Commission File Number 0-22745
As filed with the Securities and Exchange Commission on September 19, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) of
THE SECURITIES EXCHANGE ACT OF 1934
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JANUS INDUSTRIES, INC.
(Name of Small Business Issuer)
Delaware 13-2572712
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
2300 Corporate Blvd., N.W.
Suite 232
Boca Raton, Florida 33431-8596
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(Address of Principal Executive Offices) (Zip Code)
(561) 994-4800
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of this Act
Title of each class Name of exchange on which
to be so registered each class is to be registered
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background of the Company
Janus Industries, Inc. (the "Company" or "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"). 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. Since emerging from bankruptcy, the Company and JI Subsidiary were
engaged in attempting to find a suitable acquisition or acquisitions. The
Company has completed two acquisitions, which are described below. JI Subsidiary
has not completed any acquisitions and currently has no business activities. The
Company and JI Subsidiary are incorporated under the laws of the State of
Delaware. See "History of the Company's Reorganization."
On April 24, 1997, the Company acquired, from affiliates of Louis S. Beck
("Beck") and Harry Yeaggy ("Yeaggy"), certain assets relating to the hospitality
business comprised of (i) six hotels and an 85% partnership interest in a
partnership which owns a hotel (collectively, the "Owned Hotels"), (ii) a hotel
management company, with 21 hotels under management inclusive of the Owned
Hotels (hereinafter the hotels which are managed, but not owned by the Company,
are referred to as the "Managed Hotels" and the Owned Hotels and the Managed
Hotels are collectively referred to as the "Hotels"), (iii) a management fee
sharing arrangement with Summit Hotel Management Company ("Summit") and (iv) two
loans, one of which is secured by a first mortgage on a hotel and the other of
which is secured by a first mortgage on a campground and both of which are
personally guaranteed by Messrs. Beck and Yeaggy (the acquired businesses and
assets are collectively the "Beck-Yeaggy Group"). See "Certain Relationships and
Related Transactions." 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"),
representing approximately 43% of the total outstanding shares of Common Stock
and shares of the Series B preferred stock of the Company, par value $.01 per
share (the "Series B Preferred Stock"), representing 100% of the total
outstanding shares of Series B Preferred Stock.
Messrs. Beck and Yeaggy have been engaged in the hospitality business
since 1972. After giving effect to the transactions with the Company, Messrs.
Beck and Yeaggy continue to hold controlling equity interests in 12 hotel
properties, seven of which are now managed by the Company (such seven hotels are
the "Beck Yeaggy Affiliates") and, through another entity, continue to manage an
additional two hotel properties. With the exception of these existing
businesses, they have agreed not to engage in any business which competes with
the business of the Company. See "Executive Compensation - Employment
Agreements."
In July 1996, the Company acquired substantially all of the assets of
Pre-Tek Wireline Service Company, Inc. ("Wireline"), an oil and gas engineering
services and wireline logging company based in Bakersfield, California. Wireline
was founded in 1989 to provide customers in the oil and gas industry with
integrated well testing and production logging services. The Company uses
precision downhole
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data acquisition systems, and also uses advanced computer software to provide a
complete analysis service including well test design and interpretation and
simulation. KFE Wireline, Inc. ("KFE", and collectively with Wireline,
"Pre-Tek"), a wholly-owned subsidiary of Wireline which is also engaged in the
oil and gas engineering services business, was acquired by Wireline in February
1996 and became a wholly-owned subsidiary of the Company upon the acquisition of
the business of Wireline by the Company.
The Hospitality Business
General
The Company's primary business is the ownership and management of
hospitality properties.
Owned Hotels
The Owned Hotels are located in four states and operate under franchise
agreements which provide for the use of the brand names Days Inn, Best Western
and Knights Inn. One of the Owned Hotels is located at the Kings Dominion
amusement park near Richmond, Virginia and has been designated as the host
facility hotel for the amusement park. The remaining Owned Hotels are located
either near office parks, interstate highways or airports in Ohio, Indiana and
North Carolina. The Owned Hotels generally offer remote control cable television
and pool facilities, and in some cases, restaurants. Most do not have meeting
facilities nor do they offer in-room food service. They are designed to appeal
primarily to business travelers and vacationers seeking lower cost hotel
accommodations.
The Owned Hotels are owned in fee, either directly or through consolidated
entities. With the exception of the Hotel located at the Kings Dominion
amusement park, the properties are wholly-owned by the Company. The Best Western
Kings Quarters Hotel is owned by Kings Dominion Lodge, a general partnership in
which the Company has an 85% interest and Messrs. Beck and Yeaggy through a
partnership, have a 15% interest. See "Certain Relationships and Related
Transactions - Interest of Messrs. Beck and Yeaggy in Best Western, Kings
Quarters."
The following chart presents a summary of the operations at the Owned
Hotels for calendar years ended December 31, 1995 and 1996.
1995
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HOTEL AND LOCATION RMS AVAIL.(1) OCC%(2) ADR(3) RevPAR(4)
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DAYS INN, SHARONVILLE, OHIO 52,195 64% $44.28 $28.34
BEST WESTERN KINGS QUARTERS, 90,768 52% $54.32 $28.32
DOSWELL, VIRGINIA
KNIGHTS INN, WESTERVILLE, OHIO 39,785 72% $32.95 $23.87
KNIGHTS INN, LAFAYETTE, INDIANA 40,880 82% $36.39 $29.71
KNIGHTS INN, MICHIGAN CITY, INDIANA 37,595 53% $34.66 $18.28
DAYS INN CRABTREE, 44,251 70% $45.37 $31.74
RALEIGH, NORTH CAROLINA
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(1) Calculation is based on number of hotel rooms multiplied by number of days
in a year.
(2) Total number of rooms sold during a year divided by 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.
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DAYS INN RTP, 40,108 83% $55.60 $46.26
RALEIGH, NORTH CAROLINA
1996
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HOTEL AND LOCATION RMS AVAIL. OCC% ADR RevPAR
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DAYS INN, SHARONVILLE, OHIO 52,338 59% $45.10 $26.50
BEST WESTERN KINGS QUARTERS, 91,016 52% $53.86 $27.86
DOSWELL, VIRGINIA
KNIGHTS INN, WESTERVILLE, OHIO 39,894 72% $34.24 $24.80
KNIGHTS INN, LAFAYETTE, INDIANA 40,942 75% $35.88 $26.98
KNIGHTS INN, MICHIGAN CITY, INDIANA 37,633 59% $58.93 $20.47
DAYS INN CRABTREE, 44,652 71% $50.03 $33.62
RALEIGH, NORTH CAROLINA
DAYS INN RTP, 40,260 97% $60.33 $57.12
RALEIGH, NORTH CAROLINA
The following is a description of each of the Owned Hotels:
Days Inn Hotel, Raleigh, North Carolina. Built in 1979, the 122 room hotel
is located on 2.79 acres on the south side of Glenwood Avenue in the Crabtree
area of Raleigh. Glenwood Avenue is a major roadway through the area and
connects the Raleigh-Durham airport (approximately 11 miles northwest of the
property) and Interstate Highway 440 (one mile southeast). The hotel is well
located relative to the area's universities and freeways. The improvements
consist of two two-story, concrete block buildings with brick and glass
exteriors, an outdoor swimming pool and a one-story building consisting of the
hotel lobby and a 65 seat restaurant. Access to the guest rooms is from
exterior corridors. In 1996, approximately $37,000 was spent on capital
improvements and upgrading the property.
The hotel is subject to a first mortgage with a balance of approximately
$2,814,000 as of June 30, 1997, which amount is to be amortized on a monthly
basis through its maturity date of July 1, 2015. The mortgage carries a fixed
interest rate of 8.875% per annum. At June 30, 1997, the loan was in its third
loan year. Under the terms of the mortgage, the loan may not be prepaid prior to
the eighth loan year. Prepayment in loan years 8 through 14 is subject to a
prepayment penalty of 7% in year 8 decreasing by 1% each year thereafter.
In 1997 the Company intends to spend approximately $110,000 on capital
improvements. Such improvements are expected to be paid from working capital and
existing replacement reserves. The replacement reserve balance was $197,847 as
of June 30, 1997.
Best Western Kings Quarters, Doswell, Virginia. Built in 1977, the 248
room hotel is located on 10.5 acres on the eastern side of Interstate Highway 95
and the south side of Route 30 in Hanover County (Doswell), Virginia, 20 miles
north of Richmond, Virginia. The hotel is the "Host Facility" for the adjacent
Paramount Kings Dominion theme park.
The improvements consist of two-story, brick hotel buildings with exterior
corridors and pitched roofs. The hotel's lobby is attached to one of the guest
buildings. The adjacent 140 seat Denny's restaurant is owned by Kings Dominion
Lodge, the partnership which owns the hotel. The amenities also include an
outdoor swimming pool, two tennis courts, a putting green, shuffleboard,
volleyball, ping-pong, horseshoes, children's playground, video arcade, guest
laundry, meeting room, lounge, exterior lighting and a paved parking lot for 360
cars.
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The hotel is subject to a first mortgage with a balance of approximately
$5,096,000 as of June 30, 1997, which amount is to be amortized on a monthly
basis through its maturity date of January 1, 2016. The mortgage carries a fixed
interest rate of 9.75% per annum. At June 30, 1997, the loan was in its second
loan year. Under the terms of the mortgage, the loan may not be prepaid prior to
the eighth loan year. Prepayment in loan years 8 through 14 is subject to a
prepayment penalty of 7% in year 8 decreasing by 1% each year thereafter.
The Company expects to spend approximately $50,000 for improvements to the
property in 1997. Additionally, the hotel is scheduled for a design review in
1997. It is anticipated that the design review will result in additional
improvements approximating $350,000 over a two to three year period beginning
January 1998.
Improvements are expected to be financed from working capital and existing
replacement reserves. The replacement reserve balance as of June 30, 1997 was
$457,740.
Days Inn, Sharonville, Ohio. Built in 1974, the 142 room hotel is located
along the southwest quadrant of the Interstate Highway Loop 275/State Road 42
intersection. The property's visibility from the two major highways is
considered to be excellent. Improvements consist of three two story concrete
buildings. The buildings have both interior and exterior corridors. The
lobby/reception area is part of one of the guest buildings. Additionally, there
is a one-story restaurant located on the property. The restaurant is leased to
and is operated by an unrelated third party.
The hotel is subject to a first mortgage with a balance of approximately
$2,739,900 as of June 30, 1997. The mortgage requires monthly payments and
matures on September 1, 2002 with a remaining balance, assuming no prepayment,
of approximately $2,134,000. The mortgage carries an interest rate of 9.50% per
annum subject to adjustment on September 1, 1999 to a rate equal to 300 basis
points above the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of three years. Under the terms of the mortgage,
the loan has a "marked to market" prepayment penalty.
In 1995, the Company, in concert with Days Inn of America, Inc., prepared
a two year product improvement plan. Phase I was completed in 1996 and Phase II
will be completed in the fourth quarter of 1997. Phase II is expected to cost
approximately $115,000 and will be financed through internally generated cash
flow.
Days Inn (Research Triangle), Morrisville, North Carolina. Built in 1987,
the 110 room hotel is located on approximately 3.47 acres on Airport Blvd.,
south of Interstate Highway 40 and the Raleigh-Durham Airport. The three-story
concrete block building is faced with a brick and glass facade and is well
located relative to area universities, research facilities and freeways. The
building has interior corridors and a port cochere for convenient loading and
unloading of guests, and which provides a protected entry into the hotel's
lobby. Amenities include a fitness room, two meeting rooms, an outdoor swimming
pool and two airport shuttle vans.
The hotel is subject to a first mortgage with a balance of approximately
$2,886,000 as of June 30, 1997, which amount is to be amortized on a monthly
basis through its maturity date of July 1, 2015. The mortgage carries a fixed
interest rate of 8.875% per annum. At June 30, 1997, the loan was in its third
loan year. Under the terms of the mortgage, the loan may not be prepaid prior to
the eighth loan year. Prepayment in loan years 8 through 14 is subject to a
prepayment penalty of 7% in year 8 decreasing by 1% in each year thereafter.
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The Company intends to spend approximately $110,000 for capital
improvements in 1997. Capital expenditures are expected to be financed from
working capital and replacement reserves. As of June 30, 1997, the balance in
the replacement reserve account was $141,768.
Knights Inn, Westerville, Ohio. Built in 1985, the 109 room hotel is
located on approximately 2.85 acres at the northern line of Heather Down Road,
approximately 155 feet west of State Highway 10. Improvements consist of four
one-story modular buildings with wood trimmed stone and stucco exteriors and an
outdoor pool. The buildings have exterior corridors. The lobby consists of a
reception area and an office.
The hotel is subject to a first mortgage with a balance of approximately
$1,049,000 as of June 30, 1997. The mortgage matures at August 1, 2001 with a
remaining balance, assuming no prepayment, of approximately $867,000. The
mortgage carries a fixed interest rate of 8.91% per annum. Under the terms of
the mortgage, the loan may be prepaid in whole or part at any time without
penalty.
The Company intends to spend approximately $33,000 for capital
improvements in 1997. Capital expenditures will be financed from working
capital.
Knights Inn, Michigan City, Indiana. Built in 1987, the 103 room hotel is
located on approximately 3.45 acres on the north side of Kieffer Road
approximately 1/4 mile west of U.S. Highway 421. The property is highly visible
from U.S. Highway 421. Improvements consist of 5 one-story modular buildings
with wood trimmed stone and stucco exteriors. The buildings have exterior
corridors. The lobby consists of a reception area and an office.
The hotel is subject to a first mortgage with a balance of approximately
$1,640,000 as of June 30, 1997. The mortgage requires monthly payments and
matures at April 1, 2006 with a remaining balance, assuming no prepayment, of
approximately $1,097,000. The mortgage carries an interest rate of 9.5% per
annum subject to adjustment every three years to a rate 100 basis points above
the prime rate of Provident Bank. Such bank's prime rate is 8.50% as of August
20, 1997. The interest rate on the mortgage was last adjusted April 1, 1997.
Under the terms of the mortgage, the loan may be prepaid in whole or in part at
any time without penalty.
The Company intends to spend approximately $60,000 for capital improvement
in 1997. The scheduled capital improvements are expected to be financed from
working capital.
Knights Inn, Lafayette, Indiana. Built in 1987, the 112 room hotel is
located on approximately 3.24 acres on the north side of State Road 26
approximately 1/2 mile west of Interstate Highway 65. The property is not
visible from the interstate highway, but is visible from State Road 26.
Improvements consist of four one-story modular buildings with wood trimmed stone
and stucco exteriors and an outdoor swimming pool. The buildings have exterior
corridors. The lobby consists of a reception area and an office.
The hotel is subject to a mortgage with a balance of approximately
$2,173,000 as of June 30, 1997. The mortgage matures at April 1, 2006 with a
remaining balance, assuming no prepayment, of approximately $1,453,000. The
mortgage carries an interest rate of 9.50% per annum subject to adjustment every
three years to a rate 100 basis points above the original lending bank's prime
rate. The interest rate on the mortgage was last adjusted April 1, 1997. Under
the terms of the mortgage, the loan may be prepaid in whole or in part at any
time without penalty.
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The Company intends to spend approximately $65,000 for capital
improvements in 1997. Capital improvements are expected to be financed from
working capital.
The Managed Hotels
The Company operates the Managed Hotels pursuant to management agreements
(the "Management Agreements") with the owners of such Managed Hotels. Eleven of
the Managed Hotels are operated under nationally-recognized brand names and
three are non-franchised properties. The brand names of the Managed Hotels
include Best Western, Days Inn, Knights Inn, Comfort Suites, Howard Johnson and
Holiday Inn. There are three categories of properties from which the Company
derives management fees: (i) the Beck-Yeaggy Affiliates managed by the Company;
(ii) third party owned properties managed by the Company; and (iii) third party
owned properties managed by the Company's marketing partner, Summit. No single
Management Agreement accounted for more than 5% of the total annual revenue of
the Beck-Yeaggy Group for the year ended December 31, 1996.
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 hotel properties and
ensure compliance with the terms of any applicable franchise agreements. As
manager, the Company is also responsible for the retention and supervision of
personnel, necessary for the operation of the hotel property. 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 are based on
a fixed percentage of a property's total revenues and/or incentive payments
based upon net operating income. Additional fees are also generated from the
rendering of accounting services. Each of the Management Agreements with respect
to the Beck-Yeaggy Affiliates has fixed management fees of 5% of total revenues
of the Managed Hotel. The Management Agreements for properties owned by third
parties provide for fixed management fees of either 4% of the total revenues of
the Managed Hotel or a flat fee per month.
The Management Agreements with respect to the Beck-Yeaggy Affiliates have
a term of ten years and expire in the year 2007. The Management Agreements for
properties owned by third parties generally have terms of one year and are
automatically renewed for successive one year periods unless either party
decides not to renew the same. Two of the Management Agreements for properties
owned by third parties allow either party to terminate such agreements prior to
the stated expiration date without cause. All of the Management Agreements
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration dates if the applicable hotel is sold. The Management
Agreements with the Beck-Yeaggy Affiliates provide that in the event of a sale
of the underlying hotels, the Company is entitled to a termination payment equal
to the present value of the average of total fees for the prior three years (or
such shorter period that the Management Agreement was in effect) times the
number of years remaining on the term of the Management Agreement. The
Management Agreements for properties owned by third parties do not provide for a
termination payment in the event of a sale of the underlying hotel.
Messrs. Beck and Yeaggy, together with Summit, organized the Beck-Summit
Hotel Management Group, a Florida general partnership ("Beck-Summit"), in 1992.
The Company has
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succeeded to the 50% partnership interest in Beck-Summit previously beneficially
owned by Messrs. Beck and Yeaggy. The purpose of the partnership is to market
management services jointly and divide the management fees resulting therefrom.
Under the terms of the agreement between the parties, the party which identifies
a management opportunity acts as the manager for the applicable property and
receives 80% of the management fees payable by the property owner. The remaining
20% of the management fees are retained by Beck-Summit. Funds retained by the
partnership that are in excess of its cash requirements, are distributed to the
Company and Summit equally. Upon termination of the partnership, each party
retains the management rights to the properties it originally identified. The
Beck-Yeaggy Group earned approximately $691,000 during the calendar year 1996
through its relationship with Beck-Summit.
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 purchased for the Hotel and increase
operating margins.
Computerized Reporting Systems. The Company has a service agreement dated
April 23, 1997 for a hotel property management information system with Computel
Computer Systems, Inc. ("Computel"), a corporation wholly-owned by Messrs. Beck
and Yeaggy. This agreement provides a computerized system which tracks all
services provided by most 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 hotel 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. See "Certain Relationships and Related
Transactions - Interest of Messrs. Beck and Yeaggy in Service Providers to the
Company."
Hotel Personnel. Personnel at the Hotels are provided by Hospitality
Employee Leasing Program, Inc. ("HELP"), a corporation wholly-owned by Messrs.
Beck and Yeaggy, pursuant to an agreement dated April 23, 1997. The agreement
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. The Company pays HELP the actual costs of the
personnel provided to it to operate the Hotels plus an administrative fee of
$8.15 per bi-monthly pay period per person provided. See "Certain Relationships
and Related Transactions - Interest of Messrs. Beck and Yeaggy in Service
Providers to the Company."
Franchise Agreements
The Company has entered into non-exclusive multi-year franchise, licensing
or membership agreements, which allow the Company to utilize the franchise or
brand name of the franchiser or licensor. The Company believes that its
relationships with nationally recognized franchisers provides significant
benefits for its existing Owned Hotels. The franchise agreements require the
Company to pay annual fees, to maintain certain standards and to implement
certain programs which require additional
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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 for an initial fee in addition to annual fees payable to
the franchiser.
The Company currently has franchise or membership relationships with Days
Inn, Knights Inn and Best Western, and through the Managed Hotels, relationships
with Howard Johnson, Comfort Suites and Holiday Inn. 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 could be available if any of the franchise agreements were
to be terminated. Upon such termination, the Company would incur the costs of
signage removal and other expenses, possible lost revenues and the costs
incidental to establishing new associations.
Employment and Other Government Regulation
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. Also, the Company and HELP are subject to laws governing
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 overall wage rates, 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 its hotels are
substantially in compliance with these requirements, a determination that the
Company is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. These and other such
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.
Competition
The lodging industry is highly competitive both in terms of geographic
markets and market segmentation. The Owned Hotels are in the market segment
known as limited service budget hotels. The Company competes with other
franchisers of Days Inn hotels, Knights Inn hotels and Best Western hotels
within the geographic markets of the applicable Owned Hotels and operators of
other limited service budget hotels under franchise names such as Red Roof Inn,
Super 8 and Motel 6, as well as independent hotel operators in the applicable
geographic markets. The Managed Hotels cover the spectrum of market segments and
include limited service budget hotels, full service mid-market hotels
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and higher rated luxury properties. Like the Owned Hotels, the Managed Hotels
compete, within their geographical markets, with other properties operating
under the same franchise names, with properties operating under other franchise
names and with independent operators. Several 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 cyclical and is affected by general economic
conditions and by the local economy where each hotel is located. In addition, to
remain competitive, hotels must be periodically 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.
Employees
As of August 1, 1997, four full-time employees and four part-time
employees of the Company were engaged in management, business operations and
administration of its hospitality business. In addition, at that date
approximately 817 individuals employed by HELP provided services at the Hotels
under a service agreement between HELP and the Company. See "The Hospitality
Business - Operations."
Growth Strategy
Management of the Company intends to pursue a program of expanding its
business of the acquisition and/or management of hospitality (including hotels),
recreation, health care, entertainment or other related properties through the
marketing of its services to properties not owned by the Company or by
affiliates of Messrs. Beck and Yeaggy and through the acquisition of properties
either by itself or with others. Presently, the Company is engaged in
preliminary discussions with various parties who desire to sell hotel
properties. No acquisition proposals have been presented to the Company's Board
of Directors. There can be no assurance that any of these discussions will
result in an actual transaction. Moreover, 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 current limitations on the Company's
ability to raise capital through the issuance of Common Stock and certain types
of preferred stock. See "Risk Factors -Competition"; and - "Possible Need for
Additional Financing" and "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources."
Investment Policies
Generally. The Company's core business is the acquisition and/or
management of hospitality (including hotels), recreation, health care,
entertainment or other related properties which the Company believes may benefit
from the Company's management expertise.
Investments in Real Estate or Interests in Real Estate. Investments in
properties may include the acquisition and redevelopment of existing properties,
the acquisition of existing properties in concert with a third party,
acquisition of existing or new management contracts related to hospitality,
recreation, health care or entertainment properties or, in circumstances the
Company deems potentially advantageous, the acquisition of unimproved property
and the subsequent development or sale of such property.
There is no limitation on the percentage of the Company's assets which may
be invested in any one investment or in any one type of investment, including
the geographic location or distribution of such investments. The Company's
investment policy may be changed without a vote of the Company's
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security holders. The primary purpose of the Company's acquisition and
investment policy is to acquire assets which will provide income to the Company.
Capital gains related to the disposition of assets held by the Company is a
secondary consideration.
While the Company is unrestricted in terms of the type of properties in
which it may invest, the Company intends to focus its real estate investments on
hospitality or entertainment-related properties without specific geographic
limitations. Financing for any acquisitions undertaken by the Company is
expected to be provided through a combination of cash on hand, internally
generated cash, capital stock transactions (to the extent such capital stock
transactions can be accomplished without jeopardizing the Company's net
operating loss carryforwards) and through borrowings. There can be no assurance
that the enumerated sources of financing will be available to the Company on a
timely basis nor that borrowings by the Company will be available on terms the
Company deems acceptable, or at all. There is no limitation as to the amount of
indebtedness the Company may incur nor the amount or number of mortgages which
the Company may place on any one piece of property.
Investments in Real Estate Mortgages. The Company does not, within its
core business, intend to invest in real estate mortgages, except as ancillary to
the acquisition of other assets. It is not the Company's intention to service or
to warehouse real estate mortgages, nor is it the Company's intention to invest
in real estate mortgages as a passive investor in such instruments.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities. The Company does not intend to invest in securities of persons
primarily engaged in real estate activities, except where such investment may be
ancillary or incidental to transactions involving hospitality, recreation or
entertainment-related properties or management agreements to be acquired by the
Company. In this respect, the Company may acquire positions in corporate common
stock, real estate investment trusts, partnerships or limited liability
companies.
The Energy Service Business
General
In July 1996 the Company acquired the assets and liabilities of Pre-Tek
Wireline Service Company, Inc. ("Wireline"), an oil and gas engineering services
and wireline logging company based in Bakersfield, California, and all of the
stock of its wholly-owned subsidiary, KFE Wireline, Inc. ("KFE", and
collectively with Wireline, "Pre-Tek"), which engages in the same type of
businesses as Wireline. Wireline was founded in 1989 to provide customers in the
oil and gas industry with integrated well testing and production logging
services. The company provides precision downhole data acquisition systems, and
also uses advanced computer software to provide a complete analysis service
including well test design and interpretation and simulation.
Pre-Tek's operations are primarily in California. Its major customers
include Mobil Oil Corp., Chevron U.S.A., Inc., Texaco E & P Inc., Unocal
Corporation, Shell Western E&P and Southern California Gas Company. Wireline
acquired KFE in February 1996.
Wireline logging services are required in order to evaluate downhole
conditions at various stages of the well drilling and production process. Such
services are typically provided with a truck-mounted winch unit equipped with an
armored cable to which a variety of tools may be attached. The cable, which
contains one or more electrical conductors, is used to lower instruments and
tools into a well to perform a variety of services and tests. The winch unit's
instrument cab compartment contains both
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computerized and electronic equipment to supply power to downhole instruments,
to receive and record data from these instruments in order to produce the logs
which define specific characteristics of each formation, the flow of product
from the well and to display the data received from the well.
These services are performed at various times, from the time a well is
first drilled until it is depleted and abandoned. Open hole logging is performed
after the drilling of the well. Cased hole logging is performed after the casing
is set in the well and cemented into place, and from time-to-time thereafter,
during the life of the well. Cased hole services include radioactive and
acoustic logging which are used to evaluate downhole conditions such as
lithology, porosity, production patterns and the cement bonding effectiveness
between the casing and the formation. Other cased hole services include
perforating, which opens up the casing to allow production from the formations,
and free-point and back-off, which locates and releases pipes that have become
lodged in the well. Cased hole services are used in the initial completion of
the well and in virtually all subsequent workover and stimulation projects
throughout the life of the well. Pre-Tek performs these services at the well
site for well operators and owners.
Competition
Pre-Tek's services are sold in highly competitive markets. Competition is
based upon a combination of price, service (including the ability to deliver
services on "as needed, where needed basis") and technical proficiency.
Pre-Tek's major competitors include Schlumberger, Ltd., Halliburton Company and
Black Warrior Wireline Corp., all of which service many geographic areas and, in
the case of the first two companies, conduct their operations worldwide. These
competitors are larger and have greater resources than Pre-Tek.
Government Regulation
Pre-Tek is subject to various licensing requirements under California law
pertaining to the use and transportation of radioactive materials and other
hazardous substances utilized in down hole testing, as well as other state and
federal environmental laws and regulations concerning anti-pollution controls
and waste discharge. Compliance with such requirements has historically neither
substantially increased capital expenditures nor adversely affected the
Pre-Tek's competitive position. There can be no assurance that this condition
will continue in the future.
Employees
Pre-Tek has 13 full time employees, of which nine are field personnel who
are responsible for the labor and technical aspects of downhole well testing and
logging, two are management, one is clerical and one is a salesperson. Pre-Tek
retains part-time employees on an as needed basis.
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.
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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 provided for a sale of stock to an investor who
would identify investment opportunities for the reorganized companies.
A principal objective of the Plan revealed in the Second Amended and
Restated Disclosure Statement of McLean Industries, Inc., First Colony Farms,
Inc., United States Lines and United States Lines (S.A.), Inc. dated February
23, 1989 (the "Disclosure Statement") was the preservation and maximization of
substantial net operating loss carryforwards ("NOLs") of U.S. Lines and U.S.
Lines (S.A.) for Federal income tax purposes. The Plan designed the Company's
post-reorganization capital structure in order to comply with the net operating
loss provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
and to ensure that at least one half of the common stock of Janus was owned by
creditors whose claims were "old and cold". For purposes of this Registration
Statement the term "Net NOLs" means the amount of NOLs of U.S. Lines and U.S.
Lines (S.A.) for federal income tax purposes adjusted to reflect reductions and
related adjustments required under Code ss.382(1)(5) subject to Internal Revenue
Service audits, subsequent changes in the ownership of the Company and effects
under Code ss.382, the application of Code Sections 269 and 384, and the
consolidated return regulations under Code Section 1502. See "The Net Operating
Loss Carryforwards - Application of Code ss.382 Under the Chapter 11
Reorganization". Management of the Company believes that after taking into
account these reductions and related adjustments the Net NOLs currently are at
least $500 million. See "Risk Factors - Net Operating Loss Carryforwards".
For financial statement reporting purposes, no value is assigned to the
Net NOLs due to the Company's historical lack of taxable income and the
contingency that the Net NOLs may be reduced as a result of Internal Revenue
Service review. See Note 5 to the Consolidated Financial Statements of Janus
Industries, Inc. Moreover, while the Net NOLs may be available to the Company,
management of the Company believes that it is unlikely that it will be able to
utilize a significant portion of the Net NOLs prior to their scheduled
expiration during the period 1999 through 2002. The present scope of the
Company's operations, which resulted in pro forma revenues of less than
$15,000,000 for the year ended December 31, 1996, produces insufficient taxable
income to take advantage of a material amount of the Net NOLs during their
limited remaining life. See "Unaudited Pro Forma Condensed Combined Statement of
Operation for the Year Ended December 31, 1996."
Indebtedness of creditors was deemed "old and cold" by the Reorganization
Trust if the indebtedness (i) was held by a particular creditor for at least 18
months before the date of the filing of the Chapter 11 case or (ii) arose in the
ordinary course of the trade or business of the old loss corporation and was
held by the person who at all times held a beneficial interest in that debt.
Common Stock was issued to creditors with "old and cold" indebtedness and a
class of 4,000 shares of 12% preferred stock, having a liquidation value of $100
per share (the "Series A Preferred Stock"), was created for distribution to
those creditors whose claims did not meet the "old and cold" criteria. The
Company redeemed the outstanding shares of Series A Preferred Stock in December
1996.
Under the terms of the Plan, reorganized U.S. Lines (S.A.) remained a
separate entity under the name JI Subsidiary. Approximately ninety percent (90%)
of the outstanding common stock of JI Subsidiary is owned by Janus. As another
means of preserving the Federal income tax attributes of both U.S. Lines and
U.S. Lines (S.A.), the Reorganization Trust was issued both common stock of JI
Subsidiary and a class of preferred stock of JI Subsidiary (the "JIS Series A
Preferred Stock") for the benefit of the separate former unsecured creditors of
U.S. Lines (S.A.). JI Subsidiary redeemed the outstanding shares of JIS Series A
Preferred Stock in December 1996.
