10-Q 1 c79142e10vq.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 4, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________________ to ___________________ Commission File number 033-7334001 JOHN Q. HAMMONS HOTELS, L.P. JOHN Q. HAMMONS HOTELS FINANCE CORPORATION III (Exact name of registrant as specified in its charter) DELAWARE 43-1523951 MISSOURI 33-1006528 (State or other jurisdiction of incorporation (IRS Employer or organization) Identification No.) 300 JOHN Q. HAMMONS PARKWAY SUITE 900 SPRINGFIELD, MO 65806 (Address of principal executive offices) (Zip Code) (417) 864-4300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------- ------- PART I -- FINANCIAL INFORMATION Item 1. Financial Statements JOHN Q. HAMMONS HOTELS, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) ASSETS

See Notes to Condensed Consolidated Financial Statements 2 JOHN Q. HAMMONS HOTELS, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) LIABILITIES AND EQUITY

See Notes to Condensed Consolidated Financial Statements 3 JOHN Q. HAMMONS HOTELS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (000's omitted)

See Notes to Condensed Consolidated Financial Statements 4 JOHN Q. HAMMONS HOTELS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (000's omitted)

See Notes to Condensed Consolidated Financial Statements 5 JOHN Q. HAMMONS HOTELS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (000's omitted)

See Notes to Condensed Consolidated Financial Statements 6 JOHN Q. HAMMONS HOTELS, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ENTITY MATTERS The accompanying consolidated financial statements include the accounts of John Q. Hammons Hotels, L.P. and its wholly owned subsidiaries, consisting of John Q. Hammons Hotels Finance Corporation III, a corporation with nominal assets and no operations, the catering corporations (which are separate corporations for each hotel location chartered to own the respective food and liquor licenses and operate the related food and beverage facilities), and certain other wholly-owned subsidiaries conducting certain hotel operations. In conjunction with a public offering of common stock in November 1994 by our general partner, John Q. Hammons Hotels, Inc., we obtained through transfers or contributions from Mr. John Q. Hammons or enterprises that he controlled, 21 additional operating hotel properties, equity interests in two hotels under construction, the stock of catering corporations and management contracts relating to all of Mr. Hammons' hotels, to add to the ten hotel properties we already owned. We are directly or indirectly owned and controlled by Mr. Hammons, as were all enterprises that transferred or contributed net assets to us. Accordingly, the accompanying financial statements present, as a combination of entities under common control. All significant balances and transactions between the entities and properties have been eliminated. Mr. Hammons and entities directly or indirectly owned or controlled by him are our only limited partners. Mr. Hammons, through his voting control of our general partner, continues to be in control of us. 2. GENERAL The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements have been omitted. Interim results may not be indicative of fiscal year performance because of seasonal and other factors. These interim statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the fiscal year ended January 3, 2003, which included financial statements for the fiscal years ended January 3, 2003, December 28, 2001, and December 29, 2000. The information contained herein reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial position for the interim periods. We consider all operating cash accounts and money market investments with an original maturity of three months or less to be cash equivalents. Restricted cash consists of certain funds maintained in escrow for property taxes and certain other obligations. Marketable securities consist of available-for-sale commercial paper and governmental agency obligations which mature or will be available for use in operations in 2003. These securities are valued at current market value. As of July 4, 2003, unrealized holding gains were approximately $67,000, and are included as a separate component of equity until realized. 