<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 1997 Commission file number 1-14280
------------------ ------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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.)
6116 N. Central Expressway, Suite 1313, Dallas, TX 75206
- -------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 750-0760
------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
The number of outstanding shares of the Registrant's Class A Common Stock was
1,526,402 as of October 31, 1997.
<PAGE>
TABLE OF CONTENTS
Item Number Page
- ----------- ----
PART I
1. Financial Statements 3
Notes to Financial Statements 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II
1. Legal Proceedings 18
2. Changes in Securities 18
3. Defaults Upon Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 18
5. Other Information 19
6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
3
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
ASSETS
LAND, PROPERTY AND EQUIPMENT - AT COST:
Building and improvements $16,203,305 $12,644,239
Furnishings and equipment 2,630,695 1,952,233
Less accumulated depreciation (971,124) (391,009)
----------- -----------
17,862,876 14,205,463
Land 6,129,847 4,808,047
----------- -----------
Land, property and equipment - net 23,992,723 19,013,510
CASH AND CASH EQUIVALENTS 564,634 218,693
RESTRICTED CASH 579,485 128,952
RENT RECEIVABLE - CROSSROADS 179,772 223,160
DUE FROM RELATED PARTIES 18,643 30,390
LONG-TERM ADVANCES TO CROSSROADS 255,841 225,000
LOAN COMMITMENT FEES - Net 987,472 502,338
FRANCHISE FEES - Net 73,700 58,250
PREPAID AND OTHER ASSETS 251,867 35,282
----------- -----------
TOTAL $26,904,137 $20,435,575
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT $21,635,264 $15,500,000
SHORT TERM DEBT 25,000
LONG-TERM LEASE DEPOSIT 300,000 0
ACCOUNTS PAYABLE 245,015 38,354
ACCRUED INTEREST 169,509 114,886
ACCRUED PROPERTY TAXES 195,296 78,940
----------- -----------
Total liabilities 22,570,084 15,732,180
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value;
authorized 50,000,000 shares; issued and
outstanding 1,535,583 shares and 1,234,049
shares at September 30, 1997 and December 31,
1996 15,355 12,340
Class B Common stock, $.01 par value;
authorized 4,000,000 shares; issued and
outstanding 0 shares and 140,000 shares at
September 30, 1997 and December 31, 1996 0 1,400
Class C Common stock, $.01 par value;
authorized 4,000,000 shares; issued and
outstanding 0 shares and 140,000 shares at
September 30, 1997 and December 31, 1996 0 1,400
Additional Paid in Capital 7,703,079 7,501,494
Accumulated Deficit (2,268,089) (744,772)
Less: Related party note receivable 0 (1,805,675)
Less: Unearned directors' compensation (216,292) (262,792)
----------- -----------
5,234,053 4,703,395
Less: Common stock in treasury at cost, 90,000
shares at September 30, 1997 (900,000)
----------- -----------
Total shareholders' equity 4,334,053 4,703,395
----------- -----------
TOTAL $26,904,137 $20,435,575
----------- -----------
----------- -----------
The accompanying notes are an integral part
of the consolidated financial statements.
- -------------------------------------------------------------------------------
-4-
<PAGE>
<TABLE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Lease revenue - related party $ $ $ $ 200,512
Lease revenue - Crossroads 984,507 446,914 2,722,872 728,386
Interest income - related parties 3,590 57,895 122,430 160,045
Interest income & Other income 3,962 3,482 21,656 6,509
F,F, & E reserve income - related party 77,941
--------------------------- ---------------------------
Total revenue 992,059 508,291 2,866,958 1,173,393
--------------------------- ---------------------------
EXPENSES:
Interest expense 580,728 171,531 1,686,549 332,357
Depreciation and amortization 204,132 61,386 585,663 158,592
Administrative expenses - related party 224,000
Administrative expenses - other 299,556 89,304 818,213 162,459
Advisory fees - related party 7,500 2,500 13,583
Property taxes 74,158 31,387 208,139 71,403
Amortization of unearned directors' compensation 13,500 13,500 40,501 23,708
--------------------------- ---------------------------
Total expenses 1,172,074 374,608 3,341,565 986,102
--------------------------- ---------------------------
NET INCOME (LOSS) BEFORE VALUATION RESERVE (180,015) 133,683 (474,607) 187,291
Estimated loss related to property repairs (50,000)
--------------------------- ---------------------------
NET INCOME (LOSS) $ (180,015) 133,683 $ (524,607) $ 187,291
--------------------------- ---------------------------
--------------------------- ---------------------------
NET INCOME (LOSS) PER SHARE $ (0.12) $ 0.09 $ (0.35) $ 0.16
--------------------------- ---------------------------
--------------------------- ---------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,522,866 1,472,049 1,519,684 1,152,379
--------------------------- ---------------------------
--------------------------- ---------------------------
The accompanying notes are an integral part the consolidated financial statements.