The Dyson-Kissner-Moran Corporation, through a subsidiary ("DKM"), was the
investor which acquired stock of Janus as part of the Plan. DKM purchased 36% of
the stock of Janus for $3,000,000 and received a warrant to buy an additional 9%
of the stock. In addition, DKM purchased shares of the common stock of JI
Subsidiary and shares of JIS Series A Preferred Stock. Under the Plan, DKM
controlled the board of directors of Janus and provided managerial services.
Three representatives of the unsecured creditors of U.S. Lines also served on
the board.
The combination of an initial cash investment from the unsecured
creditors, an initial cash investment from DKM, estimated available NOLs of at
least $500 million and DKM's experience in acquisitions, investments and
management were to have resulted in Janus' acquisition of one or more operating
companies, the goal of which was to enhance the value of the Janus stock to be
distributed to the former creditors from the Reorganization Trust. After five
years, DKM was unable to make an acquisition for Janus or JI Subsidiary. DKM's
stock in Janus and JI Subsidiary was redeemed effective May 15, 1995 for less
than half of DKM's original investment.
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Effective upon the redemption, the representatives of the former creditors
of U.S. Lines on the Janus Board of Directors assumed responsibility for the
management of the Company and JI Subsidiary. The Board thereafter retained James
E. Bishop, an individual with experience in mergers, acquisitions and investment
banking as a senior officer and charged him with the responsibility of carrying
out the Company's and JI Subsidiary's acquisition objectives.
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 distributions 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. 5,000,000 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 June
9, 1997, the most recent distribution date, 3,943,025 of such shares have been
distributed by the Reorganization Trust to former creditors.
The balance of 1,056,975 shares, inclusive of a fixed reserve of 352,850
shares of Common Stock established by order of the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court") for the
benefit of asbestos-related and other late-manifesting claimants, is to be
distributed to former creditors of U.S. Lines. The former creditors of U.S.
Lines whose claims have yet to be resolved include, in addition to approximately
900 non-asbestos related claimants, more than 10,800 individuals who have
asserted asbestos and other late-manifesting personal injury claims. The
resolution of these claims (and any future 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 the operations of which utilize cash
which the Company and JI Subsidiary might receive as a distribution.
The Trust Agreement provides for the Reorganization Trust to make
contributions of cash to Janus and JI Subsidiary from time to time of cash on
hand which exceeds its projected liabilities and administrative requirements.
Such contributions are to be made ninety percent (90%) to Janus and ten percent
(10%) to JI Subsidiary. In accordance with this provision, the Reorganization
Trust transferred an aggregate of $7,621,980 to Janus and JI Subsidiary during
1996. An additional $755,000 was transferred on April 25, 1997 and $6,736,022
was transferred on August 19, 1997. The latter amount was attributable to the
settlement of an adversary proceeding commenced by the Reorganization Trust on
September 18, 1989 against the United States Maritime Administration ("MARAD")
relating to a sum of money that was subject to an alleged preferential security
interest received by MARAD. The full amount of the settlement proceeds received
by the Reorganization Trust was contributed to the Company and JI Subsidiary.
As of June 30, 1997, the Reorganization Trust reported total cash and cash
equivalents of $5,431,293 of which $2,417,110 was identified as "restricted
funds". While there is no objective formula to determine the extent to which
Reorganization Trust assets exceed projected liabilities and administrative
requirements, management of the Company believes that more monies may ultimately
be
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available for contribution to the Company and JI Subsidiary by the
Reorganization Trust. For the fiscal year 1996, the Reorganization Trust
reported operating expenses (including litigation expense) of approximately
$1,000,000. However, during 1997, the administrative costs of the Reorganization
Trust have been decreased through reductions in personnel and office space,
attributable to the decreasing volume of unsettled claims of former unsecured
creditors of U.S. Lines and U.S. Lines (S.A.). Also, the MARAD litigation has
been concluded. The principal unknown variable which could cause substantial
depletion of the unrestricted available cash and cash equivalents is the
remaining period of Reorganization Trust activity necessary to resolve
outstanding claims, particularly, the asbestos and other late-manifesting
personal injury claims, and the amount of professional fees associated with this
activity. No assurance can be given, nor is any assurance intended, that
additional cash will become available to the Company and JI Subsidiary from the
Reorganization Trust or the amount of such additional cash, if any.
The Net Operating Loss Carryforwards
The following description of the NOLs is based upon management's analysis
of the application of the relevant sections of the Code to the historical NOLs
of U.S. Lines and U.S. Lines (S.A.). There can be no assurance that the Internal
Revenue Service or the courts will agree with management's analysis. There are
substantial risks associated the Company's utilization of its NOLs. See "Risk
Factors - Net Operating Loss Carryforwards."
In the Disclosure Statement, it was estimated that the Gross NOLs
available to U.S. Lines and U.S. Lines (S.A.) (collectively, the "US Lines
Group") were in the range of $900 million to $1.15 billion dollars. For purposes
of this Registration Statement, unless otherwise defined or modified, the term
"Gross NOLs" means the total NOLs reported to the Internal Revenue Service on
the federal income tax returns of U.S. Lines and U.S. Lines (S.A.), including
any filed amended returns, before the application of any reductions and related
adjustments described in the following paragraphs under this heading "The Net
Operating Loss Carryforwards". Based on its federal income tax returns for the
years of 1985 through 1995, Janus reported cumulative Gross NOLs of
approximately $970,000,000. Under Code ss.172(b), unused NOLs expire after
fifteen taxable years from the taxable year of loss. Therefore, minor amounts of
these Gross NOLs will expire before 1999 (approximatley $1,700,000) and material
amounts of these NOLs will expire beginning in 1999 (approximately $124,000,000
in 1999, approximately $623,000,000 in 2000, approximately $201,000,000 in 2001,
approximately $9,000,000 in 2002 and smaller amounts in later years.)
After taking into account the reorganization of the US Lines Group
pursuant to the Plan (especially because of the reductions and related
adjustments imposed by Code ss.382(1)(5)), as described in more detail in this
section "The Net Operating Loss Carryforwards", management of the Company
believes the Net NOLs are currently at least $500 million, although management
further believes that it is unlikely that the Company will be able to generate
sufficient taxable income in order to utilize a material portion of these Net
NOLs prior to their scheduled expirations during the period 1999 through 2002.
Moreover, the NOLs of the Company may be affected by Internal Revenue Service
audits, subsequent changes in the ownership of the Company and effects under
Code ss.382, the application of Code Sections 269 and 384, and the consolidated
return regulations under Code Section 1502, which are described below in this
section. See "Risk Factors - The Net Operating Loss Carryforwards."
Cancellation of Debt Income. Under the Plan, as described in the
Disclosure Statement, unsecured indebtedness of the US Lines Group with an
aggregate face amount of approximately $1 billion to $1.35 billion was canceled.
Generally, the Code provides that a debtor whose indebtedness is canceled must
include the amount of canceled indebtedness in gross income to the extent the
indebtedness canceled exceeds any consideration given for the cancellation. The
Code further provides, however, that if a taxpayer is the subject of a
bankruptcy case and the cancellation of indebtedness ("COD") is pursuant to a
plan approved by the Bankruptcy Court, the amount canceled is not required to be
included in gross income. Instead, if the creditors receive cash or property
other than stock of the debtor, any amounts so excluded from gross income reduce
prescribed tax attributes of the debtor, including NOLs and the bases of the
assets of the debtor, in a specified order of priority beginning with NOLs. As
described in the Disclosure Statement, since it was expected that creditors
would receive some stock of the debtor (discussed in the following paragraphs),
it was anticipated that the amount of NOLs that would be reduced pursuant to
these provisions would be relatively small.
Provided two "de minimis" requirements were satisfied, if a debtor in
bankruptcy satisfied its debt by issuing its own stock prior to the effective
date of the Revenue Reconciliation Act of 1993, the
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debtor generally did not recognize COD income nor did it suffer NOL reduction.
To satisfy these two de minimis requirements former Code ss.108(e)(8) required
that (i) a creditor must have received more than nominal or token shares, and
(ii) with respect to any unsecured creditor, the ratio of the value of the stock
received by the unsecured creditor to the amount of its indebtedness canceled or
exchanged for the stock must not have been less than 50% of a similar ratio
computed for all unsecured creditors participating in the restructuring. For
purposes of this ratio, secured creditors were treated as unsecured to the
extent they were under-secured.
It had been hoped that the US Lines Group could meet the two de minimis
tests by issuing stock of U.S. Lines to the creditors of both U.S. Lines and
U.S. Lines (S.A.) because this approach would have provided a simpler and more
flexible capital structure for the U.S. Lines Group. U.S. Lines requested a
private letter ruling from the Internal Revenue Service asking it to rule that
the US Lines Group could be considered a single entity both in applying the
stock for debt exception to COD and in applying Code ss.382 (discussed below). A
favorable ruling on this issue, however, could not be obtained because on policy
grounds the Internal Revenue Service was unwilling at that time to allow a
subsidiary to utilize its parent's stock in applying the stock for debt
exception of Code ss.382. Therefore, both U.S. Lines and U.S. Lines (S.A.)
issued stock to their respective unsecured creditors to minimize any COD.
Because the Reorganization Trust represented and acted on behalf of the
creditors of both U.S. Lines and U.S. Lines (S.A.), stock of both entities was
issued to the Reorganization Trust in order to settle claims of creditors of
both entities.
The Plan was confirmed in 1989. Pursuant to the Plan, the then outstanding
common stock of U.S. Lines was canceled. Sixty-four percent (64%) of the issued
shares of Common Stock (55% after dilution for the warrant issued to DKM) and
2,200 shares of the Series A Preferred Stock, was distributed to the
Reorganization Trust for the benefit of creditors of U.S. Lines in exchange for
the cancellation of their debt and a $3 million cash capital contribution. DKM
contributed $3 million dollars in exchange for 36% of the issued Common Stock,
1,800 shares of the Series A Preferred Stock, that qualified under Code
ss.1504(a)(4), which is discussed below, and a warrant to acquire an additional
9% of the Common Stock at a nominal exercise price (the "Warrant"). All of the
interests of DKM in Janus and JI Subsidiary were redeemed effective May 15,
1995.
Code ss.382 In General. If a corporation undergoes an "ownership change",
Code ss.382 limits the corporation's right to use its NOLs each year to an
annual percentage (based on the federal long-term tax-exempt rate) of the fair
market value of the corporation at the time of the ownership change (the
"Section 382 Limitation"). If an ownership change under Code ss.382 is
triggered, a corporation may also be restricted from utilizing certain built-in
losses and built-in deductions recognized during a five-year recognition period
after the ownership change. A corporation is considered to undergo "an ownership
change" if, as a result of changes in the stock ownership by "5-percent
shareholders" or as a result of certain reorganizations, the percentage of the
corporation's stock owned by those 5-percent shareholders has increased by more
than 50 percentage points over the lowest percentage of stock owned by those
shareholders at any time during a prescribed prior three-year testing period.
Five-percent shareholders are persons who hold 5% or more of the stock of a
corporation at any time during the testing period as well as groups of
shareholders who are not individually 5-percent shareholders. Stock ("Section
1504(a)(4) stock") that is limited and preferred as to dividends, does not
participate in corporate growth to any significant extent, has redemption and
liquidation rights that do not significantly exceed the issue price of the
stock, is not convertible into another class of stock and is not entitled to a
vote (except as a result of dividend arrearages) is not considered stock for
this purpose.
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Application of Code ss.382 Under the Chapter 11 Reorganization. Management
does not believe that the US Lines Group was subject to the Section 382
Limitation because although a 50% ownership change was expected to occur as a
result of the transfer of stock of Janus and JI Subsidiary to the Reorganization
Trust for the benefit of the former unsecured creditors, an exception under Code
ss.382(l)(5) is believed to have applied as described as follows. Code
ss.382(l)(5) provides that the Section 382 Limitation will not apply to a loss
corporation if (1) the corporation, immediately before the ownership change, is
under the jurisdiction of a court in a United States Code Title 11 or similar
case, and (2) the shareholders and creditors of the old corporation own at least
50% of the total voting power and value of the stock of the corporation after
the "ownership change" as a result of being shareholders and creditors before
the change. Stock transferred to such creditors counts only if it is transferred
with respect to "old and cold" indebtedness (as defined above). The debtor
company U.S. Lines requested a private letter ruling from the Internal Revenue
Service to the effect that if a corporation or other entity held indebtedness of
U.S. Lines that was otherwise "old and cold", the indebtedness would not lose
its characterization as "old and cold" as a result of changes in ownership of
the corporation or entity. Such a ruling was issued on December 22, 1989 (the
"IRS Ruling"). The IRS Ruling also held that the ownership change of U.S. Lines
was covered by Code ss.382(l)(5) and therefore the Section 382 Limitation was
not triggered as a result of the owner shift associated with the reorganization.
Consistent with the IRS ruling, the Company's management believes that
Code 382(l)(5) applied to the transfer of Janus stock to the U.S. Lines
creditors and JI Subsidiary's stock to the U.S. Lines (S.A.) creditors. Under
former Code 382(l)(5)(c), although the ss.382 Limitation does not apply, the
Gross NOLs originally available to the US Lines Group must nevertheless be
reduced by Janus and JI Subsidiary to the extent of 50% of the COD income not
taken into account by virtue of the stock for debt exception of Code
ss.108(e)(10)(B) (see "Cancellation of Debt Income", above in this section).
Based on a review of its accounting and tax records related to this formerly
unrecognized COD income conducted by the Company's management with the
assistance of outside tax professionals, the Company's management believes that
its Gross NOLs must be reduced and adjusted under former Code ss.382(1)(5)(C) in
an amount of approximately $450,000,000. The calculation of the unrecognized COD
income amount depends on the characterization of certain historical loans and
other financial relationships as well as on certain assumptions and estimates.
While management of the Company believes it has a reasonable basis for this
calculation, no assurance can be provided that the Internal Revenue Service
would agree with the Company's analysis. In addition, the Company's management
is not aware of any authority published by the Internal Revenue Service or
otherwise that describes the proper method of allocating the reduction under
Code ss.382(1)(5)(C) among the particular NOLs according to source year. Under
Code ss.382(l)(5)(B), the Gross NOLs originally available to the US Lines Group
must also be reduced by Janus and JI Subsidiary to the extent of the amount of
interest accrued with respect to such canceled debt during the three taxable
years prior to the taxable year of the "ownership change" and during the taxable
year of the "ownership change" (up to the change date.) This Code
ss.382(1)(5)(B) adjustment is relatively minor (i.e. no more than $5 million)
because Janus filed its bankruptcy petition in 1986 and had substantially ceased
to accrue interest expense on its federal income tax returns. After taking into
account those reductions and related adjustments to the Gross NOLs, management
of the Company believes that the Net NOLs currently are at least $500 million
subject to Internal Revenue Service audits, subsequent changes in the ownership
of the Company and effects under Code ss.382, the application of Code Sections
269 and 384, and the consolidated return regulations under Code Section 1502,
which are described below in this section. See "Risk Factors - The Net Operating
Loss Carryforwards".
Redemption of DKM. Management of the Company believes that the redemption
of stock held by DKM did not cause an ownership change under Code ss.382. DKM
held 36% of the stock of Janus, based on a determination that the Warrant would
not be deemed exercised pursuant to the option attribution rules under Internal
Revenue Service regulations. At least one former creditor, Daewoo Corporation,
became a 5-percent shareholder of the Company based upon its claims against U.S.
Lines as settled by the Reorganization Trust. The remaining beneficiaries of the
Reorganization Trust, which individually were not 5-percent shareholders through
the Reorganization Trust, were collectively a "public group" 5-percent
shareholder for purposes of Code ss.382.
The interests of the Daewoo Corporation and the public group increased by
a total of 36 percentage ownership points as a result of the redemption of the
Common Stock held by DKM. This was less than the 50% necessary for an ownership
change under Code ss.382.
The redemption of the interests of DKM also gave rise to the emergence of
several new 5-percent shareholders based upon their respective interests in the
Reorganization Trust. As a result of restrictions contained in the Company's
Restated Certificate of Incorporation, as amended, Daewoo Corporation and these
5-percent shareholders are presently precluded from acquiring additional shares
of Common Stock. See "Description of Securities - Preservation of Income Tax
Attributes."
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Code ss.382 and Subsequent Events and Investors. After the issuance of
Common Stock in the acquisitions recently completed by the Company, management
of the Company believes that the Company's current cumulative ownership shift
under Code ss.382 is only a few percentage points short of a 50 percentage point
ownership change. If a future ownership change under Code ss.382 were triggered,
the Company would be allowed to use its NOLs only up to the amount of its
Section 382 Limitation on an annual basis. More specifically, this annual amount
would equal the fair market value of the Company at that time of the ownership
change multiplied by the federal long-term tax-exempt rate. Therefore, it will
be necessary for Janus to monitor, and Janus has taken certain steps to so
monitor, any further transfers of Common Stock by its 5-percent shareholders and
further issuances or redemptions of Common Stock. See "Description of Securities
- - Preservation of Income Tax Attributes". Because Code ss.382 tests whether a 50
percentage point ownership change has occurred over a three-year testing period,
Janus' capacity to issue more Common Stock during the three years subsequent to
these recent transactions will be severely curtailed.
If the Company issues stock in connection with acquisitions or to raise
cash, the new shareholders generally will be treated as either new 5-percent
shareholders or a new public group under Code ss.382.
Certain Transferability Restrictions. In accordance with authority granted
by the Company's Restated Certificate of Incorporation, as amended, the Company
has imposed certain transferability restrictions upon Daewoo Corporation,
Mitsubishi Corporation, General Electric Capital Corporation and The Prudential
Insurance Company of America, each of whom is presently a 5-percent shareholder
for purposes of Code ss.382. These restrictions provide that until April 24,
2001, the specified shareholders shall be prohibited from transferring, in any
manner, any shares of Common Stock, without the consent of the Company's Board
of Directors. The Company shall have no obligation to consent to a transfer
unless it shall have received an opinion of legal counsel acceptable to the
Company to the effect that the transfer does not give rise to an "ownership
change" under Code ss.382 or otherwise affect the availability to the Company of
its NOLs and any other applicable tax attributes for Federal income tax
purposes. In addition to such imposed transferability restrictions, Messrs. Beck
and Yeaggy have agreed to equivalent transferability restrictions. See "Certain
Relationships and Related Transactions Transferability Restrictions on Stock
Owned by Messrs. Beck and Yeaggy and Registration Rights." In the event that the
Company's Board of Directors is willing to consent to a transfer of Common Stock
by any one shareholder subject to transferability restrictions, the other
shareholders subject to equivalent restrictions, including Messrs. Beck and
Yeaggy, will be offered the opportunity to engage in a transfer on a ratable
basis.
Impact of Consolidated Return Regulations. Under the consolidated return
regulations pursuant to the Code, the consolidated return change of ownership
("CRCO") rule may limit the carryover of NOLs from a consolidated return year
ending before the year of a CRCO ownership change. The Company believes that the
changes to the US Lines Group former consolidated group's capital structure
caused a CRCO ownership change on or about December 30, 1988 when U.S. Lines
left its former consolidated group. To the extent the CRCO rule applies, Janus
and JI Subsidiary may carry over NOLs incurred in tax years prior to the CRCO
change of ownership only to the extent of the consolidated taxable income of
Janus and JI Subsidiary in the particular year after the CRCO ownership change.
The CRCO rule should not adversely affect the use of NOLs against the income of
a business acquired directly by Janus through merger or the purchase of the
acquired entities assets. The CRCO rule may prevent the Janus consolidated group
from utilizing its pre-CRCO NOLs against income generated by a newly acquired
business that is held in a subsidiary other than JI Subsidiary. Even with a CRCO
ownership change in 1988, the CRCO rule should not prevent the Janus
consolidated group from utilizing its NOLs that were generated in 1988 or in
later years against income of a new subsidiary.
Effect of Code ss.384. Congress adopted Code ss.384 in 1987 to prevent a
loss corporation from using its pre-acquisition NOLs and net built-in losses
against any net built-in gains of a corporation the
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control of which (utilizing an 80% test of Code ss.1504(a)(2)) is acquired by
the loss corporation or whose assets are acquired by the loss corporation in
certain types of reorganizations. The limitation of Code ss.384 applies to
built-in gains recognized within the five-year recognition period after the
acquisition date. Code ss.384 will prevent Janus from utilizing its NOLs against
built-in gains recognized by any acquired companies (assuming the control test
is met) within five years of the acquisition date, including Janus' recent entry
into the hospitality business. Any future acquisitions by Janus will need to be
analyzed for the impact that Code ss.384 may have on the utilization of Janus'
NOLs against any recognized built-in gains. The interaction of the five-year
rule of Code ss.384 with the impending expiration of most of the NOLs of Janus
under the general rule of Code ss.172 reduces the possible tax benefit Janus can
expect from its NOLs.
Effect of Code ss.269. Code ss.269(a) provides that if:
(1) any person or persons acquire ... directly or indirectly,
control of a corporation, or
(2) any corporation acquires ..., directly or indirectly, property
of another corporation, ... the basis of which property, in the
hands of the acquiring corporation, is determined by reference to
the basis in the hands of the transferor corporation,
and the principal purpose of such acquisition was the evasion or avoidance of
Federal income tax by securing the benefit of a deduction, credit, or other
allowance which such person or corporation would not otherwise enjoy, then the
Internal Revenue Service may disallow such deduction, credit, or other
allowance. Control is defined to mean the ownership of stock possessing at least
50% of the total combined voting power of all classes of stock entitled to vote
or at least 50% of the total value of shares of all classes of stock of the
corporation.
Under Treas. Reg. ss. 1.269-3(a), the determination of the purpose for
which an acquisition was made requires a scrutiny of the entire circumstances in
which the transaction or course of conduct occurred, in connection with the tax
result claimed to arise therefrom.
The Disclosure Statement states that Code ss.269 should not apply to the
transactions provided for under the Plan. The Disclosure Statement points out
that the creditors' receipt of Common Stock of the Company was a direct
consequence of their having extended credit to the debtor U.S. Lines. This
credit was not extended to achieve control of the debtor in bankruptcy and thus
avoid or evade federal income tax. Presumably, because of the 50% control test,
Code ss.269 would not have applied to the DKM transaction. It is uncertain
whether the Internal Revenue Service would attempt to apply Code ss.269 to any
acquisition by Janus that met the 50% control test because, in part, of the
difficulty in determining whether the principal purpose for which an acquisition
was made was evasion or avoidance of federal income tax.
Risk Factors
The Common Stock of the Company is speculative in nature and involves a
high degree of risk. The risk factors below are not listed in order of
importance.
Possible Need for Additional Financing
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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 in the absence of further
acquisitions and based on currently proposed plans and assumptions relating to
its operations, that available resources, including its current cash balances,
will be sufficient to satisfy the Company's contemplated cash requirements for
at least the next 24 months. In the event that the Company's plans change, or
its assumptions change or prove to be inaccurate, the Company could be required
to seek additional financing or curtail its activities. The Company has no
current arrangements with respect to, or sources of, additional financing. 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. There are also restrictions on the Company's ability to issue Common Stock
and certain kinds of preferred stock if the Company wishes to preserve its NOLs.
See "Description of Business - The Net Operating Loss Carryforwards" and
"Management's Discussion and Analysis - Janus Industries, Inc. and
Subsidiaries."
Conflicts of Interest
Messrs. Beck and Yeaggy continue to own and/or manage hotel properties
independent of the Company which are located in markets in which the Company is
operating. While under the terms of their employment agreements with the
Company, Messrs. Beck and Yeaggy are prohibited from acquiring additional
interests in hotels or hotel management companies while they serve as officers
of the Company, their present independent businesses give rise to the
possibility of conflicts of interest in common markets.
The Company relies upon Computel and HELP, which are wholly-owned by
Messrs. Beck and Yeaggy, for administrative and personnel services at the
Hotels.
The Company also has management agreements covering seven hotels which are
owned by affiliates of the Messrs. Beck and Yeaggy which accounted for $407,346
or 30.3% of the management fee revenues of the Beck-Yeaggy Group on a pro forma
basis for the year ended December 31, 1996. See "Pro Forma Condensed Financial
Statements." Loss of these contracts would be materially adverse to the Company.
Conflicts may arise between the Company and Messrs. Beck and Yeaggy 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 any of the management agreements between the Company and
affiliates of Messrs. Beck and Yeaggy. Conflicts may also arise between the
Company and Messrs. Beck and Yeaggy in connection with certain mortgage
indebtedness of the Company which is personally guaranteed by Messrs. Beck and
Yeaggy, or in connection with the exercise by the Company of its rights with
respect to two mortgage notes and related mortgages which were among the assets
acquired from the Beck Yeaggy Group. Although management's recommendation 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. "See
Management -- Employment Agreements" and "Certain Relationships and Related
Transactions."
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
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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.
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 be reduced when
circumstances result in a reduction of revenue.
Competition
The lodging industry is highly competitive. Several of the Company's
competitors are larger than it and possess greater financial, operational and
managerial resources. There can be no assurance that in the markets in which the
Company's Hotels operate, competing hotels will not pose greater competition for
guests than presently exists, or that new hotels will not be constructed in such
locales. New or existing competitors could significantly lower rates or offer
greater conveniences, services or amenities, or significantly expand, improve or
introduce new facilities in markets in which the Hotels compete, thereby
adversely affecting the Company's operations. See "Description of Business - The
Hospitality Business - Competition."
Geographic Concentration of Hotels
Many of the Company's Hotels are located in Florida and Ohio. Such
geographic concentration exposes the Company's operating results to events or
conditions which specifically affect those areas, such as local and regional
economic, weather and other conditions. Adverse developments which specifically
affect those areas 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 Regulation
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
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license laws) and building and zoning requirements. Also, 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 are substantially in compliance with these
requirements, a determination that the Company is not in compliance 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 seven 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.
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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. 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 which may not
permit realization of the maximum return on such investments. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
Control of the Company by Principal Officers
Messrs. Beck and Yeaggy beneficially own approximately 43% 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. See "Security Ownership of Certain
Beneficial Owners and Management" and "Directors, Executive Officers, Promoters
and Control Persons."
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No Public Trading Market; Possible Volatility of Stock Price; No Listing
of Securities on an Exchange; Potential Effects of "Penny Stock" Rules
There is no public market for the Company's securities, and there can be
no assurance that a public market for the Company's securities will develop or
be sustained if developed. In addition, while the Company has applied for
quotation of the Common Stock on the Nasdaq National Market System or the Nasdaq
SmallCap Market, the Company's securities are not listed on any such exchange
and there can be no assurance that they will be so listed. The Company's
application was pending as of August 22, 1997. In order to qualify for such
quotation, the Company must satisfy initially and continue to satisfy certain
criteria for listing. Since the bid price for a share of Common Stock is not
known, the Company cannot determine whether it will initially meet or be able to
maintain a minimum $3.00 per share bid price entry standard (or a minimum $5.00
per share bid price entry standard under proposed Nasdaq rule changes which
would be retroactive to February 28, 1997). The failure to meet and maintain
such criteria may result in the Common Stock being ineligible for quotation on
Nasdaq. As a result of no public market for the Company's securities, an
investor may find it difficult to dispose of or to obtain accurate quotations as
to the market value of the Company's securities. In addition, if the Common
Stock has a trading price of less than $5.00 per share, trading in the Common
Stock would also be subject to the requirements of certain rules promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage them from effecting transactions in the Common
Stock, which could severely limit the liquidity of the Common Stock.
The offering prices of the Company's securities and other terms of the
sales of the Company's securities within the last fifteen months were
established by negotiation between the Company and the acquirers thereof or
their representatives and may not be indicative of prices that will prevail in
the trading market. In the absence of an active trading market, purchasers of
the Company's securities may experience substantial difficulty in selling their
securities. The trading price of the Company's securities is expected to be
subject to significant fluctuations in response to variations in quarterly
operating results, changes in estimates of earnings and other factors often
unrelated to operating performance. See "Market Price of and Dividends on the
Registrant's Common Equity and Other Shareholder Matters."
Irregular Trading Market
If a public market for the Common Stock develops, the actual "float" of
shares available for sale in the market will be approximately 36.3% of the
8,731,836.181 shares outstanding as of August 20, 1997. Approximately 5,658,060
shares, comprised of 3,799,999 shares held by Messrs. Beck and Yeaggy and their
affiliate and 1,858,061 shares held by five percent shareholders for purposes of
the NOL preservation rules, are subject to transferability restrictions until
April 24, 2001. See "Description of Business - "The Net Operating Loss
Carryforwards - Certain Transferability Restrictions." In addition, 1,056,975
shares are still held by the Reorganization Trust for the benefit of former
unsecured creditors of U.S. Lines. See "Description of Business The
Reorganization Trust." Moreover, among
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the approximately 3,690 holders of record of the Common Stock there are numerous
holders of very small numbers of shares.
When the transferability restrictions expire, and as a result of certain
registration rights which have been granted to Messrs. Beck and Yeaggy, sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, would adversely affect prevailing market prices for the Common Stock. See
"Certain Relationships and Related Transactions - Transferability Restrictions
on Stock Owned by Messrs. Beck and Yeaggy and Registration Rights."
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, Louis S. Beck, its Vice Chairman, Harry
Yeaggy, its President, James E. Bishop and its President of Hotel Operations,
Michael Nanosky. Although the Company has entered into an employment agreement
with each of Messrs. Beck, Yeaggy, Bishop and 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 and does not intend to carry "key man"
insurance on the lives of any of its key personnel. See "Directors, Executive
Officers, Promoters and Control Persons."
Potential Adverse 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. See "Description of Securities -
Preferred Stock."
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 10,451.88 shares of preferred stock
outstanding with an annual dividend expense of $783,891. The Company was current
in the payment of dividends on the preferred stock as of June 30, 1997. See
"Market Price of and Dividends on the Registrant's Common Equity and Other
Shareholder Matters."
