<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) October 21, 1997
-------------------
Host Funding, Inc.
- --------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 1-14280 52-1907962
- --------------------------------------------------------------------
(STATE OR OTHER JURISDICTION) (COMMISSION) (IRS EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
6116 N. Central Expressway, Suite 1313, Dallas, Texas 75206
- --------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 214-750-0760
----------------
- --------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
Item 1. Change in Control of Registrant
Not Applicable.
Item 2. Acquisition or Disposition of Assets
On November 4, 1997, the Registrant filed a Report on Form 8-K
relating to the acquisition of two Country Hearth Inn hotel properties located
in Auburn, Indiana and Findlay, Ohio (the "Acquired Properties"). The
Registrant completed the purchase of the Acquired Properties by forming two
special purpose limited partnerships with Buckhead America Corporation, a
publicly-traded hotel company ("Buckhead"), of which the Registrant is the
beneficial owner of approximately 84% of the outstanding partnership interests.
The effective closing date of the Acquired Properties was October 21, 1997.
Effective as of the closing date of the Acquired Properties, the purchasing
entities leased the Acquired Properties to Buckhead.
Reference is made to the Form 8-K filed by the Registrant on November
4, 1997, which included more detailed information on the acquisition and
leasing of the Acquired Properties and which is incorporated herein by
reference. The financial statements of the Acquired Properties and the pro
forma financial information of the Registrant which were not available on the
date of filing of the Form 8-K are attached to this Report. The attached
financial statements should be read in accordance with the information
previously provided in the Form 8-K.
Item 3. Bankruptcy or Receivership
Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant
Not Applicable.
Item 5. Other Events
Not Applicable.
Item 6. Resignations of Registrant's Directors
Not Applicable.
Item 7. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS OF ACQUIRED PROPERTIES
Attached to this report are the Financial Statements of the Acquired
Properties required by Rule 3-14 of Regulation S-X.
2
<PAGE>
(b) 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.
(C) EXHIBITS
None
Item 8. Change in Fiscal Year
Not Applicable.
3
<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 hereunto duly authorized.
Dated: January 5, 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
4
<PAGE>
FINANCIAL STATEMENTS
TO
FORM 8-K/A
HOST FUNDING, INC.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
I. HOST FUNDING, INC. FINANCIAL STATEMENTS
A. Host Funding, Inc.'s Pro Forma Financial Statements
Introduction to Estimated Pro Forma Financial Statements........................... F-3
Unaudited Estimated Pro Forma Balance Sheet as of September 30, 1997............... F-4
Unaudited Estimated Pro Forma Statement of Loss for the year ended
December 31, 1996, the twelve months ended September 30, 1997
and the nine months ended September 30, 1997 and September 30, 1996........... F-5 F-8
Notes to Unaudited Estimated Pro Forma Financial Statements........................ F-9 F-10
B. Host Funding, Inc.'s Financial Statements for the year ended
December 31, 1996 (included in Host Funding, Inc.'s previously filed
Form 10-K for the year ended December 31, 1996, incorporated by reference)
Independent Auditor's Report
Balance Sheet as of December 31, 1996 and 1995
Statement of Loss for the twelve months ended December 31, 1996
and nine months ended December 31, 1995
Statement of Shareholder's Equity for the twelve months ended
December 31, 1996 and nine months ended December 31, 1995
Statement of Cash Flows for the twelve months ended December 31, 1996
and nine months ended December 31, 1995
Notes to Financial Statements
Independent Auditor's Report
Schedule III - Real Estate and Accumulated Depreciation
C. Host Funding, Inc.'s Financial Statements for the nine months ended
September 30, 1997 and 1996 (unaudited) (included in Host Funding, Inc.'s
previously filed Form 10-Q for the quarter ended September 30, 1997,
incorporated by reference)
Balance Sheets as of September 30, 1997 and December 31, 1996
Statement of Operations for the nine months ended September 30, 1997
and 1996 (unaudited)
Statement of Shareholders' Equity (Deficit) for the nine months ended
September 30, 1997 (unaudited)
Statement of Cash Flows for the nine months ended September 30, 1997
and 1996 (unaudited)
F-1
<PAGE>
II. COUNTRY HEARTH INN - FINDLAY, OHIO
A. Financial Statements for the twelve months ended December 31, 1996
Independent Auditor's Report....................................................... F-11
Statement Assets, Liabilities, and Net Investments and (Advances) as of
December 31, 1996 and September 30, 1997 (unaudited).......................... F-12
Statement of Revenues and Expenses for the year ended December 31, 1996
and the nine months ended September 30, 1997 (unaudited) and 1996 (unaudited). F-13
Statement of Cash Flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited) and 1996 (unaudited).............. F-14
Notes to Financial Statements...................................................... F-15 F-19
III. COUNTRY HEARTH INN - AUBURN, INDIANA
A. Financial Statements for the twelve months ended December 31, 1996
Independent Auditor's Report....................................................... F-20
Statement Assets, Liabilities, and Net Investments and (Advances) as of
December 31, 1996 and September 30, 1997 (unaudited).......................... F-21
Statement of Revenues and Expenses for the year ended December 31, 1996
and the nine months ended September 30, 1997 (unaudited) and 1996 (unaudited). F-22
Statement of Cash Flows for the year ended December 31, 1996 and the nine
months ended September 30, 1997 (unaudited) and 1996 (unaudited).............. F-23
Notes to Financial Statements...................................................... F-24 F-29
</TABLE>
F-2
<PAGE>
HOST FUNDING, INC.
UNAUDITED ESTIMATED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1997
UNAUDITED ESTIMATED PRO FORMA STATEMENTS OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1996
THE TWELVE MONTHS ENDED SEPTEMBER 30, 1997
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following unaudited estimated pro forma balance sheet gives effect
to (i) the acquisition of Auburn and Findlay; and (ii) certain other
transactions described in the notes hereto as though such transactions
occurred on September 30, 1997.
The following unaudited estimated pro forma statements of loss give
effect to: (i) the acquisition of Auburn and Findlay; (ii) the acquisition of
Flagstaff; and (iii) 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 and historical balance sheet of the
Company, Auburn, Findlay and Flagstaff. Such information should be read in
conjunction with all of the financial statements and notes thereto included
in this Form 8-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, nor
does it purport to represent the results of operations for the Company for
future periods.
