<PAGE>
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 2, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________________ to ___________________
Commission File number 033-73340 01
John Q. Hammons Hotels, L.P.
John Q. Hammons Hotels Finance Corporation
John Q. Hammons Hotels Finance Corporation II
(Exact name of registrants as specified in their charters)
Delaware 43-1523951
Missouri 43-1680322
Missouri 43-1720400
(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
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED BALANCE SHEETS
(000's omitted)
ASSETS
<TABLE>
<CAPTION>
October 2, 1998 January 2, 1998
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
CASH AND EQUIVALENTS $ 31,683 $ 41,961
MARKETABLE SECURITIES 12,761 12,742
RECEIVABLES
Trade, less allowance for doubtful accounts of $188 9,311 7,652
Construction reimbursements, shareholder and other 6,364 3,739
Management fees 78 50
INVENTORIES 1,196 1,206
PREPAID EXPENSES AND OTHER 691 1,386
--------- ---------
Total Current Assets 62,084 68,736
PROPERTY AND EQUIPMENT, at cost
Land and improvements 44,307 40,511
Buildings and improvements 609,503 527,856
Furniture, fixture and equipment 241,114 197,177
Construction in progress 53,591 78,946
--------- ---------
948,515 844,490
Less-accumulated depreciation and amortization (195,246) (166,125)
--------- ---------
753,269 678,365
Property and equipment available for sale -- 38,791
--------- ---------
753,269 717,156
RESTRICTED CASH FROM PROPERTY DISPOSITION 2,039 --
DEFERRED FINANCING COSTS, FRANCHISE FEES
AND OTHER, net 27,673 30,841
--------- ---------
$ 845,065 $ 816,733
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED BALANCE SHEETS
(000's omitted)
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
October 2, 1998 January 2, 1998
--------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES:
Current portion of long-term debt $ 38,921 $ 61,517
Accounts payable 10,705 11,232
Accrued expenses
Payroll and related benefits 4,830 5,529
Sales and property taxes 11,689 8,676
Insurance 11,797 11,242
Interest 3,926 12,603
Utilities, franchise fees and other 5,835 5,822
-------- --------
Total current liabilities 87,703 116,621
Long-term debt 696,636 634,274
Other obligations and deferred revenue 10,695 7,900
-------- --------
Total liabilities 795,034 758,795
-------- --------
COMMITMENT AND CONTINGENCIES
EQUITY:
Contributed capital 96,436 96,436
Partners' and other deficits, net (46,405) (38,498)
-------- --------
Total equity 50,031 57,938
-------- --------
$845,065 $816,733
======== ========
</TABLE>
See Notes to Consolidated Financial Statement
<PAGE>
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 2, 1998 Oct. 3, 1997 Oct. 2, 1998 Oct. 3, 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Rooms $56,918 $ 53,360 $162,306 $149,339
Food and beverage 20,168 19,472 64,361 60,710
Meeting room rental and other 5,577 6,032 16,759 15,576
------- -------- -------- --------
Total revenues 82,663 78,864 243,426 225,625
OPERATING EXPENSES:
Direct operating costs and expenses--
Rooms 13,580 13,250 40,648 37,092
Food and beverage 14,912 14,888 46,457 44,826
Other 874 878 2,663 2,457
General, administrative and sales expenses 25,491 23,406 73,066 63,758
Repairs and maintenance 3,417 3,227 9,930 9,321
Depreciation and amortization 11,547 9,422 33,900 24,459
------- -------- -------- --------
Total operating expenses 69,821 65,071 206,664 181,913
------- -------- -------- --------
INCOME FROM OPERATIONS 12,842 13,793 36,762 43,712
OTHER INCOME (EXPENSE):
Gain on sale -- -- 238 --
Interest income 698 298 2,093 787
Interest expense and amortization of
deferred financing fees (14,921) (12,022) (43,619) (31,908)
------- -------- -------- --------
INCOME (LOSS) before extraordinary item (1,381) 2,069 (4,526) 12,591
Loss on extinguishment of debt (520) -- (1,828) --
======= -------- -------- --------
NET INCOME (LOSS) (1,901) $ 2,069 (6,354) $ 12,591
======= ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(000's omitted)
<TABLE>
<CAPTION>
PARTNERS' AND
OTHER EQUITY
CONTRIBUTED CAPITAL (DEFICIT)
------------------- --------------------
General General Limited
Partner Partner Partner Total
-------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, January 2, 1998 (audited) $96,436 $(77,897) $39,399 $(57,938)
Distributions -- (120) (1,433) (1,553)
Net Loss -- (1,799) (4,555) (6,354)
-------------------------------------------
BALANCE, October 2, 1998 (unaudited) $96,436 $(79,816) $33,411 $(50,031)
===========================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
JOHN Q. HAMMONS HOTELS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
(000's omitted)
<TABLE>
<CAPTION>
Nine Months Ended
October 2, 1998 October 3, 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,354) $ 12,591
Adjustments to reconcile net income loss to cash
provided by operating activities--
Depreciation, amortization, and loan cost amortization 35,350 25,931
Loss on early extinguishment of debt 1,828 --
Gain on sale of hotels (238) --
Changes in certain assets and liabilities
Receivables (4,312) (3,842)
Inventories (103) (122)
Prepaid expenses and other 695 1,343
Accounts payable (527) (6,680)
Accrued expenses (5,795) (4,435)
Other obligations and deferred revenue 2,795 (1,599)
--------- ---------
Net cash provided by operating activities 23,339 23,009
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (103,415) (144,245)
Proceeds from disposition of hotels 39,387 --
Restricted cash remaining from property disposition (2,039) --
Franchise fees and other (5,744) (3,259)
Sale (purchase) of marketable securities, net (19) (3,879)
--------- ---------
Net cash used in investing activities (71,830) (151,383)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 223,390 152,159
Repayments of debt (183,624) (20,682)
Distributions to partners (1,553) (2,415)
--------- ---------
Net cash provided by financing activities 38,213 129,062
--------- ---------
Increase (decrease) in cash and equivalents (10,278) 688
CASH AND EQUIVALENTS, beginning of period 41,961 46,449
--------- ---------
CASH AND EQUIVALENTS, end of period $ 31,683 $ 47,137
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID FOR INTEREST, net of amounts capitalized $ 51,689 $ 39,395
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
JOHN Q. HAMMONS HOTELS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ENTITY MATTERS
The accompanying consolidated financial statements include the accounts of
John Q. Hammons Hotels, L.P. and its wholly-owned subsidiaries ("Partnership"),
consisting of John Q. Hammons Finance Corporation ("Finance Corp.") and John Q.
