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 March 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 33-78866
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MOA HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0166914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
----------------------
701 Lee Street, Suite 1000
Des Plaines, Illinois 60016
(847) 803-1200
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Number of shares of Common Stock, $.01 par value outstanding as of
June 16, 1999: 800,000
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets - March 31, 1999 2
(unaudited) and December 31, 1998.
Condensed consolidated statements of operations - 3
Three months ended March 31, 1999 and 1998 (unaudited).
Condensed consolidated statements of cash flows - 4
Three months ended March 31, 1999 and 1998 (unaudited).
Notes to condensed consolidated financial statements - 5
March 31, 1999 (unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 8
Results of Operations 9
Liquidity and Capital Resources 12
Part II Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 19,590 $ 19,582
Accounts receivable from property operations 2,521 2,015
Operating supplies and prepaid expenses 2,153 2,325
Current portion of mortgage
and notes receivable 2,335 2,139
----------- ------------
Total Current Assets 26,599 26,061
Investment property:
Operating properties,
net of accumulated depreciation 271,643 279,944
Land held for development 4,221 3,829
----------- ------------
Total investment property 275,864 283,773
Other Assets:
Deposits and other assets 10,434 5,507
Mortgage and other notes receivable,
less current portion 16,824 11,626
Financing and other deferred costs,
net of accumulated amortization of
$8,719 in 1999 and $8,259 in 1998 12,678 12,088
----------- ------------
Total Other Assets 39,936 29,221
----------- ------------
Total Assets $ 342,399 $ 339,055
=========== ============
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 4,207 $ 3,939
Real estate taxes payable 2,889 2,848
Accrued interest payable 5,802 3,382
Other accounts payable and accrued expenses 8,423 8,300
Current portion of long-term debt 11,119 40,199
----------- ------------
Total Current Liabilities 32,440 58,668
Long-term debt, less current portion:
Mortgage and other notes payable 212,240 178,846
12% Senior Subordinated Notes, net of
unamortized discount of $2,795 in 1999
and $2,894 in 1998 77,205 77,106
----------- ------------
Total Long-term debt,
excluding current portion 289,445 255,952
----------- ------------
Total Liabilities 321,885 314,620
----------- ------------
Minority Interests 1,676 1,689
Stockholders' equity:
Common stock, $.01 par value,
1,500,000 shares authorized; 800,000
shares issued and outstanding 8 8
Additional paid-in capital 15,294 15,294
Retained earnings 3,536 7,444
----------- ------------
Total stockholders' equity 18,838 22,746
----------- ------------
Total liabilities and Stockholders' Equity $ 342,399 $ 339,055
=========== ============
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except share data)
Three Months Ended
March 31
-----------------------------
1999 1998
------------ ------------
Revenues:
Motel operating revenues $ 21,263 $ 25,438
Other revenues 469 221
------------ ------------
Total revenues 21,732 25,659
Costs and expenses:
Motel operating expenses 13,380 14,936
Marketing and royalty fees 1,435 1,800
General and administrative 2,785 2,499
Depreciation and amortization 3,611 4,048
------------ ------------
Total direct expenses 21,211 23,283
------------ ------------
Net operating income 521 2,376
Interest expense 7,306 7,616
------------ ------------
Loss from operations (6,785) (5,240)
Minority interests 13 18
Gain on sale of properties 374 453
------------ ------------
Loss before income taxes (6,398) (4,769)
Income tax expense (benefit) (2,490) (1,856)
------------ ------------
Net loss $ (3,908) $ (2,913)
============ ============
Net loss per common share (basic and diluted) $ (4.89) $ (3.64)
============ ============
Weighted average number of
common shares outstanding 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)
Three Months Ended
March 31
---------------------------
1999 1998
----------- -----------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (3,908) $ (2,913)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation, amortization and accretion of
discount on notes 3,706 4,145
Minority interests of others in net income (loss)
from operations (13) (18)
Deferred income taxes (24) 241
Gain on sale of properties (374) (453)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (510) (909)
Operating supplies, prepaid expenses,
deposits and other assets (6,588) (3,066)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 378 208
Accrued interest payable 2,420 2,470
----------- ------------
Net cash used in operating activities (4,913) (295)
Cash flows provided by (used in) investing activities:
Acquisition and development of investment properties (16) (2,567)
Refurbishment of investment properties (2,306) (1,635)
Net proceeds from sale of investment properties 2,467 1,439
Cash restricted for refurbishment of properties 1,426 (61)
Collections on mortgage and other notes receivable 106 2,049
----------- -----------
Net cash provided by (used in) investing activities 1,677 (775)
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 36,880 1,134
Repayment of notes payable (32,566) (3,609)
Distributions to minority interests - (78)
Deferred financing costs (1,070) (27)
----------- -----------
Net cash provided by (used in) financing activities 3,244 (2,580)
----------- -----------
Net increase (decrease) in cash and cash equivalents 8 (3,650)
Cash and cash equivalents at beginning of period 19,582 13,032
----------- -----------
Cash and cash equivalents at end of period $ 19,590 $ 9,382
=========== ===========
Supplementary disclosure of cash flow information:
Cash paid during the period for interest $ 4,780 $ 5,146
=========== ===========
Cash paid (net of refunds received) during the
period for income taxes $ (268) $ (29)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in MOA Hospitality, Inc. and Subsidiaries' Annual Report on
Form 10-K for the year ended December 31, 1998. The terms "MOA" and the
"Company" mean MOA Hospitality, Inc. and its subsidiaries.
