<PAGE> 1
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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-14280
HOST FUNDING, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1907962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7825 Fay Avenue, Suite 250 La Jolla, CA 92037
(Address of principal executive offices including zip code)
(619)456-6070
(Registrant's telephone number, including area code)
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 March 31, 1996, the Registrant had outstanding 100 shares of
Common Stock.
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TABLE OF CONTENTS
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Item
Number Page
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PART I
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1. Financial Statements............................................ 1
2. Management's Discussion and Analysis of Financial Condition
and Result of Operations........................................ 6
PART II
1. Legal Proceedings............................................... 9
2. Changes in Securities........................................... 9
3. Defaults Upon Senior Securities................................. 10
4. Submission of Matters to a Vote of Security Holders............. 10
5. Other Information............................................... 10
6. Exhibits and Reports on Form 8-K................................ 10
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Host Funding, Inc.,
a Maryland corporation (the "Registrant" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, these
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management of the Registrant, all adjustments necessary for a
fair presentation have been included. The financial statements presented herein
have been prepared in accordance with the accounting policies described in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and
should be read in connection therewith. The results of operations for the three
month period ended March 31, 1996 are not necessarily indicative of the results
to be expected for the full year.
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HOST FUNDING, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
March 31, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
LAND PROPERTY AND EQUIPMENT - At cost:
Building and improvements $ 1,813,261 $ 1,813,261
Furnishings and equipment 285,929 285,929
Less accumulated depreciation (137,122) (103,663)
----------- -----------
1,962,068 1,995,527
Land 642,287 642,287
----------- -----------
Land, property and equipment - net 2,604,355 2,637,814
CASH 500 500
DUE FROM RELATED PARTIES 67,648 35,234
LOAN COMMITMENT FEES - Net 18,667 21,146
----------- -----------
Total $ 2,691,170 $ 2,694,694
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
LIABILITIES:
LONG-TERM DEBT $ 4,153,323 $ 4,155,321
NOTES PAYABLE 38,756 75,244
DUE TO RELATED PARTY 121,813 -
ACCRUED INTEREST PAYABLE 27,273 40,963
ACCRUED PROPERTY TAXES 16,578 -
ACCOUNTS PAYABLE - Stock issuance costs 375,000 325,000
DEFERRED INCOME TAXES - 163,000
----------- -----------
Total Liabilities 4,732,743 4,759,528
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIT:
Common stock, $.01 par value; authorized
1,000 shares; issued and outstanding 100 shares 1 1
Accumulated deficit (235,899) (259,160)
Related party note receivable (1,805,675) (1,805,675)
----------- -----------
Total shareholder's deficit (2,041,573) (2,064,834)
----------- -----------
Total $ 2,691,170 $ 2,694,694
=========== ===========
</TABLE>
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2
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HOST FUNDING, INC.
STATEMENT OF LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
REVENUES:
Lease revenue - related party $ 200,512
Interest income - related parties 44,895
---------
Total revenue 245,407
---------
EXPENSES:
Interest expense 102,631
Depreciation and amortization 35,937
Administrative expenses - related party 180,000
Property taxes 16,578
---------
Total expenses 335,146
---------
NET LOSS $ (89,739)
=========
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3
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HOST FUNDING, INC.