</TABLE>
-5-
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
- ----------------------------------------------------------------------------------------------------------
Retained
Class A Class B Class C Additional Earnings
Common Common Common Paid in (Accumulated
Stock Stock Stock Capital Deficit)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $12,340 $1,400 $ 1,400 7,501,494 $ (744,772)
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 160 - - 151,840 -
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 55 49,745
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION - - - - -
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK 1,400 - (1,400) - -
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 1,400 (1,400)
COMMON STOCK IN TREASURY AT COST
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD
DISTRIBUTIONS - - - - (998,711)
NET LOSS - - - - (524,607)
------- ------ ------- --------- ------------
BALANCE, September 30, 1997 $15,355 $ 0 $ 0 7,703,079 $(2,268,090)
------- ------ ------- --------- ------------
------- ------ ------- --------- ------------
- --------------------------------------------------------------------------------------------------------
Related Unearned Total
Party Note Directors' Treasury Shareholders'
Receivable Compensation Stock Equity(Deficit)
- --------------------------------------------------------------------------------------------------------
BALANCE, January 1, 1997 $(1,805,675) $(262,792) $ 0 $4,703,395
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE - - 152,000
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 49,800
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS 6,000 6,000
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION - 40,500 - 40,500
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK - - - 0
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 0
COMMON STOCK IN TREASURY AT COST (900,000) (900,000)
PRINCIPAL REDUCTION: NOTES RECEIVABLE: 1,805,675 1,805,675
HATFIELD
DISTRIBUTIONS - - - (998,711)
NET LOSS - - - (524,607)
----------- --------- --------- ----------
BALANCE, September 30, 1997 $ 0 $(216,292) $(900,000) $4,334,052
----------- --------- --------- ----------
----------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
- -------------------------------------------------------------------------------
-6-
<PAGE>
<TABLE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- --------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (524,607) $ 187,291
Adjustments to reconcile net income to net cash:
provided by operating activities
Depreciation and amortization 585,665 158,592
Amortization of loan fees 298,636 48,873
Amortization of unearned directors' compensation 46,500 23,708
Changes in operating assets and liabilities:
Rent receivable - Crossroads 43,388 (212,005)
Rent, interest and other receivable - related party 11,747 140
Prepaid and other assets (166,785)
Short term debt 25,000
Accounts payable and accrued expenses 377,640 136,356
----------- ------------
Net cash (used in) provided by operating activities 697,184 342,955
----------- ------------
INVESTING ACTIVITIES:
Acquisition of land, property and equipment (5,407,328) (13,803,927)
Restricted cash (450,533) (160,722)
Long-term advances to Crossroads (30,841) (150,000)
Other assets (115,848)
Franchise fees (21,000)
----------- ------------
Net cash used in investing activities (5,909,702) (14,230,497)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from common stock issued in Stock Offering 4,500,000
Stock issuance costs (402,539)
Cash portion of related party note receivable payment 905,675
Borrowings on long-term debt 6,225,000 15,500,000
Payments on long-term debt (89,736) (4,230,565)
Payment of loan fees (783,771) (693,166)
Long-term lease deposit 300,000
Distributions (998,710) (271,191)
----------- ------------
Net cash provided by financing activities 5,558,458 14,402,539
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 345,941 514,997
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,693 500
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 564,634 $ 515,497
----------- ------------
----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 956,201 $ 352,174
----------- ------------
----------- ------------
Common stock issued to independent directors
Class A common stock $ $ 300
Additional paid in capital 299,700
Unearned directors' compensation (300,000)
----------- ------------
Net non-cash investing activity $ 0 $ 0
----------- ------------
----------- ------------
Common stock issued pursuant to Mission Bay
Acquisition Agreement
Land, property and equipment $ $ (2,520,490)
Class A common stock 2,520
Additional paid in capital 2,517,970
----------- ------------
Net non-cash investing activity $ 0 $ 0
----------- ------------
----------- ------------
(Continued)
</TABLE>
-7-
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Continued)
Non-cash investing activities:
Common stock issued to partners of AAG:
Class A common stock 4,099
Class B common stock 1,400
Class C common stock 1,400
Additional paid in capital (6,899)
---------- ----------
Net non cash investing activity $ 0 $ (4,099)
---------- ----------
---------- ----------
Reclass of deferred income taxes and stock
issuance costs due to Stock Offering
Deferred income taxes $ $ (163,000)
Additional paid in capital (64,943)
Retained Earnings 227,943
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ 151,840 $ 338,205
Class A Common Stock 160 420
Land, property and equipment (152,000) (338,625)
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
Conversion of Class C common stock
to Class A common stock
Class A common stock $ 1,400 $
Class C common stock (1,400)
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
Common Stock issued as Deposits and held in
escrow pursuant to the related purchase contracts
Additional paid in capital $ 49,745 $
Class A Common Stock 55
Prepaid and other assets (49,800)
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
Conversion of Class B common stock
to Class A common stock
Class A common stock $ 1,400 $
Class B common stock (1,400)
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
Receipt of Class A common stock in partial
payment of related party note receivable
Class A common stock held in treasury (at cost) $ 900,000 $
Related party note receivable (900,000)
---------- ----------
Net non-cash investing activity $ 0 $ 0
---------- ----------
---------- ----------
The accompanying notes are an integral part of the
consolidated financial statements.
(Concluded)
-8-
<PAGE>
Host Funding, Inc. Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION.
The accompanying unaudited consolidated financial statements of Host
Funding, Inc., a Maryland corporation (the "Registrant" or the
"Company"), include the accounts of the Company and its consolidated
subsidiaries. These unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
for Form 10-Q. Accordingly, these statements do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management of the Registrant, all adjustments necessary for
a fair presentation have been included. The financial statements
presented herein have been prepared in accordance with the accounting
policies described in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and should be read in accordance
therewith. The results of operations for the nine-month period ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
2. NET INCOME (LOSS) PER SHARE.
Net Income or Loss per share for the nine months ended September 30,
1997 and September 30, 1996 is computed based on the weighted average
number of shares of common stock outstanding. The impact of common
stock equivalents to earnings per share is immaterial.
In February 1997, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings Per Share ("EPS"). SFAS 128 requires basic EPS to be computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period
and diluted EPS to reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS 128 is
effective for financial statements issued for periods ending after
December 15, 1997 and requires restatement of all prior period EPS
data presented. Earlier application is not permitted. The impact of
the implementation of SFAS 128 on the Company's consolidated financial
statements is expected to be immaterial.
3. COMMITMENTS AND CONTINGENCIES.
REIT STATUS
The Company, as a requirement under the Internal Revenue Code (the
"Code") to elect REIT status, must have no more than five (5)
shareholders, who own no more
9
<PAGE>
than 50% of the common stock, common stock equivalents, or other
forms of equity outstanding of the Company. The Company did not
satisfy this requirement as of June 30, 1997, and therefore, did not
elect to qualify as a REIT during the 1996 tax year and currently is
subject to the corporate tax provisions. However, the Company is in
a net operating loss position, and has a net deferred tax asset under
SFAS 109, Accounting for Income Taxes, that has been fully reserved.
The Company's decision not to elect REIT qualification will not
adversely affect the stockholders of the Company in that the Company
had no taxable income for the 1996 tax year and does not anticipate
any taxable income for the 1997 tax year.
LETTERS OF INTENT
The Company has executed a letter of intent to form a partnership
which will purchase four hotels comprising over 800 rooms valued at
approximately $50,000,000. The franchises represented by the hotels
include Holiday Inn, Courtyard by Marriott, and Hilton. The
acquisition is subject to a number of conditions including
completion of the Company's due diligence. It is anticipated that
the Company will initially own partnership units equating a 33%
interest in the partnership and will increase its interest as other
partnership units are converted into stock of the Company or as
additional properties are acquired. The completion of this purchase
has been delayed until the first quarter of 1998 due to seller
related tax issues.
