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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________to ________
Commission file number 1-14280
Host Funding, Inc.
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(Exact name of Company as specified in its charter)
Maryland 52-1907962
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6116 N. Central Expressway, Suite 1313, Dallas, Texas 75206
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code 214-750-0760
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act.
Class A Common Stock - $0.01 par value
--------------------------------------
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Company (totaling 996,841 shares) was $2,865,918 (based upon the closing bid
of the Company's common stock on the AMEX on March 24, 1998 of $2 7/8 per
share). The term affiliates is deemed, for this purpose only, to refer only
to directors, officers and principal stockholders of the Company.
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
The number of outstanding shares of the Company's Class A Common Stock was
1,546,369 as of March 24, 1999.
Documents Incorporated by Reference
Part III: Proxy Statement for the 1998 Annual Meeting of Stockholders
to be held June 7, 1999.
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TABLE OF CONTENTS
Item Page
Number Number
PART I
1. Business............................................................ 3
2. Properties ......................................................... 9
3. Legal Proceedings................................................... 11
4. Submission of Matters to a Vote of Securities Holders............... 11
PART II
5. Market for the Company's Common Equity and
Related Shareholder Matters......................................... 11
6. Selected Financial Data............................................. 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 14
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 20
8. Financial Statements and Supplementary Data......................... 20
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 20
PART III
10. Directors and Executive Officers of the Company..................... 21
11. Executive Compensation ............................................. 23
12. Security Ownership of Certain Beneficial Owners
and Management ..................................................... 25
13. Certain Relationships and Related Transactions...................... 27
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules
and Reports on Form 8-K ............................................ 28
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PART I
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act"). The words "believe", "expect", "anticipate",
"intend", "estimate", and other expressions which are predictions of or
indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements and to note that
they speak only as of the date hereof. Although forward-looking statements
reflect management's good faith beliefs, reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which may cause the actual results,
performance, or achievements of the Company to differ materially from
anticipated future results, performance, or achievements expressed or implied
by such forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise. Certain factors that might
cause a difference in actual results include, but are not limited to
the Company's dependence upon rental payments from the lessees of the Company's
hotel properties for substantially all of the Company's income; the
Company's dependence upon the abilities of the lessees of the Company's hotel
properties to manage the hotel properties; risks associated with the hotel
industry and real estate markets in general; and risks associated with debt
financing.
ITEM 1. BUSINESS
Overview
Host Funding, Inc. (the "Company") was incorporated in the State of
Maryland in December 1994, and was inactive from inception to March 31, 1995.
The Company's Class A Common Stock began trading on the American Stock Exchange
on April 22, 1996, the date of the Company's initial public offering. Upon
closing of the Company's initial public offering, the Company owned five Super 8
Hotels located in Somerset, Kentucky; Miner, Missouri; Poplar Bluff, Missouri;
Rock Falls, Illinois; and Mission Bay, California (the "Initial Hotels"). As of
December 31, 1998, the hotel property portfolio of the Company consisted of 12
hotels located in 9 states consisting of approximately 922 rooms
The Company is engaged in the business of acquiring high quality,
limited-service and full service hotels throughout the United States, which are
affiliated with national or regional hotel chains. Although the Company was
initially structured as a real estate investment trust ("REIT"), it has not yet
elected REIT status under the Internal Revenue Code. Since the commencement of
Company operations and the acquisition of the Initial Hotels, the Company has
formed wholly-owned subsidiaries for the purpose of owning the Initial Hotels
and acquiring additional hotel properties. Unless the context otherwise
requires, references to the Company include the Company and its subsidiaries,
and references to the hotel properties owned by the subsidiaries of the Company
are referred to as the "Company Hotels".
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Business Development
During 1998, the Company focused on improving the operations and
performance of the Company Hotels. For the period beginning January 1, 1998
and ending June 2, 1998, Crossroads Hospitality Tenant Company, LLC
("Crossroads") operated 10 of the Company Hotels pursuant to Percentage
Leases (the "Crossroads Leases") and BAC Hotel Management, LLC ("Buckhead")
operated the remaining two Company Hotels pursuant to Percentage Leases (the
"Buckhead Leases"). Effective June 3, 1998, the Company terminated two of the
Crossroads Leases relating to the Sleep Inn properties owned by Host
Ventures, Inc. ("HVI") and located in Ocean Springs, Mississippi, and
Sarasota, Florida (collectively, the "HVI Properties"). Also effective June
3, 1998 the Company terminated the Crossroads Leases relating to the Sleep
Inn properties owned by CrossHost, Inc. ("CHI") and located in Destin, and
Tallahassee, Florida; and the Super Eight properties located in Rock Falls,
Illinois; Minor, Missouri; Poplar Bluff, Missouri; and Somerset Kentucky
(collectively, the "CHI Properties.")