3. ALLOCATIONS OF INCOME, LOSSES AND DISTRIBUTIONS Prior to December 30, 2000, income, losses and distributions were allocated between our general partner and our limited partners based on their respective ownership interests of 28.31% and 71.69%. Effective 7 December 30, 2000, we redeemed 1,271,581 partnership units held by our general partner for funds we advanced to our general partner to repurchase its common stock. Effective January 4, 2003, and December 29, 2001, we sold 7,550 and 11,760 partnership units, respectively, to our general partner. The number of units exchanged is equivalent to the number of shares repurchased or sold, as outlined by our Partnership Agreement. As a result, as of July 4, 2003, and June 28, 2002, Mr. Hammons' limited partnership interest remained constant at approximately 76%, while our general partner's interest is approximately 24%. In the event we have taxable income, distributions are to be made to our partners in an aggregate amount equal to the amount that we would have paid for income taxes had we been a C Corporation during the applicable period. Aggregate tax distributions will first be allocated to our general partner, if applicable, with the remainder allocated to our limited partners. As of July 4, 2003, no distributions were paid or accrued based on current estimates. Adjustments to accrued distributions will be recorded in the period in which facts and circumstances which give rise to the adjustments become known. We distribute $150,000 each year to our general partner for state franchise taxes. Through the first six months of 2003, we distributed $90,000 of this amount. 4. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We adopted this statement in the first quarter of 2003, with no material impact on our financial position, results of operations or cash flows. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which would require applying the criteria under Opinion 30 to determine whether or not the gains and losses related to the extinguishment of debt should be classified as extraordinary items. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. This statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We adopted this statement in the first quarter of 2003, and reclassified our 2002 extraordinary item to extinguishment of debt costs classified in other income (expense). In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. We adopted this standard in the first quarter of 2003, with no material impact on our financial position, results of operations or cash flows. In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities." Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a 8 variable interest that it acquired before February 1, 2003. Management does not believe that the adoption of this interpretation will have a material impact on our financial position, results of operations or cash flows. 5. LONG-TERM DEBT In May 2002, we refinanced our $300 million 8-7/8% First Mortgage Notes due February 2004, and our $90 million 9-3/4% First Mortgage Notes due April 2005, as well as construction financing on five of our properties, with new $510 million 8-7/8% First Mortgage Notes, interest payable May 15th and November 15th, and principal due May 2012. In conjunction with this refinancing we incurred aggregate early extinguishment of debt charges of approximately $7.4 million. These charges were recorded in the second quarter of 2002 ($6.792 million) and the third quarter of 2002 ($0.591 million), as these costs became known. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Unless the context indicates or requires otherwise, the terms "we," "us," "our" and other references to our company refer to our general partner, John Q. Hammons Hotels, Inc., and to John Q. Hammons Hotels, L.P. and John Q. Hammons Hotels Finance Corporation III, including all of our subsidiaries. Our consolidated financial statements include revenues from our owned hotels and management fee revenues for providing management services to the managed hotels (owned or directly controlled by Mr. Hammons). References to our hotels include both our owned hotels and our managed hotels. We derive revenues from the owned hotels from rooms, food and beverage, meeting rooms and other revenues. Our beverage revenues include only revenues from the sale of alcoholic beverages, while we show revenues from the sale of non-alcoholic beverages as part of food revenue. Direct operating costs and expenses include expenses we incur in connection with the direct operation of rooms, food and beverage and telephones. Our general, administrative, sales and management services expenses include expenses incurred for franchise fees, administrative, sales and marketing, utilities, insurance, property taxes, rent, management services and other expenses. We currently have no hotels under construction and no plans to develop new hotels for the foreseeable future. During 2000, we entered into a five-year management contract with John Q. Hammons whereby we will provide in-house development services, which include internal administrative, architectural design, purchasing and legal services, to Mr. Hammons in conjunction with the development of hotels in an amount not to exceed 1.5% of the total development costs of any single hotel for the opportunity to manage the hotel upon opening