10-Q 1 q12003.txt 1ST QUARTER 2003 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number: 33-78866 ---------------------- MOA HOSPITALITY, INC. (Exact name of registrant as specified in its charter) Delaware 33-0166914 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ---------------------- 701 Lee Street, Suite 1000 Des Plaines, Illinois 60016 (847) 803-1200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Number of shares of Common Stock, $.01 par value outstanding as of August 31, 2003: 800,000 INDEX TO FORM 10-Q Page Part I Financial Information Item 1. Financial Statements Condensed consolidated balance sheets - March 31, 2003 2 (unaudited) and December 31, 2002. Condensed consolidated statements of operations - 3 Three months ended March 31, 2003 and 2002 (unaudited). Condensed consolidated statements of cash flows - 4 Three months ended March 31, 2003 and 2002 (unaudited). Notes to condensed consolidated financial statements - 5 March 31, 2003 (unaudited). Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations General 9 Results of Operations 10 Liquidity and Capital Resources 13 Item 3. Controls and Procedures 14 Part II Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Certifications 17 PART I - FINANCIAL INFORMATION Item 1. Financial Statements MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands except share data) Three Months Ended March 31 ------------------------ 2003 2002 ---------- ---------- Revenues: Motel operating revenues $ 6,788 $ 7,831 Lease revenues 3,278 2,897 Vending revenues 1,200 842 Other revenues 458 650 ---------- ---------- Total revenues 11,724 12,220 Costs and expenses: Motel operating expenses 4,555 4,827 Marketing and royalty fees 482 560 General and administrative 1,455 1,562 Lease expenses 335 281 Vending expenses 1,409 687 Depreciation and amortization 2,942 3,000 ---------- ---------- Total direct expenses 11,178 10,917 ---------- ---------- Net operating income 546 1,303 Interest expense 4,356 4,624 ---------- ---------- Income (loss) from continuing operations before income taxes (3,810) (3,321) ---------- ---------- Income tax expense (benefit) (1,437) (1,293) ---------- ---------- Income (loss) from continuing operations (2,373) (2,028) Discontinued operations (including net gain on disposal of $147) net of income tax of $30 - 45 ---------- ---------- Net income (loss) $ (2,373) $ (1,983) ========== ========== Income (loss) per common share (basic and diluted): Income (loss) from continuing operations $ (2.97) $ (2.54) Income (loss) from discontinued operations - 0.06 ---------- ---------- Net income (loss) $ (2.97) $ (2.48) ========== ========== Weighted average number of common shares outstanding 800,000 800,000 ========== ========== See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements. MOA HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Unaudited) 1. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in MOA Hospitality, Inc. and Subsidiaries' Annual Report on Form 10-K for the year ended December 31, 2002. The terms "MOA" and the "Company" mean MOA Hospitality, Inc. and its subsidiaries. 2. Divestitures and Leasing Activities In January through March 31, 2003, a property lessee defaulted on the operating lease and the Company is now operating the property. Subsequent to March 31, 2003 through August 31, 2003, the Company re-leased the property that was taken back in the first quarter, under substantially the same terms as the previous lease. Also subsequent to March 31, 2003 through September 30, 2003, the Company has sold a total of 19 properties that were leased at March 31, 2003 resulting in a net gain of approximately $8,700,000. The total sales proceeds approximated $30,819,000, of which approximately $21,230,000 was used to pay down a new mortgage note as discussed in Note 8 Subsequent Events. In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long Lived Assets," effective for financial statements issued for fiscal years beginning after December 31, 2001, operating results and gain/(loss) on sales of real estate for properties sold subsequent to December 31, 2001 are reflected in the consolidated statements of operations as "Discontinued operations" for both periods presented. Below is a summary of the results of operations of these properties through their respective disposition dates: For the Three Months Ended March 31 -------------------------- 2003 2002 ---------- ---------- ( in thousands ) Revenues: Motel operating revenues $ - $ 46 Lease revenues - 8 ---------- ---------- Total revenues - 54 Costs and expenses: Motel operating expenses - 80 Marketing and royalty fees - 9 Lease expenses - 1 Depreciation and amortization - 28 ---------- ---------- Total direct expenses - 118 ---------- ---------- Net operating income - (64) Interest