10-Q 1 c89679e10vq.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 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 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 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 (or for such shorter period that the registrant was required to file such reports), and (2) has 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] Number of shares of Registrant's Class A Common Stock outstanding as of November 9, 2004: 4,932,725 PART I - FINANCIAL INFORMATION Item 1. Financial Statements JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) ASSETS
OCTOBER 1, 2004 JANUARY 2, 2004 --------------- --------------- (UNAUDITED) CURRENT ASSETS: Cash and equivalents $ 50,783 $ 23,790 Restricted cash 1,391 1,268 Marketable securities 25,497 15,711 Receivables: Trade, less allowance for doubtful accounts of $231 12,959 7,214 Other 344 251 Management fees - related party 350 223 Inventories 1,110 1,067 Prepaid expenses and other 493 4,498 --------------- --------------- Total current assets 92,927 54,022 --------------- --------------- PROPERTY AND EQUIPMENT, at cost: Land and improvements 63,021 62,779 Buildings and improvements 728,278 742,807 Furniture, fixture and equipment 338,768 338,833 Construction in progress 5,421 75 --------------- --------------- 1,135,488 1,144,494 Less-accumulated depreciation and amortization (441,837) (418,509) --------------- --------------- 693,651 725,985 DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net, including $23,875 and $20,453 of restricted cash as of October 1, 2004 and January 2, 2004, respectively 44,212 42,176 --------------- --------------- TOTAL ASSETS $ 830,790 $ 822,183 =============== ===============
See Notes to Condensed Consolidated Financial Statements 2 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted, except share data) LIABILITIES AND EQUITY (DEFICIT)
OCTOBER 1, 2004 JANUARY 2, 2004 --------------- --------------- (UNAUDITED) LIABILITIES: Current portion of long-term debt $ 8,412 $ 7,423 Accounts payable 3,893 5,028 Accrued expenses: Payroll and related benefits 9,297 7,776 Sales and property taxes 15,218 12,077 Insurance 2,935 2,646 Interest 17,094 6,218 Utilities, franchise fees and other 10,424 7,298 Accrued distribution 3,480 - --------------- --------------- Total current liabilities 70,753 48,466 Long-term debt 758,736 773,649 Other obligations 3,169 2,530 --------------- --------------- Total liabilities 832,658 824,645 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST OF HOLDERS OF LIMITED PARTNER UNITS - - --------------- --------------- STOCKHOLDERS' EQUITY (DEFICIT): Preferred Stock, $.01 par value, 2,000,000 shares authorized, none outstanding - - Class A Common Stock, $.01 par value, 40,000,000 shares authorized at October 1, 2004, and January 2, 2004, 6,042,000 shares issued at October 1, 2004, and January 2, 2004, and 4,930,425 and 4,808,879 shares outstanding at October 1, 2004, and January 2, 2004, respectively 60 60 Class B Common Stock, $.01 par value, 1,000,000 shares authorized, 294,100 shares issued and outstanding 3 3 Paid-in capital 96,546 96,395 Accumulated deficit, net (93,451) (93,361) Less: Treasury Stock, at cost; 1,111,575 and 1,233,121 shares at October 1, 2004, and January 2, 2004, respectively (5,031) (5,582) Accumulated other comprehensive income 5 23 --------------- --------------- Total stockholders' equity (deficit) (1,868) (2,462) --------------- --------------- TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 830,790 $ 822,183 =============== ===============
See Notes to Condensed Consolidated Financial Statements 3 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (000's omitted, except share data)
THREE MONTHS ENDED NINE MONTHS ENDED OCTOBER 1, 2004 OCTOBER 3, 2003 OCTOBER 1, 2004 OCTOBER 3, 2003 --------------- --------------- --------------- --------------- REVENUES: Rooms $ 72,267 $ 69,975 $ 212,320 $ 204,616 Food and beverage 25,614 25,760 84,072 81,374 Meeting room rental, related party management fee and other 12,524 11,983 39,789 37,653 --------------- --------------- --------------- --------------- Total revenues 110,405 107,718 336,181 323,643 OPERATING EXPENSES: Direct operating costs and expenses: Rooms 18,610 17,161 53,002 49,988 Food and beverage 20,434 19,836 64,737 62,903 Other 577 693 1,757 2,065 General, administrative, sales and management service expenses 34,225 34,261 107,085 102,960 Repairs and maintenance 4,564 4,512 14,060 13,388 Asset impairment - - 3,197 - Depreciation and amortization 13,402 12,658 37,094 37,407 --------------- --------------- --------------- --------------- Total operating expenses 91,812 89,121 280,932 268,711 --------------- --------------- --------------- --------------- INCOME FROM OPERATIONS 18,593 18,597 55,249 54,932 OTHER INCOME (EXPENSE): Other income 193 - 193 175 Interest income 171 143 448 477 Interest expense and amortization of deferred financing fees (17,090) (17,411) (51,225) (52,617) Extinguishment of debt costs - (318) - (318) --------------- --------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND PROVISION FOR INCOME TAXES 1,867 1,011 4,665 2,649 Minority interest in earnings of partnership - (768) - (2,012) --------------- --------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES 1,867 243 4,665 637 Provision for income taxes (33) (30) (144) (120) --------------- --------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS 1,834 213 4,521 517 Discontinued operations (171) (50) (1,131) (68) --------------- --------------- --------------- --------------- NET INCOME ALLOCABLE TO THE COMPANY $ 1,663 $ 163 $ 3,390 $ 449 =============== =============== =============== =============== BASIC EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 0.35 $ 0.04 $ 0.88 $ 0.10 Discontinued operations (0.03) (0.01) (0.22) (0.01) --------------- --------------- --------------- --------------- Net earnings allocable to Company $ 0.32 $ 0.03 $ 0.66 $ 0.09 =============== =============== =============== =============== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 5,195,095 5,094,778 5,149,828 5,089,445 =============== =============== =============== =============== DILUTED EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 0.30 $ 0.04 $ 0.76 $ 0.10 Discontinued operations (0.03) (0.01) (0.19) (0.01) --------------- --------------- --------------- --------------- Net earnings allocable to Company $ 0.27 $ 0.03 $ 0.57 $ 0.09 =============== =============== =============== =============== DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,113,229 5,384,894 5,961,429 5,262,806 =============== =============== =============== ===============
