SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
JANUS HOTELS AND RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware Commission File Number: 0-22745 13-2572712
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2300 Corporate Blvd., N.W., Suite 232 33431-8596
Boca Raton, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (561) 997-2325
Securities registered pursuant to Section 12(b) of the Exchange Act of 1934:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. |_|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was approximately $3,660,000, as of March 15, 2002.
It is the position of the Company that the United States Lines, Inc. and United
States Lines (S.A.), Inc. Reorganization Trust is not an affiliate.
Number of shares of common stock outstanding as of March 15, 2002: 7,242,524
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to the 2002
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference in Part III, Items 10-13 of the Annual
Report on Form 10-K as indicated herein.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the words
or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify forward-looking statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. All such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements, including
without limitation, the impacts of the terrorist attacks of September 11, 2001
on the travel and hospitality industries; the factors described under the
heading "Certain Business Considerations" below, including competition within
the lodging industry, both on a local and national level; the duration and
severity of the recent downturn in the economy; the seasonality of the hotel
business; general real estate and economic conditions; the cost and availability
of capital for scheduled maintenance, renovations and expansion; government and
regulatory action affecting the hotel industry; the Company's ability to
generate adequate working capital to sustain its operations, described under the
heading "Liquidity and Capital Resources" below; and the other risks and
uncertainties set forth in the annual, quarterly and current reports of the
Company. The Company has no obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
PART I
Item 1. Business.
Introduction
Janus Hotels and Resorts, Inc. (the "Company" or "Janus"), a Delaware
corporation, is in the business of operating and managing hotels. The Company
has ownership interests in 14 hotels (the "Owned Hotels") and as of March 15,
2002 manages an additional 39 hotels (the hotels which are managed, but not
owned, by the Company are referred to as the "Managed Hotels" and the Owned
Hotels and Managed Hotels are collectively referred to as "Hotels").
The Company's executive offices are located at 2300 Corporate Boulevard, N.W.,
Suite 232, Boca Raton, Florida 33431 and its telephone number is (561) 997-2325.
Background of the Company
Janus is the successor to United States Lines, Inc. ("U.S. Lines"), which once
was one of the largest containerized cargo shipping companies in the world. On
November 24, 1986, McLean Industries, Inc., First Colony Farms, Inc. and their
subsidiaries U.S. Lines and United States Lines (S.A.), Inc. ("U.S. Lines
(S.A.)") filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code. Soon thereafter, the shipping operations of U.S. Lines and U.S.
Lines (S.A.) ceased. U.S. Lines and U.S. Lines (S.A.) emerged from bankruptcy in
1990 under the terms of the First Amended and Restated Joint Plan of
Reorganization dated February 23, 1989 (the "Plan"). At that time, the names of
U.S. Lines and U.S. Lines (S.A.) were changed to Janus Industries, Inc. and JI
Subsidiary, Inc. ("JI Subsidiary"), respectively. On May 21, 1999, the name of
the Company was changed to Janus Hotels and Resorts, Inc. JI Subsidiary
currently has no business activities. See " History of the Company's
Reorganization."
In July 1996, the Company acquired substantially all of the assets of Pre-Tek
Wireline Service Company, Inc. ("Pre-Tek"), an oil and gas engineering services
and wireline logging company based in Bakersfield, California. During 1997, the
Company determined to discontinue this line of business and subsequently sold
the business to its management effective April 1, 1998.
In April 1997, the Company entered the hotel business by acquiring, from
affiliates of Louis S. Beck ("Beck") and Harry G. Yeaggy ("Yeaggy"), certain
assets relating to the hospitality business comprised of (i) six hotels and an
85% interest in a partnership that owns one hotel (the minority interest was
acquired in 2001); (ii) a hotel management company; (iii) a management fee
sharing arrangement with Summit Hotel Management Company, which has since been
terminated; and (iv) two loans, one of which is secured by a first mortgage on a
hotel, which was subsequently terminated based on a merger, and the other of
which is secured by a first mortgage on a campground, which is personally
guaranteed by Messrs. Beck and Yeaggy. In consideration therefor, Messrs. Beck
and Yeaggy and Beck Hospitality III, Inc., a corporation wholly-owned by them,
received shares of the Company's common stock, par value $.01 per share (the
"Common Stock") and shares of the Series B preferred stock of the Company, par
value $.01 per share (the "Series B Preferred Stock).
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Messrs. Beck and Yeaggy, who are currently Chairman and Vice Chairman,
respectively, of the Board of Directors of the Company, have been engaged in the
hospitality business since 1972.
In August 1998, the Company acquired four hotels near Cleveland, Ohio (the
"Cornerstone Hotel Group") from an unrelated party.
Effective January 1, 1999, the Company acquired, by merger, Beck Hospitality,
Inc. II ("Beck II") which owned six hotels and a 75% interest in another hotel.
As part of the purchase price in this transaction, Messrs. Beck and Yeaggy
received additional shares of the Series B Preferred Stock.
Messrs. Beck and Yeaggy retain miscellaneous independent interests in the
hospitality business. However, they have contractually agreed with the Company
not to engage in any business that competes with the business of the Company.
The Hospitality Business
Owned Hotels
The Owned Hotels are located in five states and operate under franchise or
membership agreements that provide for the use of the brand names Days Inn, Best
Western, Holiday Inn and Comfort Inn. One of the Owned Hotels is located
adjacent to the Paramount Kings Dominion amusement park near Richmond, Virginia.
The remaining Owned Hotels are located near office parks, interstate highways,
airports or tourist attractions in Ohio, Florida and North Carolina. The Owned
Hotels generally offer remote control cable television, a swimming pool and, in
many cases, restaurants. Some of them offer meeting and banquet facilities and
room service.
The Owned Hotels are owned in fee, either directly or through consolidated
entities. Each of the Owned Hotels is subject to mortgage indebtedness. All of
such indebtedness is secured solely by the applicable hotel property and
fixtures, and is non-recourse to the other assets of the Company, with the
exception of the indebtedness incurred in the acquisition of the hotels in the
Cornerstone Hotel Group, which is cross-collateralized by such hotels.
Franchise Agreements
The Company has entered into non-exclusive multi-year franchise, licensing or
membership agreements, which allow the Company to utilize the franchise brand
name of the franchiser or licensor for the Hotels. The Company believes that its
relationships with nationally recognized franchisers provide significant
benefits for its Owned Hotels. The franchise agreements require the Company to
pay annual fees, to maintain certain standards and to implement certain programs
that require additional expenditures by the Company such as remodeling or
redecorating. The payment of annual fees, which typically total from 8% to 12%
of room revenues, covers royalties and the costs of marketing and reservation
services provided by the franchisers. Franchise agreements, at their inception,
generally provide for a term of 15 years and an initial fee in addition to
annual fees payable to the franchiser.
The Company currently has franchise or membership relationships with Bass Hotels
(Holiday Inn), Days Inn, Best Western, Choice Hotels (Comfort Inn), Ramada Inn
and Red Roof. Franchise agreements may be terminated if, among other reasons,
the Company breaches its obligations under the agreement, the hotel is not
operated in the ordinary course of business or the Company becomes financially
unstable. There can be no assurance that a desirable replacement would be
available if any franchise agreements were to be terminated. Upon such
termination with respect to the Company's Owned Hotels, the Company would incur
the costs of signage removal and other expenses, possible lost revenues and the
costs incidental to establishing new associations. Through the Managed Hotels,
the Company has additional relationships with other franchisers, including
Howard Johnson, Ramada, Wingate and Radisson.
Managed Hotels
The Company operates the Managed Hotels pursuant to management agreements (the
"Management Agreements") with the owners of such Managed Hotels. Managed Hotels
are operated primarily under nationally recognized brand names. Four Managed
Hotels are non-franchised properties.
The Company is responsible for all matters relating to the day-to-day operations
of the Managed Hotels and is required to prepare an annual operating budget, use
its reasonable best efforts to market the hotels and ensure compliance with the
terms of applicable franchise agreements. The Company is also responsible for
the retention and supervision of personnel necessary for the operation of the
hotel. The Company has a contract with a third party for this purpose. See
"Operations - Hotel Personnel."
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Under the terms of the Management Agreements, management fees either are a fixed
amount or are based on a percentage of a property's total revenues, ranging from
3% to 5%, and/or incentive payments based upon net operating income. Additional
fees are generated from accounting services. The Management Agreements generally
have terms of one year to five years and are automatically renewed for
successive similar terms, unless either party decides not to renew prior to the
expiration of the current term. Either party may terminate a Management
Agreement for cause prior to a stated expiration date, except in the case of two
Management Agreements, which permit termination at any time without cause.
Generally, the owner of a property has the right to terminate a Management
Agreement upon sale of the Hotel to an unrelated third party, subject to the
payment of a termination fee to the Company.
Operations
The Company operates each Hotel according to a business plan specifically
tailored to the characteristics of the Hotel and its market and employs
centralized management, accounting and purchasing systems to enhance hotel
operations, reduce the costs of goods, food and beverages and increase operating
margins.
Computerized Reporting Systems. The Company has a service agreement for a hotel
property management information system with Computel Computer Systems, Inc.
("Computel"), a corporation wholly-owned by Messrs. Beck and Yeaggy. The
agreement provides a computerized system that tracks all services provided by
nine of the Hotels and enables the Company to monitor a broad spectrum of the
operations of each Hotel covered by the system, including the occupancy and
revenues of the Hotels. The agreement with Computel has a term of one year and
automatically renews for successive terms of one year, unless one party notifies
the other to the contrary at least three months prior to the termination date.
Computel is paid a monthly fee of $275 per property for its basic property
management software package and one computer terminal. Additional monthly fees
are charged for additional terminals and add-on software for services such as
guest messaging, call accounting interface, franchise central reservation
interface and movie interface. On each annual renewal of the agreement, Computel
is entitled to adjust its fees to the Company commensurate with the fees charged
to other customers.
Hotel Personnel. The majority of the personnel at the Hotels is provided by
Hospitality Employee Leasing Program, Inc. ("HELP"), a corporation wholly-owned
by Messrs. Beck and Yeaggy, pursuant to an agreement with the Company. The
agreement has a term of one year and automatically renews for successive
one-year terms, unless one party notifies the other to the contrary at least
three months prior to the expiration date. The Company reimburses HELP the
actual payroll costs, including payroll taxes, of the employees and pays HELP an
administrative fee per person. In addition, the Company pays a premium for
workers compensation insurance for the indemnification by HELP for all employer
practices liability and work related injuries.
Employees
As of December 31, 2001, approximately thirty full-time employees of the Company
were engaged in management, business operations and administration of its
hospitality business. In addition, at that date approximately 2,028 individuals
employed by HELP provided services at the Hotels under a service agreement
between HELP and the Company.
Growth Strategy
Management of the Company intends to pursue a program of expanding its business
of the management and/or acquisition of hotels, recreation, resorts,
entertainment or other related entities through the marketing of its services to
the owners of properties not owned by the Company and through the acquisition of
properties either by itself or with other investors. The Company is engaged in a
marketing program to expand selectively the number of hotels that it manages.
Since entering the hospitality business in April 1997, and through December 31,
2001, the Company increased its number of Managed Hotels by eighteen. The
Company also continues to review possible acquisitions of hospitality
properties. There can be no assurance that the Company will be successful in
pursuing its growth strategy due to the highly competitive nature of the market
and the difficulties associated with raising capital or obtaining debt
financing.
Public Service
The Company has a one-year agreement with America Responds With Love, Inc.
("America Responds") under which it provides lodging at no charge at a number of
its Hotels. While this program will from time to time increase the Company's
costs of operations without a corresponding increase in revenues, management
believes that the impact upon profitability will be immaterial, and regards its
participation in the program as a marketing opportunity. The Company has the
right to cancel this agreement at any time with notice to America Responds.
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History of the Company's Reorganization
Under the terms of the Plan, (i) the United States Lines, Inc. and United States
Lines (S.A.), Inc. Reorganization Trust (the "Reorganization Trust") was created
for the benefit of unsecured creditors of U.S. Lines and U.S. Lines (S.A.); (ii)
certain assets and liabilities of U.S. Lines and U.S. Lines (S.A.) were
transferred to the Reorganization Trust; and (iii) U.S. Lines and U.S. Lines
(S.A.) were discharged of all liabilities.
The agreement establishing the Reorganization Trust (the "Trust Agreement")
provided for shares of stock of Janus and JI Subsidiary to be distributed to the
unsecured creditors as their claims were allowed. See "The Reorganization
Trust." The Plan provided for the unsecured creditors to hold a majority of the
outstanding stock of the reorganized companies through the Reorganization Trust
and further anticipated that the reorganized companies would acquire operating
businesses.
