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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, 2002
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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was approximately $973,000, as of March 21, 2003.
Number of shares of common stock outstanding as of March 21, 2003: 5,564,005
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to the 2003
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 pace of the travel and hospitality industries recovery
in the aftermath of the terrorist attacks of September 11, 2001; 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 13 hotels (the "Owned Hotels") and as of March 10,
2003 manages an additional 33 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 was
dissolved in June 2002. 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 including among other assets, six
hotels and an 85% interest in a partnership that owns one hotel (the minority
interest was acquired in 2001) and a hotel management company. 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).
Messrs. Beck and Yeaggy, who are currently Chairman of the Board and Chief
Executive Officer and Vice Chairman of the Board, respectively, of the Company,
have been engaged in the hospitality business since 1972.
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In August 1998, the Company acquired four hotels near Cleveland, Ohio (the
"Cleveland Area Hotels") 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 four 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 of the Cleveland Area Hotels, which is
cross-collateralized by the Cleveland Area Hotels. The indebtedness of the
Cleveland Area Hotels is due on August 1, 2003, unless it is refinanced with new
short-term or long-term financing prior to that date.
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 Six
Continents Hotels (Holiday Inn), Days Inn, Best Western, Choice Hotels (Comfort
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."
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
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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, Yeaggy and Richard A. Tonges ("Tonges"), the Company's Vice
President of Finance, 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 the premium for workers compensation
insurance for the indemnification by HELP for all employer practices liability
and work related injuries.
Employees
As of December 31, 2002, approximately 30 full-time employees of the Company
were engaged in management, business operations and administration of its
hospitality business. In addition, at that date approximately 2,095 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,
2002, the Company increased its number of Managed Hotels by twelve. However,
since hotel management agreements frequently have short terms, the number of
properties managed by the Company is static. 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 activities of the Reorganization Trust have not been completed due, in part,
to a dispute between the Reorganization Trust and the insurance carriers of U.S.
Lines over certain aspects of insurance coverage available for late-manifesting
asbestos and other personal injury claims.
Under the Plan, the Reorganization Trust was issued stock by both Janus and JI
Subsidiary, for distribution 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 were originally issued to the Reorganization Trust.
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 remaining shares of Common Stock of the Company that had not been
distributed to former creditors. In December 2002, the Company purchased 368,900
shares from the Reorganization Trust.
Subsequent to reorganization, JI Subsidiary did not engage in a trade or
business. It was dissolved in June 2002.
The Trust Agreement provides for the Reorganization Trust to contribute to Janus
from time to time cash on hand that exceeds its projected liabilities and
administrative requirements. Through December 31, 2002, 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
five years and does not anticipate additional transfers from the Reorganization
Trust until its administrative activities have been completed.
As of December 31, 2002, the Reorganization Trust reported total cash and cash
equivalents of $1,334,858 of which $350,249 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 mortgage indebtedness on the Cleveland Area Hotels in
the aggregate principal amount of $33,234,352, as of December 31, 2002, is due
on August 1, 2003, unless refinanced by the Company or the maturity date is
extended. Other than refinancing the Cleveland Area Hotels, the Company
anticipates that if it does not acquire additional hotel properties based on
currently proposed plans and assumptions relating to the Company's operations,
the Company's available cash balances and line of credit, will be sufficient to
satisfy the Company's contemplated cash requirements for its current operations
for at least the next 12 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
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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 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 affiliates 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 them.
The Board of Directors has delegated responsibility for the initial review of
transactions between the Company and Messrs. Beck, Yeaggy and Tonges to the
Audit Committee of the Board. Although management's recommendations on matters
potentially involving conflicts of interest will be referred to the Audit
Committee, 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, 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
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
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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 13 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
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
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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 70% 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 G. 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, 2002.
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 on the Company's net income.
Potential De-Listing by Nasdaq SmallCap Market
The Company's Common Stock currently is listed for trading on the SmallCap
Market of The Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol "JAGI." On
July 29, 2002, Nasdaq notified the Company that the bid price of the Common
Stock had closed at less than $1.00 per share over the previous 30 consecutive
trading days, and, as a result, did not comply with Nasdaq rules. In accordance
with the rules, the Company was provided 180 days to regain compliance with the
minimum bid price requirement. As of January 27, 2003, the Company had not
8
regained compliance with the minimum bid price requirement. However, under
applicable Nasdaq rules, because the Company continued to comply with the
$5,000,000 stockholders' equity requirement, on January 29, 2003, Nasdaq
informed the Company that it would be provided with an additional 180 days,
until July 24, 2003, to regain compliance with the $1.00 minimum bid
requirement. In order to regain compliance, before July 24, 2003, the bid price
of the Company's common stock must close at $1.00 or more for a minimum of 10
consecutive trading days. Under an amendment to the applicable Nasdaq rules that
became effective subsequent to January 29, 2003, if the Company has not regained
compliance by July 24, 2003, provided that the Company has at least $5,000,000
stockholders equity, the Company will be eligible for an additional 90 day
compliance period, until October 22, 2003. If compliance with the requirement
cannot be demonstrated by July 24, 2003, or if the additional 90 day period
becomes available, October 22, 2003, Nasdaq will provide the Company written
notification that the Common Stock will be delisted, at which time the Company
may appeal to a Listing Qualifications Panel.
If Nasdaq delists the Common Stock from the SmallCap Market, trading of the
Common Stock could be conducted on the over-the-counter market on the so-called
"pink sheets" or, if available, NASD's "Electronic Bulletin Board." As a result,
stockholders may find it more difficult to purchase and sell, or to obtain
accurate quotations as to the value of, the Common Stock, and the trading price
per share could be reduced.
9
Item 2. Properties.
