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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended January 3, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______________ to
__________________
Commission File Number 1-13486
JOHN Q. HAMMONS HOTELS, L.P.
JOHN Q. HAMMONS HOTELS FINANCE CORPORATION III
(Exact Name of Registrants as specified in their charters)
Delaware 43-1523951
Missouri 33-1006528
(State of Organization) (I.R.S. employer identification no.)
300 John Q. Hammons Parkway, Ste. 900
Springfield, Missouri 65806
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 864-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Act). YES | | NO |X|
PART I
ITEM 1. BUSINESS.
We use the terms we, us, our and other similar references to mean John
Q. Hammons Hotels, L.P., a Delaware limited partnership, and its corporate and
partnership subsidiaries collectively, or, as the context may require, John Q.
Hammons Hotels, L.P. only.
OVERVIEW
We are a leading independent owner and manager of upscale, full service
hotels located primarily in secondary markets. We own and manage 47 hotels
located in 20 states, containing 11,629 guest rooms or suites. We also manage
nine additional hotels located in five states, containing 2,075 guest rooms or
suites. The majority of these existing 56 hotels operate under the Embassy
Suites Hotels, Holiday Inn and Marriott trade names. Most of our hotels are
located near a state capitol, university, convention center, corporate
headquarters, office park or other stable demand generator.
We own and operate upscale hotels designed to appeal to a broad range
of hotel customers, including frequent business travelers, groups, conventions
and leisure travelers. Our in-house design staff individually designed each of
our hotels and most contain an expansive multi-storied atrium, large indoor
water fountains, lush plantings and comfortable lounge areas. In addition, our
hotels typically include exterior meeting facilities that can be readily adapted
to accommodate both large and small meetings, conventions or trade shows. Our 17
Embassy Suites Hotels are all-suite hotels which appeal to the traveler needing
or desiring greater space and specialized services. Our 18 Holiday Inn hotels
are affordably priced and designed to attract value-conscious leisure travelers
desiring quality accommodations. In addition, we own or manage 17 hotels
operating under leading brands including Marriott, Radisson, Sheraton, Hampton
Inn and Suites and Homewood Suites, as well as three independent hotels and one
non-franchise resort hotel.
We coordinate management of our hotels from our headquarters in
Springfield, Missouri, by our executive team. Six regional vice presidents
supervise a group of general managers in day-to-day operations. Centralized
management services and functions include sales and marketing, purchasing,
financial controls, architecture and design, human resources, legal and hotel
operations. Through these centralized services, we realize significant cost
savings due to economies of scale.
We currently have no hotels under construction, and no plans to develop
new hotels for the foreseeable future. During 2000, we entered into a five-year
management contract with John Q. Hammons whereby we will provide internal
administrative, architectural design, purchasing and legal services to Mr.
Hammons in conjunction with the development of hotels in an amount not to exceed
1.5% of the total development costs of any single hotel for the opportunity to
manage the hotel upon opening and the right to purchase the hotel in the event
it is offered for sale.
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FORWARD-LOOKING STATEMENTS
This Form 10-K contains "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, regarding, among other things, our business strategy,
prospects and financial position. These statements contain the words "believes,"
"anticipates," "estimates," "expects," "projects," "intends," "may," "will," and
similar words. These forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from any future results expressed or implied by such
forward looking statements. Such factors include, among others, the following:
- general economic conditions;
- competition;
- changes in operating costs, particularly energy, insurance and
labor costs;
- unexpected events, such as the September 11, 2001 terrorist
attacks;
- risks of hotel operations, such as hotel room supply exceeding
demand, increased energy and other travel costs and general
industry downturns;
- seasonality of the hotel business;
- cyclical over-building in the hotel and leisure industry;
- requirements of franchise agreements, including the right of
some franchisors to immediately terminate their respective
agreements if we breach certain provisions; and
- costs of complying with environmental laws.
These risks are uncertainties and, along with the risk factors
discussed below, should be considered in evaluating any forward looking
statements contained in this Form 10-K.
We undertake no obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise, other than as required by law.
RISKS RELATING TO OUR BUSINESS
WE MAY BE ADVERSELY AFFECTED BY THE LIMITATIONS IN OUR FRANCHISE
AGREEMENTS.
Approximately 90% of our hotels operate pursuant to franchise
agreements with nationally recognized hotel brands. The franchise agreements
generally contain specific standards for, and restrictions and limitations on,
the operation and maintenance of a hotel in order to maintain uniformity within
the franchisor system. Standards are often subject to change
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over time. Compliance with any such new standards could cause us to incur
significant expenses or capital expenditures.
If we do not comply with standards or terms of the franchise
agreements, our franchise licenses could be cancelled after the applicable cure
period. While none of our franchisors has ever terminated or failed to renew one
of our agreements, terminating or changing the franchise affiliation of a hotel
could require us to incur significant expenses or capital expenditures.
Moreover, the loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
Our current franchise agreements terminate at various times and have
differing remaining terms. Although some are subject to renewal, many of our
franchise agreements are set to expire before the notes mature. As a condition
to renewal, the franchise agreements frequently contemplate a renewal
application process, which may require substantial capital improvements to be
made to the hotel. Significant unexpected capital expenditures could adversely
affect our cash flow and our ability to make payments on our indebtedness,
including our notes.
MR. HAMMONS' CONTROL OF US CREATES POTENTIAL FOR SIGNIFICANT CONFLICTS
OF INTEREST.
Through his ownership of all of our general partner's Class B Common
Stock, and 269,100 shares of our general partner's Class A Common Stock, Mr.
Hammons controls our activities. In addition, since Mr. Hammons beneficially
owns all of our LP Units, representing 75.94% of our total Partnership units, he
will decide any matters submitted to a vote of our partners. Certain decisions
concerning our operations or financial structure may present conflicts of
interest between Mr. Hammons and our other shareholders or holders of our notes.
In addition, Mr. Hammons, as the holder of all of our LP Units, may suffer
different and/or more adverse tax consequences than we do upon the sale or
refinancing or some of the owned hotels as a result of unrealized gains
attributable to certain owned hotels. Therefore, it is unlikely that an owned
hotel will be sold or refinanced if such a transaction would result in an
adverse tax consequence to Mr. Hammons if we are unable to make sufficient
distributions to Mr. Hammons to pay those taxes, regardless of whether such a
sale or refinancing might otherwise be in our best interest.
Mr. Hammons also (1) owns hotels that we manage; (2) owns an interest
in a hotel management company that provides accounting and other administrative
services for all of our hotels; (3) owns a 50% interest in the entity from which
we lease our corporate headquarters; (4) has an agreement whereby we pay up to
1.5% of his in-house development costs for new hotels in exchange for the
opportunity to manage the hotels and to purchase them under certain
circumstances; (5) leases space to us in two trade centers owned by him that
connect with two of our hotels; (6) has the right to require the redemption of
his LP Units; (7) utilizes our administration and other services for his outside
business interests, for which he reimburses us; (8) supplements the compensation
of two employees of our general partner; and (9) owns the real estate underlying
three of our hotels, which we lease from him. We describe these arrangements in
further detail under "Certain Relationships and Related Transactions." In the
event that Mr.
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Hammons experienced material adverse changes in his outside business interests,
we could receive negative publicity as the result of his close ties to us, and
it is possible that the market price of our general partner's stock and the
rating of our debt could be affected.
WE DEPEND ON CERTAIN KEY MEMBERS OF OUR GENERAL PARTNER'S EXECUTIVE
MANAGEMENT.
We are dependent on certain key members of our general partner's
executive management, a loss of whose services could have a material effect on
our business and future operations. Some of our executive officers, including
our general partner's president, Lou Weckstein, spend a portion of their time
performing services for Mr. Hammons unrelated to our business.
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
Our hotel properties are subject to various federal, state and local
environmental laws. Under these laws, courts and governmental agencies have the
authority to require an owner of a contaminated property to clean up the
property, even if the owner did not know of and was not responsible for the
contamination. In addition to the costs of cleanup, contamination can affect the
value of a property and, therefore, an owner's ability to borrow funds using the
property as collateral. Under environmental laws, courts and government agencies
also have the authority to require a person who sent waste to a waste disposal
facility, like a landfill or an incinerator, to pay for the cleanup of that
facility if it becomes contaminated and threatens human health or the
environment. Court decisions have established that third parties may recover
damages for injury caused by contamination. For instance, a person exposed to
asbestos while staying in a hotel may seek to recover damages if he suffers
injury from the asbestos.
We could be responsible for the costs discussed above if one or more of
our properties are found to be contaminated or to have caused contamination. The
costs to clean up contaminated property, to defend against a claim or to comply
with environmental laws, could be material and could affect our financial
performance. In addition, under the laws of many states, contamination on a
property may give rise to a lien on the property for cleanup costs. In several
states, this lien has priority over all existing liens including those of
existing mortgages.
Real property pledged as security to a lender may be subject to
unforeseen environmental liabilities. Historic uses of some of our properties
have involved industries or businesses which could have used or produced
hazardous materials or generated hazardous waste. In the regular course of
business, our hotels might use and store small quantities of paints, paint
thinners, lubricants, pool supplies, and commercial cleaning compounds which, in
some instances, may be subject to federal and state regulations. Small
quantities of waste oil, medical waste, and other waste materials may also be
generated at some of our properties. Additionally, some of our properties
contain or may have contained underground or above ground storage tanks which
are regulated by federal, state and local environmental laws.
All of our properties have been subject to environmental site
assessments, or ESAs, prepared by independent third-party professionals. These
ESAs were intended to evaluate the environmental conditions of these properties
and included a site visit, a review of certain records
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and public information concerning the properties, the preparation of a written
report and, in some cases, invasive sampling. We obtained the ESAs before we
acquired or built most of our hotels to help us identify whether we might be
responsible for clean-up costs or other environmental liabilities. The ESAs on
our properties did not reveal any environmental conditions that are likely to
have a material adverse effect on our business, assets, results of operations or
liquidity. However, ESAs do not always identify all potential problems or
environmental liabilities. Consequently, we may have material environmental
liabilities of which we are unaware. Moreover, it is possible that future laws,
ordinances or regulations could impose material environmental liabilities, or
that the current environmental condition of our properties could be adversely
affected by third parties or by the condition of land or operations in the
vicinity of the properties.
ASPECTS OF OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION, AND
CHANGES IN GOVERNMENT REGULATIONS MAY HAVE SIGNIFICANT EFFECTS ON OUR BUSINESS.
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. We believe that
our hotels are substantially in compliance with these requirements or, in the
case of liquor licenses, that they have or will promptly obtain the appropriate
licenses. Compliance with, or changes in, these laws could reduce the revenue
and profitability of our hotels and could otherwise adversely affect our
revenues, results of operations and financial condition.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA-required
upgrades to our hotels, a determination that our hotels are not in compliance
with the ADA could result in a judicial order requiring compliance, imposition
of fines or an award of damages to private litigants.
MOISTURE RELATED ISSUES RELATED TO DEFECTIVE WINDOWS AT SOME OF OUR
PROPERTIES HAVE AFFECTED OUR OPERATING RESULTS, AND, IF THE PROBLEMS ARE MORE
WIDESPREAD THAN CURRENTLY APPARENT, COULD ADVERSELY AFFECT OUR FUTURE RESULTS OF
OPERATIONS.
We discovered water intrusion through defective windows at some of our
hotels. The sealant at the base of the windows provided by several manufacturers
had shrunk. This shrinkage allowed moisture into the space between the exterior
and interior walls. Because of the Exterior Finish Insulation Systems, or EFIS,
used in the construction of our hotels, there is no escape path for any moisture
that does leak in. The EFIS construction provides a "stucco" finish and is
commonly used throughout the lodging industry. We conducted an inspection of all
of our properties, and found shrinkage at 16 hotels, of which 14 had sustained
water intrusion damage related to the moisture, including six hotels with severe
damage.
We are pursuing claims against the window manufacturers and our
insurance carrier. The insurance carrier has denied coverage on a portion of our
claims and we have filed suit to enforce our claim. One window manufacturer is
in the process of repairing its windows and two others
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have agreed to do so. The remaining two manufacturers have told us that they
will not cover the costs of window repair or replacement. We intend to
vigorously pursue our claims against the insurance company and the window
manufacturers, but there is no assurance that we will prevail.
We have paid or reserved all costs incurred and expected to be incurred
in connection with the 16 hotels at which we discovered problems. Virtually all
of our properties include the same type of windows. While we have found no
evidence of any water damage in any other locations, problems could develop with
the windows in other hotels in the future. If such problems were to become
widespread, and we were unable to collect from the manufacturers or our
insurance carrier, the cost would be significant and could adversely impact our
cash flow and results of operations.
RISKS RELATED TO OUR DEBT
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH.
We have a substantial amount of indebtedness. As of January 3, 2003, we
had total indebtedness of $806.3 million. Our substantial indebtedness could,
among other things:
- make it more difficult for us to satisfy our obligations under
our notes;
- increase our vulnerability to general adverse economic and
industry conditions;
- limit our ability to obtain other financing to fund future
working capital, capital expenditures and other general
corporate requirements;
- require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, reducing the
availability of our cash flow to fund working capital and
other expenditures;
- limit our flexibility in planning for, or reacting to, changes
in our business and industry;
- place us at a competitive disadvantage compared to our
competitors that have less debt; and
- along with the financial and other restrictive covenants in
our indebtedness, limit, among other things, our ability to
borrow additional funds.
THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US, WHICH REDUCE
OPERATIONAL FLEXIBILITY AND CREATE DEFAULT RISKS.
The documents governing the terms of our notes and some of the mortgage
debt on our properties that are not part of the collateral hotels contain
covenants that place restrictions on us and certain of our activities,
including:
- acquisitions, mergers and consolidations;
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- the incurrence of additional indebtedness;
- the incurrence of liens;
- capital expenditures;
- the payment of dividends; and
- transactions with affiliates.
The restrictive covenants in the indenture and the documents governing
our mortgage debt reduce our flexibility in conducting our operations and will
limit our ability to engage in activities that may be in our long-term best
interest. In addition, certain covenants in the mortgage debt documents for some
of the non-collateral hotel properties require us to meet financial performance
tests. Our failure to comply with these restrictive covenants constitutes an
event of default that, if not cured or waived, could result in the acceleration
of the debt which we may be unable to repay.
TO SERVICE OUR INDEBTEDNESS, WE REQUIRE A SIGNIFICANT AMOUNT OF CASH.
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness and
to fund planned capital expenditures will depend on our ability to generate cash
in the future. This, to a certain extent, is subject to general economic,
financial, competitive and other factors that are beyond our control.
THE COLLATERAL FOR OUR NOTES MAY NOT BE ADEQUATE.
We do not have recent appraisals of our hotels. There can be no
assurance that the proceeds from any sale of collateral would be sufficient to
satisfy the amounts due on our notes and under the first mortgages on two of our
hotels. To the extent that proceeds from any sale of collateral would be
insufficient to satisfy the amounts due on our notes, holders of the notes would
become our general unsecured creditors with respect to our other assets. Three
of the collateral hotels are subject to ground leases, and in the event of
foreclosure, the trustee under the indenture governing our notes would be
required to comply with the terms of such ground leases, including payment of
rent and terms that may restrict the trustee's ability to dispose of a hotel
following foreclosure. In addition, we may enter into hedging arrangements
relating to interest rates and currency exchange rates which may be secured by
the collateral that secures our notes.
Mr. Hammons has agreed to contribute a total of up to $195.0 million to
us in the event that the proceeds from the sale of the collateral are
insufficient to satisfy the amounts due under the notes. No assurances can be
given that we or the trustee for our notes will be able to collect all or any
portion of such amounts. In addition, this obligation will terminate upon Mr.
Hammons' death.
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WE CANNOT ASSURE YOU THAT WE WILL CONTINUE TO RECEIVE REVENUES FROM
HOTELS WE MANAGE.
We receive a portion of our revenues from managing hotels Mr. Hammons
owns. We have management agreements with respect to the hotels owned by Mr.
Hammons. Each of the management agreements with the nine hotels owned by Mr.
Hammons or entities controlled by Mr. Hammons are terminable within either 30 or
60 days. We cannot assure you that we will continue to receive revenues with
respect to any of these hotels.
UNDER CERTAIN CIRCUMSTANCES, BANKRUPTCY RULES MAY IMPAIR RIGHTS OF
HOLDERS OF OUR NOTES IN THE COLLATERAL.
The right of the trustee under the indenture and related documents to
foreclose upon and sell the collateral after an event of default is likely to be
significantly impaired if a bankruptcy case were to be commenced by or against
us. Under applicable federal bankruptcy law, secured creditors cannot repossess
their security from a debtor in a bankruptcy case, or dispose of security
repossessed from the debtor, without bankruptcy court approval. The debtor also
is generally permitted to use collateral, including, with bankruptcy court
approval, cash collateral, provided, generally, that the secured creditor is
given "adequate protection."
The meaning of the term "adequate protection" may vary according to the
circumstances. It is intended in general to protect the value of the secured
creditor's interest in the collateral. If the bankruptcy court determines that
the value of the collateral decreased as a result of the stay or the debtor's
use of the collateral during the bankruptcy case, the court could order cash
payments or additional security.
In view of the lack of a precise definition of the term "adequate
protection" and the broad discretionary powers of a bankruptcy court, it is
impossible to predict if payments under our notes would be made during a
bankruptcy case, whether or when the trustee could foreclose upon or sell the
collateral or whether or to what extent you would be compensated for any delay
in payment or loss of value of the collateral through the requirement of
"adequate protection." Furthermore, in the event the bankruptcy court determines
the value of the collateral is not sufficient to repay all amounts due on our
notes, the note holders would hold "undersecured claims." Federal bankruptcy law
does not permit the payment and/or accrual of interest, costs and attorneys'
fees for "undersecured claims" during a bankruptcy case.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE
CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain change of control events, we will be
required to offer to repurchase all of our notes. It is possible, however, that
we will not have sufficient funds at the time of the change of control to make
the required repurchase of the notes. Our failure to repurchase any of the notes
would be a default under the indenture and under the mortgages on certain of the
non-collateral hotels.