The Reorganization Trust
The Reorganization Trust was created by the Plan for the purpose of resolving
the disputed claims of former unsecured creditors of U.S. Lines and U.S. Lines
(S.A.), marshalling the remaining assets of U.S. Lines and U.S. Lines (S.A.),
such as claims against third parties, and acting as the disbursing agent for
distribution to the former creditors. The trustee of the Reorganization Trust is
John T. Paulyson, who has been employed by the Reorganization Trust since its
inception.
The Reorganization Trust was issued stock by both Janus and JI Subsidiary, which
was intended by the Plan to be distributed to the former creditors of U.S. Lines
and U.S. Lines (S.A.) as their claims were resolved. Five million shares of the
Company's Common Stock was originally issued to the Reorganization Trust, all
ultimately to be distributed to allowed creditors of U.S. Lines. As of December
31, 2001, with the exception of a fixed reserve of 352,850 shares established
for the benefit of individuals who have asserted asbestos-related and other
late-manifesting personal injury claims and approximately 11,500 shares
tentatively committed to former creditors, all shares have been distributed by
the Reorganization Trust to former creditors.
The resolution of the late-manifesting asbestos and other personal injury claims
is delayed, in part, by a dispute between the Reorganization Trust and the
insurance carriers of U.S. Lines over certain aspects of insurance coverage.
This dispute has no impact upon the Company other than delaying identification
of individual shareholders and prolonging the activities of the Reorganization
Trust. However, by Order dated February 19, 2002, the United States Bankruptcy
Court for the Southern District of New York authorized the Reorganization Trust
to monetize the shares of Common Stock that it holds. Thus, the Reorganization
Trust is now in the position to dispose of such shares.
The Trust Agreement provides for the Reorganization Trust to contribute to Janus
and JI Subsidiary from time to time cash on hand that exceeds its projected
liabilities and administrative requirements. Such contributions are to be made
90% to Janus and 10% to JI Subsidiary. Through December 31, 2001, an aggregate
of approximately $15 million was transferred by the Reorganization Trust to the
Company. The Company has not received an additional contribution for the past
four years and does not anticipate additional transfers from the Reorganization
Trust until there is a resolution of the insurance coverage issues.
As of December 31, 2001, the Reorganization Trust reported total cash and cash
equivalents of $1,806,213 of which $419,363 was identified as "restricted
funds". The principal unknown variable that could cause substantial depletion of
the unrestricted available cash and cash equivalents is the remaining period of
Reorganization Trust activity and the amount of professional fees necessary to
resolve outstanding claims, particularly, any asbestos or other late-manifesting
personal injury claims. No assurance can be given, nor is any assurance
intended, that additional cash will become available to the Company from the
Reorganization Trust or the amount of such additional cash, if any.
Certain Business Considerations
Possible Need for Additional Financing
The Company has been substantially dependent upon mortgage loans for the
financing of its real estate activities and internal cash flow for its working
capital requirements. The Company anticipates that if it does not acquire
additional hotel properties based on currently proposed plans and assumptions
relating to it's the Company's operations, its available resources, including
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its current cash balances, will be sufficient to satisfy the Company's
contemplated cash requirements for its current operations for at least the next
24 months. In the event that the Company acquires one or more hotels, or its
assumptions change or prove to be inaccurate, the Company could be required to
seek additional financing or curtail its activities. Any equity financing may
involve substantial dilution to the interest of the Company's stockholders, and
any debt financing could result in operational or financial restrictions on the
Company. There can be no assurance that any additional financing will be
available to the Company on acceptable terms or at all.
Conflicts of Interest
Independent business interests of Messrs. Beck and Yeaggy may give rise to the
possibility of conflicts of interest.
The Company relies upon Computel, which is wholly owned by Messrs. Beck and
Yeaggy, and HELP, which is wholly owned by Messrs. Beck, Yeaggy and Richard A.
Tonges ("Tonges"), for administrative and personnel services at the Hotels.
Conflicts may arise between the Company and Messrs. Beck, Yeaggy and Tonges in
connection with the exercise of any rights or the conduct of any negotiations to
extend, renew, terminate or amend the agreements between each of Computel and
HELP and the Company, or the leases for the offices occupied by the Company in
Boca Raton and Cincinnati which are leased from an affiliate of Messrs. Beck and
Yeaggy. Conflicts may also arise between the Company and Messrs. Beck and Yeaggy
in connection with certain mortgage indebtedness of the Company that is
personally guaranteed by Messrs. Beck and Yeaggy, or in connection with the
exercise by the Company of its rights with respect to a mortgage note and
related mortgage on the undeveloped vacant ground in Kissimmee, Florida, which
is owned by Messrs. Beck and Yeaggy.
Although management's recommendations on matters potentially involving conflicts
of interest will be referred to the Audit Committee of the Board of Directors
for review, there can be no assurance that any such conflicts will be resolved
in favor of the Company.
Operating Risks
The Company's business is subject to all of the risks inherent in the lodging
industry. These risks include, among other things, adverse effects of general
and local economic conditions, changes in local market conditions, cyclical
overbuilding of hotel space, a reduction in local demand for hotel rooms,
changes in travel patterns, the recurring need for renovations, refurbishment
and improvements of hotel properties, changes in interest rates and the other
terms and availability of credit. Changes in demographics or other changes in a
hotel's local market could impact the convenience or desirability of a hotel,
which, in turn, could affect the economic returns from the operation of a hotel.
The operational expenses of a hotel cannot always be reduced when circumstances
result in a reduction of revenue.
Competition
The lodging industry is highly competitive in terms of both geographic markets
and market segmentation. The Hotels are in the market segments known generally
as full service, limited service and economy hotels. The Company competes with
other franchisers of Six Continent Hotels (Holiday Inn), Days Inn, Knights Inn,
Best Western, Choice Hotels (Comfort Inn) and Red Roof within the geographic
markets of the applicable Hotels and operators of other similar service type
hotels. The Managed Hotels cover the spectrum of market segments and include
economy, limited service, full service mid-market hotels and higher rated luxury
properties. Like the Company's Owned Hotels, the Managed Hotels compete, within
their geographical markets, with other properties under the same franchise
names, with properties operating under other franchise names and with
independent operators. Many owners/managers of multiple hotel properties are
larger than the Company and have greater financial and other resources and
better access to the capital markets than the Company. Performance of the hotel
industry has been historically cyclical and is affected by general economic
conditions and by the local economy where each hotel is located. In addition, to
remain competitive, hotels periodically must be renovated and modernized in
order to compete with newer or more recently renovated facilities. Furthermore,
shifts in demographics or other local market changes can reduce the economic
returns from a hotel.
Geographic Concentration of Hotels
Many of the Owned Hotels are located in Ohio. Such geographic concentration
exposes the Company's operating results to events or conditions that
specifically affect that area, such as local and regional economic, weather and
other conditions. Adverse developments that specifically affect that area may
have a material adverse effect on the results of operations of the Company.
Relationships with Franchisers
The Company enters into non-exclusive agreements with certain franchisers for
the franchise or license of brand names, which allows the Company to benefit
from franchise name recognition and loyalty. The Company believes that its
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relationships with nationally recognized franchisers provides significant
benefits for its existing Owned Hotels and acquisitions it may make in the
future. While the Company believes that it currently enjoys good relationships
with its franchisers, there can be no assurance that a desirable replacement
would be available if any of the franchise agreements were to be terminated.
Upon termination of any franchise agreement, the Company would incur the costs
of signage removal and other costs, possible lost revenues and the costs
incidental to establishing new associations.
Compliance with Government Regulations
The lodging industry is subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverages (such as health and liquor license laws) and building and zoning
requirements. In addition, the Company is subject to laws governing its
relationships with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. The failure to obtain or retain
liquor licenses or an increase in the minimum wage rate, employee benefit costs
or other costs associated with employees, could adversely affect the Company.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
comply with these requirements, a determination that the Company does not comply
with the ADA could result in the imposition of fines or an award of damages to
private litigants. These and other initiatives could adversely affect the
Company.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In connection with the ownership or operation of
the Hotels, the Company may be potentially liable for any such costs. Although
the Company is not currently aware of any material environmental claims pending
or threatened against it, no assurance can be given that a material
environmental claim will not be asserted against the Company or against the
Company and the Hotels. The cost of defending against claims of liability or of
remediating a contaminated property could have a material adverse effect on the
results of operations of the Company.
Litigation
The Company's Hotels are visited by thousands of invitees each year. Injuries
incurred by any invitees on the hotel premises may result in litigation against
the Company. While the Company maintains general liability insurance, there can
be no assurance that a claim will be covered by such insurance or that claims
made against insurers by the Company will not result in increased premiums or
cancellation of insurance coverage.
Ownership of Hotel Real Estate
The Company currently owns 14 hotels. Accordingly, the Company is subject to the
risks associated with the ownership of real estate. These risks include, among
others, changes in national, regional and local economies, changes in real
estate market conditions, changes in the costs, terms and availability of
credit, the potential for uninsured casualty or other losses and changes in or
enactment of new laws or regulations affecting real estate. Many of these risks
are beyond the control of the Company. Real estate is generally illiquid which
could result in limitations on the ability of the Company to sell any one or
more Owned Hotels if business conditions so required.
Hotel Renovation Risks
The renovation of hotels involves risks associated with construction and
renovation of real property, including the possibility of construction cost
overruns and delays due to various factors (including the inability to obtain
regulatory approvals, inclement weather, labor or material shortages and the
unavailability of construction or permanent financing) and market or site
deterioration after acquisition or renovation. Any unanticipated delays or
expenses in connection with the renovation of hotels could have an adverse
effect on the results of operations and financial condition of the Company.
No Limits on Indebtedness
Neither the Company's Restated Certificate of Incorporation, as amended, nor its
by-laws limit the amount of indebtedness that the Company may incur. Subject to
limitations it may agree to in debt instruments, the Company expects to incur
additional debt in the future to finance acquisitions and renovations. The
Company's continuing substantial indebtedness could increase its vulnerability
to general economic and lodging industry conditions (including increases in
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interest rates) and could impair the Company's ability to obtain additional
financing in the future and to take advantage of significant business
opportunities that may arise. The Company's indebtedness is, and will likely
continue to be, secured by mortgages on all of the Owned Hotels. Future
indebtedness may require the Company to secure indebtedness with other assets of
the Company, including its Management Agreements. There can be no assurance that
the Company will be able to meet its debt service obligations and, to the extent
that it cannot, the Company risks the loss of some or all of its assets,
including the Owned Hotels, to foreclosure. Adverse economic conditions could
cause the terms on which borrowings become available to be unfavorable. In such
circumstances, if the Company is in need of capital to repay indebtedness in
accordance with its terms or otherwise, it could be required to liquidate one or
more investments in hotels at times that may not permit realization of the
maximum return on such investments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Control of the Company by Principal Officers
Messrs. Beck and Yeaggy beneficially own approximately 54% of the outstanding
shares of the Common Stock. As a result, such persons, acting together, have the
ability to exercise significant influence over all matters requiring stockholder
approval. Messrs. Beck and Yeaggy are also directors and executive officers of
the Company. The concentration of ownership could delay or prevent a change in
control of the Company.
Dependence on Key Personnel
The Company believes that its success will depend to a significant extent on the
efforts and abilities of certain of its senior management, particularly those of
its Chairman of the Board and Chief Executive Officer, Louis S. Beck, its Vice
Chairman, Harry Yeaggy, and its President, Michael M. Nanosky. The loss of any
one of them or other key management or operations employees could have a
material adverse effect on the Company's operating results and financial
condition. There is strong competition for qualified management personnel, and
the loss of key personnel or an inability on the Company's part to attract,
retain and motivate key personnel could adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to retain its existing key personnel or attract additional
qualified personnel. The Company does not presently carry "key man" insurance on
the lives of any of its key personnel.
Potential Effects of Preferred Stock Issuance
The Board of Directors has the authority, without further stockholder approval,
to issue up to 5,000,000 shares of preferred stock, in one or more series, and
to fix the number of shares and the rights, preferences and privileges of any
such series. The issuance of preferred stock by the Board of Directors could
affect the rights of the holders of the Common Stock. For example, such an
issuance could result in a class of securities outstanding that would have
dividend, liquidation, or other rights superior to those of the Common Stock or
could make a takeover of the Company or the removal of management of the Company
more difficult.
Dividends Unlikely
Since reorganization, the Company has never declared or paid dividends on the
Common Stock and currently does not intend to pay dividends in the foreseeable
future. The payment of dividends in the future will be at the discretion of the
Board of Directors. In addition, the Company may not pay any dividends on the
Common Stock unless dividends on the outstanding preferred stock are current.
The Company presently has 3,100 shares of preferred stock outstanding with an
annual dividend expense of $232,500. The Company was current in the payment of
dividends on the preferred stock as of December 31, 2001.
