10-K 1 k2002928.txt 2002 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 803-1200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [ ] No Number of shares of Common Stock, $.01 par value outstanding as of August 31, 2003: 800,000 INDEX TO FORM 10-K Page Part I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Part II Item 5. Market for Registrant's Common Equity and Related 13 Stockholder Matters Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial 15 Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosure About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on 25 Accounting and Financial Disclosure Part III Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 28 Item 12. Security Ownership of Certain Beneficial Owners and Management 29 Item 13. Certain Relationships and Related Transactions 29 Item 14. Controls and Procedures 30 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 31 ITEM 1. BUSINESS General MOA Hospitality, Inc. and its subsidiaries ("MOA" or the "Company") is a leading owner and operator of national brand affiliated limited service lodging facilities in the United States. As of December 31, 2002, the Company, directly and through subsidiaries, owned 107 lodging facilities located in 33 states with a total of 8,244 rentable guestrooms. The Company owns a 100% interest in all of its properties. At December 31, 2002, the Company operated 33 of its motels. The remaining seventy-four motels were leased to and operated by third-party tenants pursuant to operating leases. The Company's largest concentrations of lodging facilities are located in the States of Georgia and Illinois with 13 lodging facilities in Georgia and 10 lodging facilities in Illinois. Properties owned in the states of Georgia and Illinois at December 31, 2002, accounted for 6.51% and 3.38% of consolidated motel operating revenues for the year ended December 31, 2002, respectively. Ninety-seven of the Company's lodging facilities are operated pursuant to franchise or license agreements under the following national brand names: Best Western, Comfort Inn, Day's Inn, Microtel, Howard Johnson, Ramada, Ltd., Super 8 and Travelodge. Eighty-seven of the franchise or license agreements are with brands owned by Cendant Corporation including seventy-six with Super 8 Motels, Inc., a wholly owned subsidiary of Cendant Corporation. MOA believes its lodging facilities benefit from affiliating with national brands primarily due to the national brand name recognition achieved through national advertising and product distribution. In addition, the franchisor or licensor typically provide additional services such as: central reservation services, sponsorship of customer loyalty programs, exposure in published travel directories, leads with respect to group tour business and other professional services such as quality assurance inspections. The Company was incorporated in 1986 under the laws of the State of Delaware to continue the business commenced by its predecessors in 1982. The Company's principal executive offices are located at 701 Lee Street, Suite 1000, Des Plaines, Illinois 60016, telephone (847) 803-1200. Recent History The Company, has experienced continued deterioration in its operating performance over the past several years. The following table summarizes the recent operating performance of the Company (in 000's):

During 2001, the Company experienced a downturn in the hospitality industry as a result of the September 11, 2001 terrorist attacks on New York and Washington, D.C. This forced the company to challenge its business strategy. It became quite apparent that measures had to be taken. The Company through the diligence of management and its regional managers were able to control and reduce expenses more than the decline in revenues. The Company also, through its aggressive leasing and sales efforts during 1999 and 2000 has been able to either stabilize net income on some of its non-core locations by establishing a fixed lease income, or by selling other non-desirable locations. The Company believes it is now positioned to continue concentrating its efforts on the remaining core locations to maintain and or increase the upward trend. The Company had attributed the deterioration in its operating performance to a myriad of factors, including but not limited to, a significant increase in competitive supply resulting from the extensive building of new motel properties in the markets in which the Company competes. Also increases in certain operating costs including labor due to the historically low levels of unemployment requiring the Company to compete with other industries for qualified employees. Based on a property-by-property review, the Company believed it was unlikely that it would realize the carrying value of certain of its assets due to a deterioration in their operating performance caused by factors outside of management's control. As a result of this review, the Company recorded an impairment loss of $1.9 and $5.7 million in 2002 and 2001 respectively. In 1999, the Company recorded a $1,059,000 impairment loss adjustment and a restructuring charge of $450,000. In 1998, the Company recorded an impairment loss of $9.3 million. As discussed below, the Company has undertaken a number of transactions during the period presented above including acquisitions, development and sales of properties along with refinancing of the Company's mortgage debt. The Company believes it has or will be able to obtain adequate resources to meet its near-term maturing debt and other obligations, including the remaining $11.5 million 12% Senior Subordinated Notes in 2004. Since December 31, 1997, the Company has had a net decrease in the number of lodging properties owned from 138 properties to 107 properties at December 31, 2002. A summary of the significant transactions with respect to the number of lodging properties owned and operated by the Company that have occurred since January 1, 1997 through August 31, 2003 is as follows: In 1997, an affiliate of the Company was formed for the sole purpose of constructing lodging properties to be acquired by a subsidiary of the Company upon completion at cost. Such affiliate develops the lodging properties from its own funds, payments from the Company on account to be applied towards the purchase price and the proceeds of a $20.0 million revolving construction loan facility arranged by the affiliate. The $20.0 million revolving construction loan facility of the affiliate matured in 1998. The outstanding balances were paid in full upon the purchase of financed properties by a subsidiary of the Company with funds borrowed under a $150.0 million secured loan facility with CSFB and the application of amounts previously deposited with the affiliate. At December 31, 1998 the $150.0 million secured loan facility with CSFB matured with no further borrowings available with this loan facility. As of December 31, 2002, all borrowings have been repaid. As a result of the Company's under utilization of the CSFB loan facility, the Company changed its estimate of the economic benefit of certain deferred loan costs incurred in connection with obtaining the facility and accordingly accelerated the amortization of $1.9 million of such costs in 1998. During 1998, the Company, in a series of separate transactions with unaffiliated parties, sold ten properties for approximately $61.3 million consisting of cash in the amount of $53.0 million and first mortgage notes in the amount of $8.3 million. These transactions resulted in a net gain of approximately $23.7 million. Approximately $33.3 million of the net proceeds were utilized to pay down certain outstanding borrowings. During 1998, the Company also sold a parcel of vacant land and an investment in a partnership for an aggregate amount of $4.2 million in cash that resulted in gains of approximately $2.4 million. During 1998, the Company acquired seven newly constructed motels from an affiliate at cost for an aggregate amount of $20.6 million in cash. The purchases of these motels were funded from $11.4 million of new borrowing under the CSFB secured loan facility referred to above, application of amounts previously deposited with the affiliate and from internally generated funds, including funds from the net proceeds from the sale of properties. During 1999, the Company sold ten properties for approximately $27.8 million consisting of $9.7 million in cash and $18.1 million in first mortgage notes. These sale transactions resulted in gains of $2.5 million. Also during 1999, the Company purchased one property constructed by an affiliate for the Company. The property was purchased for $ 2.9 million. During 1999, the Company repurchased from an affiliated company at fair market $35 million value of the 12% Senior Subordinated Notes at a gain of approximately $1.9 million which was offset by the accelerated write-off of related deferred financing costs in the amount of $1.9 million The Company, as Lessor, has entered into operating leases, beginning in late 1998 with unaffiliated parties to operate seventy-four motel properties at values believed by management to reflect market rates. Under the terms of these leases, the lessee is responsible for operating costs including all maintenance, repairs, taxes and insurance expense on the leased property. The leases, which have a terms ranging from five and a half years to six and half years, provide for monthly rent payments. In addition, the lease grants the lessee an option to purchase the leased properties at prices believed by management to reflect market value. During 2000, the Company sold eight properties and a vacant parcel of land for approximately $20.8 million consisting of $14.3 million in cash and $6.5 million in first mortgage notes. These sale transactions resulted in a gain of $2.2 million. The Company also purchased a parcel of land in February 2000 for approximately $250,000 cash and a note in the amount of $460,000, which was repaid in 2000. Also during 2000, in two separate transactions the Company repurchased from an affiliated company at fair market value $10.5 million and $20.9 million of the 12% Senior Subordinated Notes at a pre tax gain of approximately $4.2 million and $6.7 million respectively. Theses gains were offset by the accelerated write-off of related deferred financing costs in the amount of $0.6 million and $1.1 million respectively. During 2000, the Company began construction on two new motels. One motel is located in Milford, MA and was completed in July 2001, and is a Marriott Fairfield Inn & Suites with 73 guestrooms. The other motel is located in Santa Monica, CA and will be a boutique type motel with 77 guest rooms when completed in 2003. In 2003 the construction financing was converted to a permanent loan secured by the property in the amount of $7 million. During 2001, the Company leased an additional three, and re-leased three of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. Also during 2001, the Company sold two properties for a sales price of approximately $5.5 million in cash resulting in a recognized gain of $1.8 million. The Company also sold three additional properties to related parties at fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million. The Company also sold its partnership interest in one lodging facility for $200,000. The Company also recognized a deferred gain of $1.7 million on one of its lodging facilities sold in a prior year. Also during 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a gain of approximately $431,000 net of income taxes. During 2001, a subsidiary of the Company purchased a vending company for $624,000 funded by $126,000 cash and assumption of $498,000 of debt. During 2002, the Company sold seven properties for approximately $12.2 million for a net gain of approximately $31,000. The gain has been included in discontinued operations as discussed below. Also During 2002, the Company leased an additional seven of its lodging facilities to third party operators and took back three of its leased lodging facilities prior to lease expiration. The Company also re-leased one of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. Also During 2002, the company 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 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. Industry and Competition The United States lodging industry is generally comprised of two sectors: full-service facilities and limited-service facilities. Full-service lodging facilities generally have more extensive common areas (including restaurants, lounges and extensive meeting room facilities), offer more services such as bell service and room service, and tend to be larger in terms of number of rooms than limited-service facilities. MOA's properties are principally limited-service type lodging facilities. The United States lodging industry is also categorized into five general price segments (based on relative pricing in local markets): luxury, upscale, mid-price, economy, and budget. MOA's properties predominately fall into the economy segment with a small percentage represented in both the mid-price and budget segments. Industry estimates indicate that there are over 23,000 lodging facilities within the mid-price, economy and budget segments. The United States lodging industry is also generally considered to be relatively fragmented in terms of ownership, especially with respect to the mid-price, economy and budget segments. This combination of a large number of competitive lodging facilities and limited concentration of ownership makes the segment in which MOA's lodging facilities operate very competitive. Generally, each of the Company's lodging facilities competes within its local market with several national and regional brand affiliated lodging facilities along with many independent competitive lodging facilities. Some of the more recognizable brands with which