SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number:
0-22930
Exact name of registrant as specified in its charter:
ALLSTAR INNS INC.
State or other jurisdiction of incorporation or organization:
Delaware
I.R.S. Employer Identification No:
77-0323962
Address of Principal Executive Offices:
200 E. Carrillo Street, #300
Santa Barbara, California
Zip Code:
93101
Registrant's telephone number, including area code:
(805) 730-3383
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
As of September 30, 1996, there were 985,710 shares of the
Registrant's common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALLSTAR INNS INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended
September 30, 1996
Revenues:
Rent income $ 5,236
Interest income 176
Total revenues 5,412
Expenses:
Interest expense 4,756
Administrative and general 290
Depreciation & amortization and
other expense 2,138
Total expenses 7,184
Net loss before provision for
income taxes < 1,772>
Provision <benefit> for income taxes < 664>
Net loss $< 1,108>
Net loss per common share $< 1.12>
Weighted average common shares
outstanding 986
See accompanying notes.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Nine Months Ended
September 30, 1996
Revenues:
Rent income $ 18,911
Interest income 580
Total revenues 19,491
Expenses:
Interest expense 14,297
Administrative and general 942
Depreciation & amortization
and other expense 6,553
Total expenses 21,792
Net loss before provision for
income taxes < 2,301>
Provision <benefit> for income taxes < 1,993>
Net loss $< 308>
Net loss per common share $< .31>
Weighted average common shares
outstanding 986
See accompanying notes.
BALANCE SHEETS
September 30, 1996 (unaudited) and December 31, 1995 (audited)
(in thousands of dollars)
SEPTEMBER 30, DECEMBER 31,
A S S E T S 1996 1995
Current assets:
Cash and cash equivalents $ 13,673 $ 13,518
Receivable from Motel 6 1,004 2,089
Other current assets 51 46
Total current assets 14,728 15,653
Net property and equipment
(Note 3) 129,720 136,232
Land held for sale 1,339 1,339
Other assets including leased
property under capital lease,
less accumulated amortization
of $217 (1996) and $205
(1995) 41 53
Deferred tax assets 9,007 7,013
$ 154,835 $ 160,290
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,666 $ 5,817
Accrued interest 1,004 2,089
Total current
liabilities 4,670 7,906
Total long-term debt (Note 4) 204,762 206,854
Stockholders' deficit:
Preferred stock, $.01 par
value, authorized 1,000,000
shares; no shares issued and
outstanding at September 30,
1996 and December 31, 1995 - -
Common stock, $.01 par value,
authorized 10,000,000 shares;
985,710 shares and 984,710
shares issued and outstanding
at September 30, 1996 and
December 31, 1995,
respectively 10 10
Additional paid-in capital 23,263 23,081
Accumulated deficit < 77,870> < 77,561>
Total stockholders' deficit < 54,597> < 54,470>
$ 154,835 $ 160,290
See accompanying notes.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Period from January 1, 1996 to September 30, 1996
(in thousands)
(unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
Balance,
January 1,
1996 985 $ 10 $ 23,081 $<77,561>
Net loss - - - < 308>
Employee
Stock Options 1 - 22 -
Appreciation
of 1995's
Restricted
Stock Plan - - 160 -
Rounding - - - < 1>
Balance,
September 30,
1996 986 $ 10 $ 23,263 $<77,870>
See accompanying notes.
STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Nine Months Ended
September 30, 1996
Cash flows from operating activities:
Cash received $ 20,571
Cash paid to suppliers and
employees < 2,917>
Interest paid <15,383>
Net cash provided by
operating activities 2,271
Cash flows from investing activities:
Capital expenditures < 24>
Net cash used in investing
activities < 24>
Cash flows from financing activities:
Payments under credit agreements < 1,057>
Principal payments - mortgages < 1,035>
Net cash used by financing
activities < 2,092>
Net increase in cash and cash
equivalents 155
Cash and cash equivalents at beginning
of period 13,518
Cash and cash equivalents at end
of period $ 13,673
Reconciliation of net loss to net
cash provided by operating
activities:
Net loss $< 308>
Adjustment to reconcile net
loss to net cash provided
by operating activities:
Depreciation and
amortization 6,547
Changes in assets
and liabilities:
Decrease in
receivable
from Motel 6 1,085
Increase in other
current assets < 5>
Increase in deferred
tax assets < 1,994>
Decrease in accounts
payable < 2,151>
Decrease in accrued
interest < 1,085>
Increase in
additional paid-
in capital 182
Net cash provided by operating activities $ 2,271
See accompanying notes.