Concurrently with the termination of the Crossroads Leases listed
above, HVI and CHI entered into separate Restated and Amended Agreements
Regarding Hotel Leases with Buckhead pursuant to which Buckhead agreed to lease
the HVI Properties and the CHI Properties, except for the Sleep Inn hotel
located in Tallahassee, Florida, which was leased to the previous owner of that
property. Buckhead is a wholly owned subsidiary of Buckhead America
Corporation, an independent, publicly owned company (NASDAQ: BUCK). The
financial statements of Buckhead are included in the consolidated financial
statements of Buckhead America Corporation and are required to be filed with
the Securities and Exchange Commission, together with other information, as
required under the Securities Exchange Act of 1934. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments".
Effective January 1, 1999, CHI entered into a lease agreement (the
"RPD Lease") whereby RPD Hotels 18, LLC ("RPD") leased the Mission Bay property
from CHI. Concurrently with the execution of the RPD Lease, the Company
terminated the Crossroads Lease pertaining to the Mission Bay property and the
related franchise agreement with Super 8 Hotels. RPD will operate the Mission
Bay property as a Vagabond Inn.
In conjunction with the execution of the RPD Lease, CHI and RPD
entered into an Option Agreement relating to the Mission Bay property (the
"Mission Bay Option Agreement"). The Mission Bay Option Agreement provides
that RPD, or an affiliate of RPD, may purchase the Mission Bay property for
the amount of $3,225,000 paid in immediately available funds at closing. RPD,
in consideration for being granted a purchase option by CHI, made a
non-refundable option payment in the amount of $500,000 (the "Option
Payment"). The proceeds of such Option Payment were used to pay termination
fees due to Crossroads, termination fees due to the previous franchisor, and
for general corporate purposes. Effective February 24, 1999 HVI also entered
into an option agreement with RPD Flagstaff, LLC, an affiliated of RPD,
whereby HVI granted an option to purchase the Super 8 motel in Flagstaff,
Arizona for total consideration of $5,265,000. See "Managements Discussion
and Analysis of Financial Condition and Results of Operations--Recent
Developments."
Percentage Leases
In General
The Company leases each of the Company Hotels pursuant to the
Percentage Leases (herein so called). Each Percentage Lease contains
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substantially the provisions described below, and the Company intends that
future lease agreements entered into with respect to its hotel property
investments will contain substantially similar provisions. The Company's
Board of Directors may, in its discretion, alter any provisions within any
particular lease (including granting the lessee an option to purchase the
property similar to the RPD Lease).
Percentage Lease Terms
Each Percentage Lease has an initial term of not less than fifteen
years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Leases (including provisions
relating to damage to hotels, condemnation of hotels, and termination on
disposition of hotels).
Amounts Payable Under the Percentage Leases
During the term of each Percentage Lease, the lessee is obligated
to pay (i) base rent, (ii) percentage rent, and (iii) all taxes, assessments,
ground rents, water, sewer or other rents and charges, excises, tax
inspection, authorization or similar fees and all other governmental charges
(the "Impositions"), except the property taxes on 2 hotels (the Company is
obligated to pay property taxes on all hotels except on the Mission Bay
property and the Sleep Inn property located in Tallahassee, Florida), and
(iv) every fine, penalty, interest and cost for non-payment or late payment
of base rent, percentage rent, or the Impositions and (v) franchise fees as
described below. Base rent accrues and is required to be paid monthly.
Percentage rent is based on percentages of room revenues for each of the
hotels and is due and payable quarterly.
Maintenance, Modifications and Capital Expenditures
Generally, the lessee, at its expense, is required to maintain the
hotels in good order and repair, except for ordinary wear and tear, and to
make non-structural repairs, foreseen and unforeseen repairs, and ordinary
repairs which may be necessary and appropriate to keep the hotels in good
order and repair. During the year ended December 31, 1998, approximately
$376,000 was spent by the Lessees on repairs and maintenance.
