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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 October 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 033-7334001
JOHN Q. HAMMONS HOTELS, L.P.
JOHN Q. HAMMONS HOTELS FINANCE CORPORATION III
(Exact name of registrant as specified in its charter)
DELAWARE 43-1523951
MISSOURI 33-1006528
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
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
registrant was 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
OCTOBER 3, 2003 JANUARY 3, 2003
--------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and equivalents $ 49,057 $ 21,774
Restricted cash 1,422 1,103
Marketable securities 14,749 12,481
Receivables:
Trade, less allowance for doubtful accounts of $231 10,923 9,034
Other 923 441
Management fees -related party 294 152
Inventories 1,109 1,151
Prepaid expenses and other 383 5,884
----------- -----------
Total current assets 78,860 52,020
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 62,100 62,035
Buildings and improvements 751,668 751,092
Furniture, fixture and equipment 333,620 327,079
Construction in progress 3,055 98
----------- -----------
1,150,443 1,140,304
Less-accumulated depreciation and amortization (409,748) (371,838)
----------- -----------
740,695 768,466
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net,
including $19,156 and $15,010 of restricted cash
as of October 3, 2003 and January 3, 2003, respectively 41,554 39,486
----------- -----------
TOTAL ASSETS $ 861,109 $ 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
OCTOBER 3, 2003 JANUARY 3, 2003
--------------- ---------------
(UNAUDITED)
LIABILITIES:
Current portion of long-term debt $ 7,576 $ 13,683
Accounts payable 3,915 5,041
Accrued expenses:
Payroll and related benefits 8,265 7,199
Sales and property taxes 15,324 12,500
Insurance 2,092 1,903
Interest 17,362 6,382
Utilities, franchise fees and other 9,474 7,764
--------- ---------
Total current liabilities 64,008 54,472
Long-term debt 781,597 792,659
Other obligations 2,778 2,443
--------- ---------
Total liabilities 848,383 849,574
--------- ---------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Contributed capital 96,458 96,452
Partners' and other deficits, net (83,778) (86,109)
Accumulated other comprehensive income 46 55
--------- ---------
Total equity 12,726 10,398
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 861,109 $ 859,972
========= =========
See Notes to Condensed Consolidated Financial Statements
3
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED
OCT. 3, 2003 SEPT. 27, 2002 OCT. 3, 2003 SEPT. 27, 2002
------------ -------------- ------------ --------------
REVENUES:
Rooms $ 70,664 $ 68,938 $ 207,026 $ 205,979
Food and beverage 26,096 24,950 82,625 84,338
Meeting room, related party
management fee and other 12,091 12,021 37,994 38,182
--------- --------- --------- ---------
Total revenues 108,851 105,909 327,645 328,499
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 17,369 17,731 50,695 51,499
Food and beverage 20,159 20,697 64,047 66,071
Other 706 840 2,099 2,445
General, administrative and sales expenses 34,818 34,963 104,640 102,742
Repairs and maintenance 4,595 4,555 13,633 13,512
Depreciation and amortization 12,818 13,203 37,885 39,291
--------- --------- --------- ---------
Total operating expenses 90,465 91,989 272,999 275,560
--------- --------- --------- ---------
INCOME FROM OPERATIONS 18,386 13,920 54,646 52,939
OTHER INCOME (EXPENSE):
Other income -- -- 175 --
Interest income 143 308 478 756
Interest expense and amortization
of deferred financing fees (17,410) (17,931) (52,617) (53,415)
Extinguishment of debt costs (318) (591) (318) (7,383)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 801 $ (4,294) $ 2,364 $ (7,103)
========= ========= ========= =========
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 (Loss) Partner Partner Partner Partner Income (Loss) Total
------------- -------- -------- --------- -------- ------------- --------
BALANCE, January 3, 2003 $ 96,452 $ -- $(91,968) $ 5,859 $ 55 $ 10,398
Distributions -- -- (120) -- -- (120)
Issuance of general partner's
treasury stock 6 -- 87 -- -- 93
Net income $ 2,364 -- -- 569 1,795 -- 2,364
Unrealizable depreciation on
marketable securities (9) -- -- -- -- (9) (9)
--------
Comprehensive income $ 2,355
========
-------- -------- --------- -------- -------- --------
BALANCE, October 3, 2003 $ 96,458 $ -- $(91,432) $ 7,654 $ 46 $ 12,726
======== ======== ========= ======== ======== ========
(unaudited)
See Notes to Condensed Consolidated Financial Statements
5
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(000's omitted)
NINE MONTHS ENDED
OCT. 3, 2003 SEPT. 27, 2002