STATEMENT OF SHAREHOLDER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Related Total
Common Accumulated Party Note Shareholder's
Stock Deficit Receivable Deficit
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ 1 $ (259,160) $(1,805,675) $(2,064,834)
ELIMINATION OF DEFERRED INCOME
TAXES FROM CONVERSION TO REIT - 163,000 - 163,000
INCREASE IN STOCK ISSUANCE COSTS - (50,000) - (50,000)
NET LOSS - (89,739) - (89,739)
----------- ----------- ----------- -----------
BALANCE, March 31, 1996 $ 1 $ (235,899) $(1,805,675) $(2,041,573)
=========== =========== =========== ===========
</TABLE>
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4
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HOST FUNDING, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (89,739)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 35,937
Changes in operating assets and liabilities
Rent receivable - related party 12,481
Interest receivable - related parties (44,895)
Accrued interest payable (13,690)
Due to related party 121,814
Accrued property taxes 16,578
---------
Net cash provided by operating activities (38,486)
FINANCING ACTIVITIES:
Payments on long-term debt and notes payable (38,486)
---------
Net cash used in financing activities (38,486)
---------
NET CHANGE IN CASH -
CASH AT BEGINNING OF PERIOD 500
---------
CASH AT END OF PERIOD $ 500
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 116,321
=========
Cash paid during the period for income taxes $ 0
=========
Non-cash investing activities:
Elimination of deferred income taxes
from conversion to REIT $ 163,000
Increase in stock issuance costs (50,000)
Decrease in accumulated deficit from
elimination of deferred income taxes
and increase in stock issuance costs (113,000)
---------
Net non-cash investing activities $ 0
=========
</TABLE>
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5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Recent Developments
On April 22, 1996, the Company closed the $5 million Public Offering
and consummated the transactions referred to as the Formation Transactions.
The Formation Transactions included the acquisition of the Mission Bay Super 8
hotel located in San Diego, California (the "Acquisition Hotel"). On April 1,
1996, the leases entered into on January 1, 1995 by and between the Company and
Inn Fund, LLC, a Delaware limited liability company ("Inn Fund/Old Lessee")
were terminated and the Initial Hotels were leased to Crossroads Hospitality
Tenant Company, LLC, a Delaware limited liability company ("Lessee"). Effective
April 22, 1996, the Acquisition Hotel was also leased to the Lessee. The leases
with respect to the five (5) hotels (the "Hotels") are referred collectively to
as the "Percentage Leases". Reference to the "Initial Hotels" refers to the
Super 8 hotels owned by the Company which are located in Miner, Missouri;
Poplar Bluff, Missouri; Rock Falls, Illinois; and Somerset, Kentucky,
respectively.
The Company has made an election to be taxed as a REIT effective for
the calendar year beginning January 1, 1996. Therefore, deferred income tax
liability totaling $163,000, as illustrated in the pro forma balance sheet in
the Registration Statement, was credited to accumulated deficit effective
January 1, 1996, as the Company will be taxed as a REIT. In addition, no current
federal tax liability will be accrued based upon the election to be taxed as a
REIT.
Based upon the invoices received pertaining to the Formation
Transactions, the Company has increased 'Accounts Payable - Stock Issuance
Costs' by $50,000 to properly reflect the remaining costs and expenses of the
Formation Transactions.
Results of Operations
Quarter Ended March 31, 1996 and 1995
The Company did not acquire any assets until April 1, 1995. In
addition, the Acquisition Hotel was not acquired by the Company until April 22,
1996. Therefore, comparisons of results of operations to the corresponding
quarter of the previous year cannot be made.
Occupancy and average room rates of 65% and $34.38 for the four Initial
Hotels resulted in room sales of $510,929, which generated lease revenues of
$200,512 for the quarter ended March 31, 1996. Interest income from the Hatfield
Note totaled $44,895 for the quarter ended March 31, 1996, which interest rate
was at 10% until April 22, 1996, at which time it changed to 12%.
Interest expense incurred on the debt outstanding on the four Initial
Hotels for the quarter ended March 31, 1996 totaled $102,631, which was at an
effective borrowing rate of approximately 9.7%. In April 1996, long-term debt
and notes payable for three of the Initial Hotels were paid off from proceeds
from the Public Offering in the amount of $3,190,000.
Depreciation expense is calculated based upon the original historical
cost of the Initial Hotels over their estimated useful lives, which totaled
$35,937 for the quarter ended March 31, 1996.
