<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended January 1, 1999.
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)
<TABLE>
<CAPTION>
Delaware 43-16950593
<S> <C>
(State or other jurisdiction of incorporation or Organization) (I.R.S. Employer Identification No.)
300 John Q. Hammons Parkway, Ste. 900, Springfield, Missouri 65806
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 864-4300
</TABLE> <TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<S> <C>
Title of Each Class Name of Each Exchange on which registered
------------------- -----------------------------------------
Class A Common Stock New York Stock Exchange
$.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None
</TABLE>
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the 5,764,725 shares of Class A Common Stock
held by non-affiliates of the Registrant was approximately $26,301,558 based on
the closing price on the New York Stock Exchange for such stock on March 19,
1999.
Number of shares of the Registrant's Class A Common Stock outstanding as of
March 19, 1998: 6,042,000.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the annual report to shareholders for the year ended January 1,
1999 are incorporated by reference into Part II.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Company has duly caused this Form 10-K/A to be signed on its behalf
by the undersigned, thereunto duly authorized, on this 30th day of August, 1999.
JOHN Q. HAMMONS HOTELS, INC.
By: /s/ Kenneth J. Weber
-----------------------
Director, Chief Financial Officer
of John Q. Hammons Hotels, Inc.
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Title
- --- ------
13.1 1998 Annual Report to Shareholders
<PAGE>
[INSERT PHOTO]
John Q. Hammons
----------------
HOTELS & RESORTS
300 john q. hammons parkway . suite 900 . springfield, mo 65806 . (417) 864-4300
. www.jqhhotels.com
<PAGE>
[INSERT PHOTO]
John Q. Hammons
----------------
HOTELS & RESORTS
[INSERT PHOTO] 19
98
annual report 1998
---------------------------------------------------
THE BUILDING BLOCKS OF OUR SUCCESS
<PAGE>
financial highlights
- ---------------------------------------------------------------
(in thousands, except per share amounts, ratios and hotel data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING RESULTS
Total Revenues $326,130 $302,274 $268,847
OTHER DATA
EBITDA $ 95,029 $ 87,897 $ 78,178
SHARE DATA
EBITDA per share/LP Unit $ 4.25 $ 3.93 $ 3.49
Operating Cash Flow per share $ 1.69 $ 1.95 $ 1.90
(EBITDA less interest expense)
SELECTED BALANCE SHEET DATA
Total Assets $876,486 $816,733 $658,072
Total Debt, including Current Portion $759,716 $695,791 $531,143
Minority Interest of Holders of
Limited Partner Units $ 27,392 $ 39,399 $ 33,662
Equity $ 17,847 $ 18,508 $ 16,094
OPERATING DATA
Number of Hotels 42 45 39
Number of Rooms 10,293 11,108 9,666
Average Occupancy 62.1% 62.9% 64.7%
Average Daily Room Rate (ADR) $ 91.38 $ 82.38 $ 76.16
Room Revenue per Available
Room (RevPAR) $ 56.79 $ 51.84 $ 49.25
</TABLE>
revenue
- ----------------------------------------
350,000 326,103
302,274
300,000
268,847
250,000
200,000
150,000
100,000
- ----------------------------------------
1996 1997 1998
occupancy
- ----------------------------------------
65.0%
64.7%
64.0%
63.0% 62.9%
62.1%
62.0%
61.0%
60.0%
59.0%
58.0%
57.0%
56.0%
- ----------------------------------------
1996 1997 1998
adr
- ----------------------------------------
95.00
91.38
90.00
85.00
82.38
80.00
76.16
75.00
70.00
65.00
60.00
- ----------------------------------------
1996 1997 1998
revpar
- ----------------------------------------
58.00 56.79
56.00
54.00
52.00
51.84
50.00
49.25
48.00
46.00
44.00
42.00
40.00
- ----------------------------------------
1996 1997 1998
<PAGE>
[ ]
we will build and maintain the finest
hotel PRODUCT in the country.
[ ]
we will build in LOCATIONS that are ripe for growth.
[ ]
we will form PARTNERSHIPS with brands
that share our vision.
[ ]
we will employ quality PEOPLE with
a commitment to excellence.
we will constantly seek new ways to maximize returns for shareholders.
these are the BUILDING BLOCKS on which our company stands.
on which our company will continue to grow.
and that together, form a strong foundation for our organization.
----------------------------------------------------------------------
<PAGE>
BOARD OF DIRECTORS
JOHN Q. HAMMONS
Founder, Chairman &
Chief Executive Officer
John Q. Hammons Hotels, Inc.
KENNETH J. WEBER
Executive Vice President
Chief Financial Officer
John Q. Hammons Hotels, Inc.
JACQUELINE A. DOWDY
Secretary
John Q. Hammons Hotels, Inc.
DANIEL L. EARLEY
President, Clermont Savings Bank
WILLIAM J. HART
Partner, Husch & Eppenberger, LLC
JOHN E. LOPEZ-ONA
President, Anvil Capital
JAMES F. MOORE
Chairman, Champion Products, Inc.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE
James F. Moore
John E. Lopez-Ona
COMPENSATION AND
STOCK OPTION COMMITTEE
Daniel L. Earley
James F. Moore
John E. Lopez-Ona
FINANCE COMMITTEE
John E. Lopez-Ona
Daniel L. Earley
William J. Hart
OFFICERS
JOHN Q. HAMMONS
Founder, Chairman &
Chief Executive Officer
KENNETH J. WEBER
Executive Vice President &
Chief Financial Officer
LONNIE A. FUNK
Senior Vice President
Operations
JACQUELINE A. DOWDY
Secretary
STEVEN E. MINTON, AIA
Senior Vice President
Architecture
PAT A. SHIVERS
Senior Vice President
Administration & Control
JOHN D. FULTON
Vice President
Design & Construction
PAUL MUELLNER
Vice President
Corporate Controller
JAMES MILLER
Vice President
Sales & Marketing
DEBRA MALLONEE SHANTZ
Corporate Counsel
LAWRENCE A. WELCH
Vice President
Food & Beverage
ROBERT FUGAZI
Regional Vice President
Southern Region
Houston, Texas
JOE MORRISSEY
Regional Vice President
Midwest Region
Kansas City, Missouri
WILLIAM MEAD
Regional Vice President
Eastern Region
Greensboro, North Carolina
ROBERT NIEHAUS
Regional Vice President
Western Region
Sacramento, California
BILL PARKER
Regional Vice President
Central Region
Springfield, Missouri
<PAGE>
[INSERT PICTURE]
the atrium at embassy suites downtown/old market, omaha
<PAGE>
[INSERT PICTURE]
MANAGEMENT TEAM OF
JOHN Q. HAMMONS HOTELS, INC.
Front row (left to right): Jacqueline Dowdy, Pat Shivers, John Q. Hammons,
Robert Fugazi, Kenneth Weber, Bill Parker, Steven Minton
Second row (left to right): Veanne Stocking, William Mead, John Fulton, Debra
Mallonee Shantz, James Miller, Mark Gundlach
Third row (left to right): Joe Morrissey, Lonnie Funk, Larry Welch, Paul
Muellner, Robert Niehaus
a letter to our shareholders
- --------------------------------------
1998 WAS A WATERSHED YEAR FOR JOHN Q. HAMMONS HOTELS, INC.
Not only because we own and manage the strongest portfolio of hotels in the
nation. But because our properties gain strength every day.
In recent years, we have been the predominant developer of upscale, full-
service hotels--adding 18 properties to our portfolio since 1994. Our
hotels have consistently outperformed the industry in average daily rate
(ADR) and revenue per available room (RevPAR). To help this success
continue, the company took a series of actions in 1998 to better enhance
shareholder value, increase earnings and maximize the performance of our
portfolio.
WE ENHANCED OUR STAFF OF QUALITY PEOPLE.
Kenneth J. Weber joined John Q. Hammons Hotels, Inc. in May as executive
vice president and chief financial officer, bringing more than 30 years of
experience in financial accounting and management with some of the world's
premier lodging companies. Ken has served as chief financial officer for
Chartwell Leisure and Omni Hotels, was senior vice president, chief
accounting officer and corporate controller for Red Lion Hotels and spent
several years with Marriott Corporation in various management positions.
Paul Muellner, CPA, joined the team in June as vice president and
controller, solidifying our financial planning team. A 20-year veteran of
the hospitality industry, Paul had previously held senior positions with
such companies as Carnival Hotels & Casinos, Chartwell Leisure, Omni
Hotels, Marriott Corporation and Red Lion Hotels.
Lonnie Funk, a 23-year veteran of John Q. Hammons Hotels, Inc. who has
personally been involved in the opening of more than half of our
properties, was named senior vice president, operations, in October.
Concurrent with Lonnie's appointment, John Q. Hammons Hotels, Inc. created
the position of district director, naming Veanne Stocking and Mark Gundlach
as the first two executives to hold this title. They will oversee smaller
groups of hotels, enabling more efficient operation of our properties
nationwide.
2
<PAGE>
WE IMPLEMENTED NEW PROGRAMS.
In July, John Q. Hammons Hotels, Inc. partnered with Food Insights, Inc. of
Cordova, Tennessee, to implement a system-wide food and beverage purchasing
program that will enable the company to consolidate and track all food
purchases, saving an estimated $1 million per year.
To ensure the program's success, John Q. Hammons Hotels, Inc. has
established five regional purchasing teams, comprised of an executive chef
and food and beverage director, responsible for establishing standards of
product quality and delivery performance. The regional purchasing team
structure allows for "bottom up" support and implementation in the field.
WE REINVESTED IN OUR OWN COMPANY.
This past year, we invested $20 million in refurbishment and capital
expenditure in our existing hotels. And last December, our board of
directors authorized the repurchase of up to $3 million in company stock.
We believe that the stock is currently undervalued and represents a solid
investment for the company.
WE SUSPENDED BUILDING.
In September, we announced that we would delay future development following
the completion of the six current projects, which will be finished by early
2000. By that time, we will own or manage 53 hotels in 22 states. Twenty-
four (or 45%) of those hotels will be five years old or newer. The
suspension of new development will enable these hotels to mature and
generate greater revenue for the company without the burden of additional
development debt and costs.
In 1998, our 10 new hotels (each two years old or newer) generated an
average daily room rate (ADR) of $115.55, with occupancy at 54.1 percent
and revenue per available room (RevPAR) of $62.54. We anticipate that
occupancy and revenue per available room (RevPAR) will both improve as
these properties mature. Overall, John Q. Hammons properties generated an
average occupancy of 62.1 percent, an average daily room rate (ADR) of
$91.38 and revenue per available room (RevPAR) of $56.79.
Company revenues and EBITDA improved for the fourth consecutive year, to
$326.1 million and $95 million, respectively, increasing 7.9 percent and
8.1 percent, respectively, over 1997.
WE NEVER STOPPED LOOKING TOWARD THE FUTURE.
John Q. Hammons properties outpace the competition and the industry for
four key reasons: superior product, superior location, superior
partnerships and superior people.
As we move toward the 21st century, John Q. Hammons Hotels, Inc. has
positioned itself to become stronger than ever. Our core company strategies
will not change. We will continue to own and manage the finest hotels in
the markets we serve, and continue to provide the highest level of
customer satisfaction. We invite you to share in our success.
[INSERT PHOTOS] [INSERT PHOTOS]
/s/ John Q. Hammons /s/ Kenneth J. Weber
John Q. Hammons Kenneth J. Weber
Founder Executive Vice President
Chairman and CEO Chief Financial Officer
3
<PAGE>
SIGNATURE MEETING
FACILITIES
[INSERT PHOTO]
superior product
- --------------------------------------
John Q. Hammons properties consistently rank among the top performers in
their respective markets and outperform the industry as a whole. Our
success is due in large part to our commitment to developing, building,
owning and managing signature hotels that provide the highest level of
customer service in the industry.
OUR HOTELS AND RESORTS OFFER EXCEPTIONAL VALUE TO OUR GUESTS.
We pride ourselves in providing room amenities and meeting space that is
superior to the competition in the markets we serve. Each of our properties
is designed to meet the demands of the market of today and tomorrow, rather
than the market of yesterday.
Our signature atrium is the symbol of our commitment to excellence. With
lush foilage and water features, we create comfortable and secure
environments for those who stay with us.
BEYOND THAT, WE CONTINUALLY STRIVE FOR NEW WAYS TO SERVE OUR GUESTS AND BRING
OUR PROPERTIES INTO THE 21ST CENTURY.
Our Personal Service Desks enable our guest services representatives to
meet one-on-one with customers to provide dedicated individual attention.
Our guest rooms are 15 to 20 percent larger than those in our competitors'
hotels and offer the latest business traveler amenities, such as desk
areas with swivel chairs and dual-line telephones with modem ports.
And all of our new hotels include a corporate business center with fax
machines, computers, secretarial services and work stations to help our
guests get work done while on the road.
It's a known fact that more than 200,000 new hotel rooms have been added by
the industry in the past few years. However, the majority of new hotels are
limited-service properties that offer rooms only. All of our hotels offer
significant, flexible meeting space for business meetings and conventions.
