UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002. 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 (847) 803-1200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Number of shares of Common Stock, $.01 par value outstanding as of September 15, 2003: 800,000 INDEX TO FORM 10-Q Page Part I Financial Information Item 1. Financial Statements Condensed consolidated balance sheets - September 30, 2002 2 (unaudited) and December 31, 2001. Condensed consolidated statements of operations - 3 Three months ended September 30, 2002 and 2001 and Nine months ended September 30, 2002 and 2001 (unaudited). Condensed consolidated statements of cash flows - 4 Nine months ended September 30, 2002and 2001 (unaudited). Notes to condensed consolidated financial statements - 5 September 30, 2002 (unaudited). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General 9 Results of Operations 10 Liquidity and Capital Resources 16 Item 3. Controls and Procedures 17 Part II Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Certifications 20 PART I - FINANCIAL INFORMATION Item 1. Financial Statements MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) September 30, December 31, 2002 2001 -------------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 3,411 $ 3,152 Accounts receivable from property operations,net 1,951 1,461 Operating supplies and prepaid expenses 1,796 2,313 Current portion of mortgage and notes receivable 117 233 -------------- ------------ Total Current Assets 7,275 7,159 Investment property: Operating properties, net of accumulated depreciation 192,922 206,172 Land held for development 15,046 9,585 -------------- ------------ Total investment property 207,968 215,757 Other Assets: Deposits and other assets 6,718 2,915 Mortgage and other notes receivable, less current portion 25,117 28,081 Net deferred tax asset 1,150 1,560 Financing and other deferred costs, net of accumulated amortization of $17,737 in 2002 and $17,013 in 2001 7,051 8,934 -------------- ------------ Total Other Assets 40,036 41,490 -------------- ------------ Total Assets $ 255,279 $ 264,406 ============== ============ LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 1,447 $ 1,521 Real estate taxes payable 1,467 1,460 Accrued interest payable 3,308 2,043 Nonrefundable lease deposits and purchase price credits 25,292 23,296 Other liabilities for leased locations 6,416 4,581 Deferred income 5,475 5,475 Other accounts payable and accrued expenses 2,489 2,340 Current portion of long-term debt 27,374 31,667 -------------- ------------ Total Current Liabilities 73,268 72,383 Long-term debt, less current portion: Mortgage and other notes payable 167,566 175,250 12% Senior Subordinated Notes, net of unamortized discount of $171,000 in 2002 and $223,000 in 2001 11,356 11,304 -------------- ------------ Total Long-term debt, excluding current portion 178,922 186,554 -------------- ------------ Total Liabilities 252,190 258,937 -------------- ------------ Stockholders' equity: Common stock, $.01 par value, 1,500,000 shares authorized; 800,000 shares issued and outstanding 8 8 Additional paid-in capital 15,294 15,294 Retained deficit (12,213) (9,833) -------------- ------------ Total Stockholders' Equity 3,089 5,469 -------------- ------------ Total Liabilities and Stockholders' Equity $ 255,279 $ 264,406 ============== ============ See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands except share data) Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues: Motel operating revenues $ 12,277 $ 13,256 $ 30,145 $ 34,896 Lease revenues 2,895 3,103 8,798 8,648 Vending revenues 1,059 624 2,915 1,375 Other revenues 659 542 1,977 1,749 ------------ ------------ ------------ ------------ Total revenues 16,890 17,525 43,835 46,668 Costs and expenses: Motel operating expenses 5,268 5,725 15,024 17,935 Marketing and royalty fees 794 926 2,039 2,451 General and administrative 1,576 1,377 4,761 4,652 Lease expenses 19 436 597 603 Vending expenses 1,063 533 2,632 1,357 Depreciation and amortization 2,901 3,262 8,746 10,143 ------------ ------------ ------------ ------------ Total direct expenses 11,621 12,259 33,799 37,141 ------------ ------------ ------------ ------------ Net operating income 5,269 5,266 10,036 9,527 Interest expense 4,578 5,057 13,759 15,330 ------------ ------------ ------------ ------------ Income (loss) from operations before gain on sale of properties, minority interest and income taxes 691 209 (3,723) (5,803) Gain on sale of properties - 820 - 3,479 Minority interests - - - (20) ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes 691 1,029 (3,723) (2,344) Income tax expense (benefit) 269 401 (1,449) (912) ------------ ------------ ------------ ------------ Income (loss) from continuing operations 422 628 (2,274) (1,432) Discontinued operations (98) 3 (107) (171) ------------ ------------ ------------ ------------ Net income (loss) $ 324 $ 631 $ (2,381) $ (1,603) ============ ============ ============ ============ Income (loss) per common share (basic and diluted): Income (loss) per common share from continuing operations $ 0.53 $ 0.79 $ (2.84) $ (1.79) ============ ============ ============ ============ Net income (loss) per common share $ 0.41 $ 0.79 $ (2.98) $ (2.00) ============ ============ ============ ============ Weighted average number of common shares outstanding 800,000 800,000 800,000 800,000 ============ ============ ============ ============ See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended September 30 ---------------------------- 2002 2001 ------------ ------------ Cash flows provided by operating activities: Net loss $ (2,381) $ (1,603) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation, amortization and accretion of discount on notes 9,018 10,779 Minority interests of others in net loss from operations - 20 Deferred income taxes 410 (473) Forfeiture of security deposits and PPC (254) - (Gain) loss on sale of properties 20 (3,479) Change in assets and liabilities: (Increase) decrease in assets: Accounts receivable (490) (635) Operating supplies, prepaid expenses, deposits and other assets 328 (278) Increase (decrease) in liabilities: Accounts payable and accrued expenses 1,995 2,122 Accrued interest payable 1,273 441 ------------ ------------ Net cash provided by operating activities 9,919 6,894 Cash flows provided by (used in) investing activities: Acquisition and development of investment properties (5,461) (4,992) Refurbishment of investment properties (1,649) (2,398) Net proceeds from sale of investment properties 7,215 4,357 Cash restricted for refurbishment of properties (600) 662 Collections on mortgage and other notes receivable 3,080 12,657 ------------ ------------ Net cash provided by investing activities 2,585 10,286 Cash flows provided by (used in) financing activities: Proceeds from notes payable 3,145 12,883 Repayment of notes payable (15,122) (25,724) Deferred financing costs (268) (490) ------------ ------------ Net cash used in financing activities (12,245) (13,331) ------------ ------------ Net increase in cash and cash equivalents 259 3,849 Cash and cash equivalents at beginning of period 3,152 3,162 ------------ ------------ Cash and cash equivalents at end of period $ 3,411 $ 7,011 ============ ============ Supplementary disclosure of cash flow information: Cash paid during the period for interest $ 12,571 $ 15,079 ============ ============ Cash paid (net of refunds received) during the period for income taxes $ - $ 20 ============ ============ See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) 1. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in MOA Hospitality, Inc. and Subsidiaries' Annual Report on Form 10-K for the year ended December 31, 2001. The terms "MOA" and the "Company" mean MOA Hospitality, Inc. and its subsidiaries. Certain reclassifications of prior-period amounts have been made to conform with current-period presentation, which have not changed operations or stockholders' equity. 2. Divestitures and Leasing Activities In January through September 30, 2002, the Company leased an additional four, and re-leased one of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. In January through September 30, 2002, the Company sold five of its lodging facilities for approximately $8.4 million resulting in a net loss of approximately $20,000. Deferred purchase price credits and non-refundable security deposits aggregating approximately $923,000 were credited to the buyers in connection with these sales. In January through September 30, 2002, the company also sold and leased back two properties to related parties. Under FAS 66: Accounting for Sales of Real Estate, both sales were required to be recorded on the deposit method, because of the down payment and the continuing involvement of the company in the properties. In the attached financial statements the properties are reflected as operating properties. Subsequent to September 30, 2002 and prior to December 31, 2002, the Company leased an additional three of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. Also, the Company took back three of its leased lodging facilities and two of its leased locations exercised their right to purchase prior to lease expiration. The two combined sales were for approximately $3.8 million resulting in a gain of $52,000 and a note receivable of $225,000. Subsequent to December 31, 2002, a property lessee defaulted on the operating lease. The Company operated the property for one month. At that time it was leased to a new third-party tenant. In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets," effective for financial statements issued for fiscal years beginning after December 31, 2001, operating results and gain/(loss) on sales of real estate for properties sold subsequent to December 31, 2001 are reflected in the consolidated statements of operations as "Discontinued operations" for all periods presented. Below is a summary of the results of operations of these properties through their respective disposition dates: For the Three Months Ended For the Nine Months Ended September 30 September 30 ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ ( in thousands ) ( in thousands ) Revenues Motel operating revenues $ 89 $ 397 $ 417 $ 949 Lease revenues 60 103 191 306 ------------ ------------ ------------ ------------ Total revenues 149 500 608 1,255 Costs and expenses: Motel operating expenses 69 207 329 595 Marketing and royalty fees 8 39 43 98 Lease expenses 5 4 19 15 Depreciation and amortization 38 160 243 506 ------------ ------------ ------------ ------------ Total direct expenses 120 410 634 1,214 ------------ ------------ ------------ ------------ Net operating income 29 90 (26) 41 Interest expense 23 85 129 321 ------------ ------------ ------------ ------------ Income (loss) from operations 6 5 (155) (280) Gain (loss) on sale of properties (167) - (20) - ------------ ------------ ------------ ------------ Income (loss) before income taxes (161) 5 (175) (280) Income tax expense (benefit) (63) 2 (68) (109) ------------ ------------ ------------ ------------ Net income (loss) $ (98) $ 3 $ (107) $ (171) ============ ============ ============ ============ 3. Mortgage and Other Notes Payable In January through September 30, 2002 the Company was advanced $3.0million on loans of $7 million for construction advances on one property under construction in Santa Monica, CA bringing the total advanced to $5.5 million. In April 2002, a subsidiary of the Company purchased a vending company for $210,000 by issuing a note payable of $110,000 with monthly principal and interest payments of $10,400, due March 1, 2003. Goodwill of $120,000 and fixed assets of $90,000 were preliminarily recorded as a result of this transaction. During October through December 31, 2002, the Company was advanced an additional $945,000 on loans of $7 million for construction advances on one property under construction in Santa Monica, CA bringing the total advanced to $6.4 million. Subsequent to December 31, 2002 the company was advanced the remaining $0.6 million. The Company is currently in default with respect to certain covenants on its Senior Subordinated Notes and also a $8.4 million note. The Company is seeking to extend the maturity dates and reduce the interest rates. The Company does not have sufficient liquidity to repay the notes if demanded by the holders and accordingly, there is substantial doubt about the Company's ability to continue as a going concern. 4. Income Taxes Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes principally as a result of state income taxes. 5. 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. 