FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 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 August
8, 2005: 5,253,262
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JOHN Q. HAMMONS HOTELS, INC.
AND COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
ASSETS
JULY 1, DECEMBER 31,
2005 2004
----------- -------------
(unaudited)
CURRENT ASSETS:
Cash and equivalents $ 37,649 $ 41,044
Restricted cash 9,758 10,206
Marketable securities 23,406 22,332
Receivables:
Trade, less allowance for doubtful accounts of $231 in 2005 and 2004 10,118 7,250
Other 416 277
Management fees - related party 432 265
Inventories 1,111 1,091
Prepaid expenses and other 2,342 4,343
Assets held for sale - 4,300
----------- -------------
Total current assets 85,232 91,108
----------- -------------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 61,127 60,553
Buildings and improvements 718,575 717,870
Furniture, fixture and equipment 353,508 342,214
Construction in progress 10,815 -
----------- -------------
1,144,025 1,120,637
Less-accumulated depreciation and amortization (457,911) (436,196)
----------- -------------
686,114 684,441
DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER, net, including $23,133 and
$20,376 of restricted cash as of July 1, 2005 and December 31, 2004, respectively 42,812 40,950
----------- -------------
TOTAL ASSETS $ 814,158 $ 816,499
=========== =============
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)
JULY 1, DECEMBER 31,
2005 2004
----------- ------------
(unaudited)
LIABILITIES:
Current portion of long-term debt $ 16,628 $ 25,719
Accounts payable 3,677 8,172
Accrued expenses:
Payroll and related benefits 7,668 9,601
Sales and property taxes 13,703 12,053
Insurance 2,530 2,789
Interest 5,926 6,106
Utilities, franchise fees and other 10,216 10,115
Accrued distribution 8,525 -
----------- -----------
Total current liabilities 68,873 74,555
Long-term debt 727,298 739,485
Other obligations 3,376 3,329
----------- -----------
Total liabilities 799,547 817,369
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST OF HOLDERS OF LIMITED
PARTNER UNITS 4,691 -
----------- -----------
REFUNDABLE EQUITY 975 655
----------- -----------
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
July 1, 2005, and December 31, 2004, 6,042,000 shares issued
at July 1, 2005, and December 31, 2004, and 5,253,262 and 5,086,975
shares outstanding at July 1, 2005, and December 31, 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 97,930 96,781
Accumulated deficit, net (85,461) (94,006)
Less: Treasury Stock, at cost; 788,738 and 955,025 shares at
July 1, 2005, and December 31, 2004, respectively (3,570) (4,322)
Accumulated other comprehensive loss (17) (41)
----------- -----------
Total stockholders' equity (deficit) 8,945 (1,525)
----------- -----------
TOTAL LIABILITIES AND STOCK HOLDERS' EQUITY (DEFICIT) $ 814,158 $ 816,499
=========== ===========
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 SIX MONTHS ENDED
JULY 1, 2005 JULY 2, 2004 JULY 1, 2005 JULY 2, 2004
------------ ------------ ------------ ------------
REVENUES:
Rooms $ 73,785 $ 68,804 $ 142,335 $ 135,827
Food and beverage 29,786 28,091 58,986 56,751
Meeting room rental, related party management fee and other 13,900 12,985 27,583 26,588
------------ ------------ ------------ ------------
Total revenues 117,471 109,880 228,904 219,166
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Direct operating costs and expenses:
Rooms 18,169 16,694 35,001 33,088
Food and beverage 22,997 21,805 44,574 42,710
Other 482 547 922 1,133
General, administrative, sales and management service expenses 36,421 36,068 72,112 70,678
Repairs and maintenance 4,940 4,737 9,725 9,212
Depreciation and amortization 12,128 11,636 23,575 23,125
------------ ------------ ------------ ------------
Total operating expenses 95,137 91,487 185,909 179,946
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 22,334 18,393 42,995 39,220
OTHER INCOME (EXPENSE):
Interest income 423 159 785 276
Interest expense and amortization of deferred financing fees (16,169) (16,611) (32,470) (33,255)
Extinguishment of debt costs - - (234) -
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST AND PROVISION FOR
INCOME TAXES 6,588 1,941 11,076 6,241
Minority interest in income of partnership (4,933) - (5,153) -
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,655 1,941 5,923 6,241
Provision for income taxes (66) (81) (99) (111)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,589 1,860 5,824 6,130
Income (loss) from discontinued operations, net of $8,113 of minority
interest for six months ended July 1, 2005, and no minority interest
for the three months and six months ended July 2, 2004 - (4,482) 2,721 (4,403)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ALLOCABLE TO THE COMPANY $ 1,589 $ (2,622) $ 8,545 $ 1,727
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ 0.29 $ 0.36 $ 1.06 $ 1.20
Discontinued operations - (0.87) 0.50 (0.86)
------------ ------------ ------------ ------------
Net earnings (loss) allocable to Company $ 0.29 $ (0.51) $ 1.56 $ 0.34
============ ============ ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 5,538,659 5,143,119 5,485,765 5,127,195
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ 0.23 $ 0.36 $ 0.86 $ 1.04
Discontinued operations - (0.87) 0.40 (0.75)
------------ ------------ ------------ ------------
Net earnings (loss) allocable to Company $ 0.23 $ (0.51) $ 1.26 $ 0.29
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 6,854,430 5,143,119 6,793,606 5,902,355
============ ============ ============ ============
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)
----------------------------------------------------------
Accumulated
Comprehensive Class A Class B Company Other