The lessee, at its expense and subject to approval by the Company,
may make non-capital and capital additions, modifications or improvements to the
hotels, provided that such action does not significantly alter the character or
purposes of the hotels or significantly detract from the value or operating
efficiencies of the hotels. All such alterations, replacements and improvements
become the property of the Company upon termination of the Percentage Leases.
The Company owns substantially all personal property (other than inventory,
linens and other non-depreciable personal property) not affixed to, or deemed a
part of, the real estate or improvements thereon.
Under the Percentage Leases, the Company is required to fund into
replacement reserve accounts (the "Reserve Accounts") amounts ranging from four
percent (4%) to six
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percent (6%) of gross room revenues for the preceding month. Deposits in the
Reserve Accounts are used to fund replacements of furniture, fixtures and
equipment and for capital additions to the hotels. Expenditures from the Reserve
Accounts generally must be jointly approved by the Company and the lessee.
Insurance and Property Taxes
The Company is responsible for paying the property taxes on the
Company Hotels, except for property taxes related to the Sleep Inn property
located in Tallahassee, Florida and the Super 8 property located in Mission
Bay, California, which are the responsibility of the Lessee. Real and personal
property taxes of the Company hotels may increase as property tax rates
change and as the properties are assessed or reassessed by the taxing
authorities. The lessee is required to pay for all insurance on the Company
Hotels, with extended coverage, including business interruption, casualty,
comprehensive general public liability, workers' compensation and other
insurance as described in the Percentage Leases, and must name the Company as
the insured or an additional named insured.
Indemnification
Under each of the Percentage Leases, the lessee is obligated to
indemnify and hold harmless, the Company from and against all liabilities, costs
and expenses (including reasonable attorneys' fees and expenses) incurred by,
imposed upon or asserted against the Company; provided, however, that such
indemnification will not be construed to require the lessee to indemnify the
Company against the Company's own grossly negligent acts or omissions or willful
misconduct.
Franchise Agreements
All of the Company Hotels are currently operated pursuant to
franchise agreements (the "Franchise Agreements"). The Company expects that a
majority of any additional hotel properties it may acquire will also be subject
to similar agreements. The Company believes that franchises (including hotel
licenses) generally provide advantages to hotel operators through the use of
advertising on a much broader scale than would be possible for an individual
hotel or small group of hotels, nationally recognized brand names, nationally
accessible reservations systems, technical and business assistance to the
individual franchisee and substantial buying power over approved suppliers.
The Franchise Agreements generally require the franchisee to pay a
monthly franchise fee based on gross sales and to pay various other marketing
fees associated with certain marketing or advertising and centralized
reservation service funds, usually based on gross sales. The lessee, under the
Percentage Leases, is responsible for payment of franchise fees. Such fees may
vary between individual hotels within a franchise system based on the type of
marks, restaurants or other aspects of the particular franchise system.
The Franchise Agreements generally contain specific standards for,
and restrictions and limitations on, the operation and maintenance of the
hotels, which are established by the
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franchisors to maintain uniformity in the system created by each such
franchisor. Such standards generally regulate the hours of operation,
maintenance, appearance and cleanliness, quality and type of goods and
services offered, signage, protection of marks and advancement of marks.
Compliance with such standards could require significant expenditures by the
lessee for capital improvements. Any such improvements could increase the
value of the applicable hotel to the benefit of the Company.
The Franchise Agreements generally require the consent of the
franchisor to a transfer of an interest in the applicable franchise or
franchisee and the payment of a termination fee upon termination of the
franchise agreement prior to its expiration.
Growth Strategy
The Company's growth strategy is to increase cash flow and enhance
shareholder value by acquiring additional existing hotels that meet the
Company's investment criteria and by participating, through the Percentage
Leases, in revenue growth at its hotels. In order to achieve this strategy, the
Company began developing an innovative acquisition/lease back structure in the
early summer of 1998. This new structure is appealing to non-public sellers of
hotel properties because, in most circumstances, they may receive significant
amounts of cash for their properties without being subject to federal income
taxes. The structure is also appealing to publicly held entities which sell
hotel properties based upon the possibility of receiving significant amounts of
cash while retaining leasing and management rights.
