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):
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.
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.
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.
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.
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.
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.
(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.
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.
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(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.
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(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.
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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
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.
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.
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.
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.
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.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
Years Ended December 31, 1998, 1997 and 1996
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998
Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements
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
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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.