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 June 30, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 33-78866
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MOA HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0166914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
----------------------
701 Lee Street, Suite 1000
Des Plaines, Illinois 60016
(847) 803-1200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ]No
Number of shares of Common Stock, $.01 par value outstanding as of August
12, 1999: 800,000.
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INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets - June 30, 1999 2
(unaudited) and December 31, 1998.
Condensed consolidated statements of operations - Three 3
months ended June 30, 1999 and 1998 (unaudited); Six months
ended June 30, 1999 and 1998 (unaudited).
Condensed consolidated statements of cash flows - 4
Six months ended June 30, 1999 and 1998 (unaudited).
Notes to condensed consolidated financial statements - 5
June 30, 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 16
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MOA HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,190 $ 19,582
Accounts receivable from property operations 2,783 2,015
Operating supplies and prepaid expenses 1,728 2,325
Current portion of mortgage and notes receivable 2,463 2,139
----------- -----------
Total Current Assets 16,164 26,061
Investment property:
Operating properties, net of
accumulated depreciation 266,379 279,944
Land held for development 5,230 3,829
----------- -----------
Total investment property 271,609 283,773
Other Assets:
Deposits and other assets 15,436 5,507
Mortgage and other notes receivable,
less current portion 20,915 11,626
Financing and other deferred costs,
net of accumulated amortization
of $9,104 in 1999 and $8,259 in 1998 12,749 12,088
----------- -----------
Total Other Assets 49,100 29,221
----------- -----------
Total Assets $ 336,873 $ 339,055
=========== ===========
LIABILITIES, MINORITY INTERESTS AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 4,620 $ 3,939
Real estate taxes payable 2,833 2,848
Accrued interest payable 3,400 3,382
Other accounts payable and accrued expenses 7,826 8,300
Current portion of long-term debt 11,001 40,199
----------- -----------
Total Current Liabilities 29,680 58,668
Long-term debt, less current portion:
Mortgage and other notes payable 210,594 178,846
12% Senior Subordinated Notes, net of
unamortized discount of $2,692
in 1999 and $2,894 in 1998 77,308 77,106
----------- -----------
Total Long-term debt, excluding current portion 287,902 255,952
----------- -----------
Total Liabilities 317,582 314,620
----------- -----------
Minority Interests 1,694 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 2,295 7,444
----------- -----------
Total Stockholders' Equity 17,597 22,746
----------- -----------
Total Liabilities and Stockholders' Equity $ 336,873 $ 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 Six Months Ended
June 30 June 30
--------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
Revenues:
Motel operating revenues $ 26,181 $ 31,643 $ 47,444 $ 57,081
Other revenues 1,082 232 1,551 453
--------- --------- --------- ---------
Total revenues 27,263 31,875 48,995 57,534
Costs and expenses:
Motel operating expenses 14,145 15,681 27,525 30,617
Marketing and royalty fees 1,799 2,010 3,234 3,810
General and administrative 3,474 2,375 6,258 4,874
Depreciation and amortization 3,606 4,038 7,218 8,086
--------- --------- --------- ---------
Total direct expenses 23,024 24,104 44,235 47,387
--------- --------- --------- ---------
Net operating income 4,239 7,771 4,760 10,147
Interest expense 7,397 7,799 14,703 15,415
--------- --------- --------- ---------
Loss from operations (3,158) (28) (9,943) (5,268)
Minority interests (18) (58) (5) (40)
Gain on sale of properties 1,278 14,421 1,652 14,874
--------- --------- --------- ---------
Income (loss) before income taxes (1,898) 14,335 (8,296) 9,566
Income tax expense (benefit) (657) 5,579 (3,147) 3,723
--------- --------- --------- ---------
Net income (loss) $ (1,241) $ 8,756 $ (5,149) $ 5,843
========= ========= ========= =========
Net income (loss) per common share
(basic and diluted) $ (1.55) $ 10.95 $ (6.44) $ 7.30
========= ========= ========= =========
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)
Six Months Ended
June 30
--------------------------
1999 1998
----------- -----------
Cash flows provided by (used in) operating activities:
Net income (loss) $ (5,149) $ 5,843
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation, amortization and accretion of
discount on notes 7,411 8,273
Minority interests of others in net income (loss)
from operations 5 40
Deferred income taxes 1,121 241
Gain on sale of properties (1,652) (14,874)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (772) (1,506)
