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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 0-22745
Janus Hotels and Resorts, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2572712
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2300 Corporate Blvd., N.W.,
Suite 232
Boca Raton, Florida 33431-8596
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 997-2325
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Number of shares of common stock outstanding as of November 11, 2003: 5,564,005
1
JANUS HOTELS AND RESORTS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets As Of September 30, 2003
and December 31, 2002 3
Unaudited Consolidated Statements Of Operations For The Three
Months Ended September 30, 2003 and 2002 4
Unaudited Consolidated Statements Of Operations For The Nine
Months Ended September 30, 2003 and 2002 5
Unaudited Consolidated Statements Of Cash Flows For The Nine
Months ended September 30, 2003 and 2002 6
Notes To Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations 10
Part II. Other Information 14
Signature Page 14
2
JANUS HOTELS AND RESORTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
September 30, December 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,858,810 $ 4,783,353
Restricted cash 1,777,522 1,274,163
Accounts receivable 2,074,437 2,139,165
Other current assets 934,276 191,668
------------- -------------
Total current assets 7,645,045 8,388,349
------------- -------------
Property and equipment, net 77,816,461 82,384,819
Goodwill, net -- 7,133,384
Replacement reserve 1,797,041 2,535,637
Other assets 1,682,425 1,533,481
------------- -------------
$ 88,940,972 $ 101,975,670
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 3,992,708 $ 4,547,850
Current portion of long-term debt 16,874,547 36,907,239
Accounts payable 2,359,978 2,554,789
Accrued expenses 2,307,899 2,199,444
------------- -------------
Total current liabilities 25,535,132 46,209,322
------------- -------------
Long-term debt, net of current portion 44,921,284 28,631,305
Deferred tax liabilities 1,716,000 3,999,000
Stockholders' equity:
Preferred stock, series B; par value $0.01 per share; 20,000 shares authorized;
3,100 shares issued and outstanding 31 31
Common stock, par value $0.01 per share; 15,000,000 shares authorized;
11,804,518 shares issued 118,046 118,046
Additional paid-in capital 34,645,991 34,645,991
Accumulated deficit (12,614,345) (6,246,858)
Treasury stock, 6,240,513 common shares, at cost (5,381,167) (5,381,167)
------------- -------------
Total stockholders' equity 16,768,556 23,136,043
------------- -------------
$ 88,940,972 $ 101,975,670
============= =============
See notes to unaudited consolidated financial statements.
3
JANUS HOTELS AND RESORTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
Revenues:
Room and related services $ 9,057,575 $ 9,215,941
Food and beverage 2,709,738 2,616,488
Management fees 875,589 739,409
Other 298,285 269,163
------------ ------------
Total revenues 12,941,187 12,841,001
------------ ------------
Operating expenses:
Direct:
Room and related services 2,230,175 2,248,790
Food and beverage 2,149,066 2,156,332
Selling 704,300 647,837
------------ ------------
Total direct expenses 5,083,541 5,052,959
------------ ------------
Occupancy expenses 1,479,366 1,644,423
General and administrative expenses 3,181,663 3,126,159
Depreciation 920,996 992,409
Amortization 45,837 36,280
Goodwill impairment 7,133,384 --
(Gain) from sale of property -- (58,827)
------------ ------------
Total operating expenses 17,844,787 10,793,403
------------ ------------
Operating income (loss) (4,903,600) 2,047,598
Other income (expense):
Interest expense (1,085,582) (1,378,377)
Interest income 125,018 110,091
Gain from debt settlement -- 5,787,088
Other -- 48,094
------------ ------------
Income (loss) from continuing operations before income taxes (5,864,164) 6,614,494
Provision for income taxes 533,000 2,778,000
------------ ------------
Income (loss) from continuing operations (6,397,164) 3,836,494
Gain on disposal of discontinued operations, net of taxes 17,414 29,691
------------ ------------
Net income (loss) (6,379,750) 3,866,185
Less preferred dividend requirement 58,125 58,125
------------ ------------
Net income (loss) applicable to common stock $ (6,437,875) $ 3,808,060
============ ============
Basic income per common share:
Income (loss) from continuing operations $ (1.16) $ 0.55
Gain on disposal of discontinued operations -- --
------------ ------------
Net income(loss) $ (1.16) $ 0.55
============ ============
Diluted income per common share:
Income (loss) from continuing operations $ (1.16) $ 0.55
Gain on disposal of discontinued operations -- --
------------ ------------
Net income(loss) $ (1.16) $ 0.55
============ ============
Weighted average common shares:
Basic 5,564,005 6,889,075
============ ============
Diluted 5,564,005 6,889,075
============ ============
See notes to unaudited consolidated financial statements.