Income Minority Refundable Common Common Paid in Accumulated Treasury Comprehensive
(loss) Interest Equity Stock Stock Capital Deficit Stock Loss Total
------------- -------- ---------- ------- ------- ------- ----------- -------- ------------- -------
BALANCE, December 31,
2004 $ - $ 655 $ 60 $ 3 $96,781 $ (94,006) $ (4,332) $ (41) $(1,525)
Net income allocable
to the Company $ 8,545 - - - - - 8,545 - - 8,545
Distributions (8,525) - - - - - - - -
Refundable equity
contribution - 320 - - - - - - -
Minority interest in
income of the partnership 13,266 - - - - - - - -
Issuance of Common
Stock to employees - - - - 216 - 752 - 968
Capital contributions - - - - 933 - - - 933
Reallocation of
previously allocated
other comprehensive
losses from the
Company to minority
interest (31) - - - - - - 31 31
Unrealized depreciation
on marketable
securities (7) (19) - - - - - - (7) (7)
------------- -------- ---------- ------- ------- ------- ----------- -------- ------------- -------
Comprehensive income $ 8,538
=============
BALANCE, July 1, 2005 $ 4,691 $ 975 $ 60 $ 3 $97,930 $ (85,461) $ (3,570) $ (17) $ 8,945
(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)
SIX MONTHS ENDED
JULY 1, 2005 JULY 2, 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income allocable to the Company $ 8,545 $ 1,727
Adjustment to reconcile net income to cash provided by operating activities:
Minority interest in income of partnership 13,266 -
Depreciation, amortization and loan cost amortization 24,455 24,893
Gain on sale of property and equipment (11,161) -
Asset impairment (included in discontinued operations
for six months ended July 2, 2004) - 4,619
Extinguishment of debt costs 234 -
Non-cash lease expense 933 -
Non-cash director compensation - 50
Changes in certain assets and liabilities:
Receivables (3,378) (2,590)
Inventories (33) (49)
Prepaid expenses and other 2,001 2,355
Accounts payable (4,495) (1,799)
Accrued expenses (621) 2,745
Other obligations 47 431
------------ ------------
Net cash provided by operating activities 29,793 32,382
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (24,945) (8,229)
Proceeds from sale of property and equipment 15,739 -
Franchise fees, restricted cash and other (2,572) (2,054)
Sale (purchase) of marketable securities (1,100) 707
------------ ------------
Net cash used in investing activities (12,878) (9,576)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 31,000 -
Proceeds from issuance of Treasury Stock 968 324
Repayments of debt (52,278) (3,966)
------------ ------------
Net cash used in financing activities (20,310) (3,642)
------------ ------------
Increase (decrease) in cash and equivalents (3,395) 19,164
CASH AND EQUIVALENTS, beginning of period 41,044 23,790
------------ ------------
CASH AND EQUIVALENTS, end of period $ 37,649 $ 42,954
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 31,986 $ 33,395
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
UNREALIZED DEPRECIATION OF MARKETABLE SECURITIES $ (26) $ (15)
============ ============
ACCRUED DISTRIBUTION $ 8,525 $ -
============ ============
FINANCING COSTS FUNDED BY STOCKHOLDER $ 320 $ -
============ ============
CAPITAL CONTRIBUTION ASSOCIATED WITH LEASE EXPENSE $ 933 $ -
============ ============
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 to which we refer as the
"Partnership") in exchange for an approximately 28% general partnership
interest. As of July 1, 2005, the Partnership had redeemed approximately 955,000
Partnership units, net of shares issued. The number of net Partnership units
redeemed is equivalent to the number of net shares we have redeemed, as required
by the Partnership agreement. Accordingly, the allocation percentages were
approximately 25% and 24% for us, and approximately 75% and 76% for the limited
partners, in 2005 and 2004, respectively.
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. During the first quarter of 2005, we
recaptured approximately $4.2 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. As of July 1, 2005, distributions of $8.5
million were accrued for income taxes in accordance with the Partnership
Agreement. No such distributions were required for 2004. Adjustments to accrued
distributions will be recorded in the period in which facts and circumstances
which give rise to adjustments become known.
On June 14, 2005, we entered into an Agreement and Plan of Merger with JQH
Acquisition LLC. JQH Acquisition LLC was formed for the purposes of the proposed
transactions by Jonathan Eilian. The merger agreement provides that, upon the
consummation of the merger,
7
each outstanding share of our Class A Common Stock will convert into the right
to receive $24.00 cash per share. The merger is conditioned upon, among other
things, approval by our stockholders at a special meeting to be held in
September, 2005. Our principal stockholder, John Q. Hammons, has agreed to vote
his shares of capital stock in favor of the merger. We also are seeking the
approval of the merger by the holders of a majority of shares of our Class A
Common Stock who vote in the merger, other than shares held by Mr. Hammons and
his affiliates.
We entered into the merger agreement in connection with a series of transactions
agreed to among Mr. Hammons, JQH Acquisition LLC and their respective
affiliates. These transactions address a variety of ongoing arrangements between
the parties, including Mr. Hammons' continuing equity ownership in the business
and his ongoing, active leadership role in the company managing our properties.
The transactions to be entered into by Mr. Hammons will include the right to a
credit facility backed by iStar Financial Inc. secured by Mr. Hammons' equity
ownership in the business and certain other collateral.
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 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.