As of December 31, 2002, the Company owned the following thirteen hotels in four
different states with a total of 2,162 rooms:
Year of Last
No. of Renovation/
Hotel Name Rooms Location Construction
- --------------------------------------- ---------- ------------------------- ----------------
Best Western Cambridge 95 Cambridge, OH 2000 / 1973
Best Western Kings Quarters 248 Doswell, VA 2002 / 1977
Comfort Inn West 134 Akron, OH 2001 / 1989
Days Inn Cambridge 103 Cambridge, OH 2001 / 1973
Days Inn Cincinnati 142 Sharonville, OH 2000 / 1974
Days Inn Kings Island 124 Mason, OH 2000 / 1976
Days Inn Raleigh 126 Raleigh, NC 2001 / 1979
Days Inn RTP 110 Morrisville, NC 2000 / 1987
Holiday Inn Express 110 Juno Beach, FL 2002 / 1989
Holiday Inn Hudson 288 Hudson, OH 2001 / 1967
Holiday Inn Independence 364 Independence, OH 2002 / 1974
Holiday Inn North Canton 194 North Canton, OH 2000 / 1970
Red Roof Kings Island 124 Mason, OH 2001 / 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 that terminate on December 31, 2004. Both leases are
from affiliates 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 2002.
10
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, 2002 $1.07 $0.29
Quarter ended September 30, 2002 $1.03 $0.60
Quarter ended June 30, 2002 $1.20 $0.50
Quarter ended March 31, 2002 $1.45 $1.06
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
Holders:
As of March 14, 2003, there were approximately 799 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.
11
Item 6. Selected Financial Data
Years ended December 31,
---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ------------------ ----------------- -----------------
Total revenues $ 41,358,009 $ 44,534,364 $ 49,768,643 $ 51,173,422 $ 29,056,825
Operating income 2,273,832 2,899,205 6,937,064 8,493,864 4,968,391
Income (loss) from
continuing operations 1,688,318 (3,140,194) 996,588 1,632,584 1,751,055
Net income (loss) $ 1,777,115 $ (3,081,814) $ 1,074,246 $ 1,172,784 $ 1,887,241
Income (loss) per
common share - basic
and diluted:
Income (loss) from
contining operations $ 0.22 $ (0.42) $ (0.03) $ 0.04 $ 0.11
Net income (loss) $ 0.22 $ (0.41) $ (0.02) $ (0.01) $ 0.13
Total assets $101,975,670 $116,991,123 $ 124,162,685 $ 127,692,489 $ 110,569,666
Long-term debt 28,631,305 33,817,936 64,946,400 67,933,460 60,582,883
12
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 2002
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- ---------------- ---------------- ---------------
Total revenues $ 8,607,002 $11,157,587 $12,841,001 $ 8,752,419
Net income (loss) (1,712,651) 597,422 3,866,185 (973,841)
Net income (loss) applicable to
common stock $(1,770,776) $ 539,297 $ 3,808,060 $(1,031,966)
Income (loss) per common
share - basic and diluted $(0.24) $ 0.07 $ 0.55 $ (0.17)
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)
13
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. The 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
that 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, 2002 and 2001.
2002
HOTEL AND LOCATION RMS AVAIL.1 OCC%2 ADR3 Rev PAR4
- ------------------ ----------- ----- ---- --------
Days Inn, Sharonville, OH 52,195 66% $36.42 $24.03
Best Western Kings Quarters, Doswell, VA 90,520 49% $67.19 $33.06
Days Inn Crabtree, Raleigh, NC 44,530 65% $41.61 $27.03
Days Inn RTP, Raleigh, NC 40,515 78% $63.82 $50.03
Holiday Inn, Independence, OH 132,860 54% $77.18 $41.86
Holiday Inn, North Canton, OH 70,810 75% $68.76 $51.83
Holiday Inn, Hudson, OH 105,120 48% $69.54 $33.68
Comfort Inn, Akron, OH 48,180 52% $52.66 $27.48
Holiday Inn Express, Juno Beach, FL 39,420 78% $72.16 $56.14
Red Roof Kings Island, Mason, OH 45,260 46% $42.60 $19.46
Days Inn Kings Island, Mason, OH 45,260 52% $48.23 $25.00
Days Inn Cambridge, Cambridge, OH 37,258 37% $51.27 $19.17
Best Western Cambridge, Cambridge, OH 34,675 56% $44.40 $25.07
14
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
1 Calculation is based on number of hotel rooms in service multiplied by
number of days in a year.
2 Occupancy is the 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; property sold August 15, 2002.
6 Hotel was sold June 30, 2001.
7 Hotel acquired September 1, 2001 and sold December 31, 2001.
Year Ended December 31, 2002 Compared To Year Ended December 31, 2001
During 2002, our business was negatively impacted by both the general economic
downturn and the continued travel reduction 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, 2001 and still owned and
operated as of December 31, 2002.
Room and related services revenue decreased 8.5% to $27,713,078 from $30,293,370
in 2001. For comparable hotels: (i) the average daily room rate decreased to
$60.92 for 2002 from $64.45 for 2001; (ii) occupancy increased in 2002 to 57.1%
from 56.0% in 2001; and (iii) room and related services revenue decreased 3.8%
to $27,713,078 from $28,815,619 in 2001. Management believes that the increase
in occupancy was offset 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 3.7% to $9,689,330 in 2002 from $10,065,582
in 2001. For comparable hotels, food and beverage revenues decreased 1.5%. These
results reflected not only the effects of the slowing economy but also a
decrease in the banquet business.
Management fee income decreased 8.8% to $2,731,576 in 2002 from $2,995,763 in
2001. Excluding a significant non-recurring short-term agreement in effect from
June 2001 through August 2001, management fees increased 0.4%.
Total direct operating expenses decreased 4.2% to $17,358,300 in 2002 from
$18,111,986 in 2001 but increased as a percentage of room and related services
and food and beverage revenues to 46.4% from 44.9%. For comparable hotels, total
direct operating expenses were flat with the prior year. The Company decreased
front desk and housekeeping expenses to minimum support levels necessary to
maintain customer service.
