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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 1-13486
JOHN Q. HAMMONS HOTELS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1695093
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 John Q. Hammons Parkway, Ste. 900
Springfield, Missouri 65806
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 864-4300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Class A common stock, $0.01 par value per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the 2,490,776 shares of Class A common
stock held by non-affiliates of the Registrant was approximately $23,836,726
based on the $9.57 closing price on the American Stock Exchange for such stock
on July 2, 2004 (the last business day of the registrant's most recently
completed second fiscal quarter).
Number of shares of the Registrant's Class A common stock
outstanding as of March 22, 2005: 5,226,462
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS.
We use the terms we, us, our and other similar references to mean
(i) John Q. Hammons Hotels, Inc., a Delaware corporation, (ii) Hammons, Inc., a
Missouri corporation, (iii) John Q. Hammons Hotels, L.P., a Delaware limited
partnership, and (iv) corporate and partnership subsidiaries of John Q. Hammons
Hotels, L.P., collectively, or, as the context may require, John Q. Hammons
Hotels, Inc. only. References to the term "Partnership" mean John Q. Hammons
Hotels, L.P., a Delaware limited partnership, and its corporate and partnership
subsidiaries, collectively, or, as the context may require, John Q. Hammons
Hotels, L.P. only.
OVERVIEW
We have announced over the past several months that we and our
principal stockholder have been engaged in discussions with parties regarding a
possible merger transaction. Our board of directors appointed a Special
Committee composed solely of outside independent directors to conduct all
negotiations on our behalf. On March 9, 2005, we announced that we and John Q.
Hammons, have agreed to continue to negotiate exclusively with an investor group
led by JQH Acquisition, LLC through April 30, 2005 regarding a possible
transaction. Although terms of the investor group's proposal remain subject to
further discussion and negotiation, the proposal contemplates a merger
transaction in which our Class A shares would be purchased for $24.00 cash per
share. Although we continue to work through a number of items that remain to be
negotiated, particularly with respect to the documentation of the various
arrangements that have been agreed to in principle between the investor group
and Mr. Hammons, there can be no assurance that a transaction will be
consummated.
We are a leading independent owner and manager of upscale, full
service hotels located primarily in secondary markets. We own and manage 44
hotels located in 20 states, containing 10,853 guest rooms or suites. We also
manage 15 additional hotels located in nine states, containing 3,278 guest rooms
or suites. The majority of these existing 59 hotels operate under the Embassy
Suites Hotels, Holiday Inn and Marriott trade names. Most of our hotels are
located near a state capital, university, convention center, corporate
headquarters, office park or other stable demand generator.
We own and operate upscale hotels designed to appeal to a broad
range of hotel customers, including frequent business travelers, groups,
conventions and leisure travelers. Our in-house design staff individually
designed each of our hotels and most hotels contain an impressive multi-storied
atrium, large indoor water fountains, lush plantings and comfortable lounge
areas. In addition, our hotels typically include expansive exterior meeting
facilities that can be readily adapted to accommodate both large and small
meetings, conventions or trade shows. Our 19 Embassy Suites Hotels are all-suite
hotels which appeal to the traveler needing or desiring greater space and
specialized services. Our 14 Holiday Inn hotels are affordably priced and
designed to attract value-conscious leisure travelers desiring quality
accommodations. In addition, we own or manage 22 hotels operating under leading
brands including Marriott, Radisson and Sheraton, as well as four independent
hotels.
We coordinate management of our hotels from our headquarters in
Springfield, Missouri, by our senior executive team. Five regional vice
presidents supervise a group of general managers in day-to-day operations.
Centralized management services and functions include sales and marketing,
purchasing, financial controls, architecture and design, human resources, legal
and hotel operations. Through these centralized services, we realize significant
cost savings due to economies of scale.
We currently have no hotels under construction and no plans to
develop new hotels for the foreseeable future. During 2000, we entered into a
five-year management contract with John Q. Hammons, or Mr. Hammons, whereby we
will provide internal administrative, architectural design, purchasing and legal
services to Mr. Hammons in conjunction with the development of hotels in an
amount not to exceed 1.5% of the total development costs of any single hotel. In
exchange, we have the opportunity to manage the hotel upon opening and a 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.
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Although we are not developing new hotels, Mr. Hammons has
personally completed several projects, including new hotels in Tulsa and
Oklahoma City, Oklahoma; Rogers and Hot Springs, Arkansas; Junction City,
Kansas; Springfield, Missouri and North Charleston, South Carolina, 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, Missouri;
Frisco, Texas; Albuquerque, New Mexico and Hampton, Virginia.
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.
FORWARD-LOOKING STATEMENTS
This Form 10-K 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," "forecast," "project," "intend," "may," and similar words.
These forward looking statements are not guarantees of future performance, and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results to be materially different from any future results expressed
or implied by such forward looking statements. Such factors include, among
others:
- general economic conditions, including the 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 attacks,
or outbreaks of war;
- 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 below, should be considered in evaluating any forward looking
statements contained in this Form 10-K. We undertake no obligation to update or
revise publicly any forward-looking statement, whether as a result of new
information, future events or otherwise, other than as required by law.
RISKS RELATING TO OUR BUSINESS
WE MAY BE ADVERSELY AFFECTED BY THE LIMITATIONS IN OUR FRANCHISE
AGREEMENTS.
Approximately 90% of our hotels operate pursuant to franchise
agreements with nationally recognized hotel brands. The franchise agreements
generally contain specific standards for, and restrictions and limitations on,
the operation and maintenance of a hotel in order to maintain uniformity within
the franchisor system. Standards are
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often subject to change over time. Compliance with any such new standards could
cause us to incur significant expenses or capital expenditures.
If we do not comply with standards or terms of the franchise
agreements, our franchise licenses could be cancelled after the applicable cure
period. While none of our franchisors has ever terminated or failed to renew one
of our agreements, terminating or changing the franchise affiliation of a hotel
could require us to incur significant expenses or capital expenditures.
Moreover, the loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
Our current franchise agreements terminate at various times and have
differing remaining terms. Although some are subject to renewal, many of our
franchise agreements are set to expire before the notes mature. As a condition
to renewal, the franchise agreements frequently contemplate a renewal
application process, which may require substantial capital improvements to be
made to the hotel. Significant unexpected capital expenditures could adversely
affect our cash flow and our ability to make payments on our indebtedness.
MR. HAMMONS' CONTROL OF US CREATES POTENTIAL FOR SIGNIFICANT
CONFLICTS OF INTEREST.
Through his ownership of all of our Class B common stock, and
269,100 shares of our Class A common stock, Mr. Hammons controls our activities.
In addition, since Mr. Hammons beneficially owns all of the LP Units,
representing 74.88% of the total Partnership units, he will decide any matters
submitted to a vote of the Partnership partners. Certain decisions concerning
our operations or financial structure may present conflicts of interest between
Mr. Hammons and our other shareholders or holders of our notes. In addition, Mr.
Hammons, as the holder of all of the LP Units, may suffer different and/or more
adverse tax consequences than we do upon the sale or refinancing of some of the
owned hotels as a result of unrealized gains attributable to certain owned
hotels. Therefore, it is unlikely that an owned hotel will be sold or refinanced
if such a transaction would result in an adverse tax consequence to Mr. Hammons
if we are unable to make sufficient distributions to Mr. Hammons to pay those
taxes, regardless of whether such a sale or refinancing might otherwise be in
our best interest.
Mr. Hammons also (1) owns hotels that we manage; (2) owns an
interest in a hotel management company that provides accounting and other
administrative services for all of our hotels; (3) owns a 50% interest in the
entity from which we lease our corporate headquarters; (4) has an agreement
whereby we pay up to 1.5% of his internal development costs for new hotels in
exchange for the opportunity to manage the hotels and the right of first refusal
to purchase the hotels in the event they are offered for sale; (5) leases space
to us in two trade centers owned by him that connect with two of our hotels; (6)
has the right to require the redemption of his LP Units; (7) utilizes our
administration and other services for his outside business interests, for which
he reimburses us; (8) utilizes the services of certain of our employees in his
personal enterprises and personally subsidizes those employees' compensation;
and (9) owns the real estate underlying one of our hotels, which we lease from
him. We describe these arrangements in further detail under "Certain
Relationships and Related Transactions." In the event that Mr. Hammons
experienced material adverse changes in his outside business interests, we could
receive negative publicity as the result of his close ties to us, and it is
possible the market price of our stock and the rating of our debt could be
affected.
WE DEPEND ON CERTAIN KEY MEMBERS OF OUR EXECUTIVE MANAGEMENT.
We are dependent on certain key members of our executive management,
a loss of whose services could have a material effect on our business and future
operations. Some of our executive officers, including our president, Lou
Weckstein, spend a portion of their time performing services for Mr. Hammons
unrelated to our business, which he personally subsidizes.
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
Our hotel properties are subject to various federal, state and local
environmental laws. Under these laws, courts and governmental agencies have the
authority to require an owner of a contaminated property to clean up the
property, even if the owner did not know of and was not responsible for the
contamination. In addition to the costs of cleanup, contamination can affect the
value of a property and, therefore, an owner's ability to borrow funds using
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the property as collateral. Under environmental laws, courts and government
agencies also have the authority to require a person who sent waste to a waste
disposal facility, like a landfill or an incinerator, to pay for the cleanup of
that facility if it becomes contaminated and threatens human health or the
environment. Court decisions have established that third parties may recover
damages for injury caused by contamination. For instance, a person exposed to
asbestos while staying in a hotel may seek to recover damages if he suffers
injury from the asbestos.
We could be responsible for the costs discussed above if one or more
of our properties are found to be contaminated or to have caused contamination.
The costs to clean up contaminated property, to defend against a claim or to
comply with environmental laws, could be material and could affect our financial
performance. In addition, under the laws of many states, contamination on a
property may give rise to a lien on the property for cleanup costs. In several
states, this lien has priority over all existing liens including those of
existing mortgages.
Real property pledged as security to a lender may be subject to
unforeseen environmental liabilities. Historic uses of some of our properties
have involved industries or businesses which could have used or produced
hazardous materials or generated hazardous waste. In the regular course of
business, our hotels might use and store small quantities of paints, paint
thinners, lubricants, pool supplies, and commercial cleaning compounds which, in
some instances, may be subject to federal and state regulations. Small
quantities of waste oil, medical waste, and other waste materials may also be
generated at some of our properties. Additionally, some of our properties
contain or may have contained underground or above ground storage tanks which
are regulated by federal, state and local environmental laws.
All of our properties have been subject to environmental site
assessments, or ESAs, prepared by independent third-party professionals. These
ESAs were intended to evaluate the environmental conditions of these properties
and included a site visit, a review of certain records and public information
concerning the properties, the preparation of a written report and, in some
cases, invasive sampling. We obtained the ESAs before we acquired or built most
of our hotels to help us identify whether we might be responsible for clean-up
costs or other environmental liabilities. The ESAs on our properties did not
reveal any environmental conditions that are likely to have a material adverse
effect on our business, assets, results of operations or liquidity. However,
ESAs do not always identify all potential problems or environmental liabilities.
Consequently, we may have material environmental liabilities of which we are
unaware. Moreover, it is possible that future laws, ordinances or regulations
could impose material environmental liabilities, or that the current
environmental condition of our properties could be adversely affected by third
parties or by the condition of land or operations in the vicinity of the
properties.
ASPECTS OF OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION, AND
CHANGES IN GOVERNMENT REGULATIONS MAY HAVE SIGNIFICANT EFFECTS ON OUR BUSINESS.
A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. We believe that
our hotels are substantially in compliance with these requirements or, in the
case of liquor licenses, that they have or will promptly obtain the appropriate
licenses. Compliance with, or changes in, these laws could reduce the revenue
and profitability of our hotels and could otherwise adversely affect our
revenues, results of operations and financial condition.
Under the Americans with Disabilities Act, or ADA, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA-required
upgrades to our hotels, a determination that our hotels are not in compliance
with the ADA could result in a judicial order requiring compliance, imposition
of fines or an award of damages to private litigants.
MOISTURE RELATED ISSUES RELATED TO DEFECTIVE WINDOWS AT SOME OF OUR
PROPERTIES HAVE AFFECTED OUR OPERATING RESULTS, AND, IF THE PROBLEMS ARE MORE
WIDESPREAD THAN CURRENTLY APPARENT, COULD ADVERSELY AFFECT OUR FUTURE RESULTS OF
OPERATIONS.
We discovered water intrusion through defective windows at some of
our hotels. The sealant at the base of the windows provided by several
manufacturers had shrunk. This shrinkage allowed moisture into the space
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between the exterior and interior walls. Because of the Exterior Finish
Insulation Systems, or EFIS, used in the construction of our hotels, there is no
escape path for any moisture that does leak in. The EFIS construction provides a
"stucco" finish and is commonly used throughout the lodging industry. We
conducted an inspection of all of our properties, and found shrinkage at 16
hotels, of which 14 had sustained water intrusion damage related to the
moisture, including six hotels with severe damage.
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 December 31, 2004, we had incurred approximately $12.6 million to correct the
underlying moisture problem and no further costs are anticipated. During the
third quarter of 2003, summary judgment was granted to our insurance carrier in
one action and later affirmed on appeal, and summary judgment was granted to one
of our window manufacturers. On another action, we received a settlement of $0.2
million during the third quarter of 2004. We plan to continue to vigorously
pursue collection of these costs, although there can be no assurance that we
will be successful.
We have paid all costs incurred and expected to be incurred in
connection with the 16 hotels at which we discovered problems. Virtually all of
our properties include the same type of windows. While we have found no evidence
of any water damage in any other locations, problems could develop with the
windows in other hotels in the future. If such problems were to become
widespread, and we were unable to collect from the manufacturers or our
insurance carrier, the cost would be significant and could adversely impact our
cash flow and results of operations.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND
PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and AMEX rules, are creating uncertainty for companies such as
ours. These new or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of specificity, and as a
result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We are committed to
maintaining high standards of corporate governance and public disclosure. As a
result, our efforts to comply with evolving laws, regulations and standards have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and management time related to compliance activities. In
particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors' audit of
that assessment requires the commitment of significant financial and managerial
resources. If our efforts to comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or governing bodies
due to ambiguities related to practice, our reputation may be harmed and we
might be subject to sanctions or investigation by regulatory authorities, such
as the Securities and Exchange Commission. Any such action could adversely
affect our financial results and the market price of our stock.
RISKS RELATED TO OUR DEBT
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH.
We have a substantial amount of indebtedness. As of December 31,
2004, we had total indebtedness of $765.2 million. Our substantial indebtedness
could, among other things:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain other financing to fund future working
capital, capital expenditures and other general corporate
requirements;
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- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, reducing the
availability of our cash flow to fund working capital and other
expenditures;
- limit our flexibility in planning for, or reacting to, changes in
our business and industry;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
- along with the financial and other restrictive covenants in our
indebtedness, limit, among other things, our ability to borrow
additional funds.
THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US, WHICH REDUCE
OPERATIONAL FLEXIBILITY AND CREATE DEFAULT RISKS.
The documents governing the terms of our notes and some of the
mortgage debt on our properties that are not part of the collateral hotels
contain covenants that place restrictions on us and certain of our activities,
including:
- acquisitions, mergers and consolidations;
- the incurrence of additional indebtedness;
- the incurrence of liens;
- capital expenditures;
- the payment of dividends; and
- transactions with affiliates.
The restrictive covenants in the indenture and the documents
governing our mortgage debt reduce our flexibility in conducting our operations
and will limit our ability to engage in activities that may be in our long-term
best interest. In addition, certain covenants in the mortgage debt documents for
some of the non-collateral hotel properties require us to meet financial
performance tests. Our failure to comply with these restrictive covenants
constitutes an event of default that, if not cured or waived, could result in
the acceleration of the debt which we may be unable to repay.
TO SERVICE OUR INDEBTEDNESS, WE REQUIRE A SIGNIFICANT AMOUNT OF
CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness
and to fund planned capital expenditures will depend on our ability to generate
cash in the future. This, to a certain extent, is subject to general economic,
financial, competitive and other factors that are beyond our control.
WE CANNOT ASSURE YOU THAT WE WILL CONTINUE TO RECEIVE REVENUES FROM
HOTELS WE MANAGE.
We receive a portion of our revenues from managing hotels Mr.
Hammons owns. We have management agreements with respect to the hotels owned by
Mr. Hammons. Each of the management agreements with the 15 hotels owned by Mr.
Hammons or entities controlled by Mr. Hammons are terminable within either 30 or
60 days. We cannot assure you that we will continue to receive revenues with
respect to any of these hotels.
RISKS RELATED TO THE LODGING INDUSTRY
THE LODGING INDUSTRY IS HIGHLY COMPETITIVE.
Competitive factors in the lodging industry include, among others,
reasonableness of room rates, quality of accommodations, service levels and
convenience of locations. We generally operate in areas that contain numerous
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other competitors. There can be no assurance that demographic, geographic or
other changes in markets will not adversely affect the convenience or
desirability of the locales in which our hotels operate, competing hotels will
not pose greater competition for guests than presently exists, or that new
hotels will not enter such locales. New or existing competitors could offer
significantly lower rates or greater conveniences, services or amenities or
significantly expand, improve or introduce new facilities in markets in which we
compete, adversely affecting our operations.
INTERNATIONAL EVENTS, INCLUDING THE CONTINUED THREAT OF TERRORISM
AND THE ONGOING WAR AGAINST TERRORISM, HAVE AFFECTED AND WILL CONTINUE TO AFFECT
OUR INDUSTRY AND OUR RESULTS OF OPERATIONS.
The terrorist attacks of September 11, 2001, caused a significant
decrease in our hotels' occupancy and average daily rate due to disruptions in
business and leisure travel patterns, and concerns about travel safety. Our
occupancy and revenue per available room (RevPAR) were below historical levels
by as much as 26 percentage points and 35%, respectively, in the week
immediately after the terrorist attacks and have rebounded to prior years'
levels since. Additional similar events could have further material adverse
effects on the hotel industry and our operations.
WE ARE SUBJECT TO THE RISKS OF HOTEL OPERATIONS.
Our hotels are subject to all of the risks common to the hotel
industry. These risks could adversely affect hotel occupancy and the rates that
can be charged for hotel rooms as well as hotel operating expenses, and
generally include, among others:
- competition from other hotels;
- increases in supply of hotel rooms that exceed increases in
demand;
- increases in energy costs and other travel expenses that
reduce business and leisure travel;
- adverse effects of declines in general and local economic
activity;
- adverse effects of a downturn in the hotel industry; and
- risks associated with the ownership of hotels and real estate,
as discussed below.
WE WILL ALSO ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE
OWNERSHIP IN GENERAL.
Our investments in hotels are subject to the numerous risks
generally associated with owning real estate, including among others:
- adverse changes in general or local economic or real estate
market conditions;
- changes in zoning laws;
- changes in traffic patterns and neighborhood characteristics;
- increases in assessed valuation and tax rates;
- increases in the cost of property insurance;
- governmental regulations and fiscal policies;
- the potential for uninsured or underinsured property losses;
- the impact of environmental laws and regulations; and
- other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and
generally cannot be sold quickly. We may not be able to vary our portfolio
promptly in response to economic or other conditions. The inability to respond
promptly to changes in the performance of our investments could adversely affect
our financial condition.
OPERATIONS
Our management team at our headquarters in Springfield, Missouri,
coordinates management of our hotel network. This management team is responsible
for managing our day-to-day financial needs, including internal accounting
audits, insurance plans and business contract review, and oversees the financial
budgeting and forecasting for our hotels, as well as analyzing the financial
feasibility of new hotel developments and identifying new systems and procedures
to employ within our hotels to improve efficiency and profitability. The
management
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team also coordinates the sales force for each of our hotels, designing sales
training programs, tracking future business under contract, and identifying,
employing and monitoring marketing programs aimed at specific target markets,
and is responsible for interior design of all hotels and each hotel's product
quality, and directly oversees the detailed refurbishment of existing
operations.
Central management utilizes information systems that track each of
our hotel's daily occupancy, average room rate, rooms revenues and food and
beverage revenues. By having the latest information available at all times, we
are better able to respond to changes in each market by focusing sales and yield
management efforts on periods of demand extremes (low periods and high periods
of demand) and controlling variable expenses to maximize the profitability of
each hotel.
Creating operating, cost and guest service efficiencies in each
hotel is a top priority. With a total of 59 hotels under management, we believe
we are able to realize significant cost savings due to economies of scale. By
leveraging the total hotels/rooms under management, we are able to secure volume
pricing from vendors not available to smaller hotel companies. We employ a
systems trainer responsible for installing new computer systems and providing
training to hotel employees to maximize the effectiveness of these systems and
to ensure that guest service is enhanced.
Regional management constantly monitors each of our hotels to verify
that our high level of operating standards are being met. Our franchisors
maintain rigorous inspection programs in which chain representatives visit their
respective hotels (typically 2 or 3 times per year) to evaluate product and
service quality. Each chain also provides feedback to each hotel through their
guest satisfaction rating systems in which guests who visited the hotel are
asked to rate a variety of product and service issues.
We conduct all of our business operations through the Partnership
and its subsidiaries. Mr. Hammons beneficially owns all 294,100 shares of our
Class B common stock, and 269,100 shares of our Class A common stock,
representing 75.7% of the combined voting power of both classes of our common
stock. We are the sole general partner of the Partnership through our ownership
of all 5,381,075 General Partner units, representing 25.12% of the total equity
in the Partnership. Mr. Hammons beneficially owns all 16,043,900 limited
partnership units of the Partnership, or the LP Units, representing 74.88% of
the total equity in the Partnership. Our Class A common stock represents
approximately 22.5% of the total equity of the Partnership, and the Class A
common stock, Class B common stock and LP Units beneficially owned by Mr.
Hammons represent approximately 77.5% of the total equity in the Partnership.
Our executive offices are located at 300 John Q. Hammons Parkway,
Suite 900, Springfield, Missouri 65806 and our telephone number is (417)
864-4300. We are a Delaware corporation formed on September 29, 1994. Our
website address is www.jqh.com. We post all of our Form 10-K, Form 10-Q and Form
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8-K filings on our website as promptly as practicable after filing with the SEC.
SALES AND MARKETING
We market our hotels through national marketing programs and local
sales managers and a director of sales at each of our hotels. While we make
periodic modifications to our marketing concept in order to address regional
differences and maintain a sales organization structure based on market needs
and local preferences, we generally utilize the same major campaign concept
throughout the country. We develop the concepts at our management headquarters,
while modifications are implemented by our hotels' regional vice presidents and
local sales force, all of whom are experienced in hotel marketing. The sales
force reacts promptly to local changes and market trends in order to customize
marketing programs to meet each hotel's competitive needs. In addition, the
local sales force is responsible for developing and implementing marketing
programs targeted at specific customer segments within each market. We require
that each of our sales managers complete an extensive sales training program.
Our core market consists of business travelers who visit a given
area several times per year, including salespersons covering a regional
territory, government and military personnel and technicians. The profile of the
primary target customer is a college educated business traveler, age 25 to 54,
from a two-income household with a middle management white collar occupation or
upper level blue collar occupation. We believe that business travelers are
attracted to our hotels because of their convenient locations in state capitals,
their proximity to
9
corporate headquarters, plants, convention centers or other major facilities,
the availability of ample meeting space and our high level of service. Our sales
force markets to organizations which consistently produce a high volume of room
nights and which have a significant number of individuals traveling in our
operating regions. We also target groups and conventions attracted by our
hotels' proximity to convention or trade centers which are often adjacent to our
hotels. Our hotels' group meetings logistics include flexible space readily
adaptable to groups of varying size, high-tech audio-visual equipment and
on-site catering facilities. We believe that suburban convention centers attract
more convention sponsors due to lower prices than larger, more cosmopolitan
cities. In addition to the business market, our targeted customers also include
leisure travelers looking for secure, comfortable lodging at an affordable price
as well as women travelers who find the security benefits of our atrium hotels
appealing.
