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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 33-78866
----------------------
MOA HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0166914
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
701 Lee Street, Suite 1000, Des Plaines, Illinois 60016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 803-1200
Securities registered pursuant to Section 12(b) of the Act: NONE
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.
[X] Yes [] 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] Yes [] No
Number of shares of Common Stock, $.01 par value outstanding as of May
14, 1999: 800,000
INDEX TO FORM 10-K
Page
Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on 25
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and 29
Management
Item 13. Certain Relationships and Related Transactions 29
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports 30
on Form 8-K
ITEM 1. BUSINESS
General
MOA Hospitality, Inc. and its subsidiaries ("MOA" or the "Company")
is a leading owner and operator of national brand affiliated limited service
lodging facilities in the United States. As of December 31, 1998, the Company,
directly and through subsidiaries, owned 135 lodging facilities located in 38
states with a total of 10,736 rentable guestrooms. The Company owns a 100%
interest in all but two of its properties. At December 31, 1998, the Company
operated all of its motels with the exception of five motels that were leased
to and operated by third-party tenants pursuant to operating leases. The
Company's largest concentrations of lodging facilities are located in the States
of Illinois and Georgia with 13 lodging facilities in each state. Properties
owned in the states of Illinois and Georgia at December 31, 1998, accounted
for 8.01% and 6.16% of consolidated motel operating revenues for the year ended
December 31, 1998, respectively. 118 of the Company's lodging facilities are
operated pursuant to franchise or license agreements under the following
national brand names: Best Western, Comfort Inn, Day's Inn, Holiday Inn
Express, Microtel, Ramada, Ltd., Super 8, Travelodge and Villager Lodge. 105
of the franchise or license agreements are with brands owned by Cendant
Corporation including 91 with Super 8 Motels, Inc., a wholly owned subsidiary
of Cendant Corporation. MOA believes its lodging facilities benefit from
affiliating with national brands primarily due to the national brand name
recognition achieved through national advertising and product distribution.
In addition, the franchisor or licensor typically provide additional services
such as: central reservation services, sponsorship of customer loyalty programs,
exposure in published travel directories, leads with respect to group tour
business and other professional services such as quality assurance inspections.
Subsequent to December 31, 1998 through May 14, 1999, the Company
closed on the sale of six properties. In addition, the Company entered into
seven additional leases with third-party tenants.
The Company was incorporated in 1986 under the laws of the State of
Delaware to continue the business commenced by its predecessors in 1982. The
Company's principal executive offices are located at 701 Lee Street, Suite 1000,
Des Plaines, Illinois 60016, telephone (847) 803-1200.
Recent History
The Company has experienced a deterioration in its operating
performance over the past several years. The following table summarizes the
recent operating performance of the Company (in 000's):
1994 1995 1996 1997 1998
------ ------ -------- -------- ---------
Income(Loss) from Operations prior
to Impairment Losses and
Restructuring Costs $4,460 $1,685 $(1,080) $(3,137) $(11,474)
Impairment Losses and
Restructuring Costs -- -- -- (3,276) (9,300)
------ ------ -------- -------- ---------
Income(Loss) from Operations $4,460 $1,685 $(1,080) $(6,413) $(20,774)
====== ====== ======== ======== =========
The Company attributes the deterioration in its operating performance to a
myriad of factors, including but not limited to, a significant increase in
competitive supply resulting from the extensive building of new motel properties
in the markets in which the Company competes. Also increases in certain
operating costs including labor due to the historically low levels of
unemployment requiring the Company to compete with other industries for
qualified employees. Based on a property-by-property review, the Company
believes it is unlikely that it will realize the carrying value of certain of
its assets due to a deterioration in their operating performance caused by
factors outside of management's control and which are expected to continue for
the foreseeable future. As a result of this review, the Company recorded an
impairment loss of $9.3 million in 1998. In 1997, the Company also recorded
impairment losses of $2.5 million and restructuring charges of $750,000. As
discussed below, the Company has undertaken a number of transactions during the
period presented above including acquisitions, development and sales of
properties along with refinancing of the Company's mortgage debt. Although the
Company believes it has or will be able to obtain adequate resources to meet its
near-term maturing debt and other obligations, the deteriorating trend in
operating results noted above could adversely affect the Company's ability to
meet its maturing debt obligations in 2004 and 2005, including the maturity of
the $80 million 12% Senior Subordinated Notes in 2004.
Since December 31, 1995, the Company has had a net increase in the
number of lodging properties owned from 125 properties to 135 properties at
December 31, 1998. This net increase was accomplished through acquisition and
development funded by borrowings and internally generated funds, including funds
realized from the sale of certain properties. A summary of the significant
transactions with respect to the number of lodging properties owned and operated
by the Company that have occurred since December 31, 1995 through May 14, 1999
is as follows:
In January 1996, the Company acquired nineteen lodging facilities from
Forte USA, Inc., a subsidiary of Forte Hotels, Inc., for approximately $35.5
million in cash. The transaction was funded by $30.9 million of borrowings under
a two-year secured line of credit facility established with Nomura Asset Capital
Corporation ("NACC") in 1994 and from other unaffiliated sources. During 1996,
the Company, in a series of transactions, sold eleven motel properties for $15.8
million in net cash proceeds and $6.3 million in mortgage and other notes
receivable. In November 1996, the Company completed two separate financing
transactions with CS First Boston Corporation ("CSFB") pursuant to which the
Company borrowed approximately $37.2 million. Approximately $29.8 million of the
proceeds were utilized to repay the entire outstanding borrowings under the NACC
secured line of credit facility; $1.6 million of the proceeds were utilized
toward a partial pay-down of certain other borrowings; and the remaining net
proceeds were retained for general corporate purposes. Two other lodging
properties were acquired during 1996 in two separate transactions.
In 1997, an affiliate of the Company was formed for the sole purpose of
constructing lodging properties to be acquired by a subsidiary of the Company
upon completion at cost. Such affiliate develops the lodging properties from its
own funds, payments from the Company on account to be applied towards the
purchase price and the proceeds of a $20.0 million revolving construction loan
facility arranged by the affiliate. In connection with the construction loan
facility, the Company had guaranteed completion of the construction of each
property and the subsidiary acquiring the properties had guaranteed the
construction loan facility to a maximum of $10.0 million. In 1997, five (5) such
properties were acquired for $12.9 million of which $7.8 million was funded from
a $150.0 million secured loan facility between the subsidiary acquiring the
properties and CSFB. This facility provided for, among other things, interest
computed at a rate based upon the thirty (30) day LIBOR rate plus 300 basis
points, monthly principal and interest payments at an 11.5% per annum constant,
and repayment in full of each funding made pursuant to the facility forty-two
(42) months after the date of each such funding. In addition, the Company has
pledged its interest in a wholly owned subsidiary to secure up to $20.0 million
of borrowing under the facility. The $20.0 million revolving construction loan
facility of the affiliate matured in 1998. The outstanding balances were paid in
full upon the purchase of financed properties by a subsidiary of the Company
with funds borrowed under the $150.0 million secured loan facility with CSFB and
the application of amounts previously deposited with the affiliate. At December
31, 1998 the $150.0 million secured loan facility with CSFB matured with respect
to any additional funding thereunder. At December 31, 1998, approximately $17.7
million of borrowings were outstanding under the $150.0 million CSFB secured
loan facility. The amount outstanding is secured by eleven properties and a
pledge of the common stock of the subsidiary that owns such properties. As a
result of the Company's under utilization of the CSFB loan facility, the Company
changed its estimate of the economic benefit of certain deferred loan costs
incurred in connection with obtaining the facility and accordingly accelerated
the amortization of $1.9 million of such costs in 1998.
During 1997, in separate transactions, the Company sold two properties
for an aggregate of $3.9 million consisting of cash in the amount of $0.1
million, a mortgage note receivable in the amount of $1.0 million and the
buyer's assumption of a mortgage note in the amount of $2.3 million. The Company
remains contingently liable on the $2.3 million note; in the event the purchaser
does not perform under its obligations.
During 1998, the Company, in a series of separate transactions with
unaffiliated parties, sold ten properties for approximately $61.3 million
consisting of cash in the amount of $53.0 million and first mortgage notes in
the amount of $8.3 million. These transactions resulted in a net gain of
approximately $23.7 million. Approximately $33.3 million of the net proceeds
were utilized to pay down certain outstanding borrowings. During 1998, the
Company also sold a parcel of vacant land and an investment in a partnership for
an aggregate amount of $4.2 million in cash that resulted in gains of
approximately $2.4 million.
During 1998, the Company acquired seven newly constructed motels from
an affiliate at cost for an aggregate amount of $20.6 million in cash. The
purchases of these motels were funded from $11.4 million of new borrowing under
the CSFB secured loan facility referred to above, application of amounts
previously deposited with the affiliate and from internally generated funds,
including funds from the net proceeds from the sale of properties. As of
December 31, 1998, there is one motel property being constructed for the Company
by the affiliate and the affiliate is holding one parcel of vacant land. The
Company anticipates acquiring the motel currently under construction in 1999 for
approximately $2.7 million.
Subsequent to December 31, 1998 through May 14, 1999, the Company sold
six properties for approximately $16.9 million consisting of $7.0 million in
cash and $9.9 million in first mortgage notes. These sales transactions resulted
in losses of $2.7 million and gains of $1.6 million. The Company recorded the
losses in its 1998 operating results as a component of impairment losses
reflected on the face of the Consolidated Statements of Operations.
Industry and Competition
The United States lodging industry is generally comprised of two
sectors: full-service facilities and limited-service facilities. Full-service
lodging facilities generally have more extensive common areas (including
restaurants, lounges and extensive meeting room facilities), offer more services
such as bell service and room service, and tend to be larger in terms of number
of rooms than limited-service facilities. MOA's properties are principally
limited-service type lodging facilities. The United States lodging industry is
also categorized into five general price segments (based on relative pricing in
local markets): luxury, upscale, mid-price, economy, and budget. MOA's
properties predominately fall into the economy segment with a small percentage
represented in both the mid-price and budget segments. Industry estimates
indicate that there are over 23,000 lodging facilities within the mid-price,
economy and budget segments. The United States lodging industry is also
generally considered to be relatively fragmented in terms of ownership,
especially with respect to the mid-price, economy and budget segments. This
combination of a large number of competitive lodging facilities and limited
concentration of ownership makes the segment in which MOA's lodging facilities
compete very competitive.
Generally, each of the Company's lodging facilities competes within its
local market with several national and regional brand affiliated lodging
facilities along with many independent competitive lodging facilities. Some of
the more recognizable brands with which the Company's lodging facilities compete
either directly or indirectly include: Baymont Inns (f/k/a Budgetel Inns),
Comfort Inns, Day's Inns, Fairfield Inns, Hampton Inns, Holiday Inn Express,
LaQuinta Inns, Motel 6, Ramada, Ltd., Red Roof Inns, Super 8 Motels and
Travelodge. Distinguishing characteristics among competitive lodging facilities
include: convenience of location, degree of curb appeal, reasonableness of room
rates, and in particular with repeat customers the quality and cleanliness of
room accommodations and the level of service.
The Company competes with other lodging facilities for a wide spectrum
of business and leisure travelers who desire consistency in the quality of their
accommodations and demand reasonable prices. They tend to be value conscious
consumers consisting of: construction workers, sales people, technicians, senior
citizens, government and military employees, and vacation travelers. Due to the
nature and location of the Company's lodging facilities, the Company does not
experience any significant degree of advance bookings typical with many resort
or destination locations nor does any one customer represent a significant
portion of the Company's revenues.
The lodging industry has seen a significant increase in the
construction of new lodging facilities over the course of the past few years.
Management believes this increase is a result of the relative strength of the
United States' economy, which in turn has resulted in greater travel, and
stronger operating performance of lodging facilities in general. Management also
believes the increase in new construction has been facilitated by an increased
availability of financing for such projects and a relatively favorable interest
rate environment. Based on the Company's internally prepared surveys of new
supply entering the markets in which it competes, the percentage increase in new
supply in such markets appears to have peaked in 1996 with a slightly lower
percentage increase experienced in 1997 and significantly lower percentage of
new supply in 1998. The extent of new supply that has occurred however, is
expected to continue to negatively impact the Company's operating performance
especially during the off-peak seasons. For the first quarter of 1999, the
Company's same store motel room revenues declined 1.2% in comparison to the
first quarter of 1998.
Demand for the Company's lodging facilities is affected by normally
recurring seasonal patterns. Demand for the Company's lodging facilities is
generally highest during the months of June, July and August and lowest during
the months of December, January and February. As is the case for the lodging
industry in general, demand for the Company's lodging facilities may be affected
by weather, national and regional economic conditions, government regulations,
changes in travel patterns including temporary interruptions due to road
construction and more permanent interruptions due to the development of new
interchanges and alternative routes, construction of new lodging facilities,
changes in the degree of competition from existing lodging facilities and other
factors.
Ownership Structure
At December 31, 1998, the Company had 100% ownership interest, either
directly or through subsidiaries, in 133 of the 135 lodging facilities it owned.
The Company was a general partner with ownership interests of 30% and 50% in two
individual limited partnerships each of which owned one lodging facility as its
principal asset. These partially owned lodging facilities have been consolidated
for financial reporting purposes due to the management and control which the
Company possesses.