the Company's lodging facilities compete either directly or indirectly include: Baymont Inns (f/k/a Budgetel Inns), Comfort Inns, Day's Inns, Fairfield Inns, Hampton Inns, Holiday Inn Express, LaQuinta Inns, Motel 6, Ramada, Ltd., Red Roof Inns, Super 8 Motels and Travelodge. Distinguishing characteristics among competitive lodging facilities include: convenience of location, degree of curb appeal, reasonableness of room rates, and in particular with repeat customers the quality and cleanliness of room accommodations and the level of service. The Company competes with other lodging facilities for a wide spectrum of business and leisure travelers who desire consistency in the quality of their accommodations and demand reasonable prices. They tend to be value conscious consumers consisting of: construction workers, sales people, technicians, senior citizens, government and military employees, and vacation travelers. Due to the nature and location of the Company's lodging facilities, the Company does not experience any significant degree of advance bookings typical with many resort or destination locations nor does any one customer represent a significant portion of the Company's revenues. The lodging industry has seen a significant increase in the construction of new lodging facilities over the course of the past few years. Management believes this increase is a result of the relative strength of the United States' economy, which in turn has resulted in greater travel, and stronger operating performance of lodging facilities in general. Management also believes the increase in new construction has been facilitated by an increased availability of financing for such projects and a relatively favorable interest rate environment. Based on the Company's internally prepared surveys of new supply entering the markets in which it competes, the percentage increase in new supply in such markets appears to have peaked in 1996; however, new supply continues to enter the markets in which the Company competes. Accordingly, new supply is expected to continue to negatively impact the Company's operating performance especially during the off-peak seasons. Demand for the Company's lodging facilities is affected by normally recurring seasonal patterns. Demand for the Company's lodging facilities is generally highest during the months of June, July and August and lowest during the months of December, January and February. As is the case for the lodging industry in general, demand for the Company's lodging facilities may be affected by weather, national and regional economic conditions, government regulations, changes in travel patterns including temporary interruptions due to road construction and more permanent interruptions due to the development of new interchanges and alternative routes, construction of new lodging facilities, changes in the degree of competition from existing lodging facilities and other factors. Ownership Structure At December 31, 2002, the Company had 100% ownership interest, either directly or through subsidiaries, in all of the 107 lodging facilities it owned. Seventy-four are subject to operating leases with purchase options. (See discussion above in the general business section) Franchise and License Agreements The Company operates 97 of its lodging facilities pursuant to franchise or license agreements. Seventy-six of these agreements are with Super 8 Motels, Inc. The franchise fees (including royalties and contributions to advertising and media funds) range from 6% to 9% of room revenues. Under the Super 8 franchise agreements, the franchiser is obligated to: provide certain standardized training programs; publish a travel directory with information pertaining to all Super 8 motels; maintain an advertising and reservation fund to be administered by the franchiser for advertising and promotion; inspect the motels to assure satisfaction of Super 8 specifications and maintain availability of corporate officers and employees for consultation concerning motel operations. The obligations of the franchisee include, among other things, maintaining the motel in a manner that satisfies Super 8 quality assurance standards and compliance with Super 8 rules of operations. The Super 8 franchise agreements have an initial 20-year term that, for the Company, results in various ending dates ranging from 2002 through 2019. The agreements continue thereafter on a year-by-year basis unless terminated by either party upon nine months notice. The agreements provide a negotiated area of geographic protection within which the franchiser is prohibited from franchising another Super 8 motel. Upon expiration of individual franchise agreements there is no assurance that a renewal franchise agreement will afford the Company the same benefits that existed under the previously existing franchise agreement. Generally, new franchise agreements have higher franchise fees and reduced areas of protections. The Company has five standard license agreements with Best Western International. These agreements provide for an annual renewal. The Company has sixteen franchise or license agreements with other franchisers or licensees. These agreements, which have various terms with ending dates through 2017, generally provide similar benefits and obligations as the Super 8 franchise agreements. Not all of franchise and license agreements for the non Super 8 brands provide for a specific area of geographic protection in which case, they generally rely on an impact policy to determine if another lodging facility with the same brand affiliation could be located within a particular market. During 1997, the Company and certain of its subsidiaries commenced legal actions against ShoLodge Franchise Systems, Inc. ("ShoLodge") the franchisor of Shoney's Inns. The Company among other things has claimed that ShoLodge breached its contractual obligations and made material misrepresentations to MOA prior to MOA or its subsidiaries acquiring any Shoney's Inns. Commencing in February 1998, through May 1998 the Company disaffiliated each of its fourteen Shoney's Inns from ShoLodge by removing the sign and other identifying marks. At the time of such disaffiliation, MOA or its subsidiaries ceased remitting franchise fees to ShoLodge. ShoLodge filed a counter claim against MOA and certain of its subsidiaries claiming a failure to renovate the properties and failure to pay franchise fees. In July 1999, the Company entered into a settlement agreement with ShoLodge resolving all disputes with respect to the litigation initiated by the Company. The settlement agreement requires the Company to make an initial payment of $575,000 in July 1999 and three subsequent payments of $200,000 in July 2000, 2001 and 2002. All such payments have been made and no further liability exists at December 31, 2002 Operations The Company believes the ownership and management of its properties gives it certain competitive advantages over third party managed properties with which it competes by being able to control all aspects of a lodging facility's operations and expenditures to maintain such facilities. The Company also believes it has certain competitive advantages over chain owned and operated properties because as long as the Company meets a franchisor's minimum requirements it can tailor the services and product offering of individual facilities without concerning itself with national consistency. Management of the Company's lodging facilities is coordinated from the Company's corporate offices in Des Plaines, Illinois. During the last quarter of 1999, the Company recorded a $450,000 restructuring charge for the downsizing of both the regional and corporate offices. Regional offices are located in Indianapolis, Indiana, Weldon, North Carolina and Salt Lake City, Utah. Day-to-day management, facility renovation, human resources and training, purchasing of operating supplies and sales and marketing are principally directed from the regional offices. The executive level functions as well as accounting are centralized in Des Plaines, Illinois. Typically, the general manager is the only salaried position at an owned and operated property; although, for the larger properties (generally in excess of 100 rooms), an assistant manager and/or salesperson may be present on a salaried basis. Other employees generally are employed on an hourly basis with staffing continually adjusted based on occupancy levels. General managers generally do not reside on site because the Company believes its managers are more effective if they spend time away from the property and become involved in the communities where the properties are located. At December 31, 2002, the Company employed approximately 590 employees including approximately 79 full and part-time employees at the corporate and regional offices. Labor and related costs generally represent the single largest expense of operating a motel property. The hourly wage rates tend to be relatively low in relation to other industries and accordingly, the Company is adversely affected by turnover common in the industry partially due to the current strength of the United States economy that has resulted in historically low unemployment rates. The Company's operations could be significantly affected by changes in the Federal and State minimum wage rates. The employees are not represented by any labor unions and management believes its ongoing labor relations with its employees are good. The Company utilizes advertising and marketing programs sponsored by the various franchisers on both a national and regional basis. In addition, the Company engages in a wide variety of sales and marketing activities at the local market level including extensive individual sales calls, marketing blitzes and involvement in local community activities such as Rotary Clubs, Chambers of Commerce and motel associations. Various properties also promote special packages in conjunction with local attractions or events. Billboard advertising contracts represent the single largest sales and marketing expenditure other than contributions to franchiser sponsored advertising and media funds. Regulatory Matters The Company is subject to environmental regulations under various federal, state and local laws. Certain of these laws may require a current or previous owner or operator of real estate to clean up designated hazardous or toxic substances or petroleum product releases affecting the property. In addition, the owner or operator may be held liable to a governmental entity or to third parties for damages or costs incurred by such parties in connection with the contamination. Certain of the Company's lodging facilities are located on, adjacent to or in the vicinity of, properties, including gasoline stations, that contain or have contained storage tanks or that have engaged or may in the future engage in activities that may release petroleum products or other hazardous substances into the soil or groundwater. While there can be no assurance that in the future the foregoing environmental conditions may not have a material effect on the Company, management is not aware of any such materially adverse impacts to the Company due to the existence of contaminants under or near its properties. Except as described above, management is not aware of any environmental condition with respect to its lodging facilities that could have a material adverse impact on the Company's financial condition or results of operations. The Company's lodging facilities are subject to various other laws, ordinances and regulations. The Company believes that each facility has the necessary permits and approvals required to enable the Company to operate its lodging facilities. The Company's lodging facilities must comply with Title III of the Americans with Disabilities Act (the "ADA"). Under the provisions of the ADA, the Company, as owner of the lodging facilities, is obligated to reasonably accommodate the patrons of its facilities who have physical, mental or other disabilities. In addition, the Company is obligated to ensure that alterations to its lodging facilities conform to the specific requirements of the ADA implementing regulations. The Company believes that it is in substantial compliance with all current applicable regulations with respect to accommodations for the disabled. Item 2. PROPERTIES The Company's lodging facilities are typically situated along interstate highways and in secondary markets, offering a convenient lodging alternative for many prospective customers. The facilities have an average size of 77 rooms, though individual properties range from 33 to 163 rooms, depending on location and business environment. MOA's properties generally do not offer large meeting or banquet facilities, in-house restaurants, or room service; and most do not offer recreational facilities such as pools or fitness centers. The motels do, however, typically provide free coffee, free local calls, remote control television, fax service, and free parking. In addition, many nationally and regionally recognized restaurant chains are generally within close proximity of the motels. The Company generally owns its motels in fee simple. The company has leased seventy-four properties subject to operating leases including a purchase option. However, the underlying real property of three of the lodging facilities is subject to a ground lease. Ownership of the buildings and improvements situated on such properties remains with the landlord subject to the leasehold interest, which expires on the maturity date of the lease. Most of the Company's properties were designed and built as limited service economy lodging facilities. As such, they were designed to achieve functional efficiencies and operate at lower fixed costs than most full-service or upscale lodging facilities. The properties generally employ individual through-the-wall heating and cooling