During the second quarter of 2005, we recorded a cumulative adjustment to rental
expense and contributed capital of approximately $0.9 million related to
correcting our historical accounting for the fair market value of the rental
payments required under the Joplin trade center lease agreement with Mr. John Q.
Hammons. We do not believe that the impact of the correction for the adjustment
is material to the financial statements as of and for the year ended December
31, 2004 or previous years, nor is the cumulative adjustment recorded in the
second quarter of 2005 expected to be material, in the aggregate, to the
financial statements as of and for the year ending December 30, 2005. The
adjustment had no impact on cash flows.
8
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. In addition, pursuant to the merger agreement discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," we deposited $8.0 million in escrow during the second quarter of
2005, for payment of certain of the acquiring party's fees and expenses if the
merger agreement terminates under certain circumstances. The escrowed cash is
classified as current restricted cash as of July 1, 2005. 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 July 1, 2005,
unrealized holding losses were approximately $67,000, of which approximately
$17,000 is allocable to us and included as a separate component of shareholders'
equity (deficit) until realized, (with the remainder allocable to the minority
interest). As of December 31, 2004, unrealized holding losses were approximately
$41,000, all of which is allocable to us (with no allocations to the minority
interest) and are included as a separate component of shareholders' equity
(deficit) until realized.
The provision for income taxes is for estimated state franchise taxes.
3. NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Basic and diluted earnings per share for the three months ended July 1, 2005,
were $0.29 and $0.23, respectively, compared to basic and diluted loss per share
of $0.51 for the three months ended July 2, 2004. Basic and diluted earnings per
share were $1.56 and $1.26, respectively, for the six months ended July 1, 2005,
and $0.34 and $0.29, respectively, for the six months ended July 2, 2004. The
weighted average diluted common shares outstanding for the three months ended
July 2, 2004 exclude approximately 2.2 million options, since such options would
have been anti-dilutive. Discontinued operations relating to the sale of the
Holiday Inn Emeryville, California had a positive effect on basic and diluted
earnings per share of $0.50 and $0.40, respectively, for the 2005 six month
period, virtually all of which is attributable to the gain on sale of this
hotel. Discontinued operations for the 2004 Six Months had a negative effect on
basic and diluted earnings per share of $0.86 and $0.75, respectively.
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 and six months ended July 1, 2005 and
July 2, 2004:
9
Three Months Ended
------------------
(in thousands, except per share data)
July 1, 2005 July 2, 2004
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic earnings per share
from continuing operations $ 1,589 5,539 $ 0.29 $ 1,860 5,143 $ 0.36
Discontinued operations - 5,539 - (4,482) 5,143 (0.87)
------- --------- -------- -------
Basic earnings (loss) per share $ 1,589 5,539 $ 0.29 ($ 2,622) 5,143 ($ 0.51)
======= ========= ======== =======
Effect of dilutive securities:
Options 1,315 -
----- -----
Diluted earnings per share
from continuing operations $ 1,589 6,854 $ 0.23 $ 1,860 5,143 $ 0.36
Discontinued operations - 6,854 - (4,482) 5,143 (0.87)
------- --------- -------- -------
Diluted earnings (loss) per share $ 1,589 6,854 $ 0.23 ($ 2,622) 5,143 ($ 0.51)
======= ========= ======== =======
Six Months Ended
----------------
(in thousands, except per share data)
July 1, 2005 July 2, 2004
-------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic earnings per share
from continuing operations $ 5,824 5,486 $ 1.06 $ 6,130 5,127 $ 1.20
Discontinued operations 2,721 5,486 0.50 (4,403) 5,127 (0.86)
------- ------- ------- -------
Basic earnings per share $ 8,545 5,486 $ 1.56 $ 1,727 5,127 $ 0.34
======= ======= ======= =======
Effect of dilutive securities:
Options 1,308 775
----- -----
Diluted earnings per share
from continuing operations $ 5,824 6,794 $ 0.86 $ 6,130 5,902 $ 1.04
Discontinued operations 2,721 6,794 0.40 (4,403) 5,902 (0.75)
------- ------- ------- -------
Diluted earnings per share $ 8,545 6,794 $ 1.26 $ 1,727 5,902 $ 0.29
======= ======= ======= =======
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 six months ended
July 1, 2005, and July 2, 2004, would have been as follows:
10
Three Months Ended
-----------------------
July 1, July 2,
2005 2004
--------- ---------
(In thousands,
except per share data)
Net Income (Loss)
As reported $ 1,589 $ (2,622)
Deduct - total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (26) (51)
--------- ---------
Pro forma $ 1,563 $ (2,673)
========= =========
Basic and Diluted Income (Loss) Per Share
As reported - Basic $ 0.29 $ (0.51)
Pro forma - Basic $ 0.28 $ (0.52)
As reported - Diluted $ 0.23 $ (0.51)
Pro forma - Diluted $ 0.23 $ (0.52)
Six Months Ended
-----------------------
July 1, July 2,
2005 2004
--------- ---------
(In thousands,
except per share data)
Net Income
As reported $ 8,545 $ 1,727
Deduct - total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (53) (102)
--------- ---------
Pro forma $ 8,492 $ 1,625
========= =========
Basic and Diluted Income Per Share
As reported - Basic $ 1.56 $ 0.34
Pro forma - Basic $ 1.55 $ 0.32
As reported - Diluted $ 1.26 $ 0.29
Pro forma - Diluted $ 1.25 $ 0.28
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 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
11
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.
