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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from __________________ to ___________________
Commission File number 033-7334001
JOHN Q. HAMMONS HOTELS, L.P.
JOHN Q. HAMMONS HOTELS FINANCE CORPORATION III
(Exact name of registrant as specified in its charter)
DELAWARE 43-1523951
MISSOURI 33-1006528
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
300 JOHN Q. HAMMONS PARKWAY
SUITE 900
SPRINGFIELD, MO 65806
(Address of principal executive offices)
(Zip Code)
(417) 864-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
ASSETS
APRIL 1, 2005 DECEMBER 31, 2004
------------- -----------------
(unaudited)
CURRENT ASSETS:
Cash and equivalents $ 52,118 $ 41,044
Restricted cash 1,852 10,206
Marketable securities 18,422 22,332
Receivables:
Trade, less allowance for doubtful accounts of $231 in 2005 and 2004 12,764 7,250
Other 272 277
Management fees - related party 365 265
Inventories 1,235 1,091
Prepaid expenses and other 3,055 4,343
Assets held for sale - 4,300
----------- -----------
Total current assets 90,083 91,108
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 61,123 60,553
Buildings and improvements 717,859 717,870
Furniture, fixture and equipment 342,390 342,214
Construction in progress 10,461 -
----------- -----------
1,131,833 1,120,637
Less-accumulated depreciation and amortization (447,480) (436,196)
----------- -----------
684,353 684,441
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net,
including $23,751 and $20,376 of restricted cash as of April 1, 2005
and December 31, 2004, respectively 44,015 40,950
----------- -----------
TOTAL ASSETS $ 818,451 $ 816,499
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
LIABILITIES AND EQUITY (DEFICIT)
APRIL 1, 2005 DECEMBER 31, 2004
------------- -----------------
(unaudited)
LIABILITIES:
Current portion of long-term debt $ 7,212 $ 25,719
Accounts payable 3,995 8,172
Accrued expenses:
Payroll and related benefits 7,607 9,601
Sales and property taxes 11,414 12,053
Insurance 2,905 2,789
Interest 17,040 6,106
Utilities, franchise fees and other 10,942 10,115
Accrued distribution 5,675 -
--------- ---------
Total current liabilities 66,790 74,555
Long-term debt 738,421 739,485
Other obligations 3,345 3,328
--------- ---------
Total liabilities 808,556 817,368
--------- ---------
COMMITMENTS AND CONTINGENCIES
REFUNDABLE EQUITY 975 655
--------- ---------
PARTNERS' EQUITY (DEFICIT):
Contributed capital 97,045 96,844
Partners' and other deficits, net (88,046) (98,327)
Accumulated other comprehensive loss (79) (41)
--------- ---------
Total partners' equity (deficit) 8,920 (1,524)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIT) $ 818,451 $ 816,499
========= =========
See Notes to Condensed Consolidated Financial Statements
3
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(000's omitted)
THREE MONTHS ENDED
APRIL 1, 2005 APRIL 2, 2004
------------- -------------
REVENUES:
Rooms $ 68,550 $ 67,023
Food and beverage 29,200 28,660
Meeting room rental, related party management fee and other 13,683 13,603
------------- -------------
Total revenues 111,433 109,286
------------- -------------
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 16,832 16,394
Food and beverage 21,577 20,905
Other 440 586
General, administrative, sales and management service expenses 35,691 34,610
Repairs and maintenance 4,785 4,475
Depreciation and amortization 11,447 11,489
------------- -------------
Total operating expenses 90,772 88,459
------------- -------------
INCOME FROM OPERATIONS 20,661 20,827
OTHER EXPENSE:
Interest expense and amortization of deferred financing fees, net
of $362 and $117 of interest income in 2005 and 2004, respectively 15,939 16,527
Extinguishment of debt costs 234 -
------------- -------------
INCOME FROM CONTINUING OPERATIONS 4,488 4,300
Income from discontinued operations 10,834 79
------------- -------------
NET INCOME $ 15,322 $ 4,379
============= =============
See Notes to Condensed Consolidated Financial Statements
4
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
REFUNDABLE EQUITY AND PARTNERS' EQUITY (DEFICIT)
(000's omitted)
CONTRIBUTED PARTNERS' AND OTHER
CAPITAL EQUITY (DEFICIT) Accumulated
----------------- -------------------- Other
Comprehensive Refundable General Limited General Limited Comprehensive
Income (loss) Equity Partner Partners Partner Partners Loss Total
------------- ---------- ------- -------- --------- --------- ------------- ---------
BALANCE, December 31, 2004 $ 655 $96,844 $ - $(98,327) $ - $ (41) $ (1,524)
Distributions - - - (33) (5,675) - (5,708)
