Commission File Number 0-22745
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
JANUS AMERICAN GROUP, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2572712
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 CORPORATE BLVD., N.W.
SUITE 232
BOCA RATON, FLORIDA 33431-8596
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (561) 994-4800
CHECK WHETHER ISSUES (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
Number of shares of Common Stock outstanding as of May 11, 1998: 8,691,735
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES |_| NO |X|
<PAGE>
JANUS AMERICAN GROUP, INC.
FORM 10-QSB
FOR QUARTERLY PERIOD ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURE PAGE 36
2
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
HISTORICAL FINANCIAL STATEMENTS:
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS 4
MARCH 31, 1998 AND DECEMBER 31, 1997
UNAUDITED CONDENSED CONSOLIDATED STATEMENT 5
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF 6
STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
UNAUDITED CONDENSED CONSOLIDATED STATEMENT 7
OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL 8
STATEMENTS
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
INTRODUCTION TO THE UNAUDITED PRO FORMA CONDENSED 25
COMBINED FINANCIAL STATEMENTS
ADJUSTED UNAUDITED CONDENSED CONSOLIDATED 26
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997
ADJUSTED UNAUDITED PRO FORMA CONDENSED 27
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
NOTES TO UNAUDITED PRO FORMA CONDENSED 28
CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
JANUS AMERICAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31,1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
---------------------------
<S> <C> <C>
Current asset:
Cash and cash equivalents $10,431,780 $11,150,243
Restricted cash for preferred stock of
sub. and real estate taxes $201,805 $373,605
Accounts receivable $446,757 $554,882
Current portion of mortgage notes receivable $183,945 $171,632
Other current assets $13,465 $386,231
---------------------------
Total current assets $11,277,752 $12,636,593
Property and equipment, net of accumulated
depreciation and amortization $34,210,969 $34,803,291
Notes receivable $631,806 $126,390
Mortgage notes receivable $5,526,364 $5,558,755
Goodwill, net of accumulated amotization $6,664,879 $6,707,506
Other assets $1,641,250 $1,571,591
---------------------------
Total $59,953,020 $61,404,126
===========================
LIABILTIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable for redemption of preferred stock $41,238 $41,238
Current portion of long-term debt $2,124,180 $2,112,215
Accounts payable $599,560 $903,234
Accrued expenses $484,361 $786,167
Dividends payable $0 $197,583
---------------------------
Total current liabilities $3,249,339 $4,040,437
Long-term debt, net of current portion $17,707,574 $17,866,318
Deferred tax liabilities $1,190,000 $1,190,000
---------------------------
Total liabilities $22,146,913 $23,096,755
Minority interest $1,649,219 $1,688,969
---------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series B; par value $.01 per share;
12,000 shares authorized; 10,451.88
shares issued and outstanding $105 $105
Common stock, par value $.01 per share;
15,000,000 shares authorized; 11,880,867
shares issued $118,809 $118,809
Additional paid- in capital $43,172,142 $43,163,320
Accumulated deficit ($5,817,871) ($5,347,533)
Treasury stock- 3,189,132 shares, at cost ($1,316,299) ($1,316,299)
---------------------------
Total stockholders' equity $36,156,886 $36,618,402
---------------------------
Total $59,953,019 $61,404,126
===========================
</TABLE>
4
<PAGE>
JANUS AMERICAN GROUP, INC.
ADJUSTED UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
-------------------------
<S> <C> <C>
Revenues:
Hotel revenues:
Room and related services $1,836,667
Food and beverage $293,046
Management fees $375,131
Other $30,528
-------------------------
Total hotel revenues $2,535,372 $0
Sales $0 $0
-------------------------
Total revenues $2,535,372 $0
-------------------------
Cost and expenses:
Direct hotel operating expenses:
Room and related services $523,182
Food and beverage $252,180
Selling and general expenses $127,150
-------------------------
Total direct hotel operating expense $902,512 $0
Occupancy and other operating expenes $421,348 $0
Selling, general and administrative expenses $919,336 $166,438
Depreciation of property and equipment $341,724 $366
Amortization of intangible assets $50,982 $0
-------------------------
Total costs and expenses $2,635,902 $166,804
-------------------------
Operating income (loss) ($100,530) ($166,804)
Other income (expense)
Interest income $246,449 $59,069
Other income $0 $5,973
Interest expense ($458,422) $787
-------------------------
Income (loss) before state income taxes and
minority interest ($312,503) ($100,975)
Credit for prior year state income tax refunds $76,527
-------------------------
Income (loss) before minority interest ($312,503) ($24,448)
Minority interest ($39,751) $0
-------------------------
Net income (loss) ($272,752) ($24,448)
Less preferred dividend requirements $197,583 $0
-------------------------
Net income (loss) applicable to common stock ($470,335) ($24,448)
Net income (loss) per common share -0.05 0.00
=========================
Weighted average common shares outstanding 8,691,735 5,230,609
=========================
</TABLE>
5
<PAGE>
JANUS AMERICAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ -----------------------
Number Number Additional
of of Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------------ ----------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1. 1998 10,451.88 $105 11,880,867 118,809 $43,163,320 ($5,347,535)
Net income ($272,752)
Contibutions to capital from
United States Lines ,Inc
and United States Lines(S.A.),
Inc. Reorganization Trust
Shares Issued to acquire