15
Occupancy expenses decreased 8.8% to $5,885,241 from $6,450,918 in 2001.
Occupancy expenses decreased 2.6% for comparable hotels.
General and administrative expenses decreased 3.7% to $11,743,019 in 2002 from
$12,192,890 in 2001 but increased as a percentage of total revenues to 28.4%
from 27.4%. General and administrative expenses decreased 0.5% for comparable
hotels.
Depreciation increased by $54,182 in 2002 from $3,883,537 in 2001. The increase
was primarily attributable to depreciation on capital additions completed in
2002 and 2001, offset by depreciation on hotel properties sold in 2002 and 2001.
The gain from debt settlement of $5,787,088 is more fully described below under
the caption "Liquidity and Capital Resources".
Interest income decreased to $397,145 in 2002 from $605,357 in 2001 as interest
rates and funds on deposit decreased.
Interest expense decreased to $6,016,079 in 2002 from $6,851,400 in 2001. The
decrease was attributable to modification of the mortgage loans related to four
hotel properties located in the vicinity of Cleveland, OH, as described below
under the caption "Liquidity and Capital Resources", the elimination of interest
expense attributable to a sold property and amortization of principal in the
ordinary course of business.
The Company's effective tax rate for continuing operations was 32.5% in 2002
compared to (4.7)% in 2001.
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 non-recurring 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
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.
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%. 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.
16
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.
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 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 $4,547,850 on the lines of credit at December 31, 2002, most of which
represents borrowings used to fund operations during the latter part of December
2002.
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.
17
Contractual Obligations
The following table provides details regarding the Company's contractual cash
obligations subsequent to December 31, 2002:
Contractual Cash Obligations By Year
-------------------------------------------------------------------------
2003 2004 - 2005 2006 - 2007 Thereafter Total
----------- ----------- ----------- ----------- -----------
Mortgage debt, fixed rate $ 2,606,735 $3,647,957 $1,985,131 $12,600,813 $20,840,636
Mortgage debt, variable rate 38,751,270 - - - 38,751,270
Subordinate debt - - - 10,302,597 10,302,597
Capital leases 97,083 94,808 - - 191,891
---------- --------- --------- ---------- ----------
Total contractual cash
obligations $41,455,088 $3,742,765 $1,985,131 $22,903,410 $70,086,394
========== ========= ========= ========== ==========
Commencing November 1, 2001, the Company withheld and reserved scheduled
principal, interest and escrow payments with respect to four mortgage loans
totaling $42,266,372 which were collateralized by four hotel properties in the
vicinity of Cleveland, Ohio, in order to induce the lender to engage in
discussions regarding a reduction in debt service costs. Management believed
that the fixed interest rate on the loans was in excess of current market rates
and repayment of the notes was creating a deficit cash flow based on current
economic conditions.
Under a settlement agreement with the lender, the loans were assigned to The
Provident Bank ("Provident") in August 2002 for a payment of $38,511,554,
inclusive of a forbearance fee of $180,000 and miscellaneous costs. The Company
and the lender exchanged mutual releases.
The sources of the funds for this payment were as follows:
Loan from Provident $33,500,000
Payment by Company from reserved funds 3,522,454
Replacement reserve 1,489,100
----------
Total $38,511,554
==========
The payment by the Company was made from funds that had been reserved at the
time of the withheld payments.
Provident modified the terms of the original loans by (i) reducing the aggregate
outstanding principal balance to $33,500,000, (ii) changing the interest rate to
a variable rate of the prime rate plus one half of one percent (.50%), (iii)
requiring monthly principal payments based upon a 20 year amortization schedule,
and (iv) changing the maturity date to August 1, 2003. The four loans continue
to be cross-defaulted and cross-collateralized, meaning that if the Company
fails to make payments with respect to any single property, all four loans will
become immediately due and payable. However, the loans remain non-recourse to
assets of the Company other than the four mortgaged properties. Provident also
required and received personal guaranties from the Company's majority
stockholders, Louis S. Beck and Harry G. Yeaggy, Chairman of the Board / Chief
Executive Officer and Vice Chairman of the Company, respectively.
The payoff in accordance with the settlement agreement and the forgiveness of
accrued interest and late fees, net of certain closing costs, resulted in a
pre-tax gain of approximately $5,787,000 in the third quarter of 2002. No
currently payable federal taxes resulted from this transaction as the Company
has sufficient net operating losses to utilize. The settlement agreement
triggered a test for recoverability of the Cleveland properties by the Company
under the provisions of Financial Accounting Standard No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The Company has
determined that there is no impairment of the properties based on the test
specified in FAS 144 and has obtained concurrence from its independent auditors.
Until long-term financing is obtained, the $33,500,000 loan from Provident is
classified as short-term debt in the balance sheet.
The Company has been pursuing both replacement long-term financing for the
properties and the potential sale of one or more of the properties since August
2002. To date, the Company has been unable to secure an acceptable commitment
for new financing due to general market conditions affecting lending to the
hotel industry and the instability of the occupancy percentages of the
properties. There can be no assurance that the Company will be able to obtain
new long-term financing or, if obtained, on satisfactory terms. If the Company
is unable to close long-term financing prior to the August 1, 2003 maturity date
of the Provident loans, the Company will discuss with Provident an extension of
such maturity date, but no assurance can be given that Provident will grant an
extension.
18
Management of the Company believes that the cash flow from the Company's hotel
operations 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 $116,991,123 at December 31, 2001 to $101,975,670 at
December 31, 2002. The decrease in total assets was the result of decreases in
cash and cash equivalents, restricted cash and property and equipment, net.