Hammons Hotels Finance Corporation II ("Finance Corp. II"), both corporations
with nominal assets and no operations, the catering corporations (which are
separate corporations for each hotel location chartered to own the respective
food and liquor licenses and operate the related food and beverage facilities),
and certain other wholly-owned subsidiaries conducting certain hotel operations.
In conjunction with a public offering of first mortgage notes in February
1994 (the "1994 Notes") and in November 1995 ("1995 Notes") by the Partnership
and Finance Corp. I and II, and a public offering of common stock in November
1994 ("Common Stock Offering") by its general partner, John Q. Hammons Hotels,
Inc. ("General Partner"), the Partnership, which owned and operated ten hotels
properties, obtained through transfers or contributions from Mr. John Q. Hammons
("Mr. Hammons") or enterprises that he controlled, 21 additional operating hotel
properties, equity interests in two hotels under construction, the stock of
catering corporations and management contracts relating to all of Mr. Hammons'
hotels.
The Partnership is directly or indirectly owned and controlled by Mr.
Hammons, as were all enterprises that transferred or contributed net assets to
the Partnership. Accordingly, the accompanying financial statements present, as
a combination of entities under common control as if using the pooling method of
accounting, the financial position and related results of operations of all
entities on a consolidated basis for all periods presented.
All significant balances and transactions between the entities and
properties have been eliminated.
Mr. Hammons and entities directly or indirectly owned or controlled by him
are the only limited partners of the Partnership. Mr. Hammons, through his
voting control of the General Partner, continues to be in control of the
Partnership.
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 generally accepted accounting principles (GAAP) for complete
financial statements have been omitted. These interim statements should be read
in conjunction with the financial statements and notes thereto included in the
Partnership's Form 10-K for the fiscal year ended January 2, 1998, which
included financial statements for the fiscal years ended January 2, 1998 and
January 3, 1997.
<PAGE>
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.
The Partnership considers all operating cash accounts and money market
investments with an original maturity of three months or less to be cash
equivalents. Marketable securities consist of available-for-sale commercial
paper and governmental agency obligations which mature or will be available for
use in operations in 1997. These securities are valued at current market value,
which approximates cost.
3. ALLOCATIONS OF INCOME, LOSSES AND DISTRIBUTIONS
Income, losses and distributions of the Partnership will generally be
allocated between the General Partner and the limited partners based on their
respective ownership interests of 28.31% and 71.69%.
In the event the Partnership has taxable income, distributions are to be
made to the partners in an aggregate amount equal to the amount that 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
the General Partner, if applicable, with the remainder allocated to the limited
partners.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), which requires comprehensive income and the associated
income tax expense or benefit to be reported in a financial statement that is
displayed with the same prominence as other financial statements with an
aggregate amount of comprehensive income reported in that same financial
statement. "Other comprehensive income" refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income but not in net income. The Partnership adopted this
statement in the first quarter of fiscal 1998 with no impact on the
Partnership's reported consolidated financial position, results of operations,
cash flows or related disclosures.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" (SFAS 131), which requires disclosure for each segment in which the
chief operating decision maker organizes these segments within a company for
making operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management structure
and any manner in which management disaggregates a Partnership. The Partnership
intends to adopt SFAS 131 during fiscal 1998. This statement, which requires
expansion or modification to existing disclosures, will have no impact on the
Partnership's reported financial position, results of operation or cash flows.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities." The SOP requires costs of start-up activities, including
preopening expenses, to be expensed as incurred. The Partnership's current
practice is to defer these expenses until a hotel has commenced operations,
<PAGE>
at which time the costs, other than advertising costs that are expensed upon
opening, are amortized over a one-year period. The Partnership is required to
adopt the provisions of this statement no later than the first quarter of fiscal
1999 and, consistent with the guidance of the SOP, then existing cumulative
unamortized preopening costs will be charged to expense.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met.
SAFS 133 is effective for fiscal years beginning after June 15, 1999. Upon
adoption of this statement, the Partnership anticipates no impact on its
reported consolidated financial position, results of operations, cash flows or
related disclosures.
