UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-78866
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MOA HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0166914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
---------------------
701 Lee Street, Suite 1000
Des Plaines, Illinois 60016
(847) 803-1200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Number of shares of Common Stock, $.01 par value outstanding as of
November 12, 1999: 800,000
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets - 2
September 30, 1999(unaudited) and December 31, 1998.
Condensed consolidated statements of operations - 3
Three months ended September 30, 1999 and 1998
(unaudited); Nine months ended September 30, 1999
and 1998 (unaudited).
Condensed consolidated statements of cash flows - 4
Nine months ended September 30, 1999 and 1998
(unaudited).
Notes to condensed consolidated financial statements - 5
September 30, 1999 (unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 9
Results of Operations 10
Liquidity and Capital Resources 17
Part II Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,447 $ 19,582
Accounts receivable from property operations 2,542 2,015
Operating supplies and prepaid expenses 1,666 2,325
Current portion of mortgage and notes receivable 3,583 2,139
----------- -----------
Total Current Assets 16,238 26,061
Investment property:
Operating properties,
net of accumulated depreciation 265,692 279,944
Land held for development 5,249 3,829
----------- -----------
Total investment property 270,941 283,773
Other Assets:
Deposits and other assets 21,999 5,507
Mortgage and other notes receivable,
less current portion 18,708 11,626
Financing and other deferred costs,
net of accumulated amortization of
$9,568 in 1999 and $8,259 in 1998 13,161 12,088
----------- -----------
Total Other Assets 53,868 29,221
----------- -----------
Total Assets $ 341,047 $ 339,055
=========== ===========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 2,155 $ 3,939
Real estate taxes payable 2,964 2,848
Accrued interest payable 6,030 3,382
Other accounts payable and accrued expenses 13,352 8,300
Current portion of long-term debt 11,152 40,199
----------- -----------
Total Current Liabilities 35,653 58,668
Long-term debt, less current portion:
Mortgage and other notes payable 207,299 178,846
12% Senior Subordinated Notes, net of
unamortized discount of $2,586 in 1999
and $2,894 in 1998 77,414 77,106
----------- -----------
Total Long-term debt, excluding current portion 284,713 255,952
----------- -----------
Total Liabilities 320,366 314,620
----------- -----------
Minority Interests 1,705 1,689
Stockholders' equity:
Common stock, $.01 par value, 1,500,000
shares authorized; 800,000 shares
issued and outstanding 8 8
Additional paid-in capital 15,294 15,294
Retained earnings 3,674 7,444
----------- -----------
Total Stockholders' Equity 18,976 22,746
----------- -----------
Total Liabilities and Stockholders' Equity $ 341,047 $ 339,055
=========== ===========
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except share data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
Revenues:
Motel operating revenues $ 28,330 $ 35,272 $ 75,774 $ 92,353
Other revenues 1,237 357 2,788 810
---------- ----------- ----------- -----------
Total revenues 29,567 35,629 78,562 93,163
Costs and expenses:
Motel operating expenses 13,076 16,152 40,601 46,769
Marketing and royalty fees 1,943 2,132 5,177 5,942
General and administrative 1,975 2,642 8,234 7,516
Depreciation and amortization 2,982 4,194 10,199 12,280
---------- ----------- ----------- -----------
Total direct expenses 19,976 25,120 64,211 72,507
---------- ----------- ----------- -----------
Net operating income 9,591 10,509 14,351 20,656
Interest expense 7,627 7,705 22,330 23,120
---------- ----------- ----------- -----------
Income (loss) from operations 1,964 2,804 (7,979) (2,464)
Minority interests (11) (72) (16) (112)
Gain on sale of properties 358 9,658 2,010 24,532
---------- ----------- ----------- -----------
Income (loss) before income taxes 2,311 12,390 (5,985) 21,956
Income tax expense (benefit) 932 4,822 (2,215) 8,545
---------- ----------- ----------- -----------
Net income (loss) $ 1,379 $ 7,568 $ (3,770) $ 13,411
========== =========== =========== ===========
Net income (loss) per common share
(basic and diluted) $ 1.72 $ 9.46 $ (4.71) $ 16.76
========== =========== =========== ===========
Weighted average number of
common shares outstanding 800,000 800,000 800,000 800,000
========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30
---------------------------
1999 1998
------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (3,770) $ 13,411
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, amortization and accretion of
discount on notes 10,463 12,555
