Item 1. Business.
Introduction
Janus Hotels and Resorts, Inc. (the "Company" or "Janus"), a Delaware corporation, is in the business of operating and managing hotels. The Company has ownership interests in 14 hotels (the "Owned Hotels") and as of March 15, 2002 manages an additional 39 hotels (the hotels which are managed, but not owned, by the Company are referred to as the "Managed Hotels" and the Owned Hotels and Managed Hotels are collectively referred to as "Hotels").
The Company's executive offices are located at 2300 Corporate Boulevard, N.W., Suite 232, Boca Raton, Florida 33431 and its telephone number is (561) 997-2325.
Background of the Company
Janus is the successor to United States Lines, Inc. ("U.S. Lines"), which once was one of the largest containerized cargo shipping companies in the world. On November 24, 1986, McLean Industries, Inc., First Colony Farms, Inc. and their subsidiaries U.S. Lines and United States Lines (S.A.), Inc. ("U.S. Lines (S.A.)") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. Soon thereafter, the shipping operations of U.S. Lines and U.S. Lines (S.A.) ceased. U.S. Lines and U.S. Lines (S.A.) emerged from bankruptcy in 1990 under the terms of the First Amended and Restated Joint Plan of Reorganization dated February 23, 1989 (the "Plan"). At that time, the names of U.S. Lines and U.S. Lines (S.A.) were changed to Janus Industries, Inc. and JI Subsidiary, Inc. ("JI Subsidiary"), respectively. On May 21, 1999, the name of the Company was changed to Janus Hotels and Resorts, Inc. JI Subsidiary currently has no business activities. See " History of the Company's Reorganization."
In July 1996, the Company acquired substantially all of the assets of Pre-Tek Wireline Service Company, Inc. ("Pre-Tek"), an oil and gas engineering services and wireline logging company based in Bakersfield, California. During 1997, the Company determined to discontinue this line of business and subsequently sold the business to its management effective April 1, 1998.
In April 1997, the Company entered the hotel business by acquiring, from affiliates of Louis S. Beck ("Beck") and Harry G. Yeaggy ("Yeaggy"), certain assets relating to the hospitality business comprised of (i) six hotels and an 85% interest in a partnership that owns one hotel (the minority interest was acquired in 2001); (ii) a hotel management company; (iii) a management fee sharing arrangement with Summit Hotel Management Company, which has since been terminated; and (iv) two loans, one of which is secured by a first mortgage on a hotel, which was subsequently terminated based on a merger, and the other of which is secured by a first mortgage on a campground, which is personally guaranteed by Messrs. Beck and Yeaggy. In consideration therefor, Messrs. Beck and Yeaggy and Beck Hospitality III, Inc., a corporation wholly-owned by them, received shares of the Company's common stock, par value $.01 per share (the "Common Stock") and shares of the Series B preferred stock of the Company, par value $.01 per share (the "Series B Preferred Stock).
Messrs. Beck and Yeaggy, who are currently Chairman and Vice Chairman, respectively, of the Board of Directors of the Company, have been engaged in the hospitality business since 1972.
In August 1998, the Company acquired four hotels near Cleveland, Ohio (the "Cornerstone Hotel Group") from an unrelated party.
Effective January 1, 1999, the Company acquired, by merger, Beck Hospitality, Inc. II ("Beck II") which owned six hotels and a 75% interest in another hotel. As part of the purchase price in this transaction, Messrs. Beck and Yeaggy received additional shares of the Series B Preferred Stock.
Messrs. Beck and Yeaggy retain miscellaneous independent interests in the hospitality business. However, they have contractually agreed with the Company not to engage in any business that competes with the business of the Company.
The Hospitality Business
Owned Hotels
The Owned Hotels are located in five states and operate under franchise or membership agreements that provide for the use of the brand names Days Inn, Best Western, Holiday Inn and Comfort Inn. One of the Owned Hotels is located adjacent to the Paramount Kings Dominion amusement park near Richmond, Virginia. The remaining Owned Hotels are located near office parks, interstate highways, airports or tourist attractions in Ohio, Florida and North Carolina. The Owned Hotels generally offer remote control cable television, a swimming pool and, in many cases, restaurants. Some of them offer meeting and banquet facilities and room service.
The Owned Hotels are owned in fee, either directly or through consolidated entities. Each of the Owned Hotels is subject to mortgage indebtedness. All of such indebtedness is secured solely by the applicable hotel property and fixtures, and is non-recourse to the other assets of the Company, with the exception of the indebtedness incurred in the acquisition of the hotels in the Cornerstone Hotel Group, which is cross-collateralized by such hotels.
Franchise Agreements
The Company has entered into non-exclusive multi-year franchise, licensing or membership agreements, which allow the Company to utilize the franchise brand name of the franchiser or licensor for the Hotels. The Company believes that its relationships with nationally recognized franchisers provide significant benefits for its Owned Hotels. The franchise agreements require the Company to pay annual fees, to maintain certain standards and to implement certain programs that require additional expenditures by the Company such as remodeling or redecorating. The payment of annual fees, which typically total from 8% to 12% of room revenues, covers royalties and the costs of marketing and reservation services provided by the franchisers. Franchise agreements, at their inception, generally provide for a term of 15 years and an initial fee in addition to annual fees payable to the franchiser.
The Company currently has franchise or membership relationships with Bass Hotels (Holiday Inn), Days Inn, Best Western, Choice Hotels (Comfort Inn), Ramada Inn and Red Roof. Franchise agreements may be terminated if, among other reasons, the Company breaches its obligations under the agreement, the hotel is not operated in the ordinary course of business or the Company becomes financially unstable. There can be no assurance that a desirable replacement would be available if any franchise agreements were to be terminated. Upon such termination with respect to the Company's Owned Hotels, the Company would incur the costs of signage removal and other expenses, possible lost revenues and the costs incidental to establishing new associations. Through the Managed Hotels, the Company has additional relationships with other franchisers, including Howard Johnson, Ramada, Wingate and Radisson.
Managed Hotels
The Company operates the Managed Hotels pursuant to management agreements (the "Management Agreements") with the owners of such Managed Hotels. Managed Hotels are operated primarily under nationally recognized brand names. Four Managed Hotels are non-franchised properties.
The Company is responsible for all matters relating to the day-to-day operations of the Managed Hotels and is required to prepare an annual operating budget, use its reasonable best efforts to market the hotels and ensure compliance with the terms of applicable franchise agreements. The Company is also responsible for the retention and supervision of personnel necessary for the operation of the hotel. The Company has a contract with a third party for this purpose. See "Operations - Hotel Personnel."
Under the terms of the Management Agreements, management fees either are a fixed amount or are based on a percentage of a property's total revenues, ranging from 3% to 5%, and/or incentive payments based upon net operating income. Additional fees are generated from accounting services. The Management Agreements generally have terms of one year to five years and are automatically renewed for successive similar terms, unless either party decides not to renew prior to the expiration of the current term. Either party may terminate a Management Agreement for cause prior to a stated expiration date, except in the case of two Management Agreements, which permit termination at any time without cause. Generally, the owner of a property has the right to terminate a Management Agreement upon sale of the Hotel to an unrelated third party, subject to the payment of a termination fee to the Company.
Operations
The Company operates each Hotel according to a business plan specifically tailored to the characteristics of the Hotel and its market and employs centralized management, accounting and purchasing systems to enhance hotel operations, reduce the costs of goods, food and beverages and increase operating margins.
Computerized Reporting Systems. The Company has a service agreement for a hotel property management information system with Computel Computer Systems, Inc. ("Computel"), a corporation wholly-owned by Messrs. Beck and Yeaggy. The agreement provides a computerized system that tracks all services provided by nine of the Hotels and enables the Company to monitor a broad spectrum of the operations of each Hotel covered by the system, including the occupancy and revenues of the Hotels. The agreement with Computel has a term of one year and automatically renews for successive terms of one year, unless one party notifies the other to the contrary at least three months prior to the termination date. Computel is paid a monthly fee of $275 per property for its basic property management software package and one computer terminal. Additional monthly fees are charged for additional terminals and add-on software for services such as guest messaging, call accounting interface, franchise central reservation interface and movie interface. On each annual renewal of the agreement, Computel is entitled to adjust its fees to the Company commensurate with the fees charged to other customers.
Hotel Personnel. The majority of the personnel at the Hotels is provided by Hospitality Employee Leasing Program, Inc. ("HELP"), a corporation wholly-owned by Messrs. Beck and Yeaggy, pursuant to an agreement with the Company. The agreement has a term of one year and automatically renews for successive one-year terms, unless one party notifies the other to the contrary at least three months prior to the expiration date. The Company reimburses HELP the actual payroll costs, including payroll taxes, of the employees and pays HELP an administrative fee per person. In addition, the Company pays a premium for workers compensation insurance for the indemnification by HELP for all employer practices liability and work related injuries.
Employees
As of December 31, 2001, approximately thirty full-time employees of the Company were engaged in management, business operations and administration of its hospitality business. In addition, at that date approximately 2,028 individuals employed by HELP provided services at the Hotels under a service agreement between HELP and the Company.