We advertise primarily through direct mail, magazine publications,
directories and newspaper advertisements, all of which focus on value delivered
to and perceived by the guest. We have developed in-house marketing materials
including professional photographs and written materials that can be mixed and
matched to appeal to a specific target group (business traveler, vacationer,
religious group, reunions, etc.). Our marketing efforts focus primarily on
business travelers who we estimate account for approximately 50% of the rooms
rented in our hotels.
Our franchise hotels utilize the centralized reservation systems of
our franchisors, which we believe are among the more advanced reservation
systems in the hotel industry. The franchisors' reservation systems receive
reservation requests entered (1) on terminals located at all of their respective
franchises, (2) at reservation centers utilizing 1-800 phone access and (3)
through several major domestic airlines. Such reservation systems immediately
confirm reservations or indicate accommodations available at alternate system
hotels. Confirmations are transmitted automatically to the hotel for which the
reservations are made. We believe that these systems are effective in directing
customers to our franchise hotels.
FRANCHISE AGREEMENTS
We enter into non-exclusive franchise licensing agreements with
franchisors we believe are the most successful brands in the hotel industry. The
term of an individual franchise agreement for a hotel typically is 20 years. Our
franchise agreements allow us to start with and then build upon the reputation
of the brand names by setting higher standards of excellence than the brands
themselves require. The non-exclusive nature of our franchise agreements allows
us the flexibility to continue to develop properties with the brands that have
shown success in the past or to operate hotels in conjunction with other brand
names.
Holiday Inn. Our franchise agreements grant us a nonassignable,
non-exclusive license to use Holiday Inn's service mark and computerized
reservation network. The franchisor maintains the right to improve and change
the reservation system to make it more efficient, economical and competitive. We
pay monthly fees based on a percentage of gross revenues. The initial terms of
each of our Holiday Inn franchise agreements is 20 years with varying renewal
options and extension terms.
Embassy Suites Hotels. Our franchise agreements grant us a
nonassignable, non-exclusive license to use the Embassy Suites Hotels service
mark and computerized reservation network. The franchisor maintains the right to
improve and change the reservation system for the purpose of making it more
efficient, economical and competitive. We pay monthly fees based on a percentage
of gross revenues attributable to suite rentals, plus marketing and reservation
contributions which are also a percentage of gross revenues. The initial term of
each of our Embassy Suites Hotels franchise agreements is 20 years with varying
renewal options and extension terms.
Other Franchisors. The franchise agreements with other franchisors
not listed above are similar to those described above in that they are
nonassignable, non-exclusive licenses to use the franchisor's service mark and
computerized reservation network. Payments and terms of agreements vary based on
specific negotiations with the franchisor.
10
COMPETITION
Each of our hotels competes in its market area with numerous other
full service hotels operating under various lodging brands and other lodging
establishments. Chains such as Sheraton Inns, Marriott Hotels, Ramada Inns,
Radisson Inns, Comfort Inns, Hilton Hotels and Doubletree/Red Lion Inns are
direct competitors of our hotels in their respective markets. There is, however,
no single competitor or group of competitors of our hotels that is consistently
located nearby and competing with most of our hotels. Competitive factors in the
lodging industry include reasonableness of room rates, quality of
accommodations, level of service and convenience of locations.
REGULATIONS AND INSURANCE
Insurance. To supplement our self insurance programs, we provide
property, auto, commercial liability, workers' compensation and medical
insurance to the hotel properties under blanket commercial policies we purchase.
Insurance expenses for our owned hotels were approximately $13.0 million, $13.3
million, and $13.3 million in 2004, 2003 and 2002, respectively.
Regulations. A number of states regulate the licensing of hotels and
restaurants, including liquor license grants, by requiring registration,
disclosure statements and compliance with specific standards of conduct. We
believe that each of our hotels has the necessary permits and approvals to
operate their respective businesses.
Our hotels and any newly developed or acquired hotels must comply
with Title III of the Americans with Disabilities Act, or the ADA, to the extent
that such properties are "public accommodations" and/or "commercial facilities"
as defined by the ADA. Noncompliance could result in a judicial order requiring
compliance, an imposition of fines or an award of damages to private litigants.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of Asbestos Containing
Materials, or ACMs, when ACMs are in poor condition or when property with ACMs
is undergoing building, repair, remodeling, renovation or demolition. These laws
may impose liability for the release of ACMs and may permit third parties to
seek recovery from owners or operators of real estate for personal injury or
other damage associated with ACMs. Several of the owned hotels contain or may
contain ACMs, generally in sprayed-on ceiling treatments, floor tiles or in
roofing materials. Several of our hotels have implemented asbestos management
plans. Moreover, in each hotel with confirmed or potential ACMs, no removal of
asbestos from the owned hotels has been recommended and we have no plans to
undertake any additional removal, beyond the removal that has already occurred.
Our hotels are subject to environmental regulations under federal,
state and local laws. Certain of these laws may require a current or previous
owner or operator of real estate to clean up designated hazardous or toxic
substances or petroleum product releases affecting the property. In addition,
the owner or operator may be held liable to a governmental entity or to third
parties for damages or costs incurred by such parties in connection with the
contamination. See "Risk Factors - Risks Relating to Our Business - Compliance
with environmental laws may adversely affect our financial condition" for a more
detailed description of environmental regulations affecting our business.
EMPLOYEES
We employ over 5,800 full time employees, approximately 150 of whom
are members of labor unions. We believe that labor relations with employees are
good.
SEASONALITY
Our hotels have traditionally experienced slight seasonality.
Additionally, hotels for the fourth quarter of 2002 reflect 14 weeks of results
compared to 13 weeks for the first three quarters of the 2002 fiscal year and
all of the quarters in the 2004, 2003 and 2001 fiscal years.
11
MANAGEMENT
The following is a biographical summary of the experience of our
executive officers and other key officers.
John Q. Hammons, age 86, is our Chairman, Chief Executive Officer, a
director and founder. Mr. Hammons has been actively engaged in the development,
management and acquisition of hotel properties since 1959. From 1959 through
1969, Mr. Hammons and a business partner developed 34 Holiday Inn franchises, 23
of which were sold in 1969 to Holiday Inns, Inc. Since 1969, Mr. Hammons has
developed over 110 hotels on a nationwide basis, primarily under the Holiday Inn
and Embassy Suites Hotels trade names.
Lou Weckstein, age 68, is our President. Prior to joining us in
September 2001, Mr. Weckstein served for ten years as Senior Vice President,
Hotel Operations, for Windsor Capital Group, a Los Angeles-based hotel
management and development company. Prior to Windsor Capital Group, Mr.
Weckstein served eight years as Vice President of Operations for Embassy Suites,
Inc. Over his career, Mr. Weckstein spent numerous years as Vice
President-Operations for Ramada Inns, Inc. and Vice President-Operations for
Sheraton Inns, Inc. He began his career in the hospitality industry as a hotel
manager in Cleveland, Ohio.
Paul E. Muellner, age 48, is our Executive Vice President and Chief
Financial Officer. He has been our Chief Financial Officer since 2000 and an
Executive Vice President since 2003. From 1998 through 2000, Mr. Muellner served
as our Vice President and Corporate Controller. Prior to joining us in June of
1998, Mr. Muellner was Vice President of Finance for Carnival Hotels. He also
served as Operations Controller at Omni Hotels as well as positions with Red
Lion Inns and Marriott Corporation.
Debra M. Shantz, age 41, is our Senior Vice President and General
Counsel. She joined us in May 1995 as general counsel. Prior thereto, Ms. Shantz
was a partner of Farrington & Curtis, P.C. (now Husch & Eppenberger, LLC), a law
firm which serves as primary outside counsel for us, and Mr. Hammons, where she
practiced primarily in the area of real estate law. Ms. Shantz had been with
that firm since 1988.
William A. Mead, age 51, is our Regional Vice President, Eastern
Region. He joined us in that capacity in 1994 from Davidson Hotels, where he had
been a general manager.
Pat A. Shivers, age 53, is our Senior Vice President and Corporate
Controller since 2001. Prior to that, he served as Senior Vice President of
Administration and Control. He has been active in Mr. Hammons' hotel operations
since 1985. Prior thereto, he had served as Vice President of Product Management
in Winegardner & Hammons, Inc., a hotel management company.
Steven E. Minton, age 53, is our Senior Vice President of
Architecture since 1993. He joined as a corporate architect in 1985. Prior to
that time, Mr. Minton was a project manager with the firm of Pellham and
Phillips working on various John Q. Hammons projects.
Jacqueline A. Dowdy, age 61, is our Secretary since 1982, and a
director since 1994. She has been active in Mr. Hammons' hotel operations since
1981. She is an officer of several of our affiliates. We describe these
affiliations under "Certain Relationships and Related Transactions."
L. Scott Tarwater, age 56, is our Senior Vice President of Sales and
Marketing since March of 2004. He joined us as Vice President of Sales and
Marketing in September 2000 from Windsor Capital Group, in Los Angeles,
California, where he served as Senior Vice President, Sales and Marketing, for
ten years. Prior to that time, Mr. Tarwater served as Senior Director, Sales and
Marketing, for Embassy Suites, Inc., Irving, Texas.
John D. Fulton, age 54, is our Vice President, Interior Design. He
joined us in 1989 from Integra/Brock Hotel Corporation, Dallas, Texas, where he
had been Director of Design and Purchasing for ten years.
Kent S. Foster, age 45, is our Vice President, Human Resources. He
joined us in 1999 from Dayco Products, Inc. in Michigan where he served as
Director and Manager, Human Resources. Prior thereto, Mr. Foster served as
Assistant Vice President and Director, Human Resources, for Great Southern
Savings & Loan Association, Springfield, Missouri.
12
William T. George, Jr., age 53, is our Vice President, Capital
Planning and Asset Management. He joined us in 1994 from Promus Hotel
Corporation, where he had been Director of Capital Refurbishment.
ITEM 2. PROPERTIES.
We lease our headquarters in Springfield, Missouri, from a Missouri
company of which Mr. Hammons is a 50% owner. In 2004, we made aggregate annual
lease payments of approximately $269,000 to that company. We lease various
parcels of land on which we have either constructed a hotel property or certain
auxiliary facilities for the hotel to facilitate the property's operations. Our
owned hotels are pledged as collateral for our long-term debt. We lease from Mr.
Hammons the real estate on which one of these hotels is located. We describe
these leases under "Certain Relationships and Related Transactions - Mr.
Hammons."
DESCRIPTION OF HOTELS - GENERAL
Our hotels are located in 20 states and contain a total of 10,853
rooms and suites. A majority of our hotels operate under the Holiday Inn,
Embassy Suites Hotels and Marriott trade names. Most of our hotels have assumed
a leadership position in their local market by providing a high quality product
in a market unable to economically support a second competitor of similar
quality.
We believe that the presence of adjacent convention centers provides
incremental revenues for our hotel rooms, meeting facilities, and catering
services, and that hotels which are adjacent to convention centers occupy a
particularly successful niche within the hotel industry. These convention or
trade centers are available for rent by hotel guests. Each of our hotels has a
restaurant/catering service on its premises which provides an essential amenity
to the convention trade. We choose not to lease out the restaurant business to
third-party caterers or vendors since we consider the restaurant business an
important component of securing convention business. We own and manage all of
the restaurants in our hotels specifically to maintain direct quality control
over a vital aspect of the convention and hotel business. We also derive
significant revenue and operating profit from food and beverage sales due to our
ownership and management of all of the restaurants in our hotels. We believe
that our food and beverage sales are more profitable than those of our
competitors due to the amount of catering business provided to conventions at
our hotels.
We retain responsibility for all aspects of the day-to-day
management of each of our hotels, including establishing and implementing
standards of operation at all levels; hiring, training and supervising staff;
creating and maintaining financial controls; regulating compliance with laws and
regulations relating to the hotel operations; and providing for the safekeeping,
repair and maintenance of the hotels we own. We typically refurbish individual
hotels every four to six years. We have spent an average per year of
approximately $30.6 million in the last five years on the owned hotels and
expect to spend approximately $43.5 million in 2005 on refurbishment of the
owned hotels (including approximately $12.6 million related to planned hotel
franchise conversions of some of our properties).
OWNED HOTELS
The following table sets forth certain information concerning
location, franchise/name, number of rooms/suites, description and opening date
for each of our hotels:
NUMBER OF OPENING
LOCATION FRANCHISE/NAME ROOMS/SUITES DESCRIPTION DATE
- -------- -------------- ------------ ----------- --------
Montgomery, AL........ Embassy Suites 237 Atrium; Meeting Space: 15,000 sq. ft. (c) 8/95
Tucson, AZ............ Holiday Inn 301 Atrium; Meeting Space: 14,000 sq. ft. 11/81
Tucson, AZ............ Marriott 250 Atrium; Meeting Space: 11,500 sq. ft. 12/96
Little Rock, AR....... Embassy Suites 251 Atrium; Meeting Space: 14,000 sq. ft. 8/97
Springdale, AR........ Holiday Inn 206 Atrium; Meeting Space: 18,000 sq. ft. 7/89
Convention Center: 29,280 sq. ft.
Springdale, AR........ Hampton Inn & Suites 102 Meeting Space: 400 sq. ft. 10/95
Monterey, CA.......... Embassy Suites 225 Atrium; Meeting Space: 13,700 sq. ft. 11/95
13
NUMBER OF OPENING
LOCATION FRANCHISE/NAME ROOMS/SUITES DESCRIPTION DATE
- -------- -------------- ------------ ----------- --------
Sacramento, CA........ Holiday Inn 362 Meeting Space: 9,000 sq. ft. 8/79
Denver, CO (a)........ Holiday Inn 256 Atrium; Trade Center: 66,000 sq. ft.(b) 10/82
(International
Airport)
Fort Collins, CO...... Holiday Inn 258 Atrium; Meeting Space: 12,000 sq. ft. 8/85
Coral Springs, FL..... Marriott 224 Atrium; Meeting Space: 5,326 sq. ft. 5/99
Convention Center: 12,800 sq. ft.
St. Augustine, FL..... Renaissance 301 Atrium; Meeting Space: 9,000 sq. ft.(c) 5/98
Tampa, FL............. Embassy Suites 247 Atrium; Meeting Space: 18,000 sq. ft. 1/98
Cedar Rapids, IA...... Marriott 219 Atrium; Meeting Space: 11,250 sq. ft. 9/88
Davenport, IA......... Radisson 221 Atrium; Meeting Space: 7,800 sq. ft.(c) 10/95
Des Moines, IA........ Embassy Suites 234 Atrium; Meeting Space: 13,000 sq. ft. 9/90
Des Moines, IA........ Sheraton 285 Atrium; Meeting Space: 15,000 sq. ft. 1/87
Topeka, KS............ Capitol Plaza 224 Atrium; Meeting Space: 7,000 sq. ft.(c) 8/98
Bowling Green, KY..... Holiday Inn 218 Atrium: Meeting Space: 4,000 sq. ft.(c) 8/95
Branson, MO........... Chateau on the Lake 301 Atrium; Meeting Space: 40,000 sq. ft. 5/97
Jefferson City, MO.... Capitol Plaza 255 Atrium; Meeting Space: 14,600 sq. ft. 9/87
Joplin, MO............ Holiday Inn 262 Atrium; Meeting Space: 8,000 sq. ft. 6/79
Trade Center: 32,000 sq.ft.(b)
Kansas City, MO (a)... Embassy Suites 236 Atrium; Meeting Space: 12,000 sq. ft. 4/89
Kansas City, MO (a)... Homewood Suites 117 Extended Stay 5/97
Springfield, MO....... Holiday Inn 188 Atrium; Meeting Space: 3,020 sq. ft. 9/87
Omaha, NE............. Embassy Suites 249 Atrium; Meeting Space: 13,000 sq. ft. 1/97
Reno, NV.............. Holiday Inn 284 Meeting Space: 8,700 sq. ft. 2/74
Albuquerque, NM....... Marriott 310 Atrium; Meeting Space: 12,300 sq. ft. 12/86
Charlotte, NC......... Renaissance Suites 275 Atrium; Meeting Space: 17,400 sq. ft. 12/99
Greensboro, NC (a).... Embassy Suites 219 Atrium; Meeting Space: 10,250 sq. ft. 1/89
Greensboro, NC (a).... Homewood Suites 104 Extended Stay 8/96
Raleigh-Durham, NC.... Embassy Suites 273 Atrium; Meeting Space: 20,000 sq. ft. 9/97
Oklahoma City, OK..... Renaissance 311 Atrium; Meeting Space: 10,150 sq. ft.(c) 1/00
Portland, OR (a)...... Holiday Inn 286 Atrium; Trade Center: 37,000 sq. ft.(b) 4/79
Portland, OR (a)...... Embassy Suites 251 Atrium; Meeting Space: 11,000 sq. ft. 9/98
Columbia, SC ......... Embassy Suites 214 Atrium; Meeting Space: 13,000 sq. ft. 3/88
Greenville, SC........ Embassy Suites 268 Atrium; Meeting Space: 20,000 sq. ft. 4/93
North Charleston, SC (a) Embassy Suites 255 Atrium; Meeting Space: 3,000 sq. ft.(c) 2/00
Beaumont, TX.......... Holiday Inn 253 Atrium; Meeting Space: 12,000 sq. ft. 3/84
Dallas, Ft. Worth
Airport, TX (a).... Embassy Suites 329 Atrium; Meeting Space: 18,900 sq. ft. 8/99
Houston, TX (a)....... Marriott 287 Atrium; Meeting Space: 14,300 sq. ft. 12/85
Mesquite, TX.......... Hampton Inn & Suites 160 Meeting Space: 21,200 sq. ft. 4/99
Convention Center: 35,100 sq. ft.(c)
Charleston, WV........ Embassy Suites 253 Atrium; Meeting Space: 14,600 sq. ft. 12/97
Madison, WI........... Marriott 292 Atrium; Meeting Space: 15,000 sq. ft.(b) 10/85
Convention Center: 50,000 sq. ft.
(a) Airport location.
(b) The trade or convention center is located adjacent to hotel and is owned
by Mr. Hammons, except the convention centers in Madison, Wisconsin and
Denver, Colorado, which we own.
(c) Large civic center is located adjacent to hotel.
14
MANAGED HOTELS
The managed hotels consist of 15 hotels, including one Holiday Inn
and one Holiday Inn Express, one Sheraton, four Embassy Suites, three Marriott
Courtyards, two Marriott Residence Inns, two Renaissance properties, and one
non-franchised hotel, located in nine states (Arkansas, Kansas, Missouri,
Nebraska, Oklahoma, South Carolina, South Dakota, Tennessee and Texas), and
contain a total of 3,278 guest rooms. There is a convention and trade center
adjacent to six of our managed hotels.
We provide management services to the managed hotels within the
guidelines contained in the annual operating and capital plans submitted to the
hotel owner for review and approval during the final 30 days of the preceding
year. We are responsible for the day-to-day operations of the managed hotels.
While we are responsible for the implementation of major refurbishment and
repairs, the actual cost of such refurbishments and repairs is borne by the
hotel owner. We earn annual management fees of 3% to 4% of the hotel's revenues.
Each of the management contracts with the 15 hotels owned by Mr. Hammons or
entities controlled by Mr. Hammons are terminable within either 30 or 60 days.
ITEM 3. LEGAL PROCEEDINGS.
Two lawsuits have been filed against us (in the Court of Chancery of
the State of Delaware in and for New Castle County), Jolly Roger Fund L.P. and
Jolly Roger Offshore Fund, Ltd. vs. John Q. Hammons Hotels Inc., et al, filed
October 19, 2004 and Garco Investments LLP v. John Q. Hammons Hotels, Inc., et
al., filed October 20, 2004. Both of these class action lawsuits originally
sought injunctive relief to prevent any merger transaction and asserted that the
original price offered to the public shareholders was not equivalent to the
"sweetheart deal" offered to John Q. Hammons. These lawsuits have been
consolidated into one action and the complaint has been amended to seek
compensation, attorney fees and costs of the action for plaintiffs' efforts
because they allegedly added value for the minority public shareholders as
evidenced by the fact the proposed stock acquisition price has risen from the
initial $13.00 a share to the current proposal of $24.00 per share. The parties
have agreed that no responsive pleadings are required to be filed until March
31, 2005. We have not recorded an obligation with regard to this matter, as a
loss is not yet probable nor can an amount of loss be reasonably estimated.
Management will continue to assess the situation and adjustments will be
recorded, if necessary, in the period in which new facts and circumstances
arise.
We are party to various other legal proceedings arising from its
consolidated operations. Management believes that the outcome of these
proceedings, individually and in the aggregate, will have no material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We submitted no matters to a vote of our shareholders during the
fourth quarter of the 2004 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) MARKET INFORMATION
Our Class A common stock was listed on the New York Stock Exchange
from November 23, 1994 until February 28, 2000, under the symbol "JQH."
Effective February 28, 2000, the Class A common stock began trading on the
American Stock Exchange under the symbol "JQH." There is no established public
trading market for our Class B common stock. The following table sets forth the
high and low sale prices for our Class A common stock as reported on AMEX for
the fiscal periods indicated.
15
STOCK PRICE PER SHARE
HIGH LOW
---- ---
2004
- ----
First Quarter $ 9.90 $ 7.02
Second Quarter $ 9.71 $ 8.91
Third Quarter $ 11.45 $ 9.55
Fourth Quarter $ 20.25 $ 10.88
2003
- ----
First Quarter $ 5.80 $ 4.84
Second Quarter $ 6.18 $ 4.60
Third Quarter $ 6.95 $ 5.67
Fourth Quarter $ 7.15 $ 6.50
(b) HOLDERS
Based on the number of Annual Reports requested by brokers, we
estimate that we have approximately 1,300 beneficial owners of our Class A
common stock. On March 15, 2005, there were approximately 235 holders of record
of our Class A common stock and one holder of our Class B common stock.
(c) DIVIDENDS
We have never paid cash dividends on our capital stock and do not
intend to pay cash dividends in 2005 as we intend to re-invest earnings in
continued growth of our operations.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
We disclose information about our securities authorized for issuance
under equity compensation plans in Item 12 of this annual report.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information for the 2004, 2003,
2002, 2001 and 2000 fiscal years has been derived from, and should be read in
conjunction with, our consolidated financial statements. The information
presented below also should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included under
Item 7. Our fiscal year ends on the Friday nearest December 31.
