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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1998 Commission file number 1-14280
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
HOST FUNDING, INC.
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(Exact name of Registrant as specified in its charter)
Maryland 52-1907962
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6116 N. Central Expressway, Suite 1313, Dallas, TX 75206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 750-0760
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
The number of outstanding shares of the Registrant's Class A Common Stock was
1,615,769 as of August 10, 1998.
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TABLE OF CONTENTS
<TABLE>
Item Number Page
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PART I
1. Financial Statements 3
Notes to Financial Statements 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
3. Quantitative and Qualitative Disclosures 18
About Market Risk
PART II
1. Legal Proceedings 18
2. Changes in Securities 18
3. Defaults Upon Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 18
5. Other Information 19
6. Exhibits and Reports on Form 8-K 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
3
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HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
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June 30, December 31,
1998 1997
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<S> <C> <C>
ASSETS (Unaudited)
------
LAND, PROPERTY AND EQUIPMENT - AT COST:
Building and improvements $ 20,946,571 $ 20,667,995
Furnishings and equipment 3,600,795 3,471,336
Less accumulated depreciation (1,766,370) (1,241,798)
------------ ------------
22,780,996 22,897,533
Land 6,842,734 6,844,650
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Land, property and equipment - net 29,623,730 29,742,183
CASH AND CASH EQUIVALENTS 31,674 48,867
RESTRICTED CASH 874,777 557,758
RESTRICTED INVESTMENTS 288,000 -
RENT RECEIVABLE 261,079 115,328
NOTES AND OTHER RECEIVABLES, SALE OF LEASE RIGHTS 800,000 -
DUE FROM RELATED PARTIES 22,886 19,942
LONG-TERM ADVANCES TO LESSEES 110,090 255,841
LOAN COMMITMENT FEES 1,127,322 964,551
FRANCHISE FEES - NET 105,209 110,760
PREPAID AND OTHER ASSETS 155,307 180,950
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TOTAL $ 33,400,074 $ 31,996,180
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
LONG-TERM DEBT $ 26,049,815 $ 25,036,346
SHORT TERM DEBT 918,932 1,345,154
LONG-TERM LEASE DEPOSIT 588,000 300,000
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 424,201 335,645
ACCRUED INTEREST 197,862 196,053
ACCRUED PROPERTY TAXES 207,873 248,823
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Total liabilities 28,386,683 27,462,021
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MINORITY INTEREST IN PARTNERSHIPS 250,631 254,822
DEFERRED INCOME 170,683 -
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding 1,615,769
shares and 1,535,868 shares at June 30, 1998 and
December 31, 1997 17,057 16,258
Additional Paid in Capital 8,903,303 8,499,876
Accumulated Deficit (3,258,491) (3,134,005)
Less: Unearned directors' compensation (169,792) (202,792)
------------ ------------
5,492,077 5,179,337
Less: Class B Common stock in treasury at cost, 90,000
shares at June 30, 1998 (900,000) (900,000)
------------ ------------
Total shareholders' equity 4,592,077 4,279,337
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TOTAL $ 33,400,074 $ 31,996,180
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</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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<TABLE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998, AND 1997
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
REVENUES:
Lease revenue - related party $ $
Lease revenue - Lessees 867,208 989,208 1,777,211 1,738,365
Interest income - related parties - 60,528 - 118,840
Interest income & Other income 8,903 15,576 14,062 17,195
----------- ----------- ----------- -----------
Total revenue 876,110 1,065,312 1,791,272 1,874,400
----------- ----------- ----------- -----------
EXPENSES:
Interest expense (including amortization of loan costs) 670,931 586,673 1,374,372 1,105,821
Depreciation and amortization 265,061 204,131 530,122 381,531
Administrative expenses - other 270,463 244,337 481,668 518,157
Advisory fees - related party - - - 2,500
Property taxes 85,394 72,397 168,279 133,982
Minority Interest in Partnerships (1,365) - (4,191) -
Amortization of unearned directors' compensation 13,500 13,500 27,000 27,000
----------- ----------- ----------- -----------
Total expenses 1,303,983 1,121,038 2,577,249 2,168,991
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES, VALUATION RESERVE,
AND EXTRAORDINARY ITEM (427,873) (55,726) (785,977) (294,591)
Estimated loss related to property sale - (50,000) - (50,000)
Extraordinary item: sale of leasing rights 661,491 - 661,491 -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 233,618 (105,726) $ (124,486) (344,591)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.15 (0.07) $ (0.08) (0.23)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,554,243 1,522,042 1,554,243 1,518,067
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
UNAUDITED
<TABLE>
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Retained
Class A Class B Class C Additional Earnings
Common Common Common Paid in (Accumulated
Stock Stock Stock Capital Deficit)
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<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $16,258 $ 0 $ 0 $8,499,876 $(3,134,005)
AMORTIZATION OF UNEARNED DIRECTORS COMPENSATION
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 175 114,925