Issuance of general partner's Treasury
Stock - 201 - 667 - - 868
Net income $ 15,322 - - - 6,989 8,333 - 15,322
Refundable equity contribution 320 - - - - - -
Unrealizable depreciation on
marketable securities (38) - - - - - (38) (38)
----------
Comprehensive income $ 15,284
========== ---------- ------- ---- -------- ------- ---------- --------
BALANCE, April 1, 2005 $ 975 $97,045 $ - $(90,704) $ 2,658 $ (79) $ 8,920
========== ======= ==== ======== ======= ========== ========
(unaudited)
See Notes to Condensed Consolidated Financial Statements
5
JOHN Q. HAMMONS HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(000's omitted)
THREE MONTHS ENDED
APRIL 1, 2005 APRIL 2, 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,322 $ 4,379
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation, amortization and loan cost amortization 11,918 12,376
Gain on sale of property and equipment (11,161) -
Extinguishment of debt costs 234 -
Changes in certain assets and liabilities:
Restricted cash (831) (454)
Receivables (5,813) (4,326)
Inventories (157) (82)
Prepaid expenses and other 1,288 2,216
Accounts payable (4,177) (1,703)
Accrued expenses 9,244 12,468
Other obligations 17 122
------------ ------------
Net cash provided by operating activities 15,884 24,996
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (11,252) (2,618)
Proceeds from sale of property and equipment 15,739 -
Franchise fees, long-term restricted cash and other 5,567 (1,361)
Sale of marketable securities 3,872 133
------------ ------------
Net cash provided by (used in) investing activities 13,926 (3,846)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 31,000 -
Proceeds from issuance of Treasury Stock 868 169
Repayments of debt (50,571) (2,132)
Distributions to partners (33) (30)
------------ ------------
Net cash used in financing activities (18,736) (1,993)
------------ ------------
Increase in cash and equivalents 11,074 19,157
CASH AND EQUIVALENTS, beginning of period 41,044 23,790
------------ ------------
CASH AND EQUIVALENTS, end of period $ 52,118 $ 42,947
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 5,087 $ 5,648
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
UNREALIZED (DEPRECIATION) APPRECIATION OF MARKETABLE SECURITIES $ (38) $ 3
============ ============
ACCRUED DISTRIBUTION $ 5,675 $ -
============ ============
FINANCING COSTS FUNDED BY LIMITED PARTNERS $ 320 $ -
============ ============
See Notes to Condensed Consolidated Financial Statements
6
JOHN Q. HAMMONS HOTELS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ENTITY MATTERS
The accompanying consolidated financial statements include the accounts of John
Q. Hammons Hotels, L.P. and its wholly owned subsidiaries, consisting of John Q.
Hammons Hotels Finance Corporation III, a corporation with nominal assets and no
operations, the catering corporations (which are separate corporations for each
hotel location chartered to own the respective food and liquor licenses and
operate the related food and beverage facilities), and certain other
wholly-owned subsidiaries conducting certain hotel operations.
In conjunction with a public offering of common stock in November 1994 by our
general partner, John Q. Hammons Hotels, Inc., we obtained through transfers or
contributions from Mr. John Q. Hammons or enterprises that he controlled, 21
additional operating hotel properties, equity interests in two hotels under
construction, the stock of catering corporations and management contracts
relating to all of Mr. Hammons' hotels, to add to the ten hotel properties we
already owned.
We are directly or indirectly owned and controlled by Mr. Hammons, as were all
enterprises that transferred or contributed net assets to us. Accordingly, the
accompanying financial statements present, as a combination of entities under
common control, the financial position and related results of operations of all
entities on a consolidated basis for all periods presented.
All significant balances and transactions between the entities and properties
have been eliminated.
Mr. Hammons and entities directly or indirectly owned or controlled by him are
our only limited partners. Mr. Hammons, through his voting control of our
general partner, continues to be in control of us.
2. GENERAL
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Accordingly, certain information and footnotes
required by the accounting principles generally accepted in the United States
for complete financial statements have been omitted. Interim results may not be
indicative of fiscal year performance because of seasonal and other factors.
