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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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: 33-92772
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)
Securities registered pursuant to Section 12(b) of the Act: Class A Common
Stock
Name of each exchange on which registered: American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if 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 past 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 (Section 229.405 of this chapter) 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 /
As of December 31, 1995, the aggregate market value of the
Registrant's voting stock held by non-affiliates was $___________.
As of December 31, 1995, the Registrant had outstanding 100 shares of
Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates by reference: (i) S-11 registration
statement filed with the Securities and Exchange Commission on May 26, 1995
which Amendment No. 8 thereto was declared effective by the Securities and
Exchange Commission on April 17, 1996; (ii) S-4 registration statement
filed with the Securities and Exchange Commission on June 6, 1995, which
Amendment No. 4 was declared effective by the Securities and Exchange
Commission on December 5, 1995 (the "Registration Statements"). This
Annual Report is qualified and subject to the information contained in the
Registration Statements.
TABLE OF CONTENTS
Item
Number
- ------ PART I
1. and 2. Business and Properties 1
3. Legal Proceedings 18
4. Submission of Matters to a Vote of Security Holders 18
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
6. Selected Financial Data 30
7. Management's Discussion and Analysis of Financial
Condition and Result of Operations 36
8. Financial Statements and Supplementary Data 41
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
PART III
10. Directors and Executive Officers of the Registrant 42
11. Executive Compensation 45
12. Security Ownership of Certain Beneficial Owners and
Management 46
13. Certain Relationships and Related Transactions 48
PART IV
14. Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K 51
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PART I
Since this Annual Report is dated as of December 31, 1995, with
respect to the transactions relating to the formation of the company and
the offering described below (the "Formation Transactions"), this Annual
Report assumes such transactions have not yet occurred. The Formation
Transactions include the offering (the "Public Offering") of 500,000 shares
of Class A common stock of the Company (the "Class A Common Stock") which
the Company actually instituted on April 17, 1996. The initial price per
share of the Class A Common Stock in the Public Offering was $10.00.
References in this document to the "Offering" shall mean collectively (i)
the Public Offering, (ii) the Mission Bay Offering (as defined below), and
(iii) the exchange of the initial shares by Mr. Guy E. Hatfield and his
affiliates (the "Hatfield Affiliates") for the Company's common stock. The
disclosure in this Annual Report is subject to the information contained in
the Registration Statements which are hereby incorporated by reference.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
The Company
Host Funding, Inc. (the "Company") was organized under the laws of the
State of Maryland in December 1994 to acquire limited service hotels for
lease and is governed by a five-person Board of Directors. The Company
intends to qualify as a real estate investment trust ("REIT").
Effective April 1, 1995, the Company acquired a note receivable
secured by real property in an approximate principal amount of $1.8 million
(the "Hatfield Note") and four Super 8 hotels (the "Initial Hotels") as a
result of the transfer of certain assets from All American Group, Ltd., a
Delaware limited partnership ("AAG") to the Company. The Initial Hotels
are located in Miner, Missouri; Poplar Bluff, Missouri; Rock Falls,
Illinois; and Somerset, Kentucky, respectively. Pursuant to the
"Contribution and Assumption Agreement", partners of AAG (the "AAG
Partners") received 100 shares of Common Stock of the Company (the "Initial
Shares" of Common Stock) effective April 1, 1995. Currently, Inn Fund,
LLC, a Delaware limited liability company ("Inn Fund") leases the Initial
Hotels from the Company and All American Group, Inc., a Delaware
corporation, manages the Initial Hotels.
Concurrent with the closing of the Public Offering, the Company will
obtain the Mission Bay Super 8 hotel located in San Diego, California (the
"Acquisition Hotel") from Mission Bay Super 8, Ltd., a California limited
partnership ("Mission Bay") pursuant to the Mission Bay Acquisition (as
described below). The Acquisition Hotel and the Initial Hotels collectively
are referred to as the "Hotels".
Following the closing of the Formation Transactions, the Hotels will
be managed by Crossroads Hospitality Tenant Company, LLC, a Delaware
limited liability company ("Lessee"). In order to acquire additional hotel
properties, the Company may incur additional indebtedness. The Company
will hold the Hotels for investment. In addition, the Company will seek to
acquire additional hotel properties which meet its investment criteria.
The Company will be externally advised by Host Funding Advisors, Inc., a
Delaware corporation (the "Advisor"), which is wholly owned by Mr. Ian
Gardner-Smith. In addition, Host Acquisition Group, LLC, a Delaware
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limited liability company (the "Acquisition Company") will provide
acquisition and financing services to the Company. Mr. Gardner-Smith owns
99% of the Acquisition Company.
The Mission Bay Acquisition
On or about December 5, 1995, the Company delivered Solicitation
Materials to the limited partners of Mission Bay (the "Limited Partners")
in which the Limited Partners were given the option to vote "for",
"against", or "abstain" with respect to the sale (the "Mission Bay
Acquisition") of the Acquisition Hotel to the Company in exchange for the
issuance of shares of the Company's Class A Common Stock (the "Mission Bay
Offering") pursuant to an asset acquisition agreement (the "Mission Bay
Acquisition Agreement"). On January 9, 1996, the votes of the Limited
Partners were tabulated by GHG Hospitality, Inc., ("GHG"), the general
partner of Mission Bay. Limited Partners holding 71.12% of the limited
partnership interests of Mission Bay voted in favor of the Mission Bay
Acquisition. Limited Partners holding 10.52% of the limited partnership
interests either abstained or did not vote. Limited Partners holding 8.24%
voted against the transaction but did not perfect their dissenters' rights.
Limited Partners holding 10.12% of the limited partner interests dissented
with respect to the Mission Bay Acquisition, perfected their dissenters'
rights, and became dissenting partners ("Dissenting Partners"). The
Company will pay cash in the amount of $290,540 to the Dissenting Partners
which represents an amount equal to the value of their limited partnership
interests ($284,406) plus a fractional share allowance ($6,134). The
Company will issue 251,946 shares of Class A Common Stock to the Limited
Partners who did not become Dissenting Partners. The Mission Bay
Acquisition originally was conditioned on not more than 5% of the limited
partnership interests exercising their dissenters' rights. However, prior
to the Mission Bay Offering the Company had the right to waive this
condition. On January 10, 1996 the Company's Board of Directors
unanimously passed a resolution to exercise the Company's right to waive
the condition. The Company will close the Mission Bay Acquisition
concurrent with and subject to the close of the Public Offering.
The Hotel Industry
General
The United States hotel industry had approximately 28,930 hotel
properties with approximately 3.2 million rooms as of June 30, 1994. Of
these hotel rooms, approximately 1.9 million were affiliated with a "brand"
either through a franchise or license agreement or through ownership or
management by a national or regional hotel chain. The remainder were
managed by independent operations not affiliated with hotel chains of more
than five hotel properties. The Company believes that there are many
advantages to owning hotels which are "brand" affiliated, including access
to reservation systems, quality standards, training programs and enhanced
customer recognition.
The United States hotel industry is generally comprised of two
sectors: full-service hotels and limited-service hotels. Full-service
hotels generally offer restaurant and lounge facilities and meeting spaces,
as well as a wide range of services typically including bell service and
room service. Full-service hotels represent the largest segment of the
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hotel industry and primarily attract business travelers as compared to
leisure travelers. By contrast, limited-service hotels usually only
provide basic room accommodations, but generally attract a more balanced
mix of business and leisure travelers. All five of the Hotels are limited-
service hotels.
Based on the operating history of the Hotels and the chart below, the
Company believes that both the Hotels and the United States hotel industry
in general are experiencing cyclical growth. Since 1992, the hotel
industry has experienced improved fundamentals as the annual rates of
growth in demand for hotel rooms have exceeded the annual rates of growth
in supply of hotel room and annual ADR have increased each year. The 1994
information for occupancy rates for limited-service hotels is not
available. According to Smith Travel Research, for the five-year period
ended December 31, 1995, the United States hotel industry demonstrated the
following operating characteristics:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average hotel occupancy 60.2% 61.9% 63.3% 65.2% 65.%
Annual % growth in room supply 2.5% 1.3% 1.0% 1.4% 1.6%
Annual % growth in room demand 0.0% 3.2% 3.6% 4.5% 3.0%
ADR $58.83 $59.65 $61.14 $63.77 $67.34
REVPAR $35.42 $36.92 $38.70 $41.58 $44.86
% Change in REVPAR (2.0%) 4.2% 4.8% 7.4% 7.9%
</TABLE>
The improvement in industry fundamental has likewise resulted in an
improvement in operating statistics for both full-service and limited-
service hotels. According to Smith Travel Research, the average hotel
occupancy rate for full-service hotels in the United States increased from
62.8% in 1992 to 65.2% in 1993 while ADR increased by 1.7%. The average
hotel occupancy rate for limited-service hotels in the United States
decreased from 63.6% in 1992 to 63.3% in 1993 while ADR increased by 1.9%.
On the same property basis, the ADR at the five (5) Hotels, which are
limited-service hotels, owned by their Sellers as of January 1, 1993
increased from $36.82 in 1993 to $37.52 in 1994, an increase of 1.9%, and
the average hotel occupancy rate of such Hotels increased from 68.6% in
1993 to 71.3% in 1994.
The Company believes that improvements in performance in the United
States hotel industry since 1992 are primarily due to an improved economic
environment and a low rate of growth in room supply. The Company
attributes the low rate of growth in room supply to constraints on the
availability of financing for new hotel development from traditional
sources and an excess supply of hotel rooms resulting from high levels of
hotel construction activity in prior years. The Company anticipates that
growth in room supply will continue to be limited, except in certain select
markets experiencing rapid economic growth, due to continued restraints on
the availability of institutional funds for hotel construction. All
information regarding the hotel industry contained in this section was
obtained from Smith Travel Research.
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Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. These risks include, among other things, intense competition
from other hotels; over-building in the hotel industry which has adversely
affected occupancy, ADR and REVPAR in recent years; increases in operating
costs due to inflation and other factors, which increases have not in
recent years been, and may not necessarily in the future be, offset by
increased room rates; dependence on business and commercial travelers and
tourism; increases in energy costs and other expenses of travel; and
adverse effects of general and local economic conditions. Such factors
could adversely affect the Lessees' ability to make lease payments and,
consequently, the Company's ability to make distributions to Shareholders.
Further, a decrease in room revenues, would result in decreased revenues to
the Company under the Percentage Leases on the Hotels and decreased amounts
available for distribution to the Company's Shareholders.
Competition
(i) Competition for Guests. The hotel industry is highly
competitive. Each of the Hotels experiences competition primarily from
other similarly priced hotels in its immediate vicinity, but each also
competes with other hotel properties in its geographic market. Some of the
competitors of the Hotels have substantially greater marketing and
financial resources than the Company and the Lessee. Additional
competitive hotels are in development or could be developed in a relatively
short period of time. Such hotel properties could have an adverse effect
on the revenues of the Company's nearby hotels.
(ii) Competition for Acquisitions. When the Company seeks to
acquire hotel properties, the Company will be competing for investment
opportunities with entities which have substantially greater financial
resources than the Company. These entities may generally be able to accept
more risk than the Company prudently can manage. Competition may generally
reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to
sell. Further, the Company believes that competition from entities
organized for purposes substantially similar to the Company's objectives
will increase significantly over time.
Investment Concentration in Single Industry
The Company's current strategy is to acquire primarily high quality
limited service hotel properties throughout the continental United States.
The Company will not seek to invest in assets selected to reduce the risks
associated with investments in the hotel industry, and therefore will be
subject to risks inherent in concentrating investments in a single
industry. Therefore, the adverse effect on the Company's lease revenue and
amounts available for distribution to Shareholders resulting from a
downturn in the hotel industry will be more pronounced than if the Company
had diversified its investments outside of the hotel industry.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues
are greater in the second and third quarters than in the first and fourth
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quarters. All of the Hotels typically reflect the effects of this industry
seasonality. This seasonality can be expected to cause significant
quarterly fluctuations in the Company's lease revenues.
Limited Number of Hotels; Emphasis on Limited Service Hotel Market
The Company initially will own only five Hotels. Significant adverse
changes in the operations of any one or more of the Hotels could have a
material adverse effect on lease revenues and the Company's ability to make
distributions to its Shareholders. In addition to the Hotels, the Company
intends to place particular emphasis on the acquisition of hotel properties
that are high quality limited-service hotels. Accordingly, at least
initially, the Company will be subject to risks inherent in concentrating
investments in a single type of hotel property, which could have an adverse
effect on the Company's lease revenues and amounts available for
distribution to Shareholders.
The Hotels are located in areas throughout the United States.
Therefore, adverse events or conditions which affect those areas
particularly (such as natural disasters or adverse changes in local
economic conditions) could have a very pronounced negative impact on the
operations of the Hotels and amounts available for distribution to the
Company's Shareholders.
Renewal of Leases and Reletting of Hotels
The Company will be subject to the risks that upon expiration or
termination of the Percentage Leases, such Percentage Leases may not be
renewed, the hotel properties may not be relet or the terms of renewal or
reletting (including the cost of required renovations or concessions) may
be less favorable than previous lease terms. In addition, a default by the
Lessee under the terms of its Percentage Leases with the Company may result
in the termination of all such Percentage Leases. If the Company were
unable to promptly enter into new leases for all or a substantial portion
of the hotel properties or if the rental rates upon such renewal or
reletting were significantly lower than expected due to market conditions
or other factors, then the Company's cash flow and ability to make
distributions to Shareholders could be adversely affected. Moreover,
except with respect to a foreclosure property, as a result of the
restrictions imposed on the Company under the REIT provisions of the Code,
the Company would likely not be able to operate any hotel property without
resulting in failure to qualify as a REIT for federal income tax purposes.
All of the Percentage Leases for the Initial Hotels will commence effective
on the closing of the Offering and are for a term of fifteen (15) years.
The Percentage Lease for the Acquisition Hotel will commence on the closing
of the Mission Bay Acquisition and will have a term of 15 years.
Real Estate Investment Risks
General
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property, including, in
addition to the risks discussed below, adverse changes in general or local
economic conditions, zoning laws, traffic patterns and neighborhood
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characteristics, tax rates, governmental rules and fiscal policies, and by
civil unrest, acts of war, adverse and other factors which are beyond the
control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. Further, although the Hotels have been
recently appraised, no assurances can be given that such appraised values
reflect realizable market values. Also, no assurances can be given
that the market value of any of the Hotels will not decrease in the future.
Because market forces will most certainly value the Company as an ongoing
business rather than through liquidation values of the Company or the
Hotels, the valuation of the Company most likely will be determined based
primarily upon a capitalization of the estimated cash flow available for
distribution and other market-related factors rather than as a summation of
property by property values. There can be no assurance that the Company
will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price realized in any
disposition will recoup or exceed the amount of the Company's investment
therein.
Uninsured and Underinsured Losses
Each of the Hotels will be covered by comprehensive policies of
insurance, including liability, fire and extended coverage. Based its past
experience in obtaining insurance policies on the Initial Hotels, the
Acquisition Hotel, and numerous other hotel properties, management believes
such specified coverage is of the type and amount customarily obtained by
owners of real property assets. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes, hurricanes
and floods, that may be uninsurable or not economically insurable. The
Company's Board of Directors will use their discretion in determining
amounts, coverage limits and the deductibility provisions of insurance,
with a view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost
of the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make
it impractical to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to such property.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property
may be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Liability also may extend
to persons holding a security interest in the property, under certain
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limited circumstances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to properly remediate such
contaminated property, may adversely affect the owner's ability to dispose
of such property, to fully utilize such property without restriction or to
borrow using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable
for the costs of removal or remediation of such substances at the disposal
or treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law
principles could be used to impose liability for release of hazardous or
toxic substances, including the release of asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage
associated with such releases, including exposure to released ACMs.
Environmental laws also may impose restrictions on the manner in which
property may be used or businesses may be operated, and these restrictions
may require expenditures. Environmental laws provide for sanctions in the
event of non-compliance and may be enforced by governmental agencies or, in
certain circumstances, by private parties. In connection with the
ownership of the Hotels and any subsequently acquired hotels, the Company
or the Company may be potentially liable for such costs. The cost of
defending against claims of liability, or compliance with environmental
regulatory requirements or of remediating the contaminated property could
materially adversely affect the business, assets or results of operations
of the Company and the Company and, consequently, amounts available for
distribution to the Company's Shareholders.
Phase I environmental audits were previously obtained for each of the
Hotels from independent environmental engineers and supplemental Phase I
audits of all of the Hotels have recently been prepared in connection with
the Offering. The principal purpose of Phase I audits is to identify
indications of potential environmental contamination for which the Company
may be responsible and, secondarily, to assess, to a limited extent, the
potential for environmental regulatory compliance liabilities. The
supplemental Phase I audits were designed to meet the requirements of the
current industry approach and ASTM Standard E 1527-93 governing Phase I
audits, and consistent with those requirements, none of the audits involved
testing of groundwater, soil or air. Accordingly, they do not represent
evaluations of conditions at the studied sites that would be revealed only
through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the various above described properties' complete
compliance status. Similarly, the audits did not involve comprehensive
analysis of potential off-site liability. None of the Phase I audit
reports revealed that a Phase II audit was necessary or required. The
Phase I audit reports have not revealed any environmental liability that
management believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any
such liability. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware.
Certain of the Hotels 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
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activities that may release petroleum products or other hazardous
substances into the soil or groundwater. Although there can be no
assurance that petroleum products from such properties or other hazardous
substances have not been released or have not migrated, or in the future
will not be released or will not migrate into the Hotels, the Company is
not aware of any such releases or migrations and the Phase I environmental
assessment reports described above did not reveal any information which
would indicate that the Hotels have been materially adversely affected by
such storage tanks or activities.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While management of the
Company believes that the Hotels are substantially in compliance with these
requirements, a determination that the Company is not in compliance with
the ADA could result in imposition of fines or an award of damages to
private litigants. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA, the Company's ability
to make distributions to its Shareholders could be adversely affected.