F-3
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA BALANCE SHEET
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
As of September 30, 1997
----------------------------------------------
Pro Forma
Historical (A) Adjustments Pro Forma
<S> <C> <C> <C>
ASSETS
Land, property and equipment - at cost
Building and improvements $ 16,203,305 $ 4,439,495 (B) $ 20,642,800
Furnishings and equipment 2,630,695 834,939 (B) 3,465,634
Less accumulated depreciation (971,124) (971,124)
------------ ----------- ------------
17,862,876 5,274,434 23,137,310
Land 6,129,847 755,910 (B) 6,885,757
------------ ----------- ------------
Land, property and equipment - net 23,992,723 6,030,344 30,023,067
Cash and cash equivalents 564,634 (454,954)(B) 109,680
Restricted cash 579,485 167,045 (B) 746,530
Rent receivable - Crossroads 179,772 179,772
Due from related parties 18,643 18,643
Long-term advances to Crossroads 255,841 255,841
Loan commitment fees - net 987,472 47,918 (B) 1,035,390
Franchise fees - net 73,700 20,000 (B) 93,700
Prepaid and other assets 251,867 251,867
------------ ----------- ------------
Total $ 26,904,137 $ 5,810,353 $ 32,714,490
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 21,635,264 $ 4,596,400 (B) $ 26,231,664
Short-term debt 25,000 25,000
Long-term lease deposit 300,000 300,000
Accounts payable 245,015 (3,109)(B) 241,906
Accrued interest 169,509 169,509
Accrued property taxes 195,296 34,550 (B) 229,846
------------ ----------- ------------
Total Liabilities 22,570,084 4,627,841 27,197,925
------------ ----------- ------------
Commitments and Contingencies:
Minority Interest: 0 268,084 (B) 268,084
------------ ----------- ------------
Shareholders' Equity:
Class A Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding
1,628,407 shares 15,355 929 (B) 16,284
Class B Common stock, $.01 par value; authorized
4,000,000 shares; no shares issued and
outstanding 0 0
Class C Common stock, $.01 par value; authorized
4,000,000 shares; no shares issued and outstanding 0 0
Additional paid in capital 7,703,079 913,499 (B) 8,616,578
Accumulated deficit (2,268,089) (2,268,089)
Less: Unearned directors' compensation (216,292) (216,292)
------------ ----------- ------------
5,234,053 914,428 6,148,481
Less: Common stock in treasury at cost,
90,000 shares at September 30, 1997 (900,000) (900,000)
------------ ----------- ------------
Total Shareholders' Equity 4,334,053 914,428 5,248,481
------------ ----------- ------------
Total $ 26,904,137 $ 5,810,353 $ 32,714,490
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See notes to estimated pro forma financial statements.
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F-4
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF LOSS
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
Twelve Months Ended
December 31, 1996
-------------------------------------------
Pro Forma
Historical(C) Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 278,453 $ (278,453)(D) $ 0
Lease revenue - Crossroads and Buckhead 1,262,165 3,192,756 (E) 4,454,921
Interest income - related parties 219,467 (198,467)(E) 21,000
Interest income 8,698 (8,698)(F) 0
---------- ---------- ----------
Total revenues 1,768,783 2,707,138 4,475,921
---------- ---------- ----------
Expenses:
Interest 780,015 1,996,696 (G) 2,776,711
Depreciation and amortization 289,098 850,601 (H) 1,139,699
Administrative expenses - related parties 224,000 (224,000)(I) 0
Administrative expenses - other 427,980 651,220 (J) 1,079,200
Advisory fees - related parties 21,083 (21,083)(K) 0
Property taxes 138,675 196,325 (L) 335,000
Amortization of unearned directors' compensation 37,208 16,792 (M) 54,000
---------- ---------- ----------
Total expenses 1,918,059 3,466,551 5,384,610
---------- ---------- ----------
Estimated net loss $ (149,276) $ (759,413) $ (908,689)
---------- ---------- ----------
---------- ---------- ----------
Estimated net loss per share $ (0.59)
----------
----------
Estimated weighted average shares outstanding 1,538,407
----------
----------
</TABLE>
See notes to estimated pro forma financial statements.
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F-5
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF LOSS
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
Twelve Months Ended
September 30, 1997
-------------------------------------------
Pro Forma
Historical(C) Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 77,941 $ (77,941)(D) $ 0
Lease revenue - Crossroads and Buckhead 3,256,651 1,096,806 (E) 4,353,457
Interest income - related parties 181,852 (160,852)(E) 21,000
Interest income 23,845 (23,845)(F) 0
---------- ---------- -----------
Total revenues 3,540,289 834,168 4,374,457
---------- ---------- -----------
Expenses:
Interest 2,134,207 642,504 (G) 2,776,711
Depreciation and amortization 716,169 423,530 (H) 1,139,699
Administrative expenses - related parties 0 0 (I) 0
Administrative expenses - other 1,083,734 (4,534)(J) 1,079,200
Advisory fees - related parties 10,000 (10,000)(K) 0
Property taxes 275,411 59,589 (L) 335,000
Amortization of unearned directors' compensation 54,001 (1)(M) 54,000
---------- ---------- -----------
Total expenses 4,273,522 1,111,088 5,384,610
---------- ---------- -----------
Estimated net loss $ (733,233) $ (276,920) $(1,010,153)
---------- ---------- -----------
---------- ---------- -----------
Estimated net loss per share $ (0.66)
-----------
-----------
Estimated weighted average shares outstanding 1,538,407
-----------
-----------
</TABLE>
See notes to estimated pro forma financial statements.
- -------------------------------------------------------------------------------
F-6
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF LOSS
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
Nine Months Ended
September 30, 1997
------------------------------------------
Pro Forma
Historical(C) Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 0 $ 0 (D) $ 0
Lease revenue - Crossroads and Buckhead 2,722,872 698,661 (E) 3,421,533
Interest income - related parties 122,430 (106,680)(E) 15,750
Interest income 21,656 (21,656)(F) 0
---------- --------- ----------
Total revenues 2,866,958 570,325 3,437,283
---------- --------- ----------
Expenses:
Interest 1,686,549 395,984 (G) 2,082,533
Depreciation and amortization 585,663 269,111 (H) 854,774
Administrative expenses - related parties 0 0 (I) 0
Administrative expenses - other 818,213 (8,813)(J) 809,400
Advisory fees - related parties 2,500 (2,500)(K) 0
Property taxes 208,139 43,111 (L) 251,250
Amortization of unearned directors' compensation 40,501 (1)(M) 40,500
---------- --------- ----------
Total expenses 3,341,565 696,892 4,038,457
---------- --------- ----------
Estimated net loss $ (474,607) $(126,567) $ (601,174)
---------- --------- ----------
---------- --------- ----------
Estimated net loss per share $ (0.39)
----------
----------
Estimated weighted average shares outstanding 1,538,407
----------
----------
</TABLE>
See notes to estimated pro forma financial statements.