Operating supplies, prepaid expenses,
deposits and other assets (12,056) 6,226
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (17) 2,404
Accrued interest payable 17 (188)
----------- -----------
Net cash (used in) operating activities (11,092) 6,459
Cash flows provided by (used in) investing activities:
Acquisition and development of investment properties (4,303) (11,497)
Refurbishment of investment properties (4,054) (2,902)
Net proceeds from sale of investment properties 6,397 23,270
Cash restricted for refurbishment of properties 1,456 208
Collections on mortgage and other notes receivable 277 2,100
----------- -----------
Net cash provided by (used in) investing activities (227) 11,179
Cash flows provided by (used in) financing activities:
Proceeds from notes payable 37,948 5,919
Repayment of notes payable (35,398) (19,292)
Distributions to minority interests - (157)
Deferred financing costs (1,623) (247)
----------- -----------
Net cash provided by (used in) financing activities 927 (13,777)
----------- -----------
Net increase (decrease) in cash and cash equivalents (10,392) 3,861
Cash and cash equivalents at beginning of period 19,582 13,032
----------- -----------
Cash and cash equivalents at end of period $ 9,190 $ 16,893
=========== ===========
Supplementary disclosure of cash flow information:
Cash paid during the period for interest $ 14,483 $ 15,604
============ ===========
Cash paid (net of refunds received) during the
period for income taxes $ 656 $ 96
============ ===========
See accompanying notes to condensed consolidated financial statements.
MOA HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in MOA Hospitality, Inc. and Subsidiaries' Annual Report on
Form 10-K for the year ended December 31, 1998. The terms "MOA" and the
"Company" mean MOA Hospitality, Inc. and its subsidiaries.
2. Divestitures and Leasing Activities
In January through June 1999, the Company leased eight of its operating
properties to third party operators for a term of five years.
In January through June 1999, the Company sold six of its lodging
facilities for approximately $16.9 million consisting of $7.0 million of cash
and $9.9 million in notes receivable. The net gain recognized by the Company was
approximately $1.7 million. In comparison, during the period of January through
June of 1998 the Company sold two lodging facilities and a vacant parcel of land
for a net gain of $14.9 million.
3. Mortgage and Other Notes Payable
In January 1999, the Company repaid mortgage notes with an
outstanding balance of $17.2 million at December 31,1998 with the proceeds of a
new $13.5 million loan and the balance with cash. The 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 June 30, 1999 is $7,132,000 for the
remainder of fiscal 1999; $5,842,000 for 2000 and $21,559,000 for 2001.
The Company has a $3.9 million mortgage note payable that originally
matured on May 31, 1999. The note is secured by four motel properties. The bank
holding the note extended the maturity date to July 15, 1999, however, as of
this date has indicated it does not desire to provide any further extensions.
The Company is in the process of seeking other financing. As of August 12, 1999,
no firm financing commitments have been obtained.
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. Acquisitions
In June 1999, the Company acquired a newly constructed motel
and a parcel of vacant land from an affiliate at a cost of $3,496,000, in
settlement of a receivable. As of June 30, 1999 there are no further motels
being developed by the affiliate for the Company.
5. Income Taxes
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34% to income before income taxes principally as
a result of state income taxes.
6. Contingencies
In July 1999, the Company entered into a settlement agreement
with ShoLodge Franchise Systems, Inc. ("ShoLodge") resolving all disputes with
respect to the litigation initiated by the Company against ShoLodge in 1997. The
Company disaffiliated it's fourteen Shoney's Inns during the first half of 1998
at which time it ceased the payment of franchise fees that amounted to
approximately $650,000 on an annual basis. While ShoLodge was seeking franchise
fees for the remaining terms of the franchise agreements the settlement
agreement requires for the Company to make an initial payment of $575,000 in
July 1999 and three subsequent payments of $200,000 in July 2000, 2001 and 2002
without interest. The present value of these payments or $1,068,000 was expensed
in June 1999 as part of the Company's general and administrative expenses.
The Company is involved in various other legal proceedings
arising in the ordinary course of business. The Company does not believe that
any of these actions, either individually or in the aggregate, will have a
material adverse effect on the Company's business, results of operations or
financial condition.