Increases in Property Taxes
Each Hotel is subject to real and personal property taxes. The real
and personal property taxes on hotel properties in which the Company
invests may increase as property tax rates change and as the properties are
assessed or assessed by taxing authorities. Since the Company (and not the
Lessee) will pay the property taxes on all of the Hotels, an increase in
property taxes could adversely affect the Company's ability to make
distributions to its Shareholders. The Company is responsible for paying
the property taxes on the Hotels. The historical and pro forma terms of
the property taxes are disclosed in the section entitled "Selected
Financial Information and Operations Data" and the financial statements
attached hereto. Any changes in the terms of the property taxes will be
made pursuant to local tax statutes.
Acquisition and Development Risks
The Company intends to pursue acquisitions of additional hotel
properties and may in the future pursue development opportunities.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements
necessary to market and acquire properties will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs, risks
that the properties will not achieve anticipated occupancy levels or
sustain anticipated room rate levels, and new project commencement risk
such as receipt of zoning, occupancy and other required governmental
permits and authorizations and the incurrence of development costs in
connection with projects that are not pursued to completion. In addition,
the Company anticipates that any new development it may undertake would be
financed under lines of credit or other forms of secured or unsecured
construction financing that could result in a risk that permanent financing
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for newly developed projects might not be available or would be available
only on disadvantageous terms. In addition, the fact that the Company must
distribute 95% of its net taxable income in order to maintain its
qualification as a REIT will limit the ability of the Company to rely upon
lease income from the hotel properties to finance acquisitions or new
development. As a result, if permanent debt or equity financing were not
available on acceptable terms to refinance acquisitions or new development
undertaken without permanent financing, further acquisitions or development
activities might be curtailed or cash available for distribution might be
adversely affected.
Changes in Laws
Increased costs resulting from changes in governmental requirements
will generally be the responsibility of the Lessee. The Lessee, however,
may be unable to pass through such increased costs to their customers and
substantial increases in expenses resulting from such increased costs may
affect the Lessee' financial condition and their ability to pay rent. Such
increases in expenses will not result in adjustments of the obligations of
the Lessee to pay rent under the terms of the Percentage Leases and will
not result in adjustments of the amount of such rent, including Percentage
Rents. However, certain Percentage Leases provide that, during the latter
half of the lease term, the Company will be responsible for a portion of
the costs of any capital improvements resulting from changes in law to the
extent the useful life of such capital improvements exceeds the remaining
lease term. As a consequence, any changes in governmental requirements
which result in increased costs at an Initial Hotel subject to such a
provision could adversely affect the Company's ability to make
distributions to Shareholders. In addition, changes in laws increasing
potential liability for environmental conditions may result in significant
unanticipated expenditures by the Company, which would adversely affect the
Company's ability to make distributions to Shareholders.
The Initial Hotels
General
The Initial Hotels are diversified by geographic location (3 states).
However, the Initial Hotels share the same (i) franchise affiliation (Super
8), (ii) Lessee (Crossroads Hospitality Tenant Company, LLC), and (iii)
approximate price segment in the hotel industry (budget price segment).
There are four Initial Hotels. The Initial Hotels are the: Miner Super 8,
Poplar Bluff Super 8, Rock Falls Super 8, and the Somerset Super 8. The
Company believes that the geographic diversity of its initial portfolio
could moderate the potential effects on the Company of adverse regional
economic conditions and changes in local market competitive conditions.
The average acquisition price of the Initial Hotels was approximately
$27,380 per room. Based on the Phase I audits performed by Law Engineering
and Environmental Services, Inc., the criteria set forth by Super 8 Motels,
Inc., and its own evaluation and inspection of each of the Initial Hotels,
the Company believes that the Initial Hotels are in good operating
condition and meet the current quality and appearance standards required by
their respective Franchise Agreements.
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The Miner Super 8 -- 2609 East Malone, Sikeston, Missouri.
The Miner Super 8 hotel is located in Sikeston, Missouri, and is
located in a primarily rural area. The Miner Super 8 Hotel has 63 rooms,
has a maximum occupancy of 180 persons, and is located on 2.0 acres of
land. The Company acquired the Miner Super 8 effective April 1, 1995,
pursuant to the Contribution and Assumption Agreement. The Miner Super 8
has been appraised at a value of $2,930,000. As of December 31, 1995,
the Miner Super 8 was encumbered by a mortgage with an approximate
principal amount of $1,094,000 at an adjustable interest rate of 9.75%.
The mortgage is scheduled to be amortized over fifteen (15) years. The
mortgage contained no pre-payment penalties. The maturity date of the
mortgage is March 11, 1998. The Miner Super 8 is in competition with the
Hatfield Inn located in Sikeston, Missouri, along with several other
limited-service hotels in the area. However, based on its experience and
knowledge of the hotel industry, management of the Company believes that
the competitive conditions of the Miner Super 8 are normal in comparison to
most regions across the United States.
There is no proposed plan for the renovation, improvement or
development of the Miner Super 8, nor does management foresee the
implementation of such a plan during the term of the Percentage Lease. The
Company, via the Lessee, plans to maintain the Miner Super 8 in good
working condition and such maintenance will require the Lessee to make the
normal repairs and nominal improvements necessary to maintain such good
working condition. The Miner Super 8 will continue to be used, owned and
operated as a limited-service hotel as it is best-suited for such usage.
Based on its experience in obtaining similar insurance policies in prior
years on the Miner Super 8, management believes that currently the Miner
Super 8 is adequately covered by insurance.
The Poplar Bluff Super 8 -- 2831 North Westwood Blvd., Poplar Bluff,
Missouri.
The Poplar Bluff Super 8 hotel is located in Poplar Bluff, Missouri,
and is located in a primarily rural area. The Poplar Bluff Super 8 Hotel
has 63 rooms, has a maximum occupancy of 180 persons, and is located on
1.71 acres of land. The Company acquired the Poplar Bluff Super 8
effective April 1, 1995, pursuant to the Contribution and Assumption
Agreement. The Poplar Bluff Super 8 has been appraised at a value of
$2,160,000. As of December 31, 1995, the Poplar Bluff Super 8 was
encumbered by a mortgage with an approximate principal amount of $890,000
at an adjustable interest rate of 9.75%. The mortgage is scheduled to be
amortized over fifteen (15) years. The mortgage contains no pre-payment
penalties. The maturity date of the mortgage is March 12, 1998. Further,
as of December 31, 1995, the Poplar Bluff Super 8 was encumbered by a
cross-collateralized second mortgage (further collateral provided by the
Rock Falls Super 8) totaling approximately $55,000. The loan was closed
and the property was encumbered by the security interest on July 13, 1995.
The interest rate on the loan through September 15, 1995 was prime plus 2%
and after September 15, 1995, the interest rate is prime plus 3%.
Accordingly, after September 15, 1995 and on December 31, 1995, the
interest rate on the loan was 11.75%. The loan is payable in monthly
installments of $12,000. The second mortgage is due on April 15, 1996. It
is the Company's intention to pay off the debt from the proceeds of the
10
<PAGE>
Formation Transactions. Should the Formation Transactions not be
consummated, the Company intends to renegotiate this debt. Should the
Company be unable to renegotiate this debt the Company intends to pay off
the debt from operating cash flow. Additionally, Guy Hatfield,
individually and as a partner in AAG, has committed to the Company to take
whatever action is necessary to insure that this and other maturing loans
are not foreclosed upon. The Poplar Bluff Super 8 is in competition
several other limited-service hotels in the area. However, based on its
experience and knowledge of the hotel industry, management of the Company
believes that the competitive conditions of the Poplar Bluff Super 8 are
moderate in comparison to most regions across the United States.
There is no proposed plan for the renovation, improvement or
development of the Poplar Bluff Super 8, nor does management foresee the
implementation of such a plan during the term of the Percentage Lease. The
Company, via the Lessee, plans to maintain the Poplar Bluff Super 8 in good
working condition and such maintenance will require the Lessee to make the
normal repairs and nominal improvements necessary to maintain such good
working condition. The Poplar Bluff Super 8 will continue to be used,
owned and operated as a limited-service hotel as it is best-suited for such
usage. Based on its experience in obtaining similar insurance policies
in prior years on the Poplar Bluff Super 8, management believes that
currently the Poplar Bluff Super 8 is adequately covered by insurance.
The Rock Falls Super 8 -- 2100 First Avenue, Rock Falls, Illinois.
The Rock Falls Super 8 hotel is located in Rock Falls, Illinois, and
is located in a primarily rural area. The Rock Falls Super 8 Hotel has 63
rooms, has a maximum occupancy of 180 persons, and is located on 2.45 acres
of land. The Company acquired the Rock Falls Super 8 effective April 1,
1995, pursuant to the Contribution and Assumption Agreement. The Rock Falls
Super 8 has been appraised at a value of $2,370,000. As of December 31,
1995, the Rock Falls Super 8 was encumbered by a mortgage with an
approximate principal amount of $1,012,000 at an interest rate of 8.75%.
The mortgage is scheduled to be amortized over fifteen (15) years. The
mortgage contains no pre-payment penalties. The maturity date of the
mortgage is February 4, 1998. Further, as of December 31, 1995, the Rock
Falls Super 8 was encumbered by a cross-collateralized second mortgage
(further collateral provided by the Poplar Bluff Super 8) totaling
approximately $55,000 at an interest rate of prime plus 2%, payable in
monthly installments of $12,000. The second mortgage is due April 15,
1996. The Rock Falls Super 8 is in competition several other limited-
service hotels in the area. However, based on its experience and knowledge
of the hotel industry, management of the Company believes that the
competitive conditions of the Rock Falls Super 8 are moderate in comparison
to most regions across the United States.
There is no proposed plan for the renovation, improvement or
development of the Rock Falls Super 8, nor does management foresee the
implementation of such a plan during the term of the Percentage Lease. The
Company, via the Lessee, plans to maintain the Rock Falls Super 8 in good
working condition and such maintenance will require the Lessee to make the
normal repairs and nominal improvements necessary to maintain such good
working condition. The Rock Falls Super 8 will continue to be used, owned
and operated as a limited-service hotel as it is best-suited for such
11
<PAGE>
usage. Based on its experience in obtaining similar insurance policies in
prior years on the Rock Falls Super 8, management believes that currently
the Rock Falls Super 8 is adequately covered by insurance.
The Somerset Super 8 -- 601 South Highway 27, Somerset, Kentucky.
The Somerset Super 8 hotel is located in Somerset, Illinois, and is
located in a primarily rural area. The Somerset Super 8 Hotel has 63
rooms, has a maximum occupancy of 180 persons, and is located on 1.29 acres
of land. The Company acquired the Somerset Super 8 effective April 1,
1995, pursuant to the Contribution and Assumption Agreement. The Somerset
Super 8 has been appraised at a value of $1,850,000. As of December 31,
1995, the Somerset Super 8 was encumbered by a mortgage with an approximate
principal amount of $1,160,000 at an adjustable interest rate of 9.25%.
The mortgage is scheduled to be amortized according to a rolling six month
schedule. The mortgage contains no pre-payment penalties. The maturity
date of the mortgage is April 15, 1996. In addition, in December 1995,
note payable totaling $20,000, bearing interest at 10% per annum, which is
due on March 31, 1996, was executed. The note is unsecured but is included
with the Somerset Super 8. It is the Company's intention to pay off the
debt from the proceeds of the Formation Transactions. Should the Formation
Transactions not be consummated, the Company intends to renegotiate this
debt. Should the Company be unable to renegotiate this debt, Guy Hatfield,
individually and as a partner in AAG, has committed to the Company to take
whatever action is necessary to insure that this and other maturing loans
are not foreclosed upon. The Somerset Super 8 is in competition several
other limited-service hotels in the area. However, based on its experience
and knowledge of the hotel industry, management of the Company believes
that the competitive conditions of the Somerset Super 8 are normal in
comparison to most regions across the United States.
There is no proposed plan for the renovation, improvement or
development of the Somerset Super 8, nor does management foresee the
implementation of such a plan during the term of the Percentage Lease. The
Company, via the Lessee, plans to maintain the Somerset Super 8 in good
working condition and such maintenance will require the Lessee to make the
normal repairs and nominal improvements necessary to maintain such good
working condition. The Somerset Super 8 will continue to be used, owned
and operated as a limited-service hotel as it is best-suited for such
usage. Based on its experience in obtaining similar insurance policies in
prior years on the Somerset Super 8, management believes that currently the
Somerset Super 8 is adequately covered by insurance.
12
<PAGE>
Current Debt on Initial Hotels
The debt on the Initial Hotels (which will be paid off or paid down
considerably at the closing of the Formation Transactions) is more
particularly described below:
<TABLE>
<CAPTION>
Somerset Somerset Poplar Bluff/
Miner Poplar Bluff Rock Falls Mortgage Note Rock Falls
----- ------------ ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Principal Amt as of 12/31/95 $1,094,000 $890,000 $1,012,000 $1,160,000 $20,000 $55,000
Interest Rate 9.75%* 9.75%* 8.75% 9.25% 10% 11.75%
Amortization Provisions 15 years 15 years 15 years Rolling 6 mos. 6 mos. 9 mos.
Pre-Payment Penalty NO NO NO NO NO NO
Maturity Date 3/11/98 3/12/98 2/4/98 4/15/96 4/15/96 4/15/96
* Adjustable interest rates
</TABLE>
3
<PAGE>
Financial Information
The following table sets forth certain historical financial
information for the combined Hotels, as a percentage of revenue, for the
periods indicated.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
--------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INITIAL HOTELS AND LESSEE
Rock Falls
Average occupancy 70.2% 70.0% 79.2% 79.4% 76.3%
Average daily rate $31.51 $34.50 $35.88 $36.37 $37.21
Revenue per available room $22.05 $24.15 $28.43 $28.90 $28.38
Miner
Average occupancy 90.2% 92.7% 94.7% 96.2% 86.0%
Average daily rate $31.56 $34.22 $35.40 $36.73 $38.42
Revenue per available room $28.40 $31.72 $33.54 $35.31 $33.05
Somerset
Average occupancy 59.1% 55.2% 58.9% 67.6% 67.9%
Average daily rate $32.28 $34.19 $33.83 $34.62 $34.04
Revenue per available room $19.01 $18.88 $19.92 $23.63 $23.12
Poplar Bluff
Average occupancy 64.1% 69.2% 71.5% 72.2% 74.0%
Average daily rate $31.54 $33.35 $34.00 $35.32 $35.74
Revenue per available room $20.23 $23.07 $24.30 $25.69 $26.44
TOTAL-INITIAL HOTELS AND LESSEE
Average occupancy 70.9% 71.8% 76.1% 79% 76%
Average daily rate $31.69 $34.07 $34.89 $36.00 $36.48
Revenue per available room $22.47 $24.45 $26.55 $28.38 $27.75
ACQUISITION HOTEL
Mission Bay
Average occupancy 67.5% 65.2% 52.5% 54.9% 57.7%
Average daily rate $42.66 $43.04 $42.84 $42.20 $43.45
Revenue per available room $28.80 $28.06 $22.48 $23.18 $25.06
</TABLE>
14
<PAGE>
The Mission Bay Partnership and the Acquisition Hotel
Motels of America Series IX, a California Limited Partnership,
("Mission Bay") was formed on February 5, 1987 pursuant to the California
Revised Uniform Limited Partnership Act. Mission Bay sold 6,600 limited
partnership interests at a public offering price of $1,000 each commencing
November 19, 1986 pursuant to a Registration Statement on Form S-18 under
the Securities Act of 1933 (Registration 33-9075-LA). The offering of
$6,600,00 was fully subscribed and closed on June 15, 1987. The "purposes"
section of Mission Bay Agreement of Limited Partnership provided that the
hotel to be built was to be sold within approximately six to ten years of
1987. Accordingly, the original intent of Mission Bay was to sell the
Acquisition Hotel between 1993 and 1997 and to then distribute the sales
proceeds to the Limited Partners.
The Partnership received $5,761,115 (net of offering costs of
$838,885) from the sale of limited partnership interests. These funds were
available for investment in property, to pay legal fees and other costs
related to the investments, to pay operating expenses, and for working
capital. The majority of the proceeds were used to acquire a 1.056 acre
parcel of property in the Mission Bay area of San Diego, California for
$2,352,000 and to build and operate thereon a 117 room "economy" motel as a
franchise of Super 8 Motels, Inc. The motel was opened for business in
November 1987 under a twenty-year franchise agreement with Super 8 Motels,
Inc., which required the payment of initial franchise fees of $20,000 and
requires ongoing royalties equal to 4% of gross room revenues and chain-
affiliated advertising fees equal to 2% of gross room revenues.
Guy E. Hatfield was the original Managing General Partner of Mission
Bay. Mr. Hatfield held 32.79% of the general partner interests and Mr. Ian
Gardner-Smith held 9.89% of the general partner interests. The other 57.3%
of general partner interests were held by various other individuals. On
January 1, 1990, the general partners of Mission Bay sold their general
partner interests to GHG Hospitality, Inc., ("GHG") and the name of the
partnership was changed to "Mission Bay Super 8, Ltd.". The Hatfield
Affiliates currently own 88 of the 6,600 (1.3%) limited partnership units
of Mission Bay. Since January 1, 1990, the Acquisition Hotel has been
operated pursuant to a management agreement with GHG. Mission Bay has no
employees, and is not subject to any legal proceedings.
The Acquisition Hotel has 117 rooms, is located on 1.07 acres of land,
and is located in a primarily urban area. There is significant competition
in the San Diego lodging market. Mission Bay is in competition either
directly or indirectly with a large number of hotels and motels of varying
quality and sizes, including other motels which are part of national or
regional chains. Some of such competitive hotels and motels have greater
financial resources and personnel with more experience than Mission Bay and
the general partner. The San Diego area in particular has a large number
of hotel and motel projects that in the aggregate dilute average occupancy
and affect profitability. Mission Bay's motel does not compete directly
with any large budget motel chains, but competes indirectly in the greater
San Diego area with such budget motels as Comfort Inns and "E-Z 8" Motels.