Additionally, many of our properties are attached or located adjacent to
convention centers and exhibition halls--a testament to our belief that
meeting space, coupled with our other innovative features, will distinguish
our hotel properties and sustain our edge in increasingly competitive
markets.
4
<PAGE>
the atrium at embassy suites portland airport
[PHOTO]
<PAGE>
superior location
- ---------------------------------------
John Q. Hammons Hotels, Inc. works closely with local businesses and state
and local officials to develop hotels that meet the needs of the community
and satisfy long-term demand for hotel rooms. In some cases, the company
benefits from incentives offered by local governments and other
organizations interested in ensuring the development of a quality hotel in
their community. In fact, many of our hotels are developed in partnership
with local governments to specifically serve meetings and convention
markets.
As a result, most John Q. Hammons hotels are located near a state capitol,
university, corporate headquarters or airport and serve rapidly growing
markets of 300,000 or more people.
AS OUR FOUNDER WOULD SAY, "WE BUILD WHERE THE PEOPLE ARE."
In 1998, we did just that. Opening four new hotels--adding 1,026 new rooms
and suites and 95,000 square feet of meeting space to our portfolio.
. January saw the completion of our first new property of the year,
the 247-suite Embassy Suites Tampa. Built to answer the needs of
today's successful business travelers, the hotel is ideally located
at the University of South Florida, at the entrance to Busch
Gardens.
. In May, the World Golf Village Resort Hotel opened near St.
Augustine, Florida, joining Branson's Chateau on the Lake as a
premier resort and convention destination.
The World Golf Village Resort Hotel anchors a 6,500-acre
development that will include three championship golf courses, an
IMAX(R) Theater, the International Golf Hall of Fame, The Shops of
World Golf Village, a luxury condominium development, a Mayo Clinic
and the headquarters of PGA TOUR Productions.
The luxury-class hotel is adjacent to the St. John's County
Convention Center, making it the largest combination hotel and
convention center between Atlanta and Orlando, offering more than
40,000 square feet of flexible meeting space for events of all
sizes.
. John Q. Hammons Hotels, Inc. opened the Topeka Capitol Plaza Hotel,
its first hotel in Kansas, in August. Located in the heart of the
Kansas state capital and adjacent to the Kansas Expocentre, the
Capitol Plaza Hotel offers meeting space for groups ranging from 10
to 10,000 people.
. The 253-suite Embassy Suites at Portland Airport opened in
September. Located in one of the West Coast's fastest-growing
markets, and including over 11,000 square feet of meeting space,
this Embassy Suites Hotel is well positioned to become one of the
region's leading business meeting properties.
In 1999 and 2000, John Q. Hammons Hotels, Inc. will open the Hampton Inn &
Suites at Rodeo Center in Mesquite, Texas; the Radisson Resort Coral Springs,
Florida; the Embassy Suites at Dallas/Fort Worth International Airport North at
Bass Pro Shops(R) Outdoor World; the Renaissance Suites Hotel in Charlotte,
North Carolina; the Renaissance Oklahoma City; and the Embassy Suites Charleston
Convention Center/Coliseum, South Carolina.
To enable our shareholders to benefit from the strengthening portfolio, John Q.
Hammons Hotels, Inc. has suspended development of new hotels after the
completion of these six properties.
WORLD GOLF VILLAGE
RESORT HOTEL
St. Augustine, Florida
[PHOTO]
6
<PAGE>
MESQUITE HAMPTON INN & SUITES AT RODEO CENTER
[PHOTO]
RADISSON RESORT CORAL SPRINGS
[PHOTO]
EMBASSY SUITES DALLAS/FORT WORTH INT'L AIRPORT NORTH
AT BASS PRO SHOPS(R) OUTDOOR WORLD
[PHOTO]
RENAISSANCE SUITES HOTEL CHARLOTTE
[PHOTO]
RENAISSANCE OKLAHOMA CITY
[PHOTO]
EMBASSY SUITES CHARLESTON CONVENTION CENTER/COLISEUM
[PHOTO]
<PAGE>
superior partnerships
- ----------------------------------------
John Q. Hammons Hotels, Inc. is affiliated with some of the industry's
best-known, best-performing brands.
OUR PROPERTIES ARE NOW FRANCHISED UNDER NINE DIFFERENT FLAGS,
AS WELL AS OUR OWN PLAZA HOTEL SIGNATURE BRAND.
Our association with this diverse product line, as well as two premier
resorts, has enabled us to identify promising growth markets and develop the
hotel franchise, providing the greatest competitive strength in each
marketplace.
. John Q. Hammons Hotels, Inc. is now the nation's leading developer
of Embassy Suites hotels, with 13 existing Embassy Suites properties
and two more scheduled to open.
Our Embassy Suites hotels are among the brand's top performers,
with four John Q. Hammons Embassy Suites among the franchiser's top
ten. Our Embassy Suites Greenville Resort and Convention Center in
South Carolina received the prestigious Rose Award from Promus Hotel
Corporation as the number one Embassy Suites hotel nationwide.
. Based on our reputation and the success of our Marriott hotels in
Madison, Wisconsin, and Tucson, Arizona, Marriott Corporation
selected John Q. Hammons Hotels, Inc. as the development company to
help take its newly acquired Renaissance brand to a higher level.
In 1999 and 2000, John Q. Hammons Hotels, Inc. will open the first
two newly constructed Marriott-franchised Renaissance hotels.
Both the Renaissance Suites Hotel in the Coliseum/Douglas
International Airport area of Charlotte, North Carolina and the
Renaissance Oklahoma City at Myriad Convention Center will be among
the finest hotels in their respective markets.
. Our third Radisson property, the Radisson Resort Coral Springs,
Florida, will open in April 1999 adjacent to the PGA TOUR Tournament
Players Club at Heron Bay, home of the Honda Classic. The 224-room
resort hotel offers 17,000 square feet of meeting space and will
enhance John Q. Hammons Hotels' position as one of the premier
developers of upscale golf-oriented resorts in the country.
. Our second Hampton Inn and Suites property will open adjacent to the
Rodeo Center in Mesquite, Texas, in March 1999. The Hampton Inn and
Suites at Rodeo Center will offer 160 rooms, including 53 suites and
21,000 square feet of meeting space, on the eastern edge of the
Dallas/Ft. Worth Metroplex. John Q. Hammons Hotels, Inc. will also
manage the adjoining 21,000-square-foot Mesquite Convention Center.
The property will become an important anchor for the annual
Mesquite Rodeo and an attractive destination for conventions and
business meetings.
. Our Holiday Inn hotels continue to be top performers. Five of our 18
Holiday Inns received either Torchbearer or Quality Excellence
Awards at the Bass Hotels and Resorts Worldwide Conference in 1998,
ranking among the top tier of the system's 1,800 hotels worldwide.
John Q. Hammons Hotels, Inc. also owns and manages hotels under the Homewood
Suites, Crowne Plaza and Sheraton flags.
EMBASSY SUITES TAMPA
University of South Florida at
the entrance to Busch Gardens
Tampa, Florida
[PHOTO]
8
<PAGE>
EMBASSY SUITES PORTLAND AIRPORT
Portland, Oregon
[PHOTO]
CHATEAU ON THE LAKE RESORT HOTEL
& CONVENTION CENTER
Branson, Missouri
[PHOTO]
<PAGE>
1998
COMMITMENT TO
EXCELLENCE
[INSERT PHOTO]
superior people
- --------------------------------------------
This past year, John Q. Hammons Hotels, Inc. gained a new level of
experience with the arrival of Executive Vice President/CFO Kenneth Weber
and the promotion of Lonnie Funk to senior vice president of operations.
Additionally, in an effort to foster more effective management of its
hotels, the company split two of its regional operating divisions into
smaller districts. By doing this, the company will not only benefit from
more hands-on management, but offer career advancement opportunities to its
best and brightest managers. The first two executives to hold the new title
of district director, Veanne Stocking and Mark Gundlach, have proven a
level of service, dedication and knowledge of the business that will enable
more effective operations of our hotels nationwide.
Along with Veanne and Mark, more than 8,000 employees across the country
take pride in their work and share in the values that helped build our
company over the past 40 years: hard work, attention to detail and a
commitment to excellence.
WE NEVER LOSE SIGHT OF THE FACT THAT OUR EMPLOYEES ARE VALUABLE ASSETS.
Through ongoing training, recognition programs and promoting from within,
we continually strive to let our people know how important they are to the
future of our company. As a result, John Q. Hammons Hotels, Inc. enjoys one
of the lowest employee turnover rates in the industry.
Superior product. Superior locations. Superior partnerships. And superior
people. Combined, they are the building blocks that result in properties
that consistently outperform the competition and provide superior return on
investment. With your support, we can achieve even more, and enjoy the
rewards of our growing organization. We look forward to a prosperous future
with you.
10
<PAGE>
[INSERT PHOTO]
the grand ballroom at chateau on the lake
<PAGE>
19
98
[INSERT LOGO]
John Q. Hammons
------------------
HOTELS & RESORTS
company profile
- ------------------------------------------------
John Q. Hammons Hotels, Inc. and its subsidiaries (collectively, the
"Company") is a leading independent owner, manager and developer of
affordable upscale hotels in market-driven locations. The Company owns 42
hotels located in 20 states containing 10,293 guest rooms and suites (the
"Owned Hotels"), and manages five additional hotels located in two states
containing 1,176 guest rooms (the "Managed Hotels"). On January 1, 1999,
the Company was at various stages of development on six upscale hotels,
which are scheduled to open during 1999 and 2000 (the "Scheduled Hotels").
The Company will suspend development after the completion of the Scheduled
Hotels. The Company's existing 47 Owned Hotels and Managed Hotels
(together, the "JQH Hotels") operate primarily under the Holiday Inn and
Embassy Suites trade names. Most of the Company's hotels are near a state
capitol, university, airport, corporate headquarters, plant or other major
facility.
The Company's strategy is to increase cash flow and thereby enhance
shareholder value primarily through (i) capitalizing on positive operating
fundamentals in the upscale full-service sector of our markets and
improving the operating results of our newer hotels, (ii) converting the
franchises of its existing hotels to franchise brands that are considered
to be more upscale, and (iii) selling certain mature assets and re-
investing the net proceeds. The Company has designed each new hotel to meet
the specific needs of the market and has engaged in selling efforts months
in advance of the hotel's opening. The Company's entire management team,
including senior management, architects, design specialists, hotel managers
and sales personnel, is involved in the development and continuing
operations of each hotel.
The JQH Hotels are designed to appeal to a broad range of hotel customers,
including frequent business travelers, groups and conventions, and leisure
travelers. Each of the JQH Hotels is individually designed by the Company
and most contain an impressive multi-storied atrium, expansive meeting
space, large guestrooms or suites and comfortable lounge areas. The JQH
Hotels meeting facilities can be readily adapted to accommodate both larger
and smaller meetings, conventions, and trade shows. The 13 Embassy Suites
JQH Hotels are all-suite hotels, which appeal to the traveler needing or
desiring greater space and specialized services. The 18 Holiday Inn JQH
Hotels (owned and managed) are affordably priced hotels designed to attract
the business and leisure traveler desiring quality accommodations.
Management of the JQH Hotels is coordinated from the Company's headquarters
in Springfield, Missouri, by its senior management team. Five regional vice
presidents and two district directors are each responsible for supervising
a group of general managers of JQH Hotels in day-to-day operations.
Centralized management services and functions include development, design,
sales and marketing, purchasing and financial controls. Through these
centralized services, significant cost savings are realized due to
economies of scale.
12
<PAGE>
stock price per share
UNAUDITED QUARTERLY STOCK INFORMATION
The Company's Class A Common Stock (the "Class A Common Stock") has been
listed on the New York Stock Exchange since November 23, 1994 under the symbol
"JQH." Prior to that date, the Company's Class A Common Stock was not publicly
traded.
The following sets forth the high and low closing sales prices of the Class A
Common Stock for the period indicated, as reported by the New York Stock
Exchange Composite Tape:
<TABLE>
<CAPTION>
1997 High Low
<S> <C> <C>
First Quarter $ 9 3/4 $ 7 1/2
Second Quarter $ 9 3/8 $ 8
Third Quarter $ 9 5/8 $ 8 5/8
Fourth Quarter $ 10 13/16 $ 8 3/16
1998 High Low
First Quarter $ 8 15/16 $ 7 11/16
Second Quarter $ 8 $ 6 13/16
Third Quarter $ 7 3/16 $ 3 11/16
Fourth Quarter $ 4 1/2 $ 3 3/16
</TABLE>
On March 10, 1999, the last reported sales price of the Class A Common Stock
on the NYSE was $ 4 5/8. On March 10, 1999, the Company had approximately
2,000 record holders of Class A Common Stock.