2. Divestitures
In January through March 1999, the Company leased five of its operating
properties to third party operators.
In January through March 1999, the Company sold three of its lodging
facilities for approximately $8.2 million consisting of $2.7 million of cash and
$5.5 million in notes receivable. One property was sold for a gain of $374,000.
The other two properties were sold at a loss in the amount of $3,656,000 that
was recorded at December 31, 1998 as part of the overall $9,300,000 impairment
loss.
In April through June 16, 1999, the Company leased three of its lodging
facilities to third party operators.
In April through June 16, 1999, the Company sold three of its lodging
facilities for approximately $8.6 million consisting of $4.3 million of cash and
$4.3 million in notes receivable.
3. Mortgage and Other Notes Payable
In January 1999, the Company repaid mortgage notes with an outstanding
balance of $17.2 million at December 31,1998 with the proceeds of a new $13.5
million loan and the balance with cash. The new loan is secured by six
properties and bears interest at LIBOR plus 3.25 percentage points. During the
initial year of the loan, all excess cash flow (as defined in the loan
agreement) from the properties is to be applied toward principal amortization.
Thereafter, principal amortization is based on a twenty-year schedule plus an
additional $250,000 of annual principal amortization paid monthly. The loan
matures in January 2004. In March 1999, the Company borrowed $23.4 million, the
proceeds of which were utilized to pay-off loans with outstanding balances of
$14.0 million at December 31, 1998. The balance of the net proceeds was retained
for working capital purposes. The loan was initially secured by ten properties
and five mortgage notes receivable. The interest rate pertaining to the amount
of the loan allocated to the properties is the Prime Rate plus 0.5 percentage
points and the interest rate pertaining to the amount of the loan allocated to
the mortgage notes receivable is the Prime rate plus 1.25 percentage points. The
loan requires principal payments based on a twenty-year amortization schedule
with the outstanding balance of the loan due in April 2006. Provided certain
conditions are met, the Company has the ability to sell properties secured by
the loan in partial exchange for a mortgage note receivable that would than be
pledged as collateral under the loan with the interest rate adjusted to the
Prime rate plus 1.25 percentage points.
The Company's principal repayment obligations, reflective of the
above mentioned debt transaction, as of March 31, 1999 is $8,340,000 for the
remainder of fiscal 1999; $6,107,000 for 2000 and $26,979,000 for 2001.
The Company has agreed in principle with a bank holding a $3.9
million mortgage note as of March 31, 1999, that by the term of the note matured
May 31, 1999, to extend such maturity until July 15, 1999.
The Company believes it has or will be able to obtain adequate
resources to meet its near-term maturing debt and other obligations. Although,
the deteriorating trend in operating results noted above could adversely affect
the Company's ability to meet its maturing debt obligations in 2004 and 2005,
including the maturity of the $80 million 12% Senior Subordinated Notes in 2004.
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
During 1997, the Company and certain of its subsidiaries
commenced legal actions against ShoLodge Franchise Systems, Inc. ("ShoLodge")
the franchisor of Shoney's Inns. The Company among other things has claimed that
ShoLodge has breached its contractual obligations and made material
misrepresentations to MOA prior to MOA or its subsidiaries acquiring any
Shoney's Inns. Commencing in February 1998, through May 1998 the Company
disaffiliated each of its fourteen Shoney's Inns from ShoLodge by removing the
sign and other identifying marks. At the time of such disaffiliation, MOA or its
subsidiaries ceased remitting franchise fees to ShoLodge. ShoLodge has filed a
counter claim against MOA and certain of its subsidiaries claiming a failure to
renovate the properties and failure to pay franchise fees. The Company believes
that it will ultimately prevail in its claims against ShoLodge.