- -------------------------------------------------------------------------------
F-7
<PAGE>
HOST FUNDING, INC.
ESTIMATED PRO FORMA STATEMENT OF INCOME (LOSS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
Nine Months Ended
September 30, 1996
----------------------------------------
Pro Forma
Historical(C) Adjustments Pro Forma
<S> <C> <C> <C>
Revenues:
Lease revenue - related party $ 200,512 $ (200,512)(D) $ 0
Lease revenue - Crossroads and Buckhead 728,386 2,783,811 (E) 3,512,197
Interest income - related parties 160,045 (144,295)(E) 15,750
Interest income 6,509 (6,509)(F) 0
FF&E reserve income - related parties 77,941 (77,941)(N) 0
---------- ---------- ----------
Total revenues 1,173,393 2,354,554 3,527,947
---------- ---------- ----------
Expenses:
Interest 332,357 1,750,176 (G) 2,082,533
Depreciation and amortization 158,592 696,182 (H) 854,774
Administrative expenses - related parties 224,000 (224,000)(I) 0
Administrative expenses - other 162,459 646,941 (J) 809,400
Advisory fees - related parties 13,583 (13,583)(K) 0
Property taxes 71,403 179,847 (L) 251,250
Amortization of unearned directors' compensation 23,708 16,792 (M) 40,500
---------- ---------- ----------
Total expenses 986,102 3,052,355 4,038,457
---------- ---------- ----------
Estimated net income (loss) $ 187,291 $ (697,801) $ (510,510)
---------- ---------- ----------
---------- ---------- ----------
Estimated net loss per share $ (0.33)
----------
----------
Estimated weighted average shares outstanding 1,538,407
----------
----------
</TABLE>
See notes to estimated pro forma financial statements.
- -------------------------------------------------------------------------------
F-8
<PAGE>
HOST FUNDING, INC.
NOTES TO ESTIMATED PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
(A) Represents the historical balance sheet of the Company as of
September 30, 1997.
(B) Represents the proposed acquisition of the Country Hearth Inn,
Auburn, Indiana ("Auburn") and the Country Hearth Inn, Findlay, Ohio
("Findlay") on a pro forma basis on September 30, 1997.
(C) Represents the historical statements of income (loss) of the Company
as of the dates indicated.
(D) Represents the effect of the reversal of the lease revenue - related
party, which leases were terminated upon the completion of the Stock Offering.
(E) Represents the effect of the Transferred Properties, Acquired
Properties and Flagstaff Leases with Crossroads and Auburn and Findlay leases
with Buckhead, 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 Nine Nine
Mo. Ended Year Ended Mo. Ended Mo. Ended
September 30, December 31, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Base and Percentage Rent $ 4,353,457 $ 4,454,921 $ 3,421,533 $ 3,512,197
Less: Amounts included in historical
operating results (3,256,651) (1,262,165) (2,722,872) (728,386)
------------ ------------ ------------ ------------
$ 1,096,806 $ 3,192,756 $ 698,661 $ 2,783,811
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Interest Income - related parties is as follows:
Related party note receivable $ 21,000 $ 21,000 $ 15,750 $ 15,750
Less: Amounts included in historical
operating results (181,852) (219,467) (122,430) (160,045)
------------ ------------ ------------ ------------
$ (160,852) $ (198,467) $ (106,680) $ (144,295)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
In addition, the Company is responsible for replacement reserve expenditures
under the Transferred Properties, Acquired Properties and Flagstaff Leases
with Crossroads, which amounts are equal to 6% of Transferred Properties
gross revenues, 4% of Acquired Properties gross revenues, 5% of Flagstaff
gross revenues and 4% of the Auburn and Findlay gross revenues.
(F) For Pro Forma estimated purposes, no interest income is recognized.
(G) 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 and after the Auburn and Findlay
acquisitions as follows:
<TABLE>
Twelve Nine Nine
Mo. Ended Year Ended Mo. Ended Mo. Ended
September 30, December 31, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Interest Expense $ 2,776,711 $ 2,776,711 $ 2,082,533 $ 2,082,533
Less: Amounts included in historical
operating results (2,134,207) (780,015) (1,686,549) (332,357)
------------- ------------ ------------ ------------
$ 642,504 $ 1,996,696 $ 395,984 $ 1,750,176
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
F-9
<PAGE>
(H) Represents the effect of the acquisition of the Initial Hotels,
Mission Bay, the Acquired Properties, Flagstaff, Auburn and Findlay 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 Nine Nine
Mo. Ended Year Ended Mo. Ended Mo. Ended
September 30, December 31, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Depreciation and amortization expense $ 1,139,699 $ 1,139,699 $ 854,774 $ 854,774
Less: Amounts included in historical
operating results (716,169) (289,098) (585,663) (158,592)
------------- ------------ ------------ ------------
$ 423,530 $ 850,601 $ 269,111 $ 696,182
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
(I) Represents the reversal of the administrative expenses - related
parties, which agreement was canceled upon completion of the Stock Offering.
(J) Represents estimated general and administrative expenses of Host
Funding related to independent trustee fees, legal, accounting, employment
agreements and other administrative expenses.
<TABLE>
Twelve Nine Nine
Mo. Ended Year Ended Mo. Ended Mo. Ended
September 30, December 31, September 30, September 30,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Administrative expenses - other $ 1,079,200 $ 1,079,200 $ 809,400 $ 809,400
Less: Amounts included in historical
operating results (1,083,734) (427,980) (818,213) (162,459)
------------- ------------ ------------ ------------
$ (4,534) $ 651,220 $ (8,813) $ 646,941
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
These amounts have been estimated by Host Funding based on management's
experience and/or discussions with service providers.
(K) Represents the reversal of the Advisory fees - related parties
which agreement was terminated February 1, 1997.
(L) Represents the estimated property taxes due after execution of the
Transferred Properties, Acquired Properties, Flagstaff, Auburn and Findlay
Leases, which expense is the obligation of the lessor.
(M) 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.
(N) Represents the reversal of FF&E reserve income - related parties,
which amounts were a one time non-recurring item.