These interim statements should be read in conjunction with the financial
statements and notes thereto included in our Form 10-K for the fiscal year ended
December 31, 2004, which included financial statements for the fiscal years
ended December 31, 2004, January 2, 2004 and January 3, 2003.
The information contained herein reflects all normal and recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results of operations and financial position for the interim periods.
We consider all operating cash accounts and money market investments with an
original maturity of three months or less to be cash equivalents. Restricted
cash is escrowed for insurance, taxes, capital expenditures and certain other
obligations, in accordance with specific loan covenants and franchise
agreements. Marketable securities consist of available-for-sale commercial
paper, corporate bonds and governmental agency obligations which mature or will
be available for use in operations in 2005. These securities are valued at
current market value. As of April 1, 2005 and December 31, 2004, unrealized
7
holding losses were approximately $79,000 and $41,000, respectively, and
are included as a separate component of partners' equity (deficit) until
realized.
3. ALLOCATIONS OF INCOME, LOSSES AND DISTRIBUTIONS
Prior to December 30, 2000, income, losses and distributions were
allocated between our general partner and our limited partners based on
their respective ownership interests of 28.31% and 71.69%. As of April 1,
2005, we have redeemed approximately 955,000 Partnership units, net of
shares issued. The number of net partnership units redeemed is equivalent
to the net number of shares redeemed by John Q. Hammons Hotels, Inc., as
outlined by our Partnership Agreement. As a result, in 2005 and 2004, Mr.
Hammons' limited partnership interest was approximately 75% and 76%, while
our general partner's interest was approximately 25% and 24%,
respectively.
In the event we have taxable income, distributions are to be made to our
partners in an aggregate amount equal to the amount that we would have
paid for income taxes had we been a C Corporation during the applicable
period. Aggregate tax distributions will first be allocated to our general
partner, if applicable, with the remainder allocated to our limited
partners. As of April 1, 2005, distributions of $5.7 million were accrued
for income taxes in accordance with the Partnership Agreement. No such
distributions were required for the three months ended April 2, 2004.
Adjustments to accrued distributions will be recorded in the period in
which facts and circumstances which give rise to the adjustments become
known.
We distribute amounts to our general partner for state franchise taxes. We
distributed $33,000 as of April 1, 2005.
4. NEW ACCOUNTING PRONOUNCEMENTS
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
exceptions, 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
first quarter of fiscal 2006, and affect the compensation expense related
to stock options recorded in the accompanying consolidated financial
statements.
5. DISCONTINUED OPERATIONS
The results of operations of the Holiday Inn Emeryville, California (sold
in January 2005) are included in discontinued operations for the three
months ended April 1, 2005 and the three months ended April 2, 2004. Also
included in discontinued operations for 2004 period 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).
Condensed financial information for these hotels included in discontinued
operations is as follows:
8
Three Months Ended
(in thousands)
April 1, 2005 April 2, 2004
------------- -------------
Revenues $ 425 $ 5,090
-------- -------
Operating expenses:
Direct operating cost and expenses 390 2,151
General, administrative, sales and
management service expenses 193 1,747
Repairs and maintenance 37 231
Depreciation and amortization 1 442
-------- -------
Total operating expenses 621 4,571
-------- -------
Operating income (loss) (196) 519
Other income (expense):
Allocated interest expense (131) (440)
Gain on sale 11,161 -
-------- -------
Income from discontinued operations $ 10,834 $ 79
======== =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
Our general partner has announced over the past several months that it and
Mr. Hammons have been engaged in discussions with parties regarding a
possible merger transaction. Our general partner's board of directors
appointed a special committee, or the Special Committee, composed solely
of outside independent directors to conduct all negotiations on its
behalf. On April 29, 2005, our general partner announced that it and John
Q. Hammons have agreed to continue to negotiate exclusively with an
investor group led by JQH Acquisition, LLC through May 24, 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 general partner's Class A
shares would be purchased for $24.00 cash per share. Although the parties
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. Unless the context indicates or requires otherwise, the terms
"we," "us," "our" and other references to our company refer to our general
partner, John Q. Hammons Hotels, Inc., and to John Q. Hammons Hotels, L.P.
and John Q. Hammons Hotels Finance Corporation III, including all of our
subsidiaries.
