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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 July 2, 2004
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
JULY 2, 2004 JANUARY 2, 2004
------------ ---------------
CURRENT ASSETS: (unaudited)
Cash and equivalents $ 42,954 $ 23,790
Restricted cash 1,125 1,268
Marketable securities 14,989 15,711
Receivables:
Trade, less allowance for doubtful accounts of $231 9,744 7,214
Other 187 251
Management fees -related party 347 223
Inventories 1,116 1,067
Prepaid expenses and other 2,143 4,498
----------- -----------
Total current assets 72,605 54,022
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 62,852 62,779
Buildings and improvements 738,376 742,807
Furniture, fixture and equipment 337,333 338,833
Construction in progress 4,659 75
----------- -----------
1,143,220 1,144,494
Less-accumulated depreciation and amortization (437,282) (418,509)
----------- -----------
705,938 725,985
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net, including $22,738 and
$20,453 of restricted cash as of July 2, 2004 January 2, 2004, respectively 43,137 42,176
----------- -----------
TOTAL ASSETS $ 821,680 $ 822,183
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
LIABILITIES AND EQUITY (DEFICIT)
JULY 2, 2004 JANUARY 2, 2004
------------ ---------------
LIABILITIES: (unaudited)
Current portion of long-term debt $ 7,492 $ 7,423
Accounts payable 3,229 5,028
Accrued expenses:
Payroll and related benefits 7,243 7,776
Sales and property taxes 14,250 12,077
Insurance 2,960 2,646
Interest 6,117 6,218
Utilities, franchise fees and other 8,190 7,298
--------- ---------
Total current liabilities 49,481 48,466
Long-term debt 769,614 773,649
Other obligations 2,960 2,529
--------- ---------
Total liabilities 822,055 824,644
--------- ---------
COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT):
Contributed capital 96,534 96,458
Partners' and other deficits, net (96,917) (98,942)
Accumulated other comprehensive income 8 23
--------- ---------
Total equity (deficit) (375) (2,461)
--------- ---------
TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 821,680 $ 822,183
========= =========
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 SIX MONTHS ENDED
JULY 2, 2004 JULY 4, 2003 JULY 2, 2004 JULY 4, 2003
------------ ------------ ------------- ------------
REVENUES:
Rooms $ 72,157 $ 68,959 $ 142,345 $ 136,362
Food and beverage 29,528 27,390 59,602 56,529
Meeting room rental, related party management fee and other 13,465 12,315 27,579 25,903
--------- --------- --------- ---------
Total revenues 115,150 108,664 229,526 218,794
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 17,673 17,046 34,957 33,326
Food and beverage 23,134 21,982 45,270 43,888
Other 578 701 1,194 1,393
General, administrative, sales and management service expenses 37,749 33,747 74,106 69,822
Repairs and maintenance 4,968 4,585 9,674 9,038
Asset impairment 4,619 -- 4,619 --
Depreciation and amortization 12,079 12,586 24,010 25,067
--------- --------- --------- ---------
Total operating expenses 100,800 90,647 193,830 182,534
--------- --------- --------- ---------
INCOME FROM OPERATIONS 14,350 18,017 35,696 36,260
OTHER INCOME (EXPENSE):
Other income -- -- -- 175
Interest income 159 156 277 335
Interest expense and amortization of deferred financing fees (17,050) (17,595) (34,135) (35,207)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (2,541) $ 578 $ 1,838 $ 1,563
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
4
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(000's omitted)
CONTRIBUTED PARTNERS' AND OTHER
CAPITAL EQUITY (DEFICIT) Accumulated
--------------------- ----------------------- Other
Comprehensive General Limited General Limited Comprehensive
Income (Loss) Partner Partners Partner Partners Income (Loss) Total
------------- ------- -------- --------- -------- ------------- ---------
BALANCE, January 2, 2004 $96,458 $ - $(98,942) $ - $ 23 $ (2,461)
Distributions - - (111) - - (111)
Issuance of general partner's
Treasury Stock 76 - 298 - - 374
Net income $ 1,838 - - 1,838 - - 1,838
Unrealizable depreciation on
marketable securities (15) - - - - (15) (15)
-------------
Comprehensive income $ 1,823
============= ------- ------- -------- ------- ------------ ---------
BALANCE, July 2, 2004 $96,534 $ - $(96,917) $ - $ 8 $ (375)
(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)
SIX MONTHS ENDED
JULY 2, 2004 JULY 4, 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,838 $ 1,563
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation, amortization and loan cost amortization 24,893 25,998