and the right to purchase the hotel in the event it is offered for sale. These costs are amortized over a five-year contract period, beginning upon the opening of the hotels. RESULTS OF OPERATIONS - THREE-MONTH PERIOD The following discussion and analysis addresses results of operations for the three-month periods ended July 4, 2003 (the "2003 Quarter") and June 28, 2002 (the "2002 Quarter"). The results of operations for the three-month and six-month periods ended July 4, 2003 are not indicative of the results to be expected for the full year. Total revenues for the 2003 Quarter were $108.7 million, a decrease of $6.5 million, or 5.6%, compared to the 2002 Quarter, primarily as a result of general economic conditions. The continuing economic slowdown and related decline in travel continued to be reflected in lower revenues in all three segments of our business. Rooms revenues decreased $2.6 million, or 3.6%, from the 2002 Quarter, but increased as a percentage of total revenues, to 63.5% from 62.2%. The dollar decrease was primarily due to the effects of the 9 economic slowdown reflected primarily in the association and corporate group travel segments of our business. Our average room rate increased slightly to $99.21 compared to the 2002 Quarter average room rate of $99.11. In comparison, the average room rate for the hotel industry was $82.87 in the 2003 Quarter, down 1.3% from the 2002 Quarter, based on information from Smith Travel Research. Our occupancy for the 2003 Quarter decreased to 65.7%, or 2.5 percentage points compared to the 2002 Quarter. Occupancy for the hotel industry was 61.9%, down 1.9 percentage points from the 2002 Quarter. Our Revenue Per Available Room (RevPAR) was $65.16 in the 2003 Quarter, down 3.6% from $67.58 in the 2002 Quarter. RevPAR for the hotel industry was $51.31, down 3.2% from the 2002 Quarter. Food and beverage revenues decreased $2.7 million, or 9.0% compared to the 2002 Quarter, and decreased as a percentage of total revenues, to 25.2% from 26.1% in the 2002 Quarter. The decrease was related to the decrease in travel described above. Meeting room rental, related party management fee and other revenues decreased $1.2 million, or 8.9%, from the 2002 Quarter, and decreased as a percentage of revenues, to 11.3% from 11.7%, as the result of decreased association and corporate group travel. Rooms operating expenses decreased $0.7 million, or 4.0%, compared to the 2002 Quarter, and decreased slightly as a percentage of rooms revenues to 24.6% from 24.7%. Food and beverage operating expenses decreased $1.2 million, or 5.2%, compared to the 2002 Quarter, but increased as a percentage of food and beverage revenues, to 80.3% from 77.1%. The percentage increase was attributable to certain food and labor costs that do not vary as food and beverage sales volumes related to the association and corporate group travel business segments decline. Other operating expenses decreased slightly to $0.7 million compared to the 2002 Quarter, and decreased as a percentage of meeting room rental, related party management fee and other revenues, to 5.7% from 6.7%. General, administrative and sales expenses decreased $1.1 million, or 3.2%, from the 2002 Quarter, but increased as a percentage of total revenues to 31.0% from 30.2%. The dollar decrease was primarily attributable to decreases in franchise fees, property taxes and various administrative costs, partially offset by increases in guest frequency program costs, rising natural gas prices and insurance costs. Repairs and maintenance expenses remained stable at $4.6 million, compared to the 2002 Quarter, and increased slightly as a percentage of revenues, to 4.2% from 4.0% in the 2002 Quarter. Depreciation and amortization expenses decreased by $0.5 million, or 3.8%, compared to the 2002 Quarter, but increased slightly as a percentage of revenues to 11.6% from 11.4%. The dollar decrease related to our cessation of new hotel development. Income from operations decreased by $2.9 million, or 13.9%, compared to the 2002 Quarter, and decreased as a percentage of revenues to 16.6% from 18.1%. The decrease is primarily attributable to decreased revenues, without corresponding decreases in certain fixed expense items, including natural gas prices and guest frequency program costs. Net income (loss) was $0.6 million of income in the 2003 Quarter, compared to a loss of $4.0 million in the 2002 Quarter. The variation related to the effect of expenses for the early extinguishment of debt in the 2002 Quarter (the refinancing of our outstanding 8-7/8% and 9-3/4% First Mortgage Notes for new 8-7/8% First Mortgage Notes due 2012), in addition to the items discussed above. RESULTS OF OPERATIONS - SIX-MONTH PERIOD 10 The following discussion addresses results of operations for the six-month periods ended July 