Net Operating Loss Carryforwards
While management believes that the Net NOLs are at least $500 million (see
"Description of Business - The Net Operating Loss Carryforwards - Application of
Code ss.382 Under The Chapter 11 Reorganization") there are risks associated
with the Company's use of its NOLs to reduce Federal income tax payments,
including the
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possibility that the Internal Revenue Service may seek to challenge such use,
that the Company may be unable to produce significant levels of taxable income
prior to the expiration of the NOLs and that a "change in ownership" of the
Company may occur which would cause the Company to lose a substantial portion of
the NOLs. Although the Company has taken steps to restrict transfers of Common
Stock in order to avoid a "change in ownership," there can be no assurance that
these steps will be successful. See "Description of Business - The Net Operating
Loss Carryforwards" and Consolidated Financial Statements. Code ss.384 will
prevent Janus from utilizing its NOLs against built-in gains recognized by any
acquired companies (assuming a control test is met) within five years of the
acquisition date. The interaction of this five-year rule of Code ss.384 with the
impending expiration of most of the NOLs of Janus under the general rule of Code
ss.172 reduces the possible tax benefit Janus can expect from its NOLs. See
"Description of Business - The Net Operating Loss Carryforwards - Effect of Code
ss.384". In addition, the reductions and related adjustments to the Gross NOLs
calculated by the Company pursuant to Code ss.382(1)(5)(C) may be successfully
challenged by the Internal Revenue Service which would result in larger
reductions of the Gross NOLs than the Company has currently estimated. The
Internal Revenue Service could also challenge the manner in which the Company
eventually allocates the reductions under Code ss.382(1)(5)(C) among the source
years so as to reduce the Net NOLs available to the Company in later years as
the Company's most recent NOLs expire. See "Description of Business - The Net
Operating Loss Carryforwards - Application of Code ss.382 Under The Chapter 11
Reorganization".
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. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Such
risks and other aspects of the Company's business and operations are described
in "Description of the Business" and "Management's Discussion and Analysis or
Plan of Operation." The Company has no obligation to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis of the Historical Results of Operations and
Financial Condition of Janus and its Subsidiaries
General. For purposes of the discussion under the heading "Year Ended
December 31, 1996 Compared with the Year Ended December 31, 1995", the "Company"
means Janus collectively with its subsidiaries, JI Subsidiary, Wireline and KFE.
For purposes of the discussion under the heading "Six Months Ended June 30, 1997
Compared with the Six Months Ended June 30, 1996," the "Company" also includes
the former operations of the Beck-Yeaggy Group. The following discussion of the
Company's historical results of operations, changes in liquidity and capital
resources and liquidity and capital resources as of June 30, 1997 should be read
in conjunction with the historical audited and unaudited consolidated financial
statements of Janus Industries, Inc. and Subsidiaries and the notes thereto and
the Unaudited Pro Forma Condensed Combined Financial Statements of Janus
Industries, Inc. and Subsidiaries and the notes thereto included in this
Registration Statement. References to the operations of Pre-Tek in this
discussion are to the combined operations of Wireline and KFE.
Janus Industries Inc. and JI Subsidiary are the successors to U.S. Lines
and U.S. Lines (S.A). which emerged from a Chapter 11 bankruptcy in 1990. The
Plan which was approved by the creditors of U.S. Lines and U.S. Lines (S.A.) and
the Bankruptcy Court, contemplated that Janus and JI Subsidiary would seek out
acquisition opportunities for each of the reorganized companies in order to
utilize their
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respective NOLs. See "Description of Business - History of the Company's
Reorganization," and "- The Reorganization Trust."
The Company's current management is committed to the Plan's objectives
and, as a result, the Company acquired Pre-Tek in July 1996 and the Beck-Yeaggy
Group in April 1997. Management is diligently pursuing a program for additional
acquisitions through the use of a combination of cash, capital stock and, when
necessary, borrowing.
Net Operating Loss Carryforwards. Management believes that Janus possesses
Net NOLs of at least $500 million for Federal income tax purposes. See
"Description of Business - The Net Operating Loss Carryforwards" and "Note 5 of
the Notes to the consolidated financial statements of Janus Industries, Inc. and
Subsidiaries." Janus intends to use its NOLs to minimize the payment of U.S.
Federal income taxes by the Company. There are risks with respect to the
availability and utilization of the NOLs. See "Risk Factors - Net Operating Loss
Carryforwards."
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
Historical Results of Operations
From the date of its reorganization until July 15, 1996, when the Company
acquired Pre-Tek, the Company's revenues were derived solely from earnings on
cash invested in short-term certificates of deposit of banking institutions and
in government obligations. The acquisition of Pre-Tek was accounted for as a
purchase; therefore the results of Pre-Tek's operations have only been
consolidated with those of the rest of the Company subsequent to the date of
acquisition on July 15, 1996. Accordingly, the Company's results of operations
for 1996 are not directly comparable with those of 1995 as further explained
below.
The net loss of the Company was $1,193,981 for 1996 compared to a net loss
of $660,036 during 1995. The principal reasons for the increase in net loss were
the inclusion of the net loss generated by the operations of Pre-Tek only in
1996 and increases in compensation expenses incurred by Janus in 1996. The
magnitude of the increase in net loss from 1995 to 1996 was in part reduced
through an increase in interest income in 1996 derived primarily from the
temporary investment of cash received by the Company as a capital contribution
from the Reorganization Trust. Sales of $381,055 and operating costs of $363,162
in 1996 were derived from the operations of Pre-Tek; there were no comparable
amounts in 1995. Selling, general and administrative expenses increased by
$591,907 from $728,084 for 1995 to $1,319,991 for 1996 of which $203,769 was
attributable to the operations of Pre-Tek and the balance predominantly due to
increased compensation expenses at Janus. Increases in depreciation of property
and equipment from $3,881 in 1995 to $61,434 in 1996 and amortization of
intangible assets from $7,560 in 1995 to $30,375 in 1996 were also a result of
the Pre-Tek acquisition. As a result of the factors described above, total costs
and expenses increased from $739,525 for 1995 to $1,774,962 for 1996.
Interest income for 1996 was $247,516 compared to $140,307 for 1995. The
increase was primarily due to an increase in the amount of funds invested in
1996.
The charge to operations for minority interest decreased from $60,818 for
1995 to $50,490 for 1996 as a result of the reduction in the number of
outstanding shares of Series A Preferred Stock of JI Subsidiary attributable to
the redemption of DKM's shares of such stock.
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The decline in preferred stock dividend requirements from $31,800 for 1995
to $24,712 for 1996 resulted from the redemption by Janus of its Series A
Preferred Stock during 1996, and the repurchase by Janus of DKM's Series A
Preferred Stock of Janus in 1995.
Historical Changes in Liquidity and Capital Resources
Total assets increased from $2,109,303 at December 31, 1995 to $9,047,317
at December 31, 1996.
Total current assets of the Company increased from $2,088,632 at December
31, 1995 to $7,521,870 at December 31, 1996 for the following reasons: Cash and
cash equivalents increased from $2,053,437 at December 31, 1995 to $6,580,836 at
December 31, 1996 as a result of contributions of $7,621,980 to the Company by
the Reorganization Trust. The Company received $101,631 of cash as part of the
consideration for Pre-Tek. Cash restricted for payments to redeem preferred
stock of subsidiary increased from $0 at December 31, 1995 to $673,200 at
December 31, 1996 and represents cash held by Janus and owed to holders of
Series A Preferred Stock of JI Subsidiary as a result of JI Subsidiary's
redemption of such shares. Accounts receivable increased from $0 at December 31,
1995 to $83,100 at December 31, 1996, which increase resulted from operations of
Pre-Tek. Other current assets increased from $35,195 at December 31, 1995 to
$184,734 at December 31, 1996, which increase consists primarily of accrued
interest receivable and prepaid directors fees of Janus and prepaid insurance
premiums and supply inventories of Pre-Tek.
Property and equipment, net of accumulated depreciation, increased by
$575,418 from $7,275 at December 31, 1995 to $582,693 at December 31, 1996. This
increase resulted primarily from the acquisition of Pre-Tek.
Goodwill was $0 at December 31, 1995 and increased to $860,966 at December
31, 1996 as a result of the acquisition of Pre-Tek in 1996.
Deferred costs of proposed acquisition increased from $0 at December 31,
1995 to $74,692 at December 31, 1996 as a result of expenses incurred in 1996
related to the acquisition of the Beck-Yeaggy Group.
Liabilities and stockholders' equity increased from $2,109,303 at December
31, 1995 to $9,047,317 at December 31, 1996.
Current liabilities increased from $239,737 at December 31, 1995 to
$981,875 at December 31, 1996 as follows: Payable for redemption of preferred
stock of subsidiary increased from $0 at December 31, 1995 to $673,200 at
December 31, 1996 as a result of Janus holding funds for payment to holders of
Series A Preferred Stock of JI Subsidiary which stock was redeemed in 1996.
Accounts payable increased from $0 at December 31, 1995 to $149,020 at December
31, 1996 as a result of the operations of Pre-Tek. Accrued expenses rose from
$134,137 at December 31, 1995 to $159,655 at December 31, 1996 principally as a
result of the operation of Pre-Tek. Dividends payable were reduced from $105,600
at the end of 1995 to $0 at the end of 1996. The reduction is attributable to
the redemption by Janus of the Series A Preferred Stock of Janus.
Minority interest decreased from $622,710 at December 31, 1995 to $43,837
at December 31, 1996. The decrease was the result of capital contributions made
to JI Subsidiary in 1996 and the redemption of Series A Preferred Stock of JI
Subsidiary in 1996 which resulted in the reclassification of
28
<PAGE>
the liquidation preference and accrued dividends on such stock which were
included in minority interest to "payable for redemption of preferred stock of
subsidiary". See "Minority Interest," in Note 2 to the Consolidated Financial
Statements of Janus Industries, Inc. and Subsidiaries.
Total stockholders' equity increased from $1,246,856 at December 31, 1995
to $8,021,605 at December 31, 1996. The increase was attributable primarily to
the contributions to capital made by the Reorganization Trust of $7,578,143
during 1996 and the issuance of Common Stock with a value of $738,012 as part of
the consideration for Pre-Tek which were offset in part by the redemption of
Janus' Series A Preferred Stock and the increase in accumulated deficit. The
accumulated deficit increased $1,218,693 from $3,027,037 at December 31, 1995 to
$4,245,730 at December 31, 1996. This increase was primarily attributable to the
operating losses in 1996 described above.
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Historical and Pro Forma Results of Operations
The acquisitions of the Beck-Yeaggy Group and Pre-Tek were accounted for
as purchases and, accordingly, the Company's historical results of operations
for the six months ended June 30, 1997 and 1996 include the results of
operations of the Beck-Yeaggy Group subsequent to April 30, 1997 and Pre-Tek
subsequent to July 15, 1996 (the respective effective dates of acquisition for
accounting purposes). Accordingly, the Company's historical results of
operations for the six months ended June 30, 1997 are not directly comparable to
those of 1996.
To present more comparable information, unaudited pro forma combined
results of operations for the six months ended June 30, 1997 and 1996 are set
forth below. In addition to combining the historical results of operations of
the Company and the historical pre-acquisition results of operations of the
Beck-Yeaggy Group for the periods from January 1, 1997 to April 30, 1997 and
January 1, 1996 to June 30, 1996 as if the acquisitions had been consummated on
January 1, 1996 , the pro forma results of operations include adjustments that,
among other things, reflect: the elimination of the net revenues derived from
management contracts of the Beck-Yeaggy Group that were not acquired by the
Company; depreciation and amortization of property and equipment based on the
fair values of assets acquired; the amortization of goodwill; the net effects of
changes to compensation and related expenses based on revised employment and
lease agreements; and the issuance of shares of preferred and common stock (net
of shares returned) as part of the consideration for the acquisitions.
The pro forma combined net income of the Company was $96,340 for the six
months ended June 30, 1997 as compared to a net loss of $872,421 during the same
period of 1996. The increase in net income was primarily the result of decreases
in compensation expense and professional fees, an increase in hotel revenues,
other income and state tax refunds from prior years which were received in 1997.
Selling, general, and administrative expenses decreased by $507,335 from
$2,717,257 in 1996 to $2,209,922 for 1997 as a result of an increase in expenses
attributable to the acquisition of Pre-Tek of $100,488 and a reduction in
compensation expense and professional fees. As a result of the factors described
above, total costs and expenses decreased from $6,856,818 in 1996 to $6,476,357
for 1997.
Room revenue increased $120,719 to $4,952,302 in 1997. The 2.4% increase
was attributable primarily to an increase in room rates from Owned Hotels. The
average rate increased from $42.91 in 1996 to $45.26 for 1997 as occupancy
decreased 1.86% in 1997 to 61.79% from 63.65% in 1996.
29
<PAGE>
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.
The $22,849 decrease in food and beverage sales from $774,424 for the six month
period ended June 30, 1996 to $751,575 for the comparable period in 1997 is
related to a reduction in occupancy at the Owned Hotel, Best Western Kings
Quarters.
Management fee income increased from $544,667 in 1996 to $556,440 in 1997
as room revenues increased at Managed Hotels where the management fees are
calculated as a percent of room revenues.
Other hotel related revenues increased in 1997 from $89,537 in 1996 to
$106,272 for 1997. The increase was directly related to the co-marketing of
Kings Island and Kings Dominion amusement park tickets with room rentals which
generate $.50 to $3.00 per ticket in additional income.
Sales generated by Pre-Tek increased from $497,582 in 1996 to $731,529 in
1997 primarily as a result of perforation and land logging revenues.
Direct hotel operating expenses decreased by $52,617 from $2,131,575 in
1996 to $2,078,958 in 1997. Direct room and related services costs remained
stable as room revenue increased and occupancy decreased. Food and beverage
costs decreased as food and beverage sales decreased. Selling, general and
administrative expenses decreased as a result of expiring billboard contracts
which were not renewed.
Occupancy and other operating expenses increased to $1,417,947 in 1997
from $1,241,724 in 1996. Operating expenses at Owned Hotels decreased by
approximately $76,400 as repairs and maintenance expense and utility expenses
decreased. Operating expenses for Pre-Tek and subsidiary increased $257,275 from
$316,724 in 1996 to $573,999 in 1997 and is primarily attributable to the direct
costs associated with generating additional sales.
Selling, general and administrative expenses decreased by $507,335 to
$2,209,922 in 1997 from $2,717,257 in 1996 as a result of an increase in expense
attributable to the acquisition of Pre-Tek of $100,488 which were more than
offset by a reduction in compensation expenses and professional fees.
Interest and other income increased $16,138 to $343,895 in 1997 from
$327,757 in 1996 as the amount of funds invested increased in 1997.
Interest expense decreased from $1,045,817 in 1996 to $935,420. The
decrease was related to a decrease in the amount of long-term debt secured by
and the Owned Hotels.
The charges to operations for minority interest were not material in 1997
and 1996.
The decline in preferred stock dividends from $405,146 for 1996 to
$391,946 for 1997 resulted from the effects of the redemption of the Company's
Series A Preferred Stock during 1996 which exceeded the effects of the issuance
of Series B Preferred issued as a part of the consideration for the acquisition
of the Beck-Yeaggy Group in April 1997.
Historical Changes in Liquidity and Capital Resources
30
<PAGE>
Total assets increased from $9,047,317 at December 31, 1996 to $55,438,506
at June 30, 1997. The increase in total assets was the result of the acquisition
of the Beck-Yeaggy Group as described in Note 2 of Unaudited Consolidated
Financial Statements of Janus Industries, Inc. and Subsidiaries at June 30,
1997.
Property, plant and equipment, goodwill, notes receivable, long-term debt,
paid-in-capital, preferred stock and common stock all fluctuated as a result of
the acquisition. See Note 2 referred to above.
Liquidity and Capital Resources at June 30, 1997
The following discussion reflects the liquidity and capital resources of
the Company after the acquisition of the Beck-Yeaggy Group by the Company. The
Company's principal sources of liquidity are cash on hand (including escrow
deposits and replacement reserve), 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 of Janus and borrowings, some of
which is likely to be secured by assets of the Company. The Company has no
committed lines of credit and 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. The ability of the Company to
issue its common or preferred stock is materially restricted by the requirements
of the Code if the Company wishes to preserve its NOLs. See "Description of
Business - The Net Operating Loss Carryforwards" and "Risk Factors - Net
Operating Loss Carryforwards."
At June 30, 1997, the Company had $5,808,141 in cash and cash equivalents.
During the six months ended June 30, 1997, the Company invested $306,617
in capital improvements in connection with the Owned Hotels. The Company plans
to spend an additional $655,000 on such capital improvements over the six month
period ending December 31, 1997.
Capital for improvements to Owned Hotels has been and is expected to be
provided by a combination of internally generated cash and, if necessary and
available, borrowings. The Company expects to spend annually approximately 4% to
5% of revenues from Owned Hotels for ongoing capital expenditures in each year.
The Company believes, based on its operating experience, that these types of
capital investments will enhance the competitive position of the Owned Hotels
and thereby enhance the Company's competitive position. Changes in the
competitive environment for a specific Owned Hotel may dictate higher or lower
capital expenditures.
The Company maintains a number of commercial banking relationships but
does not currently have any committed lines of credit, but it is in active
negotiations with lending institutions which might extend credit facilities to
the Company for capital purposes including capital that might be required for
the acquisition of additional hotels or management contracts. There can be no
assurance such negotiations will be successful.
31
<PAGE>
The Company anticipates that it will be able to secure the capital
required to pursue its acquisition program through a combination of borrowing,
internally generated cash and utilization of its common and/or preferred stock
to the extent such utilization does not jeopardize the Company's NOLs. See
"Description of Business - The Net Operating Loss Carryforwards" and "Risk
Factors - Net Operating Loss Carryforwards." 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, or at
all. Further, any such borrowings may contain covenants that impose limitations
on the Company which 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 which 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 down-turn and regulatory
changes constricting the availability of credit.
The Company has benefited and continues to benefit as the recipient of
moneys disbursed by the Reorganization Trust as the Reorganization Trust
accumulates moneys in excess of its reasonably required reserves and projected
operating expenses. During 1996, the Company received $7,621,980 in
contributions from the Reorganization Trust. Additional amounts of $755,000 and
$6,736,022 were transferred on April 25, 1997 and August 19, 1997, respectively.
While there is no objective formula to determine the extent to which
Reorganization Trust assets exceed projected liabilities and administrative
requirements thereby making additional cash available for contribution to the
Company, management of the Company believes that there will be future
contributions. This belief is based upon the decrease of the Reorganization
Trust's administrative expenses through reductions in personnel and office
space, which is related to the decreasing volume of unsettled claims of former
unsecured creditors of U.S. Lines and U.S. Lines (S.A.). The amount of excess
cash available for contribution to the Company will be dependent upon the
remaining duration of Reorganization Trust activity necessary to resolve
outstanding claims, particularly the asbestos and other late-manifesting
personal injury claims, and the amount of professional fees associated with this
activity. Accordingly, no assurance can be given as to the amount or timing of
additional contributions from the Reorganization Trust, if in fact there are any
additional contributions.
The Company's long-term debt at June 30,1997 totals $20,269,600. Mortgage
debt totals $20,025,158, which consists of $10,818,822 in fixed rate, fully
self-amortizing mortgage loans and $9,204,336 in adjustable rate (3-5 year
adjustment period) mortgage loans. Such adjustable rate loans have maturity
dates range from March 1998 to April 2006. Interest rates on mortgage debt range
from 8.875% to 9.75% with a weighted average interest rate of 9.3% effective at
July 1, 1997. The approximate scheduled repayments of principal on the long-term
debt of the Company are: from July 1, 1997 through December 31, 1997 --
$290,000; 1998 -- $2,115,000; 1999 -- $591,000; 2000 -- $627,000. Management of
the Company currently believes that the cash flow from the Company's hotel
operations will be sufficient to make the required amortization payments.
Balloon payments required to be made at the maturity of the non-self-amortizing
loans are expected to 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 financing 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.
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<PAGE>
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 and related higher interest rates could have a negative
effect on the Company's ability to secure additional capital under terms and
conditions acceptable to the Company or refinance indebtedness secured by the
Owned Hotels. Increase in the rate of inflation and interest rates could
materially adversely affect the ability of the Company to expand its operations
through the acquisition of Owned Hotels.
Management's Discussion and Analysis of the Historical Results of Operations and
Financial Condition of Beck-Yeaggy Group
General. The following discussion of the Beck-Yeaggy Group's historical
results of operations and liquidity and capital resources should be read in
conjunction with the combined financial statements of the Beck-Yeaggy Group and
notes thereto included in this Registration Statement. In addition to the
Beck-Yeaggy Group, Messrs. Beck and Yeaggy also controlled, operated and/or
managed other hotel properties that are not part of the Beck-Yeaggy Group.
Management of the Beck-Yeaggy Group believes that the historical financial
statements include all charges applicable to the Beck-Yeaggy Group and that all
related allocations and estimates are based on assumptions that are reasonably
based on historical operations. However, such financial statements are not
necessarily indicative of the financial position that would have existed or the
results that would have been obtained from operations had the Beck-Yeaggy Group
operated as an unaffiliated entity. In addition, as a result of purchase
accounting adjustments arising from the acquisition of the Beck-Yeaggy Group by
Janus, these financial statements will not be directly comparable to those
applicable to periods subsequent to such acquisition. The Beck-Yeaggy Group's
revenues are derived principally from a combination of room revenues, food and
beverage sales and management fees. Factors which affect the Beck-Yeaggy Group's
operating results include occupancy levels and room rates which may vary by
brand, time of year and local demand. The ability to provide high quality
services to its hotel guests while carefully managing operating expenses is
crucial to the Beck-Yeaggy Group's profitability. Identifying growth potential,
competitive factors and securing adequate capital to take advantage of new
opportunities, particularly in under-served markets or with regard to
under-performing properties which may be acquired on advantageous terms is
important to the Beck-Yeaggy Group's future growth.
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
Historical Results of Operations
Net income rose from $2,033,176 for the year ended December 31, 1995 to
$2,215,184 for the year ended December 31, 1996.
Revenues increased from $13,992,532 for the year ended December 31, 1995
to $14,420,581 for the year ended December 31, 1996 for the following reasons.
Revenues related to the sale of available rooms at Owned Hotels increased from
$10,429,089 for the year ended December 31, 1995 to $10,927,443 for the year
ended December 31, 1996. The 4.77% increase was attributable primarily to
increased income per occupied room and increased overall occupancy. For the year
ended December 31, 1996, the average daily rate at the Owned Hotels increased
$1.69 (3.7%) from $44.81 per occupied room in 1995 to $46.50 in 1996. Overall
occupancy in the Owned Hotels was 65.7% in 1995, increasing to 66.1% in 1996.
The increase in average daily rate and occupancy was accomplished through a
program of continuous market analysis and management of room rates. Food and
beverage revenues are a
33
<PAGE>
function of the number of guests who stay at each hotel property, local walk-in
business and catering sales. The $102,520 decrease in food and beverage revenues
is primarily related to a reduction in local walk-in business and a reduction in
catered affairs at Owned Hotels. Management fee income decreased by $33,520 from
$1,662,812 for the year ended December 31, 1995 to $1,629,562 for the year ended
December 31, 1996. The reduction in management fee income was related to a
decrease, by one, of hotels under management and the restructuring of the
calculation of management fees for certain of the Company's managed properties.
Certain expiring management contracts were replaced with contracts which
provided for lower fees based on the percentage of gross revenues combined with
a participation in any increase in the specific property's net operating income.
Other revenues increased from $180,336 for the year ended December 31, 1995 to
$245,801 for the year ended December 31, 1996. The increase in other revenues
was primarily due to revenue generated from amusement park discount packages.
Costs and expenses increased from $10,529,476 for the year ended December
31, 1995 to $10,744,403 for the year ended December 31, 1996 for the following
reasons: Direct hotel operating expenses decreased from $4,505,159 for the year
ended December 31, 1995 to $4,403,814 for the year ended December 31, 1996. The
2.25% decrease in direct hotel operating expenses is attributable to reductions
of food and beverage costs resulting from the decrease in sales of food and
beverages and reductions in direct selling expenses as underperforming
advertising programs were discontinued. The decrease in direct hotel operating
expenses was off-set to some degree by increased labor costs from tight labor
conditions in some geographic areas. Occupancy and other operating expenses
increased to $1,842,254 for the year ended December 31, 1996 from $1,671,648 for
the year ended December 31, 1995. The $170,606 increase was related to increased
energy costs in the form of higher incremental demand charges and repairs and
maintenance increases, reflecting management's commitment to continued property
improvements. General and administrative expenses increased $109,216 to
$3,624,674 for the year ended December 31, 1996 from $3,515,458 for the year
ended December 31, 1995. The change is attributable to increases in professional
fees incurred primarily in connection with proposed transactions and increased
development activity.
Interest expense was reduced from $2,002,637 for the year ended December
31, 1995 to $1,935,877 for the year ended December 31, 1996. The 3.33% reduction
in interest expense was related to the scheduled principal reduction of
long-term debt.
In 1995, the Company sold approximately 4.8 acres of unimproved land
resulting in a gain on sale of property of $104,003. No property was sold in
1996 and the Beck-Yeaggy Group presently owns no unimproved land.
Historical Changes in Liquidity and Capital Resources
Total assets decreased from $20,690,585 at December 31, 1995 to
$20,466,314 at December 31, 1996.
Current assets increased from $872,471 at December 31, 1995 to $1,147,433
at December 31, 1996 for the following reasons: Cash totaled $146,901 at
December 31, 1996 compared to $46,475 at December 31, 1995. The $100,426
difference is attributable to increased cash flow from operations. Accounts
receivable increased $156,492 from $160,299 at December 31, 1995 to $316,791 at
December 31, 1996. The increase in accounts receivable was related to an
increase in direct bill accounts at two of the Owned Hotels. Current portion of
mortgage notes receivable increased to $204,864 at December 31, 1996 compared to
$189,897 at December 31, 1995. The increase was attributable to a scheduled
increase in amortization of the mortgage notes receivable. Escrow deposits
increased from $297,357 at December
34
<PAGE>
31, 1995 to $363,841 at December 31, 1996 as a result of deposits in excess of
withdrawals from the debt service reserve. Other current assets decreased from
$178,443 at December 31, 1995 to $115,036 at December 31, 1996. The change of
$63,407 was primarily due to the collection of a miscellaneous receivable.
Property and equipment, net of accumulated depreciation and amortization,
declined from $12,978,776 at December 31, 1995 to $12,503,176 at December 31,
1996 due to normal scheduled depreciation of assets and the acquisition of
personal property and equipment of $398,071.
Reserve for replacement increased from $418,964 at December 31, 1995 to
$628,271 at December 31, 1996. The increase of $209,307 was a result of deposits
to the replacement reserve in excess of withdrawals from the reserve.
Liabilities and owners' capital deficiency decreased from $20,690,585 at
December 31, 1995 to $20,466,314 at December 31, 1996.
Current liabilities decreased from $1,713,175 at December 31, 1995 to
$1,629,209 at December 31, 1996 for the following reasons: The current portion
of long-term debt increased from $509,699 at December 31, 1995 to $536,215 at
December 31, 1996 due to scheduled increases of the amortization of principal of
long-term debt. Accounts payable decreased from $560,309 at December 31, 1995 to
$400,199 at December 31, 1996. The decrease of $160,110 was attributable to a
timing difference in the payment of accrued invoices in December 1995 and in
December 1996. Accrued liabilities, primarily consisting of salaries and wages,
taxes and interest payable increased to $692,795 at December 31, 1996 compared
to $643,167 at December 31, 1995. The increase of $49,628 was related to
property taxes and accrued interest, as interest was paid through December 31,
1995 at the closing of the refinancing in 1995 of the Best Western, Kings
Quarters hotel.
Long-term debt, net of current portion, decreased from $21,793,585 at
December 31, 1995 to $19,814,561 at December 31, 1996. The reduction of
$1,979,024 is attributable to principal payments on mortgage indebtedness.
Owners' capital deficiency decreased from $2,816,175 at December 31, 1995
to $977,456 at December 31, 1996. The $1,838,719 reduction was primarily due to
the net income of $2,215,184 for 1996.
Three Months Ended March 31, 1997 Compared With Three Months Ended March 31,
1996
Historical Results of Operations
Net loss for the three months ended March 31, 1997 was $102,213 as
compared to $185,032 for the three months ended March 31, 1996.
Revenues related to the sale of available rooms increased from $ 1,872,022
for the three month period ended March 31, 1996 to $ 1,919,698 for the three
month period ended March 31, 1997. The 2.54% increase was attributable primarily
to an increase in room rates in Owned Hotels located in Michigan City, Indiana
and Raleigh, North Carolina.
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.
The $22,067 decrease in food and beverage
35
<PAGE>
revenues from $316,846 in the three month period ended March 31, 1996 to
$294,779 for the three month period ended March 31, 1997 is primarily related to
a reduction in occupancy at the Owned Hotel Best Western, Kings Quarters.
Other revenues decreased from $47,213 for the quarter ended March 31, 1996
to $34,066 for the quarter ended March 31, 1997. The decrease was attributed
primarily to a lease assigned to a related party.
Direct hotel operating expenses decreased from $943,937 for the quarter
ended March 31, 1996 to $907,918 for the period ended March 31, 1997. Room and
related services remained stable as revenue increased. Food and beverage expense
decreased as a result of a decrease in related revenues.
Occupancy and other operating expenses decreased to $415,173 for the three
month period ended March 31, 1997 from $456,002 for the three month period ended
March 31, 1996. The $40,829 decrease was related to a decrease in the cost of
repairs and maintenance expenses as a result of the 1996 capital improvement
program and the sublease of rented space.
General and administrative expenses decreased $58,579 to $774,162 for the
three month period ended March 31, 1997 from $832,741 for the three month period
ended March 31, 1996. The change is primarily a result of professional fees
related to an abandoned acquisition.
Interest expense decreased from $484,834 for the quarter ended March 31,
1996 to $451,666 for the quarter ended March 31, 1997. The decrease in interest
expense was related to a decrease in long-term debt.
Historical Changes in Liquidity and Capital Resources
Total assets decreased from $20,466,314 at December 31, 1996 to
$20,181,231 at March 31, 1997. The principal reasons for the decrease were as
follows:
Accounts receivable decreased from $316,791 at December 31, 1996 to
$193,620 at March 31, 1997 due to a reduction of outstanding direct bill
accounts at two of the Owned Hotels. Escrow deposits declined from $363,841 at
December 31, 1996 to $178,642 at March 31, 1997 primarily due to payments of
indebtedness from the debt service reserve. Property and equipment, net of
accumulated depreciation and amortization declined from $12,503,176 at December
31, 1996 to $12,454,801 at March 31, 1997 due to normal scheduled depreciation
of assets and the acquisition of $166,452 of personal property and equipment.
Liabilities and owners' capital deficiency declined from $20,466,314 at
December 31, 1996 to $20,181,231 at March 31, 1997. The decline was principally
the result of the borrowing by the Beck-Yeaggy Group of $793,803 during the
first quarter of 1997 from Messrs. Beck and Yeaggy and an increase in owners'
capital deficiency from $977,456 at December 31, 1996 to $2,207,503 at March 31,
1997 as a result of net distributions to or on behalf of the owners and the net
loss incurred during the quarter.
ITEM 3. DESCRIPTION OF PROPERTY
The Company conducts its corporate and business operations activities from
offices in Cincinnati, Ohio and Boca Raton, Florida. The Company occupies 4,300
square feet of office space in
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<PAGE>
Cincinnati, Ohio under a three-year sublease which terminates in February 2000
and occupies 2,200 square feet of office space Boca Raton, Florida under
two-year sublease which terminates in April, 1999.