16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share amounts, ratios and
hotel data)
-------------------------------------------------------------
2004 2003 2002 2001 2000
FISCAL YEAR END --------- --------- --------- --------- ---------
REVENUES:
Rooms (a) $ 266,800 $ 256,564 $ 258,068 $ 251,729 $ 250,847
Food and beverage 112,389 108,315 112,072 111,585 113,464
Meeting room rental, related party management fee and other (b) 51,591 48,596 50,181 50,100 47,048
--------- --------- --------- --------- ---------
Total revenues 430,780 413,475 420,321 413,414 411,359
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Direct operating costs and expenses: (c)
Rooms 66,712 64,096 65,321 64,123 64,066
Food and beverage 84,178 82,524 86,329 88,933 92,728
Other 2,145 2,584 3,037 3,137 3,516
General, administrative, sales, and
management service expenses (d,e) 139,902 130,980 130,571 124,872 117,510
Repairs and maintenance 18,193 17,430 17,478 16,920 16,111
Asset impairment (f) - 9,700 - - -
Depreciation and amortization 49,519 49,783 52,106 60,074 51,496
--------- --------- --------- --------- ---------
Total operating expenses 360,649 357,097 354,842 358,059 345,427
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS 70,131 56,378 65,479 55,355 65,932
OTHER (INCOME) EXPENSE:
Other income (193) (175) - - -
Interest expense and amortization of deferred financing fees,
net of interest income 65,498 67,522 69,323 69,374 71,780
Extinguishment of debt costs (m) 144 774 7,411 474 -
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST AND PROVISION FOR INCOME
TAXES 4,682 (11,743) (11,255) (14,493) (5,848)
Minority interest in losses of partnership - 5,859 8,549 11,016 4,192
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 4,682 (5,884) (2,706) (3,477) (1,656)
Provision for income taxes (g) (177) (150) (150) (150) (150)
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 4,505 (6,034) (2,856) (3,627) (1,806)
Income (loss) from discontinued operations, net of minority
interest (n) (5,150) (1,027) 95 508 970
--------- --------- --------- --------- ---------
NET LOSS ALLOCABLE TO THE COMPANY $ (645) $ (7,061) $ (2,761) $ (3,119) $ (836)
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) from continuing operations $ 0.87 $ (1.19) $ (0.56) $ (0.71) $ (0.34)
Earnings (loss) from discontinued operations (0.99) (0.20) 0.02 0.10 0.18
--------- --------- --------- --------- ---------
Net loss allocable to the Company $ (0.12) $ (1.39) $ (0.54) $ (0.61) $ (0.16)
========= ========= ========= ========= =========
17
continued
2004 2003 2002 2001 2000
FISCAL YEAR END --------- --------- --------- --------- ---------
OTHER DATA
EBITDA from continuing operations (h) $ 119,650 $ 106,161 $ 117,585 $ 115,429 $ 117,428
Net cash provided by operating activities 66,283 54,747 48,077 50,903 36,982
Net cash used in investing activities (34,757) (27,346) (34,363) (39,658) (45,584)
Net cash (used in) provided by financing activities (14,272) (25,385) (24,238) (23,786) 5,037
MARGIN AND RATIO DATA FROM CONTINUING OPERATIONS
EBITDA margin from continuing operations (% of total revenue
from continuing operations) (h) 27.8% 25.7% 28.0% 27.9% 28.5%
Earnings to fixed charges ratio (i) 1.07x N/A N/A N/A N/A
OPERATING DATA FROM CONTINUING OPERATIONS
Owned hotels:
Number of hotels 44 44 44 44 44
Number of rooms 10,853 10,858 10,857 10,861 10,861
Average occupancy 65.7% 64.6% 64.6% 63.3% 64.5%
Average daily room rate (ADR) (j) $ 102.77 $ 100.55 $ 99.13 $ 100.55 $ 98.89
Room revenue per available room (RevPAR) (k) $ 67.51 $ 64.92 $ 64.05 $ 63.68 $ 63.79
Increase in yield (l) 4.0% 1.4% 0.6% (0.2%) 6.4%
BALANCE SHEET DATA
Total assets $ 816,499 $ 822,183 $ 859,952 $ 881,724 $ 920,884
Total debt, including current portion 765,204 781,072 806,342 813,007 836,707
Minority interest of holders of the LP units - - 5,901 14,111 23,515
Refundable equity 655 - - - -
Equity (deficit) (1,525) (2,462) 4,496 7,194 10,242
(a) Includes revenues derived from rooms from continuing operations.
(b) Includes meeting room rental, related party management fees for providing
management services to the Managed Hotels and other from continuing
operations.
(c) Includes expenses incurred in connection with rooms, food and beverage and
telephones from continuing operations.
(d) Includes expenses incurred in connection with franchise fees,
administrative, marketing and advertising, utilities, insurance, property
taxes, rent and other from continuing operations.
(e) Includes expenses incurred providing management services to the Managed
Hotels.
(f) We recognized impairment charges of $9.7 million related to our World Golf
Village Hotel during 2003. The resulting impairment reserve was based on
fair market values derived from independent third party valuations.
(g) We have been taxed as a C Corporation on our portion of the Partnership's
earnings.
(h) EBITDA from continuing operations is defined as income from continuing
operations before income (loss) from discontinued operations, interest
expense, net, income tax expense, depreciation and amortization, minority
interest, extinguishment of debt costs and other income. Management
considers EBITDA to be one measure of operating performance for us before
debt service that provides a relevant basis for comparison, and EBITDA is
presented to assist investors in analyzing our performance. This
information should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted
in the United States, nor should it be considered as an indicator of our
overall financial performance. Our calculation of EBITDA may be different
from the calculation used by other companies and, therefore, comparability
may be limited. EBITDA from continuing operations for 2003 includes an
asset impairment charge of $9.7 million.
18
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
RECONCILIATION OF NET LOSS ALLOCABLE TO THE
COMPANY TO EBITDA FROM CONTINUING OPERATIONS:
Net loss allocable to the Company ($ 645) ($ 7,061) ($ 2,761)($ 3,119) ($ 836)
Income (loss) from discontinued operations 5,150 1,027 (95) (508) (970)
Provision for income taxes 177 150 150 150 150
Minority interest in loss of partnership - ($5,859) ($8,549) ($11,016) ($4,192)
Interest expense and amortization of deferred financing fees 65,498 67,522 69,323 69,374 71,780
Other income ($193) ($175) - - -
Depreciation and amortization 49,519 49,783 52,106 60,074 51,496
Extinguishment of debt costs 144 774 7,411 474 -
--------- -------- -------- -------- --------
EBITDA from continuing operations $119,650 $106,161 $117,585 $115,429 $117,428
--------- -------- -------- -------- --------
(i) Earnings used in computing the earnings to fixed charges ratios consist of
income (loss) from continuing operations before minority interest and
provision for income taxes, plus fixed charges. Fixed charges consist of
interest expense and that portion of rental expense representative of
interest (deemed to be one-third of rental expense). Fixed charges in
excess of earnings for the 2003, 2002, 2001 and 2000 fiscal years were
$11.7 million, $11.3 million, $14.5 million and $6.4 million,
respectively.
(j) Total room revenue from continuing operations divided by the number of
occupied rooms from continuing operations (ADR). Occupied rooms from
continuing operations represent the number of rooms sold during period
presented.
(k) Total room revenue from continuing operations divided by number of
available rooms from continuing operations. Available rooms from
continuing operations represent the number of rooms available for rent
from continuing operations multiplied by the number of days in the period
presented.
(l) Increase in yield represents the period-over-period increases in yield.
Yield is defined as the room revenue per available room (RevPAR).
(m) We adopted a new accounting pronouncement in 2003 which requires the loss
on extinguishment of debt that was classified as an extraordinary item in
prior periods to be reclassified to other expenses.
(n) We sold two properties during 2004 and one during January 2005. The
operating results of the three sold properties have been reclassified to
discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion in conjunction with our
selected financial data and consolidated financial statements included elsewhere
in this Form 10-K.
RECENT EVENTS
We have announced over the past several months that we and our principal
stockholder have been engaged in discussions with parties regarding a possible
merger transaction. Our board of directors appointed a special committee, or the
Special Committee, composed solely of outside independent directors to conduct
all negotiations on our behalf. On March 9, 2005, we announced that we and John
Q. Hammons, have agreed to continue to negotiate exclusively with an investor
group led by JQH Acquisition, LLC through April 30, 2005 regarding a possible
transaction. Although terms of the investor group's proposal remain subject to
further discussion and negotiation, the proposal contemplates a merger
transaction in which our Class A shares would be purchased for $24.00 cash per
share. Although we continue to work through a number of items that remain to be
negotiated, particularly with respect to the documentation of the various
arrangements that have been agreed to in principle between the investor group
and Mr. Hammons, there can be no assurance that a transaction will be
consummated.
GENERAL
Our consolidated financial statements include revenues from our owned
hotels and management fee revenues for providing management services to the
managed hotels (owned or directly controlled by Mr. Hammons). References to our
hotels include both our owned hotels and our managed hotels. We derive revenues
from the owned hotels from rooms, food and beverage, meeting rooms and other
revenues. Our beverage revenues include
19
only revenues from the sale of alcoholic beverages, while we show revenues from
the sale of non-alcoholic beverages as part of food revenue. Direct operating
costs and expenses include expenses we incur in connection with the direct
operation of rooms, food and beverage and telephones. Our general,
administrative, sales and management services expenses include expenses incurred
for franchise fees, administrative, sales and marketing, utilities, insurance,
property taxes, rent, management services and other expenses.
From 2000 through 2004, our total revenues from continuing operations
grew at an annual compounded growth rate of 1.2%, from $411.4 million to $430.8
million. Occupancy during that period increased from 64.5% to 65.7%. At the same
time, our average daily room rate increased by 3.9%, from $98.89 to $102.77, and
room revenue per available room increased by 5.8%, from $63.79 to $67.51.
The terrorist attacks of September 11, 2001, caused a significant
decrease in our hotels' occupancy and average daily rate due to disruptions in
business and leisure travel patterns, and concern about travel safety. Although
we have rebounded to prior years' levels since, general economic conditions,
including the speed and strength of the economic recovery, could have an impact
on our future operating results.
20
RESULTS OF CONTINUING OPERATIONS
FISCAL YEAR END 2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
OWNED HOTELS
Average Occupancy 65.7% 64.6% 64.6% 63.3% 64.5%
Average Daily Room Rate (ADR) $ 102.77 $ 100.55 $ 99.13 $ 100.55 $ 98.89
Room Revenue per Available Room (Rev PAR) $ 67.51 $ 64.92 $ 64.05 $ 63.68 $ 63.79
Available Rooms (a) 3,951,885 3,952,039 4,029,431 3,953,222 3,932,337
Number of Hotels 44 44 44 44 44
MATURE HOTELS (b)
Average Occupancy 65.7% 64.6% 64.6% 63.2% 65.2%
Average Daily Room Rate (ADR) $ 102.77 $ 100.55 $ 99.13 $ 99.97 $ 97.15
Room Revenue per Available Room (Rev PAR) $ 67.51 $ 64.92 $ 64.05 $ 63.14 $ 63.39
Available Rooms (a) 3,951,885 3,952,039 4,029,431 3,747,198 3,387,629
Number of Hotels 44 44 44 42 38
NEW HOTELS (b)
Average Occupancy -% -% -% 66.4% 59.9%
Average Daily Room Rate (ADR) $ - $ - $ - $ 110.55 $ 110.68
Room Revenue per Available Room (Rev PAR) $ - $ - $ - $ 73.37 $ 66.29
Available Rooms (a) - - - 206,024 544,708
Number of Hotels - - - 2 6
PERCENTAGES OF TOTAL REVENUES
REVENUES
Rooms 61.9% 62.0% 61.4% 60.9% 61.0%
Food and beverage 26.1% 26.2% 26.7% 27.0% 27.6%
Meeting room rental and other 12.0% 11.8% 11.9% 12.1% 11.4%
---------- ---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Direct operating costs and expenses
Rooms 15.5% 15.5% 15.5% 15.5% 15.6%
Food and beverage 19.5% 20.0% 20.5% 21.5% 22.5%
Other 0.5% 0.6% 0.7% 0.8% 0.9%
General, administrative, sales, and
management service expenses 32.5% 31.7% 31.1% 30.2% 28.6%
Repairs and maintenance 4.2% 4.2% 4.2% 4.1% 3.9%
Asset impairment -% 2.4% -% -% -%
Depreciation and amortization 11.5% 12.0% 12.4% 14.5% 12.5%
---------- ---------- ---------- ---------- ----------
Total operating expenses 83.7% 86.4% 84.4% 86.6% 84.0%
---------- ---------- ---------- ---------- ----------
Income from Operations 16.3% 13.6% 15.6% 13.4% 16.0%
========== ========== ========== ========== ==========
(a) Available rooms represent the number of rooms available for rent multiplied
by the number of days in the period reported or, in the case of New Hotels,
the number of days the hotel was open during the period reported. The
Company's 2002 Fiscal Year contained 53 weeks, or 371 days, while its 2004,
2003, 2001 and 2000 Fiscal Years each contained 52 weeks, or 364 days.
(b) We track the performance of our Owned Hotels in two groups. One group of
hotels are those we opened during the current and prior Fiscal Years (New
Hotels). The remainder, excluding the New Hotels, we refer to as Mature
Hotels. During 2004, 2003 and 2002 Fiscal Years, there were no New Hotels.
The distinction between Mature and New Hotels has become less significant
since cessation of our development.
2004 FISCAL YEAR COMPARED TO 2003 FISCAL YEAR
Total revenues from continuing operations increased to $430.8 million
in 2004 from $413.5 million in 2003, or 4.2%, reflecting a continued improvement
in the general economy. We experienced increases in the corporate transient,
corporate group and government market segments of our business as a result of
the improved
21
economy. Our business reflected a shift from the association market segment in
2003 to the corporate market segment in 2004.
Room revenues from continuing operations increased $10.2 million, or 4.0%,
from 2003, primarily in the corporate transient, corporate group and government
market segments of our business. Rooms revenues, as a percentage of total
revenues, decreased slightly to 61.9%, compared to 62.0% in 2003. Our average
room rate increased to $102.77 in 2004 from $100.55 in 2003, an increase of
2.3%. Occupancy increased slightly to 65.7% in 2004 from 64.6% in 2003.
Occupancy for the hotel industry, as reported by Smith Travel Research, was
61.3%, up 3.7% from 2003. Our revenue per available room (RevPAR) was $67.51 in
2004, up $2.59, or 4.0%, from 2003. RevPAR for the hotel industry was $52.93, up
7.8% from 2003.
Food and beverage revenues from continuing operations increased $4.1
million, or 3.8%, from 2003, but decreased slightly as a percentage of total
revenues to 26.1% from 26.2%. The dollar increase was primarily related to
increased banquet sales during 2004.
Meeting room rental, related party management fee and other revenues from
continuing operations increased by $3.0 million, or 6.2%, in 2004 from 2003, and
increased as a percentage of total revenues, to 12.0% from 11.8%. The increase
was attributable to increases in related party management fees, meeting room
rental fees and rooms other income, partially offset by a decrease in telephone
revenues.
Rooms operating expenses from continuing operations increased by $2.6
million, or 4.1%, in 2004. The increase was primarily attributable to increased
labor costs related to the increased occupancy.
Food and beverage operating expenses from continuing operations increased
by $1.7 million, or 2.1%, from 2003 as the result of increased food and beverage
revenues, but decreased as a percentage of food and beverage revenues to 74.9%
in 2004, from 76.2% in 2003. The dollar increase was primarily attributable to
increased labor costs directly related to higher sales volumes discussed above.
Other operating expenses from continuing operations decreased by $0.5
million, or 19.2%, from 2003 and decreased as a percentage of meeting room
rental, related party management fee and other income, to 4.1% in 2004, from
5.4% in 2003.
General, administrative, sales and management service expenses from
continuing operations increased by $8.9 million, or 6.8%, and increased as a
percentage of total revenues to 32.5% from 31.7% in 2003. The increase was
primarily attributable to increases in costs associated with administrative and
sales and marketing compensation, legal and professional fees associated with
our merger proposal, utilities, franchise frequent travel programs and credit
card commissions, partially offset by decreases in property taxes.
Repairs and maintenance expenses from continuing operations increased
slightly, by $0.8 million compared to 2003, but remained stable as a percentage
of revenues, at 4.2%.
Depreciation and amortization expenses from continuing operations
decreased by $0.3 million, or 0.6%, in 2004 from 2003, and decreased as a
percentage of total revenues to 11.5% from 12.0% in 2003. The decrease related
to cessation of new hotel development in 1998.
Income from operations increased by $13.7 million, or 24.3%, from 2003,
largely because of the absence of the 2003 asset impairment charge of $9.7
million described below.
Income (loss) from continuing operations before minority interest and
provision for income taxes was $4.7 million of income in 2004, compared to a
loss of $11.7 million in 2003, primarily as a result of the asset impairment
charge, greater interest expense and extinguishment of debt costs in 2003.
Income (loss) from continuing operations was $4.5 million of income,
compared to a loss of $6.0 million in 2003. The 2004 results from continuing
operations include $3.6 million for the recapture of the limited partners'
losses we absorbed in previous quarters before the impact of discontinued
operations. An additional $4.2 million must be recaptured before the limited
partners can be allocated future earnings. The 2003 results from continuing
22
operations included two items, which, after giving effect to minority interest,
had an unfavorable net impact of approximately $5.4 million on our income from
continuing operations. One of the items was the recognition of a $2.3 million
asset impairment, net of minority interest, due to the decline of the property's
fair value. The other item includes $3.1 million for the limited partners'
losses we must absorb, due to the inability of the limited partners' net
contribution to fall below zero.
The following represents a reconciliation of the income from continuing
operations, as reported, to income from continuing operations, as adjusted (in
thousands):
2004 2003
------- -------
Income (loss) from continuing operations, as reported $ 4,505 ($6,034)
Additions (subtractions):
Asset impairment, net of $7,366 of expected minority interest - 2,334
Reallocation of minority interest earnings (3,552) 3,059
------- -------
Sub total (3,552) 5,393
------- -------
Income (loss) from continuing operations, as adjusted $ 953 ($ 641)
======= =======
Net loss allocable to the Company was $0.6 million in 2004 compared to
$7.1 million in 2003, as the result of the factors discussed above.
Basic and diluted loss per share was $0.12 for 2004, compared to $1.39 for
2003.
2003 FISCAL YEAR COMPARED TO 2002 FISCAL YEAR
Total revenues from continuing operations decreased by $6.8 million, or
1.6%, in 2003, as fourth quarter 2003 revenues (13 weeks) decreased compared to
the 2002 fourth quarter (14 weeks). The decrease is attributable to decreases in
the corporate, leisure and corporate group market segments of our business.
Rooms revenues from continuing operations decreased by 0.6% from 2002, as
the result of a decrease in rooms revenues in the fourth quarter of 2003,
related primarily to the decreases in corporate, leisure and corporate group
market segments of our business mentioned above. Rooms revenues, as a percentage
of total revenues, increased to 62.0%, compared to 61.4% in 2002. Our average
room rate increased to $100.55 in 2003 from $99.13 in 2002, an increase of 1.4%.
Occupancy remained stable at 64.6%. Occupancy for the hotel industry, as
reported by Smith Travel Research, was 59.2%, up 0.2% from 2002. Our revenue per
available room (RevPAR) was $64.92 in 2003, up $0.87, or 1.4%, from 2002. RevPAR
for the hotel industry was $49.34, up 0.2% from 2002.
Food and beverage revenues from continuing operations decreased $3.8
million, or 3.4%, in 2003 from 2002, and decreased as a percentage of total
revenues to 26.2% from 26.7% in 2002. The decrease related primarily to the
decrease in the corporate group market segment of our business discussed above.
Meeting room rental, related party management fee and other revenues from
continuing operations decreased by $1.6 million, or 3.2%, in 2003 from 2002, and
decreased slightly as a percentage of total revenues, to 11.8% from 11.9%. The
decrease was attributable to declines in telephone department revenues as well
as the decrease from the corporate group market segment of our business.
Rooms operating expenses from continuing operations decreased by $1.2
million, or 1.8%, in 2003, and decreased as a percentage of rooms revenue, to
25.0% from 25.3% in 2002. The decrease was primarily attributable to reduced
labor costs and favorable workers' compensation loss experience.
Food and beverage operating expenses from continuing operations decreased
by $3.8 million, or 4.4%, from 2002 as the result of decreased food and beverage
revenues, but also decreased as a percentage of food and
23
beverage revenues to 76.2% in 2003, from 77.0% in 2002. The decrease was
primarily attributable to reduced labor costs directly related to lower sales
volumes as discussed above.
Other operating expenses from continuing operations decreased by $0.4
million, or 13.3%, from 2002 and decreased as a percentage of meeting room
rental, related party management fee and other income, to 5.4% in 2003, from
6.0% in 2002.
General, administrative, sales and management service expenses from
continuing operations increased by $0.4 million, or 0.3%, and increased as a
percentage of total revenues to 31.7% from 31.1% in 2002. The increase was
primarily attributable to increases in costs associated with sales and marketing
compensation, franchise frequent traveler programs, utilities and credit card
commissions, partially offset by decreases in franchise fees and property taxes.
Asset impairment from continuing operations of $9.7 million in 2003 was
attributable to the write down of our World Golf Village property to reflect the
difference between the net book value and the current estimated fair value of
this property obtained from independent third party valuations.
Depreciation and amortization expenses from continuing operations
decreased by $2.3 million, or 4.4%, in 2003 from 2002, and decreased as a
percentage of total revenues to 12.0% from 12.4% in 2002. The decrease related
to cessation of new hotel development in 1998.
Income from operations decreased by $9.1 million, or 13.9%, from 2002, as
the result of the $9.7 million asset impairment charge described above,
partially offset by reduced depreciation and amortization expenses.
Loss from continuing operations was $6.0 million, compared to $2.9 million
in 2002. The 2003 results from continuing operations included two items, which,
after giving effect to minority interest, had an unfavorable net impact of
approximately $5.4 million on our income from continuing operations. One of the
items was the recognition of a $2.3 million asset impairment, net of minority
interest, due to the decline of the property's fair value. The other item
includes $3.1 million for the limited partners' losses we must absorb, due to
the inability of the limited partners' net contribution to fall below zero. The
2002 results from continuing operations had no reallocations of minority
interest or impact from asset impairment.
The following represents a reconciliation of the income from continuing
operations, as reported, to income from continuing operations, as adjusted (in
thousands):
2003 2002
-------- --------
Loss from continuing operations, as reported ($6,034) ($2,856)
Additions:
Asset impairment, net of $7,366 of expected minority interest 2,334 -
Reallocation of minority interest earnings 3,059 -
------- -------
Sub total 5,393 -
------- -------
Loss from continuing operations, as adjusted ($ 641) ($2,856)
======= =======
Net loss allocable to the Company was $7.1 million for 2003 compared to
$2.8 million in 2002.
Basic and diluted loss per share was $1.39 for 2003, compared to $0.54 for
2002.
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.
24
At December 31, 2004, we had $41.0 million of cash and equivalents and
$22.3 million of marketable securities, compared to $23.8 million and $15.7
million, respectively, at the end of 2003. Such amounts are available for our
working capital requirements, capital expenditures and debt service. At December
31, 2004 and January 2, 2004, we had restricted cash reserves of $30.6 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 $66.3 million for 2004, from
$54.7 million for 2003, an increase of $11.6 million, or 21.2%, primarily
attributable to increased sales and operating margins and favorable changes in
certain assets and liabilities.
We incurred capital expenditures of $30.3 million in 2004, compared to
$18.4 million in 2003. 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 December 31, 2004, we had incurred approximately $12.6 million to correct the
underlying moisture problem and no further costs are anticipated. During the
third quarter of 2003, summary judgment was granted to our insurance carrier in
one action and later affirmed on appeal, and summary judgment was granted to one
of our window manufacturers. On another action, we received settlement of $0.2
million during the third quarter of 2004. 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 December
31, 2004, was $7.6 million, which we recorded in fiscal year 2001 to reserve the
net historical costs of the hotel property assets refurnished absent any
recoveries. To the extent we realize recoveries we will record them as a
component of other income.
At December 31, 2004, our total debt was $765.2 million compared with
$781.1 million at the end of 2003. The decrease is primarily attributable to the
reduction of long term debt from scheduled principal payments and from the
proceeds from the sale of certain hotels during 2004. The current portion of
long-term debt was $25.7 million at the end of 2004, compared with $7.4 million
at the end of 2003. The increase is primarily attributable to the total debt on
our World Golf Village Hotel (approximately $18.4 million) which we paid off on
February 23, 2005, as discussed below.
On January 27, 2005, we completed the sale of a Holiday Inn property
located in Emeryville, California. This hotel property served as collateral
under the 2002 First Mortgage Notes. Under the terms of these indentures, we
provided replacement collateral in accordance with the indenture provisions, as
discussed below.
On February 23, 2005, we utilized the net cash proceeds from the sale of
the Northglenn, Colorado and the Emeryville, California hotel properties to
pay-off the existing mortgage on our World Golf Village Hotel in St. Augustine,
Florida and substitute it as the replacement collateral for the 2002 First
Mortgage Notes in accordance with the indenture provisions.