Growth Strategy
Management of the Company intends to pursue a program of expanding its business of the management and/or acquisition of hotels, recreation, resorts, entertainment or other related entities through the marketing of its services to the owners of properties not owned by the Company and through the acquisition of properties either by itself or with other investors. The Company is engaged in a marketing program to expand selectively the number of hotels that it manages. Since entering the hospitality business in April 1997, and through December 31, 2001, the Company increased its number of Managed Hotels by eighteen. The Company also continues to review possible acquisitions of hospitality properties. There can be no assurance that the Company will be successful in pursuing its growth strategy due to the highly competitive nature of the market and the difficulties associated with raising capital or obtaining debt financing.
Public Service
The Company has a one-year agreement with America Responds With Love, Inc. ("America Responds") under which it provides lodging at no charge at a number of its Hotels. While this program will from time to time increase the Company's costs of operations without a corresponding increase in revenues, management believes that the impact upon profitability will be immaterial, and regards its participation in the program as a marketing opportunity. The Company has the right to cancel this agreement at any time with notice to America Responds.
History of the Company's Reorganization
Under the terms of the Plan, (i) the United States Lines, Inc. and United States Lines (S.A.), Inc. Reorganization Trust (the "Reorganization Trust") was created for the benefit of unsecured creditors of U.S. Lines and U.S. Lines (S.A.); (ii) certain assets and liabilities of U.S. Lines and U.S. Lines (S.A.) were transferred to the Reorganization Trust; and (iii) U.S. Lines and U.S. Lines (S.A.) were discharged of all liabilities.
The agreement establishing the Reorganization Trust (the "Trust Agreement") provided for shares of stock of Janus and JI Subsidiary to be distributed to the unsecured creditors as their claims were allowed. See "The Reorganization Trust." The Plan provided for the unsecured creditors to hold a majority of the outstanding stock of the reorganized companies through the Reorganization Trust and further anticipated that the reorganized companies would acquire operating businesses.
The Reorganization Trust
The Reorganization Trust was created by the Plan for the purpose of resolving the disputed claims of former unsecured creditors of U.S. Lines and U.S. Lines (S.A.), marshalling the remaining assets of U.S. Lines and U.S. Lines (S.A.), such as claims against third parties, and acting as the disbursing agent for distribution to the former creditors. The trustee of the Reorganization Trust is John T. Paulyson, who has been employed by the Reorganization Trust since its inception.
The Reorganization Trust was issued stock by both Janus and JI Subsidiary, which was intended by the Plan to be distributed to the former creditors of U.S. Lines and U.S. Lines (S.A.) as their claims were resolved. Five million shares of the Company's Common Stock was originally issued to the Reorganization Trust, all ultimately to be distributed to allowed creditors of U.S. Lines. As of December 31, 2001, with the exception of a fixed reserve of 352,850 shares established for the benefit of individuals who have asserted asbestos-related and other late-manifesting personal injury claims and approximately 11,500 shares tentatively committed to former creditors, all shares have been distributed by the Reorganization Trust to former creditors.
The resolution of the late-manifesting asbestos and other personal injury claims is delayed, in part, by a dispute between the Reorganization Trust and the insurance carriers of U.S. Lines over certain aspects of insurance coverage. This dispute has no impact upon the Company other than delaying identification of individual shareholders and prolonging the activities of the Reorganization Trust. However, by Order dated February 19, 2002, the United States Bankruptcy Court for the Southern District of New York authorized the Reorganization Trust to monetize the shares of Common Stock that it holds. Thus, the Reorganization Trust is now in the position to dispose of such shares.
The Trust Agreement provides for the Reorganization Trust to contribute to Janus and JI Subsidiary from time to time cash on hand that exceeds its projected liabilities and administrative requirements. Such contributions are to be made 90% to Janus and 10% to JI Subsidiary. Through December 31, 2001, an aggregate of approximately $15 million was transferred by the Reorganization Trust to the Company. The Company has not received an additional contribution for the past four years and does not anticipate additional transfers from the Reorganization Trust until there is a resolution of the insurance coverage issues.
As of December 31, 2001, the Reorganization Trust reported total cash and cash equivalents of $1,806,213 of which $419,363 was identified as "restricted funds". The principal unknown variable that could cause substantial depletion of the unrestricted available cash and cash equivalents is the remaining period of Reorganization Trust activity and the amount of professional fees necessary to resolve outstanding claims, particularly, any asbestos or other late-manifesting personal injury claims. No assurance can be given, nor is any assurance intended, that additional cash will become available to the Company from the Reorganization Trust or the amount of such additional cash, if any.
Certain Business Considerations
Possible Need for Additional Financing
The Company has been substantially dependent upon mortgage loans for the financing of its real estate activities and internal cash flow for its working capital requirements. The Company anticipates that if it does not acquire additional hotel properties based on currently proposed plans and assumptions relating to it's the Company's operations, its available resources, including
its current cash balances, will be sufficient to satisfy the Company's contemplated cash requirements for its current operations for at least the next 24 months. In the event that the Company acquires one or more hotels, or its assumptions change or prove to be inaccurate, the Company could be required to seek additional financing or curtail its activities. Any equity financing may involve substantial dilution to the interest of the Company's stockholders, and any debt financing could result in operational or financial restrictions on the Company. There can be no assurance that any additional financing will be available to the Company on acceptable terms or at all.
Conflicts of Interest
Independent business interests of Messrs. Beck and Yeaggy may give rise to the possibility of conflicts of interest.
The Company relies upon Computel, which is wholly owned by Messrs. Beck and Yeaggy, and HELP, which is wholly owned by Messrs. Beck, Yeaggy and Richard A. Tonges ("Tonges"), for administrative and personnel services at the Hotels.
Conflicts may arise between the Company and Messrs. Beck, Yeaggy and Tonges in connection with the exercise of any rights or the conduct of any negotiations to extend, renew, terminate or amend the agreements between each of Computel and HELP and the Company, or the leases for the offices occupied by the Company in Boca Raton and Cincinnati which are leased from an affiliate of Messrs. Beck and Yeaggy. Conflicts may also arise between the Company and Messrs. Beck and Yeaggy in connection with certain mortgage indebtedness of the Company that is personally guaranteed by Messrs. Beck and Yeaggy, or in connection with the exercise by the Company of its rights with respect to a mortgage note and related mortgage on the undeveloped vacant ground in Kissimmee, Florida, which is owned by Messrs. Beck and Yeaggy.
Although management's recommendations on matters potentially involving conflicts of interest will be referred to the Audit Committee of the Board of Directors for review, there can be no assurance that any such conflicts will be resolved in favor of the Company.
Operating Risks
The Company's business is subject to all of the risks inherent in the lodging industry. These risks include, among other things, adverse effects of general and local economic conditions, changes in local market conditions, cyclical overbuilding of hotel space, a reduction in local demand for hotel rooms, changes in travel patterns, the recurring need for renovations, refurbishment and improvements of hotel properties, changes in interest rates and the other terms and availability of credit. Changes in demographics or other changes in a hotel's local market could impact the convenience or desirability of a hotel, which, in turn, could affect the economic returns from the operation of a hotel. The operational expenses of a hotel cannot always be reduced when circumstances result in a reduction of revenue.
Competition
The lodging industry is highly competitive in terms of both geographic markets and market segmentation. The Hotels are in the market segments known generally as full service, limited service and economy hotels. The Company competes with other franchisers of Six Continent Hotels (Holiday Inn), Days Inn, Knights Inn, Best Western, Choice Hotels (Comfort Inn) and Red Roof within the geographic markets of the applicable Hotels and operators of other similar service type hotels. The Managed Hotels cover the spectrum of market segments and include economy, limited service, full service mid-market hotels and higher rated luxury properties. Like the Company's Owned Hotels, the Managed Hotels compete, within their geographical markets, with other properties under the same franchise names, with properties operating under other franchise names and with independent operators. Many owners/managers of multiple hotel properties are larger than the Company and have greater financial and other resources and better access to the capital markets than the Company. Performance of the hotel industry has been historically cyclical and is affected by general economic conditions and by the local economy where each hotel is located. In addition, to remain competitive, hotels periodically must be renovated and modernized in order to compete with newer or more recently renovated facilities. Furthermore, shifts in demographics or other local market changes can reduce the economic returns from a hotel.
Geographic Concentration of Hotels
Many of the Owned Hotels are located in Ohio. Such geographic concentration exposes the Company's operating results to events or conditions that specifically affect that area, such as local and regional economic, weather and other conditions. Adverse developments that specifically affect that area may have a material adverse effect on the results of operations of the Company.
Relationships with Franchisers
The Company enters into non-exclusive agreements with certain franchisers for the franchise or license of brand names, which allows the Company to benefit from franchise name recognition and loyalty. The Company believes that its
relationships with nationally recognized franchisers provides significant benefits for its existing Owned Hotels and acquisitions it may make in the future. While the Company believes that it currently enjoys good relationships with its franchisers, there can be no assurance that a desirable replacement would be available if any of the franchise agreements were to be terminated. Upon termination of any franchise agreement, the Company would incur the costs of signage removal and other costs, possible lost revenues and the costs incidental to establishing new associations.