systems for each room. This provides cost savings during periods of low occupancy and eliminates the need to have skilled maintenance personnel on the payroll. Further, the Company's motels have limited public areas to maintain. The Company believes that the physical condition and general appearance of a property have a significant impact on profitability. MOA has made capital expenditures (exclusive of acquisitions and development of investment properties) of $4,243,000, $2,971,000, and $4,641,000 in 2002, 2001 and 2000, respectively, relating to properties owned and operated. In addition, in accordance with the terms of the operating leases, lessees are required to maintain escrow balances to provide for recurring capital improvements at leased motels. These expenditures include not only the replacement of guestroom carpet and furnishings but also expenditures on parking lot repavement, exterior renovations and interior public area renovations including lobby enhancements and other revenue enhancing improvements such as installation of complete snack shoppe vended areas and guest laundry facilities. Management believes the level of capital expenditures made over the past three years has been sufficient to maintain the competitive position of its motel facilities. The Company believes that its facilities are currently well maintained and conform to the Company's standards and where applicable to the franchiser's standards for cleanliness and attractiveness and intends to maintain its facilities in such condition. Information pertaining to the Company's 107 lodging facilities owned as of December 31, 2002 with footnote disclosure of transactions subsequent to year-end through August 20, 2003, is set forth in the following table. Year Number of Acquired or Rentable Developed Guest Year by the Location Franchise Rooms Built Company ---------------------- ----------------- --------- ------ ----------- ARIZONA Phoenix (2) Super 8 67 1998 1998 ARKANSAS West Memphis (1) Super 8 61 1989 1989 CALIFORNIA Santa Monica Best Western 122 1991 1992 West Los Angeles (2) Best Western 74 1993 1994 COLORADO Longmont Super 8 64 1989 1994 FLORIDA Fernandina Beach (2) Best Western 134 1985 1994 Ft. Walton Beach Howard Johnson 100 1987 1994 Lake City (2) Microtel 62 1998 1998 Melbourne (2) Howard Johnson 119 1990 1994 Orlando Centroplex (1) Travelodge 75 1957 1996 Panama City (2) Super 8 63 1986 1987 Pensacola (2) Super 8 62 1985 1987 GEORGIA Athens (2) Microtel 60 1998 1998 Brunswick (2) Super 8 58 1986 1987 Catersville (2) Super 8 61 1986 1987 Columbus Super 8 74 1985 1987 Douglas Inn at Douglas 100 1986 1994 Dublin (2) Best Western 88 1984 1994 Fitzgerald (2) Inn at Fitzgerald 108 1985 1994 Hinesville (2) Inn at Hinesville 163 1976 1994 Macon (2) Ramada 120 1987 1994 Moultrie Inn at Moultrie 100 1979 1994 Rome (2) Super 8 62 1986 1987 Vidalia Inn at Vidalia 128 1984 1994 Warner Robins (2) Super 8 60 1986 1987 IDAHO Boise Super 8 108 1978 1994 Coeur d'Alene (1) Super 8 95 1983 1983 Lewiston (2) Super 8 62 1985 1985 Sandpoint Super 8 61 1984 1984 ILLINOIS Bloomington (2) Super 8 61 1985 1987 Champaign (2) Super 8 61 1984 1987 Crystal Lake (2) Super 8 59 1983 1987 Decatur (2) Super 8 61 1983 1987 Litchfield (2) Super 8 61 1987 1994 Peru (2) Super 8 61 1986 1987 South Springfield (2) Super 8 118 1987 1994 Springfield (2) Super 8 65 1985 1994 Tuscola (2) Super 8 64 1988 1994 Waukegan (2) Super 8 61 1986 1987 INDIANA Columbus (2) Super 8 62 1984 1987 Elkhart (2) Fairway Inn 60 1990 1994 Indianapolis (2) Days Inn 161 1985 1994 Mishawaka Super 8 66 1998 1998 Muncie (2) Days Inn 62 1990 1994 Terre Haute Super 8 118 1985 1994 IOWA Davenport (2) Super 8 61 1984 1987 Des Moines Super 8 152 1985 1994 KANSAS Salina (2) Super 8 61 1984 1989 Topeka (2) Super 8 62 1984 1987 KENTUCKY Danville (2) Super 8 49 1987 1987 Lexington (2) Super 8 61 1987 1987 Louisville Super 8 100 1988 1988 LOUISIANA Shreveport (2) Super 8 143 1986 1994 MAINE Ellsworth Comfort Inn 63 1993 1993 MICHIGAN Battle Creek (2)(3) Super 8 62 1985 1987 Grand Rapids (2) Super 8 62 1986 1987 Kalamazoo (2) Super 8 62 1985 1987 Muskegon (2) Super 8 62 1986 1987 Saginaw (2) Super 8 58 1985 1987 MINNESOTA Hibbing (2) Super 8 49 1993 1994 Red Wing (2) Super 8 60 1987 1996 Savage (2) Comfort Inn 75 1982 1994 MISSOURI Independence (2) Super 8 77 1983 1987 Joplin Super 8 50 1985 1987 Liberty (2) Super 8 60 1980 1987 NW Kansas City (2) Super 8 50 1983 1987 Springfield (2) Super 8 50 1985 1987 St. Joseph Super 8 54 1985 1987 MONTANA Billings (2) Ramada Ltd. 116 1978 1994 Billings Super 8 114 1979 1994 Dillon Super 8 48 1985 1989 Great Falls Super 8 117 1978 1994 Helena Super 8 102 1979 1988 NEBRASKA Fremont (2) Super 8 43 1986 1989 NEVADA Carson City (2) Super 8 63 1985 1985 NEW HAMPSHIRE Merrimack Days Inn 68 1999 1999 NEW MEXICO Las Cruces (2) Super 8 60 1981 1987 NORTH CAROLINA Weldon (2) Orchard Inn 49 1973 1993 Wilson Microtel 59 1997 1997 NORTH DAKOTA Bismarck Super 8 61 1976 1987 Grand Forks (2) Super 8 33 1983 1987 Minot (2) Super 8 60 1977 1987 OHIO Akron (2) Super 8 58 1986 1987 Canton Days Inn 61 1985 1987 St. Clairsville (2) Super 8 62 1986 1987 PENNSYLVANIA Lancaster Super 8 101 1990 1990 York Super 8 94 1990 1990 SOUTH CAROLINA Anderson (2) Super 8 62 1986 1987 Camden (2) Inn at Camden 83 1989 1994 Charleston (2) Orchard Inn 89 1973 1993 Greenwood (2) Days Inn 61 1986 1987 SOUTH DAKOTA Sioux Falls (2) Super 8 95 1976 1987 TENNESSEE Chattanooga (2) Super 8 73 1986 1987 Chattanooga (2) Ramada 72 1972 2002 East Memphis (2) Super 8 69 1990 1990 Johnson City (2) Super 8 60 1986 1987 Knoxville Super 8 137 1975 1993 Union City (2) Super 8 61 1989 1989 UTAH Salt Lake City (2) Super 8 119 1983 1988 VIRGINIA Charlottesville (2) Super 8 65 1986 1987 Richmond (2) Inn at Richmond 117 1985 1994 WISCONSIN Janesville (2) Super 8 48 1985 1987 Kenosha (2) Super 8 60 1984 1987 Madison Best Western 101 1983 1994 Rice Lake (2) Super 8 47 1984 1994 WYOMING Cody Super 8 64 1982 1982 Jackson Super 8 97 1983 1983 --------- Total 8,244 ========= (1) Property is subject to a ground lease. (2) Property is subject to an operating lease. (3) Property lessee defaulted on the operating lease subsequent to December 31, 2002 and was operated by the Company for one month. At that time it was leased to a new third-party tenant. Item 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business, results of operations or financial condition. A subsidiary of the Company (the "LLC") was placed in technical default on one of its loans in February 2003. This forced the LLC 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 debt and the Bankruptcy proceedings were dismissed. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fiscal quarter ended December 31, 2002 to a vote of the security holders of the Company. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of August 31, 2003, there were 12 holders of record of the Company's Common Stock. No established public trading market exists for the Company's common equity. The Company has been advised that since its original issuance there have been a limited number of privately negotiated sales of the Common Stock. The Company has never paid cash dividends on its Common Stock. It is the Company's present intention to retain all future earnings for use in its business and, therefore, it does not expect to pay cash dividends on the Common Stock in the foreseeable future. The declaration and payment of dividends on the Common Stock is restricted by the indenture relating to the 12% Senior Subordinated Notes due April 15, 2004, Series B issued by the Company in April 1994 (the "Notes") and the instruments relating to the Company's other indebtedness. During 1999, the Company repurchased from an affiliated company at fair market value $35 million of the 12% Senior Subordinated Notes at a gain of approximately $1.9 million which was offset by the accelerated write-off of related deferred financing costs in the amount of $1.9 million. During 2000, in two separate transactions the Company repurchased from an affiliated company at fair market value $10.5 million and $20.9 million of the 12% Senior Subordinated Notes at a gain of approximately $4.2 million and $6.7 million respectively. Theses gains were offset by the accelerated write-off of related deferred financing costs in the amount of $0.6 million and $1.1 million respectively. During 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a gain of approximately $431,000 net of income taxes. Item 6. SELECTED FINANCIAL DATA The following table sets forth-certain consolidated financial information of the Company and its subsidiaries for the five fiscal years ended December 31, 2002. This data should be read in conjunction with the audited consolidated historical financial statements of the Company and the notes thereto included elsewhere herein. (In thousands except for RevPar and ADR statistics)

Continued from table on previous page (1) Results for the year ended December 31, 1999 include the recovery of $0.5 million of offering costs previously written off. The results for years ended December 31, 1998, 1999, 2000 and 2001 include $26.1million, $2.6 million, $2.2 million and $3.6 million of gains on the sale of properties, respectively. Results for the year ended December 31, 1998 included the recording of impairment losses of $9.3 million. Results for the year ended December 31, 1999 included the recording of restructuring costs of $0.5 million and impairment losses of $0.9 million. Results for the year ended December 31, 2002 and 2001 include $1,.9 and $5.7 million of impairment losses respectively. Results from operations for year ended December 31, 2002, 2001 and 2000 include a $0.3 million, $0.4 million and $5.7 million gain net of taxes on early extinguishments of debt respectively. (2) The Company changed its estimate of the economic benefit of certain deferred loan costs in 1998. The effect of this change increased amortization by $1.9 million for the year ended December 31, 1998. (3) EBITDA represents earnings before interest expense, income taxes, depreciation, amortization, minority interest, gain on sale of properties, (including the amounts of such items included in discontinued operations), and gain on early extinguishments of debt, net of related income tax. EBITDA is not intended to represent cash flow or any other measure of performance in accordance with accounting principles generally accepted in the United States ("GAAP"). EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring the ability to service debt. EBITDA should not be construed by the reader as an alternative to net income (as determined in accordance with GAAP), as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with GAAP), as a measure of liquidity. (4) Operating data excludes amounts related to five motels, which are leased to third party tenants at December 31, 1998, forty-three motels at December 31, 1999, seventy-five motels at December 31, 2000, seventy-five motels at December 31, 2001 and seventy-four motels at December 31, 2002. (5) Revenue per available room ("REVPAR") represents motel-operating revenues divided by the total number of rooms available. Total available rooms represents the number of rooms available for rent multiplied by the number of days in the reported period. (6) The average daily room rate ("ADR") represents total room revenues divided by the total number of rooms occupied. (7) The occupancy percentage represents total rooms occupied divided by total available rooms. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. FORWARD- LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED AT THE TIME OF THE FORWARD-LOOKING STATEMENTS ARE MADE, INCLUDING, WITHOUT LIMITATION, RISKS AND UNCERTAINTIES ASSOCIATED WITH THE FOLLOWING: GENERAL REAL ESTATE, TRAVEL AND NATIONAL AND INTERNATIONAL ECONOMIC CONDITIONS, INCLUDING THE SEVERITY AND THE DURATION OF THE DOWNTURN RESULTING FROM THE SEPTEMBER 11, 2001 TERRORISTS ATTACKS ON NEW YORK AND WASHINGTON, D.C. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: THE COMPANY'S ABILITY TO OBTAIN FINANCING, COMPETITION, INTEREST RATE FLUCTUATIONS, OR GENERAL BUSINESS AND ECONOMIC CONDITIONS. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED FINANCIAL DATA" AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS PRESENTED BELOW FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 HAVE BEEN PREPARED ON THE SAME BASIS AS THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RECONCILE TO OPERATING INCOME REPORTED IN SUCH STATEMENTS. General MOA operates principally in the economy limited service segment of the lodging industry. As a result, its average room rates tend to be lower than the average room rates of full service lodging facilities. However, due to the limited nature of the public space and ancillary services provided by limited service motels, the Company's expenses tend to be lower than those of full service lodging facilities. The profitability of the lodging industry in general is significantly dependent upon room rental rates and occupancy rates. Due to the fixed nature of a relatively high portion of the Company's expenses, changes in either room rates or occupancy percentages result in significant changes in the operating profit of the Company's motels. Critical Accounting Policies and Estimates The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. The Company believes that the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Room revenues and other revenues derived from operation of lodging facilities are recognized when earned. The Company leased certain properties to third party operators under triple net leases requiring monthly rental payments that include: (i) minimum base rents which are recognized currently in revenue, and (ii) additional rents that may be applied to the purchase price of the property upon exercise of the lessee's purchase option. Recognition of such additional rents as revenue is deferred under the deposit method pending exercise of the purchase option or expiration or termination of the lease Impairment of Long-Lived Assets, Including Goodwill The Company periodically evaluates its long-lived assets, including its investments in real estate and goodwill, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal factors. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. Depreciation of Investment in Real Estate The Company depreciates the building component of its investment in real estate over a 40-year estimated useful life and both the furniture, fixtures and equipment and replacements components over a 7-year estimated useful life, all of which are judgmental determinations. Fair Value of Financial Instruments, Including Derivative Instruments The valuation of financial instruments under SFAS No. 107 and SFAS No. 133 requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on other factors relevant to the financial instruments. Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 The following chart presents certain historical operating results and statistics discussed herein and is being provided as a supplement to the audited consolidated financial statements presented elsewhere herein. (certain of the 2001 numbers have been reclassified to conform to the 2002 presentation):