hospitality business
Repurchase of common stock
Conversion of warrants $8,823
Preferred Stock Dividends ($197,583)
------------------ ----------------------- --------------------------------
Balance at March 31, 1998 10451.88 $105 11,880,867 $118,809 $43,172,143 ($5,817,870)
</TABLE>
Treasury Stock
-------------------------
Number
of
Shares Amount Total
------------------------- ------------
Balance January 1. 1998 3,189,132 ($1,316,299) $36,618,400
Net income ($272,752)
Contibutions to capital from
United States Lines ,Inc
and United States Lines(S.A.),
Inc. Reorganization Trust $0
Shares Issued to acquire
hospitality business $0
Repurchase of common stock $0
Conversion of warrants $8,823
Preferred Stock Dividends ($197,583)
------------------------- ------------
Balance at March 31, 1998 3,189,132 ($1,316,299) $36,156,888
6
<PAGE>
JANUS AMERICAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------------------------
<S> <C> <C>
Operating activities:
Net income (loss) ($272,752) ($70,605)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization $341,724 $45,699
Amortization of intangible assets $50,982
Minority Interest ($39,751)
Operating loss from discontinued operations ($73,948)
Changes in operating assets and liabilities:
Accounts receivable $108,125 ($47,004)
Other current assets $372,766 $89,669
Other asset ($78,014) ($1,233)
Accounts payable and accrued expenses ($605,480) ($38,736)
----------------------------
Net cash provided by (used in) operating
activities ($196,348) ($22,210)
----------------------------
Investing activities:
Acquisition of hospitality busuness, net of
noncash consideration and cash required ($223,859)
Increase in Notes Receivable ($4,276)
Purchases of property and equipment ($205,341) ($8,493)
Gain on sale of subsidiary's net assets $14,161
Collections of notes receivable $34,662
----------------------------
Net cash used in investing activities ($160,794) ($232,352)
----------------------------
Financing activities:
Dividends Paid(4th Qtr. 1997-$197,583 & 1st Qtr.
1998-$197,583) ($395,166)
Decrease in restricted cash $568,165
Repurchase of common stock ($9,565)
Repurchase of warrants ($102,638)
Conversion of warrants to common stock $8,823
Reduction of payable for redemption of pre-
ferred stock of subsidiary ($568,165)
Contributions to capital from United States
Lines, Inc. and United States Lines (S.A.),
Inc. Reorganization Trust, including $8,628
to minority interest in 1997
Proceeds from long-term borrowings
Repayments of long-term borrowings ($146,779)
----------------------------
Net cash provided by financing activities ($533,122) ($112,203)
----------------------------
Increase (decrease) in cash and cash equivalents ($890,264) ($366,765)
Cash and cash equivalents, beginning of period $11,523,848 $6,580,836
----------------------------
Cash and cash equivalents, end of period $10,633,584 $6,214,071
============================
Supplemental disclosure of cash flow data:
Interest paid $458,422 $787
============================
</TABLE>
7
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 American Group, Inc. (formerly Janus
Industries, Inc.) and Subsidiaries (the "Company") as of March 31,
1998, its results of operations and cash flows for the three months
ended March 31, 1998 and 1997 and its changes in stockholders'
equity for the three months ended March 31, 1998. Certain terms used
herein are defined in the audited consolidated financial statements
of the Company as of December 31, 1997 and 1996 and for the years
then ended (the "Audited Janus Financial Statements") included in
the Company's Report on Form 10-KSB for the year ended December 31,
1997 previously filed with the Securities and Exchange Commission.
Accordingly, these unaudited condensed consolidated financial
statements should be read in conjunction with the Audited Janus
Financial Statements and the other financial statements included in
the Form 10-KSB.
The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results of operations for the
full year ending December 31, 1998.
Note 2-Organization:
As of March 31, 1998, the continuing operations of Janus American
Group, Inc. ("Janus"), which until September 29, 1997 had been named
Janus Industries, Inc., and its subsidiaries were comprised
primarily of the operations of seven hotels (of which six are
wholly-owned and one is 85% owned) and a hotel management company.
Janus, its subsidiaries and its predecessor entities are referred to
collectively herein as the "Company."
The Company's owned and managed hotels are located primarily in the
Midwestern and Southeastern pans of the United States and are
designed to appeal primarily to business travelers and vacationers
on limited budgets. As further described in Note 4, the hotel
operations and two mortgage notes receivable were acquired,
effectively, as of April 30, 1997 in a transaction that was
accounted for as a purchase. Accordingly, the accompanying unaudited
consolidated financial statements reflect the accounts for the hotel
operations for the three months ended March 31, 1998 and the
financial statements for periods prior to that date are not
comparable.
8
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2-Organization (continued):
As further described in Note 10, management decided during December
1997 to discontinue and dispose of all of the Company's operations
related to the engineering and wireline logging services to
companies in the oil and gas industry (the "oil and gas services
operations").
As further described in Note 4 those operations were acquired on
July 15, 1996 in a transaction that was accounted for as a purchase.
From February 1990, when it emerged from the reorganization
proceedings described below, 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, record retention and other
administrative expenses incurred to satisfy existing financial
reporting requirements.