In January 1997, the company sold a property subject to an
existing $2.3 million first mortgage. The Company remains contingently liable
for the outstanding balance of the note in the event the purchaser does not
repay the note in accordance with its terms.
7. 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 June 30, 1999 the Company, directly and through
subsidiaries, owned 117 lodging facilities in 38 states. The Company owns a 100%
interest in all but two of its properties and also operates all but thirteen 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 Six months ended
June 30 June 30
----------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Motel operations:
Motel operating revenue:
Room revenues $ 24,629 $ 29,734 $ 44,334 $ 53,238
Ancillary motel revenues 1,552 1,909 3,110 3,843
--------- --------- --------- ---------
Total motel operating revenues 26,181 31,643 47,444 57,081
Motel costs and expenses:
Motel operating expenses 14,145 15,681 27,525 30,617
Marketing and royalty fees 1,799 2,010 3,234 3,810
Depreciation and amortization 3,532 3,552 6,737 7,126
--------- --------- --------- ---------
Total motel direct expenses 19,476 21,243 37,496 41,553
--------- --------- --------- ---------
6,705 10,400 9,948 15,528
Corporate Operations
Other revenues 1,082 232 1,551 453
General and administrative expenses:
Management Company Operations 1,285 1,305 2,924 2,548
Construction/Acquisition and Divestiture 320 276 683 597
Other general and administrative 1,869 794 2,652 1,729
--------- --------- --------- ---------
Total general and administrative expenses 3,474 2,375 6,259 4,874
Depreciation and amortization 74 486 480 960
--------- --------- --------- ---------
(2,466) (2,629) (5,188) (5,381)
---------- --------- --------- ---------
Net operating income 4,239 7,771 4,760 10,147
Interest expense 7,397 7,799 14,703 15,415
--------- --------- --------- ---------
Loss from operations (3,158) (28) (9,943) (5,268)
Minority interests (18) (58) (5) (40)
Gain on sale of properties 1,278 14,421 1,652 14,874
--------- --------- --------- ---------
Income (Loss) before income taxes (1,898) 14,335 (8,296) 9,566
Income tax expense (benefit) (657) 5,579 (3,147) 3,723
--------- --------- --------- ---------
Net Income (Loss) $ (1,241) $ 8,756 $ (5,149) $ 5,843
========= ========= ========= =========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 AND AS SUCH, SPEAK ONLY AS OF THE DATE MADE. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: THE COMPANY'S ABILITY TO OBTAIN FINANCING,
COMPETITION, INTEREST RATE FLUCTUATIONS, OR GENERAL BUSINESS AND ECONOMIC
CONDITIONS.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONDENSED
CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES
THERETO INCLUDED ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS
PRESENTED BELOW FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 HAVE
BEEN PREPARED ON THE SAME BASIS AS THE INTERIM CONDENSED CONSOLIDATED HISTORICAL
FINANCIAL STATEMENTS AND, IN THE OPINION OF THE COMPANY, INCLUDE ALL ADJUSTMENTS
(CONSISTING ONLY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY
THE INFORMATION SET FORTH THEREIN.
General
MOA operates principally in the economy limited service segment of the
lodging industry. As a result, its average room rates tend to be lower than the
average room rates of full service lodging facilities. However, due to the
limited nature of the public space and ancillary services provided by limited
service motels, the Company's expenses tend to be lower than those of full
service lodging facilities. The profitability of the lodging industry in general
is significantly dependent upon room rental rates and occupancy rates. Due to
the fixed nature of a relatively high portion of the Company's expenses, changes
in either room rates or occupancy rates result in significant changes in the
operating profit of the Company's motels.
