UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number: 33-78866 ---------------------- MOA HOSPITALITY, INC. (Exact name of registrant as specified in its charter) Delaware 33-0166914 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 701 Lee Street, Suite 1000, Des Plaines, Illinois 60016 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 803-1200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [ ] No Number of shares of Common Stock, $.01 par value outstanding as of August 20, 2002: 800,000 INDEX TO FORM 10-K Page Part I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder 14 Matters Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition 16 and Results of Operations Item 7A. Quantitative and Qualitative Disclosure About Market Risk 26 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting 26 and Financial Disclosure Part III Item 10. Directors and Executive Officers of the Registrant 27 Item 11. Executive Compensation 29 Item 12. Security Ownership of Certain Beneficial Owners and Management 30 Item 13. Certain Relationships and Related Transactions 30 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on 31 Form 8-K ITEM 1. BUSINESS General MOA Hospitality, Inc. and its subsidiaries ("MOA" or the "Company") is a leading owner and operator of national brand affiliated limited service lodging facilities in the United States. As of December 31, 2001, the Company, directly and through subsidiaries, owned 113 lodging facilities located in 36 states with a total of 8,668 rentable guestrooms. The Company owns a 100% interest in all of its properties. At December 31, 2001, the Company operated 38 of its motels. The remaining seventy-five motels 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 Georgia and Illinois with 13 lodging facilities in Georgia and 10 lodging facilities in Illinois. Properties owned in the states of Georgia and Illinois at December 31, 2001, accounted for 4.77% and 4.88% of consolidated motel operating revenues for the year ended December 31, 2001, respectively. One hundred and two 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, Microtel, Howard Johnson, Ramada, Ltd., Super 8 and Travelodge. Ninety of the franchise or license agreements are with brands owned by Cendant Corporation including seventy-nine 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. 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 deterioration in its operating performance over the past several years. The following table summarizes the recent operating performance of the Company (in 000's): 1997 1998 1999 2000 2001 -------- --------- --------- --------- --------- Loss from Operations prior to Impairment Losses and Restructuring Costs $(3,137) $(11,474) $(13,485) $(12,145) $ (9,948) Impairment Losses and Restructuring Costs (3,276) (9,300) (1,378) - (6,622) -------- --------- --------- --------- --------- Loss from Operations $(6,413) $(20,774) $(14,863) $(12,145) $(16,570) ======== ========= ========= ========= ========= During 2001, the Company experienced a downturn in the Hospitality Industry as a result of the September 11, 2001 terrorist attacks on New York and Washington, D.C. This forced the company to challenge its business strategy. It became quite apparent that measures had to be taken. The Company through the diligence of management and its regional managers were able to control and reduce expenses more than the decline in revenues. The Company also, through its aggressive leasing and sales efforts during 1999 and 2000 has been able to either stabilize net income on some of its non-core locations by establishing a fixed lease income, or by selling other non-desirable locations. The Company believes it is now positioned to continue concentrating its efforts on the remaining core locations to maintain and or increase the upward trend. The Company had attributed 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 believed it was unlikely that it would 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. As a result of this review, the Company recorded an impairment loss of $6.6 million in 2001. In 1999, the Company recorded a $928,000 impairment loss and a restructuring charge of $450,000. In 1998, the Company recorded an impairment loss of $9.3 million. 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. The Company believes it has or will be able to obtain adequate resources to meet its near-term maturing debt and other obligations, including the remaining $11.5 million 12% Senior Subordinated Notes in 2004. Since December 31, 1997, the Company has had a net decrease in the number of lodging properties owned from 138 properties to 113 properties at December 31, 2001. A summary of the significant transactions with respect to the number of lodging properties owned and operated by the Company that have occurred since January 1, 1997 through August 20, 2002 is as follows: 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. 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 a $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 no further borrowings available with this loan facility. At December 31, 2001, approximately $10.2 million of borrowings were outstanding under the $150.0 million CSFB secured loan facility. Seven properties and a pledge of the common stock of the subsidiary that owns such properties secure the amount outstanding. 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 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. During 1999, the Company sold ten properties for approximately $27.8 million consisting of $9.7 million in cash and $18.1 million in first mortgage notes. These sale transactions resulted in gains of $2.5 million. Also during 1999, the Company purchased one property constructed by an affiliate for the Company. The property was purchased for $ 2.9 million. During 1999, the Company repurchased from an affiliated company at fair market value $35 million of the 12% Senior Subordinated Notes at a gain of approximately $1.9 million which was offset by the accelerated write-off of related deferred financing costs in the amount of $1.9 million The Company, as Lessor, has entered into operating leases, primarily in 1999 and 2000 with unaffiliated parties to operate seventy-five motel properties at values believed by management to reflect market rates. Under the terms of these leases, the lessee is responsible for operating costs including all maintenance, repairs, taxes and insurance expense on the leased property. The leases, which have a terms ranging from five and a half years to six and half years, provide for monthly rent payments. In addition, the lease grants the lessee an option to purchase the leased properties at prices believed by management to reflect market value. During 2000, the Company sold eight properties and a vacant parcel of land for approximately $20.8 million consisting of $14.3 million in cash and $6.5 million in first mortgage notes. These sale transactions resulted in a gain of $2.2 million. The Company also purchased a parcel of land in February 2000 for approximately $250,000 cash and a note in the amount of $460,000, which was repaid in 2000. Also during 2000, in two separate transactions the Company repurchased from an affiliated company at fair market value $10.5 million and $20.9 million of the 12% Senior Subordinated Notes at a pre tax gain of approximately $4.2 million and $6.7 million respectively. Theses gains were offset by the accelerated write-off of related deferred financing costs in the amount of $0.6 million and $1.1 million respectively. During 2000, the Company began construction on two new motels. One motel is located in Milford, MA and was completed in July 2001, and is a Marriott Fairfield Inn & Suites with 73 guestrooms. The other motel is located in Santa Monica, CA and will be a boutique type motel with 77 guest rooms when completed in 2002. In 2001 construction financing was secured in the amounts of $3.5 million and $7.0 million, respectively. During 2001, the Company leased an additional three, and re-leased three of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. Also during 2001, the Company sold two properties for a sales price of approximately $5.5 million in cash resulting in a recognized gain of $1.8 million. The Company also sold three additional properties to related parties at fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million. The Company also sold its partnership interest in one lodging facility for $200,000. The Company also recognized a deferred gain of $1.7 million on one of its lodging facilities sold in a prior year. Also during 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a gain of approximately $431,000 net of income taxes. During 2001, a subsidiary of the Company purchased a vending company for $624,000 funded by $126,000 cash and assumption of $498,000 of debt. 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 operate 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; however, new supply continues to enter the markets in which the Company competes. Accordingly, new supply is expected to continue to negatively impact the Company's operating performance especially during the off-peak seasons. 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, 2001, the Company had 100% ownership interest, either directly or through subsidiaries, in all of the 113 lodging facilities it owned. Seventy-five are subject to operating leases with purchase options. (See discussion above in the general business section) Franchise and License Agreements The Company operates 102 of its lodging facilities pursuant to franchise or license agreements. Seventy-nine 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 2002 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 three standard license agreements with Best Western International. These agreements provide for an annual renewal. The Company has twenty-three 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. 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 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 filed a counter claim against MOA and certain of its subsidiaries claiming a failure to renovate the properties and failure to pay franchise fees. In July 1999, the Company entered into a settlement agreement with ShoLodge resolving all disputes with respect to the litigation initiated by the Company. The settlement agreement requires 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. 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 the last quarter of 1999, the Company recorded a $450,000 restructuring charge for the downsizing of both the regional and corporate offices. Regional offices are located in Indianapolis, Indiana, Weldon, North Carolina 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 are 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, 2001, the Company employed approximately 666 employees including approximately 70 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 contracts represent the single largest sales and marketing expenditure other than contributions to franchiser sponsored advertising and media funds. Regulatory Matters The Company is subject to environmental regulations under various federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. Certain of the Company's lodging facilities are located on, adjacent to or in the vicinity of, properties, including gasoline stations, that contain or have contained storage tanks or that have engaged or may in the future engage in activities that may release petroleum products or other hazardous substances into the soil or groundwater. While there can be no assurance that in the future the foregoing environmental conditions may not have a material effect on the Company, management is not aware of any such materially adverse impacts to the Company due to the existence of contaminants under or near its properties. Except as described above, management is not aware of any environmental condition with respect to its lodging facilities that could have a material adverse impact on the Company's financial condition or results of operations. The Company's lodging facilities are subject to various other laws, ordinances and regulations. The Company believes that each facility has the necessary permits and approvals required to enable the Company to operate its lodging facilities. The Company's lodging facilities must comply with Title III of the Americans with Disabilities Act (the "ADA"). Under the provisions of the ADA, the Company, as owner of the lodging facilities, is obligated to reasonably accommodate the patrons of its facilities who have physical, mental or other disabilities. In addition, the Company is obligated to ensure that alterations to its lodging facilities conform to the specific requirements of the ADA implementing regulations. The Company believes that it is in substantial compliance with all current applicable regulations with respect to accommodations for the disabled. Item 2. PROPERTIES The Company's lodging facilities are typically situated along interstate highways and in secondary markets, offering a convenient lodging alternative for many prospective customers. The facilities have an average size of 77 rooms, though individual properties range from 33 to 161 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. The company has leased seventy-five properties subject to operating leases including a purchase option. However, the underlying real property of three of the lodging facilities is subject to a ground lease. Ownership of the buildings and improvements situated on such properties remains with the landlord subject to the leasehold interest which expires on the maturity date of the lease. 