F-10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Host Funding, Inc. and the Owner of the Country
Hearth Inn - Findlay, Ohio (as defined in Note 1):
I have audited the accompanying combined statements of assets, liabilities and
net investment and advances of the Country Hearth Inn - Findlay, Ohio, as
defined in Note 1, as of December 31, 1996 and the related combined statement
of revenues and expenses excluding income taxes, and cash flow for the year
then ended. These financial statements are the responsibility of Host Funding,
Inc. and Findlay Equity Partners. My responsibility is to express an opinion
on these financial statements based on my audit.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the assets, liabilities and net
investment and advances of the Country Hearth Inn - Findlay, Ohio as of
December 31, 1996, and their revenues and expenses excluding income taxes, and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
WILLIAM H. LING
November 14, 1997
San Diego, California
F-11
<PAGE>
COUNTRY HEARTH INN - FINDLAY, OHIO
STATEMENTS OF ASSETS, LIABILITIES AND
NET INVESTMENT AND (ADVANCES)
- ----------------------------------------------------------------------------
September 30,
December 31, 1997
1996 (Unaudited)
- ----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,591 $ 93,905
Accounts receivable 19,426 12,139
Prepaid expenses 42,852 70,935
---------- ----------
Total current assets 66,869 176,979
---------- ----------
PROPERTY AND EQUIPMENT - At cost:
Land 335,538 335,538
Building 2,006,765 2,006,765
Furnishings and equipment 487,319 487,319
Less accumulated depreciation (926,171) (972,453)
---------- ----------
Property and equipment - net 1,903,451 1,857,169
---------- ----------
OTHER ASSETS:
Franchise fees - net 13,750 12,813
Deferred loan fees - net 86,281 82,963
---------- ----------
Total $2,070,351 $2,129,924
---------- ----------
---------- ----------
LIABILITIES AND NET INVESTMENT AND (ADVANCES)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 77,235 $ 88,707
Due to Lodge Keepers Group, Inc. 39,334 40,867
Current portion of long-term debt 26,834 29,084
---------- ----------
Total current liabilities 143,403 158,658
LONG-TERM DEBT 1,675,917 1,653,990
---------- ----------
Total liabilities 1,819,320 1,812,648
COMMITMENTS AND CONTINGENCIES
NET INVESTMENT AND (ADVANCES) 251,031 317,276
---------- ----------
Total $2,070,351 $2,129,924
---------- ----------
---------- ----------
See accompanying notes to financial statements.
- ----------------------------------------------------------------------------
F-12
<PAGE>
COUNTRY HEARTH INN - FINDLAY, OHIO
STATEMENTS OF REVENUES AND EXPENSES
(EXCLUDING INCOME TAXES)
- ----------------------------------------------------------------------------
Nine Months Ended
September 30,
Year Ended --------------------------
December 31, 1997 1996
1996 (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------
REVENUES:
Room sales $914,068 $749,004 $694,234
Telephone 24,631 17,810 18,295
Other - principally commissions
and vending 4,556 3,927 3,390
-------- -------- --------
Total 943,255 770,741 715,919
-------- -------- --------
EXPENSES:
Rooms 230,653 181,435 171,879
Interest 158,132 136,794 111,667
Franchise 60,191 49,135 45,813
Administrative and general 85,018 65,399 63,439
Depreciation and amortization 68,898 50,537 46,916
Energy cost 44,341 30,941 34,718
Property taxes & licenses 27,873 23,215 20,093
Repairs and maintenance 47,253 38,030 36,940
Management fee 45,704 37,450 34,278
Incentive fee 5,720 9,101 4,290
Insurance 17,979 9,352 9,273
Marketing 60,599 50,331 46,546
Telephone 16,780 11,814 12,586
-------- -------- --------
Total 869,141 693,534 638,438
-------- -------- --------
NET REVENUE OVER EXPENSES $ 74,114 $ 77,207 $ 77,481
-------- -------- --------
-------- -------- --------
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-13
<PAGE>
COUNTRY HEARTH INN - FINDLAY, OHIO
STATEMENTS OF CASH FLOWS
<TABLE>
- ---------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
Year Ended --------------------------
December 31, 1997 1996
1996 (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net revenue over expenses $ 74,114 $ 77,207 $ 77,481
Adjustments to reconcile net revenue over
expenses to net cash provided by operating
activities:
Depreciation and amortization 68,898 50,537 46,916
Changes in operating assets and liabilities
Accounts receivable 21,006 7,287 19,166
Prepaid expenses (41,673) (28,083) (36,913)
Accounts payable and accrued expenses 25,310 11,472 28,256
Due to Lodge Keepers 12,165 1,533 11,279
----------- -------- -----------
Net cash provided (used) by operating activities 159,820 119,953 146,185
----------- -------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (19,186) - (15,014)
----------- -------- -----------
FINANCING ACTIVITIES:
Payments to Lodge Keepers Group (3,900) - (3,900)
Payments of long-term debt (1,591,709) (19,677) (1,585,501)
Borrowings of long-term debt 1,711,000 - 1,711,000
Loan fees on new borrowings (88,493) - (88,493)
Net distributions or advances from owner (216,759) (10,962) (201,790)
----------- -------- -----------
Net cash provided (used) by financing activities (189,861) (30,639) (168,684)
----------- -------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (49,227) 89,314 (37,513)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 53,818 4,591 53,818
----------- -------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,591 $ 93,905 $ 16,305
----------- -------- -----------
----------- -------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 142,836 $136,970 $ 96,297
----------- -------- -----------
----------- -------- -----------
Income taxes paid $ - $ - $ -
----------- -------- -----------
----------- -------- -----------
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-14
<PAGE>
COUNTRY HEARTH INN - FINDLAY, OHIO
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION:
The Country Hearth Inn, Findlay, Ohio ("Country Hearth Inn - Findlay" or
"Motel") is a 78 room limited service motel located in Findlay, Ohio. The
Country Hearth Inn - Findlay was owned by Findlay Equity Partners ("FEP"),
an Ohio general partnership and was operated by Lodge Keepers Group, Inc.
("LKG"), an Ohio corporation. As further discussed in Note 5, the Motel
was sold in October 1997 to Host Funding, Inc., a Maryland corporation
("Host Funding").
The accompanying financial statements have been prepared for the Country
Hearth Inn - Findlay for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in an
8-K filing of Host Funding.
The accompanying financial statements provide only the net assets,
liabilities and net investment and advances, the revenues and expenses
excluding income taxes, and the cash flows for the year ended December 31,
1996. The accompanying financial statements include no provision for
assets or liabilities related to federal or state income taxes because
Country Hearth Inn - Findlay and FEP did not pay income taxes in 1996.
Accordingly, the accompanying financial statements are not intended to be
a complete presentation of Country Hearth Inn - Findlay's assets,
liabilities and net investment and advances, revenues and expenses or cash
flows, nor do they reflect or intend to reflect the complete operations of
FEP.
The Country Hearth Inn - Findlay's fiscal year end is December 31.