Three Months Ended June 30, 1999 Compared to the Three Months Ended
June 30, 1998
The following chart presents certain historical operating results and
statistics and is being provided as a supplement to the condensed
consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
-------------------------------------------------------------------
(unaudited)
Three Months Ended June 30
-------------------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
-------------------- ------------------- ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- --------- --------- ---------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $ 24,065 $ 23,496 $ 564 $ 6,238 $ 24,629 $ 29,734
Ancillary motel revenues 1,506 1,287 46 622 1,552 1,909
--------- --------- -------- --------- --------- ---------
Total motel operating revenues 25,571 24,783 610 6,860 26,181 31,643
Motel costs and expenses:
Motel operating expenses 13,584 10,856 561 4,825 14,145 15,681
Marketing and royalty fees 1,723 1,569 76 441 1,799 2,010
Depreciation and amortization 2,656 3,341 876 211 3,532 3,552
--------- --------- -------- --------- --------- ---------
Total motel direct expenses 17,963 15,766 1,513 5,477 19,476 21,243
--------- --------- -------- --------- --------- ---------
$ 7,608 $ 9,017 $ (903) $ 1,383 6,705 10,400
========= ========= ======== =========
Corporate operations:
Other revenues, net 1,082 232
General and administrative expenses:
Management Company Operations 1,285 1,305
Construction/Acquisition
and Divestiture 320 276
Other general and administrative 1,869 794
--------- ---------
Total general and administrative expenses 3,474 2,375
Depreciation and amortization 74 486
--------- ---------
(2,466) (2,629)
--------- ---------
Net operating income $ 4,239 $ 7,771
========= =========
Other data:
Number of motels at period end (5) 111 111 6 26 117 137
Number of rooms at period end (5) 8,840 8,840 395 2,393 9,235 11,233
Occupancy percentage (5) 69.48% 66.83% 54.94% 62.39% 68.53% 65.88%
ADR (1) (5) $ 43.01 $ 43.63 $ 23.55 $ 45.43 $ 41.74 $ 44.00
REVPAR (2) (5) $ 31.75 $ 30.76 $ 14.00 $ 31.17 $ 30.41 $ 30.85
Net operating income margin (3) 15.55% 24.38%
Net motel revenue margin (4) (5) 42.65% 52.60% -4.79% 25.55% 41.56% 46.92%
-------------------------------------------
(1) ADR represents room revenues divided by the total number of rooms
occupied.
(2) REVPAR represents total motel operating revenues divided by the total
number of rooms available.
(3) Net operating income margin represents net operating income divided
by total motel operating revenues plus corporate other revenues.
(4) Net motel revenue margin represents total motel operating revenues
less motel operating expenses and marketing and royalty fees,
divided by motel room revenues.
(5) At June 30, 1999 and for the three months then ended, excludes
amounts related to the thirteen 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 $27,263,000 for the three months ended June
30, 1999 from $31,875,000 for the three months ended June 30, 1998, a decrease
of $4,612,000 or 14.5%.
Motel revenues decreased to $26,181,000 for the three months ended June
30, 1999 from $31,643,000 for the three months ended June 30, 1998, a decrease
of $5,462,000 or 17.3%. The motel revenues for motels owned during both periods
increased approximately $788,000 which was offset by a decrease of $6,250,000 in
motel revenues for motels acquired and divested since April 1, 1998. Motel
revenues for motels owned during both periods increased 3.2%. The increase in
motel revenues for motels owned during both periods was attributable principally
to a increase in the occupancy percentage from 66.83% for the three months ended
June 30, 1998 to 69.48% for the three months ended June 30, 1999. The increase
in occupancy percentage is principally a result of management's efforts to raise
occupancy by decreasing the average daily rate ("ADR"). The ADR for the motels
owned during both periods decreased to $43.01 for the three months ended June
30, 1999 from $43.63 for the three months ended June 30, 1998, a decrease of
$0.62 or 1.4%. Revenue per available room ("REVPAR") for motels owned during
both periods increased to $31.75 for the three months ended June 30, 1999 from
$30.76 for the three months ended June 30, 1998, an increase of $0.99 or 3.2%.
The acquired and divested motels had an occupancy percentage of 54.94%, an ADR
of $23.55 and REVPAR of $14.00 for the three months ended June 30, 1999.