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RISKS RELATED TO THE LODGING INDUSTRY
THE LODGING INDUSTRY IS HIGHLY COMPETITIVE.
Competitive factors in the lodging industry include, among others,
reasonableness of room rates, quality of accommodations, service levels and
convenience of locations. We generally operate in areas that contain numerous
other competitors. There can be no assurance that demographic, geographic or
other changes in markets will not adversely affect the convenience or
desirability of the locales in which our hotels operate, competing hotels will
not pose greater competition for guests than presently exists, or that new
hotels will not enter such locales. New or existing competitors could offer
significantly lower rates or greater conveniences, services or amenities or
significantly expand, improve or introduce new facilities in markets in which we
compete, adversely affecting our operations.
INTERNATIONAL EVENTS, INCLUDING THE EVENTS OF SEPTEMBER 11, 2001, THE
CONTINUED THREAT OF TERRORISM, THE ONGOING WAR AGAINST TERRORISM AND THE
CONTINUED CONFLICT WITH IRAQ, HAVE AFFECTED AND WILL CONTINUE TO AFFECT OUR
INDUSTRY AND OUR RESULTS OF OPERATIONS.
The terrorist attacks of September 11th caused a significant decrease
in our hotels' occupancy and average daily rate due to disruptions in business
and leisure travel patterns, and concerns about travel safety. Our occupancy and
revenue per available room (RevPAR) were below historical levels by as much as
26 percentage points and 35%, respectively, in the week immediately after the
terrorist attacks and have rebounded to prior years' levels since. Additional
similar events could have further material adverse effects on the hotel industry
and our operations.
WE ARE SUBJECT TO THE RISKS OF HOTEL OPERATIONS.
Our hotels are subject to all of the risks common to the hotel
industry. These risks could adversely affect hotel occupancy and the rates that
can be charged for hotel rooms as well as hotel operating expenses, and
generally include, among others:
- competition from other hotels;
- increases in supply of hotel rooms that exceed increases in
demand;
- increases in energy costs and other travel expenses that
reduce business and leisure travel;
- adverse effects of declines in general and local economic
activity;
- adverse effects of a downturn in the hotel industry; and
- risks associated with the ownership of hotels and real estate,
as discussed below.
WE WILL ALSO ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE
OWNERSHIP IN GENERAL.
Our investments in hotels are subject to the numerous risks generally
associated with owning real estate, including among others:
- adverse changes in general or local economic or real estate
market conditions;
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- changes in zoning laws;
- changes in traffic patterns and neighborhood characteristics;
- increases in assessed valuation and tax rates;
- increases in the cost of property insurance;
- governmental regulations and fiscal policies;
- the potential for uninsured or underinsured property losses;
- the impact of environmental laws and regulations; and
- other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and
generally cannot be sold quickly. We may not be able to vary our portfolio
promptly in response to economic or other conditions. The inability to respond
promptly to changes in the performance of our investments could adversely affect
our financial condition.
OPERATIONS
Our general partner's management team at our headquarters in
Springfield, Missouri, coordinates management of our hotel network. This
management team manages our day-to-day financial needs, including internal
accounting audits, insurance plans and business contract review, oversees
financial budgeting and forecasting, analyzes financial feasibility of new hotel
developments, and identifies new systems and procedures to improve efficiency
and profitability in our hotels. The management team also coordinates the sales
force for each of our hotels, designing sales training programs, tracking future
business under contract, and identifying, employing and monitoring marketing
programs aimed at specific target markets. In addition they are responsible for
interior design of all hotels and each hotel's product quality and directly
oversee the detailed refurbishment of existing operations.
Central management utilizes information systems that track each of our
hotel's daily occupancy, average room rate, rooms revenues and food and beverage
revenues. By having the latest information available at all times, we are better
able to respond to changes in each market by focusing sales and yield management
efforts on periods of demand extremes (low periods and high periods of demand)
and controlling variable expenses to maximize the profitability of each hotel.
Creating operating, cost and guest service efficiencies in each hotel
is a top priority. With a total of 56 hotels under management, we believe we are
able to realize significant cost savings due to economies of scale. By
leveraging the total hotels/rooms under management, we are able to secure volume
pricing from vendors not available to smaller hotel companies. We employ a
systems trainer responsible for installing new computer systems and providing
training to hotel employees to maximize the effectiveness of these systems and
to ensure that guest service is enhanced.
Regional management constantly monitors each of our hotels to verify
that our high level of operating standards are being met. Our franchisors
maintain rigorous inspection programs in which chain representatives visit their
respective hotels (typically 2 or 3 times per year) to evaluate product and
service quality. Each chain also provides feedback to each hotel through
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their guest satisfaction rating systems in which guests who visited the hotel
are asked to rate a variety of product and service issues.
Mr. Hammons beneficially owns all 294,100 shares of our general
partner's Class B Common Stock, and 269,100 shares of our general partner's
Class A Common Stock, representing 76.8% of the combined voting power of both
classes of our common stock. We are the sole general partner of the Partnership
through our ownership of all 5,083,829 General Partner units, or the GP Units,
representing 24.06% of the total equity in the Partnership. Mr. Hammons
beneficially owns all 16,043,900 limited partnership units of the Partnership,
or the LP Units, representing 75.94% of the total equity in the Partnership. Our
Class A Common Stock represents approximately 21% of the total equity of the
Partnership, and the Class B Common Stock and LP Units beneficially owned by Mr.
Hammons represent approximately 79% of the total equity in the Partnership.
Our executive offices are located at 300 John Q. Hammons Parkway, Suite
900, Springfield, Missouri 65806 and our telephone number is (417) 864-4300. We
are a Delaware limited partnership formed in 1994. Our website address is
www.jqhhotels.com. We post all of our Form 10-K, Form 10-Q and Form 8-K filings
on our website as promptly as practicable after filing with the SEC.
SALES AND MARKETING
We market our hotels through national marketing programs and local
sales managers and a director of sales at each of our hotels. While we make
periodic modifications to our marketing concept in order to address differences
and maintain a sales organization structure based on market needs and local
preferences, we generally utilize the same major campaign concept throughout the
country. We develop the concepts at our management headquarters, while
modifications are implemented by our hotels' regional vice presidents and local
sales force, all of whom are experienced in hotel marketing. The sales force
reacts promptly to local changes and market trends in order to customize
marketing programs to meet each hotel's competitive needs. In addition, the
local sales force is responsible for developing and implementing marketing
programs targeted at specific customer segments within each market. We require
that each of our sales managers complete an extensive sales training program.
Our core market consists of business travelers who visit a given area
several times per year, including salespersons covering a regional territory,
government and military personnel and technicians. The profile of the primary
target customer is a college educated business traveler, age 25 to 54, from a
two-income household with a middle management white collar occupation or upper
level blue collar occupation. We believe that business travelers are attracted
to our hotels because of their convenient locations in state capitals, their
proximity to corporate headquarters, plants, convention centers or other major
facilities, the availability of ample meeting space and our high level of
service. Our sales force markets to organizations which consistently produce a
high volume of room nights and which have a significant number of individuals
traveling in our operating regions. We also target groups and conventions
attracted by our hotels' proximity to convention or trade centers which are
often adjacent to our hotels. Our hotels' group meetings logistics include
flexible space readily adaptable to groups of
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varying size, high-tech audio-visual equipment and on-site catering facilities.
We believe that suburban convention centers attract more convention sponsors due
to lower prices than larger, more cosmopolitan cities. In addition to the
business market, our targeted customers also include leisure travelers looking
for secure, comfortable lodging at an affordable price as well as women
travelers who find the security benefits of our atrium hotels appealing.
We advertise primarily through direct mail, magazine publications,
directories and newspaper advertisements, all of which focus on value delivered
to and perceived by the guest. We have developed in-house marketing materials
including professional photographs and written materials that can be mixed and
matched to appeal to a specific target group (business traveler, vacationer,
religious group, reunions, etc.). Our marketing efforts focus primarily on
business travelers who we estimate account for approximately 50% of the rooms
rented in our hotels.
Our franchise hotels utilize the centralized reservation systems of our
franchisors, which we believe are among the more advanced reservation systems in
the hotel industry. The franchisors' reservation systems receive reservation
requests entered (1) on terminals located at all of their respective franchises,
(2) at reservation centers utilizing 1-800 phone access and (3) through several
major domestic airlines. Such reservation systems immediately confirm
reservations or indicate accommodations available at alternate system hotels.
Confirmations are transmitted automatically to the hotel for which the
reservations are made. We believe that these systems are effective in directing
customers to our franchise hotels.
FRANCHISE AGREEMENTS
We enter into non-exclusive franchise licensing agreements with
franchisors we believe are the most successful brands in the hotel industry. The
term of an individual franchise agreement for a hotel typically is 20 years. Our
franchise agreements allow us to start with and then build upon the reputation
of the brand names by setting higher standards of excellence than the brands
themselves require. The non-exclusive nature of our franchise agreements allows
us the flexibility to continue to develop properties with the brands that have
shown success in the past or to operate hotels in conjunction with other brand
names.
Holiday Inn. Our franchise agreements grant us a nonassignable,
non-exclusive license to use Holiday Inn's service mark and computerized
reservation network. The franchisor maintains the right to improve and change
the reservation system to make it more efficient, economical and competitive. We
pay monthly fees based on a percentage of gross revenues. The initial terms of
each of our Holiday Inn franchise agreements is 20 years with varying renewal
options and extension terms.
Embassy Suites Hotels. Our franchise agreements grant us a
nonassignable, non-exclusive license to use the Embassy Suites Hotels service
mark and computerized reservation network. The franchisor maintains the right to
improve and change the reservation system for the purpose of making it more
efficient, economical and competitive. We pay monthly fees based on a percentage
of gross revenues attributable to suite rentals, plus marketing and reservation
contributions which are also a percentage of gross revenues. The initial term of
each
13
of our Embassy Suites Hotels franchise agreements is 20 years with varying
renewal options and extension terms.
Other Franchisors. The franchise agreements with other franchisors not
listed above are similar to those described above in that they are
nonassignable, non-exclusive licenses to use the franchisor's service mark and
computerized reservation network. Payments and terms of agreements vary based on
specific negotiations with the franchisor.
COMPETITION
Each of our hotels competes in its market area with numerous other full
service hotels operating under various lodging brands and other lodging
establishments. Chains such as Sheraton Inns, Marriott Hotels, Ramada Inns,
Radisson Inns, Comfort Inns, Hilton Hotels and Doubletree/Red Lion Inns are
direct competitors of our hotels in their respective markets. There is, however,
no single competitor or group of competitors of our hotels that is consistently
located nearby and competing with most of our hotels. Competitive factors in the
lodging industry include reasonableness of room rates, quality of
accommodations, level of service and convenience of locations.
REGULATIONS AND INSURANCE
Insurance. To supplement our self insurance programs, we provide
umbrella, property, auto, commercial liability and worker's compensation
insurance to our hotels under blanket policies. Insurance expenses for our
hotels were approximately $9.2 million, $7.3 million and $3.6 million in 2002,
2001 and 2000, respectively. In the three years ended December 29, 2000, we
experienced favorable trends in insurance expenses, due to lower rates and
better claims experiences, and because we were able to engage in favorable
buyouts of several earlier self-insured years. Since that time, our insurance
expenses increased as the result of the now fully-insured nature of most of our
insurance programs and changes in the market subsequent to the terrorist attacks
on September 11, 2001.
Regulations. A number of states regulate the licensing of hotels and
restaurants, including liquor license grants, by requiring registration,
disclosure statements and compliance with specific standards of conduct. We
believe that each of our hotels has the necessary permits and approvals to
operate their respective businesses.
Our hotels and any newly developed or acquired hotels must comply with
Title III of the Americans with Disabilities Act, or the ADA, to the extent that
such properties are "public accommodations" and/or "commercial facilities" as
defined by the ADA. Noncompliance could result in a judicial order requiring
compliance, an imposition of fines or an award of damages to private litigants.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of Asbestos Containing
Materials, or ACMs, when ACMs are in poor condition or when property with ACMs
is undergoing building, repair, remodeling, renovation or demolition. These laws
may impose liability for the release of ACMs and may
14
permit third parties to seek recovery from owners or operators of real estate
for personal injury or other damage associated with ACMs. Several of the owned
hotels contain or may contain ACMs, generally in sprayed-on ceiling treatments,
floor tiles, or in roofing materials. Several of our hotels have implemented
asbestos management plans. Moreover, in each hotel with confirmed or potential
ACMs, no removal of asbestos from the owned hotels has been recommended and we
have no plans to undertake any additional removal, beyond the removal that has
already occurred.
Our hotels are subject to environmental regulations under federal,
state and local laws. Certain of these laws may require a current or previous
owner or operator of real estate to clean up designated hazardous or toxic
substances or petroleum product releases affecting the property. In addition,
the owner or operator may be held liable to a governmental entity or to third
parties for damages or costs incurred by such parties in connection with the
contamination. See "Risk Factors - Risks Relating to Our Business - Compliance
with environmental laws may adversely affect our financial condition" for a more
detailed description of environmental regulations affecting our business.
EMPLOYEES
We employ over 5,900 full time employees, approximately 225 of whom are
members of labor unions. We believe that labor relations with employees are
good.
MANAGEMENT
The following is a biographical summary of the experience of the
executive officers and other key officers of our general partner.
John Q. Hammons founded us and our general partner and serves as the
Chairman, Chief Executive Officer and a director of our general partner. Mr.
Hammons has been actively engaged in the development, management and acquisition
of hotel properties since 1959. From 1959 through 1969, Mr. Hammons and a
business partner developed 34 Holiday Inn franchises, 23 of which were sold in
1969 to Holiday Inns, Inc. Since 1969, Mr. Hammons has developed 88 hotels on a
nationwide basis, primarily under the Holiday Inn and Embassy Suites Hotels
trade names.
Lou Weckstein is President of our general partner. Prior to joining our
general partner in September 2001, Mr. Weckstein served for ten years as Senior
Vice President, Hotel Operations, for Windsor Capital Group, a Los Angeles-based
hotel management and development company. Prior to Windsor Capital Group, Mr.
Weckstein served eight years as Vice President of Operations for Embassy Suites,
Inc. Over his career, Mr. Weckstein spent numerous years as Vice
President-Operations for Ramada Inns, Inc. and Vice President-Operations for
Sheraton Inns, Inc. He began his career in the hospitality industry as a hotel
manager in Cleveland, Ohio.
Paul E. Muellner is Chief Financial Officer of our general partner.
Prior to joining our general partner in June of 1998, Mr. Muellner was Vice
President of Finance for Carnival Hotels.
15
He also served as Operations Controller at Omni Hotels as well as positions with
Red Lion Inns and Marriott Corporation.
Debra M. Shantz is General Counsel of our general partner. She joined
our general partner in May 1995. Prior to that time, Ms. Shantz was a partner of
Farrington & Curtis, P.C. (now Husch & Eppenberger, LLC), a law firm which
serves as Mr. Hammons' primary outside counsel, where she practiced primarily in
the area of real estate law. Ms. Shantz had been with that firm since 1988.
Pat A. Shivers is Senior Vice President and Corporate Controller of our
general partner. He has been active in Mr. Hammons' hotel operations since 1985.
Prior to that time, he had served as Vice President of Product Management in
Winegardner & Hammons, Inc., a hotel management company.
Steven E. Minton is Senior Vice President, Architecture, of our general
partner. He has been active in Mr. Hammons' hotel operations since 1985. Prior
to that time, Mr. Minton was a project manager with the firm of Pellham and
Phillips working on various John Q. Hammons projects.
Jacqueline A. Dowdy has been the Secretary and a director of our
general partner since 1989. She has been active in Mr. Hammons' hotel operations
since 1981. She is an officer of several of our affiliates.
L. Scott Tarwater is Vice President, Sales and Marketing, of our
general partner. He joined our general partner in September 2000 from Windsor
Capital Group, in Los Angeles, California, where he served as Senior Vice
President, Sales and Marketing, for ten years. Prior to that time, Mr. Tarwater
served as Senior Director, Sales and Marketing, for Embassy Suites, Inc.,
Irving, Texas.
John D. Fulton is Vice President, Interior Design, of our general
partner. He joined our general partner in 1989 from Integra/Brock Hotel
Corporation, Dallas, Texas, where he had been Director of Design and Purchasing
for ten years.
Kent S. Foster is Vice President, Human Resources, of our general
partner. He joined our general partner in 1999 from Dayco Products, Inc. in
Michigan where he served as Director and Manager, Human Resources. Prior
thereto, Mr. Foster served as Assistant Vice President and Director, Human
Resources, for Great Southern Savings & Loan Association, Springfield, Missouri.
William T. George, Jr., is Vice President, Capital Planning and Asset
Management, of our general partner. He joined our general partner in 1994 from
Promus Hotel Corporation, where he had been Director of Capital Refurbishment.
16
ITEM 2. PROPERTIES.
We lease our headquarters in Springfield, Missouri, from a Missouri
company of which Mr. Hammons is a 50% owner. In 2002, we made aggregate annual
lease payments of approximately $253,000 to that company. We own the land on
which 35 of our hotels are located, while 12 of our hotels are subject to
long-term ground leases. We lease from Mr. Hammons the real estate on which
three of these hotels are located. We describe these leases under "Certain
Relationships and Related Transactions - Mr. Hammons."
DESCRIPTION OF HOTELS - GENERAL
Our hotels are located in 20 states and contain a total of 11,629 rooms
and suites. A majority of our hotels operate under the Holiday Inn, Embassy
Suites Hotels and Marriott trade names. Most of our hotels have assumed a
leadership position in their local market by providing a high quality product in
a market unable to economically support a second competitor of similar quality.