The dramatic decline in debt and equity financing available
to the hospitality industry that occurred in the late summer of 1998
significantly delayed the success of the Company's growth strategy. In late 1998
and early 1999, the markets appeared to be returning to underwriting and cost
standards that were in place prior to the dramatic decline in available
financing. The Company is confident that this structure will continue to be well
received by sellers of hotels, lenders, and equity sources, and expects to begin
consummating transactions using this structure in the near future.
Environmental Matters
Under various federal, state and local environmental laws,
ordinances, regulations and common law, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under, or in such property
whether or not it was responsible for their presence. Such laws and common
law principles could also be used to impose liability upon owners or
operators of real properties for release of asbestos containing materials
("ACMs") that cause personal injury or other damage. The policy of the
Company is to obtain a Phase I environmental assessment report for each of
the hotels acquired by the Company, prepared by an independent environmental
consultant.
The Company is not aware of any environmental condition with respect
to the Company Hotels that could have a material adverse affect on the Company's
financial condition or results of operations. No assurances can be given,
however, that (i)
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environmental assessments undertaken with respect to the Company Hotels have
revealed all potential environmental liabilities, (ii) any prior owner or
operator of the real property on which the Company Hotels are located did not
create any material environmental condition not known to the Company, or (iii) a
material environmental condition does not otherwise exist as to any one or more
Company Hotels. Pursuant to the Percentage Leases, the Lessee has agreed to
comply with applicable environmental regulations. However, in the event that the
Company is held liable for costs and expenses in connection with a site clean-up
or in connection with ACM, and the Company is unable to enforce or obtain
recoveries under the indemnity provisions of the Percentage Leases, such costs
and expenses could have a material adverse affect on the Company.
Employees
As of December 31, 1998, the Company had three (3) full-time
employees.
Competition
The hotel industry is highly competitive. All of the Company Hotels
are located in developed areas and experience competition primarily found in
other similarly priced hotels within their immediate vicinity. In addition, each
hotel competes with other hotel properties in its particular geographic market.
The number of competitive hotel properties in a particular market or geographic
area could have a material and adverse affect on the rental market for the room
units at each hotel and the rates which may be charged for such room units. The
Company Hotels must also compete for occupants with new hotels in the area.
In addition, when the Company seeks to acquire hotel properties, the
Company competes for investment opportunities with entities which have
substantially greater financial resources than the Company. Competition
generally reduces the number of suitable investment opportunities offered to the
Company and increases the bargaining power of property owners seeking to sell.
Seasonality of the Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues
are greater in the second and third quarters than in the first and fourth
quarters of a calendar year. All of the Company Hotels typically reflect the
effects of this industry seasonality. This seasonality may cause significant
quarterly fluctuations in the Company's lease revenues.
Regulatory Matters
General
Hotel properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities, such as
swimming pools, activity centers and
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other common areas. Based on its inspection and evaluation of the Company
Hotels, the Company believes that each Company Hotel has the necessary permits
and approvals required to enable the lessee of the particular hotel to operate
and manage such hotel in the manner contemplated by the applicable lease
agreement.
Americans with Disabilities Act
The Company Hotels must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Under the
public accommodations provisions of the ADA, the Company, as owner of the
Company Hotels, will be obligated to reasonably accommodate the patrons of the
hotel properties who have physical, mental or other disabilities. This includes
the obligation to remove architectural and communication barriers at the Company
Hotel when doing so is "readily achievable". In addition, under the commercial
facilities provisions of the ADA, the Company is obligated to ensure that
alterations to any hotel properties conform to the specific requirements of the
ADA implementing regulations. Noncompliance could result in the imposition of
fines, injunctive relief, and an award of damages and attorneys' fees. The
lessee generally is obligated to remedy any ADA compliance matters pursuant to
the Percentage Leases. However, if required changes were to involve significant
expenditures, the ability of the lessee to pay rent could be adversely affected
which, in turn, could have a material adverse affect on the Company. Currently,
the Company believes that all Company Hotels are in compliance with the ADA in
all material respects.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 6116 North
Central Expressway, Suite 1313, Dallas, Texas 75206. The Company leases
approximately 1,200 square feet for its corporate headquarters. The lease term
extends through December 1999, at an annual rate of approximately $16,000.