5. PROPERTY DISPOSITION
Effective February 6, 1998, the Partnership completed the sale of six
hotels to an unrelated party for $40 million, resulting in a gain of
approximately $0.2 million. Certain of these hotels served as collateral under
the 1994 and 1995 first mortgage notes. Under the terms of these indentures the
Partnership must provide replacement collateral of equivalent value or apply the
net proceeds from the sale to amounts outstanding. On August 12, 1998, the
Partnership provided replacement collateral in accordance with the indenture
provisions by purchasing (from an unrestricted subsidiary) the Embassy Suites in
Montgomery, Alabama at its appraised value of $25.4 million. As of October 2,
1998 a cash balance of $2.0 million remains restricted for this purpose and is
classified as non-current restricted cash in the accompanying balance sheet.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
For purposes of this discussion, the Partnership classifies new hotels (New
Hotels) as those hotels opened during the current year and the prior year, and
defines all other hotels as mature hotels (Mature Hotels).
The Partnership has opened four New Hotels in the past nine months, and has
an additional five hotels under construction. The Partnership's development
activity restricts its ability to grow per share income. Fixed charges for New
Hotels (such as depreciation and amortization expense and interest expense)
exceed New Hotel operating cash flow in the first one to three years of
operations. As New Hotels mature, the Partnership expects, but there can be no
assurance, that the operating expenses for these hotels will decrease as a
percentage of revenues.
<PAGE>
The Partnership announced on September 11, 1998 that it was ceasing new
development activity, except for the five hotels that are currently under
construction. The hotels currently under construction include Hampton Inn and
Suites Hotel adjacent to the Mesquite Championship Rodeo Arena, Mesquite, Texas;
Radisson Plaza, Coral Springs, Florida; Marriott Renaissance Hotel at Charlotte,
North Carolina Airport; Embassy Suites Hotel, Grapevine, Texas, adjacent to Bass
Pro's Outdoor World, near the Dallas-Fort Worth Airport; and Marriott
Renaissance Oklahoma City Hotel, in downtown Oklahoma City, Oklahoma.
The Partnership opened two additional hotels during the quarter ended
October 2, 1998. On August 18, 1998, the Partnership opened Capital Plaza Hotel
in Topeka, Kansas and on September 30, 1998, the Embassy Suites Hotel at the
Portland, Oregon Airport. These openings marked the seventeenth and eighteenth
hotels the Partnership has developed in less than four years.
QUARTER ENDED OCTOBER 2, 1998
The following discussion and analysis addresses results of operations for
the quarter ended October 2, 1998 (the "1998 Quarter") and October 3, 1997 (the
"1997 Quarter").
For the 1998 Quarter, the Partnership's total earnings before interest
expense, taxes, depreciation and amortization (EBITDA) were $24.4 million, an
increase of 5.1% compared to the 1997 Quarter EBITDA of $23.2 million. The
Mature Hotels' EBITDA was $18.2 million in the 1998 Quarter, down 8.5% from
$19.9 million in the 1997 Quarter, due primarily to the sale of six hotels on
February 6, 1998. The Partnership sold six Holiday Inn Hotels and recognized a
book gain of $0.2 million on the sale. Excluding the six hotels sold, the
Mature Hotels' EBITDA in the 1998 Quarter was $18.2 million, up almost 1.0% from
$18.0 million in the 1997 Quarter. As a percentage of total revenues EBITDA
related to the Mature Hotels (excluding the six hotels sold) decreased to 28.4%
in the 1998 Quarter from 28.7% in the 1997 Quarter. The New Hotels' EBITDA for
the 1998 Quarter was $3.2 million compared to $0.6 million in the 1997 Quarter.
Total revenues for the 1998 Quarter were $82.7 million, an increase of $3.8
million, or 4.8%, compared to the 1997 Quarter, primarily as a result of the
continued growth of the New Hotels' including the four hotels opened in 1998.
The Partnership's Mature Hotels (excluding the six hotels sold) generated total
revenues of $64.2 million in the 1998 Quarter, an increase of $1.3 million, or
2.0%, compared to the 1997 Quarter. The Partnership's New Hotels generated
total revenues of $17.8 million during the 1998 Quarter compared to $6.9 million
in the 1997 Quarter.
Rooms revenues increased $3.6 million, or 6.7%, from the 1997 Quarter, and
increased slightly as a percentage of total revenues, to 68.9% from 67.7%. The
dollar increase was primarily due to increased rooms revenues from the New
Hotels and increases in the Partnership's average room rate to $91.89, a 9.4%
increase compared to the 1997 Quarter average room rate of $84.03. In
comparison, the average room rate for the hotel industry was $78.13 in the 1998
Quarter, up 3.6% from the 1997 Quarter. The increased average room rate was
partially offset by a slight decrease in the Partnership's occupancy for the
1998 Quarter to 66.4% from 66.5%. Occupancy for the hotel industry was 70.1%,
down from 71.0% in the 1997 Quarter. The Partnership's Revenue per Available
Room was $60.98 in the 1998 Quarter, up 9.1% from $55.90 in the 1997 Quarter.
RevPAR for the hotel industry was $54.79, up 2.4% from the 1997 Quarter.