An analysis of the activity in the net investment and advances is set
forth below:
Balance January 1, 1996 $ 393,676
Revenues over expenses excluding income tax 74,114
Net cash transferred from FEP (216,759)
----------
Balance December 31, 1996 $ 251,031
----------
----------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which have a maturity date of three months or
less at date of purchase, represent Country Hearth - Findlay's undivided
interest in cash accounts.
F-15
<PAGE>
PROPERTY AND EQUIPMENT
Buildings and improvements are being depreciated over useful lives of 35
years using the straight-line method. Motel furnishings and equipment are
being depreciated using primarily straight-line methods over a useful life
of 7 years.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets that
an entity expects to hold and use should be based on the fair value of the
asset. The Country Hearth Inn - Findlay has adopted SFAS No. 121 during
the year ending December 31, 1996. Based on an evaluation of existing
long-lived assets, the Country Hearth Inn - Findlay has determined that no
impairment has occurred during the year ended December 31, 1996.
FRANCHISE FEES
The Initial Franchise Fee is being amortized over the term of the
franchise agreement.
DEFERRED LOAN FEES
Loan fees are amortized over the terms of the loan using the straight line
method which approximates the effective interest method.
REVENUES
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilizes 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
Country Hearth Inn - Findlay's results of operations.
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.
Cash and cash equivalents, accounts receivable, prepaid expenses, accounts
payable and accrued expenses are carried at amounts which reasonably
approximate their fair value.
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
F-16
<PAGE>
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.
NOTE 2. FRANCHISE AGREEMENTS
FEP entered into a License Agreement ("License Agreement") with LKG to
franchise the Motel using the Country Hearth Inn name and system. The
License Agreement is for a 20-year term and expires in 2006 and may be
terminated on the 8th and 14th anniversary. Pursuant to the terms of the
License Agreement, the Country Hearth Inn - Findlay is required to pay a
royalty fee and a marketing fee equal to 4% and 1.5%, respectively, of
gross room revenue. Additionally, a reservation fee is payable to LKG to
compensate it for the fully allocated direct and indirect costs of
providing the reservation system. These royalty, marketing and
reservation fees during calendar 1996 totaled $35,553, $13,332 and $9,291,
respectively.
As discussed in Note 5, this franchise agreement was terminated upon sale
of the hotel.
NOTE 3. MANAGEMENT AGREEMENT
FEP entered into a 20-year management agreement ("Management Agreement")
with LKG to manage the operations of the Country Hearth Inn - Findlay.
This agreement was amended ("Amended Management Agreement") effective July
1, 1996. The original Management Agreement paid the manager 5% of gross
room revenues, as defined, from motel operations. The Amended Management
Agreement effective July 1, 1996, reduced the management fee to 4% of
gross room revenues. Additionally, upon the sale or refinance of the
Motel, FEP shall be entitled to terminate upon payment to LKG a "recouped
base management fee" equal to 1% of gross room rentals from the Motel
operation for the period of time from July 1, 1996 to the date of such
sale or refinancing. The total management fee expense including the
"recouped base management fee" for 1996 was $44,445.
Additionally, the original Management Agreement also has an incentive
management fee payable to LKG based upon 10% of positive cash flow from
motel operations, as defined. The Amended Management Agreement requires
FEP to pay LKG a "recouped incentive management fee" of 10% of positive
cash flow, as defined, upon the sale or refinance of the motel, for the
period July 1, 1996 to the date of such sale or refinance. For 1996, the
incentive management fee, including the "recouped incentive management
fee," totaled $7,866.
As discussed in Note 5, this management agreement was terminated upon sale
of the hotel.
NOTE 4. LONG-TERM DEBT AND NOTE PAYABLE
In July 1996, the Country Hearth Inn - Findlay refinanced its mortgage
payable. The existing debt was paid off from the proceeds of the new
mortgage of $1,711,000.
The new mortgage is a 20 year mortgage which requires monthly principal,
interest and escrow payments of $17,405. The mortgage has an initial
fixed interest rate of 10.78% for 10 years and
F-17
<PAGE>
then a revised interest rate beginning in August 2006 of either the
greater of i) the initial interest rate plus two percentage points, or ii)
the Treasury rate plus two percentage points.
Principal payments for the years ended December 31 are as follows:
1997 $ 26,834
1998 29,874
1999 33,259
2000 37,027
2001 41,222
Thereafter 1,366,319
----------
Total $1,534,535
----------
----------
This mortgage was assumed pursuant to the Purchase Agreement described in
Note 5.
NOTE 5. SUBSEQUENT EVENTS
On October 21, 1997, FEP completed the sale of Country Hearth Inn -
Findlay pursuant to that certain "Agreement of Sale and Purchase"
("Purchase Agreement") by and between FEP and Host Funding. Host
Funding completed this purchase by forming a separate, special purpose
limited partnership (BH-Findlay). This partnership was formed with
Buckhead America Corporation, a publicly traded hotel company
("Buckhead"), of which Host Funding is the beneficial owner of
approximately 83% of the limited partnership interest and a 1% general
partnership interest. Buckhead beneficially holds approximately 16% of
the remaining partnership interest.
Per the terms of the Purchase Agreement, FEP sold the land, buildings and
equipment (the Country Hearth Inn - Findlay) for $2,931,900. The terms
included a cash payment of $100,000, the assumption of the existing
indebtedness on the property in the amount of $1,680,788 ("Assumed Debt"),
the payment of 53,879 shares of Class A Common Stock of Host Funding,
having an approximate fair market value of $500,000 as of the date of
closing under the Purchase Agreement, and the execution and delivery to
FEP by BH-Findlay of a promissory note of $651,111.
The promissory note of $651,111 bears annual interest at the rate of Wall
Street Journal Prime Rate plus one percent (1%). No payments are required
until April 1, 1998, on which date all outstanding principal and accrued
interest is due and payable. This promissory note is secured by 51,660
shares of Class B Common Stock of Host Funding and a guaranty by Host
Funding.
The shares of Class A Common Stock issued to FEP as partial payment of the
purchase price for the Country Hearth Inn - Findlay are restricted
securities under the Securities Act of 1933 and subject to the re-sale
provisions of Rule 144 promulgated under the Act. The Class A Common
Stock issued also entitles the holder of the shares to certain limited
"piggy back" registration rights
F-18
<PAGE>
exercisable upon the filing by Host Funding of a registration statement
with the Securities and Exchange Commission to sell securities of Host
Funding.
BH-Findlay has leased the hotel to Buckhead pursuant to a separate
percentage lease agreement (the "Country Hearth Lease"). Buckhead also
manages the hotel and holds the franchise for the hotel outside of the
limited partnerships (collectively, the "Country Hearth Franchise
Agreement").