See Notes to Condensed Consolidated Financial Statements 4 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MINORITY INTEREST AND STOCKHOLDERS' EQUITY (DEFICIT) (000's omitted)
STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------- Comprehensive Class A Class B Income Minority Common Common Paid in (Loss) Interest Stock Stock Capital ------------- ------------- ------------- ------------- ------------- BALANCE, January 2, 2004 $ - $ 60 $ 3 $ 96,395 Net income allocable to the Company $ 3,390 - - - - Distributions (3,480) - - - Reallocation of distributions from minority interest to the Company 3,480 - - - Issuance of Common Stock to employees and directors - - - 151 Unrealized depreciation on marketable securities (18) - - - - ------------- ------------- ------------- ------------- ------------- Comprehensive income $ 3,372 ============= BALANCE, October 1, 2004 $ - $ 60 $ 3 $ 96,546 (unaudited) ============= ============= ============= ============= STOCKHOLDERS' EQUITY (DEFICIT) ----------------------------------------------- Accumulated Company Other Accumulated Treasury Comprehensive Deficit Stock Income (Loss) Total ------------- ------------- ------------- ------------- BALANCE, January 2, 2004 $ (93,361) $ (5,582) $ 23 $ (2,462) Net income allocable to the Company 3,390 - - 3,390 Distributions - - - - Reallocation of distributions from minority interest to the Company (3,480) - - (3,480) Issuance of Common Stock to employees and directors - 551 - 702 Unrealized depreciation on marketable securities - - (18) (18) ------------- ------------- ------------- ------------- BALANCE, October 1, 2004 $ (93,451) $ (5,031) $ 5 $ (1,868) (unaudited) ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements 5 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (000's omitted)
NINE MONTHS ENDED OCTOBER 1, 2004 OCTOBER 3, 2003 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income allocable to the Company $ 3,390 $ 449 Adjustment to reconcile net income to cash provided by operating activities: Minority interest in earnings of partnership - 1,795 Depreciation, amortization and loan cost amortization 38,902 39,285 Extinguishment of debt costs - 318 Asset impairment 4,619 - Non-cash director compensation 50 50 Changes in certain assets and liabilities Restricted cash (123) (319) Receivables (6,034) (2,513) Inventories (51) 42 Prepaid expenses and other 4,005 5,501 Accounts payable (1,135) (1,126) Accrued expenses 18,953 16,769 Other obligations 639 335 --------------- --------------- Net cash provided by operating activities 63,215 60,586 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (17,184) (9,694) Proceeds from sale of property and equipment 8,048 - Franchise fees, long-term restricted cash and other (4,010) (4,154) Purchase of marketable securities (9,804) (2,277) --------------- --------------- Net cash used in investing activities (22,950) (16,125) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of Treasury Stock 652 43 Repayments of debt (13,924) (17,169) Debt redemption costs - (52) --------------- --------------- Net cash used in financing activities (13,272) (17,178) --------------- --------------- Increase in cash and equivalents 26,993 27,283 CASH AND EQUIVALENTS, beginning of period 23,790 21,774 --------------- --------------- CASH AND EQUIVALENTS, end of period $ 50,783 $ 49,057 =============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID FOR INTEREST $ 38,977 $ 40,318 =============== =============== SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: UNREALIZED DEPRECIATION OF MARKETABLE SECURITIES $ (18) $ (9) =============== =============== ACCRUED DISTRIBUTION $ 3,480 $ - =============== ===============
See Notes to Condensed Consolidated Financial Statements 6 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. 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). We were incorporated in September 1994 and had no operations or assets prior to our initial public offering of Class A Common Stock in November 1994. Immediately prior to the initial public offering, Mr. John Q. Hammons contributed approximately $5 million in cash to us in exchange for 294,100 shares of Class B Common Stock (which represented approximately 72% of the voting control). We contributed the approximate $96 million of net proceeds from our Class A and Class B Common Stock offerings to John Q. Hammons Hotels, L.P., (for which we serve as the general partner, and we refer to as the "Partnership,") in exchange for an approximately 28% general partnership interest. As of October 1, 2004, the Partnership had redeemed approximately 1.25 million Partnership units, net of shares issued. The number of net Partnership units redeemed is equivalent to the number of net shares we have redeemed, as required by the Partnership Agreement. Accordingly, the allocation percentages were approximately 24% for us, and approximately 76% for the limited partners in 2004 and 2003. Among other things, the Partnership Agreement provides that, 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 us, with any subsequent pretax income also to be allocated to us until such losses had been offset. As of October 1, 2004, we must recapture approximately $4.6 million due to the previous losses of the limited partners we absorbed. In addition, with respect to distributions, in the event the Partnership has taxable income, distributions are to be made in an aggregate amount equal to the amount the Partnership would have paid for income taxes had it been a C Corporation during the applicable period. Aggregate tax distributions will first be allocated to us, if applicable, with the remainder allocated to the limited partners. Distributions for taxes approximated $3.5 million for the nine months ended October 1, 2004. No distributions were required for the nine months ended October 3, 2003. Adjustments to accrued distributions will be recorded in the period in which facts and circumstances which give rise to adjustments become known. All significant balances and transactions between the entities and properties have been eliminated. 