4, 2003 (the "2003 Six Months"), and June 28, 2002 (the "2002 Six Months"). Total revenues decreased to $218.8 million in the 2003 Six Months from $222.6 million in the 2002 Six Months, a decrease of $3.8 million or 1.7%. The decrease is attributable to ongoing weaknesses in the association and corporate group travel segments of our business. Rooms revenues decreased to $136.4 million in the 2003 Six Months from $137.0 million in the 2002 Six Months, a decrease of $0.6 million or 0.4%, reflected primarily in the association and corporate group travel segments of our business. Rooms revenues as a percentage of total revenues increased slightly, to 62.3%, compared to 61.5% in the 2002 Six Months. Our average room rate increased to $100.29 in the 2003 Six Months from $99.11 in the 2002 Six Months, an increase of $1.18, or 1.2%. Occupancy decreased slightly to 64.2% in the 2003 Six Months from 65.3% in the 2002 Six Months, a decrease of 1.1 percentage points. Our revenue per available room (RevPAR) was $64.43 in the 2003 Six Months, down 0.4% from the 2002 Six Months. RevPAR for the hotel industry was $48.70, down 2.5% from the 2002 Six Months. Food and beverage revenues decreased to $56.5 million in the 2003 Six Months from $59.4 million in the 2002 Six Months, a decrease of $2.9 million, or 4.9%, and decreased as a percentage of total revenues to 25.8% from 26.7% in the 2002 Six Months. The decrease related to the decreased association and corporate group travel discussed above. Meeting room rental, related party management fee and other revenues decreased to $25.9 million in the 2003 Six Months from $26.2 million in the 2002 Six Months, a decrease of $0.3 million or 1.1%. Meeting room rental, related party management fee and other revenues remained stable as a percentage of total revenues at 11.8%. The dollar decrease was the result of decreased association and corporate group travel. Rooms operating expenses decreased to $33.3 million in the 2003 Six Months from $33.8 million in the 2002 Six Months, a decrease of $0.5 million, or 1.5%. This expense decreased slightly as a percentage of rooms revenue, to 24.4% from 24.7% in the 2002 Six Months. The decrease was attributable to reduced labor and other costs directly related to the reduction in occupied rooms in the 2003 Six Months compared to the 2002 Six Months. Food and beverage operating expenses decreased to $43.9 million in the 2003 Six Months from $45.4 million in the 2002 Six Months, a decrease of $1.5 million, or 3.3%, as the result of decreased food and beverage revenues. These expenses increased as a percentage of food and beverages revenues in the 2003 Six Months to 77.7%, from 76.4% in the 2002 Six Months, as the result of fixed food and labor costs that do not vary as food and beverage sales related to the association and corporate group travel business decline. Other operating expenses decreased to $1.4 million in the 2003 Six Months, from $1.6 million in the 2002 Six Months, and decreased as a percentage of meeting room rental, related party management fee and other income, to 5.4% in the 2003 Six Months from 6.1% in the 2002 Six Months. General, administrative and sales expenses increased to $69.8 million in the 2003 Six Months from $67.8 million in the 2002 Six Months, an increase of $2.0 million, or 2.9%, and increased as a percentage of total revenues to 31.9% from 30.5% in the 2002 Six Months. The increase was primarily attributable to increased guest frequency programs, natural gas prices and insurance costs, partially offset by decreases in franchise fees, property taxes and various administrative costs. Repairs and maintenance expenses remained stable at $9.0 million compared to the 2002 Six Months, and increased slightly as a percentage of revenues to 4.1% from 4.0% in the 2002 Six Months. 11 Depreciation and amortization expenses decreased to $25.1 million in the 2003 Six Months from $26.1 million in the 2002 Six Months, a decrease of $1.0 million, or 3.8%, and decreased as a percentage of total revenues to 11.5% from 11.7% in the 2002 Six Months. The decrease was related to cessation of new hotel development. Income from operations was $36.3 million in the 2003 Six Months compared to $39.0 million in the 2002 Six Months, a decrease of $2.7 million, or 6.9%. As a percentage of revenue, income from operations decreased to 16.6% in the 2003 Six Months from 17.5% in the 2002 Six Months. Net income (loss) was $1.6 million of income in the 2003 Six Months, compared to a $2.8 million loss in the 2002 Six Months. The variation related to the effect of expenses for the early extinguishment of debt in the 2002 Six Months (the refinancing of our outstanding 8-7/8% and 9-3/4% First Mortgage Notes for new 8-7/8% First Mortgage Notes due 2012), in addition to the items discussed above. LIQUIDITY AND