<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-14280
HOST FUNDING, INC.
---------------------------------------------------
(Exact name of Company 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, Texas 75206
- ----------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code (214) 750-0760
-------------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12 (g) of the Act.
Class A Common Stock - $0.01 par value
--------------------------------------
(Title of Class)
Indicate by check mark whether the Company (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 Company
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 Regulations S-K is not contained herein, and will not be contained to,
the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A [X]
The aggregate market value of the voting stock held by non-affiliates of the
Company (totaling 789,999 shares) was $7,801,240 (based upon the closing bid
of the Company's common stock on the AMEX on February 28, 1997 of $9.875 per
share). The term affiliates is deemed, for this purpose only, to refer only
to directors, officers and principal stockholders of the Company.
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
The number of outstanding shares of the Company's Class A Common Stock was
1,374,049 and Class B Common Stock 140,000 as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 1997 Annual Meeting of Stockholders to be
held May 21, 1997.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
On March 31, 1997, the Registrant filed its Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 in which the Registrant
disclosed the acquisition of a Super 8 Hotel located in Flagstaff,
Arizona (the "Flagstaff Super 8") for a gross purchase price of
$5,125,000 excluding closing expenses. The effective closing date of
the Flagstaff Super 8 was March 14, 1997. Reference is made to the
Annual Report on Form 10-K filed by the Registrant on March 31, 1997
which includes a more detailed description of the acquisition of the
Flagstaff Super 8.
The financial statements of the Flagstaff Super 8 and the pro forma
financial information of the Registrant which were not available on
the date of filing of the Annual Report on Form 10-K are attached to
this Report on Form 10-K/A. The information set forth in this Report
supplements the information previously provided in the Annual Report
on Form 10-K and should be read in accordance therewith.
(a) The following financial statements are filed as part of this Form 10-K/A:
(1) Financial Statements:
The Report of Independent Accountants and the following consolidated
Financial Statements of the Company are included herein:
Consolidated Balance Sheet--December 31, 1996 and December 31, 1995.
Consolidated Statement of Operations--Year ended December 31, 1996 and
nine months ended December 31, 1995.
Consolidated Statement of Shareholders' Equity (Deficit)--Year ended
December 31, 1996 and nine months ended December 31, 1995.
Consolidated Statement of Cash Flows--Year ended December 31, 1996 and
nine months ended December 31, 1995.
Notes to Consolidated Financial Statements
(2) Historical Summaries of Acquired Properties
Attached to this Report are the Historical Summaries of Gross Revenues
and Direct Operating Expenses of the Flagstaff Super 8 in compliance with
the rules and regulations of the Securities and Exchange Commission.
2
<PAGE>
(3) Pro Forma Financial Information
Attached to this Report are the pro forma condensed financial statements of
the Registrant prepared in accordance with Article 11 of Regulation S-X.
(b) Exhibits.
Exhibit Number Description
- -------------- -----------
10.1 Agreement to Purchase Motel between Teacher's Retirement
System of the State of Illinois, as Seller, and Host Funding,
Inc., as Purchaser, as from time to time amended by the
parties thereto (Flagstaff, Arizona) (incorporated by
reference to Exhibit 10.1 to Registrant's Annual Report on
Form 10-K filed on March 31, 1997).
10.2 Assignment of Agreement to Purchase Motel dated effective
as of May 14, 1997, by and between Host Funding, Inc., as
Assignor, and Host Ventures, Inc., as Assignee (Flagstaff,
Arizona) (incorporated by reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K filed on March 31,
1997).
10.3 Lease Agreement dated March 14, 1997 by and between Host
Ventures, Inc., as Lessor, and Crossroads Hospitality Tenant
Company, L.L.C., as Lessee (Flagstaff, Arizona) (incorporated
by reference to Exhibit 10.6 to Registrant's Annual Report on
Form 10-K filed on March 31, 1997).
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Host Funding, Inc.
By: /s/ MICHAEL S. McNULTY
--------------------------------
Michael S. McNulty
Title: President
Date: May 30, 1997
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 Company
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ WILLIAM M. BIRDSALL
- ----------------------------------- Chairman of the Board May 30, 1997
William M. Birdsall
/s/ MICHAEL S. McNULTY
- ----------------------------------- President and Director May 30, 1997
Michael S. McNulty
/s/ BONA K. ALLEN
- ----------------------------------- Chief Financial and May 30, 1997
Bona K. Allen Accounting Officer
/s/ DON W. COCKROFT
- ----------------------------------- Director May 30, 1997
Don W. Cockroft
/s/ GUY E. HATFIELD
- ----------------------------------- Director May 30, 1997
Guy E. Hatfield
/s/ CHARLES R. DUNN
- ----------------------------------- Director May 30, 1997
Charles R. Dunn
4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOST FUNDING, INC.
<TABLE>
I. HOST FUNDING, INC. FINANCIAL STATEMENTS
<S> <C> <C>
A. Host Funding, Inc.'s Pro Forma Financial Statements
Introduction to Estimated Pro Forma Financial Statements. . . . . . . . F-3
Unaudited Estimated Pro Forma Statement of Income for the year
ended December 31, 1996, the twelve months ended March 31, 1997
and the Three months ended March 31, 1997 and March 31, 1996. . . . . F-4 - F-7
Notes to Unaudited Estimated Pro Forma Financial Statements . . . . . . F-8 - F-9
B. Host Funding, Inc.'s Financial Statements for the year ended
December 31, 1996
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-10
Consolidated Balance Sheet as of December 31, 1996 and 1995. . . . . . F-11
Consolidated Statement of Operations for the year ended
December 31, 1996 and the nine months ended December 31, 1995. . . . F-12
Consolidated Statement of Shareholders' Equity (Deficits) for
the year ended December 31, 1996 and the nine months ended
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Consolidated Statement of Cash Flows for the year ended
December 31, 1996 and the nine months ended December 31, 1995. . . . F-14 - F-15
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-16 - F-30
Schedule III - Real Estate and Accumulated Depreciation. . . . . . . . F-31
C. Host Funding, Inc.'s Financial Statements for the three months ended
March 31, 1997 and 1996 (unaudited) (included in Host Funding, Inc.'s
previously filed Form 10-Q for the quarter ended March 31, 1997,
incorporated by reference)
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Shareholders' Equity for the three months
ended March 31, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited)
II. SUPER 8 MOTEL - FLAGSTAFF
A. Historical Summary of Gross Revenue and Direct Operating Expenses
for the year ended December 31, 1996, the period January 1 to
March 14, 1997 (unaudited) and the three months ended March 31,
1996 (unaudited)
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . F-32
F-1
<PAGE>
Historical Summary of Gross Revenue and Direct Operating Expenses
(Excluding Income Taxes) for the year ended December 31, 1996,
the period January 1 to March 14, 1997 (unaudited) and the three
months ended March 31, 1997 (unaudited). . . . . . . . . . . . . . F-33
Notes to Historical Summaries. . . . . . . . . . . . . . . . . . . . F-34 - F-37
B. Financial Statements for the period March 15 to March 31, 1997
(unaudited)
Statement of Revenues and Expenses (Excluding Income Taxes) for the
period March 15 to March 31, 1997 (unaudited). . . . . . . . . . . . F-38
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-39 - F-40
</TABLE>
F-2
<PAGE>
HOST FUNDING, INC.
UNAUDITED ESTIMATED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
THE TWELVE MONTHS ENDED MARCH 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The following unaudited estimated pro forma statements of income give
effect to: (i) the acquisition of Mission Bay; (ii) the acquisition of the
four Acquired Properties; (iii) the commencement of the Transfer Leases with
Crossroads; (iv) the commencement of the Acquired Properties Leases with
Crossroads; (v) the acquisition of Flagstaff; and (vi) certain other
transactions described in the notes hereto as though such transactions
occurred on January 1, 1996.
The estimated pro forma information is based in part upon the historical
statements of income or operations of the Company, the Initial Hotels,
Mission Bay, the Acquired Properties and Flagstaff. Such information should
be read in conjunction with all of the financial statements and notes thereto
included in this Form 10-KA. In the opinion of management, all adjustments
necessary to reflect the effects of the transactions discussed above have
been reflected in the estimated pro forma data.
The following unaudited estimated pro forma data is not necessarily
indicative of what the actual financial position or results of operations for
the Company would have been as of the date or for the period indicated, or
does it purport to represent the results of operations for the Company for
future periods.
F-3
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Twelve Months Ended
December 31, 1996
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 278,453 $ (278,453)(A) $
Lease revenue - Crossroads 1,262,165 2,464,222 (B) 3,726,387
Interest income - related parties 219,467 18,214 (B) 237,681
Interest income 8,698 (8,698)(C)
----------- ----------- -----------
Total revenues 1,768,783 2,195,285 3,964,068
----------- ----------- -----------
Expenses:
Interest 780,015 1,513,777 (D) 2,293,792
Depreciation and amortization 289,098 592,471 (E) 881,569
Administrative expenses - related parties 224,000 (224,000)(F)
Administrative expenses - other 427,980 120,420 (G) 548,400
Advisory fees - related parties 21,083 (21,083)(H)
Property taxes 138,675 141,325 (I) 280,000
Amortization of unearned directors' compensation 37,208 16,792 (J) 54,000
----------- ----------- -----------
Total expenses 1,918,059 2,139,702 4,057,761
----------- ----------- -----------
Estimated net income $ (149,276) $ 55,583 $ (93,693)
----------- ----------- -----------
----------- ----------- -----------
Estimated net income per share $ (0.06)
-----------
-----------
Estimated weighted average shares outstanding 1,514,049
-----------
-----------
</TABLE>
See notes to estimated pro forma financial statements.