Asset impairment 4,619 --
Non-cash director compensation 50 50
Changes in certain assets and liabilities
Restricted cash 143 (1,399)
Receivables (2,590) 1,506
Inventories (49) 4
Prepaid expenses and other 2,355 3,221
Accounts payable (1,799) (2,032)
Accrued expenses 2,745 1,871
Other obligations 431 224
-------- --------
Net cash provided by operating activities 32,636 31,006
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (8,229) (6,146)
Franchise fees, long-term restricted cash and other (2,197) (2,844)
Sale of marketable securities 707 322
-------- --------
Net cash used in investing activities (9,719) (8,668)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of general partner's Treasury Stock 324 --
Repayments of debt (3,966) (10,137)
Distributions to partners (111) (90)
-------- --------
Net cash used in financing activities (3,753) (10,227)
-------- --------
Increase in cash and equivalents 19,164 12,111
CASH AND EQUIVALENTS, beginning of period 23,790 21,774
-------- --------
CASH AND EQUIVALENTS, end of period $ 42,954 $ 33,885
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 33,395 $ 34,403
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
UNREALIZED APPRECIATION (DEPRECIATION) OF MARKETABLE SECURITIES $ (15) $ 12
======== ========
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 control 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 2, 2004, which included financial statements for the fiscal years ended
January 2, 2004, January 3, 2003 and December 28, 2001.
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 is escrowed for insurance, taxes, capital expenditures and certain other
obligations, in accordance with specific loan covenants and franchise
agreements. Marketable securities consist of available-for-sale commercial paper
and governmental
7
agency obligations which mature or will be available for use in operations in
2004. These securities are valued at current market value. As of July 2, 2004,
unrealized holding gains were approximately $8,000, and are included as a
separate component of equity (deficit) until realized.
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%. As of July 2, 2004, we have redeemed
approximately 1.25 million partnership units, net of shares issued. The number
of net partnership units redeemed is equivalent to the net number of shares
redeemed by John Q. Hammons Hotels, Inc., as outlined by our Partnership
Agreement. As a result, in 2004 and 2003, Mr. Hammons' limited partnership
interest was 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 July 2, 2004, 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 amounts to our general partner for state franchise taxes. For
2004, state franchise taxes are estimated to be $165,000. Through the first six
months of 2004, we distributed $66,000 of this amount, plus $45,025 for 2003
franchise taxes.
4. NEW ACCOUNTING PRONOUNCEMENTS
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. In December
2003, the FASB issued FIN 46R, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51 (as revised December 2003)." The primary objectives of
FIN 46R are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights (Variable
Interest Entities) and how to determine when and which business enterprise
should consolidate the Variable Interest Entity (the Primary Beneficiary). We do
not have any variable interest entities and therefore, FIN 46R did not impact
our financial position, results of operations or cash flows.
5. ASSET 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. In 2004, we completed a comprehensive review of our investment
strategy and of our existing hotel portfolio to identify those properties which
we believe either are non-core or no longer complement our business. As a result
of our decision to undertake the sale of these non-strategic hotels, we recorded
impairment charges of $4.6 million during the 2004 Quarter. There can be no
assurance, however, that we will be able to complete dispositions on
commercially reasonable terms or at all. As we identify other non-strategic
hotels in the future, we may recognize additional impairment charges.
8
6. SUBSEQUENT EVENTS
On July 2, 2004, our general partner's board of directors approved Letters of
Intent to enter into a contract for the sale of the Holiday Inn, Tucson, Arizona
and the Holiday Inn Denver Northglenn, Northglenn, Colorado. The contracts for
sale have not been executed nor have the buyers completed their due diligence.
On July 23, 2004, we executed a contract for the sale of the Holiday Inn Bay
Bridge, Emeryville, California. The buyer is currently in process of completing
due diligence.