The term of the Country Hearth Lease is for a period of fifteen (15) years
commencing October 21, 1997 (the "Commencement Date"). The Country Hearth
Lease has a total annual base rental of $314,000, plus percentage rentals
ranging from thirty percent (30%) to forty percent (40%) of year to date
revenues less varying break-even thresholds adjusted annually by defined
percentages for each hotel. Rentals due to BH-Findlay require only
defined base rents from the Commencement Date of the County Hearth Lease
until December 31, 1997. The Country Hearth Lease generally requires
Buckhead to pay all operating expenses of the property, including
maintenance and insurance, while BH-Findlay is responsible for the payment
of property taxes. In addition, BH-Findlay is required to fund on a
monthly basis into a capital expenditure reserve account an amount equal
to 4% of gross room revenues for the immediately preceding month. Funds
in the capital expenditure reserve account are to be used for capital
expenditures which generally must be approved by BH-Findlay. The
Country Hearth Franchise Agreement between BH-Findlay, as franchisee,
and Buckhead, as franchisor, are typical of the hotel industry and
substantially similar to the franchise agreements relating to the Super 8
Hotels and Sleep Inn Hotels currently owned directly or indirectly by Host
Funding. This franchise agreement provides that the franchisor is
entitled to a royalty fee of 4% of Gross Room Revenues, as defined, a
reservation fee of 1% of Gross Room Revenues, plus one dollar per
reservation booked through the reservation center, and a marketing fee of
1-1/2% of Gross Room Revenues.
The Country Hearth Inn - Findlay was acquired pursuant to the terms of
that certain Restated and Amended Post-Formation Acquisition Agreement
dated as of February 3, 1997 (the "Acquisition Agreement"), by and between
Host Funding and HMR Capital, LLC (f/k/a Host Acquisition Group, LLC) (the
"Acquisition Company"). Pursuant to the terms of the Acquisition
Agreement, 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
Country Hearth Inn - Findlay. The acquisition fee is payable in cash or
at the option of Host Funding in the Class A Common Stock of Host Funding.
Host Funding and the Acquisition Company have agreed that the acquisition
fee earned by the Acquisition Company relating to the Country Hearth Inn -
Findlay and a related sale of the Country Hearth Inn - Auburn is 17,539
shares of the Class A Common Stock of Host Funding valued at $10 per
share. Of the 17,539 shares issued to HMR Capital, Blacor, Inc.
("Blacor") and Donegal Partners, Ltd. ("Donegal") are entitled to receive
3,692 shares in partial redemption of the membership units held
by each entity in the Acquisition Company pursuant to the terms of a
Redemption Agreement dated effective as of April 8, 1997. Blacor and
Donegal are affiliates of Michael S. McNulty, President of Host Funding.
The shares of Class A Common Stock received by the Acquisition Company in
payment of the 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 October 20, 1997 was $9.375 per
share.
F-19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Host Funding, Inc. and the Owner of the Country
Hearth Inn - Auburn, Indiana (as defined in Note 1):
I have audited the accompanying combined statements of assets, liabilities
and net investment and advances of the Country Hearth Inn - Auburn, Indiana,
as defined in Note 1, as of December 31, 1996 and the related combined
statement of revenues and expenses excluding income taxes, and cash flow for
the year then ended. These financial statements are the responsibility of
Host Funding, Inc. and Auburn Equity Partners. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the assets, liabilities and net
investment and advances of the Country Hearth Inn - Auburn, Indiana as of
December 31, 1996, and their revenues and expenses excluding income taxes,
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
WILLIAM H. LING
November 14, 1997
San Diego, California
F-20
<PAGE>
COUNTRY HEARTH INN - AUBURN, INDIANA
STATEMENTS OF ASSETS, LIABILITIES AND
NET INVESTMENT AND (ADVANCES)
- -------------------------------------------------------------------------------
September 30,
December 31, 1997
1996 (Unaudited)
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,913 $ 36,180
Accounts receivable 976 42,418
Prepaid expenses 64,048 160,735
---------- ----------
Total current assets 73,937 239,333
---------- ----------
PROPERTY AND EQUIPMENT - At cost:
Land 141,500 141,500
Building 1,972,183 1,972,183
Furnishings and equipment 364,163 369,097
Less accumulated depreciation (897,950) (941,412)
---------- ----------
Property and equipment - net 1,579,896 1,541,368
---------- ----------
OTHER ASSETS:
Franchise fees - net 12,500 11,563
Deferred loan fees - net 165,430 159,067
---------- ----------
Total $1,831,763 $1,951,331
---------- ----------
---------- ----------
LIABILITIES AND NET INVESTMENT AND (ADVANCES)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 61,812 $ 92,384
Due to Lodge Keepers Group, Inc. 55,485 56,508
Current portion of long-term debt 28,371 30,749
---------- ----------
Total current liabilities 145,668 179,641
LONG-TERM DEBT 1,771,907 1,748,725
---------- ----------
Total liabilities 1,917,575 1,928,366
COMMITMENTS AND CONTINGENCIES
NET INVESTMENT AND (ADVANCES) (85,812) 22,965
---------- ----------
Total $1,831,763 $1,951,331
---------- ----------
---------- ----------
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-21
<PAGE>
COUNTRY HEARTH INN - AUBURN, INDIANA
STATEMENTS OF REVENUES AND EXPENSES
(EXCLUDING INCOME TAXES)
<TABLE>
- --------------------------------------------------------------------------------------
Nine Months Ended
September 30,
Year Ended --------------------------
December 31, 1997 1996
1996 (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Room sales $888,898 $645,896 $760,592
Telephone 26,757 20,101 23,934
Other - principally commissions and vending 12,872 10,829 12,348
-------- -------- --------
Total 928,527 676,826 796,874
-------- -------- --------
EXPENSES:
Rooms 202,935 150,593 165,076
Interest 196,160 159,280 146,624
Franchise 58,176 42,096 49,838
Administrative and general 78,185 59,859 63,004
Depreciation and amortization 64,047 50,762 47,126
Energy cost 69,061 48,973 53,237
Property taxes & licenses 23,956 18,800 20,999
Repairs and maintenance 71,393 53,055 60,314
Management fee 52,311 36,231 39,234
Insurance 16,188 8,423 8,352
Marketing 45,237 33,839 33,492
Telephone 15,127 11,329 12,374
-------- -------- --------
Total 892,776 673,240 699,670
-------- -------- --------
NET REVENUE OVER EXPENSES $ 35,751 $ 3,586 $ 97,204
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-22
<PAGE>
COUNTRY HEARTH INN - AUBURN, INDIANA
STATEMENTS OF CASH FLOWS
<TABLE>
- ----------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
Year Ended --------------------------
December 31, 1997 1996
1996 (Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net revenue over expenses $ 35,751 $ 3,586 $ 97,204
Adjustments to reconcile net revenue over
expenses to net cash provided by operating
activities:
Depreciation and amortization 64,047 50,762 47,126
Changes in operating assets and liabilities
Accounts receivable 15,418 (41,442) 14,657
Prepaid expenses (60,871) (96,687) (78,384)
Accounts payable and accrued expenses 18,262 30,572 31,106
Due to Lodge Keepers (66,407) 1,023 (73,755)
----------- -------- -----------
Net cash provided (used) by operating activities 6,200 (52,186) 37,954
----------- -------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,346) (4,934) -
----------- -------- -----------
FINANCING ACTIVITIES:
Payments to Lodge Keepers Group (7,800) - (7,800)
Payments of long-term debt (2,121,984) (20,804) (2,115,414)
Borrowings of long-term debt 1,809,000 - 1,809,000
Loan fees (118,422) - (118,422)
Net distributions or advances from owner 389,543 105,191 361,543
----------- -------- -----------
Net cash provided (used) by financing activities (49,663) 84,387 (71,093)
----------- -------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (45,809) 27,267 (33,139)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 54,722 8,913 54,722
----------- -------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,913 $ 36,180 $ 21,583
----------- -------- -----------
----------- -------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 179,928 $159,280 $ 130,392
----------- -------- -----------
----------- -------- -----------
Income taxes paid $ - $ - $ -
----------- -------- -----------
----------- -------- -----------
</TABLE>
See accompanying notes to financial statements.