6. Related Parties During the quarters ended September 30, 2002 and 2001, the company received approximately $70,000 and $12,000 in management fees from related parties. For the nine months ended September 30, 2002 and 2001 the Company received approximately $162,000 and $20,000 in management fees. The Company recognized interest income from related parties during the quarter ended September 30, 2002 and 2001 of approximately $301,000 and $136,000 respectively. For the nine months ended September 30, 2002 and 2001interest from related parties totaled approximately $904,000 and $136,000 respectively. Ground lease revenue from related parties for the nine months and the quarter ended September 30, 2002 totaled approximately $130,000 and $65,000 respectively. The Company had receivables from related parties of approximately $337,000 at September 30, 2002. 7. Reclassifications Certain reclassifications have been made to previously reported 2001 statements in order to provide comparability with the 2002 statements reported herein. Theses reclassifications have not changed the 2001 results or stockholders' equity. 8. Subsequent Events The Company though a subsidiary (LLC) has a mortgage note payable secured by 93 of LLC's motels, 24 of which are operated by the Company, and 69 that are leased to third-party tenants. On February 28, 2003, the Company received a default notice from the servicer of the loan ("Servicer") alleging that LLC's lease program violated certain loan covenants. The Company believes that the leasing program, which began in 1998, has been properly disclosed to the lender in both monthly and annual financial reports provided to the lender. In addition, on March 31, 2003, the Company was notified that the loan had been accelerated. The Company disputes the validity of both the default and acceleration notices and has been in negotiations with the Servicer to resolve these issues. In conjunction with such continuing negotiations, the cure date was tolled and extended by the Servicer through July 11, 2003. In July 2003, negotiations with the Servicer stalled and on July 10th, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Subsequent to filing the petition, LLC obtained a commitment to refinance the existing loan and the Servicer agreed to such refinancing subject to a $2.5 million prepayment penalty plus expenses. On August 26, 2003, the refinancing closed in the amount of $137.25 million. The new loan bears interest at LIBOR plus 5% with a floor of 7.5%, matures September 13, 2008 and stipulates that aggregate net proceeds in excess of $2.5 million from the sale of collateral properties must be applied as principal reductions on the loan. The loan has a requirement for cumulative mandatory principal reductions of $60 million by 9/13/2004, $90 million by 9/13/2005 and $112.25 million by 9/13/06. Additional payments of "Exit Interest" are required based on the proceeds of each property sale (as defined). The exit interest ranges from 2.5% to 5% and is capped at $6.25 million. The bankruptcy petition was dismissed by the court immediately prior to the closing of the refinancing. 9. Segments As of September 30, 2002 the Company, directly and through subsidiaries, owned 108 lodging facilities in 38 states. The Company owns a 100% interest in all of its properties. The Company operates thirty-two of its motels and leases seventy-six of its motels to third party tenants pursuant to operating leases. The Company separately evaluates the performance of each of its motels. Three months ended Nine months ended September 30 September 30 ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ (in thousands) (in thousands) Motel operations Motel operating revenues: Room revenues $ 11,152 $ 12,277 $ 27,255 $ 32,108 Ancillary motel revenues 1,125 979 2,890 2,788 ------------ ------------ ----------- ------------ Total motel operating revenues 12,277 13,256 30,145 34,896 Motel costs and expenses: Motel operating expenses 5,268 5,725 15,024 17,935 Marketing and royalty fees 794 926 2,039 2,451 Depreciation and amortization 1,259 1,431 3,905 4,423 ------------ ------------ ----------- ------------ Total motel direct expenses 7,321 8,082 20,968 24,809 ------------ ------------ ----------- ------------ 4,956 5,174 9,177 10,087 Lease operations: Lease revenues 2,895 3,103 8,798 8,648 Lease expenses 19 436 597 603 Depreciation and amortization 1,425 1,545 4,235 4,910 ------------ ------------ ----------- ------------ 1,451 1,122 3,966 3,135 Vending operations: Vending revenues 1,059 624 2,915 1,375 Vending expenses 1,063 533 2,632 1,357 Depreciation and amortization 158 97 441 259 ------------ ------------ ----------- ------------ (162) (6) (158) (241) Corporate operations: Other revenues, net 659 542 1,977 1,749 General and administrative expenses: Management Company Operations 978 944 3,174 3,501 Construction/Acquisition and divestiture 137 84 230 225 Vending general and administrative 461 349 1,357 926 ------------ ------------ ----------- ------------ Total general and administrative expenses 1,576 1,377 4,761 4,652 Depreciation and amortization 59 189 165 551 ------------ ------------ ----------- ------------ (976) (1,024) (2,949) (3,454) ------------ ------------ ----------- ------------ Net operating income 5,269 5,266 10,036 9,527 Interest expense 4,578 5,057 13,759 15,330 ------------ ------------ ----------- ------------ Income (loss) form continuing operations 691 209 (3,723) (5,803) before minority interests Minority interests - - - (20) Gain on sale of properties - 820 - 3,479 ------------ ------------ ----------- ------------ Income (loss) form continuing operations 691 1,029 (3,723) (2,344) before income taxes Income tax expense (benefit) 269 401 (1,449) (912) ------------ ------------ ----------- ------------ Income (loss) form continuing operations 422 628 (2,274) (1,432) Discontinued operations (98) 3 (107) (171) ------------ ------------ ----------- ------------ Net income (loss) $ 324 $ 631 $ (2,381) $ (1,603) ============ ============ =========== ============ Total Assets: Motel Operations $ 105,072 $ 130,184 Lease Operations 113,504 117,244 Other Operations 36,703 26,594 ----------- ------------ $ 255,279 $ 274,022 =========== ============ Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND AS SUCH, SPEAK ONLY AS OF THE DATE MADE. 