PROPERTY REPAIRS
In late May, the Company became aware of certain structural
deficiencies which affect the Sleep Inn Hotel properties owned by the
Company in Tallahassee, Florida (the "Tallahassee Sleep Inn") and to a
lesser extent Destin, Florida (the "Destin Sleep Inn"). The
structural defects relating to the Tallahassee Sleep Inn necessitated
that the Company temporarily suspend the day to day operations of the
hotel in order to assess adequately the needed repairs. These
structural deficiencies were not noted or otherwise disclosed in the
engineering and architectural reports obtained and relied upon by the
Company prior to purchasing the properties. Upon discovering the
structural defects, the Company immediately undertook steps to (i)
determine the extent of insurance coverage on the structural
deficiencies, (ii) require Capital Circle Hotel Company, the prior
owner of the Tallahassee Sleep Inn ("Capital"), to commence remedial
construction activities to repair the structural defects at Capital's
sole cost and expense; and (iii) negotiate a sale or lease of the
Tallahassee Sleep Inn back to Capital. As a result of these steps and
in lieu of extensive negotiations with the insurance company or
potential litigation with Capital, the Company has negotiated an
agreement in principle with Capital to lease the Tallahassee Sleep Inn
to Capital and to require Capital to correct at Capital's sole cost
and expense certain of the structural deficiencies with respect to the
Tallahassee Sleep Inn and the Destin Sleep Inn.
10
<PAGE>
In addition, Crossroads Hospitality Tenant Company, LLC
("Crossroads"), as current lessee, and the Company, as lessor, of the
hotel properties are aggressively pursuing claims with the insurance
company concerning business interruption insurance maintained by
Crossroads on the Tallahassee Sleep Inn. The business interruption
insurance is anticipated to be sufficient to reimburse the majority of
the Company costs, expenses and lost rents from May through the
settlement date related to the Tallahassee Sleep Inn. Hence, the
Company does not expect any significant loss from the structural
deficiencies relating to the Tallahassee Sleep Inn; however, it has
elected to maintain a valuation reserve of $50,000 to cover any
insurance deductible on business interruption insurance and various
other costs incurred in connection with the lease of the Tallahassee
Sleep Inn. The Company anticipates executing the lease of the
Tallahassee Sleep Inn to Capital during the fourth quarter of 1997,
with the completion of renovations to the Tallahassee Sleep Inn and
the Destin Sleep Inn anticipated during the first quarter of 1998.
FRANCHISE AGREEMENTS
Host Funding has been granted franchise license agreements from Super
8 and Sleep Inns for terms expiring in 2005 and 2011, respectively.
Pursuant to the terms of the agreements, the Company is required to
pay royalty fees and advertising fees of 5% to 4% and 3% to 1.3%,
respectively, and reservation fees due under the Sleep Inn agreements
of 1.75% of gross room revenue. Pursuant to the lease agreements for
each of the hotel properties owned by the Company, the responsibility
for payment of the fees has been assigned to Crossroads Hospitality
Tenant Company, LLC, as lessee of the hotel properties.
WARRANTS
The Company has issued and outstanding two series of warrants
designated "Series A Warrants" and "Series B Warrants". The Series A
Warrants provide warrants to purchase 225,000 shares of Host Funding's
Class A Common Stock, $0.01 par value per share, at $9.90 per share,
and expire on February 2, 2000. The Series B Warrants provide warrants
to purchase 225,000 shares of the Company's Class A Common Stock,
$0.01 par value per share, at $10.80 per share, and expire on February
2, 2001. There are additional provisions in the Series A Warrants and
the Series B Warrants that allow pari passu treatment upon
recapitalization of the Company. In addition, the Series B Warrants
include certain restrictions prohibiting exercise of the warrants if
the Company gives notice of the public offering of the securities of
the Company in which the net proceeds to the Company are not less than
$50 million. The prohibition against exercise terminates on the
earlier to occur of (i) sixty days after the effective date of the
public offering or (ii) February 2, 1999. On August 29, 1997, the
Company gave notice to the holders of the Series B Warrants of a
possible public offering thereby imposing the foregoing restrictions
on exercise of the Series B Warrants.
11
<PAGE>
4. RELATED PARTY TRANSACTION:
The Company entered into that certain Exchange and Note Prepayment
Agreement (the "Note Prepayment Agreement") effective as of
September 17, 1997 whereby Guy and Dorothy Hatfield (the
"Hatfields") and All American Group, Ltd. satisfied that certain
Related Party Note dated April 1, 1995 in the principal amount of
$1,805,675 payable on or before March 31, 2000. The amount was
partially satisfied by payment of $874,325 in cash, and a $31,350
credit from the Company. Additionally, the Company issued to the
Hatfields 140,000 shares of the Company's Class A Common Stock in
exchange for the 140,000 shares of Class B Common Stock held by the
Hatfields. The Company holds the Class B Common Stock exchanged by
the Hatfields as treasury shares. Simultaneously with the cash
payment of $874,325, and the exchange of shares described above,
the Hatfields delivered to the Company 90,000 shares of the 140,000
shares of Class A Common Stock received by the Hatfields in the
exchange. The Company accepted the 90,000 shares of Class A Common
Stock in full and final payment of the remaining $900,000 principal
balance of the Related Party Note which shares are held by the
Company as treasury shares.
5. SUBSEQUENT EVENTS.
PURCHASE OF COUNTRY HEARTH INN PROPERTIES
On October 21, 1997 the Company completed the purchase of two Country
Hearth Inn properties (the "Country Hearth Inns") located in Auburn,
Indiana and Findlay, Ohio consisting of 150 rooms for an aggregate
purchase price of $5,846,400. The Company completed the purchase of
the Country Hearth Inns by forming two special purpose entities, B-H
Auburn L.P. and B-H Findlay L.P. (the "Purchasing Entities"), with
Buckhead America Corporation, a publicly-traded hotel company
("Buckhead"), of which the Company is the beneficial owner of
approximately 83% of the limited partnership interests and 1% general
partnership interest in each limited partnership. Buckhead
beneficially holds approximately 16% of the remaining limited
partnership interest in each of the Purchasing Entities.