During 2002, the Company purchased 2,359,707 shares of its common stock at an
aggregate cost of $2,932,008, primarily in negotiated transactions from large
block holders who had been former major creditors of US Lines.
Net cash provided by operating activities decreased to $2,023,377 for the year
ended December 31, 2002 from $2,824,913 in the year ended December 31, 2001.
During the year ended December 31, 2002, the Company invested $1,589,703 in
capital improvements for the Owned Hotels as part of its operating plan. The
Company plans to spend $1,513,000 on capital improvements during the year ending
December 31, 2003 as part of its continuing improvement plans for the Owned
Hotels.
Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Our adoption of SFAS 145 is not expected to have a material impact
on our consolidated results of operations, cash flows or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Our adoption of SFAS 146
is not expected to have a material impact on our consolidated results of
operations, cash flows or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. Our adoption of SFAS 148 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
In limited instances, the Company seeks to reduce earnings and cash flow
volatility associated with changes in interest rates by entering into financial
arrangements intended to provide a hedge against a portion of the risks
associated with such volatility. The Company continues to have exposure to such
risks to the extent they are not hedged.
19
Interest rate swap agreements are the instruments used to manage interest rate
risk. At December 31, 2002, the Company had one outstanding long-term interest
rate swap agreement under which the Company pays variable interest rates and
receives fixed interest rates. The following table sets forth the scheduled
maturities and the total fair value of the Company's debt portfolio:
Expected Maturity and Fair Value at December 31,
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Debt:
Fixed rate $2,703,819 $968,629 $2,774,137 $946,531 $1,038,600 $22,903,408 $31,335,124 $33,017,962
========== ======== ========== ======== ========== =========== =========== ===========
Average
interest
rate 7.3%
====
Variable
rate $38,751,271 $38,751,271 $38,751,271
=========== =========== ===========
Average
interest
rate 4.6%
====
The Company's exposure to foreign currency risk is immaterial.
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
Incorporated by reference to 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 or to
be provided by amendment to this report on Form 10-K by April 30, 2003.
Item 11. Executive Compensation.
Incorporated by reference to 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 or to be provided by amendment to this report on Form 10-K by April
30, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to 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 or to be provided by amendment to this report on
Form 10-K by April 30, 2003.
20
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to 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 or to be provided by amendment to this report on
Form 10-K by April 30, 2003.
Item 14. Controls and Procedures.
Within 90 days of the filing of this Annual Report on Form 10-K the Company
completed an evaluation, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
controls and procedures are effective to alert them on a timely basis to any
material information relating to the Company that must be included in the
Company's periodic reports filed with the Securities and Exchange Commission.
In addition, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the aforementioned evaluation.
21
PART IV
Item 15. 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 Form
10-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 Lease Agreement between Union Savings Bank and the
Company (Cincinnati premises) dated January 1, 1999
incorporated by reference to Exhibit 10.13 to Form 10-Q
of the Company filed with the Securities and Exchange
Commission on May 13, 2002.
10.13 (a) First Lease Amendment between Union Savings Bank and
the Company (Cincinnati premises) dated January 1, 2002
incorporated by reference to Exhibit 10.13(a) to Form
10-Q of the Company filed with the Securities and
Exchange Commission on May 13, 2002.
10.14 Lease Agreement between Beck Group of Boca and the Company
(Boca Raton premises) dated April 1, 2002 incorporated by
reference to Exhibit 10.14 to Form 10-Q of the Company
filed with the Securities and Exchange Commission on
August 12, 2002.
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.
22
10.37(a)* Promissory note recast agreement dated December 31, 2002
between the Company and ELBE Financial Group, LLC, with
forms of promissory notes
10.37(b)* Promissory note recast agreement dated December 31, 2002
between the Company and Harry G. Yeaggy, with forms of
promissory notes
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
10.40a Mortgage Loan Modification Agreement dated August 2,
2002 between The Provident Bank and JAGI North Canton,
LLC incorporated by reference to Form 8-K for the event
dated August 2, 2002
10.40b Mortgage Loan Modification Agreement dated August 2,
2002 between The Provident Bank and JAGI Cleveland
Hudson, LLC incorporated by reference to Form 8-K for
the event dated August 2, 2002
10.40c Mortgage Loan Modification Agreement dated August 2,
2002 between The Provident Bank and JAGI Cleveland
Independence, LLC incorporated by reference to Form 8-K
for the event dated August 2, 2002
10.40d Mortgage Loan Modification Agreement dated August 2, 2002
between The Provident Bank and JAGI Montrose West, LLC
incorporated by reference to Form 8-K for the event dated
August 2, 2002
21* Subsidiaries of the Company.
23* Consent of Grant Thornton LLP
24* Powers of Attorney.
99.1* Certification of Chief Executive Officer pursuant to
18 U.S.C. Sec. 1350
99.2* Certification of Chief Financial Officer pursuant to
18 U.S.C. Sec. 1350
* Exhibit filed herewith
(b) Reports on Form 8-K:
The report on Form 8-K filed during the three months ended December
31, 2002 was as follows:
Item Reported Date of Report
------------- --------------
Purchase of Company common stock from General Electric Capital
Corporation and United States Lines, Inc. and United States Lines
(S.A.), Inc. Reorganization Trust November 26, 2002
23
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 31, 2003 /s/ Louis S. Beck
-----------------------------------------
Louis S. Beck
Chairman and Chief Executive Officer
Dated: March 31, 2003 /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 31, 2003 *