Seasonality; Quarterly Fluctuations
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in the revenues
of the Company. Quarterly earnings may also be adversely affected by events
beyond the Company's control, such as extreme weather conditions, economic
factors and other considerations affecting travel. However, the Company is
working on gaining ownership and management agreements in various geographic
areas throughout the United States, where the "busy" seasons are during the less
"busy" seasons of the Company's currently owned and managed hotels, thereby
lessening the seasonality affect of the Company's net income.
8
Item 2. Properties.
As of December 31, 2001, the Company owned the following fourteen hotels in five
different states with a total of 2,274 rooms:
Year of Last
No. of Renovation/
Hotel Name Rooms Location Construction
- -------------------------------- ---------- ------------------- ----------------
Best Western Cambridge 95 Cambridge, OH 1999 / 1973
Best Western Kings Quarters 248 Doswell, VA 2000 / 1977
Comfort Inn West 134 Akron, OH 2000 / 1989
Days Inn Cambridge 103 Cambridge, OH 1999 / 1973
Days Inn Cincinnati 142 Sharonville, OH 2000 / 1974
Days Inn Kings Island 124 Mason, OH 2000 / 1976
Days Inn Raleigh 126 Raleigh, NC 2000 / 1979
Days Inn RTP 110 Morrisville, NC 2000 / 1987
Holiday Inn Express 110 Juno Beach, FL 2000 / 1989
Holiday Inn Hudson 288 Hudson, OH 1999 / 1967
Holiday Inn Independence 364 Independence, OH 1999 / 1974
Holiday Inn North Canton 194 North Canton, OH 2000 / 1970
Knights Inn Lafayette 112 Lafayette, IN 2000 / 1987
Red Roof Kings Island 124 Mason, OH 1999 / 1979
The Company conducts its corporate and business operations activities from
offices in Cincinnati, OH and Boca Raton, FL. The Company leases 4,300 square
feet of office space in Cincinnati, OH and 2,200 square feet of office space in
Boca Raton, FL under leases which terminate on December 31, 2004. Both leases
are from an affiliate of Messrs. Beck and Yeaggy.
Item 3. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to stockholders for a vote during the fourth quarter
of 2001.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information:
The Company's Common Stock is traded on the Nasdaq Stock Market SmallCap
Market under the symbol "JAGI".
The following table sets forth, for the periods indicated, the range of the
high and low sales prices for the Common Stock as reported by the Nasdaq
SmallCap Market.
High Low
Quarter ended December 31, 2001 $1.75 $1.10
Quarter ended September 30, 2001 $2.75 $1.05
Quarter ended June 30, 2001 $3.00 $1.44
Quarter ended March 31, 2001 $1.69 $1.25
Quarter ended December 31, 2000 $3.63 $1.16
Quarter ended September 30, 2000 $2.92 $1.03
Quarter ended June 30, 2000 $3.50 $2.03
Quarter ended March 31, 2000 $3.94 $2.00
Holders:
As of March 15, 2002, there were approximately 846 holders of record of the
Company's Common Stock.
Dividends:
Since reorganization, the Company has never declared or paid dividends on
its Common Stock and currently does not intend to pay dividends in the
foreseeable future. The payment of dividends in the future will be at the
discretion of the Board of Directors.
10
Item 6. Selected Financial Data
Years ended December 31,
-------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- ----------------
Total revenues $44,534,364 $ 49,768,643 $ 51,173,422 $ 29,056,825 $10,275,638
Operating income 2,899,205 6,937,064 8,493,864 4,968,391 1,323,091
Income from
continuing operations (3,511,649) 996,588 1,632,584 1,751,055 423,965
Net income (loss) $(3,081,814) $ 1,074,246 $ 1,172,784 $ 1,887,241 $ (562,744)
Income (loss) per
common share -
basic and diluted:
Income (loss) from
contining operations $(0.42) $ (0.03) $ 0.04 $ 0.11 $ (0.02)
Net income (loss) $ (0.41) $ (0.02) $ (0.01) $ 0.13 $ (0.15)
Total assets $11,691,123 $124,162,685 $127,692,489 $110,569,666 $61,404,126
Long-term debt 33,817,936 64,946,400 67,933,460 60,582,883 17,866,318
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited operating results of each of
the eight prior quarters. This information is unaudited, but in the opinion of
management includes all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results of operations of such periods.
Fiscal 2001
-------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ---------------- ---------------- ----------------
Total revenues $10,031,166 $11,977,886 $13,647,242 $ 8,878,070
Net income (loss) (668,039) (346,293) 696,649 (2,764,131)
Net income (loss) applicable
to common stock $ (726,164) $ (404,418) $ 638,524 $(2,822,256)
Income (loss) per common
share - basic and diluted $ (0.09) $ (0.05) $ 0.08 $ (0.36)
Fiscal 2000
-------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ---------------- ---------------- ----------------
Total revenues $10,929,450 $13,396,556 $15,108,836 $10,333,801
Net income (loss) 110,990 428,077 1,377,820 (842,641)
Net income (loss) applicable
to common stock $ (203,787) $ 115,021 $ 1,060,456 $(1,160,006)
Income (loss) per common
share - basic and diluted $ (0.02) $ 0.01 $ 0.12 $ (0.13)
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Significant Accounting Policies
Our consolidated financial statements are impacted by the accounting policies
used and the estimates and assumptions made by management during their
preparation. Significant accounting policies and estimates that most impact our
consolidated financial statements are those that relate to our property and
equipment and income taxes.
Property and equipment is stated at cost, reduced by provisions to recognize
economic impairment in value when management determines that such impairment has
occurred. Major renovations and improvements are capitalized. When assets are
sold, retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and the gain or loss is
recognized. Repair and maintenance costs are generally charged to expense as
incurred. Buildings, furniture and fixtures and equipment are depreciated using
the straight-line method over the estimated useful lives as of the acquisition
date or date of major renovation. Estimated useful lives of our buildings are
forty years, and furniture and fixtures and equipment have useful lives ranging
from five to fifteen years.
We evaluate the realizability of our long-lived assets, including furniture and
fixtures and equipment, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
exists when estimated undiscounted cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount. Any
impairment loss recognized represents the excess of the asset's carrying value
as compared to its estimated fair value.
The Company accounts for income taxes pursuant to the asset and liability method
which requires deferred tax assets and liabilities to be computed annually for
temporary differences between the financial statement and tax bases of assets
and liabilities. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The income tax
provision or credit is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and liabilities.
Income tax credits attributable to benefits from net operating loss
carryforwards or other temporary differences that existed at the time the
Company adopted fresh-start accounting in February 1990 upon its bankruptcy
reorganization are reflected as a contribution to stockholders' equity in the
period in which the tax benefits are realized.
Overview
The operations of the Company are comprised primarily of the operations of
Hotels.
The following charts present a summary of the operations of the Owned Hotels for
the calendar years ended December 31, 2001 and 2000.
2001
HOTEL AND LOCATION RMS AVAIL.1 OCC%2 ADR3 Rev PAR4
- ------------------ ----------- ----- ---- --------
Days Inn, Sharonville, OH 52,195 58% $38.69 $22.42
Best Western Kings Quarters, Doswell, VA 90,520 49% $66.91 $32.99
Knights Inn, Lafayette, IN5 11,396 56% $34.39 $19.13
Days Inn Crabtree, Raleigh, NC 44,530 61% $45.21 $27.43
Days Inn RTP, Raleigh, NC 40,515 86% $68.04 $58.52
Holiday Inn, Independence, OH 132,860 52% $87.23 $45.69
Holiday Inn, North Canton, OH 70,810 75% $67.27 $50.70
Holiday Inn, Hudson, OH 105,120 49% $76.03 $36.99
Comfort Inn, Akron, OH 48,180 49% $56.43 $27.64
Holiday Inn Express, Juno Beach, FL 39,420 67% $73.89 $49.75
Red Roof Kings Island, Mason, OH 45,260 44% $47.27 $20.64
Days Inn Kings Island, Mason, OH 45,260 58% $49.01 $28.56
Days Inn Cambridge, Cambridge, OH 37,258 40% $50.46 $20.27
Best Western Cambridge, Cambridge, OH 34,675 53% $44.27 $23.48
Days Inn Pompano, Pompano Beach, FL6 31,494 68% $41.79 $28.34
Ramada Inn, Kent, OH7 18,392 35% $52.18 $18.07
12
2000
HOTEL AND LOCATION RMS AVAIL.1 OCC%2 ADR3 Rev PAR4
- ------------------ ----------- ----- ---- --------
Days Inn, Sharonville, OH 52,338 61% $41.23 $25.34
Best Western Kings Quarters, Doswell, VA 90,768 47% $66.30 $31.20
Knights Inn, Lafayette, IN 40,992 70% $38.29 $26.74
Days Inn Crabtree, Raleigh, NC 44,652 68% $45.44 $30.93
Days Inn RTP, Raleigh, NC 40,626 89% $70.78 $63.20
Holiday Inn, Independence, OH 133,224 61% $91.36 $55.42
Holiday Inn, North Canton, OH 71,004 80% $65.57 $52.78
Holiday Inn, Hudson, OH 105,408 52% $82.46 $43.21
Comfort Inn, Akron, OH 48,312 59% $59.53 $34.88
Days Inn East, Cincinnati, OH8 15,531 64% $41.08 $26.16
Holiday Inn Express, Juno Beach, FL 39,528 78% $62.36 $48.81
Red Roof Kings Island, Mason, OH 45,384 45% $48.63 $21.77
Days Inn Kings Island, Mason, OH 45,384 54% $52.30 $28.03
Days Inn Cambridge, Cambridge, OH 37,332 36% $53.24 $19.35
Best Western Cambridge, Cambridge, OH 34,770 62% $39.79 $24.54
Days Inn Pompano, Pompano Beach, FL 63,684 66% $36.88 $24.36
1 Calculation is based on number of hotel rooms in service multiplied by
number of days in a year.
2 Total number of rooms sold during a year divided by the total number of
rooms available in such year.
3 Average Daily Rate equals total room revenue (exclusive of taxes) during a
year divided by rooms sold.
4 Revenue Per Available Room equals total room revenues (exclusive of taxes)
during a year, divided by rooms available for sale during such year.
5 Hotel was leased April 13, 2001.
6 Hotel was sold June 30, 2001.
7 Hotel acquired September 1, 2001 and sold December 31, 2001.
8 Hotel was sold June 15, 2000.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
During 2001, our business was negatively impacted by both the general economic
downturn and the reduced travel and cancellations experienced after the
terrorist attacks of September 11, 2001. Prior to that date, due to the general
economic conditions, the Company implemented programs to reduce operating
expenses at owned hotels. Management continues to monitor operations for cost
savings and is pursuing new marketing initiatives to attract business.
In the discussion that follows, "comparable hotels" means only those hotels
owned and operated by the Company since January 1, 2000 and still owned and
operated as of December 31, 2001 .
Room and related services revenue decreased 13.3% to $30,293,370 from
$34,947,912 in 2000. For comparable hotels: (i) the average daily room rate
decreased to $64.45 for 2001 from $66.09 for 2000; (ii) occupancy decreased in
2001 to 56.0% from 60.1% in 2000; and (iii) room and related services revenue
decreased 9.4% to $28,815,619 from $31,803,915 in 2000. Management believes that
the decrease in occupancy was lessened to some extent by a reduction in room
rates. However, this strategy was not entirely successful in overcoming the
factors described in the opening paragraph.
Food and beverage revenues decreased 4.5% to $10,065,582 in 2001 from
$10,544,317 in 2000. For comparable hotels, food and beverage revenues decreased
6.7%. These results reflected not only the effects of the slowing economy but
also a decrease in the banquet business resulting from cancellations after the
events of September 11, 2001.
Management fee income decreased 7.7% to $2,995,763 in 2001 from $3,246,814 in
2000. This decrease is primarily due to lower operating results at managed
properties and a reduction in construction supervision fees. Excluding a
significant short term agreement in effect from June 2001 through August 2001,
management fees decreased 16.2%
Total direct operating expenses decreased 6.6% to $18,111,986 in 2001 from
$19,381,405 in 2000 but increased as a percentage of room and related services
13
and food and beverage revenues to 44.9% from 42.6%. For comparable hotels, total
direct operating expenses decreased 4.5%. Front desk and housekeeping expenses
were decreased to minimum support levels necessary to maintain customer service.
Occupancy expenses decreased 3.3% to $6,450,918 from $6,673,326 in 2000.
Occupancy expenses increased 0.7% for comparable hotels as utility costs
increased at various hotels as the underlying utility rates increased.
Selling, general and administrative expenses increased 1.5% to $12,192,890 in
2001 from $12,017,409 in 2000 and increased as a percentage of total revenues to
27.4% from 24.2%. Selling, general and administrative expenses increased 3.2%
for comparable hotels as reductions in bad debts and franchise fees were offset
by increases in legal fees and health insurance costs.
Depreciation decreased by $17,105 in 2001 from $3,900,642 in 2000. The decrease
was primarily attributable to depreciation on hotel properties sold in 2001 and
2000, offset by depreciation on capital additions completed in 2001 and 2000.