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 $2,971,000, $4,641,000, and $8,055,000 in 2001, 2000 and 1999, respectively, relating to properties owned and operated. In addition, in accordance with the terms of the operating leases, lessees are required to maintain escrow balances to provide for recurring capital improvements at leased motels. 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 113 lodging facilities owned as of December 31, 2001 with footnote disclosure of transactions subsequent to year-end through August 20, 2002, is set forth in the following table. Number of Year Rentable Acquired or Guest Year Developed Location Franchise Room Built by the Company - ---------------------- ----------------- --------- ------ -------------- ARKANSAS West Memphis (1) Super 8 61 1989 1989 ARIZONA Phoenix (3) Super 8 67 1998 1998 CALIFORNIA Santa Monica Best Western 122 1991 1992 West Los Angeles Best Western 74 1993 1994 COLORADO Longmont Super 8 64 1989 1994 FLORIDA Fernandina Beach (2) Best Western 134 1985 1994 at Amelia Island Ft. Walton Beach Howard Johnson 100 1987 1994 Lake City (2) Microtel 62 1998 1998 Melbourne (2) Howard Johnson 119 1990 1994 Orlando Centroplex (1) Travelodge 75 1957 1996 Panama City (2) Super 8 63 1986 1987 Pensacola (2) Super 8 62 1985 1987 GEORGIA Athens (3) Microtel 60 1998 1998 Brunswick (2) Super 8 58 1986 1987 Catersville (2) Super 8 61 1986 1987 Columbus Super 8 74 1985 1987 Douglas Inn at Douglas 100 1986 1994 Dublin (2) Best Western 88 1984 1994 Fitzgerald (2) Inn at Fitzgerald 108 1985 1994 Hinesville (2) Inn at Hinesville 163 1976 1994 Macon (2) (4) Ramada 120 1987 1994 Moultrie (2) Inn at Moultrie 100 1979 1994 Rome (2) Super 8 62 1986 1987 Vidalia (2) Inn at Vidalia 128 1984 1994 Warner Robins (2) Super 8 60 1986 1987 IDAHO Boise Super 8 108 1978 1994 Coeur d'Alene (1) Super 8 95 1983 1983 Lewiston (2) Super 8 62 1985 1985 Sandpoint Super 8 61 1984 1984 ILLINOIS Bloomington (2) Super 8 61 1985 1987 Champaign (2) Super 8 61 1984 1987 Crystal Lake (3) Super 8 59 1983 1987 Decatur (2) Super 8 61 1983 1987 Litchfield (2) Super 8 61 1987 1994 Peru (2) Super 8 61 1986 1987 South Springfield (2) Super 8 118 1987 1994 Springfield (2) Super 8 65 1985 1994 Tuscola (3) Super 8 64 1988 1994 Waukegan (2) Super 8 61 1986 1987 INDIANA Columbus (2) Super 8 62 1984 1987 Elkhart (2) Fairway Inn 60 1990 1994 Indianapolis (2) Days Inn 161 1985 1994 Mishawaka Super 8 66 1998 1998 Muncie (2) Days Inn 62 1990 1994 Terre Haute Super 8 118 1985 1994 IOWA Davenport (2) Super 8 61 1984 1987 Des Moines Super 8 152 1985 1994 KANSAS Salina (2) Super 8 61 1984 1989 Topeka (2) Super 8 62 1984 1987 KENTUCKY Danville (2) Super 8 49 1987 1987 Lexington (2) Super 8 61 1987 1987 Louisville Super 8 100 1988 1988 LOUISIANA Shreveport (2) Super 8 143 1986 1994 MAINE Ellsworth Comfort Inn 63 1993 1993 MICHIGAN Battle Creek (2) Super 8 62 1985 1987 Grand Rapids (2) Super 8 62 1986 1987 Kalamazoo (2) Super 8 62 1985 1987 Muskegon (2) Days Inn 106 1968 1993 Muskegon (2) Super 8 62 1986 1987 Saginaw (2) Super 8 58 1985 1987 MINNESOTA Hibbing (2) Super 8 49 1993 1994 Red Wing (2) Super 8 60 1987 1996 Savage (2) Comfort Inn 75 1982 1994 MISSOURI Independence (2) Super 8 77 1983 1987 Joplin Super 8 50 1985 1987 Liberty (2) Super 8 60 1980 1987 NW Kansas City (2) Super 8 50 1983 1987 St. Joseph Super 8 54 1985 1987 St. Louis (2) Super 8 99 1984 1987 Springfield (2) Super 8 50 1985 1987 MONTANA Billings Ramada Ltd. 116 1978 1994 Billings Super 8 114 1979 1994 Dillon Super 8 48 1985 1989 Great Falls Super 8 117 1978 1994 Helena Super 8 102 1979 1988 NEBRASKA Fremont (2) Super 8 43 1986 1989 NEVADA Carson City (2) Super 8 63 1985 1985 NEW HAMPSHIRE Merrimack (5) Days Inn 68 1999 1999 NEW MEXICO Las Cruces (2) Super 8 60 1981 1987 NEW YORK East Syracuse (3) Super 8 53 1997 1997 NORTH CAROLINA Weldon (2) Orchard Inn 49 1973 1993 Wilson Microtel 59 1997 1997 NORTH DAKOTA Bismarck Super 8 61 1976 1987 Grand Forks (2) Super 8 33 1983 1987 Minot (2) Super 8 60 1977 1987 OHIO Akron (2) Super 8 58 1986 1987 Canton (2) Days Inn 61 1985 1987 Maumee (5) Super 8 68 1998 1998 St. Clairsville (2) Super 8 62 1986 1987 PENNSYLVANIA Lancaster Super 8 101 1990 1990 York Super 8 94 1990 1990 SOUTH CAROLINA Anderson (2) Super 8 62 1986 1987 Camden (2) Inn at Camden 83 1989 1994 Charleston (2) Orchard Inn 89 1973 1993 Columbia (2) (5) Microtel 48 1997 1997 Greenwood (2) Days Inn 61 1986 1987 SOUTH DAKOTA Sioux Falls (2) Super 8 95 1976 1987 TENNESSEE Chattanooga (2) Super 8 73 1986 1987 East Memphis (2) Super 8 69 1990 1990 Johnson City (2) Super 8 60 1986 1987 Knoxville Super 8 137 1975 1993 Union City (2) Super 8 61 1989 1989 TEXAS Stafford (2) Microtel 68 1998 1998 UTAH Salt Lake City (2) Super 8 119 1983 1988 VIRGINIA Charlottesville (2) Super 8 65 1986 1987 Richmond (2) Inn at Richmond 117 1985 1994 WEST VIRGINIA Mineral Wells (2) Microtel 54 1998 1998 WISCONSIN Janesville (2) Super 8 48 1985 1987 Kenosha (2) Super 8 60 1984 1987 Madison Best Western 101 1983 1994 Rice Lake (2) Super 8 47 1984 1994 WYOMING Cody Super 8 64 1982 1982 Jackson Super 8 97 1983 1983 ----- Total 8,668 ===== Continued from table above: (1) Property is subject to a ground lease. (2) Property is subject to an operating lease. (3) Property leased to a third-party tenant subsequent to December 31, 2001. (4) Property lessee defaulted on the operating lease subsequent to December 31, 2001 and is now operated by the Company. (5) Property sold subsequent to December 31, 2001. Item 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business, results of operations or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal quarter ended December 31, 2001 to a vote of the security holders of the Company. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of May 31, 2002, there were 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 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. During 1999, the Company repurchased from an affiliated company at fair market value $35 million of the 12% Senior Subordinated Notes at a gain of approximately $1.9 million which was offset by the accelerated write-off of related deferred financing costs in the amount of $1.9 million. During 2000, in two separate transactions the Company repurchased from an affiliated company at fair market value $10.5 million and $20.9 million of the 12% Senior Subordinated Notes at a gain of approximately $4.2 million and $6.7 million respectively. Theses gains were offset by the accelerated write-off of related deferred financing costs in the amount of $0.6 million and $1.1 million respectively. During 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a gain of approximately $431,000 net of income taxes. 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, 2001. This data should be read in conjunction with the audited consolidated historical financial statements of the Company and the notes thereto included elsewhere herein. (In thousands except for RevPar and ADR statistics) Statement of Operations Data Year Ended December 31, ---------------------------------------------------------- 1997 (1) 1998 (1) 1999 (1) 2000 (1) 2001 (1) ---------- ---------- ---------- ---------- ---------- Total revenues $ 122,367 $ 116,327 $ 103,431 $ 72,192 $ 62,001 Costs and expenses: Motel operating 62,333 60,608 53,856 31,598 24,197 Marketing and royalty fees 8,905 7,515 6,786 4,174 3,244 Corporate general and administrative 7,908 11,105 10,351 6,410 6,932 Lease expense 0 0 158 460 783 Vending expense 0 0 717 1,081 2,141 Impairment losses and restructuring costs 3,276 9,300 1,378 0 6,622 Depreciation and amortization(2) 14,985 17,995 14,978 15,059 13,990 Total direct expenses 97,407 106,523 88,224 58,782 57,909 Net operating income 24,960 9,804 15,207 13,410 4,092 Interest expense 31,373 30,578 30,070 25,555 20,662 Income (loss) from operations (6,413) (20,774) (14,863) (12,145) (16,570) Minority interests (178) (84) (20) (472) (20) Gain on sale of properties 1,110 26,079 2,528 2,177 3,669 Income tax expense (benefit) (2,109) 2,069 (4,681) (4,003) (3,713) Extraordinary item 0 0 0 5,653 390 Net income (loss) (3,372) 3,152 (7,675) (784) (8,818) Net income (loss) per share $ (4.21) $ 3.94 $ (9.59) $ (0.98) $ (11.02) Other Financial Data Net cash provided by (used in) operating activities $ 15,947 $ 9,472 $ 11,972 $ 2,550 $ 3,277 Net cash provided by (used in) investing activities (13,648) 26,998 2,978 8,787 11,537 Net cash provided by (used in) financing activities (1,515) (29,921) (31,380) (12,596) (14,824) EBITDA(3) 43,221 37,099 31,563 28,469 24,704 EBITDA Margin (% of total revenues)(3) 35.32% 31.89% 30.52% 39.44% 39.84% Net operating revenue margin (% of total revenues) 20.40% 8.43% 14.70% 18.58% 6.60% Refurbishment of investment properties $ 7,948 $ 5,696 $ 8,055 $ 4,641 $ 2,971 Operating Data (4) Number of motels operated 138 130 83 43 38 Number of rooms 11,385 10,254 6,753 3,706 3,188 Number of leased motels 0 5 43 75 75 REVPAR(5) $ 29.48 $ 28.51 $ 29.86 $ 35.76 $ 35.35 ADR(6) $ 43.43 $ 43.51 $ 43.59 $ 48.97 $ 49.18 Occupancy percentage(7) 63.75% 61.46% 63.94% 67.51% 67.32% Balance Sheet Data Total assets $ 362,859 $ 339,055 $ 313,205 $ 287,261 $ 265,382 Total debt 324,989 296,151 268,180 234,545 218,222 Total stockholders' equity 19,59 22,746 15,071 14,288 5,470 EBITDA to GAAP Reconciliation EBITDA(3) $ 43,221 $ 37,099 $ 31,563 $ 28,469 $ 24,704 Adjustments: Impairment losses and restructuring costs (3,276) (9,300) (1,378) 0 (6,622) Depreciation and amortization(2) (14,985) (17,995) (14,978) (15,059) (13,990) Interest expense (31,373) (30,578) (30,070) (25,555) (20,662) Minority interests (178) (84) (20) (472) (20) Gain on sale of properties 1,110 26,079 2,528 2,177 3,669 Income tax (expense) benefit 2,109 (2,069) 4,681 4,003 3,713 Extraordinary item 0 0 0 5,653 390 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (3,372) $ 3,152 $ (7,674) $ (784) $ (8,818) ========== ========== ========== ========== ========== Continued from table on previous page (1) Results for the year ended December 31, 1999 include the recovery of $0.5 million of offering costs previously written off. The results for years ended December 31, 1997, 1998, 1999, 2000 and 2001 include $1.1 million, $26.1million, $2.6 million, $2.2 million and $3.5 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. Results for the year ended December 31, 1999 included the recording of restructuring costs of $0.5 million and impairment losses of $0.9 million. Results for the year ended December 31, 2001 include $6.6 million of impairment losses. Results from operations for year ended December 31, 2000 include a $5.7 million gain net of taxes on early extinguishment of debt. (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, 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 accounting principles generally accepted in the United States ("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 net 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, forty-three motels at December 31, 1999, seventy-five motels at December 31, 2000 and seventy-five motels at December 31, 2001. (5) Revenue per available room ("REVPAR") represents motel-operating revenues divided by the total number of rooms available. Total available rooms represents the number of rooms available for rent multiplied by the number of days in the reported period. (6) The average daily room rate ("ADR") represents total room revenues divided by the total number of rooms occupied. (7) The occupancy percentage represents total rooms occupied divided by total available rooms. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. FORWARD- LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED AT THE TIME OF THE FORWARD-LOOKING STATEMENTS ARE MADE, INCLUDING, WITHOUT LIMITATION, RISKS AND UNCERTAINTIES ASSOCIATED WITH THE FOLLOWING: GENERAL REAL ESTATE, TRAVEL AND NATIONAL AND INTERNATIONAL ECONOMIC CONDITIONS, INCLUDING THE SEVERITY AND THE DURATION OF THE DOWNTURN RESULTING FROM THE SEPTEMBER 11, 2001 TERRORISTS ATTACKS ON NEW YORK AND WASHINGTON, D.C. 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 "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, 2001, 2000 AND 1999 HAVE BEEN PREPARED ON THE SAME BASIS AS THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RECONCILE TO OPERATING INCOME REPORTED IN SUCH 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. Critical Accounting Policies and Estimates The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Room revenues and other revenues derived from operation of lodging facilities are recognized when earned. The Company leased certain properties to third party operators under triple net leases requiring monthly rental payments that include: (i) minimum base rents which are recognized currently in revenue, and (ii) additional rents that may be applied to the purchase price of the property upon exercise of the lessee's purchase option. Recognition of such additional rents as revenue is deferred under the deposit method pending exercise of the purchase option or expiration or termination of the lease Impairment of Long-Lived Assets, Including Goodwill The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. Depreciation of Investment in Real Estate The Company depreciates the building component of its investment in real estate over a 40-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 7-year estimated useful life, all of which are judgmental determinations. Fair Value of Financial Instruments, Including Derivative Instruments The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on other factors relevant to the financial instruments. Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 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. (certain of the 2000 numbers have been reclassified to conform to the 2001 presentation): Supplemental Operating Results and Statistics ------------------------------------------------------------------------ Year Ended December 31 ------------------------------------------------------------------------ Motels Owned Acquisitions/ Both Periods Divestitures Consolidated ----------------------- ------------------------ --------------------- 2001 2000 2001 2000 2001 2000 ----------- ---------- ----------- ---------- ---------- --------- (dollars in thousands, except Other data) Motel operations: Motel operating revenues: Room revenues $ 36,965 $ 37,698 $ 4,502 $ 16,126 $ 41,467 $ 53,824 Ancillary motel revenues 3,400 3,521 272 753 3,672 4,274 ----------- ---------- ----------- ---------- ---------- --------- Total motel operating revenues 40,365 41,219 4,774 16,879 45,139 58,098 Motel costs and expenses: Motel operating expenses 20,843 20,307 3,354 11,291 24,197 31,598 Marketing and royalty fees 2,868 2,854 376 1,320 3,244 4,174 Depreciation and amortization 5,703 6,289 627 1,192 6,330 7,481 ----------- ---------- ----------- ---------- ---------- --------- Total motel direct expenses 29,414 29,450 4,357 13,803 33,771 43,253 ----------- ---------- ----------- ---------- ---------- --------- $ 10,951 $ 11,769 $ 417 $ 3,076 11,368 14,845 =========== ========== =========== ========== Lease operations: Lease revenues 12,447 10,142 Lease operating expenses 783 460 Depreciation and amortization 6,624 6,690 ---------- --------- 5,040 2,992 Vending operations: Vending revenues 2,185 1,072 Vending operating expenses 2,141 1,081 Depreciation and amortization 376 226 ---------- --------- (332) (235) Corporate operations: Other revenues 2,230 2,880 General and administrative expenses: Management Operations 5,100 4,813 Construction/Acquisition and Divestiture 471 975 Vending general and administrative expenses 1,361 622 ---------- --------- Total general and administrative expenses 6,932 6,410 Impairment losses 6,622 - Depreciation and amortization 660 662 ---------- --------- (11,984) (4,192) ---------- --------- Net operating income $ 4,092 $ 13,410 ========== ========= Other data: Number of motels at year end (5) 36 38 2 5 38 43 Number of rooms at year end (5) 3,028 3,031 160 675 3,188 3,706 Occupancy percentage (5) 67.71% 68.38% 49.13% 55.32% 67.32% 67.51% ADR (1) (5) $ 49.37 $ 49.62 $ 37.24 $ 13.77 $ 49.18 $ 48.97 REVPAR (2) (5) $ 35.71 $ 36.26 $ 18.68 $ 8.83 $ 35.35 $ 35.76 Net operating income margin (3) 6.60% 18.58% Net motel revenue margin (4) (5) 45.05% 47.90% 13.30% 26.47% 42.68% 41.48% - --------------------------------------------------------- (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 lease revenues, vending revenues and 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, 2001 and 2000 and for the years then ended, excludes amounts related to seventy-five motels for both periods, 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 commissions. Lease revenues are derived from lease payments from properties operated by third party tenants. Vending revenues are generated by vending operations located within the Company owned locations as well as non-owned Company locations. 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 $62,001,000 in 2001 from $72,192,000 in 2000, a decrease of $10,191,000 or 14.1%. Motel revenues decreased to $45,139,000 in 2001 from $58,098,000 in 2000 a decrease of $12,959,000 or 22.3%. The decrease in motel revenues was attributable to the acquired or divested motels (including those subject to operating leases) since January 1, 2001 and a decrease in the motel revenues for motels owned during both periods of $854,000 or 2.1%. The decrease in motel revenues for motels owned during both periods was principally attributable to a decrease in the average daily room rate ("ADR"). The ADR for the motels owned during both periods decreased to $49.37 in 2001 from $49.62 in 2000, a decrease of $.25 or less than 1%. The occupancy percentage in 2001 for the motels owned during both periods decreased to 67.7% from 68.4% in 2000 or 0.9%. Revenue per available room ("REVPAR") for motels owned during both periods decreased to $35.71 in 2001 from $36.26 in 2000, a decrease of $0.55 or 1.5%. The acquired and divested motels had an occupancy percentage of 49.1%, an ADR of $37.24 and a REVPAR of $18.68 for the period which the Company owned them in 2001. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, linens and other operating supplies. Motel operating expenses decreased to $24,197,000 in 2001 from $31,598,000 in 2000 a net decrease of $7,400,000 or 23.4%. Approximately $7,937,000 of the decrease is attributable to the cost of operating the acquired and divested motels since January 1, 2001. The cost of operating motels owned during both periods increased to $20,843,000 in 2001 from $20,307,000 in 2000, an increase of $536,000 or 2.6%. Motel operating expenses as a percentage of motel revenues decreased to 53.6% in 2001 from 54.4% in 2000. Motel operating expenses as a percentage of motel revenues for motels owned in both periods increased to 51.6% in 2001 from 49.3% in 2000. 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 70.3% in 2001. 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 $3,244,000 in 2001 from $4,174,000 in 2000, a decrease of $930,000 or 22.3%. Approximately $944,000 of the decrease in marketing and royalty fees was attributable to the motels acquired and divested since January 1, 2001. The marketing and royalty fees for motels owned during both periods increased to $2,868,000 in 2001 from $2,854,000 in 2000, an increase of $14,000 or .5%. For the motels owned during both periods, marketing and royalty fees as a percent of room revenues increased to 7.8% in 2001 from 7.6% in 2000. The increase in marketing and royalty fees for motels owned both periods in 2001 and 2000 was principally due to additional marketing efforts. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction/Acquisition and Divestiture Division and Vending general and administrative expenses. 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 $287,000 to $5,100,000 in 2001 from $4,813,000 in 2000, an increase of 6.0% due to an increase in professional fees. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division decreased $504,000 from $975,000 in 2000 to $471,000 in 2001 or 51.7%. The decrease is attributable principally to the sales and leasing efforts of the Company's properties winding down in 2001. Vending general and administrative expenses increased $739,000 from $622,000 in 2000 to $1,361,000 in 2001. This increase is attributed to the increased efforts to expand the vending company operations. As a percentage of total motel operating revenues, Management Operations general and administrative expenses increased from 8.3% in 2000 to 11.3% in 2001. Lease revenues increased from $10,142,000 in 2000 to $12,447,000 in 2001, an increase of $2,305,000. This increase is the result of leasing an additional three properties since December 31, 2000, plus $542,000 of forfeited security deposits. Lease expenses increased from $460,000 in 2000 to $783,000 in 2000, an increase of $323,000. Lease expenses primarily consist of costs expended for property insurance. Vending revenues increased $1,113,000 from $1,072,000 in 2000 to $2,185,000 in 2001 or an increase of 103.8%. Vending revenue is generated by vending machines and coffee services supplied to Company owned locations as well as third party locations. The Company acquired a new vending company in 2001 consisting of approximately 100 locations. Vending expenses increased to $2,140,000 in 2001 from $1,081,000 in 2000 an increase of $1,060,000 or 98.1%. Vending expenses consist mostly of cost of goods sold and salaries related to saving or servicing the vending routes. Impairment losses were recorded in the amount of $6,622,000 in 2001. 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 recorded an impairment loss accordingly. Depreciation and amortization decreased to $13,990,000 in 2001 from $15,059,000 in 2000, a decrease of $1,069,000 or 7.1%. This decrease is attributed to a decrease in deferred loan cost amortization of approximately $400,000 and a decrease in depreciation in the amount of $700,000. Net operating income decreased to $4,092,000 in 2001 from $13,410,000 in 2000, a decrease of $9,318,000 or 69.5%. There was a decrease in net motel revenues of $4,628,000(motel revenues less motel operating expenses and marketing and royalty fees). Of the $4,628,000 decrease in net motel revenues, $3,224,000 resulted from the motels acquired and divested since January 1, 2000 and a decrease in net motel revenues for motels owned during both periods of $1,404,000 or 7.8%. Net operating revenue as a percent of total revenues was 6.6% and 18.6% in 2001 and 2000, respectively. The decrease in net operating income also included the increase in general and administrative expenses of $521,000, and a decrease in depreciation and amortization of $1,069,000 and an increase in impairment losses of $6,622,000 all of which are separately discussed above. The Company also realized an increase in net lease operations of $2,048,000 and a decrease in vending operations of $97,000. Interest expense decreased to $20,662,000 in 2001 from $25,555,000 in 2000, a decrease of $4,893,000. The decrease is principally due to a decrease in average outstanding borrowings, specifically a decrease in the 12% Senior Subordinated Debt. Gain on sale of properties amounted to $3,669,000 in 2001 as compared to $2,177,000 in 2000. The gain in 2001 resulted from the sale of three motel properties and a general partner interest compared with the sale of eight motel properties sold in 2000. Minority interests declined from 2001 to 2000 due to the sale of both partnership interests. Net loss increased $8,034,000 to a net loss of $8,818,000 in 2001 from a net loss of $784,000 in 2000. Included in the net increase are the impairment losses of $6,622,000 and a net gain on early extinguishment of debt on the 12% Senior Subordinated debt of $390,000 net of tax of $249,000. Extraordinary item gain of $390,000 is the result of the repurchase at fair market value of $1.9 million of 12% Senior Subordinated Notes at a discount and also a $66,000 penalty on repayment of a note payable. Income tax benefit decreased as a percent of income before taxes in 2001 as compared to 2000 as a result of the recognition of a tax valuation allowance of approximately $1,300,000 pertaining to state tax net operating losses which are not expected to be utilized. Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 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. (certain of the 1999 numbers have been reclassified to conform to the 2000 presentation): Supplemental Operating Results and Statistics ------------------------------------------------------------------------ Year Ended December 31 ------------------------------------------------------------------------ Motels Owned Acquisitions/ Both Periods Divestitures Consolidated ----------------------- ----------------------- --------------------- 2000 1999 2000 1999 2000 1999 ----------- ---------- ----------- ---------- ---------- --------- (dollars in thousands, except Other data) Motel operations: Motel operating revenues: Room revenues $ 43,987 $ 42,908 $ 9,837 $ 47,474 $ 53,824 $ 90,382 Ancillary motel revenues 3,636 3,444 638 2,060 4,274 5,504 ----------- ---------- ----------- ---------- ---------- --------- Total motel operating revenues 47,623 46,352 10,475 49,534 58,098 95,886 Motel costs and expenses: Motel operating expenses 23,429 22,148 8,169 31,708 31,598 53,856 Marketing and royalty fees 3,304 3,050 870 3,736 4,174 6,786 Depreciation and amortization 6,015 5,122 1,466 6,346 7,481 11,468 ----------- ---------- ----------- ---------- ---------- --------- Total motel direct expenses 32,748 30,320 10,505 41,790 43,253 72,110 ----------- ---------- ----------- ---------- ---------- --------- $ 14,875 $ 16,032 $ (30) $7,744 14,845 23,776 =========== ========== =========== ========== Lease operations: Lease revenues 10,142 2,477 Lease operating expenses 460 158 Depreciation and amortization 6,690 1,922 ---------- --------- 2,992 397 Vending operations: Vending revenues 1,072 948 Vending operating expenses 1,081 718 Depreciation and amortization 226 265 ---------- --------- (235) (35) Corporate operations: Other revenues 2,880 4,121 General and administrative expenses: Management Operations 4,813 8,944 Construction/Acquisition and Divestiture 975 907 Vending general and administrative expenses 622 500 ---------- --------- Total general and administrative expenses 6,410 10,351 Impairment losses and restructuring costs - 1,378 Depreciation and amortization 662 1,323 ---------- --------- (4,192) (8,931) ---------- --------- Net operating income $ 13,410 $ 15,207 ========== ========= Other data: Number of motels at year end (5) 42 42 1 41 43 83 Number of rooms at year end (5) 3,636 3,642 70 3,111 3,706 6,753 Occupancy percentage (5) 67.46% 67.85% 69.93% 55.32% 67.51% 63.94% ADR (1) (5) $ 48.93 $ 47.53 $ 51.10 $ 40.55 $ 48.97 $ 43.59 REVPAR (2) (5) $ 35.74 $ 34.83 $ 36.93 $ 25.90 $ 35.76 $ 29.57 Net operating income margin (3) 18.58% 14.70% Net motel revenue margin (4) (5) 47.49% 49.30% 34.80% 29.68% 41.48% 38.99% - ---------------------------------------------------------- (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 lease revenues, vending revenues and 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, 1999 and 2000 and for the years then ended, excludes amounts related to forty-three motels and seventy-five motels, respectively, 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 commissions. Lease revenues are derived from lease payments from properties operated by third party tenants. Vending revenues are generated by vending operations located within the Company owned locations as well as non-owned Company locations. 