Minority interests of others in net income (loss)
from operations 16 112
Deferred income taxes 1,302 64
Gain on sale of properties (2,010) (24,532)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (531) (624)
Operating supplies, prepaid expenses,
deposits and other assets (18,714) 6,988
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,132 5,044
Accrued interest payable 2,648 2,197
------------ ------------
Net cash (used in) operating activities (7,464) 15,215
Cash flows provided by (used in) investing activities:
Acquisition and development of investment properties (6,600) (13,107)
Refurbishment of investment properties (4,372) (5,631)
Net proceeds from sale of investment properties 6,640 47,436
Cash restricted for refurbishment of properties 1,379 (322)
Collections on mortgage and other notes receivable 2,340 2,152
------------ ------------
Net cash provided by (used in) investing activities (613) 30,528
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 37,948 5,942
Repayment of notes payable (38,542) (37,148)
Distributions to minority interests - (157)
Deferred financing costs (2,463) (251)
------------ ------------
Net cash provided by (used in) financing activities (3,057) (31,614)
------------ ------------
Net increase (decrease) in cash and cash equivalents (11,134) 14,129
Cash and cash equivalents at beginning of period 19,582 13,032
------------ ------------
Cash and cash equivalents at end of period $ 8,448 $ 27,161
============ ============
Supplementary disclosure of cash flow information:
Cash paid during the period for interest $ 19,682 $ 20,648
============ ============
Cash paid (net of refunds received) during the
period for income taxes $ 14,555 $ 96
============ ============
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in MOA Hospitality, Inc. and Subsidiaries' Annual Report on
Form 10-K for the year ended December 31, 1998. The terms "MOA" and the
"Company" mean MOA Hospitality, Inc. and its subsidiaries.
2. Divestitures and Leasing Activities
In January through September 1999, the Company leased twenty-four of
its operating properties to third party operators for various terms through
April 2005.
In January through September 1999, the Company sold seven of its
lodging facilities and a vacant parcel of land for approximately $18.1 million
consisting of $7.3 million of cash and $10.8 million in notes receivable. The
net gain recognized by the Company was approximately $2.0 million. In
comparison, during the period of January through September of 1998 the Company
sold seven lodging facilities and a vacant parcel of land for a net gain of
$24.5 million.
3. Mortgage and Other Notes Payable
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 loan was initially 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 amortization 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.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
(Unaudited)
3. Mortgage and Other Notes Payable - (Continued)
The Company's principal repayment obligations, reflective of
the above mentioned debt transaction, as of September 30, 1999 is $5,274,000 for
the remainder of fiscal 1999; $5,671,000 for 2000 and $21,448,000 for 2001.
Included in the $5,274,000 of maturities for the remainder of fiscal 1999 is a
mortgage loan in the amount of $3,884,000 that matures on December 15, 1999. The
lender has agreed to renew this loan and the legal documentation therefore is
currently being prepared.
4. Acquisitions
In June 1999, the Company acquired a newly constructed motel
and a parcel of vacant land from an affiliate at a cost of $3,496,000, in
settlement of a receivable. As of June 30, 1999 there were no further motels
being developed by the affiliate for the Company and currently no plans for such
further development through the affiliate.
5. Income Taxes
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34% to income before income taxes principally
as a result of state income taxes.
6. Contingencies
In July 1999, the Company entered into a settlement agreement
with ShoLodge Franchise Systems, Inc. ("ShoLodge") resolving all disputes with
respect to the litigation initiated by the Company against ShoLodge in 1997. The
Company disaffiliated its fourteen Shoney's Inns during the first half of 1998
at which time it ceased the payment of franchise fees that amounted to
approximately $650,000 on an annual basis. While ShoLodge was seeking franchise
fees for the remaining terms of the franchise agreements the settlement
agreement requires for the Company to make an initial payment of $575,000 in
July 1999 and three subsequent payments of $200,000 in July 2000, 2001 and 2002
without interest. The present value of these payments or $1,068,000 was expensed
in June 1999 as part of the Company's general and administrative expenses.