COMMON STOCK ISSUED AS COMPENSATION TO EMPLOYEE 2 1,124
NET LOSS (358,104)
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BALANCE, March 31, 1998 $16,435 $ 0 $ 0 $8,615,925 $(3,492,109)
------- --- --- ---------- -----------
------- --- --- ---------- -----------
COMMON STOCK ISSUED PURSUANT TO SALE OF LEASE RIGHTS 622 287,378
AMORTIZATION OF UNEARNED DIRECTORS COMPENSATION
PRINCIPAL REDUCTION: NOTES RECEIVABLE DIRECTORS
NET INCOME 233,618
------- --- --- ---------- -----------
BALANCE, JUNE 30, 1998 $17,057 $ 0 $ 0 $8,903,303 $(3,258,491)
------- --- --- ---------- -----------
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<CAPTION>
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Related Unearned Total
Party Note Directors' Treasury Shareholders'
Receivable Compensation Stock Equity
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<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ 0 $(202,792) $(900,000) $4,279,337
AMORTIZATION OF UNEARNED DIRECTORS COMPENSATION 13,500 13,500
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 115,100
COMMON STOCK ISSUED AS COMPENSATION TO EMPLOYEE 1,126
NET LOSS (358,104)
--- --------- --------- ----------
BALANCE, March 31, 1998 $ 0 $(189,292) $(900,000) $4,050,959
--- --------- --------- ----------
--- --------- --------- ----------
COMMON STOCK ISSUED PURSUANT TO SALE OF LEASE RIGHTS 288,000
AMORTIZATION OF UNEARNED DIRECTORS COMPENSATION 13,500 13,500
PRINCIPAL REDUCTION: NOTES RECEIVABLE DIRECTORS 6,000 6,000
NET INCOME 233,618
--- --------- --------- ----------
BALANCE, JUNE 30, 1998 $ 0 $(169,792) $(900,000) $4,592,077
--- --------- --------- ----------
--- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1997
(UNAUDITED)
<TABLE>
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (124,486) $ (344,591)
Adjustments to reconcile net income to net cash: -
provided by operating activities -
Depreciation and amortization 530,122 381,532
Amortization of loan fees 107,385 225,075
Amortization of unearned directors' compensation 27,000 27,000
Estimated loss related to property sale - 50,000
Stock issued as compensation 1,125 -
Minority interest in partnerships (4,191) -
Changes in operating assets and liabilities: - -
Rent receivable (145,751) 210,187
Rent, interest and other receivable - related party (2,944) (72,540)
Prepaid and other assets 25,643 (25,725)
Security deposits 288,000 -
Notes receivable: directors 6,000 2,000
Short term debt (426,222) 25,000
Deferred income 170,683 -
Accounts payable and accrued expenses 49,416 172,100
----------- -----------
Net cash provided by operating activities 501,780 650,038
----------- -----------
INVESTING ACTIVITIES:
Investment in land, property and equipment (291,018) (5,183,104)
Restricted cash (317,019) (400,559)
Long-term advances to lessee 145,751 (30,840)
Franchise fees - (21,000)
----------- -----------
Net cash used in investing activities (462,286) (5,635,503)
----------- -----------
FINANCING ACTIVITIES:
Notes and other receivables, sale of leasing rights (800,000)
Payment of loan fees (270,156) (779,427)
Borrowings on long-term debt 1,175,000 6,225,000
Payments on long-term debt (161,531) (33,443)
Long-term lease deposit - 300,000
Distributions - (663,771)
----------- -----------
Net cash provided by financing activities (56,687) 5,048,359
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (17,193) 62,894
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,867 218,693
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,674 $ 281,587
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 1,265,178 $ 649,983
----------- -----------
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</TABLE>
(Continued)
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND 1997
(UNAUDITED)
<TABLE>
1998 1997
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Continued)
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ 114,925 $ 151,840
Class A Common Stock 175 160
Land, property and equipment (115,100) (152,000)
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Net non-cash investing activity $ 0 $ 0
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Conversion of Class C common stock
to Class A common stock
Class A common stock $ - $ 1,400
Class C common stock - (1,400)
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Net non-cash investing activity $ 0 $ 0
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Common stock issued as compensation
Class A common $ 2 $ -
Additional paid in capital 1,123 -
Salary expense (1,125) -
--------- ---------
Net non-cash investing activity $ 0 $ 0
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--------- ---------
Common stock issued as deposits and held in escrow
pursuant to the related purchase documents
Class A common $ - $ 49,745
Additional paid in capital - 55
Prepaid and other assets - (49,800)
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Net non-cash investing activity $ 0 $ 0
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Common stock issued pursuant to the sale of lease rights
Class A common $ 622 $ -
Additional paid in capital 287,378 -
N/R: Buckhead (288,000) -
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Net non-cash investing activity $ 0 $ 0
--------- ---------
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Common stock pledged to Host Funding as security deposit
relating to leases to Buckhead
Restricted investments $ 288,000 $
Security deposits (288,000)
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Net non-cash investing activity $ 0 $ 0
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</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-8- (Concluded)
<PAGE>
Host Funding, Inc. Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION.