Compliance with Government Regulations
The lodging industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and beverages (such as health and liquor license laws) and building and zoning requirements. In addition, the Company is subject to laws governing its relationships with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. The failure to obtain or retain liquor licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could adversely affect the Company. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While the Company believes that the Hotels comply with these requirements, a determination that the Company does not comply with the ADA could result in the imposition of fines or an award of damages to private litigants. These and other initiatives could adversely affect the Company.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In connection with the ownership or operation of the Hotels, the Company may be potentially liable for any such costs. Although the Company is not currently aware of any material environmental claims pending or threatened against it, no assurance can be given that a material environmental claim will not be asserted against the Company or against the Company and the Hotels. The cost of defending against claims of liability or of remediating a contaminated property could have a material adverse effect on the results of operations of the Company.
Litigation
The Company's Hotels are visited by thousands of invitees each year. Injuries incurred by any invitees on the hotel premises may result in litigation against the Company. While the Company maintains general liability insurance, there can be no assurance that a claim will be covered by such insurance or that claims made against insurers by the Company will not result in increased premiums or cancellation of insurance coverage.
Ownership of Hotel Real Estate
The Company currently owns 14 hotels. Accordingly, the Company is subject to the risks associated with the ownership of real estate. These risks include, among others, changes in national, regional and local economies, changes in real estate market conditions, changes in the costs, terms and availability of credit, the potential for uninsured casualty or other losses and changes in or enactment of new laws or regulations affecting real estate. Many of these risks are beyond the control of the Company. Real estate is generally illiquid which could result in limitations on the ability of the Company to sell any one or more Owned Hotels if business conditions so required.
Hotel Renovation Risks
The renovation of hotels involves risks associated with construction and renovation of real property, including the possibility of construction cost overruns and delays due to various factors (including the inability to obtain regulatory approvals, inclement weather, labor or material shortages and the unavailability of construction or permanent financing) and market or site deterioration after acquisition or renovation. Any unanticipated delays or expenses in connection with the renovation of hotels could have an adverse effect on the results of operations and financial condition of the Company.
No Limits on Indebtedness
Neither the Company's Restated Certificate of Incorporation, as amended, nor its by-laws limit the amount of indebtedness that the Company may incur. Subject to limitations it may agree to in debt instruments, the Company expects to incur additional debt in the future to finance acquisitions and renovations. The Company's continuing substantial indebtedness could increase its vulnerability to general economic and lodging industry conditions (including increases in
interest rates) and could impair the Company's ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. The Company's indebtedness is, and will likely continue to be, secured by mortgages on all of the Owned Hotels. Future indebtedness may require the Company to secure indebtedness with other assets of the Company, including its Management Agreements. There can be no assurance that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets, including the Owned Hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in hotels at times that may not permit realization of the maximum return on such investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
Control of the Company by Principal Officers
Messrs. Beck and Yeaggy beneficially own approximately 54% of the outstanding shares of the Common Stock. As a result, such persons, acting together, have the ability to exercise significant influence over all matters requiring stockholder approval. Messrs. Beck and Yeaggy are also directors and executive officers of the Company. The concentration of ownership could delay or prevent a change in control of the Company.
Dependence on Key Personnel
The Company believes that its success will depend to a significant extent on the efforts and abilities of certain of its senior management, particularly those of its Chairman of the Board and Chief Executive Officer, Louis S. Beck, its Vice Chairman, Harry Yeaggy, and its President, Michael M. Nanosky. The loss of any one of them or other key management or operations employees could have a material adverse effect on the Company's operating results and financial condition. There is strong competition for qualified management personnel, and the loss of key personnel or an inability on the Company's part to attract, retain and motivate key personnel could adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to retain its existing key personnel or attract additional qualified personnel. The Company does not presently carry "key man" insurance on the lives of any of its key personnel.
Potential Effects of Preferred Stock Issuance
The Board of Directors has the authority, without further stockholder approval, to issue up to 5,000,000 shares of preferred stock, in one or more series, and to fix the number of shares and the rights, preferences and privileges of any such series. The issuance of preferred stock by the Board of Directors could affect the rights of the holders of the Common Stock. For example, such an issuance could result in a class of securities outstanding that would have dividend, liquidation, or other rights superior to those of the Common Stock or could make a takeover of the Company or the removal of management of the Company more difficult.
Dividends Unlikely
Since reorganization, the Company has never declared or paid dividends on the Common Stock and currently does not intend to pay dividends in the foreseeable future. The payment of dividends in the future will be at the discretion of the Board of Directors. In addition, the Company may not pay any dividends on the Common Stock unless dividends on the outstanding preferred stock are current. The Company presently has 3,100 shares of preferred stock outstanding with an annual dividend expense of $232,500. The Company was current in the payment of dividends on the preferred stock as of December 31, 2001.
Seasonality; Quarterly Fluctuations
The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the revenues of the Company. Quarterly earnings may also be adversely affected by events beyond the Company's control, such as extreme weather conditions, economic factors and other considerations affecting travel. However, the Company is working on gaining ownership and management agreements in various geographic areas throughout the United States, where the "busy" seasons are during the less "busy" seasons of the Company's currently owned and managed hotels, thereby lessening the seasonality affect of the Company's net income.
Item 2.
Item 2. Properties.
As of December 31, 2001, the Company owned the following fourteen hotels in five different states with a total of 2,274 rooms:
The Company conducts its corporate and business operations activities from offices in Cincinnati, OH and Boca Raton, FL. The Company leases 4,300 square feet of office space in Cincinnati, OH and 2,200 square feet of office space in Boca Raton, FL under leases which terminate on December 31, 2004. Both leases are from an affiliate of Messrs. Beck and Yeaggy.
Item 3.
Item 3. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to stockholders for a vote during the fourth quarter of 2001.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information:
The Company's Common Stock is traded on the Nasdaq Stock Market SmallCap Market under the symbol "JAGI".
The following table sets forth, for the periods indicated, the range of the high and low sales prices for the Common Stock as reported by the Nasdaq SmallCap Market.
High Low
Quarter ended December 31, 2001 $1.75 $1.10
Quarter ended September 30, 2001 $2.75 $1.05
Quarter ended June 30, 2001 $3.00 $1.44
Quarter ended March 31, 2001 $1.69 $1.25
Quarter ended December 31, 2000 $3.63 $1.16
Quarter ended September 30, 2000 $2.92 $1.03
Quarter ended June 30, 2000 $3.50 $2.03
Quarter ended March 31, 2000 $3.94 $2.00
Holders:
As of March 15, 2002, there were approximately 846 holders of record of the Company's Common Stock.
Dividends:
Since reorganization, the Company has never declared or paid dividends on its Common Stock and currently does not intend to pay dividends in the foreseeable future. The payment of dividends in the future will be at the discretion of the Board of Directors.
Item 6.
Item 6. Selected Financial Data
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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Significant Accounting Policies
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Significant accounting policies and estimates that most impact our consolidated financial statements are those that relate to our property and equipment and income taxes.
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value when management determines that such impairment has occurred. Major renovations and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. Repair and maintenance costs are generally charged to expense as incurred. Buildings, furniture and fixtures and equipment are depreciated using the straight-line method over the estimated useful lives as of the acquisition date or date of major renovation. Estimated useful lives of our buildings are forty years, and furniture and fixtures and equipment have useful lives ranging from five to fifteen years.
We evaluate the realizability of our long-lived assets, including furniture and fixtures and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset's carrying value as compared to its estimated fair value.
The Company accounts for income taxes pursuant to the asset and liability method which requires deferred tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Income tax credits attributable to benefits from net operating loss carryforwards or other temporary differences that existed at the time the Company adopted fresh-start accounting in February 1990 upon its bankruptcy reorganization are reflected as a contribution to stockholders' equity in the period in which the tax benefits are realized.
Overview
The operations of the Company are comprised primarily of the operations of Hotels.
The following charts present a summary of the operations of the Owned Hotels for the calendar years ended December 31, 2001 and 2000.
1 Calculation is based on number of hotel rooms in service multiplied by number of days in a year. 2 Total number of rooms sold during a year divided by the total number of rooms available in such year. 3 Average Daily Rate equals total room revenue (exclusive of taxes) during a year divided by rooms sold. 4 Revenue Per Available Room equals total room revenues (exclusive of taxes) during a year, divided by rooms available for sale during such year. 5 Hotel was leased April 13, 2001. 6 Hotel was sold June 30, 2001. 7 Hotel acquired September 1, 2001 and sold December 31, 2001. 8 Hotel was sold June 15, 2000.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000
During 2001, our business was negatively impacted by both the general economic downturn and the reduced travel and cancellations experienced after the terrorist attacks of September 11, 2001. Prior to that date, due to the general economic conditions, the Company implemented programs to reduce operating expenses at owned hotels. Management continues to monitor operations for cost savings and is pursuing new marketing initiatives to attract business.
In the discussion that follows, "comparable hotels" means only those hotels owned and operated by the Company since January 1, 2000 and still owned and operated as of December 31, 2001 .
Room and related services revenue decreased 13.3% to $30,293,370 from $34,947,912 in 2000. For comparable hotels: (i) the average daily room rate decreased to $64.45 for 2001 from $66.09 for 2000; (ii) occupancy decreased in 2001 to 56.0% from 60.1% in 2000; and (iii) room and related services revenue decreased 9.4% to $28,815,619 from $31,803,915 in 2000. Management believes that the decrease in occupancy was lessened to some extent by a reduction in room rates. However, this strategy was not entirely successful in overcoming the factors described in the opening paragraph.
