------
Totals........... $53,697,435 $27,114,578 $6,094,484 $214,080 $135,456,900 $27,328,658 $141,551,384 $168,880,042 $16,754,843
=========== =========== ========== ======== ============ =========== ============ ============ ===========
<CAPTION>
Life on
Which
Depreciation
in Latest
Income
Date Date of Statement is
Property Acquired Construction Computed
-------- -------- ------------ ------------
<S> <C> <C> <C>
Decatur, AL-
Expansion -- -- --
Gallatin, TN.... -- -- --
Greeneville,
TN.............. -- -- --
Grenada, MS..... -- -- --
Harrisonburg,
VA.............. -- -- --
Hickory, NC-
Expansion...... -- -- --
Jackson, TN..... -- -- --
Jackson, MS..... -- -- --
Jacksonville,
FL.............. -- -- --
Lake City, FL... -- -- --
Martinsville,
VA.............. -- -- --
Meridian, MS.... -- -- --
Newnan, GA...... -- -- --
Oak Ridge, TN... -- -- --
Ormond Beach,
FL.............. -- -- --
Pearl, MS....... -- -- --
Pooler, GA...... -- -- --
Prattville, AL-
Expansion...... -- -- --
Rome, GA........ -- -- --
Trussville, AL-
Expansion...... -- -- --
Vicksburg, MS... -- -- --
-------- ------------ ------------
Totals........... -- -- --
======== ============ ============
</TABLE>
F-20
<PAGE>
Jameson Inns, Inc.
Notes to Schedule III
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
(a)Reconciliation of real estate
Balance at beginning of year....... $117,515,375 $ 80,816,228 $57,369,657
Additions during year:
Improvements...................... 55,844,810 37,373,593 23,548,156
Deletions......................... (4,480,143) (674,446) (101,585)
------------ ------------ -----------
Balance at end of year............. $168,880,042 $117,515,375 $80,816,228
============ ============ ===========
(b)Reconciliation of accumulated
depreciation
Balance at beginning of year....... $ 12,584,189 $ 9,205,591 $ 6,589,753
Depreciation for the year......... 5,636,079 3,898,091 2,669,574
Retirements....................... (1,465,425) (519,493) (53,736)
------------ ------------ -----------
Balance at end of year............. $ 16,754,843 $ 12,584,189 $ 9,205,591
============ ============ ===========
</TABLE>
(c) The aggregate cost of the land, buildings and furniture, fixtures and
equipment for federal income tax purposes approximates the book basis.
(d) Depreciation for 1992 and prior additions is computed based on the
following useful lives:
Buildings 31.5 years
Land improvements 15 years
Furniture, fixtures and equipment 5
years
(e) Depreciation for 1993 and later additions is computed based on the
following useful lives:
Buildings 39 years
Land improvements 15 years
Furniture, fixtures and equipment 5
years
(f) This Inn is one of 41 Inns securing the Company's $46.2 million line of
credit. Amount of debt listed as outstanding is an allocation.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Jameson Inns, Inc.
We have audited the consolidated financial statements of Jameson Inns, Inc.
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated February 12,
1999 (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule in Item 14(a) of this Annual Report
on Form 10-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
February 12, 1999
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members
Jameson Hospitality, LLC
We have audited the accompanying consolidated balance sheets of Jameson
Hospitality, LLC as of December 31, 1998 and 1997, and the related consolidated
statements of operations, members' capital and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Jameson Hospitality, LLC at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
February 19, 1999, except as
to Note 11 as to which the
date is March 15, 1999
F-23
<PAGE>
JAMESON HOSPITALITY, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash................................................... $1,077,579 $2,318,486
Marketable securities.................................. 199,529 --
Accounts receivable.................................... 853,720 573,146
Accounts receivable from affiliates.................... 2,755,513 2,720,052
Predevelopment costs................................... 457,213 149,360
Costs and estimated earnings in excess of billings on
contracts in progress................................. -- 98,169
Prepaid advertising.................................... -- 145,766
Prepaid expenses and other assets...................... 357,975 136,980
Inventory.............................................. 625,989 478,789
---------- ----------
6,327,518 6,620,748
Property and equipment, net.............................. 2,992,093 1,934,695
Leasehold improvements, net.............................. 34,867 71,277
Intangibles, net......................................... 22,268 22,500
---------- ----------
$9,376,746 $8,649,220
========== ==========
Liabilities and members' capital
Current liabilities:
Subcontractors payable, including retainage of
$1,104,960 and $574,365 at December 31, 1998 and 1997,
respectively.......................................... $3,106,166 $2,566,230
Accounts payable....................................... 1,089,067 846,187
Lease expense payable.................................. 2,289,753 1,457,671
Notes payable, current portion......................... 650,804 113,096
Accrued interest....................................... 22,323 35,020
Other accrued liabilities.............................. 484,924 390,809
---------- ----------
7,643,037 5,409,013
Notes payable, long-term portion......................... 1,664,382 1,310,267
---------- ----------
Total liabilities........................................ 9,307,419 6,719,280
Members' capital......................................... 69,327 1,929,940
---------- ----------
$9,376,746 $8,649,220
========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
JAMESON HOSPITALITY, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Room revenues........................... $37,982,374 $26,937,065 $19,449,805