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 7 Form 10-Q. Accordingly, certain information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements have been omitted. Interim results may not be indicative of fiscal year performance because of seasonal and other factors. These interim statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the fiscal year ended January 2, 2004, which included financial statements for the fiscal years ended January 2, 2004, January 3, 2003 and December 28, 2001. The information contained herein reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial position for the interim periods. We consider all operating cash accounts and money market investments with an original maturity of three months or less to be cash equivalents. Restricted cash is escrowed for insurance, taxes, capital expenditures and certain other obligations, in accordance with specific loan covenants and franchise agreements. Marketable securities consist of available-for-sale commercial paper and governmental agency obligations which mature or will be available for use in operations in 2004. These securities are valued at current market value. As of October 1, 2004, unrealized holding gains were approximately $5,000, all which is allocable to us, (with no allocation to the minority interest), and are included as a separate component of shareholders' equity (deficit) until realized. The provision for income taxes was determined using an effective income tax rate of approximately 5% to provide for estimated state, local and franchise taxes. 8 3. NET INCOME AND EARNINGS PER SHARE Basic and diluted net earnings per share for the three months ended October 1, 2004, were $0.32 and $0.27, respectively, compared to basic and diluted net earnings per share of $0.03 for the three months ended October 3, 2003. Basic and diluted net earnings per share were $0.66 and $0.57, respectively, for the nine months ended October 1, 2004, and $0.09 for the nine months ended October 3, 2003. Diluted shares for the three and nine months ended October 1, 2004, included all outstanding options. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are 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 following is a reconciliation of the numerator and denominator for basic and diluted earnings per share for the three months and nine months ended October 1, 2004 and October 3, 2003:
Three Months Ended ------------------ (in thousands, except per share data) October 1, 2004 October 3, 2003 ------------------------------------------- ------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share from continuing operations $ 1,834 5,195 $ 0.35 $ 213 5,095 $ 0.04 Discontinued operations (171) 5,195 (0.03) (50) 5,095 (0.01) ------------ ------------ ------------ ------------ Basic earnings per share $ 1,663 5,195 $ 0.32 $ 163 5,095 $ 0.03 ============ ============ ============ ============ Effect of dilutive securities: Options 918 290 ------------ ------------ Diluted earnings per share from continuing operations $ 1,834 6,113 $ 0.30 $ 213 5,385 $ 0.04 Discontinued operations (171) 6,113 (0.03) (50) 5,385 (0.01) ------------ ------------ ------------ ------------ Diluted earnings per share $ 1,663 6,113 $ 0.27 $ 163 5,385 $ 0.03 ============ ============ ============ ============ ============ ============
Nine Months Ended ----------------- (in thousands, except per share data) October 1, 2004 October 3, 2003 ------------------------------------------- ------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share from continuing operations $ 4,521 5,150 $ 0.88 $ 517 5,089 $ 0.10 Discontinued operations (1,131) 5,150 (0.22) (68) 5,089 (0.01) ------------ ------------ ------------ ------------ Basic earnings per share $ 3,390 5,150 $ 0.66 $ 449 5,089 $ 0.09 ============ ============ ============ ============ Effect of dilutive securities: Options 811 174 ------------ ------------ Diluted earnings per share from continuing operations $ 4,521 5,961 $ 0.76 $ 517 5,263 $ 0.10 Discontinued operations (1,131) 5,961 (0.19) (68) 5,263 (0.01) ------------ ------------ ------------ ------------ Diluted earnings per share $ 3,390 5,961 $ 0.57 $ 449 5,263 $ 0.09 ============ ============ ============ ============ ============ ============
9 4. STOCK OPTIONS We account for our stock-based compensation plans according to the intrinsic method under APB Opinion No. 25. In accordance with Statement of Financial Accounting Standard No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," we are required, at a minimum, to report pro forma disclosures of expense for stock-based awards based on their fair values. Had compensation cost been determined consistent with SFAS No. 123, our net income (loss) and basic and diluted earnings (loss) per share for the three months and nine months ended October 1, 2004 and October 3, 2003, would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED OCT. 1, OCT. 3, OCT. 1, OCT. 3, 2004 2003 2004 2003 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income As reported $ 1,663 $ 163 $ 3,390 $ 449 Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (27) (53) (127) (142) ---------- ---------- ---------- ---------- Pro forma $ 1,636 $ 110 $ 3,263 $ 307 ========== ========== ========== ========== Basic earnings per share As reported $ 0.32 $ 0.03 $ 0.66 $ 0.09 Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (0.01) (0.01) (0.03) (0.03) ---------- ---------- ---------- ---------- Pro forma $ 0.31 $ 0.02 $ 0.63 $ 0.06 ========== ========== ========== ========== Diluted earnings per share As reported $ 0.27 $ 0.03 $ 0.57 $ 0.09 Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects - (0.01) (0.02) (0.03) ---------- ---------- ---------- ---------- Pro forma $ 0.27 $ 0.02 $ 0.55 $ 0.06 ========== ========== ========== ==========
The assumptions used to calculate the fair value of options granted are evaluated and revised, upon estimating the fair value of each new option grant, to reflect market conditions and experience. 5. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities." Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. In December 2003, the FASB issued FIN 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (as revised December 2003)." The primary objectives of FIN 46R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (Variable Interest Entities) and how to determine when and which business enterprise should consolidate the Variable Interest Entity (the Primary Beneficiary). We do not have any variable interest 10 entities and therefore, FIN 46R did not impact our financial position, results of operations or cash flows. 