There is no proposed plan for the renovation, improvement or
development of the Acquisition Hotel, nor does management foresee the
15
<PAGE>
implementation of such a plan during the term of the Percentage Lease. The
Company, via the Lessee, plans to maintain the Acquisition Hotel in good
working condition and such maintenance will require the Lessee to make the
normal repairs and nominal improvements necessary to maintain such good
working condition. The Acquisition Hotel will continue to be used, owned
and operated as a limited-service hotel, pursuant to the Percentage Lease.
There is no public trading market for the Partnership's limited
partnership interests. There were approximately 1,149 holders of Mission
Bay's 6,600 limited partnership interests as of December 31, 1994. Cash
distributions to holders of limited partnership interests totaled $180,000
($27.27 per interest) in 1994 and $162,000 ($24.55 per interest) in 1993.
Mission Bay's investment property has been valued at $2,810,000 as of
December 1, 1994. Because of a significant decrease in the market value of
the Acquisition Hotel, management elected to write down Mission Bay's
investment property to its appraised value of $2,810,000 as of December 31,
1994.
Limited Service Hotels
The Hotels do not offer a full variety of accommodations. They offer
daily and nightly occupancies, but do not offer food, room service,
restaurants, or laundry services.
Management Strategy
The Company believes that the economic trends affecting the hotel
industry will be the major factor in any future growth in Percentage Lease
revenue from the Hotels and in the hotel properties that may be acquired by
the Company. Additionally, the Company believes that if the Lessee operates
and manages the Hotels in an efficient manner, such operation and
management could have a positive effect on any future growth in Percentage
Lease revenue from the Hotels and in the hotel properties that may be
acquired by the Company. The Hotels will be, and any hotel properties
which may be acquired by the Company for operations, may be, managed by the
Lessee. Based upon information provided by AAG, the Initial Hotels had
average occupancy, ADR and REVPAR of 76%, $36.48, and $27.75, respectively,
for 1995. The Company expects that, since January 1, 1995 and prior to the
closing of the Offering, between 1% and 4% of room revenues of the Initial
Hotels for such period will have been spent on upgrades and improvement of
the Initial Hotels. Such capital improvements have been made to maintain
and increase the quality standards at the Initial Hotels, respectively.
Combined REVPAR for the Initial Hotels has increased from $24.45 for
1992 to $27.75 for the twelve months ended December 31, 1995. Management
of the Company believes the growth in REVPAR at the Initial Hotels reflects
the impact that can result from improved economic trends, improved
management, capital improvements, and stronger demand in the market area.
16
<PAGE>
Growth Strategy
General
The Company's growth strategy is to increase cash flow and enhance
Shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in any growth in revenue at its Hotels and subsequently acquired
hotels.
Selection of Hotels
The Company's selection of the Hotels for acquisition was principally
based on competitive position of each Initial Hotel in its market and the
prospects for growth in revenues and property values of such hotel
properties. In selecting the Hotels, the Company considered a range of
factors with respect to each Initial Hotel, including (i) the historical
and projected cash flows, (ii) the estimated replacement cost and proposed
acquisition price of each Initial Hotel, (iii) the availability of
qualified lessees, (iv) the physical condition and potential for
repositioning (including changing the franchise) or expansion or other
physical improvements, (v) the price segment, (vi) the growth potential of
the market, and (vii) the strength of the particular affiliated national
hotel organization, if any.
Percentage Leases
Upon the closing of the Public Offering, the Company will lease the
Hotels to Crossroads Hospitality Tenant Company, a Delaware limited
liability company, (the "Lessee") pursuant to various lease agreements (the
"Percentage Leases"). The Percentage Leases are designed to allow the
Company to participate in any growth in revenues at the Hotels, which the
Company's management believes can be achieved through increases in both
occupancy rates and ADR. During the term of each Percentage Lease, the
Lessee will be obligated to pay (i) the Base Rent (as set forth below) (ii)
Percentage Rent (as set forth below), (iii) all taxes other than the
property taxes on the Hotels (the Company will pay such property taxes),
assessments, ground rents, water, sewer or other rents and charges,
excises, tax inspection, authorization or similar fees and all other
governmental charges (the "Impositions"), and (iv) every fine, penalty,
interest and cost for non-payment or late payment of Base Rent, Percentage
Rent, or the Impositions (the "Additional Charges").
A summary of the Percentage Leases with respect to the Hotels is set
forth below.
17
<PAGE>
<TABLE>
<CAPTION>
Gross Revenue
for the 12
Annual Percentage Months Ended Annual Base
Rent Formula December 31, 1995 Rent
----------------- ----------------- -----------
<S> <C> <C>
Hotels:
Miner 35% YTD Revenues over initial Break-Even Threshold of $660,000*
on first $200,000 over Break-Even Threshold, and 40% thereafter, $789,418 $265,300
less Percentage Rent previously paid YTD
Poplar Bluff 35% YTD Revenues over initial Break-Even Threshold of $555,000*
on first $100,000 over Break-Even Threshold, and 37% thereafter, $636,896 $202,000
less Percentage Rent previously paid YTD
Rock Falls 28.75% YTD Revenues over initial Break-Even Threshold of $580,000**
on first $200,000 over Break-Even Threshold, and 35% thereafter, $690,385 $200,500
less Percentage Rent previously paid YTD
Somerset 32% YTD Revenues over initial Break-Even Threshold of $410,000***
on first $200,000 over Break-Even Threshold, and 35% thereafter, $548,284 $112,000
less Percentage Rent previously paid YTD
Mission Bay 30% YTD Revenues over initial Break-Even Threshold of $1,050,000**
on first $100,000 over Break-Even Threshold, and 40% thereafter, $1,143,982 $250,000
less Percentage Rent previously paid YTD ----------
Consolidated
Total for
Hotels $3,808,965 $1,029,800
========== ==========
- ---------------------------------------------------------------------------------------
* Break-Even Threshold increases by 2% per year
** Break-Even Threshold increases by 3% per year
*** Break-Even Threshold remains constant
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Description of Securities
The following summary of the terms of the stock of the Company does
not purport to be complete and is subject to and qualified in its entirety
by reference to the Company's Charter and the Company's Bylaws, copies of
which are exhibits to the Registration Statements.
In General
The Charter provides that the Company may issue up to 50,000,000
shares of Class A Common Stock, $.01 par value per share; up to 4,000,000
shares of Class B Common Stock, $.01 par value per share; up to 1,000,000
shares of Class C Common Stock, $.01 par value per share; and up to
20,000,000 shares of its preferred stock, $.01 par value per share
("Preferred Stock"). The shares of Class B Common Stock and Class C Common
Stock will have full voting and liquidation rights. The Class B Common
Stock and Class C Common Stock are subordinated to the Class A Common Stock
only with respect to dividends. Collectively, the Class A Common Stock,
the Class B Common Stock, and the Class C Common Stock are referred to as
Common Stock. Upon completion of the Formation Transactions, 1,471,946
shares of Common Stock will be issued and outstanding of which (i) 140,000
will be Class B Common Stock, (ii) 140,000 will be Class C Common Stock,
and (iii) the remainder will be shares of the Company's Class A Common
Stock. No Preferred Stock will be outstanding. Under Maryland law,
stockholders generally are not liable for the corporation's debts or
obligations.
Common Stock
All shares of Common Stock offered hereby will be duly authorized,
fully paid and nonassessable. Shareholders of Common Stock are entitled to
receive distributions on such stock if, as and when authorized and declared
by the Board of Directors out of assets legally available therefor and to
share ratably in the assets of the Company legally available for
distribution to its Shareholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for all
known debts and liabilities of the Company.
Each outstanding Share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of Shareholders, including the election
of Directors. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be
sufficient to elect a Director.
19
<PAGE>
Upon the closing of the Public Offering, the Company will issue
140,000 shares of Class B Common Stock ($.01 par value) and 140,000 shares
of Class C Common Stock ($.01 par value) to the Hatfield Affiliates in
exchange for their Initial Shares. The 140,000 shares of Class B Common
Stock will be convertible to shares of Class A Common Stock. The 140,000
shares of Class C Common Stock will automatically convert into Class A
Common Stock on January 1, 1997. The 140,000 shares of Class B and 140,000
shares of Class C Common Stock, on a pro forma basis, will not receive a
distribution.
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 above, all shares of Common Stock will have equal
distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two thirds of the shares entitled to vote on
the matter unless a lesser percentage (but not less than a majority of all
of the votes entitled to be cast on the matter) is set forth in the
corporation's charter. The Company's Charter does not provide for a lesser
percentage (i.e., 51%) in such situations.
The Charter authorizes the Board of Directors to reclassify any
unissued shares of Common Stock into other classes or series of classes of
stock and to establish the number of shares in each class or series and to
set the preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions/dividends or other
distributions, qualifications or terms or conditions of redemption for each
such class or series.
Preferred Stock
The Board of Directors is authorized to provide for the issuance of
shares of Preferred Stock in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences and
rights of each such series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred
Stock, the Board of Directors may afford the holders of any series or class
of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Stock. The issuance of Preferred
Stock could have the effect of delaying or preventing a change in control
of the Company. The Company has no present intention to issue shares of
Preferred Stock.
Excess Stock
For a description of Excess Stock, see "Restrictions on Transfer".
20
<PAGE>
Power to Issue Additional Shares of Common Stock
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock and to classify
or reclassify unissued shares of Common and thereafter to cause the Company
to issue such classified or reclassified shares of stock will provide the
Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise.
The additional classes or series, as well as the Common Stock, will be
available for issuance without further action by the Company's
Shareholders, unless such action is required by applicable law or the rules
of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Directors has no
intention at the present time of doing so, it could authorize the Company
to issue a class or series that could, depending upon the terms of such
class or series, delay, defer or prevent a transaction or a change of
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest.
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, its shares of
Common Stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months (other than the first
year for which an election to be a REIT has been made) or during a
proportionate part of a shorter taxable year. Also, not more than 50% of
the value of the outstanding shares of Common Stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities such as qualified pension plans) during the last
half of a taxable year (other than the first year for which an election to
be a REIT has been made).
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 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. The
Company's Board of Directors, upon receipt of a ruling from the IRS, an
opinion of counsel or other evidence satisfactory to the Board and upon
such other conditions as the Board of Directors may establish, may exempt a
proposed transferee from the Ownership Limit. However, the Board may not
grant an exemption from the Ownership Limit to any proposed transferee
whose ownership, direct or indirect, of in excess of 9.9% of the value of
the outstanding shares of Common Stock of the Company would result in the
termination of the Company's status as a REIT. The Ownership Limit does
not apply to the Common Stock owned, directly or indirectly, by Mr.
Hatfield. As a condition of such exemption, the intended transferee must
give written notice to the Company of the proposed transfer no later than
the fifteenth day prior to any transfer which, if consummated, would result
in the intended transferee owning shares in excess of the Ownership Limit.
The Board of Directors may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order
to determine or ensure the Company's status as a REIT. Any transfer of
shares of stock that would (a) create a direct or indirect ownership of
21
<PAGE>
shares of stock in excess of the Ownership Limit, (b) result in the shares
of stock being owned by fewer than 100 persons or (c) result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, will
be null and void and the intended transferee will acquire no rights to the
shares. The foregoing restrictions on transferability and ownership will
not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT.
Any purported transfer of shares that would result in a person owning
shares in excess of the Ownership Limit or cause the Company to become
"closely held" under Section 856(h) of the Code that is not otherwise
permitted as provided above will constitute shares of Excess Stock, which
will be transferred by operation of law to the Company as trustee for the
exclusive benefit of the person or persons to whom the shares of Excess
Stock are ultimately transferred until such time as the intended transferee
retransfers the shares of Excess Stock. While these shares of Excess Stock
are held in trust, they will not be entitled to vote or to share in any
dividends or other distributions (except upon liquidation). Subject to the
Ownership Limit, the shares of Excess Stock may be retransferred by the
intended transferee to any person (if the shares of Excess Stock would not
be shares of Excess Stock in the hands of such person) at a price not to
exceed the price paid by the intended transferee or, if the intended
transferee did not give value for such shares of Excess Stock (e.g., a
transfer by gift or devise), the fair market value (as described below) at
the time of the proposed transfer that resulted in the shares of Excess
Stock, at which point the Excess Stock will automatically be exchanged for
the stock to which the shares of Excess Stock are attributable. In
addition, such shares of Excess Stock held in trust are subject to purchase
by the Company at a purchase price equal to the lesser of the price paid
for the stock by the intended transferee (or, in the case of a devise or
gift, the fair market value at the time of such devise or gift) and the
fair market value of the shares of Excess Stock on the date the Company
exercises its right to purchase. Fair market value shall be the last sales
price reported on the American Stock Exchange on the trading day
immediately preceding the relevant date, or if not then traded on the
American Stock Exchange, the last sales price of such shares of stock on
the trading day immediately preceding the relevant date as reported on any
exchange or quotation system over which such shares of stock may be traded,
or if not then traded over any exchange or quotation system, then the
market price of such shares of stock on the relevant date as determined in
good faith by the Board of Directors of the Company. From and after the
intended transfer to the intended transferee of the shares of Excess Stock,
the intended transferee shall cease to be entitled to distributions (except
upon liquidation), voting rights and other benefits with respect to such
shares of the stock except the right to payment of the purchase price for
the shares of stock or the retransfer of shares as provided above. Any
dividend or distribution paid to a proposed transferee on shares of Excess
Stock prior to the discovery by the Company that such shares of stock have
been transferred in violation of the provisions of the Charter shall be
repaid to the Company upon demand. If the foregoing transfer restrictions
are determined to be void or invalid by virtue of any legal decision,
statute, rule or regulation, then the intended transferee of any shares of
Excess Stock may be deemed, at the option of the Company, to have acted as
an agent on behalf of the Company in acquiring such shares of Excess Stock
and to hold such shares of Excess Stock on behalf of the Company.
22
<PAGE>
All certificates representing shares of Common Stock and Preferred
Stock will bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other percentage between one
half of 1% and 5%, as provided in the rules and regulations promulgated
under the Code) of the number or value of the outstanding shares of Common
Stock of the Company must give a written notice to the Company by January
31 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with
respect to the direct, indirect and constructive ownership of shares of
Common Stock as the Board of Directors deems reasonably necessary to comply
with the provisions of the Code applicable to a REIT, to comply with the
requirements of any taxing authority or governmental agency or to determine
any such compliance.
This Ownership Limit could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the Shareholders.
Distribution Policy
The Company intends to make regular quarterly distributions to holders
of its Common Stock. Initially, the Company's sole source of revenue will
be from lease payments under the Percentage Leases and interest income.
The Company must rely on the Lessee to generate sufficient cash flow from
the operation of the Hotels to meet the Lessee's rent obligations under the
Percentage Leases. However, upon consummation of the Public Offering, the
Company intends to make regular quarterly distributions to holders of Class
A Common Stock. The Company has established a Pro Forma Distribution per
share. The Pro Forma Distribution is the amount determined from the
existing pro forma estimated level of income and cash flow ($0.885 per
share for 1996).
If the Company distributes approximately 98% of its cash available for
distribution utilizing the pro forma December 31, 1995 twelve month
earnings, then the indicated annual distribution per share would be $0.885
per share for 1996 (the "Pro Forma Distribution"). The Company estimates
that approximately 22% of this assumed 12 month Pro Forma Distribution per
share will represent a return of capital for federal income tax purposes,
which generally will not be subject to federal income tax under current
law.
The Company established the amount of the initial Pro Forma
Distribution based upon estimated cash available for distribution, the pro
forma condensed statement of operations and calculation of pro forma cash
available for distribution as of, and for the twelve months ended December
31, 1995. The Company believes that historical financial information, with
pro forma adjustments, provides a reasonable basis for setting the Pro
Forma Distribution. The Board of Directors will determine the actual
quarterly distribution rate based upon the Company's actual results of
operations, economic conditions and other factors. Approximately 34.7% of
the initial distributions by the Company initially will be received
(directly or indirectly) by the Hatfield Affiliates.
23
<PAGE>
The following table sets forth certain pro forma financial information
of the twelve months ended December 31, 1995, which was used to establish
the estimated Pro Forma Distribution per share (based on a 98% payout of
pro-forma cash available for distribution).
<TABLE>
<CAPTION>
Host Funding, Inc.
Twelve Months Ended December 31, 1995
(dollars in thousands, except per share data)
(unaudited)
<S> <C>
Pro forma net income <F1> $ 863
Pro forma depreciation and amortization <F2> 184
Pro forma amortization of unearned directors compensation <F3> 54
------
Pro forma estimated net cash provided by operating activities 1,101
Pro forma estimated net cash used in financing activities <F4> (24)
------
Pro forma estimated cash available for distribution $1,077
======
Pro forma estimated initial aggregate distribution <F5>
Class A $1,055
Class B $0
Class C $0
Pro forma estimated initial annual distribution per share <F6><F7>
Class A $0.885
Class B $0.000
Class C $0.000
Pro forma estimated payout ratio of cash available
for distribution <F8>
Class A 98.0%
Class B 0.0%
Class C 0.0%
<FN>
<F1>
The pro forma net income for the twelve months ended December 31, 1995 is
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases for the Hotels to the pro forma room revenues of the
Hotels (as if January 1, 1995 were the beginning of the lease year) and
subtracting pro forma depreciation, advisory fees, interest expense,
general and administrative expenses and the amortization of unearned
directors compensation. For the combined Hotels, pro forma Percentage
Lease revenue for the twelve months ended December 31, 1995 (which was used
in calculating pro forma net income) exceeded the Lessee's annual Base Rent
obligation by $178,141.
<F2>
Represents depreciation and amortization of property and equipment.
<F3>
Represents amortization of unearned directors compensation related to the
issuance of shares of Class A Common Stock to certain Directors in the
Formation Transactions.
24
<PAGE>
<F4>
Pro forma estimated cash used in debt service represents payments made for
debt service on pro forma estimated remaining Rock Falls, Illinois long-
term debt.
