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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 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 033-7334001
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 or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
300 JOHN Q. HAMMONS PARKWAY
SUITE 900
SPRINGFIELD, MO 65806
(Address of principal executive offices)
(Zip Code)
(417) 864-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
ASSETS
APRIL 4, 2003 JANUARY 3, 2003
------------- ---------------
CURRENT ASSETS:
Cash and equivalents $ 39,954 $ 21,774
Restricted cash 1,670 1,103
Marketable securities 11,451 12,481
Receivables:
Trade, less allowance for doubtful accounts of $231 10,516 9,034
Other 308 441
Management fees -related party 222 152
Inventories 1,165 1,151
Prepaid expenses and other 3,866 5,884
------------ ------------
Total current assets 69,152 52,020
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 62,053 62,035
Buildings and improvements 751,044 751,092
Furniture, fixture and equipment 326,262 327,079
Construction in progress 4,118 98
------------ ------------
1,143,477 1,140,304
Less-accumulated depreciation and amortization (384,306) (371,838)
------------ ------------
759,171 768,466
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net,
including $16,604 and $15,010 of restricted cash as of
April 4, 2003 January 3, 2003, respectively 40,412 39,486
------------ ------------
TOTAL ASSETS $ 868,735 $ 859,972
============ ============
See Notes to Condensed Consolidated Financial Statements
2
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
LIABILITIES AND EQUITY
APRIL 4, 2003 JANUARY 3, 2003
------------- ---------------
LIABILITIES:
Current portion of long-term debt $ 13,768 $ 13,683
Accounts payable 2,731 5,041
Accrued expenses:
Payroll and related benefits 6,092 7,199
Sales and property taxes 12,260 12,500
Insurance 2,051 1,903
Interest 17,481 6,382
Utilities, franchise fees and other 9,813 7,764
------------ ------------
Total current liabilities 64,196 54,472
Long-term debt 790,654 792,659
Other obligations 2,528 2,443
------------ ------------
Total liabilities 857,378 849,574
------------ ------------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Contributed capital 96,452 96,452
Partners' and other deficits, net (85,154) (86,109)
Accumulated other comprehensive income 59 55
------------ ------------
Total equity 11,357 10,398
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 868,735 $ 859,972
============ ============
See Notes to Condensed Consolidated Financial Statements
3
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
THREE MONTHS ENDED
APRIL 4, 2003 MARCH 29, 2002
------------- --------------
REVENUES:
Rooms $ 67,403 $ 65,490
Food and beverage 29,139 29,287
Meeting room rental, related party management fee and other 13,588 12,652
----------- -----------
Total revenues 110,130 107,429
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 16,280 16,056
Food and beverage 21,906 22,155
Other 692 709
General, administrative and sales expenses 36,075 33,009
Repairs and maintenance 4,453 4,355
Depreciation and amortization 12,481 12,992
----------- -----------
Total operating expenses 91,887 89,276
----------- -----------
INCOME FROM OPERATIONS 18,243 18,153
OTHER INCOME (EXPENSE):
Other income 175 -
Interest expense and amortization of deferred financing fees, net of $178 and $254
of interest income for the April 4, 2003 and March 29, 2002, periods, respectively (17,433) (16,998)
----------- -----------
NET INCOME $ 985 $ 1,155
=========== ===========
See Notes to Condensed Consolidated Financial Statements
4
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(000's omitted)
CONTRIBUTED PARTNERS' AND OTHER
CAPITAL EQUITY (DEFICIT) Accumulated
-------------------------- -------------------------- Other
Comprehensive General Limited General Limited Comprehensive
Income Partner Partner Partner Partner Income Total
------------- -------- ------- -------- -------- ------------- --------
BALANCE, January 3, 2003 $ 96,452 $ - $(91,968) $ 5,859 $ 55 $ 10,398
Distributions - - (30) - - (30)
Net income $ 985 - - 237 748 - 985
Unrealizable appreciation on
marketable securities 4 - - - - 4 4
-------- -------- ---- -------- -------- -------- --------
Comprehensive income $ 989
========
BALANCE, April 4, 2003 $ 96,452 $ - $(91,761) $ 6,607 $ 59 $ 11,357
======== ==== ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
5
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
THREE MONTHS ENDED
APRIL 4, 2003 MARCH 29, 2002
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 985 $ 1,155
Adjustment to reconcile net income to cash provided
by operating activities:
Depreciation, amortization and loan cost amortization 12,954 13,510
Changes in certain assets and liabilities:
Restricted cash (567) -
Receivables (1,419) (1,153)
Inventories (14) (50)
Prepaid expenses and other 2,018 854
Accounts payable (2,310) (1,735)
Accrued expenses 11,949 (4,466)
Other obligations 85 82
------------ ------------
Net cash provided by operating activities 23,681 8,197
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (3,056) (4,711)
Franchise fees and other (1,529) (1,489)
Sale of marketable securities 1,034 815
------------ ------------
Net cash used in investing activities (3,551) (5,385)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt (1,920) (4,560)
Distributions to partners (30) (30)
------------ ------------
Net cash used in financing activities (1,950) (4,590)
------------ ------------
Increase (decrease) in cash and equivalents 18,180 (1,778)
CASH AND EQUIVALENTS, beginning of period 21,774 33,180
------------ ------------
CASH AND EQUIVALENTS, end of period $ 39,954 $ 31,402
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 6,073 $ 21,366
============ ============
See Notes to Condensed Consolidated Financial Statements
6
JOHN Q. HAMMONS HOTELS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ENTITY MATTERS
The accompanying consolidated financial statements include the accounts of John
Q. Hammons Hotels, L.P. and our wholly owned subsidiaries, John Q. Hammons
Hotels Finance Corporation III, a corporation with nominal assets and no
operations, the catering corporations (which are separate corporations for each
hotel location chartered to own the respective food and liquor licenses and
operate the related food and beverage facilities), and certain other
wholly-owned subsidiaries conducting certain hotel operations.
In conjunction with a public offering of common stock in November 1994 by our
general partner, John Q. Hammons Hotels, Inc., we obtained through transfers or
contributions from Mr. John Q. Hammons or enterprises that he controlled, 21
additional operating hotel properties, equity interests in two hotels under
construction, the stock of catering corporations and management contracts
relating to all of Mr. Hammons' hotels, to add to the ten hotel properties we
already owned.
We are directly or indirectly owned and controlled by Mr. Hammons, as were all
enterprises that transferred or contributed net assets to us. Accordingly, the
accompanying financial statements present, as a combination of entities under
common control as if using the pooling method of accounting, 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.
Mr. Hammons and entities directly or indirectly owned or controlled by him are
our only limited partners. Mr. Hammons, through his voting control of our
general partner, continues to be in control of us.
2. GENERAL
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by the accounting principles generally accepted in the United States
for complete financial statements have been omitted. Interim results may not be
indicative of fiscal year performance because of seasonal and other factors.
These interim statements should be read in conjunction with the financial
statements and notes thereto included in our Form 10-K for the fiscal year ended
January 3, 2003, which included financial statements for the fiscal years ended
January 3, 2003, December 28, 2001 and December 29, 2000.
7
The information contained herein reflects all normal and recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results of operations and financial position for the interim periods.
We consider all operating cash accounts and money market investments with an
original maturity of three months or less to be cash equivalents. Restricted
cash consists of certain funds maintained in escrow for property taxes and
certain other obligations. Marketable securities consist of available-for-sale
commercial paper and governmental agency obligations which mature or will be
available for use in operations in 2003. These securities are valued at current
market value. As of April 4, 2003, unrealized holding gains were approximately
$59,000, and are included as a separate component of equity until realized.
3. ALLOCATIONS OF INCOME, LOSSES AND DISTRIBUTIONS
Prior to December 30, 2000, our income, losses and distributions were allocated
between our general partner and our limited partners based on their respective
ownership interests of 28.31% and 71.69%. Effective December 30, 2000, we
redeemed 1,271,581 partnership units held by our general partner for funds we
advanced to the general partner to repurchase its common stock. Effective
January 4, 2003, and December 29, 2001, we sold 7,550 and 11,760 partnership
units, respectively, to our general partner. The number of units exchanged is
equivalent to the number of shares repurchased or sold, as outlined by our
Partnership Agreement. As a result, as of April 4, 2003, and March 29, 2002, Mr.