The Company believes that the size of the corporate headquarters is adequate for
the Company's current needs. In addition, the Company owns twelve hotel
properties located in nine states consisting of approximately 922 rooms. Set
forth in the following chart is certain information relating to the Company
Hotels.
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<TABLE>
<CAPTION>
Gross Revenues
for the 12 Annual Year
Annual Percentage Months Ended Base Acquired/
Rooms Rent Formula (Year to Date"YTD") 12-31-98 Rent*** Built
----- -------------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
35% YTD Revenues over initial Break-Even
Miner, 63 Threshold of $706,860* on first $200,000 over
Missouri Bread-Even Threshold, and 40% thereafter, less
(Super 8) Percentage Rent previously paid YTD. $761,000 $263,000 1995/85
Poplar Bluff, 35% YTD Revenues over initial Break-Even
Missouri 63 Threshold of $586,500* on first $100,000 over
(Super 8) Break-Even Threshold, and 37% thereafter, less
Percentage Rent previously paid YTD. $587,000 $226,000 1995/85
Rock Falls, 28.75% YTD Revenues over initial Break-Even
Illinois 63 Threshold of $622,120* on first $200,000 over
(Super 8) Break-Even Threshold, and 35% thereafter, less
Percentage Rent previously paid YTD. $737,000 $266,000 1995/85
Somerset, 32% YTD Revenues over initial Break-Even
Kentucky Threshold of $425,000* on first $200,000
(Super 8) 63 over Break-Even Threshold, and 35% thereafter,
less Percentage Rent previously paid YTD. $472,000 $127,000 1995/85
Mission Bay, 30% YTD Revenues over initial Break-Even
California Threshold of $1,100,000** on first $100,000
(Super 8) 117 over Break-Even Threshold, and 40% thereafter,
less Percentage Rent previously paid YTD. $1,321,000 $308,000 1996/87
Flagstaff,
Arizona 90 32% YTD over $925,000 less Percentage Rent
(Super 8) previously paid. $1,210,000 $505,000 1997/85
Tallahassee, 78 5% of Revenues
Florida $562,000 $255,000 1996/94
(Sleep Inn)
Destin, 77 30% YTD Revenues over initial Break-Even
Florida Threshold of $850,500* on first $350,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter, less
Percentage Rent previously paid YTD. $687,000 $382,000 1996/92
Ocean Springs, 78 30% YTD Revenues over initial Break-Even
Mississippi Threshold of $788,400* on first $350,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter, less
Percentage Rent previously paid YTD. $949,000 $369,000 1996/95
Sarasota, 80 30% YTD Revenues over initial Break-Even
Florida Threshold of $802,800* on first $300,000 over
(Sleep Inn) Break-Even Threshold, and 35% thereafter, less
Percentage Rent previously paid YTD. $973,000 $304,000 1996/93
Auburn, 78 30% YTD Revenues over initial Break-Even
Indiana Threshold of $760,000 on first $260,000 over
(Country Hearth) Break-Even Threshold, and 40% thereafter, less
Percentage Rent previously paid YTD. $763,000 $303,000 1997/87
Findlay, 72 30% YTD Revenues over initial Break-Even
Ohio Threshold of $740,000 for first $300,000, and
(Country Hearth) 40% thereafter, less Percentage Rent previously
paid YTD. $989,000 $314,000 1997/88
-------- --------
Consolidated Total for Hotels $10,011,000 $3,622,000
=========== ==========
</TABLE>
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* Break-Even Threshold increases by 2% per year
** Break-Even Threshold increases by 3% per year
*** Base Rent Effective 12/31/98
ITEM 3. LEGAL PROCEEDINGS
The Company was named as a defendant in a complaint filed on
September 24, 1998, in the United States District Court, District of Minnesota,
Fifth Division under court file number 98-2154-MJD/RLE (the "Complaint") by Five
Lion, Inc. and Lion Investment Limited Partnership (the "Plaintiffs"). The
Complaint alleges, among other things, that the Company is obligated to
reimburse $150,000 that the Plaintiffs paid to the Company pursuant to a letter
agreement dated February 13, 1998. The Company believes the Plaintiffs are not
entitled to reimbursement of the $150,000 and intends to vigorously defend the
Complaint. In the event, however, that the Company should be found obligated
to reimburse all or any part of the $150,000, such reimbursement will not
have a material adverse affect on the financial condition of the Company
based upon prior accruals relating to alleged reimbursement in the Company's
financial statements.