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 $72,192,000 in 2000 from $103,431,000 in 1999, a decrease of $31,239,000 or 30.2%. Motel revenues decreased to $58,098,000 in 2000 from $95,886,000 in 1999 a decrease of $37,788,000 or 39.4%. The decrease of $37,788,000 in motel revenues was attributable to the acquired or divested motels (including those subject to operating leases) since January 1, 2000 and offset by an increase in the motel revenues for motels owned during both periods of $1,271,000. Motel revenues for motels owned during both periods increased 2.7%. The increase in motel revenues for motels owned during both periods was principally attributable to an increase in the average daily room rate ("ADR"). The ADR for the motels owned during both periods increased to $48.93 in 2000 from $47.53 in 1999, an increase of $1.40 or 2.9%. The occupancy percentage in 2000 for the motels owned during both periods decreased to 67.5% from 67.9% in 1999 or 0.6%. Revenue per available room ("REVPAR") for motels owned during both periods increased to $35.74 in 2000 from $34.83 in 1999, an increase of $0.91 or 2.6%. The acquired and divested motels had an occupancy percentage of 69.9%, an ADR of $51.10 and a REVPAR of $36.93 for the period which the Company owned them in 2000. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, linens and other operating supplies. Motel operating expenses decreased to $31,598,000 in 2000 from $53,856,000 in 1999 a net decrease of $22,258,000 or 41.3%. Approximately $23,539,000 of the decrease is attributable to the cost of operating the acquired and divested motels since January 1, 2000. The cost of operating motels owned during both periods increased to $23,429,000 in 2000 from $22,148,000 in 1999, an increase of $1,281,000 or 5.8%. Motel operating expenses as a percentage of motel revenues decreased to 54.4% in 2000 from 56.2% in 1999. Motel operating expenses as a percentage of motel revenues for the motels owned in both periods increased to 49.2% in 2000 from 47.8% in 1999. 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 78.0% in 2000. 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 $4,174,000 in 2000 from $6,786,000 in 1999, a decrease of $2,612,000 or 38.5%. Approximately $2,866,000 of the decrease in marketing and royalty fees was attributable to the motels acquired and divested since January 1, 1999. The marketing and royalty fees for motels owned during both periods increased to $3,304,000 in 2000 from $3,050,000 in 1999, an increase of $254,000 or 8.3%. For the motels owned during both periods, marketing and royalty fees as a percent of room revenues increased to 7.5% in 2000 from 7.1% in 1999. The increase in marketing and royalty fees for motels owned both periods in 1999 and 2000 was principally due to additional marketing efforts. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction/Acquisition and Divestiture Division and Vending general and administrative expenses. 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 $4,131,000 to $4,813,000 in 2000 from $8,944,000 in 1999, a decrease of 46.2%. Salary and related costs account for $1,587,000 of the decrease as a result of the restructuring efforts, which occurred, in the fourth quarter 1999. There was also a decrease of $1,951,000 resulting in the conclusion of the Sholodge litigation agreement in 1999. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division increased $68,000 from $907,000 in 1999 to $975,000 in 2000 or 7.5%. The increase is attributable principally to bonuses for the sales and leasing of the Company's properties to others. Vending general and administrative expenses increased $122,000 from $500,000 in 1999 to $622,000 in 2000. As a percentage of total motel operating revenues, Management Operations general and administrative expenses decreased from 9.3% in 1999 to 8.3% in 2000. Lease revenues increased to $10,142,000 in 2000 from $2,477,000 in 1999, an increase of $7,665,000. This increase is the result of leasing an additional thirty-two properties since December 31, 1999. Lease expenses increased to $460,000 in 2000 from $158,000 in 1999, an increase of $302,000. Lease expenses primarily consist of cost expended for property insurance. Vending revenues increased $124,000 from $948,000 in 1999 to $1,072,000 in 2000 or an increase of 13.1%. Vending revenue is generated by vending machines and coffee services supplied to Company owned locations as well as non-owned Company locations. Vending expenses increased $1,081,000 in 2000 from $718,000 in 1999 an increase of $363,000 or 50.6%. Vending expenses consist mostly of cost of goods sold and salaries related to maintain the vending routes. Impairment losses and restructuring costs in the amount of $1,378,000 were recorded in 1999. 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 $928,000 was recorded in 1999. Restructuring costs of $450,000 were recorded in the fourth quarter of 1999 relating to the reorganization of the Company's corporate and regional offices. This reorganization was necessitated as the result of the substantial leasing and sales activities throughout 1999. The provision for restructuring costs is intended to cover the severance costs. Depreciation and amortization increased from $14,978,000 in 1999 to $15,059,000 in 2000, an increase of $81,000 or 0.6%. Net operating income decreased from $15,207,000 in 1999 to $13,410,000 in 2000, a decrease of $1,797,000 or 11.8%. The decrease in net operating revenues included a decrease of $13,016,000 in net motel revenues (motel revenues less motel operating expenses and marketing and royalty fees). Of the $13,016,000 decrease in net motel revenues, $12,654,000 resulted from the motels acquired and divested since January 1, 1999 and a decrease in net motel revenues for motels owned during both periods of $362,000 or 1.7%. Net operating revenue as a percent of total revenues was 18.6% and 14.7% in 2000 and 1999, respectively. The decrease in net operating income also included the decrease in general and administrative expenses of $4,095,000, and an increase in depreciation and amortization of $81,000 and a decrease in restructuring costs and impairment losses of $1,378,000 all of which are separately discussed above. In addition to the above, the Company realized an decrease in other revenues in the amount of $1,241,000 due principally to a gain on the repurchase of outstanding bonds offset by accelerated amortization and interest expense associated with bond purchase transaction in 1999. The Company also realized an increase in net lease operations of $2,595,000 and a decrease in vending operations of $200,000. Interest expense decreased from $30,070,000 in 1999 to $25,555,000 in 2000, a decrease of $4,515,000. The decrease is principally due to a decrease in average outstanding borrowings, specifically a decrease in the 12% Senior Subordinated Debt. Gain on sale of properties amounted to $2,528,000 in 1999 as compared to $2,177,000 in 2000. The gain in 1999 consisted of $2,528,000 from the sale of ten motel properties compared with the sale of eight motel properties sold in 2000. Net income (loss) decreased $6,891,000 to a net loss of $784,000 in 2000 from a net loss of $7,675,000 in 1999. Included in the net decrease is the gain for early extinguishment of debt on the 12% Senior Subordinated debt of $5,653,000 net of tax of $3,602,000. Extraordinary item gain of $5.6 million is the result of the repurchase at fair market value of $31.4 million of 12% Senior Subordinated Notes at a discount. 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. Substantially all of the company's investment properties, mortgage and other notes receivable have been pledged as collateral. The Company's debt service requirements consist of the obligation to make interest and principal payments on its outstanding indebtedness. As of December 31, 2001, the Company has principal repayment obligations of $31,667,000, $8,081,000 and $32,323,000 for the years ending December 31, 2002, 2003 and 2004, respectively. During 2001 the Company was advanced $5.4 million on loans of $10.5 million for construction advances on two properties under construction. In June 2001, the Company refinanced $3,997,000 of debt with new loans of $3,425,000 at 8.84% due August 1, 2011, with monthly principal and interest payments of $30,464 secured by two properties located in East Syracuse, NY and Wilson, NC. In July 2001, the Company borrowed $1,000,000 at prime plus .5% due June 12, 2002 which has been repaid in full. In July 2001, the Company borrowed $3,500,000 at 8.67% due September 1, 2011 with monthly principal and interest payments of $30,751 secured by one property in Milford, MA, which was used to pay off an existing construction loan with a balance of $2,877,000. In August 2001, a subsidiary of the Company purchased a vending company and assumed debt in the amount of $250,000, non interest bearing with three annual payments of $83,333, due August 24, 2002, August 24, 2003 and August 24, 2004, $134,000, due November 1, 2008, with monthly principal and interest payments of $2,168 and $111,000, due April 1, 2007, with monthly principal and interest payments of $2,146. In October 2001, the Company repurchased an additional $1.9 million of the 12% Senior Subordinated Notes from an affiliate at fair market value for a pre-tax gain of $639,000. The Company currently has a net working capital deficit position but believes it has or will be able to obtain adequate resources to meet its near-term maturing debt and other obligations, either from operating cash flows, refinancing, sales and or leases including the maturity of the remaining $11.5 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 $2,971,000 $4,641,000 and $8,055,000, in 2001 ,2000 and 1999, respectively. In addition, as of December 31, 2001, the Company has $708,000 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, 2001 cash and cash equivalents decreased $10,000 from the balance at December 31, 2000. A total of $3,277,000 of cash was provided by operating activities, $11,537,000 of cash was provided by investing activities and $14,824,000 of cash was used in financing activities. Net investing activities include: $6,147,000 of cash utilized for motel development; $2,971,000 expended on renovation of existing motel properties; $708,000 of cash was provided by a decrease in cash restricted for refurbishment of properties; and $19,948,000 of cash provided from the sale of investment properties and collections on mortgage and other notes receivable. Cash used by financing activities include: $29,869,000 of cash utilized to repay indebtedness plus $321,000 of deferred financing costs less $15,366,000 of proceeds from borrowings. 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk As of December 31, 2001, the Company has total outstanding debt of approximately $218,221,000 of which approximately $28,855,000, or 13.22%, is variable rate debt. If market rates of interest on the Company's debt increase by 10%, the increase in interest expense on the Company's variable rate debt would decrease future earnings and cash flows by approximately $136,000. If market rates of interest increased by 10%, the fair value of the Company's total outstanding debt would decrease by approximately $6,584,000. If market rates of interest on the Company's variable rate debt decreased by 10%, the decrease in interest expense on the Company's variable rate debt would increase future earnings and cash flows by approximately $102,000. If market rates of interest decreased by 10%, the fair value of the Company's total outstanding debt would increase by approximately $2,256,000. These amounts were determined by considering the impact of hypothetical interest rates on the Company's debt. These analyses do not consider the effect of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to mitigate its exposure to such a change. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements in this Form 10-K. The supplemental financial information specified by Item 302 of Regulation S-K is not applicable. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following chart lists the Company's current directors and executive officers. Name Age Positions(s) with the Company - ------------------ --- ----------------------------------------------- Paul F. Wallace 65 Director, Chairman and Chief Executive Officer Kurt M. Mueller 45 Director, President and Chief Financial Officer Alan H. Baerenklau 56 Director Ronald P. Stewart 58 Director Peter W. McClean 58 Director Philip J. Levien 57 Director Blane P. Evans 42 Vice President, Secretary & Treasurer 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. 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. 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. 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. Mr. Baerenklau retired as the President of the company in September 2000 and remains with the company as a Director. 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. 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. Executive officers of the Company are appointed and serve at the discretion of the Board of Directors. Each director of the Company is elected for a period of one year and serves until his successor is duly elected and qualified. None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers of the Company. Item 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company to each of the Chief Executive Officers and the two 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 2001 300,000 - Chairman and Chief Executive Officer 2000 300,000 - 1999 300,000 - Alan H. Baerenklau 2000 176,664 - President and Chief Operating Officer (1) 1999 233,300 - Kurt M. Mueller 2001 218,760 - President and Chief Financial Officer 2000 200,000 - 1999 200,000 - - ------------------------------------------- (1) Mr. Baerenklau joined the Company in March 1997 as President and Chief Operating Officer and retired in September 2000. 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. Baerenklau, Stewart, McClean and Levien 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 2001, no officer or employee of the Company or its subsidiaries participated in deliberations of the Company's Board of Directors concerning executive officer compensation. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of Common Stock beneficially owned by the only entity known to be the beneficial owner of more than 5% of the Company's Common Stock, by each director and by all directors and officers of the Company as a group as of August 20, 2001: Shares of Common Stock Percent Name and Address of Beneficial Owner Beneficially Owned of Class - ------------------------------------ ---------------------- -------- Principal Stockholders: New Image Realty, Inc. 677,228 85% 888 Seventh Avenue Suite 3400 New York, NY 10106 Executive Officer and Directors - --------------------------------- Paul F. Wallace 684,357 (1) 86% All Directors and Officers as a Group (11 persons) 684,357 (2) 86% - ------------------------- (1) Mr. Wallace is President, Chairman of the Board and controlling stockholder of The Broadstone Group. The Broadstone Group owns 100% of the outstanding Common Stock of New Image Realty, Inc. ("New Image"), which owns 85% of the outstanding Common Stock of MOA. Mr. Wallace is deemed to be a beneficial owner of 677,228 shares of Common Stock of the Company owned by New Image and 7,129 shares of Common Stock of the Company issued to Opal Inc. in January 1994. (2) Includes 677,228 shares of Common Stock of the Company held by New Image and 7,129 shares of Common Stock of the Company held by Opal Inc. that are deemed to be beneficially owned by Paul F. Wallace. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is a member of an affiliated group that files a consolidated tax return for federal income tax purposes. In March 2000, the Company purchased from an affiliated company at fair market value $10.5 million of the 12% Senior Subordinated Notes due in 2004 for a gain of $4.2 million which is offset by $.6 million in accelerated deferred financing costs written off as part of the transaction. In October 2000, the Company purchased an additional $20.9 million at fair market value of the 12% Senior Subordinated Notes for a gain of approximately $6.7 million which is partially offset by $1.1 million in accelerated deferred financing costs written off as part of this transaction. In October 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a pre tax gain of approximately $639,000. Also during 2001, the Company sold three properties to related parties at fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 & 2. Financial Statements and Schedules See Index to Financial Statements in this Form 10-K. 3. Exhibits - None (b) Reports on Form 8-K - None INDEX TO FINANCIAL STATEMENTS MOA HOSPITALITY, INC. AND SUBSIDIARIES Years Ended December 31, 2001, 2000 and 1999 Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001 F-4 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2001 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001 F-6 Notes to Consolidated Financial Statements F-7 Schedule III: Real Estate and Accumulated Depreciation F-22 All other 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, 2001 and 2000, 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, 2001. Our audit also included the financial statement schedule listed in the index under Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois August 20, 2002 MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ------------------------------ 2001 2000 -------------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 3,152,386 $ 3,162,313 Accounts receivable from property operations, net 1,461,138 1,536,929 Operating supplies and prepaid expenses 2,313,143 2,031,740 Current portion of mortgage and notes receivable 1,608,881 6,185,463 -------------- -------------- Total Current Assets 8,535,548 12,916,445 Investment property: Operating properties, net of accumulated depreciation 206,171,937 232,366,362 Land held for development 9,585,383 8,365,949 -------------- -------------- Total investment property 215,757,320 240,732,311 Other Assets: Deposits and other assets 1,178,232 601,944 Restricted cash 1,735,285 2,443,008 Mortgage and other notes receivable, less current portion including $15,600,813 due from an affiliate 26,705,354 19,402,847 Net deferred tax asset 2,537,130 - Financing and other deferred costs, net of accumulated amortization of $17,012,803 in 2001 and $14,412,947 in 2000 8,934,021 11,164,445 -------------- -------------- Total Other Assets 41,090,022 33,612,244 -------------- -------------- Total Assets $ 265,382,890 $ 287,261,000 ============== ============== LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 1,520,611 $ 1,109,241 Real estate taxes payable 1,459,872 1,373,133 Accrued interest payable 2,043,464 2,002,850 Nonrefundable lease deposits and purchase price credits 23,296,085 19,579,132 Other liabilities for leased locations 4,580,512 4,852,994 Deferred income 5,474,923 1,695,854 Other accounts payable and accrued expenses 3,316,703 5,227,850 Current portion of long-term debt 31,666,797 28,518,916 -------------- -------------- Total Current Liabilities 73,358,967 64,359,970 Net deferred tax liability - 573,399 Long-term debt, less current portion: Mortgage and other notes payable 175,250,273 192,901,582 12% Senior Subordinated Notes, net of unamortized discount of $222,993 in 2001 and $351,205 in 2000 11,304,007 13,124,795 -------------- -------------- Total Long-term debt, excluding current portion 186,554,280 206,026,377 -------------- -------------- Total Liabilities 259,913,247 270,959,746 -------------- -------------- Minority Interests - 2,013,721 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 deficit (9,832,641) (1,014,751) -------------- -------------- Total stockholders' equity 5,469,643 14,287,533 -------------- -------------- Total Liabilities and Stockholders' Equity $ 265,382,890 $ 287,261,000 ============== ============== See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, ----------------------------------------------- 2001 2000 1999 -------------- -------------- -------------- Revenues: Motel operating revenues $ 45,139,165 $ 58,097,785 $ 95,885,655 Lease revenues, net of deferred purchase price 12,446,666 10,142,487 2,476,570 credit of $1,981,132 in 2001, $1,974,766 in 2000 and $299,336 in 1999 Vending revenues 2,185,316 1,071,916 947,636 Other revenues 2,229,655 2,879,897 4,121,228 -------------- -------------- -------------- Total revenues 62,000,802 72,192,085 103,431,089 Costs and expenses: Motel operating expenses 24,197,309 31,597,842 53,855,617 Marketing and royalty fees 3,243,988 4,174,102 6,785,937 General and administrative 6,931,530 6,410,684 10,350,626 Lease expense 783,433 460,028 157,729 Vending expense 2,140,611 1,080,673 717,906 Impairment losses and restructuring costs 6,622,076 - 1,378,000 Depreciation and amortization 13,989,896 15,059,018 14,978,458 -------------- -------------- -------------- Total direct expenses 57,908,843 58,782,347 88,224,273 -------------- -------------- -------------- Net operating income 4,091,959 13,409,738 15,206,816 Interest expense 20,661,979 25,554,837 30,069,919 -------------- -------------- -------------- Loss from operations (16,570,020) (12,145,099) (14,863,103) Minority interests (20,290) (472,095) (19,575) Gain on sale of properties 3,668,736 2,176,991 2,527,605 -------------- -------------- -------------- Income (loss) before income taxes and extraordinary item (12,921,574) 10,440,203) (12,355,073) Income tax expense (benefit) (3,713,292) (4,002,914) (4,680,555) -------------- -------------- -------------- Income (loss) before extraordinary item (9,208,282) (6,437,289) (7,674,518) Extraordinary item: Net gain on early extinguishment of debt, net of income taxes of $248,755 in 2001 and $3,602,298 in 2000 390,392 5,653,349 - -------------- -------------- -------------- Net Income (Loss) $ (8,817,890) $ (783,940) $ (7,674,518) ============== ============== ============== Net income (loss) per common share (basic and diluted): Income (loss) before extraordinary item (11.51) (8.05) (9.59) Extraordinary item 0.49 7.07 - -------------- -------------- -------------- Net income (loss) per common share (basic and diluted) $ (11.02) $ (0.98) $ (9.59) ============== ============== ============== Weighted average number of common shares outstanding 800,000 800,000 800,000 ============== ============== ============== See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Additional Retained Total Common Paid-In Earnings Stockholders' Stock Capital (Deficit) Equity -------- ------------- ------------- ------------- Balance at January 1, 1999 $ 8,000 $ 15,294,284 $ 7,443,707 $ 22,745,991 Net loss - - (7,674,518) (7,674,518) -------- ------------- ------------- ------------- Balance at December 31, 1999 8,000 15,294,284 (230,811) 15,071,473 Net loss - - (783,940) (783,940) -------- ------------- ------------- ------------- Balance at December 31, 2000 8,000 15,294,284 (1,014,751) 14,287,533 Net loss - - (8,817,890) (8,817,890) -------- ------------- ------------- ------------- Balance at December 31, 2001 $ 8,000 $ 15,294,284 $ (9,832,641) $ 5,469,643 ======== ============= ============= ============= See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 ---------------- ---------------- ---------------- Cash flows provided by (used in) operating activities: Net income (loss) $ (8,817,890) $ (783,940) $ (7,674,518) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization and accretion of discount on notes 14,041,535 15,226,451 16,472,044 Impairment losses 6,622,076 - 928,000 Minority interests of others in income from operations 20,290 472,095 19,575 Deferred income taxes (3,110,529) 468,601 1,646,848 Gain on early extinguishment of debt (639,147) (9,255,647) - Forfeiture of security deposits and purchase price credits (542,076) - - Gain on sale of properties (3,668,735) (2,176,991) (2,527,605) Change in assets and liabilities: (Increase) decrease in assets: Accounts receivable 75,791 276,670 197,786 Operating supplies, prepaid expenses, deposits and other assets (1,642,650) 1,469,440 (4,405,249) Increase (decrease) in liabilities: Non-refundable security deposits 4,259,029 9,820,559 9,049,336 Accounts payable and accrued expenses (3,361,355) (12,257,400) (1,065,080) Accrued interest payable 40,614 (710,063) (669,401) ---------------- ---------------- ---------------- Net cash provided by operating activities 3,276,953 2,549,775 11,971,736 Cash flows provided by (used in) investing activities: Acquisition and development of investment properties (6,146,781) (4,238,794) (4,674,649) Refurbishment of investment properties (2,971,346) (4,640,874) (8,054,960) Cash restricted for refurbishment of properties 707,723 (592,263) 44,600 Net proceeds from sales of investment properties 7,001,770 11,165,886 8,838,990 Collections on mortgage and other notes receivable 12,945,759 7,092,927 6,824,103 ---------------- ---------------- ---------------- Net cash provided by investing activities 11,537,125 8,786,882 2,978,084 Cash flows provided by (used in) financing activities: Repayment of notes payable (29,868,992) (26,477,750) (76,161,920) Proceeds from notes payable 15,365,562 15,060,000 46,698,272 Distributions to minority interests - (166,953) - Deferred financing costs (320,575) (1,011,584) (1,916,209) ---------------- ---------------- ---------------- Net cash used in financing activities (14,824,005) (12,596,287) (31,379,857) ---------------- ---------------- ---------------- Net decrease in cash and cash equivalents (9,927) (1,259,630) (16,430,037) Cash and cash equivalents at beginning of year 3,162,313 4,421,943 19,581,870 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 3,152,386 $ 3,162,313 $ 3,151,833 ================ ================ ================ Supplementary disclosure of cash flow information: Cash paid during the year for interest, including $428,000 in 2001 and $315,000 in 2000 capitalized to land held for development in 2001 and 2000 $ 21,049,061 $ 27,477,922 $ 30,739,320 ================ ================ ================ Cash paid during the year for income taxes $ - $ - $ - ================ ================ ================ See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 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 36 states throughout the United States. At December 31, 2001, the Company's largest concentrations of lodging facilities were located in the States of Georgia and Illinois with 13 lodging facilities in Georgia and 10 lodging facilities in Illinois. 