4
JANUS HOTELS AND RESORTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
Revenues:
Room and related services $ 21,924,600 $ 22,405,386
Food and beverage 7,307,380 7,364,141
Management fees 2,158,420 2,155,223
Other 851,713 680,840
------------ ------------
Total revenues 32,242,113 32,605,590
------------ ------------
Operating expenses:
Direct:
Room and related services 5,687,685 5,585,238
Food and beverage 5,766,282 5,796,283
Selling 1,940,278 1,799,549
------------ ------------
Total direct expenses 13,394,245 13,181,070
------------ ------------
Occupancy expenses 4,303,324 4,450,822
General and administrative expenses 8,577,996 8,765,167
Depreciation 2,903,956 2,953,149
Amortization 110,221 128,541
Goodwill impairment 7,133,384 --
(Gain) loss from sale of property 1,407,256 (58,827)
------------ ------------
Total operating expenses 37,830,382 29,419,922
------------ ------------
Operating income (loss) (5,588,269) 3,185,668
Other income (expense):
Interest expense (3,102,969) (4,670,505)
Interest income 150,160 329,680
Gain from debt settlement -- 5,787,088
Other -- (1,496)
------------ ------------
Income (loss) from continuing operations before income taxes (8,541,078) 4,630,435
Provision (credit) for income taxes (2,307,000) 1,944,000
------------ ------------
Income (loss) from continuing operations (6,234,078) 2,686,435
Gain on disposal of discontinued operations, net of taxes 40,966 64,521
------------ ------------
Net income (loss) (6,193,112) 2,750,956
Less preferred dividend requirement 174,375 174,375
------------ ------------
Net income (loss) applicable to common stock $ (6,367,487) $ 2,576,581
============ ============
Basic income (loss) per common share:
Income (loss) from continuing operations $ (1.15) $ 0.35
Gain on disposal of discontinued operations 0.01 0.01
------------ ------------
Net income (loss) $ (1.14) $ 0.36
============ ============
Diluted income (loss) per common share:
Income (loss) from continuing operations $ (1.15) $ 0.35
Gain on disposal of discontinued operations 0.01 0.01
------------ ------------
Net income (loss) $ (1.14) $ 0.36
============ ============
Weighted average common shares:
Basic 5,564,005 7,178,337
============ ============
Diluted 5,564,005 7,178,337
============ ============
See notes to unaudited consolidated financial statements.
5
JANUS HOTELS AND RESORTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
Operating activities:
Net income (loss) $ (6,193,112) $ 2,750,956
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation 2,903,956 2,953,149
Amortization of intangible assets 110,221 128,541
Deferred taxes (2,283,000) 1,612,000
Debt settlement -- (5,787,088)
Goodwill impairment 7,133,384 --
(Gain) loss on sale of property 1,407,256 (58,827)
Loss on note settlement -- 99,590
Minority interest settlement -- (98,094)
Changes in operating assets and liabilities:
Accounts receivable 64,728 (799,406)
Other current assets (753,128) 9,950
Replacement reserve 738,596 1,145,523
Other asset (315,013) (303,181)
Accounts payable and accrued expenses (335,499) 186,343
------------ ------------
Net cash provided by operating activities 2,478,389 1,839,456
------------ ------------
Investing activities:
Purchases of property and equipment (1,633,343) (1,195,810)
Proceeds from sale of property 2,206,000 2,577,908
Collections of notes receivable -- 266,018
------------ ------------
Net cash provided by (used in) investing activities 572,657 1,648,116
------------ ------------
Financing activities:
Dividends paid (174,375) (174,375)
Decrease (Increase) in restricted cash (503,359) 2,676,208
Repurchase of common stock -- (1,949,088)
Proceeds from short-term borrowings 1,244,701 34,919,843
Repayments of short-term borrowings (1,799,843) (1,724,952)
Proceeds from refinancing 18,850,000 --
Repayments of long-term borrowings (22,592,713) (41,451,914)
Other -- 483
------------ ------------
Net cash used in financing activities (4,975,589) (7,703,795)
------------ ------------
Decrease in cash and cash equivalents (1,924,543) (4,216,223)
Cash and cash equivalents, beginning of period 4,783,353 7,097,345
------------ ------------
Cash and cash equivalents, end of period $ 2,858,810 $ 2,881,122
============ ============
Supplemental disclosure of cash flow data:
Interest paid $ 3,074,654 $ 3,085,775
============ ============
Taxes paid $ 304,200 $ 104,020
============ ============
See notes to unaudited consolidated financial statements.