<PAGE>
Food and beverage revenues increased $0.7 million, or 3.6%, compared to the
1997 Quarter, and decreased slightly as a percentage of total revenues, to
24.4%, from 24.7%. Sales at the New Hotels with full food and beverage services
accounted for the overall dollar increase in food and beverage revenues.
Meeting room rental and other revenues decreased $0.5 million, or 7.5%,
from the 1997 Quarter, and decreased as a percentage of revenues, to 6.7% from
7.6%.
Rooms operating expenses increased $0.3 million, or 2.5%, compared to the
1997 Quarter, and decreased slightly as a percentage of rooms revenues, to 23.9%
from 24.8% in the 1997 Quarter. The dollar increase related entirely to
expenses for New Hotels. For the Mature Hotels, (excluding the six hotels sold)
rooms operating expenses as a percentage of rooms revenues, were 25.2% in the
1998 Quarter compared to 24.6% in the 1997 Quarter.
Food and beverage operating expenses remained stable at $14.9 million
compared to the 1997 Quarter, and decreased slightly as a percentage of food and
beverage revenues, to 73.9% from 76.4%.
Other operating expenses remained stable at $0.9 million compared to the
1997 Quarter, but increased as a percentage of meeting room rental and other
revenues, to 15.7% from 14.6% in the same period of the prior year.
General, administrative and sales expenses increased $2.1 million, or 8.9%,
over the 1997 Quarter, and increased as a percentage of revenues to 30.8% from
29.6%. The increase was primarily attributable to expenses associated with the
New Hotels, including management and sales payroll and marketing. General,
administrative and sales expenses for the Mature Hotels (excluding the six
hotels sold) remained stable from the 1997 Quarter.
Repairs and maintenance expenses increased $0.2 million, or 5.9%, compared
to the 1997 Quarter, but remained stable as a percentage of revenues, at 4.1%.
Depreciation and amortization expenses increased $2.1 million, or 22.5%,
compared to the 1997 Quarter, and increased significantly as a percentage of
revenues to 14.0% from 11.9%, in the 1997 Quarter. Depreciation and
amortization increased due to the New Hotels, as depreciation and amortization
expenses are higher in the initial years of a New Hotel's operation.
Income from operations decreased $0.9 million, or 6.9%, compared to the
1997 Quarter, and decreased as a percentage of revenues, to 15.5% from 17.5%.
Expenses related to operating the New Hotels, primarily depreciation and
amortization, and to a lesser extent, general, administration and sales
expenses, increased more rapidly than revenues from those New Hotels.
Interest expense (net) increased $2.5 million, or 21.3%, from the 1997
Quarter, and increased as a percentage of total revenues to 17.2% from 14.9%.
These increased costs related to interest expense on financing for the New
Hotels.
Net income (loss) represented a $1.4 million loss in the 1998 Quarter,
compared to $2.1 million of income in the 1997 Quarter. The
<PAGE>
loss was primarily attributable to higher depreciation and amortization costs as
well as interest expense associated with the Partnership's New Hotels.
NINE MONTH PERIOD ENDED OCTOBER 2, 1998
The following discussion addresses results of operations for the nine month
period ended October 2, 1998 (the "1998 Nine Months") and October 3, 1997 (the
"1997 Nine Months").
For the 1998 Nine Months the Partnership's total EBITDA was $70.7 million,
a 3.7% increase compared to the 1997 Nine Months. The Mature Hotels' EBITDA was
$55.2 million in the 1998 Nine Months, down $5.0 million from the 1997 Nine
Months, primarily due to the sale of six hotels on February 6, 1998. Excluding
the six hotels sold, the Mature Hotels' EBITDA in the 1998 Nine Months was $55.5
million, down 0.4% from $55.7 million in the 1997 Nine Months.
Total revenues increased to $243.4 million in the 1998 Nine Months from
$225.6 million in the 1997 Nine Months, an increase of $17.8 million or 7.9%.
The increase is primarily attributed to the continued growth of New Hotels.
Rooms revenues increased to $162.3 million in the 1998 Nine Months from
$149.3 million in the 1997 Nine Months, an increase of $13.0 million or 8.7% as
a result of increases in average room rates. Rooms revenues as a percentage of
total revenues increased to 66.7% compared to 66.2% in the 1997 Nine Months.
Average room rate of Mature Hotels increased to $86.61 in the 1998 Nine Months
from $80.34 in the 1997 Nine Months, an increase of $6.27 or 7.8%. Occupancy of
Mature Hotels decreased to 65.9% in the 1998 Nine Months from 66.5% in the 1997
Nine Months.
Food and Beverage revenues increased to $64.4 million in the 1998 Nine
Months from $60.7 million in the 1997 Nine Months, an increase of $3.7 million
or 6.0%, but decreased as a percentage of total revenues to 26.4% from 26.9% in
the 1997 Nine Months. The dollar increase in revenues was attributable
primarily to sales at the New Hotels, and to the opening of additional full
service hotels, opening of new restaurant concepts in the existing hotels, and
menu pricing adjustments.
Meeting room rental and other revenues increased to $16.8 million in the
1998 Nine Months from $15.6 million in the 1997 Nine Months, an increase of $1.2
million or 7.6%. Meeting room rental and other revenues remained stable as a
percentage of total revenues at 6.9%.
Rooms operating expenses increased to $40.7 million in the 1998 Nine Months
from $37.1 million in the 1997 Nine Months, an increase of $3.6 million or 9.6%.