----------------------------------------
Michael M. Nanosky
President and Director
Dated: March 31, 2003 *
----------------------------------------
Harry G. Yeaggy
Vice Chairman
Dated: March 31, 2003 *
----------------------------------------
Arthur Lubell
Director
Dated: March 31, 2003 *
----------------------------------------
Richard P. Lerner
Director
Dated: March 31, 2003 *
----------------------------------------
Lucille Hart-Brown
Director
Dated: March 31, 2003 *
----------------------------------------
C. Scott Bartlett, Jr.
Director
24
Dated: March 31, 2003 *
----------------------------------------
Stephen Grossman
Director
Dated: March 31, 2003 *
----------------------------------------
Paul Tipps
Director
Dated: March 31, 2003 *
----------------------------------------
Howard Nusbaum
Director
* /s/ Richard A. Tonges
--------------------------------
Richard A. Tonges
Attorney-in-Fact
25
CERTIFICATIONS
I, Louis S. Beck, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Janus Hotels and Resorts,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Louis S. Beck
- ----------------------------------------------
Louis S. Beck
Chief Executive Officer
26
I, Richard A. Tonges, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Janus Hotels and Resorts,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Richard A. Tonges
- ----------------------------------------------
Richard A. Tonges
Chief Financial Officer
27
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, 2002 AND 2001 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2002, 2001 AND 2000 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2002, 2001 AND 2000 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, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets" on January 1, 2002.
/s/ GRANT THORNTON LLP
February 24, 2003
F-2
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
December 31, December 31,
2002 2001
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,783,353 $ 7,097,345
Restricted cash 1,274,163 2,405,747
Accounts receivable 2,139,165 2,107,968
Current portion of notes receivable - 2,208,716
Other current assets 191,668 196,512
----------- -----------
Total current assets 8,388,349 14,016,288
----------- -----------
Property and equipment, net 82,384,819 87,150,167
Mortgage notes receivable - 3,029,629
Goodwill, net 7,133,384 7,133,384
Deferred tax asset - 60,000
Replacement reserve 2,535,637 3,415,089
Other assets 1,533,481 2,186,566
----------- -----------
$101,975,670 $116,991,123
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 4,547,850 $ 1,362,735
Current maturity of accelerated long-term debt - 42,266,372
Current portion of long-term debt 36,907,239 5,073,196
Accounts payable 2,554,789 2,743,269
Accrued expenses 2,199,444 3,417,549
----------- -----------
Total current liabilities 46,209,322 54,863,121
----------- -----------
Long-term debt, net of current portion 28,631,305 33,817,936
Deferred tax liabilities 3,999,000 2,282,000
Minority interest - 91,113
Stockholders' equity:
Preferred stock, series B; par value $0.01 per share; 5,000,000 shares authorized;
3,100 shares issued and outstanding at December 31, 2002 and 2001 31 31
Common stock, par value $0.01 per share; 15,000,000 shares authorized;
11,804,518 and 11,804,195 shares issued at December 31,
2002 and 2001, respectively 118,046 118,043
Additional paid-in capital 34,645,991 36,059,511
Accumulated deficit (6,246,858) (7,791,473)
Treasury stock, at cost, 6,240,513 and 3,880,809 common shares at
December 31, 2002 and 2001, respectively (5,381,167) (2,449,159)
----------- -----------
Total stockholders' equity 23,136,043 25,936,953
----------- -----------
$101,975,670 $116,991,123
=========== ===========
See notes to consolidated financial statements.
F-3
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
2002 2001 2000
--------------- --------------- --------------
Revenues:
Room and related services $27,713,078 $30,293,370 $34,947,912
Food and beverage 9,689,330 10,065,582 10,544,317
Management fees 2,731,576 2,995,763 3,246,814
Other 1,224,025 1,179,649 1,029,600
---------- ---------- ----------
Total revenues 41,358,009 44,534,364 49,768,643
---------- ---------- ----------
Operating expenses:
Direct:
Room and related services 7,287,864 7,926,500 9,027,084
Food and beverage 7,643,686 8,007,810 8,235,163
Selling and general 2,426,750 2,177,676 2,119,158
---------- ---------- ----------
Total direct expenses 17,358,300 18,111,986 19,381,405
---------- ---------- ----------
Occupancy expenses 5,885,241 6,450,918 6,673,326
General and administrative expenses 11,743,019 12,192,890 12,017,409
Severance arrangement of former president - - 500,000
Impairment loss - 627,263 -
Depreciation 3,937,719 3,883,537 3,900,642
Amortization 159,898 368,565 358,797
---------- ---------- ----------
Total operating expenses 39,084,177 41,635,159 42,831,579
---------- ---------- ----------
Operating income 2,273,832 2,899,205 6,937,064
Other income (expense):
Interest expense (6,016,079) (6,851,400) (6,053,127)
Interest income 397,145 605,357 846,792
Gain from debt settlement 5,787,088 - -
Gain (loss) from sale of properties 58,827 (164,811) -
Other (1,495) - (45,107)
---------- ---------- ----------
Income(loss) from continuing operations before income
taxes and minority interest 2,499,318 (3,511,649) 1,685,622
Provision(credit) for income taxes 811,000 (165,000) 615,000
---------- ---------- ----------
Income(loss) from continuing operations before minority interest 1,688,318 (3,346,649) 1,070,622
Minority interest - (206,455) 74,034
---------- ---------- ----------
Income(loss) from continuing operations 1,688,318 (3,140,194) 996,588
Gain (loss) on disposal of discontinued operations, net of taxes 88,797 58,380 77,658
---------- ---------- ----------
Net income(loss) 1,777,115 (3,081,814) 1,074,246
Less preferred dividend requirement 232,500 232,500 1,262,561
---------- ---------- ----------
Net income (loss) applicable to common stock $ 1,544,615 $(3,314,314) $ (188,315)
========== ========== ==========
Basic income per common share:
Income(loss) from continuing operations $ 0.21 $ (0.42) $ (0.03)
Gain (loss) on disposal of discontinued operations 0.01 0.01 0.01
----- ------ ------
Net income (loss) $ 0.22 $ (0.41) $ (0.02)
===== ====== ======
Diluted income per common share:
Income(loss) from continuing operations $ 0.21 $ (0.42) $ (0.03)
Gain (loss) on disposal of discontinued operations 0.01 0.01 0.01
----- ------ ------
Net income (loss) $ 0.22 $ (0.41) $ (0.02)
===== ====== ======
Weighted average common shares:
Basic 6,902,359 8,065,218 8,659,846
========= ========= =========
Diluted 6,902,359 8,065,218 8,659,846
========= ========= =========
See notes to consolidated financial statements.