Food and beverage revenues decreased 4.5% to $10,065,582 in 2001 from $10,544,317 in 2000. For comparable hotels, food and beverage revenues decreased 6.7%. These results reflected not only the effects of the slowing economy but also a decrease in the banquet business resulting from cancellations after the events of September 11, 2001.
Management fee income decreased 7.7% to $2,995,763 in 2001 from $3,246,814 in 2000. This decrease is primarily due to lower operating results at managed properties and a reduction in construction supervision fees. Excluding a significant short term agreement in effect from June 2001 through August 2001, management fees decreased 16.2%
Total direct operating expenses decreased 6.6% to $18,111,986 in 2001 from $19,381,405 in 2000 but increased as a percentage of room and related services
and food and beverage revenues to 44.9% from 42.6%. For comparable hotels, total direct operating expenses decreased 4.5%. Front desk and housekeeping expenses were decreased to minimum support levels necessary to maintain customer service.
Occupancy expenses decreased 3.3% to $6,450,918 from $6,673,326 in 2000. Occupancy expenses increased 0.7% for comparable hotels as utility costs increased at various hotels as the underlying utility rates increased.
Selling, general and administrative expenses increased 1.5% to $12,192,890 in 2001 from $12,017,409 in 2000 and increased as a percentage of total revenues to 27.4% from 24.2%. Selling, general and administrative expenses increased 3.2% for comparable hotels as reductions in bad debts and franchise fees were offset by increases in legal fees and health insurance costs.
Depreciation decreased by $17,105 in 2001 from $3,900,642 in 2000. The decrease was primarily attributable to depreciation on hotel properties sold in 2001 and 2000, offset by depreciation on capital additions completed in 2001 and 2000.
An impairment loss of $627,263 was recognized in 2001 related to the Knights Inn hotel property. The amount of the loss was determined based on a comparison of the carrying value of the property with its fair value. This value was based on the purchase option included in a lease agreement for the property. The exercise period for the option is May 1, 2002 through May 31, 2002.
Interest income decreased to $605,357 in 2001 from $846,792 in 2000 as interest rates and funds on deposit decreased.
Interest expense increased to $6,851,400 in 2001 from $6,053,127 in 2000. The increase was attributable to the subordinated debt issued in exchange for the redemption of preferred stock held by the Company's controlling stockholders Messrs. Beck and Yeaggy, offset by the reduction of interest expense attributable to properties sold and amortization of principal in the ordinary course of business. A corresponding decrease in the preferred dividend resulted from the redemption of the preferred stock held by Messrs. Beck and Yeaggy.
Other expense in 2001 is a net loss of $164,811 from the sales of two hotel properties. A gain of $605,922 was recognized on the sale of the Ramada Inn Kent, while a loss of $770,733 was recognized on the sale of a 75% owned hotel property in Pompano Beach, FL.
Minority interest income was $206,455 in 2001 compared to minority interest expense of $74,034 in 2000. This change reflects the loss from operations and the loss from the sale of the Days Inn Pompano Beach hotel as of June 30, 2001, and the acquisition of the minority interest in the Kings Dominion Lodge partnership on March 1, 2001.
The Company's effective tax rate for continuing operations was (4.7)% in 2001 compared to 36.5% in 2000. This decrease is due to the loss from continuing operations.
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Room and related services revenue decreased 7.3% to $34,947,912 in 2000 from $37,712,563 in 1999. The decrease was attributable primarily to dispositions of hotel properties. The average daily room rate, excluding dispositions, decreased to $62.26 for 2000 from $62.32 in 1999. The comparable occupancy rate decreased to 60.9% in 2000 from 61.4% in 1999. Excluding the dispositions made in 2000 and late 1999, room and related services revenue decreased 1.3%.
Food and beverage revenues are principally a function of the number of guests who stay at each Owned Hotel, local walk-in business and catering sales. These revenues decreased 0.3% to $10,544,317 in 2000 from $10,578,433 in 1999. This decrease is related primarily to decreased occupancy and catering sales. The properties disposed of in 2000 and 1999 had no effect on food and beverage revenues.
Management fee income increased 59.2% to $3,246,814 in 2000 from $2,039,565 in 1999. This increase is due to the addition of new third party management contracts.
Total direct operating expenses decreased 0.6% to $19,381,404 in 2000 from $19,502,095 in 1999 but increased as a percentage of room and related services and food and beverage revenues to 42.6% from 40.4%. Excluding the dispositions of hotel properties made in 2000 and late 1999, total direct operating expenses increased 3.4%.
Occupancy expenses decreased 1.4% to $6,673,326 in 2000 from $6,768,557 in 1999. Excluding the dispositions made in 2000 and 1999, occupancy expenses increased 6.5% primarily due to increases in real estate taxes.
Selling, general and administrative expenses decreased 2.8% to $12,017,409 in 2000 from $12,363,035 in 1999 and decreased as a percentage of total revenues to 24.1% from 24.2 %. Excluding the dispositions of hotel properties made in 2000 and late 1999, selling, general and administrative expenses increased 0.6%.
Depreciation increased to $3,900,642 in 2000 from $3,688,997 in 1999. The increase is due to an adjustment made to record depreciation of $569,344 on property reclassified to property used in operations but offset by dispositions of hotel properties made in 2000 and late 1999.
Interest income increased to $846,792 in 2000 from $808,560 in 1999.
Interest expense decreased to $6,053,127 in 2000 from $6,597,088 in 1999. The decrease was attributable to the dispositions made in 2000 and 1999.
Minority interest increased to $74,034 in 2000 from $34,606 in 1999 reflecting the results of operations from the Kings Dominion partnership and the Days Inn Pompano hotel in 2000. During the first quarter of 2001, the Company purchased the minority interest in the Kings Dominion partnership.
The Company's effective tax rate was 36.5% in 2000 compared to 40.9% in 1999. This decrease is due to the tax loss on hotel properties sold and the greater impact of the Reorganization Trust loss.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash on hand (including escrow deposits and replacement reserves), cash from operations, earnings on invested cash and, when required, principally in connection with acquisitions, borrowings (consisting primarily of loans secured by mortgages on real property owned or to be acquired by the Company). The Company's continuing operations are funded through cash generated from its hotel operations. Acquisitions of hotels, if pursued by the Company, are expected to be financed through a combination of cash on hand, internally generated cash, issuance of equity securities and borrowings, some of which are likely to be secured by assets of the Company. There can be no assurance that credit will be available to the Company or, if available, that such credit will be available on terms and in amounts satisfactory to the Company.
Capital for improvements to Owned Hotels has been and is expected to be provided by a combination of internally generated cash, reserve replacement accounts and, if necessary and available, borrowings. The Company expects to spend approximately 4% to 5% of annual revenues from Owned Hotels for ongoing capital expenditures.
The Company maintains a number of commercial banking relationships and has aggregate lines of credit totaling $6,500,000. There is an outstanding balance of $1,855,609 on the lines of credit at December 31, 2001, most of which represents borrowings used to fund operations during the latter part of December 2001.
The Company evaluates opportunities to acquire additional hotel properties from time to time. If management identifies one or more properties as attractive acquisition candidates, the Company anticipates that it will be able to secure the capital required to close purchases through a combination of borrowing, internally generated cash and utilization of its common and/or preferred stock. There can be no assurance however that the Company will be able to negotiate sufficient borrowings to accomplish its acquisition program on terms and conditions acceptable to the Company. Further, any such borrowings may contain covenants that impose limitations on the Company that could constrain or prohibit the Company from making additional acquisitions as well as its ability to pay dividends or to make other distributions, incur additional indebtedness or obligations or to enter into other transactions that the Company may deem beneficial. Additionally, factors outside of the Company's control could affect its ability to secure additional funds on terms acceptable to the Company. Those factors include, without limitation, any increase in the rate of inflation and/or interest rates, localized or general economic dislocations, an economic downturn and regulatory changes constricting the availability of credit.
Contractual Obligations
The following table provides details regarding the Company's contractual cash obligations subsequent to December 31, 2001:
At December 31, 2001, the Company was in default for nonpayment on four mortgage loans totaling $42,266,372 which are collateralized by hotel properties with a net book value of $41,253,001 in the vicinity of Cleveland, Ohio, but which are otherwise non-recourse to the other assets of the Company. Management suspended payments on these loans on November 1, 2001 as a means of inducing the mortgage loan servicer to engage in discussions regarding the renegotiation of the loans' interest rate. The Company and the mortgage loan servicer have entered into a pre-negotiation agreement which describes each party's rights and remedies under the current loan documents. Due to the Company's suspension of loan repayments, the outstanding indebtedness may be declared due and payable, in full, at any time. Accordingly, the amount of such indebtedness is included as a contractual obligation in 2002. Management believes that the applicable interest rate is substantially in excess of current market rates. However, substantial prepayment penalties preclude the possibility of refinancing these loans in the absence of cooperation by the existing lenders. The loans are held in a syndicated pool of commercial mortgage loans which makes the possibility of a modification of loan terms very difficult. Since November 1, 2001, all payments due under these loans were deposited into an interest-bearing escrow account controlled by the Company. While negotiations are continuing with the mortgage loan servicer, the Company is unable to predict at this time whether such discussions will result in modifications to the terms of the applicable mortgage loans. Moreover, management of the Company has not evaluated its options if the discussions with the mortgage loan servicer are fruitless.