Item 1. Financial Statements (continued)
ALLSTAR INNS INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. History and Basis of Presentation
Allstar Inns Inc. was originally organized as a privately-
owned corporation in 1982 to purchase 52 motels. The
acquisition was consummated on April 28, 1983. On February
11, 1987 a partnership (the "Partnership") was formed and
succeeded to the business and operations of the original
company on April 3, 1987. On November 25, 1993 the
Partnership merged with and into Allstar Inns Inc. (the
"Company").
In July 1992, the security holders of the Company approved a
plan that placed the business and operations of the
Company's Allstar Inns under the management of Motel 6
Operating L.P., a Delaware limited partnership (the "Motel 6
Operator"). A management contract (the "Management
Contract") with the Motel 6 Operator provided that the Motel
6 Operator would operate and manage all the Company's motels
through December 31, 2011.
On May 26, 1995, the security holders of the Company
approved a plan to terminate the Management Contract
effective January 1, 1995 and replace it with a Master Lease
Agreement under which the Motel 6 Operator will lease the
properties on a "net, net, net" basis from the Company for a
15 year term starting as of January 1, 1995. As of
September 30, 1996, the Company owned in fee or leased 71
motels with a total of 7,606 rooms. Under the Master Lease
Agreement, the Motel 6 Operator has an option (the "Lease
Purchase Option") to purchase the Company's motels prior to
the end of 1998.
As a consequence of entering into the Master Lease
Agreement, the Company's financial statements presented in
this report include only the period January 1, 1996 through
September 30, 1996, with the exception of the Balance Sheets
which includes the audited results for December 31, 1995.
Comparable prior periods do not exist and are, therefore,
not reflected in the statements presented in this report.
The accompanying unaudited condensed financial statements
have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, which are necessary for a fair presentation of
financial position and results of operations have been made.
These financial statements should be read in conjunction
with the Annual Report on Form 10-K for the fiscal year
ended December 31, 1995. The results of operations for the
period from January 1, 1996 to September 30, 1996 are not
indicative of the results for the full year.
2. Net Loss Per Share
Net Loss per common share is calculated by dividing net loss
by the weighted average number of common shares outstanding.
As of September 30, 1996 there were 985,710 outstanding
Shares ("Shares") of common stock.
3. Property and Equipment
Property and equipment is stated at cost and consists of the
following at September 30, 1996 and December 31, 1995 (in
thousands of dollars):
September 30, December 31,
1996 1995
Land......................... $ 31,067 $ 31,067
Buildings and improvements... 166,199 166,957
Furniture and equipment...... 42,477 42,750
Leasehold interests.......... 2,498 2,539
242,241 243,313
Less accumulated depreciation
and amortization...... 112,521 107,081
Net property and equipment... $129,720 $136,232
In March 1995, the FASB issued Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The statement, which is
effective for fiscal years beginning after December 15,
1995, requires that an entity evaluate long-lived assets and
certain other identifiable intangible assets for impairment
whenever events or changes in circumstances indicate that
the carrying amounts of the asset may not be recoverable.
An impairment loss meeting the recognition criteria is to be
measured as the amount by which the carrying amount for
financial reporting purposes exceeds the fair value of the
asset. The Company adopted this statement in 1996 and the
adoption of the statement has had no effect on the Company's
financial position or results of operations.