F-4
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Twelve Months Ended
March 31, 1997
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 77,941 $ (77,941)(A) $
Lease revenue - Crossroads 2,011,322 1,712,867 (B) 3,724,189
Interest income - related parties 233,992 3,689 (B) 237,681
Interest income 9,706 (9,706)(C)
----------- ----------- -----------
Total revenues 2,332,961 1,628,909 3,961,870
----------- ----------- -----------
Expenses:
Interest 1,196,533 1,097,259 (D) 2,293,792
Depreciation and amortization 430,562 451,007 (E) 881,569
Administrative expenses - related parties 44,000 (44,000)(F)
Administrative expenses - other 702,296 (153,896)(G) 548,400
Advisory fees - related parties 23,583 (23,583)(H)
Property taxes 183,682 96,318 (I) 280,000
Amortization of unearned directors' compensation 50,708 3,292 (J) 54,000
----------- ----------- -----------
Total expenses 2,631,364 1,426,397 4,057,761
----------- ----------- -----------
Estimated net income $ (298,403) $ 202,512 $ (95,891)
----------- ----------- -----------
----------- ----------- -----------
Estimated net income per share $ (0.06)
-----------
-----------
Estimated weighted average shares outstanding 1,514,049
-----------
-----------
</TABLE>
See notes to estimated pro forma financial statements.
F-5
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended
March 31, 1997
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ - $ 0 (A) $
Lease revenue - Crossroads 749,157 143,646 (B) 892,803
Interest income - related parties 59,420 0 (B) 59,420
Interest income 1,008 (1,008)(C)
----------- ----------- -----------
Total revenues 809,585 142,638 952,223
----------- ----------- -----------
Expenses:
Interest 519,149 54,299 (D) 573,448
Depreciation and amortization 177,401 42,991 (E) 220,392
Administrative expenses - related parties - 0 (F)
Administrative expenses - other 274,316 (137,216)(G) 137,100
Advisory fees - related parties 2,500 (2,500)(H)
Property taxes 61,585 8,415 (I) 70,000
Amortization of unearned directors' compensation 13,500 0 (J) 13,500
----------- ----------- -----------
Total expenses 1,048,451 (34,011) 1,014,440
----------- ----------- -----------
Estimated net income $ (238,866) $ 176,649 $ (62,217)
----------- ----------- -----------
----------- ----------- -----------
Estimated net income per share $ (0.04)
-----------
-----------
Estimated weighted average shares outstanding 1,514,049
-----------
-----------
</TABLE>
See notes to estimated pro forma financial statements.
F-6
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended
March 31, 1997
--------------------------------------------
Pro Forma
Historical Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 200,512 $ (200,512)(A) $
Lease revenue - Crossroads - 888,589 (B) 888,589
Interest income - related parties 44,895 14,525 (B) 59,420
Interest income - 0 (C)
FF&E reserve income - related parties 0
----------- ----------- -----------
Total revenues 245,407 702,602 948,009
----------- ----------- -----------
Expenses: (D)
Interest 102,631 470,817 (E) 573,448
Depreciation and amortization 35,937 184,455 (F) 220,392
Administrative expenses - related parties 180,000 (180,000)(G)
Administrative expenses - other - 137,100 (H) 137,100
Advisory fees - related parties - 0 (I)
Property taxes 16,578 53,422 (J) 70,000
Amortization of unearned directors' compensation - 13,500 (S) 13,500
Provision for income taxes 0 (T) -
----------- ----------- -----------
Total expenses 335,146 679,294 1,014,440
----------- ----------- -----------
Estimated net income $ (89,739) $ 23,308 $ (66,431)
----------- ----------- -----------
----------- ----------- -----------
Estimated net income per share $ (0.04)
-----------
-----------
Estimated weighted average shares outstanding 1,514,049
-----------
-----------
</TABLE>
See notes to estimated pro forma financial statements.
F-7
<PAGE>
HOST FUNDING, INC.
NOTES TO ESTIMATED PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(A) Represents the effect of the reversal of the lease revenue - related
party, which leases were terminated upon the completion of the Stock Offering.
(B) Represents the effect of the Transferred, Acquired Properties and
Flagstaff Leases with Crossroads, Unsecured Directors' Compensation Notes and
Related Party Note Receivable on revenues. Rent is derived from annual base
rent and percentage rent calculated based upon various revenue and percentage
levels for individual leases on individual hotels as follows:
<TABLE>
Twelve Three Three
Mo. Ended Year Ended Mo. Ended Mo. Ended
March 31, December 31, March 31, March 31,
1997 1996 1997 1996
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Base and Percentage Rent $ 3,724,189 $ 3,726,387 $ 892,803 $ 888,589
Less: Amounts included in historical
operating results (2,011,322) (1,262,165) (749,157) 0
------------ ------------ ----------- ----------
$ 1,712,867 $ 2,464,222 $ 143,646 $ 888,589
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
Interest Income - related parties is as follows:
Related party note receivable $ 237,681 $ 237,681 $ 59,420 $ 59,420
Less: Amounts included in historical
operating results (233,992) (219,467) (59,420) (44,895)
------------ ------------ ----------- ----------
$ 3,689 $ 18,214 $ 0 $ 14,525
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
In addition, the Company is responsible for replacement reserve expenditures
under the Transferred, Acquired Properties and Flagstaff Leases with
Crossroads, which amounts are equal to 6% of Transferred Property gross
revenues, 4% of Acquired Properties gross revenues and 5% of Flagstaff gross
revenues.
(C) For Pro Forma estimated purposes, no interest income is recognized.
(D) Represents the effects of payments due and amortization of loan fees
for the Cross Host and Host Ventures Loan Facilities after the Acquired
Properties and Flagstaff acquisitions as follows:
<TABLE>
Twelve Three Three
Mo. Ended Year Ended Mo. Ended Mo. Ended
March 31, December 31, March 31, March 31,
1997 1996 1997 1996
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Interest Expense $ 2,293,792 $ 2,293,792 $ 573,448 $ 573,448
Less: Amounts included in historical
operating results (1,196,533) (780,015) (519,149) (102,631)
------------ ------------ ----------- ----------
$ 1,097,259 $ 1,513,777 $ 54,299 $ 470,817
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
F-8
<PAGE>
(E) Represents the effect of the acquisition of the Initial Hotels,
Mission Bay, the Acquired Properties and Flagstaff on depreciation and
amortization expense. Depreciation expense is calculated on a straight line
basis over the estimated lives of buildings, improvements and equipment of up
to 35 years. Franchise fee amortization is calculated on a straight-line
basis over the life of the franchise agreement.
<TABLE>
Twelve Three Three
Mo. Ended Year Ended Mo. Ended Mo. Ended
March 31, December 31, March 31, March 31,
1997 1996 1997 1996
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Depreciation and amortization expense $ 881,569 $ 881,569 $ 220,392 $ 220,392
Less: Amounts included in historical
operating results (430,562) (289,098) (177,401) (35,937)
------------ ------------ ----------- ----------
$ 451,007 $ 592,471 $ 42,991 $ 184,455
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
(F) Represents the reversal of the administrative expenses - related
parties, which agreement was canceled upon completion of the Stock Offering.
(G) Represents estimated general and administrative expenses of Host
Funding related to independent trustee fees, legal, accounting, employment
agreements and other administrative expenses as detailed below.
<TABLE>
Twelve Three Three
Mo. Ended Year Ended Mo. Ended Mo. Ended
March 31, December 31, March 31, March 31,
1997 1996 1997 1996
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Independent trustee fees $ 20,000 $ 20,000 $ 5,000 $ 5,000
Legal fees 40,000 40,000 10,000 10,000
Accounting fees 40,000 40,000 10,000 10,000
Employment agreements 335,000 335,000 83,750 83,750
Other administrative expense 113,400 113,400 28,350 28,350
Less: Amounts included in historical
operating results (702,296) (427,980) (274,316) 0
------------ ------------ ----------- ----------
$ (153,896) $ 120,420 $ (137,216) $ 137,100
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
These amounts have been estimated by Host Funding based on management's
experience and/or discussions with service providers.
(H) Represents the reversal of the Advisory fees - related parties which
agreement was terminated February 1, 1997.
(I) Represents the estimated property taxes due after execution of the
Transferred, Acquired Properties and Flagstaff Leases, which expense is the
obligation of the lessor.
(J) Represents amortization of unearned director's compensation for
independent directors pursuant to vesting provisions in the share purchase
plan agreements and the assumption the directors will become fully vested.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Host Funding, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Host Funding, Inc. and subsidiary listed in the index on
page 31 of this Form 10-K. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Host Funding, Inc.
at December 31, 1996 and December 31, 1995 and the results of its operations and
its cash flows for the year ended December 31, 1996 and the nine months ended
December 31, 1995, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
COOPERS & LYBRAND, L.L.P.