Management of the Company believes that the cash flow from the Company's hotel operations, other than the hotel properties in the Cleveland vicinity, will be sufficient to make the required amortization payments on the applicable mortgage loans. Balloon payments required at the maturity of the non-self-amortizing loans will be made from cash on hand at the time or from the proceeds of refinancing. There can be no assurance that the Company will be able to obtain financing, or if obtained, on terms satisfactory to it.
Demand at many of the hotels is affected by seasonal patterns. Demand for hotel rooms in the industry generally tends to be lower during the first and fourth quarters and higher in the second and third quarters. Accordingly, the Company's revenues reflect this seasonality.
Historical Changes in Liquidity and Capital Resources
Total assets decreased from $124,162,685 at December 31, 2000 to $116,991,123 at December 31, 2001. The decrease in total assets was the result of decreases in property and equipment, net and offset by increases in restricted cash and accounts receivable.
Net cash provided by operating activities decreased to $2,824,913 for the year ended December 31, 2001 from $4,193,648 in the year ended December 31, 2000. The decrease is primarily the result of the net loss for 2001.
During the year ended December 31, 2001, the Company invested $2,478,673 in capital improvements for the Owned Hotels as part of its operating plan. The Company plans to spend $1,627,000 on capital improvements during the year ending December 31, 2002 as part of its continuing improvement plans for the Owned Hotels.
Effective January 1, 2001, in a transaction approved by the Company's Board of Directors and the Audit Committee, 13,688.08 shares of preferred stock held by the Company's controlling stockholders Messrs. Beck and Yeaggy were redeemed by the Company. The aggregate redemption price of $13,688,080 was paid in the form
of subordinate promissory notes maturing on December 31, 2011. The notes bear interest at the rate of 7.5% per annum. Interest only is payable on a quarterly basis. If the redemption had occurred on January 1, 2000, income from continuing operations, on a pro forma basis, for the year ended December 31, 2000 would have been $342,527, or $0.01 per basic and diluted common shares. Long-term debt, net of current portion, at December 31, 2000, would have been $78,634,480 and total stockholders' equity would have been $32,897,304.
At a special meeting of stockholders on March 15, 2001, a Company proposal to redeem the common stock of stockholders holding fewer than 100 shares of the Company's common stock was approved. A total of 79,025 shares of common stock were redeemed at a cost of $189,593. These shares were retired and reduced the number of shares outstanding.
On October 5, 2001, the Board of Directors modified its previously approved stock buy-back program and authorized the Company to repurchase up to 1,400,000 shares of its common stock for an aggregate amount not to exceed $2,300,000. During 2001 the Company purchased 468,462 common shares at a cost of $728,444. In January 2002, the Company purchased an additional 680,862 common shares from Daewoo Corporation ("Daewoo") for $851,081 in a directly negotiated transaction. Prior to this transaction, Daewoo owned more than 5% of the outstanding shares of the Company's common stock. To date, a total of 1,320,024 common shares have been repurchased at a cost of $1,845,367. The Board of Directors has authorized management to engage in negotiations with the Reorganization Trust or another former creditor of U.S. Lines who remains a holder of a significant block of the Company's stock and who may be interested in the disposition of its shares.
Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which addresses financial accounting and reporting for business combinations and supersedes Accounting Principle Board ("APB") Opinion No. 16, "Business Combinations" and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." Statement No. 141 applies to all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interest method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement No. 141 also changes the criteria to recognize intangible assets apart from goodwill. We adopted this statement on July 1, 2001. We have historically used the purchase method to account for business combinations and the adoption of this statement did not materially impact our financial position, cash flows or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which requires that goodwill and certain intangibles not be amortized. Instead, these assets will be reviewed annually for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. This Statement applies to goodwill and certain intangible assets acquired prior to June 30, 2001 and was adopted by us on January 1, 2002. Because the amount for the amortization of goodwill is significant, we expect that adoption of this accounting standard will have the impact of reducing our amortization expense for goodwill and will have a material impact on our financial statements. For each of the years ended December 31, 1999, 2000 and 2001, the amount of amortization expense for goodwill was $200,681, which is included in amortization expense on the statement of operations. The required impairment test of goodwill may result in future period write-downs.
In order to complete the transitional assessment of goodwill, we will need to determine the carrying value of each reporting unit and the fair value of each reporting unit. It was initially determined that our hotel properties are considered one reporting unit. We will have up to six months from the date of adoption to finalize the determination of fair value of our reporting unit and compare it to the reporting unit's carrying amount. To the extent the reporting unit's carrying amount exceeds its fair value, the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our consolidated statement of operations. As of the date of adoption, we have unamortized goodwill in the amount of $7,133,384. Preliminary tests indicate that there is no impairment; therefore, there should be no material impact on our financial position, cash flows or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121") and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as defined in that Opinion). SFAS 144 retains the fundamental provisions of SFAS 121 concerning the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale but provides additional guidance with regard to discontinued operations and assets to be disposed of. Furthermore, SFAS 144 excludes goodwill from its scope and, therefore, eliminates the requirement under SFAS 121 to allocate goodwill to long-lived assets to be tested for impairment. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Our adoption of SFAS 144 on January 1, 2002 is not expected to have a material impact on our consolidated results of operations, cash flows or financial position.
Inflation
Although inflation has been relatively stable over the past two years and has not had any discernible effect on the Company's operations, an increase in the inflation rate could have a negative effect on the Company's operations and its ability to secure additional capital under terms and conditions acceptable to the Company or refinance indebtedness secured by the Owned Hotels. An increase in the rate of inflation could materially adversely affect the ability of the Company to expand its operations through the acquisition of additional hotel properties.
Item 8.
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.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The material contained in "Election of Directors" and in "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive proxy statement (to be filed pursuant to the Securities Exchange Act of 1934, as amended) for the annual meeting of stockholders to be held on June 7, 2002 is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation.
The material contained in "Compensation of Directors and Executive Officers", "Compensation Committee Report on Executive Compensation" of the Company's definitive proxy statement (to be filed pursuant to the Securities Exchange Act of 1934, as amended) for the annual meeting of stockholders to be held on June 7, 2002 is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The material contained in "Voting Securities and Principal Holders Thereof" of the Company's definitive proxy statement (to be filed pursuant to the Securities Exchange Act of 1934, as amended) for the annual meeting of stockholders to be held on June 7, 2002 is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related Transactions" of the Company's definitive proxy statement (to be filed pursuant to the Securities Exchange Act of 1934, as amended) for the annual meeting of stockholders to be held on June 7, 2002 is hereby incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits: The exhibits listed in the accompanying index are filed as part of this report.
Exhibit No. Description 3.1 Second Restated Certificate of Incorporation incorporated by reference to Exhibit 3.1 to Form 10-Q of the Company for the quarter ended June 30, 2001.
3.2 By-Laws incorporated by reference to Exhibit 3.2 to Form10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.6 1996 Stock Option Plan incorporated by reference to Exhibit 10.6 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.7 Stock Option Agreement incorporated by reference to Exhibit 10.7 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.9 Investor Agreement incorporated by reference to Exhibit 10.9 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.11 Client Service Agreement between Hospitality Employee Leasing Program, Inc. and the Company incorporated by reference to Exhibit 10.11 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.12 Product Lease and Service Agreement between Computel Systems, Inc. and the Company incorporated by reference to Exhibit 10.12 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.13 Sublease Agreement between Beck Hospitality Inc. III and the Company (Cincinnati premises) incorporated by reference to Exhibit 10.13 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.14 Sublease Agreement between Beck Hospitality Inc. III and the Company (Boca Raton premises) incorporated by reference to Exhibit 10.14 to Form 10-SB of the Company filed with the Securities and Exchange Commission on June 24, 1997.
10.20 Consulting Agreement by and between the Company and The Cornerstone Company incorporated by reference to Exhibit 10.20 to Form 10-QSB for the quarter ended June 30, 1998.
10.25 Loan Agreement dated as of August 14, 1998 by and among JAGI Cleveland - Hudson, LLC; JAGI Cleveland - Independence, LLC; JAGI Montrose West, LLC, JAGI North Canton, LLC; and Amresco Capital, L.P. incorporated by reference to Exhibit 10.25 to Form 8-K for the event dated August 14, 1998.
10.26 Note (Fixed Rate) of JAGI Cleveland - Hudson, LLC dated August 14, 1998 in the principal sum of $13,300,000 and Schedule of Other Notes (Fixed Rate) incorporated by reference to Exhibit 10.26 to Form 8-K for the event dated August 14, 1998.
10.27 Mortgage and Security Agreement dated as of August 14, 1998 by and between JAGI Cleveland - Hudson, LLC and Amresco Capital, L.P. and Schedule of Other Mortgage and Security Agreements incorporated by reference to Exhibit 10.27 to Form 8-K for the event dated August 14, 1998.
10.28 Security Agreement dated as of August 14, 1998 by JAGI Cleveland - Hudson, LLC and Amresco Capital L.P. and Schedule of Other Security Agreements incorporated by reference to Exhibit 10.28 to Form 8-K for the event dated August 14, 1998.
10.29 Second Mortgage and Security Agreement dated as of August 14, 1998 by and between JAGI Cleveland - Hudson, LLC and Amresco Capital, L.P. and Schedule of Other Second Mortgage and Security Agreements incorporated by reference to Exhibit 10.29 to Form 8-K for the event dated August 14, 1998.