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 DURATION OF THE DOWNTURN RESULTING FROM THE SEPTEMBER 11, 2001 TERRORIST 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 INTERIM CONDENSED CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS PRESENTED BELOW FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 HAVE BEEN DERIVED FROM THE INTERIM CONDENSED CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS AND, IN THE OPINION OF THE COMPANY, INCLUDE ALL ADJUSTMENTS (CONSISTING ONLY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY THE INFORMATION SET FORTH THEREIN. General MOA operates principally in the economy limited service segment of the lodging industry. As a result, its average room rates tend to be lower than the average room rates of full service lodging facilities. However, due to the limited nature of the public space and ancillary services provided by limited service motels, the Company's expenses tend to be lower than those of full service lodging facilities. The profitability of the lodging industry in general is significantly dependent upon room rental rates and occupancy rates. Due to the fixed nature of a relatively high portion of the Company's expenses, changes in either room rates or occupancy rates result in significant changes in the operating profit of the Company's motels. The United States lodging industry has experienced downward pressure on ADR and occupancy throughout 2002 due to the overall slowdown in the economy. Such pressure was substantially increased as a result of the September 11, 2001 terrorist attacks on New York and Washington D.C. On a same store basis, through the third quarter ADR decreased to $51.45 for 2002 versus $51.66 for 2001, and occupancy increased to 70.24% for 2002 versus 69.56% for 2001. The Company is actively working with its managers and lessees to reduce operating and overhead expenses and has curtailed or postponed non-essential capital expenditure activities; however, there can be no assurance that the results of such efforts will be sufficient to enable the Company to continue meeting its obligations as they come due. Three Months Ended September 30, 2002 compared to the Three Months Ended September 30, 2001 The following chart presents certain historical operating results and statistics discussed herein and is being provided as a supplement to the condensed consolidated financial statements presented elsewhere herein. (certain of the 2001 numbers have been reclassified to conform to the 2002 presentation): Supplemental Operating Results and Statistics ------------------------------------------------------------------------- (unaudited) Three Months Ended September 30 ------------------------------------------------------------------------- Motels Owned Acquisitions/ Both Periods Divestitures (6) Consolidated ----------------------- ---------------------- ----------------------- 2002 2001 2002 2001 2002 2001 ---------- ---------- ---------- ---------- ---------- ---------- (dollars in thousands, except Other data) Motel operations: Motel operating revenues: Room revenues $ 10,881 $ 10,826 $ 271 $ 1,451 $ 11,152 $ 12,277 Ancillary motel revenues 916 876 209 103 1,125 979 ---------- ---------- ---------- ---------- ---------- ---------- Total motel operating revenues 11,797 11,702 480 1,554 12,277 13,256 Motel costs and expenses: Motel operating expenses 5,014 4,929 254 796 5,268 5,725 Marketing and royalty fees 773 777 21 149 794 926 Depreciation and amortization 1,222 1,231 37 200 1,259 1,431 ---------- ---------- ---------- ---------- ---------- ---------- Total motel direct expenses 7,009 6,937 312 1,145 7,321 8,082 ---------- ---------- ---------- ---------- ---------- ---------- $ 4,788 $ 4,765 $ 168 $ 409 4,956 5,174 ========== ========== ========== ========== Lease operations: Lease revenues 2,895 3,103 Lease expenses 19 436 Depreciation and amortization 1,425 1,545 ---------- ---------- 1,451 1,122 Vending operations: Vending revenues 1,059 624 Vending expenses 1,063 533 Depreciation and amortization 158 97 ---------- ---------- (162) (6) Corporate operations: Other revenues, net 659 542 General and administrative expenses: Management Company Operations 978 944 Construction/Acquisition and Divestiture 137 84 Vending general and administrative 461 349 ---------- ---------- Total general and administrative expenses 1,576 1,377 Depreciation and amortization 59 189 ---------- ---------- (976) (1,024) ---------- ---------- Net operating income $ 5,269 $ 5,266 ========== ========== Other data: Number of motels at period end (5) 30 30 2 8 32 38 Number of rooms at period end (5) 2,647 2,647 168 523 2,815 3,170 Occupancy percentage (5) 77.88% 76.99% 40.88% 68.44% 75.70% 75.61% ADR (1) (5) $ 57.35 $ 57.71 $ 41.82 $ 50.73 $ 56.85 $ 56.69 REVPAR (2) (5) $ 48.42 $ 48.03 $ 17.71 $ 35.26 $ 46.61 $ 45.97 Net operating income margin (3) 31.20% 30.05% Net motel revenue margin (4) (5) 55.22% 55.40% 75.65% 41.97% 55.73% 53.80% - -------------------------------------------------- (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 plus vending revenues plus corporate other revenues. (4) Net motel revenue margin represents total motel operating revenues less motel operating expenses and marketing and royalty fees, divided by motel room revenues. (5) At September 30, 2002 and September 30, 2001, and for the three months period then ended, excludes amounts related to the seventy-six motels and seventy-five motels, respectively, which are leased to third party tenants. (6) Includes newly aquired properties, newly leased properties and properties which were leased that the Company is now operating. Effective January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the reporting requirements of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale subsequent to December 31, 2001. For the three months ended September 30, 2002, the Company had three properties disposed. The operating results of theses properties have been reclassified as discontinued operations in the unaudited consolidated statements of operations for each of the periods included herein. 