Franchise and License Agreements
The Company operates 118 of its lodging facilities pursuant to
franchise or license agreements. Ninety-one of these agreements are with Super 8
Motels, Inc. The franchise fees (including royalties and contributions to
advertising and media funds) range from 6% to 9% of room revenues. Under the
Super 8 franchise agreements, the franchiser is obligated to: provide certain
standardized training programs; publish a travel directory with information
pertaining to all Super 8 motels; maintain an advertising and reservation fund
to be administered by the franchiser for advertising and promotion; inspect the
motels to assure satisfaction of Super 8 specifications and maintain
availability of corporate officers and employees for consultation concerning
motel operations. The obligations of the franchisee include, among other things,
maintaining the motel in a manner that satisfies Super 8 quality assurance
standards and compliance with Super 8 rules of operations.
The Super 8 franchise agreements have an initial 20-year term that, for
the Company, results in various ending dates ranging from 1999 through 2019. The
agreements continue thereafter on a year-by-year basis unless terminated by
either party upon nine months notice. The agreements provide a negotiated area
of geographic protection within which the franchiser is prohibited from
franchising another Super 8 motel. Upon expiration of individual franchise
agreements there is no assurance that a renewal franchise agreement will afford
the Company the same benefits that existed under the previously existing
franchise agreement. Generally, new franchise agreements have higher franchise
fees and reduced areas of protections.
The Company has twenty-seven franchise or license agreements with other
franchisers or licensees. These agreements, which have various terms with ending
dates through 2017, generally provide similar benefits and obligations as the
Super 8 franchise agreements. Not all of franchise and license agreements for
the non Super 8 brands provide for a specific area of geographic protection in
which case, they generally rely on an impact policy to determine if another
lodging facility with the same brand affiliation could be located within a
particular market.
The Company has four standard license agreements with Best Western
International. These agreements provide for an annual renewal.
During 1997, the Company and certain of its subsidiaries commenced
legal actions against ShoLodge Franchise Systems, Inc. ("ShoLodge") the
franchisor of Shoney's Inns. The Company among other things has claimed that
ShoLodge has breached its contractual obligations and made material
misrepresentations to MOA prior to MOA or its subsidiaries acquiring any
Shoney's Inns. Commencing in February 1998, through May 1998 the Company
disaffiliated each of its fourteen Shoney's Inns from ShoLodge by removing the
sign and other identifying marks. At the time of such disaffiliation, MOA or its
subsidiaries ceased remitting franchise fees to ShoLodge. ShoLodge has filed a
counter claim against MOA and certain of its subsidiaries claiming a failure to
renovate the properties and failure to pay franchise fees. The Company believes
that it will ultimately prevail in its claims against ShoLodge.
Operations
The Company believes the ownership and management of its properties
gives it certain competitive advantages over third party managed properties with
which it competes by being able to control all aspects of a lodging facility's
operations and expenditures to maintain such facilities. The Company also
believes it has certain competitive advantages over chain owned and operated
properties because as long as the Company meets a franchisor's minimum
requirements it can tailor the services and product offering of individual
facilities without concerning itself with national consistency.
Management of the Company's lodging facilities is coordinated from the
Company's corporate offices in Des Plaines, Illinois. During 1997, the Company
undertook a reorganization of its management infrastructure and implemented a
more decentralized organization structure whereby many of the property
management support functions previously based out of the corporate office in Des
Plaines, Illinois were moved to various regional offices which were established.
This decentralization was undertaken in order to enhance the Company's
responsiveness, efficiency and control with respect to the day-by-day operations
of its properties. In conjunction with this reorganization, the Company recorded
a charge, in the second quarter of 1997, in the amount of $750,000 to cover the
cost of restructuring. The regional offices are located in Independence,
Missouri, Indianapolis, Indiana, Marietta, Georgia and Salt Lake City, Utah.
Day-to-day management, facility renovation, human resources and training,
purchasing of operating supplies and sales and marketing are principally
directed from the regional offices. The executive level functions as well as
accounting and construction continue to be centralized in Des Plaines, Illinois.
Typically, the general manager is the only salaried position at a
property; although, for the larger properties (generally in excess of 100
rooms), an assistant manager and/or salesperson may be present on a salaried
basis. Other employees generally are employed on an hourly basis with staffing
continually adjusted based on occupancy levels. General managers generally do
not reside on site because the Company believes its managers are more effective
if they spend time away from the property and become involved in the communities
where the properties are located. At December 31, 1998, the Company employed
approximately 2,500 employees including approximately 80 full and part-time
employees at the corporate and regional offices. Labor and related costs
generally represent the single largest expense of operating a motel property.
The hourly wage rates tend to be relatively low in relation to other industries
and accordingly, the Company is adversely affected by turnover common in the
industry partially due to the current strength of the United States economy that
has resulted in historically low unemployment rates. The Company's operations
could be significantly affected by changes in the Federal and State minimum wage
rates. The employees are not represented by any labor unions and management
believes its ongoing labor relations with its employees are good.
The Company utilizes advertising and marketing programs sponsored by
the various franchisers on both a national and regional basis. In addition, the
Company engages in a wide variety of sales and marketing activities at the local
market level including extensive individual sales calls, marketing blitzes and
involvement in local community activities such as Rotary Clubs, Chambers of
Commerce and motel associations. Various properties also promote special
packages in conjunction with local attractions or events. Billboard advertising
represents the single largest sales and marketing expenditure other than
contributions to franchiser sponsored advertising and media funds.
Regulatory Matters
The Company is subject to environmental regulations under various
federal, state and local laws. Certain of these laws may require a current or
previous owner or operator of real estate to clean up designated hazardous or
toxic substances or petroleum product releases affecting the property. In
addition, the owner or operator may be held liable to a governmental entity or
to third parties for damages or costs incurred by such parties in connection
with the contamination.
Certain of the Company's lodging facilities are located on, adjacent to
or in the vicinity of, properties, including gasoline stations, that contain or
have contained storage tanks or that have engaged or may in the future engage in
activities that may release petroleum products or other hazardous substances
into the soil or groundwater.
While there can be no assurance that in the future the foregoing
environmental conditions may not have a material effect on the Company,
management is not aware of any such materially adverse impacts to the Company
due to the existence of contaminants under or near its properties. Except as
described above, management is not aware of any environmental condition with
respect to its lodging facilities that could have a material adverse impact on
the Company's financial condition or results of operations.
The Company's lodging facilities are subject to various other laws,
ordinances and regulations. The Company believes that each facility has the
necessary permits and approvals required to enable the Company to operate its
lodging facilities.
The Company's lodging facilities must comply with Title III of the
Americans with Disabilities Act (the "ADA"). Under the provisions of the ADA,
the Company, as owner of the lodging facilities, is obligated to reasonably
accommodate the patrons of its facilities who have physical, mental or other
disabilities. In addition, the Company is obligated to ensure that alterations
to its lodging facilities conform to the specific requirements of the ADA
implementing regulations. The Company believes that it is in substantial
compliance with all current applicable regulations with respect to
accommodations for the disabled.
Item 2. PROPERTIES
The Company's lodging facilities are typically situated along
interstate highways and in secondary markets, offering a convenient lodging
alternative for many prospective customers. The facilities have an average size
of 83 rooms, though individual properties range from 33 to 187 rooms, depending
on location and business environment. MOA's properties generally do not offer
large meeting or banquet facilities, in-house restaurants, or room service; and
most do not offer recreational facilities such as pools or fitness centers. The
motels do, however, typically provide free coffee, free local calls, remote
control television, fax service, and free parking. In addition, many nationally
and regionally recognized restaurant chains are generally within close proximity
of the motels.
The Company generally owns its motels in fee simple; however, the
underlying real property of five of the lodging facilities is subject to a
ground lease. Ownership of the buildings and improvements situated on such
properties reverts to the landlord upon the expiration of the lease term.
Most of the Company's properties were designed and built as limited
service economy lodging facilities. As such, they were designed to achieve
functional efficiencies and operate at lower fixed costs than most full service
or upscale lodging facilities. The properties generally employ individual
through-the-wall heating and cooling systems for each room. This provides cost
savings during periods of low occupancy and eliminates the need to have skilled
maintenance personnel on the payroll. Further, the Company's motels have limited
public areas to maintain.
The Company believes that the physical condition and general appearance
of a property have a significant impact on profitability. MOA has made capital
expenditures (exclusive of acquisitions and development of investment
properties) of $5,696,000, $7,948,000 and $9,857,000 in 1998, 1997 and 1996,
respectively. These expenditures include not only the replacement of guestroom
carpet and furnishings but also expenditures on parking lot repavement, exterior
renovations and interior public area renovations including lobby enhancements
and other revenue enhancing improvements such as installation of complete snack
shoppe vended areas and guest laundry facilities. Management believes the level
of capital expenditures made over the past three years has been sufficient to
maintain the competitive position of its motel facilities. The Company believes
that its facilities are currently well maintained and conform to the Company's
standards and where applicable to the franchiser's standards for cleanliness and
attractiveness and intends to maintain its facilities in such condition.
Information pertaining to the Company's 135 lodging facilities owned as of
December 31, 1998 with footnote disclosure of transactions subsequent to
year-end through May 14, 1999, is set forth in the following table.
Number of Year
Rentable Acquired or
Guest Year Developed by
Location Franchise Rooms Built the Company
- --------- ---------- ----- ----- ------------
ARKANSAS
West Memphis (1) Super 8 61 1989 1989
ARIZONA
Phoenix Super 8 67 1998 1998
CALIFORNIA
Indio (3) Holiday Inn Express 126 1986 1995
Santa Monica Best Western 122 1991 1992
West Los Angeles Best Western 76 1993 1994
COLORADO
Longmont Super 8 64 1989 1994
FLORIDA
Fernandina Beach Inn at Fernandina Beach 134 1985 1994
Ft. Lauderdale Travelodge 118 1987 1996
Ft. Walton Beach Inn at Ft. Walton Beach 102 1987 1994
Lake City (2) Microtel 62 1998 1998
Melbourne Inn at Melbourne 119 1990 1994
Orlando Centroplex (1) Travelodge 75 1957 1996
Panama City Super 8 63 1986 1987
Pensacola (4) Super 8 62 1985 1987
GEORGIA
Athens (2) Microtel 60 1998 1998
Brunswick (4) Super 8 62 1986 1987
Catersville (2) Super 8 62 1986 1987
Columbus Super 8 74 1985 1987
Douglas Inn at Douglas 100 1986 1994
Dublin Shamrock Inn 100 1984 1994
Fitzgerald Inn at Fitzgerald 108 1985 1994
Hinesville Inn at Hinesville 163 1976 1994
Macon (2) Cherry Blossom Inn 120 1987 1994
Moultrie Inn at Moultrie 100 1979 1994
Rome (4) Super 8 62 1986 1987
Vidalia Inn at Vidalia 128 1984 1994
Warner Robins (4) Super 8 60 1986 1987
IDAHO
Boise Super 8 110 1978 1994
Coeur d'Alene (1) Super 8 95 1983 1983
Lewiston Super 8 62 1985 1985
Sandpoint Super 8 61 1984 1984
ILLINOIS
Bloomington Super 8 61 1985 1987
Champaign Super 8 61 1984 1987
Crystal Lake Super 8 59 1983 1987
Decatur Super 8 61 1983 1987
East Moline Super 8 63 1988 1988
Litchfield Super 8 61 1987 1994
Naperville Travelodge 100 1983 1996
Okawville Super 8 40 1985 1988
Peru Super 8 61 1986 1987
South Springfield Super 8 122 1987 1994
Springfield Super 8 65 1985 1994
Tuscola Super 8 64 1988 1994
Waukegan Super 8 61 1986 1987
INDIANA
Columbus Super 8 62 1984 1987
Elkhart Inn at Elkhart 61 1990 1994
Elkhart Super 8 62 1986 1989
Indianapolis Days Inn 161 1985 1994
Mishawaka Super 8 66 1998 1998
Muncie Days Inn 62 1990 1994
Muncie Super 8 63 1986 1989
Terre Haute Super 8 118 1985 1994
IOWA
Davenport Super 8 61 1984 1987
Des Moines Super 8 152 1985 1994
KANSAS
Leavenworth Super 8 60 1984 1989
Salina Super 8 61 1984 1989
Topeka Super 8 62 1984 1987
KENTUCKY
Danville Super 8 49 1987 1987
Lexington Super 8 62 1987 1987
Louisville Super 8 100 1988 1988
LOUISIANA
Shreveport Super 8 143 1986 1994
MASSACHUSETTS
Milford Days Inn 69 1997 1997
MAINE
Ellsworth Comfort Inn 63 1993 1993
MICHIGAN
Battle Creek Super 8 62 1985 1987
Grand Rapids Super 8 62 1986 1987
Kalamazoo Super 8 62 1985 1987
Muskegon Days Inn 106 1968 1993
Muskegon Super 8 62 1986 1987
Saginaw Super 8 62 1985 1987
MINNESOTA
Hibbing Super 8 49 1993 1994
Red Wing Super 8 60 1987 1996
Savage Comfort Inn 75 1982 1994
MISSISSIPPI
Vicksburg Super 8 62 1988 1988
MISSOURI
Independence Super 8 77 1983 1987
Joplin Super 8 50 1985 1987
Liberty Super 8 60 1980 1987
NW Kansas City Super 8 50 1983 1987
St. Joseph Super 8 54 1985 1987
St. Louis Super 8 99 1984 1987
Springfield Super 8 50 1985 1987
MONTANA
Billings Ramada Ltd. 116 1978 1994
Billings Super 8 115 1979 1994
Dillon Super 8 48 1985 1989
Great Falls Super 8 117 1978 1994
Helena Super 8 102 1979 1988
Kalispell (3) Super 8 74 1984 1988
NEBRASKA
Fremont Super 8 43 1986 1989
NEVADA
Carson City Super 8 63 1985 1985
Wendover Super 8 74 1988 1988
NEW MEXICO
Las Cruces Super 8 61 1981 1987
Raton (1) Super 8 48 1983 1987
NEW YORK
East Syracuse Super 8 53 1997 1997
NORTH CAROLINA
Greensboro Travelodge 108 1985 1996
Weldon Orchard Inn 49 1973 1993
Wilson Microtel 61 1997 1997
NORTH DAKOTA
Bismarck Super 8 61 1976 1987
Grand Forks Super 8 33 1983 1987
Minot Super 8 60 1977 1987
OHIO
Akron Super 8 59 1986 1987
Beachwood (3) Travelodge 127 1980 1996
Canton Days Inn 61 1985 1987
Maumee Super 8 70 1998 1998
St. Clairsville Super 8 62 1986 1987
Willoughby Travelodge 110 1984 1996
PENNSYLVANIA
Lancaster Super 8 101 1990 1990
York Super 8 94 1990 1990
SOUTH CAROLINA
Anderson Super 8 62 1986 1987
Camden Inn at Camden 84 1989 1994
Charleston (2) Orchard Inn 89 1973 1993
Columbia Microtel 48 1997 1997
Columbia (3) Travelodge 106 1985 1996
Greenwood (4) Villager Lodge 62 1986 1987
Hilton Head Plantation Inn 136 1989 1994
SOUTH DAKOTA
Sioux Falls Super 8 95 1976 1987
TENNESSEE
Chattanooga (3) Best Western 124 1972 1995
Chattanooga (4) Super 8 73 1986 1987
East Memphis Super 8 69 1990 1990
Johnson City Super 8 63 1986 1987
Knoxville Super 8 137 1975 1993
Union City Super 8 61 1989 1989
TEXAS
Stafford Microtel 68 1998 1998
UTAH
Salt Lake City Super 8 120 1983 1988
VIRGINIA
Charlottesville Super 8 65 1986 1987
Richmond Inn at Richmond 117 1985 1994
WASHINGTON
Spokane Super 8 187 1982 1988
Wenatchee (3) Orchard Inn 103 1984 1988
WEST VIRGINIA
Mineral Wells Microtel 53 1998 1998
WISCONSIN
Ashland Super 8 70 1984 1988
Janesville Super 8 48 1985 1987
Kenosha Super 8 60 1984 1987
Madison Best Western 101 1983 1994
Oshkosh Super 8 61 1987 1994
Rice Lake Super 8 47 1984 1994
WYOMING
Cody Super 8 64 1982 1982
Jackson Super 8 97 1983 1983
------
Total 10,736
======
=============================================
(1) Property is subject to a ground lease.