F-4
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Preferred Stock Common Stock
------------------------ ------------------------
Number of Number of Additional Paid- Accumulated
Shares Amount Shares Amount in Capital Deficit
---------- --------- ----------- --------- ---------------- -------------
Balance January 1, 2000 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 (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)
Net income (loss) 1,777,115
Decrease in deferred tax asset (1,414,000)
Purchases of treasury stock
Preferred stock dividends (232,500)
Adjustment to redemption of
common stock 323 3 480
--------- --- ---------- ------- ---------- ----------
Balance December 31, 2002 3,100.00 $ 31 11,804,518 $118,046 $34,645,991 $(6,246,858)
========= === ========== ======= ========== ==========
Treasury Stock
--------------------------
Number of
Shares Amount Total
---------- ----------- -----------
Balance January 1, 2000 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 (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
Net income (loss) 1,777,115
Decrease in deferred tax asset (1,414,000)
Purchases of treasury stock 2,359,704 (2,932,008) (2,932,008)
Preferred stock dividends (232,500)
Adjustment to redemption of
common stock 483
--------- ---------- ----------
Balance December 31, 2002 6,240,513 $(5,381,167) $23,136,043
========= ========== ==========
See notes to consolidated financial statements.
F-5
JANUS HOTELS AND RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
--------------- -------------- ---------------
Operating activities:
Net income (loss) $ 1,777,115 $(3,081,814) $1,074,246
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation 3,937,719 3,883,537 3,900,642
Impairment loss - 627,263 -
Amortization of intangible assets 159,898 358,735 358,797
Deferred taxes 363,000 (108,000) (95,275)
Minority Interest - (206,455) 74,034
(Gain) loss on sale of hotel properties (57,331) 164,811 45,107
(Gain) from restructured debt (5,787,088) - -
Changes in operating assets and liabilities, excluding acquisitions:
Accounts receivable (278,336) 18,184 (382,911)
Other current assets 4,844 11,850 3,720
Replacement reserve 875,149 217,737 (957,353)
Other assets 56,350 (176,164) 245,963
Accounts payable and accrued expenses 972,057 1,115,229 (73,322)
---------- ---------- ---------
Net cash provided by operating activities 2,023,377 2,824,913 4,193,648
---------- ---------- ---------
Investing activities:
Purchases of property and equipment (1,589,703) (2,478,673) (2,633,994)
Purchase of hotel property - (1,700,000) -
Proceeds from sale of property 2,577,908 2,375,000 2,700,000
Collections of notes receivable 2,050,000 100,384 261,206
---------- ---------- ---------
Net cash (used in) provided by investing activities 3,038,205 (1,703,289) 327,212
---------- ---------- ---------
Financing activities:
Dividends paid (232,500) (232,500) (1,262,561)
Decrease (Increase) in restricted cash 1,081,994 (744,741) (79,053)
Repurchase of common stock (2,932,008) (728,444) (304,216)
Adjustment to redemption of common stock 483 (189,593) -
Proceeds of short-term borrowings 6,293,954 4,355,309 -
Repayment of short-term borrowings (3,108,839) (2,992,574) -
Proceeds from long-term borrowings - 497,266 -
Proceeds from refinancing 33,500,000 - -
Repayments of long-term borrowings (41,978,658) (2,233,483) (3,490,437)
---------- ---------- ---------
Net cash (used in) provided by financing activities (7,375,574) (2,268,760) (5,136,267)
---------- ---------- ---------
Increase (decrease) in cash and cash equivalents (2,313,992) (1,147,136) (615,407)
Cash and cash equivalents, beginning of period 7,097,345 8,244,481 8,859,888
---------- ---------- ---------
Cash and cash equivalents, end of period $ 4,783,353 $ 7,097,345 $8,244,481
========== ========== =========
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, 2002, 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 that manages
hotels for unrelated parties. 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 subject to at least an annual assessment for impairment
by applying a fair value based test.
Impairment of long-lived assets: The Company applies the provisions of Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). Under SFAS 144, impairment losses on
long-lived assets, such as property and equipment, 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, 2002, there was no such impairment.
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.
Derivatives: The Company utilizes derivative financial instruments to reduce
interest rate risk. The Company does not hold or issue derivative financial
instruments for trading purposes. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended in June 2000 by SFAS 138.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments and hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Changes in fair
value of those instruments will be reported in earnings or other comprehensive
income depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedge.
Revenue recognition: The Company recognizes room revenue and other revenue when
services are rendered. Amounts paid in advance are deferred until earned. Other
revenue, which is recognized when services are provided, consists primarily of
revenue derived from vending, guest laundry and other miscellaneous fees or
services. Management fees are recognized on an accrual basis in accordance with
the terms of the individual contracts.
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 $931,337 in 2002,
$980,851 in 2001 and $951,758 in 2000.
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.
F-8
There were no grants of stock options during 2002. 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 income for 2002 would have been
$1,737,815, or $0.22 per common share, and the pro forma net loss for 2001 would
have been $3,127,939, or $0.42 per common share.
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 had no dilutive securities during the
three years ended December 31, 2002.
The Company's reported net income represents its net income available to common
stockholders for purposes of computing both measures.
New accounting pronouncements. In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Our adoption
of SFAS 145 is not expected to have a material impact on our consolidated
results of operations, cash flows or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Our adoption of SFAS 146
is not expected to have a material impact on our consolidated results of
operations, cash flows or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. Our adoption of SFAS 148 is not expected to have a
material impact on our consolidated results of operations, cash flows or
financial position.