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, and fax machine use. Lease revenues are derived from properties leased to third parties. Vending revenues are derived from vending machines used in the motels and also vending machines placed in non-owned locations. Other revenues include interest income, and other miscellaneous income. Total revenues decreased to $16,890,000 for the three months ended September 30, 2002 from $17,525,000 for the three months ended September 30, 2001, a decrease of $635,000 or 3.6% primarily as a result of the leasing and sales activities of the Company. As lessor of 76 motels at September 30, 2002 the Company records rental income and does not reflect the gross revenues and expenses of operating these motels. Motel revenues decreased to $12,277,000 for the three months ended September 30, 2002 from $13,256,000 for the three months ended September 30, 2001, a decrease of $979,000 or 7.4%. The motel revenues for motels owned during both periods increased approximately $95,000, in addition there was a decrease of $1,074,000 in motel revenues for motels acquired and divested since July 1, 2001. Motel revenues for motels owned during both periods increased by less than 1%. The increase in motel revenues for motels owned during both periods was attributable principally to an increase in the occupancy. The occupancy percentage increased from 76.99% for the three months ended September 30, 2001 to 77.88% for the three months ended September 30, 2002. The ADR for the motels owned during both periods decreased to $57.35 for the three months ended September 30, 2002 from $57.71 for the three months ended September 30, 2001, a decrease of $.36 or less than 1%. Revenue per available room ("REVPAR") for motels owned during both periods increased to $48.42 for the three months ended September 30, 2002 from $48.03 for the three months ended September 30, 2001, an increase of $.39 or less than 1%. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, insurance, linens and other operating supplies. Motel operating expenses decreased to $5,268,000 for the three months ended September 30, 2002 from $5,725,000 for the three months ended September 30, 2001, a net decrease of $457,000 or 7.97%. Motel operating expenses for motels acquired and divested since July 1, 2001 decreased to $254,000 for the three months ended September 30, 2002 from $796,000 for the three months ended September 30, 2001, a decrease of $542,000 or 68%. The cost of operating motels owned during both periods increased to $5,014,000 for the three months ended September 30, 2002 from $4,929,000 for the three months ended September 30, 2001. The increase in operating costs is principally due to increased labor and related costs and an increase in repairs and maintenance expenditures. Motel operating expenses as a percentage of motel revenues decreased to 42.9% for the three months ended September 30, 2002 from 43.2% for the three months ended September 30, 2001. Motel operating expenses as a percentage of motel revenues for the motels owned in both periods increased to 42.5% for the three months ended September 30, 2002 from 42.1% for the three months ended September 30, 2001. Marketing and royalty fees include media advertising, billboard rental expense, advertising fund contributions and royalty charges paid to franchisors and other related marketing expenses. Marketing and royalty fees decreased to $794,000 for the three months ended September 30, 2002 from $926,000 for the three months ended September 30, 2001, a decrease of $132,000 or 14.25%. The marketing and royalty fees for motels owned during both periods decreased to $773,000 for the three months ended September 30, 2002 from $777,000 for the three months ended September 30, 2001, a decrease of $4,000 or less than 1%. For the motels owned during both periods, marketing and royalty fees as a percentage of room revenues decreased to 7.1% for the three months ended September 30, 2002 from 7.2% for the three months ended September 30, 2001. The decrease in marketing and royalty fees for motels owned in both periods are principally due to a lower Average Daily Room Rate (ADR). Lease operations increased to $1,451,000 for the three months ended September 30, 2002 from $1,122,000 for the three months ended September 30, 2001, an increase of $329,000. There are 76 leased properties with an asset value of $113,504,000 at September 30, 2002 compared with 75 leased properties with an asset value of $117,244,000 at September 30, 2001. Vending operations decreased to ($162,000) for the three months ended September 30, 2002 from ($6,000) for the three months ended September 30, 2001 as the result of additional employees added to accommodate anticipated new business. 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. Included in the Management Company Operations, which is the division responsible for the motel operations, are the costs associated with training, marketing, purchasing, administrative support, property related legal and accounting costs. The major components of these costs are salaries, wages and related expenses, travel, rent and other administrative expenses. The general and administrative expenses for the Management Company Operations increased $34,000 to $978,000 for the three months ended September 30, 2002 from $944,000 for the three months ended September 30, 2001, an increase of 3.6%. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division increased $53,000 from $84,000 for the three months ended September 30, 2001 to $137,000 for the three months ended June 30, 2002. Vending general and administrative expenses increased $112,000 to $461,000 for the three months ended September 30, 2002 from $349,000 for the three months ended June 30, 2001, primarily due to the increased personnel in preparation of expansion. As a percentage of total motel operating revenues, Management Company Operations general and administrative expenses were 8% for the three months ended September 30, 2002 and 7.1% for the three months ended September 30, 2001. Depreciation and amortization decreased to $2,901,000 for the three months ended September 30, 2002 from $3,262,000 for the three months ended September 30, 2001, a net increase of $361,000 or 11.07%. This decrease is due to the reduction in depreciation expense on furniture and fixtures which were fully depreciated for the three months ended September 30, 2002 compared to the three months ended September 30, 2001 of approximately $365,000. Net operating income increased to $5,269,000 for the three months ended September 30, 2002 from $5,266,000 for the three months ended September 30, 2001, an increase of $3,000 or less than 1%. Net operating income as a percent of total revenues was 31.2% for the three months ended September 30, 2002 as compared to 30% for the three months ended September 30, 2001. Interest expense decreased to $4,578,000 for the three months ended September 30, 2002 from $5,057,000 for the three months ended September 30, 2001, a decrease of $479,000. The decrease in interest expense is reflective of the lower average amount of outstanding borrowings during the third quarter of 2002 as compared to the third quarter 2001. Gain on sale of properties amounted to $0 for the three months ended September 30, 2002 compared to $820,000 for the respective period in 2001. For the quarter ended September 30, 2001, one property which was currently leased was sold for $1.9 million in cash for a gain of $820,000. Discontinued operations decreased to a loss of $98 for the three months ended September 30, 2002 compared to a gain of $3,000 for the three months ended September 30, 2001 as a result of the sale of properties. See Note 2 to the condensed consolidated financial statements. Net income decreased to $324,000 for the three months ended September 30, 2002 from net income of $631,000 for the three months ended September 30, 2001. Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September 30, 2001 The following chart presents certain historical operating results and statistics discussed herein and is being provided as a supplement to the condensed consolidated financial statements presented elsewhere herein. (certain of the 2001 numbers have been reclassified to conform to the 2002 presentation): Supplemental Operating Results and Statistics -------------------------------------------------------------------------------- (unaudited) Nine Months Ended September 30 -------------------------------------------------------------------------------- Motels Owned Acquisitions/ Both Periods Divestitures (6) Consolidated ----------------------- ----------------------- --------------------------- 2002 2001 2002 2001 2002 2001 ---------- ---------- ---------- ---------- ------------ ------------ (dollars in thousands, except Other data) Motel operations: Motel operating revenues: Room revenues $ 26,126 $ 25,989 $ 1,129 $ 6,119 $ 27,255 $ 32,108 Ancillary motel revenues 2,609 2,505 281 283 2,890 2,788 ---------- ---------- ---------- ---------- ------------ ------------ Total motel operating revenues 28,735 28,494 1,410 6,402 30,145 34,896 Motel costs and expenses: Motel operating expenses 13,872 13,975 1,152 3,960 15,024 17,935 Marketing and royalty fees 1,950 1,943 89 508 2,039 2,451 Depreciation and amortization 3,666 3,739 239 684 3,905 4,423 ---------- ---------- ---------- ---------- ------------ ------------ Total motel direct expenses 19,488 19,657 1,480 5,152 20,968 24,809 ---------- ---------- ---------- ---------- ------------ ------------ $ 9,247 $ 8,837 $ (70) $ 1,250 9,177 10,087 ========== ========== ========== ========== Lease operations: Lease revenues 8,798 8,648 Lease expenses 597 603 Depreciation and amortization 4,235 4,910 ------------ ------------ 3,966 3,135 Vending operations: Vending revenues 2,915 1,375 Vending expenses 2,632 1,357 Depreciation and amortization 441 259 ------------ ------------ (158) (241) Corporate operations: Other revenues, net 1,977 1,749 General and administrative expenses: Management Company Operations 3,174 3,501 Construction/Acquisition and Divestiture 230 225 Vending general and administrative 1,357 926 ------------ ------------ Total general and administrative expenses 4,761 4,652 Depreciation and amortization 165 551 ------------ ------------ (2,949) (3,454) ------------ ------------ Net operating income $ 10,036 $ 9,527 ============ ============ Other data: Number of motels at period end (5) 30 30 2 8 32 38 Number of rooms at period end (5) 2,647 2,647 168 644 2,815 3,291 Occupancy percentage (5) 70.24% 69.56% 41.94% 71.04% 68.55% 69.77% ADR (1) (5) $ 51.45 $ 51.66 $ 39.75 $ 48.49 $ 51.03 $ 51.20 REVPAR (2) (5) $ 39.75 $ 39.39 $ 17.30 $ 35.13 $ 38.41 $ 38.79 Net operating income margin (3) 22.89% 20.41% Net motel revenue margin (4) (5) 49.43% 48.39% 14.97% 31.61% 48.00% 45.19% (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 plus vending revenues plus corporate other revenues. (4) Net motel revenue margin represents total motel operating revenues less motel operating expenses and marketing and royalty fees, divided by motel room revenues. (5) At September 30, 2002 and September 30, 2001, and for the nine months period then ended, excludes amounts related to the seventy-six motels and seventy-five motels, respectively, which are leased to third party tenants. (6) Includes newly aquired properties, newly leased properties and properties which were leased that the Company is now operating. Effective January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the reporting requirements of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale subsequent to December 31, 2001. For the nine months ended September 30, 2002, the Company disposed of five properties. The operating results of theses properties have been reclassified as discontinued operations in the unaudited consolidated statements of operations for each of the periods included herein. Total revenues decreased $2,833,000 to $43,835,000 for the nine months ended September 30, 2002 from $46,668,000 for the nine months ended September 30, 2001 or 6.1% primarily as a result of the sales and leasing activities of the Company. As lessor of 76 motels at September 30, 2002 the Company records rental income and does not reflect the gross revenues and expenses of operating these motels. Motel revenues decreased to $30,145,000 for the nine months ended September 30, 2002 from $34,896,000 for the nine months ended September 30, 2001, a decrease of $4,751,000 or 13.6%. The motel room revenues for motels owned during both periods increased approximately $137,000 or less than 1%, there also was a decrease of $4,990,000 for acquired and divested motels, since January 1, 2001. The ADR for the motels owned during both periods decreased to $51.45 for the nine months ended September 30, 2002 from $51.66 for the nine months ended September 30, 2001, a decrease of $.21 or less than 1%. The occupancy percentage increased from 69.56% for the nine months ended September 30, 2001 to 70.24% for the nine months ended September 30, 2002. The REVPAR for motels owned during both periods increased to $39.75 for the nine months ended September 30, 2002 from $39.39 for the nine months ended September 30, 2001, an increase of $.36 or 1%. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, insurance, linens and other operating supplies. Motel operating expenses decreased to $15,024,000 for the nine months ended September 30, 2002 from $17,935,000 for the nine months ended September 30, 2001, a decrease of $2,909,000 or 16.2%. The cost of operating motels owned during both periods decreased to $13,872,000 for the nine months ended September 30, 2002 from $13,975,000 for the nine months ended September 30, 2001, a decrease of $103,000 or less than 1%. Motel operating expenses for motels acquired and divested since January 1, 2001 decreased to $1,152,000 for the nine months ended September 30, 2002 from $3,960,000 for the nine months ended September 30, 2001. Motel operating expenses as a percentage of motel revenues decreased to 49.8% for the nine months ended September 30, 2002 from 51.4% for the nine months ended September 30, 2001. Motel operating expenses as a percentage of motel revenues for the motels owned in both periods decreased to 48.3% for the nine months ended September 30, 2002 from 49.0% for the nine months ended September 30, 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 $2,039,000 for the nine months ended September 30, 2002 from $2,451,000 for the nine months ended September 30, 2001, a decrease of $412,000 or 16.8%. The marketing and royalty fees for motels owned during both periods increased to $1,950,000 for the nine months ended September 30, 2002 from $1,943,000 for the nine months ended September 30, 2001, an increase of $7,000 or less than 1%. For the motels owned during both periods, marketing and royalty fees as a percentage of room revenues decreased to 7.46% for the nine months ended September 30, 2002 from 7.48% for the nine months ended September 30, 2001, a decrease of less than 1%. The decrease in marketing and royalty fees is attributable to a reduction in franchise fees due to the decline in room revenues on which most such fees are based and a reduction in rates for certain contractual franchise fees due to the number of motels either sold or leased subsequent to September 30, 2001. Marketing and royalty fees for motels acquired and divested since January 1, 2001 decreased to $89,000 for the nine months ended September 30, 2002 from $508,000 for the nine months ended September 30, 2001. Lease operations increased to $3,966,000 for the nine months ended September 30, 2002 from $3,135,000 for the nine months ended September 30, 2001, an increase of $831,000, which results from an increase to 76 leased properties with an asset value of $113,504,000 at September 30, 2002 compared with 75 leased properties with an asset value of $117,244,000 at September 30, 2001. Vending operations loss was reduced to $158,000 for the nine months ended September 30, 2002 from $241,000 for the nine months ended September 30, 2001, an reduction of $83,000 as a result of new vending locations added subsequent to January 1, 2001. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction and Development and Vending general and administrative. 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 $327,000 to $3,174,000 for the nine months ended September 30, 2002 from $3,501,000 for the nine months ended September 30, 2001, a decrease of 9%. This is due primarily to discounts given on notes receivable paid off during the first nine months of 2001 of $300,000 compared to $55,000 during the nine months ended September 30, 2002. The general and administrative expenses associated with Construction and Development increased $5,000 from $225,000 for the nine months ended September 30, 2001 to $230,000 for the nine months ended September 30, 2002. Vending general and administrative expenses increased $431,000 to $1,357,000 for the nine months ended September 30, 2002 from $926,000 for the nine months ended September 30, 2001. As a percentage of total motel operating revenues, Management Operations general and administrative expenses were 10.5% for the nine months ended September 30, 2002 and 10% for the nine months ended September 30, 2001. Depreciation and amortization decreased to $8,746,000 for the nine months ended September 30, 2002 from $10,143,000 for the nine months ended September 30, 2001, a net decrease of $1,397,000 or 13.77%. This decrease is due to the reduction in depreciation expense on furniture and fixtures which were fully depreciated for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001 of approximately $820,000. Also, there was a reduction of amortization expense on corporate of $51,000 for the nine months ended September 30, 2002 compared to $262,000 for the nine months ended September 30, 2001 on various loan costs which are now fully amortized. Net operating income increased to $10,036,000 for the nine months ended September 30, 2002 from $9,527,000 for the nine months ended September 30, 2001, an increase of $509,000 or 5.33%. This is a result of a decrease in management company operations expenses of $327,000 an increase of $431,000 in vending G&A and a decrease in depreciation and amortization costs. Net operating income as a percent of total revenues was 22.9% for the nine months ended September 30, 2002 as compared to 20.4% for the nine months ended September 30, 2001. Interest expense decreased to $13,760,000 for the nine months ended September 30, 2002 from $15,330,000 for the nine months ended September 30, 2001, a decrease of $1,570,000. The decrease in interest expense is reflective of the lower average amount of outstanding borrowings during the nine months ending September 30, 2002 as compared to the nine months ending September 30, 2001. Gain on sale of properties amounted to $3,479,000 for the nine months ended September 30, 2001 compared to $0 for the period ended September 30, 2002 due to the newly adopted reporting requirements at January 1, 2002. For the nine months ended September 30, 2001, two properties were sold for $5.5 million in cash and a deferred gain of $1.7 million was recognized on one property upon repayment of the respective mortgage receivable balance. Discontinued operations loss was reduced to $107,000 for the nine months ended September 30, 2002 compared to a loss of $171,000 for the nine months ended September 30, 2001 as a result of the gain on sale of properties in 2002 included in discontinued operations. See Note 2 to the condensed consolidated financial statements. Net loss increased to $2,381,000 for the nine months ended September 30, 2002 from a net loss of $1,603,000 for the nine months ended September 30, 2001 primarily as a result of a decrease in the reporting of gains