In November 1986, the Company's predecessors, 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. In May 1989, the United
States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") confirmed a plan of reorganization with respect
to such companies, which was later amended and modified pursuant to
an order of the Bankruptcy Court entered in February 1990 (the
"Plan").
Pursuant to the Plan and the order of the Bankruptcy Court confirming the Plan.
a. USL and USL-SA changed their names to Janus Industries, Inc. and JI
Subsidiary, Inc. ("JIS"), respectively;
b. The United States Lines, Inc. and United States Lines (S.A.) Inc.
Reorganization Trust (the "Reorganization Trust") was established
for the purpose of administering the Plan and liquidating and paying
claims of former creditors of USL and USL-SA. The Reorganization
Trust 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;
9
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2-Organization (continued):
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 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 capitalize Janus and JIS on February 23, 1990 and provided
Janus and JIS with certain books and records, and all tax attributes
and tax benefits, of USL and USL-SA; it also made cash contributions
of approximately $7,491,000 and $7,622,000 to the capital of Janus
and JIS in 1997 and 1996, respectively.
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 9). 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.
The Company obtained new management during 1995 and consummated the
acquisition of the oil and gas services operations in 1996 and the hotel
operations in 1997.
Note 3-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.
Fresh-start accounting:
The Company adopted fresh-start accounting at the time of its
reorganization in February 1990 (see Note 2). 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.
10
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Principles of consolidation:
The unaudited consolidated financial statements include the accounts
of Janus and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Note 3-Summary of significant accounting policies (continued):
Cash equivalents:
Cash equivalents generally consist of highly liquid investments with
maturities of three months or less when acquired.
Property and equipment:
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets.
Goodwill:
Goodwill, which represents the excess of the costs of acquired
businesses over the fair value of the net assets acquired at the
respective dates of acquisition, is amortized using the
straight-line method over the estimated useful lives of the assets.
Impairment of long-lived assets:
The Company has 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, such
as property and equipment and goodwill, are recognized when events
or changes in circumstances indicate that the undiscounted cash
flows estimated to be generated by such assets are less than their
carrying value and, accordingly, all or a portion of such carrying
value may not be recoverable. Impairment losses are then measured by
comparing the fair value of assets to their carrying amounts.
Deferred loan costs:
Costs incurred to obtain long-term financing are deferred and
amortized using the straight-line method (which approximates the
interest method) over the terms of the loans.
Revenue recognition:
The Company recognizes revenues from room and related services and
management fees on an accrual basis as earned. Food and beverage
revenues are recognized when goods are sold. Revenues from
discontinued engineering and wireline logging services are also
recognized on an accrual basis as earned.
11
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Advertising costs:
The costs of advertising and promotion are expensed as incurred.
Note 3-Summary of significant accounting policies (continued):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred tax assets and liabilities
to be computed annually for temporary differences between the
financial statement and tax 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. Income tax credits attributable to
benefits from net operating loss carryforwards or other temporary
differences that existed at the time the Company adopted fresh-start
accounting are reflected as a contribution to stockholders' equity
in the period in which the tax benefits are realized.
As explained in Note 2, 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, if such amounts
differ materially from the historical amounts.
12
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3-Summary of significant accounting policies (concluded):
Income (loss) per common share:
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per
Share ("SFAS 128"), which replaces the presentation of "primary" and
"fully-diluted" income (loss) per common share required under
previously promulgated accounting standards with the presentation of
"basic" and "diluted" income (loss) per common share.
Basic net income (loss) per common share is calculated by dividing
net income or loss, as adjusted for required preferred stock
dividends, by the weighted average number of common shares
outstanding during the period. The calculation of diluted net income
(loss) per common share is similar to that of basic net income
(loss) per common share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally
those issuable upon the exercise of stock options and warrants, were
issued during the period.
Since the Company had losses applicable to common stock in the first
quarter of 1998 and 1997 (Pro forma Consolidated Statement of
Operations), the assumed effects of the exercise of outstanding
stock options and warrants were anti-dilutive and, accordingly,
dilutive per share amounts have not been presented in the
accompanying unaudited consolidated statements of operations. In
addition, the basic per share amounts presented in the accompanying
unaudited consolidated statements of operations which were computed
in accordance with SFAS 128 do not differ from those computed under
previously promulgated accounting standards.
Other recent accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"), which could require
the Company to make additional disclosures in its financial
statements no later than for the year ending December 31, 1998. SFAS
130 defines comprehensive income, which includes items in addition
to those reported in the statement of operations, and requires
disclosures about its components. Management believes that the
adoption of SFAS 130 will not have a material impact on the
Company's disclosures. SFAS 131 requires disclosures for each
segment of a business
13
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and the determination of segments based on its internal management
structure. Management is in the process of evaluating whether SFAS
131 will require the Company to make any additional disclosures.
Note 4 - 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 owned by an 85%-owned partnership), (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 "Mortgages"). The hotels, the
management company and the Mortgages are also referred to herein as the
"Hotel Group." The Sellers also own controlling interests in other hotels,
certain of which are managed by the Company. Each of the Sellers became an
executive officer of the Company as of the date of acquisition.