4. Long-Term Debt
(in thousands)
September 30, December 31,
1996 1995
Wells Fargo Bank mortgage
loans maturing 1998 (9.50%
weighted average)............ $102,437 $103,494
Coast Federal Bank mortgage
loans maturing 1998 (7.91%
weighted average)............ 44,848 45,489
Great Western Bank and
WHC-One Investors, L.P.
mortgage loans maturing 2005
and 2006 (8.23% weighted
average)..................... 20,437 20,781
Motel 6 Lender secured
subordinated loans maturing
1998 (11.00% weighted
average)..................... 37,040 37,090
Total long-term debt.... $204,762 $206,854
All of the Company's properties serve as collateral for the
indebtedness of the Company.
5. Dividends
The Company did not declare or pay dividends to its
stockholders during the period January 1, 1996 through
September 30, 1996.
6. Litigation
Allstar Inns Inc. vs. Herrick and Campbell
This litigation involved an action against the sellers of
the original 52 motels acquired by the Company in 1983. The
matter was heard in May 1995 and the court issued its
decision in favor of the defendant sellers.
Defendant sellers, as prevailing parties, asserted a claim
with the court for reasonable attorney fees and costs and
the court on April 30, 1996 awarded defendant sellers a
judgement in the amount of $2.5 million. However, to avoid
any further litigation and to fully and finally resolve all
disputes, differences and disagreements, the Company and
defendant sellers entered into a settlement agreement on
June 7, 1996. Under the settlement agreement the court
judgement was vacated, the action was dismissed in its
entirety and the Company paid defendant sellers a reduced
settlement amount of $1.8 million.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
General
As of September 30, 1996, the Company owned in fee or leased
71 motels with a total of 7,606 rooms. The Company's business
strategy is to maximize net cash flow through the leasing of its
motel properties to the Motel 6 Operator, and in the event the
Lease Purchase Option is exercised by December 31, 1997, the
Company will receive $40.0 million in proceeds from sale of the
properties to the Motel 6 Operator after payment of all
indebtedness of the Company relating to the motels.
In the event the option is not exercised by the Motel 6
Operator, the Company will continue to maximize net cash flow
through leasing activities through the remaining term of the
Master Lease Agreement (2009). Thereafter, the Company will
either resume operations of the motels, seek another lessee or
sell the motels.
Demand for the Company's motel rooms is dependent in part
upon regional and national economic conditions. In addition, the
operations of individual motels may be adversely affected by
changes in local business conditions, travel patterns, highway
relocations and the addition of competitors' motels. Under the
Master Lease Agreement, however, such business factors do not
affect the Motel 6 Operator's obligation to pay rent to the
Company at the agreed rate. The Motel 6 Operator's continuing
ability to pay such rent may be affected by, and its decision to
exercise the Lease Purchase Option will depend largely on, its
success in maximizing occupancy and operating income at the motel
properties. The Company is unable to predict whether the
purchase option will be exercised.
Quarter and Nine Months Ended September 30, 1996
Rent Income is comprised of:
o Basic Rent of -0- for the quarter and $3.5 million for
the nine month period is the annual prepaid rent paid
directly to the Company by the Motel 6 Operator. It
represents the second year's rent payment under the
Master Lease Agreement.
o Debt service rent of $5.2 million for the quarter and
$15.4 million for the nine month period represents
monthly principal and interest payments made by the
Motel 6 Operator to the Company's lenders.
Interest income is the interest earned from investing the
Company's available cash balances in top grade commercial paper
and other short term investments.
Interest expense includes the quarter and the year-to-date
payments made to the Company's lenders by the Motel 6 Operator.
Depreciation & amortization and other expense primarily
reflects the quarter and the year-to-date depreciation expense of
the Company's property and equipment.
Provision <benefit> for income taxes reflects the quarter
and the year-to-date accrual of the deferred tax benefit that
will result from this year's projected net operating loss.
Liquidity and Capital Resources
At September 30, 1996, the Company had $13.7 million of cash
and cash equivalents, an increase of approximately $.2 million
from December 31, 1995. As of September 30, 1996, the Company
has no borrowing capacity available on its credit facilities with
its lenders.