Hammons' general partnership interest remained constant at approximately 76%,
while our general partner's interest is approximately 24%.
In the event we have taxable income, distributions are to be made to the
partners in an aggregate amount equal to the amount that we would have paid for
income taxes had we been a C Corporation during the applicable period. Aggregate
tax distributions will first be allocated to our general partner, if applicable,
with the remainder allocated to the limited partners. As of April 4, 2003, no
distributions were paid or accrued based on current estimates. Adjustments to
accrued distributions will be recorded in the period in which facts and
circumstances which give rise to the adjustments become known.
We distribute $150,000 each year to our general partner for state franchise
taxes. In the first quarter of 2003, we distributed $30,000 of this amount.
4. 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. We adopted this statement in the first quarter of 2003,
with no material impact on our financial position, results of operations or cash
flows.
8
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. We adopted this statement in the first quarter of
2003, and will reclassify 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,
discontinued operation, or other exit or disposal activity. We adopted this
standard in the first quarter of 2003, 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.
5. LONG-TERM DEBT
In May 2002, we refinanced 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 construction financing on five of our properties, with new $510
million 8-7/8% First Mortgage Notes, interest payable May 15th and November
15th, and principal due May 2012. In conjunction with this
9
refinancing we incurred aggregate early extinguishment of debt charges of
approximately $7.4 million. These charges were recorded in the second quarter of
2002 ($6.8 million) and the third quarter of 2002 ($0.6 million), as these costs
became known.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. Unless the context indicates or requires otherwise, the terms "the
Partnership," "we," "us," "our" and other references to our company refer to
John Q. Hammons Hotels, L.P., and John Q. Hammons Hotels Finance Corporation
III, including all of our subsidiaries.
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.
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) 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, 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. These costs will be amortized over a five-year contract
period, beginning upon the opening of the hotels.
RESULTS OF OPERATIONS. The following discussion and analysis addresses results
of operations for the three month periods ended April 4, 2003 (which we refer to
as the 2003 Quarter) and March 29, 2002 (which we refer to as the 2002 Quarter).
The results of operations for the 2003 Quarter are not indicative of the results
to be expected for the full year.
10
Total revenues for the 2003 Quarter were $110.1 million, an increase of $2.7
million, or 2.5%, compared to the 2002 Quarter. Our room revenues increased as a
result of a partial rebound in domestic travel from the decline experienced in
the same period a year ago.
Rooms revenues increased $1.9 million, or 2.9%, from the 2002 Quarter, and as a
percentage of total revenues increased to 61.2% from 61.0%. The increase was
primarily due to increased domestic travel noted above. Our average room rate
increased to $101.42, a 2.3% increase compared to the 2002 Quarter average room
rate of $99.12, and our occupancy for the 2003 Quarter was 62.8% compared to
62.4% in the 2002 Quarter. In comparison, the average room rate for the hotel
industry, based on information from Smith Travel Research, was $84.72 in the
2003 Quarter, down 0.5% from the 2002 Quarter. Occupancy for the hotel industry
was 54.7% in the 2003 Quarter, down 1.1% from the 2002 Quarter. Our Revenue Per
Available Room, or RevPAR, was $63.69 in the 2003 Quarter, up 3.0% from $61.86
in the 2002 Quarter. RevPAR for the hotel industry in the 2003 Quarter was
$46.35, down 1.6% from the 2002 Quarter.
Food and beverage revenues decreased slightly, by $0.2 million, or 0.7%,
compared to the 2002 Quarter, and decreased as a percentage of total revenues to
26.4% from 27.3%. The decrease was related to decreased breakfast, lunch and
dinner sales in the restaurants, which for the most part were absorbed in the
increase in meeting and banquet functions noted below.
Meeting room rental, related party management fee and other revenues increased
$0.9 million, or 7.1%, from the 2002 Quarter and increased as a percentage of
revenues to 12.4% from 11.8%. The increase was related to increases in meeting
room rental and related set-up fees, banquet service charges and equipment
rental revenues resulting from a slight increase in the number of banquet and
meeting functions over the 2002 Quarter.