6
JANUS HOTELS AND RESORTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Unaudited interim financial statements:
The consolidated financial statements included herein have been
prepared by Janus Hotels and Resorts, Inc. (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America, have been condensed or omitted as permitted by such rules and
regulations. The Company believes the disclosures included herein are
adequate; however, these consolidated statements should be read in
conjunction with the financial statements and the notes thereto for
the year ended December 31, 2002 previously filed with the Securities
and Exchange Commission on Form 10-K.
In the opinion of management, these unaudited, consolidated financial
statements contain all of the adjustments (normal and recurring in
nature) necessary to present fairly the consolidated financial
position of the Company at September 30, 2003 and the consolidated
results of operations and cash flows for the three-month and
nine-month periods ended September 30, 2003 and 2002. The results of
operations for the periods presented may not be indicative of those
which may be expected for the full year.
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.
There were no grants of stock options during the first nine months of
2003 or the year ended December 31, 2002. The weighted average fair
value at date of grant for options granted during 2001 was $0.97. The
fair value of options at the date of grant was estimated using the
Black-Scholes model with the following assumptions: (i) expected life
- 5 years; (ii) interest rate - 3.0%; (iii) volatility - 78%; and,
(iv) dividend yield - 0%. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the
grant date for the award in 2001 consistent with the provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
pro forma net income for the quarter and nine months ended September
30, 2003 would not have changed, and the pro forma net income for the
quarter ended September 30, 2002 would have been $3,856,360, or $0.55
per common share and the pro forma net income for the nine months
ended September 30, 2002 would have been $2,721,481, or $0.35 per
common share.
Accounting pronouncements: In January 2003 the FASB issued FASB
Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN
46"), an interpretation of Accounting Research Bulletin No. 51. FIN 46
clarifies the application for certain entities that do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). It
applies in the first fiscal year or interim period beginning after
June 15, 2003. The Company does not expect FIN 46 to have a material
impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and
Equity. SFAS No. 150 changes the classification in the statement of
financial position of certain common financial instruments from either
equity or mezzanine presentation to liabilities and requires an issuer
of those financial statements to recognize changes in fair value or
redemption amount, as applicable, in earnings. SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003, and with one exception, is effective at the beginning of the
first interim period beginning after June 15, 2003. The effect of
adopting SFAS No. 150 will be recognized as a cumulative effect of an
accounting change as of the beginning of the period of adoption.
Restatement of prior periods is not permitted. SFAS No. 150 is not
expected to have any impact on the Company's financial position or
results of operations.
7
Note 2 -- Organization:
As of September 30, 2003, the continuing operations of the Company
were comprised primarily of the operation of twelve hotels and a hotel
management company which manages hotels for unrelated parties.
Note 3 - Business restructuring:
Effective April 18, 2003, the Company restructured its business by
transferring seven of its thirteen owned hotel properties to a newly
formed corporation controlled by the Company, JAGI Subsidiary, Inc.
("JAGI"). The Company continues to own six hotel properties and
maintains a hotel management business. JAGI is a consolidated
subsidiary for accounting purposes. Accordingly, the Company does not
anticipate that the transaction will have a material effect on the
financial condition or financial statements of the Company, other than
the creation of a minority interest when JAGI becomes profitable.
The transferred properties were valued at $13,242,032, net of the
aggregate indebtedness of $19,107,968 to which they were subject. In
exchange for the transfer, the Company received voting preferred stock
of JAGI representing 79% of the aggregate voting stock of JAGI, and
having a liquidation preference of $13,242,032. The preferred stock
has a cumulative annual dividend of 5% of the liquidation preference,
payable to the extent of 25% of the positive change in cash and cash
equivalents of JAGI for the applicable fiscal year. The preferred
stock is redeemable by JAGI, at its option, after January 1, 2013.