We believe that the presence of adjacent convention centers provides
incremental revenues for our hotel rooms, meeting facilities, and catering
services, and that hotels which are adjacent to convention centers occupy a
particularly successful niche within the hotel industry. These convention or
trade centers are available for rent by hotel guests. Each of our hotels has a
restaurant/catering service on its premises which provides an essential amenity
to the convention trade. We choose not to lease out the restaurant business to
third-party caterers or vendors since we consider the restaurant business an
important component of securing convention business. We own and manage all of
the restaurants in our hotels specifically to maintain direct quality control
over a vital aspect of the convention and hotel business. We also derive
significant revenue and operating profit from food and beverage sales due to our
ownership and management of all of the restaurants in our hotels. We believe
that our food and beverage sales are more profitable than those of our
competitors due to the amount of catering business provided to conventions at
our hotels.
We retain responsibility for all aspects of the day-to-day management
of each of our hotels, including establishing and implementing standards of
operation at all levels; hiring, training and supervising staff; creating and
maintaining financial controls; regulating compliance with laws and regulations
relating to the hotel operations; and providing for the safekeeping, repair and
maintenance of the hotels we own. We typically refurbish individual hotels every
four to six years. We have spent an average per year of approximately $24.0
million in the last five years on the owned hotels and expect to spend
approximately the same amount in 2003 on refurbishment of the owned hotels.
OWNED HOTELS
The following table sets forth certain information concerning location,
franchise/name, number of rooms/suites, description and opening date for each of
our hotels:
17
NUMBER OF OPENING
LOCATION FRANCHISE/NAME ROOMS/SUITES DESCRIPTION DATE
- -------- -------------- ------------ ----------- ----
Montgomery, AL.............. Embassy Suites 237 Atrium; Meeting Space: 15,000 sq. ft.(c) 8/95
Tucson, AZ.................. Holiday Inn 301 Atrium; Meeting Space: 14,000 sq. ft. 11/81
Tucson, AZ.................. Marriott 250 Atrium; Meeting Space: 11,500 sq. ft. 12/96
Little Rock, AR............. Embassy Suites 251 Atrium; Meeting Space: 14,000 sq. ft. 8/97
Springdale, AR.............. Holiday Inn 206 Atrium; Meeting Space: 18,000 sq. ft. 7/89
Convention Center: 29,280 sq. ft.
Springdale, AR.............. Hampton Inn & Suites 102 Meeting Space: 400 sq. ft. 10/95
Bakersfield, CA............. Holiday Inn Select 258 Meeting Space: 9,735 sq. ft.(c) 6/95
Monterey, CA................ Embassy Suites 225 Atrium; Meeting Space: 13,700 sq. ft. 11/95
Sacramento, CA.............. Holiday Inn 362 Meeting Space: 9,000 sq. ft. 8/79
San Francisco, CA........... Holiday Inn 279 Meeting Space: 9,000 sq. ft. 6/72
Denver, CO (a).............. Holiday Inn 256 Atrium; Trade Center: 66,000 sq. ft.(b) 10/82
(International
Airport)
Denver, CO.................. Holiday Inn (Northglenn) 235 Meeting Space: 20,000 sq. ft. 12/80
Fort Collins, CO............ Holiday Inn 258 Atrium; Meeting Space: 12,000 sq. ft. 8/85
Coral Springs, FL........... Marriott 224 Atrium; Meeting Space: 5,326 sq. ft. 5/99
Convention Center: 12,800 sq. ft.
St. Augustine, FL........... Renaissance 301 Atrium; Meeting Space: 9,000 sq. ft.(c) 5/98
Tampa, FL................... Embassy Suites 247 Atrium; Meeting Space: 18,000 sq. ft. 1/98
Cedar Rapids, IA............ Collins Plaza 221 Atrium; Meeting Space: 11,250 sq. ft. 9/88
Davenport, IA............... Radisson 221 Atrium; Meeting Space: 7,800 sq. ft.(c) 10/95
Des Moines, IA.............. Embassy Suites 234 Atrium; Meeting Space: 13,000 sq. ft. 9/90
Des Moines, IA.............. Holiday Inn 288 Atrium; Meeting Space: 15,000 sq. ft. 1/87
Topeka, KS.................. Capitol Plaza 224 Atrium; Meeting Space: 7,000 sq. ft.(c) 8/98
Bowling Green, KY........... Holiday Inn 218 Atrium: Meeting Space: 4,000 sq. ft.(c) 8/95
Branson, MO................. Chateau on the Lake 301 Atrium; Meeting Space: 40,000 sq. ft. 5/97
Jefferson City, MO.......... Capitol Plaza 255 Atrium; Meeting Space: 14,600 sq. ft. 9/87
Joplin, MO.................. Holiday Inn 262 Atrium; Meeting Space: 8,000 sq. ft. 6/79
Trade Center: 32,000 sq. ft.(b)
Kansas City, MO (a)......... Embassy Suites 236 Atrium; Meeting Space: 12,000 sq. ft. 4/89
Kansas City, MO (a)......... Homewood Suites 117 Extended Stay 5/97
Springfield, MO............. Holiday Inn 188 Atrium; Meeting Space: 3,020 sq. ft. 9/87
Omaha, NE................... Embassy Suites 249 Atrium; Meeting Space: 13,000 sq. ft. 1/97
Reno, NV.................... Holiday Inn 283 Meeting Space: 8,700 sq. ft. 2/74
Albuquerque, NM............. Marriott 310 Atrium; Meeting Space: 12,300 sq. ft. 12/86
Charlotte, NC............... Renaissance Suites 275 Atrium; Meeting Space: 17,400 sq. ft. 12/99
Greensboro, NC (a).......... Embassy Suites 219 Atrium; Meeting Space: 10,250 sq. ft. 1/89
Greensboro, NC (a).......... Homewood Suites 104 Extended Stay 8/96
Raleigh-Durham, NC.......... Embassy Suites 273 Atrium; Meeting Space: 20,000 sq. ft. 9/97
Oklahoma City, OK........... Renaissance 311 Atrium; Meeting Space: 10,150 sq. ft.(c) 1/00
Portland, OR (a)............ Holiday Inn 286 Atrium; Trade Center: 37,000 sq. ft.(b) 4/79
Portland, OR (a)............ Embassy Suites 251 Atrium; Meeting Space: 11,000 sq. ft. 9/98
Columbia, SC ............... Embassy Suites 214 Atrium; Meeting Space: 13,000 sq. ft. 3/88
Greenville, SC.............. Embassy Suites 268 Atrium; Meeting Space: 20,000 sq. ft. 4/93
North Charleston, SC (a) ... Embassy Suites 255 Atrium; Meeting Space: 3,000 sq. ft.(c) 2/00
Beaumont, TX................ Holiday Inn 253 Atrium; Meeting Space: 12,000 sq. ft. 3/84
Dallas, Ft. Worth
Airport, TX (a).......... Embassy Suites 329 Atrium; Meeting Space: 18,900 sq. ft. 8/99
Houston, TX (a)............. Marriott 287 Atrium; Meeting Space: 14,300 sq. ft. 12/85
Mesquite, TX................ Hampton Inn & Suites 160 Meeting Space: 21,200 sq. ft. 4/99
Convention Center: 35,100 sq. ft.(c)
Charleston, WV.............. Embassy Suites 253 Atrium; Meeting Space: 14,600 sq. ft. 12/97
18
NUMBER OF OPENING
LOCATION FRANCHISE/NAME ROOMS/SUITES DESCRIPTION DATE
- -------- -------------- ------------ ----------- ----
Madison, WI................. Marriott 292 Atrium; Meeting Space: 15,000 sq. ft.(b) 10/85
Convention Center: 50,000 sq. ft.
(a) Airport location.
(b) The trade or convention center is located adjacent to hotel and is
owned by Mr. Hammons, except the convention centers in Madison,
Wisconsin and Denver, Colorado, which we own.
(c) Large civic center is located adjacent to hotel.
MANAGED HOTELS
The managed hotels consist of nine hotels, including three Holiday
Inns, one Sheraton, two Embassy Suites, one Marriott Courtyard, one Marriott
Residence Inn and one Renaissance, located in five states (Missouri, Nebraska,
South Dakota, Tennessee and Texas), and contain a total of 2,075 guest rooms.
Mr. Hammons directly owns eight of these nine hotels. The remaining hotel is
owned by an entity controlled by Mr. Hammons in which he and Jacqueline Dowdy, a
director and officer of our general partner, each own a 50% interest. There is a
convention and trade center adjacent to four of our managed hotels.
We provide management services to the managed hotels within the
guidelines contained in the annual operating and capital plans submitted to the
hotel owner for review and approval during the final 30 days of the preceding
year. We are responsible for the day-to-day operations of the managed hotels.
While we are responsible for the implementation of major refurbishment and
repairs, the actual cost of such refurbishments and repairs is borne by the
hotel owner. We earn annual management fees of 3% to 5% of the hotel's revenues.
Each of the management contracts with the nine hotels owned by Mr. Hammons or
entities controlled by Mr. Hammons are terminable within either 30 or 60 days.
ITEM 3. LEGAL PROCEEDINGS.
We are not presently involved in any litigation which if decided
adversely to us would have a material effect on our financial condition. To our
knowledge, there is no litigation threatened, other than routine litigation
arising in the ordinary course of business or which would be covered by
liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
19
The selected consolidated financial information for the 2002, 2001,
2000, 1999 and 1998 fiscal years has been derived from, and should be read in
conjunction with, the audited consolidated financial statements. The information
presented below also should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included under
Item 7. Our fiscal year ends on the Friday nearest December 31.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands)
FISCAL YEAR ENDED
2002 2001 2000 1999 1998
REVENUES:
Rooms (a) $ 270,534 $ 266,353 $ 267,596 $ 229,807 $ 211,989
Food and beverage 117,810 118,042 119,865 101,231 91,982
Meeting room rental, related party management fee
and other (b) 52,036 52,263 49,113 40,646 35,003
--------- --------- --------- --------- ---------
Total revenues 440,380 436,658 436,574 371,684 338,974
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Direct operating costs and expenses (c)
Rooms 68,917 68,061 68,224 59,507 54,600
Food and beverage 91,310 94,690 98,398 84,035 77,018
Other 3,179 3,288 3,716 3,667 3,389
General, administrative, sales and management
service expenses (d,e) 136,866 131,522 124,393 104,876 95,500
Repairs and maintenance 18,387 17,847 17,065 15,059 13,438
Depreciation and amortization 54,202 62,174 53,367 45,669 45,580
--------- --------- --------- --------- ---------
Total operating expenses 372,861 377,582 365,163 312,813 289,525
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 67,519 59,076 71,411 58,871 49,449
OTHER (INCOME) EXPENSE:
Interest expense and amortization of deferred
financing fees, net of interest income 70,971 70,975 73,833 62,209 57,286
Gain on property disposition (f) -- -- -- (2,365) (8,175)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE(g)(h) $ (3,452) $ (11,899) $ (2,422) $ (973) $ 338
========= ========= ========= ========= =========
BALANCE SHEET DATA
Total assets $ 859,972 $ 881,724 $ 920,884 $ 934,312 $ 876,486
Total debt, including current portion $ 806,342 $ 813,007 $ 836,707 $ 828,843 $ 759,716
(a) Includes revenues derived from rooms.
(b) Includes meeting room rental, related party management fees for
providing management services to the managed hotels and other.
(c) Includes expenses incurred in connection with rooms, food and beverage
and telephones.
(d) Includes expenses incurred in connection with franchise fees,
administrative, marketing and advertising, utilities, insurance,
property taxes, rent and other.
(e) Includes expenses incurred in providing management services to the
managed hotels.
(f) Gain on sales includes six hotels sold February 6, 1998 and one hotel
sold December 31, 1998 and one hotel sold June 16, 1999.
20
(g) The 2002, 2001, 1999 and 1998 fiscal years do not include a $7.4
million, $0.5 million, $0.2 million and $2.2 million, respectively,
extraordinary charge related to early extinguishment of debt.
(h) We adopted a new accounting pronouncement in 1999 which requires cost
of start up activities, including pre-opening expenses, to be expensed
as incurred. The 1999 fiscal year does not include a $1.8 million
charge related to the change in accounting.
SUPPLEMENTAL FINANCIAL INFORMATION RELATING TO THE COLLATERAL HOTELS
The following tables set forth, as of January 3, 2003, unaudited
selected financial information with respect to the hotels collateralizing our
$510 million of 8-7/8% First Mortgage Notes due 2012, and about us, excluding
Unrestricted Subsidiaries (as defined in the indenture relating to our notes),
or the Restricted Group. Under the heading "Management Operations," we include
information with respect to revenues and expenses we generate as manager of the
collateral hotels and the other hotels we own or manage.
TRAILING 12 MONTHS ENDED JAN 3, 2003
------------------------------------------
2002 Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
----------- -------------- ----------
STATEMENT OF
OPERATIONS DATA:
Operating revenues $268,457 $ 9,696(a) $278,153
OPERATING EXPENSES
Direct operating costs and
expenses 99,806 -- 99,806
General, administrative,
sales and management 87,399 (310)(c) 87,089
expenses (b)
Repairs and maintenance 11,258 -- 11,258
Depreciation and
amortization 30,469 858 31,327
----------- ---------- ----------
TOTAL OPERATING
EXPENSES 228,932 548 229,480
----------- ---------- ----------
INCOME FROM
OPERATIONS $ 39,525 $ 9,148 $ 48,673
=========== ========== ==========
Operating Data:
Occupancy 63.7%
Average daily room rate $ 94.18
RevPAR $ 59.99
21
(a) Represents management revenues derived from the 17 non-collateral
hotels and the nine managed hotels.
(b) General, administrative, sales and management expenses for the
collateral hotels include management expenses allocated to the
respective hotels.
(c) General, administrative, sales and management expenses for the
collateral hotels reflect a credit for the management revenues
associated with the management expenses included in general,
administrative, sales and management expenses for the collateral
hotels.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
You should read the following discussion in conjunction with our selected
financial data and consolidated financial statements included elsewhere in this
Form 10-K.
GENERAL
Our consolidated financial statements include revenues from our owned
hotels and management fee revenues for providing management services to the
managed hotels (owned or directly controlled by Mr. Hammons). References to our
hotels include both our owned hotels and our managed hotels. We derive revenues
from the owned hotels from rooms, food and beverage, meeting rooms and other
revenues. Our beverage revenues include only revenues from the sale of alcoholic
beverages, while we show revenues from the sale of non-alcoholic beverages as
part of food revenue. Direct operating costs and expenses include expenses we
incur in connection with the direct operation of rooms, food and beverage and
telephones. Our general, administrative, sales and management services expenses
include expenses incurred for franchise fees, administrative, sales and
marketing, utilities, insurance, property taxes, rent, management services and
other expenses.
From 1998 through 2002, our total revenues grew at an annual compounded
growth rate of 6.8%, from $339.0 million to $440.4 million. Occupancy for the
owned hotels during that period remained relatively constant, ranging from 62.1%
to 64.4%. At the same time, the owned hotels' average daily room rate increased
by 7.6% from $91.38 to $98.31. Room revenue per available room for owned hotels
increased by 10.4% from $56.79 to $62.68.
Our past development activity restricts our ability to grow net income
in the short term. Fixed charges for new hotels (such as depreciation and
amortization expense) typically exceed new hotel operating cash flow in the
first one to three years of operations. As new hotels mature, we expect, based
on past experience, that the operating expenses for these hotels will decrease
as a percentage of revenues, although there can be no assurance that this will
continue to occur. We announced in September of 1998 that we were ceasing new
development activity, except for the hotels then under construction. We
currently have no hotels under construction.
In general, hotels we opened during the period from 1998 to 2000
increased overall average room rates while occupancy remained relatively
constant. Historically, we have tracked the performance of the owned hotels in
two groups; those we opened during the current fiscal
22
year and prior fiscal year, which we refer to as the new hotels; and the rest of
the owned hotels, which we refer to as the mature hotels. New hotels typically
generate positive cash flow from operations before debt service in the first
year, generate cash sufficient to service mortgage debt in the second year and
create positive cash flow after debt service in the third year.
The distinction between mature and new hotels has become much less
significant over time. For example, in 2002, we had no new hotels. In 2001, the
new hotels included only two hotels opened in 2000, and the mature hotels
included 45 hotels opened before 2000.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED 2002 2001 2000 1999 1998
OWNED HOTELS
Average occupancy 63.8% 62.9% 64.4% 62.9% 62.1%
Average daily room rate (ADR) $ 98.31 $ 100.07 $ 98.56 $ 94.87 $ 91.38
Room revenue per available room
(RevPAR) $ 62.68 $ 62.90 $ 63.50 $ 59.64 $ 56.79
Available rooms (a) 4,316,214 4,234,594 4,213,947 3,853,403 3,733,166
Number of hotels 47 47 47 45 42
MATURE HOTELS
Average occupancy 63.8% 62.7% 65.1% 64.7% 64.1%
Average daily room rate (ADR) $ 98.31 $ 99.50 $ 96.90 $ 93.60 $ 86.50
Room revenue per available room
(RevPAR) $ 62.68 $ 62.36 $ 63.09 $ 60.57 $ 55.41
Available rooms (a) 4,316,214 4,028,570 3,669,239 3,332,718 3,012,845
Number of hotels 47 45 41 37 32
NEW HOTELS
Average occupancy -- % 66.4% 59.9% 51.0% 54.1%
Average daily room rate (ADR) $ -- $ 110.55 $ 110.68 $ 105.25 $ 115.55
Room revenue per available room
(RevPAR) $ -- $ 73.37 $ 66.29 $ 53.70 $ 62.54
Available rooms (a) -- 206,024 544,708 520,685 720,321
Number of hotels -- 2 6 8 10
23
FISCAL YEAR ENDED 2002 2001 2000 1999 1998
PERCENTAGES OF TOTAL REVENUES
Rooms 61.4% 61.0% 61.3% 61.8% 62.6%
Food and beverage 26.8% 27.0% 27.5% 27.3% 27.1%
Meeting room rental, related party
management fee and other 11.8% 12.0% 11.2% 10.9% 10.3%
----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
OPERATING EXPENSES
Direct operating costs and expenses
Rooms 15.7% 15.6% 15.6% 16.0% 16.1%
Food and beverage 20.7% 21.7% 22.5% 22.6% 22.7%
Other 0.7% 0.8% 0.9% 1.0% 1.0%
General, administrative, sales and
management service expenses 31.1% 30.1% 28.5% 28.2% 28.2%
Repairs and maintenance 4.2% 4.1% 3.9% 4.1% 4.0%
Depreciation and amortization 12.3% 14.2% 12.2% 12.3% 13.4%
----- ----- ----- ----- -----
Total operating expenses 84.7% 86.5% 83.6% 84.2% 85.4%
----- ----- ----- ----- -----
Income from operations 15.3% 13.5% 16.4% 15.8% 14.6%
===== ===== ===== ===== =====
(a) Available rooms represent the number of rooms available for rent
multiplied by the number of days in the period reported or, in the case
of new hotels, the number of days the hotel was opened during the
period reported. The 2002 fiscal year contained 53 weeks, or 371 days,
while the 2001, 2000, 1999 and 1998 fiscal years each contained 52
weeks, or 364 days.