We have entered into a contract to sell our Holiday Inn hotel property located
in Bakersfield, California. As of July 22, 2004, the buyer's due diligence had
been completed and we have received a substantial non-refundable deposit. We
anticipate this sale to be completed prior to the end of August 2004.
We recorded an impairment charge during the 2004 Quarter to reflect the
difference between the net book value, less selling costs, and the estimated
selling price, for each of the Holiday Inn Denver Northglenn, Northglenn,
Colorado and our Holiday Inn in Bakersfield, California.
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.
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 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 cost of any single hotel for the opportunity to
manage the hotel upon opening and the right of first refusal 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.
Although we are not developing new hotels, Mr. Hammons has personally completed
several projects, including new hotels in Tulsa and Oklahoma City, Oklahoma and
Rogers and Hot Springs, Arkansas,
9
all of which we currently manage under the management agreement described above.
Mr. Hammons also has numerous other projects in various stages of development,
which we intend to manage upon completion, including properties in St. Charles
and Springfield, Missouri; Junction City, Kansas; Frisco, Texas; Albuquerque,
New Mexico; North Charleston, South Carolina; and Hampton, Virginia.
In 2004, we completed a comprehensive review of our investment strategy and of
our existing hotel portfolio to identify those properties which we believe
either are non-core or no longer complement our business. As a result of our
decision to undertake the sale of these non-strategic hotels, we recorded
impairment charges of $4.6 million during the 2004 Quarter. There can be no
assurance, however, that we will be able to complete dispositions on
commercially reasonable terms or at all. As we identify other non-strategic
hotels in the future, we may recognize additional impairment charges.
RESULTS OF OPERATIONS - THREE-MONTH PERIOD
The following discussion and analysis addresses results of operations for the
three-month periods ended July 2, 2004 (which we refer to as the 2004 Quarter),
and July 4, 2003 (which we refer to as the 2003 Quarter). The results of
operations for the three-month and six-month periods ended July 2, 2004 are not
indicative of the results to be expected for the full year.
Total revenues for the 2004 Quarter were $115.2 million, an increase of $6.5
million, or 6.0%, compared to the 2003 Quarter, reflecting an improving general
economy. Specifically, we experienced increases in the association, corporate
group and government market segments of our business and the related food and
beverage and meeting room rental revenues generated by the increased business.
Rooms revenues increased $3.2 million, or 4.6%, from the 2003 Quarter, but
decreased as a percentage of total revenues to 62.7% from 63.5%. The dollar
increase was primarily due to the increase in association, corporate group and
government market segments of our business noted above. Our average room rate
increased to $101.35, a 2.1% increase compared to the 2003 Quarter average room
rate of $99.21, and our occupancy for the 2004 Quarter increased 1.6 percentage
points to 67.3% from 65.7% in the 2003 Quarter. In comparison, the average room
rate for the hotel industry, based on information from Smith Travel Research,
was $86.17 in the 2004 Quarter, up 4.3% from the 2003 Quarter. Occupancy for the
hotel industry was 64.2% in the 2004 Quarter, up 4.2% from the 2003 Quarter. Our
Revenue Per Available Room, or RevPAR, was $68.19 in the 2004 Quarter, up 4.7%
from $65.16 in the 2003 Quarter. RevPAR for the hotel industry in the 2004
Quarter was $55.30, up 8.6% from the 2003 Quarter.
Food and beverage revenues increased by $2.1 million, or 7.7%, compared to the
2003 Quarter, and increased as a percentage of total revenues to 25.6% from
25.2%. The increase was due to increased revenues related to increased
association, corporate group and government market segments of our business
discussed above.
Meeting room rental, related party management fee and other revenues increased
$1.2 million, or 9.8%, from the 2003 Quarter and increased as a percentage of
revenues to 11.7% from 11.3% in the 2003 Quarter. The increase was primarily
related to guest room internet revenues and related party management fees,
partially offset by decreased telephone revenues.
Rooms operating expenses increased by $0.7 million, or 4.1%, compared to the
2003 Quarter, but decreased slightly as a percentage of rooms revenues to 24.5%
from 24.6% in the 2003 Quarter. The dollar increase was attributable to costs
associated with the increased number of occupied rooms,
10
partially offset by favorable workers compensation loss experience for employees
in this classification, compared to the 2003 Quarter.