The accompanying unaudited consolidated financial statements of Host
Funding, Inc., a Maryland corporation (the "Registrant" or the
"Company"), include the accounts of the Company and its consolidated
subsidiaries, Host Ventures, Inc. ("Host Ventures"), and CrossHost,
Inc ("CrossHost"), and the Company's interest in the Country Hearth
Inns located in Findlay, Ohio and Auburn, Indiana. These unaudited
consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q. Accordingly,
these statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management of the Registrant,
all adjustments necessary for a fair presentation have been included.
The financial statements presented herein have been prepared in
accordance with the accounting policies described in the Registrant's
Annual Report on Form 10-K/A for the year ended December 31, 1997 and
should be read in accordance therewith. The results of operations for
the three-month period ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
2. NET INCOME (LOSS) PER SHARE.
Net Income or Loss per share for the three months ended June 31, 1998
and 1997 is computed based on the weighted average number of shares of
common stock outstanding. The impact of common stock equivalents to
earnings per share is immaterial.
The Company adopted Statement of Financial Standards No. 128 ("SFAS
128"), Earnings per Share ("EPS"), beginning with the Company's fourth
quarter of 1997. SFAS 128 requires basic EPS to be computed by
dividing income available to common stockholders by weighted-average
number of common shares outstanding for the period and diluted EPS to
reflect dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. All prior period EPS data is required to be
restated to conform to the provision of this statement. There is no
difference between basic and diluted EPS; therefore, no restatement of
prior periods nor reconciliation of these amounts is needed.
3. DEFERRAL OF CONTINGENT INCOME
In May 1998, the Financial Accounting Standards Board's Emerging
Issues Task Force issued EITF number 98-9, "Accounting for Contingent
Rent in Interim Financial Periods" (EITF 98-9). EITF 98-9 provides
that a lessor shall defer recognition of contingent rental income in
interim periods until specified targets that
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trigger the contingent income are met. In July 1998 the Task Force
issued transition guidance stating that the consensus could be
applied on a prospective basis effective April 1, 1998. The Company
has reviewed the terms of its percentage leases and has determined
that the provisions of EITF 98-9 will impact the Company's current
revenue recognition on an interim basis, but will have no impact on
the Company's annual percentage lease revenue or interim cash flow
from its third party Lessees. The Company adopted the provisions of
EITF 98-9 and therefore has recorded the results of the second
quarter in accordance with the new pronouncement. The effect on the
three months ended June 31, 1998 was to decrease lease revenues and
therefore net income applicable to common shareholders
approximately $170,000.
4. EXTRAORDINARY ITEM
As described in Note 5, the Company terminated certain lease
agreements with Crossroads Tenant Hospitality Company, LLC
("Crossroads") effective June 3, 1998. Concurrently with such
termination, the Company sold the right to lease certain properties to
Buckhead America Corporation or its affiliates ("Buckhead") for the
gross price of $1,250,000. This transaction resulted in a net book
gain of approximately $661,000, and is classified as an extraordinary
item because it is non-recurring and not customary in the Company's
normal course of business.
5. COMMITMENTS AND CONTINGENCIES
REIT STATUS
The Company, as a requirement under the Internal Revenue Code (the
"Code") to elect REIT status, must have no more than five (5)
shareholders, who own no more than 50% of the common stock, common
stock equivalents, or other forms of equity outstanding of the
Company. The Company has not satisfied this requirement and therefore,
has not elected to qualify as a REIT during the 1997 tax year and
currently is subject to the corporate tax provisions. However, the
Company has a net deferred tax asset under SFAS 109, Accounting for
Income Taxes, that has been fully reserved. The Company's decision not
to elect REIT qualification should not adversely affect the
stockholders of the Company in that the Company had no taxable income
for the 1997 year and expects no material federal income tax liability
for the year ended 1998.
CONTRACTS TO PURCHASE PROPERTIES
The Company has modified previously executed contracts (the "Modified
Contracts") to purchase two properties along the West Coast of Florida
for an approximate aggregate price of $14 million. The Modified
Contracts provide for an extended closing date, and further provide
that earnest money in the amount of $50,000, which was previously
funded in escrow, is at risk if the Company does not consummate the
purchase. The properties are located in Clearwater and Port Richey
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and contain an aggregate of 258 rooms. Closing is anticipated in
the third quarter, 1998. Southwest Securities of Dallas, Texas is
assisting the Company in procuring financing for these transactions.