In December 2004, SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment
of APB Opinion No. 29" was issued. This statement amends APB Opinion No. 29 by
eliminating the exception to the fair-value principle for exchanges of similar
productive assets, and replaces it with a general exception for nonmonetary
asset exchanges that have no commercial substance. The statement also eliminates
APB No. 29's concept of the culmination of an earnings process. SFAS No. 153 is
effective for nonmonetary transactions occurring in fiscal periods beginning
after June 15, 2005. The impact of SFAS No. 153 will depend on the nature and
extent of any nonmonetary asset exchanges after the effective date, but
management does not currently expect SFAS No. 153 to have a material impact on
our consolidated financial position, results of operations and cash flows.
In May 2005, SFAS No. 154, "Accounting Changes and Error Correction - a
replacement of APB Opinion No. 20 and FASB Statement No. 3" was issued. This
statement requires that the direct effect of voluntary changes in accounting
principle be applied retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is impracticable to
determine either the cumulative effect of the change or the period-specific
effects. The statement also designates retrospective application as the
transition method for newly-issued accounting pronouncements in the instance
where the pronouncement does not provide specific transition guidance. SFAS No.
154 is effective for accounting changes and correction of errors made in fiscal
years beginning after December 15, 2005. The impact of SFAS No. 154 will depend
on the nature and extent of any voluntary accounting changes and corrections of
errors after the effective date, but management does not currently expect SFAS
No. 154 to have a material impact on our consolidated financial position,
results of operations and cash flows.
In March 2005, FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations" was issued. This Interpretation requires companies to
record a liability for those asset retirement obligations in which the amount or
timing of settlement of the obligation are uncertain. FIN 47 is effective in
fiscal years ending after December 15, 2005. We are currently evaluating the
impact of adopting FIN 47 on its consolidated financial position, results of
operations and cash flows.
In March 2005, Staff Accounting Bulletin No. 107, "Share-Based Payment" was
issued. SAB No. 107 provides guidance regarding the valuation of share-based
payment arrangements for public companies, specifically as related to
transactions with non-employees, the transition from non-public to public entity
status, valuation methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, and other issues related
12
to SFAS No. 123(R). SAB No. 107 becomes effective upon our adoption of SFAS No.
123(R). We are currently evaluating the impact of adopting SAB No. 107 on its
consolidated financial position, results of operations and cash flows.
In July 2005, the FASB issued an exposure draft, "Accounting for Uncertain Tax
Positions: an Interpretation of FASB Statement 109." This proposed
Interpretation clarifies accounting for uncertain tax positions in accordance
with SFAS No. 109. Specifically, the Interpretation requires recognition of a
company's best estimate of the impact of a tax position only if that position is
probable of being sustained by an audit based only on the technical merits of
the position. Tax positions failing the probable recognition threshold would
result in adjustments in recorded deferred tax assets or liabilities and changes
in income tax payables or receivables. This Interpretation, if approved, would
become effective for the first fiscal year ending after December 15, 2005. We
are currently evaluating the impact of adopting this proposed Interpretation on
its consolidated financial position, results of operations and cash flows.
6. DISCONTINUED OPERATIONS
The results of operations of the Holiday Inn Emeryville, California (sold in
January 2005) are included in discontinued operations for the six month periods
ended July 1, 2005 and July 2, 2004, and the three months ended July 2, 2004,
but there were no discontinued operations for the three months ended July 1,
2005. Also included in discontinued operations for 2004 periods 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:
13
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
(IN THOUSANDS)
JULY 1, 2005 JULY 2, 2004 JULY 1, 2005 JULY 2, 2004
------------ ------------- ------------ ------------
Revenues $ - $ 5,270 $ 425 $ 10,360
------------ ------------- ------------ ------------
Operating expenses:
Direct operating cost and expenses - 2,339 390 4,490
General, administrative, sales and
management service expenses - 1,681 193 3,428
Repairs and maintenance - 231 37 462
Asset impairment - 4,619 - 4,619
Depreciation and amortization - 443 1 885
------------ ------------- ------------ ------------
Total operating expenses - 9,313 621 13,884
------------ ------------- ------------ ------------
Operating loss - (4,043) (196) (3,524)
Other income (expense):
Interest income - - - 1
Interest expense - (439) (131) (880)
Gain on sale - - 11,161 -
------------ ------------- ------------ ------------
Income (loss) before minority interest - (4,482) 10,834 (4,403)
Minority interest - - (8,113) -
------------ ------------- ------------ ------------
Income (loss) from discontinued operations $ - $ (4,482) $ 2,721 $ (4,403)
============ ============= ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT EVENTS
On June 14, 2005, we entered into an Agreement and Plan of Merger with JQH
Acquisition LLC. JQH Acquisition LLC was formed for the purposes of the proposed
transactions by Jonathan Eilian. The merger agreement provides that, upon the
consummation of the merger, each outstanding share of our Class A Common Stock
will convert into the right to receive $24.00 cash per share. The merger is
conditioned upon, among other things, approval by our stockholders at a special
meeting to be held in September, 2005. Our principal stockholder, John Q.
Hammons, has agreed to vote his shares of capital stock in favor of the merger.
We also are seeking the approval of the merger by the holders of a majority of
shares of our Class A Common Stock who vote in the merger, other than shares
held by Mr. Hammons and his affiliates.