The Company is involved in various other 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.
7. Subsequent Event
During the fourth quarter of 1999, the Company developed and
commenced the implementation of a restructuring plan designed to reduce the
operating cost of the management company divisions operations. The restructuring
plan results in a reduction in the number of employees. The company anticipates
recording a charge in the fourth quarter of approximately $500,000 principally
for severance paid to the effected employees as a result of the implementation
of the restructuring plan.
Through November 12, 1999, the Company sold two properties
for an approximate $3.2 million consisting of $1.7 million in cash and $1.5
million in notes receivable. The Company realized gains of approximately $0.3
million. The Company also leased an additional six properties to third party
tenants.
8. 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 September 30, 1999 the Company, directly and through
subsidiaries, owned 129 lodging facilities in 38 states. The Company owns a 100%
interest in all but two of its properties and also operates all but twenty-nine
of its motels, 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.
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Motel operations:
Motel operating revenue:
Room revenues $ 26,587 $ 33,364 $ 70,921 $ 86,602
Ancillary motel revenues 1,743 1,908 4,853 5,751
--------- --------- --------- ---------
Total motel operating revenues 28,330 35,272 75,774 92,353
Motel costs and expenses:
Motel operating expenses 13,076 16,152 40,601 46,769
Marketing and royalty fees 1,943 2,132 5,177 5,942
Depreciation and amortization 2,796 3,651 9,533 10,777
--------- --------- --------- ---------
Total motel direct expenses 17,815 21,935 55,311 63,488
--------- --------- --------- ---------
10,515 13,337 20,463 28,865
Corporate Operations
Other revenues 1,237 357 2,788 810
General and administrative expenses:
Management Company Operations 1,288 1,462 4,212 4,011
Construction/Acquisition and Divestiture 306 221 989 817
Other general and administrative 381 959 3,033 2,688
--------- --------- --------- ---------
Total general and administrative expenses 1,975 2,642 8,234 7,516
Depreciation and amortization 186 543 666 1,503
--------- --------- --------- ---------
(924) (2,828) (6,112) (8,209)
--------- --------- --------- ---------
Net operating income 9,591 10,509 14,351 20,656
Interest expense 7,627 7,705 22,330 23,120
--------- --------- --------- ---------
Income (loss) from operations 1,964 2,804 (7,979) (2,464)
Minority interests (11) (72) (16) (112)
Gain on sale of properties 358 9,658 2,010 24,532
--------- --------- --------- ---------
Income (loss) before income taxes 2,311 12,390 (5,985) 21,956
Income tax expense (benefit) 932 4,822 (2,215) 8,545
--------- --------- --------- ---------
Net Income (Loss) $ 1,379 $ 7,568 $ (3,770) $ 13,411
========= ========= ========= =========
Item 2. 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 of the Company
to be materially different from any future 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 interim condensed
consolidated historical financial statements of the Company and the notes
thereto included elsewhere herein. The supplemental historical operating results
presented below for the three and nine months ended September 30, 1999 and 1998
have been prepared on the same basis as the interim condensed consolidated
historical financial statements and, in the opinion of the Company, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein.
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 rates result in significant changes in the
operating profit of the Company's motels.