<F5>
On January 1, 1997, the 140,000 shares of Class C Common Stock are
converted to shares of Class A Stock. Prior to the conversion of Class C
to Class A Common Stock, the pro forma estimated initial aggregate
distributions is equal to $0.885 per share times 1,191,946 weighted
average shares of Class A Common Stock outstanding and $0.00 per share
times 140,000 weighted average shares of Class B Common Stock outstanding
and $0.00 per share times 140,000 weighted average shares of Class C Common
Stock outstanding.
<F6>
Based on 1,191,946 shares of Class A Common Stock outstanding upon
completion of the Formation Transactions, including an aggregate of 30,000
shares of Class A Common Stock to be issued to three Directors. The
140,000 shares of Class B and 140,000 shares of Class C Common Stock, on a
pro forma basis, will not receive a distribution.
<F7>
Management estimates that combined approximately 22.1% ($0.160 per share of
Class A Common Stock) of the assumed initial twelve month distribution per
share will represent a return of capital for federal income tax purposes.
No assurances can be given that the portion of such pro forma twelve months
ended December 31, 1995 distribution that is estimated to be, or
constitutes, a return of capital will be indicative of the return of
capital in any future period.
<F8>
The pro forma estimated distribution represents the anticipated initial
aggregate annual distribution divided by estimated cash available for
distribution.
</FN>
</TABLE>
The estimate of anticipated initial quarterly distributions relates
only to the year ending December 31, 1996, and no assurance can be given as
to the rate of distributions, if any, after that date. The Company's
actual cash available for distribution will be affected by a number of
factors, including changes in occupancy, ADR and REVPAR at the Hotels. To
the extent that the Company has outstanding debt, whether from the
Formation Transactions or whether from financing investments in additional
hotel properties or for other purposes, the Company may utilize a portion
of cash flow for debt service. The Company presently anticipates that
additional acquisitions, including initial capital improvements thereto,
will be financed primarily through debt financing or the issuance of
addition equity securities. To the extent that such financing is
insufficient to meet all of such cash needs, or the cost of such financing
exceeds the cash flow generated by the acquired properties for any period,
cash available for distribution could be reduced. In order to maintain its
qualification as a REIT, the Company must make annual distributions to its
Shareholders of at least 95% of its taxable income (which does not include
net capital gains). Since the Company's pro forma estimated taxable income
25
<PAGE>
is $863,000, the minimum initial distribution required by the 95%
requirement discussed above would be approximately $820,000. Based on
1,191,946 shares of Class A Common Stock outstanding, such an annual
distribution of $820,000 would represent an annual per share distribution
of $0.688 per share which is significantly less than the $0.885 Pro Forma
Distribution. Under certain circumstances, the Company may be required to
make distributions in excess of cash available for distribution in order to
meet such distribution requirements. In such event, the Company presently
would expect to borrow funds, or to sell assets for cash, to the extent
necessary to obtain cash sufficient to make the distributions required to
retain its qualification as a REIT for federal income tax purposes. It is
presently anticipated that the Company's cash flow from operation of the
Hotels will be sufficient to enable it to make distributions at the
estimated initial rate. To the extent that cash flow from operations were
to be insufficient during any quarter, due to temporary or seasonal
fluctuations in Percentage Lease revenue, the Company expects to utilize
other cash on hand or additional borrowings. No assurance can be given,
however, that the Company will make distributions in the future at the
initially estimated rate, or at all.
The timing and amount of distributions made by the Company will be
determined by the Board of Directors and will depend on a number of
factors, including the amount of cash available for distribution, the
Company's financial condition, the annual distribution requirements under
the REIT provisions of the Code and such other factors as the Board of
Directors may deem relevant.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company, New York, New York.
Certain Provisions of Maryland Law and of the Company's Charter and Bylaws
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and
the Charter and Bylaws of the Company.
Classification of the Board of Directors
The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors but may not be fewer than the minimum
number required by the Maryland General Corporation Law, nor more than 15.
Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Directors,
except that a vacancy resulting from an increase in the number of Directors
must be filled by a majority of the entire Board of Directors.
Pursuant to the Charter, the Board of Directors is divided into three
classes of Directors. The initial terms of the first and second classes
will expire in 1996 and 1997 respectively. Beginning in 1998, directors of
each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of Directors will be elected by the
Shareholders. The Company believes that classification of the Board of
Directors will help to assure the continuity and stability of the Company's
26
<PAGE>
business strategies and policies as determined by the Board of Directors.
The Directors will be elected by a plurality of all Shareholders.
Shareholders will have a right to cumulative voting in the election of
Directors.
The classified board provision could have the effect of making the
replacement of incumbent Directors more time consuming and difficult. At
least two annual meetings of Shareholders, instead of one, will generally
be required to effect a change in a majority of the Board of Directors.
Thus, the classified board provision could increase the likelihood that
incumbent Directors will retain their positions. The staggered terms of
Directors may reduce the possibility of a tender offer or an attempt to
change control of the Company, even though a tender offer or change of
control might be in the best interests of the Shareholders.
Removal of Directors
The Charter provides that a director may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes entitled
to be cast in the election of Directors. According to the Company's
Charter, "cause" shall mean with respect to any particular Director a final
judgment of a court of competent jurisdiction holding that such Director
caused demonstrable, material harm to the Company through bad faith or
active and deliberate dishonesty. This provision, when coupled with the
provision in the Bylaws authorizing the Board of Directors to fill vacant
directorships, precludes Shareholders from removing incumbent Directors
except upon the existence of cause for removal and a substantial
affirmative vote and filling the vacancies created by such removal with
their own nominees.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or
more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date
in question, was the beneficial owner of ten percent or more of the voting
power of the then-outstanding voting stock of the corporation (an
"Interested Stockholder") or an affiliate thereof are prohibited for five
years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock
of the corporation and (b) two-thirds of the votes entitled to be cast by
holders of voting stock of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the
corporation's Common Shareholders receive a minimum price (as defined in
the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of
27
<PAGE>
directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. Mr. Hatfield beneficially
will own more than ten percent of the Company's voting shares and would,
therefore, be subject to the business combination provision of the MGCL.
However, pursuant to the statute, the Company has exempted any business
combinations involving Mr. Hatfield and, consequently, the five-year
prohibition and the super-majority vote requirements will not apply to
business combinations between Mr. Hatfield and the Company. As a result,
Mr. Hatfield may be able to enter into business combinations with the
Company, which may not be in the best interest of the Shareholders, without
compliance by the Company with the super-majority vote requirements and the
other provisions of the statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of stock owned by the acquirer, by
officers or by directors who are employees of the corporation. "Control
Shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquirer, or in respect of which
the acquirer is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquirer
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition
of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of Shareholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is
made, the corporation may itself present the question at any Shareholders
meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by the
acquirer or of any meeting of Shareholders at which the voting rights of
such shares are considered and not approved. If voting rights for control
shares are approved at a Shareholders meeting and the acquirer becomes
entitled to vote a majority of the shares entitled to vote, all other
Shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquirer in the control share
acquisition.
28
<PAGE>
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is
a party to the transaction or (b) to acquisitions approved or exempted by
the charter or bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
the Company's shares of stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
Amendment to the Charter
The Charter, including its provisions on classification of the Board
of Directors and removal of Directors, may be amended only by the
affirmative vote of the holders of not less than two thirds of all of the
votes entitled to be cast on the matter.
Dissolution of the Company
The dissolution of the Company must be approved by the affirmative
vote of the holders of not less than two thirds of all of the votes
entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual
meeting of Shareholders, nominations of persons for election to the Board
of Directors and the proposal of business to be considered by Shareholders
may be made only (i) pursuant to the Company's notice of the meeting, (ii)
by the Board of Directors or (iii) by a Shareholder who is entitled to vote
at the meeting and has complied with the advance notice procedures set
forth in the Bylaws and (b) with respect to special meetings of
Shareholders, only the business specified in the Company's notice of
meeting may be brought before the meeting of Shareholders and nominations
of persons for election to the Board of Directors may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) provided that the Board of Directors has determined that
Directors shall be elected at such meeting, by a Shareholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws
The business combination provisions and, if the applicable provision
in the Bylaws is rescinded, the control share acquisition provisions of the
MGCL, the provisions of the Charter on classification of the Board of
Directors and removal of Directors and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for holders of Common
Stock or otherwise be in their best interest.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Overview
Upon the closing of the Mission Bay Acquisition, the Company will own
all of the Hotels. In order for the Company to qualify as a REIT, the
Company cannot operate hotels. Therefore, the Company will lease the
Hotels to the Lessee. Accordingly, the Company's principal source of
revenue will be lease payments under the Percentage Leases. Percentage
Rent will be based upon the Hotels' revenues, and the Lessee's ability to
make payments to the Company under the Percentage Leases will be dependent
on the Lessee's ability to generate cash flow from the operation of the
Hotels.
All of the Initial Hotels were opened in 1985, all of the Initial
Hotels were initially opened as Super 8s, and were acquired by AAG in 1985.
The Acquisition Hotel which was opened in 1987, was initially opened as a
Super 8.
Average occupancy, ADR and REVPAR have each shown slight gains from
1991 through 1994. In 1995, three of the four Initial Hotels experienced
slight growth in ADR. Also in 1995, three of the four Initial Hotels
experienced slight decreases in REVPAR and Room Sales. In 1995, the
Acquisition Hotel experienced growth in ADR, REVPAR, and Room Sales.
The following table sets forth information with respect to average
occupancy, ADR and REVPAR for each of the years ended December 31, 1991,
1992, 1993, 1994, and 1995. No assurance can be given that the trends
reflected in the following table will continue or that occupancy, ADR
and/or REVPAR will not decrease due to changes in national or local
economic or hospitality industry conditions.
Management believes the slight growth in average occupancy, ADR and
REVPAR at the Hotels reflects stronger market demand. While no assurance
can be given that the Hotels will continue to experience growth in all or
any of these areas, management of the Company believes that additional
growth, particularly in the areas of occupancy, ADR and REVPAR, could occur
in light of improving industry conditions.
In addition to participating in increased revenues at the Hotels, the
Company's strategy is to increase cash flow and enhance shareholder value
by acquiring additional existing hotels that meet the Company's investment
criteria and by participating, through the Percentage Leases, in any
revenue growth experienced at its Hotels. Management believes the U.S.
lodging industry is recovering from a period of low profitability resulting
from high levels of debt, past over-building of hotel properties and the
effects of the recent economic recession. As a result, the Company
believes that, in the short-term, it will have opportunities to acquire
additional existing hotels at attractive prices.
30
<PAGE>
General
The following table sets forth financial data for the Company for the
years ended December 31, 1995, 1994, 1993, 1992, and 1991:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INITIAL HOTELS AND LESSEE
Rock Falls
Average occupancy 70.2% 70.0% 79.2% 79.4% 76.3%
Average daily rate $31.51 $34.50 $35.88 $36.37 $37.21
Revenue per available room $22.05 $24.15 $28.43 $28.90 $28.38
Miner
Average occupancy 90.2% 92.7% 94.7% 96.2% 86.0%
Average daily rate $31.56 $34.22 $35.40 $36.73 $38.42
Revenue per available room $28.40 $31.72 $33.54 $35.31 $33.05
Somerset
Average occupancy 59.1% 55.2% 58.9% 67.6% 67.9%
Average daily rate $32.28 $34.19 $33.83 $34.62 $34.04
Revenue per available room $19.01 $18.88 $19.92 $23.63 $23.12
Poplar Bluff
Average occupancy 64.1% 69.2% 71.5% 72.2% 74.0%
Average daily rate $31.54 $33.35 $34.00 $35.32 $35.74
Revenue per available room $20.23 $23.07 $24.30 $25.69 $26.44
TOTAL-INITIAL HOTELS AND LESSEE
Average occupancy 70.9% 71.8% 76.1% 79% 76%
Average daily rate $31.69 $34.07 $34.89 $36.00 $36.48
Revenue per available room $22.47 $24.45 $26.55 $28.38 $27.75
ACQUISITION HOTEL
Mission Bay
Average occupancy 67.5% 65.2% 52.5% 54.9% 57.7%
Average daily rate $42.66 $43.04 $42.84 $42.20 $43.45
Revenue per available room $28.80 $28.06 $22.48 $23.18 $25.06
</TABLE>
31
<PAGE>
The following tables set forth historical revenue for the Hotels and
the percent change among the periods indicated.
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1995
Initial Hotels
-----------------------------------------
Rock Somer- Poplar Mission
Falls Miner set Bluff Total Bay
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.5% 96.3% 97.0% 95.5% 95.8% 93.6%
Telephone 3.1% 2.3% 2.7% 3.2% 2.8% 3.1%
Other 2.4% 1.4% 0.4% 1.4% 1.4% 3.3%
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 21.0% 21.1% 21.6% 22.1% 21.4% 28.6%
Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Administrative & general 11.7% 10.6% 12.0% 10.7% 11.2% 12.2%
Depreciation & amortization 0.4% 0.0% 0.1% 0.2% 0.2% 7.3%
Management fee 3.9% 4.4% 4.9% 4.3% 4.4% 6.0%
Franchise 4.7% 4.8% 4.9% 4.8% 4.8% 5.6%
Repairs and maintenance 4.4% 3.0% 4.1% 3.5% 3.7% 5.0%
Energy cost 5.0% 4.2% 4.4% 4.3% 4.5% 5.3%
Property taxes 4.1% 1.3% 2.1% 2.0% 2.3% 3.5%
Telephone 1.5% 1.1% 2.2% 1.5% 1.5% 0.8%
Insurance 1.4% 2.9% 1.4% 1.5% 1.8% 1.9%
Marketing 0.2% 1.8% 2.3% 2.2% 1.6% 4.8%
Rent 37.8% 39.2% 43.2% 37.1% 39.2% 0.0%
Provision for Loss 0.0% 0.0% 0.0% 0.0% 0.0% 3.1%
----- ----- ----- ----- ----- -----
Total expenses 96.0% 94.4% 103.1% 94.3% 96.6% 84.2%
NET INCOME (LOSS) 4.0% 5.6% -3.1% 5.7% 3.4% 15.8%
===== ===== ====== ===== ===== =====
32
<PAGE>
<CAPTION>
Twelve Months Ended December 31, 1994
Initial Hotels
----------------------------------------
Rock Somer- Poplar Mission
Falls Miner set Bluff Total Bay
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 93.8% 96.0% 96.8% 95.5% 95.5% 93.8%
Telephone 3.4% 2.7% 2.8% 2.8% 2.9% 3.9%
Other 2.8% 1.3% 0.5% 1.7% 1.6% 2.2%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 20.0% 19.5% 23.1% 20.4% 20.6% 28.6%
Interest 14.4% 12.8% 18.1% 14.3% 14.6% 0.0%
Administrative & general 10.9% 12.9% 11.8% 10.4% 11.6% 12.7%
Depreciation & amortization 4.8% 4.4% 6.0% 5.6% 5.1% 8.1%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 5.3% 3.6% 5.0% 4.2% 4.4% 5.4%
Energy cost 4.7% 3.9% 3.9% 4.2% 4.2% 6.1%
Property taxes 5.1% 1.2% 2.0% 1.9% 2.5% 4.2%
Telephone 1.8% 1.3% 1.9% 1.6% 1.6% 1.1%
Insurance 1.4% 2.0% 1.3% 1.4% 1.6% 2.2%
Marketing 0.3% 1.9% 2.9% 2.9% 1.9% 5.4%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Provision for Loss 0.0% 0.0% 0.0% 0.0% 0.0% 145.5%
----- ----- ----- ----- ----- -----
Total expenses 78.3% 73.1% 85.9% 76.5% 77.8% 230.9%
NET INCOME (LOSS) 21.7% 26.9% 14.1% 23.5% 22.2% (130.9%)
===== ===== ===== ===== ===== ========
33
<PAGE>
<CAPTION>
Twelve Months Ended December 31, 1993
Initial Hotels
-----------------------------------------
Rock Somer- Poplar Mission
Falls Miner set Bluff Total Bay
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Room Sales 94.4% 95.9% 96.5% 95.6% 95.6% 94.0%
Telephone 2.8% 2.6% 2.7% 2.3% 2.6% 2.7%
Other 2.8% 1.4% 0.8% 2.1% 1.8% 3.3%
----- ----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Rooms 18.8% 19.2% 22.8% 21.7% 20.3% 31.1%
Interest 17.2% 18.6% 28.5% 19.2% 20.2% 0.0%
Administrative & general 11.6% 13.9% 13.5% 12.1% 12.8% 15.3%
Depreciation & amortization 4.8% 3.9% 5.0% 5.8% 4.8% 8.9%
Management fee 4.9% 5.0% 5.0% 5.0% 5.0% 6.0%
Franchise 4.7% 4.8% 4.8% 4.8% 4.8% 5.6%
Repairs and maintenance 4.4% 3.9% 7.8% 5.3% 5.1% 5.8%
Energy cost 4.7% 4.1% 4.3% 4.1% 4.3% 5.8%
Property taxes 5.2% 1.1% 2.4% 1.4% 2.5% 4.5%
Telephone 2.0% 1.4% 2.4% 1.8% 1.8% 1.4%
Insurance 1.1% 0.9% 1.4% 1.2% 1.1% 2.5%
Marketing 0.5% 2.1% 3.5% 2.4% 2.0% 5.9%
Rent 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Loan Restructuring Costs 3.7% 3.2% 5.4% 4.4% 4.0% 0.0%
----- ----- ----- ----- ----- -----
Total expenses 83.6% 82.1% 106.8% 89.1% 88.7% 92.8%
NET INCOME (LOSS) 16.4% 17.9% (6.8%) 10.9% 11.3% 7.2%
===== ===== ====== ===== ===== =====
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
--------------------------------
1991 1992 1993 1994 1995
------------------- -------------------- ------------------- ------------------ -------------------
Percent Percent
Change Percent Percent Percent Change
from Change Change Change from
Percent/ Prior Percent/ from Percent/ from Percent/ from Percent/ prior
Amount Year Amount 1991 Amount 1992 Amount 1993 Amount Year
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL HOTELS
AND LESSEE
Rock Falls
Occupancy 70.2% 1.1% 70.0% (0.3%) 79.2% 13.2% 79.4% 0.2% 76.3% (3.9%)
ADR $31.51 (2.5%) $34.50 9.5% $35.88 4.0% $36.37 1.4% $37.21 2.3%
REVPAR $22.05 (1.8%) $24.15 9.5% $28.43 17.7% $28.90 1.6% $28.38 (1.8%)
Room sales 508,414 (1.5%) $556,939 9.5% $653,730 17.4% $664,480 1.6% $652,573 (1.8%)
Miner
Occupancy 90.2% 9.6% 92.7% 2.7% 94.7% 2.2% 96.2% 1.5% 86.0% (10.5%)
ADR $31.56 1.5% $34.22 8.4% $35.40 3.4% $36.73 3.8% $38.42 4.6%
REVPAR $28.40 11.0% $31.72 11.7% $33.54 5.8% $35.31 5.3% $33.05 (6.4%)
Room sales 654,886 11.3% $731,293 11.7% $771,277 5.5% $811,923 5.3% $760,003 (6.4%)
Somerset
Occupancy 59.1% 5.7% 55.2% (6.5%) 58.9% 6.7% 67.6% 14.8% 67.9% 0.5%
ADR $32.28 (3.6%) $34.19 5.9% $33.83 (1.1%) $34.62 2.3% $34.04 (1.7%)
REVPAR $19.01 (0.2%) $18.88 (0.7%) $19.92 5.5% $23.63 18.6% $23.12 (2.1%)
Room sales 438,320 0.0% $435,314 (0.7%) $458,145 5.2% $543,305 18.6% $531,625 (2.1%)
Poplar Bluff
Occupancy 64.1% 7.8% 69.2% 7.9% 71.5% 3.3% 72.2% 1.0% 74.0% 2.4%
ADR $31.54 2.0% $33.35 5.7% $34.00 1.9% $35.32 3.9% $35.74 1.2%
REVPAR $20.23 10.0% $23.07 14.0% $24.30 5.3% $25.69 5.7% $26.44 2.9%
Room sales 465,143 10.0% $531,938 14.4% $558,761 5.0% $590,788 5.7% $607,959 2.9%
TOTAL-INITIAL HOTELS
AND LESSEE
Occupancy 70.9% 5.8% 71.8% 1.2% 76.1% 6.0% 79% 3.6% 76% (3.5%)
ADR $31.69 (0.6%) $34.07 7.5% $34.89 2.4% $36.00 3.2% $36.48 1.3%
REVPAR $22.47 5.1% $24.45 8.8% $26.55 8.6% $28.38 6.9% $27.75 (2.2%)
Room sales 2,066,763 5.1% $2,255,484 9.1% $2,441,913 8.3% $2,610,496 6.9% $2,552,160 (2.2%)
ACQUISITION HOTEL
Mission Bay
Occupancy 67.5% 0.4% 65.2% (3.4%) 52.5% (19.5%) 54.9% 4.6% 57.7% 5.0%
ADR $42.66 3.8% $43.04 0.9% $42.84 (0.5%) $42.20 (1.5%) $43.45 3.0%
REVPAR $28.80 4.2% $28.06 (2.6%) $22.48 (19.9%) $23.18 3.1% $25.06 8.1%
Room sales 1,229,791 4.2% $1,201,412 (2.3%) $960,166 (20.1%) $989,703 3.1% $1,070,216 8.1%
</TABLE>
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations
Actual Results of Operations -- Initial Hotels and Lessee
Year Ended December 31, 1995 and 1994
On January 1, 1995, the Initial Hotels were leased to Inn Fund by AAG.