San Diego, California
February 14, 1997, except as to the information presented in Note 8,
for which the date is March 14, 1997
F-10
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
- -------------------------------------------------------------------------------------------------
December 31, December 31,
1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
LAND, PROPERTY AND EQUIPMENT - AT COST:
Building and improvements $12,644,239 $ 1,813,261
Furnishings and equipment 1,952,233 285,929
Less accumulated depreciation (391,009) (103,663)
----------- -----------
14,205,463 1,995,527
Land 4,808,047 642,287
----------- -----------
Land, property and equipment - net 19,013,510 2,637,814
CASH AND CASH EQUIVALENTS 218,693 500
RESTRICTED CASH 128,952 -
RENT RECEIVABLE - CROSSROADS 223,160 -
DUE FROM RELATED PARTIES 30,390 35,234
LONG-TERM ADVANCES TO CROSSROADS 225,000 -
LOAN COMMITMENT FEES - Net 502,338 21,146
FRANCHISE FEES - Net 58,250 -
PREPAID AND OTHER ASSETS 35,282 -
----------- -----------
TOTAL $20,435,575 $ 2,694,694
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
LONG-TERM DEBT $15,500,000 $ 4,155,321
NOTES PAYABLE - 75,244
ACCOUNTS PAYABLE 38,354 -
ACCRUED INTEREST 114,886 40,963
ACCRUED PROPERTY TAXES 78,940 -
ACCOUNTS PAYABLE - STOCK ISSUANCE COSTS - 325,000
DEFERRED INCOME TAXES - 163,000
----------- -----------
Total liabilities 15,732,180 4,759,528
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Class A Common stock, at December 31, 1996 and 1995, $.01 par
value; authorized 50,000,000 and 1,000, respectively; issued and
outstanding 1,234,049 and 100 shares, respectively 12,340 1
Class B Common stock, at December 31, 1996, $.01 par value;
authorized 4,000,000 shares; issued and outstanding
140,000 shares 1,400 -
Class C Common stock, at December 31, 1996, $.01 par value;
authorized 4,000,000 shares; issued and outstanding
140,000 shares 1,400 -
Additional Paid in Capital 7,501,494 -
Accumulated Deficit (744,772) (259,160)
Less: Related party note receivable (1,805,675) (1,805,675)
Less: Unearned directors' compensation (262,792) -
----------- -----------
Total shareholders' equity (deficit) 4,703,395 (2,064,834)
----------- -----------
TOTAL $20,435,575 $ 2,694,694
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-11
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
NINE MONTHS ENDED DECEMBER 31, 1995
TWELVE AND
NINE MONTHS ENDED
DECEMBER 31,
1996 1995
------------------------
REVENUES:
Lease revenue - related party $ 278,453 $ 806,670
Lease revenue - Crossroads 1,262,165 -
Interest income - related parties 219,467 135,673
Interest income 8,698 -
---------- ----------
Total revenue 1,768,783 942,343
---------- ----------
EXPENSES:
Interest expense 780,015 322,461
Depreciation and amortization 289,098 111,099
Administrative expenses - related party 224,000 540,000
Administrative expenses - other 427,980 -
Advisory fees - related party 21,083 -
Property taxes 138,675 -
Amortization of unearned directors' compensation 37,208 -
---------- ----------
Total expenses 1,918,059 973,560
---------- ----------
LOSS BEFORE INCOME TAXES (149,276) (31,217)
BENEFIT FOR INCOME TAXES - (3,000)
---------- ----------
NET LOSS $ (149,276) $ (28,217)
---------- ----------
---------- ----------
NET LOSS PER SHARE $ (0.12) $ (0.04)
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,244,668 690,000
---------- ----------
---------- ----------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-12
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
Class A Class B Class C Additional
Common Common Common Paid in
Stock Stock Stock Capital
------- ------ ------ ----------
<S> <C> <C> <C> <C>
CONTRIBUTION OF NET ASSETS AND
LIABILITIES FOR COMMON STOCK AND
ACCUMULATED DEFICIT ON APRIL 1, 1995 $ 1 $ - $ - $ -
REDUCTION IN STOCK ISSUANCE COSTS - - - -
NET LOSS - - - -
------- ------ ------ ----------
BALANCE, December 31, 1995 1 - - -
COMMON STOCK ISSUED IN PUBLIC
STOCK OFFERING 3,000 - - 2,697,000
COMMON STOCK ISSUED IN PRIVATE
PLACEMENT 2,000 - - 1,798,000
COMMON STOCK ISSUED PURSUANT TO
MISSION BAY ACQUISITION AGREEMENT 2,520 - - 2,517,970
COMMON STOCK ISSUED TO PARTNERS
OF AAG 4,099 1,400 1,400 (6,899)
COMMON STOCK ISSUED TO INDEPENDENT
DIRECTORS 300 - - 299,700
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 420 - - 338,205
RECLASS OF STOCK ISSUANCE COSTS
AGAINST ADDITIONAL PAID IN CAPITAL - - - (64,943)
INCREASE IN STOCK ISSUANCE COSTS - - - (77,539)
AMORTIZATION OF UNEARNED DIRECTORS'
COMPENSATION - - - -
ELIMINATION OF DEFERRED INCOME
TAXES FROM CONVERSION TO REIT - - - -
DISTRIBUTIONS PAID - - - -
NET LOSS - - - -
------- ------ ------ ----------
BALANCE, December 31, 1996 $12,340 $1,400 $1,400 $7,501,494
------- ------ ------ ----------
------- ------ ------ ----------
<CAPTION>
Related Unearned Total
Accumulated Party Note Directors' Shareholders'
Deficit Receivable Compensation Equity (Deficit)
----------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF NET ASSETS AND
LIABILITIES FOR COMMON STOCK AND
ACCUMULATED DEFICIT ON APRIL 1, 1995 $(305,943) $(1,805,675) $ - $(2,111,617)
REDUCTION IN STOCK ISSUANCE COSTS 75,000 - - 75,000
NET LOSS
--------- ----------- --------- -----------
BALANCE, December 31, 1995 (259,160) (1,805,675) - (2,064,834)
COMMON STOCK ISSUED IN PUBLIC
STOCK OFFERING - - - 2,700,000
COMMON STOCK ISSUED IN PRIVATE
PLACEMENT - - - 1,800,000
COMMON STOCK ISSUED PURSUANT TO
MISSION BAY ACQUISITION AGREEMENT - - - 2,520,490
COMMON STOCK ISSUED TO PARTNERS
OF AAG - - - 0
COMMON STOCK ISSUED TO INDEPENDENT
DIRECTORS - - (300,000) 0
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE - - - 338,625
RECLASS OF STOCK ISSUANCE COSTS
AGAINST ADDITIONAL PAID IN CAPITAL 64,943 - - 0
INCREASE IN STOCK ISSUANCE COSTS - - - (77,539)
AMORTIZATION OF UNEARNED DIRECTORS'
COMPENSATION - - 37,208 37,208
ELIMINATION OF DEFERRED INCOME
TAXES FROM CONVERSION TO REIT 163,000 - - 163,000
DISTRIBUTIONS PAID (564,279) - - (564,279)
NET LOSS (149,276) - - (149,276)
--------- ----------- --------- -----------
BALANCE, December 31, 1996 $(744,772) $(1,805,675) $(262,792) $ 4,703,395
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-13
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
- ------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (149,276) $ (28,217)
Adjustments to reconcile net loss to net cash:
provided by operating activities
Depreciation and amortization 289,098 111,099
Deferred taxes - (3,000)
Amortization of loan fees 216,500 -
Amortization of unearned directors' compensation 37,208 -
Changes in operating assets and liabilities:
Rent and interest receivable - due from related parties 4,844 (35,234)
Rent receivable - Crossroads (223,160) -
Payment of loan fees (697,692) -
Prepaid and other assets (14,800)
Accounts payable and accrued expenses 191,217 40,963
------------ ---------
Net cash (used in) provided by operating activities (346,061) 85,611
------------ ---------
INVESTING ACTIVITIES:
Acquisition of land, property and equipment (13,803,929) -
Restricted cash (128,952) -
Long-term advances to Crossroads (225,000) -
Franchise fees (60,000)
Prepaid and other assets (20,482) -
------------ ---------
Net cash used in investing activities (14,238,363) 0
------------ ---------
FINANCING ACTIVITIES:
Borrowings on long-term debt and notes payable 15,500,000 120,000
Proceeds from common stock issued in Stock Offering
and Private Placement 4,500,000 -
Payments on long-term debt and notes payable (4,230,565) (105,111)
Stock issuance costs (402,539) (100,000)
Distributions paid (564,279) -
------------ ---------
Net cash provided by (used in) financing activities 14,802,617 (85,111)
------------ ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 218,193 500
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 500 0
------------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 218,693 $ 500
------------ ---------
------------ ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 610,408 $ 281,498
------------ ---------
------------ ---------
Cash paid during the period for income taxes $ 0 $ 0
------------ ---------
------------ ---------
</TABLE>
(Continued)
F-14
<PAGE>
HOST FUNDING, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
- ---------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Continued)
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)
------------ ------------
0 360,057
------------ ------------
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)
0 (360,057)
------------ ------------
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
------------ ------------
------------ ------------
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 $ 0
------------ ------------
------------ ------------
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
------------ ------------
------------ ------------
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
Class A common stock $ 420 $ -
Additional paid in capital 338,205 -
Land, property and equipment (338,625) -
------------ ------------
Net non-cash investing activity $ 0 $ 0
------------ ------------
------------ ------------
</TABLE>
(Concluded)
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
F-15
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
The accompanying financial statements include the accounts of Host Funding,
Inc., a Maryland corporation ("Host Funding") and its consolidated
subsidiary. Host Funding was initially formed on December 22, 1994 as a
Real Estate Investment Trust ("REIT") to acquire and then lease limited
service hotels/motels. Host Funding's fiscal year end is December 31.