We entered into the merger agreement in connection with a series of transactions
agreed to among Mr. Hammons, JQH Acquisition LLC and their respective
affiliates. These transactions address a variety of ongoing arrangements between
the parties, including Mr. Hammons' continuing equity ownership in the business
and his ongoing, active leadership role
14
in the company managing our properties. The transactions to be entered into by
Mr. Hammons will include the right to a credit facility backed by iStar
Financial Inc. secured by Mr. Hammons' equity ownership in the business and
certain other collateral.
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. 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. In June of 2005, our board of
directors extended the agreement until December 31, 2005. 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 Hampton, Virginia; Junction City,
Kansas; North Charleston, South Carolina; St. Charles and 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 Joplin, Missouri and Huntsville, Alabama.
RESULTS OF OPERATIONS - THREE-MONTH PERIOD
The following discussion and analysis addresses results of operations for the
three-month periods ended July 1, 2005 (which we refer to as the 2005 Quarter),
and July 2, 2004 (which
15
we refer to as the 2004 Quarter). The results of operations for the three-month
and six-month periods ended July 1, 2005 are not indicative of the results to be
expected for the full year.
Total revenues from continuing operations for the 2005 Quarter were $117.5
million, an increase of $7.6 million, or 6.9%, compared to the 2004 Quarter,
primarily as the result of our higher average room rate and improvement in
corporate, leisure, association and corporate group travel segments of our
business.
Rooms revenues from continuing operations increased $5.0 million, or 7.3%, from
the 2004 Quarter, and increased slightly as a percentage of total revenues from
continuing operations to 62.8% from 62.6%. The increase was primarily related to
higher room rates and improvement in the travel segments of our business,
discussed above. Our average room rate increased to $107.21, a 6.0% increase
compared to the 2004 Quarter average room rate of $101.15, and our occupancy for
the 2005 Quarter increased 0.8 percentage points to 69.7% from 68.9% in the 2004
Quarter. In comparison, the average room rate for the hotel industry, based on
information from Smith Travel Research, was $90.63 in the 2005 Quarter, up 5.3%
from the 2004 Quarter. Occupancy for the hotel industry was 66.0% in the 2005
Quarter, up 2.8% from the 2004 Quarter. Our Revenue Per Available Room, or
RevPAR, was $74.71 in the 2005 Quarter, up 7.3% from $69.64 in the 2004 Quarter.
RevPAR for the hotel industry in the 2005 Quarter was $59.81, up 8.3% from the
2004 Quarter.
Food and beverage revenues from continuing operations increased by $1.7 million,
or 6.0%, compared to the 2004 Quarter, but decreased slightly as a percentage of
total revenues from continuing operations to 25.4% from 25.6%. The dollar
increase was due to increased banquet revenues related to an increase in the
association and corporate group travel segments of our business, discussed
above.
Meeting room rental, related party management fee and other revenues from
continuing operations increased $0.9 million, or 6.9%, from the 2004 Quarter,
but remained stable as a percentage of total revenues from continuing operations
at 11.8%. The dollar increase was primarily attributable to related party
management fees, partially offset by decreased telephone revenues.
Rooms operating expenses from continuing operations increased by $1.5 million,
or 9.0%, compared to the 2004 Quarter, and increased as a percentage of rooms
revenues from continuing operations to 24.7% from 24.3% in the 2004 Quarter. The
increase was primarily attributable to higher housekeeping labor costs, as well
as unfavorable workers' compensation loss experience from employees in this
classification, compared to the 2004 Quarter. Although we closely monitor our
workers' compensation loss experience, by the nature of this expense, it tends
to fluctuate from period to period.
Food and beverage operating expenses from continuing operations increased $1.2
million, or 5.5%, compared to the 2004 Quarter, but decreased as a percentage of
food and beverage
16
revenues from continuing operations to 77.2% from 77.6%. The dollar increase was
attributable to higher food and beverage sales volumes.
Other operating expenses from continuing operations remained stable at
approximately $0.5 million, compared to the 2004 Quarter, but decreased slightly
as a percentage of meeting room rental, related party management fee and other
revenues from continuing operations, to 3.6% from 3.8%.
General, administrative, sales and management service expenses from continuing
operations increased $0.3 million, or 0.8%, over the 2004 Quarter, but decreased
as a percentage of total revenues from operations to 31.0% from 32.8%. The
dollar increase was attributable to the $0.9 million adjustment made to correct
our historical accounting for the fair market value of the Joplin trade center
lease agreement with Mr. Hammons (discussed in "Note 2 - General" in the Notes
to the Financial Statements above) as well as increases in utilities, fees
associated with franchise frequent traveler programs, franchise fees and credit
card commissions, partially offset by decreases in insurance costs, property
taxes and favorable workers' compensation loss experience for employees in this
classification.
Repairs and maintenance expenses from continuing operations increased $0.2
million, or 4.3%, but decreased slightly as a percentage of total revenues from
continuing operations to 4.2% from 4.3%.
Depreciation and amortization expenses from continuing operations increased $0.5
million, or 4.3%, compared to the 2004 Quarter, but decreased slightly as a
percentage of total revenues from continuing operations to 10.3% from 10.6%. The
dollar increase related to the early retirement of fixed assets attributable to
several refurbishment projects within our hotels.
Income from operations increased by $3.9 million, or 21.2%, and increased as a
percentage of total revenues from continuing operations to 19.0% from 16.7% in
the 2004 Quarter, as the result of factors noted above.
Interest expense and amortization of deferred financing fees from continuing
operations decreased by $0.4 million, or 2.4%, and decreased as a percentage of
total revenues to 13.4% from 15.0% in the 2004 Quarter. The decrease was
primarily attributable to the reduction in long-term debt compared to the 2004
Quarter.