The consideration exchanged by the Company for the assets and
liabilities of the Hotel 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 Janus 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 1,007,424
-----------
Total purchase price to be allocated $24,603,104
-----------
14
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as a purchase and, accordingly,
the results of the Hotel Group have been included in the
accompanying unaudited 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 $79,994
Accounts receivable 230,011
Other current assets 217,024
Property and equipment 34,400,000
Mortgage notes receivable 5,758,282
Goodwill 6,820,406
Other assets 1,256,672
Accounts payable (579,115)
Other current liabilities (519,595)
Long-term debt (20,333,575)
Deferred tax liabilities (1,190,000)
Minority interest in the 85%-owned hotel
Partnership (1,537,000)
-----------
Total purchase price allocated $24,603,104
-----------
Although the Company has a substantial amount of estimated available
net operating loss carryforwards for Federal income tax and
alternative minimum tax purposes, the deferred tax assets
potentially available from such carryforwards have been reduced by a
valuation allowance due to uncertainties related to their future
realization. Accordingly, the amounts allocated to goodwill and
deferred tax liabilities shown above in connection with the
acquisition of the Hotel Group have each been reduced by
approximately $8,134,000, which is equivalent to the reduction in
the valuation allowance attributable to the portion of the net
operating loss carryforwards that management estimates will be
offset by temporary differences attributable to the acquired net
assets of the Hotel Group.
The goodwill attributable to the acquisition of the Hotel Group is
being amortized based on an estimated useful life of 40 years.
15
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma information shows the actual
results of continuing operations for the three months ended March
31,1998, and pro forma results of operations for the three months
ended March 31, 1997 (and excludes the results of the discontinued
oil and gas services operations) as though the Hotel Group had been
acquired as of January 1, 1997.
March 31, 1998 Adjusted Proforma
March 31, 1997
---------------------------------------
Revenues:
Hotel revenues:
Room and related services $1,836,667 $1,919,698
Food and beverage 293,046 294,779
Management fees 375,131 274,309
Other 30,528 34,066
---------------------------------------
Total hotel revenues 2,535,372 2,522,852
Sales 0
---------------------------------------
Total revenues 2,535,372 2,522,852
---------------------------------------
Cost and expenses:
Direct hotel operating expenses
Room and related services 523,182 517,815
Food and beverage 252,180 269,962
Selling and general expenses 127,150 129,946
---------------------------------------
Total direct hotel
operating expense 902,512 917,723
Occupancy and other operating
expenses 421,348 410,989
Selling, general and admin.
Expenses 919,336 971,077
Depreciation of property and
equipment 341,724 296,033
Amortization of intangible
assets 50,982 33,834
---------------------------------------
Total costs and expenses 2,635,902 2,629,656
---------------------------------------
Operating income (loss) (100,530) (106,804)
Other income (expense)
Interest income 246,449 178,185
Other income 0
Interest expense (458,422) (450,879)
---------------------------------------
Income (loss) before state income taxes
And minority interest (312,503) (379,498)
Credit for prior year state income tax
refunds
16
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income (loss) before minority interest (312,503) (379,498)
Minority interest (39,751) (36,810)
---------------------------------------
Net income (loss) (272,752) (342,688)
Less preferred dividend requirements 197,583 195,973
---------------------------------------
Net income (loss) applicable to common
stock (470,335) (538,661)
Net income (loss) per common share -0.05 -0.06
---------------------------------------
Weighted average common shares
outstanding $8,691,735 $9,030,608
=======================================
In addition to combining the historical results of operations of the
Company (which did not have any active operations prior to the Hotel
Group acquisition other than the discontinued oil and gas services
operations not included above) and the historical pre-acquisition
results of operations of the Hotel Group, 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 Hotel Group that were not acquired by the Company;
-- Depreciation of property and equipment based on the fair values of
assets acquired;
-- Amortization of the additional goodwill arising from the Hotel Group
acquisition;
-- The net effects of changes to compensation and related expenses
based on revised lease agreements and expense sharing arrangements
with a related party and revised employment agreements;
17
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Acquisitions (continued)
- -- The provision for income taxes is based upon pro forma income from
continuing operations and the statutory Federal and state income tax
rates. Any actual income tax credits attributable to benefits from net
operating loss carryforwards that existed at the time the Company adopted
fresh-start accounting will be reflected as a contribution to
stockholders' equity in the period in which the tax benefits are realized;
and
- -- The effects of the issuance of shares of preferred and common stock as
part of the consideration for the acquisition on preferred stock dividends
and weighted average common shares
The unaudited pro forma results of operations shown above do not purport to
represent what the combined results of operations actually would have been if
the acquisition of the Hotel Group had occurred as of January 1, l997 instead of
the actual date of consummation or what the results of operations would be for
any future periods
On July 15, 1996, the Company commenced oil and gas services operations when it
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
are referred to collectively herein as "Pre-Tek." The oil and gas services
operations were discontinued in December 1997.
The consideration exchanged by the Company for such assets and liabilities and
the other direct acquisition costs were 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 per
share, of $2.75 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
----------
18
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4-Acquisitions (concluded):
Unaudited pro forma information showing the results of operations for the
three months ended March 31, 1998 and 1997 of the oil and gas services
operations are not presented because such operations have been
discontinued.