10.30 Second Security Agreement dated as of August 14, 1998 by and between JAGI Cleveland - Hudson, LLC and Amresco Capital, L.P. and Schedule of Other Second Security Agreements incorporated by reference to Exhibit 10.30 to Form 8-K for the event dated August 14, 1998.
10.31 Guaranty dated as of August 14, 1998 by and between the Company and Amresco Capital, L.P. and Schedule of Other Guaranties incorporated by reference to Exhibit 10.31 to Form 8-K for the event dated August 14, 1998.
10.33 Stock Appreciation Right Certificate incorporated by reference to Exhibit 10.33 to Form 10-KSB for the year ended December 31, 1998.
10.34 Amended and Restated Registration Rights Agreement dated as of January 1, 1999 with Louis S. Beck incorporated by reference to Exhibit 10.34 to Form 10-KSB for the year ended December 31, 1998.
10.35 Amended and Restated Registration Rights Agreement dated as of January 1, 1999 with Harry G. Yeaggy incorporated by reference to Exhibit 10.35 to Form 10-KSB for the year ended December 31, 1998.
10.36 Stock Appreciation Right Agreement with Paul Tipps dated as of December 18, 1998 incorporated by reference to Exhibit 10.36 to Form 10-KSB for the year ended December 31, 1998.
10.37 Conversion Agreement dated as of January 1, 2001 among Janus Hotels and Resorts, Inc., Harry G. Yeaggy, Louis S. Beck, Elbe Financial Group, LLC. and Beck Hospitality, Inc. III, with forms of promissory notes as exhibits incorporated by reference to Exhibit 10.37 to Form 8-K for the event dated January 31, 2001.
10.38 Purchase Agreement dated as of March 1, 2001 between Elbe Properties and JAGI Doswell, LLC incorporated by reference to Exhibit 10.38 to Form 8-K for the event dated March 1, 2001.
10.39 Directors' Stock Option Plan incorporated by reference to Exhibit 10.39 to Form 10-Q of the Company for the quarter ended June 30, 2001
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP
24 Powers of Attorney.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the period October 1, 2001 through December 31, 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JANUS HOTELS AND RESORTS, INC.
Dated: March 28, 2002 /s/ Louis S. Beck ----------------------------------------- Louis S. Beck Chairman and Chief Executive Officer
Dated: March 28, 2002 /s/ Richard A. Tonges ----------------------------------------- Richard A. Tonges Treasurer and Vice President of Finance (Principal Financial and Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Dated: March 28, 2002 * -------------------------------------- Michael M. Nanosky President and Director
Dated: March 28, 2002 * -------------------------------------- Harry G. Yeaggy Vice Chairman
Dated: March 28, 2002 * -------------------------------------- Arthur Lubell Director
Dated: March 28, 2002 * -------------------------------------- Richard P. Lerner Director
Dated: March 28, 2002 * -------------------------------------- Lucille Hart-Brown Director
Dated: March 28, 2002 * -------------------------------------- C. Scott Bartlett, Jr. Director
Dated: March 28, 2002 * --------------------------------------- Stephen Grossman Director
Dated: March 28, 2002 * --------------------------------------- Paul Tipps Director
Dated: March 28, 2002 * --------------------------------------- Howard Nusbaum Director
* /s/ Richard A. Tonges -------------------------------- Richard A. Tonges Attorney-in-Fact
JANUS HOTELS AND RESORTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Janus Hotels and Resorts, Inc.
We have audited the accompanying consolidated balance sheets of Janus Hotels and Resorts, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Janus Hotels and Resorts, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP February 20, 2002
JANUS HOTELS AND RESORTS, INC.
See notes to consolidated financial statements.
JANUS HOTELS AND RESORTS, INC.
See notes to consolidated financial statements.
JANUS HOTELS AND RESORTS, INC.
See notes to consolidated financial statements.
JANUS HOTELS AND RESORTS, INC.
See notes to consolidated financial statements.
JANUS HOTELS AND RESORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
As of December 31, 2001, the continuing operations of Janus Hotels and Resorts, Inc. and its Subsidiaries ("Janus" or the "Company") were comprised primarily of the operations of thirteen hotels and a hotel management company which manages hotels for unrelated parties. Another owned hotel is leased to a third party. The Company's owned and managed hotels are located primarily in the Midwestern and Southeastern United States.
As further described in Note 9, management decided during December 1997 to discontinue and dispose of all of the Company's operations related to the provision of engineering and wireline logging services to companies in the oil and gas industry (the "oil and gas services operations").
In November 1986, the Company's predecessor, United States Lines, Inc. ("USL"), together with United States Lines (S.A.) Inc. ("USL-SA") and two related companies, filed petitions under Chapter 11 of the United States Bankruptcy Code. In May 1989, the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") confirmed a plan of reorganization with respect to such companies, which was later amended and modified pursuant to an order of the Bankruptcy Court entered in February 1990 (the "Plan").
Pursuant to the Plan and the order of the Bankruptcy Court confirming the Plan:
(a) USL and USL-SA changed their names to Janus Industries, Inc. and JI Subsidiary, Inc. ("JIS"), respectively;
(b) The United States Lines, Inc. and United States Lines (S.A.) Inc. Reorganization Trust (the "Reorganization Trust") was established for the purpose of administering the Plan and liquidating and paying claims of former creditors of USL and USL-SA; it will also make contributions of cash to Janus and JIS from time to time of amounts in excess of its projected liabilities and administrative requirements;
(c) All claims of former creditors of USL and USL-SA were discharged; as a result, such former creditors may look only to the Reorganization Trust (and not to Janus or JIS) for payment of amounts in respect of their discharged claims;
d) The interests of all holders of shares of the capital stock of USL and USL-SA were extinguished and the former creditors of USL and USL-SA became entitled to receive all of the shares of capital stock issued by Janus and JIS under the Plan, except for shares of JIS issued to Janus, and shares of Janus and JIS issued pursuant to the Plan to a subsidiary of Dyson-Kissner-Moran ("DKM"), a new investor; (e) the shares of capital stock of Janus and JIS issuable to the former creditors were initially issued to the Reorganization Trust as recordholder for reissuance to such creditors; and
(f) The Reorganization Trust contributed $3,000,000 of USL and USL-SA cash to capitalize Janus and JIS on February 23, 1990 and provided Janus and JIS with certain books and records, and all tax attributes and tax benefits, of USL and USL-SA; it also made cash contributions of approximately $7,491,000 and $7,622,000 to the capital of Janus and JIS in 1997 and 1996, respectively.
Note 2 - Summary of significant accounting policies:
Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the consolidated financial statements. Changes in such estimates may affect amounts reported in future periods.
Fresh-start accounting: The Company adopted fresh-start accounting at the time of its reorganization in February 1990 (see Note 1). The Company's opening balance sheet consisted of $6,000,000 in cash and capital stock.
Principles of consolidation: The consolidated financial statements include the accounts of Janus and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash equivalents: Cash equivalents generally consist of highly liquid investments with maturities of three months or less when acquired.
Property and equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Goodwill: Goodwill, which represents the excess of the costs of acquired businesses over the fair value of the net assets acquired at the respective dates of acquisition, is amortized using the straight-line method over the estimated useful lives of the assets (40 years).
Impairment of long-lived assets: The Company applies the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"). Under SFAS 121, impairment losses on long-lived assets, such as property and equipment and goodwill, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. As of December 31, 2001, there was no such impairment, except as discussed in Note 5.
Deferred loan costs: Costs incurred to obtain long-term financing are deferred and amortized using the straight-line method (which approximates the interest method) over the terms of the loans.
Revenue recognition: The Company recognizes all revenues on an accrual basis as earned.
Advertising costs: The costs of advertising and promotion are expensed as incurred. Advertising costs charged to operations, all of which were attributable to the Company's hotel operations, amounted to $980,851 in 2001, $951,758 in 2000 and $814,322 in 1999.
Income taxes: The Company accounts for income taxes pursuant to the asset and liability method which requires deferred tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Income tax credits attributable to benefits from net operating loss carryforwards or other temporary differences that existed at the time the Company adopted fresh-start accounting are reflected as a contribution to stockholders' equity in the period in which the tax benefits are realized.
As explained in Note 1, the assets and liabilities of USL and USL-SA were initially transferred to the Reorganization Trust in February 1990. The Reorganization Trust is considered a grantor trust for income tax purposes. Accordingly, any taxable income or loss associated with the disposition of assets and the settlement of liabilities by the Reorganization Trust is recorded in the Federal income tax return of the Company; however, such assets and liabilities are not presented in these consolidated financial statements.
Stock options: In accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the Company will recognize compensation costs as a result of the issuance of stock options based on the excess, if any, of the fair value of the underlying stock at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employee must pay to acquire the stock. Therefore, the Company will not be required to recognize compensation expense because of any grants of stock options at an exercise price that is equivalent to or greater than fair value.
Reclassification: Certain prior year amounts have been reclassified to conform to current year presentation.
Income (loss) per common share: Basic net income (loss) per common share is calculated by dividing net income or loss, as adjusted for required preferred stock dividends, by the weighted average number of common shares outstanding during the period. The calculation of diluted net income (loss) per common share is similar to that of basic net income (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally those issuable upon the exercise of stock options and warrants, were issued during the period.