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The selected consolidated financial information of the Company for the 1998,
1997, 1996, 1995 and 1994 Fiscal Years has been derived from, and should be
read in conjunction with, the audited consolidated financial statements of the
Company, which statements have been audited by Arthur Andersen LLP,
independent public accountants. The information presented below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein. The Company's
fiscal year ends on the Friday nearest December 31. Consequently, the
Company's 1996 Fiscal Year included 53 weeks of operations, while the 1994,
1995, 1997 and 1998 Fiscal Years included 52 weeks of operations.
13
<PAGE>
selected consolidated financial information
<TABLE>
<CAPTION>
(in thousands, except per share amounts, ratios and hotel data)
- -----------------------------------------------------------------------------------------------------
FISCAL YEAR-ENDED 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
REVENUES
Rooms (a) $211,989 $195,296 $171,206 $148,432 $137,387
Food and beverage 91,982 86,183 79,580 70,840 65,308
Meeting room rental and other (b) 22,159 20,795 18,061 15,907 13,998
-------- -------- -------- -------- --------
Total revenues 326,130 302,274 268,847 235,179 216,693
-------- -------- -------- -------- --------
OPERATING EXPENSES
Direct operating costs and expenses (c)
Rooms 54,600 50,265 43,610 38,543 34,413
Food and beverage 64,174 62,383 57,956 54,228 49,721
Other 3,389 3,385 2,929 2,521 2,397
General, administrative, sales and
management service expenses (d,e) 95,500 85,766 74,646 64,234 57,981
Repairs and maintenance 13,438 12,578 11,528 10,131 9,888
Depreciation and amortization 45,580 34,781 24,034 18,346 13,975
-------- -------- -------- -------- --------
Total operating expenses 276,681 249,158 214,703 188,003 168,375
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS 49,449 53,116 54,144 47,176 48,318
OTHER (INCOME) EXPENSES
Interest expense and amortization of deferred
financing fees, net 57,286 44,325 35,620 28,447 32,932
Gain on sales of property and equipment (f) (8,175) -- -- -- --
-------- -------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST, PROVISION
FOR INCOME TAXES AND EXTRAORDINARY ITEM (g) 338 8,791 18,524 18,729 15,386
Minority interest in earnings of partnership (242) (6,302) (13,280) (13,427) (274)
-------- -------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM 96 2,489 5,244 5,302 15,112
Provision for income taxes (h) (120) (75) (105) (107) (41)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (24) 2,414 5,139 5,195 15,071
Income before extraordinary item prior to
November 23, 1994 allocable to partners -- -- -- -- (15,004)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
ALLOCABLE TO THE COMPANY $ (24) $ 2,414 $ 5,139 $ 5,195 $ 67
======== ======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK BEFORE EXTRAORDINARY ITEM (m) $ -- $ 0.38 $ 0.81 $ 0.82 $ 0.48
======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Continued
<S> <C> <C> <C> <C> <C>
FISCAL YEAR-ENDED 1998 1997 1996 1995 1994
OTHER DATA
EBITDA (i) $ 95,029 $ 87,897 $ 78,178 $ 65,522 $ 62,293
Net Cash provided by operating activities 43,494 27,769 72,052 44,037 46,107
Net Cash used in investing activities (92,925) (193,271) (136,296) (78,085) (149,510)
Net Cash provided by financing activities 53,703 161,014 68,916 66,113 104,884
MARGIN AND RATIO DATA
EBITDA margin (% of total revenue) (i) 29.1% 29.1% 29.1% 27.9% 28.8%
Earnings to fixed charges ratio (j) 0.91x 0.97x 1.26x 1.39x 1.42x
OPERATING DATA
Owned Hotels:
Number of Hotels 42 45 39 37 31
Number of Rooms 10,293 11,108 9,666 9,312 8,054
Average Occupancy 62.1% 62.9% 64.7% 67.1% 68.5%
Average Daily Room Rate (ADR) $ 91.38 $ 82.38 $ 76.16 $ 71.68 $ 68.45
Room Revenue per Available Room (RevPAR)(k) $ 56.79 $ 51.84 $ 49.25 $ 48.09 $ 46.88
Increase in Yield (l) 9.5% 5.3% 2.4% 4.8% 3.9%
BALANCE SHEET DATA
Total Assets $876,486 $ 816,733 $ 658,072 $542,371 $ 443,044
Total Debt, including current portion 759,716 695,791 531,143 458,094 380,869
Minority interest of holders of the LP units 27,392 39,399 33,662 23,082 14,820
Equity 17,847 18,508 16,094 10,955 5,852
</TABLE>
(a) Includes revenues derived from rooms.
(b) Includes meeting room rental, management fees for providing management
services to the Managed Hotels and other.
(c) Includes expenses incurred in connection with rooms, food and beverage, and
telephones.
(d) Includes expenses incurred in connection with franchise fees,
administrative, marketing and advertising, utilities, insurance, property
taxes, rent and other.
(e) Includes expenses incurred providing management services to the
Managed Hotels.
(f) Gain on sales includes six hotels sold February 6, 1998 and one hotel sold
December 31, 1998.
(g) The 1994 and 1995 Fiscal Years do not include a $3.3 million and a $0.3
million, respectively, extraordinary charge related to prepayment fees on
early debt retirement in connection with the Note Offerings and Common
Stock Offering. The 1998 Fiscal Year includes a $2.2 million extraordinary
charge related to early extinguishment of debt.
(h) After the Common Stock Offering, the Company has been taxed as a
C Corporation on its portion of the Partnership's earnings. Prior to the
Common Stock Offering, net income does not include any provision
(benefit) for income taxes in view of the S Corporation tax status of the
general partner prior to the Common Stock Offering and of the
Partnership's status as a partnership for income tax purposes.
(i) EBITDA represents earnings before net interest expense, provision for
income taxes (if applicable) and depreciation and amortization. EBITDA
is used by the Company for the purpose of analyzing its operating
performance, leverage and liquidity. Such data are not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net earnings as an indicator
of the Company's operating performance or as an alternative to cash flows
as a measure of liquidity.
(j) Earnings used in computing the earnings to fixed charges ratios consist of
net income plus fixed charges. Fixed charges consist of interest expense
and that portion of rental expense representative of interest (deemed to be
one-third of rental expense).
(k) Total room revenue divided by number of available rooms. Available rooms
represent the number of rooms available for rent multiplied by the number
of days in the period presented.
(l) Increase in yield represents the period-over-period increases in yield.
Yield is defined as the room revenue per available room (RevPAR).
(m) The 1994 unaudited pro forma net income per share represents the
Company's allocable share of pre-tax income (28.31%) after giving effect to
(i) the issuance of the Notes and the repayment of the Partnership's then
existing mortgage indebtedness with approximately $240.0 million of the
$289.7 million total net proceeds from the Note Offering, (ii) the
application of approximately $36.1 million of the net proceeds from the
Common Stock Offering to the repayment of indebtedness, and (iii) an
estimated provision for income taxes that would have been reported had the
Company filed federal and state income tax returns as a C Corporation. The
estimated tax provision was based on an assumed effective tax rate of 38%.
The unaudited pro forma earnings per share information is based upon
6,336,100 shares of common stock outstanding after the Common Stock
Offering.
15
<PAGE>
management's discussions and analysis
of financial condition and results of operations
General
The following discussion and analysis primarily addresses results of operations
of the Company for the fiscal years ended January 1, 1999 ("1998"), January 2,
1998 ("1997") and January 3, 1997 ("1996"). The following discussion should be
read in conjunction with the selected consolidated financial information of the
Company and the consolidated financial statements of the Company included
elsewhere herein.
The Company's consolidated financial statements include revenues from the Owned
Hotels and management fee revenues for providing management services to the
Managed Hotels. References to the JQH Hotels include both the Owned Hotels and
the Managed Hotels. Revenues from the Owned Hotels are derived from rooms, food
and beverage, meeting rooms and other revenues. The Company's beverage revenues
include only revenues from the sale of alcoholic beverages, while revenues from
the sale of non-alcoholic beverages are shown as part of food revenues. Direct
operating costs and expenses include expenses incurred in connection with the
direct operation of rooms, food and beverage and telephones. General,
administrative, sales and management services expenses include expenses incurred
from franchise fees, administrative, sales and marketing, utilities, insurance,
property taxes, rent, management services and other expenses.
From 1994 through 1998, the Company's total revenues grew at an annual
compounded growth rate of 10.8%, from $216.7 million to $326.1 million.
Occupancy for the Owned Hotels during that period decreased 6.4 percentage
points from 68.5% to 62.1%. However, the Owned Hotels' average daily room rate
(ADR) increased by 33.5% from $68.45 to $91.38 during that period. Room revenue
per available room (RevPAR) increased by 21.1% from $46.88 to $56.79.
In general, hotels opened during the period from 1994 to 1998 decreased overall
occupancy but increased the overall average room rate. The Company tracks the
performance of the Owned Hotels in two groups. One group of hotels are those
opened by the Company during the current and prior fiscal years (New Hotels).
During 1998, the New Hotels included four hotels opened in 1998 and six hotels
opened in 1997. The remainder of the Owned Hotels, excluding the New Hotels, are
defined as Mature Hotels. In 1998, the Mature Hotels included 32 hotels opened
prior to 1997. New hotels typically generate positive cash flow from operations
before debt service in the first year, generate cash sufficient to service
mortgage debt in the second year and create positive cash flow after debt
service in the third year.
16
<PAGE>
results of operations of the company
- ---------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR-ENDED 1998 1997 1996 1995 1994
OWNED HOTELS
<S> <C> <C> <C> <C> <C>
Average Occupancy 62.1% 62.9% 64.7% 67.1% 68.5%
Average Daily Room Rate (ADR) $ 91.38 $ 82.38 $ 76.16 $ 71.68 $ 68.45
Room Revenue per Available Room (RevPAR) $ 56.79 $ 51.84 $ 49.25 $ 48.09 $ 46.88
Available Rooms (a) 3,733,166 3,767,387 3,476,279 3,087,700 2,930,893
Number of Hotels 42 45 39 37 31
MATURE HOTELS
Average Occupancy 64.1% 63.8% 64.8% 67.1% 68.5%
Average Daily Room Rate (ADR) $ 86.50 $ 79.80 $ 76.06 $ 71.68 $ 68.45
Room Revenue per Available Room (RevPAR) $ 55.41 $ 50.90 $ 49.29 $ 48.09 $ 46.88
Available Rooms (a) 3,012,845 3,388,896 3,454,899 3,087,700 2,930,893
Number of Hotels 32 37 37 37 31
NEW HOTELS
Average Occupancy 54.1% 55.3% 42.2% -- --
Average Daily Room Rate (ADR) $ 115.55 $ 108.97 $ 100.49 -- --
Room Revenue per Available Room (RevPAR) $ 62.54 $ 60.21 $ 42.42 -- --
Available Rooms (a) 720,321 378,491 21,380 -- --
Number of Hotels 10 8 2 -- --
PERCENTAGES OF TOTAL REVENUES
REVENUES
Rooms 65.0% 64.6% 63.7% 63.1% 63.4%
Food and beverage 28.2% 28.5% 29.6% 30.1% 30.1%
Meeting room rental and other 6.8% 6.9% 6.7% 6.8% 6.5%
----------- ----------- ----------- ----------- -----------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Direct operating costs and expenses
Rooms 16.7% 16.6% 16.2% 16.4% 15.9%
Food and beverage 19.7% 20.6% 21.6% 23.0% 22.9%
Other 1.0% 1.1% 1.1% 1.1% 1.1%
General, administrative, sales and
management service expenses 29.3% 28.4% 27.8% 27.3% 26.8%
Repairs and maintenance 4.1% 4.2% 4.3% 4.3% 4.6%
Depreciation and amortization 14.0% 11.5% 8.9% 7.8% 6.4%
---------- ----------- ----------- ----------- -----------
Total operating expenses 84.8% 82.4% 79.9% 79.9% 77.7%
---------- ----------- ----------- ----------- -----------
Income from Operations 15.2% 17.6% 20.1% 20.1% 22.3%
========== =========== =========== =========== ===========
</TABLE>
(a) Available rooms represent the number of New Hotels, the rooms available for
rent multiplied by the number of days in the period reported or, in the
case of number of days the hotel was open during the period reported. The
Company's 1996 Fiscal Year contained 53 weeks, or 371 days, while its 1994,
1995, 1997 and 1998 Fiscal Years each contained 52 weeks, or 364 days.
17
<PAGE>
1998 FISCAL YEAR COMPARED TO 1997 FISCAL YEAR
Total revenues increased to $326.1 million in 1998 from $302.3 million in 1997,
an increase of $23.8 million, or 7.9%. Of the total revenues reported in 1998,
65.0% were revenues from rooms, 28.2% were revenues from food and beverage and
6.8% were revenues from meeting room rental and other, compared with 64.6%,
28.5% and 6.9%, respectively, during 1997.