2002 FISCAL YEAR COMPARED TO 2001 FISCAL YEAR
Total revenues increased to $440.4 million in 2002 (53 weeks) from $436.7
million in 2001 (52 weeks). Of total revenues, 61.4% were revenues from rooms in
2002, compared to 61.0% in 2001. Revenues from food and beverage represented
26.8% of total revenues in 2002, compared to 27.0% in 2001, and revenues from
meeting room rental, related party management fee and other represented 11.8% of
total revenues in 2002, and 12.0% in 2001.
Rooms revenues increased to $270.5 million in 2002 from $266.4 million in 2001,
an increase of $4.1 million, or 1.5%, as a result of increased occupancy. Hotel
occupancy increased 0.9 percentage points to 63.8% in 2002, compared to 62.9% in
2001. Hotel room revenue per available room (RevPAR), decreased to $62.68 in
2002 from $62.90 in 2001, a decrease of $0.22, or 0.3%. Average daily room rates
decreased to $98.31 in 2002 from $100.07 in 2001, primarily related to a
decrease in group room rates.
Food and beverage revenues decreased slightly to $117.8 million in 2002 from
$118.0 million in 2001, a decrease of $0.2 million, or 0.2%. This decrease was
primarily related to a decrease in our convention, association and corporate
group travel, partially offset by a slight increase in travel in the last six
months of 2002.
24
Meeting room rental, related party management fee and other revenues decreased
slightly to $52.0 million in 2002 from $52.3 million in 2001, a decrease of $0.3
million, or 0.6%. This decrease reflects the absence of $2.7 million in energy
surcharge revenues for 2001, partially offset by increases in management fees,
telephone revenue, rental income and other fees.
Direct operating costs and expenses for rooms increased to $68.9 million in 2002
from $68.1 million in 2001, an increase of $0.8 million, or 1.2%. As a
percentage of room revenues, these expenses decreased slightly to 25.5% in 2002
from 25.6% in 2001. The dollar increase was primarily attributable to increased
workers' compensation insurance costs.
Direct operating costs and expenses for food and beverage decreased to $91.3
million in 2002 from $94.7 million in 2001, a decrease of $3.4 million, or 3.6%,
and decreased as a percentage of food and beverage revenues to 77.5% from 80.3%
in 2001. The dollar decrease was attributable to lower food and labor costs
associated with enhanced food purchasing programs and management of labor costs.
Direct operating costs and expenses for other were $3.2 million in 2002 and $3.3
million in 2001, a decrease of $0.1 million, or 3.0%. As a percentage of meeting
room rental, related party management fee and other revenues, these expenses
were 6.2% in 2002 and 6.3% in 2001.
General, administrative, sales and management service expenses increased to
$136.9 million in 2002 from $131.5 million in 2001, an increase of $5.4 million,
or 4.1%, and increased as a percentage of total revenues to 31.1% in 2002 from
30.1% in 2001. The increases in these expenses were primarily attributable to
franchise termination charges related to planned hotel franchise conversions of
some of our properties, additional marketing costs associated with the
conversions (e.g., guest frequency programs) and increased workers' compensation
insurance costs.
Repairs and maintenance expenses increased to $18.4 million in 2002 from $17.8
million in 2001, an increase of $0.6 million, or 3.4%, and increased slightly as
a percentage of revenues to 4.2% in 2002 from 4.1% in 2001.
Depreciation and amortization decreased by $8.0 million, or 12.9%, to $54.2
million in 2002 from $62.2 million in 2001. As a percentage of total revenues,
these expenses decreased to 12.3% in 2002 from 14.2% in 2001. The decrease
related to the 2001 additional charge to depreciation expense for moisture
related issues discussed in "Liquidity and Capital Resources" and to cessation
of new hotel development in 1998.
Income from operations increased to $67.5 million in 2002 from $59.1 million in
2001, an increase of $8.4 million, or 14.2%. As a percentage of total revenues,
income from operations increased to 15.3% in 2002, from 13.5% in 2001. The
increase related primarily to increased revenue and decreased depreciation
expense, discussed above.
Interest expense and amortization of deferred financing fees, net remained
stable at $71.0 million in 2002 and 2001, but decreased slightly as a percentage
of revenues to 16.1% in 2002, from 16.3% in 2001.
25
Loss before extraordinary item was $3.5 million in 2002, compared to $11.9
million in 2001, a decrease of $8.4 million.
Extraordinary item was $7.4 million in 2002, primarily relating to the
refinancing of a significant portion of our long-term debt completed in May
2002, and $0.5 million in 2001, applicable to the early retirement of debt.
2001 FISCAL YEAR COMPARED TO 2000 FISCAL YEAR
Total revenues increased slightly to $436.7 million in 2001 from $436.6 million
in 2000. Of total revenues, 61.0% were revenues from rooms, compared to 61.3% in
2000. Revenues from food and beverage represented 27.0% of total revenues in
2001, compared to 27.5% in 2000, and revenues from meeting room rental, related
party management fee and other represented 12.0% of total revenues in 2001 and
11.2% in 2000.
Rooms revenues decreased slightly to $266.4 million in 2001 from $267.6 million
in 2000, a decrease of $1.2 million, or 0.4%, as a result of the softer economy
in late 2001 and the decreased travel related to the September 11, 2001
terrorist attacks. Average daily room rates of mature hotels increased to $99.50
in 2001 from $96.90 in 2000. Occupancy in the mature hotels decreased 2.4
percentage points to 62.7% in 2001, compared to 65.1% in 2000. The mature
hotels' RevPAR decreased to $62.36 in 2001 from $63.09 in 2000, a decrease of
$0.73, or 1.2%. In 2001, the new hotels included two hotels, which generated
RevPAR of $73.37, up 10.7% from the 2000 RevPAR of $66.29, when six new hotels
were open. In general, we believe the new hotels are more insulated from the
effects of new hotel supply than are the mature hotels, since the new hotels
utilize franchise brands that are considered to be more upscale in nature, and
have higher-quality guest rooms and public spaces.
Food and beverage revenues decreased to $118.0 million in 2001 from $119.9
million in 2000, a decrease of $1.9 million, or 1.6%. This decrease was
primarily related to the lower occupancy.
Meeting room rental, related party management fee and other revenue increased to
$52.3 million in 2001 from $49.1 million in 2000, an increase of $3.2 million,
or 6.5%. This increase was due to the movement of business conventions to
secondary markets, increased management fees from recently opened managed hotels
and the inclusion of $2.7 million in energy surcharge revenue.
Direct operating costs and expenses for rooms decreased to $68.1 million in 2001
from $68.2 million in 2000, a decrease of $0.1 million, or 0.1%. As a percentage
of rooms revenues, these expenses increased slightly to 25.6% in 2001 from 25.5%
in 2000. The dollar decrease related to variable costs that decline as rooms
revenues decrease.
Direct operating costs and expenses for food and beverage decreased to $94.7
million in 2001 from $98.4 million in 2000, a decrease of $3.7 million, or 3.8%,
and decreased as a percentage of food and beverage revenues to 80.3% from 82.1%
in 2000. The dollar decrease was due to decreased costs associated with the
lower volume of sales and the decrease as a percentage of food and beverage
revenues was related to improved inventory and labor controls.
26
Direct operating costs and expenses for other were $3.3 million in 2001 and $3.7
million in 2000, a 10.8% decrease. As a percentage of meeting room rental,
related party management fee and other revenues, these expenses were 6.3% in
2001 and 7.5% in 2000. The decrease resulted from lower telephone expenses
during 2001.
General, administrative, sales and management service expenses increased to
$131.5 million in 2001 from $124.4 million in 2000, an increase of $7.1 million,
or 5.7%, and increased as a percentage of total revenues to 30.1% in 2001 from
28.5% in 2000. The increases in these expenses were primarily attributable to
higher utility and guest frequency program costs during 2001 and other fees
associated with the moisture related problems, as discussed in "Liquidity and
Capital Resources."
Repairs and maintenance expenses increased to $17.8 million in 2001 from $17.1
million in 2000, an increase of $0.7 million, or 4.1%, and increased slightly as
a percentage of revenues to 4.1% in 2001 from 3.9% in 2000.
Depreciation and amortization increased by $8.8 million, or 16.5%, to $62.2
million in 2001 from $53.4 million in 2000. As a percentage of total revenues,
these expenses increased to 14.2% in 2001 from 12.2% in 2000. The increase was a
direct result of the additional charge to depreciation expense resulting from
the moisture related issues, as discussed in "Liquidity and Capital Resources."
Income from operations decreased to $59.1 million in 2001 from $71.4 million in
2000, a decrease of $12.3 million, or 17.2%. As a percentage of total revenues,
income from operations was 13.5% in 2001, compared to 16.4% in 2000. The change
related primarily to decreased revenues due to a softer economy in 2001 and the
additional depreciation expense, as discussed above.
Interest expense and amortization of deferred financing fees, net decreased to
$71.0 million in 2001 from $73.8 million in 2000, a decrease of $2.8 million, or
3.8%. The decrease was attributable to our use of cash to reduce debt by
approximately $23.7 million during the fiscal year.
Loss before extraordinary item was $11.9 million in 2001 compared to $2.4
million in 2000, an increase of $9.5 million.
Extraordinary item was $0.5 million in 2001, applicable to the early retirement
of debt.
LIQUIDITY AND CAPITAL RESOURCES
In general, we have financed our operations through internal cash flow,
loans from financial institutions and the issuance of public and private debt
and industrial revenue bonds. Our principal uses of cash are to pay operating
expenses, to service debt and to fund capital expenditures.
27
At January 3, 2003, we had $21.8 million of cash and equivalents and
$12.5 million of marketable securities, compared to $32.3 million and $11.0
million, respectively, at the end of 2001.
Net cash provided by operating activities decreased to $48.2 million at
the end of 2002 from $51.1 million at the end of 2001, a decrease of $2.9
million, or 5.7%, primarily attributable to the decrease in depreciation and
amortization expense, the effect of the change in interest payment dates and
resulting accrual related to the refinancing of our long term debt discussed
below, and an increase in prepaid insurance, partially offset by the decrease in
net loss and the increase in the extraordinary item.
We incurred capital expenditures of $28.6 million (approximately $3.4
million of which was related to correcting the moisture related issues discussed
below) and $32.1 million (approximately $8.4 million of which was related to
correcting the moisture related issues discussed below), respectively, for 2002
and 2001. Capital expenditures typically include capital improvements on
existing hotel properties.
During fiscal 2000, we initiated claims against certain of our
construction service providers, as well as with our insurance carrier. These
claims resulted from costs we incurred and expected to incur to address moisture
related problems caused by water intrusion through defective windows. In
December 2001, we initiated legal actions in an effort to collect claims
previously submitted. Subsequent to the filing of the legal action, the
insurance carrier notified us that a portion of our claims had been denied. As
of January 3, 2003, we had incurred approximately $11.8 million of an estimated
$12.3 million of costs to correct the underlying moisture problem.
We will continue to vigorously pursue collection of these costs.
Currently a trial is set for the fall of 2003. Our total cumulative depreciation
charge through January 3, 2003 was $7.6 million to reserve the net historical
costs of the hotel property assets refurbished absent any recoveries. To the
extent we realize recoveries we will record them as a component of other income.
During the second quarter of 2002, we completed the refinancing of our
long-term debt, primarily our $300 million 8-7/8% First Mortgage Notes due
February 2004 and our $90 million 9-3/4% First Mortgage Notes due April 2005, as
well as $30.1 million of short-term debt, with new $510 million 8-7/8% First
Mortgage Notes due May 2012. We expect 2003 capital requirements to be funded by
cash and cash flow from operations. Based upon current plans, we anticipate that
our capital resources will be adequate to satisfy our 2003 capital requirements
for normal recurring capital improvement projects.
At January 3, 2003, our total debt was $806.3 million compared with
$813.0 million at the end of 2001. The decrease is attributable to our continued
debt reduction program in 2002. We reduced total debt by $6.7 million, including
$15.1 million borrowed to provide for transaction costs in connection with the
refinancing of our First Mortgage Notes in 2002. We have reduced total debt by
$30.4 million since the end of 2000. The current portion of long-term debt was
$13.7 million at January 3, 2003, compared with $38.9 million at the end of
2001.
28
We did not distribute or accrue any amounts in 2002 or 2001 to our
partners for income taxes. We must make any such distributions n accordance with
the provisions of the Indenture.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement No. 143, "Accounting for Assets Retirement Obligations." This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This standard is required to be adopted for fiscal years
beginning after June 15, 2002, so we are not required to adopt this standard
until fiscal 2003. Management does not believe that the adoption of this
standard will have a material impact on our financial position, results of
operations or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting for the impairment or disposal of long-lived assets and requires that
one accounting model be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include more disposal
transactions. We adopted this statement in the first quarter of 2002 with no
material impact on our financial position, results of operations or cash flows.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and FASB Statement No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements," which would require applying
the criteria under Opinion 30 to determine whether or not the gains and losses
related to the extinguishment of debt should be classified as extraordinary
items. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
Opinion 30 for classification as an extraordinary item shall be reclassified.
This statement amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. This standard is required to be adopted for fiscal
years beginning after May 15, 2002 and certain transactions after May 15, 2002.
As such, we are not required to adopt this standard until fiscal 2003.
Management believes that the adoption of this standard will result in the
reclassification of our 2002 and 2001 extraordinary items to a loss on
extinguishment caption classified in other expense.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
29
discontinued operation or other exit or disposal activity. This statement is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. As such we are not required to adopt this standard until fiscal year
2003. Management does not believe that the adoption of this standard will have a
material impact on our financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45)
"Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees.
It also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. However, the provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor's obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for interim or annual periods ending after December 15,
2002. As such, we adopted the disclosure requirements of this standard in the
fourth quarter of 2002, with no material impact on our financial position,
results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." Until this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns. FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003. Management does not believe that the adoption of this interpretation
will have a material impact on our financial position, results of operations or
cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. On an ongoing basis, we evaluate our estimates and
assumptions, including those related to bad debts, investments, valuation of
long-lived assets, self-insurance reserves, contingencies and litigation. We
base our estimates and judgments on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. We believe the
following critical accounting policies, among others, affect our more
significant estimates and assumptions
30
used in preparing our consolidated financial statements. Actual results could
differ from our estimates and assumptions.
Trade receivables are reflected net of an estimated allowance for
doubtful accounts. This estimate is based primarily on historical experience and
assumptions with respect to future payment trends.
Property and equipment are stated at cost less accumulated
depreciation. The assessment of long-lived assets for possible impairment
requires us to make certain judgments, including real estate values and
estimated future cash flow from the respective properties and investments. We
review the recoverability of our long-lived assets when events or circumstances
indicate that the carrying amount of an asset may not be recoverable.
Our deferred financing costs, franchise fees and other assets include
management and franchise contracts and leases. The value of our management and
franchise contracts and leases are amortized on a straight-line method over the
life of the respective agreement. The assessment of management and franchise
contracts and leases requires us to make certain judgments, including estimated
future cash flow from the respective properties.
We are self-insured for various levels of general liability, workers'
compensation and employee medical coverages. Estimated costs related to these
self insurance programs are accrued based on known claims and projected
settlements of unasserted claims. Subsequent changes in, among others,
unasserted claims, claim cost, claim frequency as well as changes in actual
experience, could cause these estimates to change.
We recognize revenues from our rooms, catering and restaurant
facilities as earned on the close of business each day.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations
as of January 3, 2003, including long-term debt and operating lease commitments:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN 1-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
-------- --------- ------- ------- ---------
(000's omitted)
Long-term debt $806,342 $13,683 $15,446 $82,415 $ 694,798
Related party leases 23,733 943 1,343 790 20,657
Other leases 51,315 2,429 4,172 3,389 41,325
-------- ------- ------- ------- ---------
Total contractual obligations $881,390 $17,055 $20,961 $86,594 $ 756,780
======== ======= ======= ======= =========
31
SEASONALITY
Our hotel sales have traditionally experienced very slight seasonality.
Additionally, hotel revenues in the fourth fiscal quarter of 2002 reflect 14
weeks of results compared to 13 weeks for the first three quarters of the 2002
fiscal year. Set forth below is a chart illustrating the percentage of total
revenues by fiscal quarter for each of the last three fiscal years.