Telephone revenues...................... 757,105 604,467 462,871
Other inn-related sales................. 47,220 46,096 37,375
Contract revenues....................... 40,990,447 31,201,627 6,850,839
Billboard rentals....................... 91,076 84,467 42,962
Flight revenues......................... 6,458 -- --
----------- ----------- -----------
79,874,680 58,873,722 26,843,852
Expenses:
Lease expense........................... 18,229,748 12,966,185 9,376,101
Cost of contract revenues............... 35,518,450 27,514,582 6,846,378
Room expenses........................... 8,888,441 5,832,763 4,075,203
Utilities............................... 3,346,327 2,283,090 1,777,198
General and administrative.............. 3,886,264 2,700,432 1,707,354
Inn manager salaries.................... 2,510,644 1,865,181 1,247,514
Maintenance............................. 1,366,510 840,093 616,167
Advertising............................. 2,195,759 576,516 326,570
Insurance............................... 199,302 123,004 145,063
Management fee to affiliate............. 2,655,334 1,856,370 641,437
Prospective site expense................ 614,448 4,193 --
Interest, net of amounts capitalized.... 166,416 87,830 65,399
Depreciation and amortization........... 456,213 260,375 162,783
----------- ----------- -----------
Total expenses........................ 80,033,856 56,910,614 26,987,167
----------- ----------- -----------
Net (loss) income......................... $ (159,176) $ 1,963,108 $ (143,315)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
JAMESON HOSPITALITY, LLC
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<CAPTION>
Members' Comprehensive
Capital Income (Loss)
----------- -------------
<S> <C> <C>
Balance at January 1, 1996........................... $ 183,731
Capital contributions--cash........................ 205,000
Capital contributions--non-cash.................... 292,801
Distributions...................................... (100,000)
Net loss........................................... (143,315)
-----------
Balance at December 31, 1996......................... 438,217
Capital contributions.............................. 198,615
Distributions...................................... (670,000)
Net income......................................... 1,963,108
-----------
Balance at December 31, 1997......................... 1,929,940
Capital contributions.............................. 600,000
Distributions...................................... (2,234,718)
Net loss........................................... (159,176) $(159,176)
Unrealized loss on marketable securities........... (66,719) (66,719)
---------
Comprehensive loss................................. $(225,895)
----------- =========
Balance at December 31, 1998......................... $ 69,327
===========
</TABLE>
See accompanying notes.
F-26
<PAGE>
JAMESON HOSPITALITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Operating activities
Net (loss) income........................ $ (159,176) $ 1,963,108 $(143,315)
Adjustments to reconcile net (loss)
income to cash provided by operating
activities:
Depreciation and amortization.......... 456,213 260,375 162,783
Bad debt expense....................... 72,409 46,124 10,440
Gain on sale of property and
equipment............................. -- (96) --
Changes in assets and liabilities
increasing (decreasing) cash:
Accounts receivable.................. (352,983) (168,469) (138,091)
Accounts receivable from affiliates.. (35,461) (2,661,298) (41,714)
Predevelopment costs................. (307,853) (64,331) --
Costs and estimated earnings in
excess of billings on contracts in
progress............................ 98,169 (98,169) (85,029)
Prepaid advertising.................. 145,766 (145,766) --
Prepaid expenses and other assets.... (221,311) (77,692) (15,089)
Inventory............................ (147,200) (145,941) --
Subcontractors payable............... (130,238) 2,813,020 423,385
Accounts payable..................... 913,054 (87,697) (5,641)
Lease expense payable................ 832,082 773,046 188,770
Accrued interest..................... (12,697) 33,493 863
Other accrued liabilities............ 94,115 154,536 46,376
----------- ----------- ---------
Net cash provided by operating
activities.............................. 1,244,889 2,594,243 403,738
Investing activities
Proceeds from sale of property and
equipment............................... -- 24,500 --
Purchase of property and equipment....... (1,476,655) (878,532) (487,164)
Marketable securities.................... (266,248) -- --
----------- ----------- ---------
Net cash used in investing activities.... $(1,742,903) $ (854,032) $(487,164)
</TABLE>
F-27
<PAGE>
JAMESON HOSPITALITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Financing activities
Contributions from members................ 600,000 198,615 205,000
Distributions to members.................. (2,234,718) (670,000) (100,000)
Proceeds from notes payable............... 1,104,415 842,615 537,467
Payments on notes payable................. (212,590) (114,377) (357,206)
----------- ---------- ---------
Net cash (used in) provided by financing
activities............................... (742,893) 256,853 285,261
Net (decrease) increase in cash........... (1,240,907) 1,997,064 201,835
Cash at beginning of year................. 2,318,486 321,422 119,587
----------- ---------- ---------
Cash at end of year....................... $ 1,077,579 $2,318,486 $ 321,422
=========== ========== =========
Supplemental cash flow information
Interest paid during the year............. $ 1,326,782 $ 692,811 $ 125,702
=========== ========== =========
Non-cash activity
Unrealized loss on marketable securities.. $ 66,719 $ -- $ --
=========== ========== =========
</TABLE>
See accompanying notes.