Rooms revenues increased to $212.0 million in 1998 from $195.3 million in 1997,
an increase of $16.7 million, or 8.6%, as a result of the operation of two
hotels which opened in 1996 and six hotels opened in 1997, and the increase in
average daily room rate (ADR). Average daily room rates (ADR) of Mature Hotels
increased to $86.50 in 1998 from $79.80 in 1997. The occupancy in the mature
hotels was a 0.3 percentage point increase to 64.1% in 1998, compared to 63.8%
in 1997. The Mature Hotels' room revenue per available room (RevPAR) improved to
$55.41 in 1998 from $50.90 in 1997, an increase of $4.51 or 8.9%. In 1998, the
New Hotels included ten hotels, which generated a revenue per available room
(RevPAR) of $62.54, up 3.9% from the 1997 revenue per available room (RevPAR) of
$60.21, when eight New Hotels were open. In general, management believes the New
Hotels are more insulated from the effects of new hotel supply than are the
Mature Hotels, since the New Hotels utilize franchise brands that are considered
to be more upscale in nature, and the New Hotels have higher-quality guest rooms
and public spaces.
Food and beverage revenues increased to $92.0 million in 1998 from $86.2 million
in 1997, an increase of $5.8 million, or 6.7%. This increase was due to revenues
associated with newly opened hotels.
Meeting room rental and other revenues increased to $22.2 million in 1998 from
$20.8 million in 1997, an increase of $1.4 million, or 6.7%. This increase was
due to the addition of meeting space in the New Hotels.
Direct operating costs and expenses for rooms increased to $54.6 million in 1998
from $50.3 million in 1997, an increase of $4.3 million, or 8.5%. As a
percentage of rooms revenue, these expenses remained stable, at 25.8%.
Direct operating costs and expenses for food and beverage increased to $64.2
million in 1998 from $62.4 million in 1997, an increase of $1.8 million, or
2.9%, but decreased as a percentage of food and beverage revenues, to 69.8% from
72.4% in 1997. The dollar increase was due to costs associated with the higher
volume of sales.
Direct operating costs and expenses for other remained stable in 1998 at $3.4
million, but decreased as a percentage of meeting room rental and other revenues
to 15.3% from 16.3% in 1997.
General, administrative, sales and management service expenses increased to
$95.5 million in 1998 from $85.8 million in 1997, an increase of $9.7 million,
or 11.3%. Increases in these expenses are primarily attributable to expenses
associated with the opening of new hotels in 1997 and 1998. A large portion of
expenses associated with new hotel openings are fixed costs in nature. As a
result, these expenses rise faster than revenues in the first one to two years
of operation. As a percentage of total revenues, these expenses increased to
29.3% in 1998 from 28.4% in 1997.
Repairs and maintenance expenses increased to $13.4 million in 1998 from $12.6
million in 1997, by $0.8 million or 6.3%, but decreased slightly as a percentage
of total revenues, to 4.1% from 4.2% in 1997.
Depreciation and amortization increased to $45.6 million in 1998 from $34.8
million in 1997, by $10.8 million, or 31.0%. As a percentage of total revenues,
these expenses increased to 14.0% in 1998 from 11.5% in 1997. The increase was a
direct result of the increased level of capital expenditures for the newly
opened hotels.
Income from operations decreased to $49.4 million in 1998 from $53.1 million in
1997, a decrease of $3.7 million, or 7.0%. The decrease was due to higher costs,
including depreciation expense related to the building of new hotels. As a
percentage of total revenues, income from operations was 15.2% in 1998 and 17.6%
in 1997.
18
<PAGE>
Interest expense and amortization of deferred financing fees, net increased to
$57.3 million in 1998 from $44.3 million in 1997, an increase of $13.0 million,
or 29.3%. The increase was attributable to borrowing for new hotel construction.
Income before minority interest, provision for income taxes and extraordinary
item decreased to $0.3 million in 1998 from $8.8 million in 1997, a decrease of
$8.5 million, or 96.6%. The 1998 results include an $8.2 million gain on sales
of property and equipment in connection with the sale of six Holiday Inns in
February of 1998 and one Holiday Inn in December of 1998.
1997 FISCAL YEAR COMPARED TO 1996 FISCAL YEAR
Total revenues increased to $302.3 million in 1997 from $268.8 million in 1996,
an increase of $33.5 million, or 12.4%. Of total revenues recognized in 1997,
64.6% were revenues from rooms, compared to 63.7% in 1996, continuing the
gradual shift over the past several years, as the average daily room rate (ADR)
continues to increase. Revenues from food and beverage represented 28.5% of
total revenues recognized in 1997, compared to 29.6% in 1996, and revenues from
meeting room rental and other represented 6.9% of total revenues compared to
6.7% in 1996.
Rooms revenues increased to $195.3 million in 1997 from $171.2 million in 1996,
an increase of $24.1 million, or 14.1%, as a result of the addition of six
hotels opened in 1997, a full year of operation for the two hotels opened in
1996, and a 4.9% increase in the average daily room rate (ADR) of the Mature
Hotels.
Food and beverage revenues increased to $86.2 million in 1997 from $79.6 million
in 1996, an increase of $6.6 million, or 8.3%. This increase was primarily due
to revenues associated with the New Hotels.
Meeting room rental and other revenues increased to $20.8 million in 1997 from
$18.1 million in 1996, an increase of $2.7 million, or 15.1%. This increase was
primarily a result of the New Hotels.
Direct operating costs and expenses for rooms increased to $50.3 million in 1997
from $43.6 million in 1996, an increase of $6.7 million, or 15.3%. As a
percentage of rooms revenue, these expenses increased slightly to 25.7% in 1997
from 25.5% in 1996. The increased expense was associated with the New Hotels.
These costs generally represent a higher percentage of rooms revenue in newer
hotels until these hotels reach stabilized occupancy levels.
Direct operating costs and expenses for food and beverage increased to $62.4
million in 1997 from $58.0 million in 1996, an increase of $4.4 million, or
7.6%, but decreased slightly as a percentage of food and beverage revenues to
72.4%, from 72.8% in 1996. The dollar increase was due to costs associated with
the higher volume of sales associated with the New Hotels.
Other direct operating costs and expenses were $3.4 million in 1997 and $ 2.9
million in 1996, a 15.6% increase. As a percentage of meeting room rental and
other revenues, these expenses were 16.3% in 1997 and 16.2% in 1996.
General, administrative, sales and management service expenses increased to
$85.8 million in 1997 from $74.6 million in 1996, an increase of $11.2 million,
or 14.9%. Increases in these expenses were primarily attributable to expenses
associated with the New Hotels. As a percentage of total revenues, these
expenses increased to 28.4% in 1997, from 27.8% in 1996.
Repairs and maintenance expenses increased to $12.6 million in 1997 from $11.5
million in 1996, an increase of $1.1 million, or 9.1%, but decreased slightly as
a percentage of revenues to 4.2% from 4.3% in 1996.
Depreciation and amortization increased by $10.8 million, or 44.7%, to $34.8
million in 1997 from $24.0 million in 1996. As a percentage of total revenues,
these expenses increased to 11.5% in 1997 from 8.9% in 1996. The increase was a
direct result of the opening of the eight New Hotels during 1996 and 1997.
19
<PAGE>
Income from operations decreased to $53.1 million in 1997 from $54.1 million in
1996, a decrease of $1.0 million, or 1.9%. As a percentage of total revenues,
income from operations was 17.6% in 1997 compared to 20.1% in 1996, due
primarily to the non-cash expense of depreciation and amortization associated
with the New Hotels.
Interest expense and amortization of deferred financing fees, net increased to
$44.3 million in 1997 from $35.6 million in 1996, an increase of $8.7 million or
24.4%. The increase was attributable to debt associated with the financing of
the New Hotels.
Income before minority interest, provision for income taxes and extraordinary
item decreased to $8.8 million in 1997 from $18.5 million in 1996, a decrease of
$9.7 million, or 52.5%.
LIQUIDITY AND CAPITAL RESOURCES
In general, the Company has financed its operations through internal cash flow,
loans from financial institutions, the issuance of public debt and equity and
the issuance of industrial revenue bonds. The Company's principal uses of cash
are to pay operating expenses, to service debt and to fund capital expenditures,
new hotel development and permitted distributions to fund some of the taxes
allocable to the partners.
At January 1, 1999, the Company had $46.2 million of cash and equivalents and
also had $6.5 million of marketable securities, compared to $42.0 million in
cash and cash equivalents and $12.7 million of marketable securities at the end
of 1997. Such amounts are available for development of new hotels and other
working capital requirements of the Company.
Net cash provided by operating activities increased significantly to $43.5
million at the end of 1998 from $27.8 million at the end of 1997, an increase of
$15.7 million, or 56.5%, primarily as the result of changes in interim financing
of construction through trade payables.
The Company incurred net capital expenditures of $131.2 million and $179.4
million, respectively, for 1998 and 1997. Capital expenditures typically include
capital improvements on existing hotel properties and expenditures for
development of new hotels. Capital expenditures in 1998 included $111.5 million
for new hotel development and $19.7 million for existing hotels. During 1997,
capital expenditures for existing hotels and new hotel development were $19.1
million and $160.3 million, respectively. During 1999, the Company expects
capital expenditures to approximate $120.8 million, representing approximately
$15.5 million for capital improvements on existing hotels and approximately
$105.3 million for continued new hotel development.
At the end of 1998, total debt was $759.7 million compared with $695.8 million
in 1997. The increase is attributable to the hotels opened during 1998 as well
as six Scheduled Hotels under construction at the end of 1998. The current
portion of long-term debt was $42.3 million at the end of 1998, compared with
$61.5 million at the end of 1997.
In February 1998, the Company completed the sale of six hotels for $39.4
million, resulting in a gain of approximately $0.2 million. Five of the six
hotels sold served as collateral for the 1994 and 1995 Mortgage Notes. Under the
terms of these Indentures, the Company provided replacement collateral.
On December 31, 1998, the Company completed the sale of an additional hotel
property for $16.1 million, resulting in a gain of approximately $8.0 million.
The net book value of the hotel's property and equipment at the time of the sale
was approximately $8.1 million. In addition to cash received upon closing, the
sales price included a note receivable for $11.9 million, with 8.0% interest,
due in 1999. The note receivable is secured by the hotel and the personal
guarantee of a shareholder of the buyer. This hotel served as collateral under
the 1995 Mortgage Notes. Under the terms of the Indenture, the Company must
provide replacement collateral of equivalent value or apply the net proceeds
from the sale to amounts outstanding. The Company intends to provide replacement
collateral in accordance with the Indenture provisions.
20
<PAGE>
The Company estimates that building, pre-opening and other costs of the six
Scheduled Hotels will require aggregate funding of approximately $198.0 million
from the Company (net of $61.0 million included in construction in progress and
other assets at year end). The Company has obtained loans and commitments of
approximately $143.0 million (approximately $22 million of which had been drawn
at year end) on the Scheduled Hotels and expects the remaining 1999 capital
requirements to be funded by cash, cash flow from operations and refinancing of
certain existing hotels.
Based upon current plans relating to the timing of new hotel development and
loan draw schedules, the Company anticipates that its capital resources will be
adequate to satisfy its 1999 capital requirements for the currently planned
projects and normal recurring capital improvement projects.
The Company distributed or accrued $10.6 million in 1998, and $0.6 million in
1997 to its partner for income taxes. Distributions by the Company must be made
in accordance with the provisions of the Indentures.
YEAR 2000
STATE OF READINESS
John Q. Hammons Hotels, Inc. (the "Company") 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
Company and would have been implemented within the next few years even
absent a Year 2000 issue.
The Company is requiring vendors and suppliers to certify Year 2000
compliance of supplied information technology systems and devices.
Compliance is defined as no failures 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 Company 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 Company does not anticipate any material impact on its
corporate operation, given that the current systems used are believed to be
Year 2000 compliant.
CORPORATE SYSTEMS
HARDWARE--Computer systems were tested for Y2K 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
were replaced during the fourth quarter of 1998.
SOFTWARE--All software systems were tested during the first quarter of
1998. Word processing and spreadsheet software packages were deemed
materially compliant and will not be replaced. The accounting and payroll
system was not Y2K compliant and was replaced during January, 1998.
HOTEL SYSTEMS
HARDWARE--Testing of Company owned computer hardware was started during the
first quarter of 1998. Ninety percent of all systems have been tested and
those systems deemed not Y2K compliant have been identified and have either
been replaced at this time or are scheduled for replacement during the
first half of 1999.
SOFTWARE--Bass Hotels and Resorts use the Encore Property Management
System. This system is currently not Y2K compliant but is being upgraded at
no expense to the Company.
Promus Hotels, Inc. uses the HMS Property Management System. This system is
not Y2K compliant and is scheduled for replacement at all non-compliant
hotels during the first half of 1999.
Radisson Hotels and some Company hotels use the Fidelio Property Management
System. This software is Y2K compliant. The operating system on the file
servers will be compliant with the installation of software patches at no
expense to the Company. These systems are scheduled for upgrade in the year
2000 independent of the Y2K situation.
Other Company hotels use the Multi-Systems, Inc. Property Management
System, which is Y2K compliant.