FRANCHISE AGREEMENTS
Host Funding has been granted franchise license agreements relating to
the Super 8 Motels, Sleep Inns, and Country Hearth Inns owned by the
Company or its affiliates for terms expiring in 2005, 2011, and 2012,
respectively. Pursuant to the terms of the agreements, the Company is
required to pay royalty fees and advertising fees of 5% to 4% and 3%
to 1.3%, respectively, reservation fees due under the Sleep Inn
agreements of 1.75% of gross room revenue, and reservation fees due
under the Country Hearth agreements of 1% of gross room revenues plus
$1.00 per each room night generated by the Country Hearth reservation
system. Pursuant to the lease agreements for each of the hotel
properties owned by the Company, the responsibility for payment of the
fees on the Super 8 Motels located in Flagstaff, Arizona and in San
Diego, California has been assigned to Crossroads, as lessee. The
responsibility for payment of the fees on the remaining Company
Properties has been assigned to Buckhead, or its affiliates.
HOST VENTURES DEBT
Effective May 12, 1998, the Company caused Host Ventures to enter into
a new loan agreement (the "HVI Modified Loan") with Credit Suisse
First Boston Mortgage Capital, LLC ("First Boston"), in which the
principal amount of the existing loan from First Boston to HVI (the
"Original Loan") was increased from $8,725,000 to $9,075,000. The
additional proceeds of the loan were used for general corporate
purposes. The term of the Original Loan was modified so that all
principal and outstanding interest is due and payable in June, 2023.
The annual interest rate was modified to 8.12%, with interest and
principal amortized over a 25 year term, payable monthly. The HVI
Modified Loan provides for a "Hyperamortization Date", after which the
annual interest rate increases substantially. The hyperamortization
provision is intended to provide incentive for the loan to be paid off
on the 10 year anniversary of the effective date of the HVI Modified
Loan.
ADDITIONAL FINANCING
Also effective May 12, 1998, the Company entered into a new loan
agreement with First Boston (the "Mezzanine Loan") in which First
Boston loaned the Company $825,000. The proceeds of the loan were used
for general corporate purposes. Interest accrues at a floating rate of
30-day LIBOR plus 500 basis points. Interest and principal payments,
based on a 5 year amortization, are due monthly. The Company formed
Host Enterprises, Inc. ("HEI"), as a wholly owned subsidiary for the
purpose of allowing HEI to assume the Mezzanine Loan. HEI subsequently
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assumed the Mezzanine Loan with the Company simultaneously executing
an agreement guaranteeing the performance by HEI of the Mezzanine
Loan. In connection with the Mezzanine Loan, and the assumption of the
Mezzanine Loan by HEI, the Company pledged all of the outstanding
common stock of Host Ventures as security for the Mezzanine Loan.
TERMINATION OF CERTAIN AGREEMENTS WITH CROSSROADS; SALE OF LEASE
RIGHTS TO BUCKHEAD; EXECUTION OF NEW LEASES WITH BUCKHEAD
Effective June 3, 1998, the Company and its wholly owned subsidiaries,
CrossHost and Host Ventures terminated certain leases (the "Crossroads
Leases") with Crossroads and Crossroads Hospitality Tenant Company,
L.L.C. and, concurrently with such termination, CrossHost and Host
Ventures entered into new leases (the "Buckhead Leases") with BAC
Hotel Management, Inc. ("BAC"), an affiliate of Buckhead. The Buckhead
Leases are substantially the same, in all material respects, as the
Crossroads Leases. Buckhead paid a gross price of approximately $1.25
million in cash, notes payable, stock, and deemed credits for the
leasing rights related to the Buckhead Leases.
WARRANTS
The Company has issued and outstanding two series of warrants
designated "Series A Warrants" and "Series B Warrants". The Series A
Warrants provide warrants to purchase 225,000 shares of Host Funding's
Class A Common Stock, $0.01 par value per share, at $9.90 per share,
and expire on February 2, 2000. The Series B Warrants provide warrants
to purchase 225,000 shares of the Company's Class A Common Stock,
$0.01 par value per share, at $10.80 per share, and expire on February
2, 2001. There are additional provisions in the Series A Warrants and
the Series B Warrants that allow pari passu treatment upon
recapitalization of the Company. In addition, the Series B Warrants
include certain restrictions prohibiting exercise of the warrants if
the Company gives notice of a potential public offering of the
securities of the Company under certain terms and conditions. The
prohibition against exercise terminates on the earlier to occur of (i)
sixty days after the effective date of the public offering or (ii)
February 2, 1999. On August 29, 1997, the Company gave notice to the
holders of the Series B Warrants of a possible public offering thereby
imposing the foregoing restrictions on exercise of the Series B
Warrants.