FISCAL YEAR END FISCAL Q1 FISCAL Q2 FISCAL Q3 FISCAL Q4
2002 25% 26% 24% 25%
2001 26% 27% 23% 24%
2000 24% 26% 25% 25%
--- --- --- ---
Average 25% 26% 24% 25%
--- --- --- ---
INFLATION
The rate of inflation as measured by changes in the average consumer
price index has not had a material effect on our revenues or operating results
during the three most recent fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to changes in interest rates primarily as the result of
our investing and financing activities. Investing activities include operating
cash accounts and investments, with an original maturity of three months or
less, and certain balances of various money market and common bank accounts. Our
financing activities are comprised of long-term fixed and variable rate debt
obligations utilized to fund business operations and maintain liquidity. The
following table presents the principal cash repayments and related weighted
average interest rates by maturity date for our long-term fixed and variable
rate debt obligations as of January 3, 2003.
EXPECTED MATURITY DATE (IN MILLIONS)
THERE- FAIR
2003 2004 2005 2006 2007 AFTER TOTAL VALUE(d)
Long-Term Debt(a)
$510 million First Mortgage Notes $ -- $ -- $ -- $ -- $ -- $ 499 $ 499 $ 519
Average interest rate(b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%
Other fixed rate debt obligations $ 13 $ 7 $ 7 $ 28 $ 43 $ 171 $ 269 $ 269
Average interest rate(b) 8.7% 8.2% 8.2% 7.8% 8.4% 8.7% 8.5%
Other variable rate debt obligations $ 1 $ 1 $ 1 $ 10 $ -- $ 25 $ 38 $ 38
Average interest rate(c) 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%
(a) Includes amounts reflected as long-term debt due within one year.
32
(b) For the long-term fixed rate debt obligations, the weighted average
interest rate is based on the stated rate of the debt that is maturing
in the year reported. The weighted average interest rate excludes the
effect of the amortization of deferred financing costs.
(c) For the long-term variable rate debt obligations, the weighted average
interest rate assumes no changes in interest rates and is based on the
variable rate of the debt, as of January 3, 2003, that is maturing in
the year reported. The weighted average interest rate excludes the
effect of the amortization of deferred financing costs.
(d) The fair values of long-term debt obligations approximate their
respective historical carrying amounts, except with respect to the $510
million First Mortgage Notes. The fair value of the First Mortgage
Notes is estimated by obtaining quotes from brokers. A one percentage
point change in the quote received for the $510 million First Mortgage
Notes would have an effect of approximately $5 million on the fair
value, while a one percentage point change in the 8-7/8% discount rate
used to calculate the fair value of our other fixed rate debt would
change its fair value by approximately $13 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Consolidated Financial Statements and
the Financial Statements following such index in Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 24, 2002, upon the recommendation of the audit committee, our
general partner's board of directors approved the dismissal of Arthur Andersen
LLP as our independent auditors, and the selection of Deloitte & Touche LLP, to
serve as our independent auditors for the year ending January 3, 2003, subject
to Deloitte & Touche's internal client acceptance procedures.
Arthur Andersen's reports on our financial statements for each of the
years ended December 28, 2001 and December 29, 2000 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the years ended
December 28, 2001 and December 29, 2000, and through the date of their
dismissal, there were no disagreements with Arthur Andersen on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Arthur Andersen's satisfaction,
would have caused Arthur Andersen to make reference to the subject matter in
connection with its reports on our financial statement for such years, and there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 28, 2001 and December 29, 2000, and
through June 24, 2002, we did not consult Deloitte & Touche with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion
33
that might be rendered on our financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
We do not have any directors or officers. Our general partner, in its
capacity as general partner, manages and controls our activities. The following
sets forth certain information concerning the directors and director nominees of
our general partner who are not also officers of our general partner.
Information required by this item with respect to officers of our general
partner is provided in Item 1 of this report. See "Management." John Q. Hammons
Finance Cororation III has the same directors and officers as the general
partner, except that Messrs. Dempsey, Earley, Hart, Lopez-Ona, Moore and
Sullivan are not directors.
Donald H. Dempsey, age 58, became a director of our general partner in
August 1999. Mr. Dempsey currently serves as Executive Vice President,
Secretary, Treasurer and Chief Financial Officer of Equity Inns, Inc., where he
also serves on its board of directors. Equity Inns, Inc. is a large lodging real
estate investment trust headquartered in Germantown, Tennessee, which owns 96
hotels in 34 states. Mr. Dempsey has more than 30 years' experience in corporate
and financial management within the hotel industry. Before he joined Equity Inns
in July 1998, Mr. Dempsey served as Executive Vice President and Chief Financial
Officer of Choice Hotels International, Inc., a publicly traded hotel
franchisor. From April 1995 to December 1997, Mr. Dempsey served as Senior Vice
President and Chief Financial Officer of Promus Hotel Corporation. From October
1993 to April 1995, he served as Senior Vice President of Finance and
Administration of the Hotel Division of The Promus Companies Incorporated, and
from December 1991 to October 1993, as Vice President, Finance, of the Hampton
Inn/Homewood Suites Hotel Division of The Promus Companies Incorporated. Mr.
Dempsey served in various other senior financial and development officer
positions with the Hotel Division of The Promus Companies Incorporated and its
predecessor companies from 1983 to 1991. From 1969 to 1983, Mr. Dempsey held
various corporate and division financial management and administrative positions
with Holiday Inns, Inc.
Jacqueline A. Dowdy, age 59, has been the Secretary and a director of
our general partner since 1994. She has been active in Mr. Hammons' hotel
operations since 1981. She is an officer and director of several of our
affiliates.
Daniel L. Earley, age 60, has been a director of our general partner
since 1994. Since 1985, Mr. Earley has been President, Chief Executive Officer
and a director of First Clermont Bank, a community bank located in Milford,
Ohio, which is owned by Mr. Hammons.
John Q. Hammons, age 84, is Chairman, Chief Executive Officer, a
director and founder of our general partner. Mr. Hammons has been actively
engaged in the acquisition, development and management of hotel properties since
1959. From 1959 through 1969, Mr. Hammons and a business partner developed 34
Holiday Inn franchises, 23 of which were sold in 1969 to Holiday Inns, Inc.
Since 1969, Mr. Hammons has developed 88 hotels on a nationwide basis, primarily
34
under the Holiday Inn and Embassy Suites Hotels tradenames. Mr. Hammons controls
us and is the controlling shareholder of our general partner. See "Security
Ownership of Management."
William J. Hart, age 62, has been a director of our general partner
since 1994. He is a member of the law firm of Husch & Eppenberger, LLC, formerly
Farrington & Curtis, P.C., a position he has held since 1970. Mr. Hart's firm
performs legal services on a regular basis for us and personally for Mr.
Hammons. Mr. Hart has also been a director since 1981 of Johnson Industries,
Inc.
John E. Lopez-Ona, age 45, became a director of our general partner in
May 1996. He was a managing director of Kidder Peabody & Company, Inc., an
investment banking firm, from March 1990 through March 1995. Since June 1995,
Mr. Lopez-Ona has been the President of Anvil Capital, Inc., a firm he owns,
which specializes in principal investment.
James F. Moore, age 60, became a director of our general partner in May
1995. Mr. Moore is Managing Partner, American Products LLC, a privately owned
manufacturing company serving the telecommunications industry located in
Strafford, Missouri. From 1987 until 2001, he served as Chairman, Chief
Executive Officer and a director of Champion Products, Incorporated, the
predecessor company to American Products LLC. Prior to 1987, Mr. Moore served as
President of the Manufacturing Division of Service Corporation International, a
company listed on the New York Stock Exchange.
David C. Sullivan, age 63, became a director of our general partner in
May 1999. From May 1998 until 2001, Mr. Sullivan served as Chairman, Chief
Executive Officer and a director of ResortQuest International, a company listed
on the New York Stock Exchange that provides vacation rental and property
management services. From April 1995 to December 1997, Mr. Sullivan was
Executive Vice President and Chief Operating Officer of Promus Hotel
Corporation, a publicly traded hotel franchisor, manager and owner of hotels
whose brands include Hampton Inn, Homewood Suites and Embassy Suites. From 1993
to 1995, Mr. Sullivan was the Executive Vice President and Chief Operating
Officer of the Hotel Division of The Promus Companies Incorporated or PCI. He
was the Senior Vice President of Development and Operations of the Hampton
Inn/Homewood Suites Division of PCI from 1991 to 1993. From 1990 to 1991, Mr.
Sullivan was the Vice President of Development of the Hampton Inn Hotel Division
of PCI.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth the salary compensation, cash bonus and
certain other forms of compensation paid by our general partner for services
rendered in all capacities during the 2002, 2001 and 2000 fiscal years to the
Chief Executive Officer of our general partner and the four other most highly
compensated executive officers of the Company serving at the end of the 2002
fiscal year (the "Named Executive Officers").
35
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
ALL OTHER
NAME AND PRINCIPAL POSITIONS FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($)(a) SECURITIES UNDERLYING OPTIONS (#)
- ---------------------------- ----------- ---------- --------- ------------------- ---------------------------------
John Q. Hammons 2002 342,500 120,000 -- --
Chairman of the Board and 2001 315,000 110,000 -- --
Chief Executive Officer 2000 287,500 125,000 -- 100,000(d)
Louis Weckstein(b) 2002 576,214 205,600 3,338 --
President 2001 150,800 31,090 -- 100,000(e)
2000 -- -- -- --
Paul E. Muellner 2002 177,545 79,000(f) 3,570 --
Chief Financial Officer 2001 165,000 44,000 3,225 --
2000 137,100 50,000 2,057 30,000(d)
Debra M. Shantz 2002 160,839 66,500(g) 3,668 --
General Counsel 2001 153,100 44,000 3,047 --
2000 145,600 50,000 2,934 30,000(d)
William A. Mead(c) 2002 227,891 63,386 3,062 --
Regional Vice President 2001 225,000 40,000 3,000 --
Eastern Region 2000 200,150 40,000 2,871 20,000(d)
(a) Matching contributions to the general partner's 401(k) Plan.
(b) Joined the Company September 17, 2001. Salary includes $309,131 and
$88,300 paid by our general partner, and $267,083 and $62,500 paid
personally by Mr. Hammons, in 2002 and 2001, respectively. Bonus for
2002 includes $106,500 paid by our general partner and $100,000 which
Mr. Hammons personally has agreed to pay to Mr. Weckstein in five equal
monthly installments beginning March 1, 2003.
(c) Salary includes $162,891, $160,000 and $151,400 paid by our general
partner, and $65,000, $65,000 and $48,750 paid personally by Mr.
Hammons, in 2002, 2001 and 2000, respectively.
(d) Comprised of options to acquire shares of class A common stock of our
general partner with an exercise price of $5.00 per share.
(e) Comprised of options to acquire shares of class A common stock of our
general partner with an exercise price of $5.15 per share.
(f) Includes a special one-time bonus of $25,000 for work related to
refinancing our bonds.
(g) Includes a special one-time bonus of $17,500 for work related to
refinancing our bonds.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each stock option
granted by our general partner during fiscal year 2002 to each of the named
executive officers.
36
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (b)(c)
--------------------------------------------------------------------- --------------------
% OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED # FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---------------- -------------------- --------------- -------------- ---------- ------ --------
John Q. Hammons -- -- -- -- -- --
Louis Weckstein -- -- -- -- -- --
Paul E. Muellner -- -- -- -- -- --
Debra M. Shantz -- -- -- -- -- --
William A. Mead -- -- -- -- -- --
All Employees 20,000 (a) 100% $6.76 4/29/2012 $85,027 $215,474
(a) Awarded on April 30, 2002.
(b) No gain to the optionees is possible without appreciation in
the stock price which will benefit all shareholders
commensurately. The dollar amounts under these columns are in
result of calculations at the 5% and 10% assumption rates set
by the SEC and therefore are not intended to forecast possible
future appreciation of the general partner's stock price or to
establish any present value of the options.
(c) Realizable values are computed based on the number of options
granted in 2002 and still outstanding at year-end.
FISCAL YEAR-END OPTION VALUES
The following table includes the number of shares covered by both
exercisable and unexercisable stock options as of January 3, 2003 and the values
of "in-the-money" options, which represent the positive spread between the
exercise price of any such option and the fiscal year-end value of the class A
common stock of our general partner.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS (1)(2)
ACQUIRED ON VALUE ------------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------ ------------ ----------- ------------- ----------- -------------
John Q. Hammons -- -- 250,000 50,000 $ 21,500 $ 21,500
Louis Weckstein -- -- 25,000 75,000 $ 7,000 $ 21,000
Paul E. Muellner -- -- 25,000 15,000 $ 6,450 $ 6,450
Debra M. Shantz -- -- 85,000 15,000 $ 6,450 $ 6,450
William A. Mead -- -- 50,000 10,000 $ 4,300 $ 4,300
(1) Calculated based upon the excess of the closing price of our
general partner's class A common stock as reported on the
American Stock Exchange on January 3, 2003 over the exercise
price per share of the stock options ($5.15 for the options
granted in 2001 and $5.00 for the options granted in 2000).
Does not include the stock options granted in 1998, as the
exercise price per share of those stock options ($7.375) is
greater than the $5.43 closing price on January 3, 2003, and
so these options are not "in the money."
(2) All of the 1998 options are currently exercisable, fifty
percent of the 2000 options are currently exercisable and
twenty-five percent of the 2001 options are currently
exercisable.
37
401(k)
Effective January 1, 1996, our general partner adopted a contributory
retirement plan (the "401(k) Plan") for its employees age 21 and over with at
least six months of service. The 401(k) Plan is designed to provide tax-deferred
income to employees in accordance with the provisions of Section 401(k) of the
Internal Revenue Code of 1986. The 401(k) Plan provides that we will make a
matching contribution to each participant's account equal to 50% of such
participant's eligible contributions up to a maximum of 3% of such participant's
annual compensation.
EMPLOYMENT AGREEMENTS
Our general partner entered into an employment agreement with Debra M.
Shantz, dated as of May 1, 1995, and amended on October 31, 1997 and October 31,
2000. Under the agreement, Ms. Shantz's annual base salary is $155,000, plus a
discretionary bonus, with such annual increases in compensation as may be
determined by our general partner's compensation committee. The agreement is
scheduled to terminate on May 9, 2004.
Our general partner entered into an employment agreement with Lou
Weckstein, our general partner's President, effective September 17, 2001. Mr.
Weckstein's base salary under the agreement is $300,000 per year, with such
annual increases in compensation as may be determined by the compensation
committee of our general partner. He also may participate in incentive or
supplemental compensation plans for which he is eligible. The compensation
committee of our general partner may award him a cash bonus based upon the bonus
plan for executive officers. Either party may terminate the agreement at any
time. Mr. Hammons and Mr. Weckstein also have a verbal agreement, under which
Mr. Hammons has agreed to pay to Mr. Weckstein the difference between his annual
salary from our general partner and $600,000, up to a maximum of $270,000.
Our general partner entered into an employment agreement with Bill
Mead, one of its regional vice presidents, as of January 25, 2000, that became
effective on April 1, 2000. Mr. Mead's annual base salary under the agreement is
$160,000, plus a guaranteed bonus of at least $40,000 each year. He also may
participate in available savings, retirement and other benefit plans. This
agreement expires on March 31, 2005. In addition, as of January 27, 2000, Mr.
Hammons and Mr. Mead entered into an agreement that provides that in exchange
for Mr. Mead's services in selecting markets for various hotel projects, Mr.
Hammons will pay Mr. Mead an additional $65,000 per year, in equal monthly
installments, during the term of his employment agreement with our general
partner. That agreement also became effective on April 1, 2000, and provides
that Mr. Mead will have the opportunity to acquire a 25% interest in up to three
Residence Inn hotel projects, with a substantial portion of Mr. Mead's
investment to be financed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
38
Mr. Hammons is the beneficial owner of all of our 16,043,900 limited
partnership units, representing 75.96% of our total equity. He also controls our
general partner through his ownership of 269,100 shares of its class A common
stock and all 294,100 shares of its class B common stock. Our general partner
owns all of our general partner units, representing 24.04% of our total equity.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Hammons and Anvil Capital, an investment and consulting firm owned
by Mr. Lopez-Ona, one of our directors, have formed a limited liability company
through which they have invested in securities of one or more companies in
industries unrelated to the Company's business.
Mr. Hammons controls the Partnership through his control of our general
partner. His equity interest in our general partner (based on his beneficial
ownership of 269,100 shares of class A common stock, all 294,100 shares of class
B common stock and all 16,043,900 of our limited partnership units, or the LP
Units) is 79%. There are significant potential conflicts of interests between
Mr. Hammons as a limited partner of the Partnership, and the holders of class A
common stock, which conflicts may be resolved in favor of Mr. Hammons.
Holders of LP Units have the right to require the redemption of their
LP Units. This redemption right will be satisfied, at the sole option of our
general partner, by the payment of the then cash equivalent thereof or by the
issuance of shares of class A common stock on a one-for-one basis. Mr. Hammons
beneficially owns all 16,043,900 LP Units. If Mr. Hammons, as a holder of LP
Units, requires us to redeem LP Units, the non-employee directors of our general
partner would decide, consistent with their fiduciary duties as to the best
interests of our general partner, whether to redeem the LP Units for cash or for
shares of class A common stock. Mr. Hammons would not vote or otherwise
participate in the decision of the non-employee directors. Mr. Hammons has
informed our general partner that he has no current plan to require us to redeem
his LP Units.