9
Our consolidated financial statements include revenues from our owned
hotels and management fee revenues for providing management services to
the managed hotels (owned or directly controlled by Mr. Hammons).
References to our hotels include both our owned hotels and our managed
hotels. We derive revenues from the owned hotels from rooms, food and
beverage, meeting rooms and other revenues. Our beverage revenues include
only revenues from the sale of alcoholic beverages, while we show revenues
from the sale of non-alcoholic beverages as part of food revenue. Direct
operating costs and expenses include expenses we incur in connection with
the direct operation of rooms, food and beverage and telephones. Our
general, administrative, sales and management services expenses include
expenses incurred for franchise fees, administrative, sales and marketing,
utilities, insurance, property taxes, rent, management services and other
expenses.
We currently have no hotels under construction and no plans to develop new
hotels for the foreseeable future. In August 2000, we entered into a
five-year management contract with John Q. Hammons whereby we will provide
internal administrative, architectural design, purchasing and legal
services, to Mr. Hammons in conjunction with the development of hotels in
an amount not to exceed 1.5% of the total development cost of any single
hotel for the opportunity to manage the hotel upon opening and the right
of first refusal to purchase the hotel in the event it is offered for
sale. These costs are amortized over a five-year contract period,
beginning upon the opening of the hotels.
Although we are not developing new hotels, Mr. Hammons has personally
completed several projects, including new hotels in Oklahoma City,
Oklahoma; Junction City, Kansas; North Charleston, South Carolina;
Springfield, Missouri; Frisco, Texas and Albuquerque, New Mexico, 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 and Hampton, Virginia.
RESULTS OF OPERATIONS
The following discussion and analysis addresses results of operations for
the three month periods ended April 1, 2005 (which we refer to as the 2005
Quarter) and April 2, 2004 (which we refer to as the 2004 Quarter). The
results of operations for the 2005 Quarter are not indicative of the
results to be expected for the full year.
Total revenues from continuing operations for the 2005 Quarter increased
$2.1 million, or 1.9%, compared to the 2004 Quarter, primarily as a result
of an increase in our average daily room rate of approximately 6.5% to
$107.65, from the 2004 Quarter.
Rooms revenues from continuing operations increased $1.6 million, or 2.4%,
from the 2004 Quarter, and as a percentage of total revenues increased to
61.6% from 61.3%. The increase was attributable to the increase in our
average room rate to $107.65, compared to the 2004 Quarter average room
rate of $101.12. This increase was partially offset by a decrease in our
occupancy for the 2005 Quarter by 3.9% or 2.6 percentage points to 64.5%
from 67.1% in the 2004 Quarter. In comparison, the average room rate for
the hotel industry, based on information from Smith Travel Research, was
$90.25 in the 2005 Quarter, up 4.2% from the 2004 Quarter. Occupancy for
the hotel industry was 58.4% in the 2005 Quarter, up 2.8% from the 2004
Quarter. Our Revenue Per Available Room, or RevPAR, was $69.41 in the 2005
Quarter, up 2.3% from $67.84 in the 2004 Quarter. RevPAR for the hotel
industry in the 2005 Quarter was $52.74, up 7.2% from the 2004 Quarter.
Food and beverage revenues from continuing operations increased by $0.5
million, or 1.7%, compared to the 2004 Quarter, but decreased slightly as
a percentage of total revenues to 26.2% from 26.3%. The dollar increase
was due to increased banquet revenues related to an increase in the
association and small group market segments of our business.
10
Meeting room rental, related party management fee and other revenues from
continuing operations increased $0.1 million, or 0.7%, from the 2004
Quarter, but decreased slightly as a percentage of revenues to 12.3% from
12.4%. The dollar increase was primarily related to related party
management fees, partially offset by decreased telephone revenues.
Rooms operating expenses from continuing operations increased by $0.4
million, or 2.4%, compared to the 2004 Quarter, but remained stable as a
percentage of rooms revenues at 24.5%. The dollar increase was primarily
attributable to costs involved in compliance with revisions in selected
franchise standards, including such items as the purchase of new linens
for certain hotels.
Food and beverage operating expenses from continuing operations increased
$0.7 million, or 3.3%, compared to the 2004 Quarter and increased as a
percentage of food and beverage revenues to 74.0% from 72.8%. The increase
was attributable to increased labor and food costs directly related to
higher sales volumes, discussed above.