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 August 15, 2002, the Company disposed of a hotel property located in
Lafayette, Indiana. The hotel was sold for cash and resulted in a gain of
$58,827.
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 was paid
in 2002. The note had an interest rate of prime plus 2%.
F-9
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.
Note 4 - Mortgage notes receivable:
The balances at December 31, 2002 and 2001 consisted of the following:
2002 2001
---- ----
Note secured by campground, with interest at 8% $ - $3,138,345
Note secured by hotel property, with interest at prime plus 2% 2,100,000
---- ---------
Total long-term receivable - 5,238,345
Less current portion 2,208,716
---- ---------
Long-term portion, net of current portion $ - $3,029,629
==== =========
The mortgage note for the campground was 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 was 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. In December 2002, Messrs. Beck and Yeaggy, and entities
controlled by them, agreed to offset the mortgage note receivable against a
portion of the subordinated debt due to them by the Company. The note secured by
the hotel property accrued interest until its maturity on March 31, 2002.
Note 5 -- Property and equipment:
Property and equipment at December 31, 2002 and December 31, 2001 consisted of
the following:
December 31, December 31,
2002 2001
---------------- ----------------
Land $14,345,814 $ 14,913,015
Hotels 68,001,705 69,740,969
Hotel furniture and fixtures 15,347,865 14,935,617
Equipment and vehicles 1,711,969 1,320,324
---------- -----------
99,407,353 100,909,925
Less accumulated depreciation and amortization 17,022,534 13,759,758
--------- -----------
Totals $82,384,819 $ 87,150,167
========== ===========
In 2002, management's review of its long-lived assets indicated there was no
impairment. 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 impairment loss was $627,263.
Note 6 - Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". In
accordance with SFAS 142, the Company discontinued goodwill amortization and
tested goodwill for impairment as of December 31, 2002 determining that no
impairment loss was necessary. The Company will continue to test goodwill for
impairment at least annually. Goodwill was $7,133,384 as of December 31, 2002,
and was unchanged for the year then ended. The following table presents net
income on a comparable basis, after adjustment for goodwill amortization:
F-10
December 31, December 31,
2002 2001
--------------- ----------------
Net income (loss) applicable to common stock:
As reported $1,544,615 $(3,314,314)
Goodwill amortization, net of tax - 210,113
--------- ----------
Adjusted net income (loss) $1,544,615 $(3,104,201)
========= ==========
Basic and diuted earnings (loss) per common share:
As reported $0.22 $(0.41)
==== =====
As adjusted $0.22 $(0.38)
==== =====
Note 7 -- Long-term debt:
Long-term debt at December 31 consisted of the following:
2002 2001
---- ----
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 2003 through March 2016 $20,840,636 $63,419,074
Subordinated debt due December 2011 with
quarterly interest payments; interest rate at
7.5% 10,302,596 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, 2002 ranged from 4.25%
to 4.75%); the mortgage notes mature from
June 2003 through August 2003 34,203,420 3,153,431
Equipment notes with various maturities through
September 2004 and interest at rates ranging
from 0.00% to 6.58% 191,892 896,919
---------- ----------
Total long-term debt 65,538,544 81,157,504
Less:
Current maturity of accelerated long-term debt - 42,266,372
Current portion of long-term debt 36,907,239 5,073,196
---------- ----------
Long-term debt, net of accelerated debt and
current portion $28,631,305 $33,817,936
========== ==========
Commencing November 1, 2001, the Company withheld and reserved scheduled
principal, interest and escrow payments with respect to four mortgage loans
totaling $42,266,372, which were collateralized by hotel properties in the
vicinity of Cleveland, Ohio, in order to induce the lender to engage in
discussions regarding a reduction in debt service costs. Management believed
that the fixed interest rate on the loans was in excess of current market rates
and repayment of the notes was creating a deficit cash flow based on current
economic conditions.
Under a settlement agreement with the lender, the loans were assigned to The
Provident Bank ("Provident") in August 2002 for a payment of $38,511,554,
inclusive of a forbearance fee of $180,000 and miscellaneous costs. The Company
and the lender exchanged mutual releases.
F-11
The sources of the funds for this payment were as follows:
Loan from Provident $33,500,000
Payment by Company from reserved funds 3,522,454
Replacement reserve 1,489,100
----------
Total $38,511,554
==========
The payment by the Company was made from funds that had been reserved at the
time of the withheld payments.
Provident modified the terms of the original loans by (i) reducing the aggregate
outstanding principal balance to $33,500,000, (ii) changing the interest rate to
a variable rate of the prime rate plus one half of one percent (.50%), (iii)
requiring monthly principal payments based upon a 20 year amortization schedule,
and (iv) changing the maturity date to August 1, 2003. The four loans continue
to be cross-defaulted and cross-collateralized, meaning that if the Company
fails to make payments with respect to any single property, all four loans will
become immediately due and payable. However, the loans remain non-recourse to
assets of the Company other than the four mortgaged properties. Provident also
required and received personal guaranties from the Company's majority
stockholders, Louis S. Beck and Harry G. Yeaggy, Chairman of the Board / Chief
Executive Officer and Vice Chairman of the Company, respectively.
The payoff in accordance with the settlement agreement and the forgiveness of
accrued interest and late fees, net of certain closing costs, resulted in a
pre-tax gain of approximately $5,787,000 in the third quarter of 2002. No
currently payable federal taxes resulted from this transaction as the Company
has sufficient net operating losses that will be utilized. The settlement
agreement triggered a test for recoverability of the Cleveland properties by the
Company under the provisions of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The
Company has determined that there is no impairment of the properties based on
the test specified in FAS 144 and has obtained concurrence from its independent
auditors. Until long-term financing is obtained, the loan from Provident is
classified as short-term debt in the balance sheet.