Note 5 - Mortgage notes receivable:
The Mortgages, which were acquired on April 24, 1997 in connection with
acquisition of the Company's hotel operations, are secured by a hotel in
Juno Beach, Florida and a campground in Kissimmee, Florida, both of which
are owned by entities controlled by the Sellers. The Sellers have also
personally guaranteed the Mortgages. The balances receivable at March 31,
1998 consisted of the following:
Note secured by hotel property, with interest at
.5% above specified prime rate (an effective rate
of 9.0% at December 31, 1997) $2,175,112
Note secured by campground, with interest at 8% 3,476,863
----------
Total mortgage notes receivable 5,651,975
Less current portion 125,611
----------
LONG-TERM PORTION, NET OF CURRENT
PORTION $5,526,364
----------
The Mortgages are payable in monthly installments of principal and
interest through April 2003 and final installments of all remaining
principal and interest in May 2003.
Principal payments on the Mortgages in each of the five years subsequent
to December 31, 1997 are:
Year Ending
December 31 Amount
-----------
1998 $123,022
1999 133,708
2000 145,326
2001 157,958
2002 171,690
The Company derived interest income of $118,893 from the Mortgages during
the period from January 1, 1998 to March 31, 1998.
19
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Property and equipment:
Property and equipment at March 31, 1998 and 1997 consisted of the
following:
Years of March 31 March 31
Useful Life 1998 1997
----------- ---- ----
Land $6,035,000
Hotels 30 26,942,000
Hotel furniture and
fixtures 5 2,439,527
Equipment and
vehicles 5 -0- $677,291
Other 5 10,483
--------------------------------
$35,427,010 $677,291
Less accumulated
depreciation and
amortization 1,216,038 116,920
--------------------------------
Totals $34,210,972 $560,371
--------------------------------
20
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Long-term debt:
Long-term debt at March 31, 1998 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 $10,655,032
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, 1997
ranged from 8.73% to 9.5%); the mortgage notes mature from
August 1998 through April 2006 9,021,774
Equipment notes with various maturities through December
2001 and interest at rates ranging from 8.98% to 15% 154,948
-----------
Total long-term debt 19,831,754
Less current portion 2,124,180
Long-term debt, net of current portion $17,707,574
-----------
Long-term debt is secured by the Company's property and equipment.
Principal payments in years subsequent to December 31, 1997 are as follows:
Year Ending Amount
December 31 ------
-----------
1998 $2,112,215
1999 570,665
2000 620,790
2001 1,502,792
2002 2,717,123
21
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 -Commitments and contingencies:
Employment agreements:
During 1997, the Company entered into employment agreements whereby
it will be obligated to pay minimum salaries to four of its
executive officers, including each of the Sellers, aggregating
$760,000 during 1998 and 1999 and $250,000 in 2000.
Concentration of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash in banks,
accounts receivable and the Mortgages.
The Company maintains its cash balances in bank deposit accounts
which, at times, may exceed the Federal Deposit Insurance
Corporation coverage limits thereby exposing the Company to credit
risk. The Company reduces its exposure to credit risk by maintaining
such deposits with financial institutions which management believes
are high quality.
Exposure to credit risk with respect to trade receivables is limited
by the short payment terms and, generally, the low balances
applicable to such instruments and the Company's routine assessment
of the financial strength of its customers. Exposure to credit risk
with respect to the Mortgages is limited because they are secured by
real estate with an estimated market value in excess of the mortgage
balance.
Litigation:
The Company is a party to various legal proceedings. In the opinion
of management, these actions are routine in nature and will not have
a material adverse effects on the Company's consolidated financial
statements in subsequent years.
Note 9 -Income taxes:
For financial statement purposes, there was no net provision for
Federal income taxes at March 31, 1998 and 1997 as a result of the
net pre-tax loss incurred by the Company during each year. In
addition, there was no credit for Federal income taxes at March 31,
1998 and 1997 because all of the tax loss attributes referred to
above have been fully reserved through a valuation allowance rather
than reflected as deferred tax as deferred tax assets due to the
lack of a historical 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 the Company's reorganization in February 1990 will be reported as
an increase in additional paid-in capital and not as a credit to
results of operations.
22
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9-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 March 31, 1998
management believes that such a change in ownership has not
occurred.
Note 10 - Discontinued operations:
In December 1997, the Company adopted a plan to discontinue and dispose of
the oil and gas services operations that it had acquired in July 1996 (see
Note 4). Accordingly, the results of the oil and gas services operations
through December 31, 1997 and the estimated loss to be incurred in
connection with the disposal have been classified as separate components
of discontinued operations. See audited consolidated financial statements
filed as part of Form 10-KSB for the year ended December 31, 1997.
Management has completed the disposal through the sale of the stock of
PTWSC as of March 31, 1998.
Pre-Tek operating losses from January 1 to March 31, 1998 totaled $42,787.
The gain from the sale of stock totaled $14,161. The net effect of the
operating loss and gain on sale of stock totaling $28,626 reduced the
accrual from discontinued operations at March 31, 1998 to $136,186.