Other operating expenses from continuing operations decreased slightly by
$0.2 million, compared to the 2004 Quarter, and decreased as a percentage
of meeting room rental, related party management fee and other revenues,
to 2.9% from 4.4%.
General, administrative, sales and management service expenses from
continuing operations increased $1.1 million, or 3.2%, over the 2004
Quarter, and increased as a percentage of total revenues to 32.0% from
31.7%. The increase was primarily attributable to increases in costs
associated with administrative and sales and marketing compensation,
credit card commissions, franchise frequent travel programs, utilities and
franchise fees, partially offset by a decrease in insurance costs.
Repairs and maintenance expenses from continuing operations increased by
$0.3 million, or 6.7%, and increased slightly as a percentage of revenues,
to 4.3%, from 4.1% in the 2004 Quarter, as a result of increased
compensation costs and maintenance projects.
Depreciation and amortization expenses from continuing operations
decreased $0.1 million, or 0.9%, compared to the 2004 Quarter, and
decreased as a percentage of revenues to 10.2% from 10.5%. The decrease is
primarily attributable to our cessation of new development in 2000.
Income from operations decreased by $0.1 million, or 0.5%, and decreased
slightly as a percentage of revenues to 18.6% from 19.0% in the 2004
Quarter, as the result of costs in a number of areas that increased at a
higher rate than revenues, as noted in the discussion above.
Income from continuing operations increased slightly, by $0.2 million, or
4.7%, and increased as a percentage of total revenues to 4.0% from 3.9% in
the 2004 Quarter, primarily as a result of lower interest expense,
partially offset by extinguishment of debt costs of $0.2 million in the
2005 Quarter.
Net income was $15.3 million in the 2005 Quarter, compared to $4.4 million
in the 2004 Quarter, primarily related to the sale of the Holiday Inn
Emeryville, California, which resulted in an $11.2 million gain recorded
in discontinued operations.
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.
11
At April 1, 2005, we had $52.1 million of cash and equivalents and $18.4
million of marketable securities, compared to $41.0 million and $22.3
million, respectively, at the end of fiscal 2004. Such amounts are
available for our working capital requirements, capital expenditures and
debt service. At April 1, 2005, and December 31, 2004, we had current
restricted cash reserves of $1.9 million and $10.2 million, and long-term
restricted cash reserves of $23.8 million and $20.4 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 decreased to $15.9 million for the 2005
Quarter, from $25.0 million for the 2004 Quarter, a decrease of $9.1
million, or 36.4%, primarily attributable to unfavorable changes in
certain assets and liabilities.
We incurred capital expenditures of $11.3 million in the 2005 Quarter,
compared to $2.6 million in the 2004 Quarter. This increase was directly
attributable to the costs associated with the conversion of our Ft.
Collins, Colorado Holiday Inn to a Hilton and our Holiday Inn West Des
Moines, Iowa to a Sheraton. In addition, the 2005 Quarter includes costs
associated with significant capital improvement projects at our Holiday
Inn in Sacramento and our Embassy Suites in Monterey, California, included
in our previously-announced 2005 anticipated capital expenditures of $43.5
million.
At April 1, 2005, our total debt was $745.6 million compared with $765.2
million at the end of fiscal 2004. The decrease of $19.6 million is
primarily attributable to the reduction of long-term debt from scheduled
principal payments and the use of proceeds from the sale of certain hotels
discussed below. The current portion of long-term debt was $7.2 million at
the end of the 2005 Quarter, compared to $25.7 million at the end of 2004.
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.
On January 7, 2005, we completed a $31.0 million refinancing on one of our
properties. In connection with this refinancing Mr. Hammons personally
paid $975,000 for various related costs and expenses. Our general
partner's Board of Directors determined that we will repay Mr. Hammons
$975,000 for costs incurred with the refinancing, if we continue to own
this property in one year. If we were to transfer this property to Mr.
Hammons within the next year in connection with a sale or merger (as
discussed in Recent Events above), however, we will not pay Mr. Hammons
for these costs. This transaction is included in the accompanying
financial statements as deferred financing costs and refundable equity.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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
12
limited exceptions, 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 first quarter of fiscal 2006, and affect the
compensation expense related to stock options recorded in 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, 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.