F-28
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Business and Basis of Financial Statements
Jameson Development Company, LLC was formed on March 22, 1996 and then
changed its name to Jameson Hospitality, LLC (the "Company") on May 7, 1998.
Effective March 31, 1998, three related companies merged into Jameson
Development Company, LLC: Jameson Operating Company, LLC, Jameson Outdoor
Advertising Company II, LLC and Jameson Aviation Company, LLC. Since these
three companies were all wholly-owned by Thomas W. Kitchin and his spouse, the
merger was accounted for similar to a pooling of interests.
Jameson Inns, Inc. (the "REIT") is a real estate investment trust which owns
the Jameson Inns properties (the "Inns"). Thomas W. Kitchin is the Chairman and
CEO of Jameson Inns, Inc. and of the Company.
Kitchin Investments, Inc. is wholly-owned by Thomas W. Kitchin and employs
all of the individuals who provide services to both the Company and the REIT.
This company also provides the general office overhead support for these other
companies.
At December 31, 1998 the Company had one 99.9%-owned subsidiary.
Intercompany transactions among the entities and the divisions included in the
consolidated financial statements have been eliminated. The Company and its
divisions perform the following activities:
-- The Jameson Operating division leases the Inns from the REIT (see Note
3) and operates the Inns in all respects including staffing,
advertising, housekeeping, and routine maintenance. At the present time,
the Company is the exclusive lessee of Jameson Inns. At December 31,
1998 and 1997, the Company leased 81 Inns (3,748 rooms) and 62 Inns
(2,924 rooms), respectively, all located in southeastern states.
-- The Jameson Development division develops Inns and Inn expansions for
Jameson Inns, Inc., including identification of suitable Inn locations,
Inn design and configuration, land preparation, construction,
acquisition of initial furniture, fixtures and equipment, and pre-
marketing of properties prior to opening. At the present time, the
Company is the exclusive developer/contractor for Jameson Inns, Inc.
-- The Jameson Outdoor Advertising division identifies locations, designs,
constructs and manages billboards, primarily for its own use in
operating and controlling advertising for hotel properties using the
trademark "The Jameson Inn." See Note 9.
The members have no liability for any debt, obligations, or liabilities of
the Company (beyond his or her respective contributions) or for the acts of
omission of any other member, agent or employee of the Company, except as
provided for by section 14-11-408 of the Georgia Securities Act of 1973, as
amended.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-29
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketable Securities
The Company considers all of its marketable securities as available for sale
and hence records them at fair value with changes in unrealized gains or losses
being recorded directly to members' capital. Fair value is based on the closing
price of the securities on the last day of trading in the year.
Contracts
Billings and costs applicable to construction contracts are recognized on
the percentage-of-completion method, measured by the percentage of cost
incurred to date compared to estimated total cost for each contract. Revisions
to estimated contract profits or losses are made in the year in which
circumstances requiring such revisions become known. Any anticipated losses on
construction contracts are charged to operations as soon as such losses can be
estimated.
Predevelopment Costs
The Company capitalizes direct costs related to specific future Inn sites
when they are deemed probable and until either the REIT purchases the land and
actual construction begins when the amounts are transferred to construction
costs, or until the site is no longer deemed probable at which time the costs
are expensed. Amounts expensed are reflected as "Prospective Site Expense" in
the accompanying statements of operations.
Inventory
Inventory, consisting of room linens and towels, is stated at the lower of
cost (first-in, first-out method) or market. Replacements of inventory are
expensed.
Property and Equipment
Property and equipment is stated at cost. Billboards include direct
construction costs and the Company capitalizes interest, property taxes and
indirect costs such as salaries relating directly to the construction of
billboards. Interest capitalized during 1998 totaled $3,437. There was no
interest capitalized in 1997 or 1996. Leasehold improvements relate to
improvements made to the Inns prior to July 1, 1995 when this responsibility
was transferred to the REIT.
Depreciation is calculated using the straight-line method over 39 years for
the building, using the straight-line method for the billboards with a half
year convention in year of acquisition over the estimated useful life of the
asset, 10 years, using the MACRS method over five years for transportation
equipment, and using the MACRS method over three to seven years for furniture,
fixtures and equipment. Leasehold improvements are being amortized using the
straight-line method over their estimated useful lives ranging from three to
ten years, not to exceed the remaining term of the lease (see Note 3).