(2) Property is operated by a third-party tenant.
(3) Property sold subsequent to December 31, 1998.
(4) Property leased to a third-party tenant subsequent to December 31, 1998.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising in the
ordinary course of business. The Company does not believe that any of these
actions, either individually or in the aggregate, will have a material adverse
effect on the Company's business, results of operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fiscal quarter ended December 31,
1998 to a vote of the security holders of the Company.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 14, 1999, there were approximately 12 holders of record of
the Company's Common Stock. No established public trading market exists for the
Company's common equity. The Company has been advised that since its original
issuance there have been a limited number of privately negotiated sales of the
Common Stock.
The Company has never paid cash dividends on its Common Stock. It is
the Company's present intention to retain all future earnings for use in its
business and, therefore, it does not expect to pay cash dividends on the Common
Stock in the foreseeable future. The declaration and payment of dividends on the
Common Stock is restricted by the indenture relating to the $80 million
principal amount of 12% Senior Subordinated Notes due April 15, 2004, Series B
issued by the Company in April 1994 (the "Notes") and the instruments relating
to the Company's other indebtedness.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth-certain consolidated financial
information of the Company and its subsidiaries for the five fiscal years ended
December 31, 1998. This data should be read in conjunction with the audited
consolidated historical financial statements of the Company and the notes
thereto included elsewhere herein.
Year Ended December 31,
------------------------------------------------------
1994 (1) 1995 (1) 1996 (1) 1997 (1) 1998 (1)
--------- --------- --------- --------- ---------
Statement of Operations Data
Total revenues $ 87,067 $112,720 $128,271 $122,367 $116,327
Costs and expenses:
Motel operating 43,245 57,353 67,344 62,333 60,608
Marketing and royalty fees 5,900 7,643 9,606 8,905 7,515
Corporate general and
administrative 4,596 5,590 6,833 7,908 11,105
Impairment losses and
restructuring costs - - - 3,276 9,300
Depreciation and
amortization(2) 8,569 12,618 13,995 14,985 17,995
--------- --------- --------- --------- ---------
Total direct expenses 62,310 83,204 97,778 97,407 106,523
--------- --------- --------- --------- ---------
Net operating income 24,757 29,516 30,493 24,960 9,804
Interest expense 20,297 27,831 31,573 31,373 30,578
--------- --------- --------- --------- ---------
Income (loss) from operations 4,460 1,685 (1,080) (6,413) (20,774)
Net income (loss) 414 1,533 687 (3,372) 3,152
Net income (loss) per share $ 0.53 $ 1.91 $ 0.86 $ (4.21) $ 3.94
Other Financial Data
Net cash provided by operating
activities $ 10,494 $ 8,144 $ 13,477 $ 15,947 $ 9,472
Net cash provided by (used in)
investing activities (104,474) (10,532) (50,498) (13,648) 26,998
Net cash provided by (used in)
financing activities 98,713 7,798 35,371 (1,515) (29,921)
EBITDA(3) 33,326 42,134 44,487 43,221 37,099
EBITDA Margin (% of total
revenues)(3) 38.28% 37.38% 34.70% 35.32% 31.89%
Net operating revenue margin
(% of total revenues) 28.43% 26.19% 23.66% 20.40% 8.43%
Refurbishment of investment
properties $ 6,818 $ 7,806 $ 9,857 $ 7,948 $ 5,696
Operating Data (4)
Number of motels 125 125 135 138 130
Number of rooms 10,551 10,573 11,317 11,385 10,254
REVPAR(5) $ 28.38 $ 28.96 $ 28.96 $ 29.48 $ 28.51
ADR(6) $ 37.58 $ 40.25 $ 40.91 $ 43.43 $ 43.51
Occupancy percentage(7) 70.18% 66.89% 66.25% 63.75% 61.46%
Balance Sheet Data
Total assets $310,567 $325,151 $368,433 $362,859 $339,055
Total debt 268,191 286,088 327,554 324,989 296,151
Total stockholders' equity 20,745 22,279 22,966 19,594 22,746
(1)Results for the year ended December 31, 1995 includes a gain on early
extinguishment of debt, net of income taxes, of $0.2 million. Results for
the years ended December 31, 1994 and 1995 include the write-off of $3.1
million of deferred costs and the recovery of $0.5 million of offering costs
previously written off, respectively. The results for years ended December
31, 1995, 1996, 1997 and 1998 include a $0.5 million, $2.6 million, $1.1
million and $26.1 million of gains on the sale of properties, respectively.
Results for the year ended December 31, 1997 included the recording of
restructuring costs and the impairment losses of $3.3 million. Results for
the year ended December 31, 1998 included the recording of impairment losses
of $9.3 million.
(2) The Company changed its estimate of the economic benefit of certain deferred
loan costs in 1998. The effect of this change increased amortization by $1.9
million for the year ended December 31, 1998.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization, minority interest, gain on sale of properties,
write-off (recovery) of deferred offering costs, restructuring costs and
impairment losses and gain on early extinguishment of debt. EBITDA is not
intended to represent cash flow or any other measure of performance in
accordance with GAAP. EBITDA is included herein because management believes
that certain investors find it to be a useful tool for measuring the ability
to service debt. EBITDA should not be construed by the reader as an
alternative to operating income (as determined in accordance with GAAP) as
an indicator of the Company's operating performance, or to cash flows from
operating activities (as determined in accordance with GAAP) as a measure of
liquidity.
(4) Operating data excludes amounts related to five motels, which are leased to
third party tenants at December 31, 1998.
(5) Revenue per available room ("REVPAR") represents motel-operating revenues
divided by the total number of rooms available. Total available rooms
represents the number of rooms available for rent multiplied by the number
of days in the reported period.
(6) The average daily room rate ("ADR") represents total room revenues divided
by the total number of rooms occupied.
(7) The occupancy percentage represents total rooms occupied divided by total
available rooms.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS,
THE FOLLOWING: THE COMPANY'S ABILITY TO OBTAIN FINANCING, COMPETITION, INTEREST
RATE FLUCTUATIONS, OR GENERAL BUSINESS AND ECONOMIC CONDITIONS . THIS DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED FINANCIAL DATA" AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED
ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS PRESENTED BELOW
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 HAVE BEEN PREPARED ON THE
SAME BASIS AS THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
General
MOA operates principally in the economy limited service segment of the
lodging industry. As a result, its average room rates tend to be lower than the
average room rates of full service lodging facilities. However, due to the
limited nature of the public space and ancillary services provided by limited
service motels, the Company's expenses tend to be lower than those of full
service lodging facilities. The profitability of the lodging industry in general
is significantly dependent upon room rental rates and occupancy rates. Due to
the fixed nature of a relatively high portion of the Company's expenses, changes
in either room rates or occupancy percentages result in significant changes in
the operating profit of the Company's motels.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
The following chart presents certain historical operating results and
statistics discussed herein and is being provided as a supplement to the
audited consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
--------------------------------------------------------
Year Ended December 31
--------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
----------------- ---------------- --------------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- --------- ---------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $94,485 $96,607 $13,356 $17,503 $107,841 $114,110
Ancillary motel revenues 5,577 5,350 1,589 2,052 7,166 7,402
------- ------- ------- ------- --------- ---------
Total motel operating revenues 100,062 101,957 14,945 19,555 115,007 121,512
Motel costs and expenses:
Motel operating expenses 51,679 50,933 8,929 11,400 60,608 62,333
Marketing and royalty fees 6,597 7,616 918 1,289 7,515 8,905
Depreciation and amortization 12,470 12,351 2,105 1,906 14,575 14,257
------- ------- ------- ------- --------- ---------
Total motel direct expenses 70,746 70,900 11,952 14,595 82,698 85,495
------- ------- ------- ------- --------- ---------
$29,316 $31,057 $ 2,993 $ 4,960 32,309 36,017
======= ======= ======= =======
Corporate operations:
Other revenues 1,319 855
General and administrative expenses:
Management Operations 5,415 4,568
Construction/Acquisition and
Divestiture 1,389 1,032
Other general and administrative 4,301 2,308
-------- ---------
Total general and administrative 11,105 7,908
expenses
Impairment losses and
restructuring costs 9,300 3,276
Depreciation and amortization 3,420 728
-------- ---------
(22,506) (11,057)
--------- ---------
Net operating income $ 9,803 $ 24,960
========= =========
Other data:
Number of motels at year end (5) 121 121 9 17 130 138
Number of rooms at year end (5) 9,792 9,788 462 1,597 10,254 11,385
Occupancy percentage (5) 61.71% 63.80% 59.50% 64.18% 61.46% 63.75%
ADR (1) (5) $ 42.85 $ 42.30 $ 48.77 $ 52.72 $ 43.51 $ 43.43
REVPAR (2) (5) $ 28.00 $ 28.48 $ 32.47 $ 37.80 $ 28.51 $ 29.48
Net operating income margin (3) 8.43% 20.40%
Net motel revenue margin (4) (5) 44.23% 44.93% 38.17% 39.23% 43.48% 44.06%
------------------------------------------
(1) ADR represents room revenues divided by the total number of rooms occupied.
(2) REVPAR represents total motel operating revenues divided by the total number
of rooms available.
(3) Net operating income margin represents net operating income divided by total
motel operating revenues plus corporate other revenues.
(4) Net motel revenue margin represents total motel operating revenues less
motel operating expenses and marketing and royalty fees, divided by motel
room revenues.
(5) At December 31, 1998 and for the year then ended, excludes amounts
related to five motels which are leased to third party tenants.
Total revenues consist principally of motel operating revenues. Motel
operating revenues are derived from room rentals and ancillary motel revenues
such as charges to guests for food and beverage service, long distance telephone
calls, fax machine use and from vending machines. Other revenues include
interest income, lease income from properties operated by third party tenants,
distributions on partnership interests in excess of the Company's basis in such
partnerships and other miscellaneous income. Total revenues decreased to
$116,327,000 in 1998 from $122,367,000 in 1997, a decrease of $6,040,000 or
4.9%.