Rooms operating expenses increased slightly by $0.2 million, or 1.2%, compared
to the 2002 Quarter, but decreased as a percentage of rooms revenues to 24.2%
from 24.6% in the 2002 Quarter. The dollar increase was attributable to the
increased number of occupied rooms compared to the 2002 Quarter.
Food and beverage operating expenses decreased $0.3 million, or 1.4%, compared
to the 2002 Quarter, and decreased as a percentage of food and beverage revenues
to 75.3% from 75.8%. The decrease was attributable to lower food and beverage
volumes as well as improved food purchasing programs.
Other operating expenses remained stable at $0.7 million, compared to the 2002
Quarter, and decreased as a percentage of meeting room rental, related party
management fee and other revenues, to 5.1% from 5.5%.
General, administrative and sales expenses increased $3.1 million, or 9.4%, over
the 2002 Quarter, and increased as a percentage of total revenues to 32.8% from
30.7%. The increase was primarily attributable to a significant increase in
property insurance and worker's
11
compensation costs, as well as smaller increases in a number of items, including
natural gas charges, incentive compensation, franchise fees, sales salaries,
credit card commissions, guest frequency programs and promotional expenses.
Repairs and maintenance expenses increased slightly by $0.1 million, and
remained stable as a percentage of revenues, at 4.1%.
Depreciation and amortization expenses decreased $0.5 million, or 3.8%, compared
to the 2002 Quarter, and decreased as a percentage of revenues to 11.4% from
12.1%. The decrease is primarily attributable to our cessation of new
development.
Income from operations remained stable at $18.2 million, but decreased as a
percentage of revenues to 16.5% from 16.9% in the 2002 Quarter.
Interest expense and amortization of deferred financing fees, net of interest
income increased by $0.4 million, or 2.4%, from the 2002 Quarter, but remained
stable as a percentage of total revenues at 15.8%.
Net income was $1.0 million in the 2003 Quarter and $1.2 million in the 2002
Quarter, as increased revenues were offset by increases in operating costs as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES.
In general, we have financed our operations through internal cash flow, loans
from financial institutions, the issuance of public and private debt and equity
and the issuance of industrial revenue bonds. Our principal uses of cash are to
pay operating expenses, to service debt and to fund capital expenditures.
At April 4, 2003, we had $40.0 million of cash and equivalents and $11.5 million
of marketable securities, compared to $21.8 million and $12.5 million,
respectively, at the end of 2002. Such amounts are available for our working
capital requirements.
Operating activities provided $23.7 million for the 2003 Quarter compared to
$8.2 million for the 2002 Quarter. This change is primarily attributable to the
effect of the change in interest payment dates for our First Mortgage Notes and
resulting accrual related to the refinancing of our long-term debt discussed
below and a decrease in our prepaid expenses, partially offset by an increase in
accounts receivable and a decrease in accounts payable.
We incurred capital expenditures of $3.1 million and $4.7 million (approximately
$1.3 million of which was related to correcting the moisture related issues
discussed below), respectively, for the 2003 Quarter and the 2002 Quarter.
Capital expenditures typically include capital improvements on existing hotel
properties.
12
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 April 4, 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 April 4, 2003, was $7.6 million, which we recorded in fiscal 2002 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 April 4, 2003, our total debt was $804.4 million compared with $806.3 million
at the end of 2002 and $808.4 million at the end of the 2002 Quarter. The
decrease is attributable to the $4.0 million reduction of existing debt since
the end of the 2002 Quarter. The current portion of long-term debt was $13.8
million, compared with $13.7 million at the end of 2002.
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. We adopted this statement in the first quarter of 2003,
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
13
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. We
adopted this statement in the first quarter of 2003, and will reclassify 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,
discontinued operation, or other exit or disposal activity. We adopted this
standard in the first quarter of 2003, 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 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 used in preparing our consolidated
financial statements. Actual results could differ from our estimates and
assumptions.
14
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.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, regarding, among other
things, our operations outlook, business strategy, prospects and financial
position. These statements contain the words "believe," "anticipate,"
"estimate," "expect," "project," "intend," "may," "will," and similar words.