21
<PAGE>
EMBEDDED SYSTEMS
NON-CRITICAL--Fax machines, copiers and similar equipment are generally
leased. The majority of these devices have been tested and deemed Y2K
compliant. Those failing the Y2K testing will be replaced by the lessor during
1999 under current leasing agreements as required in order to be Y2K
compliant.
CRITICAL--Systems in this category include elevators, fire control, security,
energy management, credit card processing and telecommunications. The Company
is currently testing and evaluating these systems. These evaluations are
approximately 75% complete with anticipated completion by the end of the first
quarter, 1999.
TIME KEEPING AND PAYROLL SYSTEMS
The Company currently uses Time Resource Management software for time keeping.
This software is not Y2K compliant and will be replaced during the second
quarter of 1999. Payroll processing is out-sourced and a Y2K compliance
certificate from the processor is on file.
VENDOR COMPLIANCE CERTIFICATIONS
STRATEGIC RELATIONSHIPS--Requests for Y2K compliance have been sent to those
vendors which have a strategic relationship with the Company specifically and
with the hotels in general. Those compliance letters will be on file in our
offices.
UTILITY SUPPLIERS--Requests for Y2K compliance have been sent to those
suppliers which have a strategic relationship with the Company specifically
and with the hotels in general. Those compliance letters will be on file in
our offices.
COMPLIANCE TESTING
INFORMATION TECHNOLOGY
VENDOR CERTIFICATION--The Company has received Y2K compliance
certifications from the majority of its property management system vendors.
All certifications are expected to be on file by the end of the second
quarter, 1999.
FIELD TESTING--The Company has received Y2K compliance testing software
from our property management system vendors. These tests were completed
during the fourth quarter, 1998.
EVALUATION--The Company will monitor all systems currently in place and
those Y2K upgrades that will be installed during the first half of 1999 to
insure Y2K integrity. This evaluation will continue throughout the year
2000.
EMBEDDED SYSTEMS
VENDOR CERTIFICATION--The Company has received Y2K compliance
certifications from the majority of its vendors. All certifications are
expected to be on file by the end of the first quarter, 1999.
FIELD TESTING--The Company or its authorized vendors began conducting Y2K
compliance field testing during the fourth quarter of 1998 and will
continue testing throughout 1999.
EVALUATION--The Company will monitor all systems currently in place and
those Y2K upgrades that will be installed during the first half of 1999, to
insure Y2K integrity. This evaluation will continue throughout the year
2000.
22
<PAGE>
COST OF IMPLEMENTATION
CORPORATE OFFICE
INFORMATION TECHNOLOGY--Expenses for hardware and software that were
directly attributed to Y2K compliance were less than $75,000.
EMBEDDED SYSTEMS--The Company has no current expenses directly
attributed to Y2K compliance for embedded systems.
HOTELS
INFORMATION TECHNOLOGY
BASS HOTELS & RESORTS--The Company has upgraded hardware and
software systems over the last two years that were required from
a technology standpoint. Y2K compliance was an ancillary benefit
of these upgrades.
PROMUS HOTELS, INC.--The Company has allocated less than $15,000
to date for upgrades necessary to meet Y2K compliance at these
hotels.
EMBEDDED SYSTEMS--The Company has not expended any funds directly
attributed to Y2K compliance for these systems. Those upgrades and
replacements of equipment that have occurred over the last two years
were required to replace equipment that had reached the end of the
normal life cycle and not specifically for Y2K compliance.
FUTURE COSTS
CORPORATE OFFICE
Additional software upgrades are anticipated to maintain current
technology levels but are not directly attributed to Y2K compliance.
HOTELS
INFORMATION TECHNOLOGY
BASS HOTELS & RESORTS--Hotels operating under this flag (eighteen
hotels) will incur minimal costs to replace some computer
systems. Average cost per hotel is estimated to be less than
$10,000. Hardware requirements will be offset with the transfer
of existing Y2K compliant hardware from other hotels that are
receiving technology-driven upgrades.
PROMUS HOTELs, INC.--Hotels operating under this flag (sixteen
hotels) will receive new hardware and software as part of a
technology and Y2K compliant upgrade. The estimated cost for this
upgrade is approximately $625,000.
The balance of the Company's hotels have budgeted approximately
$400,000 in capital funds for technology replacements and Y2K
compliancy issues.
EMBEDDED SYSTEMS--Final evaluation of these systems has not been
completed at this time. No major replacements are expected based upon
the results of early testing.
23
<PAGE>
RISK FACTORS
INFORMATION TECHNOLOGY--Based upon current testing results and evaluation
of those results, it is believed that all hardware and software systems in
the Company's corporate office and hotels will be Y2K compliant by the end
of the second quarter, 1999. Risk to the operation of the Company is
therefore considered to be low.
EMBEDDED SYSTEMS--Complete analysis of all embedded systems has not been
completed at this time. Final evaluation is scheduled for the end of the
first quarter, 1999, with testing to be completed by the end of the second
quarter, 1999. Based upon early reports, risk to the operation of the
Company is considered to be low.
VENDORS AND SUPPLIERS--The Company does not rely on the services of any one
single vendor or supplier that will materially impact its operations. To
date, no strategic vendor or supplier has reported that it will not be Y2K
compliant by the end of 1999. Based upon these reports, risk to the
operations of the Company 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 Y2K
compliancy 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 Company 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 Company is expected.
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 over-ridden if necessary, in the event of a
failure due to a Y2K issue.
VENDORS AND SUPPLIERS
The Company will use alternative vendors and suppliers in the event
any one strategic vendor or supplier is incapable of operating as a
result of a Y2K compliance issue. The Company maintains a list of
alternative vendors and suppliers. These vendors and suppliers will be
certified as Y2K compliant in the event their services are required.
SEASONALITY
Demand is affected by normally recurring seasonal patterns. For most of the
JQH Hotels, demand is higher in the spring and summer months (March through
October) than during the remainder of the year. Accordingly, the Company's
operations are seasonal in nature, with lower revenue, operating profit and
cash flow in the first and fourth quarters due to decreased travel during
the winter months.
INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenues or operating results of
the Company during the three most recent fiscal years.
24
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result
of its 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. The financing activities of the Company 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 the Company's long-term fixed and variable rate debt
obligations as of January 1, 1999:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE (IN MILLIONS)
1999 2000 2001 2002 2003 Thereafter Total Fair Value (d)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt (a)
$300 Million 1st Mortgage Notes $ -- $ -- $ -- $ -- $ -- $300 $300 $313
Average interest rate (b) 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%
$90 Million 1st Mortgage Notes $ -- $ -- $ -- $ -- $ -- $ 90 $ 90 $ 94
Average interest rate (b) 9.8% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%
Other fixed-rate debt obligations $ 41 $ 6 $ 13 $ 30 $ 20 $213 $323 $323
Average interest rate (b) 8.8% 8.4% 8.2% 8.8% 8.7% 8.7% 8.7%
Other variable-rate debt obligations $ 1 $ 1 $ 7 $ 10 $ 3 $ 25 $ 47 $ 47
Average interest rate (c) 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1%
</TABLE>
(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 January 1, 1999, that is maturing in
the year reported. The weighted average interest rate excludes the
effect of the amortization of deferred financing costs.
(d) The fair values of long-term debt obligations approximate their
respective historical carrying amounts, except with respect to the
$300 million First Mortgage Notes and the $90 million First Mortgage
Notes. The fair value of the First Mortgage Notes issued is estimated
by obtaining quotes from brokers.
25
<PAGE>
report of independent public accountants
- ----------------------------------------
To the Shareholders of John Q. Hammons Hotels, Inc.:
We have audited the accompanying consolidated balance sheets of John Q.
Hammons Hotels, Inc. and Companies (Note 1) as of January 1, 1999 and
January 2, 1998 and the related consolidated statements of operations,
changes in minority interest and stockholders' equity and cash flows for
each of the three fiscal years ended January 1, 1999, January 2, 1998 and
January 3, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of John Q. Hammons Hotels, Inc. and Companies (Note 1) as of
January 1, 1999 and January 2, 1998 and the results of their operations and
their cash flows for each of the three fiscal years ended January 1, 1999,
January 2, 1998 and January 3, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
February 17, 1999
26
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share data)
<TABLE>
<CAPTION>
ASSETS
FISCAL YEAR ENDED 1998 1997
<S> <C> <C>
CASH AND EQUIVALENTS (Restricted cash of $860 and
$1,235 in 1998 and 1997, respectively) (Notes 2 and 5) $ 46,233 $ 41,961
MARKETABLE SECURITIES (Notes 2 and 5) 6,533 12,742
RECEIVABLES
Trade, less allowance for doubtful accounts of $206 and
$188 in 1998 and 1997, respectively 8,852 7,652
Management fees (Note 3) 62 50
Construction reimbursements, shareholder and other
(Note 3) 5,269 3,739
INVENTORIES 1,205 1,206
PREPAID EXPENSES AND OTHER 1,089 1,386
--------- ---------
TOTAL CURRENT ASSETS 69,243 68,736
--------- ---------
PROPERTY AND EQUIPMENT, at cost (Notes 2, 5 and 6)
Land and improvements 47,982 40,511
Buildings and improvements 605,586 527,856
Furniture, fixtures and equipment 239,648 197,177
Construction in progress 63,078 78,946
--------- ---------
956,294 844,490
Less-accumulated depreciation and amortization (194,860) (166,125)
--------- ---------
761,434 678,365
Property and equipment available for sale, net (Note 9) -- 38,791
--------- ---------
761,434 717,156
DEFERRED FINANCING COSTS, FRANCHISE FEES,
AND OTHER, net (Notes 2, 4 and 5) 45,809 30,841
--------- ---------
TOTAL ASSETS $ 876,486 $ 816,733
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
27
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND EQUITY
FISCAL YEAR ENDED 1998 1997
<S> <C> <C>
LIABILITIES
Current portion of long-term debt (Note 5) $ 42,256 $ 61,517
Accounts payable, including construction payables of
approximately $2,203 and $3,391, respectively 13,141 11,232
Accrued expenses
Payroll and related benefits 6,843 5,529
Sales and property taxes 9,558 8,676
Insurance (Notes 2 and 3) 10,061 11,242
Interest 12,540 12,603
Utilities, franchise fees and other 5,568 5,852
Accrued distribution 2,936 --
-------- --------
Total current liabilities 102,903 116,651
Long-term debt (Note 5) 717,460 634,274
Other obligations and deferred revenue (Note 2) 10,884 7,901
-------- --------
TOTAL LIABILITIES 831,247 758,826
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
MINORITY INTEREST OF HOLDERS OF LIMITED
PARTNER UNITS (Note 1) 27,392 39,399
STOCKHOLDERS' EQUITY (Note 1)
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none outstanding -- --
Class A common stock, $.01 par value, 40,000,000 shares authorized,
6,042,000 shares issued and outstanding 60 60
Class B common stock, $.01 par value, 1,000,000 shares authorized,
294,100 shares issued and outstanding 3 3
Paid-in capital 96,373 96,373
Retained deficit, net (78,589) (77,928)
-------- --------
TOTAL EQUITY 17,847 18,508
-------- --------
TOTAL LIABILITIES AND EQUITY $876,486 $816,733
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
28
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1998 1997 1996
<S> <C> <C> <C>
REVENUES
Rooms $211,989 $195,296 $171,206
Food and beverage 91,982 86,183 79,580
Meeting room rental and other 22,159 20,795 18,061
-------- --------- --------
Total revenues 326,130 302,274 268,847
-------- --------- --------
OPERATING EXPENSES (Notes 3, 4 and 6)
Direct operating costs and expenses
Rooms 54,600 50,265 43,610
Food and beverage 64,174 62,383 57,956
Other 3,389 3,385 2,929
General, administrative, sales and management
service expenses 95,500 85,766 74,646
Repairs and maintenance 13,438 12,578 11,528
Depreciation and amortization 45,580 34,781 24,034
-------- -------- --------
Total operating expenses 276,681 249,158 214,703
-------- -------- --------
INCOME FROM OPERATIONS (Note 9) 49,449 53,116 54,144
OTHER (INCOME) EXPENSE
Interest expense and amortization of deferred financing
fees, net of $3,794, $1,279 and $2,103 of interest income
in 1998, 1997 and 1996, respectively (Note 2(e)) 57,286 44,325 35,620
Gain on sales of property and equipment (Note 9) (8,175) -- --
-------- -------- --------
INCOME BEFORE MINORITY INTEREST, PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEM 338 8,791 18,524
Minority interest in earnings of partnership (Note 1) (242) (6,302) (13,280)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 96 2,489 5,244
Provision for income taxes (Note 2(j)) (120) (75) (105)
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (24) 2,414 5,139
Extraordinary item; cost of early extinguishment of debt,
net of applicable tax benefit (Note 5) (637) -- --
-------- -------- --------
NET INCOME (LOSS) (Note 1) $ (661) $ 2,414 $ 5,139
======== ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 2(n))
Earnings before extraordinary item $ -- $ .38 $ .81
Extraordinary item (.10) -- --
-------- -------- --------
Earnings (loss) allocable to the Company $ (.10) $ .38 $ .81
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
29
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN
MINORITY INTEREST AND STOCKHOLDERS' EQUITY
(000's omitted)
<TABLE>
<CAPTION>
MINORITY INTEREST STOCKHOLDERS' EQUITY
CLASS A CLASS B COMPANY RETAINED
COMMON COMMON PAID-IN DEFICIT AFTER
STOCK STOCK CAPITAL REORGANIZATION TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, Year-end 1995 $ 23,082 $ 60 $ 3 $ 96,373 $(85,481) $ 10,955
Distributions (Note 1(b)) (2,700) -- -- -- -- --
Net income allocable to the Company -- -- -- -- 5,139 5,139
Minority interest in earnings of the
partnership 13,280 -- -- -- -- --
-------- -------- -------- -------- -------- --------
BALANCE, Year-end 1996 33,662 60 3 96,373 (80,342) 16,094
Distributions (Note 1(b)) (565) -- -- -- -- --
Net income allocable to the Company -- -- -- -- 2,414 2,414
Minority interest in earnings of the
partnership 6,302 -- -- -- -- --
-------- -------- -------- -------- -------- --------
BALANCE, Year-end 1997 39,399 60 3 96,373 (77,928) 18,508
Distributions (Note 1(b)) (10,637) -- -- -- -- --
Net loss allocable to the Company -- -- -- -- (661) (661)
Minority interest in losses of the
partnership, after extraordinary
item of $1,612 (1,370) -- -- -- -- --
-------- -------- -------- -------- -------- --------
BALANCE, Year-end 1998 $ 27,392 $ 60 $ 3 $ 96,373 $(78,589) $ 17,847
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
30
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (661) $ 2,414 $ 5,139
Adjustments to reconcile net income (loss) to cash provided by
operating activities
Minority interest in earnings of partnership 242 6,302 13,280
Depreciation, amortization and loan cost amortization 48,448 37,662 26,414
Extraordinary item, net of tax benefit (Note 5) 637 -- --
Gain on sales of property and equipment (Note 9) (8,175) -- --
--------- --------- ---------
40,491 46,378 44,833
--------- --------- ---------
Changes in certain assets and liabilities
Receivables (2,742) (4,826) 999
Inventories (112) (187) 91
Prepaid expenses and other 297 542 (804)
Accounts payable 1,909 (18,745) 21,595
Accrued expenses 668 3,730 3,894
Other obligations and deferred revenue 2,983 877 1,444
--------- --------- ---------
Net cash provided by operating activities 43,494 27,769 72,052
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (131,183) (179,385) (155,579)
Proceeds from sales of property and equipment (Note 9) 43,577 -- --
Franchise fees and other (11,528) (3,499) (4,936)
(Purchase) sale of marketable securities, net 6,209 (10,387) 24,219
--------- --------- ---------
Net cash used in investing activities (92,925) (193,271) (136,296)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan financing fees (2,521) (3,069) (1,433)
Proceeds from borrowings 260,771 186,684 76,239
Repayments of debt (196,846) (22,036) (3,190)
Distributions (7,701) (565) (2,700)
--------- --------- ---------
Net cash provided by financing activities 53,703 161,014 68,916
--------- --------- ---------
Increase (decrease) in cash and equivalents 4,272 (4,488) 4,672
--------- --------- ---------
CASH AND EQUIVALENTS, beginning of period 41,961 46,449 41,777
--------- --------- ---------
CASH AND EQUIVALENTS, end of period $ 46,233 $ 41,961 $ 46,449
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID FOR INTEREST, net of amounts capitalized $ 58,733 $ 43,399 $ 35,441
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Note receivable from sale of property and equipment (Note 9) $ 11,900 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
31
<PAGE>
JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except share data)
1. BASIS OF PRESENTATION
(a) ENTITY MATTERS--The accompanying consolidated financial statements
include the accounts of John Q. Hammons Hotels, Inc. and John Q.