The Purchasing Entities paid the following consideration for the
properties: $500,000 in cash, the issuance of 80,819 shares of the
Class A Common Stock of the Company having a fair market value of
approximately $750,000, the execution and delivery to the seller by
the Purchasing Entities of promissory notes in the aggregate amount of
$1,138,555 (the "Seller Notes"), and the assumption of existing
indebtedness by the Purchasing Entities in the aggregate amount of
$3,457,845. The Company guaranteed the performance of the obligations
of the Purchasing Entities under the Seller Notes and pledged 90,000
shares of the Class B Common Stock of the Company to secure such
obligations.
12
<PAGE>
COMMISSIONS DUE FOR THE PURCHASE OF COUNTRY HEARTH INN PROPERTIES
Pursuant to that certain Restated and Amended Acquisition Agreement
(the "Acquisition Agreement") by and between the Company and HMR
Capital, LLC, a Delaware limited liability company, the Company is
liable for a commission on the purchase of the Country Hearth Inn
Properties in the amount of $175,390 payable in 17,539 shares of the
Class A Common Stock of the Company. The Company anticipates paying
this commission in the form of Class A Common Stock of the Company in
the fourth quarter, 1997.
6. PRO FORMA INFORMATION.
The following unaudited pro forma information has been prepared
assuming that the acquisition of the Flagstaff Super 8 (which was
purchased on March 14, 1997) occurred on January 1, 1996. Permitted
pro forma adjustments include only the effects of events directly
attributable to a transaction that are factually supportable and
expected to have continuing impact. Pro forma adjustments reflecting
anticipated "efficiencies" in operations resulting from a transaction
are, under most circumstances, not permitted. As a result of the
limitations imposed with regard to the types of permitted pro forma
adjustments, the Company believes that this unaudited pro forma
information is not indicative of future results of operations or the
results of historical operations had the acquisition of all hotels
owned on September 30, 1997 been consummated as of January 1, 1996.
(Unaudited) (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
------------- -------------
Revenues $3,040,273 $3,108,182
Net Loss $ (217,397) $ (149,489)
Net Loss Per Share $ (.15) $ (.10)
Weighted Average Number of
Common Shares Outstanding 1,445,583 1,445,583
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company declared a cash dividend of $0.24 per share to stockholders
of record on September 12, 1997, which was payable September 23, 1997. The
Company had previously changed
13
<PAGE>
its dividend policy so that any dividends declared will be paid in March,
June, September and December of each year.
The Company completed the purchase of two Country Hearth Inn properties
located in Auburn, Indiana and Findlay, Ohio for an aggregate purchase price
of $5,846,400. These properties consist of 150 rooms, increasing the
Company's real estate portfolio to twelve properties containing approximately
922 rooms. The Country Hearth properties were purchased through partnerships
beneficially owned by the Company and Buckhead America Corporation, a
publicly traded company. Reference is made to the report on Form 8-K filed by
the Company on November 4, 1997 for a more detailed description of the
Country Hearth Inn acquisitions, which Form 8-K is incorporated herein by
reference. This purchase continues the Company's previously announced
strategic plan to acquire quality limited service hotel products in secondary
and tertiary markets. The Company is aggressively pursuing additional
acquisitions that fit this criteria.
The Company has executed a letter of intent to form a partnership which
will purchase four hotels comprising over 800 rooms valued at approximately
$50,000,000. The franchises represented by the hotels include Holiday Inn,
Courtyard by Marriott, and Hilton. The acquisition is subject to a number of
conditions including completion of the Company's due diligence. It is
anticipated that the Company will initially own partnership units equating a
33% interest in the partnership and will increase its interest as other
partnership units are converted into stock of the Company or as additional
properties are acquired. This acquisition is the Company's initial step in
achieving the previously announced strategic plan of acquiring prime full
service hotel properties in secondary and tertiary markets.
The Company has taken positive steps to correct certain structural
deficiencies affecting the Sleep Inn properties owned by the Company in
Tallahassee, Florida (the "Tallahassee Sleep Inn") and to a lesser extent
Destin, Florida (the "Destin Sleep Inn"). The Company has agreed in
principle to enter into a lease agreement with Capital Circle, Inc., prior
owner of the Tallahassee Sleep Inn and the Destin Sleep Inn, whereby Capital
Circle agrees to lease the Tallahassee Sleep Inn from the Company at market
rates and fully repair both properties.
The Company also anticipates obtaining a favorable settlement with the
insurance carrier to recover lost revenues from the Tallahassee Sleep Inn
property. Receipt of the settlement proceeds and execution of the
Tallahassee Sleep Inn lease are anticipated to occur in the fourth quarter,
1997. Completion of repairs to the Tallahassee Sleep Inn and the Destin Sleep
Inn are anticipated to be completed in the first quarter, 1998 at no material
cost to the Company.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996:
The Company did not acquire any assets until April 1, 1995. On that
date the four Super 8 Hotels located in Miner, Missouri; Poplar Bluff,
Missouri; Rock Falls, Illinois; and Somerset, Kentucky were acquired by the
Company which are collectively referred to as the "Initial Hotels". On April
22, 1996, the Company completed an initial public stock offering of 500,000
common shares that
14
<PAGE>
raised net cash proceeds totaling $4,500,000 and acquired the Mission Bay Super
8 (the "Acquisition Hotel") located in San Diego, California. In September,
1996 the Company acquired three Sleep Inn Hotels located in Destin, Sarasota,
and Tallahassee, Florida and one Sleep Inn Hotel located in Ocean Springs,
Mississippi (collectively, the "Acquired Properties"). The Initial Hotels, the
Acquisition Hotel and the Acquired Properties are collectively herein referred
to as the "1996 Properties". In addition, the Company acquired a Super 8 Hotel
located in Flagstaff, Arizona (the "Flagstaff Super 8") on March 14, 1997.
Therefore, because of the foregoing acquisitions, comparisons of results of
operations to the corresponding period of the previous year are not meaningful.
However, pursuant to the Percentage Leases described below, the Company
anticipates significant increases in rental revenues in 1997 over 1996.