An impairment loss of $627,263 was recognized in 2001 related to the Knights Inn
hotel property. The amount of the loss was determined based on a comparison of
the carrying value of the property with its fair value. This value was based on
the purchase option included in a lease agreement for the property. The exercise
period for the option is May 1, 2002 through May 31, 2002.
Interest income decreased to $605,357 in 2001 from $846,792 in 2000 as interest
rates and funds on deposit decreased.
Interest expense increased to $6,851,400 in 2001 from $6,053,127 in 2000. The
increase was attributable to the subordinated debt issued in exchange for the
redemption of preferred stock held by the Company's controlling stockholders
Messrs. Beck and Yeaggy, offset by the reduction of interest expense
attributable to properties sold and amortization of principal in the ordinary
course of business. A corresponding decrease in the preferred dividend resulted
from the redemption of the preferred stock held by Messrs. Beck and Yeaggy.
Other expense in 2001 is a net loss of $164,811 from the sales of two hotel
properties. A gain of $605,922 was recognized on the sale of the Ramada Inn
Kent, while a loss of $770,733 was recognized on the sale of a 75% owned hotel
property in Pompano Beach, FL.
Minority interest income was $206,455 in 2001 compared to minority interest
expense of $74,034 in 2000. This change reflects the loss from operations and
the loss from the sale of the Days Inn Pompano Beach hotel as of June 30, 2001,
and the acquisition of the minority interest in the Kings Dominion Lodge
partnership on March 1, 2001.
The Company's effective tax rate for continuing operations was (4.7)% in 2001
compared to 36.5% in 2000. This decrease is due to the loss from continuing
operations.
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Room and related services revenue decreased 7.3% to $34,947,912 in 2000 from
$37,712,563 in 1999. The decrease was attributable primarily to dispositions of
hotel properties. The average daily room rate, excluding dispositions, decreased
to $62.26 for 2000 from $62.32 in 1999. The comparable occupancy rate decreased
to 60.9% in 2000 from 61.4% in 1999. Excluding the dispositions made in 2000 and
late 1999, room and related services revenue decreased 1.3%.
Food and beverage revenues are principally a function of the number of guests
who stay at each Owned Hotel, local walk-in business and catering sales. These
revenues decreased 0.3% to $10,544,317 in 2000 from $10,578,433 in 1999. This
decrease is related primarily to decreased occupancy and catering sales. The
properties disposed of in 2000 and 1999 had no effect on food and beverage
revenues.
Management fee income increased 59.2% to $3,246,814 in 2000 from $2,039,565 in
1999. This increase is due to the addition of new third party management
contracts.
Total direct operating expenses decreased 0.6% to $19,381,404 in 2000 from
$19,502,095 in 1999 but increased as a percentage of room and related services
and food and beverage revenues to 42.6% from 40.4%. Excluding the dispositions
of hotel properties made in 2000 and late 1999, total direct operating expenses
increased 3.4%.
Occupancy expenses decreased 1.4% to $6,673,326 in 2000 from $6,768,557 in 1999.
Excluding the dispositions made in 2000 and 1999, occupancy expenses increased
6.5% primarily due to increases in real estate taxes.
14
Selling, general and administrative expenses decreased 2.8% to $12,017,409 in
2000 from $12,363,035 in 1999 and decreased as a percentage of total revenues to
24.1% from 24.2 %. Excluding the dispositions of hotel properties made in 2000
and late 1999, selling, general and administrative expenses increased 0.6%.
Depreciation increased to $3,900,642 in 2000 from $3,688,997 in 1999. The
increase is due to an adjustment made to record depreciation of $569,344 on
property reclassified to property used in operations but offset by dispositions
of hotel properties made in 2000 and late 1999.
Interest income increased to $846,792 in 2000 from $808,560 in 1999.
Interest expense decreased to $6,053,127 in 2000 from $6,597,088 in 1999. The
decrease was attributable to the dispositions made in 2000 and 1999.
Minority interest increased to $74,034 in 2000 from $34,606 in 1999 reflecting
the results of operations from the Kings Dominion partnership and the Days Inn
Pompano hotel in 2000. During the first quarter of 2001, the Company purchased
the minority interest in the Kings Dominion partnership.
The Company's effective tax rate was 36.5% in 2000 compared to 40.9% in 1999.
This decrease is due to the tax loss on hotel properties sold and the greater
impact of the Reorganization Trust loss.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash on hand (including escrow
deposits and replacement reserves), cash from operations, earnings on invested
cash and, when required, principally in connection with acquisitions, borrowings
(consisting primarily of loans secured by mortgages on real property owned or to
be acquired by the Company). The Company's continuing operations are funded
through cash generated from its hotel operations. Acquisitions of hotels, if
pursued by the Company, are expected to be financed through a combination of
cash on hand, internally generated cash, issuance of equity securities and
borrowings, some of which are likely to be secured by assets of the Company.
There can be no assurance that credit will be available to the Company or, if
available, that such credit will be available on terms and in amounts
satisfactory to the Company.
Capital for improvements to Owned Hotels has been and is expected to be provided
by a combination of internally generated cash, reserve replacement accounts and,
if necessary and available, borrowings. The Company expects to spend
approximately 4% to 5% of annual revenues from Owned Hotels for ongoing capital
expenditures.
The Company maintains a number of commercial banking relationships and has
aggregate lines of credit totaling $6,500,000. There is an outstanding balance
of $1,855,609 on the lines of credit at December 31, 2001, most of which
represents borrowings used to fund operations during the latter part of December
2001.
The Company evaluates opportunities to acquire additional hotel properties from
time to time. If management identifies one or more properties as attractive
acquisition candidates, the Company anticipates that it will be able to secure
the capital required to close purchases through a combination of borrowing,
internally generated cash and utilization of its common and/or preferred stock.
There can be no assurance however that the Company will be able to negotiate
sufficient borrowings to accomplish its acquisition program on terms and
conditions acceptable to the Company. Further, any such borrowings may contain
covenants that impose limitations on the Company that could constrain or
prohibit the Company from making additional acquisitions as well as its ability
to pay dividends or to make other distributions, incur additional indebtedness
or obligations or to enter into other transactions that the Company may deem
beneficial. Additionally, factors outside of the Company's control could affect
its ability to secure additional funds on terms acceptable to the Company. Those
factors include, without limitation, any increase in the rate of inflation
and/or interest rates, localized or general economic dislocations, an economic
downturn and regulatory changes constricting the availability of credit.
15
Contractual Obligations
The following table provides details regarding the Company's contractual cash
obligations subsequent to December 31, 2001:
Contractual Cash Obligations By Year
------------------------------------------------------------------------------
2002 2003 - 2004 2005 - 2006 Thereafter Total
--------------- -------------- -------------- ---------------- ---------------
Mortgage debt, fixed rate $46,467,802 $1,502,687 $1,809,163 $13,639,422 $63,419,074
Mortgage debt, variable rate 1,501,735 1,150,860 1,863,571 4,516,166
Subordinate debt 13,688,080 13,688,080
Capital leases 732,766 164,153 896,919
---------- --------- --------- ---------- ----------
Total contractual cash
obligations $48,702,303 $2,817,700 $3,672,734 $27,327,502 $82,520,239
========== ========= ========= ========== ==========
At December 31, 2001, the Company was in default for nonpayment on four mortgage
loans totaling $42,266,372 which are collateralized by hotel properties with a
net book value of $41,253,001 in the vicinity of Cleveland, Ohio, but which are
otherwise non-recourse to the other assets of the Company. Management suspended
payments on these loans on November 1, 2001 as a means of inducing the mortgage
loan servicer to engage in discussions regarding the renegotiation of the loans'
interest rate. The Company and the mortgage loan servicer have entered into a
pre-negotiation agreement which describes each party's rights and remedies under
the current loan documents. Due to the Company's suspension of loan repayments,
the outstanding indebtedness may be declared due and payable, in full, at any
time. Accordingly, the amount of such indebtedness is included as a contractual
obligation in 2002. Management believes that the applicable interest rate is
substantially in excess of current market rates. However, substantial prepayment
penalties preclude the possibility of refinancing these loans in the absence of
cooperation by the existing lenders. The loans are held in a syndicated pool of
commercial mortgage loans which makes the possibility of a modification of loan
terms very difficult. Since November 1, 2001, all payments due under these loans
were deposited into an interest-bearing escrow account controlled by the
Company. While negotiations are continuing with the mortgage loan servicer, the
Company is unable to predict at this time whether such discussions will result
in modifications to the terms of the applicable mortgage loans. Moreover,
management of the Company has not evaluated its options if the discussions with
the mortgage loan servicer are fruitless.
Management of the Company believes that the cash flow from the Company's hotel
operations, other than the hotel properties in the Cleveland vicinity, will be
sufficient to make the required amortization payments on the applicable mortgage
loans. Balloon payments required at the maturity of the non-self-amortizing
loans will be made from cash on hand at the time or from the proceeds of
refinancing. There can be no assurance that the Company will be able to obtain
financing, or if obtained, on terms satisfactory to it.
Demand at many of the hotels is affected by seasonal patterns. Demand for hotel
rooms in the industry generally tends to be lower during the first and fourth
quarters and higher in the second and third quarters. Accordingly, the Company's
revenues reflect this seasonality.
Historical Changes in Liquidity and Capital Resources
Total assets decreased from $124,162,685 at December 31, 2000 to $116,991,123 at
December 31, 2001. The decrease in total assets was the result of decreases in
property and equipment, net and offset by increases in restricted cash and
accounts receivable.
Net cash provided by operating activities decreased to $2,824,913 for the year
ended December 31, 2001 from $4,193,648 in the year ended December 31, 2000. The
decrease is primarily the result of the net loss for 2001.
During the year ended December 31, 2001, the Company invested $2,478,673 in
capital improvements for the Owned Hotels as part of its operating plan. The
Company plans to spend $1,627,000 on capital improvements during the year ending
December 31, 2002 as part of its continuing improvement plans for the Owned
Hotels.
Effective January 1, 2001, in a transaction approved by the Company's Board of
Directors and the Audit Committee, 13,688.08 shares of preferred stock held by
the Company's controlling stockholders Messrs. Beck and Yeaggy were redeemed by
the Company. The aggregate redemption price of $13,688,080 was paid in the form
16
of subordinate promissory notes maturing on December 31, 2011. The notes bear
interest at the rate of 7.5% per annum. Interest only is payable on a quarterly
basis. If the redemption had occurred on January 1, 2000, income from continuing
operations, on a pro forma basis, for the year ended December 31, 2000 would
have been $342,527, or $0.01 per basic and diluted common shares. Long-term
debt, net of current portion, at December 31, 2000, would have been $78,634,480
and total stockholders' equity would have been $32,897,304.
At a special meeting of stockholders on March 15, 2001, a Company proposal to
redeem the common stock of stockholders holding fewer than 100 shares of the
Company's common stock was approved. A total of 79,025 shares of common stock
were redeemed at a cost of $189,593. These shares were retired and reduced the
number of shares outstanding.
On October 5, 2001, the Board of Directors modified its previously approved
stock buy-back program and authorized the Company to repurchase up to 1,400,000
shares of its common stock for an aggregate amount not to exceed $2,300,000.
During 2001 the Company purchased 468,462 common shares at a cost of $728,444.
In January 2002, the Company purchased an additional 680,862 common shares from
Daewoo Corporation ("Daewoo") for $851,081 in a directly negotiated transaction.
Prior to this transaction, Daewoo owned more than 5% of the outstanding shares
of the Company's common stock. To date, a total of 1,320,024 common shares have
been repurchased at a cost of $1,845,367. The Board of Directors has authorized
management to engage in negotiations with the Reorganization Trust or another
former creditor of U.S. Lines who remains a holder of a significant block of the
Company's stock and who may be interested in the disposition of its shares.
Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
addresses financial accounting and reporting for business combinations and
supersedes Accounting Principle Board ("APB") Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." Statement No. 141 applies to all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Statement No. 141 also changes the criteria to recognize intangible assets apart
from goodwill. We adopted this statement on July 1, 2001. We have historically
used the purchase method to account for business combinations and the adoption
of this statement did not materially impact our financial position, cash flows
or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which requires that goodwill and certain intangibles not be amortized.
Instead, these assets will be reviewed annually for impairment and written down
and charged to results of operations only in the periods in which the recorded
value of goodwill and certain intangibles is more than its fair value. This
Statement applies to goodwill and certain intangible assets acquired prior to
June 30, 2001 and was adopted by us on January 1, 2002. Because the amount for
the amortization of goodwill is significant, we expect that adoption of this
accounting standard will have the impact of reducing our amortization expense
for goodwill and will have a material impact on our financial statements. For
each of the years ended December 31, 1999, 2000 and 2001, the amount of
amortization expense for goodwill was $200,681, which is included in
amortization expense on the statement of operations. The required impairment
test of goodwill may result in future period write-downs.