During 2002, we provided management services to nine hotels we do not
own, or the managed hotels, pursuant to our management contracts. Eight of the
managed hotels are owned by Mr. Hammons and one is owned 50% by an entity
controlled by Mr. Hammons and 50% by Jacqueline A. Dowdy, the secretary and a
director of our general partner. Management fees of 3% to 5% of gross revenues
were paid to us by the managed hotels in the aggregate amount of $2,150,246 in
the fiscal year ended January 3, 2003. In addition to the management fees paid
by the managed hotels in that year, the managed hotels reimbursed us for a
portion of the salaries paid by our general partner to its regional vice
presidents, whose duties include management services related to the managed
hotels, and for certain marketing and other expenses allocated to the managed
hotels. Such reimbursed services and expenses aggregated $370,000 in the fiscal
year ended January 3, 2003. All of the management contracts are for 20-year
terms, which automatically extend for four periods of five years, unless
otherwise canceled.
During 2000, our general partner's Board of Directors authorized us to
enter into a five-year management contract with Mr. Hammons whereby we will
provide internal administrative,
39
architectural design, purchasing and legal services to Mr. Hammons in
conjunction with the development of hotels in an amount not to exceed 1.5% of
the total development costs of any single hotel for the opportunity to manage
the hotel upon opening and the right to purchase the hotel in the event it is
offered for sale. During fiscal year 2002, 2001 and 2000, we paid approximately
$326,000, $487,000 and $1,455,000, respectively, of additional costs in
accordance with the management contract. These costs will be amortized over a
five-year contract period. Amortization for these costs will commence upon
opening of the hotels.
We hold an option from Mr. Hammons or persons or entities controlled by
him to purchase the managed hotels, until February 2009. If an option is
exercised, the purchase price is based on a percentage of the fair market value
of the managed hotel as determined by an appraisal firm of national standing.
One hotel we own and three managed hotels are located in Springfield, Missouri.
These hotels potentially compete with one another for customers. We believe that
these hotels do not significantly compete with one another due to their
respective locations and attributes.
Mr. Hammons has a 45% ownership interest in Winegardner & Hammons,
Inc., or WHI. All of the hotels we own, or the owned hotels, have contracted
with WHI to provide accounting and other administrative services. The accounting
and administrative charges expensed by the owned hotels were approximately
$1,572,000 in the fiscal year ended January 3, 2003. The fee may increase if the
number of hotels for which WHI performs accounting and administrative services
drops below 35 hotels. The existing accounting service agreement expires in June
2005.
We lease space in the John Q. Hammons Building for our headquarters
from a Missouri company, of which Mr. Hammons owns 50% and the remaining 50% is
collectively held by other employees, including Jacqueline A. Dowdy, the
secretary and a director of our general partner, who is a 9.5% owner. Pursuant
to four lease agreements, expiring December 31, 2004, we paid monthly rental
payments of approximately $21,114 in 2002. We made aggregate annual lease
payments to that Missouri company of approximately $253,365 in 2002.
Certain of our general partner's employees provide some administrative
and other services for Mr. Hammons' outside business interests. Management does
not believe that, historically, the amount of such services has been material,
but has implemented a cost-allocation system in 2002. Pursuant to the
cost-allocation system, Mr. Hammons pays us 30% of all costs related to such
services and maintains a deposit with us, which was $100,000 as of January 3,
2003, to cover these expenses.
Mr. Hammons also owns trade centers adjacent to two of the owned hotels
(the "JQH Trade Centers"). We lease the convention space in the JQH Trade Center
located in Portland, Oregon, from Mr. Hammons pursuant to a lease expiring in
2004, requiring annual payments of approximately $300,000. With respect to the
other JQH Trade Center, we make nominal annual lease payments to Mr. Hammons. We
have assumed responsibility for all operating expenses of the JQH Trade Centers.
We lease the real estate for Chateau on the Lake Resort, opened in
mid-1997, in Branson, Missouri, from Mr. Hammons. Annual rent is based on
adjusted gross revenues from room sales
40
on the property and was approximately $287,000 in 2002. The lease term is 50
years, with an option to renew for an additional 10 years. We also have an
option to purchase the land after March 1, 2018, at the greater of $3,000,000 or
the current appraised value.
We also lease the real estate for our Embassy Suites Hotel in Little
Rock, Arkansas, which opened in the fall of 1997, from Mr. Hammons. Annual rent
was $120,000 in 2002, and in future years will be adjusted based on the Consumer
Price Index. The lease term is 40 years. We have an option to purchase the land
at any time during the first 10 years of the lease term, for the greater of
$1,900,000 or the current appraised value.
We also lease the real estate for the Renaissance Suites Hotel in
Charlotte, North Carolina, which opened in December, 1999, from Tulsa Hills
Investments, Inc., an Ohio corporation, of which Mr. Hammons is a 99% owner and
Jacqueline A. Dowdy is a 1% owner. The lease term is 99 years. Aggregate annual
lease payments are $120,000 per year through 2008, and the greater of $124,800
or 1% of gross rooms revenues plus 0.5% of gross revenues from food and beverage
sales thereafter.
Mr. Hammons owns parcels of undeveloped land throughout the United
States. Although there are no current plans to do so, we may purchase or lease
one or more of these parcels in the future in order to develop hotels. Since Mr.
Hammons controls us, such transactions would not be arms-length transactions but
will be subject to restrictions contained in the indentures relating to our
outstanding mortgage notes due in 2012.
Mr. Hammons has a written agreement with Bill Mead, one of our regional
vice presidents to supplement Mr. Mead's salary from our general partner by
$65,000 per year for five years, ending March 31, 2005, and to allow Mr. Mead to
invest in 25% of up to three proposed new hotels. Mr. Hammons also has a verbal
agreement with Lou Weckstein, our president, to supplement Mr. Weckstein's
salary from our general partner by up to $270,000 per year during his
employment. We describe these arrangements in more detail under the caption
"Employment Agreements" above.
ITEM 14. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. The chief executive
officer and chief financial officer of our general partner have evaluated the
effectiveness of our "disclosure controls and procedures" (as defined in Rules
13a-14(d) and 15d-14(d) under the Securities Exchange Act of 1934) as of April
1, 2003. Based on that review, they have concluded that, as of such date, our
disclosure controls and procedures were effective to ensure that material
information relating to us would be made known to them.
Changes in internal controls. There were no significant changes in our
internal controls or, to the knowledge of the chief executive officer and chief
financial officer of our general partner, in other factors that could
significantly affect our internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses, after the date
of such evaluation.
41
PART IV
ITEM 15. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K.
15(a)(1) FINANCIAL STATEMENTS
Reference is made to the Index to Consolidated Financial Statements and
the Consolidated Financial Statements following such index.
15(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information in
such schedules is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the consolidated
financial statements or is not required.
15(a)(3) EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are listed
in the Exhibit Index attached hereto, which is incorporated by reference. Set
forth below is a list of management contracts and compensatory plans and
arrangements required to be filed as exhibits by Item 15(c).
10.3 Form of Option Purchase Agreement
10.7 Employment Agreement between the General Partner and Debra M. Shantz
dated as of May 1, 1995, as amended on October 31, 1997 and October 31,
2000.
10.7a Employment Agreement between John Q. Hammons Hotels, Inc. and Lou
Weckstein dated as of September 17, 2001
10.7b Employment Agreement between John Q Hammons Hotels, Inc. and William A.
Mead dated as of January 25, 2000
10.7c Letter Agreement between John Q. Hammons and William A. Mead dated as
of January 27, 2000
10.13 1994 Stock Option Plan of the General Partner
10.14 1999 Non-Employee Director Stock and Stock Option Plan of the General
Partner
15(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 3,
2003.
15(c) EXHIBITS
Reference is made to the exhibit index which has been filed with the
exhibits.
42
15(d) FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets at Fiscal 2002 and 2001 Year-Ends
Consolidated Statements of Operations for the 2002, 2001 and 2000
Fiscal Years Ended
Consolidated Statements of Changes In Equity for 2002, 2001 and 2000
Fiscal Years Ended
Consolidated Statements of Cash Flows for 2002, 2001 and 2000 Fiscal
Years Ended
Notes to Consolidated Financial Statements
43
JOHN Q. HAMMONS HOTELS, L.P.
Consolidated Financial Statements
as of January 3, 2003 and December 28, 2001, and Independent
Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Partners of
John Q. Hammons Hotels, L.P.
We have audited the accompanying consolidated balance sheet of John Q. Hammons
Hotels, L.P. (Note 1) as of January 3, 2003, and the related consolidated
statements of operations, changes in equity and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of John Q. Hammons
Hotels, L.P. for the years ended December 28, 2001 and December 29, 2000, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report, which
contains an explanatory paragraph related to a change in accounting method,
dated February 8, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the January 3, 2003 consolidated financial statements, referred
to above, present fairly, in all material respects, the consolidated financial
position of John Q. Hammons Hotels, L.P. as of January 3, 2003, and the results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
February 7, 2003
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 2003 AND DECEMBER 28, 2001
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
JANUARY 3, DECEMBER 28,
ASSETS 2003 2001
CASH AND EQUIVALENTS $ 21,774 $ 32,298
RESTRICTED CASH 1,103 882
MARKETABLE SECURITIES 12,481 11,016
RECEIVABLES:
Trade, less allowance for doubtful accounts of $231 in 2002
and 2001 9,034 10,771
Other 441 824
Management fees--related party 152 148
INVENTORIES 1,151 1,288
PREPAID EXPENSES AND OTHER 5,884 3,446
----------- -----------
Total current assets 52,020 60,673
----------- -----------
PROPERTY AND EQUIPMENT--at cost:
Land and improvements 62,035 61,140
Buildings and improvements 751,092 745,277
Furniture, fixtures and equipment 327,079 312,079
Construction in progress 98 1,868
----------- -----------
1,140,304 1,120,364
Less--accumulated depreciation and amortization (371,838) (326,906)
----------- -----------
768,466 793,458
DEFERRED FINANCING COSTS, FRANCHISE FEES AND
OTHER--Net, including $15,010 and $11,478 of restricted cash in 2002
and 2001, respectively 39,486 27,593
----------- -----------
TOTAL ASSETS $ 859,972 $ 881,724
=========== ===========
See notes to consolidated financial statements
- 2 -
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 2003 AND DECEMBER 28, 2001
(Dollars in thousands)
- --------------------------------------------------------------------------------
JANUARY 3, DECEMBER 28,
LIABILITIES AND EQUITY 2003 2001
LIABILITIES:
Current portion of long-term debt $ 13,683 $ 38,862
Accounts payable 5,041 5,626
Accrued expenses:
Payroll and related benefits 7,199 7,307
Sales and property taxes 12,500 11,680
Insurance 1,903 2,308
Interest 6,382 11,999
Utilities, franchise fees and other 7,764 6,152
--------- ---------
Total current liabilities 54,472 83,934
Long-term debt 792,659 774,145
Other obligations 2,443 2,339
--------- ---------
Total liabilities 849,574 860,418
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
EQUITY:
Contributed capital 96,452 96,436
Partners' and other deficits--net (86,109) (75,130)
Accumulated other comprehensive income 55
--------- ---------
Total equity 10,398 21,306
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 859,972 $ 881,724
========= =========
See notes to consolidated financial statements.
- 3 -
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED
---------------------------------------------
2002 2001 2000
REVENUES:
Rooms $ 270,534 $ 266,353 $ 267,596
Food and beverage 117,810 118,042 119,865
Meeting room rental, related party management fee and other 52,036 52,263 49,113
--------- --------- ---------
Total revenues 440,380 436,658 436,574
--------- --------- ---------
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 68,917 68,061 68,224
Food and beverage 91,310 94,690 98,398
Other 3,179 3,288 3,716
General, administrative, sales and management service expenses 136,866 131,522 124,393
Repairs and maintenance 18,387 17,847 17,065
Depreciation and amortization 54,202 62,174 53,367
--------- --------- ---------
Total operating expenses 372,861 377,582 365,163
--------- --------- ---------
INCOME FROM OPERATIONS 67,519 59,076 71,411
OTHER EXPENSES:
Interest expense and amortization of deferred financing fees, net of $1,018,
$1,909, and $2,798 of interest income in 2002,
2001 and 2000, respectively 70,971 70,975 73,833
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (3,452) (11,899) (2,422)
EXTRAORDINARY ITEM--Cost of early extinguishment of debt (7,411) (474)
--------- --------- ---------
NET LOSS $ (10,863) $ (12,373) $ (2,422)
========= ========= =========
See notes to consolidated financial statements.
- 4 -
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
PARTNERS AND
CONTRIBUTED CAPITAL OTHER EQUITY (DEFICIT) ACCUMULATED
--------------------------------------------------- OTHER
COMPREHENSIVE GENERAL LIMITED GENERAL LIMITED COMPREHENSIVE
INCOME (LOSS) PARTNER PARTNER PARTNER PARTNER INCOME TOTAL
BALANCE--December 31, 1999 $ 96,436 $ -- $(82,580) $ 25,251 $ -- $ 39,107
Distributions (150) (150)
Advances to General Partner to
purchase Treasury Stock (2,777) (2,777)
Net loss $ (2,422) (686) (1,736) (2,422)
---------- ---------- ---------- -------- ---------- ---------- --------
Comprehensive loss $ (2,422)
==========
BALANCE--December 29, 2000 96,436 (86,193) 23,515 33,758
Distributions (150) (150)
Issuance of general partners
Treasury Stock 71 71
Net loss $ (12,373) (2,969) (9,404) (12,373)
---------- ---------- ---------- -------- ---------- ---------- --------
Comprehensive loss $ (12,373)
==========
BALANCE--December 28, 2001 96,436 (89,241) 14,111 21,306
Distributions (150) (150)
Issuance of general partners
Treasury Stock 16 34 50
Net loss $ (10,863) (2,611) (8,252) (10,863)
Unrealized appreciation on
marketable securities 55 55 55
---------- ---------- ---------- -------- ---------- ---------- --------
Comprehensive loss $ (10,808)
==========
BALANCE--January 3, 2003 $ 96,452 $ -- $(91,968) $ 5,859 $ 55 $ 10,398
========== ========== ======== ========== ========== ========
See notes to consolidated financial statements.
- 5 -
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001, AND DECEMBER 29, 2000
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED
-----------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,863) $(12,373) $ (2,422)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation, amortization and loan cost amortization 56,214 64,496 55,718
Extraordinary item 7,411 474
Non-cash director compensation 50 71 50
Changes in certain assets and liabilities:
Restricted cash (221) (167) 608
Receivables 2,116 2,402 (35)
Inventories 137 208 (147)
Prepaid expenses and other (2,438) (1,050) (697)
Accounts payable (585) (364) (5,887)
Accrued expenses (3,698) (2,951) (2,686)
Other obligations 104 307 (7,370)
--------- -------- --------
Net cash provided by operating activities 48,227 51,053 37,132
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (28,618) (32,101) (43,499)
Franchise fees and other (4,335) (158) (3,450)
Sale (purchase) of marketable securities (1,410) (7,399) 1,365
--------- -------- --------
Net cash used in investing activities (34,363) (39,658) (45,584)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 510,000 48,936 24,436
Repayments of debt (516,385) (72,636) (16,572)
Debt offering costs (13,782)
Debt redemption costs (4,071)
Purchase of treasury stock (2,827)
Distributions to partners (150) (150) (150)
Loan financing fees (86)
--------- -------- --------
Net cash (used in) provided by financing activities (24,388) (23,936) 4,887
--------- -------- --------
NET DECREASE IN CASH AND EQUIVALENTS (10,524) (12,541) (3,565)
CASH AND EQUIVALENTS--Beginning of period 32,298 44,839 48,404
--------- -------- --------
CASH AND EQUIVALENTS--End of period $ 21,774 $ 32,298 $ 44,839
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
Cash paid for interest--net of amounts capitalized $ 75,696 $ 71,208 $ 74,552
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES--
Unrealized appreciation of marketable securities $ 55 $ $
========= ======== ========
See notes to consolidated financial statements.
- 6 -
JOHN Q. HAMMONS HOTELS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
ENTITY MATTERS--The accompanying consolidated financial statements include
the accounts of John Q. Hammons Hotels, L.P. (the Partnership) and its
wholly-owned subsidiaries, John Q. Hammons Hotels Finance Corporation III,
a corporation with nominal assets and no operations; the catering
corporations, which consist of separate corporations for each hotel
location chartered to own the respective food and liquor licenses as well
as operate the related food and beverage facilities; and certain
wholly-owned subsidiaries, which consist of certain hotel operations. As
of fiscal year end 2002, 2001 and 2000, the Partnership had 47 hotels in
operation of which 30 in 2002, 2001 and 2000 operate under the Holiday Inn
and Embassy Suites Hotels trade names. The Partnership's hotels are
located in 20 states throughout the United States of America.
In conjunction with a public offering of debt securities in February 1994
and a public offering of equity securities in November 1994 by John Q.
Hammons Hotels, Inc., J.Q.H. Hotels, L.P., which owned and operated 10
hotel properties, obtained through transfers or contributions from Mr.
John Q. Hammons (Mr. Hammons) or enterprises which he controlled, 21
additional operating hotel properties, equity interests in two hotels
under construction, the stock of the catering corporations and management
contracts relating to all of Mr. Hammons' hotels. Upon consummation of
these transactions, J.Q.H. Hotels, L.P. changed its name to John Q.
Hammons Hotels, L.P. and the allocation of income or loss was modified
from 1% to its general partner and 99% to its limited partner to 10% and
90%, respectively, upon completion of the public debt offering and to
28.31% to its general partner and 71.69% to its limited partner upon
completion of the public equity offering. Effective December 30, 2000, the
Partnership redeemed 1,271,581 Partnership units held by the general
partner for funds advanced by the Partnership to the general partner to
repurchase 1,271,581 shares of the general partner's Class A Common Stock.
Effective December 29, 2001, the Partnership sold 11,760 partnership units
to the general partner. The number of Partnership units exchanged is
equivalent to the number of shares repurchased as outlined by the
partnership agreement. As a result, the allocation percentages changed to
approximately 24% in 2002 and 2001 and 28% in 2000 for the general partner
and approximately 76% in 2002 and 2001 and 72% in 2000 for the limited
partner.