Motel operating expenses include payroll and related costs, utilities,
repairs and maintenance, property taxes, insurance, linens and other operating
supplies. Motel operating expenses decreased to $14,145,000 for the three months
ended June 30, 1999 from $15,681,000 for the three months ended June 30, 1998, a
net decrease of $1,536,000 or 9.8%. Motel operating expenses for motels acquired
and divested since April 1, 1998 decreased to $561,000 for the three months
ended June 30, 1999 from $4,825,000 for the three months ended June 30, 1998, a
decrease of $4,264,000 or 88.4%. The decrease was partially offset by an
increase of $2,728,000 or 25.1% in the costs of operating the motels owned
during both periods. The cost of operating motels owned during both periods
increased to $13,584,000 for the three months ended June 30, 1999 from
$10,856,000 for the three months ended June 30, 1998. The increase in operating
costs is principally due to increased labor and related costs and an increase in
repairs and maintenance expenditures. Motel operating expenses as a percentage
of motel revenues increased to 54.0% for the three months ended June 30, 1999
from 49.6% for the three months ended June 30, 1998. Motel operating expenses as
a percentage of motel revenues for the motels owned in both periods increased to
53.1% for the three months ended June 30, 1999 from 43.8% for the three months
ended June 30, 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
$1,799,000 for the three months ended June 30, 1999 from $2,010,000 for the
three months ended June 30, 1998, a decrease of $211,000 or 10.5%. The marketing
and royalty fees for motels owned during both periods increased to $1,723,000
for the three months ended June 30, 1999 from $1,569,000 for the three months
ended June 30, 1998, an increase of $154,000 or 9.8%. For the motels owned
during both periods, marketing and royalty fees as a percentage of room revenues
increased to 7.1% for the three months ended June 30, 1999 from 6.7% for the
three months ended June 30, 1998. The increase in marketing and royalty fees for
motels owned in both periods are principally due additional marketing efforts to
increase the occupancy percentage.
Corporate general and administrative expenses are segregated
by the Company into three separate areas: Management Company Operations,
Construction/Acquisition and Divestiture Division and Other. Included in the
Management Company Operations, which is the division responsible for the motel
operations, are the costs associated with training, marketing, purchasing,
administrative support, property related legal and accounting costs. The major
components of these costs are salaries, wages and related expenses, travel, rent
and other administrative expenses. The general and administrative expenses for
the Management Company Operations decreased $20,000 to $1,285,000 for the three
months ended June 30, 1999 from $1,305,000 for the three months ended June 30,
1998, a decrease of 1.5%. The general and administrative expenses associated
with Construction/Acquisition and Divestiture Division increased $44,000 from
$276,000 for the three months ended June 30, 1998 to $320,000 for the three
months ended June 30, 1999. Other General and Administrative expenses increased
$1,075,000 to $1,869,000 for the three months ended June 30, 1999 from $794,000
for the three months ended June 30, 1998. This increase is the result of
entering into a settlement agreement with ShoLodge Franchise Systems, Inc.
("ShoLodge") in July 1999 that resolved all disputes with respect to the
litigation initiated by the Company against ShoLodge in 1997. The Company
disaffiliated it's fourteen Shoney's Inns during the first half of 1998 at which
time it ceased the payment of franchise fees that amounted to approximately
$650,000 on an annual basis. While ShoLodge was seeking franchise fees for the
remaining terms of the franchise agreements the settlement agreement provides
for the Company to make an initial payment of $575,000 in July 1999 and three
subsequent payments of $200,000 in July 2000, 2001 and 2002 without interest.
The present value of these payments or $1,068,000 was expensed in June 1999 as
part of the Company's general and administrative expenses. As a percentage of
total motel operating revenues, Management Company Operations general and
administrative expenses was 4.9% for the three months ended June 30, 1999 and
4.1% for the three months ended June 30, 1998.
Depreciation and amortization decreased to $3,606,000 for the three
months ended June 30, 1999 from $4,038,000 for the three months ended June 30,
1998, a net decrease of $432,000 or 10.7%. .
Net operating income decreased to $4,239,000 for the three months ended
June 30, 1999 from $7,771,000 for the three months ended June 30, 1998, a
decrease of $3,532,000 or 45.5%. The decrease in net operating income included a
decrease of $3,715,000 in net motel revenues (motel revenues less motel
operating expenses and marketing and royalty fees). Of the $3,715,000 decrease
in net motel revenues, $2,094,000 resulted from the motels owned during both
periods or a decrease of 16.9%. Net motel revenues for motels acquired and
divested since April 1, 1998 decreased $1,621,000. Net operating income as a
percent of total revenues was 15.5% for the three months ended June 30, 1999 as
compared to 24.4% for the three months ended June 30, 1998.
Interest expense decreased to $7,397,000 for the three months ended
June 30, 1999 from $7,799,000 for the three months ended June 30, 1998, a
decrease of $402,000. The decrease in interest expense is reflective of the
lower average amount of outstanding borrowings during the second quarter of 1999
as compared to the second quarter 1998.