MODIFICATION AND EXTENSION OF NOTES PAYABLE
In October, 1997, B-H Findlay L.P. ("Findlay") entered into a note
payable (the "Findlay Note") to the sellers of the Country Hearth Inn
in Findlay, Ohio (the "Findlay Country Hearth Inn") and B-H Auburn
L.P. ("Auburn") entered into a note payable (the "Auburn Note") to the
sellers of the Country Hearth Inn located in Auburn, Indiana (the
"Auburn Country Hearth Inn"). The Auburn Note and the Findlay Note are
herein referred to collectively as the "Country Hearth Notes". The
sellers of the Findlay Country Hearth Inn and the Auburn Country
Hearth Inn are
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herein referred to as the "Sellers". The Company is the beneficial
owner of 81% of both Findlay and Auburn, and previously executed
corporate guarantees pursuant to which the Company guarantees the
performance of Findlay and Auburn under the Country Hearth Notes.
The Country Hearth Notes are further secured by 90,000 shares of
Class Be Common Stock of the Company. The Country Hearth Notes
provide that all outstanding principal and interest was due and
payable on April 1, 1998.
Effective as of May 18, 1998, the Country Hearth Notes were modified
(collectively, the "First Modification") to provide the following:
1) Interest due was paid through May 15, 1998 on the Auburn Note and
the Findlay Note on May 18, 1998;
2) A principal payment of $243,721.18 was paid on the Auburn Note on
May 18, 1998;
3) A principal payment of $87,500 was paid on the Findlay Note on
May 18, 1998;
4) Additional principal payments of $243,721.18 and $87,500 for the
Auburn Note and the Findlay Note, respectively, on June 15, 1998.
Effective June 15, 1998 Findlay and Auburn received notices of default
under the First Modification. Findlay and Auburn have agreed in
principle to further modify the Country Hearth Notes to cure such
default upon the following terms & conditions, subject to final
documentation:
1) The outstanding balances of the Country Hearth Notes shall accrue
interest at the annual rate of 12%, effective May 15, 1998. An
interest payment for the period beginning May 15, 1998 through
October 15, 1998 will be paid concurrently with the execution of
the modification;
2) The maturity date of the Country Hearth Notes will be extended to
October 15, 1998;
3) The Country Hearth Notes will be further secured by a pledge of
up to 50% of Host Funding Inc.'s equity in BacHost, L.L.C.;
4) Upon execution of the Country Hearth Notes in October, 1997, the
Company issued 80,819 shares of the Company's Class A Common
Stock with a per share value of approximately $9.27 and an
aggregate value of $750,000. The Country Hearth Notes will be
further modified to provide that if, on October 21, 1998, the
closing price of the Company's Class A Common Stock as traded on
the American Stock Exchange is less than $6.50 per share, the
Company will issue additional shares of Class A
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Common shares so that the total value of Class A Common shares
issued to the Sellers, after such additional issuance, equals
$750,000.
SUBSEQUENT EVENTS.
MODIFICATION OF COUNTRY HEARTH NOTES
See Note 3 above.
PURCHASE OF COMMON STOCK BY THE COMPANY
On July 16, 1998 the Company's Board of Directors authorized the
Company to purchase up to $200,000 of the outstanding shares of the
Company's common stock on the open market. Through August 4, 1998,
the Company had purchased approximately 32,000 shares for a total
cost of approximately $109,000.
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company currently owns 12 properties, all of which are subject to
percentage leases (the "Percentage Leases") pursuant to which Crossroads
Hospitality Tenant Company, L.L.C. ("Crossroads") is responsible for management
and operation of 2 properties and Buckhead America Corporation ("Buckhead") is
responsible for management and operation of 10 properties.
Effective June 3, 1998, the Company terminated lease agreements with
Crossroads pertaining to certain of the Company hotels, sold the right to lease
such properties to Buckhead, and entered into lease agreements with Buckhead.
The leases with Buckhead are substantially the same in all material respects as
the previous leases with Crossroads. The sale of lease rights generated a net
book gain of approximately $661,000. Net cash received by the Company at the
close of the transaction was approximately $86,000. In connection with the sale
by the Company of the hotel lease rights to Buckhead, the Company received
53,647 shares of Buckhead common stock which the company sold on August 11,
1998, and received approximately $319,000 in cash.
The Company retained Southwest Securities, Inc.'s Real Estate Investment
Banking Group (Southwest) as financial advisor to assist the Company's Board of
Directors in evaluating various proposals from multiple sources involving
strategic alliances with the Company. The proposals are structured in order to
provide significant long-term positive impact on shareholder value. The
Company's Board directed Southwest to develop a short list of alternatives and
initiate detailed discussions with selected parties.