The Company is involved in various other legal proceedings
arising in the ordinary course of business. The Company does not believe that
any of these actions, either individually or in the aggregate, will have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company remains contingently liable on the $2.3 million
note; in the event the purchaser does not perform under its obligations.
6. Segments
During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No 131,
"Disclosures About Segments of an Enterprise and Related Information"("Statement
No. 131"). Statement No. 131 establishes standards for the manner in which
public business enterprises report information regarding reportable operating
segments. The adoption of Statement No. 131 did not affect the results of
operations or financial position of the Company.
As of March 31, 1999 the Company, directly and through
subsidiaries, owned 132 lodging facilities in 38 states. The Company owns a 100%
interest in all but two of its properties and also operates all but ten of its
motels, which are leased to third party tenants pursuant to operating leases.
The Company separately evaluates the performance of each of its motels. However,
because each of the motels has similar economic characteristics, the motels have
been aggregated into a single dominant motel segment as indicated below.
Three Months Ended
March 31
----------------------------
1999 1998
----------------------------
Motel operations:
Motel operating revenue:
Room revenues $ 19,705 $ 23,504
Ancillary motel revenues 1,558 1,934
--------- ---------
Total motel operating revenues 21,263 25,438
Motel costs and expenses:
Motel operating expenses 13,380 14,936
Marketing and royalty fees 1,435 1,800
Depreciation and amortization 3,205 3,574
--------- ---------
Total motel direct expenses 18,020 20,310
--------- ---------
3,243 5,128
Corporate Operations
Other revenues 469 221
General and administrative expenses:
Management Company Operations 1,639 1,243
Construction/Acquisition and Divestiture 363 321
Other general and administrative 783 935
--------- ---------
Total general and administrative expenses 2,785 2,499
Depreciation and amortization 406 474
--------- ---------
(2,722) (2,752)
--------- ---------
Net operating income 521 2,376
Interest expense 7,306 7,616
--------- ---------
Loss from operations (6,785) (5,240)
Minority interests 13 18
Gain on sale of properties 374 453
--------- ---------
Loss before income taxes (6,398) (4,769)
Income tax expense (benefit) (2,490) (1,856)
--------- ---------
Net Loss $ (3,908) $ (2,913)
========= =========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 AND AS SUCH, SPEAK ONLY AS OF THE DATE MADE. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: THE COMPANY'S ABILITY TO OBTAIN FINANCING,
COMPETITION, INTEREST RATE FLUCTUATIONS, OR GENERAL BUSINESS AND ECONOMIC
CONDITIONS.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONDENSED
CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES
THERETO INCLUDED ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS
PRESENTED BELOW FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 HAVE BEEN
PREPARED ON THE SAME BASIS AS THE INTERIM CONDENSED CONSOLIDATED HISTORICAL
FINANCIAL STATEMENTS AND, IN THE OPINION OF THE COMPANY, INCLUDE ALL ADJUSTMENTS
(CONSISTING ONLY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY
THE INFORMATION SET FORTH THEREIN.
General
MOA operates principally in the economy limited service segment of the
lodging industry. As a result, its average room rates tend to be lower than the
average room rates of full service lodging facilities. However, due to the
limited nature of the public space and ancillary services provided by limited
service motels, the Company's expenses tend to be lower than those of full
service lodging facilities. The profitability of the lodging industry in general
is significantly dependent upon room rental rates and occupancy rates. Due to
the fixed nature of a relatively high portion of the Company's expenses, changes
in either room rates or occupancy rates result in significant changes in the
operating profit of the Company's motels.
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1998
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.