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
The following chart presents certain historical operating results and
statistics and is being provided as a supplement to the condensed
consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
-------------------------------------------------------------------
(unaudited)
Three Months Ended September 30
-------------------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
------------------- --------------------- -----------------------
1999 1998 1999 1998 1999 1998
--------- --------- ---------- --------- ---------- -----------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $ 25,678 $ 24,874 $ 909 $ 8,490 $ 26,587 $ 33,364
Ancillary motel revenues 1,677 1,410 66 498 1,743 1,908
--------- --------- ---------- --------- ---------- -----------
Total motel operating revenues 27,355 26,284 975 8,988 28,330 35,272
Motel costs and expenses:
Motel operating expenses 12,713 10,543 363 5,609 13,076 16,152
Marketing and royalty fees 1,858 1,579 85 553 1,943 2,132
Depreciation and amortization 1,837 3,017 959 634 2,796 3,651
--------- --------- ---------- --------- ---------- -----------
Total motel direct expenses 16,408 15,139 1,407 6,796 17,815 21,935
--------- --------- ---------- --------- ---------- -----------
$10,947 $11,145 $ (432) $ 2,192 10,515 13,337
========= ========= ========== =========
Corporate operations:
Other revenues, net 1,237 357
General and administrative expenses:
Management Company Operations 1,288 1,462
Construction/Acquisition
and Divestiture 306 221
Other general and administrative 381 959
---------- -----------
Total general and administrative expenses 1,975 2,642
Depreciation and amortization 186 543
---------- -----------
(924) (2,828)
---------- -----------
Net operating income $ 9,591 $ 10,509
========== ===========
Other data:
Number of motels at period end (5) 95 95 5 37 100 132
Number of rooms at period end (5) 7,602 7,602 329 3,124 7,931 10,726
Occupancy percentage (5) 74.21% 72.93% 67.26% 62.63% 73.11% 69.71%
ADR (1) (5) $ 49.48 $ 48.65 $ 41.73 $ 42.48 $ 45.08 $ 46.92
REVPAR (2) (5) $ 39.12 $ 37.49 $ 30.10 $ 28.17 $ 35.12 $ 34.58
Net operating income margin (3) 32.44% 29.50%
Net motel revenue margin (4) (5) 49.79% 56.93% 58.01% 33.29% 50.07% 50.92%
-------------------------------------------
(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 September 30, 1999 and for the three months then ended, excludes
amounts related to the twenty nine 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, net lease income, distributions of partnership interests in
excess of the Company's basis in such partnerships and other miscellaneous
income. Total revenues decreased to $29,567,000 for the three months ended
September 30, 1999 from $35,629,000 for the three months ended September 30,
1998, a decrease of $6,062,000 or 17.0%.
Motel revenues decreased to $28,330,000 for the three months ended
September 30, 1999 from $35,272,000 for the three months ended September 30,
1998, a decrease of $6,942,000 or 19.7%. The motel revenues for motels owned
during both periods increased approximately $1,071,000 which was offset by a
decrease of $8,013,000 in motel revenues for motels acquired and divested since
July 1, 1998. Motel revenues for motels owned during both periods increased
4.1%. The increase in motel revenues for motels owned during both periods was
attributable principally to an increase in the room revenues driven by an
increase in both occupancy and average daily rate ("ADR"). The occupancy
percentage increased from 72.93% for the three months ended September 30, 1998
to 74.21% for the three months ended September 30, 1999, an increase of 1.8%.
The ADR for the motels owned during both periods increased to $49.48 for the
three months ended September 30, 1999 from $48.65 for the three months ended
September 30, 1998, an increase of $0.83 or 1.7%. Revenue per available room
("REVPAR") for motels owned during both periods increased to $39.12 for the
three months ended September 30, 1999 from $37.49 for the three months ended
September 30, 1998, an increase of $1.63 or 4.3%. The acquired and divested
motels had an occupancy percentage of 67.26%; an ADR of $41.73 and REVPAR of
$30.1 for the three months ended September 30, 1999.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, insurance, linens and other operating
supplies. Motel operating expenses decreased to $13,076,000 for the three months
ended September 30, 1999 from $16,152,000 for the three months ended September
30, 1998, a net decrease of $3,076,000 or 19.0%. Motel operating expenses for
motels acquired and divested since July 1, 1998 decreased to $363,000 for the
three months ended September 30, 1999 from $5,609,000 for the three months ended
September 30, 1998, a decrease of $5,246,000 or 93.5%. The decrease was
partially offset by an increase of $2,170,000 or 20.6% in the costs of operating
the motels owned during both periods. The cost of operating motels owned during
both periods increased to $12,713,000, for the three months ended September 30,
1999, from $10,543,000 for the three months ended September 30, 1998. The
increase in operating costs is principally due to increased labor and related
costs and an increase in repairs and maintenance expenditures. Motel operating
expenses as a percentage of motel revenues increased to 46.2% for the three
months ended September 30, 1999 from 45.8% for the three months ended September
30, 1998. Motel operating expenses as a percentage of motel revenues for the
motels owned in both periods, increased to 46.5% for the three months ended
September 30, 1999 from 40.1% for the three months ended September 30, 1998.