Note 11 - Fair value of financial instruments:
The Company's financial instruments at March 31, 1998 and 1997 consisted
of cash, accounts receivable, mortgage notes receivable, accounts payable
and fixed and variable rate mortgage and equipment notes payable. In the
opinion of management, (i) cash, accounts receivable and accounts payable
were carried at values that approximated their fair values because of
their short-term maturities and (ii) mortgage notes receivable and
mortgage and equipment notes payable were carried at values that
approximated their fair values because they had interest rates equivalent
to those currently prevailing for financial instruments with similar
characteristics
Note 12 - Minority interest:
The Company owns an interest of approximately 90% in JIS and an interest
of 85% in a hotel partnership that it acquired as part of the acquisition
of the Hotel Group during 1997 (see Note 4). The balance of the minority
interest in these consolidated
23
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
subsidiaries at March 31, 1998 and the changes in the minority interest
are set forth below:
JIS HOTEL
PARTNERSHIP TOTAL
--------------------------------------------
Balance 1/1/98 $ 91,113 $1,597,856 $1,688,969
Net Income (loss) -0- (39,751) (39,751)
--------------------------------------------
Balance at 3/31/98 $91,113 $1,558,105 $1,649,218
24
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 24, 1997, Janus American Group, 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 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. It was
determined by management to discontinue and dispose of the oil and gas services
operations at December 31, 1997. The estimated loss was accrued. Based upon the
above, the pro forma was adjusted to eliminate the effect of Pre-Tek from
operations.
The accompanying adjusted unaudited pro forma condensed statement of operations
for the three months ended March 31, 1997 combines the historical consolidated
statement of operations of Janus and its subsidiaries for the three months ended
March 31, 1997 (including the Beck-Yeaggy Group for the period from January 1,
1997 to March 31, 1997 as if the acquisition was consummated as of January 1,
1997, and the elimination of Pre-Tek for the entire period).
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
consolidated financial statements do not purport to represent what the combined
results of operations actually would have been if the acquisition of Beck
Yeaggy-Group referred to above had occurred as of January 1, 1997 instead of the
actual date 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 and in the Form 10-KSB for the year ended December 31, 1997.
25
<PAGE>
JANUS AMERICAN GROUP, INC.
ADJUSTED UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
-------------------------
<S> <C> <C>
Revenues:
Hotel revenues:
Room and related services $1,836,667
Food and beverage $293,046
Management fees $375,131
Other $30,528
-------------------------
Total hotel revenues $2,535,372 $0
Sales $0 $0
-------------------------
Total revenues $2,535,372 $0
-------------------------
Cost and expenses:
Direct hotel operating expenses:
Room and related services $523,182
Food and beverage $252,180
Selling and general expenses $127,150
-------------------------
Total direct hotel operating expense $902,512 $0
Occupancy and other operating expenes $421,348 $0
Selling, general and administrative expenses $919,336 $166,438
Depreciation of property and equipment $341,724 $366
Amortization of intangible assets $50,982 $0
-------------------------
Total costs and expenses $2,635,902 $166,804
-------------------------
Operating income (loss) ($100,530) ($166,804)
Other income (expense)
Interest income $246,449 $59,069
Other income $0 $5,973
Interest expense ($458,422) $787
-------------------------
Income (loss) before state income taxes and
minority interest ($312,503) ($100,975)
Credit for prior year state income tax refunds $76,527
-------------------------
Income (loss) before minority interest ($312,503) ($24,448)
Minority interest ($39,751) $0
-------------------------
Net income (loss) ($272,752) ($24,448)
Less preferred dividend requirements $197,583 $0
-------------------------
Net income (loss) applicable to common stock ($470,335) ($24,448)
Net income (loss) per common share -0.05 0.00
=========================
Weighted average common shares outstanding 8,691,735 5,230,609
=========================
</TABLE>
26
<PAGE>
JANUS AMERICAN GROUP, INC.
ADJUSTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Adjusted Pro
Forma
March 31, March 31,
1998 1997
---------------------------
Revenues:
Hotel revenues:
Room and related services $1,836,667 $1,919,698
Food and beverage $293,046 $294,779
Management fees $375,131 $274,309
Other $30,528 $34,066
---------------------------
Total hotel revenues $2,535,372 $2,522,852
Sales $0
---------------------------
Total revenues $2,535,372 $2,522,852
---------------------------
Cost and expenses:
Direct hotel operating expenses:
Room and related services $523,182 $517,815
Food and beverage $252,180 $269,962
Selling and general expenses $127,150 $129,946
---------------------------
Total direct hotel operating expense $902,512 $917,723
Occupancy and other operating expenes $421,348 $410,989
Selling, general and administrative expenses $919,336 $971,077
Depreciation of property and equipment $341,724 $296,033
Amortization of intangible assets $50,982 $33,834
---------------------------
Total costs and expenses $2,635,902 $2,629,656
---------------------------
Operating income (loss) ($100,530) ($106,804)
Other income (expense)
Interest income $246,449 $178,185
Other income $0
Interest expense ($458,422) ($450,879)
---------------------------
Income (loss) before state income taxes and
minority interest ($312,503) ($379,498)
Credit for prior year state income tax refunds
---------------------------
Income (loss) before minority interest ($312,503) ($379,498)
Minority interest ($39,751) ($36,810)
---------------------------
Net income (loss) ($272,752) ($342,688)
Less preferred dividend requirements $197,583 $195,973
---------------------------
$0
Net income (loss) applicable to common stock ($470,335) ($538,661)
Net income (loss) per common share -0.05 -0.06
===========================
Weighted average common shares outstanding 8,691,735 9,030,608
===========================
27
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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 4 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 is set forth in Note 4 of the notes to the unaudited condensed
consolidated financial statements of Janus included elsewhere herein.