This expense represented 25.0% of rooms revenues in the 1998 Nine Months and
24.8% in the 1997 Nine
<PAGE>
Months. The dollar and percentage increases are related to the additional hotels
opened in the last twelve months.
Food and beverage operating expenses increased to $46.5 million in the 1998
Nine Months from $44.8 million in the 1997 Nine Months, an increase of $1.7
million or 3.6%. These expenses decreased as a percentage of food and beverages
revenues in the 1998 Nine Months, however, to 72.2%, from 73.8% in the 1997 Nine
Months.
Other operating expenses increased to $2.7 million in the 1998 Nine Months
from $2.5 million in the 1997 Nine Months, an increase of $0.2 million, or 8.4%,
and remained stable as a percentage of meeting room rental and other income at
15.9%.
General, administrative and sales expenses increased to $73.1 million in
the 1998 Nine Months from $63.8 million in the 1997 Nine Months, an increase of
$9.3 million, or 14.6%, and increased as a percentage of total revenues to 30.0%
from 28.3% in the 1997 Nine Months. The increase in these expenses was
primarily the result of expenses associated with the opening of New Hotels.
Repairs and maintenance expenses increased to $9.9 million in the 1998 Nine
Months from $9.3 million in the 1997 Nine Months, an increase of $0.6 million or
6.5%. The increase was a result of ongoing preventative maintenance programs.
Depreciation and amortization expenses increased to $33.9 million in the
1998 Nine Months from $24.5 million in the 1997 Nine Months, an increase of $9.4
million or 38.6%. These expenses represented 13.9% of total revenues in the
1998 Nine Months compared to 10.8% of total revenues in the 1997 Nine Months.
Income from operations decreased to $36.8 million in the 1998 Nine Months
from $43.7 million in the 1997 Nine Months, a decrease of $6.9 million or 15.9%.
The decrease was due primarily to higher depreciation and amortization and
higher general, administrative and sales expenses.
Interest expense (net) increased to $41.5 million in the 1998 Nine Months
from $31.1 million in the 1997 Nine Months, an increase of $10.4 million or
33.4%. As a percentage of total revenues, this expense increased to 17.1% in
the 1998 Nine Months from 13.8% in the 1997 Nine Months.
Net income (loss) was a $4.5 million loss in the 1998 Nine Months, compared
to income of $12.6 million in the 1997 Nine Months.
Liquidity and Capital Resources
In general, the Partnership has financed its operations through internal
cash flow, loans from financial institutions, the issuance of public debt and
equity, and the issuance of industrial
<PAGE>
revenue bonds. In addition, in the future the Partnership will utilize existing
cash and may obtain mortgage financing secured by construction in progress to
provide additional liquidity when necessary. Any funds from sales of
unrestricted hotels also would be available for these purposes. The
Partnership's principal uses of cash are to pay operating expenses, to service
debt, to fund existing new hotel development, to fund capital improvements on
existing hotels and to make distributions to partners to fund some of the taxes
associated with income allocable to the partners.
At October 2, 1998, the Partnership had $31.7 million of cash and
equivalents and $12.8 million of marketable securities, compared to $42.0
million and $12.7 million, respectively, at the end of 1997. Total current
assets at October 2, 1998, decreased $6.7 million, as the result of the decrease
in cash and cash equivalents, partially offset by increased receivables. In
February 1998 the Partnership completed the sale of six properties for
approximately $40 million. That sale consisted of assumption of debt and other
obligations of approximately $5.1 million and cash of approximately $34.9
million. Five of six hotels sold served as collateral for the 1994 and 1995
Mortgage Notes. On August 12, 1998, the Partnership provided replacement
collateral in accordance with the indenture provisions by purchasing (from an
unrestricted subsidiary) the Embassy Suites in Montgomery, Alabama at its
appraised value of $25.4 million. As of October 2, 1998 a cash balance of $2.0
million remains restricted for this purpose and is classified as non-current
restricted cash in the accompanying balance sheet.
Net cash provided by operating activities was $23.2 million for the 1998
Nine Months compared to $23.0 million for the 1997 Nine Months.
The Partnership's total debt increased $39.8 million during the 1998 Nine
Months to fund new hotel development. The Partnership incurred net capital
expenditures of approximately $103.4 million during the 1998 Nine Months and
$144.2 million during the 1997 Nine Months. Of the $103.4 million incurred
during the 1998 Nine Months, approximately $14.4 million was for capital
improvements on existing hotel properties and approximately $89.0 million was
for the development of new hotels. During the remainder of 1998, the
Partnership expects capital expenditures to total approximately $38.7 million,
including approximately $5.7 million for capital improvements on existing hotels
and $33.0 million for hotels currently under development.
The Partnership currently has five hotels under construction. The
Partnership estimates the remaining building and pre-opening costs of these
hotels will require additional capital expenditures of approximately $137.9
million, including expenses scheduled during 1998. Construction in progress at
October 2, 1998 included $38.1 million expended for these projects. The
Partnership has received loans and loan commitments for these projects under
construction in the amount of $116.3 million, with $116.3 million available, and
expects the remaining 1998 capital requirements to be funded by cash, operating
income and additional loans on unencumbered developments. Loan commitments for
the Topeka and Portland projects were previously included in these totals. Since
the Topeka and Portland hotels opened in the third quarter, the related amounts
have been removed from the total loan commitment amount. Also, a new loan
commitment for the Oklahoma City project has been included in the total.