Pre-Tek occupies 9,100 square feet of office space in Bakersfield,
California. The premises also includes a 163,850 square foot yard.
See "Business Description - The Hospitality Business" for a description of
the properties that are owned and operated by the Company; and "Certain
Relationships and Related Transactions - Interest of Messrs. Beck and Yeaggy in
Premises Occupied by the Company."
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of August 20, 1997
for (i) each person who is known by the Company to beneficially own more than 5%
of any class the capital stock, (ii) each named executive officer listed in the
Summary Compensation Table, (iii) each director of the Company, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature Amount and Nature
of Beneficial of Beneficial Percent of Percent of
Name and Address of Ownership of Ownership of Class of Class of
Beneficial Owner (1) Common Stock Preferred Stock Common Stock Preferred Stock
- -------------------- ----------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
Louis S. Beck (2) 2,927,499 8,113.91 34% 78%
Harry G. Yeaggy (3) 1,182,500 3,437.97 14% 33%
Vincent W. Hatala, Jr. (4) 4,000 0 * 0%
Anthony J. Pacchia (5) 6,000 0 * 0%
Arthur Lubell (6) 6,000 0 * 0%
Richard P. Lerner 0 0 0% 0%
James E. Bishop (7) 4,000 0 * 0%
C. Scott Bartlett, Jr. 0 0 0% 0%
Lucille Hart-Brown 0 0 0% 0%
Richard A. Tonges 0 0 0% 0%
Michael M. Nanosky 0 0 0% 0%
Paul Tipps 0 0 0% 0%
Peter G. Aylward 0 0 0% 0%
The United States Lines, Inc. 1,056,975 0 12% 0%
and United States Lines (S.A.),
Inc. Reorganization Trust, John
Paulyson, Trustee (8)
184-186 North Avenue East
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cranford, N.J. 07016
Beck Hospitality Inc. III (9) 310,000 1,100 4% 11%
8534 E. Kemper Road
Cincinnati, Ohio 45249
Daewoo Corporation (10) 623,911 0 7% 0%
c/o Lubell & Koven
350 Fifth Avenue
New York, New York 10118
All directors and executive 4,129,999 10,451.88 47% 100%
officers as a group (13 persons)
</TABLE>
* Less than 1%.
- ----------
(1) Unless otherwise noted, the address of each of the listed persons is
c/o the Company at 2300 Corporate Blvd., N.W., Boca Raton, Florida 33431-8596.
(2) Includes 310,000 shares of Common Stock and 1,100 shares of preferred
stock held by Beck Hospitality Inc. III. Mr. Beck is an officer, director and
controlling shareholder of Beck Hospitality Inc. III.
(3) Includes 310,000 shares of Common Stock and 1,100 shares of preferred
stock held by Beck Hospitality Inc. III. Mr. Yeaggy is an officer, director and
shareholder of Beck Hospitality Inc. III.
(4) Includes options to purchase 4,000 shares of Common Stock which are
currently exercisable.
(5) Includes options to purchase 6,000 shares of Common Stock which are
currently exercisable.
(6) Includes options to purchase 6,000 shares of Common Stock which are
currently exercisable.
(7) Includes options to purchase 4,000 shares of Common Stock which are
currently exercisable.
(8) The Reorganization Trust is the record owner of 1,056,975 shares of
Common Stock for the benefit of former unsecured creditors of U.S. Lines whose
claims have not been resolved. In accordance with an order of the United States
Bankruptcy Court for the Southern District of New York (In re United States
Lines, Inc., Case No. 86B 12240), the Trustee of the Reorganization Trust votes
such shares, on each proposal before shareholders, in the same proportion "for"
or "against" (or "withhold" in the case of director elections) such proposal as
shareholders (other than the Trust) who actually vote in person or by proxy, but
disregarding for this purpose (i) shareholders who do not vote or who vote
"abstain" and (ii) shares of Common Stock issued after March 16, 1997. At
present, the 3,799,999 shares held by Messrs. Beck, Yeaggy and their affiliate
are the shares issued after March 16, 1997.
(9) Messrs. Beck and Yeaggy own 75% and 25%, respectively, of the stock of
Beck Hospitality Inc. III and are officers and directors of the corporation.
(10) Daewoo Corporation, a public corporation of South Korea with
headquarters in Seoul, was the largest unsecured creditor in the U.S. Lines
bankruptcy and, accordingly, the recipient of the greatest number of shares
through the Reorganization Trust.
38
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The directors, executive officers and significant employees of the
Company, and a consultant who is expected to make a significant contribution to
the Company, are as follows:
Name Age Position
- ---- --- --------
Louis S. Beck 51 Chairman of the Board
Harry G. Yeaggy 51 Vice Chairman of the Board
James E. Bishop 45 Director and President
Michael M. Nanosky 38 Director and President of Hotel Operations
Vincent W. Hatala, Jr. 66 Director
Anthony J. Pacchia 41 Director
Arthur Lubell 83 Director
Richard P. Lerner 58 Director
C. Scott Bartlett, Jr. 64 Director
Lucille Hart-Brown 48 Director
Paul Tipps 60 Director
Peter G. Aylward 55 Director
Richard A. Tonges 41 Treasurer and Vice President of Finance
Charles W. Thornton 54 Corporate Counsel
Louis S. Beck has been a director and Chairman of the Board of the Company
since April 24, 1997. He has been a principal stockholder and Chief Executive
Officer of Beck Hospitality Inc. III and predecessor companies engaged in the
hotel management business since 1972. He has also been a principal stockholder
and Chairman of the Board of Union Savings Bank in Cincinnati, Ohio since 1986.
Union Savings Bank is a wholly owned subsidiary of U.S. Bancorp., a savings and
loan holding company of which Mr. Beck is a director and President. In addition,
since 1992 he has served as Chairman of the Board of Guardian Savings Bank in
Cincinnati, Ohio and serves as a director and President of its holding company,
Guardian Bancorp, Inc. Mr. Beck's term as a director of the Company expires at
the Company's 1997 Annual Meeting of Stockholders ("Annual Meeting").
Harry G. Yeaggy has been a Director and Vice Chairman of the Company since
April 24, 1997. He has been a principal stockholder and chief operating officer
of Beck Hospitality Inc. III and predecessor companies engaged in the hotel
management business since 1986. He has also been a director and President of
Union Savings Bank in Cincinnati, Ohio since 1986. Union Savings Bank is a
wholly owned subsidiary of U.S. Bancorp., a savings and loan holding company of
which Mr. Yeaggy is a director and Vice President and Secretary. Mr. Yeaggy's
term as a director of the Company expires at the Company's 1999 Annual Meeting.
James E. Bishop has served as President and a director of the Company
since August 1996. Mr. Bishop was Chief Executive Officer of the Company from
August 1996 until April 24, 1997. Mr. Bishop joined the Company in September
1995 as its Executive Vice President and was charged with the responsibility for
carrying out the Company's acquisition objectives. From 1993 to 1995 he was
Senior Vice President of Gates Capital Corp., an investment banking firm. For
the seventeen years prior thereto he was an investment banker and senior manager
for various public and private entities. Mr. Bishop's term as a director expires
at the Company's 1999 Annual Meeting.
39
<PAGE>
Michael M. Nanosky has been a director and President of Hotel Operations
of the Company since April 24, 1997. Prior to joining the Company, since March,
1990 he was President of Beck Group Management Corp., a company engaged in the
hotel management business. Mr. Nanosky's term as a director expires at the
Company's 1999 Annual Meeting.
Vincent W. Hatala, Jr. was designated a creditor representative member of
the Board of Directors pursuant to the Plan in May 1990 and was President of the
Company following the redemption of the interests of DKM on May 15, 1995 until
August 28, 1996, and Chairman until April 24, 1997. Mr. Hatala operated an
independent financial consulting business from 1971 until his retirement from
that business in 1990. He was a member of the U.S. Lines Creditors' Committee
from its inception and served as a co-trustee of the Reorganization Trust from
1990 to 1993. Mr. Hatala's term as a director expires at the Company's 1999
Annual Meeting.
Anthony J. Pacchia was designated a creditor representative member of the
Board of Directors in the Plan in May 1990 and was Secretary of the Company
following the redemption of the interests of DKM on May 15, 1995 until April 24,
1997. He had been a member of the U.S. Lines Creditors' Committee from inception
in 1986 until conclusion of the Chapter 11 proceeding. Since 1994 he has
operated an independent financial consulting business and engaged in the private
practice of law. From 1991 to 1994 he was a Group Vice President of First
Fidelity Bank, N.A., New Jersey and responsible for special situation loan
workouts. Mr. Pacchia's term as a director expires at the Company's 1998 Annual
Meeting.
Arthur Lubell was designated a creditor representative member of the Board
of Directors pursuant to the Plan in May 1990 and was Treasurer of the Company
following the redemption of the interests of DKM on May 15, 1995 until April 24,
1997. Mr. Lubell has been a member of the law firm Lubell & Koven, New York
City, since 1960, and is counsel to Daewoo International (America) Corp., a
subsidiary of Daewoo Corporation, a former major unsecured creditor of U.S.
Lines and a current stockholder of the Company. On November 23, 1994, pursuant
to a plea agreement, Mr. Lubell pled guilty to a federal misdemeanor offense
charging that he offered compensation to an agent of the Internal Revenue
Service. Mr. Lubell was fined $5,000 and given six months of unsupervised
probation. Mr. Lubell's term as a director expires at the Company's 1998 Annual
Meeting.
Richard P. Lerner has been a director of the Company since August 1996.
Mr. Lerner has been a partner with the law firm of Lambos & Junge, New York
since 1996. Mr. Lerner was a partner with the law firm of Lambos & Giardino, New
York from 1978 to 1996. Mr. Lerner was a member of the U.S. Lines Creditors'
Committee from inception in 1986 until conclusion of Chapter 11 proceeding. Mr.
Lerner's term as a director expires at the Company's 1997 Annual Meeting.
C. Scott Bartlett, Jr. has been a director of the Company since August
1996. Mr. Bartlett has served as independent financial consultant advising
financial institutions in matters involving credit policy, loan approval and
loan workout since 1990. Mr. Bartlett served as Senior Vice President and Chief
Credit Officer of MTB Bank from 1992 until 1994. Mr. Bartlett served as
Executive Vice President, Senior Lending Officer and Chairman, Credit Policy
Committee for National Westminster Bank USA from 1984 until 1990. Mr. Bartlett
presently serves as a director of the following corporations: Harvard
Industries, Inc. (Chairman, Audit Committee; Compensation Committee); NVR, Inc.
(Audit Committee, Nominating Committee); The Western Transmedia Co., Inc.
(Compensation Committee); Darling International, Inc. (Chairman, Compensation
Committee; Audit Committee); Triangle Wire & Cable, Inc. (Audit Committee);
40
<PAGE>
Bucyrus International, Inc. (Compensation Committee). Mr. Bartlett's term as a
director expires at the Company's 1997 Annual Meeting.
Lucille Hart-Brown has been a director since August 1996. Ms. Hart-Brown
has served as President of Benefit Services, Inc. since June 1996. Ms.
Hart-Brown served as Administrator of Marine Engineers' Beneficial Association
from 1982 until 1996. Ms. Hart-Brown was a member of the Creditors' Committee
from inception in 1986 until conclusion of Chapter 11 proceeding. Ms.
Hart-Brown's term as a director expires at the Company's 1997 Annual Meeting.
Paul Tipps has been a director of the Company since April 24, 1997. Mr.
Tipps has been president of Public Policy Consultants, Inc., a government
affairs consulting firm, since 1983. Since January 1997 he has been a director
of the Federal Home Loan Bank - Cincinnati. Mr. Tipp's term as a director
expires at the Company's 1998 Annual Meeting.
Peter G. Aylward has been a director of the Company since April 24, 1997.
Mr. Aylward has been President of Strategic Property Advisers, Inc., an
investment advisory company, since 1992 and has operated his own law firm,
specializing in tax and securities law, since 1993. Mr. Alyward's term as a
director expires at the Company's 1998 meeting.
Richard A. Tonges has been Vice President-Finance and Treasurer of the
Company since April 24, 1997. Prior to joining the Company, Mr. Tonges was Chief
Financial Officer of Beck Group Management Corp. since September 1978. Mr.
Tonges is a certified public accountant.
Charles W. Thornton has been Corporate Counsel of the Company since April
24, 1997. Prior to joining the Company, Mr. Thornton was General Counsel to Beck
Group Management Corp. since 1989.
Committees of the Board of Directors
The Board of Directors of the Company has appointed three committees: the
Audit Committee, Compensation Committee and Operating Committee. The members of
the Audit Committee are Peter Aylward, Anthony J. Pacchia, Paul Tipps, Richard
P. Lerner and Arthur Lubell. The Audit Committee periodically reviews the
Company's auditing practices and procedures and makes recommendations to
management or to the Board of Directors as to any changes to such practices and
procedures deemed necessary from time to time to comply with applicable auditing
rules, regulations and practices, and recommends independent auditors for the
Company to be elected by the stockholders. The members of the Compensation
Committee are C. Scott Bartlett, Jr., Lucille Hart-Brown, Paul Tipps and Richard
P. Lerner. The Compensation Committee meets periodically to make recommendations
to the Board of Directors concerning the compensation and benefits payable to
the Company's executive officers and other senior executives. The members of the
Operating Committee are Louis S. Beck, James E. Bishop. C. Scott Bartlett, Jr.,
Lucille Hart-Brown, and Peter Aylward. The Operating Committee advises and makes
recommendations to the full Board of Directors with respect to matters of policy
relating to the general conduct of the business of the Company.
Staggered Board of Directors
The Company's Restated Certificate of Incorporation, as amended, provides
for a staggered Board of Directors having three classes: Class A, Class B and
Class C. The number of directors in each class shall consist, as nearly as may
be possible, of one-third of the authorized number of directors. The
41
<PAGE>
authorized number of directors shall be determined from time to time by a
majority of the directors in office.
A classified Board of Directors may have the effect of making it more
difficult to remove incumbent directors, providing such directors with enhanced
ability to retain their positions. A classified Board of Directors may also make
the acquisition of control of the Company by a third party by means of a proxy
contest more difficult. In addition, the classification may make it more
difficult to change the majority of directors for business reasons unrelated to
a change of control.
The Certificate provides that the above provisions regarding
classification of the Board of Directors may not be amended, altered, changed or
repealed except by the affirmative vote of at least 66-2/3% of the shares of
Common Stock entitled to vote at a meeting of the stockholders called for the
consideration of such amendment, alteration, change or repeal, unless such
proposal shall have been proposed by a majority of the Board of Directors.
There are no family relationships among any of the directors and executive
officers of the Company.
ITEM 6. EXECUTIVE COMPENSATION
Director Compensation
During calendar year 1996, the Company's non-employee directors and the
non-salaried employee directors received an annual retainer of $15,000 and
$1,000 per meeting attended of the Board of Directors or any committee thereof.
The arrangements for director compensation have remained the same for calendar
year 1997.
Executive Compensation
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities for executive officers of the
Company who received compensation in excess of $100,000 during the period
January 1, 1996 to December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position Year Salary ($) Bonus($) Long Term Compensation Awards
- --------------------------- ---- ---------- -------- -----------------------------
Securities Underlying Options (#)
---------------------------------
<S> <C> <C> <C> <C>
James E. Bishop, President 1996 $119,500 $25,000 4,000
Vincent W. Hatala, Jr., Chairman 1996 $358,200 $0 4,000(1)
</TABLE>
- ----------
(1) See "Stock Options below for a description of the special provisions
applicable to Mr. Hatala's options.
42
<PAGE>
Employment Agreements
The Company has entered into written employment agreements with Louis S.
Beck, Harry G. Yeaggy and Michael M. Nanosky all dated April 24, 1997, James E.
Bishop dated April 4, 1997 and Vincent W. Hatala, Jr. dated January 1, 1997.
The agreement with Mr. Beck is for a term of three years which ends on
April 23, 2000. He is employed as Chairman of the Board, and is paid an annual
salary of $275,000, which may be increased from time to time at the discretion
of the Board of Directors. He may also be paid a bonus in an amount determined
by the Board of Director in its discretion and is entitled to such benefits as
the Board of Directors shall adopt. Mr. Beck expects to devote a significant
portion of his working time to the business of the Company. In the agreement the
Company has acknowledged that Mr. Beck is the owner, an officer and director of
other businesses that engage in the same business as the Company and that, in
certain instances, such businesses may be considered to be in competition with
the Company. Together with Mr. Yeaggy, Mr. Beck owns seven of the Managed Hotels
and five additional hotel properties which are managed by their affiliate Beck
Hospitality III Inc. Mr. Beck has agreed not to engage in any business that
competes with the Company other than the existing businesses. Matters involving
potential conflicts of interests will be referred by management to the Audit
Committee of the Board of Directors for consideration. The Audit Committee is
comprised of independent directors.
The agreement with Mr. Yeaggy is for a term of three years which ends on
April 23, 2000. He is employed as Vice Chairman of the Board and is paid an
annual salary of $175,000, which may be increased from time to time at the
discretion of the Board of Directors. His agreement is otherwise substantially
similar to the agreement between Mr. Beck and the Company. Mr. Yeaggy expects to
devote a significant portion of his working time to the business of the Company.
The agreement with Mr. Bishop is for a term of three years which ends on
April 23, 2000. He is employed as President of the Company with general
supervisory authority of the business of the Company and its subsidiaries and
charged with the responsibility of preparing and implementing a strategic plan
and seeking out and consummating acquisitions, under the supervision of and in
accordance with policies set by the Chairman of the Board and the Board of
Directors. Mr. Bishop is paid an annual salary of $200,000, which may be
increased from time to time at the discretion of the Board of Directors. He is
also entitled to an annual bonus in an amount to be determined in accordance
with the Company's then current bonus or incentive compensation plan. Mr. Bishop
is also entitled to a comprehensive medical indemnity policy for himself and his
family, an annual allowance of $2,000 for additional out-of-pocket medical
payments, an annual allowance of $2,000 for dental expenses, an annual payment
of $10,000 for the purchase of annuity, grossed up for the income tax cost, term
life insurance coverage in the amount of $1,000,000 to the extent the same is
available at normal market rates, long term disability insurance coverage and
such other benefits as the Board of Directors shall adopt and approve for him.
Under the agreement, the Company reimbursed Mr. Bishop for his reasonable moving
expenses incurred incidental to the relocation of the Company's principal
offices from New Jersey to Boca Raton, Florida. In the event of a change in
control of the Company, Mr. Bishop is entitled to a lump sum payment of
$300,000.
The agreement with Mr. Nanosky is for a term of three years which ends on
April 23, 2000. He is employed as President - Hotel Operations of the Company
and charged with the responsibilities typical of a division president. He is
paid an annual salary of $100,000, which may be increased from time to
43
<PAGE>
time at the discretion of the Board of Directors. He is also entitled to an
annual bonus of up to $100,000 based upon the Company's success in achieving
budgeted goals for the Company's hotel properties and operations. Mr. Nanosky is
also entitled to a comprehensive medical indemnity policy for himself and his
family, "split dollar" life insurance coverage in the amount of $480,000, long
term disability insurance coverage and such other benefits as the Board of
Directors shall adopt and approve for him.
Mr. Hatala's employment agreement with the Company which was in effect
during the year 1996 provided for an annual base salary of $75,000 plus $200 per
hour for each hour devoted to the business of the Company in excess of 500 hours
per annum. Effective January 1, 1997 his prior agreement was replaced with a new
agreement for a one year term which expires December 31, 1997. Under this
agreement, Mr. Hatala is paid an annual salary of $75,000 in consideration of
his services as Chairman of the Board (which position he resigned from effective
April 24, 1997) and such other executive duties as are assigned to him by the
Board of Directors from time to time. He may also be paid a bonus by the Board
of Directors in its discretion. He has agreed to make himself available to the
Company for at least 500 hours on an annual basis. Mr. Hatala is also entitled
to an annual allowance of $2,000 on account of dental expenses, reimbursement
for medical insurance premium payments and up to an additional $2,000 on account
of out-of-pocket medical expenses and such other benefits as the Board of
Directors shall adopt and lawfully approve for him.
Stock Options
In August, 1996, the Board of Directors and stockholders of the Company
adopted the 1996 Stock Option Plan ("Plan") and reserved 300,000 shares of
Common Stock for issuance thereunder. The Plan provides for the granting to
employees (including employee directors and officers) of options intended to
qualify as incentive stock options within the meaning of Code ss.422, and for
the granting of nonstatutory stock options to employees and consultants. The
Plan is currently administered by the Company's Compensation Committee.
The Plan provides for the granting of both Incentive Stock Options ("ISOs") and
nonstatutory stock options (a "NSO") and in connection with such options the
granting of stock appreciation rights (an "SAR") or additional stock options,
known as progressive stock options, in the event the grantee exercises such
stock options by surrendering shares of Common Stock of the Company (a "PSO").
NSOs and SARs may be issued to any key employee or officer of the Company or its
subsidiaries, or any other person who is an independent contractor, agent or
consultant of the Company or its subsidiaries but not any director of the
Company who is not an employee of the Company. ISOs may be issued to key
employees and officers of the Company and its subsidiaries, but not to any
independent contractor, agent or consultant. The Compensation Committee also
determines the times at which options become exercisable, their transferability
and the dates, not more than ten years after the date of grant, on which options
will expire. In the event of a tender offer for more than 25% of the Company's
outstanding stock, or a "change in control" (as defined in the Plan) of the
Company, all outstanding options become immediately exercisable. The fair market
value of the stock with respect to which ISOs under the Plan or any other plan
of the Company first become exercisable may not exceed $100,000 in any year. The
option price of an ISO is to be at least 100% of the fair market value on the
date of grant (110% in the case of optionees holding more than ten percent of
the combined voting power of all classes of stock of the Company). The Plan,
however, permits the Compensation Committee to grant NSOs at any exercise price
consistent with the purposes of the Plan, whether or not such exercise price is
equal to the fair market value of the stock on the date of grant of the NSO.
NSOs with an exercise price of less than fair market value on the date of grant
would not qualify as performance-based compensation under ss.162(m) of the
Internal Revenue Code of 1986, as amended, and, therefore, any compensation
expense generated
44
<PAGE>
by the exercise of such an option would not be deductible by the Company when
the Company is considered to be subject to such Section, if the optionee is a
"covered employee" who is paid compensation from the Company in an amount in
excess of $1,000,000 in the year of exercise.
Options may be exercised by the payment of the exercise price in cash,
Common Stock or a combination thereof. Subject to compliance with the provisions
of applicable governmental regulations, the Compensation Committee may make a
loan for the purpose of exercising any option granted under the Plan to an
optionee in an amount not to exceed 100% of the purchase price of the shares
acquired upon exercise of the options. The loan must be secured by a pledge of
shares of the Company having an aggregate purchase price equal to or greater
than the amount of the loan.
The Plan permits the Compensation Committee to grant 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
Compensation Committee, 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 Plan also permits the Compensation Committee to grant PSOs in
connection with any option granted under the Plan. PSOs enable an optionee to
receive additional stock options in the event the grantee exercises a stock
option, in whole or in part, by surrendering shares of Common Stock of the
Company. Any PSO granted will be for a number of shares equal to the number of
surrendered shares of Common Stock, shall not be exercisable for a minimum of
six months from the grant date of the option, shall have an option price per
share equal to 100% of the fair market value of a share of stock on the grant
date and shall be subject to such other terms and conditions as the Compensation
Committee may determine.
Unless otherwise provided by the Compensation Committee, the following
rules will apply to all options granted under the Plan. Options granted under
the Plan expire immediately if an employee is terminated for cause. If
termination of employment is voluntary or involuntary, options granted expire
after a three month period. In the event of an employee's death within such
three-month period, the employee's estate may exercise the option for the number
of shares for which it is exercisable at the date of termination, for one year
after death but in no event beyond the expiration dates of the option. An option
outstanding at the time an employee retires under a Company retirement plan or
becomes disabled is exercisable within one year of termination in the case of an
ISO and in the case of a NSO may be exercisable at any time to the extent that
the optionee was otherwise entitled to exercise it at the time of such cessation
of employment with the Company or a subsidiary thereof, but in no event after
the expiration of the option period. If an employee dies, whether before or
after such retirement or disability, the employee's estate may exercise the
option exercisable at the date of termination of employment for up to three
years after death (one year in the case of voluntary termination of employment),
but in no event beyond the expiration dates of the option.
Pursuant to the Plan, Messrs. Hatala and Bishop have been granted ISOs
incentive stock options to acquire 4,000 shares of Common Stock at $2.75 per
share, and Messrs. Lubell and Pacchia have been granted NSOS to acquire 6,000
shares of Common Stock at $2.75 per share. Mr. Hatala has also been granted a
tandem NSO to acquire 6,000 shares of Common Stock at $2.75 per share. The two
options granted to Mr. Hatala are mutually exclusive. The NSO will not be
exercisable as long as the ISO remains exercisable. To the extent that the ISO
is exercised in part, the number of shares subject to the NSO will be reduced by
.667 shares for each share issued pursuant to the exercise of the ISO.
45
<PAGE>
Stock Appreciation Rights
Effective April 23, 1997, the Company granted a stock appreciation right
to James E. Bishop, the President of the Company, in connection with his
employment agreement with respect to 100,000 shares of Common Stock at an
exercise price of $3.25 per share, which vests 20,000 shares per year over a
period of five years, commencing that date, subject to accelerated vesting under
certain circumstances. Messrs. Hatala, Lubell, Pacchia, Bartlett, Lerner,
Aylward and Tipps and Ms. Hart-Brown have been granted stock appreciation rights
with respect to 5,000 shares at an exercise price of $3.25 per share
(collectively, the "Director SARs"). Subject to approval of such grants by the
Company's stockholders at the 1997 Annual Meeting, the Director SARs may be
exercised during the period October 25, 1997 through April 23, 2003. In no event
may the appreciated value per share paid in respect of the Director SARs exceed
$7.00 per share.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Interest of Messrs. Beck and Yeaggy in Hotels Under Management by the Company
The Company has agreements to manage 14 Managed Hotels which are not owned
directly or indirectly by the Company. Seven of these Managed Hotels are owned
by corporations or partnerships owned by Messrs. Beck and Yeaggy. The management
agreements with the Beck/Yeaggy - affiliated hotels provides for the payment to
the Company of an annual management fee equal to 5% of gross revenues and have
an initial term expiring in 2007. In the event of a sale of a hotel subject to a
management agreement, the Company is entitled to receive a payment equivalent to
the discounted present value of the anticipated management fees over the
remainder of the initial term.
Interest of Messrs. Beck and Yeaggy in Properties Subject to Mortgages held by
the Company
The Company has financial participations in the form of promissory notes
secured by mortgages on a hotel property in Juno Beach, Florida (the "Juno
Note") and on a KOA Campground in the vicinity of Orlando, Florida (the "KOA
Note"), both of which are owned by affiliates of Messrs. Beck and Yeaggy. The
principal balances of the Juno Note and the KOA Note as of June 30, 1997 are
$2,199,921 and $3,524,439 respectively. The Juno Note is subject to a prior lien
in favor of The Provident Bank as security for indebtedness of the Company in
the remaining principal amount of $1,160,602 as of June 30, 1997. Both the Juno
Note and KOA Note provide for monthly principal payments based upon a twenty
year amortization. Both notes mature on May 1, 2000, but their respective
maturity dates may be extended for an additional three years if the notes are
not in default on the original maturity date. The Juno Note bears interest at a
floating rate equal to the prime rate plus 1%, but in no event less than 7.75%
per annum. The KOA Note bears interest at a fixed rate of 8% per annum. Messrs.
Beck and Yeaggy have jointly and severally guaranteed the payment of the notes.
The Company does not regard these guarantees as material to the ultimate
satisfaction of either the Juno Note or the KOA Note on the basis that the
values of the respective properties exceed the underlying mortgage indebtedness.
Interest of Messrs. Beck and Yeaggy in Service Providers to the Company
The Company has a service agreement dated April 23, 1997 for a hotel
property management system with Computel Computer Systems, Inc. ("Computel"), a
corporation wholly-owned by Messrs. Beck and Yeaggy. The agreement 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 hotel location for
its basic property management software package plus one computer terminal. For
each additional terminal at a hotel location there is an additional charge of
$75 per month. Additional monthly fees are charged for add-on
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software for such services as guest messaging, call accounting interface,
franchise central reservation interface and movie interface. The Company
believes that these are market-rate fees. Based on the Company's present
operations, the Company projects aggregate payments to Computel of $43,650
during 1997. On each annual renewal of the agreement, Computel is entitled to
increase its fees commensurate with the fees charged to other customers.
Personnel at the hotels owned and managed by the Company are provided by
Hospitality Employee Leasing Program, Inc. ("HELP"), a corporation also
wholly-owned by Messrs. Beck and Yeaggy, pursuant to an agreement dated April
23, 1997. The Agreement 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. The Company pays
HELP an administrative fee of $8.15 per bi-monthly pay period per employee. The
Company believes that this is a market-rate fee. Based on the Company's present
operations, the Company projects aggregate fees of $39,120 to HELP during 1997.
Interest of Messrs. Beck and Yeaggy in Premises Occupied by the Company
The Company subleases office space in Cincinnati, Ohio and Boca Raton,
Florida from affiliates of Messrs. Beck and Yeaggy. The Sublease agreements are
on a triple-net basis and provide for annual rental payments of $25,248 and
$18,240 respectively. The Company believes that these are market rate rentals.
Interest of Messrs. Beck and Yeaggy in Best Western, Kings Quarters
The Company has an 85% general partnership interest in Kings Dominion
Lodge, a Virginia general partnership, the sole asset of which is the hotel
known as the Best Western, Kings Quarters, which is adjacent to the Kings
Dominion Amusement Park near Richmond, Virginia. The remaining 15% general
partnership interest is held by Elbe Properties, an Ohio general partnership
whose partners are Messrs. Beck and Yeaggy.
Under the partnership agreement for Kings Dominion Lodge, the Company is
the managing partner and has the authority to direct the day to day affairs of
the partnership's business. The managing partner may not construct any buildings
on the real property owned by the partnership without the consent of the other
partner. Any sale of an interest in the partnership requires the consent of the
other partner. The partnership agreement also provides for periodic
distributions of free cash flow except to the extent that any distribution would
impair the business of the partnership.
Independent Hospitality Business Maintained by Messrs. Beck and Yeaggy
In addition to their ownership of seven of the Managed Hotels, Messrs.
Beck and Yeaggy own five additional hotel properties which are managed by their
affiliate Beck Hospitality Inc. III. In their respective employment agreements
with the Company, Messrs. Beck and Yeaggy have agreed with the Company that, in
some instances, these existing businesses may be competitive with the
hospitality business of the Company and, with the exception of these existing
businesses, they have agreed not to engage in any business that competes with
the Company.