expense on mortgage debt - 8 ---------- ---------- Income (loss) from operations - (72) Gain (loss) on sale of properties - 147 ---------- ---------- Income (loss) before income taxes - 75 Income tax expense (benefit) - 30 ---------- ---------- Income (loss) from discontinued operations $ - $ 45 ========== ========== 3. Mortgages and Other Notes Payable In January through March 31, 2003 the Company was advanced $600,000 for construction advances on one property under construction bringing the total advanced to $7.0 million. The Company also borrowed an additional $5.0 million during the first quarter of 2003. The note is secured by mortgages on five of its properties and interest only is payable monthly until February 13, 2004 when the entire balance is due. Subsequent to March 31, 2003, the company refinanced the Mortgage note payable that was due in 2005. See Note 8- Subsequent Events. 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. Other than classifying the Senior Subordinated Notes as a current obligation, no adjustment to the consolidated financial statements has been made to reflect this uncertainty. 4. Income Taxes Income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes principally as a result of state income taxes. 5. Contingencies The Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business, results of operations or financial condition. 6. Related Parties During each of the quarters ended March 31, 2003 and 2002, the company received approximately $38,000 in management fees from related parties. The Company recognized interest income from related parties during the quarter ended March 31, 2003 and 2002 of approximately $301,000 and $301,000 respectively. Ground lease revenue from related parties for the quarter ended March 31, 2003 totaled approximately $65,000. The Company had receivables relating to these transactions, from related parties, of approximately $486,000 and $426,000 at March 31, 2003 and December 31, 2002 respectively. 7. Reclassifications Certain reclassifications have been made to previously reported 2002 statements in order to provide comparability with the 2003 statements reported herein. Theses reclassifications have not changed the 2002 results or stockholders' equity. 8. Subsequent Events The Company though a subsidiary (LLC) has a mortgage note payable secured by 93 of LLC's motels, 24 of which are operated by the Company, and 69 that are leased to third-party tenants. On February 28, 2003, the Company received a default notice from the servicer of the loan ("Servicer") alleging that LLC's lease program violated certain loan covenants. The Company believes that the leasing program, which began in 1998, has been properly disclosed to the lender in both monthly and annual financial reports provided to the lender. In addition, on March 31, 2003, the Company was notified that the loan had been accelerated. The Company disputes the validity of both the default and acceleration notices and has been in negotiations with the Servicer to resolve these issues. In conjunction with such continuing negotiations, the cure date was tolled and extended by the Servicer through July 11, 2003. In July 2003, negotiations with the Servicer stalled and on July 10th, LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Subsequent to filing the petition, LLC obtained a commitment to refinance the existing loan and the Servicer agreed to such refinancing subject to a $2.5 million prepayment penalty plus expenses. Which will be recognized in the third quarter of 2003. 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. 10. Segments As of March 31, 2003, the Company, directly and through subsidiaries, owned 107 lodging facilities in 33 states. The Company owns a 100% interest in all of its properties. The Company operates thirty-four of its motels and leases seventy-three of its motels to third party tenants pursuant to operating leases. The Company separately evaluates the performance of each of its motels. Three months ended March 31 ------------------------ 2003 2002 ---------- ---------- ( in thousands ) Motel operations: Motel operating revenue: Room revenues $ 5,972 $ 6,973 Ancillary motel revenues 816 858 ---------- ---------- Total motel operating revenues 6,788 7,831 Motel costs and expenses: Motel operating expenses 4,555 4,827 Marketing and royalty fees 482 560 Depreciation and amortization 1,216 1,348 ---------- ---------- Total motel direct expenses 6,253 6,735 ---------- ---------- 535 1,096 Lease Operations Lease revenues 3,278 2,897 Lease expenses 335 281 Depreciation and amortization 1,391 1,467 ---------- ---------- 1,552 1,149 Vending Operations Vending revenues 1,200 842 Vending expenses 1,409 687 Depreciation and amortization 186 144 ---------- ---------- (395) 11 Corporate Operations