6. ASSET CARRYING VALUE We review the carrying value of our long-lived assets when events and circumstances occur which indicate that the carrying value of an asset may not be recoverable. In 2004, we completed a comprehensive review of our investment strategy and of our existing hotel portfolio to identify those properties which we believe either are non-core or no longer complement our business. As a result of our decision to undertake the sale of these non-strategic hotels, we recorded impairment charges of $4.6 million during the second quarter of 2004, including $1.4 million related to the Holiday Inn Bakersfield, California, which we reclassified as discontinued operations upon the sale of the hotel in the third quarter. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all. As we identify other non-strategic hotels in the future, we may recognize additional impairment charges. 7. DISCONTINUED OPERATIONS Included in discontinued operations are the results of operations of the Holiday Inn Bakersfield, California sold in August, 2004. Condensed financial information for this hotel included in discontinued operations is as follows:
Three Months Ended Nine Months Ended (in thousands) (in thousands) Oct. 1, 2004 Oct. 3, 2003 Oct. 1, 2004 Oct. 3, 2003 ------------ ------------ ------------ ------------ Revenues $ 630 $ 1,133 $ 4,380 $ 4,002 Direct operating expenses 393 544 1,938 1,885 General, administrative, sales and management service expenses 305 557 1,592 1,680 Repairs and maintenance 50 83 227 245 Asset impairment - - 1,383 - Depreciation and amortization 53 159 371 477 ------------ ------------ ------------ ------------ Total operating expenses 801 1,343 5,511 4,287 Operating loss (171) (210) (1,131) (285) Minority interest - 160 - 217 ------------ ------------ ------------ ------------ Loss from discontinued operations $ (171) $ (50) $ (1,131) $ (68) ============ ============ ============ ============
We sold our Holiday Inn Bakersfield, California on August 20, 2004 for net proceeds of approximately $8.0 million. 8. STATUS OF PENDING HOTEL SALES 11 On July 2, 2004, our board of directors approved a letter of intent to enter into a contract for the sale of our Holiday Inn, Tucson, Arizona. Subsequently, the prospective buyer of this property withdrew the letter of intent. On July 23, 2004, we executed a contract for the sale of the Holiday Inn Bay Bridge, Emeryville, California. The buyer is in the process of completing due diligence. On August 20, 2004, we sold our Holiday Inn Bakersfield, California, as discussed above. In the second quarter of 2004, we recorded an asset impairment on this property of approximately $1.4 million. Upon the sale, we reclassified this amount to discontinued operations. 9. SUBSEQUENT EVENTS On September 30, 2004, we executed a contract for the sale of the Holiday Inn Denver Northglenn, Northglenn, Colorado, and the buyer is currently in process of completing due diligence. We recorded an asset impairment of approximately $3.2 million during the second quarter of 2004 on this property, to reflect the difference between the net book value, less selling costs and the estimated selling price. On October 27, 2004, our board of directors approved a letter of intent to enter into a contract for the sale of the Holiday Inn, Beaumont, Texas. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Unless the context indicates or requires otherwise, the terms "we," "us," "our" and other references to our company refer to John Q. Hammons Hotels, Inc. and John Q. Hammons Hotels, L.P., including all of our subsidiaries. Our consolidated financial statements include revenues from our owned hotels and management fee revenues for providing management services to the managed hotels (owned or directly controlled by Mr. Hammons). References to our hotels include both our owned hotels and our managed hotels. We derive revenues from the owned hotels from rooms, food and beverage, meeting rooms and other revenues. Our beverage revenues include only revenues from the sale of alcoholic beverages, while we show revenues from the sale of non-alcoholic beverages as part of food revenue. Direct operating costs and expenses include expenses we incur in connection with the direct operation of rooms, food and beverage and telephones. Our general, administrative, sales and management services expenses include expenses incurred for franchise fees, administrative, sales and marketing, utilities, insurance, property taxes, rent, management services and other expenses. We currently have no hotels under construction and no plans to develop new hotels for the foreseeable future. During 2000, we entered into a five-year management contract with John Q. Hammons whereby we will provide internal administrative, architectural design, purchasing and legal services, to Mr. Hammons in conjunction with the development of hotels in an amount not 12 to exceed 1.5% of the total development cost of any single hotel for the opportunity to manage the hotel upon opening and the right of first refusal to purchase the hotel in the event it is offered for sale. These costs are amortized over a five-year contract period, beginning upon the opening of the hotels. Although we are not developing new hotels, Mr. Hammons has personally completed several projects, including new hotels in Tulsa and Oklahoma City, Oklahoma; Rogers and Hot Springs, Arkansas; Junction City, Kansas 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 and Springfield, Missouri; Frisco, Texas; Albuquerque, New Mexico; and Hampton, Virginia. Barcelo Crestline Corporation has submitted a proposal to acquire all of our shares of Class A Common Stock for $13.00 in cash per Class A share. Our board of directors established a special committee comprised of independent directors to evaluate, review and negotiate the Barcelo Crestline proposal and to make a recommendation to the board of directors. The special committee has retained Lehman Brothers to act as its financial advisor and the law firm of Katten Muchin Zavis Rosenman to represent it and assist it in its review. At the request of the special committee, Lehman Brothers has commenced a review of the proposal. As previously announced, a complaint has been filed in the Court of Chancery of the State of Delaware against us and the members of our board of directors. The complaint alleges, among other things, that the consideration offered by Barcelo Crestline is inadequate and that the members of our board of directors had breached their fiduciary duties in connection with the proposed transaction discussed above. A second suit was filed on October 20, 2004, in the Court of Chancery of the State of