The Company, through wholly owned subsidiaries, leases each of its hotels
to Crossroads Hospitality Tenant Company, LLC ("Crossroads"), which is
responsible for maintaining and operating the hotels. At September 30, 1997,
the Company leased ten hotels to Crossroads pursuant to percentage leases (the
"Percentage Leases"). The terms of the Percentage Leases are for a period of
fifteen years from the date of acquisition of each hotel property. The
Percentage Leases provided for defined base rentals plus percentage rentals
ranging from 30% to 40% of year-to-date revenues less varying breakeven
thresholds adjusted annually by defined percentages for each hotel.
Occupancy and average room rates of 64.8% and $48.56 for the 1996
Properties for the nine months ended September 30, 1997 and 80.3% and $48.56 for
the Flagstaff Super 8 from the period from March 14 to September 30 resulted in
total sales of approximately $6,956,000 and generated lease revenues of
approximately $2,723,000.
As noted in the Notes to Financial Statements included in this Form 10-Q,
the Company suspended operations at its Sleep Inn property in Tallahassee,
Florida due to structural deficiencies. Thus, rental revenue generated by this
property through September 30, 1997 is below expectations. The Company
anticipates a favorable settlement with the insurance carrier, thus recovering
much of the rental revenue in the fourth quarter of 1997.
Interest income from a note received from All American Group, Ltd., a
Delaware limited partnership ("AAG"), and a principal shareholder of the
Company (the "Related Party Note"), which is included in Interest income -
related parties, totaled $103,000 for the nine months ended September 30,
1997, which interest rate is 12% pursuant to the terms of the note. The
Related Party Note was satisfied on September 17, 1997. Reference is made to
the Notes to Consolidated Financial Statements included with this Form 10-Q
for a more detailed description of the satisfaction of the Related Party
Note. Interest income from the notes with the independent directors, which
income is included in Interest income - related parties, totaled $14,500 for
the period ending September 30, 1997.
Interest expense incurred for the period January 1 to September 30, 1997
was a result of interest expense and loan fee amortization expense on notes
payable relating to the CrossHost Facility and the Host Ventures Facility (See
Liquidity and Capital Resources). Interest expense for the nine months totaled
$1,687,000, including $299,000 of loan fee amortization.
Depreciation expense, which is included in depreciation and amortization,
is calculated based upon the original historical cost of the Initial Hotels and
the acquisition value of the Acquisition Hotel,
15
<PAGE>
the Acquired Properties and the Flagstaff Super 8 over their estimated useful
lives, totaled $580,000 for the nine months ended September 30, 1997.
Franchise fee amortization, which is included in depreciation and
amortization, is calculated based upon the original cost amortized on a
straight line basis over the life of the franchise agreement, which totaled
$5,550 for the nine months ended September 30, 1997.
Administrative expenses - other totaled approximately $818,000 for the nine
months ended September 30, 1997 including the 1996 audit fees of approximately
$24,000, legal fees totaling $79,000 and accounting fees totaling $53,000, which
amounts are greater than will be expected in future quarters due to start-up
costs, stock transfer fees totaling approximately $57,000, travel expenses
totaling approximately $92,000, statutory filing & printing costs of
approximately $40,000, payroll related expenses totaling approximately $239,000,
director fees of $15,000, and other administrative expenditures of approximately
$219,000, approximately $110,000 of which are non-recurring expenses.
Advisory fees - related party totaling $2,500 were due under an Advisory
Agreement which Host Funding Advisors, Inc., a Delaware corporation ( the
"Advisor") entered into upon the close of the initial stock offering of the
Company. This agreement was terminated effective January 31, 1997.
Effective January 1, 1996, the Company became responsible for property
taxes under the Percentage Leases for the Initial Hotels. In addition, the
Company is responsible for property taxes on the Acquisition Hotel, the Acquired
Properties and the Flagstaff Super 8. Property tax expense, based upon local
taxing authorities' assessment of the values of the Company's real and personal
property owned times the statutory rates in effect in the respective tax
districts, totaled approximately $208,000 for the nine months ended September
30, 1997.
Amortization of unearned directors' compensation has been calculated based
upon the terms of the independent director's notes.
Net income or loss per share and weighted average shares outstanding have
been calculated based upon the daily average of the number of shares outstanding
for the applicable reporting periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has in place through CrossHost, Inc. and Host
Ventures, Inc., wholly owned subsidiaries of the Company, two credit facilities
with Credit Suisse First Boston, LLC, in the principal amounts of $13,000,000
(the "CrossHost Facility") and $8,725,000 (the "Host Ventures Facility"). The
CrossHost Facility is payable over twenty years in equal monthly installments of
$120,838, including interest at a fixed rate of 9.46% per annum over the first
ten years, with an increased fixed monthly payment the second ten years that
fully amortizes remaining principal plus interest at an increased interest rate,
and a due date in March, 2017. The Host Ventures Facility is payable interest
only, monthly, at the LIBOR rate plus 350 basis points, with a maturity date of
April 1, 1999. A substantial portion of the proceeds from the two credit
facilities was used to finance the acquisition of the Acquired Properties and
the Flagstaff Super 8.
16
<PAGE>
The Company has no committed additional sources of external liquidity
available, therefore 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 stockholders, is its share of the
Company's cash flow from the Percentage Leases relating to the hotel
properties owned by the Company. Although the obligations of Crossroads, as
lessee, under the Percentage Leases are guaranteed in part by Crossroads
Hospitality Company, LLC, a Delaware limited liability company (a subsidiary
of Interstate Hotels, Inc., a publicly traded, Delaware corporation and
parent company of Crossroads), the ability of Crossroads to make lease
payments under the Percentage Leases, and therefore the Company's liquidity,
including its ability to make distributions to stockholders, is dependent on
the ability of Crossroads to generate sufficient cash flow from the hotels.
Other than debt service on the CrossHost Facility, the Host Ventures
Facility, capital expenditures required under the Percentage Leases or any loan
facility, property taxes on the Company's hotels, obligations under employment
agreements with key executives of the Company, other administrative expenses and
the Internal Revenue Service tax requirements (the "Code") to make distributions
to stockholders to maintain the Company's REIT status, 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. Based upon
REIT distribution requirements, the Company expects that future investments
in hotel properties will be financed, in whole or in part, with common stock,
proceeds from additional issuances of common stock in the form of future
public offerings or private placements, 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 facility, negotiate additional credit
facilities, or issue corporate debt instruments, all in compliance with its
charter restrictions. Any debt incurred or issued by the Company may be
secured or unsecured, long-term or short-term, charge a fixed or variable
interest rate and may be subject to such other terms as the Board of
Directors of the Company deems prudent.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the ability of the lessee to
raise room rates in the face of inflation.