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,364 $ (7,103)
Adjustment to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, amortization and loan cost amortization 39,285 40,760
Extinguishment of debt costs 318 7,383
Non-cash director compensation 50 50
Changes in certain assets and liabilities:
Restricted cash (319) (421)
Receivables (2,513) (285)
Inventories 42 120
Prepaid expenses and other 5,501 1,621
Accounts payable (1,126) (2,069)
Accrued expenses 16,769 11,561
Other obligations 335 491
--------- ---------
Net cash provided by operating activities 60,706 52,108
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (9,694) (19,786)
Franchise fees, restricted cash and other (4,154) (2,839)
Purchase of marketable securities (2,277) (5,075)
--------- ---------
Net cash used in investing activities (16,125) (27,700)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of general partner's treasury stock 43 --
Proceeds from borrowings -- 510,000
Repayments of debt (17,169) (510,399)
Debt offering costs -- (13,730)
Debt redemption costs (52) (4,061)
Distributions to partners (120) (120)
--------- ---------
Net cash used in financing activities (17,298) (18,310)
--------- ---------
Increase in cash and equivalents 27,283 6,098
CASH AND EQUIVALENTS, beginning of period 21,774 32,298
--------- ---------
CASH AND EQUIVALENTS, end of period $ 49,057 $ 38,396
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 40,318 $ 47,652
========= =========
UNREALIZED DEPRECIATION OF MARKETABLE SECURITIES $ (9) $ --
========= =========
See Notes to Condensed Consolidated Financial Statements
6
JOHN Q. HAMMONS HOTELS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ENTITY MATTERS
The accompanying consolidated financial statements include the accounts of John
Q. Hammons Hotels, L.P. and its wholly owned subsidiaries, consisting of 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, 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.
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 October 3, 2003, unrealized holding gains were approximately
$46,000, and are included as a separate component of equity until realized.
7
3. ALLOCATIONS OF INCOME, LOSSES AND DISTRIBUTIONS
Prior to December 30, 2000, 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 our 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 October 3, 2003, and September 27,
2002, Mr. Hammons' limited partnership interest remained constant at
approximately 76%, while our general partner's interest was approximately 24%.
In the event we have taxable income, distributions are to be made to our
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 our limited partners. As of October 3, 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. Through the first nine months of 2003, we distributed $120,000 of this
amount.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement No. 143, "Accounting for Asset 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 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 reclassified our 2002 extraordinary item to extinguishment of debt
costs classified in other income (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.
8
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. A public entity with a variable interest in a variable interest entity
created before February 1, 2003 shall apply all the provisions of this
interpretation to that entity no later than the first interim or annual
reporting period ending after December 15, 2003. The related disclosure
requirements were effective immediately. 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.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement was effective for financial instruments entered into or
modified after May 31, 2003, and was effective on July 1, 2003, for financial
instruments held prior to issuance of this statement. We adopted this statement
in the third quarter of 2003, with no material impact on our financial position,
results of operation or cash flows.
5. LONG-TERM DEBT
Since the beginning of fiscal 2003, we retired a $6.3 million note (Springdale
Hampton Inn) at 9-1/4% set to mature in the fourth quarter of 2003, as well as a
$5.2 million note (Denver Airport Holiday Inn) at 7-1/8%, due in the third
quarter of 2015, bringing the total debt reduction for the first nine months of
2003 to slightly over $17 million. We recorded $0.3 million in extinguishment of
debt costs related to these retirements.
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 refinancing we
incurred aggregate early extinguishment of debt charges of approximately $7.4
million. These charges were recorded in the second quarter of 2002 ($6.792
million) and the third quarter of 2002 ($0.591 million), as these costs became
known.