Motel revenues decreased to $115,007,000 in 1998 from $121,512,000 in
1997 a decrease of $6,505,000 or 5.4%. Approximately $4,610,000 of the decrease
in motel revenues was attributable to the acquired or divested motels, since
January 1, 1997 and a decrease in the motel revenues for motels owned during
both periods of $1,895,000. Motel revenues for motels owned during both periods
decreased 1.9%. The decrease in motel revenues for motels owned during both
periods was principally attributable to a decrease in the occupancy percentage.
The ADR for the motels owned during both periods increased to $42.85 in 1998
from $42.30 in 1997, an increase of $0.55 or 1.3%. The occupancy percentage in
1998 for the motels owned during both periods decreased to 61.7% from 63.8% in
1997 or 3.3%. Management attributes this decrease to an increase in competitive
supply and other factors outside of its control. Revenue per available room
("REVPAR") for motels owned during both periods decreased to $28.00 in 1998 from
$28.48 in 1997, a decrease of $0.48 or 1.7%. The acquired and divested motels
had an occupancy percentage of 59.50%, an ADR of $48.77 and a REVPAR of $32.47
for the period, which they were owned by the Company in 1998.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, linens and other operating supplies.
Motel operating expenses decreased to $60,608,000 in 1998 from $62,333,000 in
1997 a net decrease of $1,725,000 or 2.8%. Approximately $2,471,000 of the
decrease is attributable to the cost of operating the acquired and divested
motels since January 1, 1997. The cost of operating motels owned during both
periods increased to $51,679,000 in 1998 from $50,933,000 in 1997, an increase
of $746,000 or 1.5%. Motel operating expenses as a percentage of motel revenues
increased to 52.7% in 1998 from 51.3% in 1997. Motel operating expenses as a
percentage of motel revenues for the motels owned in both periods increased to
51.7% in 1998 from 50.0% in 1997. The increase in the operating expenses as a
percentage of motel revenues for motels owned during both periods is primarily
attributable to an increase in labor costs and repair and maintenance expenses
that on a percentage basis exceed the percentage increase in motel revenues.
Motel operating expenses as a percent of motel revenues for the acquired and
divested motels was 59.7% in 1998.
Marketing and royalty fees include media advertising, billboard rental
expense, advertising fund contributions and royalty charges paid to franchisers
and other related marketing expenses. Marketing and royalty fees decreased to
$7,515,000 in 1998 from $8,905,000 in 1997, a decrease of $1,390,000 or 15.7%.
Approximately $371,000 of the decrease in marketing and royalty fees was
attributable to the motels acquired and divested since January 1, 1997. The
marketing and royalty fees for motels owned during both periods decreased to
$6,597,000 in 1998 from $7,616,000 in 1997, a decrease of $1,019,000 or 13.4%.
For the motels owned during both periods, marketing and royalty fees as a
percent of room revenues decreased to 7.0% in 1998 from 7.9% in 1997. The
decrease in marketing and royalty fees for the motels owned in both periods is
principally due to a reduction in franchise fees. Franchise fees declined due to
two reasons i) a reduction of 1% of room revenues for most of the Company's
Super 8 motels and ii) a reduction in franchise fees paid to ShoLodge Franchise
Systems Inc. with respect to the Company's fourteen former Shoney's Inns. The
Company had participated in a voluntary program with Super 8 Motels, Inc.
whereby an additional 1% of room revenues were contributed to the advertising
fund to be utilized for additional national advertising. This program ceased
December 31, 1997. During the period from February 1998 through May 1998, the
Company disaffiliated all of its Shoney's Inns from ShoLodge Franchise Systems,
Inc. and ceased payment of franchise fees at such time, On an annual basis the
Company historically had paid approximately $650,000 of franchise fees on its
fourteen former Shoney's Inns.
Corporate general and administrative expenses are segregated by the
Company into three separate areas: Management Company Operations,
Construction/Acquisition and Divestiture Division and Other. Included in the
Management Company Operations which is the division responsible for the motel
operations, are the costs associated with training, marketing, purchasing,
administrative support, property related legal and accounting costs. The major
components of these costs are salaries, wages and related expenses, travel, rent
and other administrative expenses. The general and administrative expenses for
the Management Operations increased $847,000 to $5,415,000 in 1998 from
$4,568,000 in 1997, an increase of 18.5%. Approximately $400,000 of the increase
is due to the costs incurred with respect to the installation and implementation
of the Company's new primary financial accounting system. Salary and related
costs account for the majority of the remaining overall increase. The general
and administrative expenses associated with Construction/Acquisition and
Divestiture Division increased $357,000 from $1,032,000 in 1997 to $1,389,000 or
34.6%. The increase is attributable principally to an increase in the sales and
leasing of the Company's properties to others. Other General and Administrative
expenses increased $1,993,000 from $2,308,000 in 1997 to $4,301,000 in 1998. The
increase is due to an increase in legal costs incurred in connection with the
lawsuit that the Company initiated against ShoLodge Franchise Systems, Inc. in
1997 and severance payments to certain former employees of the Company. As a
percentage of total motel operating revenues, Management Operations general and
administrative expenses increased from 3.8% in 1997 to 4.7% in 1998.
Impairment losses and restructuring costs in the amount of $9,300,000
and $3,276,000 were recorded in 1998 and 1997, respectively. Based on a
property-by-property review of certain properties that had experienced a
deterioration in operating performance, management determined that in certain
instances the decline in operating performance was due to factors outside of
management's control and likely to persist for the foreseeable future. The
Company believes it is unlikely to realize the carrying value of certain of its
properties through either a sale or from operations and accordingly an
impairment loss in the amount of $9,300,000 was recorded in 1998. Restructuring
costs of $750,000 were recorded in the second quarter of 1997 relating to the
reorganization of the Company's management structure. This reorganization
included the implementation of a decentralized organizational structure whereby
many of the property management support functions previously based out of the
corporate office were moved to various regional offices which were established
throughout the country. The provision for restructuring costs is intended to
cover the associated relocation and severance costs. Impairment losses of
$2,526,000 were recorded in 1997 to reflect the writedown of certain land held
for development to its fair value based on an independent appraisal of such land
obtained in 1998 and to reflect a provision for loss on the collection of a
mortgage note receivable.
Depreciation and amortization increased to $17,995,000 in 1998 from
$14,985,000 in 1997, an increase of $3,010,000 or 20.1%. The $3,010,000 increase
consists of a $2,692,000 increase in corporate operations and a $318,000
increase from motel operations. During 1998, the Company reevaluated the
economic useful life of certain deferred loan costs associated with the CS First
Boston $150.0 million loan facility in light of the Company's under utilization
of such facility. As a result, the Company accelerated the amortization of such
deferred loan costs in the amount of $1.9 million in 1998, which is included in
the $2,692,000 increase referred to above.
Net operating income decreased to $9,803,000 in 1998 from $24,960,000
in 1997, a decrease of $15,157,000 or 60.7%. The decrease in net operating
revenues included a decrease of $3,390,000 in net motel revenues (motel revenues
less motel operating expenses and marketing and royalty fees). Of the $3,390,000
decrease in net motel revenues, $1,768,000 resulted from the motels acquired and
divested since January 1, 1997 and a decrease in net motel revenues for motels
owned during both periods of $1,622,000 or 3.7%. Net operating revenue as a
percent of total revenues was 8.4% and 20.4% in 1998 and 1997, respectively. The
decrease in net operating income also included the increase in general and
administrative expenses of $3,197,000, and increase in depreciation and
amortization of $3,010,000 and an increase in restructuring costs and impairment
losses of $6,024,000 all of which are separately discussed above. In addition to
the above, the Company realized an increase in other revenues in the amount of
$464,000 due principally to an increase in interest income and lease income.
Interest expense decreased to $30,578,000 in 1998 from $31,373,000 in
1997, a decrease of $795,000. The decrease is principally due to a decrease in
average outstanding borrowings.
Gain on sale of properties amounted to $26,079,000 in 1998 as compared
to $1,110,000 in 1997. The gain in 1998 consisted of $25,409,000 from the sale
of ten motel properties and a parcel of vacant land and a gain of $670,000 on
the sale of an investment.
Net income (loss) increased $6,524,000 to net income of $3,152,000 in
1998 from a net loss of $3,372,000 in 1997. Included in the net increase of
$6,524,000 is an increase of $15,015,000 in the net of tax gains realized on the
sale of properties of $15,693,000 in 1998 and $678,000 in 1997. Also included in
the $6,524,000 increase in net income is the provision for the restructuring
costs and impairment losses of $5,596,000 and $2,016,000 net of tax for 1998 and
1997, respectively.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
The following chart presents certain historical operating results and
statistics discussed herein and is being provided as a supplement to the
audited consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
-------------------------------------------------------
Year Ended December 31
-------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
---------------- ---------------- -------------------
1997 1996 1997 1996 1997 1996
------- ------- ------- ------- --------- ---------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $98,828 $97,143 $15,282 $22,505 $114,110 $119,648
Ancillary motel revenues 6,813 6,408 589 1,787 7,402 8,195
------- ------- ------- ------- --------- ---------
Total motel operating revenues 105,641 103,551 15,871 24,292 121,512 127,843
Motel costs and expenses:
Motel operating expenses 53,142 52,387 9,191 14,957 62,333 67,344
Marketing and royalty fees 7,438 7,602 1,467 2,004 8,905 9,606
Depreciation and amortization 11,657 11,305 2,600 1,903 14,257 13,208
------- ------- ------- ------- --------- ---------
Total motel direct expenses 72,237 71,294 13,258 18,864 85,495 90,158
------- ------- ------- ------- --------- ---------
$33,404 $32,257 $ 2,613 $ 5,428 36,017 37,685
======= ======= ======= =======
Corporate operations:
Other revenues 855 428
General and administrative expenses:
Management Operations 4,568 4,893
Construction and development 1,032 695
Other general and administrative 2,308 1,245
--------- ---------
Total general and administrative 7,908 6,833
expenses
Impairment losses and
restructuring costs 3,276 -
Depreciation and amortization 728 787
--------- ---------
(11,057) (7,192)
--------- ---------
Net operating income $ 24,960 $ 30,493
========= =========
Other data:
Number of motels at year end 119 119 19 16 138 135
Number of rooms at year end 9,640 9,673 1,745 1,644 11,385 11,317
Occupancy percentage 64.50% 66.87% 59.25% 63.75% 63.75% 66.25%
ADR (1) $ 43.45 $ 41.01 $ 43.26 $ 40.51 $ 43.43 $ 40.91
REVPAR (2) $ 29.96 $ 29.23 $ 26.62 $ 27.88 $ 29.48 $ 28.96
Net operating income margin (3) 20.40% 23.77%
Net motel revenue margin (4) 45.60% 44.84% 34.11% 32.57% 44.06% 42.54%
-----------------------------------------
(1) ADR represents room revenues divided by the total number of rooms occupied.
(2) REVPAR represents total motel operating revenues divided by the total
number of rooms available.
(3) Net operating income margin represents net operating income divided by total
motel operating revenues plus corporate other revenues.
(4) Net motel revenue margin represents total motel operating revenues less
motel operating expenses and marketing and royalty fees, divided by
motel room revenues.
Total revenues consist principally of motel operating revenues. Motel
operating revenues are derived from room rentals and ancillary motel revenues
such as charges to guests for food and beverage service, long distance telephone
calls, fax machine use and from vending machines. Other revenues include
interest income, distributions on partnership interests in excess of the
Company's basis in such partnerships and other miscellaneous income. Total
revenues decreased to $122,367,000 in 1997 from $128,271,000 in 1996, a decrease
of $5,904,000 or 4.6%.
Motel revenues decreased to $121,512,000 in 1997 from $127,843,000 in
1996, a decrease of $6,331,000 or 5.0%. Approximately $8,421,000 of the decrease
in motel revenues was attributable to the twenty-six motels acquired and the
thirteen motels divested, since January 1, 1996 and an increase in the motel
revenues for motels owned during both periods offset the decrease by $2,090,000.
Motel revenues for motels owned during both periods increased 2.0%. The increase
in motel revenues for motels owned during both periods was attributable to an
increase in the average daily room rate ("ADR"); and a decrease in the occupancy
percentage. The ADR for the motels owned during both periods increased to $43.45
in 1997 from $41.01 in 1996, an increase of $2.44 or 6.0%. The increase in ADR
is reflective of management's efforts to increase room rates at its lodging
facilities. The occupancy percentage in 1997 for the motels owned during both
periods decreased to 64.5% from 66.9% in 1996. Management attributes this
decrease to an increase in competitive supply and other factors outside of its
control. Revenue per available room ("REVPAR") for motels owned during both
periods increased to $29.96 in 1997 from $29.23 in 1996, an increase of $0.73 or
2.5%. The acquired and divested motels had an occupancy percentage of 59.25%, an
ADR of $43.26 and a REVPAR of $26.62 for the period which they were owned by the
Company in 1997.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, linens and other operating supplies.