SEASONALITY
Hotel operations are generally seasonal in nature based upon geographic
locations. This seasonality can be expected to cause fluctuations in the
Company's quarterly lease revenue to the extent that it receives percentage
rent. It is presently anticipated that the Company's cash flow from operation
of the hotels is sufficient to enable it to make distributions at the estimated
initial rate. To the extent
17
<PAGE>
that cash flow form operations is 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.
"THE SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Quarterly Report on Form 10-Q contains or incorporates statements that
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number
of places in this Quarterly Report on Form 10-Q and include statements
regarding, among other matters, the Company's growth opportunities, the
Company's acquisition strategy, regulatory matters pertaining to compliance with
governmental regulations and other factors affecting the Company's financial
condition or results of operations. Stockholders are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks, uncertainties and other factors which may cause actual results,
performance or achievements to differ materially from the future results,
performance or achievements, expressed or implied in such forward looking
statements.
PART II-OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES.
The Company entered into that certain Exchange and Note Prepayment
Agreement (the "Note Prepayment Agreement") effective as of September 17, 1997
whereby Guy and Dorothy Hatfield (the "Hatfields") and All American Group, Ltd.
satisfied that certain Related Party Note dated April 1, 1995 in the principal
amount of $1,805,675 payable on or before March 31, 2000. The amount was
partially satisfied by payment of $874,325 in cash, and a $31,350 credit from
the Company. Additionally, the Company issued to the Hatfields 140,000 shares
of the Company's Class A Common Stock in exchange for the 140,000 shares of
Class B Common Stock held by the Hatfields. Simultaneously with the cash
payment of $874,325, and the exchange of shares described above, the Hatfields
delivered to the Company 90,000 shares of the 140,000 shares of Class A Common
Stock received by the Hatfields in the exchange. The Company accepted the
90,000 shares of Class A Common Stock in full and final payment of the remaining
$900,000 principal balance of the Related Party Note.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
18
<PAGE>
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11 effective
April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
5.1 Form of Share Certificate (incorporated by reference to Exhibit 4.1
to Company's Amendment No. 8 to Form S-11 effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3, 1997
(incorporated by reference to Exhibit 4.2 to Company's Annual Report
on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3, 1997
(incorporated by reference to Exhibit 4.3 to Company's Annual Report
on Form 10-K filed on March 31, 1997).
10.1 Agreement of Sale and Purchase between Auburn Equity Partners and
Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn, Auburn,
Indiana) (incorporated by reference to Exhibit 10.23 to Company's
Quarterly Report on Form 10-Q filed on May 14, 1997).
10.2 Amendment to Agreement of Sale and Purchase between Auburn Equity
Partners and Host Funding, Inc. dated effective as of June 19, 1997
(Country Hearth Inn, Auburn, Indiana) (incorporated by reference to
Exhibit 10.4 to Company's Annual Report on Form 10-Q filed on August
14, 1997).
10.3 Second Amendment to Agreement of Sale and Purchase between Auburn
Equity Partners and Host Funding, Inc. dated effective as of July
28, 1997 (Country Hearth Inn, Auburn, Indiana) (incorporated
19
<PAGE>
by reference to Exhibit 10.5 to Company's Quarterly Report on Form
10-Q filed on August 14, 1997).
10.4 Third Amendment to Agreement of Sale and Purchase between Auburn
Equity Partners and Host Funding, Inc. dated effective as of
September 20, 1997 (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 2.4 to Company's Form 8-K filed
on November 4, 1997).
10.5 Assignment of Agreement of Sale and Purchase dated effective as of
October 21, 1997 between Host Funding Inc., as Assignor, and BH
Auburn, LP, as Assignee (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 2.5 to Company's Form 8-K
filed on November 4, 1997).
10.6 Agreement of Sale and Purchase between Findlay Equity Partners and
Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn, Findlay,
Ohio) (incorporated by reference to Exhibit 10.24 to Company's Form
10-Q filed on May 14, 1997).
10.7 Amendment to Agreement of Sale and Purchase Agreement between
Findlay Equity Partners and Host Funding, Inc. dated effective as of
June 19, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated by
reference to Exhibit 10.7 to Company's Quarterly Report on Form 10-Q
filed on August 14, 1997).
10.8 Second Amendment to Agreement of Sale and Purchase between Findlay
Equity Partners and Host Funding, Inc. dated effective as of July
28, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated by
reference to Exhibit 10.8 to Company's Quarterly Report on Form 10-Q
filed on August 14, 1997).
10.9 Third Amendment to Agreement of Sale and Purchase between Findlay
Equity Partners and Host Funding, Inc. dated effective as of
September 20, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated
by reference to Exhibit 2.6 to Company's Form 8-K filed on November
4, 1997).
10.10 Assignment of Agreement of Sale and Purchase dated effective as of
October 21, 1997 between Host Funding, Inc., as Assignor, and BH
Findlay, LP, as Assignee, (Country Hearth Inn, Findlay, Ohio)
(incorporated by reference to Exhibit 2.7 to Company's Form 8-K
filed on November 4, 1997).
20
<PAGE>
10.11 Lease Summary, Country Hearth Inn, Auburn, Indiana (incorporated by
reference to Exhibit 2.8 to Company's Form 8-K filed on November 4,
1997).
10.12 Lease Summary, Country Hearth Inn, Findlay, Ohio (incorporated by
reference to Exhibit 2.9 to Company's Form 8-K filed on November 4,
1997).
10.13 Exchange and Note Prepayment Agreement dated effective as of
September 17, 1997 by and among Host Funding, Inc. and Guy and
Dorothy Hatfield.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on November 4, 1997 relating to the
acquisition of two Country Hearth Inns located in Auburn, Indiana and Findlay,
Ohio. The Company did not file any financial statements in connection with
the Form 8-K filing, but anticipates filing the required financial statements
and pro forma information relating to the Country Hearth Inn acquisitions when
available.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized and in the capacity as the Registrant's
President and Chief Executive Officer and Chief Financial and Accounting
Officer, respectively.