Delaware. We also have received a stockholder demand to review our books and records, and the special committee has received a request from a group of stockholders to meet with the special committee to discuss the group's views as to the inadequacy of the Barcelo Crestline proposal. The special committee also has been contacted by another party that the committee is advised has had discussions with Mr. Hammons about a possible transaction and who has expressed interest in continuing to explore a transaction with Mr. Hammons. The special committee also has received a letter from Barcelo Crestline reaffirming its proposal and seeking the committee's approval of a proposed agreement between it and Mr. Hammons. In the letter, Barcelo Crestline states that a previously announced agreement between Barcelo Crestline and Mr. Hammons has been terminated. By separate letter, Mr. Hammons has advised the committee he is interested in entering into the proposed agreement with Barcelo Crestline upon approval of the agreement by the Company's board of directors. The committee is at a very preliminary stage in its deliberations and does not expect to act upon Barcelo Crestline's request until it has further analyzed such request with its advisors. 13 RESULTS OF OPERATIONS - THREE-MONTH PERIOD The following discussion and analysis addresses results of our continuing operations for the three-month periods ended October 1, 2004 (which we refer to as the 2004 Quarter) and October 3, 2003 (which we refer to as the 2003 Quarter). The results of continuing operations for the three-month and nine-month periods ended October 1, 2004 are not indicative of the results to be expected for the full year. Total revenues from continuing operations for the 2004 Quarter were $110.4 million, an increase of 2.5%, compared to the 2003 Quarter, 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 economy. Our business reflected a shift from the association market segment in the 2003 Quarter to the corporate group market segment in the 2004 Quarter. Rooms revenues from continuing operations increased 3.3% from the 2003 Quarter, and increased as a percentage of total revenues to 65.5% from 65.0%. The increase primarily related to the increase in corporate transient, corporate group and government market segments of our business noted above. Our average room rate increased to $102.49, or 2.6%, compared to the 2003 Quarter average room rate of $99.88, and our occupancy for the 2004 Quarter increased 0.6% to 68.1% from the 2003 Quarter. In comparison, the average room rate for the hotel industry, based on information from Smith Travel Research, was $86.32 in the 2004 Quarter, up 3.6% from the 2003 Quarter. Occupancy for the hotel industry was 67.1% in the 2004 Quarter, up 2.6% from the 2003 Quarter. Our Revenue Per Available Room, or RevPAR, was $69.84 in the 2004 Quarter, up 3.3% from the 2003 Quarter, while RevPAR for the hotel industry in the 2004 Quarter was $57.96, up 6.4% from the 2003 Quarter. Food and beverage revenues from continuing operations decreased slightly, by 0.8%, compared to the 2003 Quarter, and decreased as a percentage of total revenues, to 23.2% from 24.0% in the 2003 Quarter. The decrease reflects the shift in our business to the corporate group market segment in the 2004 Quarter, from the association market segment in the 2003 Quarter, noted above. Meeting room rental, related party management fee and other revenues from continuing operations increased 4.2%, from the 2003 Quarter, and increased slightly as a percentage of revenues, to 11.3% from 11.1%. The increase was primarily attributable to the increased business from the corporate market segment in the 2004 Quarter noted above. Rooms operating expenses from continuing operations increased 8.1%, compared to the 2003 Quarter, and increased as a percentage of rooms revenues to 25.7% from 24.6%. The increase reflects costs associated with the increased number of occupied rooms as well as unfavorable workers' compensation loss experience from employees in this classification, compared to the 2003 Quarter. Although we closely monitor the prevention of employee injuries in our properties, our workers compensation loss experience, by its nature, tends to fluctuate from period to period. 14 Food and beverage operating expenses from continuing operations increased 3.0% from the 2003 Quarter, and increased as a percentage of food and beverage revenues, to 79.7% from 76.7%. The increase was primarily attributable to higher labor costs. Other operating expenses from continuing operations decreased slightly compared to the 2003 Quarter, and decreased as a percentage of meeting room rental, related party management fee and other revenues to 4.8% from 5.8%. General, administrative, sales and management service expenses from continuing operations decreased slightly, by 0.3%, from the 2003 Quarter, and decreased as a percentage of total revenues to 31.0% from 31.8%. The decrease was primarily attributable to favorable workers' compensation loss experience from employees in this classification and reduced legal fees, partially offset by increases in credit card commissions, compared to the 2003 Quarter. Repairs and maintenance expenses from continuing operations increased slightly, but remained stable as a percentage of revenues from the 2003 Quarter, at 4.2%. Depreciation and amortization expenses from continuing operations increased 5.5% from the 2003 Quarter, and increased as a percentage of revenues to 12.1% from 11.8%. The increase related to the disposal of certain property and equipment as we refurbished assets at one of our properties. Income from operations remained relatively stable compared to the 2003 Quarter, but decreased as a percentage of revenues to 16.8% from 17.3%. Income from continuing operations before minority interest and provision for income taxes increased 90.0% from the 2003 Quarter, primarily as the result of $0.2 million of legal settlements in the litigation concerning moisture-related problems discussed below, the absence of extinguishment of debt costs, which were $0.3 million in the 2003 Quarter, and reduced interest expense as we reduced our debt. Income from continuing operations for the 2004 Quarter was $1.8 million, up $1.6 million, compared to the 2003 Quarter. The 2004 Quarter was positively impacted by $1.4 million for the recapture of the limited partners' losses we absorbed in previous quarters 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): 15