The Partnership is directly or indirectly owned and controlled by Mr.
Hammons, as were all enterprises, which transferred or contributed net
assets to the Partnership. Accordingly, the accompanying financial
statements present, as a combination of entities under common control, the
financial position and related results of operations of all entities on a
consolidated basis for all periods presented.
All significant balances and transactions between the entities and
properties have been eliminated.
PARTNERSHIP MATTERS--A summary of selected provisions of the Partnership
agreement as well as certain other matters are as follows:
General and Limited Partner--John Q. Hammons Hotels, Inc. (the
Company) was formed in September 1994 and had no operations or
assets prior to its initial public offering of 6,042,000 Class A
common shares at $16.50 per share on November 23, 1994. Immediately
prior to the initial public offering, Mr. Hammons contributed
approximately $5 million in cash in exchange for 294,100 shares of
Class B Common Stock (which represents approximately 72% of the
voting
- 7 -
control of the Company). John Q. Hammons Hotels, Inc. contributed
the approximate $96 million of the net proceeds from the Class A and
Class B Common Stock offerings to the Partnership in exchange for an
approximate 28% general partnership interest.
As a result of the public equity offering, John Q. Hammons Hotels, Inc.
became the sole general partner and John Q. Hammons Revocable Living Trust
and Hammons, Inc., entities beneficially owned and controlled by Mr.
Hammons, became its limited partners.
ALLOCATION OF INCOME, LOSSES AND DISTRIBUTIONS--Income, losses and
distributions of the Partnership will generally be allocated between the
general partner and the limited partners based on their respective
ownership interests.
In the event the Partnership has taxable income, distributions are to be
made to the partners in an aggregate amount equal to the amount that the
Partnership would have paid for income taxes had it been a C-Corporation
during the applicable period. Aggregate tax distributions will first be
allocated to the general partner, if applicable, with the remainder
allocated to the limited partners. There were no distributions to the
limited partner for taxes for the fiscal year ended 2002, 2001 and 2000.
In 1998 and 1999, the board of directors of John Q. Hammons Hotels, Inc.
authorized the purchase of up to $3.0 million of its stock during each of
the fiscal years 2000 and 1999. No stock repurchase program was approved
for 2002 and 2001. As of January 3, 2003, $5,669 of stock had been
purchased, net of reissued stock. For financial reporting purposes, the
advances by the partnership to its general partner to purchase stock have
been reflected as a reduction of equity in the accompanying consolidated
balance sheet and statement of changes in equity.
ADDITIONAL CAPITAL CONTRIBUTIONS--In the event proceeds from the sale of
the 30 hotel properties (or applicable replacement collateral) which
secure the $510 million First Mortgage Notes (2002 First Mortgage Notes)
(Note 5) are insufficient to satisfy amounts due on the 2002 First
Mortgage Notes, Mr. Hammons and Hammons, Inc. are severally obligated to
contribute up to $195 million to satisfy amounts due, if any. In addition,
with respect to the original 11 hotel properties contributed by Mr.
Hammons concurrent with the public equity offering, Mr. Hammons is
obligated to contribute up to $50 million in the event proceeds from the
sale of these hotel properties (or applicable replacement collateral) are
insufficient to satisfy amounts due on the then outstanding mortgage
indebtedness related to these properties.
REDEMPTION OF LIMITED PARTNER INTERESTS--Subject to certain limitations,
the limited partners have the right to require redemption of their limited
partner interests at any time subsequent to November 1995. Upon
redemption, the limited partners receive, at the sole discretion of the
general partner, one share of John Q. Hammons Hotels, Inc.'s Class A
Common Stock for each limited partner unit tendered or the then cash
equivalent thereof.
ADDITIONAL GENERAL PARTNER INTERESTS--Upon the issuance by the general
partner of additional shares of its Common Stock, including shares issued
upon the exercise of its stock options, the general partner will be
required to contribute to the Partnership the net proceeds received and
the Partnership will be required to issue additional general partner units
to the general partner in an equivalent number to the additional shares of
Common Stock issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND EQUIVALENTS--Cash and equivalents include operating cash accounts
and investments, with an original maturity of three months or less, and
certain balances of various money market and common bank accounts.
- 8 -
RESTRICTED CASH--Restricted cash consists of certain funds maintained in
escrow for property taxes and certain other obligations.
MARKETABLE SECURITIES--Marketable securities consist of available-for-sale
commercial paper and government agency obligations which mature or will be
available for use in operations in 2003. These securities are valued at
current market value as determined by published market quotes. Realized
gains and losses in 2002, 2001 and 2000, determined using the specific
identification method, were nominal. Unrealized holding gains in 2002 of
$55 are included as a separate component of partners' equity until
realized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS--The following summarizes activity in the
allowance for doubtful accounts on trade accounts receivable:
ADDITIONS
BALANCE-- CHARGED TO BALANCE--
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
Year ended January 3, 2003 $231 $575 $(575) $231
Year ended December 28, 2001 231 664 (664) 231
Year ended December 29, 2000 226 558 (553) 231
INVENTORIES--Inventories consist of food and beverage items. These items
are stated at the lower of cost, as determined by the first-in, first-out
valuation method, or market.
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER--Franchise fees paid to
the respective franchisors of the hotel properties are amortized on a
straight-line basis over 10 to 20 years which approximates the terms of
the respective agreements. Costs of obtaining financing are capitalized
and amortized over the respective terms of the debt. The restricted cash
deposits are required by certain mortgages and franchise agreements, which
require the Partnership to maintain escrow accounts for real estate taxes
and furniture and fixture replacement reserves, based upon a percentage of
revenue.
The components of deferred financing costs, franchise fees and other are
summarized as follows:
FISCAL YEAR END
---------------------
2002 2001
Deferred financing costs $ 18,394 $ 21,650
Franchise fees 5,313 5,186
Managed contract costs 2,268 1,942
Less--accumulated amortization (5,391) (16,439)
-------- --------
20,584 12,339
-------- --------
Deposits 3,401 3,459
Restricted cash deposits 15,010 11,312
Restricted cash deposits, related to
sales of hotels and a component of replacement collateral
for 1994 and 1995 First Mortgage Notes 166
Other--net 491 317
-------- --------
$ 39,486 $ 27,593
======== ========
- 9 -
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost
(including interest, real estate taxes and certain other costs incurred
during development and construction) less accumulated depreciation and
amortization. Buildings and improvements are depreciated using the
straight-line method while all other property is depreciated using both
straight-line and accelerated methods. The estimated useful lives of the
assets are summarized as follows:
LIVES IN YEARS
Land improvements 5 to 25
New buildings and improvements 10 to 40
Purchased buildings 25
Furniture, fixtures and equipment 3 to 10
Construction in progress includes refurbishment costs of certain hotel
developments at January 3, 2003 and December 28, 2001.
During fiscal 2000, the Partnership initiated claims against certain of
its construction contractors and its insurance carrier to recover repair
costs related to moisture related problems at certain of its hotels. In
December 2001, the Partnership initiated legal action to collect the
claims submitted to the insurance carrier. The insurance carrier
subsequently denied all claims filed to date. Accordingly, the Partnership
reflected $3,400 in 2002 and $8,400 in 2001 of capital expenditures as
property additions and recorded additional depreciation expense of $7,600
in 2001 to fully reserve the net historical cost of all damaged property.
The Partnership estimates an additional $500 of capital expenditures will
be necessary to complete repair of the moisture related damage. The
Partnership and its legal counsel will continue to vigorously pursue
collection of these costs and, to the extent recoveries are realized, they
will be recorded as other income.
The Partnership periodically reviews the carrying value of these assets
and other long-lived assets and impairment losses are recognized when the
expected undiscounted future cash flows are less than the carrying amount
of the asset. Based on its most recent analysis, the Partnership believes
no impairment existed at January 3, 2003.
Interest costs, construction overhead and certain other carrying costs are
capitalized during the period hotel properties are under construction.
Interest costs capitalized were $0, $0 and $504 for the fiscal years ended
2002, 2001 and 2000, respectively. Costs incurred for prospective hotel
projects ultimately abandoned are charged to operations in the period such
plans are finalized. Costs of significant improvements are capitalized,
while costs of normal recurring repairs and maintenance are charged to
expense as incurred.
The accompanying 2002 consolidated financial statements include the land
costs for 35 of the operating hotel properties. Land for 9 of the
remaining 12 operating hotel properties is leased by the Partnership from
unrelated parties over long-term leases. Land for the remaining 3
operating hotel properties is leased by the Partnership from a related
party over long-term leases. Rent expense for all land leases was $1,545,
$1,514 and $1,489 for the fiscal years ended 2002, 2001 and 2000,
respectively.
PAR OPERATING EQUIPMENT--The Partnership's initial expenditures for the
purchase of china, glassware, silverware, linens and uniforms are
capitalized into furniture, fixtures and equipment and amortized on a
straight-line basis over a three to five year life. Costs for replacement
of these items are charged to operations in the period the items are
placed in service.
ADVERTISING--The Partnership expenses the cost of advertising associated
with operating hotels as incurred. Advertising expense for 2002, 2001 and
2000 was approximately $34,179, $32,899 and $31,815, respectively.
- 10 -
PENSIONS AND OTHER BENEFITS--The Partnership contractually provides
retirement benefits for certain union employees at two of its hotel
properties under a union-sponsored defined benefit plan and a defined
contribution plan. Contributions to these plans, based upon the provisions
of the respective union contracts, approximated $97, $99 and $86 for the
fiscal years ended 2002, 2001 and 2000, respectively.
The Partnership maintains an employee savings plan (a 401(k) plan) and
matches a percentage of an employee's contributions. The Partnership's
matching contributions are funded currently. The costs of the matching
program and administrative costs charged to income were approximately
$760, $647 and $506 in 2002, 2001 and 2000, respectively. The Partnership
does not offer any other post employment or postretirement benefits to its
employees.
SELF-INSURANCE--The Partnership became self-insured for medical coverage
effective January 1999. Effective October 1, 2002, the Partnership became
self-insured for workers' compensation, general liability and auto claims.
Estimated costs related to these self-insurance programs are accrued based
on known claims and projected settlements of unasserted claims. Subsequent
changes in, among others, unasserted claims, claims costs, claim
frequency, as well as changes in actual experience, could cause these
estimates to change. See Note 3 for additional insurance coverage.
The Partnership had a $500 irrevocable stand-by letter-of-credit agreement
with a bank, which was required by an insurance carrier for the
Partnership's self-insurance programs. The letter of credit automatically
renews annually in October unless terminated in advance by the Company or
bank.
INCOME TAXES--Prior to 1994, the entities and properties included in the
accompanying consolidated financial statements consisted of a Partnership,
S-Corporations and a sole proprietorship. Accordingly, the Partnership
generally is not responsible for payment of income taxes. Rather, the
respective partner, stockholder or sole proprietor, as applicable, is
taxed on the Partnership's taxable income at the respective individual
federal and state income tax rates. Therefore, no income taxes have been
provided in the accompanying consolidated financial statements.
As described in Note 1, the Partnership and its general partner, as
applicable, completed public offerings of first mortgage notes and equity
securities. Prior to the consummation of these offerings, the
S-Corporation status of the catering companies was terminated and,
accordingly, the Partnership is subject to federal and state income taxes
on taxable income, if any, earned by the catering companies after the
effective date of the securities registrations. There were nominal, if
any, earnings attributable to the catering companies after the applicable
public offerings and there were no undistributed earnings of the
S-Corporations at the time of termination.
REVENUE RECOGNITION--The Partnership recognizes revenues from its rooms,
catering and restaurant facilities as earned on the close of business each
day.
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FISCAL YEAR--The Partnership's fiscal year ends on the Friday nearest
December 31, which includes 53 weeks in 2002, and 52 weeks in 2001 and
2000.
The periods ended in the accompanying consolidated financial statements
are summarized as follows:
- 11 -
YEAR FISCAL YEAR END
2002 January 3, 2003
2001 December 28, 2001
2000 December 29, 2000
SEGMENTS--The Partnership operates in one reportable segment, hospitality
services.
RECLASSIFICATIONS--Certain prior years' amounts have been reclassified to
conform to the 2002 presentation.
ACCOUNTING PRONOUNCEMENTS--In June 2001, the Financial Accounting
Standards Board issued Statement No. 143 (SFAS 143) "Accounting for Assets
Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This standard
is required to be adopted for fiscal years beginning after June 15, 2002.
As such, the Partnership is not required to adopt this standard until
fiscal year 2003. Management does not believe that the adoption of this
standard will have a material impact on the financial position, results of
operations or cash flows of the Partnership.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement addresses financial accounting for the impairment or
disposal of long-lived assets and requires that one accounting model be
used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. The Partnership adopted this statement in the first quarter
of 2002 with no material impact on its financial position, results of
operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement
No. 145 (SFAS 145) "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145
rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and FASB Statement No. 64, "Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements", which would require applying
the criteria under Opinion 30 to determine whether or not the gains and
losses related to the extinguishment of debt should be classified as
extraordinary items. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does
not meet the criteria in Opinion 30 for classification as an extraordinary
item shall be reclassified. This statement amends FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. This statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. This standard is required to be adopted for fiscal
years beginning after May 15, 2002 and certain transactions after May 15,
2002. As such, the Partnership is not required to adopt this standard
until the fiscal year 2003. Management believes that the adoption of this
standard will result in the reclassification of the 2002 and 2001
extraordinary items to a loss on extinguishment of debt caption classified
in other expense.
In June 2002, the Financial Accounting Standards Board issued Statement
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation or other exit or disposal activity. SFAS 146 is to
be applied prospectively to exit or disposal activities initiated after
December 31, 2002. As such, the Partnership is not required to adopt
- 12 -
this standard until the fiscal year 2003. Management does not believe that
the adoption of this standard will have a material impact on its financial
position, results of operations or cash flows.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45) "Guarantor's Accounting and Disclosure
requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." FIN 45 elaborates on the existing disclosure requirements for
most guarantees, including loan guarantees. It also clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it
assumes under that guarantee. However, the provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties or to
guarantees accounted for as derivatives. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of
FIN 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002. As such, the Partnership adopted the
disclosure requirements of this standard in the fourth quarter of 2002
with no material impact on the financial position, results of operations
or cash flows of the Partnership.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest
Entities." Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the
entity through voting interests. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Management does not believe that the
adoption of this interpretation will have a material impact on the
financial position, results of operations or cash flows of the
Partnership.
3. RELATED PARTY TRANSACTIONS
HOTEL MANAGEMENT FEES--In addition to managing the hotel properties
included in the accompanying consolidated financial statements, the
Partnership provides similar services for other hotel properties owned or
controlled by Mr. Hammons, which included nine, nine and six properties at
January 3, 2003, December 28, 2001 and December 29, 2000, respectively. A
management fee of approximately 3% to 5% of gross revenues (as defined) is
paid to the Partnership by these hotels, which aggregated approximately
$2,150, $1,684 and $1,245 for the fiscal years ended 2002, 2001 and 2000,
respectively.
ACCOUNTING AND ADMINISTRATIVE SERVICES--The hotels have contracted for
accounting and other administrative services with Winegardner & Hammons,
Inc. (WHI), a company related by common ownership. The accounting and
administrative charges expensed by the hotel properties, included in
administrative expenses, were approximately $1,572, $1,574 and $1,577 for
the fiscal years ended 2002, 2001 and 2000, respectively.
In 2002, the Partnership negotiated a new contract with WHI to continue to
provide accounting and administrative services through June 2005. Charges
for these services provided by WHI will approximate $35 per year for each
hotel property for the duration of the agreement.
INSURANCE COVERAGE--To supplement the Partnership's self-insurance
programs, property, auto, commercial liability, workers' compensation and
medical insurance is provided to the hotel properties under blanket
commercial policy purchased by John Q. Hammons Hotels, Inc. covering hotel
properties
- 13 -
owned by the Partnership or Mr. Hammons. In addition, the Partnership's
umbrella and crime insurance is provided to the hotel properties under
blanket commercial policies purchased by John Q. Hammons Hotels, Inc,
covering hotel properties owned by the Partnership, Mr. Hammons or managed
by WHI. Generally, premiums allocated to each hotel property are based
upon factors similar to those used by the insurance provider to compute
the aggregate group policy premium. Insurance expense for the properties
included in operating expenses was approximately $9,218, $7,341 and $3,578
for the fiscal years ended 2002, 2001 and 2000, respectively. During
fiscal 2000, the Partnership realized favorable trends in insurance
expense as a result of claims experience, rate improvements and favorable
buyouts of several prior self-insured years.
ALLOCATION OF COMMON COSTS--The Partnership incurs certain hotel
management expenses incidental to the operations of all hotels
beneficially owned or controlled by Mr. Hammons. These costs principally
include the compensation and related benefits of certain senior hotel
executives. Commencing in May 1993, these costs were allocated by the
Partnership to hotels not included in the accompanying statements, based
on the respective number of rooms of all hotels owned or controlled by Mr.
Hammons. These allocated costs approximated $370, $328 and $184 for the
fiscal years ended 2002, 2001 and 2000, respectively. Management considers
these allocations to be reasonable.
TRANSACTIONS WITH PARTNERS AND DIRECTORS--Mr. Hammons maintained a deposit
with the Partnership for approximately $100 as of January 3, 2003, and the
Partnership advanced Mr. Hammons approximately $368 as of December 28,
2001 relating to the use of certain in-house development resources.
During 2000, the general partner authorized the Partnership to enter into
a five-year management contract with Mr. Hammons whereby the Partnership
will provide internal administrative, architectural design, purchasing and
legal services to Mr. Hammons in connection with the development of hotels
in an amount not to exceed 1.5% of the total development cost of any
single hotel, for the opportunity to manage the hotels upon opening and
the right to purchase the hotels in the event they are offered for sale.