Host Funding was inactive from inception, December 22, 1994 to March 31,
1995. Host Funding intends to elect REIT status with the filing of their
consolidated tax return for the year ending December 31, 1996 (see note 7).
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 ($2,741,477) and loan commitment fees ($28,582), and Host
Funding agreed to assume stock issuance costs payable ($425,000) and all
real property debt ($4,215,676), 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") ($1,805,675). In
accordance with generally accepted accounting principles, the Related Party
Note has been offset against shareholder's equity as the Related Party Note
was originally issued for equity in AAG. As consideration to AAG, Host
Funding issued 100 shares of common stock. As of December 31, 1995, all of
the outstanding stock of Host Funding was owned by AAG.
On April 22, 1996, Host Funding raised additional capital via an initial
public offering of Class A common stock (the "Stock Offering"). The Stock
Offering issued 500,000 common shares and raised net cash proceeds totaling
$3,997,461 (300,000 of publicly offered shares at $3,000,000 net of
$300,000 of sales commissions and 200,000 privately placed shares at
$1,800,000 for a total of $4,500,000, net of issuance costs of $502,539).
Host Funding used 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.
Further, on April 22, 1996, Host Funding acquired for a total purchase
price of $2,810,000, certain assets of Mission Bay Super 8, Ltd., a
California limited partnership ("Mission Bay"), the owner of a 117 room
Super 8 motel located in San Diego, California, pursuant to an asset
acquisition agreement (the "Mission Bay Acquisition Agreement"). Host
Funding exchanged 252,049 shares of common stock at a stated value of
$10.00 per share ($2,520,490) plus cash for a reserve for dissenters rights
and fractional share settlements of approximately $290,000 (see note 6).
F-16
<PAGE>
Upon completion of the Stock Offering and the Mission Bay Acquisition
Agreement, Host Funding issued additional Class A, B and C common shares to
AAG in exchange for 100 initial shares held by AAG based upon appraised
values of Host Funding's assets net of liabilities prior to the Stock
Offering. The common shares issued upon completion of the Stock Offering
include 410,000 Class A, 140,000 Class B and 140,000 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
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. The Class C common shares
converted into Class A common shares effective January 1, 1997.
On September 5, 1996, Host Funding formed CrossHost, Inc., a Maryland
Corporation ("CrossHost"), as a wholly-owned, special purpose, REIT
qualified, subsidiary. CrossHost was formed at the request of CS First
Boston Mortgage Capital Corp. ("First Boston") as a condition to First
Boston providing an acquisition and credit facility (the "Initial Loan
Facility") to CrossHost (see note 3 and 7). A significant portion of the
proceeds from the Loan Facility was used by CrossHost to acquire three
Sleep Inn Hotels located in Destin, Sarasota, and Tallahassee, Florida from
Capital Circle Hotel Company ("Capital Circle") and one Sleep Inn Hotel
located in Ocean Springs, Mississippi from Ocean Springs Hotel Company
("Ocean Springs") (collectively, the "Acquired Properties"). The effective
closing dates for the purchase of the Acquired Properties by CrossHost from
Capital Circle and Ocean Springs were September 13, 1996 and September 19,
1996, respectively (see note 6).
As a further condition to obtaining the Loan Facility, First Boston
required Host Funding to transfer to CrossHost the five Super 8 hotel
properties owned by Host Funding (the "Transferred Properties").
Simultaneously with the acquisition of the Acquired Properties by
CrossHost, Host Funding deeded the Transferred Properties to CrossHost in a
tax free reorganization.
Host Funding is listed on the American Stock Exchange.
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.
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, 1996, nor has impairment been 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."
F-17
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with a maturity, at the date of purchase, of three
months or less.
RESTRICTED CASH
Restricted cash represents cash deposited in escrow accounts under
contractual agreements for property taxes and capital improvements that are
restricted as to usage.
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. Accumulated amortization of loan fees totaled $195,355 and $28,424
as of December 31, 1996 and 1995, respectively.
FRANCHISE FEES
Franchise fees are being amortized on a straight-line basis over the
fifteen (15) year life of the franchise agreements. Accumulated
amortization of franchise fees totaled $1,750 as of December 31, 1996.
REVENUES
Host Funding recognizes lease revenue on an accrual basis over the terms of
the lease agreement.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding during the year. The weighted average number of shares
outstanding prior to the Stock Offering were calculated as if the shares
issued to AAG upon completion of the Stock Offering were outstanding from
April 1, 1995.
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 receivable - Crossroads, due from related parties, long-term advances
to Crossroads, accounts payable and accrued expenses, and accounts payable
are carried at amounts which reasonably approximate their fair value.
The carrying value of long-term debt approximates fair value as the related
interest rate is variable and approximates market rates.
F-18
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
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 had 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 carry forwards.
Deferred income tax benefit totaled $3,000 for the year ended December 31,
1995. The deferred income tax liability as of December 31, 1995, totaling
$163,000, was reversed and credited to retained earnings upon consummation
of the Stock Offering in 1996. The reason for the reversal of the deferred
tax liability is that upon completion of the Stock Offering, Host Funding
will elect 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.
Host Funding will elect to be treated as a REIT under the provisions of the
Code beginning with the 1996 year. As a result, Host Funding will not be
subject to federal income tax on its taxable income at corporate rates to
the extent it distributes annually 95% of its taxable income to its
shareholders and complies with certain other requirements (see note 7).
Host Funding is subject to state income and franchise taxes in certain
states which it operates. There is no provision for Federal income taxes
for the year ended December 31, 1996, as Host Funding will elect REIT
status and has a net operating loss carry forward of $348,000 expiring in
2011 and 2010. Host Funding elected not to recognize this deferred tax
asset as future utilization of this net operating loss is uncertain.
As of December 31, 1996, Host Funding's net assets for federal tax
reporting purposes totaled approximately $19,900,000.
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 were leased (the "Initial
Leases") to Inn Fund, LLC, a Delaware limited liability company ("Inn
Fund"). Guy D. Hatfield, the controlling partner of AAG, and approximate
46% shareholder of Host Funding, owns 7.5% and Ian Gardner-Smith owns 92.5%
of Inn Fund. The four motels were operated for Inn Fund by All American
Group, Inc., an entity 100% owned by Guy Hatfield and his wife ("AAG,
Inc."). Lease revenue - related party under the Initial Leases for the
year and nine months ended December 31, 1996 and 1995, respectively,
include $195,025 and $772,350 of base rentals and $5,487 and $34,320 of
percentage rentals, respectively.
F-19
<PAGE>
On April 1, 1996 and on April 22, 1996, Host Funding agreed to enter into
new motel leases for the four existing motel properties and Mission Bay,
respectively, (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"). Upon execution of the New Leases, the previous leases with
Inn Fund, which leases were similar to the New Leases, were terminated.
The New Leases with Crossroads were transferred to CrossHost on September
13, 1996 and amended on October 1, 1996 (the "Amended Transferred Property
Leases").
Further, effective as of the closing dates of the respective Acquired
Properties, CrossHost also (i) leased each of the Acquired Properties to
Crossroads by separate Lease Agreements (the "Acquired Property Leases")
and (ii) entered into a Master Agreement with Crossroads and Crossroads
Hospitality Company, LLC, a Delaware limited liability company ("Crossroads
Hospitality") a subsidiary of Interstate Hotels, Inc. a Delaware
Corporation, and parent company of Crossroads), relating to the Acquired
Property Leases.
The Amended Transferred Property Leases and the Acquired Property Leases
(the "Combined Leases") are for a term of 15 years from the effective
dates. Combined total annual base rentals of $2,631,600 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 under the Combined Leases. Base and percentage rentals under
the Combined Leases totaled $1,091,654 and $170,511, respectively, for the
year ended December 31, 1996.
The annual base rentals of the Amended Transferred Property Leases are
subject to possible additional increases annually beginning in calendar
year 1998 and thereafter based upon increases in average room rates, as
defined in the Amended Transferred Property Leases.
During the first four years after the Commencement Date, Crossroads will be
entitled to accumulate a credit of 50% of base rent paid in excess of hotel
cash flow, if any, as defined in the Acquired Property Leases, for each of
the Acquired Properties which may be applied towards future percentage
rentals that may be due (the "Negative Base Rent"). Should no future
percentage rent be due under the Acquired Property Leases during the lease
terms, the Negative Base Rent will expire. No Negative Base Rent credit
was outstanding as of December 31, 1996.
The Combined Leases generally require Crossroads to pay all operating
expenses of the properties, including maintenance and insurance, while Host
Funding is responsible for property taxes.
Concurrent with the change in base rent due for each Amended Transferred
Property Lease, the requirement for Crossroads to set aside in a
replacement reserve $125 per room, per quarter, increased annually by
inflation factors, was terminated. As of December 31, 1996, Crossroads has
on deposit in a replacement reserve account net remaining funds totaling
approximately $80,000 which are available for capital improvements on the
Transferred Properties.