Guarantees by Messrs. Beck and Yeaggy of Indebtedness of the Company
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Messrs. Beck and Yeaggy have personally guaranteed the obligations of
Envoy Inns of Morrisville, L.L.C., a Delaware limited liability company, of
which the Company is the sole member, and Kings Dominion Lodge, a Virginia
general partnership, of which the Company owns an 85% interest, in connection
with three loans secured by mortgages on three Owned Hotels from State Street
Bank and Trust Company, as Trustee under a Pooling and Servicing Agreement dated
as of January 1, 1997 for J.P. Morgan Commercial Mortgage Finance Corporation.
The obligations of Messrs. Beck and Yeaggy pursuant to their guarantees in
connection with these loans are limited to payment of the outstanding debt in
the event of fraud or material misrepresentation by the borrowing entities, and
indemnification in connection with certain specific liability and costs for the
lender, such as environmental liability and liability caused by the gross
negligence or willful misconduct of the borrowing entity, the failure to pay
property taxes when due, the misapplication of insurance and condemnation
proceeds, damage or waste to the property subject to lender's mortgage, and
costs incurred by the Lender as a result of certain actions taken by the
borrowing entity after an event of default.
In addition, Messrs. Beck and Yeaggy have personally guaranteed the
obligations of the Company in connection with two loans from Star Bank, N.A.,
which obligations were assumed by the Company on April 24, 1997 from affiliates
of Messrs. Beck and Yeaggy and are secured by mortgages on two Owned Hotels. The
guarantees of Messrs. Beck and Yeaggy pursuant to these loans are limited to an
aggregate total of $209,250, plus liability incurred by the lender in connection
with events such as fraud or intentional misrepresentation by the Company or its
predecessor and misapplication of insurance or condemnation proceeds.
Messrs. Beck and Yeaggy are also personally obligated in connection with
loans from The Huntington National Bank in the original principal amount of
$3,260,000 with a balance of $2,739,900 as of June 30, 1997, and from 1st
National Bank, located in Warren County, Ohio, in the original principal amount
of $50,000 each of which was assumed by the Company on April 24, 1997 and are
secured by mortgages on the Days Inn, Sharonville, an Owned Hotel. Prior to the
Company's acquisition of the Beck-Yeaggy Group, this property was appraised at
$4,200,000.
Transferability Restrictions on Stock Owned by Messrs. Beck and Yeaggy and
Registration Rights
Messrs. Beck and Yeaggy, in the aggregate, directly and indirectly own
approximately 43% of the outstanding shares of the Company's Common Stock. They
have agreed that until April 23, 2001, they will not transfer, in any manner,
any shares of the Common Stock, without the consent of the Company's Board of
Directors. The Company shall have no obligation to consent to a transfer unless
it shall have received an opinion of counsel to the effect that the transfer
does not give rise to an "ownership change" under Code ss. 382 or otherwise
affect the availability to the Company of its NOLs and any other applicable tax
attributes for Federal income tax purposes. See "Description of Business - The
Net Operating Loss Carryforwards." In addition to the foregoing transferability
restrictions which have been consented to by Messrs. Beck and Yeaggy, the
Company has imposed equivalent transferability restrictions upon certain other
"5-percent shareholders" for purposes of Code ss. 382. See "Description of
Business - The Net Operating Loss Carryforwards - Certain Transferability
Restrictions."
Messrs. Beck and Yeaggy have been granted certain registration rights with
respect to the Company's securities owned by them. On a one-time basis they may
demand registration, at the Company's expense, of shares of preferred stock
owned by them. In addition, if the Company proposes to register any of its
securities in connection with a public offering of such
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securities (other than in connection with certain limited purpose
registrations), Messrs. Beck and Yeaggy may request that the preferred stock be
registered incidental thereto. Following the termination of the transferability
restrictions referred to above, on a one-time basis, Messrs. Beck and Yeaggy may
also demand registration, at the Company's expense, of their shares of Common
Stock. In addition, if following the termination of the transferability
restrictions referred to above, the Company proposes to register any of its
securities in connection with a public offering of such securities (other than
in connection with certain limited purpose registrations), Messrs. Beck and
Yeaggy may request that their Common Stock be registered incidental thereto.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, par value $.01 per share and 5,000,000 shares of Preferred
Stock, par value $.01 per share.
Preferred Stock
The Company is authorized to issue Preferred Stock in classes or series
having such designations, preferences and relative participating, optional or
other special rights, qualifications, limitations or restrictions, as shall be
stated and expressed in the resolutions of the Board of Directors providing for
the issuance of such stock. The Preferred Stock shall not have voting rights
except as required by law or as expressed in the resolutions of the Board of
Directors providing for the issuance of such shares.
The Company's Restated Certificate of Incorporation, as amended, provides
for a series of 12,000 shares of Preferred Stock, par value $.01 per share,
Series B (the "Series B Preferred Stock"), of which 10,451.88 shares are
outstanding. The Series B Preferred Stock has a redemption price of $1,000 per
share. Each holder of a share of Series B Preferred Stock is entitled to
cumulative dividends at the annual rate of $75 per share payable on the last day
of each March, June, September and December. There are currently no accrued and
unpaid dividends on the Series B Preferred Stock. The shares of Series B
Preferred Stock are not convertible into any other security.
Generally, the Series B Preferred Stock is non-voting. However, if accrued
and unpaid dividends have accumulated in an amount equal to the sum of four
quarterly dividends, under the Company's Restated Certificate of Incorporation,
the holders of Series B Preferred Stock are entitled to 0.01 of a vote per
share.
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Common Stock
As of August 20, 1997, there were 8,731,836.181 shares of Common Stock
outstanding. Each holder of Common Stock is entitled to one vote for each share
held. The holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. As long as there are accrued unpaid dividends on the Preferred Stock,
no dividends may be declared and paid on the Common Stock until such dividends
have been paid or until provision has been made for such payment. In the event
of a liquidation, dissolution or winding up of the company, holders of Common
Stock would be entitled to share in the Company's assets remaining after the
payment of liabilities and the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of preferred stock. The shares
of Common Stock are not convertible into any other security.
Warrants
The Company has outstanding Warrants to purchase 223,600 shares of the
Company's Common Stock. The Warrants are currently exercisable and have a term
of five years expiring in July 2001. Beginning in May 1999, the Company shall
have the right, upon at least thirty days notice to the holders of the Warrants,
to call the same for redemption if the market price of Common Stock shall have
exceeded $10.00 per share for a period of ten consecutive trading days. The
redemption price would be $0.25 per share.
The Warrants would not be exercisable if at the time of exercise or after
giving effect thereto, the holder would be directly, indirectly or by
attribution, a holder of five percent of more of the issued and outstanding
capital stock of the Company or the votes represented by the shares of the
capital stock of the Company entitled to vote for the election of directors.
The Warrants were issued in denominations divisible by four, and are
exercisable for two shares of the Common Stock at $3.00 per share, for one share
at $4.00 per share and for one share at $5.00 per share.
The exercise price of the Warrants is subject to adjustment in the event
of stock dividends or stock splits. In the event of a reorganization,
consolidation or merger, transfer of substantially all the assets or dissolution
involving the Company, the Company is required to make adequate provision for
the rights of the holders of the Warrants and the holders shall receive, upon
exercise of the Warrants, in lieu of Common Stock, the same kind and amount of
any share, securities or assets as may be issuable, distributable or payable on
any such sale, transfer, merger, reorganization, dissolution or winding up with
respect to each share of Common Stock that the holder would have received upon
exercise of the Warrant.
The Delaware Business Combination Act
Section 203 of the Delaware General Corporation Law (the "Delaware
Business Combination Act") imposes a three-year moratorium on business
combinations between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" (in general, a stockholder owning 15% or more of a corporation's
outstanding voting stock) or an affiliate or associate thereof unless (a) prior
to an interested stockholder becoming such, the board of directors of the
corporation approved either the business combination or the transaction
resulting in the interested stockholder becoming such, (b) upon consummation of
the
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transaction resulting in the interested stockholder becoming such, the
interested stockholder owns 85% of the voting stock outstanding at the time the
transaction commenced (excluding, from the calculation of outstanding shares,
shares beneficially owned by directors who are also officers and certain
employee stock plans) or (c) on or after an interested stockholder becomes such,
the business combination is approved by (i) the board of directors and (ii)
holders of at least 66-2/3% of the outstanding shares (other than those shares
beneficially owned by the interested stockholder) at a meeting of stockholders.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder"
involving the assets or stock of the corporation or its majority-owned
subsidiaries and transactions which increase an "interested stockholder's"
percentage ownership of stock.
The Delaware Business Combination Act applies to certain corporations
incorporated in the State of Delaware unless the corporation expressly elects
not to be governed by such legislation and sets forth such election in (a) the
corporation's original certificate of incorporation, (b) an amendment to the
corporation's by-laws as adopted by the corporation's board of directors within
90 days of the effective date of such legislation or (c) an amendment to the
corporation's certificate of incorporation or by-laws is approved by (in
addition to any other vote required by law) a majority of the shares entitled to
vote (however, such amendment would not be effective until 12 months after the
date of its adoption and would not apply to any business combination between the
corporation and any person who became an interested stockholder on or prior to
such adoption of such amendment). The Company has not made such an election and
is subject to the Delaware Business Combination Act since it has over 2,000
shareholders of record. However, while they own more than 15% of the Company's
outstanding voting stock, Messrs. Beck and Yeaggy are not "interested
stockholders" because the Company's Board of Directors approved the transactions
resulting in their Stock ownership. Accordingly, the restrictions of Section 203
will not apply to transactions, if any, between the Company and either Mr. Beck
or Mr. Yeaggy.
Director Liability Provisions
As permitted by the Delaware General Corporation Law, the Company's
Restated Certificate of Incorporation, as amended, contains a provision which
eliminates under certain circumstances the personal liability of directors (only
in their capacities as directors of the Company) to the Company or its
stockholders for monetary damages for a breach of fiduciary duty as directors.
The provision in the Certificate does not change a director's duty of care, but
it does authorize the Company to eliminate monetary liability for certain
violations of the duty, including violations based on grossly negligent business
decisions which may include decisions relating to attempts to change control of
the Company. The provision does not affect the availability of equitable
remedies for a breach of duty of care, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty; however, in certain
circumstances equitable remedies may not be available as a practical matter. The
provision in the Certificate in no way affects a director's liability under the
federal securities laws. The Company's By-Laws contain similar provisions.
Preservation of Income Tax Attributes
The Company's Restated Certificate of Incorporation contains several
provisions which are intended to preserve the availability of the Company's net
operating losses. See "Description of Business - The Net Operating Loss
Carryforwards." Except if a transaction is approved by resolution of the Board
of Directors by a vote of two-thirds of the directors then in office, the
affirmative vote of the holders of two-thirds of the outstanding shares of
Common Stock is required to approve (i) the issuance
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during any 24-month period of shares of the capital stock or other securities of
the Company convertible into capital stock, which shares would entitle the
holders thereof to exercise five percent (5%) or more of the voting power of the
Company for the election of directors immediately after the issuance of such
shares, (ii) any merger, consolidation or other reorganization of the Company,
(iii) any dissolution or liquidation of the Company of (iv) any sale or
disposition of any substantial portion of the assets of the Company.
No person or entity may acquire shares of the capital stock of the Company
if, after giving affect to any acquisition, such person or entity would have
record or beneficial ownership directly or by attribution, of five percent (5%)
or more of the issued and outstanding capital stock of the Company determined on
the basis of the fair market value of the capital stock of the Company or the
votes represented by the shares of the capital stock of the Company entitled to
vote for the election of directors. There is an exception to the foregoing
restriction for any person or entity which originally received shares of the
capital stock of the Company pursuant to the Plan, but no such person or entity
may acquire additional capital stock.
The Board of Directors of the Company is empowered to adopt such
procedures and to impose such further limitations on the transferability of the
Company's capital stock as the Board deems desirable to preserve and maintain
the Federal income tax attributes of the Company. Moreover, the Board of
Directors is empowered to waive any transferability restrictions if it
determines that a proposed acquisition of shares of the Company's capital stock
would not be adverse to the interests of the Company and its stockholders,
taking into account the likely effect of a transaction upon the Federal income
tax attributes of the Company. See "Description of Business - The Net Operating
Loss Carryforwards" and "Risk Factors - Irregular Trading Market."
Transfer Agent and Registrar
Chase Mellon Shareholder Services, Inc. acts as the Company's transfer
agent and registrar.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
As of August 20, 1997, there were approximately 3,690 holders of record of
the Company's Common Stock.
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.
There has been no prior market for the Company's Common Stock and there
can be no assurance that a public market for the Common Stock will develop or be
sustained in the future. The Company intends to apply for quotation of the
Common Stock on the Nasdaq National Market System or the Nasdaq SmallCap Market.
In order to qualify for such quotation, the Company must satisfy certain
maintenance criteria. The failure to meet and maintain such maintenance criteria
will result in the Common Stock being ineligible for quotation on Nasdaq and
trading, if any, of the Common Stock. As a result of no public market for the
Company's securities, an investor may find it difficult to dispose of or to
obtain accurate quotations as to the market value of the Company's securities.
In addition, if the Common Stock has a trading price of less than $5.00 per
share, trading in the Common Stock would also be subject to the requirements of
certain rules promulgated under the Exchange Act, which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage them from effecting transactions in the Common Stock, which could
severely limit the liquidity of the Common Stock.
The offering prices of the Company's securities and other terms of the
sales of the Company's securities within the last ten months were established by
negotiation between the Company and the acquirers thereof and may not be
indicative of prices that will prevail in the trading market. In the absence of
an active trading market, purchasers of the Company's securities may experience
substantial difficulty in selling their securities. The trading price of the
Company's securities is expected to be subject to significant fluctuations in
response to variations in quarterly operating results, changes in estimates of
earnings and other factors often unrelated to operating performance.
ITEM 2. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In November 1996, the Company engaged J.H. Cohn LLP ("J.H. Cohn") as
independent auditors to perform the audit of the Company's annual financial
statements as successor to Arthur Andersen LLP
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("Arthur Andersen"). In October, 1996, Arthur Andersen decided to no longer
serve as the Company's auditors. Arthur Andersen informed the Company that it
was not aware of any disputes between its firm and the Company in the context of
its audits and tax return services performed for the years ended December 31,
1994 and 1995. From the effective date of the Plan in 1990 until the date
hereof, there have been no disagreements between the Company and prior certified
public accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of such prior accountants,
would have caused them to make reference in connection with their report to the
subject matter of the disagreements.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information with respect to all sales of
unregistered securities by the Company within the past three years:
(a) Private placement of 268,368 shares of Common Stock (subsequently
reduced to 231,018 as a result of a post-closing adjustment) and warrants to
acquire 500,000 shares of Common Stock (the "Warrants") to former debt and
equity investors in and service providers to Pre-Tek Wireline Service Company,
Inc., a California corporation (the "Selling Company").
This placement was made in connection with the sale of the business of the
Selling Company to the Company and the subsequent dissolution of the Selling
Company. Four individuals were accredited investors. An additional 150,000
shares of Common Stock was placed in escrow for issuance contingent upon the
purchased business achieving sales of a target level. This level of sales was
not achieved and the 150,000 shares were returned to treasury in August 1997.
The Company relied on Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. Prior to the Selling Company's approval of the
transaction, the Company provided a private placement memorandum to each
recipient of the Common Stock and Warrants which met the disclosure requirements
of Rule 502. Non-accredited investors were represented by investor
representatives Fred Miller and Eric Riedman, who were the control persons of
the Selling Company.
For purposes of the transaction, a share of Common Stock was valued at
$2.75 per share for an aggregate offering price (prior to the post-closing
adjustment) of $738,012. No value was ascribed to the Warrants. The Warrants
were issued as nearly as practicable in multiples of four, with two of each
block of four representing a Common Stock purchase price of $3.00 per share; one
of $4.00 per share; and one of $5.00 per share. The Warrants expire on July 15,
2001. Commencing in May 1999, the Warrants become subject to redemption by the
Company at $0.25 per Warrant if the market price of the Common Stock equals or
exceeds $10.00 per share for 10 consecutive trading days.
The recipients of the securities, through the Selling Company, were:
Name Security Amount
Mary Boehm Common Stock 7,272.727
Warrants 2,353
Richard Sheffield Common Stock 7,272.727
Warrants 2,353
Hansjorg & Brigit Jansen Common Stock 7,272.727
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Warrants 2,353
Nanette K. Moore Common Stock 7,272.727
Warrants 2,353
Reynoldo Frios Common Stock 7,272.727
Warrants 2,353
Hugh & Marjorie Lehman Common Stock 3,636.364
Warrants 1,176
Robert A. Hardekopf Common Stock 1,818.182
Warrants 2,353
Stargate Corporation Common Stock 2,523
Warrants 3,800
Patrick J. Sanjenis Common Stock 8,541
Wayne Corprew Common Stock 8,541
Warrants 13,000
Ram Krishna Common Stock 33,768
Warrants 92,000
Jack R. Gill Common Stock 749
Warrants 1,250
Patrick D. Love Common Stock 749
Warrants 1,250
Guy Chaffin Common Stock 749
Warrants 1,250
Karl F. Edmonds, Jr. Common Stock 749
Warrants 1,250
Eric Riedman Common Stock 28,333
Warrants 100,153
Fred Miller Common Stock 23,800
Adolph Weissman Common Stock 6,175
Target Energy Partners Common Stock 6,227
Warrants 9,400
Texas A & G Systems, L.P. Common Stock 28,131
Warrants 61,000
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Om Prakash Common Stock 7,358
Warrants 10,400
PT Liquidating Corp. Common Stock 12,807
Janus, as Escrow Agent Common Stock 20,000
(for Miller and Riedman)
Robert J. Hess Warrants 2,353
Dick Teater Warrants 2,353
Nancy S. Miller Warrants 93,391
Ruth Weissman Warrants 9,400
Shirley L. Sanjenis Warrants 57,965
Arthur Kronenberg Warrants 14,491
Ivan Irizarry, II Warrants 10,000
(b) Private placement of 3,799,999 shares of Common Stock, valued for
purposes of the transaction at $3.25 per share, and 10,451.88 shares of Series B
Preferred Stock, valued at the liquidation preference of $1,000 per share, to
Louis S. Beck, Harry Yeaggy and Beck Hospitality Inc III. Management of the
Company valued the Series B Preferred Stock by comparing the taxable equivalent
yield on such stock (after application of an assumed 70% dividend exclusion)
with a market basket of below investment grade high yield corporate bonds, and
by making adjustments in the yield on the stock to reflect both positive and
negative market related attributes.
This placement was made in connection with the acquisition of the
Beck-Yeaggy Group.
The securities were issued as follows:
Name Shares of Common Shares of Preferred
Louis S. Beck 2,617,499 7,013.91
Harry Yeaggy 872,500 1,237.97
Beck Hospitality Inc III. 310,000 1,100
The Company relied on Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. All three recipients were accredited investors.
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No underwriters were involved nor any commissions paid in connection with
any of the above transactions.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation, as amended, limits
the liability of directors to the maximum extent permitted by Delaware law. The
Company's By-Laws provide that the Company shall indemnify its directors and
executive officers and may indemnify its other officers, employees, agents and
other agents to the fullest extent permitted by law. The Company's By-Laws also
permit the Company to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the By-Laws would permit indemnification.
Each of the officers and directors of the Company is insured against
certain liabilities which he or she might incur in his or her capacity as an
officer or director pursuant to a Directors and Officers Liability and
Reimbursement Policy issued by American Guarantee and Liability Insurance
Company, of New York, New York. The general effect of this policy is that if
during the policy period any claim or claims are made against the officers and
directors of the Company or any of them individually for a Wrongful Act (as
defined in the policy) while acting in their individual or collective capacities
as directors or officers, and the Company has indemnified them, the insurer
will, after application of a $50,000 deductible, reimburse the Company for 100%
of any Loss (as defined in the policy). In those instances where the officers
and directors are not indemnified by the Company, the insurer will pay on behalf
of the officers and directors of the Company or any of them, their executors,
administrators, or assigns, 100% of the Loss. The insurer's combined limit of
liability is $5,000,000 during any policy year and $5,000,000 for any single
Loss. "Wrongful Act" is defined as any error, misstatement, misleading
statement, act, omission, neglect or breach of duty actually or allegedly
committed or attempted by the officers or directors of the Company while acting
in their individual or collective capacities or in any matter, not excluded by
the terms and conditions of the policy, claimed against them by reason of their
being directors or officers of the Company. For purposes of reimbursement of the
Company for indemnity payments by the Company to officers or directors, the term
"Loss" is defined as any amount which the Company shall be required or permitted
by law to pay to such person as indemnity for a claim or claims made against
them for "Wrongful Acts", and for purposes of direct payment by the insurer to
officers and directors, the term "Loss" is defined as any amount which the
officers and directors of the Company are legally obligated to pay for a claim
or claims made against them for "Wrongful Acts"; and includes in each case
damages, judgments, settlements, costs, charges, and expenses incurred in the
defense of actions, suits or proceedings and appeals therefrom, except that the
term "Loss" does not include fines or penalties imposed by law or matters which
may be deemed uninsurable under the law pursuant to which the policy shall be
construed.
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INDEX TO FINANCIAL STATEMENTS
PAGE
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JANUS INDUSTRIES, INC. AND SUBSIDIARIES:
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-3/4
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 F-5
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9/23
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 (Unaudited) F-24
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited) F-25
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) F-26
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited) F-27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) F-28/30
THE BECK/YEAGGY GROUP:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-31
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 F-32
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-33
COMBINED STATEMENTS OF OWNERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-34
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-35
NOTES TO COMBINED FINANCIAL STATEMENTS F-36/43
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(Concluded)
PAGE
----
THE BECK/YEAGGY GROUP (Concluded):
CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997 (Unaudited) F-44
CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited) F-45
CONDENSED COMBINED STATEMENTS OF OWNERS' CAPITAL DEFICIENCY
THREE MONTHS ENDED MARCH 31, 1997 (Unaudited) F-46
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited) F-47
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited) F-48/49
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-50
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM APRIL 1, 1996 THROUGH JULY 15, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995 F-51
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 1, 1996 THROUGH JULY 15, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995 F-52/53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-54/66
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS:
INTRODUCTION TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS F-67
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 (Unaudited) F-68
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) F-69
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) F-70
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited) F-71/72
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Janus Industries, Inc.
We have audited the accompanying consolidated balance sheet of JANUS INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Janus Industries,
Inc. and Subsidiaries as of December 31, 1996, and their results of operations
and cash flows for the year then ended, in conformity with generally accepted
accounting principles.
J. H. COHN LLP
Roseland, New Jersey
March 7, 1997, except for
Note 9 as to which the
date is April 24, 1997
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Janus Industries, Inc.
(formerly United States Lines, Inc.)
We have audited the accompanying consolidated balance sheet of Janus Industries,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Industries, Inc. and
subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
April 18, 1996
F-4
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
----------- ----------
Current assets:
Cash and cash equivalents $ 6,580,836 $2,053,437
Cash restricted for payments to redeem
preferred stock of subsidiary 673,200
Accounts receivable 83,100
Other current assets 184,734 35,195
----------- ----------
Total current assets 7,521,870 2,088,632
Property and equipment, net of accumulated
depreciation of $86,105 and $25,888 582,693 7,275
Goodwill, net of accumulated amortization
of $30,375 860,966
Deferred costs of proposed acquisition 74,692
Other assets 7,096 13,396
----------- ----------
Totals $ 9,047,317 $2,109,303
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable for redemption of preferred stock
of subsidiary $ 673,200
Accounts payable 149,020
Accrued expenses 159,655 $ 134,137
Dividends payable 105,600
----------- ----------
Total current liabilities 981,875 239,737
----------- ----------
Minority interest 43,837 622,710
----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; 2,200
shares issued and outstanding in 1995;
$220,000 liquidation preference 22
Common stock, par value $.01 per share;
15,000,000 shares authorized; 8,080,868 and
7,812,500 shares issued 80,809 78,125
Additional paid-in capital 13,061,256 4,967,763
Accumulated deficit (4,245,730) (3,027,037)
Treasury stock - 2,849,850 and 2,812,500
shares, at cost (874,730) (772,017)
----------- ----------
Total stockholders' equity 8,021,605 1,246,856
----------- ----------
Totals $ 9,047,317 $2,109,303
=========== ==========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- ---------
Sales $ 381,055
-----------
Costs and expenses:
Operating costs 363,162
Selling, general and administrative expenses 1,319,991 $ 728,084
Depreciation of property and equipment 61,434 3,881
Amortization of intangible assets 30,375 7,560
----------- ---------
Totals 1,774,962 739,525
----------- ---------
Operating loss (1,393,907) (739,525)
Other income (expense):
Interest income 247,516 140,307
Other income 4,376
Interest expense (1,476)
----------- ---------
Loss before minority interest (1,143,491) (599,218)
Minority interest 50,490 60,818
----------- ---------
Net loss (1,193,981) (660,036)
Preferred dividend requirements 24,712 31,800
----------- ---------
Net loss applicable to common stock $(1,218,693) $(691,836)
=========== =========
Net loss per common share $(.24) $(.11)
===== =====
Weighted average common shares outstanding 5,119,634 6,040,240
========= =========
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Treasury Stock
--------------- ---------------- ------------------
Number Number Additional Number
of of Paid-in Accumulated of
Shares Amount Shares Amount Capital Deficit Shares Amount Total
------ ------ ------ ------ ---------- ----------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 4,000 $40 7,812,500 $78,125 $ 5,147,745 $(2,405,401) $2,820,509
Net loss (660,036) (660,036)
Redemption of preferred
stock (1,800) (18) (179,982) (180,000)
Repurchase of common stock 2,812,500 $(772,017) (772,017)
Release from certain
preferred stock
dividend obligations 70,200 70,200
Preferred stock dividends (31,800) (31,800)
----- --- --------- ------- ----------- ----------- --------- -------- ----------
Balance, December 31,
1995 2,200 22 7,812,500 78,125 4,967,763 (3,027,037) 2,812,500 (772,017) 1,246,856
Net loss (1,193,981) (1,193,981)
Contributions to capital
from United States
Lines, Inc. and United
States Lines (S.A.),
Inc. Reorganization
Trust 7,578,143 7,578,143
Shares and warrants issued
to acquire oil and gas
services business 268,368 2,684 735,328 738,012
Shares returned as a
result of post-closing
adjustments in
connection with
acquisition of oil and
gas services business 37,350 (102,713) (102,713)
Redemption of preferred
stock (2,200) (22) (219,978) (220,000)
Preferred stock dividends (24,712) (24,712)
----- --- --------- ------- ----------- ----------- --------- -------- ----------
Balance, December 31,
1996 - $- 8,080,868 $80,809 $13,061,256 $(4,245,730) 2,849,850 $(874,730) $8,021,605
===== === ========= ======= =========== =========== ========= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- ----------
Operating activities:
Net loss $(1,193,981) $ (660,036)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 91,809 11,441
Minority interest 50,490 60,818
Changes in operating assets and liabilities,
net of effects of acquisition of
oil and gas service business:
Accounts receivable 17,229
Other current assets (89,393) (1,952)
Other assets 7,547
Accounts payable and accrued expenses (85,593) 116,959
----------- ----------
Net cash used in operating activities (1,201,892) (472,770)
----------- ----------
Investing activities:
Acquisition of oil and gas services business,
net of noncash consideration and cash
acquired (701,631)
Purchases of equipment (101,854) (5,827)
Proceeds from sale of equipment 9,000
Costs of proposed acquisition (74,692)
----------- ----------
Net cash used in investing activities (869,177) (5,827)
----------- ----------
Financing activities:
Reduction of minority interest through
redemption of preferred stock of
subsidiary (478,508)
Redemption of preferred stock (220,000) (180,000)
Increase in restricted cash (673,200)
Repurchase of common stock (772,017)
Preferred stock dividends (130,312)
Contributions to capital from United States
Lines, Inc. and United States Lines (S.A.),
Inc. Reorganization Trust, including
$43,837 attributable to minority interest 7,621,980
Net cash provided by (used in) ----------- ----------
financing activities 6,598,468 (1,430,525)
----------- ----------
Increase (decrease) in cash and cash
equivalents 4,527,399 (1,909,122)
Cash and cash equivalents, beginning of year 2,053,437 3,962,559
----------- ----------
Cash and cash equivalents, end of year $ 6,580,836 $2,053,437
=========== ==========
Supplemental disclosure of cash flow data:
Interest paid $ 1,476
===========
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
In November 1986, United States Lines, Inc. ("USL") and United
States Lines (S.A.) Inc. ("USL-SA"), together with two related
companies, filed petitions under Chapter 11 of the United States
Bankruptcy Code. On May 16, 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 on February 6, 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. ("Janus") and JI Subsidiary, Inc. ("JIS"), respectively
(Janus, JIS and the other subsidiaries subsequently formed
or acquired by Janus are referred to collectively herein as
the "Company");
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 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 issuable by Janus and
JIS, except for shares issuable to Janus and a subsidiary of
Dyson-Kissner-Moran ("DKM"), a new investor; shares of
capital stock issuable to such former creditors were
initially issued to the Reorganization Trust as recordholder
for reissuance to such creditors; and
e. The Reorganization Trust contributed $3,000,000 of USL and
USL-SA cash to initially 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 a cash contribution of
approximately $7,622,000 to the capital of Janus and JIS in
1996.
F-9
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization (concluded):
At the time the Plan was approved, Janus and JIS had no commercial
operations. However, they had substantial Federal net operating
loss carryforwards (see Note 5). Under the Plan, DKM purchased
approximately 36% of the Company's common stock and a warrant to
purchase an additional 9% of the Company's common stock for
$3,000,000. In addition, DKM was to control the Board of Directors
of Janus and was required to seek and assist the Company in the
consummation of the acquisition of one or more operating
businesses while preserving the Federal income tax attributes of
Janus and JIS. However, DKM was not able to assist the Company in
consummating any acquisitions and, as a result, the Company
repurchased and redeemed all of DKM's interests in Janus and JIS
and obtained new management during 1995.
Until July 15, 1996, the Company did not actively engage in any
trade or business. Income consisted primarily of interest on
temporary investments. Expenses consisted primarily of
professional fees and other costs incurred in connection with the
Company's efforts to acquire businesses, and record retention and
other administrative expenses incurred to satisfy existing
financial reporting requirements.
On July 15, 1996, as further explained in Note 3, the Company
acquired certain assets and liabilities of Pre-Tek Wireline
Service Company, Inc. ("PTWSC") and its wholly-owned subsidiary,
K.F.E. Wireline, Inc. ("KFE"), for consideration comprised of
cash, common stock and warrants. PTWSC and KFE (which are referred
to collectively herein as "Pre-Tek") provide engineering and
wireline logging services to companies in the oil and gas industry
that are located primarily in California.