Pro Forma Adjustments to the Unaudited Condensed Combined Statements of
Operations for the three months ended March 31, 1997.
(a) To eliminate the net revenues derived from management contracts of the
Beck-Yeaggy Group that were not acquired by Janus.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
28
<PAGE>
JANUS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(f) To adjust state income tax provisions and credits based on the pro forma
income or loss before income taxes and related carryforwards applicable to
each state. No provisions or credits for Federal income taxes have been
recorded on the pro forma net income or loss before income taxes based on
the availability of net operating loss carryforwards due to the
uncertainties related to their future use (see Note 9 of the notes to the
condensed consolidated financial statements herein).
(g) To record the minority interest in the net income (loss) of the 85%-owned
hotel.
(h) To record the dividends attributable to the shares of Series B preferred
stock issued as part of the consideration paid to the Sellers.
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion of the Company's historical results of
operations, changes in liquidity and capital resources and liquidity and capital
resources as of March 31, 1998 and for the three months ended March 31, 1998 and
1997 should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements of the Company and the notes thereto and the Adjusted
Unaudited Pro Forma Condensed Consolidated Financial Statements of Janus
American Group, Inc. and Subsidiaries and the notes thereto included elsewhere
herein. The term "Company" means Janus American Group, Inc. ("Janus")
collectively with its subsidiaries JI Subsidiary, Inc. ("JIS"), Pre-Tek Wireline
Service Company, Inc. ("Wireline") and KFE Wireline, Inc. ("KFE"). References to
the operations of "Pre-Tek" in this discussion are to the combined operations of
Wireline and Wireline's subsidiary, KFE.
Janus and JIS are the successors to United States Lines, Inc. ("U.S.
Lines") and United States Lines (S.A.), Inc. ("U.S. Lines (S.A)"), which emerged
from a Chapter 11 bankruptcy in 1990. The Plan of Reorganization which was
approved by the creditors of U.S. Lines and U.S. Lines (S.A.) and the United
States Bankruptcy Court for the Southern District of New York, contemplated that
Janus and JIS would seek out acquisition opportunities for each of the
reorganized companies in order to utilize their respective anticipated available
net operating loss carryforwards ("NOLs") for Federal income tax purposes.
The Company acquired the business of Pre-Tek, an oil and gas engineering
services and wireline logging company based in Bakersfield, California, in July
1996. 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 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"). Management is diligently pursuing a
program for additional acquisitions through the use of a combination of cash,
capital stock and, when necessary, borrowing.
In December 1997, the Company adopted a plan to discontinue and dispose of
the oil and gas services operations that it had acquired in July 1996. See Note
4 to the Unaudited Condensed Consolidated Financial Statements included
elsewhere herein. Accordingly, the results of the oil and gas services
operations through December 31, 1997 and the estimated loss
30
<PAGE>
to be incurred in connection with the disposal were classified as separate
components of discontinued operations at December 31, 1997. See Consolidated
Statements of Operations included in the Company's Report on Form 10-KSB for the
year ended December 31, 1997. Management has completed the disposal through the
sale of the stock of Pre-Tek to management of Pre-Tek as of March 31, 1998.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Historical and Pro Forma Results of Operations
The acquisition of the Beck-Yeaggy Group and Pre-Tek were accounted
for as purchases and, accordingly, the Company's historical results of
operations for the three months ended March 31, 1998 and 1997 include the
results of operations of the Beck-Yeaggy Group for the three months ended March
31, 1998 and Pre-Tek subject to the effect of discontinued operations as
estimated at December 31, 1997. See Note 10 to the Unaudited Condensed
Consolidated Financial Statements included elsewhere herein. As a result of the
acquisition of Beck-Yeaggy Group subsequent to April 30, 1997 and the accounting
effect of the discontinued operations of Pre-Tek, the Company's historical
results of operations for the three months ended March 31, 1998 are not directly
comparable to those of 1997.
To present more comparable information, adjusted unaudited pro forma
combined results of operations for the three months ended March 31, 1998 and
1997 are set forth herein. The adjusted unaudited pro forma result of operations
sets forth the historical results of the Company for the three months ended
March 31, 1998 as compared to the historical results of Beck-Yeaggy Group for
the three months ended March 31, 1997 adjusted to reflect: the elimination of
net revenues derived from management contracts of the Beck-Yeaggy Group that
were not acquired by the Company; depreciation and amortization of property on
equipment based on fair values of assets acquired; the amortization for
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 statement of operations for the three months
ended March 31, 1998 and 1997 are exclusive of Pre-Tek's operating results. See
Note 10 to the Unaudited Condensed Consolidated Financial Statements included
elsewhere herein.
The pro forma combined net loss of the Company was $470,335 for the three
months ended March 31, 1998 as compared to a net loss of $538,661 during the
same period of 1997. The decrease in net loss was primarily the result of
increases in interest income and management fee income which more than offset a
decrease in hotel revenues.