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 2005 capital requirements estimated at
$43.5 million (including approximately 12.6 million related to planned hotel
franchise conversions of some of our properties) 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 2005 capital requirements for normal
recurring capital improvement projects.
25
NEW ACCOUNTING PRONOUNCEMENT
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 operation or cash flow.
In December 2004, the FASB issued SFAS 123R "Share Based Payment" that
will require compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited exception, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
realized each reporting period. Compensation costs will be recognized over the
period that an employee provides service in exchange for the award. This will be
effective for the third quarter of fiscal 2005, and affect the compensation
expense related to stock options recorded in the accompanying consolidated
financial statements. As of December 31, 2004, SFAS 123R did not impact the
accompanying consolidated financial statements.
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, net of deferred tax assets, self-insurance reserves, contingencies and
litigation. We base our estimates and judgments on historical experience and
various other factors we believe 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 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 deposit.
Until a buyer has completed its due diligence review of the asset, necessary
approvals have been received and substitutive conditions to the buyer's
obligation to perform have been satisfied, we do not consider a sale to be
probable.
26
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 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 and auto,
workers' compensation and employee medical coverages. Estimated costs related to
these self insurance programs are accrued based on known claims and projected
settlements of unasserted claims. Subsequent changes in, among others,
unasserted claims, claim cost, claim frequency, as well as changes in actual
experience, could cause these estimates to change.
We recognize revenues from our rooms, catering and restaurant facilities
as earned on the close of business each day.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations as
of December 31, 2004, including long-term debt and operating lease commitments:
Payments Due by Period
-----------------------------------------------------
Contractual obligations 1 Year 2-3 4-5 After 5
(000s omitted) Total or less Years Years Years
Long-term debt $765,204 $25,719 $78,976 $53,108 $607,401
Related party leases 7,383 1,208 300 300 5,575
Other leases 65,283 2,744 5,279 3,845 53,415
-------- ------- ------- ------- --------
Total contractual obligations $837,870 $29,671 $84,555 $57,253 $666,391
======== ======= ======= ======= ========
For 41 of 44 operating hotel properties, which excludes the Holiday Inn
Emeryville, California property we sold on January 27, 2005 (as discussed
above), we have entered into franchise agreements with national hotel chains
that require each hotel to remit to the franchisor monthly fees equal to
approximately 3.0% to 6.0% of gross room revenues, as defined. Franchise fees
expensed under these contracts were $11.9 million in fiscal 2004, of which $0.5
million is included in discontinued operations. In addition, each hotel under a
franchise agreement pays additional advertising, reservation and maintenance
fees to the franchisor which range from 1.0% to 4.0% of gross revenues as
defined. The amount of expense related to these fees included in the
consolidated statements of operations as a component of general, administrative,
sales and management service expenses was $10.4 million in fiscal 2004, of which
$0.4 million was included in discontinued operations. Since these franchise
obligations are dependent on gross revenues and as such are variable, the
amounts are not included in the above table. Interest expense obligations also
are excluded from the above table.
SEASONALITY
Our hotels have traditionally experienced slight seasonality.
Additionally, hotels for the fourth quarter of 2002 reflect 14 weeks of results
compared to 13 weeks for the first three quarters of the 2002 fiscal year and
all of the quarters in the 2004, 2003 and 2001 fiscal years.
27
INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on our revenues or operating results during
the three most recent fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to changes in interest rates primarily as the result of our
investing and financing activities. Investing 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 December 31, 2004.
EXPECTED MATURITY DATE THERE- FAIR
2005 2006 2007 2008 2009 AFTER TOTAL VALUE(d)
Long-Term Debt(a)
(IN MILLIONS)
$510 million First Mortgage Notes $ - $ - $ - $ - $ - $ 499 $ 499 $ 561-
569
Average interest rate(b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%
Other fixed-rate debt obligations $ 25 $ 27 $ 41 $ 26 $ 4 $ 108 $ 231 $ 231
Average interest rate(b) 9.8% 7.8% 8.4% 8.1% 8.7% 8.6% 8.5%
Other variable-rate debt
obligations $ 1 $ 10 $ 1 $ 23 $ - $ - $ 35 $ 35
Average interest rate(c) 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
(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 December 31, 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 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 issued is
estimated by obtaining quotes from brokers. A one percentage point change in
the quote received for the $510 million First Mortgage Notes would have an
effect of approximately $5 million on the fair value, while a one percentage
point change in the 8-7/8% discount rate used to calculate the fair value of
our other fixed rate debt would change its fair value by approximately $11
million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Consolidated Financial Statements and
the Financial Statements following such index in Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
We maintain a system of disclosure controls and procedures designed to
provide reasonable assurance that information we are required to disclose in the
reports that we file or submit under the Securities Exchange Act of
28
1934, as amended, is recorded, processed, summarized and reported, within the
time periods specified in Securities and Exchange Commission rules and forms.
Our management, with the participation of our chief executive officer and our
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2004. Based on that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
There have been no changes in our internal control over financial
reporting that occurred during the quarter ended December 31, 2004, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information required to be disclosed in a report on Form 8-K
during the fourth quarter of the 2004 fiscal year that was not reported on such
Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
We list below the members of our board of directors, and we provide
certain other information about each person's age, principal occupation or
employment during the past five years, the periods during which they have served
as directors and positions they currently hold with us.
Director Expiration
Age Since of Term Position(s) Held with Company
--- -------- ---------- -----------------------------
Donald H. Dempsey 60 1999 2007 Director
Jacqueline A. Dowdy 61 1994 2005 Director and Secretary
Daniel L. Earley 62 1994 2006 Director
John Q. Hammons 86 1994 2006 Director, Chairman and Chief
Executive Officer
William J. Hart 64 1994 2005 Director
James F. Moore 62 1995 2006 Director
John E. Lopez-Ona 47 1996 2007 Director
David C. Sullivan 65 1999 2005 Director
Donald H. Dempsey became a director of the Company in August 1999. From
July 1998 until January 2004, Mr. Dempsey served as Executive Vice President,
Secretary, Treasurer, Chief Financial Officer and Director of Equity Inns, Inc.
Equity Inns, Inc. is a large lodging real estate investment trust headquartered
in Germantown, Tennessee. Mr. Dempsey has more than 30 years' experience in
corporate and financial management within the hotel industry. Before he joined
Equity Inns in July 1998, Mr. Dempsey served as Executive Vice President and
Chief Financial Officer of Choice Hotels International, Inc., a publicly traded
hotel franchisor. From April 1995 to December 1997, Mr. Dempsey served as Senior
Vice President and Chief Financial Officer of Promus Hotel Corporation. From
October 1993 to April 1995, he served as Senior Vice President of Finance and
Administration of the Hotel Division of The Promus Companies Incorporated, and
from December 1991 to October 1993, as Vice President, Finance, of the Hampton
Inn/Homewood Suites Hotel Division of The Promus Companies Incorporated. Mr.
Dempsey served in various other senior financial and development officer
positions with the Hotel Division of The Promus Companies Incorporated and its
predecessor companies from 1983 to 1991. From 1969 to 1983, Mr. Dempsey held
various corporate and division financial management and administrative positions
with Holiday Inns, Inc.
29
Jacqueline A. Dowdy has been the Secretary of the Company since 1982 and a
director of the Company since 1994. She has been active in Mr. Hammons' hotel
operations since 1981. She is an officer and director of several affiliates of
the Company.
Daniel L. Earley has been a director of the Company since 1994. From 1985
until January 2005, Mr. Earley served as President, Chief Executive Officer and
a director of the First Clermont Bank, a community bank located in Milford,
Ohio, which was owned by Mr. Hammons. In January 2005, that bank was sold and
became a division of The Park National Bank, Milford, Ohio, where Mr. Earley
remains as President.
John Q. Hammons is Chairman, Chief Executive Officer, a director and
founder of the Company. Mr. Hammons has been actively engaged in the
acquisition, development and management of hotel properties since 1959. From
1959 through 1969, Mr. Hammons and a business partner developed 34 Holiday Inn
franchises, 23 of which were sold in 1969 to Holiday Inns, Inc. Since 1969, Mr.
Hammons has developed 110 hotels on a nationwide basis, primarily under the
Holiday Inn and Embassy Suites Hotels tradenames. Mr. Hammons is the controlling
shareholder of the Company. See "Security Ownership of Management."
William J. Hart has been a director of the Company since 1994. He is a
member of the law firm of Husch & Eppenberger, LLC, formerly Farrington &
Curtis, P.C., a position he has held since 1970. Mr. Hart's firm performs legal
services on a regular basis for the Company and personally for Mr. Hammons.
John E. Lopez-Ona became a director of the Company in May 1996. He was a
managing director of Kidder Peabody & Company, Inc., an investment banking firm,
from March 1990 through March 1995. Since June 1995, Mr. Lopez-Ona has been the
President of Anvil Capital, Inc., a firm he owns, which specializes in principal
investment. Since 1998, Mr. Lopez-Ona has been the Chairman and CEO of Six Sigma
Qualtec, a premier training, consulting and technology solutions company for
performance improvement methodologies.
James F. Moore became a director of the Company in May 1995. Mr. Moore is
Managing Partner, American Products LLC, a privately owned manufacturing company
serving the telecommunications industry located in Strafford, Missouri. From
1987 until 2000, he served as Chairman, Chief Executive Officer and a director
of Champion Products, Incorporated, the predecessor company to American Products
LLC. Prior to 1987, Mr. Moore served as President of the Manufacturing Division
of Service Corporation International, a company listed on the New York Stock
Exchange.
David C. Sullivan became a director of the Company in May 1999. He is the
Chairman of Sullivan Investments, LLC, a position he has held since May 2000.
From December 1997 until May 2000, Mr. Sullivan served as Chairman, Chief
Executive Officer and a director of ResortQuest International, a company listed
on the New York Stock Exchange that provides vacation rental and property
management services. From April 1995 to December 1997, Mr. Sullivan was
Executive Vice President and Chief Operating Officer of Promus Hotel
Corporation, a publicly traded hotel franchisor, manager and owner of hotels
whose brands include Hampton Inn, Homewood Suites and Embassy Suites. From 1993
to 1995, Mr. Sullivan was the Executive Vice President and Chief Operating
Officer of the Hotel Division of The Promus Companies Incorporated, or PCI. He
was the Senior Vice President of Development and Operations of the Hampton
Inn/Homewood Suites Division of PCI from 1991 to 1993. From 1990 to 1991, Mr.
Sullivan was the Vice President of Development of the Hampton Inn Hotel Division
of PCI. Mr. Sullivan serves on the board of directors of Winston Hotels, Inc.
30
CORPORATE GOVERNANCE AND OTHER MATTERS
DIRECTOR INDEPENDENCE. The board of directors has determined that five of
its current directors, John E. Lopez-Ona, James F. Moore, David C. Sullivan,
Donald H. Dempsey and William J. Hart, are "independent" within the meaning of
the American Stock Exchange listing standards. This determination has been made
based on written responses provided by each of the directors in a questionnaire
regarding relationships and possible conflicts of interest. Mr. Hart and his law
firm provide services to the Company, Mr. Hammons and certain of his affiliates.
The board of directors has determined that this legal representation of Mr.
Hammons and the Company does not impair Mr. Hart's independence because the duty
of Mr. Hart and his firm as counsel to the Company is to the Company in its
entirety, including all of the shareholders, and not to Mr. Hammons. In the
event of a conflict between Mr. Hammons and the Company, Mr. Hart and his firm
could not represent either party. In addition, the board considered Mr. Hart's
fiduciary duties as a director, and his past performance on the board, and
concluded that Mr. Hart had demonstrated an independence of thought and a
commitment to the best interest of all shareholders.
SELECTION OF NOMINEES AND NOMINATIONS BY SHAREHOLDERS. In March of 2004,
the board of directors established a nominating committee composed of three
independent directors (as defined in the American Stock Exchange listing
standards) to select nominees for election as directors. The board has adopted a
nominating committee charter governing the nomination process.
The nominating committee considers director candidates recommended by any
shareholder in writing. A shareholder's written recommendation must be received
by the committee in a timely manner, but no later than 90 days before the annual
meeting, and contain the name of the candidate, a detailed description of his or
her experience and qualifications and any other information that may assist the
nominating committee in its evaluation of the candidate. The recommendation
should be addressed to the Nominating Committee of the Board of Directors c/o
Chief Financial Officer, John Q. Hammons Hotels, Inc., 300 John Q. Hammons
Parkway, Suite 900, Springfield, Missouri 65806.
The nominating committee uses the same process to review and evaluate all
potential director nominees, regardless of who recommends the candidate, and
considers the candidate's qualifications in light of the criteria established
for board members, as well as any special skills the committee believes are
appropriate, in light of the credentials of the other directors. We have never
used a director search firm to locate potential board nominees in the past,
although the nominating committee is free to do so in the future if it so
chooses.
Criteria and minimum qualifications for new board members include a high
level of integrity and ability, independence from the Company and management
under the criteria established by the American Stock Exchange listing standards
and operating company experience as a member of senior management (operational
or financial). The nominating committee also seeks individuals with the time and
commitment necessary to perform the duties of a board member, hospitality
industry experience or knowledge, and other special skills that complement or
supplement the skill sets of current directors.
In addition to recommending potential nominees to the board, our Bylaws
permit shareholders to nominate persons directly for directors if the
nominations are made in a timely written notice. We must receive the notice at
our principal executive offices not less than 120 days and not more than 180
days before the meeting date (if at least 130 days' notice or prior public
disclosure of the annual meeting date is made). If less than 130 days' notice or
public disclosure of the meeting date is given to shareholders, we must receive
notice not later than the close of business on the 10th day following the day on
which such notice of the annual meeting date was mailed or such public
disclosure was made. A shareholder's notice of nomination must include certain
information (specified in Section 3.5 of our Bylaws) concerning each proposed
nominee and the nominating shareholder. We have not received any nominations for
directors from shareholders for the 2005 annual meeting.
DIRECT COMMUNICATIONS WITH THE BOARD OF DIRECTORS. Our board of directors
has established the following methods for shareholders to communicate directly
with the board of directors or any of its members:
- By Mail. Letters may be addressed to the board of directors or to an
-------
individual board member as follows:
31
The Board of Directors (or name of individual director)
c/o Office of the Chief Financial Officer
John Q. Hammons Hotels, Inc.
300 John Q. Hammons Parkway, Suite 900
Springfield, Missouri 65806
The Chief Financial Officer will forward (unopened) any
correspondence addressed as set forth directly to the named board
member, or if addressed to the entire board of directors, to the
chair of the audit committee.
- By Telephone. We have established a safe and confidential process
------------
for reporting, investigating and resolving employee and other third
party concerns related to accounting, auditing and similar matters
under the Sarbanes-Oxley Act of 2002. Shareholders may also use this
Report Line to communicate with one or more of our directors. The
Report Line is operated by an independent, third party service. In
the United States, the Report Line can be reached by dialing
toll-free 1-888-337-7507.
BOARD COMMITTEES. Our four standing board committees operate under
charters adopted by the board of directors. Those charters are posted on our
website at HTTP://WWW.JQH.COM/INDEX.CFM/FUSEACTION/CORPORATE.DSPSUBCMS/PGID/618.
--------------------------------------------------------------------
In addition, as noted above, our board has established a Special Committee to
handle all negotiations with respect to the possible merger of the Company with
an outside buyer.
The audit committee is composed of Messrs. Moore, Dempsey and Lopez-Ona.
During the fiscal year ended December 31, 2004, they met four times. The audit
committee reviews the scope and results of the independent annual audit. The
audit committee also reviews the scope and results of audits performed by our
internal auditors. The board of directors has determined that all three members
of the audit committee are "independent," as such term is defined by the
American Stock Exchange listing standards. In addition, Donald H. Dempsey and
John E. Lopez-Ona are both "audit committee financial experts," as defined by
SEC rules. The board determined that Mr. Lopez-Ona qualifies as an audit
committee financial expert on the basis of his relevant experience, and
determined that he has demonstrated the required attributes of an audit
committee financial expert during his five-year tenure on our audit committee.
In addition to his undergraduate degree in accounting and his graduate degree
(MBA), Mr. Lopez-Ona spent five years at a Fortune 100 conglomerate conducting
operation audits and ten years with large New York-based investment banks
managing transactions involving large public and private companies.
The members of the finance committee are Messrs. Earley, Dempsey, Sullivan
and Mrs. Dowdy. The finance committee oversees our finance, accounting and
development activities, and reviews and makes recommendations to the board
concerning all real property acquisitions of $1,000,000 or more, agreements with
annual obligations of $250,000 or more, financings of $1,000,000 or more, any
agreement or arrangements with Company insiders, sales or purchases of hotels or
associated properties, our annual budget and the refinancing of our bonds and
bank debt. After finance committee review, board policy provides that all such
corporate commitments must be reviewed and approved by the board. During the
fiscal year ended December 31, 2004, the finance committee held seven meetings.
The compensation committee establishes the compensation for our CEO and
our executive officers, and also reviews employee compensation and makes
recommendations to the board regarding changes in compensation. The committee
administers our stock option plan and makes option grants. During the fiscal
year ended December 31, 2004, the compensation committee held three meetings.
The members of the compensation committee are Messrs. Hart, Moore and Sullivan.
The board of directors has determined that all three members of the compensation
committee are "independent," as such term is defined by the American Stock
Exchange listing standards.
The nominating committee is composed of Messrs. Hart, Moore and Sullivan.
That committee selected the nominees for re-election at the 2005 annual meeting
of shareholders.
32
MEETINGS OF THE BOARD OF DIRECTORS AND THE SHAREHOLDERS. As a policy of
the board of directors, all directors are expected to attend all board and
relevant committee meetings, as well as our annual shareholder meeting, if
possible. All of our directors attended the 2004 annual shareholders meeting.
During the fiscal year ended December 31, 2004, our board of directors
held eleven meetings. Each director attended all board meetings, except for Mr.
Lopez-Ona who attended eight of the eleven board meetings. Each director
attended all meetings of each standing committee of which he or she was a
member, except for Mr. Lopez-Ona who attended three of the four audit committee
meetings. All members of the Special Committee attended all 19 meetings held in
2004, except for Mr. Moore who attended 17 of the 19 Special Committee meetings.
CODE OF ETHICS. We have adopted a code of ethics that applies to all of
our directors, officers and employees, including our chief executive officer,
principal financial officer and principal accounting officer. Our code of ethics
is posted on our Internet website at
HTTP://WWW.JQH.COM/INDEX.CFM/FUSEACTION/CORPORATE.DSPSUBCMS/PGID/618. We intend
- --------------------------------------------------------------------
to post any amendments to or waivers from our code of ethics, which must be
approved by the board of directors on our Internet website at
HTTP://WWW.JQH.COM/INDEX.CFM/FUSEACTION/CORPORATE.DSPSUBCMS/PGID/618. You also
- --------------------------------------------------------------------
may obtain, free of charge, a copy of our code of ethics by writing to Investor
Relations, John Q. Hammons Hotels, Inc., 300 John Q. Hammons Parkway, Suite 900,
Springfield, Missouri 65806.
MANAGEMENT
The following is a biographical summary of the experience of our executive
officers and other key officers.
John Q. Hammons, age 86, is the Chairman, Chief Executive Officer, a
director and founder of the Company. Mr. Hammons has been actively engaged in
the development, management and acquisition of hotel properties since 1959. From
1959 through 1969, Mr. Hammons and a business partner developed 34 Holiday Inn
franchises, 23 of which were sold in 1969 to Holiday Inns, Inc. Since 1969, Mr.
Hammons has developed over 110 hotels on a nationwide basis, primarily under the
Holiday Inn and Embassy Suites Hotels trade names.
Lou Weckstein, age 68, is President of the Company. Prior to joining the
Company in September 2001, Mr. Weckstein served for ten years as Senior Vice
President, Hotel Operations, for Windsor Capital Group, a Los Angeles-based
hotel management and development company. Prior to Windsor Capital Group, Mr.
Weckstein served eight years as Vice President of Operations for Embassy Suites,
Inc. Over his career, Mr. Weckstein spent numerous years as Vice
President-Operations for Ramada Inns, Inc. and Vice President-Operations for
Sheraton Inns, Inc. He began his career in the hospitality industry as a hotel
manager in Cleveland, Ohio.
Paul E. Muellner, age 48, is Executive Vice President and Chief Financial
Officer of the Company. He has been the Chief Financial Officer of the Company
since 2000 and an Executive Vice President since 2003. From 1998 through 2000,
Mr. Muellner served as our Vice President and Corporate Controller. Prior to
joining the Company in June of 1998, Mr. Muellner was Vice President of Finance
for Carnival Hotels. He also served as Operations Controller at Omni Hotels as
well as positions with Red Lion Inns and Marriott Corporation.
Debra M. Shantz, age 41, is Senior Vice President and General Counsel of
the Company. She joined the Company in May 1995 as general counsel. Prior
thereto, Ms. Shantz was a partner of Farrington & Curtis, P.C. (now Husch &
Eppenberger, LLC), a law firm which serves as primary outside counsel for us and
Mr. Hammons, where she practiced primarily in the area of real estate law. Ms.
Shantz had been with that firm since 1988.
William A. Mead, age 51, is Regional Vice President, Eastern Region, of
the Company. He joined the Company in that capacity in 1994 from Davidson
Hotels, where he had been a general manager.
Pat A. Shivers, age 53, has served as Senior Vice President and Corporate
Controller of the Company since 2001. Prior to that, he served as Senior Vice
President of Administration and Control. He has been active in Mr. Hammons'
hotel operations since 1985. Prior thereto, he had served as Vice President of
Product Management in Winegardner & Hammons, Inc., a hotel management company.
33
Steven E. Minton, age 53, has served as Senior Vice President,
Architecture, of the Company since 1993. He joined the Company as a corporate
architect in 1985. Prior to that time, Mr. Minton was a project manager with the
firm of Pellham and Phillips working on various John Q. Hammons projects.
Jacqueline A. Dowdy, age 61, has been the Secretary of the Company since
1982 and a director of the Company since 1994. She has been active in Mr.
Hammons' hotel operations since 1981. She is an officer of several affiliates of
the Company. We describe these affiliations under "Certain Relationships and
Related Transactions."
L. Scott Tarwater, age 56, has been Senior Vice President of Sales and
Marketing of the Company since March of 2004. He joined the Company as Vice
President of Sales and Marketing in September 2000 from Windsor Capital Group,
in Los Angeles, California, where he served as Senior Vice President, Sales and
Marketing, for ten years. Prior to that time, Mr. Tarwater served as Senior
Director, Sales and Marketing, for Embassy Suites, Inc., Irving, Texas.
John D. Fulton, age 54, is Vice President, Interior Design, of the
Company. He joined the Company in 1989 from Integra/Brock Hotel Corporation,
Dallas, Texas, where he had been Director of Design and Purchasing for ten
years.
Kent S. Foster, age 45, is Vice President, Human Resources, of the
Company. He joined the Company in 1999 from Dayco Products, Inc. in Michigan
where he served as Director and Manager, Human Resources. Prior thereto, Mr.
Foster served as Assistant Vice President and Director, Human Resources, for
Great Southern Savings & Loan Association, Springfield, Missouri.
William T. George, Jr., age 53, is Vice President, Capital Planning and
Asset Management, of the Company. He joined the Company in 1994 from Promus
Hotel Corporation, where he had been Director of Capital Refurbishment.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and officers to file with the SEC initial reports of ownership of
our securities and to file subsequent reports when their ownership changes.
Based on a review of reports submitted to us, we believe that all Section 16(a)
filing requirements applicable to our directors and officers during the fiscal
year ended December 31, 2004, were complied with on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION.
CASH COMPENSATION
The following table sets forth the salary compensation, cash bonus and
certain other forms of compensation paid for services rendered in all capacities
during the 2004, 2003 and 2002 fiscal years to our Chief Executive Officer and
our four other most highly compensated executive officers serving at the end of
2004 (the "named executive officers").