THREE MONTHS ENDED OCT. 1, 2004 OCT. 3, 2003 ------------ ------------ Income from continuing operations, as reported $ 1,834 $ 213 Subtractions: Reallocation of minority interest gains (1,416) - ------------ ------------ Income from continuing operations, as adjusted $ 418 $ 213 ============ ============
Net income allocable to the Company was $1.7 million compared to $0.2 million as the result of factors discussed above. Basic and diluted earnings per share in the 2004 Quarter were $0.32 and $0.27, respectively, compared to basic and diluted earnings per share of $0.03 in the 2003 Quarter. RESULTS OF OPERATIONS - NINE-MONTH PERIOD The following discussion addresses results of our continuing operations for the nine-month periods ended October 1, 2004 (the "2004 Nine Months"), and October 3, 2003 (the "2003 Nine Months"). Total revenues from continuing operations increased by 3.9% from the 2003 Nine Months due to increases in the market segments noted above and the overall improvement in the general economy. Rooms revenues from continuing operations increased 3.8% from the 2003 Nine Months, 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 63.1% from 63.2% in the 2003 Nine Months. Our average room rate for the 2004 Nine Months increased to $102.27, or 1.7%, from the 2003 Nine Months. While our occupancy increased 2.0% to 66.9% for the 2004 Nine Months, occupancy for the hotel industry was 62.7%, up 3.6% from the 2003 Nine Months. Our revenue per available room (RevPAR) was $68.40 in the 2004 Nine Months, up 3.8% from the 2003 Nine Months, while RevPAR for the hotel industry was $54.20, up 7.5%. Food and beverage revenues from continuing operations increased 3.3% from the 2003 Nine Months, but decreased slightly as a percentage of total revenues to 25.0% from 25.2% in the 2003 Nine Months. The increase was primarily related to increased banquet sales during the first six months of 2004. Meeting room rental, related party management fee and other revenues from continuing operations increased 5.6% from the 2003 Nine Months, and increased slightly as a percentage of total revenues, to 11.8% from 11.7%. The increase related to guest room internet revenue and related party management fees, partially offset by decreased telephone revenue. 16 Rooms operating expenses from continuing operations increased by 6.0% from the 2003 Nine Months, and increased as a percentage of rooms revenue, to 25.0% from 24.4%. The dollar increase was attributable to increased labor and other costs directly related to the increase in occupied rooms in the 2004 Nine Months. Food and beverage operating expenses from continuing operations increased by 2.9% from the 2003 Nine Months, but decreased as a percentage of food and beverages revenues, to 76.9% from 77.3% in the 2003 Nine Months. The dollar increase related to increased costs for the additional food and beverage revenues. Other operating expenses from continuing operations decreased by 14.3% from the 2003 Nine Months, and decreased as a percentage of meeting room rental, related party management fee and other income, to 4.5% from 5.6% in the 2003 Nine Months. The decrease was attributable to lower telephone costs compared to the 2003 Nine Months. Telephone costs, as well as telephone revenues, continue to decline as more guests utilize cellular telephones and internet services. General, administrative and sales expenses from continuing operations increased by 4.0% from the 2003 Nine Months, but remained relatively stable as a percentage of total revenues, at 31.9% for the 2004 Nine Months compared to 31.8% for the 2003 Nine Months. The dollar increase was primarily attributable to increased guest frequency program costs, which ordinarily trend with occupancy, as well as unfavorable workers compensation loss experience for employees in this classification, and the other factors described above for the 2004 Quarter. Repairs and maintenance expenses from continuing operations increased by 5.2% compared to the 2003 Nine Months, but remained relatively stable as a percentage of revenues, at 4.2% for the 2004 Nine Months, compared to 4.1% for the 2003 Nine Months. Asset impairment from continuing operations of $3.2 million in the 2004 Nine Months is attributable to our decision to sell certain non-strategic hotels and reflects the difference between the net book value, less selling costs, and the current estimated fair market value of these hotels, and less $1.4 million reclassified as loss from continuing operations upon the sale of our Holiday Inn, Bakersfield, California in August 2004. Depreciation and amortization expenses from continuing operations decreased slightly, by 0.8% from the 2003 Nine Months, and decreased as a percentage of total revenues to 11.0% from 11.6% in the 2003 Nine Months. The decrease was related to the effects of our cessation of new hotel development, partially offset by the disposal of certain property and equipment as we refurbished assets at one of our properties. Income from operations increased 0.5% compared to the 2003 Nine Months, but decreased as a percentage of revenue, to 16.4% from 17.0%. The dollar increase was primarily the result of increased revenues, discussed above. 17 Income from continuing operations before minority interest and provision for income taxes increased 80.8% from the 2003 Nine Months, primarily as a result of increased revenues and decreased interest and debt extinguishment costs, compared to the 2003 Nine Months. Income from continuing operations for the 2004 Nine Months was $4.5 million, up $4.0 million, compared to 2003 Nine Months. The 2004 results included two items, which, after giving effect to minority interest, had a favorable net impact of approximately $2.8 million on our income from continuing operations. One item was the recognition of a $0.8 million asset impairment, net of minority interest, due to our decision to sell certain non-strategic hotels and reflects the difference between the net book value, less selling costs, and the current estimated fair market value of these hotels. The other item includes $3.5 million for the recapture of the limited partners' losses we absorbed in previous quarters. An additional $4.6 million must be recaptured before the limited partners can be allocated future earnings. The following represents a reconciliation of the income from continuing operations, as reported, to income from continuing operations, as adjusted (in thousands):