During fiscal 2002, 2001 and 2000, the Partnership paid $326, $487 and
$1,455, respectively, of additional costs in accordance with the
management contract. These costs are amortized over a five-year contract
period. Amortization for these costs commences upon the opening of the
hotels. The hotel management fee received by the Partnership from these
hotels is discussed in Note 3 above.
For 2002, 2001 and 2000, Mr. Hammons personally has paid or has agreed to
pay $432, $128 and $49, respectively, to certain employees pursuant to the
agreements.
SUMMARY OF RELATED PARTY EXPENSES--The following summarizes expenses
reported as a result of activities with related parties:
2002 2001 2000
Expenses included within general, administrative,
sales and management service expenses:
Accounting and administrative $1,572 $1,574 $1,577
Rental expenses 943 937 830
------ ------ ------
$2,515 $2,511 $2,407
====== ====== ======
Allocated insurance expense from the pooled coverage
included within various operating categories--insurance
other than medical $9,218 $7,341 $3,578
====== ====== ======
Medical--net of employee payments $4,063 $4,105 $3,404
====== ====== ======
- 14 -
4. FRANCHISE AGREEMENTS
As of January 3, 2003 and December 28, 2001, 43 and 42, respectively, of
the 47 operating hotel properties included in the accompanying
consolidated balance sheets have franchise agreements with national hotel
chains that require each hotel to remit to the franchisor monthly fees
equal to approximately 3% to 6% of gross room revenues, as defined.
Franchise fees expensed under these contracts were $12,944, $10,496 and
$10,305 for the fiscal years ended 2002, 2001 and 2000, respectively.
As part of the franchise agreements, each hotel also pays additional
advertising, reservation and maintenance fees to the franchisor which
range from 1% to 3.5% of gross room revenues, as defined. The amount of
expense related to these fees included in the consolidated statements of
operations as a component of sales expenses was approximately $9,255,
$8,975 and $9,021 for the fiscal years ended 2002, 2001 and 2000,
respectively.
- 15 -
5. LONG-TERM DEBT
The components of long-term debt are summarized as follows:
FISCAL YEAR END
-----------------------------
2002 2001
2002 First Mortgage Notes, interest at 8.875%, interest only payable May 15 and
November 15, principal due May 15, 2012, secured by a first mortgage lien on 28
hotel properties, a second mortgage lien on 2 hotels and additional capital
contributions of up to $195 million by Mr. Hammons $ 499,000 $ 0
1994 First Mortgage Notes, interest at 8.875%, interest only payable February 15
and August 15, refinanced May 2002 294,775
1995 First Mortgage Notes, interest at 9.75%, interest only payable April 1 and
October 1, refinanced May 2002 79,293
Development bonds, interest rates at 7.125%, payable in scheduled installments
with maturities through August 2015, certain of the obligations are subject to
optional acceleration by the bondholders, secured by certain hotel facilities,
fixtures and an assignment of rents 12,282 12,881
Mortgage notes payable to banks, insurance companies and a state retirement
plan, fixed rates ranging from 7.5% to 9.5%, payable in scheduled installments
with maturities through April 2027, secured by certain hotel facilities,
fixtures and an assignment of rents, with certain instruments subject to
cross-collateralization provisions and with respect to approximately $250,986
and $280,909 for 2002 and 2001, respectively, of mortgage notes, a personal
guarantee of Mr. Hammons 257,408 303,237
Mortgage notes payable to banks, variable interest rates at prime to prime plus
0.50%, payable in scheduled installments with maturities through February 2008,
with a certain instrument subject to a ceiling and a floor, secured by certain
hotel facilities, fixtures and an assignment of rents, and with respect to
approximately $37,652 and $115,874 for 2002 and 2001, respectively, of mortgage
notes, a personal guarantee of Mr. Hammons 37,652 115,874
Other notes payable, interest at 8.125%, refinanced May 2002 6,947
--------- ---------
806,342 813,007
Less current portion (13,683) (38,862)
--------- ---------
$ 792,659 $ 774,145
========= =========
During May 2002, the Partnership issued $510 million of 2002 First
Mortgage Notes. The Partnership utilized the proceeds from these notes to
pay in full the 1994 First Mortgage Notes and 1995 First Mortgage Notes
and certain fixed and variable rate mortgage notes. The indenture
agreements relating to the 2002 First Mortgage Notes include certain
covenants which, among others, limit the ability of the Partnership and
its restricted subsidiaries (as defined) to make distributions, incur debt
and issue preferred equity interests, engage in certain transactions with
its partners or affiliates, incur certain liens, engage in mergers or
consolidations. In addition, certain of the other credit agreements
include subjective acceleration clauses and limit, among others, the
incurrence of certain liens and additional indebtedness and require the
achievement or maintenance of certain financial covenants. The 2002 First
- 16 -
Mortgage Notes and certain other obligations include scheduled prepayment
penalties in the event the obligations are paid prior to their scheduled
maturity.
The Partnership paid in full or refinanced approximately $505,578, $63,268
and $9,701 of long-term debt in 2002, 2001 and 2000, respectively. In
connection with these transactions, the Partnership incurred approximately
$7,411, $474 and $0, respectively, in charges related to the early
extinguishment of debt. These debt extinguishment charges have been
reflected in the accompanying consolidated statements of operations as
extraordinary items.
Scheduled maturities of long-term debt as of January 3, 2003 are
summarized as follows:
FISCAL YEAR ENDING AMOUNT
2003 $ 13,683
2004 7,472
2005 7,974
2006 38,809
2007 43,606
Thereafter 694,798
--------
$806,342
========
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The hotel properties lease certain equipment and land
from unrelated parties under various lease arrangements. In addition, the
Partnership leases certain parking spaces at one hotel for the use of its
patrons and is billed by the lessor based on actual usage. Rent expense
for these non-related party leases was approximately $3,115, $3,114 and
$3,311 for the fiscal years ended 2002, 2001 and 2000, respectively, which
has been included in general, administrative, sales and management service
expenses.
The Partnership operates two trade centers located in Joplin, Missouri,
and Portland, Oregon. Both of the facilities in which these trade centers
operate are owned by Mr. Hammons. The lease agreement for the Joplin trade
center stipulates nominal rentals for each of the fiscal years ended 2002,
2001 and 2000 and for each ensuing year through 2014. The lease agreement
for the Portland facility extends through 2004 and requires minimum annual
rents of $300 to Mr. Hammons. In addition, the Partnership leases office
space in Springfield, Missouri, from a partnership (of which Mr. Hammons
is a partner) for annual payments of approximately $250 per year through
2004. The Partnership has also entered into land leases with Mr. Hammons
for three operating hotel properties. Subject to the Partnership
exercising purchase options provided under these agreements, these leases
extend through 2096, 2036 and 2045, respectively, and require aggregate
minimum annual payments of approximately $390. Rent expense for these
related party leases was approximately $943, $937 and $830 for the fiscal
years ended 2002, 2001 and 2000, respectively.
- 17 -
The minimum annual rental commitments for non-cancelable operating leases
at January 3, 2003 are as follows:
FISCAL YEAR ENDING MR. HAMMONS OTHER TOTAL
2003 $ 943 $ 2,429 $ 3,372
2004 948 2,180 3,128
2005 395 1,992 2,387
2006 395 1,797 2,192
2007 395 1,592 1,987
Thereafter 20,657 41,325 61,982
------- ------- -------
$23,733 $51,315 $75,048
======= ======= =======
HOTEL DEVELOPMENT--Currently, the Partnership does not have any hotels
under construction nor does it have any plans to start construction.
LEGAL MATTERS--The Partnership is party to various legal proceedings
arising from its consolidated operations. Management of the Partnership
believes that the outcome of these proceedings, individually and in the
aggregate, will have no material adverse effect on the Partnership's
consolidated financial position, results of operations or cash flows.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
During 2001, the Partnership entered into an interest rate swap agreement
in order to manage its interest rate risk on a long-term bank borrowing
approximating $27,665. During May 2002 this borrowing was refinanced into
the 2002 First Mortgage Notes and the swap agreement was terminated.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of long-term debt approximate their respective historical
carrying amounts except with respect to the 2002 First Mortgage Notes. The
fair value of the 2002 First Mortgage Notes was approximately $519 million
at January 3, 2003. The aggregate fair market value of the 1994 First
Mortgage Notes and 1995 First Mortgage Notes was approximately $376
million at December 28, 2001. The fair value of the First Mortgage Notes
issued is estimated by obtaining quotes from brokers.
9. SUBSEQUENT EVENT
Subsequent to January 3, 2003, the Partnership has agreed to issue
approximately 8,000 general partner units to the Company. The number of
general partner units to be issued is equivalent to the number of shares
issued as outlined by the partnership agreement.
******
- 18 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrants have duly caused this
report to be signed on their behalf by the undersigned, thereunto duly
authorized, in the City of Springfield, Missouri, on the 1st day of
April, 2003.
JOHN Q. HAMMONS HOTELS, L.P.
By: John Q. Hammons Hotels, Inc.,
its General Partner
By: /s/ John Q. Hammons
----------------------------
John Q. Hammons
Chairman and Chief Executive Officer
JOHN Q. HAMMONS HOTELS FINANCE
CORPORATION III
By: /s/ John Q. Hammons
---------------------------
John Q. Hammons
Chairman and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
in their capacities at John Q. Hammons Hotels, Inc. as general partner of John
Q. Hammons Hotels, L.P., and in the capacities indicated for John Q. Hammons
Hotels Finance III, on April 1, 2003.
Signatures Title
/s/ John Q. Hammons Chairman and Chief Executive Officer of John Q.
- ----------------------- Hammons Hotels, Inc., and John Q. Hammons Finance
John Q. Hammons Corporation III (Principal Executive Officer)
/s/ Paul E. Muellner Chief Financial Officer (Principal Financial and
- ----------------------- Accounting Officer)
Paul E. Muellner
/s/ Jacqueline A. Dowdy Director, Secretary of John Q. Hammons Hotels,
- ----------------------- Inc., and John Q. Hammons Hotels Finance
Jacqueline A. Dowdy Corporation III
/s/ William J. Hart Director of John Q. Hammons Hotels, Inc.
- -----------------------
William J. Hart
44
/s/ Daniel L. Earley Director of John Q. Hammons Hotels, Inc.
- -----------------------
Daniel L. Earley
/s/ James F. Moore Director of John Q. Hammons Hotels, Inc.
- -----------------------
James F. Moore
/s/ John E. Lopez-Ona Director of John Q. Hammons Hotels, Inc.
- -----------------------
John E. Lopez-Ona
/s/ David C. Sullivan Director of John Q. Hammons Hotels, Inc.
- -----------------------
David C. Sullivan
/s/ Donald H. Dempsey Director of John Q. Hammons Hotels, Inc.
- -----------------------
Donald H. Dempsey
CERTIFICATIONS
I, John Q. Hammons, certify that:
1. I have reviewed this annual report on Form 10-K of John Q. Hammons Hotels,
L.P. and John Q. Hammons Finance Corporation III;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
45
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and all material weaknesses.
Date: April 1, 2003
/s/ John Q. Hammons
------------------------------------------
John Q. Hammons, Chief Executive Officer,
John Q. Hammons Hotels Finance Corporation
III and John Q. Hammons Hotels, Inc.,
general partner of John Q. Hammons Hotels,
L.P.
I, Paul E. Muellner, certify that:
1. I have reviewed this annual report on Form 10-K of John Q. Hammons Hotels,
L.P. and John Q. Hammons Finance Corporation III;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
46
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and all material weaknesses.
Date: April 1, 2003
/s/ Paul E. Muellner
------------------------------------------
Paul E. Muellner, Chief Financial Officer
John Q. Hammons Hotels Finance Corporation
III and John Q. Hammons Hotels, Inc.,
general partner of John Q. Hammons Hotels
L.P.
47
EXHIBIT INDEX
NO. TITLE
- ----- -----
3.1 Second Amended and Restated Agreement of Limited Partnership of the
Company (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
3.2 Certificate of Limited Partnership of the Company filed with the
Secretary of State of the State of Delaware (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-4,
Registration Number 333-89856-01)
3.3 Restated Certificate of Incorporation of the General Partner
(Incorporated by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4, Registration Number 333-89856-01)
3.4 Bylaws of the General Partner, as amended (Incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-4,
Registration Number 333-89856-01)
3.5 Articles of Incorporation of John Q. Hammons Hotels Finance Corporation
III (Incorporated by reference to Exhibit 3.5 to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
3.6 By-laws of John Q. Hammons Hotels Finance Corporation III (Incorporated
by reference to Exhibit 3.6 to the Company's Registration Statement on
Form S-4, Registration Number 333-89856-01)
4.1 Indenture dated May 21, 2002 among the Company, John Q. Hammons Hotels
Finance Corporation III and Wachovia Bank, National Association, as
trustee (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
4.2 Form of Global Note evidencing the 8 7/8% First Mortgage Notes due 2012
(Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4, Registration Number 333-89856-01)
10.1 Holiday Inn License Agreement (Incorporated by reference to Exhibit
10.2 to the General Partner's Registration Statement on Form S-1, No.
33-84570)
10.2 Embassy Suites License Agreement (Incorporated by reference to Exhibit
10.3 to the General Partner's Registration Statement on Form S-1, No.
33-84570)
10.3 Form of Option Purchase Agreement (Incorporated by reference to Exhibit
10.4 to the General Partner's Registration Statement on Form S-1, No.
33-84570)
10.4 Collective Bargaining Agreement between East Bay Hospitality Industry
Association, Inc. and Service Employee's International Union
(Incorporated by reference to Exhibit 10.5 to the General Partner's
Registration Statement on Form S-1, No. 33-84570)
10.5 Collective Bargaining Agreement between Hotel Employee and Restaurant
Employee Union Local 49 and Holiday Inn Sacramento--Capitol Plaza, for
06/01/01 to 5/31/06 (Incorporated by reference to Exhibit 10.6a to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December
28, 2001)
48
10.6 Letter Agreement re: Hotel Financial Services for Certain Hotels Owned
and Operated by John Q. Hammons or John Q. Hammons Controlled Companies
(Incorporated by reference to Exhibit 10.7 to the General Partner's
Registration Statement on Form S-1, No. 33-84570)
10.7 Employment Agreement between John Q. Hammons Hotels, Inc. and Debra M.
Shantz dated as of May 1, 1995, as amended on October 31, 1997 and
October 31, 2000 (Incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December
29, 2000.)
10.7a Employment Agreement between John Q. Hammons Hotels, Inc. and Lou
Weckstein dated as of September 17, 2001. (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter Ended September 28, 2001.)
10.7b Employment Agreement between John Q. Hammons Hotels, Inc. and William
A. Mead dated as of January 25, 2000 (Incorporated by reference to
Exhibit 10.8b to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
10.7c Letter Agreement between John Q. Hammons and William A. Mead dated as
of January 27, 2000 (Incorporated by reference to Exhibit 10.8c to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended December
28, 2001)
10.8 John Q. Hammons Building Lease Agreement - 9th Floor (6000 sq. ft.)
(Incorporated by reference to Exhibit 10.7a to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
10.8a Lease Renewal for John Q. Hammons Building Lease Agreement - 9th Floor
(6000 sq. ft.) effective January 1, 2002 (Incorporated by reference to
Exhibit 10.9a.1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
10.8b John Q. Hammons Building Lease Agreement - 7th Floor (2775 sq. ft.)
(Incorporated by reference to Exhibit 10.7b to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
10.8c Lease Renewal for John Q. Hammons Building Lease Agreement - 7th Floor
(2775 sq. ft.) effective January 1, 2002 (Incorporated by reference to
Exhibit 10.9b.1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
10.8d John Q. Hammons Building Lease Agreement - 7th Floor (2116 sq. ft.)
(Incorporated by reference to Exhibit 10.7c to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
10.8e Lease Renewal for John Q. Hammons Building Lease Agreement - 7th Floor
(2116 sq. ft.) effective January 1, 2002 (Incorporated by reference to
Exhibit 10.9c.1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
10.8f John Q. Hammons Building Lease Agreement - 8th Floor (6000 sq. ft.)
(Incorporated by reference to Exhibit 10.7d to the Company's
Registration Statement on Form S-4, Registration Number 333-89856-01)
10.8g Lease Renewal for John Q. Hammons Building Lease Agreement - 8th Floor
(6000 sq. ft.) effective January 1, 2002 (Incorporated by reference to
Exhibit 10.9d.1 to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
49
10.9 Triple Net Lease (Incorporated by reference to Exhibit 10.10 to the
General Partner's Registration Statement on Form S-1, No. 33-84570)
10.10 Lease Agreement between John Q. Hammons and the Company (Incorporated
by reference to Exhibit 10.11 to the General Partner's Registration
Statement on Form S-1, No. 33-84570)
10.11 Ground lease between John Q. Hammons and John Q. Hammons-Branson, L.P.
- (Chateau on the Lake, Branson, Missouri) (Incorporated by reference
to Exhibit 10.10 of the Company's Registration Statement on Form S-4,
Registration Number 333-89856-01)
10.12 Ground lease between John Q. Hammons and John Q. Hammons-Hotels Two,
L.P. - (Little Rock, Arkansas) (Incorporated by reference to Exhibit
10.11 of the Company's Registration Statement on Form S-4, Registration
Number 333-89856-01)
10.13 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.12 of
the Company's Registration Statement on Form S-4, Registration Number
333-89856-01)
10.14 1999 Non-Employee Director Stock and Stock Option Plan of the General
Partner (incorporated by reference to Exhibit 10.19 to the General
Partner's Annual Report on Form 10-K for the Fiscal Year Ended January
1, 1999)
12.1 Computation of Ratio of Earnings to Fixed Charges of the Company
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
in the Company's Registration Statement on Form S-4, No. 333-89856-01)
99.1 Certification Statement of Chief Executive Officer of the General
Partner
99.2 Certification Statement of Chief Financial Officer of the General
Partner
50