In order to complete the transitional assessment of goodwill, we will need to
determine the carrying value of each reporting unit and the fair value of each
reporting unit. It was initially determined that our hotel properties are
considered one reporting unit. We will have up to six months from the date of
adoption to finalize the determination of fair value of our reporting unit and
compare it to the reporting unit's carrying amount. To the extent the reporting
unit's carrying amount exceeds its fair value, the reporting unit's goodwill may
be impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS No. 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in our consolidated
statement of operations. As of the date of adoption, we have unamortized
goodwill in the amount of $7,133,384. Preliminary tests indicate that there is
no impairment; therefore, there should be no material impact on our financial
position, cash flows or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121") and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
17
the disposal of a segment of a business (as defined in that Opinion). SFAS 144
retains the fundamental provisions of SFAS 121 concerning the recognition and
measurement of the impairment of long-lived assets to be held and used and the
measurement of long-lived assets to be disposed of by sale but provides
additional guidance with regard to discontinued operations and assets to be
disposed of. Furthermore, SFAS 144 excludes goodwill from its scope and,
therefore, eliminates the requirement under SFAS 121 to allocate goodwill to
long-lived assets to be tested for impairment. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. Our adoption of SFAS 144 on January 1,
2002 is not expected to have a material impact on our consolidated results of
operations, cash flows or financial position.
Inflation
Although inflation has been relatively stable over the past two years and has
not had any discernible effect on the Company's operations, an increase in the
inflation rate could have a negative effect on the Company's operations and its
ability to secure additional capital under terms and conditions acceptable to
the Company or refinance indebtedness secured by the Owned Hotels. An increase
in the rate of inflation could materially adversely affect the ability of the
Company to expand its operations through the acquisition of additional hotel
properties.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements required by this item appear under the caption "Index
to Financial Statements" and are included elsewhere herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The material contained in "Election of Directors" and in "Section 16(a)
Beneficial Ownership Reporting Compliance" of the Company's definitive proxy
statement (to be filed pursuant to the Securities Exchange Act of 1934, as
amended) for the annual meeting of stockholders to be held on June 7, 2002 is
hereby incorporated by reference.
Item 11. Executive Compensation.
The material contained in "Compensation of Directors and Executive Officers",
"Compensation Committee Report on Executive Compensation" of the Company's
definitive proxy statement (to be filed pursuant to the Securities Exchange Act
of 1934, as amended) for the annual meeting of stockholders to be held on June
7, 2002 is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The material contained in "Voting Securities and Principal Holders Thereof" of
the Company's definitive proxy statement (to be filed pursuant to the Securities
Exchange Act of 1934, as amended) for the annual meeting of stockholders to be
held on June 7, 2002 is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related Transactions" of
the Company's definitive proxy statement (to be filed pursuant to the Securities
Exchange Act of 1934, as amended) for the annual meeting of stockholders to be
held on June 7, 2002 is hereby incorporated by reference.
18
PART IV
Item 14. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits: The exhibits listed in the accompanying index are filed as part
of this report.
Exhibit No. Description
3.1 Second Restated Certificate of Incorporation incorporated by
reference to Exhibit 3.1 to Form 10-Q of the Company for the
quarter ended June 30, 2001.
3.2 By-Laws incorporated by reference to Exhibit 3.2 to
Form10-SB of the Company filed with the Securities and
Exchange Commission on June 24, 1997.
10.6 1996 Stock Option Plan incorporated by reference to Exhibit
10.6 to Form 10-SB of the Company filed with the Securities
and Exchange Commission on June 24, 1997.
10.7 Stock Option Agreement incorporated by reference to Exhibit
10.7 to Form 10-SB of the Company filed with the Securities
and Exchange Commission on June 24, 1997.
10.9 Investor Agreement incorporated by reference to Exhibit 10.9
to Form 10-SB of the Company filed with the Securities and
Exchange Commission on June 24, 1997.
10.11 Client Service Agreement between Hospitality Employee
Leasing Program, Inc. and the Company incorporated by
reference to Exhibit 10.11 to Form 10-SB of the Company
filed with the Securities and Exchange Commission on
June 24, 1997.
10.12 Product Lease and Service Agreement between Computel
Systems, Inc. and the Company incorporated by reference to
Exhibit 10.12 to Form 10-SB of the Company filed with the
Securities and Exchange Commission on June 24, 1997.
10.13 Sublease Agreement between Beck Hospitality Inc. III and the
Company (Cincinnati premises) incorporated by reference to
Exhibit 10.13 to Form 10-SB of the Company filed with the
Securities and Exchange Commission on June 24, 1997.
10.14 Sublease Agreement between Beck Hospitality Inc. III and the
Company (Boca Raton premises) incorporated by reference to
Exhibit 10.14 to Form 10-SB of the Company filed with the
Securities and Exchange Commission on June 24, 1997.
10.20 Consulting Agreement by and between the Company and The
Cornerstone Company incorporated by reference to Exhibit
10.20 to Form 10-QSB for the quarter ended June 30, 1998.
10.25 Loan Agreement dated as of August 14, 1998 by and among JAGI
Cleveland - Hudson, LLC; JAGI Cleveland - Independence, LLC;
JAGI Montrose West, LLC, JAGI North Canton, LLC; and Amresco
Capital, L.P. incorporated by reference to Exhibit 10.25 to
Form 8-K for the event dated August 14, 1998.
10.26 Note (Fixed Rate) of JAGI Cleveland - Hudson, LLC dated
August 14, 1998 in the principal sum of $13,300,000 and
Schedule of Other Notes (Fixed Rate) incorporated by
reference to Exhibit 10.26 to Form 8-K for the event dated
August 14, 1998.
10.27 Mortgage and Security Agreement dated as of August 14, 1998
by and between JAGI Cleveland - Hudson, LLC and Amresco
Capital, L.P. and Schedule of Other Mortgage and Security
Agreements incorporated by reference to Exhibit 10.27 to
Form 8-K for the event dated August 14, 1998.
10.28 Security Agreement dated as of August 14, 1998 by JAGI
Cleveland - Hudson, LLC and Amresco Capital L.P. and
Schedule of Other Security Agreements incorporated by
reference to Exhibit 10.28 to Form 8-K for the event dated
August 14, 1998.
19
10.29 Second Mortgage and Security Agreement dated as of August
14, 1998 by and between JAGI Cleveland - Hudson, LLC and
Amresco Capital, L.P. and Schedule of Other Second Mortgage
and Security Agreements incorporated by reference to Exhibit
10.29 to Form 8-K for the event dated August 14, 1998.
10.30 Second Security Agreement dated as of August 14, 1998 by and
between JAGI Cleveland - Hudson, LLC and Amresco Capital,
L.P. and Schedule of Other Second Security Agreements
incorporated by reference to Exhibit 10.30 to Form 8-K for
the event dated August 14, 1998.
10.31 Guaranty dated as of August 14, 1998 by and between the
Company and Amresco Capital, L.P. and Schedule of Other
Guaranties incorporated by reference to Exhibit 10.31 to
Form 8-K for the event dated August 14, 1998.
10.33 Stock Appreciation Right Certificate incorporated by
reference to Exhibit 10.33 to Form 10-KSB for the year ended
December 31, 1998.
10.34 Amended and Restated Registration Rights Agreement dated as
of January 1, 1999 with Louis S. Beck incorporated by
reference to Exhibit 10.34 to Form 10-KSB for the year ended
December 31, 1998.
10.35 Amended and Restated Registration Rights Agreement dated as
of January 1, 1999 with Harry G. Yeaggy incorporated by
reference to Exhibit 10.35 to Form 10-KSB for the year ended
December 31, 1998.
10.36 Stock Appreciation Right Agreement with Paul Tipps dated as
of December 18, 1998 incorporated by reference to Exhibit
10.36 to Form 10-KSB for the year ended December 31, 1998.
10.37 Conversion Agreement dated as of January 1, 2001 among Janus
Hotels and Resorts, Inc., Harry G. Yeaggy, Louis S. Beck,
Elbe Financial Group, LLC. and Beck Hospitality, Inc. III,
with forms of promissory notes as exhibits incorporated by
reference to Exhibit 10.37 to Form 8-K for the event dated
January 31, 2001.
10.38 Purchase Agreement dated as of March 1, 2001 between Elbe
Properties and JAGI Doswell, LLC incorporated by reference
to Exhibit 10.38 to Form 8-K for the event dated March 1,
2001.
10.39 Directors' Stock Option Plan incorporated by reference to
Exhibit 10.39 to Form 10-Q of the Company for the quarter
ended June 30, 2001
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP
24 Powers of Attorney.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the period October 1, 2001
through December 31, 2001.
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JANUS HOTELS AND RESORTS, INC.
Dated: March 28, 2002 /s/ Louis S. Beck
-----------------------------------------
Louis S. Beck
Chairman and Chief Executive Officer
Dated: March 28, 2002 /s/ Richard A. Tonges
-----------------------------------------
Richard A. Tonges
Treasurer and Vice President of Finance
(Principal Financial and Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated.
Dated: March 28, 2002 *
--------------------------------------
Michael M. Nanosky
President and Director
Dated: March 28, 2002 *
--------------------------------------
Harry G. Yeaggy
Vice Chairman
Dated: March 28, 2002 *
--------------------------------------
Arthur Lubell
Director
Dated: March 28, 2002 *
--------------------------------------
Richard P. Lerner
Director
Dated: March 28, 2002 *
--------------------------------------
Lucille Hart-Brown
Director
Dated: March 28, 2002 *
--------------------------------------
C. Scott Bartlett, Jr.
Director
21
Dated: March 28, 2002 *
---------------------------------------
Stephen Grossman
Director
Dated: March 28, 2002 *
---------------------------------------
Paul Tipps
Director
Dated: March 28, 2002 *
---------------------------------------
Howard Nusbaum
Director
* /s/ Richard A. Tonges
--------------------------------
Richard A. Tonges
Attorney-in-Fact
22
JANUS HOTELS AND RESORTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 AND 1999 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 AND 1999 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Janus Hotels and Resorts, Inc.
We have audited the accompanying consolidated balance sheets of Janus Hotels and
Resorts, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Janus Hotels and Resorts, Inc.
and Subsidiaries as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ GRANT THORNTON LLP
February 20, 2002
F-2
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,097,345 $ 8,244,481
Restricted cash 2,405,747 1,330,350
Accounts receivable 2,107,968 2,126,152
Current portion of notes receivable 2,208,716 100,384
Other current assets 196,512 208,362
----------- -----------
Total current assets 14,016,288 12,009,729
----------- -----------
Property and equipment, net 87,150,167 93,311,684
Mortgage notes receivable 3,029,629 3,138,345
Goodwill, net 7,133,384 7,334,064
Deferred tax asset 60,000 2,566,000
Replacement reserve 3,415,089 3,632,826
Other assets 2,186,566 2,170,037
----------- -----------
$116,991,123 $124,162,685
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,362,735 $ -
Current maturity of accelerated long-term debt 42,266,372 -
Current portion of long-term debt 5,073,196 3,659,241
Accounts payable 2,743,269 2,342,183
Accrued expenses 3,417,549 1,921,449
----------- -----------
Total current liabilities 54,863,121 7,922,873
----------- -----------
Long-term debt, net of current portion 33,817,936 64,946,400
Deferred tax liabilities 2,282,000 2,250,000
Minority interest 91,113 2,540,028
Stockholders' equity:
Preferred stock, series B; par value $0.01 per share; 20,000 shares authorized;
3,100 and 16,788.08 shares issued and outstanding at December 31,
2001 and 2000, respectively 31 168
Common stock, par value $0.01 per share; 15,000,000 shares authorized;
11,804,195 and 11,883,220 shares issued at December 31,
2001 and 2000, respectively 118,043 118,833
Additional paid-in capital 36,059,511 52,582,257
Accumulated deficit (7,791,473) (4,477,159)
Treasury stock, at cost, 3,880,809 and 3,412,47 common shares at
December 31, 2001 and 2000, respectively (2,449,159) (1,720,715)
----------- -----------
Total stockholders' equity 25,936,953 46,503,384
----------- -----------
$116,991,123 $124,162,685
=========== ===========
See notes to consolidated financial statements.