On April 24, 1997, the Company entered the hospitality business by
issuing preferred and common stock to acquire seven hotels, a
hotel management company and certain other assets (see Note 9).
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. Accordingly, actual results could
differ from those estimates.
F-10
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Fresh start accounting:
The Company adopted fresh-start accounting as of February 23,
1990, the date of its reorganization (see Note 1). The Company's
opening balance sheet consisted of $6,000,000 in cash and
capital stock. Accordingly, the reorganization value of the
Company approximated book value.
Principles of consolidation:
The consolidated financial statements include the accounts of
Janus and its 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 an estimated useful
life of five years.
Intangible assets:
Goodwill, which represents the excess of the costs of acquiring
the oil and gas services business over the fair value of the net
assets at the date of acquisition, is being amortized using the
straight-line method over an estimated useful life of 15 years.
Organization costs, consisting primarily of professional fees
and other costs associated with the formation of the Company,
were amortized using the straight-line method over an estimated
useful life of five years. Such costs totaled $37,800 and were
included in other assets at December 31, 1995, net of
accumulated amortization of $31,500, and became fully amortized
in 1996.
Impairment of long-lived assets:
Effective as of January 1, 1996, the Company adopted 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 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. The adoption of SFAS 121
had no material effect on the Company's 1996 consolidated
financial statements.
F-11
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Minority interest:
Of the $6,000,000 initially contributed to capitalize Janus and
JIS by the Reorganization Trust and DKM under the Plan (see
Notes 1 and 6), an aggregate of $815,000 was allocated to the
capital of JIS, of which $765,000 was allocated based on the
total liquidation preference attributable to the JIS Series A
preferred stock and $50,000 was allocated based on the total
stated value of the JIS common stock (of which $5,000 was
attributable to the minority stockholders of JIS and the balance
was attributable to the shares held by Janus).
At December 31, 1995, the minority interest of $622,710
reflected in the accompanying consolidated balance sheet
represented the total liquidation preference of, and accrued
dividends on, the shares of JIS Series A preferred stock that
remained outstanding. The minority interest attributable to the
JIS preferred stock was eliminated as a result of the redemption
of those shares during 1996.
As a result of cumulative losses that exceeded the stated
capital initially attributable to minority stockholders of JIS
common stock, the balance of the minority interest in the JIS
common stock had been eliminated as of December 31, 1995. Since
the minority stockholders do not incur any obligations as a
result of losses in excess of their capital contributions or
contributions made on their behalf, such excess was charged
against the majority interest in the JIS common stock held by
Janus. As a result of additional capital contributions made to
JIS during 1996, the excess of losses over stated capital
previously charged against the majority interest in the JIS
common stock held by Janus was eliminated and the excess of
$43,837 of stated capital over cumulative losses attributable to
the 11% minority interest in the JIS common stock is reflected
as minority interest in the accompanying 1996 consolidated
balance sheet.
The charge for minority interest reflected in the accompanying
consolidated statement of operations represents the accrued
dividends applicable to the JIS Series A preferred stock.
F-12
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income 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.
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 to be 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 are
recorded in the Federal and state income tax returns 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 as a result of any grants of stock options at an
exercise price that is equivalent to or greater than fair value.
The Company will also make pro forma disclosures, as required by
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), of net income or
loss as if a fair value based method of accounting for stock
options had been applied instead if such amounts differ
materially from the historical amounts.
F-13
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (concluded):
Net loss per common share:
Net loss per common share was computed based on the net income
or loss for each period adjusted for dividend requirements on
outstanding shares of preferred stock and the weighted average
number of common shares outstanding. The effects of the assumed
exercise of outstanding options have not been included in the
computations because such effects were anti-dilutive.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS 128") which replaces the
presentation of primary earnings per share required under
previously promulgated accounting standards with a presentation
of basic earnings per share. It also requires dual presentation
of basic and diluted earnings per share on the face of the
statement of income for all entities with complex capital
structures and provides guidance on other computational changes.
SFAS 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997. Earlier
application is not permitted. The Company does not expect the
adoption of SFAS 128 to have a material impact on its results of
operations or computations of net income or loss per share.
Reclassifications:
Certain accounts in the 1995 consolidated financial statements
have been reclassified to conform with 1996 presentations.
Note 3 - Acquisition of oil and gas services business:
As explained in Note 1, on July 15, 1996, the Company acquired the
oil and gas services business and certain assets of Pre-Tek
(including 100% of the capital stock of KFE) and assumed certain
of its liabilities.
The consideration exchanged by the Company for such assets and
liabilities and the other direct acquisition costs was comprised
as follows:
Cash payments to certain creditors and
former stockholders of Pre-Tek $ 605,413
Issuance of 268,368 shares of Janus
common stock, with a fair value of $2.75 per share, and
500,000 warrants to purchase Janus common stock, to
stockholders and former stockholders of Pre-Tek 738,012
Return of 37,350 shares of Janus common
stock as a result of post-closing
adjustments (102,713)
Other acquisition costs 182,092
----------
Total $1,422,804
==========
F-14
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of oil and gas services business (continued):
The Company also agreed to issue up to 150,000 additional shares
of common stock to the sellers based contingent upon Pre-Tek's
sales exceeding certain specified levels during the year ending
July 15, 1997.
The acquisition was accounted for as a purchase and, accordingly,
the results of Pre-Tek's operations have been included in the
accompanying consolidated statements of operations from July 15,
1996, the effective date of the acquisition. In addition, total
acquisition costs were allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the
date of acquisition, with the excess of cost over such fair values
allocated to goodwill, as shown below:
Cash $ 85,874
Accounts receivable 100,329
Inventory 34,814
Other current assets 25,332
Equipment 543,995
Other assets 1,250
Goodwill 891,341
Accounts payable and other current
liabilities (260,131)
----------
Cost of acquisition $1,422,804
==========
The fair value of any additional shares issued to the sellers
based on Pre-Tek's sales volume will also be allocated to
goodwill.
The following unaudited pro forma information shows the results of
operations for 1996 and 1995 as though Pre-Tek had been acquired
at the beginning of 1995:
1996 1995
---------- ----------
Sales $ 928,000 $ 743,000
Net loss (1,634,000) (1,339,000)
Net loss applicable
to common stock (1,659,000) (1,115,000)
Net loss per common share (.32) (.18)
Weighted average common shares
outstanding 5,231,000 6,271,000
In addition to combining the historical results of operations of
the Company and Pre-Tek, the pro forma results include adjustments
to reflect depreciation and amortization based on the fair values
of assets acquired, a reduction of interest earned on cash paid as
part of the consideration for the acquisition and the issuance of
shares of common stock (net of shares returned) as part of the
consideration for the acquisition.
F-15
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition of oil and gas services business (concluded):
The issuance and return of Janus common shares in connection with
the acquisition were noncash transactions that are not reflected
in the accompanying 1996 consolidated statement of cash flows.
Note 4 - Property and equipment:
Property and equipment consists of the following:
1996 1995
-------- -------
Equipment $367,357 $14,282
Vehicles 275,551
Office equipment, furniture and
fixtures 20,797 13,488
Leasehold improvements 5,093 5,093
-------- -------
668,798 32,863
Less accumulated depreciation 86,105 25,588
-------- -------
Totals $582,693 $ 7,275
======== =======
Note 5 - Income taxes:
Management believes that as of December 31, 1996, Janus had, after
giving effect to the Plan and transactions contemplated
thereunder, estimated available adjusted net operating loss
carryforwards for Federal income tax and alternative minimum tax
purposes of at least $500,000,000 that were generated primarily
during 1985 through 1987. These loss carryforwards, which expire
primarily during 1999 through 2001, may also be used to offset
future taxable income, if any, of Janus as well as the
Reorganization Trust, subject to certain limitations. All of the
net operating loss carryforwards referred to above are subject to
review and possible adjustment by the Internal Revenue Service.
Management believes the Company also has net operating loss
carryforwards in several states in which it operated prior to the
implementation of the Plan. The amount, expiration and opportunity
to use these losses vary from state to state.
For financial statement purposes, no provision for Federal income
taxes was recorded in 1996 and 1995 as a result of the operating
losses incurred by the Company during those years. All of the tax
loss attributes referred to above have been fully reserved through
a valuation allowance rather than reflected as deferred tax assets
due to the lack of a taxable income stream and the uncertainties
referred to above. Future benefits, if any, to be realized from
the utilization of the net operating loss carryforwards generated
prior to February 8, 1990 will be reported as additional paid-in
capital.
F-16
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Income taxes (concluded):
Additionally, 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,
1996, management believes that such a change in ownership has not
occurred.
Note 6 - Stockholders' equity:
Capital stock:
Information regarding the capital stock of Janus follows:
-- Preferred stock, par value $.01 per share; 5,000,000
shares authorized at December 31, 1996 and 1995,
respectively, of which 4,000 shares were designated as
"Series A" (the "Janus Series A preferred stock"); 2,200
shares of Series A preferred stock issued and outstanding
at December 31, 1995, all of which were redeemed during
1996; and
-- Common stock, par value $.01 per share; 15,000,000
shares authorized; 8,080,868 and 7,812,500 shares
issued at December 31, 1996 and 1995, respectively
(the 150,000 shares of Janus common stock contingently
issuable based on the post-acquisition sales volume of
Pre-Tek are not included in shares outstanding for
financial accounting purposes); 2,849,850 and
2,812,500 shares held in treasury at December 31, 1996
and 1995. At December 31, 1996, the Reorganization
Trust held approximately 1,702,000 shares of Janus
common stock for possible future distribution under
the Plan which the Reorganization Trust was required
to vote in proportion to the votes cast by the Company's
other stockholders (see Note 9).
Information regarding the capital stock of JIS follows:
-- Preferred stock, par value $.01 per share; 5,000,000
shares authorized at December 31, 1996 and 1995,
respectively, of which 7,650 shares were designated as
"Series A" (the "JIS Series A preferred stock"); 4,207
shares of Series A preferred stock issued and outstanding
at December 31, 1995, all of which were redeemed during
1996; and
-- Common stock, par value $.01 per share; 15,000,000 shares
authorized; 5,000,000 shares issued at December 31, 1996
and 1995; 409,000 shares held in treasury at December 31,
1996 and 1995.
F-17
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Stockholders' equity (continued):
Capital stock (continued):
At December 31, 1995, accrued but undeclared dividends on the
Janus Series A preferred stock and the JIS Series A preferred
stock amounted to $105,600 and $201,960, respectively.
The capitalization of Janus and JIS upon confirmation of the
Plan was determined pursuant to the Stock Purchase Agreement
dated May 16, 1989, as amended pursuant to the Supplemental
Agreement dated as of February 23, 1990 (the "Stock Purchase
Agreement"), among the subsidiary of DKM, USL and USL-SA. The
Stock Purchase Agreement was an integral part of the Plan.
On May 15, 1995, the Company repurchased and redeemed from DKM,
all of its interests in Janus and JIS (comprised of 1,800 shares
of Janus Series A preferred stock, 2,812,500 shares of Janus
common stock and 3,443 shares of JIS Series A preferred stock)
for total consideration of $1,430,525 and DKM's waiver of its
right to any unpaid dividends. Additionally, DKM and its
affiliates were released from all of their obligations under the
Stock Purchase Agreement.
The shares of Janus and JIS common stock and Series A preferred
stock acquired by the Reorganization Trust were acquired for the
benefit of former holders of claims against USL and USL-SA. Such
shares will be distributed by the Reorganization Trust from time
to time to such former creditors as their claims are liquidated.
However, shares of Janus or JIS common stock will be issued by
the Reorganization Trust only to creditors in a manner designed
to preserve the Company's net operating losses in accordance
with the requirements of the Internal Revenue Code.
The restated Certificate of Incorporation of each of Janus and
JIS contain restrictions on the "transfer" (as defined) of
shares of the Janus and JIS capital stock which are intended to
preserve and maintain the Federal income tax attributes of Janus
and JIS. The restated Certificates of Incorporation of each of
Janus and JIS prohibit the acquisition of any shares of the
capital stock or securities of Janus or JIS if, at the date of
such acquisition, such purchaser would be a holder of 5% or more
of the issued and outstanding capital stock of Janus or JIS,
determined based on the fair market value of the capital stock
of Janus or JIS or the votes represented by the shares of the
capital stock of Janus or JIS entitled to vote for the election
of directors. However, such transfers and issuances can be made
if approved by the Board of Directors.
F-18
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Stockholders' equity (continued):
Capital stock (concluded):
The Janus Series A preferred stock and the JIS Series A
preferred stock were substantially identical in their terms. The
Janus and JIS Series A preferred stock entitled the holders
thereof to cash dividends, payable on the last day of each June
and December, at an annual rate equal to 12% of the liquidation
preference value of the Janus or JIS Series A preferred stock.
Shares of the Janus and JIS Series A preferred stock were
redeemable at a price of $100 per share. Holders of the Janus
and JIS Series A preferred stock were not entitled to vote
except as required by law.
In December 1996, the remaining 2,200 shares of Janus Series A
preferred stock then outstanding were redeemed through the
payment of the aggregate redemption price of $220,000 and the
aggregate balance of accrued and unpaid dividends of $130,312.
In December 1996, the Company notified the holders of the
remaining 4,207 shares of JIS Series A preferred stock then
outstanding that such shares were being redeemed. Those shares
were effectively redeemed through the transfer of the aggregate
redemption price of $420,750 and the aggregate balance of
accrued and unpaid dividends of $252,450 to a restricted cash
account which can only be used for such redemption payments. The
restricted cash and corresponding liability of $673,200 are
reflected separately in the accompanying consolidated balance
sheet as of December 31, 1996.
During 1996, the Reorganization Trust transferred cash in excess
of its projected liabilities and administrative requirements
totaling $7,621,980 to the Company, of which $6,859,784 (90%)
was deemed a capital contribution to Janus and $762,196 (10%)
was deemed a capital contribution to JIS (including $43,837
attributable to the minority interest in the JIS common stock).
In July 1996, the Company issued 268,368 shares of Janus common
stock with a fair value of 738,012, as part of the consideration
for the acquisition of Pre-Tek (see Note 3) and deposited
150,000 shares in escrow, issuance of which is contingent upon
Pre-Tek's sales reaching certain levels. A total of 37,350
shares were subsequently returned to the Company as a result of
post-closing adjustments to the purchase price.
F-19
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Stockholders' equity (concluded):
Warrants:
In July 1996, the Company also 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 warrants will expire on July
15, 2001. At December 31, 1996, warrants to purchase 250,006
shares were exercisable at $3.00 per share; warrants to purchase
125,000 shares were exercisable at $4.00 per share; and warrants
to purchase 124,994 shares were exercisable at $5.00 per share.
However, the warrants, or the shares issuable upon the exercise
of the warrants, may only be sold pursuant to an effective
registration statement under the Securities Act of 1933 or an
appropriate exemption from such registration.
Commencing in May 1999, the warrants become subject to
redemption by the Company at $.25 per warrant on 30 days' prior
written notice if the market price of the Janus common stock
equals or exceeds $10.00 per share for 10 consecutive trading
days.
Note 7 - Stock options:
During 1996, the stockholders of the Company approved the
adoption of the Janus Industries, Inc. 1996 Stock Option Plan
(the "1996 Plan") and approved the adoption and termination
of the Janus Industries, Inc. Directors' Stock Option Plans
(the "Directors' Plan").
The 1996 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 any 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 1996 Plan.
F-20
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stock options (concluded):
The 1996 Plan permits the Committee to grant stock appreciation
rights ("SARs") in connection with any option granted under the
1996 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 Company granted options for the purchase of 20,000 shares of
common stock at an exercise price of $2.75 per share during 1996,
all of which remained outstanding and exercisable at December 31,
1996. The pro forma net loss and net loss per share determined
using a fair value based method of accounting for the stock
options granted in 1996, as required by SFAS 123, do not differ
materially from the corresponding historical amounts.
The Directors' Plan provided for annual grants of a specified
number stock options to each nonemployee director beginning in
1997 at an exercise price equal to the fair market value of the
common stock on the date of grant. No options were granted under
the Directors' Plan prior to its termination.
Note 8 - Commitments and contingencies:
Leases:
The Company leases certain office and warehouse facilities and
equipment under operating leases that expire at various dates
through March 1999. A lease for one of the facilities requires
the Company to pay real estate taxes and maintenance costs in
addition to base rentals.
Rent expense was $52,629 and $34,694, net of reimbursements by
the Reorganization Trust of $18,111 and $14,869, in 1996 and
1995, respectively. Future minimum rental payments required by
noncancelable leases at December 31, 1996 aggregated
approximately $70,000, substantially all of which is payable
during 1997.
Concentration of credit risk:
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 high quality financial
institutions.
F-21
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
Concentration of credit risk (concluded):
Pre-Tek's trade accounts receivable are due from a limited
number of customers that operate in a single industry and in the
same general geographical area. Accordingly, these financial
instruments also expose the Company to a concentration of credit
risk. Generally, such exposure is mitigated by maintaining
strong customer relationships; by ongoing customer credit
evaluations; and by maintaining an allowance for doubtful
accounts that management believes will adequately provide for
credit losses.
Agreement to repurchase common stock:
The former stockholders of KFE hold an option whereby they can
require the Company to repurchase all of the 36,364 shares of
Janus common stock they acquired as a result of the Company's
acquisition of Pre-Tek at an aggregate repurchase price of
$100,000 (or $2.75 per share). The option may be exercised at
any time within a specified two month period during 1998. If the
option is exercised, certain former directors of Pre-Tek are
required to make a payment to the Company in cash or shares of
Janus common stock based on a percentage of the difference
between the repurchase price and the market value of the shares
of Janus common stock repurchased by the Company.
Note 9 - Subsequent events:
Acquisition of hospitality business:
On April 24, 1997, the Company entered the hospitality business
by acquiring the following from affiliates of Louis S. Beck and
Harry Yeaggy (the "Sellers"): (i) seven hotels (of which six are
wholly-owned and one is 85%-owned), (ii) a hotel management
company and (iii) financial participations in the form of
mortgages on one additional hotel and a campground. The
consideration paid by the Company for the hospitality business
consisted of 10,451.88 shares of Series B preferred stock and
3,799,999 shares of Janus common stock (approximately 43% of the
Janus common stock outstanding after such issuance). The
acquisition will be accounted for as a purchase and,
accordingly, the results of operations of the hospitality
business will be included in the Company's consolidated
financial statements from the date of acquisition.
The Series B preferred stock has a par value of $.01 per share
and 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.
F-22
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Subsequent events (concluded):
Acquisition of hospitality business (concluded):
Based on the provisions of Janus' corporate charter and a
separate agreement between Janus and the Sellers, the Sellers
are prohibited from purchasing additional shares of Janus common
stock without the prior approval of the Board of Directors.
Repurchases of common stock and warrants:
During the period from January 1, 1997 through April 24, 1997,
the Company repurchased 299,181 shares of Janus common stock for
$388,935 and warrants to purchase 276,400 shares of Janus common
stock for $102,268.
Employment agreements:
During the period from January 1, 1997 through April 24, 1997,
the Company entered into employment agreements whereby it will
be obligated to pay minimum salaries to four of its executive
officers aggregating $750,000 during each of the three years in
the period ending April 23, 1997.
Change in method of voting for shares held by the Reorganization
Trust:
On April 14, 1997, the Bankruptcy Court issued an order
modifying the terms under which the Reorganization Trust votes
the shares of Janus common stock it holds. The Reorganization
Trust is now required to vote the shares of Janus common stock
it holds in proportion to the votes cast by other stockholders
who acquired their shares prior to March 17, 1997 (see Note 6).
Issuances of SARs:
During the period from January 1, 1997 through April 24, 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 will vest at the rate of 20,000 shares per
year commencing on April 23, 1997. It also granted, subject to
stockholder approval, SARs with respect to a total of 40,000
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. The
SARs issued in 1997 were not issued in conjunction with the 1996
Plan (see Note 7).
* * *
F-23
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,808,141
Accounts receivable 603,768
Current portion of mortgage notes receivable 113,905
Other current assets 423,932
-----------
Total current assets 6,949,746
Property and equipment, net of accumulated depreciation
and amortization of $359,262 34,906,217
Mortgage notes receivable, net of current portion 5,610,455
Goodwill, net of accumulated amortization of $83,949 6,534,351
Other assets 1,437,737
-----------
Total $55,438,506
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 570,198
Accounts payable 993,832
Accrued expenses 657,524
Dividends payable 130,649
-----------
Total current liabilities 2,352,203
Long-term debt, net of current portion 19,699,402
Deferred tax liabilities 412,000
-----------
Total liabilities 22,463,605
-----------
Minority interest 1,633,312
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series A; par value $.01 per share; 5,000,000 shares
authorized; none issued -
Series B; par value $.01 per share; 12,000,000 shares
authorized; 10,451.88 shares issued and outstanding 105
Common stock, par value $.01 per share; 15,000,000
shares authorized; 11,880,867 shares issued 118,809
Additional paid-in capital 36,468,762
Accumulated deficit (3,929,788)
Treasury stock - 3,189,132 shares, at cost (1,316,299)
-----------
Total stockholders' equity 31,341,589
-----------
Total $55,438,506
===========
See Notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
1997 1996
---------- ----------
Revenues:
Hotel revenues:
Room and related services $2,197,760
Food and beverage 322,962
Management fees 202,047
Other 57,263
----------
Total hotel revenues 2,780,032
Sales 731,229
----------
Total revenues 3,511,261
----------
Costs and expenses:
Direct hotel operating expenses:
Room and related services 451,548
Food and beverage 258,335
Selling and general expenses 79,978
----------
Total direct hotel operating expense 789,861
Occupancy and other operating expenses 843,256
Selling, general and administrative expenses 1,019,965 $ 553,228
Depreciation of property and equipment 274,009 8,539
Amortization of intangible assets 53,574
---------- ----------
Total costs and expenses 2,980,665 561,767
---------- ----------
Operating income (loss) 530,596 (561,767)
Other income (expense):
Interest income 174,615 75,956
Other income 19,640
Interest expense (322,670)
---------- ----------
Income (loss) before state income taxes and
minority interest 402,181 (485,811)
Credit for prior year state income tax refunds 76,257
---------- ----------
Income (loss) before minority interest 478,438 (485,811)
Minority interest 31,847 25,245
---------- ----------
Net income (loss) 446,591 (511,056)
Less preferred dividend requirements 130,649 13,200
---------- ----------
Net income (loss) applicable to common stock $ 315,942 $ (524,256)
========== ==========
Net income (loss) per common share $.05 $(.10)
==== =====
Weighted average common shares outstanding 6,357,577 5,000,000
========= =========
See Notes to Condensed Consolidated Financial Statements.
F-25
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
---------------- ----------------- ------------------
Number Number Additional Number
of of Paid-in Accumulated of
Shares Amount Shares Amount Capital Deficit Shares Amount Total
------ ------ ------ ------ ---------- ----------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1997 8,080,868 $ 80,809 $13,061,256 $(4,245,730) 2,849,850 $ (874,730) $ 8,021,605
Net income 446,591 446,591
Contributions to
capital from
United States
Lines, Inc. and
United States
Lines (S.A.),
Inc.
Reorganization
Trust 746,372 746,372
Shares issued to
acquire
hospitality
business 10,451.88 $105 3,799,999 38,000 22,763,772 22,801,877
Repurchase of
common stock 339,282 (441,569) (441,569)
Repurchase of
276,400 warrants (102,638) (102,638)
Preferred stock
dividends (130,649) (130,649)
--------- ---- ---------- -------- ----------- ----------- --------- ----------- -----------
Balance, June 30,
1997 10,451.88 $105 11,880,867 $118,809 $36,468,762 $(3,929,788) 3,189,132 $(1,316,299) $31,341,589
========= ==== ========== ======== =========== =========== ========= =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-26
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
1997 1996
---------- ----------
Operating activities:
Net income (loss) $ 446,591 $ (511,056)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 274,009 8,539
Amortization of intangible assets 53,574
Minority interest 31,847 25,245
Other (4,180)
Changes in operating assets and liabilities:
Accounts receivable (290,657)
Other current assets 11,944 (21,637)
Other assets (103,937)
Accounts payable and accrued expenses 134,345 (115,891)
---------- ----------
Net cash provided by (used in) operating
activities 553,536 (614,800)
---------- ----------
Investing activities:
Acquisition of hospitality business, net of
noncash consideration and cash acquired (1,325,129)
Purchases of property and equipment (202,053) (4,836)
Proceeds from sale of property and equipment 13,000
Collections of notes receivable 33,922
----------
Net cash used in investing activities (1,480,260) (4,836)
---------- ----------
Financing activities:
Decrease in restricted cash 631,830
Repurchase of common stock (441,569)
Repurchase of warrants (102,638)
Reduction of payable for redemption of
preferred stock of subsidiary (631,830)
Contributions to capital from United States
Lines, Inc. and United States Lines (S.A.),
Inc. Reorganization Trust, including $8,628
attributable to minority interest in 1997 755,000 4,300,000
Proceeds from long-term borrowings 26,136
Repayments of long-term borrowings (82,900)
---------- ----------
Net cash provided by financing
activities 154,029 4,300,000
---------- ----------
Increase (decrease) in cash and cash equivalents (772,695) 3,680,364
Cash and cash equivalents, beginning of period 6,580,836 2,053,437
---------- ----------
Cash and cash equivalents, end of period $5,808,141 $5,733,801
========== ==========
Supplemental disclosure of cash flow data:
Interest paid $ 311,681
==========
See Notes to Condensed Consolidated Financial Statements.
F-27
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of Janus Industries, Inc. and
Subsidiaries (the "Company") as of June 30, 1997, its results of
operations and cash flows for the six months ended June 30, 1997
and 1996 and its changes in stockholders' equity for the six
months ended June 30, 1997. Certain terms used herein are defined
in the audited consolidated financial statements of the Company as
of December 31, 1996 and 1995 and for the years then ended (the
"Audited Janus Financial Statements") also included in this Form
10-SB. Accordingly, these unaudited condensed consolidated
financial statements should be read in conjunction with the
Audited Janus Financial Statements and the other financial
statements included herein.
The results of operations for the six months ended June 30, 1997
are not necessarily indicative of the results of operations for
the full year ending December 31, 1997.
Note 2 - Acquisitions:
On April 24, 1997, the Company entered the hospitality business by
acquiring the following from affiliates of Louis S. Beck and Harry
Yeaggy (the "Sellers"): (i) seven hotels (of which six are
wholly-owned and one is 85%-owned), (ii) a hotel management
company and substantially all of the assets thereof other than
seven management contracts and (iii) financial participations in
the form of mortgages on one additional hotel and a campground.
The hotels, the management company and the mortgages are referred
to herein as the "Beck-Yeaggy Group."
The consideration exchanged by the Company (which is further
described in Note 9 of the notes to the audited consolidated
financial statements of the Company also included in this Form
10-SB) for the assets and liabilities of the Beck-Yeaggy Group and
the other direct acquisition costs were comprised as follows:
Issuance of:
10,451.88 shares of Series B preferred stock
with a liquidating and estimated fair value
of $1,000 per share $10,451,880
3,799,999 shares of common stock with an
estimated fair value of $3.25 per share 12,349,997
-----------
Total value of shares issued 22,801,877
Cash paid to the Sellers to repay short-term
loans 793,803
Legal, accounting and other costs related to
the purchase 637,170
-----------
Total purchase price to be allocated $24,232,850
===========
F-28
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Acquisitions (continued):
The acquisition was accounted for as a purchase and, accordingly,
the results of operations of the Beck-Yeaggy Group have been
included in the accompanying consolidated statements of operations
subsequent to April 30, 1997 (the effective date of the
acquisition for accounting purposes). In addition, total
acquisition costs were allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the
date of acquisition, with the excess of cost over such fair values
allocated to goodwill, as shown below:
Cash $ 31,152
Accounts receivable 230,011
Other current assets 209,772
Property and equipment 34,400,000
Mortgage notes receivable 5,758,282
Goodwill 5,726,959
Other assets 1,331,004
Accounts payable (561,530)
Other current liabilities (605,436)
Long-term debt (20,326,364)
Deferred tax liabilities (412,000)
Minority interest in the 85%-owned hotel (1,549,000)
-----------
Total purchase price allocated $24,232,850
===========
On July 15, 1996, the Company acquired the oil and gas services
business and certain assets of Pre-Tek Wireline Service Company,
Inc. ("Pre-Tek") and assumed certain of its liabilities. The
acquisition was accounted for as a purchase and, accordingly, the
results of Pre-Tek's operations have been included in the
accompanying consolidated statements of operations subsequent to
July 15, 1996, the effective date of the acquisition. Information
as to the consideration exchanged by the Company and the
allocation of total acquisition costs to the assets acquired and
liabilities assumed is set forth in Note 3 of the notes to the
audited consolidated financial statements of the Company also
included in this Form 10-SB.
The following unaudited pro forma information shows the results of
operations for the six months ended June 30, 1997 and 1996 as
though the Beck-Yeaggy Group and Pre-Tek had been acquired as of
January 1, 1996:
1997 1996
---------- ----------
Total revenues $7,098,000 $6,738,000
Net income (loss) 96,000 (882,000)
Net loss applicable to common
stock (296,000) (1,287,000)
Net loss per common share (.03) (.14)
Weighted average common shares
outstanding 8,876,913 9,031,017
F-29
<PAGE>
JANUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Acquisitions (concluded):
In addition to combining the historical results of operations of
the Company and the historical pre-acquisition results of
operations of the Beck-Yeaggy Group and Pre-Tek, the pro forma
results of operations include adjustments that, among other
things, reflect: the elimination of the net revenues derived from
management contracts of the Beck-Yeaggy Group that were not
acquired by the Company; depreciation and amortization of property
and equipment based on the fair values of assets acquired; the
amortization of goodwill; the net effects of changes to
compensation and related expenses based on revised employment and
lease agreements; and the issuance of shares of preferred and
common stock (net of shares returned) as part of the consideration
for the acquisitions.
The Company recognizes revenues from room and related services,
management fees and engineering and wireline logging services on
an accrual basis as earned. Food and beverage revenues are
recognized when goods are sold.
Note 3 - Long-term debt:
Long-term debt at June 30, 1997 consisted of the following:
Fixed rate mortgage notes payable in monthly installments,
including interest at rates ranging from 8.875% to 10%; the
mortgage notes mature from
August 2000 through January 2016 $10,818,822
Variable rate mortgage notes payable in monthly installments,
including interest at rates varying with the prime commercial
lending rate, rates on U.S. Treasury securities and other
defined indexes (the effective rates at June 30, 1997 ranged
from 8.73% to 9.5%); the mortgage notes
mature from March 1998 through April 2006 9,204,336
Equipment notes with various maturities
through June 2001 and interest at rates
ranging from 7% to 15% 246,442
-----------
Total long-term debt 20,269,600
Less current portion 570,198
-----------
Long-term debt, net of current portion $19,699,402
===========
Long-term debt is secured by the mortgage notes receivable held by
the Company and substantially all of its property and equipment.