6. ASSETS CARRYING VALUE
We review the carrying value of our long-lived assets when events and
circumstances occur which indicate that the carrying value of an asset may not
be recoverable. Given the current outlook with respect to our World Golf Village
property, we commissioned an appraisal of the property to be completed prior to
yearend. In the event the carrying value of the property exceeds the fair market
value less the costs to sell, we will record a write down.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. Unless the context indicates or requires otherwise, the terms "we,"
"us," "our" and other references to our company refer to our general partner,
John Q. Hammons Hotels, Inc., and to John Q. Hammons Hotels, L.P. and John Q.
Hammons Hotels Finance Corporation III, including all of our subsidiaries.
9
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.
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 in-house
development services, which include 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 are amortized over a five-year contract period, beginning upon the opening
of the hotels.
RESULTS OF OPERATIONS - THREE-MONTH PERIOD
The following discussion and analysis addresses results of operations for the
three-month periods ended October 3, 2003 (the "2003 Quarter") and September 27,
2002 (the "2002 Quarter"). The results of operations for the three-month and
nine-month periods ended October 3, 2003 are not indicative of the results to be
expected for the full year.
Total revenues for the 2003 Quarter were $108.9 million, an increase of $3.0
million, or 2.8%, compared to the 2002 Quarter, primarily as a result of
slightly improved general economic conditions, reflected in higher revenues in
all three areas of our business.
Rooms revenues increased $1.8 million, or 2.6%, from the 2002 Quarter, but
decreased as a percentage of total revenues, to 64.9% from 65.1%. The increase
was primarily due to increases in the discount (AAA, AARP, travel agencies,
etc.) and association market segments of our business. Our average room rate
increased 2.4%, to $99.40 compared to the 2002 Quarter average room rate of
$97.09, as average room rates for all market segments increased from the 2002
Quarter. In comparison, the average room rate for the hotel industry was $83.44
in the 2003 Quarter, up 0.4% from the 2002 Quarter, based on information from
Smith Travel Research. Our occupancy for the 2003 Quarter increased to 67.2%, or
0.1 percentage point compared to the 2002 Quarter. Occupancy for the hotel
industry was 65.6%, up 2.0% from the 2002 Quarter. Our Revenue Per Available
Room (RevPAR) was $66.78 in the 2003 Quarter, up 2.5% from $65.12 in the 2002
Quarter. RevPAR for the hotel industry was $54.71, up 2.3% from the 2002
Quarter.
Food and beverage revenues increased $1.1 million, or 4.4%, compared to the 2002
Quarter, and increased as a percentage of total revenues, to 24.0% from 23.6% in
the 2002 Quarter. The increase was related to the increase in travel in the
association market segments of our business described above.
Meeting room rental, related party management fee and other revenues increased
$0.1 million, or 0.8%, from the 2002 Quarter, but decreased slightly as a
percentage of revenues, to 11.1% from 11.3%.
10
Rooms operating expenses decreased $0.3 million, or 1.7%, compared to the 2002
Quarter, and decreased as a percentage of rooms revenues to 24.6% from 25.7%.
The decrease was primarily attributable to favorable workers' compensation loss
experience, compared to the 2002 Quarter.
Food and beverage operating expenses decreased $0.5 million, or 2.4%, compared
to the 2002 Quarter, and decreased as a percentage of food and beverage
revenues, to 77.4% from 82.8%. The decrease was primarily attributable to the
favorable workers' compensation loss experience described above, as well as
improved management of labor expenses.
Other operating expenses decreased slightly to $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 5.8% from 6.7%.
General, administrative and sales expenses decreased $0.2 million, or 0.6%, from
the 2002 Quarter, and decreased as a percentage of total revenues to 32.0% from
33.1%. The decrease was primarily attributable to decreases in franchise fees
(related to the termination charges incurred in changing the brand name for one
of our hotels in the 2002 Quarter) and property insurance costs, partially
offset by increases in credit card commissions, costs associated with franchise
frequent traveler programs and utility costs.
Repairs and maintenance expenses remained stable at $4.6 million compared to the
2002 Quarter, and decreased slightly as a percentage of revenues, to 4.2% from
4.3% in the 2002 Quarter.
Depreciation and amortization expenses decreased by $0.4 million, or 3.0%,
compared to the 2002 Quarter, and decreased as a percentage of revenues to 11.8%
from 12.5%. The dollar decrease related to our cessation of new hotel
development.