F-3
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
2001 2000 1999
--------------- --------------- ---------------
Revenues:
Room and related services $30,293,370 $34,947,912 $37,712,563
Food and beverage 10,065,582 10,544,317 10,578,433
Management fees 2,995,763 3,246,814 2,039,565
Other 1,179,649 1,029,600 842,861
---------- ---------- ----------
Total revenues 44,534,364 49,768,643 51,173,422
---------- ---------- ----------
Operating expenses:
Direct:
Room and related services 7,926,500 9,027,084 9,341,472
Food and beverage 8,007,810 8,235,163 8,113,617
Selling and general 2,177,676 2,119,158 2,047,006
---------- ---------- ----------
Total direct expenses 18,111,986 19,381,405 19,502,095
---------- ---------- ----------
Occupancy expenses 6,450,918 6,673,326 6,768,557
Selling, general and administrative expenses 12,192,890 12,017,409 12,363,032
Severance arrangement of former president - 500,000 -
Impairment loss 627,263 - -
Depreciation 3,883,537 3,900,642 3,688,997
Amortization 368,565 358,797 356,877
---------- ---------- ----------
Total operating expenses 41,635,159 42,831,579 42,679,558
---------- ---------- ----------
Operating income 2,899,205 6,937,064 8,493,864
Other income (expense):
Interest expense (6,851,400) (6,053,127) (6,597,088)
Interest income 605,357 846,792 808,650
Other (164,811) (45,107) 115,565
---------- ---------- ----------
Income(loss) from continuing operations before income taxes and minority
interest (3,511,649) 1,685,622 2,820,991
Provision(credit) for income taxes (165,000) 615,000 1,153,801
---------- ---------- ----------
Income(loss) from continuing operations before minority interest (3,346,649) 1,070,622 1,667,190
Minority interest (206,455) 74,034 34,606
---------- ---------- ----------
Income(loss) from continuing operations (3,140,194) 996,588 1,632,584
Gain (loss) on disposal of discontinued operations, net of taxes 58,380 77,658 (459,800)
---------- ---------- ----------
Net income(loss) (3,081,814) 1,074,246 1,172,784
Less preferred dividend requirement 232,500 1,262,561 1,217,443
---------- ---------- ----------
Net income (loss) applicable to common stock $(3,314,314) $ (188,315) $ (44,659)
========== ========== ==========
Basic income per common share:
Income(loss) from continuing operations $ (0.42) $ (0.03) $ 0.04
Gain (loss) on disposal of discontinued operations 0.01 0.01 (0.05)
---------- ---------- ----------
Net income (loss) $ (0.41) $ (0.02) $ (0.01)
========== ========== ==========
Diluted income per common share:
Income(loss) from continuing operations $ (0.42) $ (0.03) $ 0.04
Gain (loss) on disposal of discontinued operations 0.01 0.01 (0.05)
---------- ---------- ----------
Net income (loss) $ (0.41) $ (0.02) $ (0.01)
========== ========== ==========
Weighted average common shares:
Basic 8,065,218 8,659,846 8,673,996
========= ========= =========
Diluted 8,065,218 8,659,846 8,673,996
========= ========= =========
See notes to consolidated financial statements.
F-4
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Preferred Stock Common Stock
------------------ ---------------------
Additional
Number of Number of Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
--------- ------ ---------- ------- ---------- -----------
Balance January 1, 1999 10,451.88 105 11,883,220 118,833 45,738,120 (4,244,185)
Net income 1,172,784
Increase in deferred tax asset 508,000
Shares issued for acquisition 6,336.20 63 6,336,137
Common stock returned from Pre-Tek
purchase for non-performance of
earn out
Preferred stock dividends (1,217,443)
-------- --- ---------- ------- ---------- ----------
Balance December 31, 1999 16,788.08 168 11,883,220 118,833 52,582,257 (4,288,844)
Net income 1,074,246
Purchases of treasury stock
Preferred stock dividends (1,262,561)
-------- --- ---------- ------- ---------- ----------
Balance December 31, 2000 16,788.08 168 11,883,220 118,833 52,582,257 (4,477,159)
Net income (loss) (3,081,814)
Decrease in deferred tax asset (2,646,000)
Purchases of treasury stock
Preferred stock dividends (232,500)
Redemption of preferred stock (13,688.08) (137) (13,687,943)
Redemption of common stock (79,025) (790) (188,803)
-------- --- ---------- ------- ---------- ----------
Balance December 31, 2001 3,100.00 $ 31 11,804,195 $118,043 $36,059,511 $(7,791,473)
======== === ========== ======= ========== ==========
Treasury Stock
------------------------
Number of
Shares Amount Total
--------- ---------- ----------
Balance January 1, 1999 3,192,128 (1,416,299) 40,196,574
Net income 1,172,784
Increase in deferred tax asset 508,000
Shares issued for acquisition 6,336,200
Common stock returned from Pre-Tek
purchase for non-performance of
earn out 20,000 (200) (200)
Preferred stock dividends (1,217,443)
--------- ---------- ----------
Balance December 31, 1999 3,212,128 (1,416,499) 46,995,915
Net income 1,074,246
Purchases of treasury stock 200,219 (304,216) (304,216)
Preferred stock dividends (1,262,561)
--------- ---------- ----------
Balance December 31, 2000 3,412,347 (1,720,715) 46,503,384
Net income (loss) (3,081,814)
Decrease in deferred tax asset (2,646,000)
Purchases of treasury stock 468,462 (728,444) (728,444)
Preferred stock dividends (232,500)
Redemption of preferred stock (13,688,080)
Redemption of common stock (189,593)
--------- ---------- ----------
Balance December 31, 2001 3,880,809 $(2,449,159) $25,936,953
========= ========== ==========
See notes to consolidated financial statements.
F-5
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
--------------- --------------- ---------------
Operating activities:
Net income (loss) $(3,081,814) $1,074,246 $ 1,172,784
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,883,537 3,900,642 3,688,997
Impairment loss 627,263 - -
Amortization of intangible assets 358,735 358,797 356,877
Deferred taxes (108,000) (95,275) 967,401
Minority Interest (206,455) 74,034 34,606
(Gain) loss on sale of hotel properties 164,811 45,107 (110,787)
Discontinued operations - - 499,800
Changes in operating assets and liabilities, excluding acquisitions:
Accounts receivable 18,184 (382,911) (320,914)
Other current assets 11,850 3,720 27,124
Other assets 41,573 (711,390) 638,526
Accounts payable and accrued expenses 1,115,229 (73,322) (1,458,009)
---------- --------- ----------
Net cash provided by operating activities 2,824,913 4,193,648 5,496,405
---------- --------- ----------
Investing activities:
Acquisition of hospitality business, net of noncash consideration
and cash acquired - - 462,008
Increase in notes receivable - - (250,000)
Purchases of property and equipment (2,478,673) (2,633,994) (4,953,847)
Purchase of hotel property (1,700,000) - -
Proceeds from sale of property 2,375,000 2,700,000 4,250,000
Collections of notes receivable 100,384 261,206 233,599
---------- --------- ----------
Net cash (used in) provided by investing activities (1,703,289) 327,212 (258,240)
---------- --------- ----------
Financing activities:
Dividends paid (232,500) (1,262,561) (1,217,443)
Increase in restricted cash (744,741) (79,053) (448,551)
Repurchase of common stock (728,444) (304,216) -
Redemption of common stock (189,593) - -
Proceeds of short-term borrowings 4,355,309 - -
Repayment of short-term borrowings (2,992,574) - -
Proceeds from long-term borrowings 497,266 - -
Repayments of long-term borrowings (2,233,483) (3,490,437) (7,096,024)
---------- --------- ----------
Net cash (used in) provided by financing activities (2,268,760) (5,136,267) (8,762,018)
---------- --------- ----------
Increase (decrease) in cash and cash equivalents (1,147,136) (615,407) (3,523,853)
Cash and cash equivalents, beginning of period 8,244,481 8,859,888 12,383,741
---------- --------- ----------
Cash and cash equivalents, end of period $ 7,097,345 $8,244,481 $ 8,859,888
========== ========= ==========
See notes to consolidated financial statements.
F-6
JANUS HOTELS AND RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
As of December 31, 2001, the continuing operations of Janus Hotels and Resorts,
Inc. and its Subsidiaries ("Janus" or the "Company") were comprised primarily of
the operations of thirteen hotels and a hotel management company which manages
hotels for unrelated parties. Another owned hotel is leased to a third party.
The Company's owned and managed hotels are located primarily in the Midwestern
and Southeastern United States.
As further described in Note 9, management decided during December 1997 to
discontinue and dispose of all of the Company's operations related to the
provision of engineering and wireline logging services to companies in the oil
and gas industry (the "oil and gas services operations").
In November 1986, the Company's predecessor, United States Lines, Inc. ("USL"),
together with United States Lines (S.A.) Inc. ("USL-SA") and two related
companies, filed petitions under Chapter 11 of the United States Bankruptcy
Code. In May 1989, the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court") confirmed a plan of reorganization with
respect to such companies, which was later amended and modified pursuant to an
order of the Bankruptcy Court entered in February 1990 (the "Plan").
Pursuant to the Plan and the order of the Bankruptcy Court confirming the Plan:
(a) USL and USL-SA changed their names to Janus Industries, Inc. and JI
Subsidiary, Inc. ("JIS"), respectively;
(b) The United States Lines, Inc. and United States Lines (S.A.) Inc.
Reorganization Trust (the "Reorganization Trust") was established for the
purpose of administering the Plan and liquidating and paying claims of former
creditors of USL and USL-SA; it will also make contributions of cash to Janus
and JIS from time to time of amounts in excess of its projected liabilities and
administrative requirements;
(c) All claims of former creditors of USL and USL-SA were discharged; as a
result, such former creditors may look only to the Reorganization Trust (and not
to Janus or JIS) for payment of amounts in respect of their discharged claims;
d) The interests of all holders of shares of the capital stock of USL and USL-SA
were extinguished and the former creditors of USL and USL-SA became entitled to
receive all of the shares of capital stock issued by Janus and JIS under the
Plan, except for shares of JIS issued to Janus, and shares of Janus and JIS
issued pursuant to the Plan to a subsidiary of Dyson-Kissner-Moran ("DKM"), a
new investor; (e) the shares of capital stock of Janus and JIS issuable to the
former creditors were initially issued to the Reorganization Trust as
recordholder for reissuance to such creditors; and
(f) The Reorganization Trust contributed $3,000,000 of USL and USL-SA cash to
capitalize Janus and JIS on February 23, 1990 and provided Janus and JIS with
certain books and records, and all tax attributes and tax benefits, of USL and
USL-SA; it also made cash contributions of approximately $7,491,000 and
$7,622,000 to the capital of Janus and JIS in 1997 and 1996, respectively.
Note 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 certain reported amounts and disclosures in the
consolidated financial statements. Changes in such estimates may affect amounts
reported in future periods.
Fresh-start accounting: The Company adopted fresh-start accounting at the time
of its reorganization in February 1990 (see Note 1). The Company's opening
balance sheet consisted of $6,000,000 in cash and capital stock.
Principles of consolidation: The consolidated financial statements include the
accounts of Janus and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash equivalents: Cash equivalents generally consist of highly liquid
investments with maturities of three months or less when acquired.
F-7
Property and equipment: Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets.
Goodwill: Goodwill, which represents the excess of the costs of acquired
businesses over the fair value of the net assets acquired at the respective
dates of acquisition, is amortized using the straight-line method over the
estimated useful lives of the assets (40 years).
Impairment of long-lived assets: The Company applies the provisions of Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121").
Under SFAS 121, impairment losses on long-lived assets, such as property and
equipment and goodwill, are recognized when events or changes in circumstances
indicate that the undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all or a portion of
such carrying value may not be recoverable. Impairment losses are then measured
by comparing the fair value of assets to their carrying amounts. As of December
31, 2001, there was no such impairment, except as discussed in Note 5.
Deferred loan costs: Costs incurred to obtain long-term financing are deferred
and amortized using the straight-line method (which approximates the interest
method) over the terms of the loans.
Revenue recognition: The Company recognizes all revenues on an accrual basis as
earned.
Advertising costs: The costs of advertising and promotion are expensed as
incurred. Advertising costs charged to operations, all of which were
attributable to the Company's hotel operations, amounted to $980,851 in 2001,
$951,758 in 2000 and $814,322 in 1999.
Income taxes: The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred tax assets and liabilities to be
computed annually for temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the temporary differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The income tax provision or
credit is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities. Income tax credits
attributable to benefits from net operating loss carryforwards or other
temporary differences that existed at the time the Company adopted fresh-start
accounting are reflected as a contribution to stockholders' equity in the period
in which the tax benefits are realized.
As explained in Note 1, the assets and liabilities of USL and USL-SA were
initially transferred to the Reorganization Trust in February 1990. The
Reorganization Trust is considered a grantor trust for income tax purposes.
Accordingly, any taxable income or loss associated with the disposition of
assets and the settlement of liabilities by the Reorganization Trust is recorded
in the Federal income tax return of the Company; however, such assets and
liabilities are not presented in these consolidated financial statements.
Stock options: In accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, the Company will
recognize compensation costs as a result of the issuance of stock options based
on the excess, if any, of the fair value of the underlying stock at the date of
grant or award (or at an appropriate subsequent measurement date) over the
amount the employee must pay to acquire the stock. Therefore, the Company will
not be required to recognize compensation expense because of any grants of stock
options at an exercise price that is equivalent to or greater than fair value.