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 which have not changed operations or stockholders' equity. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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 and future payment of taxes and insurance. 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. Marketing costs are expensed as incurred. 2. Summary of Significant Accounting Policies- (Continued) Revenue Recognition Room revenues and other revenues derived from operation of lodging facilities are recognized when earned. The Company leased certain properties to third party operators under triple net leases requiring monthly rental payments that include: (i) minimum base rents which are recognized currently in revenue, and (ii) additional rents that may be applied to the purchase price of the property upon exercise of the lessee's purchase option. Recognition of such additional rents as revenue is deferred under the deposit method pending exercise of the purchase option or expiration or termination of the lease. 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 Basic and fully diluted earnings per share are based on the weighted average number of shares of common stock outstanding during each period. Reclassifications Certain reclassifications have been made to previously reported 1999 and 2000 statements in order to provide comparability with the 2001 statements reported herein. These reclassifications have not changed the 1999 or 2000 results or stockholders' equity. Impact of New Accounting Standards In accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, effective for financial statements issued for fiscal years beginning after December 15, 2001, the net income and gain/(loss) on sales of real estate for properties sold subsequent to December 31, 2001 is reflected in the consolidated statement of operations as "Discontinued operations" for all periods presented. In accordance with Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections, effective for financial statements issued for fiscal years beginning after May 15, 2002, gains and losses on extinguishments of debt are classified as income from continuing operations rather than as extraordinary items as previously required under Statement 4. 3. Mortgage and Other Notes Receivable Mortgage notes receivable in the amounts of $27,740,936 and $25,000,007 at December 31, 2001 and 2000, respectively, represent notes collateralized by motel properties. The notes provide for monthly principal and interest (various rates of 7% to 10%) receipts over various terms through 2006, although certain notes are callable prior to their due dates. Other notes receivable in the amount of $573,299 and $588,303 at December 31, 2001 and 2000, respectively, bear an interest rate of 11% and are receivable through 2016. Notes receivable of $20,474,765 at December 31, 2000 have been pledged as collateral for a loan facility. The loan facility had an outstanding balance of $10,318,911 at December 31, 2000. Notes receivable of $8,245,494 at December 31, 2001 have been pledged as collateral for a loan facility. The loan facility had an outstanding balance of $3,191,954 at December 31, 2001. At December 31, 2001, approximately $15.6 million of notes receivable are due from affiliated entities. See note 9. 4. Operating Properties The major classes of operating properties, at cost, are as follows: December 31, -------------------------------- 2001 2000 --------------- --------------- Land $ 42,918,880 $ 43,897,002 Buildings 204,907,435 223,444,895 Furniture and Equipment 57,758,228 59,558,636 --------------- --------------- 305,584,543 326,900,533 Less: Accumulated depreciation (99,412,606) (94,534,171) --------------- --------------- $ 206,171,937 $ 232,366,362 =============== =============== Depreciation expense equaled $11,174,249, $11,886,201, and $12,135,308 for the years ended December 31, 2001, 2000 and 1999, 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 ("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%. 5. Notes Payable and Senior Subordinated Notes - (Continued) The terms of the secured note payable prohibit prepayments and contain customary restrictive covenants. Release of lien on related collateral properties may be achieved only via defeasance using U.S. government securities, as defined in the agreements. Principle payments required on the secured note payable are approximately $4,985,000 in 2002, $5,438,000 in 2003, and $5,900,980 in 2004. If the loan is not repaid in 2005, principle payments in 2005 and subsequent periods will be dependant upon various factors as described above. 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 were not redeemable by 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. In October 1999, the Company repurchased from an affiliated company at fair market value $35 million of the 12% Senior Subordinated Notes for a gain of $1.9 million, which was offset by the accelerated write-off of deferred financing costs of $1.9 million. The repurchase transaction included the assumption of $8.75 million of notes payable of the affiliate. In March 2000, the Company repurchased from an affiliated company at fair market value $10.5 million of the 12% Subordinated Notes for a gain of approximately $4.2 million which was partially offset by a $0.6 million write-off of accelerated deferred financing costs. The repurchase transaction included the assumption of $4.4 million of notes payable of the affiliate. In October 2000, the Company repurchased from an affiliated company at fair market value an additional $20.9 million of the 12% Subordinated Notes for a gain of approximately $6.7 million which was partially offset by a $1.1 million write-off of accelerated deferred financing costs. The repurchase transaction included the assumption of $3.7 million of notes payable of the affiliate. A portion of the purchase price ($12,297,000 and $24,453,000 in 2000 and 1999, respectively) of each repurchase transaction was satisfied through a reduction of tax amounts due from the parent under the tax sharing agreement. In October 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the Senior Subordinated Notes at a gain, net of income taxes, of approximately $431,000. An extraordinary gain of $5,653,349, net of income taxes, was recognized in 2000 relating to the repurchase of the 12% Subordinated Notes. An extraordinary gain of $390,392, net of income taxes, was recognized in 2001 relating to the repurchase of the 12% Subordinated Notes and a prepayment penalty of $66,000 relating to early retirement of a note payable. The declaration and payment of dividends by the Company is restricted by the indenture relating to the 12% Senior Subordinated Notes. Substantially all of the company's investment properties, mortgage and other notes receivable have been pledged as collateral. 5. Notes Payable and Senior Subordinated Notes - (Continued) A summary of mortgage and other notes payable is as follows: December 31, --------------------------------- 2001 2000 -------------- -------------- Mortgage and other notes: Mortgage note payable secured by 93 motels, with interest at 8.62% through October 10, 2005, then rate equal to greater of 10.62% or ten-year treasury note plus 4.5%; monthly principal and interest; due October 11, 2015. $ 136,103,458 $ 140,672,342 Mortgage note payable secured by 1 motel, with interest at 9.5% for the first 3 years which ends April 2003, then adjusted at years 3 and 6 to prime plus 0.5%; monthly principal and interest; due April 20, 2007. 2,035,890 2,075,759 Mortgage note payable secured by 1 motel, with interest at 9%; monthly principal and interest; due December 1, 2010. 2,943,819 3,000,000 Mortgage note payable secured by 2 and 3 motels at December 31, 2001 and 2000 respectively, with variable interest tied to treasury constant maturity plus 3.75%; monthly principal and interest; due June 1, 2016. 1,285,613 2,331,088 Note secured by undeveloped land, with a fixed interest rate of 8%; interest payable monthly; paid in full March 19, 2001. - 1,440,000 Mortgage note payable secured by 1 motel, with interest at 7.75% through 2/1/04, then adjusted to 6-month treasury bill plus 3%; monthly principal and interest; due February 1, 2009. 2,541,385 2,612,637 Mortgage note payable secured by 2 and 4 motels at December 31, 2001 and 2000 respectively, with interest at LIBOR plus 3.25%; monthly principal and interest; additional monthly principal payment of $17,232.68 and $20,833.33 respectively, due January 1, 2004. 6,829,164 7,073,322 Mortgage note payable secured by 4 and 8 motels at December 31, 2001 and 2000 respectively, with interest at prime plus 0.5%; monthly principal and interest; due April 1, 2006. 4,791,828 7,703,556 Note payable unsecured, with a fixed interest rate of 10%, initial principal payment $575,000 and three additional annual principal payments of $200,000; repaid in full July 31, 2002. 190,521 362,983 Mortgage note payable secured by a guarantee of New Image, with a fixed interest rate of 14%; interest payments payable quarterly; due on demand. 8,400,000 8,400,000 Notes payable secured by 8 and 10 motels at December 31, 2001 and 2000 respectively, and a pledge of stock of one of MOA Hospitality, Inc.'s subsidiaries, with interest at a floating rate of LIBOR plus 3%; monthly principal and interest; due on demand. 10,243,677 14,659,000 Industrial development revenue bonds secured by 1 motel, with interest payable semi-annually at 10.5%; annual sinking fund redemptions of principal on December 1 through 2016; due December 1, 2016. 3,275,000 3,365,000 Note payable secured by $20,098,000 of 12% subordinated notes repurchased by the Company, with a fixed interest rate of 9.5%; monthly interest and semi-annual principal payments; repaid in full May 31, 2002. 800,000 1,700,000 Note payable secured by notes receivable, with an interest rate of prime plus 1.25%; monthly principal and interest; due April 1, 2006. 3,191,955 10,318,911 Note payable secured by $15,000,000 of 12% subordinated notes repurchased by the Company, with a fixed interest rate of 13.5%; monthly interest payments; due November 11, 2002. 4,629,010 4,500,000 Note payable secured by $10,497,000 of 12% subordinated notes repurchased by the Company, with a variable interest rate; monthly interest payments; due April 15, 2004. 4,472,170 4,565,583 Note payable secured by $20,929,000 of 12% subordinated notes repurchased by the Company, with a fixed interest rate of 12%; monthly interest payments; due April 15, 2004. 2,000,000 2,000,000 Note payable secured by $20,929,000 of 12% subordinated notes repurchased by the Company, with a fixed interest rate of 12%; monthly interest payments; due April 15, 2004. 600,000 600,000 Note payable secured by $20,929,000 of 12% subordinated notes repurchased by the Company, with a fixed interest rate of 12%; monthly interest payments; due April 15, 2004 548,704 1,140,000 Note payable secured by the cash flow of the LLC, with interest at 10.5%; monthly principal and interest; due May 15, 2004. 2,160,411 2,900,317 Mortgage note payable secured by 1 motel, with interest at 8.84%; monthly principal and interest; due July 1, 2011. 1,389,146 - Mortgage note payable secured by 1 motel, with interest at 8.67%; monthly principal and interest; due August 1, 2011. 3,477,906 - Mortgage note payable secured by 1 motel, with interest at 8.84%; monthly principal and interest; due July 1, 2011. 2,009,300 - Construction loan secured by motel in progress, with interest at prime plus 1.25%; monthly interest through 11/1/02, then principal and interest; due March 1, 2006. Total loan available is $7,000,000. 2,512,288 - Unsecured promissory note, bearing no interest, with annual principal payments of $83,333; due August 24, 2004. 250,000 - Unsecured promissory note, with interest at 9.75%; monthly principal and interest; repaid in full July 1, 2002. 1,884 - Promissory note secured by vending equipment, with interest at 9.98%; monthly principal and interest; due November 1, 2008. 128,616 - Promissory note secured by vending equipment, with interest at 9.98%; monthly principal and interest; due April 1, 2007. 