Marketing and royalty fees include media advertising, billboard rental
expense, advertising fund contributions and royalty fees paid to franchisors and
other related marketing expenses. Marketing and royalty fees decreased to
$1,943,000 for the three months ended September 30, 1999 from $2,132,000 for the
three months ended September 30, 1998, a decrease of $189,000 or 8.9%. The
marketing and royalty fees for motels owned during both periods increased to
$1,858,000 for the three months ended September 30, 1999 from $1,579,000 for the
three months ended September 30, 1998, an increase of $279,000 or 17.7%. For the
motels owned during both periods, marketing and royalty fees as a percentage of
room revenues increased to 7.2% for the three months ended September 30, 1999
from 6.3% for the three months ended September 30, 1998. The increase in
marketing and royalty fees for motels owned in both periods are principally due
to additional marketing efforts to increase the occupancy percentage including
the affiliation of certain properties with national brands resulting in the
payment of franchise fees on such properties in 1999 where no such fees were
incurred in 1998.
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 Company Operations decreased $174,000 to $1,288,000 for the three
months ended September 30, 1999 from $1,462,000 for the three months ended
September 30, 1998, a decrease of 11.9%. The general and administrative expenses
associated with Construction/Acquisition and Divestiture Division increased
$85,000 from $221,000 for the three months ended September 30, 1998 to $306,000
for the three months ended September 30, 1999. Other General and Administrative
expenses decreased $578,000 to $381,000 for the three months ended September 30,
1999 from $959,000 for the three months ended September 30, 1998. As a
percentage of total motel operating revenues, Management Company Operations
general and administrative expenses was 4.5% for the three months ended
September 30, 1999 and 4.1% for the three months ended September 30, 1998.
Depreciation and amortization decreased to $2,982,000 for the three
months ended September 30, 1999 from $4,194,000 for the three months ended
September 30, 1998, a net decrease of $1,212,000 or 28.9%. .
Net operating income decreased to $9,591,000 for the three months ended
September 30, 1999 from $10,509,000 for the three months ended September 30,
1998, a decrease of $918,000 or 8.7%. The decrease in net operating income
included a decrease of $3,677,000 in net motel revenues (motel revenues less
motel operating expenses and marketing and royalty fees). Of the $3,677,000
decrease in net motel revenues, $1,378,000, resulted from the motels owned
during both periods, a decrease of 9.7%. Net motel revenues for motels acquired
and divested since July 1, 1998 decreased $2,299,000. Net operating income as a
percent of total revenues was 32.4% for the three months ended September 30,
1999 as compared to 29.5% for the three months ended September 30, 1998.
Interest expense decreased to $7,627,000 for the three months ended
September 30, 1999 from $7,705,000 for the three months ended September 30,
1998, a decrease of $78,000. The decrease in interest expense is reflective of
the lower average amount of outstanding borrowings during the third quarter of
1999 as compared to the third quarter 1998.
Gain on sale of properties amounted to $358,000 for the three months
ended September 30, 1999 compared to $9,658,000 for the respective period in
1998. In two unrelated transactions, one motel and a vacant parcel of land were
sold for $0.3 million in cash and $1.0 million in a note receivable. Five motels
were sold in 1998 for $25.6 million in cash in five unrelated transactions on
which the $9.6 million gain was recognized.