Income from operations increased by $4.5 million, or 32.4%, compared to the 2002
Quarter, and increased as a percentage of revenues to 16.9% from 13.1%. The
increase is attributable to, among other factors, increased revenues, improved
cost controls, favorable workers' compensation loss experience and reduced
property insurance costs.
Net income (loss) was $0.8 million of income in the 2003 Quarter, compared to a
loss of $4.3 million in the 2002 Quarter. The variation related to increased
revenues and improved cost controls, as discussed above.
RESULTS OF OPERATIONS - NINE-MONTH PERIOD
The following discussion addresses results of operations for the nine-month
periods ended October 3, 2003 (the "2003 Nine Months"), and September 27, 2002
(the "2002 Nine Months").
Total revenues decreased slightly to $327.6 million in the 2003 Nine Months from
$328.5 million in the 2002 Nine Months, a decrease of $0.9 million or 0.3%. The
decrease is attributable to ongoing weaknesses in the association and corporate
group travel market segments of our business during the first six months of
2003, partially offset by a slight increase in these market segments during the
2003 Quarter.
Rooms revenues increased to $207.0 million in the 2003 Nine Months from $206.0
million in the 2002 Nine Months, an increase of $1.0 million, or 0.5%, reflected
primarily in the discount market segment of our business. Rooms revenues as a
percentage of total revenues increased, to 63.2%, compared to 62.7% in the 2002
Nine Months. Our average room rate increased to $99.98 in the 2003 Nine Months
from $98.43 in the 2002 Nine Months, an increase of $1.55, or 1.6%. Occupancy
decreased to 65.2% in the 2003 Nine Months from 65.9% in the 2002 Nine Months, a
decrease of 0.7 percentage point. Occupancy for the
11
hotel industry was 60.7%, down 0.3% from the 2002 Nine Months. Our revenue per
available room (RevPAR) was $65.21 in the 2003 Nine Months, up 0.6% from the
2002 Nine Months. RevPAR for the hotel industry was $50.67, down 0.8% from the
2002 Nine Months.
Food and beverage revenues decreased to $82.6 million in the 2003 Nine Months
from $84.3 million in the 2002 Nine Months, a decrease of $1.7 million, or 2.0%,
and decreased as a percentage of total revenues to 25.2% from 25.7% in the 2002
Nine Months. The decrease related to the decreased association and corporate
group travel in the first six months of 2003, partially offset by a slight
increase in these market segments during the 2003 Quarter.
Meeting room rental, related party management fee and other revenues decreased
to $38.0 million in the 2003 Nine Months from $38.2 million in the 2002 Nine
Months, a decrease of $0.2 million, or 0.5%, and remained stable as a percentage
of total revenues, at 11.6%. The dollar decrease was the result of decreased
association and corporate group travel in the first six months of 2003,
partially offset by a slight increase in these market segments during the 2003
Quarter.
Rooms operating expenses decreased to $50.7 million in the 2003 Nine Months from
$51.5 million in the 2002 Nine Months, a decrease of $0.8 million, or 1.6%, and
decreased as a percentage of rooms revenue, to 24.5% from 25.0% in the 2002 Nine
Months. The decrease was primarily attributable to reduced labor costs and
favorable workers' compensation loss experience compared to the 2002 Nine
Months.
Food and beverage operating expenses decreased to $64.0 million in the 2003 Nine
Months from $66.1 million in the 2002 Nine Months, a decrease of $2.1 million,
or 3.2% as the result of decreased food and beverage revenues. These expenses
also decreased as a percentage of food and beverages revenues in the 2003 Nine
Months to 77.5%, from 78.4% in the 2002 Nine Months.
Other operating expenses decreased to $2.1 million in the 2003 Nine Months, from
$2.4 million in the 2002 Nine Months, and decreased as a percentage of meeting
room rental, related party management fee and other income, to 5.5% in the 2003
Nine Months from 6.3% in the 2002 Nine Months.
General, administrative and sales expenses increased to $104.6 million in the
2003 Nine Months from $102.7 million in the 2002 Nine Months, an increase of
$1.9 million, or 1.9%, and increased as a percentage of total revenues to 31.9%
from 31.3% in the 2002 Nine Months. The increase was primarily attributable to
increases in costs associated with franchise frequent traveler programs,
utilities and credit card commissions, partially offset by decreases in
franchise fees, property taxes and property insurance costs.