105,327 - -------------- -------------- 206,917,070 221,420,498 Less current portion (31,666,797) (28,518,916) -------------- -------------- $ 175,250,273 $ 192,901,582 ============== ============== Principal payments required on notes payable and the Senior Subordinated Notes are scheduled as follows: Years ended December 31, 2002 $ 31,666,797 2003 8,080,522 2004 32,322,744 2005 120,976,416 2006 9,236,470 Thereafter 16,161,120 -------------- Sub-total 218,444,069 Less: Discount, net of accumulated amortization (222,992) -------------- $ 218,221,077 ============== 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 $506,000, $398,000, and $504,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Minimum annual rentals for leases on properties and the corporate office for the five years subsequent to December 31, 2001 and thereafter, are approximately as follows: Years ended December 31, 2002 $ 559,000 2003 494,000 2004 440,000 2005 383,000 2006 339,000 Thereafter 930,000 ------------ $ 3,145,000 ============ The Company, as lessor, has entered into operating leases with unaffiliated parties to operate seventy-five motel properties at December 31, 2001 and 2000. Under the terms of these leases, the lessee is responsible for operating costs including all maintenance, repairs, taxes and insurance expense on the leased property. The leases, which have terms ranging from five and a half years to six and half years, provide for monthly rent payments. In addition, the lease grants the lessee an option to purchase the leased properties at prices believed by management to reflect market value, which in the aggregate is $142,146,000 and $141,500,000 at December 31, 2001 and 2000, respectively. Nonrefundable deposits and non-refundable purchase price credits, aggregating approximately $23,300,000 and $19,600,000 at December 31, 2001 and 2000, respectively, received from lessees can be applied towards the purchase prices of the leased properties. Monthly lease payments are allocated between rental income and a nonrefundable purchase price credit to be applied if the purchase option is exercised. The deposits and real estate tax and other amounts collected from the lessees aggregating approximately $4,600,000 and $4,900,000 at December 31, 2001 and 2000, respectively are reflected in the balance sheet as a liability. Future minimum rentals under the lease (assuming that the purchase options are not exercised prior to expiration) are approximately as follows: Years ended December 31, 2002 $ 11,212,000 2003 11,081,000 2004 10,948,000 2005 2,851,000 ------------- $ 36,092,000 ============= Total cost basis on the seventy-five leased locations at December 31, 2001 is approximately $138,370,000 with accumulated depreciation of approximately $35,034,000. Depreciation is calculated on a 40 year life of the building. 6. Leases - (Continued) During 2001 the lessee's at four properties defaulted on their leases, resulting in termination of their leasehold interests and forfeiture of approximately $542,000 in security deposits, which is included in lease revenue in the statement of operations. 7. Impairment losses and restructuring costs In 1999, impairment losses of $928,000 were recorded to reflect the writedown of certain properties to their estimated fair value. Restructuring costs of $450,000 were recorded to reflect the downsizing of corporate employees due to the reduction of operating properties. In 2001, impairment losses of $6,622,000 were recorded to reflect the write-down of certain properties to their estimated fair value based upon a permanent deterioration in operating results at such properties.. 8. Income Taxes During fiscal year 2001, the Company recorded a valuation allowance of $1.3 million relating to state net operating losses from previous years which are not expected to be utilized. Total income tax expense was allocated as follows: 2001 2000 1999 ------------ ------------ ------------ Income from operations $(3,713,292) $(4,002,914) $(4,680,555) Extraordinary item 248,755 3,602,298 - ------------ ------------ ------------ $(3,464,537) $ (400,616) $(4,680,555) ============ ============ ============ 8. Income Taxes - (Continued) Income tax expense (benefit) consists of: Current Deferred Total ------------ ------------ ------------ Year ended December 31, 2001 U.S. federal $ (503,215) $(3,534,598) $(4,037,813) State and local (99,548) 424,069 324,521 ------------ ------------ ------------ $ (602,763) $(3,110,529) $(3,713,292) ============ ============ ============ Year ended December 31, 2000 U.S. federal $(4,987,549) $ 1,751,331 $(3,236,218) State and local 94,415 (861,111) (766,696) ------------ ------------ ------------ $(4,893,134) $ 890,220 $(4,002,914) ============ ============ ============ Year ended December 31, 1999 U.S. federal $(4,711,638) $ 927,573 $(3,784,065) State and local (1,615,767) 719,277 (896,490) ------------ ------------ ------------ $(6,327,405) $ 1,646,850 $(4,680,555) ============ ============ ============ 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, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Computed "expected" tax expense (benefit) $(4,393,335) $(3,549,669) $(4,200,725) Increase (decrease) in income taxes resulting from: State NOL valuation allowance 1,281,125 - - State income taxes, net of federal income tax effect (631,360) (506,021) (591,684) Other, net 30,278 52,776 111,854 ------------ ------------ ------------ $(3,713,292) $(4,002,914) $(4,680,555) ============ ============ ============ 8. Income Taxes - (Continued) 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, ------------------------------ 2001 2000 ------------- ------------- Deferred tax assets: Primarily impairment losses and reserves $ (4,890,436) $ (2,324,446) Net state operating loss carryforwards (2,362,004) (1,920,819) Federal tax credits carryover (447,201) (447,201) Other, net (156,441) (697,362) ------------- ------------- Deferred tax assets (7,856,082) (5,389,828) Less: Valuation allowance 1,281,125 - ------------- ------------- Net deferred tax assets (6,574,957) (5,389,828) Deferred tax liabilities: Lease cost amortization 681,177 949,470 Investment properties, principally due to depreciation and purchase accounting adjustments 3,356,650 5,013,757 ------------- ------------- Total deferred tax liabilities 4,037,827 5,963,227 ------------- ------------- Net deferred tax (asset) liability $ (2,537,130) $ 573,399 ============= ============= 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. At December 31, 2000 and December 31, 2001, approximately $1.4 million and $487,000, respectively is owed to the parent corporation, which has been included in other accounts payable and accrued expenses. At December 31, 2001, the Company has recognized a net deferred asset relating to net operating loss carryforwards ("NOLs") for state income tax purposes of approximately $14.5 million. The NOLs, which are subject to certain limitations, expire at various dates through 2016. 9. Acquisitions and Divestitures In 1999, the Company sold ten properties, including one being accounted for on the installment basis, for approximately $27.8 million consisting of $9.7 million in cash and $18.1 million in notes receivable. The Company realized gains of approximately $2.5 million and deferred recognition of a gain in the approximate amount of $1.7 million relating to the installment sale. The Company also leased an additional thirty-eight properties to third party operators in 1999. 9. Acquisitions and Divestitures - (Continued) Also in 1999, the Company purchased one property constructed by an affiliate for the Company. The property was purchased for $2.9 million. During 2000, the Company has sold eight properties for approximately $20.8 million consisting of $11.2 million in cash and $7.6 million in first mortgage notes. These sale transactions resulted in a net gain of $2.2 million. The Company also sold a vacant parcel of land at cost during 2000. The Company also purchased a parcel of land in February 2000 for approximately $250,000 cash and a note in the amount of $460,000, which was repaid in 2000. Also, in 2000, the Company, as lessor, has leased an additional thirty-two motel properties. During 2001, the Company leased an additional three, and re-leased three of its lodging facilities to third party operators. Also during 2001, the Company sold two properties for approximately $5.5 million in cash for a recognized gain of $1.8 million. The Company also sold three additional properties to related parties at prices believed by management to represent fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million secured by wrap notes on the properties, which are encumbered by $10,888,700 of first mortgage debt that is included in the consolidated financial statements of the Company. The deferred gain will be recognized when the note receivables are paid in full. The company continues to manage these properties for a fee which was approximately $56,000 for the 2001. At December 31, 2001, short term advances for operating and capital expenditures, made by the Company on behalf of the affiliates equaled approximately $464,000, and are included in other assets. The Company retained the land underlying two of these properties in the amount of $1,327,000. The buyers' obligations under ground leases require annual aggregate payments of $240,000 through an initial term of 31 years. The Company also sold its partnership interest in one lodging facility for $200,000. The Company also recognized a deferred gain of $1.7 million on one of its lodging facilities sold in a prior year. During 2001, a subsidiary of the Company purchased a vending company for $624,000 funded by $126,000 cash and assumption of $498,000 of debt. 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. 10. Fair Value of Financial Instruments - (Continued) 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 Fair Carrying Fair Amount Value Amount Value 2001 2001 2000 2000 ------------- ------------- ------------- ------------- Cash and cash equivalents $ 3,152,386 $ 3,152,386 $ 3,162,313 $ 3,162,313 Mortgage and other notes receivable 28,314,235 28,015,672 25,588,310 25,959,789 Secured notes payable 206,917,070 202,364,597 221,420,498 217,419,803 12% Senior Subordinated Notes 11,304,007 6,765,448 13,124,795 8,668,747 11. Segments 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") establishes standards for the manner in which public business enterprises report information regarding reportable operating segments. The Company, directly and through subsidiaries, owned 113 lodging facilities in 36 states, 118 lodging facilities in 38 states and 126 lodging facilities in 39 states for the years ended December 31, 2001, 2000 and 1999, respectively. The Company owns a 100% interest in all of its properties. Seventy-five, seventy-five and forty-three of its motels for the years ended December 31, 2001, 2000 and 1999, respectively, which are leased to third party tenants pursuant to operating leases and one to an affiliated party. 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. 11. Segments (continued) 2001 2000 1999 ---------- ---------- ---------- (in thousands) Motel operations: Motel operating revenue: Room revenues $ 41,467 $ 53,824 $ 90,382 Ancillary motel revenues 3,672 4,274 5,504 ---------- ---------- ---------- Total motel operating revenues 45,139 58,098 95,886 Motel costs and expenses: Motel operating expenses 24,197 31,598 53,856 Marketing and royalty fees 3,244 4,174 6,786 Depreciation and amortization 6,330 7,481 11,468 ---------- ---------- ---------- Total motel direct expenses 33,771 43,253 72,110 ---------- ---------- ---------- 11,368 14,845 23,776 Lease Operations: Lease revenues 12,447 10,142 2,477 Lease operating expenses 783 460 158 Depreciation and amortization 6,624 6,690 1,922 ---------- ---------- ---------- 5,040 2,992 397 Vending Operations: Vending revenues 2,185 1,072 948 Vending operating expenses 2,141 1,081 718 Depreciation and amortization 376 226 265 ---------- ---------- ---------- (332) (235) (35) Corporate Operations Other revenues 2,230 2,880 4,121 General and administrative expenses: Management Company Operations 5,100 4,813 8,944 Construction/Acquisition and Divestiture 471 975 907 Vending general and administrative 1,361 622 500 ---------- ---------- ---------- Total general and administrative expenses 6,932 6,410 10,351 Impairment losses and restructuring costs 6,622 - 1,378 Depreciation and amortization 660 662 1,323 ---------- ---------- ---------- (11,984) (4,192) (8,931) ---------- ---------- ---------- Net operating income 4,092 13,410 15,207 Interest expense 20,662 25,555 30,070 ---------- ---------- ---------- Loss from operations (16,570) (12,145) (14,863) Minority interests (20) (472) (20) Gain on sale of properties 3,669 2,177 2,528 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary item (12,922) (10,440) (12,355) Income tax expense (benefit) (3,713) (4,003) (4,681) ---------- ---------- ---------- Income (loss) before extraordinary item (9,208) (6,437) (7,674) Gain on early extinguishment of debt 390 5,653 - ---------- ---------- ---------- Net Income (loss) $ (8,818) $ (784) $ (7,674) ========== ========== ========== Total Assets: Motel operations $ 117,909 $ 137,785 $ 207,835 Lease operations 112,352 121,072 73,929 Corporate and other 35,122 28,404 31,441 ---------- ---------- ---------- $ 265,383 $ 287,261 $ 313,205 ========== ========== ========== 12. Contingencies 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. In July 1999, the Company entered into a settlement agreement with ShoLodge resolving all disputes with respect to the litigation initiated by the Company. The settlement agreement requires 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. 