34
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ALL OTHER ------
NAME AND PRINCIPAL FISCAL COMPENSATION SECURITIES UNDERLYING OPTIONS
POSITIONS YEAR SALARY ($) BONUS ($) ($) (a) (#)
- ------------------ ------ ---------- ------------ ------------ -----------------------------
John Q. Hammons 2004 370,750 225,374 - -
Chairman of the Board and 2003 359,000 200,130 - 35,000 (d)
Chief Executive Officer 2002 342,500 120,000 - -
Louis Weckstein (b) 2004 330,381 187,625 5,125 -
President 2003 330,381 184,972 6,603 20,000 (d)
2002 309,131 105,600 3,338 -
Paul E. Muellner 2004 216,045 97,969 4,100 -
Executive Vice President and 2003 202,545 99,078 3,088 25,000 (d)
Chief Financial Officier 2002 177,545 79,000 (e) 3,570 -
Debra M. Shantz 2004 172,380 78,147 4,902 -
Senior Vice President and 2003 166,717 72,757 3,238 15,000 (d)
General Counsel 2002 160,839 66,500 (f) 3,668 -
William A. Mead (c) 2004 176,967 63,990 4,998 -
Regional Vice President 2003 166,600 40,000 2,469 15,000 (d)
Eastern Region 2002 162,891 63,386 3,062 -
(a) Matching contributions to 401(k) Plan.
(b) Salary does not include $270,000, $270,000 and $267,083 paid personally by
Mr. Hammons in 2004, 2003 and 2002, respectively. Bonuses do not include
$100,000 paid by Mr. Hammons for 2002 in five equal monthly installments
beginning March 1, 2003. Mr. Hammons personally compensated the employee for
services related to his personal enterprises.
(c) Salary does not include $65,000, $65,000 and $65,000 paid personally by Mr.
Hammons, in 2004, 2003 and 2002, respectively. Mr. Hammons personally
compensated the employee for services related to his personal enterprises.
(d) Comprised of options with an exercise price of $4.75 per share.
(e) Includes a special one-time bonus of $25,000 for work related to refinancing
our bonds.
(f) Includes a special one-time bonus of $17,500 for work related to refinancing
our bonds.
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant any stock options during 2004 to any of the named
executive officers.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
stock options during 2004 by each of the named executive officers and the fiscal
year-end value of unexercised options. The table includes the number of shares
covered by both exercisable and unexercisable stock options as of December 31,
2004 and the values of "in-the-money" options, which represent the positive
spread between the exercise price of any such option and the fiscal year-end
value of the common stock.
35
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS (1)
-------------------------------------------------------------------
SHARES ACQUIRED VALUE REALIZED
NAME ON EXERCISE (#) ($) EXERCISABLE (2) UNEXERCISABLE EXERCISABLE (2) UNEXERCISABLE
- ---------------- --------------- -------------- --------------- ------------- --------------- -------------
John Q. Hammons - - 308,750 26,250 $4,235,625 $406,875
Louis Weckstein - - 80,000 40,000 $1,210,000 $610,000
Paul E. Muellner - - 46,250 18,750 $ 683,125 $290,625
Debra M. Shantz - - 103,750 11,250 $1,416,875 $174,375
William A. Mead - - 63,750 11,250 $ 878,125 $174,375
(1) Calculated based upon the excess of the closing price of our Class A
Common Stock as reported on the American Stock Exchange on December 31,
2004, over the exercise price per share of the stock options ($4.75 for
the options granted in 2003, $5.15 for the options granted in 2001, $5.00
for the options granted in 2000 and $7.375 for the options granted in
1998).
(2) All of the 1998 and 2000 options are currently exercisable, seventy-five
percent of the 2001 options are currently exercisable and twenty-five
percent of the 2003 options are currently exercisable.
401(k) PLAN
Effective January 1, 1996, we adopted a contributory retirement plan (the
"401(k) Plan") for our employees that currently requires employees to be 21
years of age and have at least 6 months of service to participate. The 401(k)
Plan is designed to provide tax-deferred income to employees in accordance with
the provisions of Section 401(k) of the Internal Revenue Code of 1986. The
401(k) Plan provides that we will make a matching contribution to each
participant's account equal to 50% of such participant's eligible contributions
up to a maximum of 3% of such participant's annual compensation.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Lou Weckstein, our President,
effective September 17, 2001. Mr. Weckstein's base salary under the agreement is
$300,000 per year, with such annual increases in compensation as may be
determined by the compensation committee of the Company. He also may participate
in incentive or supplemental compensation plans for which he is eligible. The
compensation committee of the Company may award him a cash bonus based upon the
bonus plan for our other executive officers. Either party may terminate the
agreement at any time. Mr. Hammons and Mr. Weckstein also have a verbal
agreement, under which Mr. Hammons has agreed to pay to Mr. Weckstein, for
services he performs unrelated to our business, the difference between his
annual salary from the Company and $600,000, up to a maximum of $270,000 per
year.
We entered into an employment agreement with Paul Muellner, our Chief
Financial Officer, on December 1, 2003. This agreement entitles Mr. Muellner to
an annual base salary of $210,000 and other benefits generally available to the
Company's executive officers, including participation in incentive or
supplemental compensation plans for which he is eligible. The compensation
committee of the Company may award him a cash bonus based upon the bonus plan
for our other executive officers and stock options pursuant to the Company's
1994 Stock Option Plan. In the event Mr. Muellner is terminated without cause or
there is a change-in-control of the Company, the Company will continue to pay
his base salary and COBRA payments for a period of one year, in addition to an
annual bonus award pursuant to the executive bonus plan. Either party may
terminate the agreement at any time.
We entered into an employment agreement with Debra M. Shantz, dated as of
May 1, 1995, and amended on October 31, 1997 and November 1, 2001. Under the
agreement, Ms. Shantz's annual base salary is $155,000, plus a discretionary
bonus, with such annual increases in compensation as may be determined by the
compensation committee of the Company. The agreement runs until May 1, 2005, and
renews automatically thereafter from year to year, unless she or the Company
terminates her employment at the end of the renewal term by giving not less than
six months prior written notice. If the Company terminates Ms. Shantz's
employment without cause, she receives two years of her base salary and any
vested deferred compensation, as well as six months of benefits under the
Company's benefit plans. In the event there is a change-in-control of the
Company, Ms. Shantz may terminate the agreement, and the Company will pay her 12
times her monthly salary and an amount equal to her bonus for the prior fiscal
year.
36
We entered into an employment agreement with William A. Mead, one of our
regional vice-presidents, as of January 25, 2000, that became effective on April
1, 2000. Mr. Mead's annual base salary under the agreement is $160,000, plus a
guaranteed bonus of at least $40,000 each year. He also may participate in our
available savings, retirement and other benefit plans. This agreement expires on
March 31, 2005. In addition, as of January 27, 2000, Mr. Hammons and Mr. Mead
entered into an agreement that provides that in exchange for Mr. Mead's services
in selecting markets for various hotel projects for Mr. Hammons personally, Mr.
Hammons will pay Mr. Mead an additional $65,000 per year, in equal monthly
installments, during the term of his employment agreement with the Company. That
agreement also became effective on April 1, 2000, and provides that Mr. Mead
will have the opportunity to acquire a 25% interest in up to three Residence Inn
hotel projects, with a substantial portion of Mr. Mead's investment to be
financed.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee for the fiscal year ended December 31, 2004 was
comprised of three directors, Messrs. Sullivan, Moore and Hart.
Mr. Hart is a non-employee director of the Company and is a member of the
law firm of Husch & Eppenberger, LLC, which performs legal services on a regular
basis for the Company and personally for Mr. Hammons. The Company paid such firm
$68,747 in legal fees during the fiscal year ended December 31, 2004.
DIRECTOR COMPENSATION
For 2004, each non-employee director received:
- $1,000 for each regular board meeting attended and $500 for each
regular committee meeting of a standing committee attended ($750 per
meeting for the committee chair),
- $1,000 for each meeting of the Special Committee attended,
- a cash payment of $10,000 (other than Mr. Earley, who declined the
cash payment),
- 1,087 shares of Class A common stock with a fair market value equal
to $10,000 on the date of payment, (other than Mr. Earley, who
declined the share grant), and
- an option to purchase 10,000 shares of our Class A common stock at a
per share exercise price of $9.20, exercisable in four equal annual
installments, beginning May 12, 2005, and expiring May 12, 2014.
The stock and options were issued pursuant to the 1999 Non-Employee
Director Stock and Stock Option Plan. Employee directors are not compensated for
their services as directors or committee members.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This table summarizes share and exercise price information about our
equity compensation plans as of December 31, 2004.
37
EQUITY COMPENSATION PLAN INFORMATION
(b)
WEIGHTED-AVERAGE (c)
(a) EXERCISE NUMBER OF SECURITIES
NUMBER OF SECURITIES PRICE OF REMAINING AVAILABLE FOR
TO BE ISSUED UPON OUTSTANDING FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF OPTIONS, COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS(1) RIGHTS REFLECTED IN COLUMN(a)) (1)
---------------------- ---------------- ------------------------------
Equity compensation plans approved by
security holders.......................... 1,624,950 $5.80 --
Equity compensation plans not approved
by security holders (2)................... 350,000(3) $5.94 97,625
------------ ------
Total....................................... 1,974,950(3) $5.82 97,625
============ ======
(1) Number of shares is subject to adjustment for changes in capitalization
for stock splits and stock dividends and similar events.
(2) Under the 1999 Non-Employee Director Stock and Stock Option Plan,
non-employee directors receive an automatic grant of shares of Class A
common stock with a fair market value of $10,000 and an option to purchase
10,000 shares of Class A common stock each year. Each such option has a
term of ten years from the date of the grant and is fully exercisable
within four years (one-fourth exercisable on each anniversary of the
grant). The exercise price of such options is the fair market value of the
Class A common stock on the date of grant.
(3) Does not include 52,375 shares issued outright to directors under the 1999
Non-Employee Director Stock and Stock Option Plan.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of February 15,
2005, with respect to our Class A common stock and Class B common stock owned by
(1) each director and director nominee, (2) the named executive officers in the
Summary Compensation Table and (3) all of our directors, director nominees and
executive officers as a group. In accordance with the rules promulgated by the
SEC, such ownership includes shares presently owned, as well as shares that the
named person has the right to acquire within 60 days of February 15, 2005,
including shares that the named person has the right to acquire through the
exercise of any option or warrant.
38
The number of shares of Class A common stock shown in the table gives
effect to the conversion of all 294,100 shares of Class B common stock into an
equal number of shares of Class A common stock and also gives effect to the
redemption of all 16,043,900 LP Units of the Partnership for shares of Class A
common stock on a one-for-one basis.
Except as indicated in the footnotes, all shares set forth in the table
are owned directly, and the indicated person has sole voting and investment
power with respect to all shares shown as beneficially owned by such person.
SHARES OF CLASS A COMMON STOCK SHARES OF CLASS B COMMON STOCK
------------------------------ ------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE NUMBER OF SHARES PERCENTAGE
- ------------------------------------ ------------------ ---------- ---------------- ----------
John Q. Hammons 16,915,850 (b) 77.83% 294,100 100%
Jacqueline A. Dowdy 100,462 (c) *
Donald H. Dempsey 35,465 (d) *
Daniel L. Earley 37,000 (e) *
William J. Hart 46,545 (e) *
John E. Lopez-Ona 52,645 (e) *
Debra M. Shantz 104,250 (g) *
William A. Mead 63,750 (f) *
James F. Moore 47,345 (e) *
Paul E. Muellner 46,250 (f) *
David C. Sullivan 47,045 (e) *
Louis Weckstein 80,700 (h) *
All executive officers and directors 17,577,307 (b)
group (12) persons (c)(d)(e)(f)(g)(h) 78.84% 294,100 100%
*Less than 1%
(a) The address of each of the executive officers and directors of the Company
is 300 John Q. Hammons Parkway, Suite 900, Springfield, Missouri 65806.
(b) Includes 269,100 outstanding shares of Class A common stock. Also includes
294,100 shares of Class B common stock convertible into Class A common
stock on a share-for-share basis at any time and which will be
automatically converted into Class A common stock upon the occurrence of
certain events. Prior to conversion of the Class B common stock and
without giving effect to the redemption of the LP Units, the Class B
common stock (which has 50 votes per share) represents 74.3% of the
combined voting power of both classes of the Company's outstanding Company
common stock. Also includes 16,043,900 LP Units of the Partnership
redeemable, at the sole option of the Company, by payment of the then cash
equivalent of such LP Units or by the issuance of shares of class A common
stock on a one-for-one basis, including LP Units owned for Mr. Hammons'
benefit through Hammons, Inc., of which the John Q. Hammons Revocable
Trust dated December 28, 1989, as amended and restated, is the sole
shareholder. Also includes exercisable options to purchase 308,750 shares.
(c) Includes approximately 1,712 shares allocated to 401(k) Plan account as of
the end of 2004, and exercisable options to purchase 68,750 shares.
(d) Includes exercisable options to purchase 25,000 shares.
(e) Includes exercisable options to purchase 35,000 shares.
(f) Exercisable options.
(g) Includes exercisable options to purchase 103,750 shares.
(h) Includes exercisable options to purchase 80,000 shares.
39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
We list below information, as of December 31, 2004 (or such later date as
indicated based on the most recent reports filed with the SEC), with respect to
each person we believe to be the beneficial owner of more than 5% of our
outstanding Class A common stock, other than Mr. Hammons. This information is
based solely on beneficial ownership information contained in the most recent
Schedule 13D or 13G filed on behalf of such person with the SEC. The percentages
shown are based on the outstanding shares of Class A common stock as of March
22, 2005 (and do not give effect to the conversion of any of the 294,100 shares
of Class B common stock into an equal number of shares of Class A common stock
or to the redemption of any of the 16,043,900 LP Units for shares of Class A
common stock).
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL PERCENT OF CLASS A COMMON STOCK
OWNER OWNERSHIP OUTSTANDING
- ------------------------------------ ------------------------------- -------------------------------
James M. Clark, Jr. 538,215(a) 10.3%
c/o Gerald A. Eppner, Esq.
Cadwalader, Wickersham & Taft LLP
100 Maiden Lane
New York, NY 10038
First Manhattan Co. 605,319(b) 11.6%
437 Madison Avenue
New York, NY 10022
Pirate Capital LLC 475,100(c) 9.1%
200 Connecticut Avenue
4th Floor
Norwalk, CT 06854
R. Scott Asen 258,508(d) 4.946%(d)
Asen and Co.
224 East 49th Street
New York, NY 10017
JQH Shareholders for Fair Play 1,017,923(e) 19.5%
c/o James M. Clark, Jr.
350 Park Avenue
New York, NY 10022
JQH Acquisition, LLC 1,147,723(f) 22%
152 West 57th Street, 56th Floor
New York, NY 10019
Washburne Capital Management, LLC 346,100(g) 6.6%
230 Park Avenue
Suite 925
New York, NY 10169
Severn River Capital Management, LLC 294,400(h) 5.6%
Eight Greenwich Office Park
Greenwich, CT 06831
(a) Based on Schedule 13D, as amended, dated October 28, 2004 (filed with the
SEC on the same date). According to the Schedule 13D, as amended, Mr. Clark has
[sole voting power as to 507,815 shares, sole dispositive power as to 507,185
shares] and shared voting and dispositive power as to 30,400 shares (held in
family trust, owned by spouse and held in a charitable foundation). The filing
was also made on behalf of Susanna L. Porter. Ms. Porter has sole voting and
dispositive power as to 7,500 shares and shared voting and dispositive power as
to 500 shares (held in a custodial account for a non-related minor for which Ms.
Porter has custodial powers).
40
(b) Based on Schedule 13G, as amended, dated February 8, 2005 (filed with the
SEC on the same date). According to the Schedule 13G, as amended, First
Manhattan Co. ("FMC") has sole voting and dispositive power as to 7,200 shares,
shared voting power as to 580,169 shares and shared dispositive power as to
598,119 shares. According to the Schedule 13G, as amended, 54,885 shares are
owned by family members of Senior Managing Directors of FMC. FMC disclaims
dispositive power as to 9,200 of such shares and beneficial ownership as to
45,685 of such shares.
(c) Based on Schedule 13D, as amended, dated January 7, 2005 (filed with the
SEC on January 10, 2005). According to the Schedule 13D, as amended, Pirate
Capital, LLC has sole voting power as to 171,900 shares and sole dispositive
power as to 475,100 shares. The filing is also made on behalf of Thomas R.
Hudson, Jr. and Gabrielle Katz Hudson, the controlling members of Pirate
Capital, LLC. Mr. Hudson has sole voting power as to 303,200 shares, shared
voting power as to 171,900 shares and shared dispositive power as to 475,100
shares. Ms. Hudson has shared voting power as to 171,900 shares and shared
dispositive power as to 475,100 shares.
(d) Based on Schedule 13D dated October 27, 2004 (filed with the SEC on the
same date). According to the Schedule 13D, Mr. Asen has sole voting and
dispositive power as to 228,508 shares and shared voting and dispositive power
as to 30,000 shares. Mr. Asen disclaims beneficial ownership as to 30,000 shares
(which consist of shares held in and owned by certain managed accounts managed
by Asen and Co.). In the Schedule 13D, Mr. Asen reports that he is the
beneficial owner of 5.3% of Class A common stock outstanding, based on 4,886,175
shares outstanding pursuant to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended July 2, 2004.
(e) Based on Schedule 13D dated October 26, 2004 (filed with the SEC on the
same date), as amended by Amendment No. 1 to Schedule 13D dated November 17,
2004 (filed with the SEC on November 18, 2004) and Amendment No. 2 to Schedule
13D dated February 2, 2005 (filed with the SEC on the same date). According to
the Schedule 13D as amended, the group JQH Shareholders for Fair Play consists
of James M. Clark, Jr., R. Scott Asen, Gifford Combs and Stephen J. Clearman
(described as the "Reporting Persons"). Each member of the group has agreed to
support the proposal by JQH Acquisition, LLC to purchase shares of the Company.
The group may be deemed to beneficially own, directly and indirectly, 982,923
shares, consisting of (i) 538,215 shares beneficially owned by Mr. Clark as
described in (a), above, (ii) 258,508 shares beneficially owned by Mr. Asen as
described in (d), above, (iii) 126,200 shares beneficially owned by Mr. Combs,
including 116,200 shares as to which Mr. Combs has sole voting and dispositive
power (in his position as managing director of Dalton Investments, LLC which has
investment authority to act on behalf of Pacific and General Investments, Inc.,
which beneficially owns 116,200 shares) and 10,000 shares as to which Mr. Combs
has shared voting and dispositive power (in his position as a member of the
board of directors of Kings Bay Investment Company Ltd., which owns 10,000
shares) and (iv) 60,000 shares beneficially owned by Mr. Clearman, as to which
Mr. Clearman has shared voting and dispositive power in his position as managing
member of Kinderhook GP, LLC which is the general partner of Kinderhook
Partners, LP, which directly beneficially owns the 60,000 shares. In the
Schedule 13D, as amended, JQH Shareholders for Fair Play reports that the
Reporting persons in the aggregate may be deemed to beneficially own, directly
and indirectly, 1,017,923 shares. We included this aggregate number in the table
above, but were not able to reconcile this aggregate number with the information
provided in the Schedule 13D, as amended, however, with respect to the shares
reported as beneficially owned by each of the Reporting Persons in that Schedule
13D.
(f) Based on Schedule 13D, as amended, dated March 14, 2005 (filed with the
SEC on the same date). According to the Schedule 13D, as amended, JQH
Acquisition, LLC has shared voting power as to 1,147,723 shares based on a
Stockholders Agreement between JQH Acquisition, LLC and James M. Clark, Jr., R.
Scott Asen, Gifford Combs, Stephen J. Clearman, and Raffles Associates, L.P.,
shareholders of the Company. Pursuant to the Stockholders Agreement, each of the
shareholder parties to the agreement agreed to support an offer by JQH
Acquisition, LLC to purchase all or any and all of the shares of the Company.
Neither JQH Acquisition, LLC nor Jonathan Eilian, the sole member of JQH
Acquisition, LLC, owns of record any shares. According to the Schedule 13D, as
amended, JQH Acquisition, LLC may be deemed to have shared voting power as to
538,215 shares with Mr. Clark, shared voting power as to 258,508 shares with Mr.
Asen, shared voting power as to 161,200 shares with Mr. Combs, shared voting
power as to 60,000 shares with Mr. Clearman and shared voting power as to
129,800 shares with Raffles Associates, L.P.
41
(g) Based on Schedule 13G dated March 11, 2005 (filed with the SEC on the same
date). According to the Schedule 13G, Washburne Capital Management, LLC
("Washburne") has sole voting power as to 96,908 shares and sole dispositive
power as to 346,100 shares. Washburne serves as investment manager to certain
funds and separate accounts ("Funds"). In its role as an investment manager,
Washburne possesses the investment and/or voting power over shares owned by the
Funds, and may be deemed to be the beneficial owner of shares held by the Funds.
All shares reported in the Schedule 13G are owned by the Funds, and Washburne
disclaims ownership of such shares.
(h) Based on Schedule 13G dated March 10, 2005 (filed with the SEC on the same
date). According to the Schedule 13G, Severn River Capital Management, LLC has
shared voting power as to 294,400 shares and shared dispositive power as to
294,400 shares. The filing is also made on behalf of Severn River Master Fund,
Ltd. and S. Scott Roth, each of which has shared voting power as to 294,400
shares and shared dispostive power as to 294,400 shares. Each of Severn River
Capital Management, LLC, Severn River Master Fund, Ltd. and S. Scott Roth
disclaim beneficial ownership of the shares reported in the Schedule 13G except
to the extent of their pecuniary interest therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Hammons and Anvil Capital, an investment and consulting firm owned by
Mr. Lopez-Ona, one of our directors, have formed a limited liability company
through which they have invested in securities of one or more companies in
industries unrelated to our business.
Mr. Hammons controls the Partnership through his control of the Company,
the sole general partner of the Partnership. His equity interest in the Company
(based on his beneficial ownership of 269,100 shares of Class A common stock,
all 294,100 shares of Class B common stock and all 16,043,900 limited
partnership units of the Partnership, or the LP Units) is 79%. There are
significant potential conflicts of interests between Mr. Hammons as a limited
partner of the Partnership, and the holders of Class A common stock, which
conflicts may be resolved in favor of Mr. Hammons.
Holders of LP Units have the right to require the redemption of their LP
Units. This redemption right will be satisfied, at the sole option of the
Company, by the payment of the then cash equivalent thereof or by the issuance
of shares of Class A common stock on a one-for-one basis. Mr. Hammons
beneficially owns all 16,043,900 LP Units. If Mr. Hammons, as a holder of LP
Units, requires the Partnership to redeem LP Units, the non-employee directors
of the Company would decide, consistent with their fiduciary duties as to the
best interests of the Company, whether to redeem the LP Units for cash or for
shares of Class A common stock. Mr. Hammons would not vote or otherwise
participate in the decision of the non-employee directors. Mr. Hammons has
informed us that he has no current plan to require the Partnership to redeem his
LP Units.
During 2004, we provided management services to fifteen hotels not owned
by the Company (the "Managed Hotels") pursuant to management contracts (the
"Management Contracts"). Management fees of 3% to 4% of gross revenues were paid
to the Company by the Managed Hotels in the aggregate amount of $3,323,505 in
the fiscal year ended December 31, 2004. In addition to the management fees paid
by the Managed Hotels to the Partnership in that year, the Managed Hotels
reimbursed us for a portion of the salaries we paid to our regional vice
presidents, whose duties include management services related to the Managed
Hotels, and for certain marketing and other expenses allocated to the Managed
Hotels. Such reimbursed services and expenses aggregated $71,452 in the fiscal
year ended December 31, 2004. The Management Contracts have 20-year terms and
automatically extend for four periods of five years, unless otherwise canceled.