Other revenues 458 650 General and administrative expenses: Management Company Operations 1,195 1,142 Construction/Acquisition and Divestiture 96 5 Vending - general and administrative 164 415 ---------- ---------- Total general and administrative expenses 1,455 1,562 Depreciation and amortization 149 41 ---------- ---------- (1,146) (953) ---------- ---------- Net operating income 546 1,303 Interest expense 4,356 4,624 ---------- ---------- Loss from continuing operations before income taxes (3,810) (3,321) Income tax expense (benefit) (1,437) (1,293) ---------- ---------- Loss from continuing operations (2,373) (2,028) Discontinued operations (including net gain on disposal of $147) net of income tax of $30 - 45 ---------- ---------- Net Loss $ (2,373) $ (1,983) ========== ========== Total Assets: Motel Operations $ 104,788 $ 109,897 Lease Operations 112,652 113,599 Other Operations 29,400 37,284 ---------- ---------- $ 246,840 $ 260,780 ========== ========== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND AS SUCH, SPEAK ONLY AS OF THE DATE MADE. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED AT THE TIME OF THE FORWARD-LOOKING STATEMENTS ARE MADE, INCLUDING, WITHOUT LIMITATION, RISKS AND UNCERTAINTIES ASSOCIATED WITH THE FOLLOWING: GENERAL REAL ESTATE, TRAVEL AND NATIONAL AND INTERNATIONAL ECONOMIC CONDITIONS, INCLUDING THE SEVERITY AND DURATION OF THE DOWNTURN RESULTING FROM THE SEPTEMBER 11, 2001 TERRORIST ATTACKS ON NEW YORK AND WASHINGTON, D.C.; SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: THE COMPANY'S ABILITY TO OBTAIN FINANCING, COMPETITION, INTEREST RATE FLUCTUATIONS, OR GENERAL BUSINESS AND ECONOMIC CONDITIONS. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONDENSED CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. THE SUPPLEMENTAL HISTORICAL OPERATING RESULTS PRESENTED BELOW FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 HAVE BEEN PREPARED ON THE SAME BASIS AS THE INTERIM CONDENSED CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS AND, IN THE OPINION OF THE COMPANY, INCLUDE ALL ADJUSTMENTS (CONSISTING ONLY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY TO PRESENT FAIRLY THE INFORMATION SET FORTH THEREIN. General MOA operates principally in the economy limited service segment of the lodging industry. As a result, its average room rates tend to be lower than the average room rates of full service lodging facilities. However, due to the limited nature of the public space and ancillary services provided by limited service motels, the Company's expenses tend to be lower than those of full service lodging facilities. The profitability of the lodging industry in general is significantly dependent upon room rental rates and occupancy rates. Due to the fixed nature of a relatively high portion of the Company's expenses, changes in either room rates or occupancy rates result in significant changes in the operating profit of the Company's motels. The United States lodging industry has experienced downward pressure on RevPAR and occupancy throughout 2003 due to the overall slowdown in the economy. Such pressure was substantially increased as a result of the September 11, 2001 terrorist attacks on New York and Washington D.C. On a same store basis, through the first quarter, RevPAR and occupancy have decreased to $27.59 and 57.39%, respectively, for 2003 versus $28.15 and 57.6 % for 2002. The Company is actively working with its managers and lessees to reduce operating and overhead expenses and has curtailed or postponed non-essential capital expenditure activities; however, there can be no assurance that the results of such efforts will be sufficient to enable the Company to continue meeting its obligations as they come due. Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31, 2002 The following chart presents certain historical operating results and statistics discussed herein and is being provided as a supplement to the condensed consolidated financial statements presented elsewhere herein.

------------------------------------------------- (1) ADR represents room revenues divided by the total number of rooms occupied. (2) REVPAR represents total motel operating revenues divided by the total number of rooms available. (3) Net operating income margin represents net operating income divided by total motel operating revenues plus lease revenues plus vending revenues plus corporate other revenues. (4) Net motel revenue margin represents total motel operating revenues less motel operating expenses and marketing and royalty fees, divided by motel room revenues. (5) At March 31, 2003 and March 31, 2002, and for the three months periods then ended, excludes amounts related to the seventy-three motels and seventy-six motels, respectively, which are leased to third party