The Company's reported net income represents its net income available to common stockholders for purposes of computing both measures. The following reconciles shares outstanding at the beginning of the year to average shares outstanding used to compute both income per share measures.
New accounting pronouncements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No.141 requires that all business combinations be accounted for by the purchase method and adds disclosure requirements related to business combination transactions. SFAS No. 141 also establishes criteria for the recognition of intangible assets apart from goodwill. This Statement applies to all business combinations for which the acquisition date was July 1, 2001 or later. We adopted this statement on July 1, 2001. We have historically used the purchase method to account for business combinations and the adoption of this statement did not materially impact our financial position, results of operations, or cash flows.
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes guidelines for the financial accounting and reporting of acquired goodwill and other intangibles. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization; rather it will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company is required to adopt the provisions of this pronouncement no later than the beginning of 2002; however, goodwill and other intangible assets acquired after June 30, 2001, are subject immediately to the amortization provisions of this statement. The Company had no material acquisitions of goodwill or other intangibles in the second half of 2001. We will adopt the amortization provisions of SFAS No. 142 beginning in the first quarter of 2002. The Company believes adopting SFAS No. 142 will result in approximately a $200,681 pre-tax benefit to earnings in 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement supersedes SFAS No. 121 and the Statement also supersedes APB No. 30 provisions related to the accounting and reporting for the disposal of a segment of a business. This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long-lived assets to be held and used. The Statement is effective for fiscal years beginning after December 15, 2001. Our adoption of SFAS No. 144 on January 1, 2002 is not expected to have a material impact on our financial position, results of operations, or cash flows.
Note 3 - Acquisitions and dispositions:
The Company continually monitors general economic conditions and the local economies where its hotels are located. When purchase offers for hotel properties present sufficient economic benefits over ownership or other market changes reduce economic returns, the properties are sold.
On September 1, 2001, the Company completed the acquisition of a 152-room hotel now known as Ramada Inn Kent. The purchase price of $1,700,000, which was allocated to the assets acquired, was paid in cash. The results of operations of the acquired hotel property are included in the consolidated financial statements from the effective date of acquisition. On December 30, 2001, this property was sold for $2,500,000 resulting in a gain of $605,922. The consideration was $400,000 cash and a $2,100,000 note receivable that is due and payable on March 31, 2002. The note has an interest rate of prime plus 2%.
On July 2, 2001, the Company sold a 75% owned hotel property located in Pompano Beach, FL. The hotel was sold for cash of $2,375,000 and resulted in a loss of $770,733.
On June 15, 2000, the Company disposed of a hotel property located in Cincinnati, Ohio. The hotel was sold for cash of $2,700,000 and resulted in a gain of $29,893.
On December 29, 1999, the Company disposed of a hotel property located in Michigan City, Indiana. The hotel was sold for $2,000,000 cash resulting in a gain of approximately $279,000.
On September 29, 1999, the Company disposed of a hotel property located in Westerville. Ohio. The hotel was sold for $2,500,000 resulting in a loss of approximately $168,000. The consideration was $2,250,000 cash and a $250,000
note receivable. The note had an interest rate of 10%. During the third quarter of 2000, an early payoff of the note receivable was received. The early payoff reflected a $75,000 discount which was included in other income.
Effective January 1, 1999 the Company acquired all of the outstanding shares of Beck Hospitality, Inc. II ("Beck II"), which owned seven hotels and two hotel management contracts with respect to the hotels known as Knights Inn West Palm Beach in West Palm Beach, Florida and Days Inn Inner Harbor in Baltimore, Maryland. The purchase price of $6,336,200 approximated the fair value of the net assets acquired. The acquisition was accounted for under the purchase method. The results of operations of the acquired business are included in the consolidated financial statements from the effective date of acquisition. The consideration exchanged by the Company pursuant to the merger agreement with Beck II was the issuance of 6,336.20 shares of Series B preferred stock with a liquidation preference of $1,000 per share for a total value of $6,336,200.
Note 4 - Mortgage notes receivable:
The balances at December 31, 2001 and 2000 consisted of the following:
The mortgage note for the campground is payable in monthly installments of principal and interest through April 2003 with final installments of remaining principal and interest due in May 2003. The mortgage note is secured by undeveloped vacant ground in Kissimmee, Florida. The ground is owned by an entity controlled by Messrs. Louis S. Beck ("Beck") and Harry G. Yeaggy ("Yeaggy") who together with their affiliates own in excess of 50% of the Company's common stock. Messrs. Beck and Yeaggy have personally guaranteed the mortgage note. The note secured by the hotel property accrues interest until its maturity on March 31, 2002. Note 5 -- Property and equipment:
Property and equipment at December 31, 2001 and December 31, 2000 consisted of the following:
In 2001, management's review of its long-lived assets for impairment indicated that the carrying value of the hotel property known as Knights Inn Lafayette ("Lafayette Property") was in excess of its fair value. The fair value of the Lafayette Property was based on a purchase option included in a five year lease agreement. The exercise period for the option is May 1, 2002 through May 31, 2002. The impairment loss was $627,263.
Effective July 1, 1999, Janus completed significant renovations of its portfolio of properties in accordance with its operating plan. These renovations upgraded the facilities and improved the ability to sell rooms at competitive rates within respective markets. The Company provided the liquidity to perform these renovations and management continues to anticipate that further acquisitions will be subjected to the same operating plan. The result of these improvements is that the useful life of the previously acquired properties was increased to reflect the upgrades. Building and mechanical improvement lives were changed to reflect this renovation and are now depreciated from 15 to 40 years. The equipment has a life range of 5 to 10 years. Management believes the revised estimated useful lives provide a better matching of costs and revenues. The effect of this change on income from continuing operations for the year ended December 31, 1999 was to increase it by approximately $605,000 or $0.07 per diluted share.
Note 6 -- Long-term debt:
Long-term debt at December 31 consisted of the following:
At December 31, 2001, the Company was in default for nonpayment on four mortgage loans totaling $42,266,372 which are collateralized by hotel properties with a net book value of $41,253,001 in the vicinity of Cleveland, Ohio. Payments on these loans directly to the mortgagor were suspended on November 1, 2001 as attempts were being made to renegotiate the interest rate. All payments due under these loans are currently being deposited into an interest-bearing escrow account that is controlled by the Company. Currently, negotiations are continuing with the mortgagor, but the Company is not able to predict the results of these negotiations at this time.
Long-term debt is secured by the Company's notes, property and equipment. Principal payments in years subsequent to December 31, 2001 are as follows:
Year Ending December 31 Amount ------------------------- ------------ $47,339,568 2003 1,906,336 2004 911,363 2005 915,896 2006 2,756,839
Note 7 -- Commitments and contingencies:
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash in banks, accounts receivable and the mortgages.
The Company maintains its cash balances in bank deposit accounts which, at times, may exceed the Federal Deposit Insurance Corporation coverage limits thereby exposing the Company to credit risk. The Company reduces its exposure to credit risk by maintaining such deposits with financial institutions which management believes are high quality.
Exposure to credit risk with respect to trade receivables is limited by the short payment terms and, generally, the low balances applicable to such instruments and the Company's routine assessment of the financial strength of its customers.
Exposure to credit risk with respect to the mortgages is limited because they are secured by real estate with an estimated market value in excess of the mortgage balance.
Litigation:
The Company is a party to various legal proceedings. In the opinion of management, these actions are routine in nature and will not have a material adverse effect on the Company's consolidated financial statements in subsequent years.
Note 8 - Income taxes:
For financial statement purposes, there was a credit for income taxes at December 31, 2001 and a provision for income taxes at December 31, 2000 and 1999. The utilization or expiration of the federal net operating loss carryforwards generated prior to the Company's reorganization in February 1990 will be reported as an increase or decrease in additional paid-in capital and not as a credit or expense in the results of operations. In 2001, the Company decreased additional paid-in-capital by $2,646,000 as a result of the expiration of federal net operating loss carryforwards. In 1999, the Company increased paid-in-capital by $508,000.
Section 382 of the Internal Revenue Code limits the amounts of net operating loss carryforwards usable by a corporation following a change of more than 50% in the ownership of the corporation during a three-year period. As of December 31, 2001, management believes that such a change in ownership has not occurred. The provision(credit) for income taxes consists of the following:
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:
Deferred taxes at year-end were comprised of the following:
At December 31, 2001, the Company had federal net operating loss carryforwards of $28,704,000 that expire beginning in 2002 through 2016. Although realization is not assured, the Company has concluded that it is more likely than not that the net operating loss carryforwards will be realized prior to their expiration dates. Therefore, no valuation allowance has been provided.
Note 9 -- Discontinued operations:
In April 1998, the Company entered into an agreement for the sale of its oil and gas services operations. An amendment to this agreement was completed in September 1999. As part of the amended agreement, the buyers had the right to make a payment of $356,372 on or before December 31, 1999 in settlement of a $500,000 note. If the payment was not made, the note would be paid out over a period of sixty months at an 8% rate of interest. As a result, a loss from disposal of discontinued operations of $500,000 has been accrued. The Company received $101,380 and $121,658 as a recovery on the note during 2001 and 2000, respectively.