On April 1, 1995, the real estate assets and long-term debt were
transferred to the Company. Please refer to the Initial Hotels and Inn
Fund financial statements and footnotes thereto in the Registration
Statements incorporated by reference for additional information and for
purposes of comparison of actual results of operations.
Occupancy, average room rates, and revenue per available room were 76%
versus 79%, $36.48 versus $36.00, and $27.75 versus $28.38 for the year
ended December 31, 1995 as compared to 1994, resulting in room revenues of
$2,552,160 and $2,610,496, respectively. The decrease in occupancy and
revenue per available room, which were slightly offset by an increase in
average room rates, are attributable to the opening of several new hotels
adjacent to the Miner Super 8 (the Hatfield Inn, among others) and reduced
business travel in Rock Falls, Illinois.
During 1995, the Initial Hotels incurred no interest expense and
depreciation of $4,532 and rent expenses totaling $1,043,456, while for the
same comparative period of 1994 no rent expense was incurred, interest
expense totaled $400,003, and depreciation and amortization totaled
$139,112. As described above, the Initial Hotels were leased effective
January 1, 1995 to Inn Fund. Thereafter, Inn Fund incurred rent expense
while depreciation and amortization on existing assets and interest expense
on long-term debt remained with AAG and the Company.
In 1995, three of the four Initial Hotels experienced slight growth in
ADR. However, three of the four Initial Hotels experienced slight
decreases in REVPAR and Room Sales. Occupancy for the Initial Hotels
decreased by an average of 3.5%. Also in 1995, the Acquisition Hotel
experienced growth in ADR, REVPAR, Occupancy, and Room Sales.
Expenses of hotel operations, excluding rent, depreciation and
amortization and interest expense for the comparable years ended December
31, 1995 and 1994 totaled $1,525,676 versus $1,589,372. The approximate 4%
decrease in hotel expenses in 1995 as compared to 1994 is principally
attributed to decreased management fees, as a result of the decrease in the
management fee rate from 5% to 3%, and reduced repairs and maintenance and
marketing due to expense controls.
The principal reason for the decrease in net income to $91,319 from
$605,970 for the year ended December 31, 1995 as compared to 1994 is the
effect the execution of the intercompany lease had on rent expense,
depreciation and amortization and interest expense.
36
<PAGE>
Year Ended December 31, 1994 as Compared to Year Ended December 31,
1993
Occupancy and average room rates of 79% versus 76% and $36.00 versus
$34.89 for the year ended December 31, 1994 as compared to 1993 resulted in
room revenues of $2,610,496 versus $2,441,913 respectively. The increase
in room revenues is principally attributed to the increase in occupancy due
to increased business travel in 1994 as compared to 1993 and to the
increased room rate able to be achieved due to higher demand for rooms.
The restructuring of the long-term debt in 1993 resulted in lower
interest rates which caused interest expense to decrease to $400,002 from
$516,116 in 1994 as compared to 1993. Further, in 1993, loan restructuring
costs totaling $101,883 were incurred while restructuring the previous debt
with no similar expense in 1994.
Room expense increased in 1994 as compared to 1993 principally because
of increased occupancy at the Hotels.
Depreciation expense increase in 1994 as compared to 1993 principally
because of late 1993 and 1994 asset additions for which increased
depreciation expense was incurred in 1994.
Insurance expense increased in 1994 as compared to 1993 principally
due to increased liability insurance premiums due to market conditions.
The principal reasons for the increase in net income to $605,879 from
$288,162 for the comparable 1994 and 1993 calendar year periods was the
effect on interest rates and elimination of loan restructuring costs and
the increase in occupancy and average room rates in 1994 as compared to
1993.
Year Ended December 31, 1993 as Compared to Year Ended December 31,
1992
Occupancy and average room rates of 76% and 72% and $34.89 versus
$34.07 for the year ended December 31, 1993 as compared to 1992 resulted in
room revenues of $2,441,913 versus $2,255,483. The increase in room
revenues is principally attributed to increased business travel in 1993 as
compared to 1992 due to improvement in the Midwest economy and to the
slight increase in the average room rate, principally the result of
inflation.
Interest expense decreased to $516,116 from $631,489 for the
comparable 1993 and 1992 calendar year ends, principally due to lower
interest rates as a result of loan restructuring completed in 1993.
Loan restructuring costs totaled $101,883 in 1993 as compared to
$59,528 in 1992, which costs were expensed as incurred during the loan
restructuring completed in 1993.
Depreciation and amortization decreased in 1993 as compared to 1992
due to the final depreciation in 1992 of the costs incurred for the
original hotel furnishings and equipment upon construction.
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<PAGE>
Management fees increased in 1993 as compared to 1992 due to the one
year agreed upon reduction in 1992 by the General Partner of AAG of
management fee expense form 5% to 3% of gross revenue.
The principal reasons for the increase in net income to $288,162 in
1993 from a loss of ($50,130) in 1992 was the improved effect on interest
rates due to the loan restructuring completed in 1993, the decrease in
depreciation and amortization expense due to the final depreciation in 1992
of the original hotel furnishing sand equipment and improved occupancy and
average room rates in 1993 as compared to 1992.
Actual Results of Operations -- Mission Bay
Year Ended December 31, 1995 as Compared to Year Ended December 31,
1994
Please refer to the Mission Bay Super 8, Ltd. financial statements and
footnotes thereto in the Registration Statements incorporated by reference
for additional information and for purposes of comparison of actual results
of operations. Occupancy, average room rates, and revenue per available
room of 57.7% versus 54.9%, $43.45 versus $42.20, and $25.06 versus $23.18
for the year ended December 31, 1995 as compared to the year ended December
31, 1994 resulted in room revenues of $1,070,216 and $989,703,
respectively. The increase in occupancy, average room rates, and revenue
per available room is attributed to increased pleasure travel in 1995 as
compared to 1994, which resulted in increased business at a higher room
rate.
The net income for the year ended December 31, 1995 was $181,260
compared to a net loss of $1,381,028 for the year ended December 31, 1994.
This $1,562,288 increase in net income resulted from (i) an $89,163
increase in gross income (attributable to higher occupancy and average room
rates), and (ii) a $61,825 increase in operating expenses and a $1,534,950
decrease in an unrealized loss due to a decline in value of investment
property.
Year Ended December 31, 1994 as Compared to Year Ended December 31,
1993
Net income (loss) was ($1,381,028) in 1994 and $73,760 in 1993. In
light of this loss in 1994 and income in 1993, on a current basis 100% of
the $180,000 distribution in 1994 was a return of capital and 54.5% of the
$162,000 distribution made in 1993 was a return of capital. Total
revenues were $1,054,819 in 1994 and $1,021,785 in 1993. The property
operated at an occupancy rate of 54.9% in 1994 and 52.5% in 1993. The
average daily room rate was $42.20 in 1994 and $42.84 in 1993. This
decrease of 1.5% was attributable to selective decreases in room rates in
order to maintain and/or improve marketing. In fact, total gross revenues
increased by 3.2% for this same period. The net loss for 1994 resulted
from an unrealized loss due to decline in value of investment property of
$1,534,950 as discussed above.
38
<PAGE>
Year Ended December 31, 1993 as Compared to Year Ended December 31,
1992
Net income was $73,760 in 1993 and $194,197 in 1992. In light of
this income in 1993 and 1992, on a current basis 54.5% of the $162,000
distribution made in 1993 was a return of capital, and 56.9% of the
$340,996 distribution made in 1992 was a return of capital. Total
revenues were $1,021,785 in 1993, and $1,261,616 in 1992. The property
operated at an occupancy rate of 52.5% in 1993, and 65.2% in 1992. The
average daily room rate was $42.84 in 1993, and $43.04 in 1992. The
$120,437 decrease in net income from 1993 to 1992 was primarily
attributable to the combination of the $239,831 decrease in gross revenue
(caused by a 12.7% drop in occupancy) and the $103,336 decrease in
depreciation expense.
Liquidity and Capital Resources
The Company
Upon consummation of the Offering and application of net proceeds, the
Company will have approximately $718,000 of outstanding debt and
approximately $357,000 of cash. 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, will be 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 Parent, a subsidiary of
Interstate Hotels, 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, will be dependent on the
ability of the Lessee to general sufficient cash flow from the Hotels.
Other than the debt service and/or refinancing costs of the $718,000
debt and the $50,000 deposit to the Capital Expenditure Reserve Account,
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 to obtain a line of credit
or a permanent credit facilities, 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
39
<PAGE>
rate and may be subject to such other terms as the Board of Directors of
the Company deems prudent.
The Lessee
The Lessee will funds its cash needs, including monthly payments of
Base Rent and quarterly payments of Percentage Rent, with cash available
from operations of the Hotels. Based on the pro-forma financial
statements contained herein, the Company believes that the Lessee will have
adequate funds to meet its short-term liquidity requirements. The Lessee
will have no outstanding indebtedness for borrowed funds.
Pursuant to the Percentage Leases, the Lessee will be required to fund
the ongoing replacement or refurbishment of furniture, fixtures and
equipment at the Hotels in an amount equal to $125 per room per quarter .
The Company believes that such amount will be sufficient to fund required
capital expenditures for the term of the Percentage Leases. The Company
anticipates entering into similar arrangements with respect to future hotel
properties in which it invests. Further, in the event that a prospective
buyer makes an offer to purchase one or more of the Hotels, the Lessee will
have a 30 day right of first refusal to purchase such hotel(s) under the
Percentage Leases equal to the price offered to the Company.
Upon the commencement of the Percentage Leases, the Company must
deliver the Hotels to Lessee along with levels of cash on hand and working
capital of not less than $75,000, operating supply inventories at levels
defined in the Percentage Leases, and amounts sufficient to satisfy all
outstanding vacation due hotel employees. The Company, Mission Bay or Inn
Fund were required to have completed capital improvements for 1995 totaling
approximately $285,000, with any deficiency to be provided to Lessee upon
commencement of the Percentage Leases. Upon commencement of the Percentage
Leases, the Company and Inn Fund must deposit $50,000 and $36,900,
respectively, into the Capital Expenditure Reserve Account. In addition,
upon inspection by Lessee of the Hotels upon commencement of the Percentage
Leases and after Lessee's prorated obligation to fund the Capital
Expenditure Reserve Account of $125 per room, per quarter, should there
remain a deficiency to fund the 1995 defined capital improvement of
$285,000, the Company will be obligated to fund any deficiency up to
approximately $60,000.
The Lessee's obligations under the Percentage Leases will be secured
by a guaranty, set forth in the Master Agreement, whereby Crossroads Parent
will guaranty limited obligations of the Lessee. These obligations
concern payment of liquidated damages if the Lessee voluntarily terminates
or defaults on more than one of the Percentage Leases in the first five
years of each of the Percentage Leases. In addition, Crossroads Parent
will guaranty the Lessee's obligations concerning payment of Percentage
Rent throughout the respective terms of the Percentage Leases.
The limited guaranty is equal to $264,000 in the first three years of
the Percentage Leases and decreases thereafter to zero in the fifth year,
but not less than the Percentage Rent in the prior twelve months. The
guaranty will initially be secured by a letter of credit in the amount of
$264,000. After the first year, Crossroads may substitute the letter of
credit by providing to the Company a copy of Crossroad Parent's audited
40
<PAGE>
financial statements which indicate a net worth of at least 2-1/2 times the
value of the letter of credit, with at least 40% of the net worth in cash
or cash equivalent assets. In addition, Crossroads Parent makes certain
negative covenants concerning maintenance of its minimum net worth levels.
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 will be sufficient to enable it to make distributions at the
estimated initial rate. To the extent that cash flow from operations are
to be 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item
are included in Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The Company's Board of Directors consists of five members, three of
whom are Independent Directors. The Board of Directors is divided into
three classes. The term of each class of directors is three years except
that the initial term of the Class I director is one year and the initial
term of the Class II director is three years. The Company has four
executive officers and no employees. Certain information regarding the
Directors and executive officers of the Company is set forth below.
Director
Name Position Class
- ---- -------- -----
Michael S. McNulty President, Treasurer, and Director Class II
Michael P. Fedynyshyn Vice-President N/A
Guy E. Hatfield Secretary and
Non-Independent Director Class III
Don W. Cockroft Independent Director Class III
William Birdsall Independent Director Class II
Charles R. Dunn Independent Director Class I
Michael S. McNulty, 47, is President of the Company and has extensive
experience in real estate. In 1973, he received his J.D. from Southern
Methodist University. In May, 1977, Mr. McNulty joined the real estate
development company of a multi-national family with business interests in
various countries. In that period, Mr. McNulty was responsible for
developing partnerships for investments in over thirty real estate projects
with gross investments exceeding $200,000,000. Since 1985, Mr. McNulty has
been self-employed and has directed numerous financial reorganizations. In
1987, he served as a consultant to the Herbert Hunt family. Mr. McNulty
represented United Inns, Inc., in a $60,000,000 debt restructure. From
1990 to 1993, he assisted other clients in various debt restructures
involving over $400,000,000 in debt. In 1994, Mr. McNulty prepared due
diligence materials, coordinated due diligence efforts, and met with
potential suitors when the majority shareholder family of United Inns,
Inc., decided to sell its interests. In November, 1994, a group introduced
by Mr. McNulty purchased the shares. According to Business Week, page 156,
(December 26, 1994 issue), United Inns, Inc. was the best performing NYSE
stock in 1994. Mr. McNulty is President and director of a controlling
venturer in a Napa Valley based winery. Mr. McNulty was elected President
and Treasurer of the Company effective September 28, 1995.
Guy E. Hatfield, age 61, has been President of All American Group,
Inc., a Delaware corporation, since 1989. Mr. Hatfield earned a Bachelor
of Science degree from Bradley University in 1955 and shortly thereafter,
enlisted in the U.S. Navy where he eventually served as a Lieutenant
Commander. In 1962, Mr. Hatfield graduated with a Juris Doctorate from
University of San Diego. From 1962 to 1965, Mr. Hatfield was Senior
Partner of Hatfield & Wasserman, a law firm specializing in Real Estate
law. From 1965 to 1968, Mr. Hatfield was President of Guy Hatfield Homes a
42
<PAGE>
real estate development company that built 940 single family homes. From
1968 to 1973, he was President and Chairman of the Board of Empire
Equities, Inc., a public corporation that was a conglomerate composed of
six title offices and three mortgage offices. From 1973 to 1979, Mr.