NINE MONTHS ENDED OCT. 1, 2004 OCT. 3, 2003 -------------- -------------- Income from continuing operations, as reported $ 4,521 $ 517 Additions (subtractions): Asset impairment, net $2,426 of expected minority interest 771 - Reallocation of minority interest gains (3,539) - -------------- -------------- Sub total (2,768) - -------------- -------------- Income from continuing operations, as adjusted $ 1,753 $ 517 ============== ==============
Net income allocable to the Company increased to $3.4 million in the 2004 Nine Months compared to $0.4 million in the 2003 Nine Months, the result of the factors discussed above Basic and diluted earnings per share were $0.66 and $0.57, respectively, for the 2004 Nine Months, compared to $0.09 for the 2003 Nine Months. LIQUIDITY AND CAPITAL RESOURCES In general, we have financed our operations through internal cash flow, loans from financial institutions, the issuance of public and private debt and equity and the issuance of industrial revenue bonds. Our principal uses of cash are to pay operating expenses, to service debt and to fund capital expenditures. At October 1, 2004, we had $50.8 million of cash and equivalents and $25.5 million of marketable securities, compared to $23.8 million and $15.7 million, respectively, at the end of fiscal 2003. Such amounts are available for our working capital requirements, capital expenditures and debt service. At October 1, 2004, and January 2, 2004, we had restricted cash reserves of $25.3 million and $21.7 million, respectively. This restricted cash is escrowed for 18 insurance, taxes, capital expenditures and certain other obligations, in accordance with specific loan covenants and franchise agreements. Cash from operating activities increased to $63.2 million for the 2004 Nine Months, from $60.6 million for the 2003 Nine Months, primarily attributable to the increased net income and the non-cash charge for asset impairment, partially offset by changes in other assets and liabilities. During the 2004 Quarter, we accrued $3.5 million for tax liabilities of the Partnership. Distributions must be made in accordance with the provisions of the Indentures and the Partnership Agreement. We incurred capital expenditures of $17.2 million in the 2004 Nine Months, compared to $9.7 million in 2003 Nine Months. Capital expenditures typically include capital improvements on existing hotel properties. During fiscal 2000, we initiated claims against certain of our construction service providers, as well as with our insurance carrier, for costs we incurred and expected to incur to address moisture related problems caused by water intrusion through defective windows. In December 2001, we initiated legal actions in an effort to collect claims previously submitted. Subsequent to the filing of the legal action, the insurance carrier notified us that a portion of our claims had been denied. As of October 1, 2004, we had incurred approximately $11.8 million of an estimated $12.3 million of costs to correct the underlying moisture problem. During the 2003 Quarter, summary judgment was granted to our insurance carrier in one action, and the appellate court rejected our appeal of this ruling during the 2004 Quarter. Summary judgment was also granted to one of our window manufacturers. However, on another action we received a $0.2 million settlement during the 2004 Quarter. We plan to continue to vigorously pursue collection of these costs, although there can be no assurance that we will be successful. Our total cumulative depreciation charge through October 1, 2004, was $7.6 million, which we recorded in fiscal 2001 to reserve the net historical costs of the hotel property assets refurbished absent any recoveries. To the extent we realize recoveries in addition to the $0.2 million, we will record them as a component of other income. At October 1, 2004, our total debt was $767.1 million compared with $781.1 million at the end of 2003. The decrease is attributable to reduction of long term debt from scheduled principal payments and from the proceeds from the sale of the Holiday Inn Bakersfield, California. The current portion of long-term debt was $8.4 million at the end of the 2004 Nine Months compared with $7.4 million at the end of 2003. We estimate 2004 capital requirements to be $30.8 million (including approximately $5.7 million related to planned hotel franchise conversions of some of our properties), and to be funded by cash and cash flow from operations. Based upon current plans, we anticipate that our capital resources will be adequate to satisfy our 2004 capital requirements for normal recurring capital improvement projects. SUBSEQUENT EVENTS 19 On September 30, 2004, we executed a contract for the sale of the Holiday Inn Denver Northglenn, Northglenn, Colorado, and the buyer is currently in process of completing due diligence. We recorded an asset impairment of approximately $3.2 million during the second quarter of 2004 on this property, to reflect the difference between the net book value, less selling costs and the estimated selling price. On October 27, 2004, our board of directors approved a letter of intent to enter into a contract for the sale of the Holiday Inn, Beaumont, Texas. 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 flows. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to bad debts, investments, valuation of long-lived assets, tax valuation allowance, self-insurance reserves, contingencies and litigation. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the following critical accounting policies, among others, affect our more significant estimates and assumptions used in preparing our consolidated financial statements. Actual results could differ from our estimates and assumptions. Trade receivables are reflected net of an estimated allowance for doubtful accounts. This estimate is based primarily on historical experience and assumptions with respect to future payment trends. 