After January 1, 2008, the preferred stock is mandatorily redeemable
by JAGI at the election of holders of two thirds of the shares of
preferred stock.
JAGI also entered into a management agreement with the Company under
which the Company is paid its standard annual management fee of 3% of
gross revenues. Under the management agreement the Company also is
entitled to (i) an incentive fee equal to 50% of JAGI's positive
change in cash and cash equivalents for the applicable fiscal year and
(ii) 50% of the net sale proceeds from the disposition by JAGI of any
properties transferred to it by the Company.
The common stock, par value $0.01, of JAGI is owned by Louis S. Beck
and Harry G. Yeaggy, Chairman and Vice Chairman of the Company,
respectively, and owners of approximately 70% of the Company's common
stock. The common stock will represent 21% of the aggregate voting
stock of JAGI. No dividends will be payable on such common stock while
the JAGI preferred stock remains outstanding. In consideration for the
common stock, Messrs. Beck and Yeaggy delivered to JAGI cash in the
amount of the par value of the shares and promissory notes in the
aggregate principal amount of $3,519,996.80 (the "Common Stock
Notes"), together representing 21% of the aggregate initial
capitalization of JAGI. The Common Stock Notes bear interest of 7.5%
per annum, payable quarterly, and are payable in full on December 31,
2011.
A brief description of the seven transferred properties is as follows:
Best Western Cambridge in Cambridge, Ohio (sold May 29, 2003),
Best Western Kings Quarter, located at the Kings Dominion
Amusement Park in Doswell, Virginia,
Days Inn Cambridge in Cambridge, Ohio,
Days Inn Cincinnati in Sharonville, Ohio,
Days Inn Kings Island, located near the Kings Island Amusement
Park in Mason, Ohio,
Holiday Inn North Canton in North Canton, Ohio, and
Red Roof Kings Island, located near the Kings Island Amusement
Park in Mason, Ohio.
The statement of operations does not show a minority interest as a
result of this transaction since the minority stockholders have little
net capital invested and have not guaranteed the losses of the
properties transferred. Therefore, the Company has not recognized a
minority interest in the net loss of approximately $16,000.
Note 4 - Debt refinancing:
On June 11, 2003, the Company closed permanent financing on the
Holiday Inn - North Canton and the Holiday Inn - Independence
properties. The secured notes, totaling $18,850,000, have a maturity
date of July 1, 2010, and a fixed annual interest rate of 5.9%.
Monthly payments were calculated on the basis of a twenty year
amortization of principal and interest.
8
Effective June 11, 2003, the Company executed note extension
agreements with the Provident Bank for the outstanding balances
related to the Cleveland properties that were due August 1, 2003.
These agreements extended the maturity dates to January 1, 2004. There
were no modifications to any other terms of the notes.
Note 5 - Disposition of property:
On May 29, 2003, the Company sold the property known as Best Western -
Cambridge for cash of $2,200,000. This transaction resulted in a loss
of $1,407,256.
Note 6 - Income taxes:
For the quarter ended September 30, 2003, the Company's tax provision
was calculated using an effective income tax rate of 42%.
For the nine months ended September 30, 2003, the Company's tax credit
was calculated after giving effect to the business restructuring
described above. The principal reason for the larger than expected tax
credit relates to deferred state taxes of approximately $1,600,000
that will not be payable as a result of the business restructuring.
Note 7 - Merger agreement and goodwill impairment:
As of July 28, 2003, the Company entered into an Agreement and Plan of
Merger with Janus Acquisition, Inc., a Delaware corporation
("Acquisition"). The merger agreement contemplates that, subject to
the approval of the Company's stockholders and other customary closing
conditions, the Company will be merged with and into Acquisition, with
Acquisition as the surviving corporation. In connection with the
Merger Agreement, each holder of the Company's common stock, except
for Acquisition, will be entitled to receive $0.65 per share. Such
stockholders will then have no continuing interest in the operations
of the Company.
Acquisition was formed by Louis S. Beck and Harry G. Yeaggy, Chairman
/ Chief Executive Officer, and Vice Chairman, respectively, of the
Company for the purpose of taking the Company private. At present,
Messrs. Beck and Yeaggy control approximately 70.4% of the Company's
issued and outstanding common stock, which assures the approval of the
merger agreement when it is voted upon by the Company's stockholders.
