-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q0D1U+TIY/Ccu8ohDxZkdqZjx+z9Gf1vmiyEI5q1PNu7KzF9C2RprS5HN49+pnqz 9aK/hmXKL1O43PEFud3jqQ== 0000950131-99-005141.txt : 19990831 0000950131-99-005141.hdr.sgml : 19990831 ACCESSION NUMBER: 0000950131-99-005141 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAMMONS JOHN Q HOTELS INC CENTRAL INDEX KEY: 0000930796 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 431695093 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-13486 FILM NUMBER: 99703036 BUSINESS ADDRESS: STREET 1: 300 JOHN Q HAMMONS PKWY STE 900 CITY: SPRINGFIELD STATE: MO ZIP: 65806 BUSINESS PHONE: 4178644300 MAIL ADDRESS: STREET 1: 300 JOHN Q HAMMONS PKWY STREET 2: SUITE 900 CITY: SPRINGFIELD STATE: MO ZIP: 65806 10-K405/A 1 AMENDED 10-K405 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)
Delaware 43-16950593 (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
Securities registered pursuant to Section 12(b) of the Act: 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
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. 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) EXHIBIT INDEX No. Title - --- ------ 13.1 1998 Annual Report to Shareholders EX-13 2 EXCERPTS FROM THE ANNUAL REPORT [INSERT PHOTO] John Q. Hammons ---------------- HOTELS & RESORTS 300 john q. hammons parkway . suite 900 . springfield, mo 65806 . (417) 864-4300 . www.jqhhotels.com [INSERT PHOTO] John Q. Hammons ---------------- HOTELS & RESORTS [INSERT PHOTO] 19 98 annual report 1998 --------------------------------------------------- THE BUILDING BLOCKS OF OUR SUCCESS financial highlights - --------------------------------------------------------------- (in thousands, except per share amounts, ratios and hotel data)
1998 1997 1996 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
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 [ ] 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. ---------------------------------------------------------------------- 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 [INSERT PICTURE] the atrium at embassy suites downtown/old market, omaha [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 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 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 the atrium at embassy suites portland airport [PHOTO] 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 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] 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 EMBASSY SUITES PORTLAND AIRPORT Portland, Oregon [PHOTO] CHATEAU ON THE LAKE RESORT HOTEL & CONVENTION CENTER Branson, Missouri [PHOTO] 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 [INSERT PHOTO] the grand ballroom at chateau on the lake 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 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:
1997 High Low 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
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 selected consolidated financial information
(in thousands, except per share amounts, ratios and hotel data) - ----------------------------------------------------------------------------------------------------- FISCAL YEAR-ENDED 1998 1997 1996 1995 1994 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 ======== ======== ======== ======== ========
14
Continued 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
(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 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 results of operations of the company - ---------------------------------------
FISCAL YEAR-ENDED 1998 1997 1996 1995 1994 OWNED HOTELS 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% ========== =========== =========== =========== ===========
(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 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 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 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 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 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 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 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 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:
EXPECTED MATURITY DATE (IN MILLIONS) 1999 2000 2001 2002 2003 Thereafter Total Fair Value (d) 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%
(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 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 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONSOLIDATED BALANCE SHEETS (000's omitted, except share data)
ASSETS FISCAL YEAR ENDED 1998 1997 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 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 27 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONSOLIDATED BALANCE SHEETS (000's omitted, except share data)
LIABILITIES AND EQUITY FISCAL YEAR ENDED 1998 1997 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 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 28 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted, except share data)
FISCAL YEAR ENDED 1998 1997 1996 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 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 29 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN MINORITY INTEREST AND STOCKHOLDERS' EQUITY (000's omitted)
MINORITY INTEREST STOCKHOLDERS' EQUITY CLASS A CLASS B COMPANY RETAINED COMMON COMMON PAID-IN DEFICIT AFTER STOCK STOCK CAPITAL REORGANIZATION TOTAL 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 ======== ======== ======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 30 JOHN Q. HAMMONS HOTELS, INC. AND COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted)
FISCAL YEAR ENDED 1998 1997 1996 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 $ -- $ -- ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 31 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 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 The components of deferred financing costs, franchise fees, and other are summarized as follows:
FISCAL YEAR-ENDED 1998 1997 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 ======== =======
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 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:
1998 1997 1996 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% ===== ===== ===== ===== ======= =====
35 At January 1, 1999 and January 2, 1998, the net deferred tax liability consisted of the following:
DEFERRED TAX ASSETS: 1998 1997 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) ======= =======
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 (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 (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:
1998 1997 1996 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 ====== ====== ======
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 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:
FISCAL YEAR-ENDED 1998 1997 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 ======== ========
39 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:
YEAR-ENDED YEAR-ENDED 1998 1999 $ 42,256 2000 6,828 2001 19,844 2002 39,946 2003 23,533 Thereafter 627,309 -------- $759,716 ========
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 The minimum annual rental commitments for these noncancelable operating leases at January 1, 1999 are as follows:
FISCAL YEAR-ENDED JQH OTHER TOTAL 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 ======= ======= =======
(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:
NUMBER OF SHARES OPTION PRICE PER SHARE 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 -- -- ========= ==========
41 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 Summary unaudited operating results for the seven hotels for each of the three years ended 1998, 1997 and 1996 are as follows:
1998 1997 1996 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 ====== ======= =======
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Thousands, except per share amounts) QUARTERS FIRST SECOND THIRD FOURTH 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)
43 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 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 [LOGO] 300 john q. hammons parkway . suite 900 . springfield, mo 65806 . (417) 864-4300 . www.jqhhotels.com -----END PRIVACY-ENHANCED MESSAGE-----