20 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 substantial non-refundable deposit. Until a buyer has completed its due diligence review of the asset, necessary approvals have been received and substantive conditions to the buyer's obligation to perform have been satisfied, we do not consider a sale to be probable. We do not depreciate hotel assets while they are classified as "held for sale." Upon designation of a hotel as being "held for sale," and quarterly thereafter, we review the carrying value of the hotel and, as appropriate, adjust its carrying value to the lesser of depreciated cost or fair value less cost to sell, in accordance with SFAS 144. Any such adjustment in the carrying value of a hotel classified as "held for sale" will be reflected in discontinued operations. We will include in discontinued operations the operating results of hotels classified as "held for sale" or that have been sold. Our deferred financing costs, franchise fees and other assets include management and franchise contracts and leases. The value of our management and franchise contracts and leases are amortized on a straight-line method over the life of the respective agreement. The assessment of management and franchise contracts and leases requires us to make certain judgments, including estimated future cash flow from the respective properties. We are self-insured for various levels of general liability, workers' compensation and employee medical coverages. Estimated costs related to these self insurance programs are accrued based on known claims and projected settlements of unasserted claims. Subsequent changes in, among others, unasserted claims, claim cost, claim frequency, as well as changes in actual experience, could cause these estimates to change. We recognize revenues from our rooms, catering and restaurant facilities as earned on the close of business each day. FORWARD-LOOKING STATEMENTS This Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, regarding, among other things, our operations outlook, 21 business strategy, prospects and financial position. These statements contain the words "believe," "anticipate," "estimate," "expect," "project," "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 economic recovery; - The impact of any serious communicable diseases on travel; - Competition; - Changes in operating costs, particularly energy and labor costs; - Unexpected events, such as the September 11, 2001 terrorist attack; - Risks of hotel operations, such as hotel room supply exceeding demand, increased energy and other travel costs and general industry downturns; - Seasonality of the hotel business; - Cyclical over-building in the hotel and leisure industry; - Requirements of franchise agreements, including the right of some franchisors to immediately terminate their respective agreements if we breach certain provisions; and - Costs of complying with applicable state and federal regulations. These risks are uncertainties and, along with the risk factors discussed in our Annual Report on Form 10-K, should be considered in evaluating any forward looking statements contained in this Form 10-Q. We undertake no obligation to update or review publicly any forwarding-looking statement, whether as a result of new information, future events or otherwise, other than as required by law. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to changes in interest rates primarily as a result of our investing and financing activities. Investing activity includes operating cash accounts and investments with an original maturity of three months or less, and certain balances of various money market and common bank accounts. Our financing activities are comprised of long-term fixed and variable-rate debt obligations utilized to fund business operations and maintain liquidity. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for our long-term fixed and variable-rate debt obligations as of October 1, 2004:
EXPECTED MATURITY DATE (in millions) Fair There- Value 2004(d) 2005 2006 2007 2008 After Total (e) Long-Term Debt(a) $510 Million 1st Mortgage Notes $ - $ - $ - $ - $ - $ 499 $ 499 $ 559 Average interest rate(b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% Other fixed-rate debt obligations $ 7 $ 8 $ 29 $ 42 $ 54 $ 93 $ 233 $ 241 Average interest rate(b) 8.6% 8.6% 8.0% 8.5% 8.5% 8.9% 8.6%
22 Other variable-rate debt obligations $ 1 $ 1 $ 9 $ - $ 24 $ - $ 35 $ 35 Average interest rate(c) 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1%
(a) Includes amounts reflected as long-term debt due within one year. (b) For the long-term fixed rate debt obligations, the weighted average interest rate is based on the stated rate of the debt that is maturing in the year reported. The weighted average interest rate excludes the effect of the amortization of deferred financing costs. (c) For the long-term variable rate debt obligations, the weighted average interest rate assumes no changes in interest rates and is based on the variable rate of the debt, as of October 1, 2004, that is maturing in the year reported. The weighted average interest rate excludes the effect of the amortization of deferred financing costs. (d) The 2004 balances include actual and projected principal repayments and weighted average interest rates. (e) The fair values of long-term debt obligations approximate their respective historical carrying amounts except with respect to the $510 million First Mortgage Notes. The fair value of the First Mortgage Notes is estimated by obtaining quotes from brokers. A one percentage point change in the par or the then-current premium or discount quote received for the $510 million First Mortgage Notes would have an effect of approximately $5 million. A one percentage point change in the 8-7/8% rate used to calculate the fair value of other fixed rate debt would change its estimated fair value by approximately $11 million. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of October 1, 2004. Based on that review, they have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that material information relating to us would be made known to them. Changes in internal controls. There were no significant changes in our internal controls or, to the knowledge of our chief executive officer and chief financial officer, in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, after the date of such evaluation. PART II. OTHER INFORMATION AND SIGNATURES ITEM 1. Legal Proceedings Not Applicable 23 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Securities Holders Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits See Exhibit Index. 24 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. JOHN Q. HAMMONS HOTELS, INC. By: /s/ John Q. Hammons ------------------------------------- John Q. Hammons Chairman, Founder, and Chief Executive Officer By: /s/ Paul E. Muellner ------------------------------------- Paul E. Muellner Chief Financial Officer Dated: November 12, 2004 25 EXHIBIT INDEX EXHIBIT NO. TITLE 31.1 Rule 13a-15(e)/15d-15(e) Certification of Chief Executive Officer 31.2 Rule 13a-15(e)/15d-15(e) Certification of Chief Financial Officer 32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer 26