The Company is a party to other non-material legal proceedings
through the normal course of business. The Company does not anticipate the
losses, if any, will have a material impact on the financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no submissions of matters to a vote of securities holders in
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Class A Common Stock trades and is reported on the
American Stock Exchange ("AMEX") under the symbol "HFD". The Class A Common
Stock began trading on April 22, 1996, the date of the Company's initial public
offering. In July 1998, the Company's Board of Directors authorized the Company
to purchase up to $200,000 of the Company's Class A Common Stock in the open
market. From that time through December 31, 1998, the Company purchased 54,400
shares for a total amount of approximately $155,000, including transaction fees.
The Company also 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 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 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 certain
limited registration rights and pro rata treatment upon the occurrence of
certain events, including, without limitation, stock splits, mergers,
reclassifications of stock, or a recapitalization of the Company.
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The following table shows the range of high and low bid prices of
the Company's Class A Common Stock for the years 1996, 1997 and 1998 as
reported on the AMEX.
1996
High Low
---- ---
April 22, 1996
to June 30,1996 9 7 7/8
Third Quarter 8 5/8 7 5/8
Fourth Quarter 8 3/4 7 3/8
1997
High Low
---- ---
First Quarter 10 1/2 7 1/2
Second Quarter 9 7/8 8 3/8
Third Quarter 9 5/8 8 5/8
Fourth Quarter 9 3/16 5
1998
High Low
---- ---
First Quarter 7 3/4 5 1/4
Second Quarter 5 7/16 4 3/8
Third Quarter 4 3/ 4 1 7/8
Fourth Quarter 2 5/16 1 11/16
As of March 24, 1999 there were approximately 1,300 shareholders of
record of the Company's Class A Common Stock and the closing bid price was $2
7/8.
During 1997, the Company declared dividends of $0.24 per share on
February 4, $0.24 per share on May 30, $0.24 per share on September 2, and $0.24
per share on December 12. No dividends were declared or paid in 1998.
The Company's ability to make dividend payments to its shareholders is
significantly dependent upon the Company's net cash flow from the operations of
the Company Hotels. No assurances can be given that net cash flow from the
Company's operations will be sufficient to enable the Company to make dividend
payments in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial
information for the Company, all of which has been derived from the financial
statements which are included elsewhere in this Annual Report on Form 10-K. The
following information should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto for the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
located elsewhere in this Annual Report on Form 10-K.
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<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Nine Months Ended
December 1, 1998 December 31, 1997 December 31, 1996 December 31, 1995
OPERATING RESULTS:
<S> <C> <C> <C> <C>
GROSS REVENUES $ 3,926,042 $ 3,837,350 $ 1,768,783 $ 942,343
LOSS BEFORE INCOME TAXES $ (904,316) $ (1,025,514) $ (149,276) $ (31,217)
NET LOSS $ (904,316) $ (1,025,514) $ (149,276) $ (28,217)
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.58) $ (0.68) $ (0.12) $ (0.04)
WEIGHTED AVERAGE NUMBER
OF BASIC AND DILUTED COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 1,559,916 1,516,652 1,244,668 690,000
DISTRIBUTIONS PER COMMON SHARE:
CLASS A $ $ 0.96 $ 0.465
CLASS B $ $ $
CLASS C $ $ $
TOTAL ASSETS $ 32,449,658 $ 31,996,180 $ 20,435,575 $ 2,694,694
LONG TERM DEBT
(including current portion) $ 25,790,837 $ 25,036,346 $ 15,500,000 $ 4,230,565
SHAREHOLDERS'EQUITY $ 3,587,500 $ 4,279,337 $ 4,703,395 $(2,064,834)
OTHER FINANCIAL DATA:
NET CASH PROVIDED BY (USED IN)
OPERATING, INVESTING, AND
FINANCING ACTIVITIES $ 17,462 $ (169,825) $ 218,193 $ 500
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Developments
Effective June 3, 1998, leasing and management of seven of the
Company Hotels (the "Crossroads Leases") were transferred from Crossroads to
Buckhead. See "Business-Business Development". Management believes that the
hotel management abilities of Buckhead will have long term, positive impacts on
the profitability of the Company Hotels leased to Buckhead and thus, the
Company.