The Company has been pursuing both replacement long-term financing for the
properties and the potential sale of one or more of the properties since August
2002.
In the fourth quarter, the Company entered into an interest rate swap
transaction with a lender bank by which they converted LIBOR based payments into
fixed payments for the debt during the swap period. The contract matures on
December 18, 2005, the same maturity date as the related loan in the amount of
$2,088,974. The fixed interest rate under the agreement is 5.81%. There has been
no material change in the fair value of the interest rate swap at December 31,
2002.
Long-term debt is secured by the Company's notes, property and equipment.
Principal payments in years subsequent to December 31, 2002 are as follows:
Year Ending December 31 Amount
------------------------- ------------------
2003 $36,907,239
2004 968,629
2005 2,774,137
2006 946,531
2007 1,038,600
Note 8 -- 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 that, 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-12
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 9 - Income taxes:
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 2002 and 2001, the Company
decreased additional paid-in-capital by $1,414,000 and $2,646,000, respectively,
as a result of the expiration of federal net operating loss carryforwards.
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, 2002, management believes that such a change in ownership has not occurred.
The provision (credit) for income taxes consists of the following:
2002 2001 2000
---- ---- ----
Federal income tax provision:
Current $ - $ - $ 16,000
Deferred 362,000 (175,000) 404,000
------- -------- -------
Total federal income tax provision 362,000 (175,000) 420,000
-------
State and local income tax provision:
Current 464,000 10,000 290,275
Deferred (15,000) - (95,275)
------- -------- -------
Total state and local provision 449,000 10,000 195,000
------- -------- -------
Provision (credit) for income taxes $811,000 $(165,000) $615,000
======= ======== =======
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:
2002 2001 2000
--------- --------- ---------
Statutory rate 34.0% (34.0)% 34.0%
Nondeductible amortization of goodwill - 1.9 4.2
State and local tax 11.6 0.2 7.6
Gain (loss) on hotel properties sold - 9.7 (8.8)
Minority interest acquisition - 9.7 -
Reorganization Trust loss (6.2) (6.7) (15.2)
Valuation allowance - 12.5 14.7
Expiration of net operating losses (6.9) - -
Other - 2.0 -
---- ---- ----
Total 32.5% (4.7)% 36.5%
==== ==== ====
F-13
Deferred taxes at year-end were comprised of the following:
2002 2001
--------------- ---------------
Deferred tax liabilities:
Depreciation and other $10,400,000 $11,981,000
---------- ----------
Deferred tax assets:
Net operating loss carryforwards 6,401,000 9,759,000
---------- ----------
Net deferred tax (liability) asset $(3,999,000) $(2,222,000)
========== ==========
At December 31, 2002, the Company had federal net operating loss carryforwards
of $18,828,000 that expire beginning in 2003 through 2012. 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 10 -- 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 $131,797 and $101,380 as a recovery on the note during 2002 and 2001,
respectively.
Note 11 -- 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:
2002 2001
-------------------------------- ---------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
-------------- --------------- --------------- ---------------
Long-term debt $57,446,735 $59,627,767 $66,572,505 $65,889,507
Subordinated debt 10,302,597 10,404,402 13,688,080 13,833,658
Fixed rate long-term debt is 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.
Note 12 -- Minority interest:
On June 7, 2002, JI Subsidiary, Inc., which was 90% owned by the Company, was
dissolved. The amount due to minority stockholders was disbursed to the
Company's transfer agent in July 2002.
Note 13 - 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 of Series B preferred stock were issued and outstanding at
December 31, 2002 and 2001. 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.
F-14
Common stock, par value $.01 per share; 15,000,000 shares authorized;
11,804,518 shares and 11,804,195 shares issued at December 31, 2002 and 2001,
respectively; and 6,240,513 and 3,880,809 shares held as treasury shares at
December 31, 2002 and 2001, respectively. At December 31, 2001, the
Reorganization Trust held shares of Janus common stock for possible future
distribution under the Plan that the Reorganization Trust is required to vote
in proportion to the votes cast by the Company's stockholders other than
Messrs. Beck and Yeaggy. These shares were repurchased in December 2002.
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 14 -- 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.
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.
F-15
The following summarizes the stock option transactions under the plans for the
three years ended December 31, 2002:
Weighted
Average
Exercise
Shares Price
--------- -----------
Options outstanding January 1, 2000 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
Granted -
Exercised -
Forfeited -
-------
Options outstanding December 31, 2002 110,000 $ 1.50
=======
Options exercisable December 31, 2002 110,000 $ 1.50
=======
The weighted average contractual life of the outstanding options at December 31,
2002 is 8.25 years.
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
that 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 that 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:
2002 2001 2000
---------- ----------- ----------
Interest paid $4,442,155 $ 6,271,156 $6,053,127
========= ========== =========
Income taxes paid $ 165,443 $ 270,309 $ 493,909
========= ========== =========
Noncash investing and financing transactions:
Reduction of note secured by campground $3,385,484 $ - $ -
========= ========== =========
Reduction of subordinated debt $3,385,484 $ - $ -
========= ========== =========
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 $ -
========= ========== =========
F-16
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 2002, 2001 and 2000 include
revenues and expenses derived from related party transactions as follows:
2002 2001 2000
-------- -------- --------
Personnel leasing fees (a) $168,917 $188,005 $213,979
Management systems fees (b) 47,930 37,065 38,137
Rent for office facilities and equipment 78,921 54,520 54,520
Airplane charges (c) 365,036 300,000 306,000
Tax preparation and contingent fees (d) 15,732 - -
(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) 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 pays fees for return preparation
and contingent fees based on realized tax savings. Messrs. Beck and Tonges
are minority owners in this company.
At various times the Company may deposit funds in a financial institution that
is controlled by Messrs. Beck and Yeaggy.
F-17