tenants. (6) Includes newly aquired properties, newly leased properties and properties which were leased that the Company is now operating. Effective January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the reporting requirements of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale. During the three months ended March 31, 2002, the Company disposed of three properties. The operating results of theses properties have been reclassified as discontinued operations in the unaudited consolidated statements of operations for each of the periods included herein. Total revenues consist principally of motel operating revenues. Motel operating revenues are derived from room rentals and ancillary motel revenues such as charges to guests for food and beverage service, long distance telephone calls, and fax machine use. Lease revenues are derived from properties leased to third parties. Vending revenues are derived from vending machines used in the motels and also vending machines placed in non-owned locations. Other revenues include interest income, and other miscellaneous income. Total revenues decreased to $11,724,000 for the three months ended March 31, 2003 from $12,220,000 for the three months ended March 31, 2002, a decrease of $496,000 or 4.06%. Motel revenues decreased to $6,788,000 for the three months ended March 31, 2003 from $7,831,000 for the three months ended March 31, 2002, a decrease of $1,043,000 or 13.32%. The motel revenues for motels owned during both periods decreased approximately $131,000 and revenues for motels acquired and divested since January 1, 2001 decreased by $912,000. Motel revenues for motels owned during both periods decreased by 2%. The decrease in motel revenues for motels owned during both periods was attributable to a combined decrease in the average daily rate ("ADR") and the occupancy rate. The ADR for the motels owned during both periods decreased to $42.07 for the three months ended March 31, 2003 from $42.86 for the three months ended March 31, 2002, a decrease of $0.79 or 1.8%. The occupancy for the motels owned during both periods decreased to 57.39% for the three months ended March 31, 2003 from 57.6% for the three months ended March 31, 2002, a decrease of less than 1%. Revenue per available room ("REVPAR") for motels owned during both periods decreased to $27.59 for the three months ended March 31, 2003 from $28.15 for the three months ended March 31, 2002, a decrease of $.56 or 2%. The acquired and divested motels had an occupancy percentage of 39.78%, an ADR of $31.07 and REVPAR of $13.07 for the period, which they were owned by the Company in 2003. Motel operating expenses include payroll and related costs, utilities, repairs and maintenance, property taxes, insurance, linens and other operating supplies. Motel operating expenses decreased to $4,555,000 for the three months ended March 31, 2003 from $4,827,000 for the three months ended March 31, 2002, a net decrease of $272,000 or 5.63%. Motel operating expenses for motels acquired and divested since January 1, 2002 decreased to $392,000 for the three months ended March 31, 2003 from $916,000 for the three months ended March 31, 2002, a decrease of $524,000 or 57%. Motel operating expenses increased by $252,000 or 6.4% in the costs of operating the motels owned during both periods. The cost of operating motels owned during both periods increased to $4,163,000 for the three months ended March 31, 2003 from $3,911,000 for the three months ended March 31, 2002. Motel operating expenses as a percentage of motel revenues decreased to 67.1% for the three months ended March 31, 2003 from 61.6% for the three months ended March 31, 2002. Motel operating expenses as a percentage of motel revenues for the motels owned in both periods increased to 65.6% for the three months ended March 31, 2003 from 60.4% for the three months ended March 31, 2002. Marketing and royalty fees include media advertising, billboard rental expense, advertising fund contributions and royalty charges paid to franchisors and other related marketing expenses. Marketing and royalty fees decreased to $482,000 for the three months ended March 31, 2003 from $560,000 for the three months ended March 31, 2002, a decrease of $78,000 or 13.93%. The marketing and royalty fees for motels owned during both periods increased to $458,000 for the three months ended March 31, 2003 from $453,000 for the three months ended March 31, 2002, an increase of $5,000 or less than 1%. For the motels owned during both periods, marketing and royalty fees as a percentage of room revenues increased to 8.2% for the three months ended March 31, 2003 from 8% for the three months ended March 31, 2002. Marketing and royalty fees for motels acquired and divested since January 1, 2001 decreased to $24,000 for