----------------------------------------------------------- (1) ADR represents room revenues divided by the total number of rooms occupied. (2) REVPAR represents total motel operating revenues divided by the total number of rooms available. (3) Net operating income margin represents net operating income divided by total motel operating revenues plus lease revenues, vending revenues and corporate other revenues. (4) Net motel revenue margin represents total motel operating revenues less motel operating expenses and marketing and royalty fees, divided by motel room revenues. (5) At December 31, 2002 and 2001 and for the years then ended, excludes amounts related to seventy-four and seventy-five motels, respectively, which are leased to third party tenants. 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. During the twelve months ended December 31, 2002, the Company disposed of seven properties. The operating results of theses properties have been reclassified as discontinued operations in the 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, fax machine use and from vending machines commissions. Lease revenues are derived from lease payments from properties operated by third party tenants. Vending revenues are generated by vending operations located within the Company owned locations as well as non-owned Company locations. Other revenues include interest income, distributions on partnership interests in excess of the Company's basis in such partnerships and other miscellaneous income. Total revenues decreased to $57,007,000 in 2002 from $59,834,000 in 2001, a decrease of $2,827,000 or 4.7%. Motel revenues decreased to $37,713,000 in 2002 from $43,650,000 in 2001 a decrease of $5,937,000 or 13.6%. The decrease in motel revenues was attributable to the acquired or divested motels (including those subject to operating leases) since January 1, 2002 offset by an increase in the motel revenues for motels owned during both periods of $96,000 or .3%. The increase in motel revenues for motels owned during both periods was principally attributable to an increase in the occupancy percentage. The occupancy percentage in 2002 for the motels owned during both periods increased to 67.06% from 66.8% in 2001 or 0.4%. The ADR for the motels owned during both periods decreased to $49.41 in 2002 from $49.61 in 2001, a decrease of $.20 or less than 1%. Revenue per available room ("REVPAR") for motels owned during both periods increased to $36.77 in 2002 from $36.66 in 2001, a increase of $0.11 or .3%. The acquired and divested motels had an occupancy percentage of 40.91%, an ADR of $38.04 and a REVPAR of $16.22 for the period which the Company owned them in 2002. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, linens and other operating supplies. Motel operating expenses decreased to $19,836,000 in 2002 from $23,221,000 in 2001 a net decrease of $3,385,000 or 14.58%. Approximately $3,450,000 of the decrease is attributable to the cost of operating the acquired and divested motels since January 1, 2002. The cost of operating motels owned during both periods increased to $16,576,000 in 2002 from $16,511,000 in 2001, an increase of $65,000 or .39%. Motel operating expenses as a percentage of motel revenues decreased to 52.60% in 2002 from 53.20% in 2001. Motel operating expenses as a percentage of motel revenues for motels owned in both periods increased to 50.25% in 2002 from 50.20% in 2001. The increase in the operating expenses as a percentage of motel revenues for motels owned during both periods is primarily attributable to an increase in labor costs and repair and maintenance expenses that on a percentage basis exceed the percentage increase in motel revenues. Motel operating expenses as a percent of motel revenues for the acquired and divested motels was 68.94% in 2002. 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 $2,607,000 in 2002 from $3,106,000 in 2001, a decrease of $499,000 or 16.07%. Approximately $473,000 of the decrease in marketing and royalty fees was attributable to the motels acquired and divested since January 1, 2002. The marketing and royalty fees for motels owned during both periods decreased to $2,233,000 in 2002 from $2,259,000 in 2001, an decrease of $26,000 or 1.15%. For the motels owned during both periods, marketing and royalty fees as a percent of room revenues decreased to 7.51% in 2002 from 7.6% in 2001. The decrease in marketing and royalty fees for motels owned both periods in 2002 and 2001 was principally due to reduced marketing costs. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction/Acquisition and Divestiture Division and Vending general and administrative expenses. Included in the Management Company Operations which is the division responsible for the motel operations, are the costs associated with training, marketing, purchasing, administrative support, property related legal and accounting costs. The major components of these costs are salaries, wages and related expenses, travel, rent and other administrative expenses. The general and administrative expenses for the Management Operations decreased $612,000 to $4,488,000 in 2002 from $5,100,000 in 2001, an decrease of 12% due to a reduction in home office staff and expenses. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division decreased $219,000 from $471,000 in 2001 to $252,000 in 2002 or 46.5%. The decrease is attributable principally to the sales and leasing efforts of the Company's properties winding down in 2002. Vending general and administrative expenses decreased $418,000 from $1,361,000 in 2001 to $943,000 in 2002. This decrease is attributed to the reclassifying of certain employees from management to field operations. As a percentage of total motel operating revenues, Management Operations general and administrative expenses increased from 11.68% in 2001 to 11.9% in 2002. Lease revenues increased from $11,769,000 in 2001 to $12,663,000 in 2002, an increase of $894,000. This increase is primarily due to $890,000 of forfeited security deposits and purchase price credits. Lease expenses increased from $671,000 in 2001 to $959,000 in 2002, an increase of $288,000. Lease expenses primarily consist of costs expended for property insurance. Vending revenues increased $1,794,000 from $2,185,000 in 2001 to $3,979,000 in 2002 or an increase of 82.11%. Vending revenue is generated by vending machines and coffee services supplied to Company owned locations as well as third party locations. Vending expenses increased to $4,809,000 in 2002 from $2,141,000 in 2001 an increase of $2,668,000 or 124.6%. The increase is principally due to increased staffing and overhead need to continue to increase sales and grow the business. Vending expenses consist mostly of cost of goods sold and salaries related to retaining or servicing the vending routes. Impairment losses were recorded in the amount of $1,910,000 in 2002. Based on a property-by-property review of certain properties that had experienced a deterioration in operating performance, management determined that in certain instances the decline in operating performance was due to factors outside of management's control and likely to persist for the foreseeable future. The Company believes it is unlikely to realize the carrying value of certain of its properties through either a sale or from operations and recorded an impairment loss accordingly. Depreciation and amortization decreased to $11,227,000 in 2002 from $13,073,000 in 2001, a decrease of $1,846,000 or 14.12%. This decrease is attributed to a decrease in deferred loan costs amortization of approximately $281,000 and a decrease in depreciation in the amount of $1,557,000 resulting from the cessation of depreciation on fully depreciated assets. Net operating income increased to $9,977,000 in 2002 from $4,987,000 in 2001, a increase of $4,989,000 or 100%. There was a decrease in net motel revenues of $2,053,000(motel revenues less motel operating expenses and marketing and royalty fees). Of the $2,053,000 decrease in net motel revenues, $2,110,000 resulted from the motels acquired and divested since January 1, 2001 and a increase in net motel revenues for motels owned during both periods of $57,000 or .4%. Net operating revenue as a percent of total revenues was 17.5% and 8.3% in 2002 and 2001, respectively. The increase in net operating income also included the decrease in general and administrative expenses of $612,000, and a decrease in depreciation and amortization of $1,839,000 and an overall decrease in impairment losses of $3,792,000 all of which are separately discussed above. The Company also realized an increase in net lease operations of $1,216,000 and a decrease in vending operations of $1,077,000. Interest expense decreased to $17,190,000 in 2002 from $20,173,000 in 2000, a decrease of $2,893,000. The decrease is principally due to a decrease in average outstanding borrowings, specifically a decrease in the 12% Senior Subordinated Debt. Gain on sale of properties amounted to $0 in 2002 as compared to $3,669,000 in 2001. The gain in 2001 resulted from the sale of three motel properties and a general partner interest. The sale of seven motel properties in 2002 has been reflected as discontinued operations. Minority interests declined from 2002 to 2001 due to the sale of both partnership interests in 2001. Net loss decreased $3,993,000 to a net loss of $4,825,000 in 2002 from a net loss of $8,818,000 in 2001. Included in the net decrease is a decrease in impairment losses of $3,792,000. Extraordinary item gain of $305,000 is the result of the repayment at a discount of $4.7 million of Notes, net of income taxes of $195,000. Income tax benefit increased as a percent of income before taxes in 2002 as compared to 2001 as a result of the recognition of a tax valuation allowance of approximately $1,300,000 in 2001 pertaining to state tax net operating losses which are not expected to be utilized. Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 The following chart presents certain historical operating results and statistics discussed herein and is being provided as a supplement to the audited consolidated financial statements presented elsewhere herein. (certain of the 2000 numbers have been reclassified to conform to the 2001 presentation and both years have been restated to reflect discontinued operations for properties sold in 2002):

---------------------------------------------------------- (1) ADR represents room revenues divided by the total number of rooms occupied. (2) REVPAR represents total motel operating revenues divided by the total number of rooms available. (3) Net operating income margin represents net operating income divided by total motel operating revenues plus lease revenues, vending revenues and corporate other revenues. (4) Net motel revenue margin represents total motel operating revenues less motel operating expenses and marketing and royalty fees, divided by motel room revenues. (5) At December 31, 2001 and 2000 and for the years then ended, excludes amounts related to seventy-five motels for both periods, which are leased to third party tenants. 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. During the twelve months ended December 31, 2002, the Company disposed of seven properties. The operating results of theses properties have been reclassified as discontinued operations in the 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, fax machine use and from vending machines commissions. Lease revenues are derived from lease payments from properties operated by third party tenants. Vending revenues are generated by vending operations located within the Company owned locations as well as non-owned Company locations. Other revenues include interest income, distributions on partnership interests in excess of the Company's basis in such partnerships and other miscellaneous income. Total revenues decreased to $59,834,000 in 2001 from $68,912,000 in 2000, a decrease of $9,078,000 or 13.17%. Motel revenues decreased to $43,650,000 in 2001 from $55,128,000 in 2000 a decrease of $11,478,000 or 20.82%. The decrease of $11,478,000 in motel revenues was attributable to the acquired or divested motels (including those subject to operating leases) since January 1, 2001 and by a decrease in the motel revenues for motels owned during both periods of $762,000. Motel revenues for motels owned during both periods decreased 1.91%. The decrease in motel revenues for motels owned during both periods was principally attributable to a decrease in the average daily room rate ("ADR"). The ADR for the motels owned during both periods decreased to $49.74 in 2001 from $49.86 in 2000, an decrease of $.12 or .2%. The occupancy percentage in 2001 for the motels owned during both periods decreased to 67.8% from 68.54% in 2000 or 0.74%. Revenue per available room ("REVPAR") for motels owned during both periods decreased to $36.90 in 2001 from $37.45 in 2000, a decrease of $0.55 or 1.5%. The acquired and divested motels had an occupancy percentage of 49.13%, an ADR of $37.24 and a REVPAR of $18.68 for the period which the Company owned them in 2001. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, linens and other operating supplies. Motel operating expenses decreased to $23,221,000 in 2001 from $29,358,000 in 2000 a net decrease of $6,137,000 or 20.9%. Approximately $6,684,000 of the decrease is attributable to the cost of operating the acquired and divested motels since January 1, 2001. The cost of operating motels owned during both periods increased to $20,075,000 in 2001 from $19,528,000 in 2000, an increase of $547,000 or 2.8%. Motel operating expenses as a percentage of motel revenues decreased to 53.2% in 2001 from 53.25% in 2000. Motel operating expenses as a percentage of motel revenues for the motels owned in both periods increased to 51.25% in 2001 from 48.9% in 2000. The increase in the operating expenses as a percentage of motel revenues for motels owned during both periods is primarily attributable to an increase in labor costs and repair and maintenance expenses that on a percentage basis exceed the percentage increase in motel revenues. Motel operating expenses as a percent of motel revenues for the acquired and divested motels was 70.2% in 2001. Marketing and royalty fees include media advertising, billboard rental expense, advertising fund contributions and royalty charges paid to franchisers and other related marketing expenses. Marketing and royalty fees decreased to $3,106,000 in 2001 from $3,917,000 in 2000, a decrease of $811,000 or 20.7%. Approximately $836,000 of the decrease in marketing and royalty fees was attributable to the motels acquired and divested since January 1, 2000. The marketing and royalty fees for motels owned during both periods increased to $2,743,000 in 2001 from $2,718,000 in 2000, an increase of $25,000 or .9%. For the motels owned during both periods, marketing and royalty fees as a percent of room revenues increased to 7.66 in 2001 from 7.45% in 2000. The increase in marketing and royalty fees for motels owned both periods in 2000and 2001 was principally due to additional marketing efforts. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction/Acquisition and Divestiture Division and Vending general and administrative expenses. Included in the Management Company Operations which is the division responsible for the motel operations, are the costs associated with training, marketing, purchasing, administrative support, property related legal and accounting costs. The major components of these costs are salaries, wages and related expenses, travel, rent and other administrative expenses. The general and administrative expenses for the Management Operations increased $287,000 to $5,100,000 in 2001 from $4,813,000 in 2000, an increase of 6.0% due to an increase in professional fees. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division decreased $504,000 from $975,000 in 2000 to $471,000 in 2001 or 51.7%. The decrease is attributable principally to the sales and leasing efforts of the Company's properties winding down in 2001. Vending general and administrative expenses increased $739,000 from $622,000 in 2000 to $1,361,000 in 2001. This increase is attributed to the increased efforts to expand the vending company operations. As a percentage of total motel operating revenues, Management Operations general and administrative expenses increased from 8.73% in 2000 to 11.68% in 2001. Lease revenues increased from $9,832,000 in 2000 to $11,769,000 in 2001, an increase of $1,937,000. This increase is the result of leasing an additional three properties since December 31, 2000, plus $542,000 of forfeited security deposits. Lease expenses increased from $455,000 in 2000 to $671,000 in 2001, an increase of $216,000. Lease expenses primarily consist of costs expended for property insurance. Vending revenues increased $1,113,000 from $1,072,000 in 2000 to $2,185,000 in 2001 or an increase of 103.8%. Vending revenue is generated by vending machines and coffee services supplied to Company owned locations as well as third party locations. The Company acquired a new vending company in 2001 consisting of approximately 100 locations. Vending expenses increased to $2,141,000 in 2001 from $1,081,000 in 2000 an increase of $1,060,000 or 98.1%. Vending expenses consist mostly of cost of goods sold and salaries related to saving or servicing the vending routes. Impairment losses were recorded in the amount of $5,702,000 in 2001. Based on a property-by-property review of certain properties that had experienced a deterioration in operating performance, management determined that in certain instances the decline in operating performance was due to factors outside of management's control and likely to persist for the foreseeable future. The Company believes it is unlikely to realize the carrying value of certain of its properties through either a sale or from operations and recorded an impairment loss accordingly. Depreciation and amortization decreased to $13,073,000 in 2001 from $14,099,000 in 2000, a decrease of $1,026,000 or 7.27%. This decrease is attributed to a decrease in deferred loan costs amortization of approximately $400,000 and a decrease in depreciation in the amount of $700,000. Net operating income decreased to $4,987,000 in 2001 from $13,592,000 in 2000, a decrease of $8,605,000 or 63.31%. There was a decrease in net motel revenues of $4,530,000(motel revenues less motel operating expenses and marketing and royalty fees). Of the $4,530,000 decrease in net motel revenues, $3,196,000 resulted from the motels acquired and divested since January 1, 2000 and a decrease in net motel revenues for motels owned during both periods of $1,334,000 or 7.54%. Net operating revenue as a percent of total revenues was 8.33% and 19.72% in 2001 and 2000, respectively. The decrease in net operating income also included the increase in general and administrative expenses of $521,000, and a decrease in depreciation and amortization of $1,026,000 and an increase in impairment losses of $5,702,000 all of which are separately discussed above. The Company also realized an increase in net lease operations of $1,989,000 and a decrease in vending operations of $97,000. Interest expense decreased to $20,173,000 in 2001 from $24,844,000 in 2000, a decrease of $4,671,000. The decrease is principally due to a decrease in average outstanding borrowings, specifically a decrease in the 12% Senior Subordinated Debt. Gain on sale of properties amounted to $3,669,000 in 2001 as compared to $2,177,000 in 2000. The gain in 2001 resulted from the sale of three motel properties and a general partner interest compared with the sale of eight motel properties sold in 2001. Minority interests declined from 2001 to 2000 due to the sale of both partnership interests. Net loss increased $8,034,000 to a net loss of $8,818,000 in 2001 from a net loss of $784,000 in 2000. Included in the net increase are the impairment losses of $5,702,000 and a net gain on early extinguishment of debt on the 12% Senior Subordinated debt of $390,000 net of tax of $249,000. Extraordinary item gain of $390,000 is the result of the repurchase at fair market value of $1.9 million of 12% Senior Subordinated Notes at a discount and also a $66,000 penalty on repayment of a note payable. Income tax benefit decreased as a percent of income before taxes in 2001 as compared to 2000 as a result of the recognition of a tax valuation allowance of approximately $1,300,000 pertaining to state tax net operating losses which are not expected to be utilized. Liquidity and Capital Resources The Company's primary uses of its capital resources include debt service, capital expenditures (primarily for motel refurbishment) and working capital. In addition, on a discretionary basis the Company utilizes its capital resources for the development and acquisition of motel properties. Substantially all of the company's investment properties, mortgage and other notes receivable have been pledged as collateral. The Company's debt service requirements consist of the obligation to make interest and principal payments on its outstanding indebtedness. As of December 31, 2002, the Company has principal repayment obligations of $32,823,000, $19,079,000 and $120,696,000 for the years ending December 31, 2003, 2004 and 2005, respectively. During 2002 the Company was advanced $3.9 million on a loan of $7.0 million for construction advances on a property under construction. In June 2001, the Company refinanced $3,997,000 of debt with new loans of $3,425,000 at 8.84% due August 1, 2011, with monthly principal and interest payments of $30,464 secured by two properties located in East Syracuse, NY and Wilson, NC. In July 2001, the Company borrowed $1,000,000 at prime plus .5% due June 12, 2002 which has been repaid in full. In July 2001, the Company borrowed $3,500,000 at 8.67% due September 1, 2011 with monthly principal and interest payments of $30,751 secured by one property in Milford, MA, which was used to pay off an existing construction loan with a balance of $2,877,000. In August 2001, a subsidiary of the Company purchased a vending company and assumed debt in the amount of $250,000, non interest bearing with three annual payments of $83,333, due August 24, 2002, August 24, 2003 and August 24, 2004, $134,000, due November 1, 2008, with monthly principal and interest payments of $2,168 and $111,000, due April 1, 2007, with monthly principal and interest payments of $2,146. In October 2001, the Company repurchased an additional $1.9 million of the 12% Senior Subordinated Notes from an affiliate at fair market value for a pre-tax gain of $639,000. As discussed in Note 14 - Going concern, 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. The Company's capital expenditure requirements principally include capital improvements and the refurbishment of lodging facilities as part of an ongoing strategy to provide well-maintained facilities. The Company made capital expenditures (exclusive of acquisitions and development of investment properties) of $4,243,000 $2,971,000 and $4,641,000, in 2002, 2001 and 2000, respectively. In addition, as of December 31, 2002, the Company has $1,199,000 of cash restricted for future refurbishment, in accordance with certain debt agreements. Management is not aware of any unusual required level of future capital expenditures necessary to maintain its existing properties. In order to complete construction on a property in Santa Monica, CA the company estimates it will need an additional $2,600,000 above the available financing. For the year ended December 31, 2002 cash and cash equivalents increased $48,000 from the balance at December 31, 2001. A total of $17,005,000 of cash was provided by operating activities, $6,741,000 of cash was provided by investing activities and $23,699,000 of cash was used in financing activities. Net investing activities include: $8,337,000 of cash utilized for motel development; $4,2431,000 expended on renovation of existing motel properties; $1,066,000 of cash was used by a increase in cash restricted for refurbishment of properties; and $20,388,000 of cash provided from the sale of investment properties and collections on mortgage and other notes receivable. Cash used by financing activities include: $33,244,000 of cash utilized to repay indebtedness plus $1,144,000 of deferred financing costs less $10,689,000 of proceeds from borrowings. The Company is not currently a party to any proceeding, which in management's opinion, is likely to have a material adverse effect on the Company's operating results or financial position. However, subsequent to December 31, 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 7A. Quantitative and Qualitative Disclosures About Market Risk As of December 31, 2002, the Company has total outstanding debt of approximately $195,235,000 of which approximately $14,063,000, or 7.2%, is variable rate debt. If market rates of interest on the Company's debt increase by 10%, the increase in interest expense on the Company's variable rate debt would decrease future earnings and cash flows by approximately $75,000. If market rates of interest increased by 10%, the fair value of the Company's total outstanding debt would decrease by approximately $3,278,000. If market rates of interest on the Company's variable rate debt decreased by 10%, the decrease in interest expense on the Company's variable rate debt would increase future earnings and cash flows by approximately $66,000. If market rates of interest decreased by 10%, the fair value of the Company's total outstanding debt would increase by approximately $3,367,000. These amounts were determined by considering the impact of hypothetical interest rates on the Company's debt. These analyses do not consider the effect of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to mitigate its exposure to such a change. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements in this Form 10-K. The supplemental financial information specified by Item 302 of Regulation S-K is not applicable. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following chart lists the Company's current directors and executive officers. Name Age Positions(s) with the Company ------------------ ----- ----------------------------------------------- Paul F. Wallace 66 Director, Chairman and Chief Executive Officer Kurt M. Mueller 46 Director, President and Chief Financial Officer Alan H. Baerenklau 57 Director Ronald P. Stewart 59 Director Peter W. McClean 59 Director Philip J. Levien 58 Director Blane P. Evans 43 Vice President, Secretary & Treasurer The following is a biographical summary of the experience of the directors and executive officers of the Company: Paul F. Wallace, formerly a Director and controlling stockholder of EconoLodge, has been Chairman and Chief Executive Officer of the Company since January 1994 and a Director of the Company since August 1992. Mr. Wallace also serves on the Company's operations committee. Mr. Wallace was President of The Broadstone Group from July 1978 until June of 1986, and he became the President again in July of 1993. Mr. Wallace has been Chairman of the Board and controlling stockholder of The Broadstone Group since July 1981, and is currently the principal shareholder of a privately held manufacturing company and an investor in and operator of various real estate related projects. Kurt M. Mueller has been the Chief Financial Officer since April 1997. Mr. Mueller has been a Director of the Company since he joined MOA in May 1991. Mr. Mueller was President from January 1994 until April 1997 and Chief Operating Officer of the Company from May 1991 until April 1997. Mr. Mueller also served as Executive Vice President from May 1991 until January 1994. In addition, Mr. Mueller currently serves on the Company's operations committee. From 1978 to 1991, Mr. Mueller was employed by Ernst & Young LLP most recently as a Senior Manager. During his career at Ernst & Young LLP, he was on the audit staff and, during his last two years, he worked in the Mergers and Acquisitions Group performing due diligence financial and operational reviews. Alan H. Baerenklau joined the Company in March 1997 and became a Director, President and Chief Operating Officer of the Company in April 1997. Mr. Baerenklau was President and Chief Operating Officer of Florida Hospitality Group, a hotel development and management company, from 1984 to 1997. Prior to 1984, Mr. Baerenklau held various positions with the Howard Johnson Company including those of General Manager, Regional Manager, Director of Corporate Real Estate and Vice President of Operations. He is also an investor, partner and officer in various hotel real estate ventures. Mr. Baerenklau retired as the President of the company in September 2000 and remains with the company as a Director. Ronald P. Stewart, formerly a Director of EconoLodge, has been a Director of the Company since October 1993. Mr. Stewart has been Headmaster of York Preparatory School in New York City since 1969 and Chairman of The Rhodes Group, Inc. since 1992. Peter W. McClean, has been a Director of the Company since April 1997. Mr. McClean is currently Senior Vice President and Head of Global Risk Management for the Bank of Bermuda Limited, based in Hamilton, Bermuda. In his current position, Mr. McClean is responsible for the credit policy, the market risk policy, the operating risk, the internal audit and the Bank's General Counsel. Philip J Levien, formerly a Director and Chairman of the Board of EconoLodge, has been a Director of the Company since April 1997 and serves on its audit committee. Mr. Levien has served as a Director of the Broadstone Group for the past 15 years. Mr. Levien has been a Real Estate Developer for the past 30 years. Blane P. Evans has been Vice President, Secretary and Treasurer of the Company since May 1999. Mr. Evans joined the Company in January 1992 and has served in various capacities, most recently as Corporate Controller. Executive officers of the Company are appointed and serve at the discretion of the Board of Directors. Each director of the Company is elected for a period of one year and serves until his successor is duly elected and qualified. None of the directors or executive officers of the Company has a family relationship with any of the other directors or executive officers of the Company. Item 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company to each of the Chief Executive Officers and the two other most highly compensated executive officers of the Company, as of the end of the last fiscal year, for services rendered to the Company in all capacities during the last three fiscal years: SUMMARY COMPENSATION TABLE Name and Principal Position Year Salary($) Bonus($) ------------------------------------------- ------ ---------- ---------- Paul F. Wallace 2002 300,000 - Chairman and Chief Executive Officer 2001 300,000 - 2000 300,000 - Alan H. Baerenklau 2000 176,664 - President and Chief Operating Officer (1) Kurt M. Mueller 2002 240,000 - President and Chief Financial Officer 2001 220,000 - 2000 200,000 - (1) Mr. Baerenklau joined the Company in March 1997 as President and Chief Operating Officer and retired in September 2000. The Company historically has and intends to continue to pay discretionary bonuses to key employees, including property managers, as rewards for superior financial performance. The Company does not maintain any employee pension, profit sharing or savings plans for its employees, other than a 401(k) savings plan, nor does it currently have any stock related plans for key executives. Members of the Board of Directors do not receive compensation for serving on the Board except that Messrs. Baerenklau, Stewart, McClean and Levien each receive a $5,000 annual retainer and are paid $1,000 for each meeting. All members of the Board of Directors receive reimbursement of reasonable expenses incidental to attendance at meetings of the Board of Directors and all committees. Compensation Committee Interlocks and Insider Participation The Company has no compensation committee of the Board of Directors. During 2001, no officer or employee of the Company or its subsidiaries participated in deliberations of the Company's Board of Directors concerning executive officer compensation. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of Common Stock beneficially owned by the only entity known to be the beneficial owner of more than 5% of the Company's Common Stock, by each director and by all directors and officers of the Company as a group as of August 20, 2003:

(1) Mr. Wallace is President, Chairman of the Board and controlling stockholder of The Broadstone Group. The Broadstone Group owns 100% of the outstanding Common Stock of New Image Realty, Inc. ("New Image"), which owns 85% of the outstanding Common Stock of MOA. Mr. Wallace is deemed to be a beneficial owner of 677,228 shares of Common Stock of the Company owned by New Image and 7,129 shares of Common Stock of the Company issued to Opal Inc. in January 1994. (2) Includes 677,228 shares of Common Stock of the Company held by New Image and 7,129 shares of Common Stock of the Company held by Opal Inc. that are deemed to be beneficially owned by Paul F. Wallace. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is a member of an affiliated group that files a consolidated tax return for federal income tax purposes. In March 2000, the Company purchased from an affiliated company at fair market value $10.5 million of the 12% Senior Subordinated Notes due in 2004 for a gain of $4.2 million which is offset by $.6 million in accelerated deferred financing costs written off as part of the transaction. In October 2000, the Company purchased an additional $20.9 million at fair market value of the 12% Senior Subordinated Notes for a gain of approximately $6.7 million which is partially offset by $1.1 million in accelerated deferred financing costs written off as part of this transaction. In October 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the 12% Senior Subordinated Notes at a pre tax gain of approximately $639,000. Also during 2001, the Company sold three properties to related parties at fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million. On two of the three properties the Company retained title to the Land and has leased it on a ground lease to the purchaser. During 2002, the company 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. Item 14. 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 IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 & 2. Financial Statements and Schedules See Index to Financial Statements in this Form 10-K. 3. Exhibits - None (b) Reports on Form 8-K - None INDEX TO FINANCIAL STATEMENTS MOA HOSPITALITY, INC. AND SUBSIDIARIES Years Ended December 31, 2002, 2001 and 2000 Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002 F-4 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2002 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002 F-6 Notes to Consolidated Financial Statements F-7 Schedule III: Leased Real Estate and Accumulated Depreciation F-22 All other schedules have been omitted because they are not required or are not applicable, or the required information is included in the financial statements or notes thereto. REPORT OF INDEPENDENT AUDITORS The Board of Directors MOA Hospitality, Inc. We have audited the consolidated balance sheets of MOA Hospitality, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audit also included the financial statement schedule listed in the index under Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MOA Hospitality, Inc. and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 14, the Company is in default under certain loan covenants relating to two notes payable and has insufficient liquidity to repay the amounts outstanding should they become immediately due and payable. Management is currently pursuing the restructuring of these obligations but there can be no assurance as to the outcome of such efforts. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. In 2002, as discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". /s/Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois July 10, 2003, except for Note 13 as to which the date is August 26, 2003 MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 1. Organization and Basis of Presentation MOA Hospitality, Inc., an 85%-owned subsidiary of New Image Realty, Inc. ("New Image"), owns, develops, and manages various national brand affiliated limited service lodging facilities in 33 states throughout the United States. At December 31, 2002, the Company's largest concentrations of lodging facilities were located in the States of Georgia and Illinois with 13 lodging facilities in Georgia and 10 lodging facilities in Illinois. The consolidated financial statements include the accounts of MOA Hospitality, Inc. and all wholly owned subsidiaries and all entities in which it has a controlling interest (collectively, the "Company"). All significant intercompany accounts have been eliminated in consolidation. Certain reclassifications of prior-period amounts have been made to conform with the current-period presentation which have not changed operations or stockholders' equity. 2. Summary of Significant Accounting Policies Use of Estimates- The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents- Cash equivalents represent liquid assets with a maturity of three months or less when purchased. Restricted Cash- Restricted cash represents cash that, under the terms of certain mortgage notes payable, has been set aside for the refurbishment of motel properties and future payment of taxes and insurance. Investment Properties- The Company's operating properties are stated at cost less accumulated depreciation. Operating properties, excluding land, are depreciated using the straight-line method over the estimated useful lives of the assets (buildings - 40 years; furniture and equipment - 7 years). Maintenance and repair costs are expensed as incurred, while significant improvements, replacements and major renovations are capitalized. The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. An impairment loss is measured as the difference between the carrying value and fair value. Marketing costs are expensed as incurred. Developments and Land held for development- Developments in process are carried at cost, which includes land acquisition cost, architectural fees, general contractor fees, capitalized interest, internal costs related directly to the development and other costs related directly to the construction of the property. Depreciation is not recorded until the property is placed in service, which occurs shortly after receipt of a certificate of occupancy. Land held for development is carried at cost and is not depreciated. Land held for development includes various vacant land parcels that may have some improvements such as utility service. 