- -------------------------------------------------------------------------------
F-23
<PAGE>
COUNTRY HEARTH INN - AUBURN, INDIANA
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION:
The Country Hearth Inn, Auburn, Indiana ("Country Hearth Inn - Auburn" or
"Motel") is a 78 room limited service motel located in Auburn, Indiana.
The Country Hearth Inn - Auburn was owned by Auburn Equity Partners
("AEP"), an Ohio general partnership and was operated by Lodge Keepers
Group, Inc. ("LKG"), an Ohio corporation. As further discussed in Note 5,
the Motel was sold in October 1997 to Host Funding, Inc., a Maryland
corporation ("Host Funding").
The accompanying financial statements have been prepared for the Country
Hearth Inn - Auburn for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in an
8-K filing of Host Funding.
The accompanying financial statements provide only the net assets,
liabilities and net investment and advances, the revenues and expenses
excluding income taxes, and the cash flows for the year ended December 31,
1996. The accompanying financial statements include no provision for
assets or liabilities related to federal or state income taxes because
Country Hearth Inn - Auburn and AEP did not pay income taxes in 1996.
Accordingly, the accompanying financial statements are not intended to be
a complete presentation of Country Hearth Inn - Auburn's assets,
liabilities and net investment and advances, revenues and expenses or cash
flows, nor do they reflect or intend to reflect the complete operations of
AEP.
The Country Hearth Inn - Auburn's fiscal year end is December 31.
An analysis of the activity in the net investment and advances is set
forth below:
Balance January 1, 1996 $(511,106)
Revenues over expenses excluding income tax 35,751
Net cash transferred from AEP 389,543
---------
Balance December 31, 1996 $ (85,812)
---------
---------
F-24
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which have a maturity date of three months or
less at date of purchase, represent Country Hearth - Auburn's undivided
interest in cash accounts.
PROPERTY AND EQUIPMENT
Buildings and improvements are being depreciated over useful lives of 35
years using the straight-line method. Motel furnishings and equipment are
being depreciated using primarily straight-line methods over a useful life
of 7 years.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets that
an entity expects to hold and use should be based on the fair value of the
asset. The Country Hearth Inn - Auburn has adopted SFAS No. 121 during
the year ending December 31, 1996. Based on an evaluation of existing
long-lived assets, the Country Hearth Inn - Auburn has determined that no
impairment has occurred during the year ended December 31, 1996.
FRANCHISE FEES
The Initial Franchise Fee is being amortized over the term of the
franchise agreement.
DEFERRED LOAN FEES
Loan fees are amortized over the terms of the loan using the straight line
method which approximates the effective interest method.
REVENUES
Revenue is recognized as earned. Earned is generally defined as the date
upon which a guest occupies a room and/or utilizes 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
Country Hearth Inn - Auburn's results of operations.
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.
F-25
<PAGE>
Cash and cash equivalents, accounts receivable, prepaid expenses, accounts
payable and accrued expenses are carried at amounts which reasonably
approximate their fair value.
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.
NOTE 2. FRANCHISE AGREEMENTS
AEP entered into a License Agreement ("License Agreement") with LKG to
franchise the Motel using the Country Hearth Inn name and system. The
License Agreement is for a 20-year term and expires in 2006 and may be
terminated on the 8th and 14th anniversary. Pursuant to the terms of the
License Agreement, the Country Hearth Inn - Auburn is required to pay a
royalty fee and a marketing fee equal to 4% and 1.5%, respectively, of
gross room revenue. Additionally, a reservation fee is payable to LKG to
compensate it for the fully allocated direct and indirect costs of
providing the reservation system. These royalty, marketing and
reservation fees during calendar 1996 totaled $35,553, $13,332 and $9,291,
respectively.
As discussed in Note 5, this franchise agreement was terminated upon sale
of the hotel.
NOTE 3. MANAGEMENT AGREEMENT
AEP entered into a 20-year management agreement ("Management Agreement")
with LKG to manage the operations of the Country Hearth Inn - Auburn.
This agreement was amended ("Amended Management Agreement") effective July
1, 1996. The original Management Agreement paid the manager 5% of gross
room revenues, as defined, from motel operations. The Amended Management
Agreement effective July 1, 1996, reduced the management fee to 4% of
gross room revenues. Additionally, upon the sale or refinance of the
Motel, AEP shall be entitled to terminate upon payment to LKG a "recouped
base management fee" equal to 1% of gross room rentals from the Motel
operation for the period of time from July 1, 1996 to the date of such
sale or refinancing. The total management fee expense including the
"recouped base management fee" for 1996 was $44,445.
Additionally, the original Management Agreement also has an incentive
management fee payable to LKG based upon 20% of positive cash flow from
motel operations, as defined. The Amended Management Agreement requires
AEP to pay LKG a "recouped incentive management fee" of 20% of positive
cash flow, as defined, upon the sale or refinance of the motel, for the
period July 1, 1996 to the date of such sale or refinance. For 1996, the
incentive management fee including the "recouped incentive management fee"
totaled $7,866.