Repairs and maintenance expenses increased slightly to $13.6 million compared to
$13.5 million in the 2002 Nine Months, and increased slightly as a percentage of
revenues to 4.2% from 4.1% in the 2002 Nine Months.
Depreciation and amortization expenses decreased to $37.9 million in the 2003
Nine Months from $39.3 million in the 2002 Nine Months, a decrease of $1.4
million, or 3.6%, and decreased as a percentage of total revenues to 11.6% from
12.0% in the 2002 Nine Months. The decrease was related to cessation of new
hotel development.
Income from operations was $54.6 million in the 2003 Nine Months compared to
$52.9 million in the 2002 Nine Months, an increase of $1.7 million, or 3.2%. As
a percentage of revenue, income from operations increased to 16.7% in the 2003
Nine Months from 16.1% in the 2002 Nine Months, as the result of reduced costs
in several categories, discussed above.
12
Net income (loss) was $2.4 million of income in the 2003 Nine Months, compared
to a $7.1 million loss in the 2002 Nine Months. The variation related to the
effect of expenses for the early extinguishment of debt in the 2002 Nine Months
(the refinancing of our outstanding 8-7/8% and 9-3/4% First Mortgage Notes for
new 8-7/8% First Mortgage Notes due 2012), in addition to the items 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, to fund capital expenditures and to
make distributions to fund some of the taxes allocable to partners.
At October 3, 2003, we had $49.1 million of cash and equivalents and $14.7
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 and capital expenditures.
Cash from operating activities increased to $60.7 million for the 2003 Nine
Months from $52.1 million for the 2002 Nine Months, primarily attributable to
the increase in net income and decrease in debt extinguishment costs and other
favorable changes in certain assets and liabilities.
We incurred capital expenditures of $9.7 million and $19.8 million,
respectively, for the 2003 Nine Months and the 2002 Nine Months. Approximately
$4.2 million of the expenditures in the 2002 Nine Months was related to
correcting the moisture related issues discussed below. 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 October 3, 2003, we had
incurred approximately $11.8 million of an estimated $12.3 million of costs to
correct the underlying moisture problem. During the 2003 Quarter, summary
judgment was granted to our insurance carrier in one action, which is currently
on appeal. Due to the uncertain outcome of this appeal, the parties have agreed
to a settlement conference in November 2003, to attempt to dispose of all issues
against the insurance carrier. Summary judgment was also granted to one of our
window manufacturers and we are in the process of appealing that decision. We
plan to continue to vigorously pursue collection of these costs, although there
can be no assurance that we will be successful. Our total cumulative
depreciation charge through October 3, 2003, was $7.6 million, which we recorded
in fiscal 2001 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.
At October 3, 2003, our total debt was $789.2 million compared with $806.3
million at the end of 2002. The decrease is attributable to the $17.1 million
reduction of existing debt since the end of 2002 (including the prepayment of a
9-1/4% note for $6.3 million due in the fourth quarter of 2003 and prepayment of
a 7-1/8% note for $5.2 million due in third quarter of 2015). The current
portion of long-term debt was $7.6 million, compared with $13.7 million at the
end of 2002. For the 2003 Nine Months, we incurred $0.3 million in early
extinguishment of debt charges.
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
13
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement No. 143, "Accounting for Asset 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 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 reclassified our 2002 extraordinary item to extinguishment of debt
costs classified in other income (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. A public entity with a variable interest in a variable interest entity
created before February 1, 2003 shall apply all the provisions of this
interpretation to that entity no later than the first interim or annual
reporting period ending after December 15, 2003. The related disclosure
requirements were effective immediately. 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.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement was effective for financial instruments entered into or
modified after May 31, 2003, and was effective on July 1, 2003, for financial
instruments held prior to issuance of this statement. We adopted this statement
in the third quarter of 2003, with no material impact on our financial position,
results of operation or cash flows.
14
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.
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. Given the current outlook with
respect to our World Golf Village property, we commissioned an appraisal of the
property to be completed prior to year-end. In the event the carrying value of
the property exceeds the fair market value less the costs to sell, we will
record a write down.