Motel operating expenses decreased to $62,333,000 in 1997 from $67,344,000 in
1996, a net decrease of $5,011,000 or 7.4%. Approximately $5,766,000 of the
decrease is attributable to the cost of operating the acquired and divested
motels since January 1, 1996. The cost of operating motels owned during both
periods increased to $53,142,000 in 1997 from $52,387,000 in 1996, an increase
of $755,000 or 1.4%. Motel operating expenses as a percentage of motel revenues
decreased to 51.3% in 1997 from 52.7% in 1996. Motel operating expenses as a
percentage of motel revenues for the motels owned in both periods decreased to
50.3% in 1997 from 50.6% in 1996. The increase in the operating margin for
motels owned during both periods is primarily attributable to the increase in
motel operating revenues. Motel operating expenses as a percent of motel
revenues for the acquired and divested motels was 57.9% in 1997.
Marketing and royalty fees include media advertising, billboard rental
expense, advertising fund contributions and royalty charges paid to franchisers
and other related marketing expenses. Marketing and royalty fees decreased to
$8,905,000 in 1997 from $9,606,000 in 1996, a decrease of $701,000 or 7.3%.
Approximately $537,000 of the decrease in marketing and royalty fees was
attributable to the motels acquired and divested since January 1, 1996. The
marketing and royalty fees for motels owned during both periods decreased to
$7,438,000 in 1997 from $7,602,000 in 1996, a decrease of $164,000 or 2.2%. For
the motels owned during both periods, marketing and royalty fees as a percent of
room revenues decreased to 7.5% in 1997 from 7.8% in 1996.
Corporate general and administrative expenses are segregated by the
Company into three separate areas: Management Company Operations, Construction
and Development, and Other. Included in the Management Company Operations which
is the division responsible for the motel operations, are the costs associated
with training, marketing, purchasing, administrative support, property related
legal and accounting costs. The major components of these costs are salaries,
wages and related expenses, travel, rent and other administrative expenses. The
general and administrative expenses for the Management Operations decreased
$325,000 to $4,568,000 in 1997 from $4,893,000 in 1996, a decrease of 6.6%. The
decrease is primarily attributable to the Company's implementation of its
decentralized management structure and the elimination of certain corporate
positions, which had previously existed. The general and administrative expenses
associated with Construction and Development increased $337,000 from $695,000 in
1996 to $1,032,000 or 48.5%. The increase is directly attributable to the
increase in development activity in 1997 compared to 1996 including site
location personnel. Other General and Administrative expenses increased
$1,063,000 from $1,245,000 in 1996 to $2,308,000 in 1997. The increase is due to
legal costs incurred in connection with a lawsuit that the Company initiated
against ShoLodge Franchise Systems, Inc., the franchiser of the Shoney's Inn
Franchises operated by the Company and the creation of a new executive position
unrelated to the operations of the motel properties. As a percentage of total
motel operating revenues, Management Operations general and administrative
expenses were 3.8% in both 1997 and 1996.
Impairment losses and restructuring costs in the amount of $3,276,000
were recorded in 1997. Restructuring costs of $750,000 were recorded relating to
the reorganization of the Company's management structure. This reorganization
included the implementation of a decentralized organizational structure whereby
many of the property management support functions previously based out of the
corporate office were moved to various regional offices, which were established
throughout the country. The provision for restructuring costs is intended to
cover the associated relocation and severance costs. Impairment losses of
$2,526,000 were recorded in 1997 to reflect the writedown of certain land held
for development to its fair value based on an independent appraisal of such land
obtained in 1998 and to reflect a provision for loss on the collection of a
mortgage note receivable.
Depreciation and amortization increased to $14,985,000 in 1997 from
$13,995,000 in 1996, an increase of $990,000 or 7.1%. Approximately $697,000 of
the increase in depreciation and amortization is attributable to the addition of
the motels acquired and divested since January 1, 1996. Depreciation and
amortization with respect to motels owned during both periods increased $352,000
due to the Company's continued reinvestment in the properties. Corporate
depreciation and amortization decreased $59,000 to $728,000 in 1997 from
$787,000 in 1996.
Net operating income decreased to $24,960,000 in 1997 from $30,493,000
in 1996, a decrease of $5,533,000 or 18.2%. The decrease in net operating
revenues included a decrease of $619,000 in net motel revenues (motel revenues
less motel operating expenses and marketing and royalty fees). Of the $619,000
decrease in net motel revenues, $2,118,000 resulted from the motels acquired and
divested since January 1, 1996 offset by an increase in net motel revenues for
motels owned during both periods of $1,499,000 or 3.4%. Net operating revenue as
a percent of total revenues was 20.4% and 23.8% in 1997 and 1996, respectively.
Interest expense decreased to $31,373,000 in 1997 from $31,573,000 in
1996, a decrease of $200,000. The decrease is principally due to a decrease in
outstanding borrowings.
Net income (loss) decreased $4,059,000 to a net loss of $3,372,000 in
1997 from a net income of $687,000 in 1996. Included in the net decrease of
$4,059,000 is a reduction of $903,000 in the net of tax gains realized on the
sale of properties of $678,000 in 1997 and $1,581,000 in 1996. In addition, for
1997, included in the $4,059,000 reduction in net income is the provision for
the restructuring costs and impairment losses of $2,016,000 net of tax.
Liquidity and Capital Resources
The Company's primary uses of its capital resources include debt service,
capital expenditures (primarily for motel refurbishment) and working capital. In
addition, on a discretionary basis the Company utilizes its capital resources
for the development and acquisition of motel properties.
The Company's debt service requirements consist of the obligation to make
interest and principal payments on its outstanding indebtedness. As of December
31, 1998, the Company has principal repayment obligations of $40,199,000,
$5,114,000 and $25,916,000 for the years ending December 31, 1999, 2000 and
2001, respectively. In January 1999 the Company repaid mortgage notes with an
outstanding balance of $17.2 million at December 31,1998 with the proceeds of a
new $13.5 million loan and the balance with cash. The new loan is secured by six
properties and bears interest at LIBOR plus 3.25 percentage points. During the
initial year of the loan, all excess cash flow (as defined in the loan
agreement) from the properties is to be applied toward principal amortization.
Thereafter, principal amortization is based on a twenty-year schedule plus an
additional $250,000 of annual principal amortization paid monthly. The loan
matures in January 2004. In March 1999, the Company borrowed $23.4 million, the
proceeds of which were utilized to pay-off loans with outstanding balances of
$14.0 million at December 31, 1998. The balance of the net proceeds was retained
for working capital purposes. The loan was initially secured by ten properties
and five mortgage notes receivable. The interest rate pertaining to the amount
of the loan allocated to the properties is the Prime Rate plus 0.5 percentage
points and the interest rate pertaining to the amount of the loan allocated to
the mortgage notes receivable is the Prime rate plus 1.25 percentage points. The
loan requires principal payments based on a twenty-year schedule with the
outstanding balance of the loan due in April 2006. Provided certain conditions
are met, the Company has the ability to sell properties secured by the loan in
partial exchange for a mortgage note receivable that would than be pledged as
collateral under the loan with the interest rate adjusted to the Prime rate plus
1.25 percentage points. The Company's principal repayment obligations,
reflective of the above mentioned debt transaction, as of March 31, 1999 is
$8,340,000 for the remainder of fiscal 1999; $6,107,000 for 2000 and $26,979,000
for 2001. The Company is currently in negotiations to refinance a $3.9 million
mortgage loan that matures in May 1999. Although the Company believes it has
or will be able to obtain adequate resources to meet its near-term maturing debt
and other obligations, the deteriorating trend in operating results noted above
could adversely affect the Company's ability to meet its maturing debt
obligations in 2004 and 2005, including the maturity of the $80 million 12%
Senior Subordinated Notes in 2004.
The Company's capital expenditure requirements principally include capital
improvements and the refurbishment of lodging facilities as part of an ongoing
strategy to provide well-maintained facilities. The Company made capital
expenditures (exclusive of acquisitions and development of investment
properties) of $5,696,000, $7,948,000, and $9,857,000 in 1998, 1997 and 1996,
respectively. In addition, as of December 31, 1998, the Company has $2,203,000
of cash restricted for future refurbishment, in accordance with certain debt
agreements. Management is not aware of any unusual required level of future
capital expenditures necessary to maintain its existing properties. For the year
ended December 31, 1998 cash and cash equivalents increased $6,549,000 from
$13,033,000 at December 31, 1997 to $19,582,000 at December 31, 1998. A total of
$9,472,000 of cash was provided by operating activities, $26,998,000 of cash was
provided by investing activities and $29,921,000 of cash was used by financing
activities. Net investing activities include: $22,173,000 of cash utilized for
motel development: $5,696,000 expended on renovation of existing motel
properties; $976,000 of cash was used as an increase in cash restricted for
refurbishment of properties; and $55,843,000 of cash provided from the sale of
investment properties and collections on mortgage and other notes receivable.
Cash provided by financing activities include: $14,054,000 of proceeds from
borrowings less $553,000 of deferred financing costs; $43,264,000 of cash
utilized to repay indebtedness; and $157,000 of cash distributed to minority
interests.
The Company is not currently a party to any proceeding which, in management's
opinion, is likely to have a material adverse effect on the Company's operating
results or financial position.
Impact of Year 2000
The year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company replaced its primary financial accounting system in 1998 at a cost
of approximately $400,000. The new system is year 2000 compliant. The Company is
continuing to evaluate various sub-systems that are in place, including those
utilized to process credit card transactions, to determine their year 2000
readiness. The Company has also made inquires of its significant vendors upon
which it relies and believes they are sufficiently prepared to handle year 2000
issues so as not to cause any interruption to the Company's operations. The
Company, on an on-going basis, evaluates its contingency plans with respect to
potential year 2000 issues. The Company does not anticipate incurring any
additional significant expenditures with respect to the year 2000 situation.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of
Regulation S-K is not applicable.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following chart lists the Company's current directors and executive
officers.
Name Age Positions(s) with the Company
Paul F. Wallace 62 Director, Chairman and Chief Executive Officer
Alan H. Baerenklau 53 Director, President and Chief Operating Officer
Kurt M. Mueller 42 Director, Chief Financial Officer
Carl W. Desch 83 Director
Louis A. Scarrone, M.D 75 Director
Ronald P. Stewart 55 Director
Peter W. McClean 55 Director
Philip J. Levien 54 Director
Richard Gerhart 52 Executive Vice President
Blane P. Evans 39 Vice President, Secretary & Treasurer
Anne H. Binns 55 Vice President
The following is a biographical summary of the experience of the
directors and executive officers of the Company:
Paul F. Wallace, formerly a Director and controlling stockholder of
EconoLodge, has been Chairman and Chief Executive Officer of the Company since
January 1994 and a Director of the Company since August 1992. Mr. Wallace also
serves on the Company's operations committee. Mr. Wallace was President of The
Broadstone Group from July 1978 until June of 1986, and he became the President
again in July of 1993. Mr. Wallace has been Chairman of the Board and
controlling stockholder of The Broadstone Group since July 1981, and is
currently the principal shareholder of a privately held manufacturing company
and an investor in and operator of various real estate related projects.
Alan H. Baerenklau joined the Company in March 1997 and became a
Director, President and Chief Operating Officer of the Company in April 1997.
Mr. Baerenklau was President and Chief Operating Officer of Florida Hospitality
Group, a hotel development and management company, from 1984 to 1997. Prior to
1984, Mr. Baerenklau held various positions with the Howard Johnson Company
including those of General Manager, Regional Manager, Director of Corporate Real
Estate and Vice President of Operations. He is also an investor, partner and
officer in various hotel real estate ventures.
Kurt M. Mueller has been the Chief Financial Officer since April 1997.
Mr. Mueller has been a Director of the Company since he joined MOA in May 1991.
Mr. Mueller was President from January 1994 until April 1997 and Chief Operating
Officer of the Company from May 1991 until April 1997. Mr. Mueller also served
as Executive Vice President from May 1991 until January 1994. In addition, Mr.
Mueller currently serves on the Company's operations committee and audit
committee. From 1978 to 1991, Mr. Mueller was employed by Ernst & Young LLP most
recently as a Senior Manager. During his career at Ernst & Young LLP, he was on
the audit staff and, during his last two years, he worked in the Mergers and
Acquisitions Group performing due diligence financial and operational reviews.
Carl W. Desch, formerly a Director of EconoLodge, has been a Director of
the Company since April 1993 and serves on the Company's audit committee and
operations committee. Mr. Desch has been Chairman and Director of Citibank (NY
State), N.A. for over five years.
Louis A. Scarrone, M.D., formerly a Director of EconoLodge, has been a
Director of the Company since October 1993. He has been engaged in his own
private practice of internal medicine since 1955.
Ronald P. Stewart, formerly a Director of EconoLodge, has been a Director
of the Company since October 1993. Mr. Stewart has been Headmaster of York
Preparatory School in New York City since 1969 and Chairman of The Rhodes Group,
Inc. since 1992.
Peter W. McClean, has been a Director of the Company since April 1997.
Mr. McClean is currently Senior Vice President and Head of Global Risk
Management for the Bank of Bermuda Limited, based in Hamilton, Bermuda. In his
current position, Mr. McClean is responsible for the credit policy, the market
risk policy, the operating risk, the internal audit and the Bank's General
Counsel.