Note 10 -- Fair value of financial instruments:
The Company assumes that the fair values of current assets and current liabilities are equal to their reported carrying amounts due to their relatively short period of maturity. The fair values of noncurrent financial assets and liabilities are as follows:
Mortgage notes receivable and fixed rate long-term debt are valued based on the expected future cash flows discounted at risk adjusted rates. Variable rate mortgage notes are valued at their carrying amounts since they bear current interest rates. Equipment notes are valued at carrying amounts since determination of the fair value of capital lease is not practicable.
Note 11 -- Minority interest:
The Company owns an interest of approximately 90% in JIS. During 2001, the Company acquired the 15% minority interest in a hotel partnership and sold the property in a 75% owned corporation. The balance of the minority interest at December 31, 2001 and December 31, 2000 and the changes in the minority interest are set forth below:
Note 12 - Stockholders' equity:
Capital stock: Information regarding the capital stock of Janus follows: Preferred stock, par value $.01 per share; 5,000,000 shares authorized and 3,100 shares and 16,788.08 shares of Series B preferred stock were issued and outstanding at December 31, 2001 and 2000, respectively. The Series B preferred stock has a liquidating and redemption price of $1,000 per share. Holders of the Series B preferred stock are entitled to cumulative dividends at the annual rate of $75 per share. Unless dividends remain unpaid for a specified period, holders will not derive any voting rights from the Series B preferred stock. Effective January 1, 2001, 13,688.08 shares of preferred stock were redeemed by the Company. The aggregate redemption price of $13,688,080 was paid in the form of promissory notes maturing on December 31, 2011. The notes bear interest at the rate of 7.5% per annum. Interest only is payable on a quarterly basis.
Common stock, par value $.01 per share; 15,000,000 shares authorized; 11,804,195 shares and 11,883,220 shares issued at December 31, 2001 and 2000, respectively; and 3,880,809 and 3,412,347 shares held as treasury shares at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the Reorganization Trust held shares of Janus common stock for possible future distribution under the Plan which the Reorganization Trust is required to vote in proportion to the votes cast by the Company's stockholders other than Messrs. Beck and Yeaggy.
At a special meeting of stockholders on March 15, 2001, a Company proposal to redeem the common stock of stockholders holding fewer than 100 shares of the Company's common stock was approved. A total of 79,025 shares of common stock were redeemed at a cost of $189,593. These shares were retired and reduced the number of shares outstanding.
Warrants:
In July 1996, the Company issued warrants to purchase 500,000 shares of Janus common stock, which were deemed to have a nominal fair value, as part of the consideration for the acquisition of Pre-Tek. All of the unexercised warrants to purchase 221,247 shares expired on July 15, 2001.
Note 13 -- Stock options and stock appreciation rights:
On June 7, 2001, the stockholders approved the adoption of the Janus Hotels and Resorts, Inc. Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the granting of options to members of the Board of Directors who are not employees of the Company or its subsidiaries ("Outside Directors"). The options granted under the Plan are nonstatutory stock options. The Board of Directors of the Company administers the Directors' Plan that will terminate on December 31, 2010.An aggregate of 300,000 shares of common stock is reserved for issuance under the Directors' Plan.
Each Outside Director received an option for 15,000 shares of common stock at fair market value of $1.50 on April 2, 2001, the date of the grant, which are exercisable as follows: 5,000 shares immediately upon approval of the Plan by the stockholders of the Company and 5,000 shares on each of the first and second December 31 thereafter, provided that the optionee is a member of the Board of Directors on each such date. A new Outside Director will automatically receive an option for 15,000 shares of common stock on the date such person becomes a director, subject to the vesting described in the following paragraph.
If the Board of Directors determines to make additional grants of options, such grants will be made effective at least thirty (30) days after the date of determination. Future grants of options will be exercisable in three installments, each equal to one-third of the entire option granted on the first, second and third December 31 following the date of grant, provided that the optionee is a member of the Board of Directors on each such date. In addition, options are fully exercisable upon the death of the optionee or upon the occurrence of other events involving the acquisition of the Company's outstanding securities or certain mergers or combinations involving the Company or a sale of substantially all of the assets of the Company. Options are not transferable except upon death or pursuant to a "qualified domestic relations order" as defined in the Code. The expiration of an option may be accelerated in the event of an optionee's death or if the optionee ceases to be an Outside Director for any reason.
During 1996, the stockholders of the Company approved the adoption of the Janus Industries, Inc. 1996 Stock Option Plan (the " Plan"). The Plan provides for grants of incentive stock options ("ISOs") and nonstatutory stock options ("NSOs"). ISOs may be issued to any key employee or officer of the Company; NSOs may be issued to any key employee or officer of the Company or any of the Company's independent contractors, agents or consultants other than nonemployee directors. A committee of at least two directors (the "Committee") will determine the dates on which options become exercisable and terminate (provided that options may not expire more than ten years after the date of grant). All outstanding options will become immediately exercisable in the event of a "change in control" (as defined) of the Company. The exercise price of an ISO must be at least 100% of the fair market value on the date of grant (110% for an optionee that holds more than ten percent of the combined voting power of all classes of stock of the Company). NSOs may be granted at any exercise price determined by the Committee. The Company has reserved 300,000 shares of common stock for issuance under the Plan.
The Plan permits the Committee to grant stock appreciation rights ("SARs") in connection with any option granted under the Plan. SARs enable an optionee to surrender an option and to receive a payment in cash or common stock, as determined by the Committee, with a value equal to the difference between the fair market value of the common stock on the date of surrender of the related option and the option price.
The following summarizes the stock option transactions under the plans for the three years ended December 31, 2001:
Weighted Average Exercise Shares Price ------ -------- Options outstanding January 1, 1999 4,000 $ 2.75 Granted - Exercised - Forfeited - ------- Options outstanding December 31, 1999 4,000 2.75 Granted Exercised Forfeited (4,000) ------- Options outstanding December 31, 2000 - - Granted 120,000 1.50 Exercised Forfeited (10,000) 1.50 ------- Options outstanding December 31, 2001 110,000 $ 1.50 =======
Options exercisable December 31, 2001 75,000 $ 1.50 =======
The weighted average contractual life of the outstanding options at December 31, 2001 is 9.25 years.
The weighted average fair value at date of grant for options granted during 2001 was $0.97. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following assumptions: (i) expected life - 5 years; (ii) interest rate - 3.0%; (iii) volatility - 78%; and, (iv) dividend yield - 0%. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for the award in 2001 consistent with the provisions of SFAS No. 123, the Company's pro forma net loss would have been $3,127,939, or $0.42 per common share.
During 1997, the Company granted SARs with respect to 100,000 shares of Janus common stock to an executive officer at an exercise price of $3.25 per share which vest at the rate of 20,000 shares per year commencing on April 23, 1997. During 2000, these SARs were forfeited at the time the executive resigned his position. It also granted SARs in 1997 with respect to a total of 35,000 shares of Janus common stock to directors at an exercise price of $3.25 per share which will be exercisable at any time during the period from October 25, 1997 through April 23, 2003; however, the appreciated value paid with respect to the SARs issued to the directors will be limited to $7.00 per share. Appreciation upon any exercise of the SARs issued in 1997 must be paid in cash. Management estimates that the exercise price for the SARs granted in 1997 approximated the fair value on the respective dates of grant and throughout the remainder of the year. Accordingly, the Company made no charges to compensation expense related to the SARs during 1997. The SARs issued in 1997 were not issued in conjunction with the Plan. In 1998, the Company granted SARs with respect to 25,000 shares of common stock to a director at an exercise price of $2.48 per share which will be exercisable at any time through December 17, 2003. These SARs were not issued in conjunction with the Plan.
Note 15 Supplemental Cash Flow Disclosures:
The following table illustrates the supplemental cash flow disclosures for the three years ended December 31, 2001:
Note 16 -- Related party transactions:
The Company engages in various transactions with other entities in which Mr. Beck and Mr. Yeaggy have an interest. In addition to interest derived from the mortgages (see Note 4), results of operations in 2001, 2000 and 1999 include revenues and expenses derived from related party transactions as follows:
(a) The Company pays administrative fees to Hospitality Employee Leasing Program, Inc. ("HELP"), a corporation wholly owned by Messrs. Beck, Yeaggy and Richard A. Tonges ("Tonges"), Chief Financial Officer of the Company, which provides the Company with personnel for the hotels it owns and manages. In addition, the Company reimburses HELP for the actual payments it makes to or on behalf of such employees.
(b) The Company pays management systems fees for the use of a hotel property management system and related computer hardware and software under an agreement with Computel Computer Systems, Inc., a corporation wholly-owned by Messrs. Beck and Yeaggy.
(c) The Company incurs charges from a company controlled by Mr. Beck for the use of an airplane by Company personnel.
(d) The Company managed two hotels for entities controlled by Messrs. Beck and Yeaggy in 1999. Both hotels were sold prior to December 31, 1999.
At various times the Company may deposit funds in a financial institution that is controlled by Messrs. Beck and Yeaggy.
In January 2002, the Company entered into an agreement with Cunningham Consulting and Associates to prepare personal property tax returns and to analyze potential tax savings. The Company will pay fees for return preparation and contingent fees based on realized tax savings. An initial review indicates a savings in personal property taxes of approximately $100,000. Messrs. Beck and Tonges are minority owners in this company.