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:
15
o 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;
o The impact of any serious communicable diseases on travel,
including any increase or further spread in Severe Acute
Respiratory Syndrome (SARS);
o Competition;
o Changes in operating costs, particularly energy and labor
costs;
o Unexpected events, such as terrorist attacks or outbreaks of
war;
o Risks of hotel operations, such as hotel room supply exceeding
demand, increased energy and other travel costs and general
industry downturns;
o Seasonality of the hotel business;
o Cyclical over-building in the hotel and leisure industry;
o Requirements of franchise agreements, including the right of
some franchisors to immediately terminate their respective
agreements if we breach certain provisions; and
o Costs of complying with applicable state and federal
regulations.
These risks and uncertainties, as well as the risk factors discussed in our 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.
SUPPLEMENTAL FINANCIAL INFORMATION RELATING TO THE COLLATERAL HOTELS
The following table sets forth, as October 3, 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 our 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 OCTOBER 3, 2003
2002 Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
---------- ---------- ----------
Statement of operations data:
Operating revenues $265,715 $ 10,047(a) $275,762
Operating expenses:
Direct operating costs and
Expenses 97,316 -- 97,316
General, administrative, sales
and management expenses (b) 87,443 (233)(c) 87,210
Repairs and maintenance 11,224 -- 11,224
Depreciation and amortization 30,427 574 31,001
-------- -------- --------
Total operating expenses 226,410 341 226,751
-------- -------- --------
Income from operations $ 39,305 $ 9,706 $ 49.011
======== ======== ========
Operating data:
Occupancy 62.9%
Average daily doom rate $ 95.15
RevPar $ 59.85
16
(a) Represents management revenues derived from the 17 non-collateral
hotels and the eleven 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.
TRAILING 12 MONTHS ENDED SEPTEMBER 27, 2002
2002 Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
----------- ---------- ----------
Statement of operations data:
Operating revenues $264,581 $ 9,448(a) $274,029
Operating expenses:
Direct operating costs and
Expenses 97,690 -- 97,690
General, administrative, sales
and management expenses (b) 85,670 (1,918)(c) 83,752
Repairs and maintenance 10,871 -- 10,871
Depreciation and amortization 34,869 892 35,761
-------- -------- --------
Total operating expenses 229,100 (1,026) 228,074
-------- -------- --------
Income from operations $ 35,481 $ 10,474 $ 45,955
======== ======== ========
Operating data:
Occupancy 64.3%
Average daily doom rate $ 93.75
RevPar $ 60.28
(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 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 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 October 3, 2003:
17
EXPECTED MATURITY DATE
(in millions)
Fair
There- Value
2003(d) 2004 2005 2006 2007 After Total (e)
Long-Term Debt(a)
$510 Million 1st Mortgage Notes $ -- $ -- $ -- $ -- $ -- $ 499 $ 499 $551
Average interest rate (b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%
Other fixed-rate debt obligations $ 6 $ 7 $ 8 $ 28 $ 41 $ 163 $ 253 $252
Average interest rate (b) 8.3% 8.3% 8.3% 7.8% 8.4% 8.7% 8.5%
Other variable-rate debt obligations $ 1 $ 1 $ 1 $ 10 $ 1 $ 23 $ 37 $ 37
Average interest rate (c) 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%
(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 October 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 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 par
on the then-current premium or discount quote received for the
$510 million First Mortgage Notes would have an effect of
approximately $5 million. A one percentage point change in the
8-7/8% rate used to calculate the fair value of other fixed
rate debt would change its estimated fair value by
approximately $13 million.
ITEM 4. 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 October
3, 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 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.
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
See Exhibit Index
(b) Reports on Form 8-K
Form 8-K to furnish Press Release announcing October 3, 2003 results, filed
November 12, 2003.
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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 (Principal 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 (Principal Financial Officer)
Dated: November 14, 2003
20
EXHIBIT INDEX
EXHIBIT NO. TITLE
31.1 Rule 13a-14(a)/15d-14(a) Certification of general partner's Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of general partner's Chief
Financial Officer
32 Section 1350 Certification of general partner's Chief Executive
Officer and Chief Financial Officer
21