F-20
<PAGE>
Under the Amended Transferred Property Leases, effective October 1, 1996,
CrossHost is required to fund into a replacement reserve (the "Replacement
Reserve") an amount equal to six percent (6%) of gross room revenue for the
proceeding month. In addition, under the Acquired Property Leases,
CrossHost is required to set aside in the Replacement Reserve an amount
equal to 4% of gross room revenue during years one (1) to four (4) and 6%
of gross room revenue during years five (5) and thereafter. Capital
expenditures generally must be jointly approved by CrossHost and
Crossroads. Replacement Reserve contributions due from CrossHost under the
Combined Leases totaled $75,683 for the period October 1 to December 31,
1996. As of December 31, 1996 Replacement Reserve contributions totaling
$67,294 have been funded by CrossHost, which amount is included in
restricted cash, with $8,389 in Replacement Reserve contributions due.
Based upon an accounting of remaining furniture, fixtures and equipment
reserve contributions due from Inn Fund under the Initial Leases to March
31, 1996, the date of the cancellation of the Initial Leases, Inn Fund owes
$77,941 to Host Funding. This amount has been included in lease revenue -
related party and was offset against an approximately equal net amount owed
by Host Funding to affiliates of Guy E. Hatfield, an affiliate of the
Company. (See note 5.)
Further, should Host Funding decide to sell any of the properties leased to
Crossroads under the Combined 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. In addition, under the Acquired Property
Leases, if Crossroads elects not to exercise its right of first refusal to
acquire the properties and should CrossHost elect to terminate the lease,
upon the consent of CrossHost, Crossroads and the buyer, Crossroads may be
entitled to some portion of the sale proceeds based on a formula as
provided in the applicable Acquired Property Lease.
CrossHost, under the Combined Leases, was required to provide long-term
non-interest bearing advances totaling $225,000 to Crossroads to be used
for working capital purposes which is due back to CrossHost at the end of
the term of each Acquired Property Lease.
Crossroads may terminate any one lease under the Amended Transferred
Property Leases within the first five years without damages. Should two
leases under the Amended Transferred Property 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 under the Amended Transferred
Property Leases, Host Funding has the right to terminate all remaining
leases or to collect the termination fee as described above.
The parent company of Crossroads has agreed to pledge as collateral 30,000
shares of Host Funding Class A common stock acquired by Crossroads parent
under the Stock Offering to collateralize the payment of rent due under the
Amended Transferred Property 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 Amended Transferred Property 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.
F-21
<PAGE>
Minimum future base rents due under operating leases for the five years
ending December 31, 1997 to 2001 and thereafter are as follows:
1997 $ 2,631,600
1998 2,992,800
1999 2,992,800
2000 2,992,800
2001 2,992,800
Thereafter 28,897,150
-----------
Total $43,499,950
-----------
-----------
NOTE 3. LONG-TERM DEBT AND NOTES PAYABLE
LONG-TERM DEBT:
A summary of Host Funding's long-term debt as of December 31 follows:
1996 1995
----------- ----------
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 $ -- $1,094,146(A)
First mortgage not payable to bank; 8.75%
interest; payments of $11,244 monthly; due
February 1998. -- 1,011,545(B)
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. -- 889,630(A)
First mortgage note payable to bank; prime
plus 1/2% interest rate adjusted daily (prime
was 9% at December 31, 1995); accrued interest
plus principal are due on March 31, 1996. -- 1,160,000(A)
F-22
<PAGE>
First mortgage note payable, interest at
LIBOR plus 304.5 basis points, adjusted
monthly (LIBOR was 5.53906% at December 31,
1996); payable monthly; due October 1997
(for information regarding the refinancing
see note 7). 15,500,000 --
----------- ----------
15,500,000 4,155,321
Less current portion 15,500,000 1,251,844
----------- ----------
$ 0 $2,903,477
----------- ----------
----------- ----------
(A) Paid off from proceeds from Stock Offering in April 1996.
(B) Paid off from proceeds of the Initial Loan Facility in September 1996.
From the proceeds of the Initial Loan Facility, CrossHost paid
approximately $9,730,000 in cash to Capital Circle and approximately
$3,555,000 in cash to Ocean Springs as consideration for the Acquired
Properties plus closing expenses on the Acquired Properties in the
approximate amount of $229,000. In addition, CrossHost used approximately
$980,000 of the loan proceeds to pay in full the mortgage relating to the
Super 8 motel located in Rock Falls, Illinois. Further, proceeds from the
Initial Loan Facility were used by Host Funding and CrossHost for loan
origination costs and other expenses relating to the acquisition of the
Acquired Properties and the financing of the Transferred Properties in the
approximate amount totaling $693,000, including related party loan fees and
expense reimbursements of $232,500 and $20,000, respectively, which amount
will be amortized over the term of the Initial Loan Facility (see note 5
and 7). In addition, CrossHost used approximately $60,000 of proceeds from
the Initial Loan Facility to acquire a ten (10) year Sleep Inn franchise
with Choice Hotels, Inc., a nationally recognized hotel franchisor.
Additional proceeds from the Loan Facility were escrowed in restricted cash
accounts required under the Initial Loan Facility to be used to pay
property taxes in the approximate amount of $99,000 and for capital
improvements in the approximate amount of $62,000. The remaining proceeds
from the Loan Facility in the approximate amount of $92,000 were used for
long-term advances due Crossroads under the Acquired Property Leases (see
note 2). The Initial Loan Facility was collateralized by liens on
substantially all of the assets of CrossHost, including the Acquired
Properties and the Transferred Properties. The Initial Loan Facility was
refinanced on March 14, 1997 (see note 7).
NOTES PAYABLE:
In July 1995, Host Funding entered into a second mortgage collateralized by
the Poplar Bluff, Missouri and Rock Falls, Illinois motels totaling
$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 note
balance as of December 31, 1995 totaled $55,244. The note was paid off
upon completion of the Stock Offering.
In October 1995, Host Funding entered into an unsecured note payable
totaling $20,000. This note bore interest at 10% and was due and payable
March 31, 1996. The note balance as of December 31, 1995 totaled $20,000.
The note was paid off upon completion of the Stock Offering.
F-23
<PAGE>
NOTE 4. SHAREHOLDERS' EQUITY
Host Funding is authorized to issue 55,000,000 shares of common 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 consummation of the Stock Offering and Mission Bay Acquisition
Agreement, Host Funding sold to each independent 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 ($300,000) 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 totaling 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 collateralize
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. Interest income - related party, paid or accrued by the
directors, to Host Funding totaled $14,528 for the year ended December 31,
1996. As of December 31, 1996, $819 remains payable to Host Funding and is
included in due from related parties.
Host Funding also has 20,000,000 authorized preferred shares, $.01 par
value, none of which are issued or outstanding.
Please refer to Note 1, Organization and Summary of Significant Accounting
Policies, for information regarding common stock issued as a result of the
Stock Offering and the Mission Bay Acquisition Agreement. Also, refer to
Note 5, Related Party Transactions, for information regarding common stock
issued under the Post-Formation Acquisition Agreement as a result of the
purchase of the Acquired Properties.
NOTE 5. RELATED PARTY TRANSACTIONS
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, as of December 31, 1996, 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 Stock
Offering, 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, 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
F-24
<PAGE>
Shareholders' Equity (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. Interest income - related parties, paid or
accrued by the AAG partners to Host Funding, totaled $204,939 and $135,673
for the year ended December 31, 1996 and for the nine months ended December
31, 1995, respectively. As of December 31, 1996, $33,706 of Related Party
Note interest is payable and included in due from related parties.
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%, or 180,780, of the fraction shares issued to AAG in
the Stock Offering, 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 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. Related party consulting fees totaling $224,000 and $540,000
for the year ended December 31, 1996 and for the nine months ended December
31, 1995, respectively, were paid or accrued to AAG under the Related Party
Consulting Agreement. The Related Party Consulting Agreement was canceled
upon completion of the Stock Offering.
RELATED PARTY ADVISORY AGREEMENT:
Host Funding has entered into an Advisory Agreement (the "Advisory
Agreement") with Host Funding Advisors, Inc., a Delaware corporation (the
"Advisor") on the close of the Stock Offering. 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. The Advisor is an affiliate
of Ian Gardner-Smith, a director and officer of CrossHost, and Michael S.
McNulty, a director and president of Host Funding and CrossHost. Advisory
fees totaling $21,083 were paid or accrued during the calendar year ended
December 31, 1996. Effective January 31, 1997, the Advisory Agreement was
canceled for payment of a fee at $30,000 and the Registrant became self-
administered.
RELATED PARTY ACQUISITION AGREEMENT:
Host Funding has entered into a Post-Formation Acquisition Agreement (as
amended, the "Acquisition Agreement") with HMR Capital, LLC, a Delaware
limited liability company, (the "Acquisition Company") on April 22, 1996.
The Acquisition Company is an affiliate of Michael S. McNulty and Ian
Gardner-Smith. Under the terms of the Acquisition Agreement, the
Acquisition Company is responsible for the management, coordination, and
supervision of Host Funding's acquisition of additional hotel properties.
The Acquisition Company sought out the Acquired Properties and negotiated
the terms of the acquisition.