The Partnership announced on September 11, 1998 that it was ceasing new
development activity, except for the five hotels that are currently under
construction. The five hotels under construction are expected to open over the
next year and a half. During that time, debt levels will rise to fund the new
building, but debt leverage should decrease modestly as cash flow from
<PAGE>
new properties is realized and New Hotels continue to mature. The Partnership's
past rate of new hotel development has created tremendous value but has had a
significant impact on the earnings per share. Accordingly, the Partnership has
determined that it is in its best interest to suspend future hotel development
to allow the Partnership to better enhance shareholder value, increase earnings,
and maximize the performance of existing hotels.
Based upon current plans relating to the timing of payments due on hotels
under development, and loan draw schedules, the Partnership anticipates that
its capital resources will be adequate to satisfy its 1998 capital requirements
for the currently planned projects and normal recurring capital improvements.
The Partnership accrued $1.6 million of distributions to the partners
during the 1998 Nine Months. Any distributions by the Partnership to its
partners must be made in accordance with the provisions of the indentures
relating to the 1994 Notes and 1995 Notes (the "1994 and 1995 Note Indentures").
On October 5, 1998, the Partnership was notified that Standard & Poor's
lowered its senior secured debt ratings to single "B" plus from double "B"-minus
with a "stable outlook". The Partnership will maintain contact with Standard &
Poor's and anticipates having its debt ratings re-evaluated in the future.
Year 2000 State of Readiness
The Partnership is actively addressing the impact of the Year 2000 as it
relates to the processes of its information technology environment. Potential
problems with internal, external and embedded systems are being addressed.
Capital budget funds have been set aside for software and hardware upgrades
and/or replacements to address Year 2000 issues. Virtually all such upgrades
were anticipated by the Partnership and would have been implemented within the
next few years even absent a Year 2000 issue.
The Partnership is requiring vendors and suppliers to certify Year 2000
compliance of supplied information technology systems and devices. Compliance
is defined as no failure or interruptions occurring due to the processing of
date information or data between the years through 1999 and years beginning with
the year 2000.
The Partnership has reviewed the effects of the upcoming Year 2000 on its
computer systems and operations, as well as on those of the hotels it operates.
The Partnership does not anticipate any material impact on its corporate
operation, given the current systems used are believed to be Year 2000
compliant.
Corporate Systems
Hardware. Computer systems were tested for Year 2000 compliance during the
first quarter of 1998. Ninety percent of those systems not compliant were
replaced by the end of the third quarter of 1998. The remaining systems will be
replaced during the fourth quarter of 1998.
Software. All software systems were tested during the first quarter of 1998.
Word processing and spread sheet software packages were deemed materially
compliant and will not
<PAGE>
be replaced. The accounting and payroll system was not Year 2000 compliant and
was replaced during January of 1998.
Hotel Property Management and Reservation Systems
Hardware. Testing of Partnership-owned computer hardware was started
during the first quarter of 1998. Ninety percent of all systems have been tested
and those systems deemed not Year 2000 compliant have been identified and have
either been replaced at this time or are scheduled for replacement during the
first half of 1999.
The franchiser of each of the major brands above have further identified
hardware systems that will require modification or replacement. The majority of
these modifications or replacements will be covered by current maintenance
agreements.
Software. Bass Hotels and Resorts (Holiday Inn brand) -- These hotels use
the Encore Property Management System. This system is currently not Year 2000
compliant but is being upgraded during the fourth quarter of 1998 at no expense
to the Partnership.
Promus Hotels, Inc. -- The majority of these hotels use the HMS Property
Management System. This system is not Year 2000 compliant and is scheduled for
replacement at all non-compliant hotels during the first half of 1999.
Radisson Hotels and some other Partnership hotels use the Fidelio Property
Management System. The software is Year 2000 compliant. The operating system on
the file servers will by compliant with the installation of software patches at
no expense to the Partnership. These systems are scheduled for upgrade in 2000,
interdependent of the Year 2000 compliance issue.
Other Partnership hotels use the Multi-Systems, Inc., Property Management
System which is Year 2000 compliant.
Embedded Systems
Non-critical equipment including fax machines, copiers and similar
equipment that are generally leased. The majority of these devices have been
tested and deemed Year 2000 compliant. Those failing the Year 2000 testing will
be replaced by the lessor during 1999 under current leasing agreements as
required in order to be Year 2000 compliant.
Critical equipment including elevators, fire control, security, energy
management, credit card processing and telecommunications. The Partnership is
currently testing and evaluating these systems. These evaluations are
approximately fifty percent complete with anticipated completion by the end of
the fourth quarter of 1998.
Time Keeping and Payroll Systems
The Partnership currently uses Time Resource Management software for time
keeping. This software is not Year 2000 compliant and will be replaced during
the first quarter of 1999. Payroll processing is out-sourced and a Year 2000
compliance certificate from the processor is on file.
<PAGE>
Vendor Compliance Certifications
Strategic Relationships -- Requests for Year 2000 compliance have been sent
to those vendors which have a strategic relationship with the Partnership
specifically and with the hotels in general. Those compliance letters will be on
file in the Partnership's corporate headquarters.