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Administrative expenses totaling $60,000 per month under the Related
Party Consulting Agreement were paid to All American Group, Ltd., a Delaware
limited partnership, for the three months ended March 31, 1996. The Related
Party Consulting Agreement was terminated upon consummation of the Public
Offering on April 22, 1996.
Effective January 1, 1996, the Company became responsible for property
taxes under the Percentage Leases. Property tax expense is based upon local
taxing authorities' assessment of the values of the Initial Hotels times the
statutory rates in effect in the respective tax districts, which totaled $16,578
for the quarter ended March 31, 1996.
Liquidity and Capital Resources
Since the Company has consummated the Public Offering, the Company has
paid off approximately $3,190,000 of debt with approximately $1,000,000 of
outstanding debt remaining on the Rock Falls Super 8 hotel. The Company intends
to refinance and/or pay down the mortgage on the Rock Falls Super 8 and has
reserved approximately $294,000 of proceeds from the Public Offering to pay
down the debt. The Company has no commitments for additional financing.
Accordingly, since there are no committed sources of external liquidity
available to the Company, the Company will rely on its internal cash flow to
meet its liquidity needs. The Company's principal source of cash to meet its
cash requirements, including distributions to Shareholders, is its share of the
Company's cash flow from the Percentage Leases. Although, the Lessee's
obligations under the Percentage Leases are guaranteed in part by Crossroads
Hospitality Company, LLC, a Delaware limited liability company ("Crossroads
Parent"), a subsidiary of Interstate Hotels and parent company of the Lessee,
the Lessee's ability to make lease payments under the Percentage Leases, and
therefore the Company's liquidity, including its ability to make distributions
to Shareholders, is dependent on the ability of the Lessee to generate
sufficient cash flow from the Hotels.
Other than the debt service and/or refinancing costs of the $1,000,000
debt, the $150,000 Working Capital requirement under the Percentage Leases, and
the commitment by the Company to fund any shortfall of actual capital expenses
through the date of the Public Offering added to the $125 per room, per quarter,
replacement fund as compared to budgeted capital expenditures of approximately
$285,000 for calendar year 1996, and the additional funding of $50,000 in stock
issuance costs, the Company is not aware of any demands, commitments, events
or uncertainties that will result or are likely to result in a change in the
Company's liquidity.
The Company intends to make additional investments in hotel properties
and may incur indebtedness to make such investments or to meet distribution
requirements imposed on a REIT under the Code to the extent that working capital
and cash flow from the Company's investments are insufficient to make such
distributions. The Company will invest in additional hotel properties only as
suitable opportunities arise, and the Company will not undertake investments
unless adequate sources of financing are available. It is expected that future
investments in hotel properties will be financed, in whole or in part, with
Common Stock, proceeds from additional issuances of Common Stock, or from the
issuance of other debt or equity securities. The Company in the future may seek
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to obtain a line of credit or a permanent credit facility, negotiate additional
credit facilities, or issue corporate debt instruments, all in compliance with
its Charter restrictions. Any debt incurred or issued by the Company may be
secured or unsecured, long-term or short-term, charge a fixed or variable
interest rate and may be subject to such other terms as the Board of Directors
of the Company deems prudent.
Inflation
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the Lessee's ability to
raise room rates in the face of inflation. Since 1987, industry wide annual
increases in ADR have failed to keep pace with inflation.
Seasonality
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
lease revenue to the extent that it receives Percentage Rent. It is presently
anticipated that the Company's cash flow from operation of the Hotels is
sufficient to enable it to make distributions at the estimated initial rate. To
the extent that cash flow from operations are insufficient during any quarter,
due to temporary or seasonal fluctuations in lease revenue, the Company expects
to utilize other cash on hand or borrowings to make such distributions. No
assurance can be given, however, that the Company will make distributions in the
future at the initially estimated rate, or at all.