Dated: November 10, 1997 HOST FUNDING, INC.
/s/ Michael S. McNulty
------------------------------------------
By: Michael S. McNulty
Its: President and Chief Executive Officer
/s/ Bona K. Allen
------------------------------------------
By: Bona K. Allen
Its: Chief Financial and Accounting Officer
22
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11 effective
April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
5.1 Form of Share Certificate (incorporated by reference to Exhibit 4.1
to Company's Amendment No. 8 to Form S-11 effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3, 1997
(incorporated by reference to Exhibit 4.2 to Company's Annual Report
on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3, 1997
(incorporated by reference to Exhibit 4.3 to Company's Annual Report
on Form 10-K filed on March 31, 1997).
10.1 Agreement of Sale and Purchase between Auburn Equity Partners and
Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn, Auburn,
Indiana) (incorporated by reference to Exhibit 10.23 to Company's
Quarterly Report on Form 10-Q filed on May 14, 1997).
10.2 Amendment to Agreement of Sale and Purchase between Auburn Equity
Partners and Host Funding, Inc. dated effective as of June 19, 1997
(Country Hearth Inn, Auburn, Indiana) (incorporated by reference to
Exhibit 10.4 to Company's Annual Report on Form 10-Q filed on August
14, 1997).
10.3 Second Amendment to Agreement of Sale and Purchase between Auburn
Equity Partners and Host Funding, Inc. dated effective as of July
28, 1997 (Country Hearth Inn, Auburn, Indiana) (incorporated
<PAGE>
by reference to Exhibit 10.5 to Company's Quarterly Report on Form
10-Q filed on August 14, 1997).
10.4 Third Amendment to Agreement of Sale and Purchase between Auburn
Equity Partners and Host Funding, Inc. dated effective as of
September 20, 1997 (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 2.4 to Company's Form 8-K filed
on November 4, 1997).
10.5 Assignment of Agreement of Sale and Purchase dated effective as of
October 21, 1997 between Host Funding Inc., as Assignor, and BH
Auburn, LP, as Assignee (Country Hearth Inn, Auburn, Indiana)
(incorporated by reference to Exhibit 2.5 to Company's Form 8-K
filed on November 4, 1997).
10.6 Agreement of Sale and Purchase between Findlay Equity Partners and
Host Funding, Inc. dated May 1, 1997 (Country Hearth Inn, Findlay,
Ohio) (incorporated by reference to Exhibit 10.24 to Company's Form
10-Q filed on May 14, 1997).
10.7 Amendment to Agreement of Sale and Purchase Agreement between
Findlay Equity Partners and Host Funding, Inc. dated effective as of
June 19, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated by
reference to Exhibit 10.7 to Company's Quarterly Report on Form 10-Q
filed on August 14, 1997).
10.8 Second Amendment to Agreement of Sale and Purchase between Findlay
Equity Partners and Host Funding, Inc. dated effective as of July
28, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated by
reference to Exhibit 10.8 to Company's Quarterly Report on Form 10-Q
filed on August 14, 1997).
10.9 Third Amendment to Agreement of Sale and Purchase between Findlay
Equity Partners and Host Funding, Inc. dated effective as of
September 20, 1997 (Country Hearth Inn, Findlay, Ohio) (incorporated
by reference to Exhibit 2.6 to Company's Form 8-K filed on November
4, 1997).
10.10 Assignment of Agreement of Sale and Purchase dated effective as of
October 21, 1997 between Host Funding, Inc., as Assignor, and BH
Findlay, LP, as Assignee, (Country Hearth Inn, Findlay, Ohio)
(incorporated by reference to Exhibit 2.7 to Company's Form 8-K
filed on November 4, 1997).
<PAGE>
10.11 Lease Summary, Country Hearth Inn, Auburn, Indiana (incorporated by
reference to Exhibit 2.8 to Company's Form 8-K filed on November 4,
1997).
10.12 Lease Summary, Country Hearth Inn, Findlay, Ohio (incorporated by
reference to Exhibit 2.9 to Company's Form 8-K filed on November 4,
1997).
10.13 Exchange and Note Prepayment Agreement dated effective as of
September 17, 1997 by and among Host Funding, Inc. and Guy and
Dorothy Hatfield.
27 Financial Data Schedule.
<PAGE>
EXCHANGE AND NOTE PREPAYMENT AGREEMENT
THIS EXCHANGE AND PREPAYMENT AGREEMENT (the "Agreement") is entered into
effective as of September 17, 1997 by and among Host Funding, Inc., a
Maryland corporation ("Host Funding") and Guy and Dorothy Hatfield
(collectively, the "Hatfields").
RECITALS
A. The Hatfields and AAG executed that certain Promissory Note dated
April 1, 1995 payable to Host Funding in the principal amount of $1,805,675
(the "Hatfield Note"). The Hatfield Note bears interest at the rate of 12%
quarterly with all outstanding principal and accrued interest being due and
payable on March 31, 2000.
B. In December 1996, All American Group, Ltd., a Delaware limited
partnership, transferred all of its interest, consisting of 140,000 shares of
Class A Common Stock and 90,000 shares of Class B Common Stock in Host
Funding to the Hatfields. The Hatfields acquired the stock subject to the
obligations to repay the Hatfield Note to Host Funding.
C. The Hatfields currently own 140,000 shares of Class B Common Stock
of Host Funding (the "Class B Common"). The 140,000 shares of the Class B
Common owned by the Hatfields represents all of the issued and outstanding
shares of Class B Common of Host Funding. The Hatfield Note is secured by
(i) 90,000 shares of the Class B Common and (ii) 190,000 shares of the Class
A Common Stock of Host Funding held by the Hatfields (collectively, the
"Pledged Shares"), as more particularly described in that certain Assignment
Separate From Certificate attached hereto as Exhibit A.
D. The Hatfields desire to prepay the Hatfield Note and in connection
with such prepayment to exchange the Class B Common for shares of the Class A
Common Stock of Host Funding (the "Class A Common").