Net income decreased to $1,379,000 for the three months ended
September 30, 1999 from net income of $7,568,000 for the three months ended
September 30, 1998.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
The following chart presents certain historical operating results and
statistics and is being provided as a supplement to the condensed
consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
-------------------------------------------------------------------
(unaudited)
Nine Months Ended September 30
-------------------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
------------------- --------------------- -----------------------
1999 1998 1999 1998 1999 1998
--------- --------- ---------- --------- ---------- -----------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $ 62,180 $ 61,061 $ 8,741 $ 25,541 $ 70,921 $ 86,602
Ancillary motel revenues 4,368 3,727 485 2,024 4,853 5,751
--------- --------- ---------- --------- ---------- -----------
Total motel operating revenues 66,548 64,788 9,226 27,565 75,774 92,353
Motel costs and expenses:
Motel operating expenses 34,339 29,973 6,262 16,796 40,601 46,769
Marketing and royalty fees 4,480 4,153 697 1,789 5,177 5,942
Depreciation and amortization 6,484 8,113 3,049 2,664 9,533 10,777
--------- --------- ---------- --------- ---------- -----------
Total motel direct expenses 45,303 42,239 10,008 21,249 55,311 63,488
--------- --------- ---------- --------- ---------- -----------
$ 21,245 $ 22,549 $ (782) $ 6,316 20,463 28,865
========= ========= ========== =========
Corporate operations:
Other revenues, net 2,788 810
General and administrative expenses:
Management Company Operations 4,212 4,011
Construction/Acquisition
and Divestiture 989 817
Other general and administrative 3,033 2,688
---------- -----------
Total general and administrative expenses 8,234 7,516
Depreciation and amortization 666 1,503
---------- -----------
(6,112) (8,209)
========== ===========
Net operating income $ 14,351 $ 20,656
========== ===========
Other data:
Number of motels at period end (5) 94 94 6 38 100 132
Number of rooms at period end (5) 7,536 7,536 395 3,190 7,931 10,726
Occupancy percentage (5) 66.73% 65.58% 58.47% 60.00% 65.29% 63.75%
ADR (1) (5) $ 45.25 $ 45.18 $ 34.48 $ 42.36 $ 42.30 $ 44.31
REVPAR (2) (5) $ 32.31 $ 31.44 $ 21.28 $ 27.43 $ 29.51 $ 30.12
Net operating income margin (3) 18.27% 22.17%
Net motel revenue margin (4) (5) 44.59% 50.22% 25.94% 35.16% 42.29% 45.77%
-------------------------------------------
(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 September 30, 1999 and for the nine months then ended, excludes
amounts related to the twenty nine motels which are leased to third
party tenants.
Total revenues decreased $14,601,000 to $78,562,000 for the nine months
ended September 30, 1999 from $93,163,000 for the nine months ended
September 30, 1998 or 15.7%.