F-25
<PAGE>
The Acquisition Agreement is for a term of five years, as amended, from
February 3, 1997 or when net fees earned by the Acquisition Company exceed
$9 million, subject to a 30 day cancellation provision by either party.
Further, the Acquisition Company is entitled to receive an acquisition fee
of no less than 2% and up to 6% of the gross purchase price of the Acquired
Properties, subject to the 30 day cancellation provision, plus
reimbursement of certain expenses (the "Acquired Properties Acquisition
Fee"). The Acquired Properties Acquisition Fee is payable in cash or, at
the option of the Acquisition Company, in the Class A Common Stock of Host
Funding. Host Funding and the Acquisition Company agreed that the Acquired
Properties Acquisition Fee earned by the Acquisition Company relating to
the Acquired Properties was 42,000 shares of the Class A Common Stock of
the Registrant valued at $10 per share and payable as of September 19, 1996
(the Ocean Springs closing date). The shares of Class A Common Stock
received by the Acquisition Company in payment of the Acquired Properties
Acquisition Fee will be restricted securities under the Securities Act of
1933 and subject to the resale provisions of Rule 144 promulgated under the
Act. The last traded price of the stock of Host Funding on the American
Stock Exchange on September 19, 1996 was $8.0625 per share. Host Funding
has recorded the Acquired Properties Acquisition Fee on the Acquired
Properties at the fair market value of the Class A Common Stock on
September 19, 1996. The Acquired Properties Acquisition Fee (based upon a
value of $8.0625 per share or $338,625) represents approximately 2.5% of
the gross purchase price totaling $13,285,000 excluding closing expenses of
the Acquired Properties.
OTHER RELATED PARTY TRANSACTIONS:
As of the close of the Stock Offering, 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
against accrued interest receivable due under the Related Party Note and
accrued rent receivable and remaining furniture, fixtures and equipment
reserve contributions due under the Initial Leases with Inn Fund. As of
December 31, 1996, $4,135 remains payable to AAG from Host Funding and has
been netted against and included in due from related parties.
Hatfield Inn is the owner and operator of a 40 room motel adjacent to Host
Funding's property located in Miner, Missouri. 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.
Hotel Mortgage Resources Corp. ("HMRC"), an affiliate of Mr. Ian Gardner-
Smith and Michael S. McNulty, in connection with the Loan Facility
discussed in Note 1 and 3, received a loan origination fee of $232,500 plus
reimbursement of expenses of approximately $20,000 during the year ended
December 31, 1996. The total fees received by affiliates relating to the
acquisition of the Acquired Properties, including loan origination fees,
the Acquired Properties Acquisition Fee and the expense reimbursement,
totaled approximately $591,125.
HMRC, during the year ended December 31, 1996, also received expense
reimbursements for stock issuance costs totaling $105,679 and for travel
and other related expenses which are included in administrative and other
expenses totaling $23,455. Loan application fees totaling $5,000 were paid
to HMRC during the year ended December 31, 1996.
The parent company of Crossroads, the lessee under the New Leases,
purchased 60,000 shares of Class A common stock via the initial Private
Placement.
F-26
<PAGE>
NOTE 6. ACQUISITIONS
The following unaudited pro forma information has been prepared assuming
that the acquisition of Mission Bay and the Acquired Hotels has occurred at
the beginning of the periods presented. 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, Host Funding believes that this unaudited
pro forma information is not indicative of future results of operations,
not the results of historical operations had the acquisition of Mission Bay
and the Acquired Properties been consummated as of the assumed dates.
(Unaudited)
Nine Months
Year Ending Ending
December 31, December 31,
1996 1995
------------ ------------
Revenues $3,318,000 $2,524,000
Net Income $ 463,000 $ 382,000
Earnings Per Share $ 0.31 $ 0.25
Weighted Average Number of
Common Shares Outstanding 1,514,049 1,514,049
NOTE 7. COMMITMENTS AND CONTINGENCIES
REIT STATUS:
Host Funding, as a requirement under the Code to elect REIT status, must
have no more than five (5) shareholders, own no more than 50% of common
stock, common stock equivalents, or other forms of equity outstanding.
Host Funding has not met this requirement as of December 31, 1996. Under
the Code, Host Funding is allowed a six month exemption until June 30, 1997
to meet the requirement. While management at Host Funding intends to meet
the Code requirements, no assurance can be given that REIT status will be
maintained, which could result in Host Funding being taxed as a C
corporation.
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 agreement, Host Funding 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. The responsibility for payment of the fees has been assigned to
Crossroads under the Combined Leases.
DIVIDEND DECLARATION:
On January 27, 1997, Host Funding declared a cash dividend of $0.24 per
share to stockholders of record on February 4, 1997, which was payable on
February 18, 1997.
F-27
<PAGE>
TERMINATION OF ADVISORY AGREEMENT, AMENDMENT OF ACQUISITION AGREEMENT
AND ISSUANCE OF WARRANTS:
On February 3, 1997, Host Funding entered into an Agreement with the
Acquisition Company and the Advisor whereby the Acquisition Company and
Host Funding agreed to amend the Acquisition Agreement and the Advisor and
Host Funding terminated the Advisory Agreement (see note 5).
As compensation to the Acquisition Company for amending the Acquisition
Agreement allowing a thirty (30) day cancellation, Host Funding has agreed
to issue 225,000 Series A Warrants (the "Series A Warrants") and 225,000
Series B Warrants (the "Series B Warrants") to the Acquisition Company.
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. There are additional provisions in
the Series A Warrants that allow pari passu treatment upon recapitalization
of Host Funding.
The Series B Warrants provide warrants to purchase 225,000 shares of Host
Funding'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 B Warrants that allow pari passu treatment upon recapitalization
of Host Funding and certain restrictions within the first twenty-four
months of issuance as to the price allowed upon exercise of the Series B
Warrants based upon consummation of a public offering in which proceeds to
Host Funding are not less than $50 million.
EMPLOYMENT AGREEMENTS:
Host Funding has entered into Employment Agreements (the "Employment
Agreements") with William Birdsall, Chairman of the Board; Michael S.
McNulty, President; and Bona K. Allen, Chief Financial Officer, for a term
of three years from February 1997. The Employment Agreements provide for
base salaries of $291,000 with a minimum bonus of 15% up to a maximum of
50%, based upon a prescribed formula in the Employment Agreements, of base
compensation in the first year. The Employment Agreements also provide for
base salary increases based upon prescribed increases in Host Funding's
asset size. The Employment Agreements are terminable by Host Funding, for
cause, upon thirty (30) days written notice, or upon death or disability,
with severance payments due employees ranging from nothing to two years of
current base salary then in effect.
NOTE 8. SUBSEQUENT EVENTS
FORMATION OF HOST VENTURES, REFINANCING OF INITIAL LOAN FACILITY AND
ACQUISITION OF FLAGSTAFF SUPER 8:
On March 5, 1997, Host Funding formed Host Ventures, Inc., a Maryland
corporation ("Host Ventures"), as a wholly-owned, special purpose
subsidiary of Host Funding. Host Ventures was formed at the request of
First Boston as a condition to refinancing the existing $15,500,000 Initial
Loan Facility with CrossHost at a reduced amount of $13,000,000 (the
"CrossHost Loan Facility") and provided an acquisition and credit facility
to Host Ventures in the amount of $8,725,000 (the "Host Ventures Loan
Facility").
F-28
<PAGE>
The CrossHost Loan Facility is payable over twenty years in equal monthly
installments of $120,838, including interest at a fixed rate of 9.46% per
annum (the "Base Interest Rate") over the first ten years, with an
increased fixed monthly payment the second ten years that fully amortizes
remaining principal plus interest at an interest rate equal to the greater
of 2% over the Base Interest Rate or 2% over the then-existing ten year
U.S.Treasury Note rate, with a due date in March 2017.
The Host Ventures Loan Facility is payable interest only, monthly at the
LIBOR Rate plus 350 basis points (LIBOR Rate was 5.4375% as of March 14,
1997), with a maturity date of April 1, 1999, at which time all unpaid
interest plus principal are due.
Aggregate principal payments under the CrossHost and Host Ventures Loan
Facilities for the next five calendar years ended December 31 and
thereafter are as follows:
1997 $ 150,951
1998 244,973
1999 8,994,179
2000 295,777
2001 325,004
Thereafter 11,714,116
-----------
Total $21,725,000
-----------
-----------
A significant portion of the proceeds from the Host Ventures Loan Facility
was used by Host Ventures to acquire a 90 room Super 8 Motel in Flagstaff,
Arizona for $5,125,000 plus closing costs (the "Flagstaff Super 8") from
Teachers Retirement System of the State of Illinois ("Teachers") and to pay
down the Initial Loan Facility in the amount of $2,500,000. The effective
closing date for the purchase of the Flagstaff Super 8 was March 14, 1997.
Effective as of the closing date of the Flagstaff Super 8, Host Ventures
also leased the Flagstaff Super 8 to Crossroads. The CrossHost and Host
Ventures Loan Facilities require escrows to be reserved for property taxes
and capital expenditures.
The lease agreement between Crosshost and Host Ventures for the Flagstaff
Super 8 (the "Flagstaff Lease Agreement") is for a term of fifteen (15)
years from March 1997 and provides for annual base rentals of $505,000 plus
percentage rentals of 32% of gross revenues less a breakeven level of
$925,000, adjusted annually. Remaining terms of the Flagstaff Lease
Agreement are similar to the Acquired Properties Leases.