We currently have no hotels under construction and no plans to develop new
hotels for the foreseeable future. During 2000, we entered into a five-year
management contract with John Q. Hammons whereby we will provide internal
administrative, architectural design, purchasing and legal services to Mr.
Hammons in conjunction with the development of hotels in an amount not to exceed
1.5% of the total development costs of any single hotel. In exchange, we have
the opportunity to manage the hotel upon opening and a right of first refusal to
purchase the hotel in the event it is offered for sale. During fiscal year 2004,
2003, 2002 and 2001, we paid approximately $805,300, $327,800, $326,000, and
$487,000, respectively, of additional costs in accordance with the management
contract. These costs will be amortized over a five-year contract period.
Amortization for these costs commence upon the opening of the hotels.
42
The Partnership holds an option from Mr. Hammons or persons or entities
controlled by him to purchase the Managed Hotels, until February 2009. If an
option is exercised, the purchase price is based on a percentage of the fair
market value of the Managed Hotel as determined by an appraisal firm of national
standing. One hotel we own and four Managed Hotels are located in Springfield,
Missouri. These hotels potentially compete with one another for customers. We
believe that these hotels do not significantly compete with one another due to
their respective locations and attributes.
Mr. Hammons has a 45% ownership interest in Winegardner & Hammons, Inc.,
or WHI. All of the hotels we own or manage have contracted with WHI to provide
accounting and other administrative services. The accounting and administrative
charges expensed by the hotels we own were approximately $1,651,000, of which
approximately $109,000 is from discontinued operations, in the fiscal year ended
December 31, 2004. The fee may increase if the number of hotels for which WHI
performs accounting and administrative services drops below 55 hotels. The
existing accounting service agreement expires in June 2005.
We lease space in the John Q. Hammons Building for our headquarters from a
Missouri company, of which Mr. Hammons owns 50% and the remaining 50% is
collectively held by other employees, including Jacqueline A. Dowdy, the
secretary and a director, who is a 9.5% owner. Pursuant to four lease
agreements, expiring December 31, 2004, we paid monthly rental payments of
approximately $22,450 in 2004. We made aggregate annual lease payments to that
Missouri company of approximately $269,400 in 2004. On December 14, 2004 we
extended our lease for a one year extension under which we will pay monthly
rental payments of approximately $24,000, aggregating $288,000 in 2005.
We also lease the real estate for the Chateau on the Lake Resort, opened
in mid-1997, in Branson, Missouri, from Mr. Hammons. Annual rent is based on the
greater of a percentage of adjusted gross revenues from room sales and food and
beverage sales on the property or $150,000. Rent expense was approximately
$233,100 in 2004. The lease term is 50 years, with an option to renew for an
additional 10 years. We also have an option to purchase the land after March 1,
2018, at the greater of $3,000,000 or the current appraised value.
To supplement our self-insurance programs, we provide property, auto,
commercial liability, workers' compensation and medical insurance to the hotels,
including hotels owned by the Partnership and Mr. Hammons, under blanket
commercial policies we purchase. In addition, we provide umbrella and crime
insurance to all such hotels under blanket commercial policies we purchase.
Generally, we allocate expenses to each hotel (including those owned by Mr.
Hammons) based upon factors similar to those used by the insurance provider to
compute the aggregate group policy expense.
Certain of our employees provide some administrative and other services
for Mr. Hammons' outside business interests. Management does not believe that,
historically, the amount of such services has been material, but has implemented
a cost-allocation system in 2002. Pursuant to the cost-allocation system, Mr.
Hammons pays us 30% of all costs related to such services as well as the
internal development costs discussed above, and maintains a deposit with us,
which was $54,847 as of December 31, 2004, to cover these expenses.
Mr. Hammons also owns trade centers adjacent to two of the Owned Hotels
(the "JQH Trade Centers"). We lease the convention space located in Portland,
Oregon, from Mr. Hammons on a month to month basis at a fee of $25,000 per
month. With respect to the other JQH Trade Center, located in Joplin, MO, we
make nominal annual lease payments to Mr. Hammons pursuant to a lease expiring
in 2014. We have assumed responsibility for all operating expenses of the JQH
Trade Centers.
Mr. Hammons owns parcels of undeveloped land throughout the United States.
Although there are no current plans to do so, we may purchase or lease one or
more of these parcels in the future in order to develop hotels. Since Mr.
Hammons controls the Company, such transactions would not be arms-length
transactions but will be subject to restrictions contained in the indentures
relating to the Partnership's outstanding mortgage notes due in 2012.
We receive no management fee or similar compensation in connection with
our management of the Partnership. We receive the following remuneration from
the Partnership: (i) distributions, if any, in respect of our
43
equity interest in the Partnership; and (ii) reimbursement for all direct and
indirect costs and expenses we incur for or on behalf of the Partnership and all
other expenses necessary or appropriate to the conduct of the business of, and
allocable to, the Partnership.
Mr. Hammons has a written agreement with William A. Mead, one of our
regional vice presidents, to pay Mr. Mead $65,000 per year for five years,
ending March 31, 2005, in exchange for services he provides unrelated to our
business, and to allow Mr. Mead to invest in 25% of up to three proposed new
hotels. Mr. Hammons also has a verbal agreement with Lou Weckstein, our
president, to supplement Mr. Weckstein's salary from the Company by up to
$270,000 per year during his employment for services he provides unrelated to
our business. We describe these arrangements in more detail under the caption
"Employment Agreements" above.
The information under Item 11 under the caption "Compensation Committee
Interlocks and Insider Participation" is incorporated into this Item 13.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Deloitte & Touche LLP was our independent auditor for 2004 and 2003. A
summary of the fees Deloitte & Touche LLP billed us for fiscal 2004 and fiscal
2003 follows:
Nature of Service 2004 2003
----------------- -------- ---------
Audit Fees (a)....................... $346,392 $ 290,068
Audit-Related Fees (b)............... $ 59,522 $ 91,910
Tax Fees (c)......................... $ 44,500 $ -
(a) The "Audit Fees" represent fees for professional services for the audit of
our annual financial statements, the review of financial statements
included in our quarterly financial statements and audit services provided
in connection with other statutory or regulatory fees. The Audit Committee
pre-approved 100% of the "Audit Fees" in 2004 and 2003.
(b) The "Audit-Related Fees" consist of fees for assurance and related
services that were reasonably related to the performance of the audit or
review of our financial statements and are not reported under "Audit
Fees." These services included Sarbanes-Oxley Act services, audit of our
401(k) Plan and the audit of other financial elements of individual
hotels. The Audit Committee pre-approved 100% of the "Audit - Related
Fees" in 2004 and 2003.
(c) The "Tax Fees" include fees for professional services for tax advice and
planning. The Audit Committee pre-approved 100% of the "Tax Fees" in 2004.
The audit committee determined that the provision of the services
described above is compatible with maintaining the independence of Deloitte &
Touche LLP.
The audit committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. The audit committee
will generally pre-approve a list of specific services and categories of
services, including audit, audit-related and other services, for the upcoming or
current fiscal year, subject to a specified cost level. Any service that is not
included in the approved list of services must be separately pre-approved by the
audit committee. In addition, all audit and permissible non-audit services in
excess of the pre-approved cost level, whether or not such services are included
on the pre-approved list of services, must be separately pre-approved by the
audit committee chair. Also, all permissible non-audit services must be
separately pre-approved by the audit committee chair if the aggregate fees for
such services exceed 5% of the total fees paid to the independent auditor for
the current fiscal year.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The audit committee of the board of directors serves as the representative
of the board for general oversight of financial accounting and reporting
process, system of internal control and audit process. The audit committee
operates under a written charter which was adopted by the board of directors and
is available on our website. Our
44
management has primary responsibility for preparing our financial statements and
our financial reporting process. Our independent accountants, Deloitte & Touche
LLP, are responsible for expressing an opinion on the conformity of our
financial statements to accounting principles generally accepted in the United
States.
In this context, the audit committee reports as follows:
1. The audit committee has reviewed and discussed the audited financial
statements with Deloitte & Touche LLP and Company management.
2. The audit committee has discussed with the independent accountants the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standard, AU 380), and SAS 99 (Consideration of Fraud in a Financial
Statement Audit).
3. The audit committee has received the written disclosures and the letter
from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standards No. 1, Independence
Discussions with Audit Committees) and has discussed with the independent
accountants the independent accountants' independence.
4. Based on the review and discussion referred to in paragraphs (1)
through (3) above, the audit committee recommended to the board of directors,
and the board has approved, that the audited financial statements be included in
our annual report on Form 10-K for the fiscal year ended December 31, 2004, for
filing with the Securities and Exchange Commission.
Each of the members of the audit committee is independent as defined under
the listing standards of the American Stock Exchange.
The undersigned members of the audit committee have submitted this Report:
2004 AUDIT COMMITTEE
Donald H. Dempsey
John E. Lopez-Ona
James F. Moore
PART IV
ITEM 15. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K.
15(a) FINANCIAL STATEMENTS (immediately following Item 15)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at Fiscal 2004 and 2003 Year-Ends
Consolidated Statements of Operations for the 2004, 2003, and 2002 Fiscal
Years Ended
Consolidated Statements of Changes In Minority Interest, Refundable Equity
and Stockholders Equity for the 2004, 2003, and 2002 Fiscal Years Ended
Consolidated Statements of Cash Flows for the 2004, 2003, and 2002 Fiscal
Years Ended
Notes to Consolidated Financial Statements
45
15(b) EXHIBITS
Exhibits required to be filed by Item 601 of Regulation S-K are listed in
the Exhibit Index attached hereto, which is incorporated by reference.
SET FORTH BELOW IS A LIST OF MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
AND ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS BY ITEM 15(c).
10.4 Form of Option Purchase Agreement
10.7 Employment Agreement between John Q. Hammons Hotels, Inc. and
Debra M. Shantz dated as of May 1, 1995, as amended on October
31, 1997 and November 1, 2001
10.7a Employment Agreement between John Q. Hammons Hotels, Inc. and Lou
Weckstein dated as of September 17, 2001
10.7b Employment Agreement between John Q. Hammons Hotels, Inc. and
William A. Mead dated as of January 25, 2000
10.7c Letter Agreement between John Q. Hammons and William A. Mead
dated as of January 27, 2000
10.7d Employment Agreement between John Q. Hammons Hotels, Inc. and
Paul E. Muellner dated as of December 1, 2003
10.14 1994 Employee Stock Option Plan
10.15 1999 Non-Employee Director Stock and Stock Option Plan
15(c) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information in such
schedules is not present in amounts sufficient to require submission of the
schedule or because the required information is included in the consolidated
financial statements or is not required.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of John Q. Hammons Hotels, Inc.:
We have audited the accompanying consolidated balance sheets of John Q. Hammons
Hotels, Inc. and Companies (see Note 1) as of December 31, 2004 and January 2,
2004, and the related consolidated statements of operations, changes in minority
interest, refundable equity and stockholders' equity (deficit) and cash flows
for the years ended December 31, 2004, January 2, 2004 and January 3, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2004 and January 2, 2004, and the results of
their operations and their cash flows for the years ended December 31, 2004,
January 2, 2004 and January 3, 2003, in conformity with accounting principles
generally accepted in the United States of America.
March 25, 2005
47
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND JANUARY 2, 2004
(000'S OMITTED, EXCEPT SHARE DATA)
DECEMBER 31, JANUARY 2,
ASSETS 2004 2004
CASH AND EQUIVALENTS $ 41,044 $ 23,790
RESTRICTED CASH 10,206 1,268
MARKETABLE SECURITIES 22,332 15,711
RECEIVABLES:
Trade, less allowance for doubtful accounts
of $231 in 2004 and 2003 7,250 7,214
Other 277 251
Management fees--related party 265 223
INVENTORIES 1,091 1,067
PREPAID EXPENSES AND OTHER 4,343 4,498
ASSETS HELD FOR SALE 4,300 -
------------ ------------
Total current assets 91,108 54,022
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 60,553 62,779
Buildings and improvements 717,870 742,807
Furniture, fixtures and equipment 342,214 338,833
Construction in progress - 75
------------ ------------
1,120,637 1,144,494
Less: Accumulated depreciation and amortization (436,196) (418,509)
------------ ------------
684,441 725,985
------------ ------------
DEFERRED FINANCING COSTS, FRANCHISE FEES
AND OTHER, net, including $20,376 and $20,453 of
restricted cash in 2004 and 2003, respectively 40,950 42,176
------------ ------------
TOTAL ASSETS $ 816,499 $ 822,183
============ ============
(Continued)
See notes to consolidated financial statements.
48
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND JANUARY 2, 2004
(000'S OMITTED, EXCEPT SHARE DATA)
DECEMBER 31, JANUARY 2,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2004 2004
CURRENT LIABILITIES:
Current portion of long-term debt $ 25,719 $ 7,423
Accounts payable 8,172 5,028
Accrued expenses:
Payroll and related benefits 9,601 7,776
Sales and property taxes 12,053 12,077
Insurance 2,789 2,646
Interest 6,106 6,218
Utilities franchise fees and other 10,115 7,298
------------ ------------
Total current liabilities 74,555 48,466
LONG-TERM DEBT 739,485 773,649
OTHER OBLIGATIONS 3,329 2,530
------------ ------------
Total liabilities 817,369 824,645
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST OF HOLDERS OF LIMITED PARTNER UNITS - -
------------ ------------
REFUNDABLE EQUITY 655 -
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 2,000,000 shares authorized,
none outstanding - -
Class A Common Stock, $0.01 par value, 40,000,000 shares authorized at
December 31, 2004, and January 2, 2004, 6,042,000 shares issued at December
31, 2004, and January 2, 2004, 5,086,975 and 4,808,879 shares outstanding at
December 31, 2004, and January 2, 2004, respectively 60 60
Class B Common Stock, $0.01 par value, 1,000,000 shares authorized,
294,100 shares issued and outstanding 3 3
Paid-in-capital 96,781 96,395
Accumulated deficit, net (94,006) (93,361)
Less: Treasury Stock, at cost, 955,025 and 1,233,121 shares at
December 31, 2004, and January 2, 2004, respectively (4,322) (5,582)
Accumulated other comprehensive income (loss) (41) 23
------------ ------------
Total stockholders' deficit (1,525) (2,462)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 816,499 $ 822,183
============ ============
(Concluded)
See notes to consolidated financial statements.
49
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(000'S OMITTED, EXCEPT SHARE DATA)
FISCAL YEAR ENDED
-------------------------------------------------
2004 2003 2002
------------- ------------- -------------
REVENUES:
Rooms $ 266,800 $ 256,564 $ 258,068
Food and beverage 112,389 108,315 112,072
Meeting room rental, related party management fee and other 51,591 48,596 50,181
------------ ------------ ------------
Total revenues 430,780 413,475 420,321
------------ ------------ ------------
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 66,712 64,096 65,321
Food and beverage 84,178 82,524 86,329
Other 2,145 2,584 3,037
General, administrative, sales and management service expenses 139,902 130,980 130,571
Repairs and maintenance 18,193 17,430 17,478
Asset impairment - 9,700 -
Depreciation and amortization 49,519 49,783 52,106
------------ ------------ ------------
Total operating expenses 360,649 357,097 354,842
------------ ------------ ------------
INCOME FROM OPERATIONS 70,131 56,378 65,479
OTHER (INCOME) EXPENSE:
Other income (193) (175) -
Interest expense and amortization of deferred financing fees, net of $788,
$546 and $907 of interest income in 2004, 2003 and 2002, respectively 65,498 67,522 69,323
Extinquishment of debt costs 144 774 7,411
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST AND PROVISION FOR INCOME TAXES 4,682 (11,743) (11,255)
Minority interest in losses of partnership - 5,859 8,549
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 4,682 (5,884) (2,706)
Provision for income taxes (177) (150) (150)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 4,505 (6,034) (2,856)
Income (loss) from discontinued operations, net of no minority
interest in 2004 and 2003 and $297 in 2002 (5,150) (1,027) 95
------------ ------------ ------------
NET LOSS ALLOCABLE TO THE COMPANY $ (645) $ (7,061) $ (2,761)
============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ 0.87 $ (1.19) $ (0.56)
Discontinued operations (0.99) (0.20) 0.02
------------ ------------ ------------
Net loss allocable to the Company $ (0.12) $ (1.39) $ (0.54)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,173,705 5,092,829 5,081,285
============ ============ ============
See notes to consolidated financial statements.
50
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN MINORITY INTEREST, REFUNDABLE EQUITY AND
STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(000'S OMITTED)
COMPREHENSIVE
INCOME MINORITY REFUNDABLE
(LOSS) INTEREST EQUITY
BALANCE, At December 28, 2001 $ 14,111 $ -
Net loss allocable to the
Company $ (2,761) - -
Minority interest in losses
of the partnership (8,252) -
Issuance of Common Stock
to directors - -
Unrealized appreciation on
marketable securities,
net of minority interest
and income taxes 13 42 -
------------ ------------ ------------
Comprehensive loss $ (2,748)
============
BALANCE, At January 3, 2003 5,901 -
Net loss allocable to the
Company $ (7,061) - -
Minority interest in losses
of the partnership (5,859) -
Issuance of Common Stock to
employees and directors - -
Unrealized depreciation on
marketable securities,
net of income taxes (32) - -
Reallocation of previously
allocated other comprehensive
income from minority interest
to the Company (42) -
------------ ------------ ------------
Comprehensive loss $ (7,093)
============
BALANCE, At January 2, 2004 - -
Net loss allocable to the
Company $ (645) - -
Refundable equity contribution - 655
Issuance of Common Stock to
employees and directors - -
Unrealized depreciation on
marketable securities, net
of income taxes (64) - -
------------ ------------ ------------
Comprehensive loss $ (709)
============
BALANCE, At December 31, 2004 $ - $ 655
============ ============
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------
ACCUMULATED
CLASS A CLASS B COMPANY OTHER
COMMON COMMON PAID-IN ACCUMULATED TREASURY COMPREHENSIVE
STOCK STOCK CAPITAL DEFICIT STOCK INCOME (LOSS) TOTAL
BALANCE, At December 28, 2001 $ 60 $ 3 $ 96,373 $(83,539) $ (5,703) $ - $ 7,194
Net loss allocable to the
Company - - - (2,761) - - (2,761)
Minority interest in losses
of the partnership - - - - - - -
Issuance of Common Stock
to directors - - 16 - 34 - 50
Unrealized appreciation on
marketable securities,
net of minority interest
and income taxes - - - - - 13 13
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss
BALANCE, At January 3, 2003 60 3 96,389 (86,300) (5,669) 13 4,496
Net loss allocable to the
Company - - - (7,061) - - (7,061)
Minority interest in losses
of the partnership - - - - - - -
Issuance of Common Stock to
employees and directors - - 6 - 87 - 93
Unrealized depreciation on
marketable securities,
net of income taxes - - - - - (32) (32)
Reallocation of previously
allocated other comprehensive
income from minority interest
to the Company - - - - - 42 42
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss
BALANCE, At January 2, 2004 60 3 96,395 (93,361) (5,582) 23 (2,462)
Net loss allocable to the
Company - - - (645) - - (645)
Refundable equity contribution - - - - - - -
Issuance of Common Stock to
employees and directors - - 386 - 1,260 - 1,646
Unrealized depreciation on
marketable securities, net
of income taxes - - - - - (64) (64)
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss
BALANCE, At December 31, 2004 $ 60 $ 3 $ 96,781 $(94,006) $ (4,322) $ (41) $ (1,525)
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
51
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANAURY 3, 2003
(000's OMITTED)
FISCAL YEAR
-----------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss allocable to the Company $ (645) $ (7,061) $ (2,761)
Adjustments to reconcile net loss to cash provided by operating activities:
Minority interest in losses of partnership - (5,859) (8,252)
Depreciation, amortization and loan cost amortization 52,936 53,559 56,214
Loss on sale of property and equipment 390 - -
Asset impairment (included in discontinued operations for 2004) 4,619 9,700 -
Extinguishment of debt costs 144 774 7,411
Non-cash director compensation 50 50 50
Changes in certain assets and liabilities:
Restricted cash 247 (165) (221)
Receivables (173) 1,939 2,116
Inventories (32) 84 137
Prepaid expenses and other 155 1,386 (2,438)
Accounts payable 3,144 (13) (585)
Accrued expenses 4,649 267 (3,698)
Other obligations 799 86 104
---------- ---------- ----------
Net cash provided by operating activities 66,283 54,747 48,077
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (30,259) (18,372) (28,618)
Proceeds from sale of property and equipment 12,218 - -
Franchise fees, restricted cash and other (10,031) (5,712) (4,335)
Purchase of marketable securities (6,685) (3,262) (1,410)
---------- ---------- ----------
Net cash used in investing activities (34,757) (27,346) (34,363)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - 328 510,000
Proceeds from issuance of treasury stock 1,596 43 -
Repayments of debt (15,868) (25,598) (516,385)
Debt offering costs - - (13,782)
Debt redemption costs - (158) (4,071)
---------- ---------- ----------
Net cash used in financing activities (14,272) (25,385) (24,238)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 17,254 2,016 (10,524)
CASH AND EQUIVALENTS, Beginning of period 23,790 21,774 32,298
---------- ---------- ----------
CASH AND EQUIVALENTS, End of period $ 41,044 $ 23,790 $ 21,774
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 66,380 $ 68,254 $ 75,696
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Unrealized (depreciation) appreciation of marketable securities $ (64) $ (32) $ 55
========== ========== ==========
Exchange of land parcels $ - $ 2,586 $ -
========== ========== ==========
Financing costs funded by stockholder $ 655 $ - $ -
========== ========== ==========
See notes to consolidated financial statements.
52
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(000'S OMITTED, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
ENTITY MATTERS -- The accompanying consolidated financial statements
include the accounts of John Q. Hammons Hotels, Inc. and John Q. Hammons
Hotels, L.P. and subsidiaries (collectively, the "Company" or, as the
context may require John Q. Hammons Hotels, Inc. only). As of December 31,
2004 the Company owned 45 hotels, and as of January 2, 2004 and January 3,
2003 the Company owned 47 hotels, of which 28 in fiscal year 2004 and 30
in fiscal years 2003 and 2002 operated under the Holiday Inn and Embassy
Suites Hotels trade names. The Company's hotels are located in 20 states
throughout the United States of America.
The Company sold two Holiday Inn hotels located in Bakersfield, California
and Northglenn, Colorado during fiscal year 2004 (Note 8). In addition,
the Company sold the Holiday Inn located in Emeryville, California
subsequent to year end (Notes 7 and 11). These three hotels are included
as discontinued operations in the accompanying consolidated financial
statements with the Emeryville, California property reported as held for
sale as of December 31, 2004.
The Company was formed in September 1994 and had no operations or assets
prior to its initial public offering of 6,042,000 Class A common shares at
$16.50 per share on November 23, 1994. Immediately prior to the initial
public offering, Mr. John Q. Hammons ("JQH") contributed approximately $5
million in cash to the Company in exchange for 294,100 shares of Class B
common stock (which represents approximately 72% of the voting control of
the Company). The Company contributed the approximate $96 million of net
proceeds from the Class A and Class B common stock offerings to John Q.
Hammons Hotels, L.P. ("JQHLP" or the "Partnership") in exchange for an
approximate 28% general Partnership interest. Since that time, the
Partnership has redeemed approximately 955,000 Partnership units, net of
shares issued. The number of net Partnership units redeemed is equivalent
to the number of net shares redeemed by the Company as required by the
Partnership agreement. Accordingly, the allocation percentage was
approximately 24% for the Company and approximately 76% for the limited
partners in fiscal year 2004.
