<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 9, 1999
JAMESON INNS, INC.
(Exact name of Registrant as specified in its charter)
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Georgia 0-23256 58-2079583
- --------------------------------------------------------------------------------
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification No.)
incorporation)
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8 Perimeter East -- Suite 8050, Atlanta, Georgia 30346-1603
- ----------------------------------------------------- ----------
(Address of Registrant's principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 901-9020
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<PAGE>
ITEM 5. Other Events
This current report on Form 8-K is being filed to provide the consolidated
financial statements of Jameson Inns, Inc., a Georgia corporation ("Jameson" or
the "Company"), as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998 and the consolidated financial statements
of Jameson Hospitality, LLC, a Georgia limited liability company, as of December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998. In addition, the Company has included Selected Financial Information
(pursuant to Item 301 of Regulation S-K) and Management's Discussion and
Analysis Financial Condition and Results of Operations for (i) the year ended
December 31, 1998 compared to the year ended December 31, 1997 and (ii) the year
ended December 31, 1997 compared to the year ended December 31, 1996 (pursuant
to Item 303 of Regulation S-K).
ITEM 7. Financial Statements and Exhibits.
(c) Exhibits
Exhibit 23.1 Consent of Ernst & Young LLP
Exhibit 27 Financial Data Schedule (for SEC use only)
<PAGE>
JAMESON
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>
<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 limited
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 1,772 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>
2
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(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 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.
3
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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 Form 8-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 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.
4
<PAGE>
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 losses to be recorded on
long-loved 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.
5
<PAGE>
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, the 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.
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>
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(1) This amount equals 4% of the aggregate room revenues of the Jameson Inns
for the period.
6
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Liquidity and Capital Resources. Jameson expects to continue to develop
additional Jameson Inns 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 entirely with bank borrowings.
Jameson believes it can continue to finance new Jameson Inns 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 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
7
<PAGE>
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
(the "1997 Registration Statement") with 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 existing mortgage indebtedness. In 1998, Jameson stockholders approved
amendments to Jameson's articles of incorporation increasing the number of
authorized shares of Jameson common stock from 20 million to 40 million shares
and the authorized shares of Jameson preferred stock from 100,000 to 10 million
shares. In February 1998 Jameson sold 1,200,000 shares of Jameson Series A
Preferred Stock under the 1997 Registration Statement. Total net proceeds of
approximately $28.5 million were used to repay existing mortgage indebtedness.
Jameson intends to use future net proceeds, if any, from any additional sales
of securities under the 1997 Registration Statement for the repayment of
existing indebtedness, working capital and general corporate purposes.
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.
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.
8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
I. Jameson Audited Financial Statements
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998, and 1997........... F-3
Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-4
Consolidated Statements of Stockholders' Equity for each of the three
years ended December 31, 1998, 1997 and 1996........................... F-5
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
II. Jameson Hospitality Audited Financial Statements
Report of Independent Auditors.......................................... F-18
Consolidated Balance Sheets as of December 31, 1998, and 1997........... F-19
Consolidated Statement of Operations for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-20
Consolidated Statements of Members Capital for each of the three years
ended December 31, 1998, 1997 and 1996................................. F-21
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996....................................... F-22
Notes to Consolidated Financial Statements.............................. F-24
</TABLE>
F-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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 options 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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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
F-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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.
F-31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf the
undersigned thereunto duly authorized.
JAMESON INNS, INC.
March 9, 1999 By: /s/ Craig R. Kitchin
-----------------------
Craig R. Kitchin, President, Treasurer
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
<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 with respect to the
consolidated financial statements of Jameson Hospitality, LLC included in the
Current Report on Form 8-K dated March 9, 1999 of Jameson Inns, Inc.
Ernst & Young LLP
Atlanta, Georgia
March 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 500,377
<SECURITIES> 0
<RECEIVABLES> 2,289,753
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,093,627
<PP&E> 168,880,042
<DEPRECIATION> (16,754,843)
<TOTAL-ASSETS> 156,329,162
<CURRENT-LIABILITIES> 3,763,190
<BONDS> 0
0
1,200,000
<COMMON> 989,581
<OTHER-SE> 96,678,956
<TOTAL-LIABILITY-AND-EQUITY> 156,329,162
<SALES> 18,229,748
<TOTAL-REVENUES> 18,229,748
<CGS> 1,523,619
<TOTAL-COSTS> 1,523,619
<OTHER-EXPENSES> 592,041
<LOSS-PROVISION> 2,507,000
<INTEREST-EXPENSE> 1,656,240
<INCOME-PRETAX> 5,807,051
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,807,051
<DISCONTINUED> 0
<EXTRAORDINARY> 133,951
<CHANGES> 0
<NET-INCOME> 5,673,100
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