Food and beverage operating expenses increased $1.1 million, or 5.0%, compared
to the 2003 Quarter, but decreased as a percentage of food and beverage revenues
to 78.3% from 80.3%. The dollar increase was attributable to higher food and
beverage sales volumes, and the percentage decrease related to certain food and
labor costs that do not vary as food and beverage sales volumes increase.
Other operating expenses decreased slightly to $0.6 million, compared to the
2003 Quarter, and decreased as a percentage of meeting room rental, related
party management fee and other revenues, to 4.4% from 5.7%.
General, administrative, sales and management service expenses increased $4.0
million, or 11.9%, over the 2003 Quarter, and increased as a percentage of total
revenues to 32.7% from 31.0%. The increase was primarily attributable to
unfavorable workers compensation loss experience for employees in this
classification and increases in costs associated with utilities,
franchise-sponsored sales and reservations offices, franchise fees, franchise
frequent traveler programs, and sales and marketing compensation costs compared
to the 2003 Quarter.
Repairs and maintenance expenses increased to $5.0 million from $4.6 million, or
8.7%, and increased slightly as a percentage of revenues to 4.3% from 4.2%.
Asset impairment of $4.6 million in the 2004 Quarter is attributable to our
decision to sell certain non-strategic hotels and reflects the difference
between the net book value, less selling costs, and the current estimated fair
market value of these hotels.
Depreciation and amortization expenses decreased $0.5 million, or 4.0%, compared
to the 2003 Quarter, and decreased as a percentage of revenues to 10.5% from
11.6%. The decrease is primarily attributable to our cessation of new
development in 2000.
Income from operations decreased by $3.6 million, or 20.0%, and decreased as a
percentage of revenues to 12.5% from 16.6% in the 2003 Quarter, primarily as the
result of the asset impairment charge, discussed above.
Interest expense and amortization of deferred financing fees, net of interest
income decreased by $0.5 million, or 2.8%, and decreased as a percentage of
total revenues to 14.7% from 16.0% in the 2003 Quarter. The decrease was
primarily attributable to the reduction in long-term debt compared to the 2003
Quarter.
Net income (loss) was a $2.5 million loss in the 2004 Quarter, compared to
income of $0.6 million in the 2003 Quarter.
RESULTS OF OPERATIONS - SIX-MONTH PERIOD
The following discussion and analysis addresses results of operations for the
six-month periods ended July 2, 2004 (which we refer to as the 2004 Six Months),
and July 4, 2003 (which we refer to as the 2003 Six Months).
Total revenues increased to $229.5 million in the 2004 Six Months from $218.8
million in the 2003 Six Months, an increase of $10.7 million or 4.9%. The
increase is attributable to improvement in the
11
association, corporate group and government travel segments of our business, and
related segments, primarily related to the overall improvement in the general
economy, as noted above.
Rooms revenues increased to $142.3 million in the 2004 Six Months from $136.4
million in the 2003 Six Months, an increase of $5.9 million, or 4.3%, primarily
in the association, corporate group and government travel segments of our
business. Rooms revenues as a percentage of total revenues decreased slightly,
to 62.0%, compared to 62.3% in the 2003 Six Months. Our average room rate
increased to $101.32 in the 2004 Six Months from $100.29 in the 2003 Six Months,
an increase of $1.03, or 1.0%. Occupancy increased to 66.4% in the 2004 Six
Months from 64.2% in the 2003 Six Months, an increase of 2.2 percentage points.
Our revenue per available room (RevPAR) was $67.26 in the 2004 Six Months, up
4.4% from the 2003 Six Months. RevPAR for the hotel industry was $52.35, up 8.2%
from the 2003 Six Months.
Food and beverage revenues increased to $59.6 million in the 2004 Six Months
from $56.5 million in the 2003 Six Months, an increase of $3.1 million, or 5.5%,
and increased as a percentage of total revenues to 26.0% from 25.8% in the 2003
Six Months. The increase related to the increased association, corporate group
and government travel discussed above.