Income from continuing operations before minority interest and provision for
income taxes was $6.6 million in the 2005 Quarter compared to $1.9 million in
the 2004 Quarter.
Income from continuing operations for the 2005 Quarter was $1.6 million,
compared to $1.9 million in the 2004 Quarter. The 2004 Quarter was positively
impacted by $1.5 million of limited partners' earnings we recaptured from
limited partners' losses we absorbed in previous quarters as a result of the
inability of the limited partners' net contribution to fall below zero.
17
The following represents a reconciliation of the income from continuing
operations, as reported, to income from continuing operations, as adjusted (in
thousands):
THREE MONTHS ENDED
July 1, 2005 July 2, 2004
------------ ------------
Income from continuing operations, as reported $ 1,589 $ 1,860
Subtractions:
Reallocation of minority interest earnings - (1,473)
------------ ------------
Income from continuing operations, as adjusted $ 1,589 $ 387
============ ============
Net income (loss) allocable to the Company was net income of $1.6 million in the
2005 Quarter, compared to a net loss of $2.6 million for the 2004 Quarter. The
2005 Quarter results reflect a reduction of $4.9 million of minority interest in
the income of the Partnership, while the 2004 Quarter results reflect $4.5
million loss from discontinued operations from the sale of certain non-strategic
hotels.
Basic and diluted earnings per share from continuing operations were $0.29 and
$0.23, respectively, in the 2005 Quarter, compared to $0.36 in the 2004 Quarter.
Basic and diluted loss per share from discontinued operations was $0.87 for the
2004 Quarter, offset by earnings of $0.36 of per share from continuing
operations, resulting in net basic and diluted loss per share of $0.51. For
additional information, see "Note 3 Net Income (Loss) and Earnings (Loss) per
Share" of the Notes to Financial Statements.
RESULTS OF OPERATIONS - SIX-MONTH PERIOD
The following discussion and analysis addresses results of operations for the
six-month periods ended July 1, 2005 (which we refer to as the 2005 Six Months),
and July 2, 2004 (which we refer to as the 2004 Six Months).
Total revenues from continuing operations increased $9.7 million, or 4.4%,
compared to the 2004 Six Months. The increase is primarily as the result of our
higher average room rate and improvement in corporate, leisure, association and
corporate group travel segments of our business, partially offset by a very
slight decrease in occupancy.
Rooms revenues from continuing operations for the 2005 Six Months increased $6.5
million, or 4.8%, from the 2004 Six Months, as a result of the factors discussed
above, and increased slightly as a percentage of total revenues from continuing
operations, to 62.2%, compared to 62.0% in the 2004 Six Months. Our average room
rate increased to $107.42 in the 2005 Six Months from $101.13 in the 2004 Six
Months. Occupancy decreased to 67.1% in the 2005 Six Months from 68.0% in the
2004 Six Months, a decrease of 0.9 percentage points. Our revenue per available
room (RevPAR) was $72.06 in the 2005 Six Months, up 4.8% from the
18
2004 Six Months. RevPAR for the hotel industry was $56.31 up 7.8% from the 2004
Six Months.
Food and beverage revenues from continuing operations increased $2.2 million, or
3.9%, in the 2005 Six Months, but decreased slightly as a percentage of total
revenues from continuing operations to 25.8% from 25.9% in the 2004 Six Months.
The dollar increase related to increased food and beverage sales from the
improvement in the travel segments discussed above, while the percentage
decrease reflected the fact that food and beverage sales increased at a slightly
slower pace than rooms revenues.
Meeting room rental, related party management fee and other revenues from
continuing operations for the 2005 Six Months increased $1.0 million, or 3.8%,
from the 2004 Six Months, but remained stable as a percentage of total revenues
from continuing operations at 12.1%. The increase was primarily related to
related party management fees, partially offset by decreased telephone revenue.
Rooms operating expenses from continuing operations for the 2005 Six Months
increased $1.9 million, or 5.7%, from the 2004 Six Months, and increased
slightly as a percentage of rooms revenues from continuing operations to 24.6%
from 24.4%. The increase was attributable to higher front desk and housekeeping
labor costs over the 2004 Six Months.
Food and beverage operating expenses from continuing operations for the 2005 Six
Months increased $1.9 million, or 4.4%, from the 2004 Six Months, and increased
slightly as a percentage of food and beverages revenues from continuing
operations to 75.6%, from 75.2% in the 2004 Six Months. The dollar increase was
directly related to increased food revenues over the 2004 Six Months.
Other operating expenses from continuing operations for the 2005 Six Months
decreased $0.2 million, or 18.2%, from the 2004 Six Months, and decreased as a
percentage of meeting room rental, related party management fee and other income
from continuing operations, to 3.3% in the 2005 Six Months from 4.1% in the 2004
Six Months, primarily as the result of reduced long distance telephone costs.
General, administrative, sales and management service expenses from continuing
operations for the 2005 Six Months increased $1.4 million, or 2.0%, but
decreased as a percentage of total revenues from continuing operations to 31.5%
from 32.3% in the 2004 Six Months. The dollar increase was primarily
attributable to the factors described above in the discussion regarding the 2005
Quarter.
Repairs and maintenance expenses from continuing operations increased $0.5
million, or 5.4%, compared to the 2004 Six Months, and remained stable as a
percentage of total revenues from continuing operations.