Hammons Hotels, L.P. and subsidiaries (collectively the Company or, as
the context may require John Q. Hammons Hotels, Inc. only). As of
fiscal year-end 1998, 1997 and 1996, the Company had 42, 45, and 39,
respectively, hotels in operation of which 28 in 1998, 35 in 1997 and
32 in 1996 operate under the Holiday Inn and Embassy Suites trade
names. The Company's hotels are located in 20 states throughout the
United States.
The Company was formed in September 1994 and had no operations or
assets prior to its initial public offering of 6,042,000 Class A
common shares at $16.50 per share on November 23, 1994. Immediately
prior to the initial public offering, Mr. John Q. Hammons (JQH)
contributed approximately $5 million in cash to the Company in
exchange for 294,100 shares of Class B common stock (which represents
approximately 72% of the voting control of the Company). The Company
contributed the approximate $96 million of net proceeds from the Class
A and Class B common stock offerings to John Q. Hammons Hotels, L.P.
(JQHLP) in exchange for an approximate 28% general partnership
interest.
As the sole general partner of JQHLP, the Company exercises control
over all decisions as set forth in the partnership agreement. The net
income (loss) allocable to the Company reported in the accompanying
consolidated statements of operations include the Company's
approximate 28% share of all JQHLP earnings (losses). The approximate
72% minority interest attributable to the portion of the partnership
not owned by the Company has been reflected as minority interest in
the accompanying consolidated financial statements.
All significant balances and transactions between the entities and
properties have been eliminated.
(b) PARTNERSHIP AND OTHER MATTERS--A summary of selected provisions of the
partnership agreement as well as certain other matters are summarized
as follows:
Allocation of Income, Losses and Distributions: Pretax income, losses
and distributions of JQHLP will generally be allocated pro rata
between the Company, as general partner, and the limited partner
interest beneficially owned by JQH based on their respective
approximate 28% and 72% ownership interests in JQHLP. However, among
other things, to the extent the limited partners were not otherwise
committed to provide further financial support and pretax losses
reported for financial reporting purposes were deemed to be of a
continuing nature, the balance of the pretax losses would be allocated
only to the Company, with any subsequent pretax income also to be
allocated only to the Company until such losses had been offset. In
addition, with respect to distributions, in the event JQHLP has
taxable income, distributions are to be made in an aggregate amount
equal to the amount JQHLP would have paid for income taxes had it been
a C Corporation during the applicable period. Aggregate tax
distributions will first be allocated to the Company, if applicable,
with the remainder allocated to the limited partners. Distributions
for taxes approximated $10,637, $565 and $2,700 for the fiscal years
ended 1998, 1997 and 1996, respectively.
32
<PAGE>
Additional Capital Contributions: In the event proceeds from the sale
of the twenty hotel properties (or applicable replacement collateral)
which secure the $300 million first mortgage notes (1994 notes) (Note
5) are insufficient to satisfy amounts due on the 1994 notes, JQH and
Hammons, Inc. (as general partners at the time the 1994 notes were
secured) are severally obligated to contribute up to $135 million and
$15 million, respectively, to satisfy amounts due, if any. In the
event proceeds from the sale of the eight hotel properties (or
applicable replacement collateral) which secure the $90 million first
mortgage notes (1995 notes) (Note 5) are insufficient to satisfy
amounts due on the 1995 notes, JQH is obligated to contribute up to
$45 million to satisfy amounts due, if any. In addition, with respect
to the eleven hotel properties contributed by JQH concurrent with the
public equity offering, JQH is obligated to contribute up to $50
million in the event proceeds from the sale of these hotel properties
(or applicable replacement collateral) are insufficient to satisfy
amounts due on the then outstanding mortgage indebtedness related to
these properties.
Redemption of Limited Partner Interests: Subject to certain
limitations, the limited partners of JQHLP have the right to require
redemption of their limited partner interests at any time subsequent
to November, 1995. Upon redemption, the limited partners receive, at
the sole discretion of the Company, one share of its Class A common
stock for each limited partner unit tendered or the then cash
equivalent thereof.
Additional General Partner Interest: Upon the issuance by the Company
of additional shares of its common stock, including shares issued upon
the exercise of its stock options (Note 8), the Company will be
required to contribute to JQHLP the net proceeds received and JQHLP
will be required to issue additional general partner units to the
Company in an equivalent number to the additional shares of common
stock issued.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND EQUIVALENTS--Cash and equivalents include operating cash
accounts and investments with an original maturity of three months or
less and certain balances of various money market and common bank
accounts.
Restricted cash consists of certain funds maintained in escrow for
property taxes and certain other obligations.
(b) MARKETABLE SECURITIES--Marketable securities consist of available-for-
sale commercial paper and government agency obligations which mature
or will be available for use in operations in 1999. These securities
are valued at current market value, which approximates cost. Realized
gains and losses in 1998 and 1997, determined using the specific
identification method, were nominal.
(c) INVENTORIES--Inventories consist of food and beverage items. These
items are stated at the lower of cost, as determined by the first-in,
first-out valuation method, or market.
(d) DEFERRED FINANCING COSTS, FRANCHISE FEES AND OTHER--Franchise fees
paid to the respective franchisors of the hotel properties are
amortized on a straight-line basis over ten to twenty years which
approximates the terms of the respective agreements. Costs of
obtaining financing are capitalized and amortized over the respective
terms of the debt.
Costs directly related to commencing a hotel's operations are deferred
until the hotel has opened. The preopening expense is amortized over
one year using the straight-line method. Unamortized preopening costs
were approximately $2,296 and $3,825 as of fiscal year-end 1998 and
1997, respectively (Note 2(p)).
33
<PAGE>
The components of deferred financing costs, franchise fees, and other
are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR-ENDED 1998 1997
<S> <C> <C>
Deferred financing costs $ 23,534 $24,025
Franchise fee 6,412 4,716
Less--Accumulated amortization (12,009) (9,466)
-------- -------
17,937 19,275
Note receivable, related to sale of hotel and a component of replacement
collateral for 1994 and 1995 first mortgage notes (Note 9) 11,900 --
Restricted cash deposits, interest bearing, related to sales of hotels and a component
of replacement collateral for 1994 and 1995 first mortgage notes (Note 9) 6,266 --
Deposits 7,017 7,397
Preopening expenses and other, net 2,689 4,169
-------- -------
$ 45,809 $30,841
======== =======
</TABLE>
In October 1997, the Company entered into an irrevocable stand-by
letter of credit agreement with a bank for approximately $5.6 million.
The letter of credit replaced the restricted cash deposit which was
required by and maintained with an insurance carrier. In December
1998, the letter of credit amount was amended to approximately $2.2
million. The letter of credit expires in October 1999.
(e) PROPERTY AND EQUIPMENT--Property and equipment are stated at cost
(including interest, real estate taxes and certain other costs
incurred during development and construction) less accumulated
depreciation and amortization. Buildings and improvements are
depreciated using the straight-line method while all other property is
depreciated using both straight-line and accelerated methods. The
estimated useful lives of the assets are summarized as follows:
LIVES IN YEARS
Land improvements 5-25
New buildings and improvements 5-40
Purchased buildings 25
Furniture, fixtures and equipment 5-10
Construction in progress includes primarily land, development and
construction costs of certain hotel developments. Costs associated
with hotel development construction in progress approximated $59
million in 1998 and $75 million in 1997, with the remainder
representing refurbishments of operating hotels.
The Company periodically reviews the carrying value of these assets
and other long-lived assets and impairments are recognized when the
expected undiscounted future cash flows are less than the carrying
amount of the asset. Based on its most recent analysis, the Company
believes no impairment exists at January 1, 1999.
Interest costs, construction overhead and certain other carrying costs
are capitalized during the period hotel properties are under
construction. Interest costs capitalized were $6,163, $10,259 and
$7,162 for the fiscal years ended 1998, 1997 and 1996, respectively.
Construction in progress is recorded at the lower of cost or market.
Costs incurred for prospective hotel projects ultimately abandoned are
charged to operations in the period such plans are finalized. Costs of
significant improvements are capitalized, while costs of normal
recurring repairs and maintenance are charged to expense as incurred.
34
<PAGE>
The accompanying 1998 consolidated financial statements include the
land costs for thirty-three of the operating hotel properties. Land
for seven of the remaining nine operating hotel properties is leased
by the Company from unrelated parties over long-term leases. Land for
the remaining two operating hotel properties is leased by the Company
from a related party over long-term leases. Rent expense for all land
leases was $1,008, $464 and $450 for the fiscal years ended 1998, 1997
and 1996, respectively.
(f) PAR OPERATING EQUIPMENT--A hotel's initial expenditures for the
purchase of china, glassware, silverware, linens and uniforms are
capitalized into furniture, fixtures and equipment and amortized on a
straight-line basis over a three to five year life. Costs for
replacement of these items are charged to operations in the period the
items are placed in service.
(g) ADVERTISING--The Company expenses the cost of advertising associated
with operating hotels as incurred. Advertising costs incurred for a
hotel prior to its opening are deferred and charged to expense in the
period the hotel commences operations.