Utility Suppliers -- Requests for Year 2000 compliance have been sent to
those suppliers which have a strategic relationship with the Partnership
specifically and with the hotels in general. Those compliance letters will be on
file in the Partnership's corporate headquarters.
Compliance Testing
Information Technology. The Partnership has received Year 2000 compliance
certifications from the majority of its Property Management System vendors. All
certifications are expected to be on file by the end of 1998.
The Partnership has received Year 2000 compliance testing software from our
Property Management System vendors. These tests will be completed by the end of
1998.
The Partnership will monitor all systems currently in place and those Year
2000 upgrades that will be installed during the first half of 1999, to insure
Year 2000 integrity. This evaluation will continue throughout the year 2000.
Embedded Systems. The Partnership has received Year 2000 compliance
certifications from the majority of its Property Management System vendors. All
certifications are expected to be on file by the end of 1998.
The Partnership or its authorized vendors will be conducting Year 2000
compliance field testing during the fourth quarter of 1998 and the first quarter
or 1999.
The Partnership will monitor all systems currently in place and those Year
2000 upgrades that will be installed during the first half of 1999, to insure
Year 2000 integrity. This evaluation will continue throughout the year 2000.
Cost of Implementation
----------------------
Corporate Office. Expenses for hardware and software that were directly
attributed to YEAR 2000 compliance have been approximately $75,000. The
Partnership has no current expenses directly attributed to Year 2000 compliance
for embedded systems.
Hotels. The Partnership upgraded hardware and software systems at its Bass
Hotels over the last two years that were required from a technology standpoint.
Year 2000 compliance was an ancillary benefit of these upgrades. The Partnership
has spent approximately $15,000 to date for upgrades necessary to meet Year 2000
requirements.
The Partnership has upgraded systems at its Promus Hotels. The Partnership
has not expended any funds directly attributed to Year 2000 compliance for
embedded systems. Those upgrades and replacements of equipment that have
occurred over the last two years were
<PAGE>
required to replace equipment that had reached the end of the normal life cycle
and not specifically for Year 2000 compliance.
Future Costs. In the future additional software upgrades are anticipated
at the corporate office to maintain current technology levels but they are not
directly attributed to Year 2000 compliance.
Bass Hotels and Resorts (Holiday Inn brand) -- Hotels operating under a
Bass Hotels franchise will incur minimal costs to replace some computer systems
in the future. Average cost per hotel is estimated to be less than $10,000.
Hardware requirements will be offset with the transfer of existing Year 2000
compliant software from other hotels that are receiving technology driven
upgrades.
Promus Hotels, Inc. -- Hotels operating under a Promus franchise will
receive new hardware and software as part of a technology and Year 2000
compliant upgrade. The estimated cost for this upgrade is approximately
$625,000.
The balance of the Partnership's hotels have budgeted approximately
$400,000 in capital funds for technology replacements and Year 2000 compliance
issues.
Risk Factors
------------
Based upon current testing results and evaluation of those results, it is
believed that all hardware and software systems in the Partnership's corporate
office and hotels will be Year 2000 compliant by the end of the second quarter,
1999. Risk to the operation of the Partnership is therefore considered to be
low.
Complete analysis of all embedded systems has not been completed at this
time. Final evaluation is scheduled for the end of 1998, with testing to be
completed by the end of the second quarter, 1999. Based upon early reports, risk
to the operation of the Partnership is considered to be low.
The Partnership does not rely on the services of any one single vendor or
supplier that will have a material impact. To date, no strategic vendor or
supplier has reported that it will not be in Year 2000 compliance by the end of
1999. Based upon these reports, risk to the operation of the Partnership is
considered to be low.
Contingency Plans
-----------------
Information Technology
Hardware -- A number of non-critical (time/date critical operations are not
dependent on these systems) hardware systems have failed Year 2000 compliance
testing. These systems are scheduled for replacement during the first half of
1999. Failure to replace these systems will not materially impact the operation
of the Partnership or its hotels.
Software -- Manual operation of guest services, reservations, credit card
processing and time keeping systems can be accomplished with existing personnel
and equipment. Since all known non-compliant software systems will be replaced
during the first half of 1999, no material impact to the operation of the
Partnership is expected.
<PAGE>
Embedded Systems -- Contingency plans will be finalized during the first
quarter of 1999, when evaluation of these systems is complete. All known
embedded systems can be manually overridden if necessary, in the event of a
failure due to a Year 2000 issue.
Vendors and Suppliers -- The Partnership will use alternative vendors and
suppliers in the event any one strategic vendor or supplier is incapable of
operating as a result of a Year 2000 compliance issue. The Partnership maintains
a list of alternative vendors and suppliers. These vendors and suppliers will be
certified as Year 2000 compliant in the event their services are required.
NOTE: Certain matters discussed within this report, including statements
regarding the Partnership's expectations or plans, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties and are
based on current expectations. Consequently, actual results could differ
materially from the expectations expressed in the forward-looking statements.
Among the various factors that could cause actual results to differ include a
downturn in the economy (either regionally or nationwide) affecting overall
hotel occupancy rates, revenues at New Hotels not reaching expected levels as
quickly as planned as the result of competitive factors or the Partnership's
inability to obtain permanent financing for New Hotels on terms similar to those
available in the past.