Reclassification: Certain prior year amounts have been reclassified to conform
to current year presentation.
Income (loss) per common share: Basic net income (loss) per common share is
calculated by dividing net income or loss, as adjusted for required preferred
stock dividends, by the weighted average number of common shares outstanding
during the period. The calculation of diluted net income (loss) per common share
is similar to that of basic net income (loss) per common share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common shares,
principally those issuable upon the exercise of stock options and warrants, were
issued during the period.
The Company's reported net income represents its net income available to common
stockholders for purposes of computing both measures. The following reconciles
shares outstanding at the beginning of the year to average shares outstanding
used to compute both income per share measures.
F-8
December 31, December 31, December 31,
2001 2000 1999
---------------- ---------------- ----------------
Average shares outstanding-basic 8,065,218 8,659,846 8,673,996
Effect of dilutive securities- dilutive shares
contingently issuable upon the exercise of
stock options and warrants - - -
--------- --------- ---------
Average shares outstanding- Assuming dilution 8,065,218 8,659,846 8,673,996
========= ========= =========
New accounting pronouncements. In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.141
requires that all business combinations be accounted for by the purchase method
and adds disclosure requirements related to business combination transactions.
SFAS No. 141 also establishes criteria for the recognition of intangible assets
apart from goodwill. This Statement applies to all business combinations for
which the acquisition date was July 1, 2001 or later. We adopted this statement
on July 1, 2001. We have historically used the purchase method to account for
business combinations and the adoption of this statement did not materially
impact our financial position, results of operations, or cash flows.
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes guidelines for the financial accounting and reporting
of acquired goodwill and other intangibles. With the adoption of SFAS No. 142,
goodwill is no longer subject to amortization; rather it will be subject to at
least an annual assessment for impairment by applying a fair value based test.
The Company is required to adopt the provisions of this pronouncement no later
than the beginning of 2002; however, goodwill and other intangible assets
acquired after June 30, 2001, are subject immediately to the amortization
provisions of this statement. The Company had no material acquisitions of
goodwill or other intangibles in the second half of 2001. We will adopt the
amortization provisions of SFAS No. 142 beginning in the first quarter of 2002.
The Company believes adopting SFAS No. 142 will result in approximately a
$200,681 pre-tax benefit to earnings in 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121 and the
Statement also supersedes APB No. 30 provisions related to the accounting and
reporting for the disposal of a segment of a business. This Statement
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement
retains most of the requirements in SFAS No. 121 related to the recognition of
impairment of long-lived assets to be held and used. The Statement is effective
for fiscal years beginning after December 15, 2001. Our adoption of SFAS No. 144
on January 1, 2002 is not expected to have a material impact on our financial
position, results of operations, or cash flows.
Note 3 - Acquisitions and dispositions:
The Company continually monitors general economic conditions and the local
economies where its hotels are located. When purchase offers for hotel
properties present sufficient economic benefits over ownership or other market
changes reduce economic returns, the properties are sold.
On September 1, 2001, the Company completed the acquisition of a 152-room hotel
now known as Ramada Inn Kent. The purchase price of $1,700,000, which was
allocated to the assets acquired, was paid in cash. The results of operations of
the acquired hotel property are included in the consolidated financial
statements from the effective date of acquisition. On December 30, 2001, this
property was sold for $2,500,000 resulting in a gain of $605,922. The
consideration was $400,000 cash and a $2,100,000 note receivable that is due and
payable on March 31, 2002. The note has an interest rate of prime plus 2%.
On July 2, 2001, the Company sold a 75% owned hotel property located in Pompano
Beach, FL. The hotel was sold for cash of $2,375,000 and resulted in a loss of
$770,733.
On June 15, 2000, the Company disposed of a hotel property located in
Cincinnati, Ohio. The hotel was sold for cash of $2,700,000 and resulted in a
gain of $29,893.
On December 29, 1999, the Company disposed of a hotel property located in
Michigan City, Indiana. The hotel was sold for $2,000,000 cash resulting in a
gain of approximately $279,000.
On September 29, 1999, the Company disposed of a hotel property located in
Westerville. Ohio. The hotel was sold for $2,500,000 resulting in a loss of
approximately $168,000. The consideration was $2,250,000 cash and a $250,000
F-9
note receivable. The note had an interest rate of 10%. During the third quarter
of 2000, an early payoff of the note receivable was received. The early payoff
reflected a $75,000 discount which was included in other income.
Effective January 1, 1999 the Company acquired all of the outstanding shares of
Beck Hospitality, Inc. II ("Beck II"), which owned seven hotels and two hotel
management contracts with respect to the hotels known as Knights Inn West Palm
Beach in West Palm Beach, Florida and Days Inn Inner Harbor in Baltimore,
Maryland. The purchase price of $6,336,200 approximated the fair value of the
net assets acquired. The acquisition was accounted for under the purchase
method. The results of operations of the acquired business are included in the
consolidated financial statements from the effective date of acquisition. The
consideration exchanged by the Company pursuant to the merger agreement with
Beck II was the issuance of 6,336.20 shares of Series B preferred stock with a
liquidation preference of $1,000 per share for a total value of $6,336,200.
Note 4 - Mortgage notes receivable:
The balances at December 31, 2001 and 2000 consisted of the following:
2001 2000
---- ----
Note secured by campground, with interest at 8% $3,138,345 $3,238,729
Note secured by hotel property, with interest at prime plus 2% 2,100,000 -
--------- ---------
Total long-term receivable 5,238,345 3,238,729
Less current portion 2,208,716 100,384
--------- ---------
Long-term portion, net of current portion $3,029,629 $3,138,345
========= =========
The mortgage note for the campground is payable in monthly installments of
principal and interest through April 2003 with final installments of remaining
principal and interest due in May 2003. The mortgage note is secured by
undeveloped vacant ground in Kissimmee, Florida. The ground is owned by an
entity controlled by Messrs. Louis S. Beck ("Beck") and Harry G. Yeaggy
("Yeaggy") who together with their affiliates own in excess of 50% of the
Company's common stock. Messrs. Beck and Yeaggy have personally guaranteed the
mortgage note. The note secured by the hotel property accrues interest until its
maturity on March 31, 2002.
Note 5 -- Property and equipment:
Property and equipment at December 31, 2001 and December 31, 2000 consisted of
the following:
December 31, December 31,
2001 2000
------------- -------------
Land $ 14,913,015 $ 15,538,359
Hotels 69,740,969 72,758,745
Hotel furniture and fixtures 14.935,617 14,317,153
Equipment and vehicles 1,320,324 1,003,791
----------- -----------
100,909,925 103,618,048
Less accumulated depreciation and amortization 13,759,758 10,306,364
----------- -----------
Totals $ 87,150,167 $ 93,311,684
=========== ===========
In 2001, management's review of its long-lived assets for impairment indicated
that the carrying value of the hotel property known as Knights Inn Lafayette
("Lafayette Property") was in excess of its fair value. The fair value of the
Lafayette Property was based on a purchase option included in a five year lease
agreement. The exercise period for the option is May 1, 2002 through May 31,
2002. The impairment loss was $627,263.
Effective July 1, 1999, Janus completed significant renovations of its portfolio
of properties in accordance with its operating plan. These renovations upgraded
the facilities and improved the ability to sell rooms at competitive rates
within respective markets. The Company provided the liquidity to perform these
renovations and management continues to anticipate that further acquisitions
will be subjected to the same operating plan. The result of these improvements
is that the useful life of the previously acquired properties was increased to
reflect the upgrades. Building and mechanical improvement lives were changed to
reflect this renovation and are now depreciated from 15 to 40 years. The
equipment has a life range of 5 to 10 years. Management believes the revised
estimated useful lives provide a better matching of costs and revenues. The
effect of this change on income from continuing operations for the year ended
December 31, 1999 was to increase it by approximately $605,000 or $0.07 per
diluted share.
F-10
Note 6 -- Long-term debt:
Long-term debt at December 31 consisted of the following:
2001 2000
---- ----
Fixed rate mortgage notes payable in monthly
installments, including interest at rates ranging
from 2.4% to 9.75%; the mortgage notes mature
from May 2002 through March 2016 $63,419,074 $63,822,094
Subordinated debt due December 2011 with
quarterly interest payments; interest rate at
7.5% 13,688,080 -
Variable rate mortgage notes payable in monthly
installments, including interest at rates varying
with the prime commercial lending rate and
rates on U.S. Treasury securities (the effective
rates at December 31, 2001 ranged from 4.75%
to 10.0%); the mortgage notes mature from
June 2003 through April 2006 3,153,431 4,203,332
Equipment notes with various maturities through
December 2003 and interest at rates ranging
from 8.98% to 15% 896,919 580,215
---------- ----------
Total long-term debt 81,157,504 68,605,641
Less:
Current maturity of accelerated long-term debt 42,266,372 -
Current portion of long-term debt 5,073,196 3,659,241
---------- ----------
Long-term debt, net of accelerated debt and $33,817,936 $64,946,400
current portion ========== ==========
At December 31, 2001, the Company was in default for nonpayment on four mortgage
loans totaling $42,266,372 which are collateralized by hotel properties with a
net book value of $41,253,001 in the vicinity of Cleveland, Ohio. Payments on
these loans directly to the mortgagor were suspended on November 1, 2001 as
attempts were being made to renegotiate the interest rate. All payments due
under these loans are currently being deposited into an interest-bearing escrow
account that is controlled by the Company. Currently, negotiations are
continuing with the mortgagor, but the Company is not able to predict the
results of these negotiations at this time.
Long-term debt is secured by the Company's notes, property and equipment.
Principal payments in years subsequent to December 31, 2001 are as follows:
Year Ending December 31 Amount
------------------------- ------------
2002
$47,339,568
2003 1,906,336
2004 911,363
2005 915,896
2006 2,756,839
Note 7 -- Commitments and contingencies:
Concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash in banks,
accounts receivable and the mortgages.
The Company maintains its cash balances in bank deposit accounts which, at
times, may exceed the Federal Deposit Insurance Corporation coverage limits
thereby exposing the Company to credit risk. The Company reduces its
exposure to credit risk by maintaining such deposits with financial
institutions which management believes are high quality.
F-11
Exposure to credit risk with respect to trade receivables is limited by the
short payment terms and, generally, the low balances applicable to such
instruments and the Company's routine assessment of the financial strength
of its customers.
Exposure to credit risk with respect to the mortgages is limited because
they are secured by real estate with an estimated market value in excess of
the mortgage balance.
Litigation:
The Company is a party to various legal proceedings. In the opinion of
management, these actions are routine in nature and will not have a
material adverse effect on the Company's consolidated financial statements
in subsequent years.
Note 8 - Income taxes:
For financial statement purposes, there was a credit for income taxes at
December 31, 2001 and a provision for income taxes at December 31, 2000 and
1999. The utilization or expiration of the federal net operating loss
carryforwards generated prior to the Company's reorganization in February 1990
will be reported as an increase or decrease in additional paid-in capital and
not as a credit or expense in the results of operations. In 2001, the Company
decreased additional paid-in-capital by $2,646,000 as a result of the expiration
of federal net operating loss carryforwards. In 1999, the Company increased
paid-in-capital by $508,000.
Section 382 of the Internal Revenue Code limits the amounts of net operating
loss carryforwards usable by a corporation following a change of more than 50%
in the ownership of the corporation during a three-year period. As of December
31, 2001, management believes that such a change in ownership has not occurred.
The provision(credit) for income taxes consists of the following:
2001 2000 1999
---- ---- ----
Federal income tax provision:
Current $ - $ 16,000 $ 259,171
Deferred (175,000) 404,000 628,000
-------- ------- ---------
Total federal income tax provision (175,000) 420,000 887,171
-------- ------- ---------
State and local income tax provision:
Current 10,000 290,275 356,496
Deferred - (95,275) (89,866)
-------- ------- ---------
Total state and local provision 10,000 195,000 266,630
-------- ------- ---------
Provision(credit) for income taxes $(165,000) $615,000 $1,153,801
======== ======= =========
A reconciliation of the statutory Federal income tax rate of 34% to the
effective tax rate for the provision for income taxes attributable to income
from continuing operations follows:
2001 2000 1999
------- ------ -------
Statutory rate (34.0)% 34.0% 34.0%
Nondeductible amortization of goodwill 1.9 4.2 2.4
State and local tax 0.2 7.6 6.2
Gain (loss) on hotel properties sold 9.7 (8.8) 7.9
Minority interest acquisition 9.7 - -
Reorganization Trust loss (6.7) (15.2) (9.7)
Valuation allowance 12.5 14.7 0.1
Other 2.0 - -
---- ---- ----
Total (4.7)% 36.5% 40.9%
==== ==== ====
F-12
Deferred taxes at year-end were comprised of the following:
2001 2000
----------- ------------
Deferred tax liabilities:
Depreciation and other $11,981,000 $11,356,000
---------- ----------
Deferred tax assets:
Net operating loss carryforwards 9,759,000 81,600,000
Valuation allowance 69,928,000
---------- ----------
Net deferred tax assets 9,759,000 11,672,000
---------- ----------
Net deferred tax (liability) asset $(2,222,000) $ 316,000
========== ==========
At December 31, 2001, the Company had federal net operating loss carryforwards
of $28,704,000 that expire beginning in 2002 through 2016. Although realization
is not assured, the Company has concluded that it is more likely than not that
the net operating loss carryforwards will be realized prior to their expiration
dates. Therefore, no valuation allowance has been provided.