Supplemental Operating Results and Statistics
--------------------------------------------------------------------
(unaudited)
Three Months Ended March 31
--------------------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
-------------------- -------------------- ----------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- ---------- ----------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $ 18,735 $ 18,963 $ 970 $ 4,541 $ 19,705 $ 23,504
Ancillary motel revenues 1,503 1,400 55 534 1,558 1,934
--------- --------- --------- --------- ---------- ----------
Total motel operating revenues 20,238 20,363 1,025 5,075 21,263 25,438
Motel costs and expenses:
Motel operating expenses 12,513 11,704 867 3,232 13,380 14,936
Marketing and royalty fees 1,339 1,469 96 331 1,435 1,800
Depreciation and amortization 2,857 2,893 348 681 3,205 3,574
--------- --------- --------- --------- ---------- ----------
Total motel direct expenses 16,709 16,066 1,311 4,244 18,020 20,310
--------- --------- --------- --------- ---------- ----------
$ 3,529 $ 4,297 $ (286) $ 831 3,243 5,128
========= ========= ========= =========
Corporate operations:
Other revenues, net 469 221
General and administrative expenses:
Management Company Operations 1,639 1,243
Construction/Acquisition
and Divestiture 363 321
Other general and administrative 783 935
---------- ----------
Total general and administrative expenses 2,785 2,499
Depreciation and amortization 406 474
---------- ----------
(2,722) (2,752)
---------- ----------
Net operating income $ 521 $ 2,376
========== ==========
Other data:
Number of motels at period end (5) 117 117 5 20 122 137
Number of rooms at period end (5) 9,404 9,403 325 1,932 9,729 11,335
Occupancy percentage (5) 55.62% 55.74% 44.77% 55.32% 55.04% 55.61%
ADR (1) (5) $ 39.80 $ 40.21 $ 41.72 $ 47.21 $ 39.85 $ 41.37
REVPAR (2) (5) $ 23.91 $ 24.07 $ 19.72 $ 29.19 $ 20.82 $ 24.90
Net operating income margin (3) 2.40% 9.26%
Net motel revenue margin (4) (5) 34.09% 37.92% 6.39% 33.30% 32.72% 37.02%
-------------------------------------------
(1) ADR represents room revenues divided by the total number of rooms
occupied.
(2) REVPAR represents total motel operating revenues divided by the total
number of rooms available.
(3) Net operating income margin represents net operating income divided
by total motel operating revenues plus corporate other revenues.
(4) Net motel revenue margin represents total motel operating revenues
less motel operating expenses and marketing and royalty fees,
divided by motel room revenues.
(5) At March 31, 1999 and for the three months then ended, excludes
amounts related to the ten motels which are leased to third party
tenants.
Total revenues consist principally of motel operating revenues. Motel
operating revenues are derived from room rentals and ancillary motel revenues
such as charges to guests for food and beverage service, long distance telephone
calls, fax machine use and from vending machines. Other revenues include
interest income, net lease income, distributions of partnership interests in
excess of the Company's basis in such partnerships and other miscellaneous
income. Total revenues decreased to $21,732,000 for the three months ended March
31, 1999 from $25,659,000 for the three months ended March 31, 1998, a decrease
of $3,927,000 or 15.3%.
Motel revenues decreased to $21,263,000 for the three months ended
March 31, 1999 from $25,438,000 for the three months ended March 31, 1998, a
decrease of $4,175,000 or 16.4%. The motel revenues for motels owned during both
periods decreased approximately $125,000 and revenues for motels acquired and
divested since January 1, 1998 decreased by $4,050,000. Motel revenues for
motels owned during both periods decreased 0.6%. The decrease in motel revenues
for motels owned during both periods was attributable principally to a decrease
in the average daily rate ("ADR"). The ADR for the motels owned during both
periods decreased to $39.80 for the three months ended March 31, 1999 from
$40.21 for the three months ended March 31, 1998, a decrease of $0.41 or 1.0%.
The decrease in ADR is principally a result of management's efforts to mitigate
the decline in occupancy that has occurred during the first quarter for the past
several years. The first quarter traditionally represents a slow period for the
Company's motels and accordingly most affected by the increase in new supply of
competing motels. The occupancy percentage decreased from 55.74% for the three
months ended March 31, 1998 to 55.62% for the three months ended March 31, 1999.
Revenue per available room ("REVPAR") for motels owned during both periods
decreased to $23.91 for the three months ended March 31, 1999 from $24.07 for
the three months ended March 31, 1998, a decrease of $0.16 or 0.7%. The acquired
and divested motels had an occupancy percentage of 44.77%, an ADR of $41.72 and
REVPAR of $19.72 for the period, which they were owned by the Company in 1999.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, insurance, linens and other operating
supplies. Motel operating expenses decreased to $13,380,000 for the three months
ended March 31, 1999 from $14,936,000 for the three months ended March 31, 1998,
a net decrease of $1,556,000 or 10.4%. Motel operating expenses for motels
acquired and divested since January 1, 1998 decreased to $867,000 for the three
months ended March 31, 1999 from $3,232,000 for the three months ended March 31,
1998, a decrease of $2,365,000 or 73.2%. The decrease was partially offset by an
increase of $809,000 or 6.9% in the costs of operating the motels owned during
both periods. The cost of operating motels owned during both periods increased
to $12,513,000 for the three months ended March 31, 1999 from $11,704,000 for
the three months ended March 31, 1998. The increase in operating costs is
principally due to increased labor and related costs and an increase in repairs
and maintenance expenditures. Motel operating expenses as a percentage of motel
revenues increased to 62.9% for the three months ended March 31, 1999 from 58.7%
for the three months ended March 31, 1998. Motel operating expenses as a
percentage of motel revenues for the motels owned in both periods increased to
61.8% for the three months ended March 31, 1999 from 57.5% for the three months
ended March 31, 1998.