2. Summary of Significant Accounting Policies- (Continued) Revenue Recognition- Room revenues and other revenues derived from operation of lodging facilities are recognized when earned. The Company leased certain properties to third party operators under triple net leases requiring monthly rental payments that include: (i) minimum base rents which are recognized currently in revenue, and (ii) additional rents that may be applied to the purchase price of the property upon exercise of the lessee's purchase option. Recognition of such additional rents as revenue is deferred under the deposit method pending exercise of the purchase option or expiration or termination of the lease. Financing and Other Deferred Costs- Financing costs are amortized over the terms of the related indebtedness using the level yield method. Franchise costs are amortized using the straight-line method over the life of the related franchise agreement. Earnings Per Share- Basic and fully diluted earnings per share are based on the weighted average number of shares of common stock outstanding during each period. Income Taxes- Deferred income taxes are recorded based on enacted statutory rates to reflect the tax consequences in future years of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets, such as net operating loss carry forwards, which will generate future tax benefits are recognized to the extent that realization of such benefits through future taxable earnings or alternative tax strategies is more likely than not. Reclassifications- Certain reclassifications have been made to previously reported 2000 and 2001 statements in order to provide comparability with the 2002 statements reported herein. These reclassifications have not changed the 2000 and 2001 results or stockholders' equity. Impact of New Accounting Standards- In accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, effective for financial statements issued for fiscal years beginning after December 15, 2001, the net income and gain/(loss) on sales of real estate for properties sold subsequent to December 31, 2001 is reflected in the consolidated statement of operations as "Discontinued operations" for all periods presented. In accordance with Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections, effective for financial statements issued for fiscal years beginning after May 15, 2002, gains and losses on extinguishments of debt that do not meet the criteria for extraordinary classification are to be classified as a component of income from continuing operations rather than as extraordinary items as previously required under Statement 4. The Company is required to adopt this Statement January 1, 2003 and anticipates that all previously reported extraordinary items resulting from debt extinguishments will be reclassified. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 Consolidation of Variable Interest Entities and Interpretation of Accounting Research Bulletin (ARB) No. 51 ("FIN 46").FIN 46 introduces a new consolidation model, the variable interest model, which determines control (and consolidation) based on potential variability in gains and losses of the entity being evaluated for consolidation. The consolidation provisions of FIN 46 apply immediately to variable interests in variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise that is a public company holds a variable interest that it acquired before February 1, 2003. Management does not anticipate that the provisions of FIN 46 will have a material impact on the Company's financial condition and results of operations. 3. Mortgage and Other Notes Receivable Mortgage notes receivable in the amounts of $17,665,317` and $27,740,936 at December 31, 2002 and 2001, respectively, represent notes collateralized by motel properties. The notes provide for monthly principal and interest (various rates of 6.75% to 10%) receipts over various terms through 2007, although certain notes are callable prior to their due dates. Other notes receivable in the amount of $556,625 and $573,299 at December 31, 2002 and 2001, respectively, bear an interest rate of 11% and are receivable through 2016. Notes receivable of $8,245,494 at December 31, 2001 have been pledged as collateral for a loan facility. The loan facility had an outstanding balance of $3,191,955 at December 31, 2001. The loan was repaid during 2002 At December 31, 2001 and December 31, 2002 approximately $15.6 million of notes receivable are due from affiliated entities. See note 9. One of the notes has been amended to reduce the monthly payments until September 1, 2004. The reduction is to be deferred and added to the amount due at maturity, June 1, 2006. The amount deferred ($ 288,000) is included in Accounts Receivable in the December 31, 2002 financial statements. 4. Operating Properties The major classes of operating properties, at cost, are as follows: December 31, --------------------------------- 2002 2001 -------------- -------------- Land $ 40,728,933 $ 42,918,880 Buildings 195,392,617 204,907,435 Furniture and Equipment 55,636,590 57,758,228 -------------- -------------- 291,758,140 305,584,543 Less: Accumulated depreciation (104,056,591) (99,412,606) -------------- -------------- $ 187,701,549 $ 206,171,937 ============== ============== Depreciation expense equaled $9,292,455, $11,174,249, and $11,886,201 for the years ended December 31, 2002, 2001 and 2000, respectively. 5. Notes Payable and Senior Subordinated Notes In September 1995, the Company completed funding of a financing transaction with Nomura Asset Capital Corporation ("NACC"). Motels of America, L.L.C. (the "LLC"), a limited purpose subsidiary, obtained a loan from NACC in the principal amount of $158.8 million evidenced by a Promissory Note ("Note") due 2015. The Note is secured by 93 motel properties owned by the LLC. The loan requires fixed monthly payments (based on a 20-year amortization schedule) of principal and interest totaling approximately $1,390,000 through October 11, 2005; thereafter, if the loan is not repaid, excess cash flow as defined is applied as additional principal payments until October 10, 2015 (The maturity date). Interest accrues at 8.62% through October 11, 2005, and thereafter at a fixed rate per annum equal to the greater of (i) 10.62% or (ii) the yield as of October 11, 2005 on ten-year U.S. Treasury notes, plus 4.5%. 5. Notes Payable and Senior Subordinated Notes - (Continued) The terms of the secured note payable prohibit prepayments and contain customary restrictive covenants. Release of lien on related collateral properties may be achieved only via defeasance using U.S. government securities, as defined in the agreements. Scheduled principle payments required on the secured note payable are approximately $5,438,000 in 2003, and $5,900,980 in 2004. If the loan is not repaid in 2005, principle payments in 2005 and subsequent periods will be dependent upon various factors as described above. See Note 13 for a discussion of events subsequent to December 31, 2002. In 1994, the Company completed an offering of $80,000,000 in principal amount of 12% Senior Subordinated Notes due April 15, 2004, Series B. In conjunction with this offering, 80,000 shares of common stock were also issued. These Notes have been registered under the Securities Act of 1933 and are freely transferable by holders thereof. Interest on the Notes is payable semiannually. The Notes were not redeemable by the Company prior to April 15, 1999. The Company may redeem the Subordinated Notes at 106% reducing to 100% over the life of the Subordinated Notes plus any accrued and unpaid interest. In October 1999, the Company repurchased from an affiliated company at fair market value $35 million of the 12% Senior Subordinated Notes for a gain of $1.9 million, which was offset by the accelerated write-off of deferred financing costs of $1.9 million. The repurchase transaction included the assumption of $8.75 million of notes payable of the affiliate. In March 2000, the Company repurchased from an affiliated company at fair market value $10.5 million of the 12% Subordinated Notes for a gain of approximately $4.2 million which was partially offset by a $0.6 million write-off of accelerated deferred financing costs. The repurchase transaction included the assumption of $4.4 million of notes payable of the affiliate. In October 2000, the Company repurchased from an affiliated company at fair market value an additional $20.9 million of the 12% Subordinated Notes for a gain of approximately $6.7 million which was partially offset by a $1.1 million write-off of accelerated deferred financing costs. The repurchase transaction included the assumption of $3.7 million of notes payable of the affiliate. A portion of the purchase price ($12,297,000 and $24,453,000 in 2000 and 1999, respectively) of each repurchase transaction was satisfied through a reduction of tax amounts due from the parent under the tax sharing agreement. In October 2001, the Company repurchased from an affiliated company at fair market value $1.9 million of the Senior Subordinated Notes at a gain, net of income taxes, of approximately $431,000. The Company is currently in default with respect to certain covenants pertaining to its unsecured Senior Subordinated Notes ("Notes"). Accordingly, holders of not less than 25% of the outstanding Notes may call the outstanding principal and accrued interest thereon immediately due and payable.(See Note 14) An extraordinary gain of $5,653,349, net of income taxes, was recognized in 2000 relating to the repurchase of the 12% Subordinated Notes. An extraordinary gain of $390,392, net of income taxes, was recognized in 2001 relating to the repurchase of the 12% Subordinated Notes and a prepayment penalty of $66,000 relating to early retirement of a note payable. The declaration and payment of dividends by the Company is restricted by the indenture relating to the 12% Senior Subordinated Notes. Substantially all of the company's investment properties, mortgage and other notes receivable have been pledged as collateral. 5. Notes Payable and Senior Subordinated Notes - (Continued) A summary of mortgage and other notes payable is as follows:

An extraordinary gain of $305,000 was recognized in 2002 as a result of the repayment at a discount of $4.7 million of Notes, net of income taxes of $195,000. Principal payments required on notes payable and the Senior Subordinated Notes are scheduled as follows: Years ended December 31, 2003 $ 32,822,793 2004 19,079,289 2005 120,696,272 2006 7,296,365 2007 2,367,092 Thereafter 13,126,930 --------------- Sub-total 195,388,741 Less: Discount, net of accumulated amortization (153,861) --------------- $ 195,234,880 =============== 6. Leases The Company leases certain properties, administrative offices, and equipment under operating leases. The leases generally provide for the Company to pay taxes, insurance, and maintenance expenses related to the leased property. Rent expense was approximately $556,000, $506,000, and $398,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Minimum annual rentals for leases on properties and the corporate office for the five years subsequent to December 31, 2002 and thereafter, are approximately as follows: Years ended December 31, 2003 $ 563,000 2004 498,000 2005 446,000 2006 393,000 2007 281,000 Thereafter 643,000 ------------ $ 2,824,000 ============ The Company, as lessor, has entered into operating leases with unaffiliated parties to operate seventy-four and seventy-five motel properties at December 31, 2002 and 2001, respectively. Under the terms of these leases, the lessee is responsible for operating costs including all maintenance, repairs, taxes and insurance expense on the leased property. The leases, which have terms ranging from five and a half years to six and half years, provide for monthly rent payments. In addition, the lease grants the lessee an option to purchase the leased properties at prices believed by management to reflect market value, which in the aggregate is $151,376,000 and $142,146,000 at December 31, 2002 and 2001, respectively. Nonrefundable deposits and non-refundable purchase price credits, aggregating approximately $25,946,000 and $23,300,000 at December 31, 2002 and 2001, respectively, received from lessees can be applied towards the purchase prices of the leased properties. Monthly lease payments are allocated between rental income and a nonrefundable purchase price credit to be applied if the purchase option is exercised. The deposits and real estate tax and other amounts collected from the lessees aggregating approximately $5,157,000 and $4,600,000 at December 31, 2002 and 2001, respectively are reflected in the balance sheet as a liability. Future minimum rentals under the leases (assuming that the purchase options are not exercised prior to expiration) are approximately as follows: Years ended December 31, 2003 $ 11,511,000 2004 11,384,000 2005 3,594,000 2006 187,000 -------------- $ 26,676,000 ============== Total cost basis on the seventy-four leased locations at December 31, 2002 is approximately $146,074,000 with accumulated depreciation of approximately $38,961,000. Total cost basis on the seventy-five leased locations at December 31, 2001 is approximately $138,370,000 with accumulated depreciation of approximately $35,034,000. Depreciation is calculated on a 40 year life of the building. 6. Leases - (Continued) During 2001 and 2002 the lessees at four and three properties respectively, defaulted on their leases, resulting in termination of their leasehold interests and forfeiture of approximately $542,000 and $890,000 in security deposits and purchase price credits, which are included in lease revenue in the statement of operations. 7. Impairment losses and restructuring costs In 2001 and 2002 impairment losses of $6,622,000 and $1,910,440, respectively, were recorded to reflect the write-down of certain properties to their estimated fair value based upon a permanent deterioration in operating results at such properties. During 2002 certain properties were sold and $920,000 of the impairment loss booked in 2001 is now reflected in discontinued operations. 8. Income Taxes During fiscal year 2002 and fiscal year 2001, the Company recorded a valuation allowance of $454,000 and $581,000, respectively, relating to state net operating losses from previous years that are not expected to be utilized. Total income tax expense (benefit) was allocated as follows: 2002 2001 2000 ------------- ------------- ------------- Continuing operations $ (2,183,175) $ (3,179,239) $ (3,659,110) Discontinued operations (51,769) (534,053) (343,804) Extraordinary item 194,600 248,755 3,602,298 ------------- ------------- ------------- $ (2,040,344) $ (3,464,537) $ (400,616) ============= ============= ============= Income tax expense (benefit) consists of: Current Deferred Total ------------- ------------- ------------- Year ended December 31, 2002 U.S. federal $ (2,181,076) $ (6,839) $ (2,187,915) State and local 65,493 (60,753) 4,740 ------------- ------------- ------------- $ (2,115,583) $ (67,592) $ (2,183,175) ============= ============= ============= Year ended December 31, 2001 U.S. federal $ (67,539) $ (3,534,598) $ (3,602,137) State and local (1,171) 424,069 422,898 ------------- ------------- ------------- $ (68,710) $ (3,110,529) $ (3,179,239) ============= ============= ============= Year ended December 31, 2000 U.S. federal $ (4,706,551) $ 1,751,331 $ (2,955,220) State and local 157,221 (861,111) (703,890) ------------- ------------- ------------- $ (4,549,330) $ 890,220 $ (3,659,110) ============= ============= ============= 8. Income Taxes - (Continued) Income tax expense (benefit) differs from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes and extraordinary item as a result of the following:

The deferred tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes are as follows: December 31, ------------------------------ 2002 2001 ------------- ------------- Deferred tax assets: Primarily impairment losses and reserves $ (4,501,078) $ (4,890,436) State operating loss carryforwards (2,185,062) (1,662,303) Federal tax credits carryover (447,201) (447,201) Other, net (498,442) (96,689) ------------- ------------- Deferred tax assets (7,631,783) (7,096,629) Less: Valuation allowance 1,035,395 581,424 ------------- ------------- Net deferred tax assets (6,596,388) (6,515,205) Deferred tax liabilities: Lease cost amortization 564,962 681,177 Investment properties, principally due to depreciation and purchase accounting adjustments 4,002,365 4,274,187 ------------- ------------- Total deferred tax liabilities 4,567,327 4,955,364 ------------- ------------- Net deferred tax (asset) liability $ (2,029,061) $ (1,559,841) ============= ============= 8. Income Taxes - (Continued) The Company is a member of an affiliated group that files a consolidated tax return for federal income tax purposes and has entered into a tax allocation agreement with New Image and its parent corporation. In accordance with the agreement, the Company's tax liability/benefit will be computed as if the Company had filed its own consolidated tax return and is subject to tax on all of its taxable income. At December 31, 2001 and December 31, 2002, approximately $487,000 and $3.9 million, respectively is owed from the parent corporation, which has been included in other accounts payable and accrued expenses. At December 31, 2002, the Company has recognized a net deferred asset relating to net operating loss carryforwards ("NOLs") for state income tax purposes of approximately $15.4 million. The NOLs, which are subject to certain limitations, expire at various dates through 2017. 9. Acquisitions and Divestitures During 2000, the Company sold eight properties for approximately $20.8 million consisting of $11.2 million in cash and $7.6 million in first mortgage notes. These sale transactions resulted in a net gain of $2.2 million. The Company also sold a vacant parcel of land at cost during 2000. The Company also purchased a parcel of land in February 2000 for approximately $250,000 cash and a note in the amount of $460,000, which was repaid in 2000. Also, in 2000, the Company, as lessor, has leased an additional thirty-two motel properties. During 2001, the Company leased an additional three, and re-leased three of its lodging facilities to third party operators. Also during 2001, the Company sold two properties for approximately $5.5 million in cash for a gain of $1.8 million. The Company also sold three additional properties to related parties at prices believed by management to represent fair market value for approximately $17.5 million resulting in a deferred gain of $5.4 million and notes receivable of $15.6 million secured by wrap notes on the properties, which are encumbered by $10,533,933 and $10,888,700 of first mortgage debt that is included in the consolidated financial statements of the Company at December 31, 2002 and 2001, respectively. On two of the three properties the Company retained title to the Land and has leased it on a ground lease to the purchaser. The deferred gain will be recognized when the note receivables are paid in full. The Company continues to manage these properties for a fee which was approximately $217,000 for 2002 and $61,000 for 2001. Short term advances for operating and capital expenditures, made by the Company on behalf of the affiliates equaled approximately $426,000 and $464,000 December 31, 2002 and 2001 respectively, and are included in other assets. The Company retained the land underlying two of these properties in the amount of $1,327,000. The buyers' obligations under ground leases require annual aggregate payments of $240,000 through an initial term of 31 years. The Company received interest income on the notes in the amount of $1,205,000 for 2002 and $283,000 for 2001. Also during 2001 the Company sold its partnership interest in one lodging facility for $200,000. The Company also recognized a deferred gain of $1.7 million on one of its lodging facilities sold in a prior year. During 2001, a subsidiary of the Company purchased a vending company for $624,000 funded by $126,000 cash and assumption of $498,000 of debt. During 2002, the Company sold seven properties for approximately $12.2 million for a net gain of approximately $31,000. The gain has been reclassified to discontinued operations as discussed below. 9. Acquisitions and Divestitures - (Continued) Also during 2002, the Company leased an additional seven of its lodging facilities to third party operators and took back three of its leased lodging facilities prior to lease expiration. The Company also re-leased one of its lodging facilities to third party operators under terms similar to previous operating leases executed by the Company. Also during 2002, the company sold and leased back two properties to related parties. Under SFAS 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 consolidated financial statements the properties are reflected as operating properties. The net of the deposits, interest income and lease expense, which totaled $663,052 at December 31, 2002, is shown net in Other accounts payable and accrued expenses. 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 15, 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 Years Ended December 31, -------------------------------- (in thousands) -------------------------------- 2002 2001 2000 -------- -------- -------- Revenues Motel operating revenues $ 418 $ 1,489 $ 2,970 Lease revenues 490 678 310 -------- -------- -------- Total revenues 908 2,167 3,280 Costs and expenses: Motel operating expenses 326 976 2,240 Marketing and royalty fees 44 138 257 Lease expenses 117 112 5 Impairment loss - 920 - Depreciation and amortization 422 917 960 -------- -------- -------- Total direct expenses 909 3,063 3,462 -------- -------- -------- Net operating loss (1) (896) (182) Interest expense on mortgage debt 183 489 711 -------- -------- -------- Income (loss) from operations (184) (1,385) (893) Net gain on sale of properties 31 - - -------- -------- -------- Income (loss) before income taxes (153) (1,385) (893) Income tax expense (benefit) (52) (534) (344) -------- -------- -------- Discontinued operations $ (101) $ (851) $ (549) ======== ======== ======== 10. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Mortgage and other notes receivable: The fair values of the Company's mortgage and other notes receivable are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage and other notes payable: The fair values of the Company's mortgage and other notes payable are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 12% Senior Subordinated Notes: The fair value of the Company's 12% Senior Subordinated Notes are based on quoted market prices. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:

11. Segments The Financial Accounting Standards Board's Statement of Financial Accounting Standards No 131, "Disclosures About Segments of an Enterprise and Related Information"("Statement No. 131") establishes standards for the manner in which public business enterprises report information regarding reportable operating segments. The Company, directly and through subsidiaries, owned 107 lodging facilities in 33 states, 113 lodging facilities in 36 states and 118 lodging facilities in 38 states for the years ended December 31, 2002, 2001 and 2000, respectively. The Company owns a 100% interest in all of its properties. Seventy-four, seventy-five and seventy-five of its motels for the years ended December 31, 2002, 2001 and 2000, respectively, which are leased to third party tenants pursuant to operating leases and one to an affiliated party. During 2002 the Company sold seven of its properties and as a result the operations for those properties have been reclassified to discontinued operations for all periods presented (See note #9). The Company separately evaluates the performance of each of its motels. However, because each of the motels has similar economic characteristics, the motels have been aggregated into a single dominant motel segment as indicated below. 11. Segments (continued)

12. Contingencies The Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business, results of operations or financial condition. 13. Subsequent Events As described in Note 5, "Notes Payable and Senior Subordinated Notes", the Company through 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. At December 31, 2002, the outstanding balance on this promissory note was $131,118,878. 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. 14. Going concern The Company is currently in default with respect to certain covenants pertaining to its unsecured Senior Subordinated Notes ("Notes"). Accordingly, holders of not less than 25% of the outstanding Notes may call the outstanding principal and accrued interest thereon immediately due and payable. The Company has not received notification from the Trustee that the Notes are being called. The Company does not believe it will have sufficient liquidity to repay the Notes from operating cash flow and is therefore seeking to extend the maturity date of the Notes to October 15, 2007 and is seeking a reduction in the interest rate. As a result of the default and the uncertainty with respect to the timing of the repayment of the Notes, the Notes have been classified as a current obligation as of December 31, 2002. The Company is currently in default with respect to certain covenants and subsequent to December 31, 2002 ceased paying interest on the $8.4 million note. The Company is currently in negotiation with the holder to restructure the terms of the $8.4 million note that is currently due upon demand and therefore classified as a current obligation as of December 31, 2002. The Company does not have sufficient liquidity to repay the note if demanded by the holder. As a result of the uncertainties raised with respect to the above, there can be no assurance that the Company will be successful in its attempts to restructure the terms of the notes and accordingly, there is substantial doubt about the Company's ability to continue as a going concern. Other than classifying the Senior Subordinated Notes as a current obligation, no adjustment to the consolidated financial statements at December 31, 2002 have been made to reflect this uncertainty.

MOA HOSPITALITY, INC SCHEDULE III - LEASED REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2002 Continued (1) The Company has various mortgage notes payable. See footnote 5 to the Company's consolidated financial statements for a description of its mortgage notes payable. (2) Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. (3) These properties are part of a mortgage covering 93 properties with a balance of $131,118,878 as of December 31, 2002. The following table reconciles our historical cost for the years ended December 31, 2002, 2001 and 2000:

The following table reconciles the acccumulated depreciation for the years ended December 31, 2002, 2001 and 2000:

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of September 2003. MOA HOSPITALITY, INC. By: /s/ Kurt M. Mueller Kurt M. Mueller President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------------------------- ------------------------ ------------------ /s/ Paul F. Wallace Director, Chairman and September 29, 2003 Paul F. Wallace Chief Executive Officer Principal Executive Officer /s/ Kurt M. Mueller Director, President and September 29, 2003 Kurt M. Mueller Chief Financial Officer Principal Financial Officer /s/ Alan H. Baerenklau Director September 29, 2003 Alan H. Baerenklau /s/ Peter W. McClean Director September 29, 2003 Peter W. McClean /s/ Ronald P. Stewart Director September 29, 2003 Ronald P. Stewart /s/ Philip J. Levien Director September 29, 2003 Philip J. Levien CERTIFICATIONS Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. I, Kurt M. Mueller, certify that: 1. I have reviewed this annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 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 annual 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 annual report ( the "Evaluation Date" ); and c) presented in this annual 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 annual 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 annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 5. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 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 annual 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 annual report ( the "Evaluation Date" ); and c) presented in this annual 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 annual 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 annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 7. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: 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 annual report on Form 10-K of MOA Hospitality, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 8. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 29, 2003 /s/ Paul F. Wallace Paul F. Wallace Chief Executive Officer

MOA HOSPITALITY INC 10-K