Meeting room rental, related party management fee and other revenues increased
to $27.6 million in the 2004 Six Months from $25.9 million in the 2003 Six
Months, an increase of $1.7 million, or 6.6%. Meeting room rental, related party
management fee and other revenues also increased as a percentage of total
revenues to 12.0% from 11.8%. The increase was primarily related to guest room
internet revenue and related party management fees, partially offset by
decreased telephone revenue.
Rooms operating expenses increased to $35.0 million in the 2004 Six Months from
$33.3 million in the 2003 Six Months, an increase of $1.7 million, or 5.1%. This
expense increased slightly as a percentage of rooms revenue, to 24.6% from 24.4%
in the 2003 Six Months. The increase was attributable to increased labor and
other costs directly related to the increase in occupied rooms in the 2004 Six
Months.
Food and beverage operating expenses increased to $45.3 million in the 2004 Six
Months from $43.9 million in the 2003 Six Months, an increase of $1.4 million,
or 3.2%, as the result of increased food and beverage revenues. These expenses
decreased as a percentage of food and beverages revenues in the 2004 Six Months
to 76.0%, from 77.7% in the 2003 Six Months, as the result of fixed food and
labor costs that do not increase as food and beverage sales increase.
Other operating expenses decreased to $1.2 million in the 2004 Six Months, from
$1.4 million in the 2003 Six Months, and decreased as a percentage of meeting
room rental, related party management fee and other income, to 4.3% in the 2004
Six Months from 5.4% in the 2003 Six Months.
General, administrative, sales and management service expenses increased $4.3
million, or 6.2%, and increased as a percentage of total revenues to 32.3% from
31.9% in the 2003 Six Months. The increase was primarily attributable to
increased guest frequency programs, unfavorable workers compensation loss
experience for employees in this classification, and the other factors described
above for the 2004 Quarter.
Repairs and maintenance expenses increased $0.7 million, or 7.8%, compared to
the 2003 Six Months, and increased slightly as a percentage of revenues to 4.2%
from 4.1% in the 2003 Six Months.
12
Asset impairment of $4.6 million in the 2004 Six Months reflects the difference
between the net book value, less selling costs, and the current estimated fair
market value of hotels we intend to sell for strategic reasons, as described
above.
Depreciation and amortization expenses decreased to $24.0 million in the 2004
Six Months from $25.1 million in the 2003 Six Months, a decrease of $1.1
million, or 4.4%, and decreased as a percentage of total revenues to 10.5% from
11.5% in the 2003 Six Months. The decrease was related to cessation of new hotel
development in 2000.
Income from operations was $35.7 million in the 2004 Six Months compared to
$36.3 million in the 2003 Six Months, a decrease of $0.6 million, or 1.7%,
primarily as a result of the asset impairment discussed above. As a percentage
of revenue, income from operations decreased to 15.6% in the 2004 Six Months
from 16.6% in the 2003 Six Months.
Net income was $1.8 million for the 2004 Six Months, compared to $1.6 million in
the 2003 Six Months.
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 July 2, 2004, we had $43.0 million of cash and equivalents and $15.0 million
of marketable securities, compared to $23.8 million and $15.7 million,
respectively, at the end of fiscal 2003. Such amounts are available for our
working capital requirements, capital expenditures and debt service. At July 2,
2004, and January 2, 2004, we had restricted cash reserves of $23.9 million and
$21.7 million, respectively. This restricted cash is escrowed for insurance,
taxes, capital expenditures and certain other obligations, in accordance with
specific loan covenants and franchise agreements.
Cash from operating activities increased to $32.6 million for the 2004 Six
Months, from $31.0 million for the 2003 Six Months, an increase of $1.6 million,
or 5.2%, primarily attributable to the increased net income and the non-cash
charge for asset impairment, partially offset by changes in other assets and
liabilities.
We incurred capital expenditures of $8.2 million in the 2004 Six Months,
compared to $6.1 million in 2003 Six Months. 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 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 July 2, 2004, we had
incurred approximately $11.8 million of an estimated $12.3 million of costs to
correct the underlying moisture problem. During the third quarter of 2003,
summary judgment was granted to our insurance carrier in one action, which is
currently on appeal. 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
13
that we will be successful. Our total cumulative depreciation charge through
July 2, 2004, was $7.6 million, which we recorded in fiscal year 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 July 2, 2004, our total debt was $777.1 million compared with $781.1 million
at the end of fiscal 2003. The decrease of $4.0 million is primarily
attributable to scheduled principal payments on long term debt. The current
portion of long-term debt was $7.5 million at the end of the 2004 Six Months
compared with $7.4 million at the end of 2003.