Philip J Levien, formerly a Director and Chairman of the Board of
EconoLodge, has been a Director of the Company since April 1997 and serves on
its audit committee. Mr. Levien has served as a Director of the Broadstone Group
for the past 15 years. Mr. Levien has been a Real Estate Developer for the past
30 years.
Richard Gerhart has been the Senior Vice President of Operations since
joining the Company in April 1997. With over 25 years experience in the
Hospitality industry, he has served in various operations positions with
Marriott Corporation, Registry Hotels, LaQuinta Inns, Remington Hotels and Motel
6. His responsibilities ranged from property level management positions to
Senior Vice President of Operations.
Blane P. Evans has been Vice President, Secretary and Treasurer of the
Company since May 1999. Mr. Evans joined the Company in January 1992 and has
served in various capacities, most recently as Corporate Controller.
Anne H. Binns joined the Company in July 1997 as a Vice President for
Human Resources and Training. Prior to joining the Company, Ms. Binns held
various positions in operations and human resources with Motel 6, Sheraton and
LaQuinta Inns.
Executive officers of the Company are appointed and serve at the
discretion of the Board of Directors. Each director of the Company is elected
for a period of one year and serves until his successor is duly elected and
qualified. None of the directors or executive officers of the Company has a
family relationship with any of the other directors or executive officers of the
Company.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company to each of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company, as of the end of the last fiscal
year, for services rendered to the Company in all capacities during the last
three fiscal years:
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary($) Bonus($)
Paul F. Wallace 1998 300,000 -
Chairman and Chief Executive Officer 1997 300,000 -
1996 300,000 -
Alan H. Baerenklau 1998 233,300 116,700
President and Chief Operating Officer (1) 1997 194,500 -
Kurt M. Mueller 1998 200,000 50,000
Chief Financial Officer 1997 266,667 -
1996 400,000 50,000
Richard Gerhart 1998 155,000 40,000
Senior Vice President (2) 1997 95,333 -
Anne Binns 1998 72,315 5,000
Vice President (3) 1997 40,833 -
- -----------------------------
(1) Mr. Baerenklau joined the Company in March 1997.
(2) Mr. Gerhart joined the Company in April 1997.
(3) Ms. Binns joined the Company in July 1997.
The Company historically has and intends to continue to pay
discretionary bonuses to key employees, including property managers, as rewards
for superior financial performance. The Company does not maintain any employee
pension, profit sharing or savings plans for its employees, other than a 401(k)
savings plan, nor does it currently have any stock related plans for key
executives.
Members of the Board of Directors do not receive compensation for
serving on the Board except that Messrs. Desch, Stewart and Dr. Scarrone each
receive a $5,000 annual retainer and are paid $1,000 for each meeting. All
members of the Board of Directors receive reimbursement of reasonable expenses
incidental to attendance at meetings of the Board of Directors and all
committees.
Compensation Committee Interlocks and Insider Participation
The Company has no compensation committee of the Board of Directors.
During 1998, no officer or employee of the Company or its subsidiaries
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
beneficially owned by the only entity known to be the beneficial owner of more
than 5% of the Company's Common Stock, by each director and by all directors and
officers of the Company as a group as of May 14, 1999:
Shares of
Common
Stock Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
Principal Stockholders:
New Image Realty, Inc. 677,228 85%
888 Seventh Avenue
Suite 3400
New York, NY 10106
Executive Officer and Directors
Paul F. Wallace 684,357 (1) 86%
All Directors and Officers as a Group (11 persons) 684,357 (2) 86%
- -------------------------
(1) Mr. Wallace is President, Chairman of the Board and controlling stockholder
of The Broadstone Group. The Broadstone Group owns 100% of the outstanding
Common Stock of New Image Realty, Inc. ("New Image"), which owns 85% of the
outstanding Common Stock of MOA. Mr. Wallace is deemed to be a beneficial owner
of 677,228 shares of Common Stock of the Company owned by New Image and 7,129
shares of Common Stock of the Company issued to Opal Inc. in January 1994.
(2) Includes 677,228 shares of Common Stock of the Company held by New Image and
7,129 shares of Common Stock of the Company held by Opal Inc. that are deemed to
be beneficially owned by Paul F. Wallace.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid $185,000 and $243,000 for construction management,
brokerage commissions and for other services performed in 1996 and 1997,
respectively, to a company which Mr. Kouba has a minority ownership interest.
Mr. Kouba resigned as a Director of the Company in December 1997 citing personal
reasons.
The Company is a member of an affiliated group that files a
consolidated tax return for federal income tax purposes. The Company received a
payment of approximately $0.4 million during 1997 and during 1998 and 1996, the
Company made payments of approximately $4.8 million and $0.5 million
respectively, to affiliates of Paul F. Wallace, of which approximately $1.7
million is available to offset required future tax payments, if any.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 & 2. Financial Statements and Schedules
See Index to Financial Statements in this Form 10-K.
3. Exhibits
The Exhibits listed in the accompanying Index to Exhibits
are filed as part of this Form 10-K.
(b) Reports on Form 8-K
None.
INDEX TO FINANCIAL STATEMENTS
MOA HOSPITALITY, INC. AND SUBSIDIARIES
Years Ended December 31, 1998, 1997 and 1996
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
All schedules have been omitted because they are not required or are not
applicable, or the required information is included in the financial
statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MOA Hospitality, Inc.
We have audited the consolidated balance sheets of MOA Hospitality, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MOA
Hospitality, Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
May 12, 1999
Chicago, Illinois
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,581,870 $ 13,032,496
Accounts receivable from property 2,014,742 2,240,908
operations
Operating supplies and prepaid
expenses 2,324,528 2,199,013
Current portion of mortgage and notes
receivable 2,139,434 601,445
------------ ------------
Total Current Assets 26,060,574 18,073,862
Investment property:
Operating properties, net of
accumulated depreciation 279,943,510 310,991,915
Land held for development 3,829,439 2,389,439
------------ ------------
Total investment property 283,772,949 313,381,354
Other Assets:
Deposits and other assets 1,762,314 6,797,533
Restricted cash 2,202,638 1,226,379
Net deferred tax asset 1,542,050 -
Mortgage and other notes receivable,
less current portion 11,625,905 6,800,493
Financing and other deferred costs,
net of accumulated amortization
$8,258,685 in 1998 and $5,604,511
in 1997. 12,088,216 16,579,356
------------ ------------
Total Other Assets 29,221,123 31,403,761
------------ ------------
Total Assets $339,054,646 $362,858,977
============ ============
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 3,939,181 $ 2,693,317
Real estate taxes payable 2,847,444 2,450,224
Accrued interest payable 3,382,314 3,624,809
Other accounts payable and
accrued expenses 8,300,005 4,392,814
Current portion of long-term debt 40,199,004 67,157,229
------------ ------------
Total Current Liabilities 58,667,948 80,318,393
Net deferred tax liability - 3,351,684
Long-term debt, less current portion:
Mortgage and other notes payable 178,845,937 181,097,669
12% Senior Subordinated Notes, net of
unamortized discount of $2,894,235 in
1998 and $3,265,362 in 1997 77,105,765 76,734,638
------------ ------------
Total Long-term debt, excluding
current portion 255,951,702 257,832,307
------------ ------------
Total Liabilities 314,619,650 341,502,384
------------ ------------
Minority Interests 1,689,005 1,762,507
Stockholders' equity:
Common stock, $.01 par value,
1,500,000 shares authorized;
800,000 shares issued and
outstanding 8,000 8,000
Additional paid-in capital 15,294,284 15,294,284
Retained earnings 7,443,707 4,291,802
------------ ------------
Total stockholders' equity 22,745,991 19,594,086
------------ ------------
Total Liabilities and
Stockholders' Equity $339,054,646 $362,858,977
============ ============
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Revenues:
Motel operating revenues $115,007,367 $121,511,834 $127,842,502
Other revenues 1,319,407 855,305 428,277
------------- ------------- -------------
Total revenues 116,326,774 122,367,139 128,270,779
Costs and expenses:
Motel operating expenses 60,608,213 62,333,314 67,343,939
Marketing and royalty fees 7,515,048 8,904,980 9,606,013
General and administrative 11,104,660 7,907,752 6,833,365
Impairment losses and
restructuring costs 9,300,000 3,276,219 -
Depreciation and amortization 17,995,330 14,984,942 13,994,963
------------- ------------- -------------
Total direct expenses 106,523,251 97,407,207 97,778,280
------------- ------------- -------------
Net operating income 9,803,523 24,959,932 30,492,499
Interest expense 30,578,266 31,372,749 31,572,501
------------- ------------- -------------
Loss from operations (20,774,743) (6,412,817) (1,080,002)
Minority interests (83,641) (177,617) (334,010)
Gain on sale of properties 26,078,852 1,109,622 2,589,029
------------ ------------- -------------
Income (loss) before income taxes 5,220,468 (5,480,812) 1,175,017
Income tax expense (benefit) 2,068,563 (2,108,997) 487,761
------------ ------------- -------------
Net income (loss) $ 3,151,905 $ (3,371,815) $ 687,256
============ ============= =============
Net income (loss) per common share
(basic and diluted) $ 3.94 $ (4.21) $ 0.86
============ ============= =============
Weighted average number of
common shares outstanding 800,000 800,000 800,000
============ ============= =============
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
------ ----------- ------------ ------------
Balance at January 1, 1996 $8,000 $15,294,284 $ 6,976,361 $22,278,645
Net income -- -- 687,256 687,256
------ ----------- ------------ ------------
Balance at December 31, 1996 8,000 15,294,284 7,663,617 22,965,901
Net loss -- -- (3,371,815) (3,371,815)
------ ----------- ------------ ------------
Balance at December 31, 1997 8,000 15,294,284 4,291,802 19,594,086
Net income -- -- 3,151,905 3,151,905
------ ----------- ------------ ------------
Balance at December 31, 1998 $8,000 $15,294,284 $ 7,443,707 $22,745,991
====== =========== ============ ============
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash flows provided by operating activities:
Net income (loss) $ 3,151,905 $ (3,371,815) $ 687,256
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation, amortization and
accretion of discount on notes 18,390,661 15,313,183 14,286,260
Impairment losses 9,300,000 -- 2,530,219
Minority interests of others
in income from operations 83,641 177,617 334,010
Deferred income taxes (4,893,734) (332,881) (480,994)
Gain on sale of properties (26,078,853) (1,109,622) (2,589,029)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 219,529 553,831 54,855
Operating supplies, prepaid expenses
deposits and other assets 3,987,946 1,295,880 (1,196,653)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 5,553,702 959,074 1,792,405
Accrued interest payable (242,495) (68,059) 589,037
------------- ------------- -------------
Net cash provided by operating activities 9,472,302 15,947,427 13,477,147
Cash flows provided by (used in) investing activities:
Acquisition and development of investment properties (22,173,231) (10,401,985) (55,021,276)
Refurbishment of investment properties (5,696,331) (7,948,239) (9,857,347)
Cash restricted for refurbishment of properties (976,259) 2,512,099 (1,575,913)
Net proceeds from sales of investment properties 53,606,876 569,892 15,821,148
Collections on mortgage and other notes receivable 2,236,599 1,620,492 135,552
------------- ------------- -------------
Net cash provided by (used in) investing activities 26,997,654 (13,647,741) (50,497,836)
Cash flows provided by (used in) financing activities:
Repayment of notes payable (43,263,684) (10,350,127) (41,674,691)
Proceeds from notes payable 14,053,727 9,798,728 82,721,234
Distributions to minority interests (157,143) (314,286) (314,285)
Deferred financing costs (553,482) (649,076) (5,361,159)
------------- ------------- -------------
Net cash provided by (used in) financing activities (29,920,582) (1,514,761) 35,371,099
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 6,549,374 784,925 (1,649,590)
Cash and cash equivalents at beginning of year 13,032,496 12,247,571 13,897,161
------------- ------------- -------------
Cash and cash equivalents at end of year $ 19,581,870 $ 13,032,496 $ 12,247,571
============= ============= =============
Supplementary disclosure of cash flow information:
Cash paid during the year for interest $ 30,820,761 $ 31,440,807 $ 30,732,896
============= ============= =============
Cash paid (received) during the year for income taxes $ 4,783,625 $ (59,941) $ 993,984
============= ============= =============
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization and Basis of Presentation
MOA Hospitality, Inc., an 85%-owned subsidiary of New Image Realty, Inc.
("New Image"), owns, develops, manages, and has equity interests in various
national brand affiliated limited service lodging facilities in 38 states
throughout the United States. At December 31, 1998, the Company's largest
concentrations of lodging facilities were located in the States of Georgia and
Illinois with 13 lodging facilities each. The consolidated financial statements
include the accounts of MOA Hospitality, Inc. and all wholly owned subsidiaries
and all entities in which it has a controlling interest (collectively, the
"Company"). All significant intercompany accounts have been eliminated in
consolidation. Certain reclassifications of prior-period amounts have been made
to conform with the current-period presentation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent liquid assets with a maturity of three months
or less when purchased.
Restricted Cash
Restricted cash represents cash that, under the terms of certain mortgage
notes payable, has been set aside for the refurbishment of motel properties.