The acceptance of the merger agreement by the board of directors was a
triggering event for the evaluation of the goodwill in the Company and
indicated a new value for the entire Company. The acceptance of the
offer indicated that the value of the goodwill was diminished. A
charge for $7,133,384 was made in the quarter ended September 30, 2003
to reflect the impairment of the value of goodwill. There is no tax
effect for this charge since the Company's goodwill is not deductible
for tax purposes.
The acceptance of the merger also represented a triggering event for
the evaluation of impairment under SFAS No. 144 of the properties used
in the business. A calculation was performed by management to assess
the future undiscounted cash flow from the properties. The results of
that calculation indicated that the undiscounted cash flow from the
properties exceeded the carrying value of those properties, therefore
no impairment is indicated.
Note 8 - 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.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT ACCOUNTING POLICIES
For a description of critical accounting policies, including those which involve
varying degrees of judgement, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.
OVERVIEW
The operations of the Company are comprised primarily of the operations of owned
hotels and the Company's management of hotels owned by third parties. In the
discussion that follows, "Comparable Hotels" means only those hotels owned and
operated by the Company since January 1, 2002 and still owned and operated as of
September 30, 2003. There were no new hotels added since January 1, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Room and related services revenue decreased 1.7% to $9,057,575 in 2003 from
$9,215,941 in 2002. For Comparable Hotels: (i) the average daily room rate
decreased to $65.58 for 2003 from $66.76 in 2002; (ii) occupancy increased in
2003 to 72.3% from 69.7% in 2002; and (iii) room and related services revenue
increased 1.8% from $8,901,534 in 2002. The Company selectively lowered room
rates in order to maintain or increase occupancy rates at or above 2002 levels.
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 increased 3.6% to $2,709,738 in 2003 from $2,616,488 in 2002. For
Comparable Hotels, food and beverage revenues increased 5.6% from $2,567,236 in
2002.
Management fee income, which is based on a percentage of revenue or a fixed fee,
increased 18.4% to $875,589 in 2003 from $739,409 in 2002. This increase is
primarily due to an increase in the number of properties under management and
improved revenues at the managed properties.
Total direct operating expenses increased 0.6% to $5,083,541 in 2003 from
$5,052,959 in 2002 and increased as a percentage of room and related services
and food and beverage revenues to 43.2% from 42.7%. Total direct operating
expenses increased 3.0% for Comparable Hotels.
Occupancy expenses decreased 10.0% to $1,479,366 from $1,644,423 in 2003. At
Comparable Hotels, occupancy expenses decreased 7.8%.
General and administrative expenses increased 1.8% to $3,181,663 in 2003 from
$3,126,159 in 2002 and increased as a percentage of total revenues to 24.6% from
24.4%. This increase is primarily attributable to certain professional and legal
fees related to the merger agreement. Excluding these costs, general and
administrative expenses would have decreased 4.8%. For Comparable Hotels and
excluding merger expenses, general and administrative expenses decreased 3.6%.
Depreciation decreased by $71,413 in 2003 from $992,409 in 2002. For Comparable
Hotels, depreciation decreased $22,974.
The acceptance of the merger agreement by the board of directors was a
triggering event for the evaluation of the goodwill in the Company and indicated
a new value for the entire Company. The acceptance of the offer indicated that
the value of the goodwill was diminished. A charge for $7,133,384 was made to
reflect the impairment of the value of goodwill. There is no tax effect for this
charge since the Company's goodwill is not deductible for tax purposes.
Interest income increased to $125,018 in 2003 from $110,091 in 2002. This
increase is due to interest on the notes from Messrs. Beck and Yeaggy for the
JAGI Subsidiary, Inc. common stock acquired by them in connection with the
restructuring of the Company effective April 18, 2003 offset by lower available
funds for investment.
10
Interest expense decreased to $1,085,582 in 2003 from $1,378,377 in 2002. The
decrease was attributable to the restructuring of debt for four properties near
Cleveland, Ohio, the reduction of subordinated debt in December 2002, the
pay-off of debt related to a property sold in the second quarter of 2003 and
scheduled amortization.
In 2002, the Company recorded a gain of $5,787,088 from the settlement of
mortgage debt for four properties near Cleveland, Ohio.