The Annual Meeting of the Stockholders of the Company was held on July 16,
1998 in Dallas, Texas. At the annual meeting, the stockholders re-elected
Michael S McNulty, Guy E. Hatfield, Don W. Cockroft, William M. Birdsall and
Charles R. Dunn to serve as directors of the Company, each of whom had served as
directors of the Company during the immediately preceding year.
14
<PAGE>
Subsequent to the annual meeting, the Company announced that its Board of
Directors authorized the Company to undertake the purchase of the Company's
stock in the open market for a period of 90 days commencing July 17, 1998.
Through August 4, 1998, the Company had purchased approximately 30,000 shares
for a total cost of approximately $101,000.
The Company has addressed issues related to the "Year 2000 Problem", in
which certain electronic systems may be affected by the turn of the millenium.
Management has determined that the Company's accounting software is Year 2000
compliant. Management is evaluating the level of compliance of other systems
utilized by the Company, but does not anticipate a material effect on its
financial position or results of operation.
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998 the Task Force
issued transition guidance stating that the consensus could be applied on a
prospective basis effective April 1, 1998. The Company has reviewed the terms of
its percentage leases and has determined that the provisions of EITF 98-9 will
impact the Company's current revenue recognition on an interim basis, but will
have no impact on the Company's annual percentage lease revenue or interim cash
flow from its third party Lessees. The Company has adopted the provisions of
EITF 98-9 and has recorded the results of the second quarter in accordance with
the new pronouncement. The effect of the change on the three months ended June
30, 1998 was to decrease lease revenue and therefore net income applicable to
common shareholders approximately $170,000 ($.11 per share-basic and diluted).
The Company's percentage leases provide for the greater of (i) annual fixed
base rent or (ii) rent based on the revenue of hotels ("Percentage Rent") to be
remitted to the Company annually. The leases contain annual room revenue
thresholds used to calculate two tiers of percentage rent which are applied to
annualized room revenues on a quarterly basis to determine quarterly Lessee
Percentage Rent payments. The provisions of EITF 98-9 call for straight-line
recognition of the annual base rent throughout the year and for the deferral of
any additional lease amounts collected or due from the Lessees until such
amounts exceed the annual fixed base rent. This will generally result in base
rent being recognized in the first and second quarters and percentage rents
already collected or due from the Lessee being deferred and then recognized in
the third and fourth quarters due to the structure of the Company's percentage
leases and the seasonality of the hotel operations. Historically, the Company
has recorded lease revenue in interim periods on a basis similar to that used to
determine quarterly Lessee Percentage Rent payments, resulting in the second and
third quarters being the strongest quarters.
At June 30, 1998 deferred revenue of $170,000 represents Percentage Rent
collected or due from Lessee under the terms of the leases which the Company's
quarterly distributions are based on Percentage Rents collected or due from
Lessee, as opposed to percentage lease revenue recognized.
15
<PAGE>
Management expects its hotel portfolio to yield "Percentage Rent" annually,
based on its cash flow analyses of the hotels prior to their acquisition and
based on the negotiation of the related leases.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997:
The Company acquired four hotel properties on April 1, 1995 (the "Initial
Hotels"), one property on April 1, 1996 (the "Mission Bay Hotel"), four
properties on September 13, 1996 (the "Sleep Inn Properties"), one property on
March 14, 1997 (the "Flagstaff Property"), and two properties on October 21,
1997 (the "Country Hearth Inns"). Collectively, the twelve properties owned by
the Company are herein referred to as the "Company Properties".
Occupancy and average room rates of approximately 65% and $45.41 for the
Company Properties for the six months ended June 30, 1998 resulted in total
sales of approximately $4,900,000 and generated total lease revenues of
approximately $1,777,000. An additional $150,000 in percentage rental revenues
were received in cash or due, but deferred for financial reporting purposes
pursuant to EITF 98-9. Occupancy and average room rates of 64.2% and $48.41 for
the Initial Hotels, the Mission Bay Hotel, and the Sleep Inn properties for the
six months ended June 30, 1997 and 95.7% and $54.27 for the Flagstaff property
for the period from March 14 to June 30, 1997 resulted in total sales of
approximately $4,480,000 which generated lease revenues of approximately
$1,739,000.
The increase in Interest Expense (including amortization of loan costs) to
approximately $1,374,000 for the six months ended June 30, 1998 from $1,106,000
in 1997 results from debt associated with property acquisitions and general
corporate use over these periods. The 1998 and 1997 amounts include
approximately $107,000 and $225,000 in loan fee amortization.
The increase in Depreciation and Amortization results from acquisition of
the Company Properties over the periods. The Company Properties are recorded at
cost and depreciated over the useful lives. Amortization of franchise fees
totaling approximately $5,550 are included in Depreciation and Amortization.