Investment Properties
The Company's operating properties are stated at cost less accumulated
depreciation. Operating properties, excluding land, are depreciated using the
straight-line method over the estimated useful lives of the assets (buildings -
40 years; furniture and equipment - 7 years).
Maintenance and repair costs are expensed as incurred, while significant
improvements, replacements and major renovations are capitalized.
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. An impairment loss is measured as the difference between the
carrying value and fair value.
Financing and Other Deferred Costs
Financing costs are amortized over the terms of the related indebtedness
using the level yield method. Franchise costs are amortized using the
straight-line method over the life of the related franchise agreement.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of
common stock outstanding during each period. In 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share". The adoption of
Statement No. 128 had no effect on the Company's earnings per share
calculations.
3. Mortgage and Other Notes Receivable
Mortgage notes receivable in the amounts of $12,989,747 and $6,601,412 at
December 31, 1998 and 1997, respectively, represent notes collateralized by
motel properties. The notes provide for monthly principal and interest (various
rates of 8% to 10.5%) receipts over various terms through 2009, although certain
notes are callable prior to their due dates.
Other notes receivable in the amounts of $775,592 and $800,526 at December
31, 1998 and 1997, respectively, bear interest at rates from 9% to 11% and are
receivable over various terms through 2016.
Notes receivable of $2,625,807 and $4,692,262 at December 31, 1998 and
1997, respectively, have been pledged as collateral for a loan facility in which
the Company participated along with one of its affiliates. The loan facility has
an outstanding balance of $242,691 and $2,442,146 at December 31, 1998 and 1997,
respectively.
4. Operating Properties
The major classes of operating properties, at cost, are as follows:
December 31,
-------------------------------
1998 1997
-------------- --------------
Land $ 50,611,428 $ 53,830,545
Buildings 250,547,251 273,244,078
Furniture and Equipment 60,277,741 57,786,496
-------------- --------------
361,436,420 384,861,119
Less: Accumulated depreciation (81,492,910) (73,869,204)
-------------- --------------
$ 279,943,510 $ 310,991,915
============== ==============
Depreciation expense equaled $12,942,987, $12,151,209, and $11,520,181 for
the years ended December 31, 1998, 1997 and 1996, respectively.
5. Notes Payable and Senior Subordinated Notes
In September 1995, the Company completed funding of a financing
transaction with Nomura Asset Capital Corporation ("NACC"). Motels of America,
L.L.C. (the "LLC"), a limited purpose subsidiary, obtained a loan from NACC in
the principal amount of $158.8 million evidenced by a Promissory Note due 2015.
The Note is secured by 93 motel properties owned by the LLC. The loan requires
fixed monthly payments (based on a 20-year amortization schedule) of principal
and interest totaling approximately $1,390,000 through October 11, 2005;
thereafter, if the loan is not repaid, excess cash flow as defined is applied as
additional principal payments. Interest accrues at 8.62% through October 11,
2005, and thereafter at a fixed rate per annum equal to the greater of (i)
10.62% or (ii) the yield as of October 11, 2005 on ten-year U.S. Treasury notes,
plus 4.5%.
In 1997, an affiliate of the Company was formed for the sole purpose of
constructing lodging properties to be acquired by a subsidiary of the Company
upon completion at cost. Such affiliate develops the lodging properties from its
own funds, payments from the Company on account of the purchase price and the
proceeds of a $20,000,000 revolving construction loan facility arranged by the
affiliate. In connection with such construction loan facility, the Company has
guaranteed completion of the construction of each property, and the subsidiary
acquiring the properties has guaranteed the construction loan facility to a
maximum of $10,000,000. In 1997, five (5) such properties were acquired for
$12,900,000 of which $7,800,000 was funded from a new $150,000,000 secured loan
facility between the subsidiary acquiring the properties and CS First Boston.
This facility provides, among other things for interest computed at a rate based
upon the thirty (30) day LIBOR rate plus 300 basis points, monthly principal and
interest payments at an 11.5% per annum constant, and repayment in full of each
funding made pursuant to the facility forty-two (42) months after the date of
each such funding. In addition, the Company has pledged its interest in a wholly
owned subsidiary to secure up to $20,000,000 of borrowing under the facility.
During 1998, the Company acquired seven newly constructed motels from an
affiliate at cost for an aggregate amount of $20,600,000 in cash. The purchases
of these motels were funded from $11,400,000 of new borrowing under the CSFB
secured loan facility referred to above, application of amounts previously
deposited with the affiliate and from internally generated funds, including
funds from the net proceeds from the sale of properties. As of December 31,
1998, there is one motel property being constructed for the Company by the
affiliate and the affiliate is holding one parcel of vacant land. The Company
anticipates acquiring the motel currently under construction in 1999 for
approximately $2.7 million.
In 1994, the Company completed an offering of $80,000,000 in principal
amount of 12% Senior Subordinated Notes due April 15, 2004, Series B. In
conjunction with this offering, 80,000 shares of common stock were also issued.
These Notes have been registered under the Securities Act of 1933 and are freely
transferable by holders thereof. Interest on the Notes is payable semiannually.
The Notes are not redeemable at the option of the Company prior to April 15,
1999. The Company may redeem the Subordinated Notes at 106% reducing to 100%
over the life of the Subordinated Notes plus any accrued and unpaid interest.
The declaration and payment of dividends is restricted by the indenture
relating to the 12% Senior Subordinated Notes.
A summary of mortgage and other notes payable is as follows:
December 31,
------------------------------
1998 1997
------------- -------------
Mortgage and other notes:
Mortgage note payable secured by
93 motels, with interest at 8.62%
per annum through October 10, 2005.
Rate equal to greater of 10.62% or
ten-year Treasury note plus 4.5%
thereafter. Principal and
interest payable monthly; due
October 11, 2015 $148,667,825 $152,188,885
11, 2015
Mortgage notes payable secured by 13
and 19 motels at December 31,1998
and 1997, respectively and a pledge
of the stock of one of MOA Hospitality,
Inc's subsidiaries, with interest at a
floating rate of LIBOR plus 3.37%;
Principal and interest payable monthly;
due September 30, 1999 12,025,637 35,891,475
Various cross-collateralized, nonrecourse
mortgage notes secured by 7 motels and
the common stock of MOA Portfolio II,
Ltd., with interest at a floating rate
of LIBOR plus 1.75% with a cap of 9%;
monthly principal and interest payments;
due December 31, 1998 17,233,789 18,396,629
Various mortgage notes payable currently
secured by 7 motels, with fixed interest
from 7.85% to 10.25%; principal and
interest payments payable monthly; due
dates from May 1, 1999 to December 15,
2003. 7,009,027 7,205,967
Note secured by undeveloped land with a
fixed interest rate of 8%; interest
payable monthly, due date May 4, 2001. 1,440,000 -
Various mortgage notes payable currently
secured by 1 motel in 1998 and 1997 and
undeveloped land in 1997, with variable
interest based on prime or Treasury
bill rates; principal and interest payments
payable monthly; due upon demand. 2,739,325 3,347,926
Mortgage note payable secured by a hotel,
with interest at LIBOR plus 1.75%,
principal and interest payments payable
monthly, paid in full. - 8,827,220
Note secured by notes receivable with
interest at a floating rate of LIBOR
plus 2.50%; monthly principal and
interest payment: due November 13, 1999. 242,691 2,442,146
Mortgage note payable secured by a
guarantee of New Image Realty, Inc. with
a fixed interest rate of 14%; interest
payments payable quarterly; due January
23, 2001. 8,400,000 8,400,000
Notes payable secured by a pledge of stock
of one of MOA Hospitality, Inc.'s
subsidiaries, with an interest at a
floating rate of LIBOR plus 3%;
principal and interest payments payable
monthly; due April 8, 2001 through June
18, 2002. 17,716,547 7,783,995
Industrial development revenue bonds
secured by a motel with interest payable
semiannually at 10.5%; annual sinking
fund redemptions of principal on
December 1 through 2016. 3,520,000 3,585,000
December 1 through 2016.
Other notes payable 50,100 185,655
------------- -------------
219,044,941 248,254,898
Less current portion (40,199,004) (67,157,229)
------------- -------------
$178,845,937 $181,097,669
============= =============
Principal payments required on notes payable and the Senior Subordinated
Notes are scheduled as follows:
Years ended December 31,
------------------------
1999 $ 40,199,004
2000 5,113,886
2001 25,916,261
2002 11,057,714
2003 5,631,456
Thereafter 211,126,620
-------------
Sub-total $299,044,941
Less: Discount, net of
accumulated amortization 2,894,235
-------------
$296,150,706
=============
In January 1999, the Company repaid mortgage notes with an outstanding
balance of $17.2 million at December 31,1998 with the proceeds of a new $13.5
million loan and the balance with cash. The new loan is secured by six
properties and bears interest at LIBOR plus 3.25 percentage points. During the
initial year of the loan, all excess cash flow (as defined in the loan
agreement) from the properties is to be applied toward principal amortization.
Thereafter, principal amortization is based on a twenty-year schedule plus an
additional $250,000 of annual principal amortization paid monthly. The loan
matures in January 2004. In March 1999, the Company borrowed $23.4 million, the
proceeds of which were utilized to pay-off loans with outstanding balances of
$14.0 million at December 31, 1998. The balance of the net proceeds was retained
for working capital purposes. The loan was initially secured by ten properties
and five mortgage notes receivable. The interest rate pertaining to the amount
of the loan allocated to the properties is the Prime Rate plus 0.5 percentage
points and the interest rate pertaining to the amount of the loan allocated to
the mortgage notes receivable is the Prime rate plus 1.25 percentage points. The
loan requires principal payments based on a twenty-year schedule with the
outstanding balance of the loan due in April 2006. Provided certain conditions
are met, the Company has the ability to sell properties secured by the loan in
partial exchange for a mortgage note receivable that would than be pledged as
collateral under the loan with the interest rate adjusted to the Prime rate plus
1.25 percentage points. The Company's principal repayment obligations,
reflective of the above mentioned debt transaction, as of March 31, 1999 is
$8,340,000 for the remainder of fiscal 1999; $6,107,000 for 2000 and $26,979,000
for 2001.
6. Leases
The Company leases certain properties, administrative offices, and
equipment under operating leases. The leases generally provide for the Company
to pay taxes, insurance, and maintenance expenses related to the leased
property. Rent expense was approximately $806,000, $947,000, and $974,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Minimum annual rentals for leases on properties and the corporate office
for the five years subsequent to December 31, 1998 and thereafter, are
approximately as follows:
Years ended December 31,
------------------------
1999 $ 393,000
2000 397,000
2001 321,000
2002 163,000
2003 135,000
Thereafter 873,000
----------
$2,282,000
==========
The Company, as Lessor, has entered into operating leases with
unaffiliated parties to operate five motel properties. The leases, which have a
term of six and a half years, provide for monthly rent payments. In addition,
the lease grants the lessee an option to purchase the leased properties. Future
minimum rentals under the lease (assuming that the purchase options are not
exercised) are approximately as follows:
Years ended December 31,
------------------------
1999 $ 886,000
2000 901,000
2001 918,000
2002 935,000
2003 954,000
Thereafter 2,331,000
----------
$6,925,000
==========
7. Impairment losses and restructuring costs
In 1997, restructuring costs of $750,000 were recorded relating to the
reorganization of the Company's management structure. This reorganization
included the implementation of a decentralized organizational structure whereby
many of the property management support functions previously based out of the
corporate office were moved to various regional offices, which were established
throughout the country. Impairment losses of $2,526,000 were recorded in 1997 to
reflect the writedown of certain land held for development to its estimated fair
value and to reflect a provision for loss on collection of a mortgage note
receivable.
In 1998, impairment losses of $9,300,000 were recorded to reflect the
writedown of certain properties to their estimated fair value.
8. Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
------------ ------------ -------------
Year ended December 31, 1998:
U.S. federal $ 5,273,060 $(3,600,699) $ 1,672,361
State and local 1,689,240 (1,293,038) 396,202
============ ============ =============
$ 6,962,300 $(4,893,737) $ 2,068,563
============ ============ =============
Year ended December 31, 1997:
U.S. federal $(1,498,879) $ (206,171) $ (1,705,050)
State and local (277,237) (126,710) (403,947)
------------ ------------ -------------
$(1,776,116) $ (332,881) $ (2,108,997)
============ ============ =============
Year ended December 31, 1996:
U.S. federal $ 910,476 $ (516,139) $ 394,337
State and local 58,279 35,145 93,424
------------ ------------ -------------
$ 968,755 $ (480,994) $ 487,761
============ ============ =============
Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate of 34% to income before income taxes and
extraordinary item as a result of the following:
Year Ended December 31,
---------------------------------------------
1998 1997 1996
-------------- ------------- --------------
Computed "expected" tax
expense (benefit) $ 1,774,959 $(1,863,476) $399,506
Increase in income taxes
resulting from:
State income taxes, net of
federal income tax effect 261,494 (266,605) 61,659
Other, net 32,110 21,084 26,596
-------------- ------------- -------------
$ 2,068,563 $(2,108,997) $487,761
============== ============= =============
The deferred tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts reported for income tax purposes are as follows:
December 31,
-----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Reserves, primarily impairment losses $(4,655,368) $(1,035,999)
Net state operating loss carryforwards (1,428,811) (896,012)
Federal tax credits carryover (633,727) (633,727)
Other, net (800,484) (457,225)
------------ ------------
Total deferred tax assets (7,518,390) (3,022,963)
Deferred tax liabilities:
Investment properties, principally due to
depreciation and purchase accounting
adjustments 5,976,340 6,374,647
------------ ------------
Total deferred tax liabilities 5,976,340 6,374,647
------------ ------------
Net deferred tax liability (asset) $(1,542,050) $ 3,351,684
============ ============
The Company is a member of an affiliated group that files a consolidated
tax return for federal income tax purposes and has entered into a tax allocation
agreement with New Image and its parent corporation. In accordance with the
agreement, the Company's tax liability/benefit will be computed as if the
Company had filed its own consolidated tax return and is subject to tax on all
of its taxable income. During 1998 the Company made payments of approximately
$4.8 million to the parent and during 1997, the Company received a payment of
approximately $0.4 million, from the parent corporation. At December 31, 1998,
approximately $1.7 million has been advanced to offset future tax payments to
the parent corporation, if any.