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PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
General
Currently, 1,471,946 shares of Common Stock are issued and outstanding
of which (i) 140,000 shares are Class B Common Stock (owned by the Hatfield
Affiliates), (ii) 140,000 shares are Class C Common Stock (owned by the Hatfield
Affiliates), and (iii) the remainder are shares of the Company's Class A Common
Stock. No Preferred Stock is outstanding. Shareholders of Common Stock have no
preference, exchange, sinking fund, redemption or appraisal rights and have no
preemptive rights to subscribe for any securities of the Company. Except for the
subordination of the Class B Common Stock and Class C Common Stock to the
Company's Class A Common Stock discussed below, all shares of Common Stock will
have equal distribution, liquidation and other rights.
Hatfield Exchange
Prior to the closing of the Public Offering, Mr. Guy Hatfield and his
affiliates (the "Hatfield Affiliates") owned 100% of the Company's 100 shares of
outstanding Common Stock (the "Initial Shares"). The 100 Initial Shares were
received by the Hatfield Affiliates in exchange for the contribution of the
Initial Hotels which had a total appraised value of $6.9 million. The Initial
Shares were never registered with the Securities and Exchange Commission. Upon
the closing of the Public Offering and as part of the Formation Transactions,
the Hatfield Affiliates received 410,000 shares of Class A Common Stock, 140,000
shares of Class B Common Stock, and 140,000 shares of Class C Common Stock in
exchange for the Initial Shares.
The stockholder rights held by the Hatfield Affiliates with respect to
the 410,000 shares of Class A Common Stock are substantially similar to the
rights formerly held by the Hatfield Affiliates with respect to the Initial
Shares. However, the 140,000 shares of Class B Common Stock and 140,000 shares
of Class C Common Stock, on a pro forma basis, will not receive a distribution
and are subordinated to the shares of Class A Common Stock. The 140,000 shares
of Class B Common Stock are convertible to shares of Class A Common Stock upon
the occurrence of certain conditions. The 140,000 shares of Class C Common Stock
will automatically convert into Class A Common Stock on January 1, 1997.
REIT Qualification
Because the Board of Directors believes it is essential for the Company
to qualify as a REIT, the Charter, subject to certain exceptions, contains
certain restrictions on the number of shares of
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Common Stock of the Company that a person may own. The Charter provides that no
person may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than the lesser of 9.9% (the "Ownership Limit") of the number or
value of the outstanding shares of Common Stock of the Company. However, the
Board of Directors has the power to grant an exemption to the Ownership Limit so
long as the exemption does not result in the termination of the Company's status
as a REIT. Following receipt of an opinion of counsel stating that the Company's
status as a REIT would not be jeopardized, the Board of Directors granted such
an exemption, subject to certain restrictions, on any Common Stock owned,
directly or indirectly, by the Hatfield Affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
1.1 Amendment No. 8 to Form S-11 of Host Funding, Inc. dated April 17,
1996 (incorporated by reference in the Registrant's Form 10-K dated
December 31, 1995).
1.2 Amendment No. 4 to Form S-4 of Host Funding, Inc. dated December 1,
1995 (incorporated by reference in the Registrant's Form 10-K dated
December 31, 1995).
3.1 Amended and Restated Charter of the Registrant (incorporated by
reference to Exhibit 3.1 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.2 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to Exhibit 4.1
to Registrant's Amendment No. 8 to Form S-11 effective April 17,
1996).
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10.1 Form of Percentage Leases (incorporated by reference to Exhibit 10.1
to Registrant's Amendment No. 8 to Form S-11 effective April 17,
1996).
10.2 Master Agreement (incorporated by reference to Exhibit 10.2 to
Registrant's Amendment No. 8 to Form S-11 effective April 17, 1996).
10.3 Advisory Agreement (incorporated by reference to Exhibit 10.3 to
Registrant's Amendment No. 8 to Form S-11 effective April 17, 1996).
10.4 Mission Bay Acquisition Agreement (incorporated by reference to
Exhibit 10.4 to Registrant's Amendment No. 8 to Form S-11 effective
April 17, 1996).