Hatfield was President and Owner of All American Development Company, which
built 3,250 single family homes. From 1980 to 1982, he was President and
Chairman of the Board of a computer manufacturing company by the name of
Itron, Inc., a publicly held company whose shares were traded on the
NASDAQ. Mr. Hatfield was Assistant Convention Manager of the 1984
Republican National Convention. Also in 1984, Mr. Hatfield was a Committee
Member of the Committee of the 50th American Presidential Inaugural
Guaranty Fund. From 1984 to 1989, Mr. Hatfield was Chairman of the Board
and Chief Executive Officer of Motels of America, Inc., a corporation which
built and managed 107 Super 8 motels and had gross annual sales of
$80,000,000. Currently, Mr. Hatfield is President of Hatfield Inns, Inc.,
a corporation which owns and manages five motels and has annual sales of
$2,600,000. Mr. Hatfield is Secretary of the Company.
Ian Gardner-Smith, 58, has been continually involved in capital
formation for over thirty years. He is the Founder of Hotel Mortgage
Resources, Inc., a Delaware corporation, and has served as the Chief
Executive Officer of Hotel Mortgage Resources since 1993. From 1988 to
1993, he was the sole stockholder of Southwest Motel Equities Corporation,
a motel management company. He is a Co-Founder of Motels of America and
served as that company's Vice President of Finance from 1985 to 1988.
Prior to that, he spent seventeen years with various New York Stock
Exchange firms and participated in numerous capital formation activities as
Chief Financial Officer. Mr. Gardner-Smith is the sole shareholder of Host
Funding Advisors and the 99% owner of Host Funding Acquisition, LLC. He is
a graduate of United States International University with a B.A. degree in
Business Administration.
Michael P. Fedynyshyn, age 37, is an attorney at law, licensed to
practice in the State of California since 1986. Mr. Fedynyshyn specializes
in Hospitality law. He is a member of the San Diego Convention and
Visitors Bureau and the San Diego Hotel & Motel Association. From
December, 1993 to January, 1995, Mr. Fedynyshyn was Head of a hospitality
group, consisting of four attorneys. From July, 1992 to December, 1993,
Mr. Fedynyshyn was senior partner in a law firm specializing in Commercial
law, Insolvency law, and Hospitality law. From May, 1985 to July, 1992,
Mr. Fedynyshyn was a partner in a law firm that specialized in Commercial
Law, Insolvency Law, and Corporate Law. The Company believes that Mr.
Fedynyshyn's extensive knowledge and experience in the hospitality industry
will contribute positively to the Company. Mr. Fedynyshyn was elected
Vice-President of the Company effective September 28, 1995.
Don W. Cockroft, 55, joined United Inns, Inc., in the early 1960's.
Mr. Cockroft occupied a variety of positions in his over 25 years with
United Inns, Inc. Eventually, he became Chairman of the Board and
President of United Inns, Inc. He resigned from these positions upon the
recent purchase of United Inns, Inc., by Hempstead, Ltd. United Inns, Inc.
was traded on the New York Stock Exchange and in 1994 it achieved the New
York Stock Exchange's largest percentage gain. Mr. Cockroft's duties with
United Inns, Inc. included asset development, acquisitions, dispositions,
and debt restructure. United Inns, Inc. was the initial franchisee of
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<PAGE>
Holiday Inns and also opened the initial Hampton Inn in Jackson,
Mississippi and Atlanta, Georgia. Mr. Cockroft is currently an Independent
Director of the Company.
William Birdsall, 46, is President of Birdsall & Company., a real
estate investment and finance firm located in Del Mar, California. Before
starting at Birdsall & Company. in 1993, Mr. Birdsall was Chairman and CEO
of the Price REIT, a public company which he Company-founded with Mr. Sol
Price and took public in 1991 in the form of a Real Estate Investment Trust
trading on NASDAQ. Mr. Birdsall has been involved with real estate
development since 1978. He was Chief Operating Officer of Estes
Properties, Inc., where he was responsible for operations of the Lowes
Ventana Canyon Resort and Golf Club in Tucson, Arizona, a 2000-acre planned
community and resort hotel. From 1982 through 1987 he was Senior Vice
President of Real Estate for Ramada, Inc., the international hotel chain.
Prior to 1978, he served as legal counsel to the Interior Committee of the
U.S. House of Representatives and as an Assistant Attorney General for the
State of Arizona where he specialized in environmental legislation and
enforcement. He now serves on the Scripps Memorial Hospitals Foundation
Board and is a member of the Young Presidents Organization, Arizona Bar
Association, Urban Land Institute, and International Council of Shopping
Centers.
Charles R. Dunn, age 49, is Founder and Chief Executive Officer of
Hospitality Concepts, established in July of 1988. Hospitality Concepts
provides accounting and consulting services to the lodging and restaurant
industry in the Southwestern United States. Clients are located in
California, Nevada, Arizona, New Mexico, and Texas. Services range from
financial statement production, budgeting and related planning, to system
design and consulting. Prior to July 1988, Mr. Dunn was Controller for the
San Diego Princess Hotel, a 450 room, full-service convention facility and
resort located in San Diego, California. Mr. Dunn graduated from
Washington State University with a B.A. degree in Hotel Administration.
Management of the Advisor
Initially, Mr. McNulty will be the only salaried employee of the
Advisor. Pursuant to the Company's plan to operate as an externally
managed REIT, Mr. McNulty is President of the Advisor and will receive a
substantial portion of the Advisory fees (including the $30,000 base fee)
paid in cash to the Advisor by the Company pursuant to the Advisory
Agreement as compensation for his services and duties performed as the sole
employee and President of the Advisor.
Audit Committee
The Audit Committee consists and will only consist of the three
Independent Directors. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with
the independent public accountants the plans and results of the audit
engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
44
<PAGE>
Compensation Committee
The Compensation Committee consists of the three Independent
Directors. The Company has not previously compensated its executive
officers and does not plan to compensate such officers while the Advisory
Agreement is in effect. The Company anticipates terminating the Advisory
Agreement when its asset base reaches a size which renders it more cost
effective to employ Company employees to perform management functions than
to retain the Advisor. Subsequent to such termination, the compensation
paid to the officers and employees shall be commensurate with their
position and determined with reference to compensation paid to similarly
situated employees and officers of companies which are deemed by the
Compensation Committee to be comparable to the Company.
The Company may from time to time form other committees as
circumstances warrant. Such committees will have authority and
responsibility as delegated by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Officers
Michael McNulty, President and Treasurer of the Company, is not
currently receiving any salary, stock or other monetary compensation from
the Company in connection with his role as President and Treasurer.
Michael Fedynyshyn, Vice-President of the Company, is not receiving any
salary, stock or other monetary compensation from the Company in connection
with his role as Vice-President. Guy Hatfield, Secretary of the Company,
is not receiving any salary, stock or other monetary compensation from the
Company in connection with his role as Secretary.
However, the Company entered into a consulting agreement ("The Related
Party Consulting Agreement") with AAG effective April 1, 1995 whereby AAG
agreed to provide advisory, accounting and other consulting services to the
Company in exchange for a monthly fee of $60,000 plus annual additional
compensation as mutually agreed upon. Mr. Hatfield is President of All
American Group, Inc. which is the General Partner of AAG.
Compensation of Directors
The Company intends to pay to its Independent Directors an annual fee
of $6,000 during its first year of operation. Directors who are employees
of the Company will not be paid any directors' fees. In addition, the
Company will reimburse directors for travel expenses incurred in connection
with their activities on behalf of the Company. Immediately after
consummation of the Formation Transactions, the Company will sell to its
three Independent Directors, 10,000 shares of Common Stock at a price per
share equal to $10 per share (i.e., the per share price of the shares of
Common Stock in the Public Offering). The purchase price will be paid by
them through delivery of a five year promissory note executed in favor of
the Company by each purchaser, which shall bear interest, payable
quarterly, at a fixed rate equal to 7% per annum. The shares of Common
Stock purchased by each Independent Director will be pledged to the Company
to secure payment of the $100,000 promissory note, which shall be non-
recourse to the maker. Principal payments on the note will be 2% per year.
45
<PAGE>
In addition, the Company has agreed to forgive the promissory notes issued
in exchange for the shares of Common Stock (i) in increments of 18% of the
principal amount per annum for each year that the maker remains a director
of the Company, and (ii) upon the death, disability, or resignation of the
Director (except for a voluntary resignation or failure to serve).
Accordingly, after five years the notes will be satisfied. In addition, as
a class, the Directors, shall be granted similar stock purchase rights for
0.5% of the value of subsequent public issuances of the Company's Stock.
The stock purchase rights would grant the Independent Directors the
right to acquire in the aggregate 0.5% of subsequent issuances of the
Company's Common Stock at the offering price of such shares with the
consideration for such shares payable by a 100% non-recourse note, with
principal payments of 2% per year and 18% of the principal forgiven each
year the maker remains a director of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of shares of
Class A Common Stock, Class B Common Stock, and Class C Common Stock upon
consummation of the Formation Transactions for (1) each person who is
expected to hold more than a 5% interest in the Company, (2) directors of
the Company, (3) the executive officers, and (4) the directors and
executive officers of the Company as a group. Unless otherwise indicated
in the table or in the footnotes, all such interests are owned directly,
and the indicated person or entity has sole voting and investment power (or
shares with spouse). The "Percentage of All Shares" represents the number
of shares of Class A, B, and C Common Stock the person is expected to hold
immediately after the Formation Transactions as a percentage of the total
number of shares of Class A Common Stock to be outstanding immediately
after the Formation Transactions assuming the full issuance of 500,00
shares of Class A Common Stock in the Public Offering. The table assumes
the following ownership:
46
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned All Shares
- ------------------- ------------------ -------------
<S> <C> <C>
------------
Guy E. and Dorothy Hatfield )
Route 1, Box 162 )
Ridgeland, SC 29936 )
)
Julia Hatfield King )
63 Bigwood Drive )------- 693,737<F1> 47.1%
Hilton Head Island, SC 29926 )
)
Scott Jeffrey Hatfield )
1243 16th Avenue East )
Seattle, WA 98112 )
------------
William Birdsall 10,000 .68%
25 Lewis Mountain Lane
Durango, CO 81301
Don W. Cockroft 10,000 .68%
United Inns
26 N. White Station
Memphis, TN 38137
Charles R. Dunn 10,000 .68%
7925 Wing Span Drive ------ ----
San Diego, CA 92119
OFFICERS AND DIRECTORS TOTALS 723,737 49.14%
======= ======
<FN>
<F1>
The Hatfield Affiliates will receive 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 their 100 Initial Shares in the Company.
Additionally, the Hatfield Affiliates will receive 3,737 shares of Class A
Common Stock in exchange for their 1.3% limited partnership interest in
Mission Bay.
</FN>
</TABLE>
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Related Parties -- The Advisor, The Acquisition Company, and
The Lessee
The Company: Host Funding, Inc.
The Company is governed by a five person Board of Directors. The
three Independent Directors are Don W. Cockroft, William Birdsall, and
Charles R. Dunn. The two non-Independent Directors are Michael S. McNulty
and Guy E. Hatfield. Mr. McNulty is the President and Treasurer of the
Company. Michael Fedynyshyn is Vice-President of the Company. Guy E.
Hatfield is Secretary of the Company.
The Advisor: Host Funding Advisor, Inc.
The Advisor is a newly-formed Delaware corporation. Mr. Gardner-Smith
is the Vice President and Secretary of the Advisor and Mr. McNulty is the
Advisor's President and Treasurer. All of the stock of the Advisor is
owned by Ian Gardner-Smith. Mr. Gardner-Smith has no relationship with the
Company or Mission Bay. Upon closing of the Offering, the Company will
enter into an Advisory Agreement with the Advisor pursuant to which the
Advisor will provide its management and strategic business services to the
Company. The Company shall pay to the Advisor an annual base fee of
$30,000 payable quarterly and a percentage fee of 1.25% of the total market
value of all real property owned by the Company when the real property
owned by the Company exceeds $35 million. The Company shall reimburse the
Advisor for all third party professional expenses incurred in its role as
Advisor. The Advisory Agreement may be canceled by the Company or the
Advisor on ninety (90) days notice.
The Acquisition Company: Host Acquisition Group, LLC
Host Acquisition Group, LLC, a Delaware limited liability company, is
the acquisition company (the "Acquisition Company"). Ian Gardner-Smith is
President and Treasurer of the Acquisition Company. Michael McNulty is
the Vice President and Secretary. Ian Gardner-Smith owns 99% of the
membership interest in the Acquisition Company and Paul K. Richey owns 1%
of the membership interest in the Acquisition Company. Mr. Gardner-Smith
is Manager of Acquisition Company. Upon closing of the Offering, the
Company will enter into a Post-Formation Acquisition Agreement with the
Acquisition Company pursuant to which the Acquisition Company will be paid
up to a 6% placement fee payable in Common Stock of the Company for
services in connection with the acquisition of additional (new and
incremental) hotel properties and/or for structuring cash private
placements of the Company's Common Stock. If the purchase is a cash
purchase, the 6% placement fee will be determined by the cash purchase
price. If the purchase is for other than cash, the 6% placement fee will
be determined by the acquisition value of the acquired property. Such
acquisition value will be the fair market value of the acquired property as
determined by an independent appraiser. No fees will be paid to the
Acquisition Company with respect to any aspect of the Formation
Transactions.
48
<PAGE>
The Lessee: Crossroads Hospitality Tenant Company, LLC
The Lessee is a newly formed Delaware limited liability company.
Crossroads Hospitality Company, a Delaware limited liability company,
("Crossroads Parent") is the Manager of the Lessee and owns 75% of the
voting interests and a 99% interest in the profits, losses and
distributions of the Lessee. IHC Member Corporation, a Delaware
corporation, ("IHCM") owns 25% of the voting interests and a 1% interest in
the profits, losses and distributions of the Lessee. Interstate Hotels
Corporation, a Pennsylvania corporation, ("Interstate") owns 75% of the
voting interests and a 99% interest in the profits, losses, and
distributions of Crossroads Parent. IHCM owns 25% of the voting interests
and a 1% interest in the profits, losses, and distributions of Crossroads
Parent. The Lessee has no present relationship with the Company or Mission
Bay.
Milton Fine is Chairman of the Board and Chief Executive Officer of
Interstate and IHCM. W. Thomas Parrington, Jr. is President and Chief
Operating Officer of Interstate and IHCM. Robert L. Froman is Executive
Vice-President of Interstate and IHCM. J. William Richardson is Executive
Vice-President and Chief Financial Officer of Interstate and IHCM. Marvin
Droz is Senior Vice-President, General Counsel, and Secretary of Interstate
and IHCM. Timothy Q. Hudak is Assistant Secretary of Interstate and IHCM.
100% of Interstate and IHCM is owned by Milton Fine and his Affiliates.
Kevin Kilkeary is Executive Vice-President of Interstate and President of
Crossroads Parent.
Interstate manages more than 95 upscale hotels and 35 resorts
nationwide, including numerous Marriott hotels and resorts. Crossroads
Parent is an affiliate of Interstate Hotels and manages over 50 hotels
nationwide. The Lessee will operate the Hotels pursuant to the Percentage
Leases. Accordingly, the Lessee will not operate or manage any hotels other
than those owned by the Company.
49
<PAGE>
Following consummation of the Formation Transactions, the structure
and relationships among the Company, the Hotels, Advisor, the Acquisition
Company, and the Lessee, will be as follows:
REIT Shareholders
- ---------------------------------------------------------------------------
Former Public
Mission Bay Hatfield Offering Directors
Partners Affiliates Purchasers
251 Shares of 410,000 Shares 500,000 Shares 30,000 Shares
Class A Common of Class A of Class A of Class A
Stock in Mission Common Stock Common Stock Common Stock
Bay Offering
(10.12% Dissent-
ing Partners)
140,000 Shares of Class B
Common Stock HOST FUNDING
ADVISORS, INC.
140,000 Shares of Class C (the "Advisor")
Common Stock Ian Gardner-
Smith 100%
Advisory Agrmt
REIT
HOST FUNDING, INC.
(the "Company") Class A Class B Class C Totals
------- ------- ------- ------
Hatfield Affiliates 28.1% 9.5% 9.5% 47.1%
Public Offering Purchasers 33.9% 33.9%
Mission Bay Limited Partners 17.0% 17.0%
Directors 2.0% 2.0%
----- ----- ----- -----
81.0% 9.5% 9.5% 100%
Percentage Leases
CROSSROADS HOSPITALITY TENANT COMPANY, LLC
(the "Lessee")
Crossroads Hospitality Company, LLC IHC Member Corporation
----------------------------------- ----------------------
75% of voting interests 25% of voting interests
99% of profits & losses 1% of profits & losses
Interstate Hotels Corporation IHC Member Corporation
----------------------------- ----------------------
75% of voting interests 25% of voting interests
99% of profits & losses 1% of profits & losses
Post-Formation Acquisition Agreement
HOST ACQUISITION GROUP, LLC
(the "Acquisition Company")
----------------------------
Ian Gardner-Smith 99%
Paul K. Richey 1%
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES 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.
1.2 Amendment No. 4 to Form S-4 of Host Funding, Inc. dated December
1, 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).
5.1 Opinion of Peter G. Aylward (incorporated by reference to Exhibit
5.1 to Registrant's Amendment No. 8 to Form S-11 effective April
17, 1996).
5.2 Opinion of Ballard Spahr Andrews & Ingersoll (incorporated by
reference to Exhibit 5.2 to Registrant's Amendment No. 8 to Form
S-11 effective April 17, 1996).
8.1 Opinion of Peter G. Aylward as to Tax Matters (incorporated by
reference to Exhibit 8.1 to Registrant's Amendment No. 8 to Form
S-11 effective April 17, 1996).
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).
51
<PAGE>
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).
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).
52
<PAGE>
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).
13.1 Mission Bay's Annual Report on Form 10-K (SB) for the fiscal year
ended December 31, 1994 (incorporated by reference to Exhibit
13.1 to Registrant's Amendment No. 8 to Form S-11 effective April
17, 1996).