Gain on sale of properties amounted to $1,278,000 for the three months
ended June 30, 1999 compared to $14,421,000 for the respective period in 1998.
In three unrelated transactions, three properties were sold for $4.3 million in
cash and $4.4 million in notes receivable. One motel and a parcel of vacant land
were sold in 1998 for $23.0 million in cash in two unrelated transactions on
which the $14.4 million gain was recognized.
Net income decreased to a net loss of $1,241,000 for the three months
ended June 30, 1999 from net income of $8,756,000 for the three months ended
June 30, 1998. Total revenues decreased $8,539,000 to $48,995,000 for the six
months ended June 30, 1999 from $57,534,000 for the six months ended June 30,
1998 or 14.8%.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The following chart presents certain historical operating results and
statistics and is being provided as a supplement to the condensed
consolidated financial statements presented elsewhere herein.
Supplemental Operating Results and Statistics
-------------------------------------------------------------------
(unaudited)
Six Months Ended June 30
------------------------------------------------------------------
Motels Owned Acquisitions/
Both Periods Divestitures Consolidated
-------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
(dollars in thousands, except Other data)
Motel operations:
Motel operating revenues:
Room revenues $ 41,631 $ 41,346 $ 2,703 $ 11,892 $ 44,334 $ 53,238
Ancillary motel revenues 2,928 2,616 182 1,227 3,110 3,843
--------- --------- --------- --------- --------- ---------
Total motel operating revenues 44,559 43,962 2,885 13,119 47,444 57,081
Motel costs and expenses:
Motel operating expenses 25,403 22,560 2,122 8,057 27,525 30,617
Marketing and royalty fees 2,954 2,930 280 880 3,234 3,810
Depreciation and amortization 5,396 6,112 1,341 1,014 6,737 7,126
--------- --------- --------- --------- --------- ---------
Total motel direct expenses 33,753 31,602 3,743 9,951 37,496 41,553
--------- --------- --------- --------- --------- ---------
$ 10,806 $ 12,360 $ (858) $ 3,168 9,948 15,528
========= ========= ========= =========
Corporate operations:
Other revenues, net 1,551 453
General and administrative expenses:
Management Company Operations 2,924 2,548
Construction/Acquisition
and Divestiture 683 597
Other general and administrative 2,652 1,729
--------- ---------
Total general and administrative expenses 6,259 4,874
Depreciation and amortization 480 960
--------- ---------
(5,188) (5,381)
--------- ---------
Net operating income $ 4,760 $ 10,147
========= =========
Other data:
Number of motels at period end (5) 111 111 6 26 117 137
Number of rooms at period end (5) 8,840 8,840 395 2,393 9,235 11,233
Occupancy percentage (5) 62.49% 61.38% 51.49% 58.63% 61.71% 60.76%
ADR (1) (5) $ 41.58 $ 42.04 $ 43.32 $ 45.74 $41.42 $ 42.80
REVPAR (2) (5) $ 27.81 $ 27.44 $ 23.80 $ 29.59 $26.93 $ 27.88
Net operating income margin (3) 9.72% 17.64%
Net motel revenue margin (4) (5) 38.92% 44.68% 6.39% 35.17% 37.63% 42.55%
- -------------------------------------------
(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 June 30, 1999 and for the six months then ended, excludes
amounts related to the thirteen motels which are leased to third
party tenants.
Motel revenues decreased to $47,444,000 for the six months ended June
30, 1999 from $57,081,000 for the six months ended June 30, 1998, a decrease of
$9,637,000 or 16.9%. The motel revenues for motels owned during both periods
increased approximately $597,000 or 1.4% which was partially offset by a
decrease of $10,234,000 for acquired and divested motels, since January 1, 1998.
The increase in motel revenues for motels owned during both periods was
attributable principally to an increase in the occupancy percentage. The
occupancy percentage increased from 61.38% for the six months ended June 30,
1998 to 62.49% for the six months ended June 30, 1999. The increase in occupancy
percentage is principally a result of management's efforts to raise occupancy by
decreasing the average daily rate ("ADR"). The ADR for the motels owned during
both periods decreased to $41.58 for the six months ended June 30, 1999 from
$42.04 for the six months ended June 30, 1998, a decrease of $0.46 or 1.1%.