on sale of properties of $3,479,000 for the nine months ended September 30, 2001 compared with $0 for the nine months ended September 30, 2002. Liquidity and Capital Resources The Company's primary uses of its capital resources include debt service, capital expenditures and working capital. In addition, on a discretionary basis, the Company utilizes its capital resources for the development and acquisition of motel properties. The Company's debt service requirements consist of the obligation to make interest and principal payments on its outstanding indebtedness. In January through September 30, 2002 the Company was advanced $3.0 million on loans of $7.0 million for construction advances on one property under construction in Santa Monica, CA bringing the total advanced to $5.5 million. In April 2002, a subsidiary of the Company purchased a vending company for $210,000 by issuing a note payable of $110,000 with monthly principal and interest payments of $10,400, due March 1, 2003. Goodwill of $120,000 and fixed assets of $90,000 were preliminarily recorded as a result of this transaction. The Company's capital expenditure requirements principally include capital improvements and refurbishment of its lodging facilities as part of its ongoing operating strategy to provide well-maintained facilities. The Company made capital expenditures (exclusive of acquisitions and development of properties) of $1,649,000 and $2,398,000 for the nine months ended September 30, 2002 and 2001, respectively. In addition, as of September 30, 2002, the Company had $706,000 of cash restricted for future refurbishment of motel properties, in accordance with certain debt agreements. Management is not aware of any unusual required level of future capital expenditures necessary to maintain its existing properties. Capital repairs and maintenance expenses on leased properties are funded by lessees. For the nine months ended September 30, 2002, cash and cash equivalents increased $259,000. This increase consisted of $2,585,000 of funds provided by investing activities and $12,245,000 of funds used in financing activities and $9,919,000 of funds provided by operations. Net investing activities of $2,585,000 include: $5,461,000 of cash utilized for motel development and $1,649,000 expended on refurbishment of existing properties, offset by $7,215,000 of cash provided from the sale of investment properties and collections on mortgage and other notes receivable and a change in cash restricted for refurbishment of $2,480,000. Cash used in financing activities includes: $15,122,000 of cash utilized to repay indebtedness; and $268,000 of cash used for deferred financing costs and other items offset by $3,145,000 from proceeds from notes payable. The Company is currently in default with respect to certain covenants on its Senior Subordinated Notes and also a $8.4 million note. The Company is seeking to extend the maturity dates and reduce the interest rates. The Company does not have sufficient liquidity to repay the notes if demanded by the holders and accordingly, there is substantial doubt about the Company's ability to continue as a going concern. Subsequent to September 30, 2002, a subsidiary of the Company (the "LLC") was placed in technical default on one of its loans and was forced to file for Bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on July 10, 2003. On August 26, 2003 the LLC refinanced the loan and the Bankruptcy proceedings were dismissed. The Company believes that the refinancing will not have any negative impact on the operations or liquidity in the future. Item 3. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our principal executive officer, Paul F. Wallace, and our principal financial officer, Kurt M. Mueller, evaluated within 90 days prior to the filing of this Form 10-K the effectiveness of the design and operation of our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As a result of this evaluation, these executive officers have concluded that, as of such date, the design and operation of our disclosure controls and procedures were effective. Changes in Internal Controls Since the date of the evaluation of our disclosure controls and procedures by Mr. Wallace and Mr. Mueller described above, there have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures. PART II - OTHER INFORMATION Item 1. 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. See Note 5 of the Notes to the Condensed Consolidated Financial Statements. Subsequent to September 30, 2002, a subsidiary of the Company (the "LLC") was placed in technical default on one of its loans and was forced to file for Bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on July 10, 2003. On August 26, 2003 the LLC refinanced the loan and the Bankruptcy proceedings were dismissed. Item 2. Changes in Securities Not Applicable Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Not Applicable (b) Reports on Form 8-K: Not Applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOA HOSPITALITY, INC. September 29, 2003 By: /s/ Kurt M. Mueller Kurt M. Mueller President and Chief Financial Officer September 29, 2003 By: /s/ Blane P. Evans Blane P. Evans Secretary and Treasurer 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 quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date" ); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions; a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Date: September 29, 2003 /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 quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 5. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 6. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date" ); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions; c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Date: September 29, 2003 /s/ Paul F. Wallace Paul F. Wallace Chief Executive Officer CERTIFICATIONS Written Statement of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. I, Kurt M. Mueller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. Date: September 29, 2003 /s/ Kurt M. Mueller Kurt M. Mueller Chief Financial Officer CERTIFICATIONS Written Statement of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. I, Paul F. Wallace, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 4. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. Date: September 29, 2003 /s/ Paul F. Wallace Paul F. Wallace Chief Executive Officer