The Company follows FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
There were no impairment losses recorded in 1998, 1997 or 1996.
Intangibles
Intangibles consist of the registered trademark, "The Jameson Inn." The
lease described in Note 3 requires the Company to operate the Inns using the
trademark and not to use the trademark (or license its use to
F-30
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
any other parties) for the operation of lodging facilities other than the Inns
unless the REIT does not object to such unrelated use. The REIT has an option
to purchase the trademark from the Company at the end of the lease term (or
upon the earlier termination of the lease with respect to all of the Inns) for
$25,000. The trademark is being amortized over 40 years. Accumulated
amortization totaled $3,125 and $2,500 as of December 31, 1998 and 1997,
respectively.
Income Taxes
Jameson Hospitality, LLC has elected to be treated as a partnership for
federal and state income tax purposes. Accordingly, the members are to report
their proportionate share of the Company's taxable income or loss in their
respective tax returns; therefore, no provision for income taxes has been
included in the accompanying financial statements.
Advertising
During 1998 and 1997, the Company contracted with an advertising agency for
the production and broadcast or printing of various radio, newspaper and
television ads for the Inns. The Company expenses advertising upon first
showing. As of December 31, 1997, approximately $146,000 of costs had been
incurred related to the production of ads that began to be broadcast or printed
in January 1998. These costs had been capitalized and included in the
accompanying balance sheet at December 31, 1997.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or members' equity.
Statement 130 requires unrealized gains or losses on the Company's available-
for-sale securities to be included in other comprehensive income. Prior to
1998, the Company had no components of comprehensive income.
3. Leases
In January 1994, the Company entered into a master lease (the "Lease") with
the REIT whereby all of the operating Inns are leased to the Company under the
Lease and future Inns constructed by the REIT during the term of the Lease will
be added to the lease upon completion of each such Inn's construction.
The Lease expires December 31, 2007 and provides for payment of Base Rent
plus Percentage Rent. Base Rent, which is payable monthly, equals $264 per
month for each rentable room in the Inns at the beginning of the relevant
month. Percentage Rent, which is payable quarterly, is calculated as a
percentage in excess of Base Rent of the total amount of room rental and other
miscellaneous revenues ("Room Revenues") realized by the Company over the
relevant period.
The percentage is 39% of such revenues up to $21.62 per day per room over
the period, 65% of all additional average daily room rental revenues, provided,
however, that total rent for any calendar year is limited to 47% of total room
rental revenues for that year. The $21.62 per room amount used in calculating
Percentage Rent is subject to adjustment each year end, based on changes in the
Consumer Price Index, and as of January 1, 1999 was $22.18.
Base Rent totaled $10,501,920 $7,532,712 and $5,469,288 in 1998, 1997 and
1996, respectively, and assuming the same number of rooms in operation as of
December 31, 1998, would total $11,873,664 per year until the Lease expires.
F-31
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Lease requires the REIT to pay real and personal property taxes,
casualty and liability insurance premiums and the cost of maintaining
structural elements, including underground utilities and effective July 1,
1995, the cost of replacing or refurbishing the furniture, fixtures and
equipment in the Inns. Prior to July 1, 1995, the Company was responsible for
the cost of replacing or refurbishing furniture, fixtures and equipment and
hence recorded these costs as leasehold improvements. The Company is required
to pay workers compensation insurance premiums, utility costs and all other
costs and expenses incurred in the operation of the Inns.
Under the Lease, the REIT is required to maintain the structural elements of
each Inn. The Company is required, at its expense, to maintain the Inns
(exclusive of furniture, fixtures and equipment) in good order and repair and
to make nonstructural, foreseen and unforeseen, and ordinary and extraordinary
repairs which may be necessary and appropriate and do not significantly alter
the character or purpose, or significantly detract from the value or operating
efficiencies of the Inns. All alterations, replacements and improvements are
subject to all the terms and provisions of the Lease and become the property of
the REIT upon termination of the Lease.
The Company has agreed that neither it nor any of its affiliates will (i)
operate or manage a hotel property in which the REIT has not invested that is
within a 20-mile radius of an Inn, or (ii) own or have any interest in any
hotel property in which the REIT or an affiliate does not have an interest.