the three months ended March 31, 2003 from $107,000 for the three months ended March 31, 2002. Lease operations increased to $1,552,000 for the three months ended March 31, 2003 from $1,149,000 for the three months ended March 31, 2002, an increase of $403,000 as a result more leased properties. Vending operations decreased to a loss of $395,000 for the three months ended March 31, 2003 from income of $11,000 for the three months ended March 31, 2002, an increase of $406,000, which is the result of an increase in costs to expand the business. Corporate general and administrative expenses are segregated by the Company into three separate areas: Management Company Operations, Construction/Acquisition and Divestiture Division and Vending general and administrative. Included in the Management Company Operations, which is the division responsible for the motel operations, are the costs associated with training, marketing, purchasing, administrative support, property related legal and accounting costs. The major components of these costs are salaries, wages and related expenses, travel, rent and other administrative expenses. The general and administrative expenses for the Management Company Operations decreased $53,000 to $1,195,000 for the three months ended March 31, 2003 from $1,142,000 for the three months ended March 31, 2002, a decrease of 4.6%. The general and administrative expenses associated with Construction/Acquisition and Divestiture Division increased $91,000 from $5,000 for the three months ended March 31, 2002 to $96,000 for the three months ended March 31, 2003. Vending General and Administrative expenses decreased $251,000 to $164,000 for the three months ended March 31, 2003 from $415,000 for the three months ended March 31, 2002. As a percentage of total motel operating revenues, Management Company Operations general and administrative expenses was 17.6% for the three months ended March 31, 2003 and 14.6% for the three months ended March 31, 2002. Depreciation and amortization decreased to $2,942,000 for the three months ended March 31, 2003 from $3,000,000 for the three months ended March 31, 2002, a net decrease of $58,000 or 2%. Net operating income decreased to $546,000 for the three months ended March 31, 2003 from $1,303,000 for the three months ended March 31, 2002, a decrease of $757,000 or 58%. The decrease in net operating income included a decrease of $693,000 in net motel revenues (motel revenues less motel operating expenses and marketing and royalty fees). Of the $693,000 decrease in net motel revenues, a decrease of $388,000 resulted from the motels owned during both periods or an decrease of 18.3%. Net motel revenues for motels acquired and divested since January 1, 2001 decreased $305,000. The remaining net decrease is a result of the increased leasing activities and the reduction of management general and administrative expenses. Net operating income as a percent of total revenues was 4.66% for the three months ended March 31, 2003 as compared to 10.7% for the three months ended March 31, 2002. Interest expense decreased to $4,356,000 for the three months ended March 31, 2003 from $4,624,000 for the three months ended March 31, 2002, a decrease of $268,000. The decrease in interest expense is reflective of the lower average amount of outstanding borrowings during the first quarter of 2003 as compared to the first quarter 2002. Discontinued operations decreased to $0 for the three months ended March 31, 2003 compared to a $45,000 for the three months ended March 31, 2002 as a result of the sale of properties in 2002. Net loss increased to $2,373,000 for the three months ended March 31, 2003 from $1,983,000 for the three months ended March 31, 2002. Liquidity and Capital Resources The Company's primary uses of its capital resources include debt service, capital expenditures and working capital. In addition, on a discretionary basis, the Company utilizes its capital resources for the development and acquisition of motel properties. The Company's debt service requirements consist of the obligation to make interest and principal payments on its outstanding indebtedness. In January through March 31, 2003 the Company was advanced $600,000 on loans of $7 million for construction advances on one property under construction bringing the total advanced to $7 million. The Company is currently in default with respect to certain covenants on its Senior Subordinated Notes and also a $8.4 million note. The Company is seeking to extend the maturity dates and reduce the interest rates. The Company does not have sufficient liquidity to repay the notes if demanded by the holders and accordingly, there is substantial doubt about the Company's ability to continue as a going concern. During the first quarter of 2003, 