The Flagstaff Super 8 was acquired pursuant to terms of the Acquisition
Agreement by and between Host Funding and the Acquisition Company.
Pursuant to the terms of the Acquisition Agreement, the acquisition Company
is entitled to receive an acquisition fee of up to 6% of the gross purchase
price of the Flagstaff Super 8 plus reimbursement of certain expenses (the
"Flagstaff Property Acquisition Fee"). The Flagstaff property Acquisition
Fee is payable in cash or, at the option of the Acquisition Company, in the
Class A Common Stock of Host Funding. Host Funding and the Acquisition
Company agreed that the Flagstaff Property Acquisition Fee earned by the
Acquisition Company relating to the Flagstaff Super 8 was 16,000 shares of
the Class A Common Stock of Host Funding valued at $10 per share and
payable as of March 31, 1997. The shares of Class A Common Stock received
by the Acquisition Company in payment of the Flagstaff Property Acquisition
Fee will be restricted securities under the Securities Act of 1933 and
subject to the resale provisions of Rule 144 promulgated under the Act.
The last traded price of the stock of Host
F-29
<PAGE>
Funding on the American Stock Exchange on March 14, 1997 was $9.50 per
share. Host Funding intends to record the Flagstaff Property Acquisition
Fee on the Flagstaff Super 8 at the fair market value of the Class A Common
Stock on March 14, 1997. The Flagstaff Property Acquisition Fee (based
upon a value of $10 and $9.50 per share or $160,000 and $152,000,
respectively) represents approximately 3.1% and 3.0%, respectively, of the
gross purchase price totaling $5,125,000 excluding closing expenses of the
Flagstaff Super 8.
As a further condition to obtaining the Host Ventures Loan Facility, First
Boston required Host Funding to transfer to Host Ventures two Sleep Inn
properties owned by Host Funding. The two Sleep Inns are located in
Sarasota, Florida and Ocean Springs, Mississippi (collectively, the
"Transferred Sleep Inns"). Simultaneously with the acquisition of the
Flagstaff Super 8, Host Funding deeded the Transferred Sleep Inns to Host
Ventures in a tax free reorganization. In addition, Host Funding assigned
to Host Ventures the lease agreements with Crossroads pertaining to each of
the Transferred Sleep Inns.
F-30
<PAGE>
SCHEDULE III
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
COSTS SUBSEQUENT GROSS AMOUNT AT WHICH
INITIAL COST TO COMPANY TO ACQUISITION CARRIED AT CLOSE OF PERIOD
-------------------------- -------------------------- --------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCES (1) LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ----------- ---------------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ $ 131,627 $ 491,711 $ - $ - $ 131,627 $ 491,711
Super 8, Somerset, KY 170,000 449,541 - - 170,000 449,541
Super 8, Miner, MO 187,660 461,494 - - 187,660 461,494
Super 8, Poplar Bluff, MO 153,000 410,515 - - 153,000 410,515
Super 8, San Diego, CA 702,500 1,826,500 - - 702,500 1,826,500
Sleep Inn, Ocean Springs, MS 924,162 2,402,821 - - 924,162 2,402,821
Sleep Inn, Destin, FL 993,429 2,582,915 - - 993,429 2,582,915
Sleep Inn, Sarasota, FL 834,990 2,170,975 - - 834,990 2,170,975
Sleep Inn, Tallahassee, FL 710,679 1,847,767 - - 710,679 1,847,767
----------- ---------- ----------- ---------- ----------- ---------- -----------
$15,500,000 $4,808,047 $12,644,239 $ 0 $ 0 $4,808,047 12,644,239
----------- ---------- ----------- ---------- ----------- ----------
----------- ---------- ----------- ---------- ----------- ----------
Land 4,808,047
Furniture and equipment 1,952,233
-----------
Total hotels and land
under lease $19,404,519
-----------
-----------
<CAPTION>
ACCUMULATED
DEPRECIATION & YEAR OF DATE
DESCRIPTION AMORTIZATION CONSTRUCTION ACQUIRED LIFE
- ----------- -------------- ------------ -------- ----
<S> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 18,099 1985 4/1/95 35
Super 8, Somerset, KY 23,014 1985 4/1/95 35
Super 8, Miner, MO 25,198 1985 4/1/95 35
Super 8, Poplar Bluff, MO 23,462 1985 4/1/95 35
Super 8, San Diego, CA 26,872 1987 4/22/96 35
Sleep Inn, Ocean Springs, MS 15,439 1995 9/19/96 35
Sleep Inn, Destin, FL 16,596 1992 9/13/96 35
Sleep Inn, Sarasota, FL 13,949 1993 9/13/96 35
Sleep Inn, Tallahassee, FL 11,873 1994 9/13/96 35
--------
174,502
Land -
Furniture and equipment 216,507
--------
Total hotels and land
under lease $391,009
--------
--------
</TABLE>
- -------------------------
(1) All hotel assets are cross collateralized and encumbered by the Initial
Loan Facility as of December 31, 1996.
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
F-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors Host Funding, Inc.:
I have audited the accompanying Historical Summaries of Gross Revenues and
Direct Operating Expenses (the "Historical Summaries") of the Super 8 Motel -
Flagstaff, as defined in Note 1 for the year ended December 31, 1996. These
Historical Summaries are the responsibility of Teachers, CARA and Crossroads.
My responsibility is to express an opinion on these Historical Summaries based
on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summaries. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Historical
Summaries. I believe that my audit provide a reasonable basis for my opinion.
The accompanying Historical Summaries are prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1, and are not intended to be a complete
presentation of the Super 8 Motel - Flagstaff's gross revenues and direct
operating expenses.
In my opinion, the Historical Summaries referred to above present fairly, in
all material respects, the assets, gross revenues and direct operating expenses
of the Super 8 Motel - Flagstaff for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
WILLIAM H. LING
May 27, 1997
San Diego, California
F-32
<PAGE>
SUPER 8 MOTEL - FLAGSTAFF
HISTORICAL SUMMARIES OF GROSS REVENUE
AND DIRECT OPERATING EXPENSES
<TABLE>
- ----------------------------------------------------------------------------------------------------
Period January 1 Three Months
Year Ended to March 14, Ended
December 31, 1997 March 31, 1996
1996 (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Room Sales $ 1,333,357 $ 171,974 $ 224,854
Telephone 25,019 4,780 2,911
Other - principally vending 6,782 116 1,380
------------ ---------- ----------
Total 1,365,158 176,870 229,145
------------ ---------- ----------
EXPENSES:
Rooms 239,728 46,774 46,288
Administrative and general 80,690 17,804 16,678
Franchise 80,002 10,319 13,492
Energy cost 66,318 11,935 13,537
Management fee 69,195 8,840 11,457
Repairs and maintenance 34,316 9,372 6,761
Property taxes 50,424 14,049 12,606
Insurance 9,444 2,361 2,361
Marketing 8,421 1,116 1,812
Telephone 13,014 2,669 3,283
------------ ---------- ----------
Total 724,794 141,152 146,585
------------ ---------- ----------
GROSS REVENUES IN EXCESS OF DIRECT
OPERATING EXPENSES $ 640,364 $ 35,718 $ 82,560
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-33
<PAGE>
SUPER 8 MOTEL - FLAGSTAFF
OWNER
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION:
The Super 8 Motel - Flagstaff ("Flagstaff" or "Motel") is a 90 room limited
service motel located in Flagstaff, Arizona. The Motel was owned by
the Teachers Retirement Fund of Illinois ("Teachers" or "Owner"), whose
asset manager is Capital Associates Realty Advisors Corp. ("CARA") and
whose operator was Crossroads Hospitality Tenant Company, a Delaware
limited liability company ("Crossroads") (see Notes 3 and 4). As further
discussed in Note 4, the Motel was sold in March 1997 to Host Funding,
Inc., a Maryland corporation ("Host Funding").
The Historical Summaries have been prepared to substantially comply with
the rules and regulations of the Securities and Exchange Commission for
business combinations accounted for as a purchase. Historical financial
statement summaries, rather than full audited financial statements, are
presented for the Super 8 Motel - Flagstaff because the Super 8 Motel -
Flagstaff was acquired from an unaffiliated third party in a negotiated
transaction and the seller of the Super 8 Motel - Flagstaff would not
allow Host Funding access to records supporting hotel historical costs,
indebtedness and equity of the Super 8 Motel - Flagstaff. Because it was
not practicable to obtain full audited financial statements of the Super 8
Motel - Flagstaff, the historical summaries of gross revenue and direct
operating expenses do not include certain historical expenses of the
Super 8 Motel - Flagstaff such as interest, depreciation, and amortization
and indirect costs. Therefore, the Historical Summaries are not
representative of the actual operations for the periods presented.
F-34
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUES
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilized the hotel's services.
Ongoing credit evaluations are performed and potential credit losses are
expensed at the time the account receivable is estimated to be
uncollectible. Historically, credit losses have not been material to the
Motel's results of operations.