Advertising expense for 1998, 1997 and 1996 was approximately $23,571,
$21,405 and $17,373, respectively, of which approximately $797, $1,296
and $291, respectively, pertained to preopening advertising expenses
of the hotels which opened in these respective years.
(h) PENSIONS AND OTHER BENEFITS--The Company contractually provides
retirement benefits for certain union employees at two of its hotel
properties under a union sponsored defined benefit plan and a defined
contribution plan. Contributions to these plans, based upon the
provisions of the respective union contracts, approximated $70, $66
and $54 for the fiscal years ended 1998, 1997 and 1996, respectively.
Effective January 1996, the Company implemented an employee savings
plan (a 401(k) plan). The Company matches a percentage of an
employee's contribution. The Company's matching contributions are
funded currently. The cost of the matching program and administrative
costs charged to income were approximately $591, $381 and $293 in
1998, 1997 and 1996, respectively. The Company does not offer any
other post-employment or post-retirement benefits to its employees.
(i) SELF-INSURANCE--The Company is self-insured for certain levels of
general liability and workers' compensation coverage. Estimated costs
of these self-insurance programs are accrued based on known claims and
projected settlements of unasserted claims. Subsequent changes in,
among others, assumed claims, claim costs, claim frequency, as well as
changes in actual experience, could cause these estimates to change.
(j) INCOME TAXES--The Company's provision for income taxes for fiscal
1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Currently payable $ 120 $ 75 $ 105
Deferred -- -- --
----- ------- -------
Provision for income taxes $ 120 $ 75 $ 105
===== ======= =======
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
1998 1997 1996
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Provision for income taxes at the
federal statutory rate $ 33 34% $ 846 34% $ 1,783 34%
Tax benefit allocable to general partner (33) (34) (846) (34) (1,783) (34)
Provision for state franchise taxes 120 125 75 3 105 2
----- ----- ----- ----- ------- -----
Provision for income taxes $ 120 125% $ 75 3% $ 105 2%
===== ===== ===== ===== ======= =====
</TABLE>
35
<PAGE>
At January 1, 1999 and January 2, 1998, the net deferred tax liability
consisted of the following:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1998 1997
<S> <C> <C>
Estimated allocated tax basis in excess of the Company's proportionate
share of the book value of JQHLP's net assets $ 6,100 $ 7,400
Deferred tax liabilities (1) (1)
------- -------
6,099 7,399
Valuation allowance (6,100) (7,400)
------- -------
Net deferred tax liability $ (1) $ (1)
======= =======
</TABLE>
The realization of the estimated deferred tax asset resulting from
estimated tax basis in excess of the Company's proportionate share of
the book value of JQHLP's net assets is dependent upon, among others,
prospective taxable income allocated to the Company, disposition of
the hotel properties subsequent to the end of a property's respective
depreciable tax life, and the timing of subsequent conversions, if
any, of limited partnership units in JQHLP into common stock of the
Company. Accordingly, a valuation allowance has been recorded in an
amount equal to the estimated deferred tax asset associated with the
differences between the Company's basis for financial reporting and
tax purposes. Adjustments to the valuation allowance, if any, will be
recorded in the periods in which it is determined the asset is
realizable.
(k) REVENUE RECOGNITION--The Company recognizes revenues from its rooms,
catering and restaurant facilities as earned on the close of business
each day.
(l) USE OF ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(m) FISCAL YEAR--The Company's fiscal year ends on the Friday nearest
December 31 which includes 52 weeks in 1998 and 1997 and 53 weeks in
1996.
The periods ended in the accompanying consolidated financial
statements are summarized as follows:
YEAR FISCAL YEAR-ENDED
1998 January 1, 1999
1997 January 2, 1998
1996 January 3, 1997
(n) EARNINGS (LOSS) PER SHARE--In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
128). In accordance with SFAS 128, basic earnings (loss) per share are
computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the year. Diluted earnings (loss)
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 dilutive potential common shares had been
issued.
Options to purchase shares of common stock at prices of $16.50 per
share and $7.38 per share (Note 8) were outstanding during fiscal
1998. The options were not included in the computation of diluted
earnings per share since the options' exercise prices were greater
than the average market price of the common shares and the options
would be antidilutive.
Since there are no dilutive securities, basic and diluted earnings
(loss) per share are identical, thus a reconciliation of the numerator
and denominator is not necessary.
36
<PAGE>
(o) RECLASSIFICATIONS--Certain reclassifications have been reflected in
1997 and 1996 to conform with the current period presentation.
(p) 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 Company adopted this statement in the first quarter of fiscal 1998
with no impact on the Company's reported consolidated financial
position, results of operations, cash flows or related disclosures.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS No. 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 company. The Company adopted this
statement in the fourth quarter of fiscal 1998 with no impact on the
Company's reported consolidated financial position, results of
operations, cash flows or related disclosures.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), which requires costs of start-up activities,
including preopening expenses, to be expensed as incurred. The
Company's current practice is to defer these expenses until a hotel has
commenced operations, at which time the costs, other than advertising
costs which are expensed upon opening, are amortized over a one-year
period. The Company intends to adopt SOP 98-5 in the first quarter of
fiscal 1999. Included in the accompanying 1998 consolidated balance
sheet is approximately $2,296 of unamortized preopening expenses which
would have been expensed had this pronouncement been effective as of
January 1, 1999.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). This statement 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. This statement requires that changes in the
derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. Upon adoption of this
statement, the Company anticipates no impact on its reported
consolidated financial position, results of operations, cash flows or
related disclosures.
3. RELATED PARTY TRANSACTIONS
(a) HOTEL MANAGEMENT FEES--In addition to managing the hotel properties
included in the accompanying consolidated financial statements, the
Company provides similar services for other hotel properties owned or
controlled by JQH which included five properties at January 1, 1999. A
management fee of approximately 3% of gross revenues (as defined) is
paid to the Company by these hotels which aggregated approximately
$715, $643 and $717 for the fiscal years ended 1998, 1997 and 1996,
respectively.
(b) ACCOUNTING AND ADMINISTRATIVE SERVICES--The hotels have contracted for
accounting and other administrative services with Winegardner &
Hammons, Inc. (WHI), a company related by common ownership. The
accounting and administrative charges expensed by the hotel properties,
included in administrative expenses, were approximately $1,388, $1,411
and $1,228 for the fiscal years ended 1998, 1997 and 1996,
respectively.
In 1995, the Company negotiated a new contract with WHI to continue to
provide accounting and administrative services through June 1999.
Charges for these services provided by WHI will approximate $32 per
year for each hotel property for the duration of the agreement.
37
<PAGE>
(c) INSURANCE COVERAGE--To supplement the Company's self-insurance
programs, umbrella, property, auto, commercial liability and workers'
compensation insurance is provided to the hotel properties under a
blanket commercial policy purchased by the Company or WHI, covering
hotel properties owned by JQHLP, JQH or managed by WHI. Generally,
premiums allocated to each hotel property are based upon factors
similar to those used by the insurance provider to compute the
aggregate group policy premium. Insurance expense for the properties
included in operating expenses was approximately $2,158, $6,196 and
$6,265 for the fiscal years ended 1998, 1997 and 1996, respectively.
During fiscal 1998, the Company realized continued favorable trends in
insurance expense as a result of claim experience and rate improvements
and a favorable buyout of several prior self-insured years.
(d) ALLOCATION OF COMMON COSTS--The Company and its general partner incur
certain hotel management expenses incidental to the operations of all
hotels beneficially owned or controlled by JQH. These costs principally
include the compensation and related benefits of certain senior hotel
executives. Commencing in May of 1993, these costs were allocated by
the Company to hotels not included in the accompanying consolidated
statements, based on the respective number of rooms of all hotels owned
or controlled by JQH. These costs approximated $145, $131 and $150, for
the fiscal years ended 1998, 1997 and 1996, respectively. Management
considers these allocations to be reasonable.
(e) TRANSACTIONS WITH STOCKHOLDERS AND DIRECTORS--At fiscal 1997 year-end,
there were certain prepayments to a stockholder associated with the
Company's estimated 1998 taxable income, which approximated $2,031 and
are included as a component of construction reimbursements, shareholder
and other receivables.
In 1997, the Company reimbursed JQH for development costs incurred on
behalf of the Company, at approximate cost. These transactions amounted
to approximately $7,251 (including debt assumed of $4,728). In addition
to actual costs incurred, the 1997 reimbursement includes a return on
capital employed by JQH of approximately $120, calculated based on the
Company's approximate incremental borrowing rate. During 1998, no such
transactions occurred. Consistent with the Company's plans to suspend
new development activity, in 1998, JQH assumed approximately $0.3
million in costs incurred associated with new developments.
During 1996, the Company entered into an agreement with a director
relating to certain financial advisory services. The Company has
recognized approximately $17, $180 and $188 in expense for the fiscal
years ended 1998, 1997 and 1996, respectively, under this agreement.
(f) SUMMARY OF RELATED PARTY EXPENSES--The following summarizes expenses
reported as a result of activities with related parties:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expenses included within general, administrative, sales
and management service expenses:
Accounting and administrative $1,388 $1,411 $1,228
Rental expenses (Note 6) 800 465 520
Financial advisory services from a director 17 180 188
------ ------ ------
$2,205 $2,056 $1,936
====== ====== ======
Allocated insurance expense from the pooled coverage
included within various operating categories $2,158 $6,196 $6,265
====== ====== ======
</TABLE>
4. FRANCHISE AGREEMENTS
As of year-end 1998 and 1997, 36 of the 42 and 41 of the 45, respectively,
operating hotel properties included in the accompanying consolidated balance
sheets have franchise agreements with national hotel chains which require
each hotel to remit to the franchisor monthly fees equal to approximately
four percent of gross room revenues, as defined. Franchise fees expensed
under these contracts were $8,110, $7,165 and $6,250 for the fiscal years
ended 1998, 1997 and 1996, respectively.
38
<PAGE>
As part of the franchise agreement, each hotel also pays additional
advertising, reservation and maintenance fees to the franchisor which range
from 1% to 3.5% of room revenues, as defined. The amount of expense related
to these fees included in the consolidated statements of operations as a
component of sales expense was approximately $7,083, $6,497 and $5,493 for
the fiscal years ended 1998, 1997 and 1996, respectively.
5. LONG-TERM DEBT
The components of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR-ENDED 1998 1997
<S> <C> <C>
First Mortgage Notes, interest at 8.875%, interest only payable February 15
and August 15, principal due February 15, 2004, secured by a first mortgage
lien on twenty hotel properties (or applicable replacement collateral) and
additional capital contributions of up to $150 million by JQH and
an entity under his control. (Note 1(b)) $300,000 $300,000
First Mortgage Notes, interest at 9.75%, interest only payable April 1 and
October 1, principal due October 1, 2005, secured by a first mortgage lien on
six hotel properties (or applicable replacement collateral), a second
mortgage lien on two hotel properties and additional capital contributions
of up to $45 million by JQH. (Note 1(b)) 90,000 90,000
Development Bonds, variable interest rate approximates 85% of the bond
equivalent yield of thirteen week U.S. Treasury bills (not to exceed 12%) and
fixed rates ranging from 7.125% to 9.00%, payable in scheduled installments
through June 2015, certain of the obligations are subject to optional
prepayments by the bondholders, secured by certain hotel facilities,
fixtures and an assignment of rents. 14,443 36,063
Mortgage notes payable to banks, insurance companies and a state retirement
plan, variable interest rates at prime to LIBOR plus 3.25% with certain
instruments subject to a ceiling rate and a floor rate, fixed rates ranging
from 7.97% to 9.5%, payable in scheduled installments through April 2027,
secured by certain hotel facilities, fixtures, assignment of rents, certain
other real property controlled by JQH, with certain instruments subject to
cross-collateralization provisions and, with respect to approximately
$334,005 of mortgage notes, a personal guarantee of JQH. 344,369 261,071
Other notes payable, various variable interest rates and fixed rates ranging
from 6.8% to 8.1%, payable in scheduled installments through March 2003,
secured by certain hotel improvements, furniture, fixtures and related
equipment and, with respect to approximately $1,725 of notes, a personal
guarantee of JQH. 10,904 8,657
-------- --------
759,716 695,791
Less--current portion (42,256) (61,517)
-------- --------
$717,460 $634,274
======== ========
</TABLE>
39
<PAGE>
The indenture agreements relating to the 1994 and 1995 notes include certain
covenants which, among others, limit the ability of JQHLP and its restricted
subsidiaries (as defined) to make distributions, incur debt and issue
preferred equity interests, engage in certain transactions with its partners,
stockholders or affiliates, incur certain liens, engage in mergers or
consolidations and achieve certain interest coverage ratios, as defined. In
addition, certain of the other credit agreements include subjective
acceleration clauses and limit, among others, the incurrence of certain liens
and additional indebtedness. The 1994 and 1995 notes and certain other
obligations include scheduled prepayment penalties in the event the
obligations are paid prior to their scheduled maturity.