Motel revenues decreased to $75,774,000 for the nine months ended
September 30, 1999 from $92,353,000 for the nine months ended September 30,
1998, a decrease of $16,579,000 or 18.0%. The motel revenues, for motels owned
during both periods, increased approximately $1,760,000 or 2.7% which was offset
by a decrease of $18,339,000 for acquired and divested motels, since January 1,
1998. The increase in motel room revenues for motels owned during both periods
was attributable principally to an increase in the occupancy percentage. The
occupancy percentage increased from 65.58% for the nine months ended September
30, 1998 to 66.73% for the nine months ended September 30, 1999. The increase in
occupancy percentage is principally a result of management's efforts to raise
occupancy by decreasing the average daily rate ("ADR") during the slower months
of January through May. The ADR for the motels owned during both periods
increased to $45.25 for the nine months ended September 30, 1999 from $45.18 for
the nine months ended September 30, 1998, an increase of $0.07 or 0.2%. REVPAR
for motels owned during both periods increased to $32.31 for the nine months
ended September 30, 1999 from $31.44 for the nine months ended September 30,
1998, an increase of $0.87 or 2.8%. The acquired and divested motels had an
occupancy percentage of 58.47%, an ADR of $34.48 and REVPAR of $21.28 for the
period in 1999 that they were owned by the Company.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, insurance, linens and other operating
supplies. Motel operating expenses decreased to $40,601,000 for the nine months
ended September 30, 1999 from $46,769,000 for the nine months ended September
30, 1998, a net decrease of $6,168,000 or 13.2%. The cost of operating motels
owned during both periods increased to $34,339,000 for the nine months ended
September 30, 1999 from $29,973,000 for the nine months ended September 30,
1998, an increase of $4,366,000 or 14.6%. The increase in operating costs is
principally due to the increased labor and related costs and an increase in
repair and maintenance expenditures. Motel operating expenses for motels
acquired and divested since January 1, 1998 decreased to $6,262,000 for the nine
months ended September 30, 1999 from $16,796,000 for the nine months ended
September 30, 1998. Motel operating expenses as a percentage of motel revenues
increased to 53.6% for the nine months ended September 30, 1999 from 50.6% for
the nine months ended September 30, 1998. Motel operating expenses as a
percentage of motel revenues, for the motels owned in both periods, increased to
51.6% for the nine months ended September 30, 1999 from 46.3% for the nine
months ended September 30, 1998. For the nine months ended September 30, 1999,
motel operating expenses were 67.9% of motel revenues for the acquired and
divested motels.
Marketing and royalty fees include media advertising, billboard rental
expense, advertising fund contributions and royalty charges paid to franchisors
and other related marketing expenses. Marketing and royalty fees decreased to
$5,177,000 for the nine months ended September 30, 1999 from $5,942,000 for the
nine months ended September 30, 1998, a decrease of $765,000 or 12.9%. The
marketing and royalty fees for motels owned during both periods increased to
$4,480,000 for the nine months ended September 30, 1999 from $4,153,000 for the
nine months ended September 30, 1998, an increase of $327,000 or 7.9%. For the
motels owned during both periods, marketing and royalty fees as a percentage of
room revenues increased to 7.2% for the nine months ended September 30, 1999
from 6.8% for the nine months ended September 30, 1998. The increase in
marketing and royalty fees is a result of managements increased marketing
efforts during the January to May timeframe to build market share in addition to
affiliating certain properties previously operated as independents resulting in
the commencement of franchise fees.
Corporate general and administrative expenses are segregated by the
Company into three separate areas, Management Company Operations,
Construction/Acquisition and Divestitures, 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 $201,000 to $4,212,000 for the nine months ended
September 30, 1999 from $4,011,000 for the nine months ended September 30, 1998,
an increase of 5.0%. The general and administrative expenses associated with
Construction/Acquisition and Divestitures increased $172,000 from $817,000 for
the nine months ended September 30, 1998 to $989,000 for the nine months ended
September 30, 1999. Other General and Administrative expenses increased $345,000
to $3,033,000 for the nine months ended September 30, 1999 from $2,688,000 for
the nine months ended September 30, 1998. This increase is the result of
entering into a settlement agreement with ShoLodge Franchise Systems, Inc.
("ShoLodge") in July 1999 that resolved all disputes with respect to the
litigation initiated by the Company against ShoLodge in 1997. The Company
disaffiliated its fourteen Shoney's Inns during the first half of 1998 at which
time it ceased the payment of franchise fees that amounted to approximately
$650,000 on an annual basis. While ShoLodge was seeking franchise fees for the
remaining terms of the franchise agreements the settlement agreement provides
for the Company to make an initial payment of $575,000 in July 1999 and three
subsequent payments of $200,000 in July 2000, 2001 and 2002 without interest.
The present value of these payments or $1,068,000 was expensed in June 1999 as
part of the Company's general and administrative expenses. As a percentage of
total motel operating revenues, Management Operations general and administrative
expenses was 5.6% for the nine months ended September 30, 1999 and 4.3% for the
nine months ended September 30, 1998.