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
13
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.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, regarding, among other
things, our operations outlook, business strategy, prospects and financial
position. These statements contain the words "believe," "anticipate,"
"estimate," "expect," "project," "forecast," "intend," "may," and similar
words. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results to be
materially different from any future results expressed or implied by such
forward-looking statements. Such factors include, among others:
- General economic conditions, including the speed and strength
of the current economic recovery;
- The impact of any serious communicable diseases on travel;
- Competition;
- Changes in operating costs, particularly energy and labor
costs;
- Unexpected events, such as the September 11, 2001 terrorist
attack;
- Risks of hotel operations, such as hotel room supply exceeding
demand, increased energy and other travel costs and general
industry downturns;
- Seasonality of the hotel business;
- Cyclical over-building in the hotel and leisure industry;
- Requirements of franchise agreements, including the right of
some franchisors to immediately terminate their respective
agreements if we breach certain provisions; and
- Costs of complying with applicable state and federal
regulations.
These risks are uncertainties and, along with the risk factors discussed
in our Annual Report on Form 10-K, should be considered in evaluating any
forward looking statements contained in this Form 10-Q. We undertake no
obligation to update or revised publicly any forwarding-looking statement,
whether as a result of new information, future events or otherwise, other
than as required by law.
SUPPLEMENTAL FINANCIAL INFORMATION RELATING TO THE COLLATERAL HOTELS
The following tables set forth, as April 1, 2005 and April 2, 2004,
unaudited selected financial information with respect to the hotels
collateralizing our $510 million of 8-7/8% First Mortgage Notes, and about
us, excluding our Unrestricted Subsidiaries (as defined in the indenture
governing the notes), which we refer to as the "Restricted Group". Under
the heading "Management Operations," we provide information with respect
to revenues and expenses we generate as manager of the collateral hotels
and the other hotels we own or manage.
14
TRAILING 12 MONTHS ENDED APRIL 1, 2005
2002 Management Total
Collateral Operations Restricted
Hotels(d) Groups Group
---------- ---------- ----------
Statement of operations data:
Operating revenues $ 271,506 $ 9,905(a) $ 281,411
Operating expenses:
Direct operating costs and
expenses 97,511 - 97,511
General, administrative, sales
and management service expenses (b) 93,875 937(c) 94,812
Repairs and maintenance 12,324 - 12,324
Depreciation and amortization 31,368 993 32,361
---------- ---------- ----------
Total operating expenses 235,078 1,930 237,008
---------- ---------- ----------
Income from operations $ 36,428 $ 7,975 $ 44,403
========== ========== ==========
Operating data:
Occupancy 64.3%
Average daily room rate $ 99.29
RevPAR $ 63.85
(a) Represents management revenues derived from the non-collateral
hotels including partial period revenues for Bakersfield, California
(sold in August 2004) and the managed hotels.
(b) General, administrative, sales and management service expenses for
the collateral hotels include management expenses allocated to the
respective hotels.
(c) General, administrative, sales and management service expenses for
the collateral hotels are presented net of the management revenues
associated with the management expenses included in general,
administrative, sales and management expenses for the collateral
hotels.
(d) Represents operating data for the 29 hotels serving as collateral as
of April 1, 2005.
TRAILING 12 MONTHS ENDED APRIL 2, 2004
2002 Management Total
Collateral Operations Restricted
Hotels(d) Groups Group
---------- ---------- ----------
Statement of operations data:
Operating revenues $ 262,697 $ 10,410(a) $ 273,107
Operating expenses:
Direct operating costs and
expenses 96,520 - 96,520
General, administrative, sales
and management service expenses (b) 86,238 (301)(c) 85,937
Repairs and maintenance 11,339 - 11,339
Depreciation and amortization 29,434 822 30,256
---------- ---------- ----------
Total operating expenses 223,531 521 224,052
---------- ---------- ----------
Income from operations $ 39,166 $ 9,889 $ 49,055
========== ========== ==========
Operating data:
Occupancy 63.5%
Average daily room rate $ 95.41
RevPAR $ 60.59
(a) Represents management revenues derived from the non-collateral
hotels and the managed hotels.
15
(b) General, administrative, sales and management service expenses for
the collateral hotels include management expenses allocated to the
respective hotels.
(c) General, administrative, sales and management service expenses for
the collateral hotels are presented net of the management revenues
associated with the management expenses included in general,
administrative, sales and management expenses for the collateral
hotels.