USE OF ESTIMATES
The preparation of Historical Summaries in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of gross revenues and direct
operating expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2. FRANCHISE AGREEMENTS
Flagstaff has been granted a License Agreement ("License Agreement") by
Super 8 Motels, Inc. for a 20-year term expiring in 2008. Pursuant to the
terms of the License Agreement, Flagstaff is required to pay a royalty fee
and an advertising fee equal to 4% and 2%, respectively, of gross room
revenue. This royalty fee and advertising fee totalled approximately
$53,000 and $27,000 in 1996, respectively.
NOTE 3. MANAGEMENT AGREEMENT
Teachers had entered into a Management Agreement ("Management Agreement")
with Crossroads, which is a subsidiary of Interstate Hotels, Inc. a
Delaware corporation and nationally recognized hotel operator, to manage
Flagstaff. Under this management agreement, Crossroads operates and
manages the Motel and receives a management fee of 5% of gross revenue and
an incentive fee of 20% of the increase in profits over the preceding
fiscal year, as defined in the Management Agreement. The management fee
totalled approximately $69,000 in 1996, with no incentive fee due.
F-35
<PAGE>
NOTE 4. SUBSEQUENT EVENT
In 1997, Teachers entered into an "Agreement to Purchase Motel" ("Purchase
Agreement") with Host Ventures, Inc., a Maryland corporation ("Host
Ventures"), a wholly-owned, special purpose subsidiary of Host Funding.
Per the terms of the Purchase Agreement, Teachers sold the land, buildings
and equipment to Host Ventures for $5,150,000. This sale closed effective
March 14, 1997.
Effective as of the closing date of Flagstaff, Host Ventures also leased
Flagstaff to Crossroads. The lease agreement between Crossroads and Host
Ventures for Flagstaff is for a term of fifteen (15) years from March 1997
and provides for annual base rentals of $505,000 plus percentage rentals of
32% of gross revenues less a breakeven level of $925,000, adjusted
annually.
Flagstaff was acquired pursuant to terms of an Acquisition Agreement (the
"Acquisition Agreement") by and between Host Funding and HMR Capital, LLC,
a Delaware limited liability company (the "Acquisition Company"). The
Acquisition Company was an affiliate of Michael S. McNulty, president and
a director of Host Funding. Under the terms of the Acquisition Agreement,
the Acquisition Company is responsible for the management, coordination,
and supervision of Host Funding's acquisition of additional hotel
properties. The Acquisition Company sought out Flagstaff and negotiated
the terms of the acquisition.
Pursuant to the terms of the Acquisition Agreement, the Acquisition Company
is entitled to receive an acquisition fee of up to 6% of the gross purchase
price of Flagstaff plus reimbursement of certain expenses (the "Flagstaff
Property Acquisition Fee"). The Flagstaff Property Acquisition Fee is
payable in cash or, at the option of the Acquisition Company, in the Class
A Common Stock of Host Funding. Host Funding and the Acquisition Company
agreed that the Flagstaff Property Acquisition Fee earned by the
Acquisition Company relating to Flagstaff was 16,000 shares of the Class A
Common Stock of Host Funding valued at $10 per share. The shares of Class
A Common Stock received by the Acquisition Company in payment of the
Flagstaff Property Acquisition Fee will be restricted securities under the
Securities Act of 1933 and subject to the resale provision of Rule 144
promulgated under the Act. The last traded price of the stock of Host
Funding on the American Stock Exchange on March 14, 1997 was $9.50 per
share. Host Funding intends to record the Flagstaff Property Acquisition
Fee on Flagstaff at the fair market value of the Class A Common Stock on
March 14, 1997. The Flagstaff Property Acquisition Fee (based upon a value
of $10 and $9.50 per share or $160,000 and $152,000, respectively)
represents approximately 3.1% and 3.0%, respectively, of the gross purchase
price totaling $5,150,000 excluding closing expenses of Flagstaff.
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<PAGE>
SUPER 8 MOTEL - FLAGSTAFF
LESSEE
STATEMENT OF REVENUES AND EXPENSES
(EXCLUDING INCOME TAXES)
FOR THE PERIOD MARCH 15 TO MARCH 31, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
REVENUES:
Room Sales $72,225
Telephone 1,334
Other - principally vending 59
-------
Total 73,618
-------
EXPENSES:
Rooms 10,046
Administrative and general 4,586
Franchise 3,611
Energy cost 2,703
Management fee 3,681
Repairs and maintenance 778
Insurance 886
Marketing 2,992
Telephone 524
Rent 22,986
-------
Total 52,793
-------
NET REVENUE OVER EXPENSES $20,825
-------
-------
See accompanying notes to unaudited financial statements.
- -------------------------------------------------------------------------------
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<PAGE>
SUPER 8 MOTEL - FLAGSTAFF
LESSEE
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Super 8 Motel - Flagstaff ("Flagstaff" or "Motel") is a 90 room limited
service motel located in Flagstaff, Arizona. The Motel was owned by the
Teachers Retirement Fund of Illinois ("Teachers" or "Owner"), whose asset
manager is Capital Associates Realty Advisors Corp. ("CARA") and whose operator
was Crossroads Hospitality Tenant Company, a Delaware limited liability company
("Crossroads" or "Lessee") (see Note 4). The Motel was sold on March 14, 1997
to Host Funding, Inc., a Maryland corporation ("Host Funding") and leased to
Crossroads (see Note 2).
The accompanying financial statements have been prepared for Flagstaff for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the 10-KA filing of Host Funding.
The accompanying financial statement provides only the unaudited revenues and
expenses excluding income taxes of Flagstaff for the period March 15 to March
31, 1997. The accompanying financial statement includes no provision related to
federal or state income taxes because Flagstaff and Crossroads did not pay
income taxes and Crossroads does not allocate or charge these expenses to its
individual units. Accordingly, the accompanying financial statements are not
intended to be a complete presentation of Flagstaff's revenues and expenses, nor
do they reflect or intend to reflect the operations of Crossroads.
The Motel's fiscal year end is December 31.
REVENUES
Revenue is recognized as earned. Earned is generally defined as the date upon
which a guest occupies a room and/or utilized the hotel's services. Ongoing
credit evaluations are performed and potential credit losses are expensed at the
time the account receivable is estimated to be uncollectible. Historically,
credit losses have not been material to the Motel's results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and 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.
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<PAGE>
NOTE 2. ACQUISITION AND LEASES
In 1997, Teachers entered into an "Agreement to Purchase Motel" ("Purchase
Agreement") with Host Ventures, Inc., a Maryland corporation ("Host Ventures"),
a wholly-owned, special purpose subsidiary of Host Funding. Per the terms of
the Purchase Agreement, Teachers sold the land, buildings and equipment to Host
Ventures for $5,150,000. This sale closed effective March 14, 1997.
Effective as of the closing date of Flagstaff, Host Ventures also leased
Flagstaff to Crossroads. The lease agreement between Crossroads and Host
Ventures for Flagstaff is for a term of fifteen (15) years from March 1997 and
provides for annual base rentals of $505,000 plus percentage rentals of 32% of
gross revenues less a breakeven level of $925,000, adjusted annually. Under the
terms of the lease, the lessor is responsible for paying for replacements and
property taxes.
Flagstaff was acquired pursuant to terms of an Acquisition Agreement (the
"Acquisition Agreement") by and between Host Funding and HMR Capital, LLC, a
Delaware limited liability company (the "Acquisition Company"). The Acquisition
Company was an affiliate of Michael S. McNulty, president and a director of Host
Funding. Under the terms of the Acquisition Agreement, the Acquisition Company
is responsible for the management, coordination, and supervision of Host
Funding's acquisition of additional hotel properties. The Acquisition Company
sought out Flagstaff and negotiated the terms of the acquisition.
Pursuant to the terms of the Acquisition Agreement, the Acquisition Company is
entitled to receive an acquisition fee of up to 6% of the gross purchase price
of Flagstaff plus reimbursement of certain expenses (the "Flagstaff Property
Acquisition Fee"). The Flagstaff Property Acquisition Fee is payable in cash
or, at the option of the Acquisition Company, in the Class A Common Stock of
Host Funding. Host Funding and the Acquisition Company agreed that the
Flagstaff Property Acquisition Fee earned by the Acquisition Company relating to
Flagstaff was 16,000 shares of the Class A Common Stock of Host Funding valued
at $10 per share. The shares of Class A Common Stock received by the
Acquisition Company in payment of the Flagstaff Property Acquisition Fee will be
restricted securities under the Securities Act of 1933 and subject to the resale
provision of Rule 144 promulgated under the Act. The last traded price of the
stock of Host Funding on the American Stock Exchange on March 14, 1997 was $9.50
per share. Host Funding intends to record the Flagstaff Property Acquisition
Fee on Flagstaff at the fair market value of the Class A Common Stock on March
14, 1997. The Flagstaff Property Acquisition Fee (based upon a value of $10 and
$9.50 per share or $160,000 and $152,000, respectively) represents approximately
3.1% and 3.0%, respectively, of the gross purchase price totaling $5,150,000
excluding closing expenses of Flagstaff.
NOTE 3. FRANCHISE AGREEMENT
Flagstaff has been granted a License Agreement ("License Agreement") by Super 8
Motels, Inc. ("Super 8") for a 10-year term expiring in 2007. Pursuant to the
terms of the License Agreement, Flagstaff is required to pay a royalty fee and
an advertising fee equal to 4% and 2%, respectively, of gross room revenue.
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