Room revenue decreased $83,031 to $1,836,667 in the three months ended
March 31, 1998 as compared to the three month period in the prior year. The 4.3%
decrease was attributable primarily to a decrease in the occupancy percentage
for the Owned Hotels. The average rate increased from $39.63 in 1997 to $42.67
for 1998 as the occupancy percentage decreased 5.65% in 1998 to 49.14% from
54.79% in 1997.
31
<PAGE>
Management fee income increased from $274,309 in 1997 to $375,131 in 1998
as room revenues increased at the Managed Hotels where the management fees are
calculated as a percentage of room revenues, the Company had additional
management contracts over the same period in the prior year and the Company
received the payment of incentive management fees upon the sale of certain
Managed Hotels by such hotels' owners.
Other hotel related revenues remained stable from 1997 to 1998.
Direct hotel operating expenses decreased by $15,211 from $917,723 in 1997
to $901,512 in 1998. Direct room and related services costs increased as linen
costs increased. Food and beverage costs decreased as food costs decreased.
Occupancy and other operating expenses increased to $421,348 in 1998 from
$410,989 in 1997. The increase was the net effect of a decrease in utility
expense and an increase in repairs and maintenance expense.
Selling, general and administrative expenses decreased by $51,741 to
$919,336 in 1998 from $971,077 in 1997 as a result of a reduction in
compensation expenses and professional fees.
Depreciation and amortization expense increased by $45,691 in 1998 from
$296,033 in 1997 as a result of depreciation expense on 1997 improvements.
Interest and other income increased $68,365 to $246,449 in 1998 from
$178,175 in 1997 as the amount of funds invested increased over the same period
in the prior year.
Interest expense increased from $450,879 in 1997 to $458,422. The increase
was attributable to interest rate increases on variable rate debt.
The charges to operations for minority interest remained stable from 1997
to 1998.
Historical Changes in Liquidity and Capital Resources
Total assets decreased from $61,404,126 at December 31, 1997 to
$59,953,020 at March 31, 1998. The decrease in total assets was the result of
the discontinued operations of Pre-Tek.
Property, plant and equipment, goodwill, and notes receivable, all
fluctuated as a result of the sale of Pre-Tek.
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 1998
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
32
<PAGE>
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.
At March 31, 1998, the Company had $10,633,584 in cash and cash
equivalents. Included in the total is restricted cash of $201,805 consisting of
$41,238 for the redemption of preferred stock of JIS and $160,567 for real
estate tax escrow accounts.
During the three months ended March 31, 1998, the Company invested
approximately $215,000 in capital improvements in connection with the Owned
Hotels. The Company plans to spend an additional $1,300,000 on such capital
improvements over the nine month period ending December 31, 1998.
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 committed lines of credit. 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.
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. 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
33
<PAGE>
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 management believes that the Company will
continue 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. 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. However, management's belief
that there will be further contributions 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 also 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 March 31, 1998 totals $19,831,754.
Mortgage debt totals $19,676,806, which consists of $10,655,032 in fixed rate,
fully self-amortizing mortgage loans and $9,021,774 in adjustable rate (3-5 year
adjustment period) mortgage loans. Such adjustable rate loans have maturity
dates ranging from March 1998 to April 2006. Interest rates on mortgage debt
range from 8.875% to 10.00% with a weighted average interest rate of 9.3%
effective at March 31, 1998. The approximate scheduled repayments of principal
on the long-term debt of the Company are: from April 1, 1998 through December
31, 1998 -- $1,965,500; 1999 -- $570,665; 2000 -- $620,790; and 2001 --
$1,502,792. 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.
Seasonality. 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.
YEAR 2000 ISSUES
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and has initiated an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using
34
<PAGE>
the two digits rather than four to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. Additionally, the Company does
not expect the Year 2000 problem to have a material effect on its financial
position or results of operations. However, if such modifications and
conversions are not completed timely, the Year 2000 problem may have a material
impact on the financial position or operations of the Company.
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 within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
27.1 Financial Data Schedule
(B) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during the quarter
ended March 31, 1998.
35
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: May 14, 1998 JANUS AMERICAN GROUP, INC.
By: /s/ James E. Bishop
-------------------------------------
James E. Bishop, President
Dated: May 14, 1998 /s/ Richard A. Tonges
-------------------------------------
Richard A. Tonges, Treasurer and
Vice President of Finance (Principal
Financial and Accounting Officer)
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements for the three months ending March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> USDOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 10,431,780
<SECURITIES> 0
<RECEIVABLES> 1,078,563
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,277,752
<PP&E> 34,210,969
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,953,020
<CURRENT-LIABILITIES> 3,249,339
<BONDS> 0
0
105
<COMMON> 118,809
<OTHER-SE> 43,172,142
<TOTAL-LIABILITY-AND-EQUITY> 59,953,019
<SALES> 0
<TOTAL-REVENUES> 2,535,372
<CGS> 0
<TOTAL-COSTS> 2,635,902
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (458,422)
<INCOME-PRETAX> (312,503)
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<INCOME-CONTINUING> (312,503)
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<NET-INCOME> (272,752)
<EPS-PRIMARY> (0.05)
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