Note 9 -- Discontinued operations:
In April 1998, the Company entered into an agreement for the sale of its oil and
gas services operations. An amendment to this agreement was completed in
September 1999. As part of the amended agreement, the buyers had the right to
make a payment of $356,372 on or before December 31, 1999 in settlement of a
$500,000 note. If the payment was not made, the note would be paid out over a
period of sixty months at an 8% rate of interest. As a result, a loss from
disposal of discontinued operations of $500,000 has been accrued. The Company
received $101,380 and $121,658 as a recovery on the note during 2001 and 2000,
respectively.
Note 10 -- Fair value of financial instruments:
The Company assumes that the fair values of current assets and current
liabilities are equal to their reported carrying amounts due to their relatively
short period of maturity. The fair values of noncurrent financial assets and
liabilities are as follows:
2001 2000
---------------------------- ----------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
-------------- ---------- -------------- -----------
Mortgage notes receivable $ 5,238,345 $ 5,122,462 $ 3,238,729 $ 3,129,524
Long-term debt 66,572,505 65,889,507 68,605,641 66,174,083
Subordinated debt 13,688,080 13,833,658 - -
Mortgage notes receivable and fixed rate long-term debt are valued based on the
expected future cash flows discounted at risk adjusted rates. Variable rate
mortgage notes are valued at their carrying amounts since they bear current
interest rates. Equipment notes are valued at carrying amounts since
determination of the fair value of capital lease is not practicable.
F-13
Note 11 -- Minority interest:
The Company owns an interest of approximately 90% in JIS. During 2001, the
Company acquired the 15% minority interest in a hotel partnership and sold the
property in a 75% owned corporation. The balance of the minority interest at
December 31, 2001 and December 31, 2000 and the changes in the minority interest
are set forth below:
JIS HOTEL PARTNERSHIPS TOTAL
--------- ------------------- -------------
Balance at December 31, 1999 $91,113 $2,374,881 $2,465,994
Net income(loss) 74,034 74,034
------ --------- ---------
Balance at December 31, 2000 91,113 2,448,915 2,540,028
Acquisition of minority interest (1,722,004) (1,722,004)
Minority interest in property sold (520,456) (520,456)
Net income(loss) (206,455) (206,455)
------ --------- ---------
Balance at December 31, 2001 $91,113 $ - $ 91,113
====== ========= =========
Note 12 - Stockholders' equity:
Capital stock: Information regarding the capital stock of Janus follows:
Preferred stock, par value $.01 per share; 5,000,000 shares authorized and
3,100 shares and 16,788.08 shares of Series B preferred stock were issued and
outstanding at December 31, 2001 and 2000, respectively. The Series B
preferred stock has a liquidating and redemption price of $1,000 per share.
Holders of the Series B preferred stock are entitled to cumulative dividends
at the annual rate of $75 per share. Unless dividends remain unpaid for a
specified period, holders will not derive any voting rights from the Series B
preferred stock. Effective January 1, 2001, 13,688.08 shares of preferred
stock were redeemed by the Company. The aggregate redemption price of
$13,688,080 was paid in the form of promissory notes maturing on December 31,
2011. The notes bear interest at the rate of 7.5% per annum. Interest only is
payable on a quarterly basis.
Common stock, par value $.01 per share; 15,000,000 shares authorized;
11,804,195 shares and 11,883,220 shares issued at December 31, 2001 and 2000,
respectively; and 3,880,809 and 3,412,347 shares held as treasury shares at
December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the
Reorganization Trust held shares of Janus common stock for possible future
distribution under the Plan which the Reorganization Trust is required to
vote in proportion to the votes cast by the Company's stockholders other than
Messrs. Beck and Yeaggy.
At a special meeting of stockholders on March 15, 2001, a Company proposal to
redeem the common stock of stockholders holding fewer than 100 shares of the
Company's common stock was approved. A total of 79,025 shares of common stock
were redeemed at a cost of $189,593. These shares were retired and reduced
the number of shares outstanding.
Warrants:
In July 1996, the Company issued warrants to purchase 500,000 shares of Janus
common stock, which were deemed to have a nominal fair value, as part of the
consideration for the acquisition of Pre-Tek. All of the unexercised warrants
to purchase 221,247 shares expired on July 15, 2001.
Note 13 -- Stock options and stock appreciation rights:
On June 7, 2001, the stockholders approved the adoption of the Janus Hotels and
Resorts, Inc. Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the granting of options to members of the Board of
Directors who are not employees of the Company or its subsidiaries ("Outside
Directors"). The options granted under the Plan are nonstatutory stock options.
The Board of Directors of the Company administers the Directors' Plan that will
terminate on December 31, 2010.An aggregate of 300,000 shares of common stock is
reserved for issuance under the Directors' Plan.
F-14
Each Outside Director received an option for 15,000 shares of common stock at
fair market value of $1.50 on April 2, 2001, the date of the grant, which are
exercisable as follows: 5,000 shares immediately upon approval of the Plan by
the stockholders of the Company and 5,000 shares on each of the first and second
December 31 thereafter, provided that the optionee is a member of the Board of
Directors on each such date. A new Outside Director will automatically receive
an option for 15,000 shares of common stock on the date such person becomes a
director, subject to the vesting described in the following paragraph.
If the Board of Directors determines to make additional grants of options, such
grants will be made effective at least thirty (30) days after the date of
determination. Future grants of options will be exercisable in three
installments, each equal to one-third of the entire option granted on the first,
second and third December 31 following the date of grant, provided that the
optionee is a member of the Board of Directors on each such date. In addition,
options are fully exercisable upon the death of the optionee or upon the
occurrence of other events involving the acquisition of the Company's
outstanding securities or certain mergers or combinations involving the Company
or a sale of substantially all of the assets of the Company. Options are not
transferable except upon death or pursuant to a "qualified domestic relations
order" as defined in the Code. The expiration of an option may be accelerated in
the event of an optionee's death or if the optionee ceases to be an Outside
Director for any reason.
During 1996, the stockholders of the Company approved the adoption of the Janus
Industries, Inc. 1996 Stock Option Plan (the " Plan"). The Plan provides for
grants of incentive stock options ("ISOs") and nonstatutory stock options
("NSOs"). ISOs may be issued to any key employee or officer of the Company; NSOs
may be issued to any key employee or officer of the Company or any of the
Company's independent contractors, agents or consultants other than nonemployee
directors. A committee of at least two directors (the "Committee") will
determine the dates on which options become exercisable and terminate (provided
that options may not expire more than ten years after the date of grant). All
outstanding options will become immediately exercisable in the event of a
"change in control" (as defined) of the Company. The exercise price of an ISO
must be at least 100% of the fair market value on the date of grant (110% for an
optionee that holds more than ten percent of the combined voting power of all
classes of stock of the Company). NSOs may be granted at any exercise price
determined by the Committee. The Company has reserved 300,000 shares of common
stock for issuance under the Plan.
The Plan permits the Committee to grant stock appreciation rights ("SARs") in
connection with any option granted under the Plan. SARs enable an optionee to
surrender an option and to receive a payment in cash or common stock, as
determined by the Committee, with a value equal to the difference between the
fair market value of the common stock on the date of surrender of the related
option and the option price.
The following summarizes the stock option transactions under the plans for the
three years ended December 31, 2001:
Weighted
Average
Exercise
Shares Price
------ --------
Options outstanding January 1, 1999 4,000 $ 2.75
Granted -
Exercised -
Forfeited -
-------
Options outstanding December 31, 1999 4,000 2.75
Granted
Exercised
Forfeited (4,000)
-------
Options outstanding December 31, 2000 - -
Granted 120,000 1.50
Exercised
Forfeited (10,000) 1.50
-------
Options outstanding December 31, 2001 110,000 $ 1.50
=======
Options exercisable December 31, 2001 75,000 $ 1.50
=======
The weighted average contractual life of the outstanding options at December 31,
2001 is 9.25 years.
F-15
The weighted average fair value at date of grant for options granted during 2001
was $0.97. The fair value of options at the date of grant was estimated using
the Black-Scholes model with the following assumptions: (i) expected life - 5
years; (ii) interest rate - 3.0%; (iii) volatility - 78%; and, (iv) dividend
yield - 0%. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for the award in 2001
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
would have been $3,127,939, or $0.42 per common share.
During 1997, the Company granted SARs with respect to 100,000 shares of Janus
common stock to an executive officer at an exercise price of $3.25 per share
which vest at the rate of 20,000 shares per year commencing on April 23, 1997.
During 2000, these SARs were forfeited at the time the executive resigned his
position. It also granted SARs in 1997 with respect to a total of 35,000 shares
of Janus common stock to directors at an exercise price of $3.25 per share which
will be exercisable at any time during the period from October 25, 1997 through
April 23, 2003; however, the appreciated value paid with respect to the SARs
issued to the directors will be limited to $7.00 per share. Appreciation upon
any exercise of the SARs issued in 1997 must be paid in cash. Management
estimates that the exercise price for the SARs granted in 1997 approximated the
fair value on the respective dates of grant and throughout the remainder of the
year. Accordingly, the Company made no charges to compensation expense related
to the SARs during 1997. The SARs issued in 1997 were not issued in conjunction
with the Plan. In 1998, the Company granted SARs with respect to 25,000 shares
of common stock to a director at an exercise price of $2.48 per share which will
be exercisable at any time through December 17, 2003. These SARs were not issued
in conjunction with the Plan.
Note 15 Supplemental Cash Flow Disclosures:
The following table illustrates the supplemental cash flow disclosures for the
three years ended December 31, 2001:
Interest paid $ 6,271,156 $6,053,127 $ 6,597,088
========== ========= ==========
Income taxes paid $ 270,309 $ 493,909 $ 757,880
========== ========= ==========
Noncash investing and financing transactions:
Conversion of preferred stock to long-term debt $13,688,080 $ - $ -
========== ========= ==========
Acquisition of minority interest through a note $ 600,000 $ - $ -
========== ========= ==========
Sale of hotel property through a note $ 2,100,000 $ - $ -
========== ========= ==========
Acquisitions of equipment through capital leases $ - $ 385,772 $ -
========== ========= ==========
Noncash transactions:
Acquisition of hospitality business
Assets acquired $ - $ - $27,192,451
Liabilities assumed 20,856,251
- -
---------- --------- ----------
Value of stock issued $ - $ - $ 6,336,200
========== ========= ==========
Note 16 -- Related party transactions:
The Company engages in various transactions with other entities in which Mr.
Beck and Mr. Yeaggy have an interest. In addition to interest derived from the
mortgages (see Note 4), results of operations in 2001, 2000 and 1999 include
revenues and expenses derived from related party transactions as follows:
2001 2000 1999
----------- ----------- --------------
Personnel leasing fees (a) $188,005 $213,979 $216,600
Management systems fees (b) 37,065 38,137 68,202
Rent for office facilities and equipment 54,520 54,520 54,268
Airplane charges (c) 300,000 306,000 214,745
Management fee income (d) -0- -0- 136,761
F-16
(a) The Company pays administrative fees to Hospitality Employee Leasing
Program, Inc. ("HELP"), a corporation wholly owned by Messrs. Beck, Yeaggy
and Richard A. Tonges ("Tonges"), Chief Financial Officer of the Company,
which provides the Company with personnel for the hotels it owns and
manages. In addition, the Company reimburses HELP for the actual payments
it makes to or on behalf of such employees.
(b) The Company pays management systems fees for the use of a hotel
property management system and related computer hardware and software
under an agreement with Computel Computer Systems, Inc., a corporation
wholly-owned by Messrs. Beck and Yeaggy.
(c) The Company incurs charges from a company controlled by Mr. Beck
for the use of an airplane by Company personnel.
(d) The Company managed two hotels for entities controlled by Messrs. Beck
and Yeaggy in 1999. Both hotels were sold prior to December 31, 1999.
At various times the Company may deposit funds in a financial institution that
is controlled by Messrs. Beck and Yeaggy.
In January 2002, the Company entered into an agreement with Cunningham
Consulting and Associates to prepare personal property tax returns and to
analyze potential tax savings. The Company will pay fees for return preparation
and contingent fees based on realized tax savings. An initial review indicates a
savings in personal property taxes of approximately $100,000. Messrs. Beck and
Tonges are minority owners in this company.
F-17