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. The Company's capital expenditure requirements principally include capital improvements and refurbishment of its lodging facilities as part of its ongoing operating strategy to provide well-maintained facilities. The Company made capital expenditures (exclusive of acquisitions and development of properties) of $618,000 and $375,000 for the three months ended March 31, 2003 and 2002, respectively. In addition, as of March 31, 2003, the Company had $1,376,000 of cash restricted for future refurbishment of motel properties, in accordance with certain debt agreements. Management is not aware of any unusual required level of future capital expenditures necessary to maintain its existing properties. Capital repairs and maintenance expenses on leased properties are funded by lessees. For the three months ended March 31, 2003, cash and cash equivalents increased $1,101,000. This increase consisted of $2,799,000 of funds used by investing activities and $2,000,000 of funds provided by financing activities and $1,900,000 of funds provided by operations. Net investing activities of $2,799,000 include: $2,110,000 of cash utilized for motel development and $618,000 expended on refurbishment of existing properties, and a change in cash restricted for refurbishment of $115,000, offset by $44,000 of cash provided from the collections on mortgage and other notes receivable. Cash used in financing activities includes: $3,154,000 of cash utilized to repay indebtedness, $5,715,000 from proceeds from notes payable and $561,000 expended on deferred costs. Item 3. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our principal executive officer, Paul F. Wallace, and our principal financial officer, Kurt M. Mueller, evaluated within 90 days prior to the filing of this Form 10-Q the effectiveness of the design and operation of our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As a result of this evaluation, these executive officers have concluded that, as of such date, the design and operation of our disclosure controls and procedures were effective. Changes in Internal Controls Since the date of the evaluation of our disclosure controls and procedures by Mr. Wallace and Mr. Mueller described above, there have been no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various legal proceedings arising in the ordinary course of business. The Company does not believe that any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's business, results of operations or financial condition. See Note 5 of the Notes to the Condensed Consolidated Financial Statements. During the first quarter of 2003, a subsidiary of the Company (the "LLC") was placed in technical default on one of its loans and was forced to file for Bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on July 10, 2003. On August 26, 2003 the LLC refinanced the loan and the Bankruptcy proceedings were dismissed. Item 2. Changes in Securities Not Applicable Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Not Applicable (b) Reports on Form 8-K: Not Applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOA HOSPITALITY, INC. November 7, 2003 By: /s/ Kurt M. Mueller ------------------------------------- Kurt M. Mueller President and Chief Financial Officer November 7, 2003 By: /s/ Blane P. Evans ------------------------------------- Blane P. Evans Secretary and Treasurer CERTIFICATIONS Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. I, Kurt M. Mueller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date" ); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions; a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Date: November 7, 2003 /S/ Kurt M. Mueller ----------------------- Kurt M. Mueller Chief Financial Officer CERTIFICATIONS Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. I, Paul F. Wallace, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report ( the "Evaluation Date" ); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions; c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant efficiencies and material weaknesses. Date: November 7, 2003 /s/ Paul F. Wallace ----------------------- Paul F. Wallace Chief Executive Officer CERTIFICATIONS Written Statement of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. I, Kurt M. Mueller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 7, 2003 /s/ Kurt M. Mueller ----------------------- Kurt M. Mueller Chief Financial Officer CERTIFICATIONS Written Statement of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. I, Paul F. Wallace, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MOA Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 7, 2003 /s/ Paul F. Wallace ----------------------- Paul F. Wallace Chief Executive Officer

MOA HOSPITALITY INC 10-Q