4. Property and Equipment
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land............................................... $ 100,000 $ 100,000
Building........................................... 105,706 105,706
Billboards, including under construction........... 1,699,908 1,513,719
Transportation equipment........................... 1,809,560 573,825
Furniture, fixtures and equipment.................. 94,586 39,855
---------- ----------
3,809,760 2,333,105
Accumulated depreciation........................... (817,667) (398,410)
---------- ----------
$2,992,093 $1,934,695
========== ==========
</TABLE>
5. Contracts
Contracts consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Costs incurred on contracts........... $35,518,450 $27,514,582 $6,846,378
Estimated earnings.................... 5,471,997 3,687,045 4,461
----------- ----------- ----------
Contract revenues earned.............. 40,990,447 31,201,627 6,850,839
Less: Billings........................ 40,990,447 31,103,458 6,850,839
----------- ----------- ----------
Costs and estimated earnings in excess
of billings on contracts in
progress............................. $ -- $ 98,169 $ --
=========== =========== ==========
</TABLE>
The Company records income on construction contracts on the percentage-of-
completion basis. Revisions to estimated contract profits are made in the year
in which circumstances requiring such revisions become known. The effect of
changes in the estimates of contract gross margins decreased net income for the
year
F-32
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ended December 31, 1998 by approximately $155,000 and increased net income for
the year ended December 31, 1997 by approximately $16,000.
6. Notes Payable
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Notes payable to a bank with a term of five years.
Due in monthly installments of principal of $8,525
plus interest with remaining unpaid balances and
accrued interest payable in June 2003. Interest
accrues at a floating interest rate of prime rate
minus .5% (7.25% at December 31, 1998). The notes
are personally guaranteed by the president of the
Company............................................. $ 963,325 $ --
$535,843 term note payable to a financial
institution, maturing July 2017. Due in monthly
installments of principal and interest of $4,650
until July 1999 and then $4,995 until maturity when
the remaining unpaid balances are payable in full.
The interest rate at December 31, 1998 was 8.5% and
increases to 9.5% in August 1999 for the remainder
of the note's term. The note is personally
guaranteed by the president of the Company.......... 469,454 525,115
$600,000 line of credit renewing each July until the
bank discontinues the line. Interest accrues at
prime plus 2% (9.75% at December 31, 1998) and is
due quarterly. Available borrowings of $171,658 at
December 31, 1998................................... 428,342 343,702
$300,000 term note payable maturing December 2002.
Due in monthly installments of $6,409 of principal
and interest with remaining unpaid balances payable
in full on note's maturity date. Interest accrues at
10.5% per annum..................................... 248,804 297,169
$170,000 term note, maturing July 2012. Interest
accrues at an initial annual rate of 8.39% and is
adjusted annually to equal the weekly average yield
on U.S. Treasury securities, adjusted to a constant
maturity of five years, plus 2%. Payments of
interest are due monthly and principal payments of
$11,333 are due annually beginning July 1, 1998. The
note is personally guaranteed by the president of
the Company......................................... 159,856 170,000
Notes payable to banks with terms of five years. Due
in monthly installments of principal and interest
with remaining unpaid balances payable in full on
the individual note's maturity dates, which range
through 2000. The four notes have fixed interest
rates (rates ranging from 8.75% to 11.0% at December
31, 1998)........................................... 45,405 87,377
---------- ----------
Total................................................ 2,315,186 1,423,363
Less current portion............................... 650,804 113,096
---------- ----------
$1,664,382 $1,310,267
========== ==========
</TABLE>
At December 31, 1998 and 1997, approximately $2,316,000 and $1,358,000,
respectively, of the Company's net book value of property and equipment
collateralized the various notes payable. In addition, certain notes payable
and line of credit are secured by the assignment of billboard rental income.
F-33
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the scheduled aggregate principal payments
for the notes payable for the five years subsequent to December 31, 1998 and
thereafter:
<TABLE>
<S> <C>
1999............................................................ $ 650,804
2000............................................................ 196,216
2001............................................................ 198,309
2002............................................................ 206,452
2003............................................................ 588,909
Thereafter...................................................... 474,496
----------
$2,315,186
==========
</TABLE>
7. Related Party Transactions
The Company shares office space and management with Kitchin Investments,
Inc. and the REIT. The Company has a Cost Reimbursement Agreement with Kitchin
Investments, Inc. whereby the Company agrees to pay for its share of the use of
office space, office equipment, telephones, file and storage space and other
reasonable and necessary office equipment and facilities and personnel costs.
The Cost Reimbursement Agreement expires on December 31, 1999. Kitchin
Investments, Inc. charged the Company $2,655,334, $1,856,370 and $641,437 in
1998, 1997 and 1996, respectively, pursuant to the Cost Reimbursement Agreement
and such amounts are reflected as management fees in the accompanying
statements of operations.
The Company's construction contracts with the REIT are generally fixed price
and limit the Company's profit on each contract to 10% after considering costs
of construction and certain other amounts. The Company does not believe that
there were amounts in excess of such limitations at December 31, 1998 or 1997.
Although the REIT is the legal borrower of construction loans or related
debt, the Company is responsible for interest due on such financing during the
construction period as a part of its contract. Construction period interest
incurred during 1998, 1997, and 1996 which is included in cost of revenues
earned, totaled approximately $1,125,935, $637,290, $168,957, respectively.
Interest paid includes amounts paid on behalf of the REIT.