At December 31, 1998, the Company has net operating loss carryforwards
("NOLs") for state income tax purposes of approximately $19.2 million. The NOLs,
which are subject to certain limitations, expire at various dates through 2010.
At December 31, 1998, the Company also has approximately $634,000 of tax credit
carryforwards subject to certain limitations; approximately $500,000 of which do
not expire.
9. Acquisitions and Divestitures
In January 1996, the Company acquired nineteen motel properties from Forte
USA, Inc., a subsidiary of Forte Hotels, Inc., for $35.5 million.
In January through March 1996, the Company acquired two additional motel
properties and the land underlying one of its properties for approximately $8.2
million.
In May through November 1996, the Company sold eleven motel properties to
unaffiliated parties for approximately $15.8 million in net cash proceeds and
$6.3 million in notes receivable; the Company recorded a gain of $2.6 million.
During 1997, in separate transactions, the Company sold two properties for
an aggregate of $3.9 million consisting of cash in the amount of $0.1 million, a
mortgage note receivable in the amount of $1.0 million and the buyer's
assumption of a mortgage note in the amount of $2.3 million. The Company remains
contingently liable on the note, $2.3 million, in the event the purchaser does
not perform under its obligations.
In 1998, the Company sold ten properties, a parcel of vacant land and an
investment in a partnership to unaffiliated parties for approximately $65.5
million consisting of $57.2 million of cash and $8.3 in notes receivable; the
Company recorded a gain of $26.1 million.
Through May 12, 1999, the Company has sold six properties for approximately
$16.9 million consisting of $7.0 million in cash and $9.9 million in notes
receivable. The Company realized gains of approximately $1.6 million and losses
of approximately $2.7 million. The losses were recorded in 1998 operating
results as a part of the impairment loss. The Company has also leased an
additional six properties to third party operators in 1999.
10. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Mortgage and other notes receivable: The fair values of the Company's
mortgage and other notes receivable are estimated using discounted cash
flow analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings.
Mortgage and other notes payable: The fair values of the Company's
mortgage and other notes payable are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
12% Senior Subordinated Notes: The fair value of the Company's 12% Senior
Subordinated Notes are based on quoted market prices.
The carrying amounts and fair values of the Company's financial
instruments at December 31 are as follows:
Carrying Carrying
Amount Fair Value Amount Fair Value
1998 1998 1997 1997
------------ ------------ ------------ ------------
Cash and cash
equivalents $ 19,581,870 $ 19,581,870 $ 13,032,496 $ 13,032,496
Mortgage and other
notes receivable 13,765,339 14,018,869 7,401,938 7,588,815
Secured notes
payable 219,044,941 224,922,041 248,254,898 249,509,580
12% Senior
Subordinated Notes 77,105,765 55,600,000 76,734,638 76,000,000
11. Segments
During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No 131,
"Disclosures About Segments of an Enterprise and Related Information"("Statement
No. 131"). Statement No. 131 establishes standards for the manner in which
public business enterprises report information regarding reportable operating
segments. The adoption of Statement No. 131 did not affect the results of
operations or financial position of the Company.
As of December 31, 1998 the Company, directly and through subsidiaries,
owned 135 lodging facilities in 38 states. The Company owns a 100% interest in
all but two of its properties and also operates all but five of its motel, which
are leased to third party tenants pursuant to operating leases. The Company
separately evaluates the performance of each of its motels. However, because
each of the motels has similar economic characteristics, the motels have been
aggregated into a single dominant motel segment as indicated below.
1998 1997 1996
--------- --------- ---------
(in thousands)
Motel operations:
Motel operating revenue:
Room revenues $107,841 $114,110 $119,648
Ancillary motel revenues 7,166 7,402 8,195
--------- --------- ---------
Total motel operating revenues 115,007 121,512 127,843
Motel costs and expenses:
Motel operating expenses 60,608 62,333 67,344
Marketing and royalty fees 7,515 8,905 9,606
Depreciation and amortization 14,575 14,257 13,208
--------- --------- ---------
Total motel direct expenses 82,698 85,495 90,158
--------- --------- ---------
32,309 36,017 37,685
Corporate Operations
Other revenues 1,319 855 428
General and administrative expenses:
Management Company Operations 5,415 4,568 4,893
Construction/Acquisition and
Divestiture 1,389 1,032 695
Other general and administrative 4,301 2,308 1,245
--------- --------- ---------
Total general and administrative
expenses 11,105 7,908 6,833
Impairment losses and restructuring costs 9,300 3,276 -
Depreciation and amortization 3,420 728 787
--------- --------- ---------
(22,506) (11,057) (7,192)
--------- --------- ---------
Net operating income 9,803 24,960 30,493
Interest expense 30,578 31,373 31,573
--------- --------- ---------
Loss from operations (20,775) (6,413) (1,080)
Minority interests (84) (178) (334)
Gain on sale of properties 26,079 1,110 2,589
--------- --------- ---------
Income before income taxes 5,220 (5,481) 1,175
Income tax expense 2,068 (2,109) 488
--------- --------- ---------
Net Income $ 3,152 $ (3,372) $ 687
========= ========= =========
12. Contingencies
During 1997, the Company and certain of its subsidiaries commenced legal
actions against ShoLodge Franchise Systems, Inc. ("ShoLodge") the franchisor of
Shoney's Inns. The Company among other things has claimed that ShoLodge has
breached its contractual obligations and made material misrepresentations to MOA
prior to MOA or its subsidiaries acquiring any Shoney's Inns. Commencing in
February 1998, through May 1998 the Company disaffiliated each of its fourteen
Shoney's Inns from ShoLodge by removing the sign and other identifying marks. At
the time of such disaffiliation, MOA or its subsidiaries ceased remitting
franchise fees to ShoLodge. ShoLodge has filed a counter claim against MOA and
certain of its subsidiaries claiming a failure to renovate the properties and
failure to pay franchise fees. The Company believes that it will ultimately
prevail in its claims against ShoLodge.
The Company is involved in various legal proceedings arising in the
ordinary course of business. The Company does not believe that any of these
actions, either individually or in the aggregate, will have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company remains contingently liable on the $2.3 million note; in the
event the purchaser does not perform under its obligations.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
May, 1999.
MOA HOSPITALITY, INC.
By: /s/ Kurt M. Mueller
----------------------
Kurt M. Mueller
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Paul F. Wallace Director, Chairman and May 14, 1999
- -------------------------------
Paul F. Wallace Chief Executive Officer
Principal Executive Officer
/s/ Alan H. Baerenklau Director, President and May 14, 1999
- -------------------------------
Alan H. Baerenklau Chief Operating Officer
/s/ Kurt M. Mueller Director and Chief May 14, 1999
- -------------------------------
Kurt M. Mueller Financial Officer
Principal Financial Officer
/s/ Carl W. Desch Director May 14, 1999
- -------------------------------
Carl W. Desch
/s/ Peter W. McClean Director May 14, 1999
- -------------------------------
Peter W. McClean
/s/ Louis A. Scarrone, M.D. Director May 14, 1999
- -------------------------------
Louis A. Scarrone, M.D
/s/ Ronald P. Stewart Director May 14, 1999
- -------------------------------
Ronald P. Stewart
/s/ Philip J. Levien Director May 14, 1999
- -------------------------------
Philip J. Levien
Supplemental Information to Be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
The Company did not submit an annual report to security holders
covering the registrants's last fiscal year. In addition, the Company did not
send proxy statements, any form of proxy or other proxy soliciting material to
security holders with respect to any annual or other meeting of security
holders.
INDEX TO EXHIBITS
Sequential
Exhibit Page
Number Description Number
3.1 Certificate of Incorporation of Motels of America,
Inc. ("MOA" or the "Company") as amended to date,
incorporated by reference to Exhibit 3.1 to MOA's
Registration Statement on Form S-1 (No. 33-78866)
which became effective on July 13, 1994 (the "1994 Form S-1").
3.2 By-laws of MOA, incorporated by reference to
Exhibit 3.2 to the 1994 Form S-1.
4.1 Indenture dated April 14, 1994 for the 12% Senior
Subordinated Notes due 2004, incorporated by
reference to Exhibit 4.1 to the 1994 Form S-1.
4.2 Registration Rights Agreement dated as of April 14, 1994
by and among MOA, Alex. Brown and BT Securities,
incorporated by reference to Exhibit 4.2 to the 1994 Form S-1.
4.3 Loan Agreement between Motels of America, L.L.C. and
Nomura Asset Capital Corporation ("NACC") dated as of
September 15, 1995, incorporated by reference to Exhibit 4.1
to MOA's Form 8-K filed on November 4, 1995.
4.4 Form of Mortgage, Security Agreement, Assignment of Rents
and Fixture Filing between MOA-TL Corp. and MOA-CS Corp.,
as Mortgagor to CS First Boston Mortgage Capital Corp.,
as Mortgagee, dated as of November 5, 1996, incorporated
by reference to Exhibit 4.4 to MOA's Form 10-K for the
fiscal year ended December 31, 1996 (the "1996 Form 10-K").
10.1 Note Purchase Agreement dated as of October 20, 1994, among
NACC and MOA, MOA Midwest Corp. and Tri-State Inns, Inc. (the
"Note Purchase Agreement"), incorporated by reference to
Exhibit 10.2 to MOA's Form 10-K for the fiscal year ended
December 31, 1994 (the "1994 Form 10-K").
10.1A Amendment No. 1 to the Note Purchase Agreement, dated as of
October 20, 1994, incorporated by reference to Exhibit 10.2A
to the 1994 Form 10-K.
10.1B Environmental Indemnity Agreement dated as of October 20,
1994, incorporated by reference to Exhibit 10.2B to the 1994
Form 10-K.
Sequential
Exhibit Page
Number Description Number
10.1C Amendment No. 2 to the Note Purchase Agreement, dated as of
December 16, 1994, incorporated by reference to Exhibit 10.1B
to MOA's Form 8-K filed on February 7, 1996 (the "1996 Form
8-K").
10.1D Amendment No. 3 to the Note Purchase Agreement, dated as of
January 23, 1996, incorporated by reference to Exhibit 10.1C
to the 1996 Form 8-K.
10.2 Note Purchase Agreement dated as of January 23, 1996, among
NACC and MOA-TL Corp., incorporated by reference to Exhibit
10.2 to the 1996 Form 8-K.
10.3 $10,000,000 Promissory Note of MOA-TL Holding Corp. payable
to HFS Incorporated, dated as of January 23, 1996,
incorporated by reference to Exhibit 10.3 to the 1996
Form 8-K.
10.4 Asset Purchase Agreement dated as of December 19, 1995,
by and among MOA, Forte Hotels, Inc. and Forte USA, Inc.
(the "Asset Purchase Agreement"), incorporated by reference
to Exhibit 10.4 to the 1996Form 8-K.
10.4A First Amendment to the Asset Purchase Agreement, dated as of
January 23, 1996, incorporated by reference to Exhibit 10.4A
to the 1996 Form 8-K.
10.5 Employment Agreement of Daniel W. Daniele dated September 14,
1994, incorporated by reference to Exhibit 10.14 to the 1994
Form 10-K.
10.6 $20,000,000 Promissory Note of MOA-TL Corp. payable to CS First
Boston Mortgage Capital Corp., dated as of November 5, 1996,
incorporated by reference to Exhibit 10.6 to MOA's Form 10-K
for the fiscal year ended December 31, 1996 (the "1996 Form
10-K").
10.7 $17,150,000 Promissory Note of MOA-CS Corp. payable to CS First
Boston Mortgage Capital Corp., dated as of November 5, 1996,
incorporated by reference to Exhibit 10.7 to MOA's Form
10-K for the fiscal year ended December 31, 1996
(the "1996 Form 10-K").
10.8 Credit facility agreement up to $150,000,000 between TAD
Properties, L.L.C. and Credit Suisse First Boston Mortgage
Capital., date as of December 20, 1996.
10.8A Amendment to credit facility agreement, dated as of
October 8, 1997.
21.1 Subsidiaries of MOA.