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
$1,435,000 for the three months ended March 31, 1999 from $1,800,000 for the
three months ended March 31, 1998, a decrease of $365,000 or 20.3%. The
marketing and royalty fees for motels owned during both periods decreased to
$1,339,000 for the three months ended March 31, 1999 from $1,469,000 for the
three months ended March 31, 1998, a decrease of $130,000 or 8.8%. 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 March 31, 1999 from
7.7% for the three months ended March 31, 1998. The decrease in marketing and
royalty fees for motels owned in both periods are principally due to a reduction
in franchise fees. Franchise fees declined due a reduction in franchise fees
paid to ShoLodge Franchise Systems, Inc. with respect to the Company's fourteen
former Shoney's Inns. During the period February 1998 through May 1998, the
Company disaffiliated all of its Shoney's Inns from ShoLodge Franchise Systems,
Inc. and ceased payment of franchise fees at such time. On an annual basis the
Company historically had paid approximately $650,000 of franchise fees on its
fourteen Shoney's Inns. Marketing and royalty fees for motels acquired and
divested since January 1, 1998 decreased to $96,000 for the three months ended
March 31, 1999 from $331,000 for the three months ended March 31, 1998.
Corporate general and administrative expenses are segregated by the
Company into three separate areas: Management Company Operations,
Construction/Acquisition and Divestiture Division and Other. Included in the
Management Company Operations, which is the division responsible for the motel
operations, are the costs associated with training, marketing, purchasing,
administrative support, property related legal and accounting costs. The major
components of these costs are salaries, wages and related expenses, travel, rent
and other administrative expenses. The general and administrative expenses for
the Management Company Operations increased $396,000 to $1,639,000 for the three
months ended March 31, 1999 from $1,243,000 for the three months ended March 31,
1998, an increase of 31.9%. The general and administrative expenses associated
with Construction/Acquisition and Divestiture Division decreased $42,000 from
$321,000 for the three months ended March 31, 1998 to $363,000 for the three
months ended March 31, 1999. Other General and Administrative expenses decreased
$152,000 to $783,000 for the three months ended March 31, 1999 from $935,000 for
the three months ended March 31, 1998. As a percentage of total motel operating
revenues, Management Company Operations general and administrative expenses was
7.8% for the three months ended March 31, 1999 and 4.9% for the three months
ended March 31, 1998.
Depreciation and amortization decreased to $3,611,000 for the three
months ended March 31, 1999 from $4,048,000 for the three months ended March 31,
1998, a net decrease of $437,000 or 10.8%. Approximately $333,000 of the net
decrease related to the motels acquired and divested since January 1, 1998.
Net operating income decreased to $521,000 for the three months ended
March 31, 1999 from $2,376,000 for the three months ended March 31, 1998, a
decrease of $1,855,000 or 78.1%. The decrease in net operating income included a
decrease of $2,254,000 in net motel revenues (motel revenues less motel
operating expenses and marketing and royalty fees). Of the $2,254,000 decrease
in net motel revenues, $804,000 resulted from the motels owned during both
periods or a decrease of 11.2%. Net motel revenues for motels acquired and
divested since January 1, 1998 decreased $1,450,000. Net operating income as a
percent of total revenues was 2.4% for the three months ended March 31, 1999 as
compared to 9.3% for the three months ended March 31, 1998.
Interest expense decreased to $7,306,000 for the three months ended
March 31, 1999 from $7,616,000 for the three months ended March 31, 1998, a
decrease of $310,000. The decrease in interest expense is reflective of the
lower average amount of outstanding borrowings during the first quarter of 1999
as compared to the first quarter 1998.
Net loss increased to $3,908,000 for the three months ended March 31,
1999 from $2,913,000 for the three months ended March 31, 1998.