We estimate 2004 capital requirements to be $30.8 million (including
approximately $5.7 million related to planned hotel franchise conversions of
some of our properties), and 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 2004 capital requirements for normal recurring capital
improvement projects.
OTHER MATTERS
From time to time, the Chairman, CEO and principal owner of our general partner,
Mr. John Q. Hammons, may examine various alternatives with respect to some or
all of his holdings. These often times may be from inquiries unsolicited by Mr
Hammons, but they also may be solicited directly by him or by persons engaged by
him for these purposes. Our general partner's board of directors is not involved
in these discussions. If Mr. Hammons seeks to pursue a particular transaction
that would affect the Company, our general partner's board of directors will
evaluate the opportunity based upon what it believes to be in the best interests
of the Company.
SUBSEQUENT EVENTS
On July 2, 2004, our general partner's board of directors approved Letters of
Intent to enter into a contract for the sale of the Holiday Inn, Tucson, Arizona
and the Holiday Inn Denver Northglenn, Northglenn, Colorado. The contracts for
sale have not been executed nor have the buyers completed their due diligence.
On July 23, 2004, we executed a contract for the sale of the Holiday Inn Bay
Bridge, Emeryville, California. The buyer is currently in process of completing
due diligence.
We have entered into a contract to sell our Holiday Inn hotel property located
in Bakersfield, California. As of July 22, 2004, the buyer's due diligence had
been completed and we have received a substantial non-refundable deposit. We
anticipate this sale to be completed prior to the end of August 2004.
We recorded an impairment charge during the 2004 Quarter to reflect the
difference between the net book value, less selling costs, and the estimated
selling price for each of the Holiday Inn Denver Northglenn, Northglenn,
Colorado and our Holiday Inn in Bakersfield, California.
NEW ACCOUNTING PRONOUNCEMENTS
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
14
loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. In December 2003, the FASB issued FIN
46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51
(as revised December 2003)." The primary objectives of FIN 46R are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (Variable Interest Entities) and how to
determine when and which business enterprise should consolidate the Variable
Interest Entity (the Primary Beneficiary). We do not have any variable interest
entities and therefore, FIN 46R did not impact our financial position, results
of operation 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.
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. We
periodically review the carrying value of property and equipment and other
long-lived assets for indications that the carrying value of such assets may not
be recoverable. This review consists of a comparison of the carrying value of
the assets with the expected future undiscounted cash flows. If the respective
carrying values exceed the expected future undiscounted cash flows, the
impairment is measured using fair value measures to the extent available or
discounted cash flows.
We consider each individual hotel to be an identifiable component of our
business. In accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we do not consider a hotel as "held for sale"
until it is probable that the sale will be completed within one year. Once a
hotel is "held for sale" the operations related to the hotel will be included in
discontinued operations. We consider a hotel as "held for sale" once the
potential transaction has been approved by our general partner's board of
directors (i.e., Letter of Intent is approved), a contract for sale has been
executed, the buyer has completed its due diligence review of the asset, and we
have received a substantial non-refundable deposit. Until a buyer has completed
its due diligence review of the asset, necessary approvals have been received
and substantive conditions to the buyer's obligation to perform have been
satisfied, we do not consider a sale to be probable.
We do not depreciate hotel assets while they are classified as "held for sale."
Upon designation of a hotel as being "held for sale," and quarterly thereafter,
we review the carrying value of the hotel and, as appropriate, adjust its
carrying value to the lesser of depreciated cost or fair value less cost to
sell, in accordance with SFAS 144. Any such adjustment in the carrying value of
a hotel classified as "held
15
for sale" will be reflected in discontinued operations. We will include in
discontinued operations the operating results of hotels classified as "held for
sale" or that have been sold.