These forward-looking statements are not guarantees of future performance, and
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:
- General economic conditions, including the duration and severity of
the current economic slowdown and the pace at which the lodging
industry adjusts to the continuing war on terrorism;
- The impact of Severe Acute Respiratory Syndrome (SARS) or any other
serious communicable diseases on travel, particularly if cases
significantly increase or spread beyond the currently affected areas;
- Competition;
15
- Changes in operating costs, particularly energy 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 applicable state and federal regulations.
These risks and uncertainties, as well as the risks described in our Annual
Report on Form 10-K, should be considered in evaluating any forward looking
statements contained in this Form 10-Q. 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.
16
SUPPLEMENTAL FINANCIAL INFORMATION RELATING TO THE COLLATERAL HOTELS
The following table sets forth, as of April 4, 2003, unaudited selected
financial information with respect to the hotels collateralizing our $510
million of 8-7/8% First Mortgage Notes, and about us, excluding Unrestricted
Subsidiaries (as defined in the indenture governing the notes), which we refer
to as the "Restricted Group." Under the heading "Management Operations," we
provide 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 April 4, 2003
Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
--------------------------------------------------
Statement of Operations Data:
Operating Revenues $ 270,298 $ 9,765 (a) $ 280,063
Operating Expenses:
Direct Operating Costs and
Expenses 99,605 - 99,605
General, Administrative, Sales
and Management Expenses (b) 89,127 (144) (c) 88,983
Repairs and Maintenance 11,301 - 11,301
Depreciation and Amortization 30,408 708 31,116
------------------------------------------------
Total Operating Expenses 230,441 564 231,005
------------------------------------------------
Income from Operations $ 39,857 $ 9,201 $ 49,058
================================================
Operating Data:
Occupancy 63.9%
Average Daily Room Rate $ 94.79
RevPAR $ 60.57
(a) Represents management revenues derived from the 17 non-collateral hotels
and the ten 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our
investing and financing activities. Investing activity includes operating cash
accounts and investments, with an original
17
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 April 4, 2003:
Fair
EXPECTED MATURITY DATE There- Value
(in millions) 2003(d) 2004 2005 2006 2007 After Total (e)
Long-Term Debt (a)
$510 Million 1st
Mortgage Notes $ - $ - $ - $ - $ - $ 499 $ 499 $521
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 $ 170 $ 268 $266
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 $ - $ 24 $ 37 $ 37
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.
(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 April 4, 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 2003 balances include actual and projected principal repayments and
weighted average interest rates.
(e) 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
market value, while a one percentage point change in the 8-7/8% used to
calculate the fair value of our other fixed rate debt would change its
fair value by approximately $13 million.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. Our general partner's
chief executive officer and chief financial officer 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 May 9,
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.
18
Changes in internal controls. There were no significant changes in our
internal controls or, to the knowledge of our general partner's chief executive
officer and chief financial officer, 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.
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Statement of Chief Executive Officer and Chief
Financial Officer of general partner
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereto duly authorized.
JOHN Q. HAMMONS HOTELS, L.P.
By: John Q. Hammons Hotels, Inc.
its General Partner
By: /s/ John Q. Hammons
-----------------------------------------
John Q. Hammons, Chairman,
Founder, and Chief Executive Officer
By: /s/ Paul E. Muellner
-----------------------------------------
Paul E. Muellner, Chief Financial Officer
JOHN Q. HAMMONS HOTELS FINANCE
CORPORATION III
By: /s/ John Q. Hammons
-----------------------------------------
John Q. Hammons, Chairman,
Founder, and Chief Executive Officer
By: /s/ Paul E. Muellner
-----------------------------------------
Paul E. Muellner, Chief Financial Officer
Dated: May 16, 2003
20
CERTIFICATIONS
I, John Q. Hammons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John Q. Hammons Hotels,
L.P. and John Q. Hammons Hotels Finance Corporation III;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and all material weaknesses.
Date: May 16, 2003
/s/ John Q. Hammons
----------------------------------------
John Q. Hammons, Chief Executive Officer
21
I, Paul E. Muellner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John Q. Hammons Hotels,
L.P. and John Q. Hammons Hotels Finance Corporation III;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
22
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and all material weaknesses.
Date: May 16, 2003
/s/ Paul E. Muellner
-----------------------------------------
Paul E. Muellner, Chief Financial Officer
23
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
99.1 Certification Statement of Chief Executive Officer and Chief Financial Officer of general
partner
24