8. Commitments and Contingencies
The Company leases land for each billboard location for terms of five or ten
years. These leases expire at various dates but generally include 5-year
automatic renewal periods; the leases provide for future minimum payments by
the Company as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999.......................................................... $ 90,312
2000.......................................................... 82,745
2001.......................................................... 78,628
2002.......................................................... 71,612
2003.......................................................... 59,362
Thereafter.................................................... 169,623
--------
$552,282
========
</TABLE>
F-34
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Portions of certain billboards are leased to third party entities under
operating leases with terms of 1 to 2 years, renewable annually. The rent will
increase each year on the anniversary of the lease commencement date in an
amount equal to increases, if any, in the Consumer Price Index. As of December
31, 1998, future minimum rental income due under noncancellable operating
leases is as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999........................................................... $49,507
2000........................................................... 7,530
Thereafter..................................................... --
-------
$57,037
=======
</TABLE>
From time to time, the Company becomes party to various claims and legal
actions arising during the ordinary course of business. Management, after
reviewing with legal counsel all actions and proceedings, believes that
aggregate losses, if any, would not have a material adverse effect on the
Company's financial position or results of operations.
9. Pending Events
On November 3, 1998, the Board of Directors of the REIT approved the
proposed acquisition by the REIT of the outdoor advertising assets of the
Company. These assets consist of approximately 100 road side billboards on
which advertising for the REIT's hotel properties and, in certain instances,
other services or products for third parties is placed. It is anticipated that
the REIT will lease these billboards back to the Company and use them for the
same type of advertising. The consideration payable to the Company will consist
of (i) 72,727 newly issued shares of the REIT'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 April 1999 and that the Company will distribute the shares of the
Series A Preferred Stock it receives to Thomas W. Kitchin and his wife.
On January 27, 1999, the REIT announced plans to merge with Signature Inns,
Inc. As a part of this transaction, the Company will acquire all of the assets
and assume the liabilities related to operation of the Signature Inn hotel
properties, for total cash consideration of $250,000. It is anticipated that
the Signature Inn employees will become employees of the Company and that the
Company will lease and operate these hotels from the REIT after the merger.
10. Year 2000 (Unaudited)
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 Jameson
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. The Company believes that its current software
and operating systems are year 2000 compliant. Based on current information,
costs of addressing and solving Year 2000 problems are not expected to have a
material effect on the Company's financial position or results of operations.
The ability of third parties with whom the Company transacts business to
address adequately their Year 2000 issues is
F-35
<PAGE>
JAMESON HOSPITALITY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The Company maintains contingency plans in its normal course of business
designed to be deployed in the event of various potential business
interruptions. These generally include manual workarounds and adjusting
staffing.
11. Subsequent Events
On March 15, 1999, the Company received a $150,000 capital contribution from
its members.
F-36
<PAGE>
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: March 25, 1999
By: /s/ Thomas W. Kitchin
---------------------------------
Thomas W. Kitchin
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Thomas W. Kitchin
- --------------------------------- Chairman of the Board March 25, 1999
Thomas W. Kitchin Chief Executive Officer, and
Director
Principal Financial and
Accounting Officer:
/s/ Craig R. Kitchin
- --------------------------------- President, Chief Financial March 25, 1999
Craig R. Kitchin Officer,
and Treasurer
Additional Directors:
/s/ Robert D. Hisrich
- --------------------------------- Director March 25, 1999
Robert D. Hisrich
/s/ Thomas J. O'Haren
- --------------------------------- Director March 25, 1999
Thomas J. O'Haren
/s/ Michael E. Lawrence
- --------------------------------- Director March 25, 1999
Michael E. Lawrence
</TABLE>
<PAGE>
Index to Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger between Jameson Inns, Inc. and Signature
Inns, Inc. incorporated by reference to Exhibit 2.1 to the Registration
Statement on S-4, File No. 333-74149.
3.1 Articles of Incorporation of Jameson Inns, Inc. incorporated by reference
to Exhibit 3.1.1 to the Registration Statement filed on Form S-11, File
No. 33-71160.
3.2 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. incorporated by reference to Exhibit 3.1.2 to the Registration
Statement filed on Form S-11, File No. 33-71160.
3.3 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. incorporated by reference to Exhibit 3.3.1 to Form 10-K/A2
(Amendment No. 2 to the Annual Report on Form 10-K) for the year ended
December 31, 1993.
3.4 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. setting forth, among other things, the Designation of the
Preferences, Rights, Privileges and Restrictions of the 9.25% Series A
Cumulative Preferred Stock incorporated by reference to Exhibit 2 to
Jameson Inns, Inc.'s Registration Statement on Form 8-A filed March 13,
1998 (File No. 23256).
3.5 Articles of Amendment to the Articles of Incorporation of Jameson Inns,
Inc. amending the Designation of Preferences, Rights, Privileges and
Restrictions of the 9.25% Series A Cumulative Preferred Stock
incorporated by reference to Exhibit 3.5 to the Registration Statement on
S-4, File No. 333-74149.