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," "forecast," "intend," "may," "will," and
similar words. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from any future results expressed or implied by such
forward-looking statements. Such factors include, among others:
- General economic conditions, including the speed and strength of the
economic recovery;
- The impact of any serious communicable diseases on travel;
- Competition;
- Changes in operating costs, particularly energy and labor costs;
- Unexpected events, such as the September 11, 2001 terrorist attack;
- 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 are uncertainties and, along with the risk factors discussed 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 review publicly any forwarding-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 tables set forth, as July 2, 2004 and July 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 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 JULY 2, 2004
2002 Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
-------- -------- --------
Statement of operations data:
Operating revenues $266,249 $ 10,745 (a) $276,994
Operating expenses:
Direct operating costs and
expenses 97,124 -- 97,124
General, administrative, sales
and management service expenses (b) 88,878 (230)(c) 88,648
Repairs and maintenance 11,577 -- 11,577
Asset impairment 3,197 (d) -- 3,197
Depreciation and amortization 29,442 865 30,307
-------- -------- --------
Total operating expenses 230,218 635 230,853
-------- -------- --------
Income from operations $ 36,031 $ 10,110 $ 46,141
======== ======== ========
Operating data:
Occupancy 63.9%
Average daily room rate $ 96.04
RevPAR $ 61.37
(a) Represents management revenues derived from the 17 non-collateral hotels
and the 13 managed hotels.
(b) General, administrative, sales and management service expenses for the
collateral hotels include management expenses allocated to the respective
hotels.
(c) General, administrative, sales and management service 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.
(d) Represents difference between the net book value, less selling costs, for
the Holiday Inn Denver Northglenn, Northglenn, Colorado and its estimated
selling price.
TRAILING 12 MONTHS ENDED JULY 4, 2003
2002 Management Total
Collateral Operations Restricted
Hotels (30) Groups Group
--------- --------- ---------
Statement of operations data:
Operating revenues $ 265,661 $ 9,767 (a) $ 275,428
Operating expenses:
Direct operating costs and
expenses 98,407 -- 98,407
General, administrative, sales and
management service expenses (b) 88,573 (261)(c) 88,312
Repairs and maintenance 11,247 -- 11,247
Depreciation and amortization 30,352 724 31,076
--------- --------- ---------
Total operating expenses 228,579 463 229,042
--------- --------- ---------
Income from operations $ 37,082 $ 9,304 $ 49,386
========= ========= =========
Operating data:
Occupancy 63.1%
Average daily room rate $ 94.60
RevPAR $ 59.69
17
(a) Represents management revenues derived from the 17 non-collateral hotels
and the 11 managed hotels.
(b) General, administrative, sales and management service expenses for the
collateral hotels include management expenses allocated to the respective
hotels.
(c) General, administrative, sales and management service 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 July 2, 2004:
EXPECTED MATURITY DATE
(in millions)
Fair
There- Value
2004(d) 2005 2006 2007 2008 After Total (e)
------ ------ ------ ------ ------ ------ ------ ------
Long-Term Debt(a)
$510 Million 1st Mortgage Notes $ -- $ -- $ -- $ -- $ -- $ 499 $ 499 $ 547
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 $ 28 $ 41 $ 52 $ 108 $ 242 $ 242
Average interest rate(b) 8.4% 8.4% 7.8% 8.4% 8.4% 9.1% 8.7%
Other variable-rate debt obligations $ 1 $ 1 $ 10 $ 1 $ 23 $ -- $ 36 $ 36
Average interest rate(c) 4.7% 4.7% 4.7% 4.7% 4.7% -% 4.7%
18
(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 July 2, 2004, that is maturing in the
year reported. The weighted average interest rate excludes the effect of
the amortization of deferred financing costs.
(d) The 2004 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 or
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 $11 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 July 2,
2004. Based on that review, they have concluded that, as of such date, our
disclosure controls and procedures were effective to ensure that material
information relating to us would be made known to them.
Changes in internal controls. There were no significant changes in our
internal controls or, to the knowledge of the chief executive officer and chief
financial officer of our general partner, in other factors that could
significantly affect our internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses, after the date
of such evaluation.
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
Report on Form 8-K filed August 9, 2004, to furnish press release with
July 2, 2004 financial results.
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 (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: August 13, 2004
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