As the sole general partner of JQHLP, the Company exercises control over
all decisions as set forth in the Partnership agreement. The net income
(loss) allocable to the Company reported in the accompanying consolidated
statements of operations includes the Company's approximate 24% share in
fiscal years 2004, 2003 and 2002 in all JQHLP earnings (losses). The
approximate 76% minority interest in fiscal years 2004, 2003 and 2002
attributable to the portion of the Partnership not owned by the Company
has been reflected as minority interest in the accompanying consolidated
financial statements. During fiscal year 2003, losses otherwise allocable
to the limited partners of $9,698 were limited to $5,859 as the allocation
of additional losses would have exceeded the limited partners' cumulative
net investment in the JQHLP. During fiscal year 2004, additional losses of
$355 otherwise allocable to the limited partners were recognized by the
Company, resulting in cumulative losses of $4,194 recognized by the
Company otherwise allocable to the limited partners as of December 31,
2004. The Company must recapture the total losses from future earnings of
JQHLP before any earnings will be allocated to the limited partners.
During 2004 and subsequent to December 31, 2004, the Company has received
certain merger and sales offers and has negotiated with certain parties
regarding a potential sale or merger of the Company.
All significant balances and transactions between the entities and
properties have been eliminated.
53
PARTNERSHIP AND OTHER MATTERS -- A summary of selected provisions of the
Partnership agreement as well as certain other matters are summarized as
follows:
Allocation of Income, Losses and Distributions -- Pretax income,
losses and distributions of JQHLP will generally be allocated pro
rata between the Company, as general partner, and the limited
partners' interest beneficially owned by JQH based on their
respective ownership interests in JQHLP. However, among other
things, to the extent the limited partners were not otherwise
committed to provide further financial support and pretax losses
reported for financial reporting purposes were deemed to be of a
continuing nature, the balance of the pretax losses would be
allocated only to the Company, with any subsequent pretax income
also to be allocated only to the Company until such losses had been
offset. In addition, with respect to distributions, in the event
JQHLP has taxable income, distributions are to be made in an
aggregate amount equal to the amount JQHLP would have paid for
income taxes had it been a C-Corporation during the applicable
period. Aggregate tax distributions will first be allocated to the
Company, if applicable, with the remainder allocated to the limited
partners. There were no distributions for taxes for fiscal years
2004, 2003 and 2002.
Additional Capital Contributions -- In the event proceeds from the
sale of the original 30 hotel properties (or applicable replacement
collateral) that secure the $510 million First Mortgage Notes (2002
First Mortgage Notes) (Note 5) are insufficient to satisfy amounts
due on the 2002 First Mortgage Notes, JQH and Hammons, Inc., a
Missouri S-Corporation controlled by JQH, are severally obligated to
contribute up to $195 million to satisfy amounts due, if any. In
addition, with respect to the original 11 hotel properties
contributed by JQH concurrent with the public equity offering, JQH
is obligated to contribute up to $50 million in the event proceeds
from the sale of these hotel properties (or applicable replacement
collateral) are insufficient to satisfy amounts due on the then
outstanding mortgage indebtedness related to these properties.
Redemption of Limited Partner Interests -- Subject to certain
limitations, the limited partners of JQHLP have the right to require
redemption of their limited partner interests at any time subsequent
to November 1995. Upon redemption, the limited partners receive, at
the sole discretion of the Company, one share of its Class A common
stock for each limited partner unit tendered or the then cash
equivalent thereof.
Additional General Partner Interest -- Upon the issuance by the
Company of additional shares of its common stock, including shares
issued upon the exercise of its stock options (Note 10), the Company
will be required to contribute to JQHLP the net proceeds received
and JQHLP will be required to issue additional general partner units
to the Company in an equivalent number to the additional shares of
common stock issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND EQUIVALENTS -- Cash and equivalents include operating cash
accounts and investments, with an original maturity of three months or
less, and certain balances of various money market and common bank
accounts.
RESTRICTED CASH -- Restricted cash consists of certain funds maintained in
escrow for property taxes and certain other obligations. As of December
31, 2004, restricted cash also included $4,170 from the sale proceeds from
Northglenn, Colorado, which was used to provide replacement collateral
subsequent to year end, and included $5,015 of restricted cash required
under the St. Augustine, Florida property's debt agreement, which was paid
in full subsequent to year end (Note 11).
MARKETABLE SECURITIES -- Marketable securities consist of investments
which mature or will be available for use in operations in 2005. These
securities are valued at current market value as determined by published
market quotes. Realized gains and losses for the fiscal years ended 2004,
2003 and 2002, determined using the specific identification method, were
nominal. Unrealized holding losses of $41 as of December 31, 2004, and
unrealized holding gains of $23 as of January 2, 2004 are included as a
separate component of shareholders' equity (deficit) until realized.
54
The following summarizes the types of marketable securities owned by the
Company and their respective carrying value, gross unrealized gains and
losses and fair market value:
DECEMBER 31, 2004
CARRYING GROSS UNREALIZED FAIR MARKET
VALUE GAINS LOSSES VALUE
Commercial paper $ 14,347 $ 13 $ - $ 14,360
Government agencies 5,977 4 (35) 5,946
Corporate bonds 2,049 - (23) 2,026
-------- -------- -------- --------
$ 22,373 $ 17 $ (58) $ 22,332
======== ======== ======== ========
JANUARY 2, 2004
CARRYING GROSS UNREALIZED FAIR MARKET
VALUE GAINS LOSSES VALUE
Commercial paper $ 12,110 $ - $ - $ 12,110
Corporate bonds 3,578 23 - 3,601
-------- -------- --------- --------
$ 15,688 $ 23 $ - $ 15,711
======== ======== ========= ========
As of December 31, 2004, the marketable securities are scheduled to mature
as follows:
CARRYING FAIR MARKET
FISCAL YEAR ENDING VALUE VALUE
2005 $ 17,336 $ 17,342
2006 5,037 4,990
--------- --------
$ 22,373 $ 22,332
========= ========
The Company expects actual maturities to differ from scheduled maturities
because borrowers have the right to call or prepay certain obligations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -- The following summarizes activity in
the allowance for doubtful accounts on trade accounts receivable:
ADDITIONS
BALANCE, CHARGED TO BALANCE,
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
Year ended December 31, 2004 $ 231 $ 311 $ (311) $ 231
Year ended Janaury 2, 2004 231 244 (244) 231
Year ended Janaury 3, 2003 231 575 (575) 231
ASSETS HELD FOR SALE -- The Company considers each individual hotel to be
an identifiable component of its business. In accordance with Statement of
Financial Accounting Standard ("SFAS") 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," the Company does 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. The Company
considers a hotel as "held for sale" once the potential transaction has
been approved by its board of directors (i.e., letter of intent
55
is approved), a contract for sale has been executed, the buyer has
completed its due diligence review of the asset, and the Company has
received a 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, the
Company does not consider a sale to be probable.
The Company does not depreciate hotel assets while classified as "held for
sale." Upon designation of a hotel as being "held for sale," and quarterly
thereafter, the Company reviews 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 for sale"
will be reflected in discontinued operations. The Company includes in
discontinued operations the operating results of hotels classified as
"held for sale" or that have been sold.
INVENTORIES -- Inventories consist of food and beverage items. These items
are stated at the lower of cost, as determined by the first-in, first-out
valuation method, or market.
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER -- Franchise fees paid
to the respective franchisors of the hotel properties are amortized on a
straight-line basis over 10 to 20 years, which approximates the terms of
the respective agreements. Costs of obtaining financing are deferred and
amortized over the respective terms of the debt. The restricted cash
deposits are required by certain mortgages and franchise agreements, which
require the Company to maintain escrow accounts for real estate taxes and
furniture and fixture replacement reserves, based upon a percentage of
gross revenue.
The components of deferred financing costs, franchise fees and other are
summarized as follows:
DECEMBER 31, JANUARY 2,
2004 2004
Deferred financing costs $ 17,386 $ 17,152
Franchise fees 5,260 5,251
Management contract costs 3,401 2,596
--------- ---------
26,047 24,999
Less: Accumulated amortization (9,164) (7,044)
--------- ---------
16,883 17,955
Deposits 3,283 3,342
Restricted cash deposits 20,376 20,453
Other, net 408 426
--------- ---------
$ 40,950 $ 42,176
========= =========
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost
(including interest, real estate taxes and certain other costs incurred
during development and construction) less accumulated depreciation and
amortization. Buildings and improvements are depreciated using the
straight-line method, while all other property is depreciated using both
straight-line and accelerated methods. Depreciation expense was $48,495,
$50,997 and $53,509 for the fiscal years ended 2004, 2003 and 2002,
respectively, of which $1,475, $1,908 and $2,068, respectively, is
included in discontinued operations. The estimated useful lives of the
assets are summarized as follows:
56
LIVES IN YEARS
Land improvements 10 to 25
New buildings and improvements 10 to 40
Purchased buildings 25
Furniture, fixtures and equipment 3 to 10
Construction in progress includes refurbishment costs of certain hotel
developments at January 2, 2004.
The Company periodically reviews 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.
During fiscal year 2003, the Company recognized impairment charges of
$9,700 related to its St. Augustine, Florida property. The impairment
reserves were based on fair market values derived from independent third
party valuations.
During fiscal year 2004, the Company recorded impairment charges of
$4,619, which is included in discontinued operations, related to its
decision to sell the two properties (Note 8). The impairment reserves were
based on fair market values derived from third party offers to purchase
the hotels' property and equipment.
Interest costs, construction overhead and certain other carrying costs are
capitalized during the period hotel properties are under construction. No
interest costs were capitalized during the fiscal years ended 2004, 2003
and 2002. Costs incurred for prospective hotel projects ultimately
abandoned are charged to operations in the period such plans are
finalized. Costs of significant improvements are capitalized, while costs
of normal recurring repairs and maintenance are charged to expense as
incurred.
The Company leases various parcels of land on which the Company has either
constructed a hotel property or constructed certain auxiliary facilities
for the hotel to facilitate the property's operations. As of December 31,
2004 and January 2, 2004, land for one operating hotel property was leased
by the Company from a related party over a long-term lease (Note 3). Rent
expense for all land leases was $1,809, $1,437 and $1,545 for the fiscal
years ended 2004, 2003 and 2002, respectively.
PAR OPERATING EQUIPMENT -- The Company's initial expenditures for the
purchase of china, glassware, silverware, linens and uniforms are
capitalized into furniture, fixtures and equipment and amortized on a
straight-line basis over a three to five year life. Costs for replacement
of these items are charged to operations in the period the items are
placed in service.
ADVERTISING -- The Company expenses the cost of advertising associated
with operating hotels as incurred. Advertising expense for the fiscal
years ended 2004, 2003 and 2002 was approximately $38,599, $35,289 and
$34,179, respectively, of which, $1,616, $1,594 and $1,452, respectively,
is included in discontinued operations.
PENSIONS AND OTHER BENEFITS -- The Company contractually provides
retirement benefits for certain union employees at two of its hotel
properties under a union-sponsored defined benefit plan and a defined
contribution plan. Contributions to these plans, based upon the provisions
of the respective union contracts, approximated $105, $96 and $97 for the
fiscal years ended 2004, 2003 and 2002, respectively, of which $38, $36
and $39, respectively, is included in discontinued operations.
The Company maintains an employee savings plan (a 401(k) plan) and matches
a percentage of an employee's contributions. The Company's matching
contributions are funded currently. The costs of the matching program and
administrative costs charged to operations were approximately $1,116, $812
and $760 for the fiscal years ended 2004, 2003 and 2002, respectively, of
which, $45, $35 and $24, respectively, is included in discontinued
operations.
57
The Company does not offer any other post-employment or post-retirement
benefits to its employees.
SELF-INSURANCE -- The Company became self-insured for medical coverage
effective January 1999. Effective October 1, 2002, the Company became
self-insured for workers' compensation, general liability and auto claims.
Estimated costs related to these self-insurance programs are accrued based
on known claims and projected settlements of unasserted claims. Subsequent
changes in, among others, unasserted claims, claim costs, claim frequency,
as well as changes in actual experience, could cause these estimates to
change (Note 3).
INCOME TAXES - The Company's provision for income taxes for fiscal years
2004, 2003 and 2002 is summarized as follows:
FISCAL YEAR 2004 2003 2002
Current $177 $150 $150
Deferred - - -
---- ---- ----
Provision for income taxes $177 $150 $150
==== ==== ====
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
FISCAL YEAR ENDED 2004 2003 2002
--------------- -------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Benefit for income taxes at the
federal statutory rate $ (159) 34% $(2,350) 34% $ (888) 34%
Increase in tax valuation
allowance to the general partner 159 (34) 2,350 (34) 888 (34)
Provision for state franchise taxes 177 (38) 150 (2) 150 (6)
------- --- ------- --- ------- ---
Provision for income taxes $ 177 (38)% $ 150 (2)% $ 150 (6)%
======= === ======= === ======= ===
58
As of December 31, 2004 and January 2, 2004, the net deferred tax
liability consisted of the following:
DECEMBER 31, JANUARY 2,
2004 2004
Deferred tax assets:
Net operating loss carryforwards $ 14,964 $ 14,202
Accruals and other 1,605 16
----------- ---------
16,569 14,218
Deferred tax liabilities:
Depreciation net of estimated allocated tax basis in
excess of the Company's proportionate share of the
book value of JQHLP's net assets (5,375) (3,183)
----------- ---------
11,194 11,035
Valuation allowance (11,195) (11,036)
----------- ---------
Net deferred tax liability $ (1) $ (1)
=========== =========
The realization of the estimated deferred tax assets is dependent upon,
among others, prospective taxable income allocated to the Company,
disposition of the hotel properties subsequent to the end of a property's
respective depreciable tax life and the timing of subsequent conversions,
if any, of limited partnership units in JQHLP into common stock of the
Company. Accordingly, a valuation allowance has been recorded in an amount
equal to the estimated net deferred tax asset associated with the
differences between the Company's basis for financial reporting and tax
purposes. Adjustments to the valuation allowance, if any, will be recorded
in the periods in which it is determined the asset is realizable. The
change in the valuation allowance is related to the federal tax benefit of
the current year financial reporting loss before the state franchise
taxes. The net operating loss carryforwards, which approximate $44,000 as
of December 31, 2004, begin to expire in 2010.
REVENUE RECOGNITION -- The Company recognizes revenues from its rooms,
catering and restaurant facilities as earned on the close of business each
day.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FISCAL YEAR -- The Company's fiscal year ends on the Friday nearest
December 31, which includes 52 weeks in fiscal years 2004 and 2003, and 53
weeks in fiscal year 2002.
The periods ended in the accompanying consolidated financial statements
are summarized as follows:
FISCAL YEAR ENDED FISCAL YEAR END
2004 December 31, 2004
2003 January 2, 2004
2002 January 3, 2003
59
STOCK OPTIONS -- The Company accounts for its stock-based compensation
plans according to the intrinsic method under Accounting Principals Board
Opinion No. 25, under which no compensation cost has been recognized for
option grants for fiscal years ended 2004, 2003 and 2002. In accordance
with SFAS 123, "Accounting for Stock-Based Compensation," the Company is
required to report pro forma disclosures of expense for stock-based awards
based on their fair values. Had compensation cost been determined
consistent with SFAS 123, the Company's net loss and diluted loss per
share for the fiscal years ended 2004, 2003 and 2002 would have been as
follows:
FISCAL YEAR ENDED 2004 2003 2002
Net loss:
As reported $ (645) $(7,061) $(2,761)
Deduct -- total stock-based employee compensation
expense determined under fair value-based
method for all awards, net of related tax effects (147) (195) (228)
------- ------- -------
Proforma $ (792) $(7,256) $(2,989)
======= ======= =======
Basic and diluted loss per share:
As reported $ (0.12) $ (1.39) $ (0.54)
Proforma (0.15) (1.42) (0.59)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
FISCAL YEAR ENDED 2004 2003 2002
Dividend yield -% -% -%
Expected volatility 25.75% 24.17% 41.97%
Risk-free interest rate 4.71% 3.29% 5.18%
Expected lives 7.5 years 7.5 years 7.5 years
The options granted under the plans during the fiscal years ended 2004,
2003 and 2002 have a weighted average fair value per option of $3.76,
$1.68 and $3.61, respectively.
EARNINGS (LOSS) PER SHARE -- Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average number of common
shares outstanding during the year. Diluted earnings (loss) per share is
computed similar to basic except the denominator is increased to include
the number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The Company had 1,974,950, 2,194,350 and 1,713,700 options outstanding to
purchase shares of common stock as of December 31, 2004, January 2, 2004
and January 3, 2003, respectively (Note 10). The options were not included
in the computation of diluted earnings per share since the options would
be anti-dilutive.
Since there are no dilutive securities, basic and diluted earnings (loss)
per share are identical, thus a reconciliation of the numerator and
denominator is not necessary.
SEGMENTS -- The Company operates in one reportable segment, hospitality
services.
RECLASSIFICATIONS -- Certain prior years' amounts have been reclassified
to conform to the current year presentation.
60
ACCOUNTING PRONOUNCEMENTS -- In January 2003, the Financial Accounting
Standards Board ("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). The
Company does not have any variable interest entities and therefore, FIN
46R did not impact the accompanying consolidated financial statements.
In December 2004, the FASB issued SFAS 123R "Share Based Payment" that
will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exception, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be realized each reporting period.
Compensation costs will be recognized over the period that an employee
provides service in exchange for the award. This will be effective for the
Company's third quarter of fiscal 2005, and affect the compensation
expense related to stock options recorded in the accompanying consolidated
financial statements. As of December 31, 2004, SFAS 123R did not impact
the accompanying consolidated financial statements.
3. RELATED PARTY TRANSACTIONS
HOTEL MANAGEMENT FEES -- In addition to managing the hotel properties
included in the accompanying consolidated financial statements, the
Company provides similar services for other hotel properties owned or
controlled by JQH, which included 14, 12 and 9 properties at December 31,
2004, January 2, 2004 and January 3, 2003, respectively. A management fee
of approximately 3% to 4% of gross revenues (as defined) is paid to the
Company by these hotels, which aggregated approximately, $3,324, $2,572
and $2,150 for the fiscal years ended 2004, 2003 and 2002, respectively.
ACCOUNTING AND ADMINISTRATIVE SERVICES -- The hotels have contracted for
accounting and other administrative services with Winegardner & Hammons,
Inc. ("WHI"), a company related by common ownership. The accounting and
administrative charges expensed by the hotel properties, included in
general, administrative, sales and management services expenses, were
approximately $1,651, $1,615 and $1,572 for the fiscal years ended 2004,
2003 and 2002, respectively, of which, $109, $107 and $104, respectively,
is included in discontinued operations.
In 2002, the Company negotiated a new contract with WHI to continue to
provide accounting and administrative services through June 2005. Charges
for these services provided by WHI will approximate $35 per year for each
hotel property for the duration of the agreement.
INSURANCE COVERAGE -- To supplement the Company's self-insurance programs,
property, auto, commercial liability, workers' compensation and medical
insurance is provided to the hotel properties under blanket commercial
policies purchased by the Company, covering hotel properties owned by
JQHLP or JQH. In addition, the Company's umbrella and crime insurance is
provided to the hotel properties under blanket commercial policies
purchased by the Company covering hotel properties owned by JQHLP, JQH or
managed by WHI. Generally, expenses allocated to each hotel property are
based upon factors similar to those used by the insurance provider to
compute the aggregate group policy expense. Insurance expense for the
properties included in operating expenses was approximately $13,027,
$13,284 and $13,281 for the fiscal years ended 2004, 2003 and 2002,
respectively, of which $517, $740 and $868, respectively, is included in
discontinued operations. Management considers these allocations to be
reasonable.
ALLOCATION OF COMMON COSTS -- The Company and JQHLP incur certain hotel
management expenses incidental to the operations of all hotels
beneficially owned or controlled by JQH. These costs principally include
the compensation and related benefits of certain senior hotel executives
and certain marketing
61
managers. These costs were allocated by the Company to hotels not included
in the accompanying consolidated statements, based on the respective
number of rooms of all hotels owned or controlled by JQH. Effective 2004,
the agreement between the Company and JQH was clarified to exclude
compensation and related benefits of certain senior hotel executives and
approximately $340 was refunded by the Company to JQH. These allocated
costs approximated $71, $365 and $370 for the fiscal years ended 2004,
2003 and 2002, respectively. Management considers these allocations to be
reasonable.
JQH utilizes the services of certain of the Company's employees in his
personal enterprises for which he paid $335, $335 and $432 for the fiscal
years ended 2004, 2003 and 2002, respectively, to such employees' total
compensation.
TRANSACTIONS WITH STOCKHOLDERS AND DIRECTORS -- During fiscal year 2000,
the Company's Board of Directors authorized the Company to enter into a
five-year management contract with JQH whereby the Company will provide
internal administrative, architectural design, purchasing and legal
services to JQH in connection with the development of hotels in an amount
not to exceed 1.5% of the total development cost of any single hotel for
the opportunity to manage the hotels upon opening and the right of first
refusal to purchase the hotels in the event they are offered for sale.
During fiscal years ended 2004, 2003 and 2002, the Company provided $805,
$328 and $326, respectively, of services to JQH in accordance with the
management contract. These costs are recorded as management contract costs
(Note 2) and amortized over the five-year contract period commencing upon
opening of the respective hotel. For fiscal year 2004, 2003 and 2002, the
amortization of management contract costs was approximately $404, $298 and
$214, respectively.
JQH also utilizes architecture and design and certain other services of
the Company's for his personal enterprises. Certain of these services are
specifically identifiable tasks which can be tracked and accounted for
separately while other services are not specifically identifiable thus
accounted for based upon an allocation percentage. Management considers
these allocations to be reasonable. The Company bills JQH monthly for use
of these services and reports the expenses net of reimbursements in
general, administrative, sales and management services expense.
Reimbursements from JQH totaled $894, $638 and $572 for the fiscal years
ended 2004, 2003 and 2002, respectively. JQH had advanced payments to the
Company of approximately $55 and $51 as of December 31, 2004 and January
2, 2004, respectively.
During fiscal year 2003, the Company exchanged an undeveloped land parcel
for two land parcels owned by JQH and leased by the Company (Notes 2 and
6). The Company recognized no gain or loss on the exchange.
During fiscal year 2004, the Company authorized JQH to initiate the
refinancing of one of the Company's properties. In connection with the
refinancing, which was not yet complete as of December 31, 2004, JQH
personally paid $655 for various related costs and expenses. The Company's
Board of Directors resolved that after one year, if the Company still owns
the property, it will refund JQH $655 for costs incurred in the
refinancing. However, if the Company were to spin off or distribute the
property to JQH within the next year in connection with a sale or merger
(Note 1), the costs will not be refunded. This transaction is included in
the accompanying financial statements as deferred financing costs and
refundable equity. On January 27, 2005, JQH paid an additional $320 and
completed the refinancing.
SUMMARY OF RELATED PARTY REVENUE, EXPENSES AND REIMBURSED EXPENSES -- The
following summarizes revenues and expenses reported as a result of
activities with related parties:
62
FISCAL YEAR ENDED 2004 2003 2002
Revenue:
Hotel management fees $ 3,324 $ 2,572 $ 2,150
======= ======= =======
Expenses:
Expenses included within depreciation and amortization:
Amortization of management contract costs $ 404 $ 298 $ 214
------- ------- -------
Expenses included within general, administrative, sales and management
service expenses:
Accounting and administrative:
Continuing operations 1,542 1,508 1,468
Discontinued operations 109 107 104
------- ------- -------
1,651 1,615 1,572
------- ------- -------
Rental expenses from continuing operations (Note 6) 802 948 1,026
------- ------- -------
Expenses included within various operating categories:
Insurance other than medical:
Continuing operations 7,425 8,545 8,481
Discontinued operations 390 616 737
------- ------- -------
7,815 9,161 9,218
------- ------- -------
Medical, net of employee payments:
Continuing operations 5,085 3,999 3,932
Discontinued operations 127 124 131
------- ------- -------
5,212 4,123 4,063
------- ------- -------
Total $15,884 $16,145 $16,093
======= ======= =======
Reimbursed expenses:
Reimbursements from JQH reflected net within general, administrative, sales
and management service expenses:
Common costs $ 71 $ 365 $ 370
Architecture and design and certain other services 894 638 572
------- ------- -------
Total $ 965 $ 1,003 $ 942
======= ======= =======
4. FRANCHISE AGREEMENTS
As of December 31, 2004, and January 2, 2004, 42 and 43, respectively, of
the hotel properties included in the accompanying consolidated financial
statements operated under franchise agreements with national hotel chains
which require each hotel to remit to the franchisor monthly fees equal to
approximately 3% to 6% of gross room revenues, as defined. Franchise fees
expensed under these contracts were $11,909, $11,275 and $12,944 for the
fiscal years ended 2004, 2003 and 2002, respectively, of which $535, $550
and $582, respectively, is included in discontinued operations.