In 1998, the Company paid off or refinanced approximately $133.0 million of
long-term debt in 1998. In connection with these transactions, the Company
incurred approximately $2.2 million in charges related to the early
extinguishment of debt of which $0.6 million is allocable to the Company with
the remaining charges applied to the minority interest. The Company's debt
extinguishment charges have been reflected in the accompanying 1998
consolidated statement of operations as an extraordinary item.
Scheduled maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
YEAR-ENDED YEAR-ENDED 1998
<S> <C> <C>
1999 $ 42,256
2000 6,828
2001 19,844
2002 39,946
2003 23,533
Thereafter 627,309
--------
$759,716
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES--The hotel properties lease certain equipment and
land from unrelated parties under various lease arrangements. In
addition, the Company leases certain parking spaces at one hotel for
the use of its patrons and is billed by the lessor based on actual
usage. Rent expense for these leases was approximately $2,715, $1,819
and $1,629 for the fiscal years ended 1998, 1997 and 1996,
respectively, which has been included in general and management
service expenses.
Included in the accompanying consolidated financial statements are the
operating results of trade centers located in Joplin, Missouri and
Portland, Oregon. Both of the trade centers are owned by JQH. The
lease agreement for the Joplin trade center stipulates nominal rentals
for each of the fiscal years ended 1998, 1997 and 1996 and for each
ensuing year through 2014. The lease agreement for the Portland
facility extends through 2004 and requires minimum annual rents of
$300 to JQH. In addition, the Company leases office space in
Springfield, Missouri from a partnership (of which JQH is a partner)
for annual payments of approximately $234 through December 2001. The
Company has also entered into land leases with JQH for two operating
hotel properties. Subject to the Company exercising purchase options
provided under these agreements, these leases extend through 2036 and
2045, respectively, and require aggregate minimum annual payments of
approximately $270. Rent expense for these related party leases was
approximately $800, $465 and $520 for the fiscal years ended 1998,
1997 and 1996, respectively.
40
<PAGE>
The minimum annual rental commitments for these noncancelable
operating leases at January 1, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR-ENDED JQH OTHER TOTAL
<S> <C> <C> <C>
1999 $ 553 $ 1,442 $ 1,995
2000 570 1,195 1,765
2001 570 839 1,409
2002 570 640 1,210
2003 570 574 1,144
Thereafter 10,805 40,200 51,005
------- ------- -------
$13,638 $44,890 $58,528
======= ======= =======
</TABLE>
(b) HOTEL DEVELOPMENT--In 1999 and 2000, the Company plans to complete
construction and open six new hotels. The total estimated aggregate
development and construction costs for these hotels are expected to
exceed $197 million.
(c) LEGAL MATTERS--The Company is party to various legal proceedings
arising from its consolidated operations. Management of the Company
believes that the outcome of these proceedings, individually and in
the aggregate, will have no material adverse effect on the Company's
consolidated financial position, results of operations or its cash
flows.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of marketable securities and long-term debt approximate
their respective historical carrying amounts except with respect to the
1994 and 1995 notes for which fair market value was approximately $408
million and $404 million at 1998 and 1997, respectively. The fair value of
the First Mortgage Notes issued is estimated by obtaining quotes from
brokers.
8. STOCK OPTIONS
Concurrent with the sale of equity securities in November 1994, the Company
adopted a stock option plan for its employees. The plan authorizes the
issuance of up to 2,416,800 shares of Class A common stock. Options granted
under the plan in 1994 were at fair market value as of the date of the
grant (approximately $16.50 per share). In June 1998, the options
outstanding under the initial stock option grant were cancelled. Concurrent
with this cancellation, new options were granted under the provisions of
the 1994 stock option plan at fair market value as of the date of the grant
($7.38 per share), and are generally exercisable over periods not exceeding
ten years. (See Note 1(b) Additional General Partner Interest).
A summary of the changes in options outstanding during 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE PER SHARE
<S> <C> <C>
Outstanding at January 3, 1997 750,000 $16.50
Granted -- --
Exercised -- --
--------- -----------
Outstanding at January 2, 1998 750,000 16.50
Granted 829,100 7.38
Exercised -- --
Cancelled or expired (839,600) 7.38-16.50
--------- ----------
Outstanding at January 1, 1999 739,500 $7.38
========= ==========
Exercisable at January 1, 1999 -- --
========= ==========
</TABLE>
41
<PAGE>
The Company accounts for these option plans under APB Opinion No. 25, under
which no compensation cost has been recognized. In accordance with Financial
Accounting Standards Board Statement No. 123, (SFAS No. 123) "Accounting for
Stock-Based Compensation," the Company is 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,
the Company's net loss and diluted loss per share for the year ended January
1, 1999 would have been as follows:
1998
NET LOSS:
As reported $ (661)
Pro forma (771)
DILUTED LOSS PER SHARE:
As reported $ (.10)
Pro forma (.12)
Given that disclosures under SFAS No. 123 are not applicable to options
granted prior to January 1, 1995 and given the Company has granted no options
in 1997 and 1996, there is no additional pro forma compensation expense to be
disclosed for 1997 and 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998:
YEAR ENDED JANUARY 1, 1999
Dividend yield 0%
Expected volatility 33.5%
Risk-free interest rate 6.5%
Expected lives 7.5 years
At January 1, 1999, the options granted in 1998 under the 1994 plan to
employees have an exercise price of $7.38, a fair value of $3.59 per option
and remaining contractual lives of 10 years.
9. SALES OF PROPERTY AND EQUIPMENT
On February 6, 1998, the Company completed the sale of six hotels to an
unrelated party for $39.4 million, resulting in a gain of approximately $0.2
million. The net book value of the hotels' property and equipment at the time
of the sale was approximately $38.6 million. Certain of these hotels served
as collateral under the 1994 and 1995 first mortgage notes (Note 5). Under
the terms of these indentures, the Company provided replacement collateral in
accordance with the indenture provisions.
On December 31, 1998, the Company completed the sale of an additional hotel
property to an unrelated party for $16.1 million, resulting in a gain of
approximately $8.0 million. The net book value of the hotel's property and
equipment at the time of the sale was approximately $8.0 million. In addition
to cash received upon closing, the sales price included a note receivable for
$11.9 million, 8.0% interest, due in 1999. The note receivable is secured by
the hotel and the personal guarantee of a shareholder of the buyer. This
hotel served as collateral under the 1994 first mortgage notes (Note 5).
Under the terms of this indenture, the Company must provide replacement
collateral of equivalent value or apply the net proceeds from the sale to
amounts outstanding. The Company intends to provide replacement collateral in
accordance with the indenture provisions.
42
<PAGE>
Summary unaudited operating results for the seven hotels for each of the
three years ended 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues $9,716 $35,673 $36,637
====== ======= =======
Income from operations, including depreciation and amortization
of $861, $3,101 and $2,971, respectively $1,250 $ 5,122 $ 4,722
====== ======= =======
</TABLE>
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(Thousands, except per share amounts)
QUARTERS FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
1998
Total revenues $78,952 $81,811 $82,663 $82,704
Income from operations 11,132 12,788 12,842 12,687
Net income (loss) allocable to the Company (969) (367) (578) 1,253
Basic and diluted earnings (loss) per share $ (0.15) $ (0.06) $ (0.09) $ 0.20
1997
Total revenues $70,542 $76,219 $78,864 $76,649
Income from operations 13,774 16,145 13,793 9,404
Net income (loss) allocable to the Company 1,187 1,643 557 (973)
Basic and diluted earnings (loss) per share $ 0.19 $ 0.26 $ 0.09 $ (0.15)
</TABLE>
43
<PAGE>
john q. hammons hotels, inc. portfolio
EMBASSY SUITES
Charleston, West Virginia
Columbia, South Carolina
Dallas (D/FW North), Texas
(Opens 1999)
Des Moines, Iowa
Greensboro, North Carolina
Greenville, South Carolina
Kansas City (International Airport),
Missouri
Little Rock, Arkansas
Montgomery, Alabama
North Charleston, South Carolina
(Opens 2000)
Omaha, Nebraska
Portland (Airport), Oregon
Raleigh/Durham, North Carolina
Seaside (Monterey Bay), California
Tampa, Florida
HAMPTON INN & SUITES
Mesquite, Texas (Opens 1999)
Springdale, Arkansas
HOMEWOOD SUITES
Greensboro, North Carolina
Kansas City (International Airport),
Missouri
RESORTS
Chateau on the Lake, Branson, Missouri
World Golf Village Resort, St. Augustine,
Florida
INDEPENDENTS
University Plaza, Bowling Green, Kentucky
Collins Plaza, Cedar Rapids, Iowa
Capitol Plaza, Jefferson City, Missouri
Capitol Plaza, Topeka, Kansas
RENAISSANCE
Charlotte, North Carolina
(Renaissance Suites, Opens 1999)
Oklahoma City, Oklahoma (Opens 2000)
SHERATON
Sioux Falls, South Dakota*
RADISSON
Coral Springs, Florida (Opens 1999)
Davenport, Iowa
Houston (Hobby Airport), Texas
MARRIOTT
Madison, Wisconsin
Tucson, Arizona
CROWNE PLAZA
Albuquerque, New Mexico
HOLIDAY INN
Bakersfield, California (Holiday Inn Select)
Beaumont, Texas
Denver (International Airport), Colorado
Denver (Northglenn), Colorado
Emeryville (Bay Bridge), California
Fort Collins, Colorado
Fresno, California (Sold 12/31/98)
Joliet, Illinois (Holiday Inn Express)
Joplin, Missouri
Portland (International Airport), Oregon
Rapid City, South Dakota*
Reno, Nevada
Sacramento, California
Sioux Falls, South Dakota*
Springdale, Arkansas
Springfield (North), Missouri
Springfield (University Plaza), Missouri*
Tucson (International Airport), Arizona
West Des Moines, Iowa
DAYS INN
Springfield, Missouri*
CORPORATE ADDRESS
John Q. Hammons Hotels, Inc.
300 John Q. Hammons Parkway
Suite 900
Springfield, MO 65806
Telephone: (417) 864-4300
Website: www.jqhhotels.com
INDEPENDENT AUDITORS
Arthur Andersen LLP
Cincinnati, Ohio
TRANSFER AGENT
First Union National Bank of
North Carolina
Shareholder Services Group
230 South Tryon Street
Charlotte, North Carolina 28288-1153
Toll Free (800) 829-8432
Local (704) 374-6531
Fax (704) 383-8030
10-K AVAILABILITY
The Company will furnish to any shareholder, without charge, a copy of the
Company's Annual Report or Form 10-K as filed with the Securities and Exchange
Commission for the year ended January 1, 1999 upon written request to:
Investor Relations
John Q. Hammons Hotels, Inc.
300 John Q. Hammons Parkway
Suite 900
Springfield, MO 65806
* Managed Hotels
44
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BOARD OF DIRECTORS
JOHN Q. HAMMONS
Founder, Chairman &
Chief Executive Officer
John Q. Hammons Hotels, Inc.
KENNETH J. WEBER
Executive Vice President
Chief Financial Officer
John Q. Hammons Hotels, Inc.
JACQUELINE A. DOWDY
Secretary
John Q. Hammons Hotels, Inc.
DANIEL L. EARLEY
President, Clermont Savings Bank
WILLIAM J. HART
Partner, Husch & Eppenberger, LLC
JOHN E. LOPEZ-ONA
President, Anvil Capital
JAMES F. MOORE
Chairman, Champion Products, Inc.
COMMITTEES OF THE BOARD
AUDIT COMMITTEE
James F. Moore
John E. Lopez-Ona
COMPENSATION AND
STOCK OPTION COMMITTEE
Daniel L. Earley
James F. Moore
John E. Lopez-Ona
FINANCE COMMITTEE
John E. Lopez-Ona
Daniel L. Earley
William J. Hart
OFFICERS
JOHN Q. HAMMONS
Founder, Chairman &
Chief Executive Officer
KENNETH J. WEBER
Executive Vice President &
Chief Financial Officer
LONNIE A. FUNK
Senior Vice President
Operations
JACQUELINE A. DOWDY
Secretary
STEVEN E. MINTON, AIA
Senior Vice President
Architecture
PAT A. SHIVERS
Senior Vice President
Administration & Control
JOHN D. FULTON
Vice President
Design & Construction
PAUL MUELLNER
Vice President
Corporate Controller
JAMES MILLER
Vice President
Sales & Marketing
DEBRA MALLONEE SHANTZ
Corporate Counsel
LAWRENCE A. WELCH
Vice President
Food & Beverage
ROBERT FUGAZI
Regional Vice President
Southern Region
Houston, Texas
JOE MORRISSEY
Regional Vice President
Midwest Region
Kansas City, Missouri
WILLIAM MEAD
Regional Vice President
Eastern Region
Greensboro, North Carolina
ROBERT NIEHAUS
Regional Vice President
Western Region
Sacramento, California
BILL PARKER
Regional Vice President
Central Region
Springfield, Missouri
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[LOGO]
300 john q. hammons parkway . suite 900 . springfield, mo 65806 . (417) 864-4300
. www.jqhhotels.com