In the three months ended September 30, 2003 and 2002, the Company recorded
gains, net of tax, from discontinued operations of $17,414 and $29,691,
respectively. In April 1998, the Company sold its oil and gas services
operations and reported the transaction as a discontinued operation. The
consideration for the sale included a $500,000 note. As of December 31, 1999,
management, based on representations from the debtor, concluded that the note
was not collectible and the write-off was reported as a discontinued operation
consistent with the reporting of the original transaction. Collections in
respect of this note subsequent to the write-off have been reported as gains
from discontinued operations.
The Company used an effective tax rate of 42% for federal and state taxes to
calculate its tax provision for the three months ended September 30, 2003.
The Company had a net loss of $6,397,750 for the three months ended September
30, 2003 compared to net income of $3,866,185 for the three months ended
September 30, 2002. This change is attributable primarily to the goodwill
impairment in 2003 and the after tax effect of the gain from debt settlement.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
Room and related services revenue decreased 2.2% to $21,924,600 in 2003 from
$22,405,386 in 2002. For Comparable Hotels: (i) the average daily room rate
decreased to $60.97 for 2003 from $63.78 in 2002; (ii) occupancy increased in
2003 to 62.6% from 59.8% in 2002; and (iii) room and related services revenue
decreased 0.2% to $21,662,252 from $21,695,714 in 2002.
Food and beverage revenues decreased 0.8% to $7,307,380 in 2003 from $7,364,141
in 2002. For Comparable Hotels, food and beverage revenues was flat compared to
2002.
Management fee income, which is based on a percentage of revenue or a fixed fee,
increased 0.2% to $2,158,420 in 2003 from $2,155,223 in 2002.
Total direct operating expenses increased 1.6% to $13,394,245 in 2003 from
$13,181,070 in 2002 and increased as a percentage of room and related services
and food and beverage revenues to 45.8% from 44.3%. Total direct operating
expenses increased 3.0% for Comparable Hotels.
Occupancy expenses decreased 3.3% to $4,303,324 in 2003 from $4,450,822 in 2002.
At Comparable Hotels, occupancy expenses decreased 2.0%.
General and administrative expenses decreased 2.1% to $8,577,996 in 2003 from
$8,765,167 in 2002 and decreased as a percentage of total revenues to 26.6% from
26.9%. Excluding certain professional and legal fees related to the merger
agreement, general and administrative expenses decreased 5.1%. For Comparable
Hotels and excluding merger expenses, general and administrative expenses
increased 4.6%.
Depreciation decreased by $49,193 in 2003 from $2,953,149 in 2002. For
Comparable Hotels, depreciation increased $30,694.
The acceptance of the merger agreement by the board of directors was a
triggering event for the evaluation of the goodwill in the Company and indicated
a new value for the entire Company. The acceptance of the offer indicated that
the value of the goodwill was diminished. A charge for $7,133,384 was made to
reflect the impairment of the value of goodwill. There is no tax effect for this
charge since the Company's goodwill is not deductible for tax purposes.
Interest income decreased to $150,160 in 2003 from $329,680 in 2002. This
decrease is due to lower available funds for investment offset by interest on
the notes from Messrs. Beck and Yeaggy for the JAGI Subsidiary, Inc. common
stock acquired by them in connection with the restructuring of the Company
effective April 18, 2003.
11
Interest expense decreased to $3,102,969 in 2003 from $4,670,505 in 2002. The
decrease was attributable to the restructuring of debt for four properties near
Cleveland, Ohio, the reduction of subordinated debt in December 2002, the
pay-off of debt related to a property sold in the second quarter of 2003 and
traditional amortization.
In 2002, the Company recorded a gain of $5,787,088 from the settlement of
mortgage debt for four properties near Cleveland, Ohio.
In the nine months ended September 30, 2003 and 2002, the Company recorded
gains, net of tax, from discontinued operations of $40,966 and $64,521,
respectively. In April 1998, the Company sold its oil and gas services
operations and reported the transaction as a discontinued operation. The
consideration for the sale included a $500,000 note. As of December 31, 1999,
management, based on representations from the debtor, concluded that the note
was not collectible and the write-off was reported as a discontinued operation
consistent with the reporting of the original transaction. Collections in
respect of this note subsequent to the write-off have been reported as gains
from discontinued operations.
For the nine months ended September 30, 2003, the Company's tax credit was
calculated after giving effect to the business restructuring described above.
The principal reason for the larger than expected tax credit relates to deferred
state taxes of approximately $1,600,000 that will not be payable as a result of
the business restructuring.