* * *
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Beck-Yeaggy Group
We have audited the accompanying combined balance sheets of THE BECK-YEAGGY
GROUP as of December 31, 1996 and 1995, and the related combined statements of
income, owners' capital deficiency and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Beck-Yeaggy
Group as of December 31, 1996 and 1995, and its results of operations and cash
flows for the then years ended, in conformity with generally accepted accounting
principles.
J. H. COHN LLP
Roseland, New Jersey
February 21, 1997, except for
Notes 1 and 3 as to which the
date is April 24, 1997
F-31
<PAGE>
THE BECK-YEAGGY GROUP
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
----------- -----------
Current assets:
Cash $ 146,901 $ 46,475
Accounts receivable 316,791 160,299
Current portion of mortgage notes receivable 204,864 189,897
Escrow deposits 363,841 297,357
Other current assets 115,036 178,443
----------- -----------
Total current assets 1,147,433 872,471
Property and equipment, net of accumulated
depreciation and amortization 12,503,176 12,978,766
Mortgage notes receivable, net of current
portion 5,619,757 5,824,852
Replacement reserves 628,271 418,964
Deferred loan costs 367,855 389,993
Other assets 199,822 205,539
----------- -----------
Totals $20,466,314 $20,690,585
=========== ===========
LIABILITIES AND OWNERS' CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 536,215 $ 509,699
Accounts payable 400,199 560,309
Accrued liabilities 692,795 643,167
----------- -----------
Total current liabilities 1,629,209 1,713,175
Long-term debt, net of current portion 19,814,561 21,793,585
----------- -----------
Total liabilities 21,443,770 23,506,760
Commitments and contingencies
Owners' capital deficiency (977,456) (2,816,175)
----------- -----------
Totals $20,466,314 $20,690,585
=========== ===========
See Notes to Combined Financial Statements.
F-32
<PAGE>
THE BECK-YEAGGY GROUP
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Revenues:
Room and related services $10,927,443 $10,429,089
Food and beverage 1,617,775 1,720,295
Management fees 1,629,562 1,662,812
Other 245,801 180,336
----------- -----------
Totals 14,420,581 13,992,532
----------- -----------
Costs and expenses:
Direct hotel operating expenses:
Room and related services 2,461,716 2,390,574
Food and beverage 1,412,193 1,455,776
Selling and general expenses 529,905 658,809
Occupancy and other operating expenses 1,842,254 1,671,648
General and administrative expenses 3,624,674 3,515,458
Depreciation and amortization 873,661 837,211
----------- -----------
Totals 10,744,403 10,529,476
----------- -----------
Operating income 3,676,178 3,463,056
Other income (expense):
Interest income 474,883 468,754
Interest expense (1,935,877) (2,002,637)
Gain on sale of property 104,003
----------- -----------
Net income $ 2,215,184 $ 2,033,176
=========== ===========
See Notes to Combined Financial Statements.
F-33
<PAGE>
THE BECK-YEAGGY GROUP
COMBINED STATEMENTS OF OWNERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1996 AND 1995
Balance, January 1, 1995 $(1,563,452)
Net income 2,033,176
Distributions to or on behalf of owners, net of
contributions (3,285,899)
-----------
Balance, December 31, 1995 (2,816,175)
Net income 2,215,184
Distributions to or on behalf of owners, net of
contributions (376,465)
-----------
Balance, December 31, 1996 $ (977,456)
===========
See Notes to Combined Financial Statements.
F-34
<PAGE>
THE BECK-YEAGGY GROUP
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
Operating activities:
Net income $2,215,184 $2,033,176
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 873,661 837,211
Gain on sale of property (104,003)
Amortization of deferred costs 22,138 36,665
Changes in operating assets and liabilities:
Accounts receivable (156,492) (25,290)
Escrow deposits (66,484) (184,514)
Other current assets 63,407 90,406
Replacement reserves (209,307) (418,964)
Other assets 5,717 6,057
Accounts payable (160,110) 503,950
Accrued liabilities 49,628 44,266
---------- ----------
Net cash provided by operating
activities 2,637,342 2,818,960
---------- ----------
Investing activities:
Purchases of property and equipment (398,071) (412,348)
Proceeds from sale of property and equipment 267,309
Collections of notes receivable 190,128 176,026
---------- ----------
Net cash provided by (used in) investing
activities (207,943) 30,987
---------- ----------
Financing activities:
Proceeds from long-term borrowings 39,660 1,275,188
Repayments of long-term borrowings (1,992,168) (661,350)
Increase in deferred loan costs (371,002)
Distributions to or on behalf of owners, net
of contributions (376,465) (3,285,899)
---------- ----------
Net cash used in financing activities (2,328,973) (3,043,063)
---------- ----------
Increase (decrease) in cash 100,426 (193,116)
Cash, beginning of year 46,475 239,591
---------- ----------
Cash, end of year $ 146,901 $ 46,475
========== ==========
Supplemental disclosure of cash flow data:
Interest paid $1,861,898 $2,100,726
========== ==========
See Notes to Combined Financial Statements.
F-35
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
Organization and basis of combination:
The combined financial statements of the Beck-Yeaggy Group (the
"Hotel Group") include the financial statements of seven hotels
(the "Hotels") and a hotel management company (the "Management
Company") together with the accounts related to financial
participations in the form of mortgages (the "Mortgages") on one
additional hotel and a campground, all of which were owned by
corporations and partnerships that were, effectively,
wholly-owned or controlled by Louis S. Beck and Harry Yeaggy
(the "Sellers") during 1996 and 1995. The Sellers also own
controlling interests in other hotels, certain of which are
managed by the Management Company. On April 24, 1997, Janus
Industries, Inc. ("Janus") acquired from the Sellers a 100%
equity interest in six of the Hotels and an 85% equity interest
in the seventh Hotel; a 100% equity interest in the Management
Company and substantially all of the assets thereof other than
seven management contracts; and 100% interests in the Mortgages.
The financial statements of the Hotels and the Management
Company and the accounts related to the Mortgages have been
combined on the basis of their common control and their
acquisition by Janus. All material accounts and transactions
have been eliminated in combination.
The Hotel Group's primary business is the ownership and
management of limited service hotels that are designed to appeal
primarily to business travelers and vacationers on limited
budgets.
Additional information with respect to each of the Hotels
included in the combined financial statements and their
ownership during 1996 and 1995 follows:
Days Inn, Sharonville, Ohio, a 142 room hotel, was owned by
the Sellers through a division of a partnership.
Best Western Kings Quarters, Doswell, Virginia, a 248 room
hotel, was owned by the Sellers through a partnership.
Knights Inn, Westerville, Ohio, a 109 room hotel, was owned by
the Sellers through a corporation.
Knights Inn, Lafayette, Indiana, a 112 room hotel, and Knights
Inn, Michigan City, Indiana, a 103 room hotel, were controlled
by the Sellers through a division of a partnership during 1996
(the Sellers reacquired a 100% equity interest in the
partnership prior to the sale of the Hotel Group to Janus) and
owned by the Sellers through a corporation during 1995.
F-36
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(continued):
Organization and basis of combination (continued):
Days Inn Crabtree, Raleigh, North Carolina, a 122 room hotel,
that was owned by the Sellers through a corporation.
Days Inn RTP, Raleigh, North Carolina, a 110 room hotel, was
owned by the Sellers through a partnership.
In addition to operating the Hotels included in the combined
financial statements, the Management Company, which was owned by
the Sellers through a division of a corporation, operated 21
hotels in 1996 and 22 hotels in 1995 under management contracts,
including 12 hotels in 1996 and 13 hotels in 1995 that were
owned or controlled by the Sellers. Pursuant to a marketing
agreement, the Management Company also receives a portion of the
management fees from hotels managed by a marketing partner and
shares a portion of the management fees it earns from certain of
the hotels it manages with the marketing partner. The managed
hotels are located primarily in the Midwestern and Southeastern
parts of the United States.
The corporations that own or owned the Knights Inn, Westerville,
Ohio, the Knights Inn, Lafayette, Indiana, the Knights Inn,
Michigan City, Indiana and the Management Company have elected
to be taxed as "S Corporations" pursuant to the Internal Revenue
Code and certain state and local tax regulations.
As explained above, certain of the Hotels and the Management
Company operated as divisions of corporations or partnerships
controlled by the Sellers and the Sellers had controlling
interests in other hotels. The management of the Hotel Group
believes that the accompanying combined statements of income
include all charges applicable to the Hotel Group and that all
related allocations and estimates are based on assumptions that
are reasonable.
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. Accordingly, actual results could
differ from those estimates.
Property and equipment:
Property and equipment is stated at cost. Depreciation is
computed primarily using the straight-line method over the
estimated useful lives of the assets.
F-37
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
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.
Impairment of long-lived assets:
Effective as of January 1, 1996, the Company adopted 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 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. The adoption of SFAS 121
had no material effect on the Company's 1996 consolidated
financial statements.
Advertising costs:
The costs of advertising and promotions are expensed as
incurred. Advertising costs charged to operations were $248,000
and $276,000 in 1996 and 1995, respectively.
Income taxes:
The Hotel Group accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax assets
and liabilities to be computed annually for temporary
differences between the financial statement and tax basis 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.
The combined financial statements do not include any provisions
or credits for Federal, state and local income taxes for the
combined entities that are owned by partnerships or corporations
that have elected to be taxed as S Corporations since such taxes
are the liability of their respective partners and stockholders.
F-38
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 2 - Mortgage notes receivable:
The Mortgages held by the Hotel Group are secured by a hotel
property in Juno Beach, Florida and a campground in the vicinity
of Orlando, Florida, both of which are owned by entities
controlled by the Sellers. The balances receivable at December 31,
1996 and 1995 consisted of the following:
1996 1995
---------- ----------
Note secured by hotel property $2,238,311 $2,311,520
Note secured by campground 3,586,310 3,703,229
---------- ----------
Total long-term debt 5,824,621 6,014,749
Less current portion 204,864 189,897
---------- ----------
Long-term portion, net of current
portion $5,619,757 $5,824,852
========== ==========
The Mortgages mature in June 2012. Principal and interest payments
on the Mortgages were receivable in aggregate monthly installments
of $53,423 as of December 31, 1996, including interest at a rate
that is 1.75% above the weekly average rate for three-year U.S.
Treasury securities, as adjusted every three years (the effective
rate was 7.6% as of December 31, 1996). The Hotel Group derived
interest income of $451,190 and $465,063 from the Mortgages in
1996 and 1995, respectively.
The Sellers agreed to personally guarantee the Mortgages in
connection with their sale to Janus on April 24, 1997.
Note 3 - Property and equipment:
Property and equipment at December 31, 1996 and 1995 consisted of
the following:
Years of
Useful
Life 1996 1995
-------- ----------- -----------
Land $ 2,695,941 $ 2,695,941
Land improvements 15 206,164 206,164
Hotels 15 to 40 14,616,612 14,616,612
Furniture and fixtures 5 to 7 4,441,167 4,053,833
Equipment and vehicles 5 to 7 1,099,989 1,060,329
----------- -----------
23,059,873 22,632,879
Less accumulated
depreciation and
amortization 10,556,697 9,654,113
----------- -----------
Totals $12,503,176 $12,978,766
=========== ===========
F-39
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Long-term debt:
Long-term debt at December 31, 1996 and 1995 consisted of the
following:
1996 1995
----------- -----------
Fixed rate mortgage notes payable
in monthly installments,
including interest at rates
ranging from 8.875% to 10%; the
mortgage notes mature from
August 2000 through January
2016 $10,954,449 $11,163,207
Variable rate mortgage notes payable
in monthly installments,
including interest at rates
varying with the prime
commercial lending rate, rates
on U.S. Treasury securities and
other defined indexes (the
effective rates at December 31,
1996 ranged from 7.25% to
9.5%); the mortgage notes
mature from March 1998 through
April 2006 9,338,842 11,102,184
Equipment notes with various
maturities through June 2001
and interest at rates ranging
from 7% to 15% 57,485 37,893
----------- -----------
Total long-term debt 20,350,776 22,303,284
Less current portion 536,215 509,699
----------- -----------
Long-term debt, net of current
portion $19,814,561 $21,793,585
=========== ===========
Principal payments in years subsequent to December 31, 1996 are as
follows:
Year Ending
December 31, Amount
------------ ----------
1997 $ 536,215
1998 2,091,016
1999 567,155
2000 602,713
2001 1,485,471
Long-term debt is secured by the Mortgages held by the Hotel Group
and substantially all of its property and equipment.
F-40
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Long-term debt (concluded):
During 1995, the Hotel Group refinanced mortgage notes payable,
which had principal balances aggregating approximately $9,880,000,
with new lenders (these were noncash transactions and,
accordingly, are not reflected in the accompanying combined
statement of cash flows).
Note 5 - Commitments and contingencies:
Concentrations of credit risk:
Financial instruments that potentially subject the Hotel Group
to concentrations of credit risk consist principally of cash,
accounts receivable and the Mortgages.
The Hotel Group maintains its cash balances in bank deposit
accounts which, at times, may exceed the Federal Deposit
Insurance Corporation coverage limits thereby exposing the Hotel
Group to credit risk. The Hotel Group reduces its exposure to
credit risk by maintaining such deposits with high quality
financial institutions.
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 Hotel Group'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.
Litigation:
Certain of the combined entities are parties to various legal
proceedings. In the opinion of the management of the Hotel
Group, these actions are routine in nature and will not have any
material adverse effects on the Company's combined financial
statements in subsequent years.
Note 6 - Operating leases:
The Hotel Group leases office facilities and certain equipment
from related and unrelated parties under month-to-month leases.
Rental expense for all such operating leases for 1996 and 1995
were comprised as follows:
1996 1995
Related parties $143,222 $153,965
Other 34,461 45,181
-------- --------
Totals $177,683 $199,146
======== ========
F-41
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 7 - Other related party transactions:
The Hotel Group engages in various transactions with other
entities in which Mr. Beck and/or Mr. Yeaggy have an interest. In
addition to interest derived from the Mortgages (see Note 2) and
rent expense attributable to leases of office facilities and
equipment (see Note 6), results of operations in 1996 and 1995
include revenues and expenses derived from related party
transactions as follows:
1996 1995
-------- --------
Management fee income (a) $917,560 $961,398
Personnel leasing fees (b) 11,136 10,545
Management systems fees (c) 38,332 37,276
(a) The Management Company managed 12 hotels in 1996 and 13
hotels in 1995 for entities controlled by Messrs. Beck
and Yeaggy.
(b) The Hotel Group pays administrative fees to Hospitality
Employee Leasing Program, Inc. ("HELP"), a corporation
wholly-owned by Messrs. Beck and Yeaggy, which provides the
Hotel Group with personnel for the hotels it owns and
manages. In addition, the Hotel Group reimburses HELP for
the actual payments it makes to or on behalf of such
employees.
(c) The Hotel Group 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.
The Hotel Group also derived management fee income of $691,335 in
1996 and $666,459 in 1995 pursuant to the agreement with its
marketing partner.
Note 8 - Historical and unaudited pro forma income taxes:
Historical income taxes:
As explained in Note 1, the combined financial statements do not
include any provisions or credits for Federal, state and local
income taxes for the combined entities that are owned by
partnerships or S Corporations. As a result, only one of the
corporations included in the Hotel Group was subject to Federal
and state income taxes at statutory rates during 1996 and 1995.
However, the combined financial statements do not include any
provisions for Federal and state income taxes for that
corporation as a result of benefits of approximately $335,000
and $234,000 derived from the utilization of its net operating
loss carryforwards during 1996 and 1995, respectively. As of
December 31, 1996, substantially all of the net operating loss
carryforwards had been utilized.
F-42
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Historical and unaudited pro forma income taxes (concluded):
Pro forma unaudited income taxes:
The following unaudited pro forma information shows the results
of operations for 1996 and 1995 as though all of the
partnerships and corporations included in the Hotel Group had
been subject to income taxes:
1996 1995
---------- ----------
Historical income before income
taxes $2,215,184 $2,033,176
Pro forma provision for income
taxes 886,000 813,000
---------- ----------
Pro forma net income $1,329,184 $1,220,176
========== ==========
Note 9 - Fair value of financial instruments:
Cash, accounts receivable and accounts payable were financial
instruments of the Hotel Group that, in the opinion of its
management, had fair values that approximated their carrying
values at December 31, 1996 and 1995 because of their short-term
maturities. Mortgage notes receivable and mortgage and equipment
notes payable were the other financial instruments of the Hotel
Group that, in the opinion of its management, had fair values that
approximated their carrying values at December 31, 1996 and 1995
because they had interest rates equivalent to those currently
prevailing for financial instruments with similar characteristics.
* * *
F-43
<PAGE>
THE BECK-YEAGGY GROUP
CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
ASSETS
Current assets:
Cash $ 129,192
Accounts receivable 193,620
Current portion of mortgage notes receivable 208,787
Escrow deposits 178,642
Other current assets 125,773
-----------
Total current assets 836,014
Property and equipment, net of accumulated depreciation
and amortization 12,454,801
Mortgage notes receivable, net of current portion 5,555,949
Replacement reserves 709,328
Deferred loan costs, net 361,491
Other assets 263,648
-----------
Total $20,181,231
===========
LIABILITIES AND OWNERS' CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 535,602
Loans payable to owners 793,803
Accounts payable 452,770
Accrued liabilities 729,997
-----------
Total current liabilities 2,512,172
Long-term debt, net of current portion 19,840,862
Deferred tax liabilities 35,700
-----------
Total liabilities 22,388,734
Commitments and contingencies
Owners' capital deficiency (2,207,503)
-----------
Total $20,181,231
===========
See Notes to Condensed Combined Financial Statements.
F-44
<PAGE>
THE BECK-YEAGGY GROUP
CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
---------- ----------
Revenues:
Room and related services $1,919,698 $1,872,022
Food and beverage 294,779 316,846
Management fees 382,147 381,988
Other 34,066 47,213
---------- ----------
Totals 2,630,690 2,618,069
---------- ----------
Costs and expenses:
Direct hotel operating expenses:
Room and related services 522,118 516,831
Food and beverage 249,221 282,120
Selling and general expenses 136,579 144,986
Occupancy and other operating expenses 415,173 456,002
General and administrative expenses 774,162 832,741
Depreciation and amortization 214,827 207,360
---------- ----------
Totals 2,312,080 2,440,040
---------- ----------
Operating income 318,610 178,029
Other income (expense):
Interest income 113,143 121,773
Interest expense (451,666) (484,834)
---------- ----------
Loss before provision for taxes (19,913) (185,032)
Provision for income taxes 82,300
---------- ----------
Net loss $ (102,213) $ (185,032)
========== ==========
See Notes to Condensed Combined Financial Statements.
F-45
<PAGE>
THE BECK-YEAGGY GROUP
CONDENSED COMBINED STATEMENT OF OWNERS' CAPITAL DEFICIENCY
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
Balance, January 1, 1997 $ (977,456)
Net loss (102,213)
Distributions to or on behalf of owners, net of
contributions (1,127,834)
-----------
Balance, March 31, 1997 $(2,207,503)
===========
See Notes to Condensed Combined Financial Statements.
F-46
<PAGE>
THE BECK-YEAGGY GROUP
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Operating activities:
Net loss $ (102,213) $ (185,032)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 214,827 207,360
Deferred income taxes 35,700
Amortization of deferred costs 6,364 8,218
Changes in operating assets and liabilities:
Accounts receivable 123,171 (50,377)
Escrow deposits 185,199 (151,013)
Other current assets (10,737) 25,462
Replacement reserves (81,057) (142,498)
Other assets (63,826) 9,493
Accounts payable 52,571 128,078
Accrued liabilities 37,202 156,084
----------- -----------
Net cash provided by operating activities 397,201 5,775
----------- -----------
Investing activities:
Purchases of property and equipment (166,452) (247,735)
Collections of notes receivable 59,885 38,957
----------- -----------
Net cash used in investing activities (106,567) (208,778)
----------- -----------
Financing activities:
Proceeds from loans payable to owners 793,803
Proceeds from long-term borrowings 148,631
Repayments of long-term borrowings (122,943) (1,627,694)
Contributions from (distributions to or on
behalf of) owners, net (1,127,834) 1,995,865
----------- -----------
Net cash provided by (used in) financing
activities (308,343) 368,171
----------- -----------
Increase (decrease) in cash (17,709) 165,168
Cash, beginning of period 146,901 46,475
----------- -----------
Cash, end of period $ 129,192 $ 211,643
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 1,984,278 $ 449,939
=========== ===========
See Notes to Condensed Combined Financial Statements.
F-47
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited condensed
combined financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary to present fairly the
financial position of The Beck/Yeaggy Group (the "Hotel Group") as
of March 31, 1997, and its results of operations and cash flows
for the three months ended March 31, 1997 and 1996 and its changes
in owners' capital deficiency for the three months ended March 31,
1997. Certain terms used herein are defined in the audited
consolidated financial statements of the Hotel Group as of
December 31, 1996 and 1995 and for the years then ended (the
"Audited Hotel Group Financial Statements") also included in this
Form 10-SB. Accordingly, these unaudited condensed combined
financial statements should be read in conjunction with the
Audited Hotel Group Financial Statements and the other financial
statements included herein.
The results of operations for the three months ended March 31,
1997 are not necessarily indicative of the results of operations
for the full year ending December 31, 1997.
Note 2 - Historical and unaudited pro forma income taxes:
Historical income taxes:
As explained in Note 1 to the Audited Hotel Group Financial
Statements, the combined financial statements do not include any
provisions or credits for Federal, state and local income taxes
for the combined entities that are owned by partnerships or S
Corporations. As a result, only one of the corporations included
in the Hotel Group was subject to Federal and state income taxes
at statutory rates during the three months ended March 31, 1997
and the years ended December 31, 1996 and 1995. However, the
combined financial statements do not include any provision for
Federal and state income taxes for that corporation for the
three months ended March 31, 1996 as a result of benefits
derived from the utilization of its net operating loss
carryforwards during that period. As of December 31, 1996,
substantially all of the net operating loss carryforwards had
been utilized.
F-48
<PAGE>
THE BECK-YEAGGY GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Historical and unaudited pro forma income taxes (concluded):
Pro forma unaudited income taxes:
The following unaudited pro forma information shows the results
of operations for the three months ended March 31, 1997 and 1996
as though all of the partnerships and corporations included in
the Hotel Group had been subject to income taxes:
1997 1996
-------- ---------
Historical loss before income
taxes $(19,913) $(185,032)
Pro forma credit for income
taxes (8,000) (74,000)
-------- ---------
Pro forma net loss $(11,913) $(111,032)
======== =========
* * *
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Pre-Tek Wireline Service Company, Inc.
We have audited the accompanying consolidated statements of operations and cash
flows of PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY for the period
from April 1, 1996 through July 15, 1996 and the years ended March 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Pre-Tek Wireline Service Company, Inc. and Subsidiary for the period from April
1, 1996 through July 15, 1996 and the years ended March 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
J. H. COHN LLP
Roseland, New Jersey
April 25, 1997
F-50
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM APRIL 1, 1996 THROUGH JULY 15, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995
April
1, 1996
Through Years Ended March 31,
July -------------------------
15, 1996 1996 1995
--------- ----------- -----------
Sales $ 317,555 $ 742,832 $ 1,362,273
--------- ----------- -----------
Costs and expenses:
Operating costs 240,871 462,653 722,392
Selling, general and administrative
expenses 232,823 465,257 477,752
Depreciation of property and
equipment 80,901 237,287 233,700
Amortization of intangible assets 26,513 209,115 25,000
--------- ----------- -----------
Totals 581,108 1,374,312 1,458,844
--------- ----------- -----------
Operating loss (263,553) (631,480) (96,571)
Other income (expense):
Other income 24,593 38,457 17,589
Interest expense (40,718) (86,135) (45,357)
Litigation settlement (14,939)
--------- ----------- -----------
Loss before income taxes (294,617) (679,158) (124,339)
Credit for income taxes (24,000) (26,300) (12,000)
--------- ----------- -----------
Net loss $(270,617) $ (652,858) $ (112,339)
========= =========== ===========
See Notes to Consolidated Financial Statements.
F-51
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 1, 1996 THROUGH JULY 15, 1996
AND YEARS ENDED MARCH 31, 1996 AND 1995
April
1, 1996
Through Years Ended March 31,
July ---------------------
15, 1996 1996 1995
--------- --------- ---------
Operating activities:
Net loss $(270,617) $(652,858) $(112,339)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 107,414 446,402 258,700
Deferred income taxes (24,000) (29,200) 34,900
Other 50,952 (5,909) (8,080)
Changes in operating assets and
liabilities, net of effects of
purchase of subsidiary:
Accounts receivable 87,857 (26,841) 23,473
Income tax refunds receivable 38,373 19,856 (54,507)
Other current assets 24,882 40,294 (1,122)
Other assets 18,303 (40,207)
Accounts payable 71,360 59,697 (31,317)
Accrued expenses (34,426) 38,623 48,162
--------- --------- ---------
Net cash provided by (used in)
operating activities 70,098 (150,143) 157,870
--------- --------- ---------
Investing activities:
Proceeds from sale of equipment 21,451 9,500
Purchases of property and equipment (52,768) (40,983) (302,184)
Cash paid for purchase of subsidiary,
net of cash acquired of $10,334 (135,711)
--------- --------- ---------
Net cash used in investing
activities (52,768) (155,243) (292,684)
--------- --------- ---------
Financing activities:
Net proceeds from short-term borrowings (32,398) 233,866
Proceeds from long-term borrowings 38,300 212,903
Repayments of long-term borrowings (12,550) (69,308) (82,016)
Proceeds from issuance of preferred
stock 81,500 81,500
Proceeds from issuance of warrants 50,000
Other (7,500)
--------- --------- ---------
Net cash provided by financing
activities 36,552 276,858 180,887
--------- --------- ---------
F-52
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 1, 1996 THROUGH JULY 15, 1996
AND YEARS ENDED MARCH 31, 1996 AND 1995
April
1, 1996
Through Years Ended March 31,
July ---------------------
15, 1996 1996 1995
-------- -------- -------
Net increase (decrease) in cash and
cash equivalents $ 53,882 $(28,528) $46,073
Cash and cash equivalents, beginning
of period 31,992 60,520 14,447
-------- -------- -------
Cash and cash equivalents, end of
period $ 85,874 $ 31,992 $60,520
======== ======== =======
Supplemental disclosure of cash flow data:
Interest paid $ 18,686 $ 16,102 $ 7,388
======== ======== =======
Income taxes paid $ 800 $16,350
======== ========
Supplemental schedule of noncash
investing and financing activities:
Purchase of subsidiary:
Issuance of common stock $100,000
========
Assumption of notes payable $ 17,336
========
Issuance of notes payable for:
Covenant not-to-compete $200,000
========
Purchase of equipment $ 12,210
========
Conversion of preferred stock
to common stock $162,500
========
See Notes to Consolidated Financial Statements.
F-53
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies:
Description of business:
Pre-Tek Wireline Service Company, Inc. ("Pre-Tek"), which
was incorporated in California in 1990, and its wholly-owned
subsidiary, K.F.E. Wireline, Inc. ("KFE"), provide
engineering and wireline logging services to companies in
the oil and gas industry that are located primarily in
California. Pre-Tek and KFE are referred to together herein
as (the "Company"). KFE was purchased by Pre-Tek effective
February 15, 1996. The business and certain assets of the
Company were acquired by Janus Industries, Inc. ("Janus"),
effective July 15, 1996.
Basis of presentation:
The consolidated financial statements present the results of
operations and cash flows of the Company for the years ended
March 31, 1996 and 1995 and for the period from April 1, 1996
through July 15, 1996, immediately prior to the acquisition of
the business and certain assets of the Company by Janus.
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. Accordingly, actual results could
differ from those estimates.
Principles of consolidation:
The consolidated financial statements include the accounts of
Pre-Tek and KFE. All material 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 an estimated useful
life of five years.
Intangible assets:
Covenants not-to-compete are being amortized using the
straight-line method over the terms of the related agreements
which range from one to five years.
Goodwill, which represents the excess of the costs of acquiring
the oil and gas services business of KFE over the fair value of
its net assets at the date of acquisition, is being amortized
using the straight-line method over an estimated useful life of
20 years.
F-54
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of significant accounting policies (concluded):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income 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.
Note 2 - Acquisition of KFE:
In February 1996, Pre-Tek acquired 100% of the outstanding common
stock of KFE, which is also in the oil and gas service business,
for consideration comprised as follows:
Cash payments to certain creditors and
former stockholders of KFE $146,045
Issuance of 500 shares of Pre-Tek common
stock, with an estimated fair value of
$200 per share 100,000
--------
Total $246,045
========
In addition, Pre-Tek granted the former stockholders of KFE an
option to "put" the Pre-Tek shares they received back to the
Company during 1998 (see Note 7).
The acquisition was accounted for as a purchase and, accordingly,
the results of KFE's operations have been included in the
accompanying consolidated statements of operations from February
15, 1996, the effective date of the acquisition. In addition,
total acquisition costs were allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the
date of acquisition, with the excess of cost over such fair values
allocated to goodwill, as shown below:
Cash $ 10,334
Accounts receivable 100,469
Other current assets 95,305
Property and equipment 232,600
Goodwill 50,147
Accounts payable and other current
liabilities (192,613)
Other liabilities (50,197)
--------
Cost of acquisition $246,045
========
F-55
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisition of KFE (concluded):
Pre-Tek also received covenants not to compete from the selling
stockholders which were deemed to have an insignificant fair
value.
Note 3 - Income taxes:
At July 15, 1996, the Company had net operating loss
carry-forwards of approximately $512,000 for Federal income tax
purposes which expire through 2011 and $256,000 for state income
tax purposes which expire through 2001.
The provision (credit) for income taxes consists of the following:
April 1,
1996 Years Ended
Through March 31,
July 15, -------------------
1996 1996 1995
--------- -------- --------
Current:
Federal $ 1,300 $(47,700)
State 1,600 800
-------- --------
Totals 2,900 (46,900)
-------- --------
Deferred:
Federal $(104,100) (225,800) 6,000
State (3,800) (43,300) 4,700
--------- -------- --------
Totals (107,900) (269,100) 10,700
--------- -------- --------
Totals (107,900) (266,200) (36,200)
Effect of valuation
allowance 83,900 239,900 24,200
--------- -------- --------
Totals $ (24,000) $(26,300) $(12,000)
========= ======== ========
F-56
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes (concluded):
The difference between the actual credits for Federal income tax
and the credits computed by applying the statutory Federal income
tax rate of 34% to losses before tax benefits is attributable to
the following:
April
1, 1996 Years Ended
Through March 31,
July ---------------------
15, 1996 1996 1995
-------- --------- --------
Tax credit computed at
Federal statutory tax
rate $(100,200) $(230,000) $(42,300)
State taxes, net of Federal
income tax effects (2,500) (28,600) 3,400
Increase in valuation allowance 83,900 239,900 24,200
Other (5,200) (7,600) 2,700
-------- --------- --------
Totals $(24,000) $ (26,300) $(12,000)
======== ========= ========
Aggregate deferred tax assets and liabilities consist of the
following:
March 31,
July 15, --------------------
1996 1996 1995
-------- -------- --------
Deferred tax assets $499,000 $408,100 $ 71,200
Valuation allowance (348,000) (264,100) (24,200)
Deferred tax liabilities (151,000) (168,000) (71,600)
-------- -------- --------
Net deferred tax liabilities $ - $(24,000) $(24,600)
======== ======== ========
Deferred tax assets resulted primarily from temporary differences
attributable to the utilization of the cash basis of accounting
for income tax purposes and net operating loss carryforwards.