19
Depreciation and amortization expenses from continuing operations for the 2005
Six Months increased $0.5 million, or 2.2%, from the 2004 Six Months, but
decreased slightly as a percentage of total revenues from continuing operations
to 10.3% from 10.5% in the 2004 Six Months. The changes were related to the
factors discussed above in the discussion of the 2005 Quarter.
Income from operations increased by $3.8 million, or 9.7%, and increased as a
percentage of total revenues from continuing operations to 18.8% from 17.9% in
the 2004 Six Months, as the result of factors noted above.
Interest expense and amortization of deferred financing fees from continuing
operations decreased by $0.8 million, or 2.4%, and decreased as a percentage of
total revenues to 13.8% from 15.0% in the 2004 Six Months. The decrease was
primarily attributable to the reduction in long-term debt from the 2004 Six
Months.
Income from continuing operations before minority interest and provision for
income taxes was $11.1 million in the 2005 Six Months compared to $6.2 million
in the 2004 Six Months.
Income from continuing operations for the 2005 Six Months was $5.8 million,
compared to $6.1 million in the 2004 Six Months. Income from continuing
operations for the 2005 Six Months was positively impacted by $3.1 million of
the limited partners' earnings we recaptured from limited partners' losses we
absorbed in previous quarters as a result of the inability of the limited
partners' net contribution to fall below zero. Results for the 2004 Six Months
were positively impacted by $4.7 million of limited partners' earnings for the
same reason.
The following represents a reconciliation of the income from continuing
operations, as reported, to income from continuing operations, as adjusted (in
thousands):
SIX MONTHS ENDED
July 1, 2005 July 2, 2004
------------ ------------
Income from continuing operations, as reported $ 5,824 $ 6,130
Subtractions:
Reallocation of minority interest earnings (3,140) (4,735)
------------ ------------
Income from continuing operations, as adjusted $ 2,684 $ 1,395
============ ============
Net income allocable to the Company was $8.5 million in the 2005 Six Months
compared to $1.7 million in the 2004 Six Months. Results for the 2005 Six Months
included $2.7 million of income from discontinued operations resulting from the
gain on the sale of the Holiday Inn in Emeryville, California, while the 2004
Six Months included a $4.4 million loss from the other hotel sales described
above.
20
Basic and diluted earnings per share from continuing operations were $1.06 and
$0.86, respectively, in the 2005 Six Months, compared to $1.20 and $1.04,
respectively, in the 2004 Six Months. Basic and diluted earnings per share from
discontinued operations was $0.50 and $0.40, respectively, for the 2005 Six
Months, which, combined with basic and diluted earnings from continuing
operations, resulting in net basic and diluted earnings per share of $1.56 and
$1.26, respectively, for the 2005 Six Months. Basic and diluted loss per share
from discontinued operations was $0.86 and $0.75, respectively, for the 2004 Six
Months, which partially offset basic and diluted earnings from continuing
operations of $1.20 and $1.04 per share, resulting in net basic and diluted
earnings per share of $0.34 and $0.29, respectively, for the 2004 Six Months.
For additional information, see "Note 3 Net Income (Loss) and Earnings (Loss)
per Share" of the Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In general, we have financed our operations through internal cash flow, loans
from financial institutions, the issuance of public and private debt and equity
and the issuance of industrial revenue bonds. Our principal uses of cash are to
pay operating expenses, to service debt and to fund capital expenditures.
At July 1, 2005, we had $37.6 million of cash and equivalents and $23.4 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 July 1,
2005, and December 31, 2004, we had current restricted cash reserves of $9.8
million and $10.2 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, in addition to
the $8.0 million escrowed in connection with the merger agreement.
Cash from operating activities decreased to $29.8 million for the 2005 Six
Months, from $32.4 million for the 2004 Six Months, a decrease of $2.6 million,
or 8.0%, primarily attributable to unfavorable changes in assets and
liabilities, partially offset by increased net income.
We incurred capital expenditures of $24.9 million in the 2005 Six Months,
compared to $8.2 million in 2004 Six Months. 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, results for the 2005 Six Months include 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 July 1, 2005, our total debt was $743.9 million compared with $765.2 million
at the end of fiscal 2004. The decrease of $21.3 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 $16.6 million at the end of the
2005 Six Months, compared to $25.7 million at the end of 2004.
21
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 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 as is contemplated in
connection with the proposed merger, 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 estimate 2005 capital requirements to be $43.5 million (including
approximately $12.6 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 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 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.
In December 2004, SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment
of APB Opinion No. 29" was issued. This statement amends APB Opinion No. 29 by
eliminating the exception to the fair-value principle for exchanges of similar
productive assets, and replaces it with a general exception for nonmonetary
asset exchanges that have no commercial substance. The statement also eliminates
APB No. 29's concept of the culmination of an earnings process. SFAS No. 153 is
effective for nonmonetary transactions occurring in fiscal periods beginning
after June 15, 2005. The impact of SFAS No. 153 will depend on the
22
nature and extent of any nonmonetary asset exchanges after the effective date,
but management does not currently expect SFAS No. 153 to have a material impact
on our consolidated financial position, results of operations and cash flows.
In May 2005, SFAS No. 154, "Accounting Changes and Error Correction - a
replacement of APB Opinion No. 20 and FASB Statement No. 3" was issued. This
statement requires that the direct effect of voluntary changes in accounting
principle be applied retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is impracticable to
determine either the cumulative effect of the change or the period-specific
effects. The statement also designates retrospective application as the
transition method for newly-issued accounting pronouncements in the instance
where the pronouncement does not provide specific transition guidance. SFAS No.