Liquidity and Capital Resources
The Company's primary uses of its capital resources include debt service,
capital expenditures and working capital. In addition on a discretionary basis
the Company utilizes its capital resources for the development and acquisition
of motel properties.
The Company's debt service requirements consist of the obligation to make
interest and principal payments on its outstanding indebtedness. In January 1999
the Company repaid mortgage notes with an outstanding balance of $17.2 million
as of December 31, 1998 with the proceeds of a new $13.5 million loan and the
balance with cash. The new loan is secured by six properties and bears interest
at LIBOR plus 3.25 percentage points. During the initial year of the loan, all
excess cash flow (as defined in the loan agreement) from the properties is to be
applied toward principal amortization. Thereafter, principal amortization is
based on a twenty-year schedule plus an additional $250,000 of annual principal
amortization paid monthly. The loan matures in January 2004. In March 1999, the
Company borrowed $23.4 million, the proceeds of which were utilized to pay-off
loans with outstanding balances of $14.0 million as of December 31, 1998. The
balance of the net proceeds was retained for working capital purposes. The loan
was initially secured by ten properties and five mortgage notes receivable. The
interest rate pertaining to the amount of the loan allocated to the properties
is the Prime Rate plus 0.5 percentage point and the interest rate pertaining to
the amount of the loan allocated to the mortgage notes receivable is the Prime
rate plus 1.25 percentage points. The loan requires principal payments based on
a twenty-year amortization schedule with the outstanding balance of the loan due
in April 2006. Provided certain conditions are met, the Company has the ability
to sell properties secured by the loan in partial exchange for a mortgage note
receivable that would than be pledged as collateral under the loan with the
interest rate adjusted to the Prime rate plus 1.25 percentage points. The
Company's principal repayment obligations, reflective of the transactions
mentioned above, as of March 31, 1999 is $8,340,000 for the remainder of fiscal
1999; $6,107,000 for 2000 and $26,979,000 for 2001.
The Company has agreed in principle with a bank holding a $3.9 million mortgage
note as of March 31, 1999, that by the terms of the note matured May 31, 1999,
to extend such maturity until July 15, 1999. As of June 16, 1999 the Company
does not have a commitment for the refinancing of this debt.
The Company believes it has or will be able to obtain adequate resources to meet
its near-term maturing debt and other obligations. Although, the deteriorating
trend in operating results noted above could adversely affect the Company's
ability to meet its maturing debt obligations in 2004 and 2005, including the
maturity of the $80 million 12% Senior Subordinated Notes in 2004.
The Company's capital expenditure requirements principally include capital
improvements and 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 $2,306,000 and $1,635,000 for the three months ended March 31, 1999 and 1998,
respectively. In addition, as of March 31, 1999, the Company had $777,000 of
cash restricted for future refurbishment of motel properties, in accordance with
certain debt agreements. Management is not aware of any unusual required level
of future capital expenditures necessary to maintain its existing properties.
For the three months ended March 31, 1999, cash and cash equivalents increased
$8,000. This increase consisted of $1,667,000 of funds provided by investing
activities and $3,244,000 of funds provided by financing activities and
$4,913,000 of funds used in operations. Net investing activities of $1,667,000
include: $16,000 of cash utilized for motel development and $2,306,000 expended
on refurbishment of existing properties, offset by $2,573,000 of cash provided
from the sale of investment properties and collections on mortgage and other
notes receivable and a change in cash restricted for refurbishment of
$1,426,000. Cash used in financing activities includes: $32,566,000 of cash
utilized to repay indebtedness; and $1,070,000 of cash used for deferred
financing costs and other items offset by $36,880,000 from proceeds from notes
payable.
Impact of Year 2000
The year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company replaced its primary financial accounting system in 1998 at a cost
of approximately $400,000. The new system is year 2000 compliant. The Company is
continuing to evaluate various sub-systems that are in place, including those
utilized to process credit card transactions, to determine their year 2000
readiness. The Company has also made inquires of its significant vendors upon
which it relies and believes they are sufficiently prepared to handle year 2000
issues so as not to cause any interruption to the Company's operations. The
Company, on an on-going basis, evaluates its contingency plans with respect to
potential year 2000 issues. The Company does not anticipate incurring any
additional significant expenditures with respect to the year 2000 situation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
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.
June 16, 1999 By: /s/ Kurt M. Mueller
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Kurt M. Mueller
Chief Financial Officer
June 16, 1999 By: /s/ Blane P. Evans
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Blane P. Evans
Vice President, Secretary and Treasurer