Deferred tax liabilities resulted primarily from temporary
differences attributable to methods of depreciating property and
equipment and amortizing intangible assets and the tax benefits of
state deferred tax assets.
The Company offsets its net deferred tax assets by valuation
allowances due to the uncertainties related to the extent and
timing of its future taxable income.
All of the tax loss attributes referred to above have been fully
reserved through a valuation allowance rather than reflected as
deferred tax assets due to the lack of a taxable income stream and
the uncertainties referred to above.
F-57
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Line of credit:
On February 22, 1996, the Company obtained a $250,000 line of
credit from United Credit Corporation ("United") which expires on
February 16, 1998. Amounts available under the line are limited to
75% of the net security value of outstanding accounts receivable
of the Company and consist of the following:
July March
15, 1996 31, 1996
-------- --------
Installment loan in the original
amount of $125,000, accrues interest
at 18% per annum; weekly principal
payments of $692 beginning in August
1996 $125,000 $125,000
Revolving loan remaining balance of
line available on a revolving basis,
accrues interest at highest New York
City prime rate plus 10%, but not
less than 18%, payable monthly;
outstanding principal balance
required to be paid upon expiration
of the credit line 76,468 108,866
-------- --------
Totals $201,468 $233,866
======== ========
The line of credit requires payment of a commitment fee of $2,500
per month against which the monthly interest is first credited.
The line is secured by all accounts receivable, intangibles,
inventory and equipment of Pre-Tek. In addition, Pre-Tek was
required to make a deposit of $40,000 with United in February 1996
as additional security. Under a separate pledge agreement dated
February 22, 1996, Pre-Tek also pledged all of the issued and
outstanding capital stock of KFE as collateral for the line of
credit. The line of credit was settled in connection with the sale
of the business to Janus (see Note 9).
F-58
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Long-term debt:
Long-term debt consists of the following:
March 31,
July 15, ------------------
1996 1996 1995
-------- -------- -------
Payable to third parties:
Notes bearing interest at 2%
above the prime rate of Chase
Manhattan Bank were due on
April 30, 1996 and are in
default. The notes and accrued
interest thereon, were settled
with cash, common stock of
Janus and warrants to purchase
common stock of Janus in
connection with the sale of
the business to Janus (see
Note 9) $170,000 $170,000 $170,000
Advances outstanding under a
$100,000 one year non-
revolving line of credit with
Wells Fargo Bank. Secured by
the Company's inventory,
receivables, equipment and
intangibles. Advances require
monthly payments of principal
and interest (ranging from
10.35% to 12.65%) and are due
at various dates through
February 5, 1999. This
liability was settled with
cash in connection with the
sale of the business to Janus
(see Note 9)
35,848 45,630 41,548
Other 17,709 23,411
-------- -------- -------
Total - third party
notes payable 223,557 239,041 211,548
-------- -------- --------
F-59
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Long-term debt (continued):
March 31,
July 15, ------------------
1996 1996 1995
-------- -------- -------
Payable to current and former
stockholders:
Promissory note payable dated
April 20, 1995 to a former
officer and stockholder in
exchange for a noncompete
agreement in connection with a
stock purchase agreement dated
April 13, 1995. Principal and
accrued interest at 12% per
annum becomes due and payable
upon occurrence of the earlier
of: the close of an initial
public offering of the Company
or one year from the date of
note. The note, which is
secured by a first lien on
certain Pre-Tek equipment, was
released as part of a
settlement agreement with the
former officer and
stockholder. The note was
written down to the amount
required to be paid in the
settlement agreement
(see Note 7) $192,500 $200,000
F-60
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Long-term debt (continued):
March 31,
July 15, ------------------
1996 1996 1995
-------- -------- -------
Payable to current and former
stockholders (continued):
Subordinated debt to Texas A & G
Systems, L.P. ("Texas A & G"),
a stockholder, issued in
connection with a Stock
Purchase Agreement dated June
30, 1993 (see Note 6) with
interest due quarterly.
Commencing at the end of the
first quarter of the second
twelve-month period, principal
payments are due quarterly, in
equal installments, together
with interest maturing on June
30, 1996. Interest accrues at
the Federal Reserve prime
interest rate (7.75% as of
March 31, 1996) plus 2% and
subject to a minimum rate of
8%. These notes were settled
in warrants to purchase 18,000
shares of common stock of
Janus in connection with the
sale of business to Janus (see
Note 9) $165,000 $165,000 $165,000
F-61
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Long-term debt (concluded):
March 31,
July 15, ------------------
1996 1996 1995
-------- -------- -------
Payable to current and former
stockholders (concluded):
Promissory note payable to
former officer and stockholder
issued in connection with the
Stock Purchase Agreement dated
June 30, 1993 (see Note 6)
with interest due quarterly.
Commencing at the end of the
first quarter of the second
twelve-month period, principal
payments are due quarterly, in
equal installments, together
with interest over the
remaining twenty-four months,
with the promissory note
maturing on June 30, 1996.
Interest accrues at the
Federal reserve prime interest
rate (7.75% as of March 31,
1996) plus 2%. The note was
released as part of a
settlement agreement with the
former officer and stockholder
(see Note 7) $ 75,512 $ 75,512 $ 92,139
-------- -------- --------
Total related party
notes payable 433,012 440,512 257,139
-------- -------- --------
Total long-term debt $656,569 $679,553 $468,687
======== ======== ========
F-62
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Stockholders' equity (deficiency):
Equity activity:
In November 1995, the Company issued 815 shares of 10% cumulative
convertible Series I preferred stock and a six-month option to
acquire 815 shares of 10% cumulative convertible Series II
preferred stock at $100 per share for $81,500 to a trust. Certain
anti-dilution provisions in such preferred stock provide that the
holder would receive a fully diluted percentage of the common
stock. On May 5, 1996, the trust converted the 815 shares of Series
I preferred stock to 2,684 shares of common stock. On June 7, 1996,
the Trust exercised its option to acquire 815 shares of 10%
cumulative convertible Series II preferred stock and immediately
converted it into 2,491 shares of common stock.
Outstanding options, warrants and subscriptions:
On January 17, 1995, the Company issued a warrant to West End
Energy Associates ("West End"), an affiliate of certain principal
stockholders of Pre-Tek, for $50,000. Pursuant to the terms of this
warrant, West End is entitled to purchase, at any time within three
years from the date of the warrant, shares of Pre-Tek's common
stock in an amount equal to an aggregate 7% of the issued and
outstanding common stock for the exercise price of $.01 per share.
The warrant contains certain anti-dilution provisions. West End has
waived the right to exercise this warrant in consideration of
shares issued to its partners.
In connection with common shares issued under a June 30, 1993 Stock
Purchase Agreement, warrants exercisable into an additional 10% of
the common stock outstanding of the Company were granted to Texas A
& G. These warrants are exercisable at any time subsequent to, and
initial public offering of, the Company's stock and thereafter for
a period of two years. The exercise price will equal 25% of the
initial offering price of the Company's common stock.
Attached to the private debt offering of $170,000 (see Note 5) were
warrants for an aggregate of 297.5 shares of common stock of the
Company. The warrants are exercisable for the price of $100 per
share for a term of thirty-six months. In addition, the secured
promissory notes may be converted into additional shares of common
stock in the event of a public offering of the shares (the
"Conversion Option"). The Conversion Option is exercisable from the
eleventh month of the term of the secured promissory notes through
the twenty-fourth month of the term. Pursuant to the Conversion
Option, the outstanding principal balance of the secured promissory
notes may be converted into common stock at a price equal to 110%
of the initial public offering price of the common stock.
F-63
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and contingencies:
Leases:
The Company's leasing activities consist principally of leasing
office space, vehicles and equipment. The Company leased certain
office space under an operating lease which commenced in March 1992
at which time the lessors were stockholders of the Company. This
lease was disputed and was terminated in connection with the
settlement of litigation (see Note 9).
Lease expense incurred for the period from April 1, 1996 through
July 15, 1996 and the years ended March 31, 1996 and 1995 is as
follows:
Period from Years Ended
April 1, 1996 March 31,
Through July -----------------
15, 1996 1996 1995
-------------- ------- -------
Related party $ 7,600 $40,100 $45,400
Nonrelated party 13,300 4,000 30,100
------- ------- -------
Totals $20,900 $44,100 $75,500
======= ======= =======
The following is a schedule by years of future minimum rental
payments required under the nonrelated party operating leases in
years subsequent to July 15, 1996:
Years Ending
July 15, Amount
------------ ------
1997 $48,300
1998 23,100
1999 3,400
-------
Total $74,800
=======
Concentration of credit risk:
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 high quality financial institutions.
The Company's trade accounts receivable are due from a limited
number of customers that operate in a single industry and in the
same general geographical area. Accordingly, these financial
instruments also expose the Company to a concentration of credit
risk. Generally, such exposure is mitigated by maintaining strong
customer relationships; by ongoing customer credit evaluations; and
by maintaining an allowance for doubtful accounts that management
believes will adequately provide for credit losses.
F-64
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments and contingencies (concluded):
Repurchase agreement:
In the acquisition of its subsidiary, Pre-Tek issued 500 shares of
its common stock and gave the former stockholders of KFE a "put"
option at a price of $200 per share. The "put" option is
exercisable any time after the 24th month from the closing of the
purchase of KFE (see Note 2).
Guarantees of indebtedness:
The Company has guaranteed two loans with an aggregate balance at
July 15, 1996 of approximately $2,000,000 (see Note 9).
Litigation:
Former stockholders had instituted litigation against the Company
in connection with a lease agreement and certain other agreements
which arose when these stockholders sold their equity interests in
the Company. In July 1996, such litigation was settled. The
settlement agreements require the Company to pay to the former
stockholders (or certain creditors of the former stockholders) an
aggregate of $289,500, and deliver certain equipment to one of the
former stockholders. Cash of $282,500 was paid by Janus on behalf
of the Company in connection with the sale of the business on July
15, 1996. In exchange for the total consideration, the Company was
released from all liabilities to these former stockholders.
Accordingly, for the period from April 1, 1996 through July 15,
1996, the Company has recorded a loss on settlement of litigation
of $14,939 which is comprised as follows:
Required cash payments $289,500
Book value of equipment 50,238
Subtotal 339,738
Notes payable and accrued interest
to the former stockholders previously
recorded (see Note 5) 324,799
--------
Loss on settlement of litigation $ 14,939
========
Note 8 - Fair value of financial instruments:
The carrying amounts of the Company's financial instruments
approximate fair value. Fair value was estimated using discounted
cash flow analysis, based on the Company's incremental borrowing
rate for similar borrowings.
F-65
<PAGE>
PRE-TEK WIRELINE SERVICE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Sale of assets and dissolution:
On July 15, 1996, the Company executed an agreement to sell its
business and certain assets (including 100% of the capital stock of
KFE) to and have certain of its liabilities assumed by Janus.
Effective July 15, 1996, the Company executed a Plan of Dissolution
(the "Plan"). Pursuant to the Plan, any liabilities not assumed or
discharged by Janus were to be paid by two stockholders of the
Company. Subsequent to the payment of liabilities, the shares of
Janus common stock acquired by the Company and any other assets
which are available for distribution were to be distributed to the
Company's stockholders in accordance with a formula defined by the
Plan.
The consideration exchanged by Janus for the business, assets and
liabilities was comprised as follows:
Cash payments to certain creditors (including
former stockholders) of the Company (see
Notes 4, 5 and 7) $ 605,413
Issuance of 268,368 shares of Janus common
stock, with a fair value of $2.75 per
share (see Note 5), and 500,000 warrants to
purchase Janus common stock to Pre-Tek
and former stockholders of Pre-Tek (see
Note 7) 738,012
Return of 37,350 shares of Janus common
stock as a result of post-closing adjust-
ments (102,713)
----------
Total $1,240,712
==========
In addition, Janus pledged a $20,000 certificate of deposit with a
bank in order to secure the release of a guaranty of a loan by
Pre-Tek. Janus will issue 10,000 shares of Janus common stock to
each of two of the Company's stockholders in consideration for
their indemnification of Janus from liability from the "put"
described in Note 2 which Janus assumed. Subject to the shares of
Janus common stock held by Janus, as provided in the Asset Purchase
Agreement, the remaining 423,000 shares of Janus common stock and
200,000 warrants will be disposed of pursuant to the Plan together
with any other assets which are available for distribution by
Pre-Tek.
Janus also agreed to issue up to 150,000 additional shares of its
common stock contingent upon Pre-Tek's sales exceeding certain
specified levels during the year ending July 15, 1997.
* * *
F-66
<PAGE>
JANUS INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On April 24, 1997, Janus Industries Inc. ("Janus") consummated the acquisition
of a 100% equity interest in six hotels and an 85% equity interest in a seventh
hotel (the "Hotels"), a 100% equity interest in a hotel management company (the
"Management Company") and substantially all of the assets thereof other than
seven management contracts and 100% interests in mortgages (the "Mortgages") on
one additional hotel and a campground, all of which were owned by corporations
and partnerships that were, effectively, wholly-owned or controlled by Louis S.
Beck and Harry Yeaggy (the "Sellers") during the year ended December 31, 1996
and the period from January 1, 1997 through the date of acquisition. The Hotels,
the Management Company and the Mortgages are referred to herein as the
"Beck-Yeaggy Group." On July 15, 1996, the Company acquired the oil and gas
industry services business of Pre-Tek Wireline Service Company, Inc. and its
wholly-owned subsidiary ("Pre-Tek"). Janus has accounted for the acquisitions of
the Beck-Yeaggy Group and Pre-Tek pursuant to the purchase method of accounting
in its historical financial statements based on effective acquisition dates of
April 30, 1997 and July 15, 1996, respectively.
The accompanying unaudited pro forma condensed statement of operations for the
year ended December 31, 1996 combines the historical consolidated statement of
operations of Janus and its subsidiaries for the year ended December 31, 1996
(including Pre-Tek for the period from July 16, 1996 to December 31, 1996), the
historical consolidated statement of operations of Pre-Tek for the period from
January 1, 1996 to July 15, 1996 and the historical combined statement of
operations of the Beck-Yeaggy Group for the year ended December 31, 1996 as if
the acquisitions of Pre-Tek and the Beck-Yeaggy Group had been consummated as of
January 1, 1996. The accompanying unaudited pro forma condensed statement of
operations for the six months ended June 30, 1997 combines the historical
consolidated statement of operations of Janus and its subsidiaries for the six
months ended June 30, 1997 (including the Beck-Yeaggy Group for the period from
May 1, 1997 to June 30, 1997 and Pre-Tek for the entire period) and the
historical combined statement of operations of the Beck-Yeaggy Group for the
period from January 1, 1997 to April 30, 1997 as if the acquisitions had been
consummated as of January 1, 1996. The accompanying unaudited pro forma
condensed statement of operations for the six months ended June 30, 1996
combines the historical consolidated statements of operations of Janus and its
subsidiaries, Pre-Tek and the Beck-Yeaggy Group for the six months ended June
30, 1996 as if the acquisitions had been consummated as of January 1, 1996.
The accompanying unaudited pro forma condensed combined financial statements are
based on the assumptions and adjustments described in the accompanying notes
which management believes are reasonable. The unaudited pro forma condensed
combined financial statements do not purport to represent what the combined
results of operations actually would have been if the acquisitions referred to
above had occurred as of January 1, 1996 instead of the actual dates of
consummation or what the financial position and results of operations would be
for any future periods. The unaudited pro forma condensed combined financial
statements and the accompanying notes should be read in conjunction with the
audited and unaudited historical financial statements of Janus and its
subsidiaries, the Beck-Yeaggy Group and Pre-Tek included elsewhere herein.
F-67
<PAGE>
JANUS INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Historical
-------------------------
Pre-Tek and The Beck-
Subsidiary Janus Yeaggy
Janus and (1/1/96 to Pro Forma Pro Forma Group Pro Forma Pro Forma
Subsidiaries 7/15/96) Adjustments Combined Historical Adjustments Combined
------------ -------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hotel revenues $12,545,218 $12,545,218
Management fees 1,629,562 $ (592,158)(B) 1,037,404
Other hotel related
revenues 245,801 245,801
Sales $ 381,055 $ 546,741 $ 927,796 927,796
----------- ------------ ----------- ----------- ----------- -----------
Total revenues 381,055 546,741 927,796 14,420,581 (592,158) 14,756,219
----------- ------------ ----------- ----------- ----------- -----------
Costs and expenses:
Direct hotel operating
expenses 4,403,814 30,722 (C) 4,434,536
Occupancy and other oper-
ating expenses 363,162 349,759 712,921 1,842,254 (91,550)(D) 2,463,625
Selling, general and ad-
ministrative expenses 1,319,991 410,725 1,730,716 3,624,674 145,476 (D) 5,500,866
Depreciation and amorti-
zation 61,434 151,952 $ (85,039)(A) 128,347 873,661 309,006 (E) 1,311,014
Amortization of intang-
ible assets 30,375 82,947 (47,049)(A) 66,273 135,341 (F) 201,614
----------- ------------ --------- ----------- ----------- ----------- -----------
Total costs and ex-
penses 1,774,962 995,383 (132,088) 2,638,257 10,744,403 528,995 13,911,655
----------- ------------ --------- ----------- ----------- ----------- -----------
Operating income (loss) (1,393,907) (448,642) 132,088 (1,710,461) 3,676,178 (1,121,153) 844,564
Other income (expense):
Interest and other income 251,892 251,892 474,883 726,775
Interest expense (1,476) (85,411) (86,887) (1,935,877) (2,022,764)
Other expense (38,086) (38,086) (38,086)
----------- ------------ --------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and minority in-
terest (1,143,491) (572,139) 132,088 (1,583,542) 2,215,184 (1,121,153) (489,511)
Provision for income taxes 138,000 (G) 138,000
----------- ------------ --------- ----------- ----------- ----------- -----------
Income (loss) before minor-
ity interest (1,143,491) (572,139) 132,088 (1,583,542) 2,215,184 (1,259,153) (627,511)
Minority interest 50,490 50,490 28,321 (H) 78,811
----------- ------------ --------- ----------- ----------- ----------- -----------
Net income (loss) (1,193,981) (572,139) 132,088 (1,634,032) 2,215,184 (1,287,474) (706,322)
Less preferred dividend
requirements 24,712 24,712 783,891 (I) 808,603
----------- ------------ --------- ----------- ----------- ----------- -----------
Net income (loss) applic-
able to common stock $(1,218,693) $ (572,139) $132,088 $(1,658,744) $ 2,215,184 $(2,071,365) $(1,514,925)
=========== ============ ========= =========== =========== =========== ===========
Net loss per common share $(.24) $(.32) $(.17)
===== ===== =====
Weighted average number
of shares outstanding 5,119,634 5,231,018 9,031,017
=========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-68
<PAGE>
JANUS INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Historical
-------------------------
Janus and The
Subsid- Beck-Yeaggy
iaries Group
(1/1/97 to (1/1/97 to Pro Forma Pro Forma
6/30/97) 4/30/97) Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Hotel revenues $ 2,520,722 $ 3,183,155 $ 5,703,877
Management fees 202,047 497,153 $ (142,760)(B) 556,440
Other hotel related revenues 57,263 49,009 106,272
Sales 731,229 731,229
----------- ----------- ----------- -----------
Total revenues 3,511,261 3,729,317 (142,760) 7,097,818
----------- ----------- ----------- -----------
Costs and expenses:
Direct hotel operating expenses 789,861 1,276,024 13,073 (C) 2,078,958
Occupancy and other operating
expenses 843,256 551,474 23,217 (D) 1,417,947
Selling, general and administrative
expenses 1,019,965 1,092,923 97,034 (D) 2,209,922
Depreciation and amortization 274,009 286,436 107,786 (E) 668,231
Amortization of intangible assets 53,574 47,725 (F) 101,299
----------- ----------- ---------- -----------
Total costs and expenses 2,980,665 3,206,857 288,835 6,476,357
----------- ----------- ----------- -----------
Operating income (loss) 530,596 522,460 (431,595) 621,461
Other income (expense):
Interest and other income 194,255 149,640 343,895
Interest expense (322,670) (612,750) (935,420)
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest 402,181 59,350 (431,595) 29,936
Credit for income taxes (76,257) 19,000 (G) (57,257)
----------- ----------- ----------- -----------
Income before minority interest 478,438 59,350 (450,595) 87,193
Minority interest 31,847 (40,994)(H) (9,147)
----------- ----------- ----------- -----------
Net income 446,591 59,350 (409,601) 96,340
Less preferred dividend requirements 130,649 261,297 (I) 391,946
----------- ----------- ----------- -----------
Net income (loss) applicable to com-
mon stock $ 315,942 $ 59,350 $ (670,898) $ (295,606)
=========== =========== =========== ===========
Net income (loss) per common share $.05 $(.03)
==== =====
Weighted average number of shares
outstanding 6,483,544 8,876,913
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-69
<PAGE>
JANUS INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Historical
----------------------- The Beck-
Pre-Tek Janus Yeaggy
Janus and and Pro Forma Pro Forma Group Pro Forma Pro Forma
Subsidiaries Subsidiary Adjustments Combined Historical Adjustments Combined
------------ ---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Hotel revenues $5,606,007 $ 5,606,007
Management fees 789,798 $ (245,131)(B) 544,667
Other hotel related
revenues 89,537 89,537
Sales $ 497,582 $ 497,582 497,582
--------- ---------- ---------- ----------- -----------
Total revenues 497,582 497,582 6,485,342 (245,131) 6,737,793
--------- ---------- ---------- ----------- -----------
Costs and expenses:
Direct hotel operating
expenses 2,111,226 20,049 (C) 2,131,275
Occupancy and other oper-
ating expenses 316,724 316,724 920,129 4,871 (D) 1,241,724
Selling, general and ad-
ministrative expenses $ 553,228 377,439 930,667 1,647,545 139,045 (D) 2,717,257
Depreciation and amorti-
zation 8,539 139,562 $(77,796)(A) 70,305 418,228 173,106 (E) 661,639
Amortization of intang-
ible assets 76,596 (43,460)(A) 33,136 71,587 (F) 104,723
--------- --------- -------- ---------- ---------- ----------- -----------
Total costs and ex-
penses 561,767 910,321 (121,256) 1,350,832 5,097,128 408,658 6,856,618
--------- --------- -------- ---------- ---------- ----------- -----------
Operating income (loss) (561,767) (412,739) 121,256 (853,250) 1,388,214 (653,789) (118,825)
Other income (expense):
Interest and other income 75,956 75,956 251,801 327,757
Interest expense (78,859) (78,859) (966,958) (1,045,817)
Other expense (34,536) (34,536) (34,536)
--------- ---------- -------- ---------- --------- ---------- -----------
Income (loss) before income
taxes and minority in-
terest (485,811) (526,134) 121,256 (890,689) 673,057 (653,789) (871,421)
Provision for income taxes 1,000 (G) 1,000
--------- ---------- -------- ---------- ---------- ----------- -----------
Income (loss) before minor-
ity interest (485,811) (526,134) 121,256 (890,689) 673,057 (654,789) (872,421)
Minority interest 25,245 25,245 (15,435)(H) 9,810
--------- ---------- -------- ---------- ---------- ----------- -----------
Net income (loss) (511,056) (526,134) 121,256 (915,934) 673,057 (639,354) (882,231)
Less preferred dividend
requirements 13,200 13,200 391,946 (I) 405,146
--------- ---------- -------- ---------- ---------- ----------- -----------
Net income (loss) applic-
able to common stock $(524,256) $ (526,134) $121,256 $ (929,134) $ 673,057 $(1,031,300) $(1,287,377)
========= ========== ======== ========== ========== =========== ===========
Net loss per common share $(.10) $(.18) $(.14)
===== ===== =====
Weighted average number
of shares outstanding 5,000,000 5,231,018 9,031,017
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
F-70
<PAGE>
JANUS INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Purchases of the Beck-Yeaggy Group and Pre-Tek:
Information with respect to the cost incurred by Janus to purchase the
Beck-Yeaggy Group on April 30, 1997 (the effective date of the acquisition used
for accounting purposes) and the allocation of such costs in accordance with the
purchase method of accounting is set forth in Note 2 of the notes to the
unaudited condensed consolidated financial statements of Janus included
elsewhere herein.
Information with respect to the cost incurred by Janus to purchase Pre- Tek on
July 15, 1996 and the allocation of such costs in accordance with the purchase
method of accounting is set forth in Note 3 of the notes to the audited
consolidated financial statements of Janus included elsewhere herein.
Information with respect to pro forma adjustments for the effects of the assumed
acquisitions of the Beck-Yeaggy Group and Pre-Tek as of January 1, 1996
(including the effects of certain agreements related to such acquisitions) on
the results of operations of Janus and its subsidiaries for the year ended
December 31, 1996 and the six months ended June 30, 1997 and 1996 is set forth
below.
Pro Forma Adjustments to the Unaudited Condensed Combined Statements of
Operations for the Year Ended December 31, 1996 and the six months ended June
30, 1997 and 1996:
(A) To record the effects arising from the allocation of the purchase
price for the acquisition of Pre-Tek on historical depreciation and
amortization of property and equipment based on the fair values and
estimated useful lives of the assets acquired and on historical
amortization of goodwill based on an estimated benefit period for
goodwill arising from the acquisition of Pre-Tek of 15 years.
(B) To eliminate the net revenues derived from management contracts of
the Beck-Yeaggy Group that were not acquired by Janus.
(C) To record the additional cost to be incurred as a result of the
revisions to the agreement with Hospitality Employee Leasing
Program, Inc. that became effective upon the consummation of the
acquisition of the Beck-Yeaggy Group.
(D) To record the net effects of changes to compensation and related
expenses based on revised employment and lease agreements that
became effective upon the consummation of the acquisition of the
Beck-Yeaggy Group and the elimination of the costs of consultants
who will no longer be employed and certain other nonrecurring costs.
F-71
<PAGE>
JANUS INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(E) To record the effects arising from the allocation of the purchase
price for the acquisition of the Beck-Yeaggy Group on historical
depreciation and amortization of property and equipment based on the
fair values and estimated useful lives of the assets required.
(F) To record the effects arising from the allocation of the purchase
price for the acquisition of the Beck-Yeaggy Group on historical
amortization of goodwill based on a minimum estimated benefit period
for goodwill arising from the acquisition of the Beck-Yeaggy Group
of 40 years.
(G) To record state income tax provisions (credits). No credits for
Federal income taxes have been recorded on the pro forma net loss
before income taxes based on the availability of net operating loss
carryforwards due to the uncertainties related to their future use
(see Note 5 of the notes to the audited financial statements of
Janus Industries, Inc. and Subsidiaries).
(H) To record the minority interest in the net income (loss) of the
85%-owned hotel.
(I) To record the dividends attributable to the shares of Series B
preferred stock issued as part of the consideration paid to the
Sellers.
F-72
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1* Restated Certificate of Incorporation
3.2* By-Laws
5.1* Opinion of Crummy, Del Deo, Dolan, Griffinger & Vecchione
10.1* Employment Agreement with James E. Bishop dated April 4, 1997
10.2* Employment Agreement with Vincent W. Hatala, Jr. dated January
1, 1997
10.3* Employment Agreement with Louis S. Beck dated April 24, 1997
10.4* Employment Agreement with Harry G. Yeaggy dated April 24, 1997
10.5* Employment Agreement with Michael M. Nanosky dated April 24,
1997
10.6* 1996 Stock Option Plan
10.7* Form of Stock Option Agreement
10.8* Form of Registration Rights Agreement
10.9* Form of Investor Agreement
10.10* Form of Management Agreement
10.11* Form of Client Service Agreement between Hospitality Employee
Leasing Program, Inc. and Janus Industries, Inc.
10.12* Form of Product Lease and Service Agreement between Computel
Systems, Inc. and Janus Industries, Inc.
10.13* Sublease Agreement between Beck Hospitality Inc. III and Janus
Industries, Inc. (Cincinnati premises)
10.14* Sublease Agreement between Beck Hospitality Inc. III and Janus
Industries, Inc. (Boca Raton premises)
10.15* Partnership Agreement of Beck Summit Hotel Management Group, as
amended
10.16* Partnership Agreement of Kings Dominion Lodge, G.P.
10.17* Form of Franchise Agreement with Days Inn of America, Inc.
10.18* Form of Franchise Agreement with Knights Franchise Systems, Inc.
10.19* Membership with Best Western International, Inc.
16.1* Letter on Change in Certifying Accountant
24.1* Power of Attorney
27.1* Financial Data Schedule
- ----------
* Previously filed.
59
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this Post-Effective Amendment No.1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
JANUS INDUSTRIES, INC.
By: /s/ James E. Bishop
-------------------------------
James E. Bishop
President
In accordance with the requirements of the Securities Exchange Act of
1934, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
Name Title Date
---- ----- ----
/s/ James E. Bishop
- --------------------------
James E. Bishop President and Director September 19, 1997
/s/ Richard A. Tonges
- --------------------------
Richard A. Tonges Treasurer and Vice President of September 19, 1997
Finance (Principal Financial and
Accounting Officer)
* Chairman September 19, 1997
- --------------------------
Louis S. Beck
* Vice Chairman September 19, 1997
- --------------------------
Harry G. Yeaggy
*
- --------------------------
Arthur Lubell Director September 19, 1997
* Director September 19, 1997
- --------------------------
Richard P. Lerner
* Director September 19, 1997
- --------------------------
Vincent W. Hatala, Jr.
<PAGE>
* Director September 19, 1997
- --------------------------
Lucille Hart-Brown
* Director September 19, 1997
- --------------------------
Anthony Pacchia
* Director September 19, 1997
- --------------------------
C. Scott Bartlett, Jr.
* President of Hotel Operations September 19, 1997
- -------------------------- and Director
Michael M. Nanosky
* Director September 19, 1997
- --------------------------
Paul Tipps
* Director September 19, 1997
- --------------------------
Peter G. Aylward
* /s/ James E. Bishop
- --------------------------
James E. Bishop
Attorney-in-Fact
61