23.1 Consent of Peter G. Aylward, APC (included in Exhibit 5.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in 5.2)
23.3 Consent of Peter G. Aylward, APC (included in Exhibit 8.1)
23.4 Consent of William H. Ling, C.P.A. (incorporated by reference to
Exhibit 23.4 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
23.5 Consent of Levitz, Zacks & Ciceric (incorporated by reference to
Exhibit 23.5 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
23.6 Consent of Arthur Andersen, LLP (incorporated by reference to
Exhibit 23.6 to Registrant's Amendment No. 8 to Form S-11
effective April 17, 1996).
23.7 Accountant Dismissal Letter (incorporated by reference to Exhibit
23.7 to Registrant's Amendment No. 8 to Form S-11 effective April
17, 1996).
99.1 Consents of persons named to become directors (incorporated by
reference to Exhibit 99.1 to Registrant's Amendment No. 8 to Form
S-11 effective April 17, 1996).
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K in the last
quarter of this fiscal year. However, the Registrant did file 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.
53
<PAGE>
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.
HOST FUNDING, INC.
(Registrant)
Dated: May 31, 1996 /s/ Michael S. McNulty
By: Michael S. McNulty
Its: President
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 indicted.
Signature Title Date
/s/ Michael S. McNulty President, Treasurer May 31, 1996
Michael S. McNulty & Director
Chief Executive Officer
Chief Financial & Accounting Officer
/s/ Guy E. Hatfield Vice-President, May 31, 1996
Guy E. Hatfield Secretary & Director
/s/ Charles R. Dunn Director May 31, 1996
Charles R. Dunn
/s/William Birdsall Director May 31, 1996
William Birdsall
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Host Funding, Inc. Financial Statements
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheet as of April 1, 1995 and December 31, 1995. . . . . . . . F-3
Statement of Loss for the nine months ended December 31, 1995. . . . . F-4
Statement of Shareholder's Deficit for the nine months
ended December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . F-5
Statement of Cash Flows for the nine months ended December 31, 1995. . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . .F-7 - F-18
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . .F-19
Schedule III -- Real Estate and Accumulated Depreciation . . . F-20 - F-21
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors of Host Funding, Inc.:
I have audited the accompanying balance sheets of Host Funding, Inc. as of
April 1 and December 31, 1995, and the related statements of loss,
shareholder's deficit and cash flows for the nine months ended December 31,
1995. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audits
provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Host Funding, Inc. as
of April 1 and December 31, 1995, and the results of its operations and its
cash flows for the nine months ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ William H. Ling
February 16, 1996 except for the last paragraph
in Note 3 for which the date is March 22, 1996
and paragraphs 5 and 16 in Note 5 for which the
date is April 4, 1996
San Diego, California
F-2
<PAGE>
HOST FUNDING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
As of As of
April 1, 1995 Dec. 31, 1995
------------- -------------
<S> <C> <C>
ASSETS
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 - (103,663)
----------- -----------
2,099,190 1,995,527
Land 642,287 642,287
----------- -----------
Land, property and equipment - net 2,741,477 2,637,814
CASH - 500
RENT RECEIVABLE - Related party - 12,481
INTEREST RECEIVABLE - Related parties - 22,753
LOAN COMMITMENT FEES - Net 28,582 21,146
----------- -----------
Total $ 2,770,059 $ 2,694,694
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
LIABILITIES:
LONG-TERM DEBT $ 4,215,676 $ 4,155,321
NOTES PAYABLE - 75,244
ACCRUED INTEREST PAYABLE - 40,963
ACCOUNTS PAYABLE - Stock issuance costs 500,000 325,000
DEFERRED INCOME TAXES 166,000 163,000
----------- -----------
Total liabilities 4,881,676 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 (305,943) (259,160)
Related party note receivable (1,805,675) (1,805,675)
----------- -----------
Total shareholder's deficit (2,111,617) (2,064,834)
----------- -----------
Total $ 2,770,059 $ 2,694,694
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
STATEMENT OF LOSS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<S> <C>
REVENUES:
Lease revenue - related party $ 806,670
Interest income - related parties 135,673
---------
Total revenue 942,343
---------
EXPENSES:
Interest expense 322,461
Depreciation and amortization 111,099
Administrative expenses - related party 540,000
---------
Total expenses 973,560
---------
LOSS BEFORE INCOME TAXES (31,217)
---------
INCOME TAX:
Current 0
Deferred (3,000)
---------
Total income tax (3,000)
---------
NET LOSS $ (28,217)
=========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HOST FUNDING, INC.
STATEMENT OF SHAREHOLDER'S DEFICIT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Related Total
Common Accumulated Party Note Shareholder's
Stock Deficit Receivable Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, April 1, 1995 $ - $ - $ - $ -
CONTRIBUTION OF NET ASSETS
AND LIABILITIES FOR COMMON
STOCK AND ACCUMULATED
DEFICIT 1 (305,943) (1,805,675) (2,111,617)
REDUCTION IN
STOCK ISSUANCE COSTS - 75,000 - 75,000
NET LOSS - (28,217) - (28,217)
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 $ 1 $ (259,160) $ (1,805,675) $ (2,064,834)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (28,217)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 111,099
Deferred taxes (3,000)
Changes in operating assets and liabilities
Rent receivable - related party (12,481)
Interest receivable - related parties (22,753)
Accrued interest payable 40,963
-----------
Net cash provided by operating activities 85,611
FINANCING ACTIVITIES:
Payments on long-term debt and notes payable (105,111)
Borrowings on notes payable 120,000
Stock issuance costs (100,000)
-----------
Net cash used in financing activities (85,111)
-----------
NET CHANGE IN CASH 500
CASH AT BEGINNING OF PERIOD 0
CASH AT END OF PERIOD $ 500
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 281,498
===========
Cash paid during the period for income taxes $ 0
===========
Non-cash investing activities:
Contribution of net assets and liabilities for common stock
and accumulated deficit
Land, property and equipment $ 2,741,477
Loan commitment fees 28,582
Related party note receivable 1,805,675
Long-term debt (4,215,676)
Common Stock (1)
-----------
360,057
-----------
Less: Liabilities and accumulated deficit resulting from
the contribution of net assets and liabilities
Accounts payable stock issuance costs (500,000)
Reduction in accounts payable stock issuance costs 75,000
Deferred income taxes (166,000)
Accumulated deficit 305,943
Reduction in stock issuance costs (75,000)
-----------
(360,057)
-----------
Net non-cash investing activities $ 0
===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
HOST FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization:
The accompanying balance sheet includes the accounts of Host Funding,
Inc., a Maryland corporation ("Host Funding"). Host Funding was formed on
December 22, 1994 to engage in any lawful act or activity (including,
without limitation or obligation, engaging in business as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code") for which corporations may
be organized under the general laws of the State of Maryland as now or
hereafter in force. Host Funding's fiscal year end is December 31. Host
Funding was inactive from inception, December 22, 1994 to March 31, 1995.
On April 1, 1995, Host Funding and All American Group, Ltd., a
Delaware limited partnership ("AAG") entered into a Contribution and
Assumption Agreement (the "Contribution and Assumption Agreement"). Under
the Contribution and Assumption Agreement AAG transferred, assigned and
conveyed to Host Funding all of the real property, including land and
personal property, and Host Funding agreed to assume stock issuance costs
payable and all real property debt, at historical cost, of four (4) Super 8
motels located and doing business in Somerset, Kentucky; Miner, Missouri;
Poplar Bluff, Missouri; and Rock Falls, Illinois. In addition, AAG
contributed a note receivable (the "Related Party Note"). In accordance
with generally accepted accounting principles, the Related Party Note is
included in shareholder's deficit as the Related Party Note was originally
issued for equity in AAG. As collections are made on the Related Party
Note, equity will be recognized (see Note 4). As consideration to AAG,
Host Funding issued 100 shares of common stock. As of April 1 and December
31, 1995, all of the outstanding stock of Host Funding is owned by AAG (see
note 4). The balance sheet is for Host Funding only and has not been
consolidated with Host Funding's parent, AAG. As of December 31, 1995,
AAG's principal asset is the stock of Host Funding with no significant
liabilities.
Host Funding was a "Developmental Stage Company," as defined under
generally accepted accounting principles, and, as such, was exposed to the
inherent risks of a company of this type. Upon execution of the
Contribution and Assumption Agreement and the initiation of operations
thereafter, Host Funding ceased to be classified as a "Developmental Stage
Company".
Summary of Significant Accounting Policies:
Land, Property and Equipment
Buildings and improvements are being depreciated over useful lives of
35 years from the original historical date of acquisition using the
straight-line method. Hotel furnishings and equipment are being
depreciated using primarily straight-line methods over useful lives ranging
from 3 to 7 years from the original historical date of acquisition.
F-7
<PAGE>
Host Funding assesses impairment of its real estate properties based upon
whether it is probable that undiscounted future cash flows from each
individual property will be less than its net book value. No impairment
has occurred as of December 31, 1995, nor would any impairment be required
to be recorded upon implementation in 1996 of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed Of."
Loan Commitment Fees
The loan commitment fees are amortized over the terms of the loans
using the straight-line method which approximates the effective interest
rate method.
Revenues
Revenue is recognized as earned. Earned is generally defined as the
date at which the lease or interest obligation under the contractual
agreement is due to Host Funding.
Stock Issuance Costs
Stock issuance costs (the "Issuance Costs") have been charged to
shareholder's deficit. Should the transaction described in note 5 as
"Possible Formation Transactions" not occur, the expenses will be charged
against current period income.
Fair Value of Financial Instruments and Concentration of
Credit Risk
The following disclosure of estimated fair value was determined by
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data and
develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could
be realized upon disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Rent and interest receivable, accrued interest payable and accounts
payable - stock issuance costs are carried at amounts which reasonably
approximate their fair value.
The carrying value of long-term debt and notes payable approximate
fair value at December 31, 1995, as the related interest rates are either
variable or in line with market rates.
The carrying value of the related party note receivable, which value
is included in shareholder's deficit, is equal to the original amount
credited to accumulated deficit, which fair value is believed by management
to approximate cost.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
F-8
<PAGE>
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes
Host Funding has adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
the use of the liability method of accounting for deferred income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and income tax purposes and operating loss and tax
credit carryforwards. Host Funding, as a result of the Contribution and
Assumption Agreement, has a timing difference regarding depreciation
methods used for financial reporting and income tax purposes. On April 1
and December 31, 1995, the deferred income taxes resulting from the timing
difference regarding depreciation methods totalled $166,000 and $163,000,
as Host Funding is presently taxed as a C Corporation (see note 5).
There is no provision for current period income taxes as of December
31, 1995, as the company has a tax net operating loss of $15,000. The
company elected not to recognize this deferred tax asset as future
utilization of this net operating loss is uncertain.
The net deferred tax liability is the result of temporary differences
between depreciation recorded in tax returns in excess of depreciation
recorded in the financial statements.
On December 31, 1995, Host Funding's net assets for federal tax
reporting purposes totalled approximately $2,300,000.
NOTE 2. REAL ESTATE INVESTMENTS
As described in note 1, on April 1, 1995, Host Funding acquired fee
interests in four motels. The motel properties are leased to Inn Fund,
LLC, a Delaware limited liability company ("Inn Fund"). Guy E. Hatfield,
the controlling partner of AAG, sole shareholder of Host Funding, owns 7.5%
and Ian Gardner-Smith owns 92.5% of Inn Fund. Although only a 7.5% member
of Inn Fund, Guy Hatfield retains effective control over Inn Fund until
such time as the Possible Formation Transactions as described in note 5
occur. The four motels are operated for Inn Fund by All American Group,
Inc., an entity 100% owned by Guy Hatfield and his wife ("AAG, Inc.") (See
note 5).
The individual motel leases were for a term of 15 years, and were
scheduled to expire on December 31, 2009, at combined total annual base
rents of $931,000, or percentage rentals ranging from 35% to 55% for each
individual property based upon gross revenue levels, whichever was greater.
The leases were "triple net" in that Inn Fund was generally responsible for
paying all operating expenses of the properties, including maintenance,
insurance and property taxes. Further, Inn Fund was required to set aside
in a replacement reserve 4% of gross room revenue to be used for capital
additions to the properties.
F-9
<PAGE>
Effective January 1, 1996 the existing leases were terminated and new
leases with terms similar to the New Leases described in note 5 were
entered into between Host Funding and Inn Fund. The new leases have
combined total annual base rents of $779,800, plus percentage rents ranging
from 28.75% to 40% of year to date revenues less varying break even
thresholds adjusted annually by defined percentages for each motel. The
leases require Inn Fund to pay all operating expenses of the properties,
including maintenance and insurance, while Host Funding is responsible for
property taxes. In addition, Inn Fund is required to set aside a
replacement reserve of $125 per room, per quarter, increased annually by
inflation factors, to be used for capital additions.
These leases are for a term of 15 years, however they are subject to
termination should certain events happen as fully described in note 5.
Minimum future rents due under operating leases for the five years
ending December 31, 1996 to 2000 and thereafter are as follows:
Amount
-----------
1996 $ 779,800
1997 779,800
1998 779,800
1999 779,800
2000 779,800
Thereafter 7,798,000
----------
Total $11,697,000
===========
F-10
<PAGE>
NOTE 3. LONG-TERM DEBT, NOTES PAYABLE AND POSSIBLE DEBT RESTRUCTURING
Long-term debt:
A summary of Host Funding's long-term debt as of April 1 and December
31, 1995 follows:
<TABLE>
<CAPTION>
April 1, 1995 Dec. 31, 1995
------------- -------------
<S> <C> <C>
First mortgage note payable to bank; 8.5%
interest until March 1994, prime plus 1.5%
but not less than 8.5% thereafter (prime was
9% at December 31, 1995), adjusted annually;
payments of $11,823 monthly, due March 1998;
personal guarantees of Guy E. and Dorothy
Hatfield. $1,113,144 $1,094,146
First mortgage note payable to bank; 8.75%
interest; payments of $11,244 monthly; due
February 1998. 1,043,915 1,011,545
First mortgage note payable to bank; prime
plus 2%, adjusted quarterly (prime was 9% at
December 31,1995); payments of $9,174 monthly,
due March 1998. 898,617 889,630
First mortgage note payable to bank; prime plus
1/2% interest rate adjustable daily (prime was
9% at December 31, 1995); accrued interest plus
principal are due on March 31, 1996. 1,160,000 1,160,000
---------- ---------
4,215,676 4,155,321
Less current portion 1,245,213 1,251,844
---------- ---------
$2,970,463 $2,903,477
========== ==========
</TABLE>
Aggregate principal payments for the next three calendar years ended
December 31, subsequent to December 31, 1995 are as follows:
1996 $1,251,844
1997 101,084
1998 2,802,393
----------
Total $4,155,321
==========
Substantially all of the assets of Host Funding are collateral for the
above debt (see note 5).
F-11
<PAGE>
Notes Payable:
In July 1995, Host Funding entered into a second mortgage
collateralized by the Poplar Bluff, Missouri and Rock Falls, Illinois
motels totalling $100,000 at an interest rate of prime plus 2% payable
interest only on August 15, 1995 and, thereafter, in monthly installments
of $12,000, including principal and interest, commencing September 15, 1995
(the "New Second Mortgage"). The due date of the New Second Mortgage is
April 15, 1996, unless the "Possible Formation Transactions" as described
below occur, at which time the entire amount is due and payable. The note
balance as of December 31, 1995 totalled $55,244.
In October 1995, Host Funding entered into an unsecured note payable
totalling $20,000. This note bears interest at 10% and is due and payable
March 31, 1996. The note balance as of December 31, 1995 totalled $20,000.
Possible Debt Restructuring:
On April 15, 1996, the mortgage note of $1,160,000, the unsecured note
payable of $20,000 and the second mortgage note payable of $55,255,
respectively, will mature. It is Host Funding's intention to pay off the
debt from the proceeds of the Possible Formation Transactions. Should the
Possible Formation Transactions not be consummated, Host Funding intends to
renegotiate this debt. Should the Possible Formation Transactions not be
consummated or Host Funding be unable to renegotiate this debt, Guy
Hatfield, individually and as a partner in AAG, has committed to Host
Funding to take whatever action is necessary to insure that the loans are
not foreclosed upon. No assurance can be given as to the completion of the
Possible Formation Transactions and the outcome of the debt restructuring.
NOTE 4. COMMON STOCK, RELATED PARTY NOTE RECEIVABLE, STOCK PLEDGE
AGREEMENT, RELATED PARTY CONSULTING AGREEMENT AND
RELATED PARTY TRANSACTIONS
Common Stock:
Host Funding is authorized to issue 1,000 shares of common stock, $.01
par value per share. As of April 1 and December 31, 1995, 100 shares of
Host Funding common stock are outstanding, and solely owned by AAG (see
notes 1 and 5).
Related Party Note Receivable:
As described in note 1, on April 1, 1995, AAG, as part of the
Contribution and Assumption Agreement, contributed the Related Party Note
to Host Funding. The Related Party Note is due from Guy and Dorothy
Hatfield and their two children, sole limited partners, and AAG, Inc., sole
general partner (the "AAG Partners"), of AAG. The principal balance of
the Related Party Note dated March 31, 1995, is $1,805,675, with interest
payable quarterly, commencing November 15, 1995, at 10% per annum, adjusted
to 12% per annum upon completion of the Possible Formation Transactions,
with remaining outstanding principal and unpaid accrued interest due and
payable on March 31, 2000. The Related Party Note was secured by second
trust deeds on properties located in Central City, Kentucky; Lebanon,
F-12
<PAGE>
Kentucky; Miner, Missouri; and Dexter, Missouri. The collateral for the
Related Party Note was provided via a Lent Collateral Agreement from
Hatfield Inn, Inc., a Delaware corporation ("Hatfield Inn") 100% owned by
Guy and Dorothy Hatfield. In September 1995, the Related Party Note was
amended to remove the obligation of AAG to maintain real property security,
conditioned upon the delivery to Host Funding of an unconditional guarantee
by Guy and Dorothy Hatfield. The Related Party Note is classified in the
Shareholder's Deficit section of the balance sheet as it was contributed to
AAG and, in turn, Host Funding to provide equity to AAG and Host Funding,
respectively.