13. Subsequent Events Subsequent to December 31, 2001, the Company has entered into operating leases for five motel properties that require monthly rental payments of $73,000, non-refundable security deposits of $1,470,000 and provide for a final option purchase price of $10,680,000. Also, subsequent to December 31, 2001, the Company has sold four of its lodging facilities. One was sold for approximately $2.2 million in cash which approximated net book value at date of sale. Another was sold to a related party at a price believed by management to represent fair market value for $3.5 million, resulting in a deferred gain of $1.1 million and a note receivable of $3.2 million. The third was sold for $1.5 million for a gain of $150,000 and the fourth was sold for $1.7 million in cash for a loss of $809,000. MOA HOSPITALITY, INC SCHEDULE III - LEASED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2001 (DOLLARS IN THOUSAND) Cost Capitalized Encumbrances (1) Initial Cost Subsequent to Acqusition ---------------- ----------------------- -------------------------------- December 31, Building & Building & Location Name 2001 Land Improvements Land Impairments Improvements - ---------------------------------- ---------------- --------- ------------ ----- ----------- ------------ Akron Super 8 Motel (3) $ - $ 176 $ 1,431 $ - $ - $ 70 Anderson Super 8 Motel (3) - 146 947 - - 24 Battle Creek Super 8 Motel (3) - 112 1,168 - - 40 Bloomington Super 8 Motel (3) - 204 1,468 - - 64 Brunswick Super 8 Motel (3) - 184 1,490 - - 131 Camden Travelodge (3) - 168 898 - - 61 Canton Days Inn (3) - 198 1,669 - - 142 Carson City Super 8 Motel (3) - 257 706 - - 28 Cartersville Super 8 Motel (3) - 99 1,378 - - 67 Champaign Super 8 Motel (3) - 190 1,773 - - 18 Charleston Super 8 (3) - 172 1,437 - - 354 Charlottesville Super 8 Motel (3) - 220 1,430 - - 49 Chattanooga Super 8 Motel (3) - 180 1,047 - - 70 Columbia Microtel (4) - 423 1,416 - (549) 4 Columbus IN Super 8 Motel (3) - 63 1,480 - - 36 Danville Super 8 Motel (3) - 151 623 - - 43 Davenport Super 8 Motel (3) - 183 1,503 - - 97 Decatur Super 8 Motel (3) - 193 1,492 - - 99 Dublin Best Western (3) - 598 3,438 - (1,605) 152 East Memphis Super 8 Motel (3) - 456 1,414 - - 68 Elkhart Fairway Inn (3) - 571 926 - - 138 Fernandina Beach, the Inn at (3) - 912 5,273 - (1,046) 239 Fitzgerald , The Inn at (3) - 472 2,670 - (1,226) 136 Fremont Super 8 Motel (3) - 150 622 - - 39 Grand Forks Super 8 Motel (3) - 86 928 - - 15 Grand Rapids Super 8 Motel (3) - 132 1,240 - - 24 Greenwood Days Inn (3) - 119 656 - - 36 Hibbing Super 8 Motel (3) - 354 587 - - 4 Hinesville, The Inn at (3) - 703 3,969 - (600) 193 Independence Super 8 Motel (3) - 233 1,916 - - 145 Indianapolis Days Inn (3) - 606 3,852 - - 417 Janesville Super 8 Motel (3) - 134 1,106 - - 79 Johnson City Super 8 Motel (3) - 189 1,593 - - 87 Kalamazoo Super 8 Motel (3) - 153 1,261 - - 30 Kenosha Super 8 Motel (3) - 164 1,304 - - 86 Lake City Microtel 1,291 441 1,525 - (268) 109 Las Cruces Super 8 Motel (3) - 116 1,291 - - 89 Lewiston Super 8 Motel (3) - 176 653 - - 41 Lexington Super 8 Motel (3) - 372 846 - - 189 Liberty Super 8 Motel (3) - 211 1,663 - - 138 Litchfield Super 8 Motel (3) - 344 1,080 - - 29 Macon Ramada (3) - 821 4,743 - (1,698) 149 Melbourne Howard Johnson (3) - 593 3,391 - - 233 Mineral Wells Microtel 1,337 354 1,736 - (200) (40) Minot Super 8 Motel (3) - 131 968 - - 81 Moultrie, The Inn at (3) - 315 1,744 - (441) 59 Muncie Days Inn (3) - 429 668 - - 36 Muskegon Days Inn 740 73 578 - - 419 Muskegon Super 8 Motel (3) - 160 1,181 - - 19 NW Kansas City Super 8 Motel (3) - 181 1,633 - - 58 Panama City Super 8 Motel (3) - 211 1,595 - - 125 Pensacola Super 8 Motel (3) - 154 1,013 - - 7 Peru Super 8 Motel (3) - 197 1,370 - - 94 Red Wing Super 8 Motel (3) - 500 1,371 - - (3) Rice Lake Super 8 Motel (3) - 547 951 - - 23 Richmond Best Western (3) - 457 2,567 - - 116 Rome Super 8 Motel (3) - 93 1,158 - - 45 Saginaw Super 8 Motel (3) - 168 1,156 - - 42 Salina Super 8 Motel (3) - 261 1,012 - - 68 Salt Lake Super 8 Motel 2,461 785 3,917 - - 381 Savage Comfort Inn (3) - 574 1,436 - - 77 Shreveport Super 8 Motel (3) - 456 2,249 - - 133 Sioux Falls Super 8 Motel (3) - 225 1,503 - - 45 South Springfield Super 8 Motel (3) - 323 1,569 - - 55 Springfield IL. Super 8 Motel (3) - 243 1,226 - - 94 Springfield MO. Super 8 Motel (3) - 150 1,119 - - 35 St Clairsville Super 8 Motel (3) - 273 1,363 - - 59 St Louis Super 8 Motel 830 293 1,969 - - 201 Stafford Microtel 1,531 587 1,986 - (1,438) 10 Topeka Super 8 Motel (3) - 168 1,299 - - 84 Union City Super 8 Motel (3) - 211 850 - - 73 Vidalia, The Inn at (3) - 488 2,737 - (1,209) 54 Warner Robins Super 8 Motel (3) - 102 1,555 - - 95 Waukegan Super 8 Motel (3) - 231 1,659 - - 201 Weldon Orchard Inn (3) - 229 919 - - 288 ---------------- --------- ------------ ----- ----------- ------------- TOTAL LEASED $ 8,190 $ 21,994 $ 119,360 $ - $ (10,280) $ 7,296 ================ ========= ============ ===== =========== ============= MOA HOSPITALITY, INC SCHEDULE III - LEASED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2001 (DOLLARS IN THOUSAND)- CONTINUED Accumulated Date of Total Depreciation Acquisition (A) Total Building & Combined at December 31, or Placed (P) Location Name Land Improvements Total 2001 (2) in Service - ---------------------------------- -------- ------------ --------- --------------- --------------- Akron Super 8 Motel (3) $ 176 $ 1,501 $ 1,677 $ 545 Jul 1987 (A) Anderson Super 8 Motel (3) 146 971 1,117 359 Jul 1987 (A) Battle Creek Super 8 Motel (3) 112 1,208 1,320 445 Jul 1987 (A) Bloomington Super 8 Motel (3) 204 1,532 1,736 560 Jul 1987 (A) Brunswick Super 8 Motel (3) 184 1,621 1,805 580 Jul 1987 (A) Camden Travelodge (3) 168 959 1,127 176 Apr 1994 (A) Canton Days Inn (3) 198 1,811 2,009 645 Jul 1987 (A) Carson City Super 8 Motel (3) 257 734 991 337 Jun 1985 (P) Cartersville Super 8 Motel (3) 99 1,445 1,544 523 Jul 1987 (A) Champaign Super 8 Motel (3) 190 1,791 1,981 658 Jul 1987 (A) Charleston Super 8 (3) 172 1,791 1,963 593 Mar 1993 (A) Charlottesville Super 8 Motel (3) 220 1,479 1,699 541 Jul 1987 (A) Chattanooga Super 8 Motel (3) 180 1,117 1,297 401 Jul 1987 (A) Columbia Microtel (4) 423 871 1,294 148 Sep 1997 (P) Columbus IN Super 8 Motel (3) 63 1,516 1,579 564 Jul 1987 (A) Danville Super 8 Motel (3) 151 666 817 229 Jul 1987 (A) Davenport Super 8 Motel (3) 183 1,600 1,783 577 Jul 1987 (A) Decatur Super 8 Motel (3) 193 1,591 1,784 574 Jul 1987 (A) Dublin Best Western (3) 598 1,985 2,583 671 Apr 1994 (A) East Memphis Super 8 Motel (3) 456 1,482 1,938 434 Jun 1990 (A) Elkhart Fairway Inn (3) 571 1,064 1,635 179 Apr 1994 (A) Fernandina Beach, the Inn at (3) 912 4,466 5,378 1,024 Apr 1994 (A) Fitzgerald , The Inn at (3) 472 1,580 2,052 522 Apr 1994 (A) Fremont Super 8 Motel (3) 150 661 811 251 Jun 1989 (A) Grand Forks Super 8 Motel (3) 86 943 1,029 351 Jul 1987 (A) Grand Rapids Super 8 Motel (3) 132 1,264 1,396 468 Jul 1987 (A) Greenwood Days Inn (3) 119 692 811 256 Jul 1987 (A) Hibbing Super 8 Motel (3) 354 591 945 107 Apr 1994 (A) Hinesville, The Inn at (3) 703 3,562 4,265 896 Apr 1994 (A) Independence Super 8 Motel (3) 233 2,061 2,294 614 Jul 1987 (A) Indianapolis Days Inn (3) 606 4,269 4,875 717 Apr 1994 (A) Janesville Super 8 Motel (3) 134 1,185 1,319 427 Jul 1987 (A) Johnson City Super 8 Motel (3) 189 1,680 1,869 606 Jul 1987 (A) Kalamazoo Super 8 Motel (3) 153 1,291 1,444 476 Jul 1987 (A) Kenosha Super 8 Motel (3) 164 1,390 1,554 503 Jul 1987 (A) Lake City Microtel 441 1,366 1,807 141 Jun 1998 (P) Las Cruces Super 8 Motel (3) 116 1,380 1,496 502 Jul 1987 (A) Lewiston Super 8 Motel (3) 176 694 870 304 Jun 1985 (P) Lexington Super 8 Motel (3) 372 1,035 1,407 368 Apr 1987 (P) Liberty Super 8 Motel (3) 211 1,801 2,012 652 Jul 1987 (A) Litchfield Super 8 Motel (3) 344 1,109 1,453 196 Apr 1994 (A) Macon Ramada (3) 821 3,194 4,015 1,318 Apr 1994 (A) Melbourne Howard Johnson (3) 593 3,624 4,217 659 Apr 1994 (A) Mineral Wells Microtel 354 1,496 1,850 160 Mar 1998 (P) Minot Super 8 Motel (3) 131 1,049 1,180 372 Jul 1987 (A) Moultrie, The Inn at (3) 315 1,362 1,677 338 Apr 1994 (A) Muncie Days Inn (3) 429 704 1,133 129 Apr 1994 (A) Muskegon Days Inn 73 997 1,070 179 Nov 1993 (A) Muskegon Super 8 Motel (3) 160 1,200 1,360 445 Jul 1987 (A) NW Kansas City Super 8 Motel (3) 181 1,691 1,872 616 Jul 1987 (A) Panama City Super 8 Motel (3) 211 1,720 1,931 614 Jul 1987 (A) Pensacola Super 8 Motel (3) 154 1,020 1,174 374 Jul 1987 (A) Peru Super 8 Motel (3) 197 1,464 1,661 525 Jul 1987 (A) Red Wing Super 8 Motel (3) 500 1,368 1,868 196 Jan 1996 (A) Rice Lake Super 8 Motel (3) 547 974 1,521 176 Apr 1994 (A) Richmond Best Western (3) 457 2,683 3,140 501 Apr 1994 (A) Rome Super 8 Motel (3) 93 1,203 1,296 443 Jul 1987 (A) Saginaw Super 8 Motel (3) 168 1,198 1,366 440 Jul 1987 (A) Salina Super 8 Motel (3) 261 1,080 1,341 355 Jun 1989 (A) Salt Lake Super 8 Motel 785 4,298 5,083 1,398 Mar 1988 (A) Savage Comfort Inn (3) 574 1,513 2,087 263 Apr 1994 (A) Shreveport Super 8 Motel (3) 456 2,382 2,838 429 Apr 1994 (A) Sioux Falls Super 8 Motel (3) 225 1,548 1,773 581 Jul 1987 (A) South Springfield Super 8 Motel (3) 323 1,624 1,947 320 Apr 1994 (A) Springfield IL. Super 8 Motel (3) 243 1,320 1,563 242 Apr 1994 (A) Springfield MO. Super 8 Motel (3) 150 1,154 1,304 430 Jul 1987 (A) St Clairsville Super 8 Motel (3) 273 1,422 1,695 519 Jul 1987 (A) St Louis Super 8 Motel 293 2,170 2,463 787 Jul 1987 (A) Stafford Microtel 587 558 1,145 174 Jul 1998 (P) Topeka Super 8 Motel (3) 168 1,383 1,551 509 Jul 1987 (A) Union City Super 8 Motel (3) 211 923 1,134 305 Jan 1989 (A) Vidalia, The Inn at (3) 488 1,582 2,070 525 Apr 1994 (A) Warner Robins Super 8 Motel (3) 102 1,650 1,752 595 Jul 1987 (A) Waukegan Super 8 Motel (3) 231 1,860 2,091 650 Jul 1987 (A) Weldon Orchard Inn (3) 229 1,207 1,436 346 Mar 1993 (A) -------- ------------ --------- --------------- TOTAL LEASED $21,994 $ 116,376 $138,370 $ 35,034 ======== ============ ========= =============== MOA HOSPITALITY, INC SCHEDULE III - LEASED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2001 (CONTINUED) (1) The Company has various mortgage notes payable. See footnote 5 to the Company's consolidated financial statements for a description of its mortgage notes payable. (2) Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. (3) These properties are part of a mortgage covering 93 properties with a balance of $136,103,458 as of December 31, 2001. (4) Sold subsequent to December 31, 2001. The following table reconciles our historical cost for the years ended December 31, 2001, 2000 and 1999: Year ended December 31, (in thousands) --------------------------------- 2001 2000 1999 ---------- ---------- --------- Balance, beginning of period $ 140,210 $ 83,383 $ 13,596 Properties leased during period 8,473 56,807 69,745 Additions to buildings during period 28 20 41 Sales and lease terminations during the period (5,723) - - Impairments (4,618) - - ---------- ---------- --------- Balance, end of period $ 138,370 $ 140,210 $ 83,383 ========== ========== ========= The following table reconciles the acccumulated depreciation for the years ended December 31, 2001, 2000 and 1999: Year ended December 31, (in thousands) --------------------------------- 2001 2000 1999 --------- --------- --------- Balance, beginning of period $ 30,678 $ 17,351 $ 35 Depreciation prior to lease date 1,957 10,635 16,386 Depreciation for the period on leased properties 3,242 2,693 930 Sales and lease terminations during the period (843) - - --------- --------- --------- Balance, end of period $ 35,034 $ 30,678 $ 17,351 ========= ========= ========= 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 20th day of August 2002. MOA HOSPITALITY, INC. By: /s/ Kurt M. Mueller ----------------------- Kurt M. Mueller President and 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 August 20, 2002 Paul F. Wallace Chief Executive Officer Principal Executive Officer /s/ Kurt M. Mueller Director, President and Chief August 20, 2002 Kurt M. Mueller Financial Officer Principal Financial Officer /s/ Alan H. Baerenklau Director August 20, 2002 Alan H. Baerenklau /s/ Peter W. McClean Director August 20, 2002 Peter W. McClean /s/ Ronald P. Stewart Director August 20, 2002 Ronald P. Stewart /s/ Philip J. Levien Director August 20, 2002 Philip J. Levien CERTIFICATIONS Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. I, Kurt M. Mueller, certify that: 1. I have reviewed this annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: August 28, 2002 /s/ Kurt M. Mueller Kurt M. Mueller Chief Financial Officer CERTIFICATIONS Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. I, Paul F. Wallace, certify that: 1. I have reviewed this annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: August 28, 2002 /s/ Paul F. Wallace Paul F. Wallace Chief Executive Officer 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 1996 Form 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, incorporated by reference to Exhibit 10.8 to MOA's Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"). 10.8A Amendment to credit facility agreement, dated as of October 8, 1997, incorporated by reference to Exhibit 10.8 to MOA's Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"). 21.1 Subsidiaries of MOA. 99.1 Statement of Chief Executive Officer and Chief Financial Officer (under Section 906 of the Sarbanes- Oxley Act of 2002) dated August 28, 2002.