REVPAR for motels owned during both periods increased to $27.81 for the six
months ended June 30, 1999 from $27.44 for the six months ended June 30, 1998,
an increase of $0.37 or 1.3%. The acquired and divested motels had an occupancy
percentage of 51.49%, an ADR of $43.32 and REVPAR of $23.80 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 $27,525,000 for the six months
ended June 30, 1999 from $30,617,000 for the six months ended June 30, 1998, a
net decrease of $3,092,000 or 10.1%. The cost of operating motels owned during
both periods increased to $25,403,000 for the six months ended June 30, 1999
from $22,560,000 for the six months ended June 30, 1998, a decrease of
$2,843,000 or 12.6%. Motel operating expenses for motels acquired and divested
since January 1, 1998 decreased to $2,122,000 for the six months ended June 30,
1999 from $8,057,000 for the six months ended June 30, 1998. Motel operating
expenses as a percentage of motel revenues increased to 58.0% for the six months
ended June 30, 1999 from 53.6% for the six months ended June 30, 1998. Motel
operating expenses as a percentage of motel revenues for the motels owned in
both periods increased to 57.0% for the six months ended June 30, 1999 from
51.3% for the six months ended June 30, 1998. Motel operating expenses as a
percentage of motel revenues for the acquired and divested motels was 73.6% for
the six months ended June 30, 1999.
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
$3,234,000 for the six months ended June 30, 1999 from $3,810,000 for the six
months ended June 30, 1998, a decrease of $576,000 or 15.1%. The marketing and
royalty fees for motels owned during both periods increased to $2,954,000 for
the six months ended June 30, 1999 from $2,930,000 for the six months ended June
30, 1998, an increase of $24,000 or 0.8%. For the motels owned during both
periods, marketing and royalty fees as a percentage of room revenues remained
the same at 7.1% for the six months ended June 30, 1999 and for the six months
ended June 30, 1998. 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. In addition, during the period from February 1998 through May
1998 the Company disaffiliated its Shoney's Inns from the ShoLodge Franchise
System and ceased the payments of franchise fees at such time. On an annual
basis, the Company historically 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 $280,000 for the six months ended
June 30, 1999 from $880,000 for the six months ended June 30, 1998.
Corporate general and administrative expenses are segregated by the
Company into three separate areas: Management Company Operations, Construction
and Development and Other. Included in the Management Company Operations, which
is the division responsible for the motel operations, are the costs associated
with training, marketing, purchasing, administrative support, property related
legal and accounting costs. The major components of these costs are salaries,
wages and related expenses, travel, rent and other administrative expenses. The
general and administrative expenses for the Management Operations increased
$376,000 to $2,924,000 for the six months ended June 30, 1999 from $2,548,000
for the six months ended June 30, 1998, an increase of 14.8%. The general and
administrative expenses associated with Construction and Development increased
$86,000 from $597,000 for the six months ended June 30, 1998 to $683,000 for the
six months ended June 30, 1999. Other General and Administrative expenses
increased $923,000 to $2,652,000 for the six months ended June 30, 1999 from
$1,729,000 for the six months ended June 30, 1998. This increase is the result
of entering into a settlement agreement with ShoLodge Franchise Systems, Inc.
("ShoLodge") in July 1999 that resolved all disputes with respect to the
litigation initiated by the Company against ShoLodge in 1997. The Company
disaffiliated it's fourteen Shoney's Inns during the first half of 1998 at which
time it ceased the payment of franchise fees that amounted to approximately
$650,000 on an annual basis. While ShoLodge was seeking franchise fees for the
remaining terms of the franchise agreements the settlement agreement provides
for the Company to make an initial payment of $575,000 in July 1999 and three
subsequent payments of $200,000 in July 2000, 2001 and 2002 without interest.
The present value of these payments or $1,068,000 was expensed in June 1999 as
part of the Company's general and administrative expenses. As a percentage of
total motel operating revenues, Management Operations general and administrative
expenses was 6.2% for the six months ended June 30, 1999 and 4.5% for the six
months ended June 30, 1998.
Depreciation and amortization decreased to $7,217,000 for the six
months ended June 30, 1999 from $8,086,000 for the three months ended June 30,
1998, a net decrease of $869,000 or 10.7%. Approximately $480,000 of the net
decrease in depreciation and amortization is attributable to the corporate
operations.