Stock Pledge Agreement:
Further, on April 1, 1995, the AAG Partners entered into a Stock
Pledge Agreement (the "Stock Pledge Agreement") with Host Funding.
Pursuant to the Stock Pledge Agreement, the AAG Partners agreed to pledge a
security investment in 26.2 fraction shares, together with all additional
shares issued to the AAG Partners by reason of stock split or stock
dividend, of common stock in Host Funding to secure the Related Party Note.
Related Party Consulting Agreement:
Host Funding has entered into a consulting agreement (The "Related
Party Consulting Agreement") with AAG effective April 1, 1995 to provide
advisory, accounting and other consulting services to Host Funding for a
monthly fee of $60,000 plus annual additional compensation as mutually
agreed upon. The Related Party Consulting Agreement is cancelable upon
thirty days written notice from either party.
Related Party Transactions:
As of December 31, 1995, management of Host Funding, Inn Fund and AAG
and the general and limited partners of AAG have offset the consulting fees
due AAG under the Related Party Consulting Agreement in the amount of
$540,000 for the period April 1 to December 31, 1995 against accrued
interest receivable due under the Related Party Note in the amount of
$112,921 for the period April 1 to November 15, 1995 and accrued rent
receivable due under the four leases from Inn Fund in the amount of
$427,079 for base rents due and substantially all percentage rent due for
the period April 1 to December 31, 1995.
During 1995, a consulting fee totalling $10,000 was paid by Host
Funding to an entity in which the president of Host Funding has a financial
interest. This fee is included in stock offering costs.
Guy Hatfield, as partner in AAG, has indicated his intention to
provide support necessary to continue operations should the Possible
Formation Transactions not be consummated.
NOTE 5. POSSIBLE FORMATION TRANSACTIONS AND COMMITMENTS AND
CONTINGENCIES
Host Funding intends to acquire certain assets of Mission Bay Super 8,
Ltd., a California limited partnership ("Mission Bay"), the owner of a 117
F-13
<PAGE>
room Super 8 motel located in San Diego, California, pursuant to an asset
acquisition agreement (the "Mission Bay Acquisition Agreement") by which
Host Funding will acquire the hotel assets of Mission Bay. Upon the
acquisition of Mission Bay, Host Funding intends to lease the property
under similar terms as described in note 2, to Inn Fund or to a similarly
qualified third party hotel operator.
The limited partners of Mission Bay, as a result of the filing of a
registration statement on Form S-4 on December 5, 1995 and the tabulation
of the votes of the limited partners of Mission Bay by the general partner
of Mission Bay on January 9, 1996, voted in favor of approving the Mission
Bay Acquisition Agreement.
The Mission Bay Acquisition Agreement will exchange 251,946 shares of
common stock in Host Funding at a stated value of $10.00 per share plus
cash for a reserve for dissenters rights and fractional share settlements
of approximately $291,000 based upon an appraisal of Mission Bay for
limited and general partnership interest in a final liquidating
distribution by Mission Bay.
Since the Mission Bay acquisition is conditioned upon additional
transactions as described below, no assurance can be given that the Mission
Bay asset acquisition will be consummated.
Further, Host Funding intends to raise additional capital via an
initial public offering of common stock (the "Stock Offering") concurrent
with the Mission Bay asset acquisition. The Stock Offering Host Funding
intends to complete will offer at least 500,000 common shares at $10.00 per
share. Should Host Funding be successful with the completion of the Stock
Offering, the underwriter will receive 10% of the proceeds. Host Funding
plans to use the capital raised from the Stock Offering to pay down long-
term debt, to pay expenses of the formation of Host Funding, and for
working capital purposes. No assurance can be given that the Stock
Offering will be consummated.
In addition, in September 1995, Host Funding has agreed to enter into
new motel leases for the four existing motel properties and Mission Bay
(the "New Leases") with a limited liability company of a nationally
recognized hotel management company and operator, Crossroads Hospitality
Tenant Company, a Delaware limited liability company ("Crossroads"),
subject to completion of the Mission Bay Acquisition Agreement and the
Stock Offering. The New Leases are for a term of 15 years from the final
effective date of completion of the Mission Bay Acquisition and the Stock
Offering. Combined total annual base rentals of $1,029,800 are due, plus
percentage rentals ranging from 28.75% to 40% of year to date revenues less
varying break even thresholds adjusted annually by defined percentages for
each motel. The New Leases generally require Crossroads to pay all
operating expenses of the properties, including maintenance and insurance,
while Host Funding is responsible for property taxes. In addition,
Crossroads is required to set aside in a replacement reserve $125 per room,
per quarter, increased annually by inflation factors, to be used for
capital additions which generally must be approved by Host Funding.
Further, should Host Funding decide to sell any of the properties leased to
Crossroads under the New Leases, Crossroads will be provided a 30 day right
of first refusal to purchase such property at the price offered Host
Funding by the third party.
F-14
<PAGE>
Crossroads may terminate any one lease within the first five years
without damages. Should two leases be terminated within the first five
years, Crossroads has agreed to pay a termination fee equal to the previous
twelve months revenue for the hotel times 18% in years one to three, 12% in
year four and 6% in year five. If more than two leases are terminated
within the first five years, Host Funding has the right to terminate all
remaining leases or to collect the termination fee as described above.
Upon the commencement date of the New Leases with Crossroads, Host
Funding shall deliver possession of the leased properties along with levels
of cash on hand and working capital of not less than $75,000, operating
supply inventories at levels defined in the lease, and amounts sufficient
to satisfy all outstanding vacation due hotel employees. In addition, Host
Funding will be responsible for any fees required to assign the franchise
license agreements with Super 8. Finally, Host Funding, Mission Bay or Inn
Fund were required to have completed capital improvements for calendar 1995
totalling approximately $285,000, with any deficiency required to be
provided to Crossroads upon commencement of the New Leases. The capital
improvement deficiency which has been agreed to be funded from working
capital of Host Funding and Inn Fund upon execution of the New Leases
totals $50,000 and $36,900, respectively. In addition, upon inspection by
Crossroads of the leased properties upon commencement of the New Leases and
after Crossroads calendar 1996 prorated obligation to fund the replacement
reserve of $125 per room, per quarter, should there remain a deficiency to
fund the 1995 defined capital improvement of $285,000, Host Funding will be
obligated to fund any deficiency up to approximately $60,000.
The parent company of Crossroads has agreed to provide a letter of
credit to secure the payment of rent due under the leases in the amount of
$264,000 during the first three years of the lease terms. In addition,
Crossroads has agreed to maintain a letter of credit thereafter equal to
annually calculated termination fees that would be due on the lease
anniversary dates throughout the remaining terms of the leases. After the
first year, Crossroads parent may substitute the letter of credit by
guaranteeing the equivalent amounts required by the letter of credit and
providing to Host Funding a copy of Crossroads parent's audited financial
statements which indicate a net worth of at least 2-1/2 times the value of
the letter of credit, with at least 40% of the net worth in cash or cash
equivalent assets. In addition, Crossroads parent makes certain negative
covenants concerning maintenance of its minimum net worth levels.
No assurance can be given that the New Leases will be consummated.
Host Funding intends to become listed on the American Stock Exchange
("the AMEX").
No assurance can be given that the listing on the AMEX will be
consummated.
Upon completion of the Mission Bay acquisition, the Stock Offering,
the execution of the New Leases and listing on the AMEX, Host Funding
intends to elect to be taxed as a real estate investment trust under the
Internal Revenue Code of 1986, as amended, or any successor statute (the
"Possible Formation Transactions").
F-15
<PAGE>
Hatfield Inn is the owner and operator of a 40 room motel adjacent to
Host Funding's property located in Miner, Missouri. The motel owned by
Hatfield Inn was newly constructed and is secured by a $730,500 first deed
of trust (the "Hatfield Inn Note"). The Host Funding motel property
located in Miner, Missouri serves as cross collateral under a second deed
of trust (the "Cross Collateral Agreement") to secure payment of the
Hatfield Inn Note. As the Hatfield Inn property is completed and has
operating history, Host Funding has requested the Cross Collateral
Agreement under the Hatfield Inn note be released. No assurance can be
given that the Cross Collateral Agreement will be released by the lender,
and Host Funding remains contingently liable under the Hatfield Inn Note.
Further, Host Funding and Hatfield Inn have a shared parking agreement
allowing cars to park in either property's parking facilities, compete for
similar business, and are managed by the general partner of AAG.
AAG has been granted license agreements by Super 8 Motels, Inc.
("Super 8") for 20-year terms expiring in 2005. Pursuant to the terms of
the agreement, AAG is required to pay a royalty fee and an advertising fee
equal to 4% and 1%, respectively, of gross room revenue. As part of, and
only upon occurrence of, the Possible Formation Transactions, AAG intends
to assign the franchise agreements to Crossroads. Mission Bay has a
similar license agreement with Super 8, which likely will be assigned to
the lessee. Super 8 has expressed a willingness to allow the assignments,
but may require Crossroads to pay a higher royalty and advertising fee.
Issuance Costs of the Possible Formation Transactions were originally
expected to total approximately $500,000, which were accrued for in the
financial statements. Subsequently, it was determined that the expenses of
the underwriting will be reduced by approximately $75,000, and accordingly
accounts payable stock issuance costs has been reduced by $75,000 with a
corresponding reduction to accumulated deficit. Funding for the Issuance
Costs has principally been provided by certain AAG Partners; Ian Gardner-
Smith; and GHG Hospitality, Inc., the general partner of Mission Bay (the
"Related Parties"). Should the Possible Formation Transactions occur, the
various Issuance Costs will be reimbursed to the Related Parties.
The deferred income tax liability will be reversed and credited to
accumulated deficit upon consummation of the Possible Formation
Transactions. The reason for the reversal of the deferred tax liability is
that upon completion of the Possible Formation Transactions, Host Funding
will have elected REIT status and intends to meet the Code requirements and
be taxed as a REIT. As a result, no future deferred tax liability will be
required.
Upon the proposed amendment and restatement of the charter, Host
Funding will have authority to issue 75,000,000 shares of stock, consisting
of 50,000,000 shares of Class A common stock, $.01 par value per share, and
4,000,000 shares of Class B common stock, $.01 par value per share and
1,000,000 shares of Class C common stock, $.01 par value per share. Upon
completion of the Possible Formation Transactions, Host Funding will issue
additional Class A, B and C shares to AAG in exchange for 100 initial
shares now held by AAG based upon appraised values of Host Funding's assets
net of liabilities prior to the Possible Formation Transactions. The
initial common shares to be issued upon completion of the Possible
Formation Transactions include 410,000 Class A, 140,000 Class B and 140,000
F-16
<PAGE>
Class C, which number of shares were determined based upon the net
appraised value of assets net of liabilities of $6,900,000 or $10.00 per
share. The Class B and C shares will include certain restrictions as to
the future payment of dividends and are convertible to Class A common
shares at certain times and under certain circumstances as defined in the
charter.
Upon the amendment and restatement of the charter and completion of
the Possible Formation Transactions, Host Funding will have 20,000,000
authorized preferred shares, $.01 par value, none of which are issued or
outstanding.
Immediately after consummation of the Possible Formation Transactions,
Host Funding intends to sell to each director then in office 10,000 shares
of Class A common stock at a price per share equal to $10 per share. The
purchase price will be paid by them through delivery of a five year
promissory note executed in favor of Host Funding by each purchaser, which
shall bear interest, payable quarterly, at a fixed rate equal to 7% per
annum. Principal payments totalling 2% of the original principal will be
due annually. The shares of common stock purchased by each independent
director will be pledged to Host Funding to secure payment of the
promissory note, which shall be non-recourse to the maker, except to 10% of
the principal amount due from directors. Host Funding has agreed to
forgive the promissory notes issued in exchange for the shares of common
stock in increments of 18% of the principal amount per annum for each year
that the maker remains a director of Host Funding. The estimated annual
amortization of unearned director's compensation is expected to total
$54,000 based upon the issuance of a total of 30,000 shares to three
directors.
Host Funding intends to enter into an Advisory Agreement (the
"Advisory Agreement") with Host Funding Advisors, Inc., a Delaware
corporation (the "Advisor") on the close of the Possible Formation
Transactions. The Advisor was formed on June 23, 1994. Pursuant to the
Advisory Agreement, the Advisor will provide information, advice,
assistance, and facilities to Host Funding in connection with Host
Funding's future investment in hotel properties. Additionally, the Advisor
will administer the daily operations of Host Funding, negotiate on Host
Funding's behalf, act as agent for Host funding in collecting funds and
paying debts, and generally manage and operate Host Funding. In
consideration for such services, Host Funding will compensate the Advisor
in the amount of $30,000 per year. Ian Gardner-Smith is Chief Executive
Officer, Vice President and Secretary and owns 100% of the Advisor.
Host Funding intends to enter into a Post-Formation Acquisition
Agreement (the "Post-Formation Acquisition Agreement") with Host
Acquisition Group, a proposed Delaware limited liability company (the
"Acquisition Company") on the close of the Possible Formation Transactions.
Pursuant to the Post-Formation Acquisition Agreement, the Acquisition
Company will manage, coordinate, and supervise Host Funding's acquisition
program for the acquisition of additional hotel properties. The
Acquisition Company will have authority to negotiate for and prepare
acquisition documentation for Host Funding's acquisition of additional
hotel properties. In exchange for such services, Host Funding will pay the
F-17
<PAGE>
Acquisition Company six percent (6%) of the gross purchase price of any
hotel properties acquired by Host Funding during the term of the Post-
Formation Acquisition Agreement. Ian Gardner-Smith is the proposed
President and Secretary of the Acquisition Company and owns controlling
interest in HMR, the proposed owner of 99% of the Acquisition Company.
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholder and Director of Host Funding, Inc.:
I have audited the financial statements of Host Funding, Inc. as of April 1
and December 31, 1995, and for the nine months ended December 31, 1995, and
have issued my report thereon dated February 16, 1996 except for the last
paragraph in Note 3 for which the date is March 22, 1996 and paragraphs 5
and 16 in Note 5 for which the date is April 4, 1996; such financial
statements and report are included elsewhere in this Form 10-K. My audit
also included the financial statement schedules of Host Funding, Inc.,
listed in Item 14. These financial statement schedules are the
responsibility of the Corporation's management. My responsibility is to
express an opinion based upon my audits. In my opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ William H. Ling
February 16, 1996 except for the last paragraph
in Note 3 for which the date is March 22, 1996
and paragraphs 5 and 16 in Note 5 for which the
date is April 4, 1996
San Diego, California
F-19
<PAGE>
SCHEDULE III
Page 1 of 2
<TABLE>
<CAPTION>
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Costs Subsequent
Initial Cost to Company to Acquisition
----------------------------- -----------------------------
Buildings and Buildings and
Description Encumbrances Land <F1> Improvements <F1> Land Improvements
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 1,011,545 $ 131,627 $ 491,711 $ -- $ --
Super 8, Somerset, KY 1,160,000 170,000 449,541 -- --
Super 8, Miner, MO 1,094,146 187,660 461,494 -- --
Super 8, Poplar Bluff, MO 944,874<F2> 153,000 410,515 -- --
----------- ----------- ----------- ----------- -----------
$ 4,210,565 $ 642,287 $ 1,813,261 $ -- $ --
=========== =========== =========== =========== ===========
<CAPTION>
Gross amount at which
carried at close of period
-----------------------------
Accumulated
Buildings & Depreciation & Year of Date
Description Land <F1> Improvements <F1> Amortization <F1> Construction Acquired Life
----------- ----------- ----------- ------------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 131,627 $ 491,711 $ 14,778 1985 4/1/95 35
Super 8, Somerset, KY 170,000 449,541 13,560 1985 4/1/95 35
Super 8, Miner, MO 187,660 461,494 13,791 1985 4/1/95 35
Super 8, Poplar Bluff, MO 153,000 410,515 12,427 1985 4/1/95 35
----------- ----------- -----------
$ 642,287 1,813,261 54,556
=========== =========== ===========
Land 642,287 --
Furniture and equipment 285,929 49,107
----------- -----------
Total hotels and land under lease $ 2,741,477 $ 103,663
=========== ===========
<FN>
<F1>
Land, buildings and improvements have been recorded at the historical
costs net of accumulated depreciation of AAG upon execution of the
Contribution and Assumption Agreement as described in Note 1 to the
Financial Statements.
<F2>
Includes $55,244 encumbrance secured by Poplar Bluff and Rock Falls
properties.
</F>
</TABLE>
See accompanying notes to financial statements.
F-20
SCHEDULE III
Page 2 of 2
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION - NOTES TO SCHEDULE
DECEMBER 31, 1995
Notes:
(A) The change in total cost of properties for the
year ended December 31, 1995 is as follows:
Balance at December 31, 1994 $ 0
Additions: Capital expenditures 2,741,477
-----------
Balance at December 31, 1995 $ 2,741,477
===========
(B) The change in accumulated depreciation and
amortization for the year ended December 31,
1995 is as follows:
Balance at December 31, 1994 $ 0
Depreciation and amortization 103,663
-----------
Balance at December 31, 1995 $ 103,663
===========
F-21
[ARTICLE] 5
[CIK] 0000945980
[NAME] HOST FUNDING INC
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[CASH] 500
[SECURITIES] 0
[RECEIVABLES] 35,594
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 36,094
[PP&E] 2,741,477
[DEPRECIATION] 103,663
[TOTAL-ASSETS] 2,694,694
[CURRENT-LIABILITIES] 441,207
[BONDS] 4,155,321
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1
[OTHER-SE] (2,064,835)
[TOTAL-LIABILITY-AND-EQUITY] 2,694,694
[SALES] 942,343
[TOTAL-REVENUES] 942,343
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 651,099
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 322,461
[INCOME-PRETAX] (31,217)
[INCOME-TAX] (3,000)
[INCOME-CONTINUING] (28,217)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (28,217)
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
</TABLE>