Net cash provided by operating activities was $2.3 million
for the nine months ended September 30, 1996. This favorable
result was primarily due to receiving, in January 1996, the
annual prepaid Basic Rent payment of $3.5 million from the Motel
6 Operator.
There was only $24 thousand of expenditures by the Company
for investment activities for the nine months ended September 30,
1996. The Motel 6 Operator, under the Master Lease Agreement, is
responsible for all motel capital expenditures.
Net cash used by financing activities was <$2.1 million> for
the nine months ended September 30, 1996 and includes a $1.1
million loan amortization payment, by the Company, to Wells Fargo
Bank ("WFB"). Also included in the above was $1.0 million of
mortgage principal payments made to the Company's other lenders.
Under the terms of the WFB Loan Modification Agreement
entered into in 1995, the Company is required to provide annually
out of the Basic Rent payment an annual principal payment, based
on a 25-year amortization schedule, in an amortization account
with WFB. Under terms of the Master Lease Agreement, the Motel 6
Operator is required to reimburse the Company for these payments.
Such reimbursement shall come from an annual calculation of
excess cash flow from the WFB mortgaged motels, or in lump sum at
December 31, 1998 if the interim years' annual excess cash flow
payments have not been sufficient for full reimbursement to the
Company. During September 1996, Motel 6 paid the Company $78
thousand representing the 1995 excess cash flow from the motels
collateralizing the WFB loan.
EBITDA was $18.5 million for the nine months ended September
30, 1996. EBITDA, as used above, is defined as earnings before
interest expense, income taxes, depreciation and amortization.
The Company believes this definition of EBITDA provides a
meaningful measure of its ability to service debt, especially
when considering that any increase in debt service will be
largely offset by an increase in debt service rent paid by the
Motel 6 Operator.
The Company has substantial repayment obligations under its
long-term debt facilities and is subject to a number of
significant affirmative and negative covenants. Management is
unable to predict whether the Lease Purchase Option will be
exercised by the Motel 6 Operator. The Company does not believe
that it will generate sufficient cash from operations to repay
the principal amount of its long-term indebtedness when such
indebtedness comes due in 1998. Thus, unless the Company sells
its assets to the Motel 6 Operator or another purchaser which
assumes or satisfies the Company's indebtedness (or unless the
Company is able to refinance its indebtedness at an earlier
date), the Company will be forced to attempt to refinance such
indebtedness on or before December 31, 1998. Under the terms of
the Master Lease Agreement, if the Motel 6 Operator fails to
exercise the Lease Purchase Option, the Company's indebtedness to
an affiliate of the Motel 6 Operator (the "Motel 6 Lender")
(approximately $37.0 million as of September 30, 1996) will be
cancelled. The Company is unable to predict whether it will be
able to refinance its indebtedness and, if so, the terms on which
such refinancing might occur.
The Company currently anticipates, that with its present
cash balances, sufficient working capital will be available to
meet its fiscal year 1996 obligations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
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.
November 4, 1996
ALLSTAR INNS INC.
BY: /S/ Edward J. Gallagher
Edward J. Gallagher
Vice Chairman - Principal
Accounting Officer
BY: /S/ Edward A. Paul
Edward A. Paul
Vice President - Principal
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed financial statements for the nine month period ended September 30,
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13673
<SECURITIES> 0
<RECEIVABLES> 1055
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14728
<PP&E> 242241
<DEPRECIATION> 112521
<TOTAL-ASSETS> 154835
<CURRENT-LIABILITIES> 4670
<BONDS> 204762
0
0
<COMMON> 10
<OTHER-SE> (54607)
<TOTAL-LIABILITY-AND-EQUITY> 154835
<SALES> 0
<TOTAL-REVENUES> 19491
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14297
<INCOME-PRETAX> (2301)
<INCOME-TAX> (1993)
<INCOME-CONTINUING> (308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (308)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