In consideration of the termination of the Crossroads Leases, CHI
and HVI together paid approximately $349,000 in lease termination fees to
Crossroads (the "Termination Fees"). The Termination Fees were reduced by
certain working capital amounts previously funded by CHI and HVI; increased
by amounts advanced by Crossroads relating to capital expenditure items; and
increased or reduced by certain other items pursuant to the Crossroads
Leases; all of which totaled approximately $402,000. Additionally, the
Company released the 60,000 shares of the Company's Class A Common Stock
previously pledged by Crossroads as security for the performance by
Crossroads of its obligations under the Crossroads Leases.
Concurrently with the termination of the Crossroads Leases, HVI and
CHI entered into separate lease agreements with Buckhead (collectively, the
"Buckhead Leases"), for the seven hotel properties subject to the Crossroads
Leases.
The total purchase price paid to CHI and HVI in consideration of
execution of the Buckhead Leases was $1,250,000, and was adjusted for the
Termination Fees, working capital retained by Buckhead, promissory notes from
Buckhead, transaction costs, and a credit to Buckhead. A portion of the purchase
price was paid by Buckhead in the form of Preferred Stock in Buckhead (the
"Buckhead Stock"), which was sold by the Company in August, 1998. The net cash
proceeds from the above lease transactions and Termination Fees was
approximately $400,000, which was used for general corporate purposes. The
above transactions generated a net gain of approximately $573,000.
Effective January 1, 1999, the Company terminated the lease with
Crossroads and entered into a new lease with RPD 18, LLC ("RPD") relating to
the Mission Bay property. RPD is an affiliate of Vagabond Inns, a proven
motel owner/operator with motel properties located throughout the Western
United States. RPD has converted the Mission Bay Property from a Super 8
Motel to a Vagabond Inn.
The Company and Vagabond had previously executed an option
agreement (the "Mission Bay Option") whereby Vagabond has the option to
purchase the Mission Bay Property for a purchase price of $3,225,000. In
consideration for granting the Mission Bay Option, Vagabond agreed to pay
the Company a non-refundable option payment of $500,000. These funds were
received in the first quarter, 1999 and were used to pay termination fees to
Crossroads, termination fees to the franchisor, and for general corporate
purposes.
Effective February 24, 1999 HVI and RPD Flagstaff, LLC ("RPD
Flagstaff") entered into an option agreement (the "Flagstaff Option") whereby
HUI granted RPD Flagstaff an option to purchase the Flagstaff property. The
Flagstaff Option may be exercised at the earlier of March 2000 or upon
conveyance of the Flagstaff property to a third party by HVI. The total
consideration to HVI upon exercise of the Flagstaff Option is approximately
$5,265,000.
The Company is expending significant funds to maintain and enhance
the quality of the Company Hotels. An additional amount of approximately
$400,000 of the proceeds from the sale of lease rights to Buckhead was reserved
for the benefit of the Company Hotels. As of December 31, 1998, approximately
$130,000 had been expended on certain repairs and improvements to the Sleep Inn
property located in Destin, Florida. The repair and improvement work to the
Destin property was completed in January 1999 and the property is fully
operational. An additional amount of approximately $120,000 of the reserved
$400,000 was expended on six other Company Hotels during the first quarter,
1999. Additionally, in March 1999, the Company began undertaking renovations to
the Sleep Inn property in Sarasota, Florida in order to achieve compliance with
certain guidelines from Choice Hotels International, the holder of the Sleep Inn
franchise. Management expects construction to proceed as expected with
compliance to be achieved in the second quarter of 1999.
As previously reported, the Company negotiated and entered into a
letter of intent during the second quarter of 1997 relating to the purchase of
four hotels (including franchises representing Holiday
14
<PAGE>
Inn, Courtyard by Marriott, and Hilton) valued at approximately $50,000,000 and
comprising over 800 rooms. Effective February 17, 1998, negotiations relating to
the letter of intent were terminated due to the inability of the parties to
reach an agreement economically feasible and acceptable to both parties.
In May, 1998 the Sleep Inn Motel located in Tallahassee, Florida
(the "Tallahassee Sleep Inn") was reopened after having been closed due to
repair of certain structural defects. The Tallahassee Sleep Inn is fully
restored and operating.