Net operating income decreased to $4,760,000 for the six months ended
June 30, 1999 from $10,147,000 for the six months ended June 30, 1998, a
decrease of $5,387,000 or 53.1%. The decrease in net operating income included;
a decrease of $5,969,000 in net motel revenues (motel revenues less motel
operating expenses and marketing and royalty fees), an increase in corporate
general and administrative expenses of $1,385,000, offset by a decrease in
depreciation and amortization of $869,000 and an increase of other revenues of
$1,098,000. Of the $5,969,000 decrease in net motel revenues, $2,270,000
resulted from the motels owned during both periods or a decrease of 12.3%. Net
motel revenues for motels acquired and divested since January 1, 1998 decreased
$3,699,000. Net operating income as a percent of total revenues was 9.7% for the
six months ended June 30, 1999 as compared to 17.6% for the six months ended
June 30, 1998.
Interest expense decreased to $14,703,000 for the six months ended
June 30, 1999 from $15,415,000 for the six months ended June 30, 1998, a
decrease of $712,000.
Gain on sale of properties amounted to $1,652,000 for the six months
ended June 30, 1999 compared to $14,874,000 for the respective period in 1998.
In six unrelated transactions, six properties were sold for $7.0 million in cash
and $9.9 million in notes receivable. Two motels and a parcel of vacant land
were sold in 1998 for $24.4 million in cash in three unrelated transactions on
which the $14.9 million gain was recognized.
Net income decreased to a net loss of $5,149,000 for the six months
ended June 30, 1999 from a net income of $5,843,000 for the six months ended
June 30, 1998.
Liquidity and Capital Resources
The Company's primary uses of its capital resources include debt
service, capital expenditures and working capital. In addition, on a
discretionary basis, the Company utilizes its capital resources for the
development and acquisition of motel properties.
The Company's debt service requirements consist of the obligation to
make interest and principal payments on its outstanding indebtedness. In January
1999 the Company repaid mortgage notes with an outstanding balance of $17.2
million as of December 31, 1998 with the proceeds of a new $13.5 million loan
and the balance with cash. The new loan 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 June 30, 1999
is $7,730,000 for the remainder of fiscal 1999; $7,166,000 for 2000 and
$24,011,000 for 2001.
The Company has a $3.9 million mortgage note payable that originally
matured on May 31, 1999. The note is secured by four motel properties. The bank
holding the note extended the maturity date to July 15, 1999, however, as of
this date has indicated it does not desire to provide any further extensions.
The Company is in the process of seeking other financing. As of August 3, 1999,
no firm financing commitments have been obtained.
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 $4,054,000 and $2,902,000 for the six months ended June 30, 1999
and 1998, respectively. In addition, as of June 30, 1999, the Company had
$747,000 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 six months ended June 30, 1999, cash and cash equivalents
decreased $10,392,000. This decrease consisted of $227,000 of funds used in
investing activities and $927,000 of funds provided by financing activities and
$11,092,000 of funds used in operations. Net investing activities of $227,000
include: $4,303,000 of cash utilized for motel development and $4,054,000
expended on refurbishment of existing properties, offset by $6,674,000 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
$1,456,000. Cash provided by financing activities includes: $35,398,000 of cash
utilized to repay indebtedness; and $1,623,000 of cash used for deferred
financing costs and other items offset by $37,948,000 from proceeds from notes
payable.
Impact of Year 2000
The year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company replaced its primary financial accounting system in 1998
at a cost of approximately $400,000. The new system is year 2000 compliant. The
Company is continuing to evaluate various sub-systems that are in place,
including those utilized to process credit card transactions, to determine their
year 2000 readiness. The Company has also made inquires of its significant
vendors upon which it relies and believes they are sufficiently prepared to
handle year 2000 issues so as not to cause any interruption to the Company's
operations. The Company, on an on-going basis, evaluates its contingency plans
with respect to potential year 2000 issues. The Company does not anticipate
incurring any additional significant expenditures with respect to the year 2000
situation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 of the Notes to the Condensed Consolidated
Financial Statements.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Not Applicable
(b) Reports on Form 8-K:
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOA HOSPITALITY, INC.
August 12, 1999 By: /s/ Kurt M. Mueller
--------------------------------------------
Kurt M. Mueller
Chief Financial Officer
August 12, 1999 By: /s/ Blane P. Evans
--------------------------------------------
Blane P. Evans
Vice President, Secretary and Treasurer