3.6 Form of Articles of Amendment to the Articles of Incorporation of Jameson
Inns, Inc. setting forth the Designation of Preferences, Rights,
Privileges and Restrictions of Series S Preferred Stock of the Registrant
incorporated by reference to Exhibit 3.6 to the Registration Statement on
Form S-4, File No. 333-74149.
3.7 Bylaws of Jameson Inns, Inc. incorporated by reference to Exhibit 3.2.1
to the Registration Statement on Form S-11, File No. 33-71160.
3.8 Amendment No. 1 to Jameson Inns, Inc. Bylaws incorporated by reference to
Exhibit 3.2.2 to the Registration Statement on Form S-11, File No. 33-
71160.
3.9 Amendment No. 2 to Jameson Inns, Inc. Bylaws incorporated by reference to
Exhibit 3.8 to the Annual Report filed on Form 10-K for the year ended
December 31, 1995.
4.1 Specimen Certificate of Common Stock incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-11, File No. 33-71160.
4.2 Specimen Certificate of 9.25% Series A Cumulative Preferred Stock
incorporated by reference to Exhibit 1 to the Registration Statement on
Form 8-A filed March 13, 1998 (File No. 23256).
10.1 Master Lease Agreement incorporated by reference to Exhibit 10.1 to the
Annual Report filed on Form 10-K for the year ended December 31, 1993.
10.2 Amendment No. 1 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company (revised) incorporated by reference to Exhibit
10.2 to the Annual Report filed on Form 10-K for the year ended December
31, 1995.
10.3 Amendment No. 2 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.3 to
the Annual Report filed on Form 10-K for the year ended December 31,
1996.
10.4 Amendment No. 3 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.4 to
the Annual Report filed on Form 10-K for the year ended December 31,
1996.
10.5 Amendment No. 4 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Operating Company incorporated by reference to Exhibit 10.5 to
the Annual Report filed on Form 10-K for the year ended December 31,
1997.
10.6 Amendment No. 5 to Master Lease Agreement between Jameson Inns, Inc. and
Jameson Alabama, Inc., as lessor, and Jameson Development Company, LLC
incorporated by reference to Exhibit 10.6 to the Registration Statement
on Form S-4, File No. 333-74149.
10.7 Schedule of documents substantially similar to Exhibit 10.1 incorporated
by reference to Exhibit 10.7 to the Registration Statement on Form S-4,
File No. 333-74149.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.8 Schedule of documents substantially similar to Exhibit 10.6 incorporated
by reference to Exhibit 10.8 to the Registration Statement on Form S-4,
File No. 000-23256.
10.9 Cost Reimbursement Agreement between Jameson Inns, Inc. and Kitchin
Investments, Inc. incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-11, File No. 33-71160.
10.10 Form of Construction Contract between Jameson Inns, Inc. and Jameson
Construction Company for construction of Jameson Inns incorporated by
reference to Exhibit 10.7 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.11 Jameson 1993 Stock Incentive Plan incorporated by reference to Exhibit
10.22.1 to the Registration Statement on Form S-11, File No. 33-71160.
10.12 Form of Stock Option Agreement under Jameson Inns, Inc. Stock Incentive
Plan incorporated by reference to Exhibit 10.23 to the Registration
Statement on Form S-11, File No. 33-71160.
10.13 Amendment No. 1 to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.10 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.14 1994 Amendment to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.11 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.15 Amendment No. 3 to Jameson 1993 Stock Incentive Plan incorporated by
reference to Exhibit 10.12 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.16 Jameson Inns, Inc. Director Stock Option Plan incorporated by reference
to Exhibit 10.13 to the Annual Report filed on Form 10-K for the year
ended December 31, 1995.
10.17 Jameson 1996 Stock Incentive Plan incorporated by reference to Exhibit
10.45 to the Annual Report filed on Form 10-K for the year ended
December 31, 1996.
10.18 Jameson 1997 Director Stock Option Plan incorporated by reference to
Exhibit 10.17 to the Annual Report filed on Form 10-K for the year ended
December 31, 1997.
10.19 Employment Agreement between Jameson Inns, Inc. and Thomas W. Kitchin
incorporated by reference to Exhibit 10.24 to the Registration Statement
on Form S-11, File No. 33-71160.
10.20 Amendment No. 1 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.15 to the
Annual Report filed on Form 10-K for the year ended December 31, 1995.
10.21 Amendment No. 2 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.16 to the
Annual Report filed on Form 10-K for the year ended December 31, 1995.
10.22 Amendment No. 3 to Employment Agreement between Jameson Inns, Inc. and
Thomas W. Kitchin incorporated by reference to Exhibit 10.46 to the
Annual Report filed on Form 10-K for the year ended December 31, 1996.
10.23 Indemnification and Hold Harmless Agreement between Jameson Inns, Inc.
and Jameson Operating Company incorporated by reference to Exhibit 10.25
to the Registration Statement on Form S-11, File No. 33-71160.