Administrative expenses - other totaled approximately $482,000 and $518,000
for the three months ended June 30, 1998 and 1997, including the following
approximate amounts: salary and benefit costs of $155,000 and $147,000, audit
and accounting fees of $40,000 and $72,000, contract labor of $19,000 and $0,
rent of $7,000 and $5,000, fees to the American Stock Exchange of $7,000 and $0,
fees to the stock transfer agent of $25,000 and $47,000, filing and printing
costs of $20,000 and $32,000, relinquished project costs of $104,000 and $0,
legal fees of $40,000 and $65,000, travel costs of $16,000 and $68,000,
directors fees of 13,000 and 12,000, and other costs of $36,000 and $70,000.
Net income or loss per share and weighted average shares outstanding have
been calculated based upon the daily average of the number of shares outstanding
for the applicable reporting periods.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has no committed additional sources of external liquidity
available, therefore the Company will rely on its internal cash flow to meet its
liquidity needs. The Company's principal source of cash to meet its cash
requirements, including distributions to stockholders, is its share of the
Company's cash flow from the Percentage Leases relating to the hotel properties
owned by the Company. Although the obligations of the lessees under the
Percentage Leases are guaranteed in part by the parent companies of each lessee
(Crossroads and Buckhead), the ability of the lessees to make lease payments
under the Percentage Leases, and therefore the Company's liquidity, including
its ability to make distributions to stockholders, is dependent on the ability
of the lessees to generate sufficient cash flow from the hotels.
The Company intends to make additional investments in hotel properties and
may incur indebtedness to make such investments or to meet distribution
requirements imposed on a REIT under the Code to the extent that working capital
and cash flow from the Company's investments are insufficient to make such
distributions. The Company will invest in additional hotel properties only as
suitable opportunities arise, and the Company will not undertake investments
unless adequate sources of financing are available. Based upon potential REIT
distribution requirements, the Company expects that future investments in hotel
properties will be financed, in whole or in part, with common stock, proceeds
from additional issuances of common stock in the form of future public offerings
or private placements, or from the issuance of other debt or equity securities.
The Company in the future may seek to obtain a line of credit or a permanent
credit facility, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with its charter restrictions. Any debt incurred
or issued by the Company may be secured or unsecured, long-term or short-term,
charge a fixed or variable interest rate and may be subject to such other terms
as the Board of Directors of the Company deems prudent.
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the ability of the lessee to
raise room rates in the face of inflation.
SEASONALITY
Hotel operations are generally seasonal in nature based upon geographic
locations. This seasonality can be expected to cause fluctuations in the
Company's quarterly lease revenue to the extent that it receives percentage
rent. To the extent that cash flow form operations is insufficient during any
quarter, due to temporary or seasonal fluctuations in lease revenue, the Company
expects to utilize other cash on hand or borrowings to make distributions to its
shareholders. No assurance can be given, however, that the Company will make
distributions in the future.
"THE SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995
This Quarterly Report on Form 10-Q contains or incorporates statements that
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number of
places in this Quarterly Report on Form 10-Q and include statements
17
<PAGE>
regarding, among other matters, the Company's growth opportunities, the
Company's acquisition strategy, regulatory matters pertaining to compliance
with governmental regulations and other factors affecting the Company's
financial condition or results of operations. Stockholders are cautioned that
any such forward looking statements are not guarantees of future performance
and involve risks, uncertainties and other factors which may cause actual
results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II-OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES.
In June the Company issued 62,612 shares of the Company's Class A Common
Stock to Buckhead pursuant to the sale to Buckhead by the Company of the leasing
rights to certain of the Company Properties. The shares were issued by the
Company at a per share price of approximately $4.63 and are being held by the
Company to secure the performance by Buckhead of its obligations under the hotel
leases relating to the Company Properties. The shares were issued to Buckhead in
a private transaction as restricted securities under the Securities Act of 1933
and are subject to the resale provisions of Rule 144 promulgated under the Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of the Stockholders of the Company was held on
July 16, 1998 in Dallas, Texas.
(b) Proxies for the election of directors of the Company were
solicited pursuant to a Proxy Statement prepared in accordance
with Regulation 14 of the Securities and Exchange Act of 1934.
There was no solicitation in opposition to the management's
nominees listed in the Proxy Statement, and all nominees were
elected by the stockholders.
(c) One matter was submitted to a vote of the stockholders at the
Annual Meeting held on July 16, 1998, as follows:
18
<PAGE>
ELECTION OF DIRECTORS
The stockholders elected five directors, each of whom was a
nominee of management, with the following votes: Michael S.
McNulty: For: 981,632; Against: 33,734; Abstain: 0; William M.
Birdsall: For: 981,717; Against: 33,649; Abstain: 0; Guy
Hatfield: For: 981,623; Against: 33,734; Abstain: 0; Charles R.