As part of the franchise agreements, each hotel also pays additional
advertising, reservation and maintenance fees to the franchisor which
range from 1.0% to 4.0% of gross room revenues, as defined. The amount of
63
expense related to these fees included in the consolidated statements of
operations as a component of general, administrative, sales and management
service expenses was $10,447, $9,698 and $9,255 for the fiscal years ended
2004, 2003 and 2002, respectively, of which, $444, $442 and $436,
respectively, is included in discontinued operations.
5. LONG-TERM DEBT
The components of long-term debt are summarized as follows:
FISCAL YEAR END 2004 2003
2002 First Mortgage Notes, interest at 8.875% interest only payable May 15 and
November 15, principal due May 15, 2012, secured by a first mortgage lien on
29 hotel properties, cash from the sales proceeds of one collateral property
until sufficient replacement collateral is provided and an agreement for
additional capital contributions of up to $195 million by JQH. $ 499,000 $ 499,000
Mortgage notes payable to banks, insurance companies and a state retirement
plan, fixed rates ranging from 7.5% to 9.5% payable in scheduled installments
with maturities through November 2018, secured by certain hotel facilities,
fixtures and an assignment of rents, with certain instruments subject to
cross-collateralization provisions, and a personal guarantee of JQH. 231,010 245,297
Mortgage notes payable to banks, variable interest rates at prime to prime plus
0.50% with a certain instrument subject to a ceiling and a floor, payable in
scheduled installments with maturities through February 2008, secured by
certain hotel facilities, fixtures and an assignment of rents, and a personal
guarantee of JQH. 35,194 36,447
Other notes payable, interest at 3%, paid in full during 2004. - 328
--------- ---------
765,204 781,072
Less: Current portion (25,719) (7,423)
--------- ---------
$ 739,485 $ 773,649
========= =========
During May 2002, the Company issued $510 million of 2002 First Mortgage
Notes. The Company utilized the proceeds from these notes to pay in full
the 1994 First Mortgage Notes and the 1995 First Mortgage Notes and
certain fixed and variable rate mortgage notes. The indenture agreements
relating to the 2002 First Mortgage Notes include certain covenants which,
among others, limit the ability of JQHLP and its restricted subsidiaries
(as defined) to make distributions, incur debt and issue preferred equity
interests, engage in certain transactions with its partners, stockholders
or affiliates, incur certain liens and engage in mergers or
consolidations. In addition, certain of the other credit agreements
include subjective acceleration clauses, and limit, among others, the
incurrence of certain liens and additional indebtedness and require the
achievement or maintenance of certain financial covenants. The 2002 First
Mortgage Notes and certain other obligations include scheduled prepayment
penalties in the event the obligations are paid prior to their scheduled
maturity.
The Company repaid or refinanced $15,868, $25,598 and $516,385 of
long-term debt in fiscal year 2004, 2003 and 2002, respectively. In
connection with these transactions, the Company incurred approximately
$144,
64
$774 and $7,411 in fiscal year 2004, 2003 and 2002, respectively, for
charges related to the early extinguishment of debt.
Scheduled maturities of long-term debt as of December 31, 2004, after
giving effect to the early extinguishment of a mortgage note payable
subsequent to year end (Note 11) and refinancing of a note payable (Note
3) are summarized as follows:
FISCAL YEAR ENDING AMOUNT
2005 $ 25,719
2006 36,865
2007 42,111
2008 48,880
2009 4,228
Thereafter 607,401
--------
$765,204
========
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- The hotel properties lease certain equipment and land
from unrelated parties under various lease arrangements. In addition, the
Company leases certain parking spaces at one hotel for the use of its
patrons and is billed by the lessor based on actual usage. Rent expense
for these non-related party leases, which is included in general,
administrative, sales and management service expenses, was approximately
$3,715, $3,123 and $3,502 for the fiscal years ended 2004, 2003 and 2002,
respectively, of which $22, $42 and $56, respectively, is included in
discontinued operations.
The Company operates two trade centers located in Joplin, Missouri and
Portland, Oregon, both of which are owned by JQH and leased by the
Company. The lease agreement for the Joplin trade center stipulates
nominal rentals for the fiscal years ended 2004, 2003 and 2002, and for
each ensuing year through 2014. The lease agreement for the Portland
facility stipulates annual rents of $300 payable on a month-to-month
basis. In addition, the Company leases office space in Springfield,
Missouri, from a partnership (of which JQH is a partner) for annual
payments of $288 payable monthly through December 2005. The Company also
leased land from JQH during fiscal year 2004 for one hotel property, and
during 2003 and 2002 for three hotel properties. The Company exchanged
certain undeveloped land for two of these leased parcels during fiscal
year 2003. Subject to the Company exercising the purchase option provided
under the agreement, the remaining land lease extends through 2045 and
requires aggregate minimum annual payments of approximately $150 and
additional contingent rent based upon a percentage of the property's
operating revenues. Rent expense for these related party leases was
approximately $802, $948 and $1,026 for the fiscal years ended 2004, 2003
and 2002, respectively.
The minimum annual commitments for non-cancelable leases and contracts as
of December 31, 2004 are as follows:
65
FISCAL YEAR RELATED PARTY OTHER TOTAL
2005 $ 1,208 $ 2,744 $ 3,952
2006 150 2,650 2,800
2007 150 2,629 2,779
2008 150 2,521 2,671
2009 150 1,324 1,474
Thereafter 5,575 53,415 58,990
------------- ---------- ---------
$ 7,383 $ 65,283 $ 72,666
============= ========== =========
HOTEL DEVELOPMENT -- Currently, the Company does not have any hotels under
construction nor does it have any plans to start construction.
STOCK REPURCHASE -- On December 1, 1998, the Board of Directors authorized
the Company to repurchase up to $3,000 of the outstanding stock at market
prices during fiscal year 1999. On November 30, 1999, the Board of
Directors authorized the Company to repurchase up to an additional $3,000
of the outstanding stock at market prices during fiscal year 2000. No
stock repurchase program was approved since 2000. As of December 31, 2004,
the Company has repurchased $4,322 of the total authorized to be
repurchased, net of reissued stock.
LEGAL MATTERS -- Two lawsuits have been filed against the Company (in the
Court of Chancery of the State of Delaware in and for New Castle County),
Jolly Roger Fund L.P. and Jolly Roger Offshore Fund, Ltd. vs. John Q.
Hammons Hotels Inc., et al, filed October 19, 2004 and Garco Investments
LLP v. John Q. Hammons Hotels, Inc., et al., filed October 20, 2004. Both
of these class action lawsuits originally sought injunctive relief to
prevent any merger transaction and asserted that the original price
offered to the public shareholders was not equivalent to the "sweetheart
deal" offered to John Q. Hammons. These lawsuits have been consolidated
into one action and the complaint has been amended to seek compensation,
attorney fees and costs of the action for plaintiffs' efforts because they
allegedly added value for the minority public shareholders as evidenced by
the fact the proposed stock acquisition price has risen from the initial
$13.00 a share to the current proposal of $24.00 per share. The parties
have agreed that no responsive pleadings are required to be filed until
March 31, 2005. The Company has not recorded an obligation with regard to
this matter, as a loss is not yet probable nor can an amount of loss be
reasonably estimated. Management will continue to assess the situation and
adjustments will be recorded, if necessary, in the period in which new
facts and circumstances arise.
The Company is party to various other legal proceedings arising from its
consolidated operations. Management believes that the outcome of these
proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's consolidated financial position, results
of operations or cash flows.
7. ASSETS HELD FOR SALE
During 2004, the Company completed a comprehensive review of its
investment strategy and of its existing hotel portfolio to identify
properties which the Company believes are either non-core or no longer
complement the business. As of December 31, 2004, only one hotel property,
the Holiday Inn property located in Emeryville, California, met the
Company's criteria for held for sale classification. The other assets
identified for disposition program did not meet the probability criteria
as prescribed by SFAS 144 to classify as held for sale. See Note 11 for
asset sale subsequent to December 31, 2004.
Assets held for sale consisted of the following:
66
DECEMBER 31,
2004
Land and improvements $ 791
Building and improvements 5,755
Furniture, fixtures and equipment 4,705
-----------
11,251
Less: Accumulated depreciation and amortizaiton (6,951)
-----------
Assets held for sale $ 4,300
===========
8. DISCONTINUED OPERATIONS
Included in discontinued operations are the results of operations of the
Holiday Inn Bakersfield, California sold in August 2004 and the Holiday
Inn Northglenn, Colorado sold in December 2004. In addition, the Holiday
Inn Emeryville, California hotel property met the Company's criteria for
held for sale classification as of December 31, 2004, which requires it to
be classified as discontinued operations for the periods presented.
Condensed financial information for these three hotels included in
discontinued operations is as follows:
FISCAL YEAR ENDED 2004 2003 2002
Revenues $ 17,573 $ 17,770 $ 20,059
Direct operating expenses 8,044 8,041 8,719
General, administrative, sales and
management service expenses 5,597 6,222 6,295
Repairs and maintenance 815 891 909
Asset impairment 4,619 - -
Depreciation and amortizaiton 1,499 1,940 2,096
-------- -------- --------
Total operating expenses 20,574 17,094 18,019
-------- -------- --------
Operating income (loss) (3,001) 676 2,040
Allocated interest expense 1,759 1,759 1,759
Other income - (56) (111)
Loss on sale 390 - -
-------- -------- --------
Income (loss) before minority interest (5,150) (1,027) 392
Minority interest - - (297)
-------- -------- --------
Income (loss) from discontinued operations $ (5,150) $ (1,027) $ 95
======== ======== ========
The Company sold a Holiday Inn located in Bakersfield, California in
August 2004 for net proceeds of $8,048. In December 2004, the Company sold
a Holiday Inn located in Northglenn, Colorado for net proceeds of $4,170.
From these sales, the Company recognized a net loss of $5,009, including
$4,619 of asset impairment charges and loss on dispositions of $390. The
Holiday Inn located in Northglenn, Colorado served as collateral under the
2002 First Mortgage Notes (Note 5). Under the terms of these indentures,
the Company plans to provide replacement collateral in accordance with the
indenture provisions.
67
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of long-term debt approximate their respective historical
carrying amounts except with respect to the 2002 First Mortgage Notes. The
fair market value of the 2002 First Mortgage Notes ranged from
approximately $561,000 to $569,000 as of December 31, 2004. The fair
market value of the First Mortgage Notes issued is estimated by obtaining
market quotes from brokers.
10. STOCK OPTIONS
Concurrent with the sale of equity securities in November 1994, the
Company adopted a stock option plan for its employees. The plan authorizes
the issuance of up to 2,416,800 shares of Class A common stock in option
grants. This plan expired during the fiscal year ended 2004, and as of
December 31, 2004, no options remained available for issuance. In February
1999, the Company adopted a stock option plan for its non-employee
directors. The plan authorizes the issuance of up to 500,000 shares of
Class A common stock in option grants. Options are granted at exercise
prices based upon market value of the underlying common stock at the date
of grant. The options become vested and exercisable on a pro rata basis
over a period of four years beginning one year after the grant date. All
unexercised options expire ten years after the grant date.
A summary of the changes in options outstanding during fiscal year 2004,
2003 and 2002 is as follows:
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
Outstanding at December 28, 2001 1,649,500 $ 5.99
Granted 80,000 6.66
Exercised - -
Expired (15,800) 5.95
--------- -------------
Outstanding at January 3, 2003 1,713,700 6.02
Granted 534,250 4.75
Exercised (8,625) 5.00
Expired (44,975) 5.33
--------- -------------
Outstanding at January 2, 2004 2,194,350 5.73
Granted 60,000 9.20
Exercised (272,650) 5.85
Expired (6,750) 3.63
--------- -------------
Outstanding at December 31, 2004 1,974,950 $ 5.82
========= =============
Exercisable at January 3, 2003 1,111,450 $ 6.39
========= =============
Exercisable at January 2, 2004 1,344,350 $ 6.18
========= =============
Exercisable at December 31, 2004 1,442,513 $ 5.96
========= =============
The outstanding exercisable options as of December 31, 2004 have a
weighted average remaining contractual life of 4.9 years.
68
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- ---------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE REMAINING LIFE SHARES EXERCISE PRICE
- --------------- --------- ---------------- ---------------- --------- ----------------
$3.94 to $5.15 1,203,950 $ 4.85 6.7 786,513 $ 4.89
$6.03 to $7.38 711,000 7.18 4.1 656,000 7.24
$9.20 60,000 9.20 9.4 - -
--------- ---------
1,974,950 $ 5.82 1,442,513 $ 5.96
========= =========
11. SUBSEQUENT EVENTS
Subsequent to December 31, 2004, the Company has agreed to purchase
approximately 278,096 general partner units from JQHLP primarily as a
result of stock options exercised. The number of general partner units to
be purchased is equivalent to the number of Class A and Class B common
stock issued as outlined by the partnership agreement. Had the units been
purchased in fiscal 2004, the effect would not have had a material impact
on the net loss.
On January 27, 2005, the Company completed the sale of a Holiday Inn
property located in Emeryville, California for net proceeds of $15,739,
resulting in a gain of $11,161. This hotel property served as collateral
under the 2002 First Mortgage Notes (Note 5). Under the terms of these
indentures, the Company plans to provide replacement collateral in
accordance with the indenture provisions.
On February 23, 2005, the Company utilized the net cash proceeds from the
sale of the Northglenn, Colorado and the Emeryville, California hotel
properties to pay-off the existing mortgage on our World Golf Village
Hotel in St. Augustine, Florida, and substitute it as the replacement
collateral for the 2002 First Mortgage Notes in accordance with the
indenture provisions.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly information has been restated to reflect the operations of
assets sold during fiscal year 2004 or classified as held for sale as of
December 31, 2004 as discontinued operations for all period presented.
Earnings per share for each quarter of the year are calculated
individually and may not add to the total of the year.
69
QUARTER
---------------------------------------------------
2004 FIRST SECOND THIRD FOURTH
Total revenues $ 109,286 $ 109,880 $ 106,913 $ 104,701
Income from operations 20,827 18,396 18,298 12,610
Income (loss) from continuing operations 4,270 1,861 1,980 (3,606)
Net income (loss) allocable to the Company 4,349 (2,622) 1,663 (4,035)
Basic earnings (loss) per share 0.85 (0.51) 0.32 (0.77)
Diluted earnings (loss) per share 0.74 (0.51) 0.27 (0.77)
Basic weighted average shares 5,111,270 5,143,119 5,195,095 5,245,334
Diluted weighted average shares 5,856,746 5,143,119 6,113,229 5,245,334
QUARTER
--------------------------------------------------
2003 FIRST SECOND THIRD FOURTH
Total revenues $ 105,711 $ 104,081 $ 104,476 $ 99,207
Income from operations 18,121 17,741 18,469 2,047
Income (loss) from continuing operations 279 114 284 (6,711)
Net income (loss) allocable to the Company 207 79 163 (7,510)
Basic earnings (loss) per share 0.04 0.02 0.03 (1.47)
Diluted earnings (loss) per share 0.04 0.01 0.03 (1.47)
Basic weighted average shares 5,083,829 5,089,728 5,094,778 5,102,979
Diluted weighted average shares 5,151,081 5,372,627 5,384,894 5,102,979
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, Missouri, on the 31st day of March, 2005.
JOHN Q. HAMMONS HOTELS, INC.
By: /s/ John Q. Hammons
----------------------------------
John Q. Hammons
Founder, Chairman and CEO
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
in their capacities at John Q. Hammons Hotels, Inc. on March 31, 2005.
Signatures Title
/s/ John Q. Hammons Founder, Chairman and CEO of John Q. Hammons Hotels,
- ------------------------ Inc.(Principal Executive Officer)
John Q. Hammons
/s/ Paul E. Muellner Chief Financial Officer of John Q. Hammons Hotels,
- ------------------------ Inc.(Principal Financial and Accounting Officer)
Paul E. Muellner
/s/ Jacqueline A. Dowdy Director, Secretary of John Q. Hammons Hotels, Inc.
- ------------------------
Jacqueline A. Dowdy
/s/ William J. Hart Director of John Q. Hammons Hotels, Inc.
- ------------------------
William J. Hart
/s/ Daniel L. Earley Director of John Q. Hammons Hotels, Inc.
- ------------------------
Daniel L. Earley
/s/ James F. Moore Director of John Q. Hammons Hotels, Inc.
- ------------------------
James F. Moore
/s/ John E. Lopez-Ona Director of John Q. Hammons Hotels, Inc.
- ------------------------
John E. Lopez-Ona
/s/ David C. Sullivan Director of John Q. Hammons Hotels, Inc.
- -----------------------
David C. Sullivan
/s/ Donald H. Dempsey Director of John Q. Hammons Hotels, Inc.
- ------------------------
Donald H. Dempsey
71
EXHIBIT INDEX
NO. TITLE
--- -----
3.1 Restated Certificate of Incorporation of the Company (Incorporated
by reference to Exhibit 3.3 of the Limited Partnership's
Registration Statement on Form S-4, Registration Number
333-89856-01)
3.2 Bylaws of the Company, as amended (Incorporated by reference to
Exhibit 3.4 of the Limited Partnership's Registration Statement on
Form S-4, Registration Number 333-89856-01)
3.3 Second Amended and Restated Agreement of Limited Partnership of the
Partnership (Incorporated by reference to Exhibit 3.1 of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
3.4 Certificate of Limited Partnership of the Partnership, filed with
the Secretary of State of the State of Delaware (Incorporated by
reference to Exhibit 3.2 of the Limited Partnership's Registration
Statement on Form S-4, Registration Number 333-89856-01)
3.5 Articles of Incorporation of John Q. Hammons Hotels Finance
Corporation III (Incorporated by reference to Exhibit 3.5 of the
Limited Partnership's Registration Statement on Form S-4,
Registration Number 333-89856-01)
3.6 By-laws of John Q. Hammons Hotels Finance Corporation III
(Incorporated by reference to Exhibit 3.6 of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
4.1 Indenture dated May 21, 2002 among the Limited Partnership and John
Q. Hammons Hotels Finance Corporation III and Wachovia Bank,
National Association, as trustee (Incorporated by reference to
Exhibit 4.1 of the Limited Partnership's Registration Statement on
Form S-4, Registration Number 333-89856-01)
4.2 Form of Global Note evidencing the 8-7/8% First Mortgage Notes due
2012 (Incorporated by reference to Exhibit 4.2 of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
10.1 Letter Agreement re: Hotel Financial Services for Certain Hotels
Owned and Operated by John Q. Hammons or John Q. Hammons Controlled
Companies (Incorporated by reference to Exhibit 10.7 to the
Registration Statement of the Company on Form S-1, No. 33-84570)
(a)10.2 Holiday Inn License Agreement
(a)10.3 Embassy Suites License Agreement
(a)10.4 Form of Option Purchase Agreement
10.5 Lease Agreement between The Plaza Associates and John Q. Hammons
Hotels, Inc., dated December 14, 2004 (Suite 701)
10.6 Collective Bargaining Agreement between Hotel Employee and
Restaurant Employee Union Local 49 and Holiday Inn Sacramento
Capitol Plaza, for 06/01/01 to 5/31/06 (Incorporated by reference to
Exhibit 10.6a from the Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 28, 2001)
10.7 Employment Agreement between John Q. Hammons Hotels, Inc. and Debra
M. Shantz dated as of May 1, 1995, as amended on October 31, 1997
and November 1, 2001 (Incorporated by reference to the same numbered
exhibit in the Company's Annual Report on Form 10-K for the Fiscal
Year Ended December 29, 2000)
10.7a Employment Agreement between John Q. Hammons Hotels, Inc. and Lou
Weckstein dated as of September 17, 2001 (Incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the Fiscal Quarter Ended September 28, 2001)
10.7b Employment Agreement between John Q. Hammons Hotels, Inc. and
William A. Mead dated as of January 25, 2000 (Incorporated by
reference to Exhibit 10.7b from the Company's Annual Report on Form
10-K for the Fiscal Year Ended December 28, 2001)
10.7c Letter Agreement between John Q. Hammons and William A. Mead dated
as of January 27, 2000 (Incorporated by reference to Exhibit 10.7c
from the Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 28, 2001)
10.7d Employment Agreement between John Q. Hammons Hotels, Inc. and Paul
E. Muellner dated as of December 1, 2003 (Incorporated by reference
to Exhibit 10.7d from the Company's Annual Report on Form 10-K for
the Fiscal Year Ended January 2, 2004)
72
10.8 John Q. Hammons Building Lease Agreement - 9th Floor (6000 sq. ft.)
(Incorporated by reference to Exhibit 10.7a of the Registration
Statement of the Company on Form S-1, No. 33-84570)
10.8a Lease Renewal for John Q. Hammons Building Lease Agreement - 9th
Floor (6000 sq. ft.) effective January 1, 2005
10.8b John Q. Hammons Building Lease Agreement - 7th Floor (2775 sq. ft.)
(Incorporated by reference to Exhibit 10.7b of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
10.8c Lease Renewal for John Q. Hammons Building Lease Agreement - 7th
Floor (2775 sq. ft.) effective January 1, 2005
10.8d John Q. Hammons Building Lease Agreement - 7th Floor (2116 sq. ft.)
(Incorporated by reference to Exhibit 10.7c of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
10.8e Lease Renewal for John Q. Hammons Building Lease Agreement - 7th
Floor (2116 sq. ft.) effective January 1, 2005
10.9 John Q. Hammons Building Lease Agreement - 8th Floor (6000 sq. ft.)
(Incorporated by reference to Exhibit 10.7d of the Limited
Partnership's Registration Statement on Form S-4, Registration
Number 333-89856-01)
10.9a Lease Renewal for John Q. Hammons Building Lease Agreement - 8th
Floor (6000 sq. ft.) effective January 1, 2005
(a)10.10 Triple Net Lease
(a)10.11 Lease Agreement between John Q. Hammons and John Q. Hammons Hotels,
L.P.
10.12 Ground lease between John Q. Hammons and John Q. Hammons-Branson,
L.P. - (Chateau on the Lake, Branson, Missouri) (Incorporated by
reference to Exhibit 10.10 of the Limited Partnership's Registration
Statement on Form S-4, Registration Number 333-89856-01)
10.13 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.12
of the Limited Partnership's Registration Statement on Form S-4,
Registration Number 333-89856-01)
10.14 1999 Non-Employee Director Stock and Stock Option Plan (Incorporated
by reference to the Exhibit 10.19 in the Company's Annual Report on
Form 10-K for the Fiscal Year Ended January 1, 1999)
12.1 Computation of Historical Ratio of Earnings to Fixed Charges of the
Company
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
31.1 Certification Statement of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) of the Securities and Exchange Act, as
amended
31.2 Certification Statement of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) of the Securities and Exchange Act, as
amended
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002, as amended
- ------------------------
(a) INCORPORATED BY REFERENCE TO THE SAME NUMBERED EXHIBIT IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1, NO. 33-84570.
73