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As discussed in Note 5, this management agreement was terminated upon sale
of the hotel.
NOTE 4. LONG-TERM DEBT AND NOTE PAYABLE
In July 1996, the Country Hearth Inn - Auburn refinanced its mortgage
payable. The existing debt was paid off from the proceeds of the new
mortgage of $1,809,000, from an unsecured bank note of $300,000, and from
promissory notes issued by AEP to various individuals. The promissory
notes due the bank and the notes due to individuals are liabilities of AEP
and not of the Country Hearth Inn - Auburn, so, accordingly, are included
in net investment and advances.
The new mortgage is a 20 year mortgage which requires monthly principal,
interest and escrow payments of $18,402. The mortgage has an initial
fixed interest rate of 10.78% for 10 years and then a revised interest
rate beginning in August 2006 of either the greater of i) the initial
interest rate plus two percentage points, or ii) the Treasury rate plus
two percentage points.
Principal payments for the years ended December 31 are as follows:
1997 $ 28,371
1998 31,565
1999 35,164
2000 39,147
2001 43,582
Thereafter 1,622,449
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Total $1,800,278
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This mortgage was assumed pursuant to the Purchase Agreement described in
Note 5.
NOTE 5. SUBSEQUENT EVENTS
On October 21, 1997, AEP completed the sale of Country Hearth Inn - Auburn
pursuant to that certain "Agreement of Sale and Purchase" ("Purchase
Agreement") by and between AEP and Host Funding. Host Funding completed
this purchase by forming a separate, special purpose limited partnership
(BH-Auburn). This partnership was formed with Buckhead America
Corporation, a publicly traded hotel company ("Buckhead"), of which Host
Funding is the beneficial owner of approximately 83% of the limited
partnership interest and a 1% general partnership interest. Buckhead
beneficially holds approximately 16% of the remaining partnership
interest.
Per the terms of the Purchase Agreement, AEP sold the land, buildings and
equipment (the Country Hearth Inn - Auburn) for $2,914,500. The terms
included a cash payment of $400,000, the assumption of the existing
indebtedness on the property in the amount of $1,777,057 ("Assumed
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<PAGE>
Debt"), the payment of 26,940 shares of Class A Common Stock of Host
Funding, having an approximate fair market value of $250,000 as of the
date of closing under the Purchase Agreement, and the execution and
delivery to AEP by BH-Auburn of a promissory note of $487,443.
The promissory note of $487,443 bears annual interest at the rate of Wall
Street Journal Prime Rate plus one percent (1%). No payments are required
until April 1, 1998, on which date all outstanding principal and accrued
interest is due and payable. This promissory note is secured by 38,340
shares of Class B Common Stock of Host Funding and a guaranty by Host
Funding.
The shares of Class A Common Stock issued to AEP as partial payment of the
purchase price for the Country Hearth Inn - Auburn are restricted
securities under the Securities Act of 1933 and subject to the re-sale
provisions of Rule 144 promulgated under the Act. The Class A Common
Stock issued also entitles the holder of the shares to certain limited
"piggy back" registration rights exercisable upon the filing by Host
Funding of a registration statement with the Securities and Exchange
Commission to sell securities of Host Funding.
BH-Auburn has leased the hotel to Buckhead pursuant to a separate
percentage lease agreement (the "Country Hearth Lease"). Buckhead also
manages the hotel and holds the franchise for the hotel outside of the
limited partnerships (collectively, the "Country Hearth Franchise
Agreement").
The term of the Country Hearth Lease is for a period of fifteen (15) years
commencing October 21, 1997 (the "Commencement Date"). The Country Hearth
Lease has a total annual base rental of $303,000, plus percentage rentals
ranging from thirty percent (30%) to forty percent (40%) of year to date
revenues less varying break-even thresholds adjusted annually by defined
percentages for each hotel. Rentals due to BH-Auburn require only defined
base rents from the Commencement Date of the County Hearth Lease until
December 31, 1997. The Country Hearth Lease generally requires Buckhead
to pay all operating expenses of the property, including maintenance and
insurance, while BH-Auburn is responsible for the payment of property
taxes. In addition, BH-Auburn is required to fund on a monthly basis into
a capital expenditure reserve account an amount equal to 4% of gross room
revenues for the immediately preceding month. Funds in the capital
expenditure reserve account are to be used for capital expenditures which
generally must be approved by BH-Auburn. The Country Hearth Franchise
Agreement between BH-Auburn, as franchisee, and Buckhead, as franchisor,
are typical of the hotel industry and substantially similar to the
franchise agreements relating to the Super 8 Hotels and Sleep Inn Hotels
currently owned directly or indirectly by Host Funding. This franchise
agreement provides that the franchisor is entitled to a royalty fee of 4%
of Gross Room Revenues, as defined, a reservation fee of 1% of Gross Room
Revenues, plus one dollar per reservation booked through the reservation
center, and a marketing fee of 1-1/2% of Gross Room Revenues.
The Country Hearth Inn - Auburn was acquired pursuant to the terms of that
certain Restated and Amended Post-Formation Acquisition Agreement dated as
of February 3, 1997 (the "Acquisition Agreement"), by and between Host
Funding and HMR Capital, LLC (f/k/a Host Acquisition Group, LLC) (the
"Acquisition Company"). Pursuant to the terms of the Acquisition
Agreement, the Acquisition Company is entitled to receive an acquisition
fee of no less than 2% and up to 6% of
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the gross purchase price of the Country Hearth Inn - Auburn. The
acquisition fee is payable in cash or at the option of Host Funding in the
Class A Common Stock of Host Funding. Host Funding and the Acquisition
Company have agreed that the acquisition fee earned by the Acquisition
Company relating to the Country Hearth Inn - Auburn and a related sale of
the Country Hearth Inn - Findlay is 17,539 shares of the Class A Common
Stock of Host Funding valued at $10 per share. Of the 17,539 shares
issued to HMR Capital, Blacor, Inc. ("Blacor") and Donegal Partners, Ltd.
("Donegal") are entitled to receive 3,692 shares in partial redemption of
the membership units held by each entity in the Acquisition Company
pursuant to the terms of a Redemption Agreement dated effective as of
April 8, 1997. Blacor and Donegal are affiliates of Michael S. McNulty,
President of Host Funding. The shares of Class A Common Stock received by
the Acquisition Company in payment of the 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
October 20, 1997 was $9.375 per share.
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