CAPITAL RESOURCES In general, we have financed our operations through internal cash flow, loans from financial institutions, the issuance of public and private debt and equity, and the issuance of industrial revenue bonds. Our principal uses of cash are to pay operating expenses, to service debt, to fund capital expenditures and to make distributions to fund some of the taxes allocable to partners. At July 4, 2003, we had $33.9 million of cash and equivalents and $12.2 million of marketable securities, compared to $21.8 million and $12.5 million, respectively, at the end of 2002. Such amounts are available for our working capital requirements. Cash from operating activities remained stable at $31.0 million for the 2003 Six Months and the 2002 Six Months, as the result of increases in net income, prepaid expenses and accrued expenses, which were offset by decreases in debt extinguishment costs, depreciation costs and accounts payable. We incurred capital expenditures of $6.1 million and $12.4 million (approximately $2.9 million of which was related to correcting the moisture related issues discussed below), respectively, for the 2003 Six Months and the 2002 Six Months. Capital expenditures typically include capital improvements on existing hotel properties. During fiscal 2000, we initiated claims against certain of our construction service providers, as well as with our insurance carrier. These claims resulted from costs we incurred and expected to incur to address moisture related problems caused by water intrusion through defective windows. In December 2001, we initiated legal actions in an effort to collect claims previously submitted. Subsequent to the filing of the legal action, the insurance carrier notified us that a portion of our claims had been denied. As of July 4, 2003, we had incurred approximately $11.8 million of an estimated $12.3 million of costs to correct the underlying moisture problem. We will continue to vigorously pursue collection of these costs. Currently a trial is set for January of 2004. Our total cumulative depreciation charge through July 4, 2003, was $7.6 million, which we recorded in fiscal 2001 to reserve the net historical costs of the hotel property assets refurbished absent any recoveries. To the extent we realize recoveries we will record them as a component of other income. During the second quarter of 2002, we completed the refinancing of our long-term debt, primarily our $300 million 8-7/8% First Mortgage Notes due February 2004 and our $90 million 9-3/4% First Mortgage Notes due April 2005, as well as $30.1 million of short-term debt, with new $510 million 8-7/8% First Mortgage Notes due May 2012. We expect 2003 capital requirements to be funded by cash and cash flow from operations. Based upon current plans, we anticipate that our capital resources will be adequate to satisfy our 2003 capital requirements for normal recurring capital improvement projects. 12 At July 4, 2003, our total debt was $796.2 million compared with $806.3 million at the end of 2002. The decrease is attributable to the $10.1 million reduction of existing debt (including the prepayment of a 9-1/4% note for $6.3 million due in the fourth quarter of 2003) since the end of 2002. The current portion of long-term debt was $7.7 million, compared with $13.7 million at the end of 2002. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We adopted this statement in the first quarter of 2003, with no material impact on our financial position, results of operations or cash flows. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which would require applying the criteria under Opinion 30 to determine whether or not the gains and losses related to the extinguishment of debt should be classified as extraordinary items. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We adopted this statement in the first quarter of 2003, and reclassified our 2002 extraordinary item to extinguishment of debt costs classified in other income (expense). In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, or other exit or disposal activity. We adopted this standard in the first quarter of 2003, with no material impact on our financial position, results of operations or cash flows. In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation of Variable Interest Entities." Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management does not believe that the adoption of this interpretation will have a material impact on our financial position, results of operations or cash flows. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to bad debts, investments, valuation of long-lived assets, self-insurance reserves, contingencies and litigation. We base our estimates and 13 judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the following critical accounting policies, among others, affect our more significant estimates and assumptions used in preparing our consolidated financial statements. Actual results could differ from our estimates and assumptions. Trade receivables are reflected net of an estimated allowance for doubtful accounts. This estimate is based primarily on historical experience and assumptions with respect to future payment trends. Property and equipment are stated at cost less accumulated depreciation. The assessment of long-lived assets for possible impairment requires us to make certain judgments, including real estate values and estimated future cash flow from the respective properties and investments. We review the recoverability of our long-lived assets when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Our deferred financing costs, franchise fees and other assets include management and franchise contracts and leases. The value of our management and franchise contracts and leases are amortized on a straight-line method over the life of the respective agreement. The assessment of management and franchise contracts and leases requires us to make certain judgments, including estimated future cash flow from the respective properties. We are self-insured for various levels of general liability, workers' compensation and employee medical coverages. Estimated costs related to these self insurance programs are accrued based on known claims and projected settlements of unasserted claims. Subsequent changes in, among others, unasserted claims, claim cost, claim frequency, as well as changes in actual experience, could cause these estimates to change. We recognize revenues from our rooms, catering and restaurant facilities as earned on the close of business each day. FORWARD-LOOKING STATEMENTS This Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, regarding, among other things, our operations outlook, business strategy, prospects and financial position. These statements contain the words "believe," "anticipate," "estimate," "expect," "project," "intend," "may," "will," and similar words. These forward-looking statements are not guarantees of future performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from any future results expressed or implied by such forward looking statements. Such factors include, among others: o General economic conditions; including the duration and severity of the current economic slowdown and the pace at which the lodging industry adjusts to the continuing war on terrorism; o The impact of any serious communicable diseases on travel, including any increase or further spread in Severe Acute Respiratory Syndrome (SARS); o Competition; o Changes in operating costs, particularly energy and labor costs; o Unexpected events, such as terrorist attacks or outbreaks of war; o Risks of hotel operations, such as hotel room supply exceeding demand, increased energy and other travel costs and general industry downturns; o Seasonality of the hotel business; o Cyclical over-building in the hotel and leisure industry; o Requirements of franchise agreements, including the right of some franchisors to 14 immediately terminate their respective agreements if we breach certain provisions; and o Costs of complying with applicable state and federal regulations. These risks and uncertainties, as well as the risk factors discussed in our Form 10-K should be considered in evaluating any forward-looking statements contained in this Form 10-Q. We undertake no obligation to update or revise publicly any forward looking statement, whether as a result of new information, future events or otherwise, other than as required by law. SUPPLEMENTAL FINANCIAL INFORMATION RELATING TO THE COLLATERAL HOTELS The following table sets forth, as July 4, 2003, unaudited selected financial information with respect to the hotels collateralizing our $510 million of 8-7/8% First Mortgage Notes, and about us, excluding our Unrestricted Subsidiaries (as defined in the indenture governing the notes), which we refer to as the "Restricted Group". Under the heading "Management Operations," we provide information with respect to revenues and expenses we generate as manager of the collateral hotels and the other hotels we own or manage. TRAILING 12 MONTHS ENDED JULY 4, 2003

(a) Represents management revenues derived from the 17 non-collateral hotels and the eleven managed hotels. (b) General, administrative, sales and management expenses for the collateral hotels include management expenses allocated to the respective hotels. (c) General, administrative, sales and management expenses for the collateral hotels reflect a credit for the management revenues associated with the management expenses included in general, administrative, sales and management expenses for the collateral hotels. 15 TRAILING 12 MONTHS ENDED JUNE 28, 2002