Supplemental Financial Information Relating to the 1994 and 1995 Collateral
Hotels
The following tables set forth, as of October 2, 1998, unaudited selected
financial information with respect to the 1994 Collateral Hotels and the 1995
Collateral Hotels and the Partnership, excluding the Unrestricted Subsidiaries
(as defined in the indentures relating to the 1994 Notes and the 1995
Indentures) (the "Restricted Group"). Under the heading "Management Operations,"
information with respect to revenues and expenses generated by the Partnership
as manager of the 1994 Collateral Hotels, the 1995 Collateral Hotels, the other
Owned Hotels owned by John Q. Hammons Hotels Two, L.P. ("L.P. Two"), and the
Managed Hotels is provided.
<PAGE>
<TABLE>
<CAPTION>
Trailing 12 Months Ended October 2, 1998
---------- ---------- ---------- ----------
1994 1995 Management Total
Collateral Collateral Operations Restricted
Hotels Hotels Groups Group
---------- ---------- ---------- ----------
(Dollars in thousands, except operating data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues $140,511 $58,426 $6,045 $204,092
Operating expenses:
Direct operating costs and expenses 53,822 22,399 -- 76,222
General, administrative, sales and
management expenses(b) 39,587 18,040 (140) 57,487
Repairs and maintenance 5,507 2,599 -- 8,106
Depreciation and amortization 15,117 4,051 357 19,524
-------- ------- ------ --------
Total operating expenses 110,859 47,089 217 158,165
-------- ------- ------ --------
$ 29,652 $11,337 $5,828 $ 46,817
======== ======= ====== ========
Income from operations:
Operating Data:
Occupancy 64.7% 61.8%
Average daily room rate $ 85.77 $ 78.98
RevPAR $ 55.51 $ 48.81
</TABLE>
<TABLE>
<CAPTION>
Trailing 12 Months Ended January 2, 1998
---------- ---------- ---------- ----------
1994 1995 Management Total
Collateral Collateral Operations Restricted
Hotels Hotels Groups Group
---------- ---------- ---------- ----------
(Dollars in thousands, except operating data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues $151,797 $62,209 $ 4,828(a) $218,834
Operating expenses:
Direct operating costs and expenses 57,511 24,030 -- 81,541
General, administrative, sales and
management expenses(b) 41,960 18,303 (1,524)(c) 58,739
Repairs and maintenance 6,089 2,771 -- 8,860
Depreciation and amortization 12,072 5,391 76 17,539
-------- ------- ------- --------
Total operating expenses 117,632 50,496 (1,448) 166,679
-------- ------- ------ --------
Income from operations $ 34,165 $11,713 $ 6,276 $ 52,154
======== ======= ======= ========
Operating Data:
Occupancy 65.2% 65.2%
Average daily room rate $ 80.32 $ $ 75.30
RevPAR $ 52.33 $ 49.06
</TABLE>
- -------------------------------------------
(a) Represents management revenues derived from the Owned Hotels owned by Two
L.P. and the Managed Hotels
(b) General, administrative, sales and management expenses for the 1994 and
1995 Collateral Hotels includes management expenses allocated to the respective
hotels.
(c) General, administrative, sales and management expenses applicable to
management operations is net of management revenues allocated to the 1994 and
1995 Collateral Hotels.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Not Applicable
PART II. OTHER INFORMATION AND SIGNATURES
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index incorporated by reference.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
<PAGE>
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, L.P.
By: John Q. Hammons Hotels, Inc,
its General Partner
By: /s/ John Q. Hammons
----------------------------------------------
John Q. Hammons, Chairman, Founder, and
Chief Executive Officer
By: /s/ Kenneth J. Weber
----------------------------------------------
Chief Financial Officer and Executive Vice
President (Principal Financial Officer)
JOHN Q. HAMMONS HOTELS FINANCE
CORPORATION
By: /s/ John Q. Hammons
----------------------------------------------
John Q. Hammons, Chairman, Founder, and
Chief Executive Officer
By: /s/ Kenneth J. Weber
----------------------------------------------
Chief Financial Officer and Executive Vice
President (Principal Financial Officer)
JOHN Q. HAMMONS HOTELS FINANCE
CORPORATION II
By: /s/ John Q. Hammons
----------------------------------------------
John Q. Hammons, Chairman, Founder, and
Chief Executive Officer
By: /s/ Kenneth J. Weber
----------------------------------------------
Chief Financial Officer and Executive Vice
President (Principal Financial Officer)
Dated: November 13, 1998
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> OCT-02-1998
<CASH> 31,683
<SECURITIES> 12,761
<RECEIVABLES> 15,941
<ALLOWANCES> 188
<INVENTORY> 1,196
<CURRENT-ASSETS> 62,084
<PP&E> 948,515
<DEPRECIATION> 195,246
<TOTAL-ASSETS> 845,065
<CURRENT-LIABILITIES> 87,703
<BONDS> 696,636
0
0
<COMMON> 0
<OTHER-SE> 50,031
<TOTAL-LIABILITY-AND-EQUITY> 845,065
<SALES> 0
<TOTAL-REVENUES> 243,426
<CGS> 0
<TOTAL-COSTS> 89,768
<OTHER-EXPENSES> 116,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,526
<INCOME-PRETAX> (4,526)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,526)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,828)
<CHANGES> 0
<NET-INCOME> (6,354)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