Depreciation and amortization decreased to $10,199,000 for the nine
months ended September 30, 1999 from $12,280,000 for the nine months ended
September 30, 1998, a net decrease of $2,081,000 or 16.9%. Approximately
$837,000 of the net decrease in depreciation and amortization is attributable to
the corporate operations.
Net operating income decreased to $14,351,000 for the nine months ended
September 30, 1999 from $20,656,000 for the nine months ended September 30,
1998, a decrease of $6,305,000 or 30.5%. The decrease in net operating income
included a decrease of $9,646,000 in net motel revenues (motel revenues less
motel operating expenses and marketing and royalty fees). Of the $9,646,000
decrease in net motel revenues, $2,933,000 resulted from the motels owned during
both periods, a decrease of 9.6%. Net motel revenues for motels acquired and
divested since January 1, 1998 decreased $6,713,000. Net operating income as a
percent of total revenues was 18.3% for the nine months ended September 30, 1999
as compared to 22.2% for the nine months ended September 30, 1998.
Interest expense decreased to $22,330,000 for the nine months ended
September 30, 1999 from $23,120,000 for the nine months ended September 30,
1998, a decrease of $790,000.
Gain on sale of properties amounted to $2,010,000 for the nine months
ended September 30, 1999 compared to $24,532,000 for the respective period in
1998. In eight unrelated transactions, seven properties and a vacant parcel of
land were sold for $7.3 million in cash and $10.8 million in notes receivable.
Seven motels and a parcel of vacant land were sold in 1998 for $50.0 million in
cash in eight unrelated transactions on which the $24.5 million gain was
recognized.
Net income decreased to a net loss of $3,770,000 for the nine months
ended September 30, 1999 from a net income of $13,411,000 for the nine months
ended September 30, 1998.
Liquidity and Capital Resources
The Company's primary uses of its capital resources include debt
service, capital expenditures 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. In January
1999 the Company repaid mortgage notes with an outstanding balance of $17.2
million as of December 31, 1998 with the proceeds of a new $13.5 million loan
and the balance with cash. The new loan was initially 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 as of
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 point 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 amortization 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 transactions mentioned above, as of September 30,
1999 is $5,274,000 for the remainder of fiscal 1999; $5,671,000 for 2000 and
$21,448,000 for 2001. Included in the $5,274,000 of maturities for the remainder
of fiscal 1999 is a mortgage loan in the amount of $3,884,000 that matures on
December 15, 1999. The lender has agreed to renew this loan and the legal
documentation therefore is currently being prepared.
The Company's capital expenditure requirements principally include
capital improvements and refurbishment of its lodging facilities as part of its
ongoing operating strategy to provide well-maintained facilities. The Company
made capital expenditures (exclusive of acquisitions and development of
properties) of $6,600,000 and $5,631,000 for the nine months ended September 30,
1999 and 1998, respectively. In addition, as of September 30, 1999, the Company
had $824,000 of cash restricted for future refurbishment of motel properties, 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 nine months ended September 30, 1999, cash and cash equivalents
decreased $11,134,000. This decrease consisted of $613,000 of funds used in
investing activities and $3,057,000 of funds used by financing activities and
$7,464,000 of funds used in operations. Net investing activities of $613,000
include; $4,372,000 of cash utilized for motel development and $6,600,000
expended on refurbishment of existing properties, offset by $8,980,000 of cash
provided from the sale of investment properties and collections on mortgage and
other notes receivable and a change in cash restricted for refurbishment of
$1,379,000. Cash provided by financing activities includes: $38,542,000 of cash
utilized to repay indebtedness; and $2,463,000 of cash used for deferred
financing costs and other items offset by $37,948,000 from proceeds from notes
payable.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 of the Notes to the Condensed Consolidated Financial
Statements.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Not Applicable
(b) Reports on Form 8-K:
Not Applicable
SIGNATURES
Pursuant to the requirements 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.
MOA HOSPITALITY, INC.
November 12, 1999 By: /s/ Kurt M. Mueller
Kurt M. Mueller
Chief Financial Officer
November 12, 1999 By: /s/ Blane P. Evans
Blane P. Evans
Vice President, Secretary and Treasurer