(d) Represents operating data for the 30 hotels serving as collateral as
of April 2, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our
investing and financing activities. Investing activity includes operating
cash accounts and investments with an original maturity of three months or
less, and certain balances of various money market and common bank
accounts. Our financing activities are comprised of long-term fixed and
variable-rate debt obligations utilized to fund business operations and
maintain liquidity. The following table presents the principal cash
repayments and related weighted average interest rates by maturity date
for our long-term fixed and variable-rate debt obligations as of April 1,
2005:
EXPECTED MATURITY DATE
(in millions)
Fair
There- Value
2005(d) 2006 2007 2008 2009 After Total (e)
Long-Term Debt(a)
$510 Million First Mortgage Notes $ - $ - $ - $ - $ - $ 499 $ 499 $ 535-
Average interest rate(b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 540
Other fixed-rate debt obligations $ 6 $ 27 $ 41 $ 25 $ 5 $ 108 $ 212 $ 203
Average interest rate(b) 8.0% 7.7% 8.3% 8.0% 8.2% 7.9% 8.0%
Other variable-rate debt obligations $ 1 $ 10 $ 1 $ 23 $ - $ - $ 35 $ 35
Average interest rate(c) 5.9% 5.9% 5.9% 5.9% -% -% 5.9%
(a) Includes amounts reflected as long-term debt due within one year.
(b) For the long-term fixed rate debt obligations, the weighted average
interest rate is based on the stated rate of the debt that is
maturing in the year reported. The weighted average interest rate
excludes the effect of the amortization of deferred financing costs.
(c) For the long-term variable rate debt obligations, the weighted
average interest rate assumes no changes in interest rates and is
based on the variable rate of the debt, as of April 1, 2005 that is
maturing in the year reported. The weighted average interest rate
excludes the effect of the amortization of deferred financing costs.
(d) The 2005 balances include actual and projected principal repayments
and weighted average interest rates.
(e) The fair values of long-term debt obligations approximate their
respective historical carrying amounts except with respect to the
$510 million First Mortgage Notes and other fixed rate debt
obligations. The fair value of the First Mortgage Notes is estimated
by obtaining quotes from brokers. A one percentage point change in
the par or the then-current premium or discount quote received for
the $510 million First Mortgage Notes would have an effect of
approximately $5 million. A one percentage point change in the
8-7/8% rate used to calculate the fair value of other fixed rate
debt would change its estimated fair value by approximately $8
million.
16
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. The chief
executive officer and chief financial officer of our general partner have
evaluated the effectiveness of our "disclosure controls and procedures"
(as defined in Rules 13a-14(d) and 15d-14(d) under the Securities Exchange
Act of 1934) as of April 1, 2005. Based on that review, they have
concluded that, as of such date, our disclosure controls and procedures
were effective to ensure that material information relating to us would be
made known to them.
Changes in internal controls. There were no significant changes in
our internal controls or, to the knowledge of the chief executive officer
and chief financial officer of our general partner, in other factors that
could significantly affect our internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses,
after the date of such evaluation.
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. Legal Proceedings
Two class action lawsuits were filed against our general partner last fall
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 actions 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. On May 6, 2005, our general
partner filed a motion to dismiss. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
17
ITEM 4. Submission of Matters to a Vote of Securities Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits
See Exhibit Index
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereto duly authorized.
JOHN Q. HAMMONS HOTELS, L.P.
By: John Q. Hammons Hotels, Inc.
its General Partner
By: /s/ John Q. Hammons
------------------------------------
John Q. Hammons, Chairman,
Founder, and Chief Executive Officer
By: /s/ Paul E. Muellner
------------------------------------
Paul E. Muellner, Executive Vice President and
Chief Financial Officer (Principal Financial
Officer)
JOHN Q. HAMMONS HOTELS FINANCE
CORPORATION III
By: /s/ John Q. Hammons
--------------------------------------------
John Q. Hammons, Chairman,
Founder, and Chief Executive Officer
By: /s/ Paul E. Muellner
--------------------------------------------
Paul E. Muellner, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
Dated: May 13, 2005
19
EXHIBIT INDEX
EXHIBIT NO. TITLE
31.1 Rule 13a-14(a)/15d-14(a) Certification of the general partner's Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of the general partner's Chief
Financial Officer
32 Section 1350 Certification of the general partner's Chief Executive Officer
and Chief Financial Officer
20