10.24 Indemnification and Hold Harmless Agreement between Jameson Inns, Inc.
and Kitchin Investments, Inc. incorporated by reference to Exhibit 10.26
to the Registration Statement on Form S-11, File No. 33-71160.
10.25 Form of Indemnification agreement between Jameson Inns, Inc. and
Directors and Officers incorporated by reference to Exhibit 10.27 to the
Registration Statement on Form S-11, File No. 33-71160.
10.26 Form of Construction Loan Agreement, Indenture, Security Agreement and
Promissory Note for loan from Empire Financial Services, Inc. to Jameson
Inns, Inc. (formerly Jameson Company) for construction of Jameson Inn
incorporated by reference to Exhibit 10.39 to the Registration Statement
on Form S-11, File No. 33-71160.
10.27 Form of Loan Indenture, Security Agreement, Assignment of Fees and
Income, Promissory Note for $4.2 million revolving loan from Empire
Financial Services, Inc. to Jameson Inns, Inc. incorporated by reference
to Exhibit 10.21 to the Annual Report filed on Form 10-K for the year
ended December 31, 1993.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.28 Form of Deed to Secure Debt, Security Agreement, Assignment of Operating
Lease, Assignment of Fees and Income, Promissory Note for loan from
Empire Financial Services, Inc. to Jameson Inns, Inc. incorporated by
reference to Exhibit 10.24 to the Annual Report filed on Form 10-K for
the year ended December 31, 1995.
10.29 Loan Modification Agreement and Note increasing by $2.6 million the
revolving loan from Empire Financial Services, Inc. to Jameson Inns,
Inc. incorporated by reference to Exhibit 10.26 to the Annual Report
filed on Form 10-K for the year ended December 31, 1995.
10.30 Deeds to Secure Debt, Mortgages, Assignments and Security Agreements,
Assignment of Rents and Leases, Assignments of Income and Promissory
Note for $17,171,717 loan from Bank Midwest, N.A. to Jameson Inns, Inc.
secured by 14 separate Jameson Inns incorporated by reference to Exhibit
10.34 to the Registration Statement on Form S-4, File No. 333-74149.
10.31 Adjustable Rate Note dated June 30, 1996 in the amount of $1,050,000
from Jameson Inns, Inc. to Empire Financial Services, Inc. for loan on
Waynesboro, Georgia incorporated by reference to Exhibit 10.3 to the
Report for the quarter ended March 31, 1996.
12.1 Ratios of Earnings to Combined Fixed Charges and Preferred Stock
21.1 List of subsidiaries of Jameson Inns, Inc. incorporated by reference to
Exhibit 21.1 to the Registration Statement on Form S-4, File No. 333-
74149.
23.1 Consent of Ernst & Young LLP.
</TABLE>
<PAGE>
EXHIBIT 12.1
Jameson Inns, Inc.
Calculation of Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
<TABLE>
<CAPTION>
December 31, Pro Forma
------------------------------------------------------ ----------
1994 1995 1996 1997 1998 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated income
before extraordinary
items.................. $1,311,157 $1,791,268 $4,040,809 $6,595,132 $5,807,051 $1,424,000
Interest................ 305,130 1,503,373 1,292,427 698,203 1,542,133 187,000
Amortization............ 34,312 87,151 93,085 79,515 114,107 --
---------- ---------- ---------- ---------- ---------- ----------
Earnings............... $1,650,599 $3,381,792 $5,426,321 $7,372,850 $7,463,291 $1,611,000
========== ========== ========== ========== ========== ==========
Interest................ $ 305,130 $1,503,373 $1,292,427 $ 698,203 $1,542,133 $ 187,000
Amortization............ 34,312 87,151 93,085 79,515 114,107 --
Preferred stock
dividends.............. -- 489,949 -- -- 2,188,050 --
Interest capitalized
during the period...... 182,569 381,508 526,130 637,290 1,125,935 183,000
---------- ---------- ---------- ---------- ---------- ----------
Fixed Charges.......... $ 522,011 $2,461,981 $1,911,642 $1,415,008 $4,970,225 $ 370,000
========== ========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges and
preferred stock
dividends.............. 3.16 1.37 2.84 5.21 1.50 4.35
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-91218, Form S-3 No. 333-20143, Form S-8 No. 333-3310 and Form
S-8 No. 333-42735) of Jameson Inns, Inc. of our reports dated February 12,
1999, with respect to the consolidated financial statements of Jameson Inns,
Inc. and February 19, 1999, except as to Note 11 as to which the date is March
15, 1999 with respect to the consolidated financial statements of Jameson
Hospitality, LLC included in the Annual Report on Form 10-K of Jameson Inns,
Inc. for the year ended December 31, 1998.
Ernst & Young LLP
Atlanta, Georgia
March 25, 1999