10.5 Appraisal Report for Super 8 Motel in Miner, Missouri (incorporated
by reference to Exhibit 10.5 to Registrant's Amendment No. 8 to Form
S-11 effective April 17, 1996).
10.6 Appraisal Report for Super 8 Motel in Poplar Bluff, Missouri
(incorporated by reference to Exhibit 10.6 to Registrant's Amendment
No. 8 to Form S-11 effective April 17, 1996).
10.7 Appraisal Report for Super 8 Motel in Rock Falls, Illinois
(incorporated by reference to Exhibit 10.7 to Registrant's Amendment
No. 8 to Form S-11 effective April 17, 1996).
10.8 Appraisal Report for Super 8 Motel in Somerset, Kentucky
(incorporated by reference to Exhibit 10.8 to Registrant's Amendment
No. 8 to Form S-11 effective April 17, 1996).
10.9 Appraisal Report for the Mission Bay Super 8 Motel in San Diego,
California (incorporated by reference to Exhibit 10.9 to Registrant's
Amendment No. 8 to Form S-11 effective April 17, 1996).
10.10 Post-Formation Acquisition Agreement (incorporated by reference to
Exhibit 10.10 to Registrant's Amendment No. 8 to Form S-11 effective
April 17, 1996).
10.12 Non-Competition Agreement (incorporated by reference to Exhibit 10.12
to Registrant's Amendment No. 8 to Form S-11 effective April 17,
1996).
10.13 Pledge Agreement (incorporated by reference to Exhibit 10.13 to
Registrant's Amendment No. 8 to Form S-11 effective April 17, 1996).
10.14 Form of Underwriting Agreement (incorporated by reference to Exhibit
10.14 to Registrant's Amendment No. 8 to Form S-11 effective April
17, 1996).
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10.15 Form of Agreement Among Underwriters (incorporated by reference to
Exhibit 10.15 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
10.16 Form of Selected Dealers Agreement (incorporated by reference to
Exhibit 10.16 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
10.18 Form of Super Motels, Inc. Franchise Agreement (Poplar Bluff)
(incorporated by reference to Exhibit 10.18 to Registrant's
Amendment No. 8 to Form S-11 effective April 17, 1996).
10.19 Form of Super 8 Motels, Inc. Declaration of Franchise Agreement
(Poplar Bluff) (incorporated by reference to Exhibit 10.19 to
Registrant's Amendment No. 8 to Form S-11 effective April 17,
1996).
10.20 Form of Three Party Agreement (Poplar Bluff) (incorporated by
reference to Exhibit 10.20 to Registrant's Amendment No. 8 to Form
S-11 effective April 17, 1996).
10.21 Form of Subscription Agreement (incorporated by reference to
Exhibit 10.21 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
(b) Reports on Form 8-K
The Registrant filed reports on Form 8-K on April 24, 1996 and May 7,
1996, respectively. The Registrant did not file any financial statements in
connection with these Form 8-K filings and has not filed any financial
statements other than those contained in the Registration Statements.
12
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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 and in the capacity as
the Registrant's Chief Financial and Accounting Officer.
HOST FUNDING, INC.
(Registrant)
Dated: June 13, 1996 /s/Michael S. McNulty
------------------------------------
By: Michael S. McNulty
Its: President
Chief Executive Officer
Chief Financial & Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 500
<SECURITIES> 0
<RECEIVABLES> 67,648
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,148
<PP&E> 2,741,477
<DEPRECIATION> 137,122
<TOTAL-ASSETS> 2,691,170
<CURRENT-LIABILITIES> 579,420
<BONDS> 4,153,323
0
0
<COMMON> 1
<OTHER-SE> (2,041,574)
<TOTAL-LIABILITY-AND-EQUITY> 2,691,170
<SALES> 245,407
<TOTAL-REVENUES> 245,407
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 232,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,631
<INCOME-PRETAX> (89,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (89,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (89,739)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