Dunn: For: 981,844; Against: 33,522; Abstain: 0; Don W. Cockroft:
For: 981,844; Against: 33,522; Abstain: 0. There were 0
non-broker votes.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description
- --------------
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11
effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to
Form S-11 effective April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.2 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.3 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
10.1 Termination of Certain Lease Agreements and Master Agreement
Related Thereto (CrossHost Properties) dated June 3, 1998 by
and between CrossHost, Inc., Host Funding, Inc., Crossroads
Hospitality Tenant Company, L.L.C., and Crossroads
Hospitality
19
<PAGE>
Company, L.L.C. (incorporated by reference to Exhibit 2.1 to
Company's Form 8-K Current Report filed on June 12, 1998).
10.2 Termination of Certain Lease Agreements and Master
Agreements Related Thereto (Host Ventures Properties) dated
June 3, 1998 by and between Host Ventures, Inc., Host
Funding, Inc., Crossroads Hospitality Tenant Company,
L.L.C., and Crossroads Hospitality Company, L.L.C.
(incorporated by reference to Exhibit 2.2 to Company's Form
8-K Current Report filed on June 12, 1998).
10.3 Restated And Amended Agreement Regarding Hotel Leases
(CrossHost Properties) dated June 3, 1998 by and between,
Host Funding, Inc. and Buckhead America Corporation
(incorporated by reference to Exhibit 2.3 to Company's Form
8-K Current Report filed on June 12, 1998).
10.4 Restated And Amended Agreement Regarding Hotel Leases (Host
Ventures Properties) dated June 3, 1998 by and between Host
Funding, Inc, and Buckhead America Corporation (incorporated
by reference to Exhibit 2.4 to Company's Form 8-K Current
Report filed on June 12, 1998).
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on form 8-K, dated June 3, 1998 (the
"Current Report") which disclosed the termination of certain leases by and
between Crossroads Hospitality, L.L.C., Crossroads Hospitality Tenant Company,
L.L.C., CrossHost, Inc., Host Ventures, Inc., and the Company. The Current
Report also disclosed the sale of certain lease rights to Buckhead America
Corporation ("Buckhead") and the execution of leases between Buckhead and the
Company (or its affiliates) pertaining to certain motel properties owned by the
Company or its affiliates. The Current Report also disclosed certain loan
transactions with Credit Suisse First Boston Capital, LLC, and the rescheduling
of the date of the Annual Meeting of the Shareholders of the Company to July 16,
1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized and in the capacity as the Registrant's
President and Chief Executive Officer and Chief Financial and Accounting
Officer, respectively.
Dated: August 14, 1998 HOST FUNDING, INC.
/s/ Michael S. McNulty
-------------------------------------------
By: Michael S. McNulty
Its: President and Chief Executive Officer
/s/ Bona K. Allen
-------------------------------------------
By: Bona K. Allen
Its: Chief Financial and Accounting Officer
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11
effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to
Form S-11 effective April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.2 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.3 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
10.1 Termination of Certain Lease Agreements and Master Agreement
Related Thereto (CrossHost Properties) dated June 3, 1998 by
and between CrossHost, Inc., Host Funding, Inc., Crossroads
Hospitality Tenant Company, L.L.C., and Crossroads
Hospitality Company, L.L.C. (incorporated by reference to
Exhibit 2.1 to Company's Form 8-K Current Report filed on
June 12, 1998).
10.2 Termination of Certain Lease Agreements and Master
Agreements Related Thereto (Host Ventures Properties) dated
June 3, 1998 by and between Host Ventures, Inc., Host
Funding, Inc., Crossroads Hospitality Tenant Company,
L.L.C., and Crossroads Hospitality Company, L.L.C.
(incorporated by reference to Exhibit 2.2 to Company's Form
8-K Current Report filed on June 12, 1998).
10.3 Restated And Amended Agreement Regarding Hotel Leases
(CrossHost Properties) dated June 3, 1998 by and between,
Host Funding, Inc. and Buckhead America Corporation
(incorporated by reference to Exhibit 2.3 to Company's Form
8-K Current Report filed on June 12, 1998).
10.4 Restated And Amended Agreement Regarding Hotel Leases (Host
Ventures Properties) dated June 3, 1998 by and between Host
Funding, Inc, and Buckhead America Corporation(incorporated
by reference to Exhibit 2.4 to Company's Form 8-K Current
Report filed on June 12, 1998).
27 Financial Data Schedule.
</TABLE>
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<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 1,194
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,226
<PP&E> 31,390
<DEPRECIATION> (1,766)
<TOTAL-ASSETS> 33,400
<CURRENT-LIABILITIES> 1,749
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8,020
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<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 33,400
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<TOTAL-REVENUES> 1,791
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<OTHER-EXPENSES> 1,203
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