The Company had a net loss of $6,193,112 for the nine months ended September 30,
2003 compared to net income of $2,750,956 for the nine months ended September
30, 2002. This change is attributable primarily to the goodwill impairment in
2003 and the after tax effect of the gain from debt settlement in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Total assets decreased to $88,940,972 at September 30, 2003 from $101,975,670 at
December 31, 2002.
Net cash provided by operating activities increased to $2,478,389 in the nine
months ended September 30, 2003 from $1,839,456 in the nine months ended
September 30, 2002. The increase is primarily the result of the lower operating
loss, which excludes the goodwill impairment, the loss on the sale of property
and deferred taxes in 2003 and the gain from restructured debt, the gain from
the sale of property and deferred taxes in 2002, for the nine months ended
September 30, 2003 offset by the net decrease in operating assets and
liabilities. Excluding the previously mentioned items, the Company had operating
income of $64,528 in 2003 compared to an operating loss of $1,482,959 in 2002.
Net cash provided by investing activities was $572,657 in the nine months ended
September 30, 2003 compared to cash provided by investing activities of
$1,648,116 in the nine months ended September 30, 2002. This change is
attributable to the higher capital expenditures in 2003, lower proceeds from the
sale of properties in 2003 and the pay-off of the notes receivable in December
2002. The Company plans to spend an additional $163,000 on capital improvements
during the remainder of 2003.
Net cash used in financing activities was $4,975,589 in the nine months ended
September 30, 2003 compared to $7,703,795 used in financing activities in the
nine months ended September 30, 2002. This change resulted from the reduced cash
used in net short and long term borrowings, no purchase of common stock in 2003
and the increase in restricted cash in 2003.
The Company maintains a number of commercial banking relationships and maintains
aggregate lines of credit totaling $6,500,000, which had $3,992,708 outstanding
at September 30, 2003.
The Company's contractual obligations at September 30, 2003, and the effect such
obligations are expected to have on its liquidity and cash flow in future
periods have not changed materially since December 31, 2002.
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 are
expected to be financed through a combination of cash on hand, internally
generated cash, issuance of equity securities and borrowings, some of which is
likely to be secured by assets of the Company.
12
Seasonality
Demand at many of the Company's 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 similar seasonality.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the words
or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify forward-looking statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. All such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements, including
without limitation, the impacts of the terrorist attacks of September 11, 2001
on the travel and hospitality industries; the duration and severity of the
recent downturn in the economy; the availability and cost of long-term financing
for the Company's hotel properties; the seasonality of the hotel business;
general real estate and economic conditions; the cost and availability of
capital for scheduled maintenance, renovations and expansion; government and
regulatory action affecting the hotel industry; the Company's ability to
generate adequate working capital to sustain its operations, described under the
heading "Liquidity and Capital Resources" above; and the other risks and
uncertainties set forth in the annual, quarterly and current reports of the
Company. The Company has no obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
ITEM 4 - CONTROLS and PROCEDURES
In accordance with the Securities Exchange Act Rules 13a-15 and 15d-15, the
Company's management, under the supervision of the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of the Company's disclosure controls and procedures were
effective. There have been no significant changes in internal controls over
financial reporting or in other factors that could significantly affect internal
controls over financial reporting subsequent to the date of such evaluation.
13
PART II--OTHER INFORMATION
Items 1 to 5
None
Item 6 -- Exhibits and Reports on Form 8-K.
A. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
31.1* Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
31.2* Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) of the Exchange Act
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350
* Filed herewith.
B. Reports on Form 8-K
The reports on Form 8-K filed during the three months ended September
30, 2003 were as follows:
Item Reported Date of Report
------------------------------------------------------------ ----------------------
Agreement and Plan of Merger with Janus Acquisition, Inc. July 28, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JANUS HOTELS AND RESORTS, INC.
Dated: November 14, 2003 /s/ Richard A. Tonges
----------------- -------------------------------------------
Richard A. Tonges
Treasurer and Vice President of Finance
(Principal Financial and Accounting
Officer)
14
CERTIFICATIONS
I, Louis S. Beck, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Janus Hotels and
Resorts, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2003
/s/ Louis S. Beck
- ----------------------------------------------
Louis S. Beck
Chief Executive Officer
15
I, Richard A. Tonges, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Janus Hotels and
Resorts, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2003
/s/ Richard A. Tonges
- ----------------------------------------------
Richard A. Tonges
Chief Financial Officer
16