(a) Represents management revenues derived from the 17 non-collateral hotels and the nine managed hotels. (b) General, administrative, sales and management expenses for the collateral hotels include management expenses allocated to the respective hotels. (c) General, administrative, sales and management expenses for the collateral hotels reflect a credit for the management revenues associated with the management expenses included in general, administrative, sales and management expenses for the collateral hotels. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to changes in interest rates primarily as a result of our investing and financing activities. Investing activity includes operating cash accounts and investments, with an original maturity of three months or less, and certain balances of various money market and common bank accounts. Our financing activities are comprised of long-term fixed and variable-rate debt obligations utilized to fund business operations and maintain liquidity. The following table presents the principal cash repayments and related weighted average interest rates by maturity date for our long-term fixed and variable rate debt obligations as of July 4, 2003:

(a) Includes amounts reflected as long-term debt due within one year. 16 (b) For the long-term fixed rate debt obligations, the weighted average interest rate is based on the stated rate of the debt that is maturing in the year reported. The weighted average interest rate excludes the effect of the amortization of deferred financing costs. (c) For the long-term variable rate debt obligations, the weighted average interest rate assumes no changes in interest rates and is based on the variable rate of the debt, as of July 4, 2003, that is maturing in the year reported. The weighted average interest rate excludes the effect of the amortization of deferred financing costs. (d) The 2003 balances include actual and projected principal repayments and weighted average interest rates. (e) The fair values of long-term debt obligations approximate their respective historical carrying amounts except with respect to the $510 million First Mortgage Notes. The fair value of the First Mortgage Notes is estimated by obtaining quotes from brokers. A one percentage point change in the par on the then-current premium or discount quote received for the $510 million First Mortgage Notes would have an effect of approximately $5 million. A one percentage point change in the 8-7/8% rate used to calculate the fair value of other fixed rate debt would change its estimated fair value by approximately $13 million. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. The chief executive officer and chief financial officer of our general partner have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-14(d) and 15d-14(d) under the Securities Exchange Act of 1934) as of July 4, 2003. Based on that review, they have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that material information relating to us would be made known to them. Changes in internal controls. There were no significant changes in our internal controls or, to the knowledge of the chief executive officer and chief financial officer of our general partner, in other factors that could significantly affect our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, after the date of such evaluation. PART II. OTHER INFORMATION AND SIGNATURES ITEM 1. Legal Proceedings Not Applicable ITEM 2. Changes in Securities and Use of Proceeds Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Securities Holders Not Applicable 17 ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K Form 8-K to furnish Press Release announcing July 4, 2003 results, filed August 12, 2003. 18 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereto duly authorized. JOHN Q. HAMMONS HOTELS, L.P. By: John Q. Hammons Hotels, Inc. its General Partner By: /s/ John Q. Hammons -------------------------------------- John Q. Hammons, Chairman, Founder, and Chief Executive Officer By: /s/ Paul E. Muellner -------------------------------------- Paul E. Muellner, Chief Financial Officer (Principal Financial Officer) JOHN Q. HAMMONS HOTELS FINANCE CORPORATION III By: /s/ John Q. Hammons -------------------------------------- John Q. Hammons, Chairman, Founder, and Chief Executive Officer By: /s/ Paul E. Muellner -------------------------------------- Paul E. Muellner, Chief Financial Officer (Principal Financial Officer) Dated: August 15, 2003 19 EXHIBIT INDEX EXHIBIT NO. TITLE 31.1 Rule 13a-14(a)/15d-14(a) Certification of general partner's Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of general partner's Chief Financial Officer 32 Section 1350 Certification of general partner's Chief Executive Officer and Chief Financial Officer 20

HAMMONS JOHN Q FINANCE CORP III 10-Q