E. Host Funding desires to accept such prepayment and to exchange the
Class A Common for the Class B Common, all upon the terms and conditions set
forth in this Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged and agreed, the parties to this
Agreement hereby agree as follows:
1. EXCHANGE OF SHARES. In consideration for the prepayment of the
Hatfield Note, Host Funding agrees to issue to the Hatfields 140,000 shares
of Class A Common in exchange for the 140,000 shares of Class B Common held
by the Hatfields. The parties acknowledge and agree that the shares of Class
A Common Stock issued to the Hatfields will be deemed restricted securities
under the Securities Act of 1933 (the "Act") and will therefore be subject to
the resale provisions of Rule 144 promulgated under the Act.
2. PREPAYMENT OF HATFIELD NOTE. Simultaneously with and as a condition
<PAGE>
precedent to the obligations of each of the parties to consummate the
exchange of shares described in Section 1 above, the Hatfields agree to make
a cash prepayment in the amount of $874,325 on the outstanding principal
balance on the Hatfield Note as of the date of the funding of the loan
described in greater detail below. The parties acknowledge and agree that
said cash prepayment of the Hatfield Note shall be conditioned upon the
closing of a loan to the Hatfields from a third party lender in the amount of
at least $935,000 for a one year period on terms no less favorable than at
prime plus 3% at a cost of 6% points (the "Secured Loan"). The Hatfields
agree to pay up to 6% of the closing points payable on the Secured Loan in
exchange for a $25,675 credit as set out below which credit shall be deemed
earned upon receipt by Host Funding of the $874,325 loan. Accordingly, after
payment of the loan the outstanding principal balance of the loan shall be
$900,000.
In addition, if the third party lender charges a prepayment penalty in
the nature of a yield maintenance not to exceed 3% times the principle
balance of the Secured Loan for the one year term of the Secured Loan when
the Secured Loan is no longer outstanding, Host Funding has agreed to pay
said prepayment penalty if the Hatfields sell their Host Funding shares at a
price less than $10.00 per share to pay off the Secured Loan; but if the
Hatfields sell the Host Funding shares at more than $10.00 per share to pay
off the Secured Loan, then the Hatfields shall bear the full cost of such
penalty. The Hatfields further agree to pledge up to 285,000 shares of their
Class A Common Stock as security for the repayment of the Secured Loan.
3. IN-KIND EXCHANGE. Simultaneously with the exchange of shares
described in Section 1 above, and the cash prepayment of $874,325 and the
$25,675 credit earned by the Hatfields described in Section 2 above, the
Hatfields will deliver to Host Funding 90,000 shares of the 140,000 shares of
Class A Common received by the Hatfields pursuant to the exchange described
in Section 1 above. Such delivery of the 90,000 shares to Host Funding shall
constitute prepayment of the remaining $900,000 outstanding principal balance
due on the Hatfield Note, since the parties agree to value the 90,000 shares
at $10.00 per share and since the remaining balance on the Note is $900,000
after prepayment of the note as described section 2 above. Upon receipt by
Host Funding of the cash payment described in Section 2 above and the 90,000
shares of Class A Common Stock described in this Section, Host Funding will
cancel all accrued interest on the Hatfield Note and return the Hatfield Note
to the Hatfields marked "Paid in Full".
4. REPRESENTATIONS AND WARRANTIES OF THE HATFIELDS. The Hatfields
hereby represent and warrant to Host Funding, as follows:
(A) As of the date of the exchange of the Class B Common as provided in
Section 1 above, the Hatfields are the owners of 50,000 shares of the Class B
Common free and clear of any and all liens, claims, encumbrances, proxies or
rights of first refusal, subject to the release of the lien held by
Caruthersville Bank with respect to such shares;
(B) As of the date of the exchange of the Class B Common as provided in
Section 1 above, the Hatfields are the owners of 90,000 shares of the Class B
Common free and clear of any and all liens, claims, encumbrances, proxies or
rights of first refusal, subject to the release of the lien held by Host
Funding with respect to such shares;
2
<PAGE>
(C) This Agreement has been duly authorized, executed and delivered by
the Hatfields and constitutes the legal, valid and binding obligation of the
Hatfields enforceable against the Hatfields in accordance with its terms.
5. REPRESENTATIONS AND WARRANTIES OF HOST FUNDING. Host Funding
represents and warrants that this Agreement has been duly authorized,
executed and delivered by Host Funding and constitutes the legal, valid and
binding obligation of Host Funding enforceable against Host Funding in
accordance with its terms.
6. FURTHER ASSURANCES. The parties hereto agree (i) to furnish upon
request to each other such further information; (ii) to execute and deliver
to each other such other documents; and (iii) to do such acts and things, all
as any party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to herein.
7. General.
(A) The parties hereby confirm and ratify the matters contained and
referred to in the recitals to this Agreement and agree that the same are
expressly incorporated into this Agreement.
(B) This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof and supercedes all prior and
contemporaneous agreements, understandings and negotiations, whether oral or
written.
(C) This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas. The parties hereto submit to the
jurisdiction of the Courts of the State of Texas in and for the County of
Dallas in connection with any dispute under this Agreement.
(D) Time shall be of the essence of this Agreement.
(E) This Agreement shall be binding upon and inure to the benefit of the
parties and their respective heirs, executors, administrators, successors and
assigns.
(F) This Agreement may be signed or executed in separate counterparts
and the signing or execution of each counterpart shall have the same effect
as the signing or execution of a single original document.
(G) Representations and warranties of the parties hereto shall survive
the closing of the transactions contemplated herein.
3
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
hereinabove written.
HOST FUNDING, INC.
By: /s/ Michael S. McNulty
---------------------------------
Michael S. McNulty, President
/s/ Guy E. Hatfield
------------------------------------
Guy E. Hatfield
/s/ Dorothy Hatfield
------------------------------------
Dorothy Hatfield
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,144
<SECURITIES> 0
<RECEIVABLES> 454
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,598
<PP&E> 24,964
<DEPRECIATION> (971)
<TOTAL-ASSETS> 26,904
<CURRENT-LIABILITIES> 634
<BONDS> 0
0
0
<COMMON> 6,818
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,904
<SALES> 0
<TOTAL-REVENUES> 2,867
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,686
<INCOME-PRETAX> (524)
<INCOME-TAX> 0
<INCOME-CONTINUING> (524)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (524)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