154 is effective for accounting changes and correction of errors made in fiscal
years beginning after December 15, 2005. The impact of SFAS No. 154 will depend
on the nature and extent of any voluntary accounting changes and corrections of
errors after the effective date, but management does not currently expect SFAS
No. 154 to have a material impact on our consolidated financial position,
results of operations and cash flows.
In March 2005, FASB Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations" was issued. This Interpretation requires companies to
record a liability for those asset retirement obligations in which the amount or
timing of settlement of the obligation are uncertain. FIN 47 is effective in
fiscal years ending after December 15, 2005. We are currently evaluating the
impact of adopting FIN 47 on its consolidated financial position, results of
operations and cash flows.
In March 2005, Staff Accounting Bulletin No. 107, "Share-Based Payment" was
issued. SAB No. 107 provides guidance regarding the valuation of share-based
payment arrangements for public companies, specifically as related to
transactions with non-employees, the transition from non-public to public entity
status, valuation methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, and other issues related to
SFAS No. 123(R). SAB No. 107 becomes effective upon our adoption of SFAS No.
123(R). We are currently evaluating the impact of adopting SAB No. 107 on its
consolidated financial position, results of operations and cash flows.
In July 2005, the FASB issued an exposure draft, "Accounting for Uncertain Tax
Positions: an Interpretation of FASB Statement 109." This proposed
Interpretation clarifies accounting for uncertain tax positions in accordance
with SFAS No. 109. Specifically, the Interpretation requires recognition of a
company's best estimate of the impact of a tax position only if that position is
probable of being sustained by an audit based only on the technical merits of
the position. Tax positions failing the probable recognition threshold would
result in adjustments in recorded deferred tax assets or liabilities and changes
in income tax payables or receivables. This Interpretation, if approved, would
become effective for the first fiscal year ending after
23
December 15, 2005. We are currently evaluating the impact of adopting this
proposed Interpretation on its consolidated financial position, results of
operations and 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, net deferred tax assets, self-insurance reserves, contingencies and
litigation. We base our estimates and judgments on historical experience and
various other factors we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. We
believe the following critical accounting policies, among others, affect our
more significant estimates and assumptions used in preparing our consolidated
financial statements. Actual results could differ from our estimates and
assumptions.
Trade receivables are reflected net of an estimated allowance for doubtful
accounts. This estimate is based primarily on historical experience and
assumptions with respect to future payment trends.
Property and equipment are stated at cost less accumulated depreciation. We
periodically review the carrying value of property and equipment and other
long-lived assets for indications that the carrying value of such assets may not
be recoverable. This review consists of a comparison of the carrying value of
the assets with the expected future undiscounted cash flows. If the respective
carrying values exceed the expected future undiscounted cash flows, the
impairment is measured using fair value measures to the extent available or
discounted cash flows.
We consider each individual hotel to be an identifiable component of our
business. In accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we do not consider a hotel as "held for sale"
until it is probable that the sale will be completed within one year. Once a
hotel is "held for sale" the operations related to the hotel will be included in
discontinued operations. We consider a hotel as "held for sale" once the
potential transaction has been approved by our board of directors (i.e., Letter
of Intent is approved), a contract for sale has been executed, the buyer has
completed its due diligence review of the asset, and we have received a deposit.
Until a buyer has completed its due diligence review of the asset, necessary
approvals have been received and substantive conditions to the buyer's
obligation to perform have been satisfied, we do not consider a sale to be
probable.
24
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, 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
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;
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- 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 July 1,
2005:
EXPECTED MATURITY DATE
(in millions)
Fair
Value
2005(d) 2006 2007 2008 2009 There-After Total (e)
Long-Term Debt(a)
$510 Million First Mortgage Notes $ - $ - $ - $ - $ - $499 $ 499 $544-549
Average interest rate(b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%
Other fixed-rate debt obligations $ 6 $ 27 $ 62 $ 4 $ 4 $107 $ 210 $ 210
Average interest rate(b) 8.0% 7.7% 8.2% 8.2% 8.2% 7.9% 8.0%
Other variable-rate debt obligations $ 10 $ 1 $ 24 $ - $ - $ - $ 35 $ 35
Average interest rate(c) 6.4% 6.4% 6.4% -% -% -% 6.4%
(a) Includes amounts reflected as long-term debt due within one year.
(b) For the long-term fixed rate debt obligations, the weighted average
interest rate is based on the stated rate of the debt that is
maturing in the year reported. The weighted average interest rate
excludes the effect of the amortization of deferred financing costs.
(c) For the long-term variable rate debt obligations, the weighted
average interest rate assumes no changes in interest rates and is
based on the variable rate of the debt, as of July 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.
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(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.
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-14(d) and 15d-14(d) under the
Securities Exchange Act of 1934) as of July 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 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
Two purported class action lawsuits were filed against us and our board of
directors 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 sought injunctive relief to prevent a proposed transaction pursuant
to which Barcelo Crestline Corporation would acquire us. Plaintiffs alleged that
the proposed transaction was unfair to our shareholders because the
consideration offered was too low. The Chancery Court consolidated the two
lawsuits. Subsequently, plaintiffs filed an amended complaint that seeks
injunctive relief if we fail to treat bidders equally. On May 6, 2005, we 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,
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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
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.
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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: August 12, 2005
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EXHIBIT INDEX
EXHIBIT NO. TITLE
- ----------- -----
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
30