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. Southwest negotiated,
on behalf of the Company, a letter of intent with an investment group (the
"Investment Group") whereby the Investment Group agreed to purchase 2,000,000
new shares of the Company's Class A Common Stock for $3.00 per share. The
Company terminated such letter of intent effective February 16, 1999 due to
the inability of the parties to reach a mutual understanding. Southwest
continues to negotiate, on behalf of the Company, with several other groups
interested in making significant investments in the Company.
In a separate transaction, on February 17, 1999 a tender offer
(the "Tender Offer") was filed on Schedule 14D-1 with the Securities and
Exchange Commission by a group unaffiliated with the Investor Group described
above. The Company filed a Schedule 14D-9 with the Securities and Exchange
Commission on March 1, 1999 and an amendment to Schedule 14D-9 on March 23,
1999, each of which is incorporated by reference into this Annual Report in
Form 10-K. The Company has not been informed of the status of the Tender Offer
as of March 30, 1999.
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, William M. Birdsall, Don W.
Cockroft 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.
Subsequent to the annual meeting, the Company announced that the
Board of Directors had 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 December 31, 1998 the Company had purchased 54,400 shares for
approximately $155,000, including transaction fees.
The Company is structured as a REIT, but has not elected REIT status.
Results of Operations
Years Ended December 31, 1998, 1997, and 1996:
Occupancy, average room rates, and revenue per available room of
62.4%, $49.50, and $30.88 for the Company Hotels for the year ended December 31,
1998 resulted in total sales, including room sales, of approximately
$10,012,000.
15
<PAGE>
Lease Revenue, Related Party: Reduced to $0 in 1998 and 1997, from
$278,453 in 1996. The reduction was the result of the termination of the related
party leases and Crossroads Hospitality Tenant Company, L.L.C. (an unrelated
party) ("Crossroads"), becoming lessee of the Company Hotels in April, 1996.
Lease Revenue: The 1998 amount of $3,891,000 reflects a full year of
operations for all properties; the 1997 amount of $3,679,000 reflects revenues
associated with the acquisition of the Super 8 Motel located in Flagstaff,
Arizona and the Country Hearth Inns located in Auburn, Indiana and Findlay,
Ohio. The 1997 amount also reflects the first full year of unrelated parties as
lessees. The 1996 amount of $1,262,000 reflects a partial year (April through
December) of unrelated parties as lessees.
Interest Income, Related Parties: Reduced to $0 in 1998 from $122,000
in 1997. The 1998 amount was reduced from the 1997 amount because a note
receivable from a related party was satisfied in 1997, and the directors of Host
Funding agreed to forego director fees provided interest due on the director
notes is forgiven. The 1997 amount was reduced from the 1996 amount of $219,000
because the note receivable from a related party was outstanding for all of
1996, but only a portion of 1997.
Interest Expense, Depreciation and Amortization, and Property
Taxes: the 1998 amounts are greater than the 1997 and 1996 amounts because of
the additional debt, capitalized cost, loan cost, and property taxes
associated with the acquisition of the Super 8 motel located in Flagstaff, AZ
and the Country Hearth Inn properties located in Findlay, Ohio and Auburn,
Indiana (the "1997 Properties"). 1998 was the first full year of operations
for the 1997 properties.
Depreciation expense, which is included in depreciation and
amortization, is calculated based upon the original historical cost of the
Initial Hotels and the acquisition value of the remaining Company Hotels.
Administrative Expenses, Other: the 1998 total amount of
approximately $831,000 is reduced from the 1997 total of $1,294,000 primarily
because of reductions in direct corporate overhead in 1998, and certain one time
charges incurred in 1997 related to moving the corporate office from California
to Texas. These one time 1997 charges, together with the termination of an
advisory agreement and the incurrence of salaries, wages, and other employment
related costs caused the increased 1997 costs from the 1996 cost of
approximately $428,000.
Administrative Expenses, Other totaled $831,000 and $1,294,000 for
the years ended 1998 and 1997, including the following approximate amounts:
Salaries & benefits: $285,000 and $328,000; audit and accounting fees: $83,000
and $109,000; legal fees: $82,000 and $95,000; contract labor: $52,000 and
$20,000; corporate office rent: $16,000 and $12,000; office supplies: $5,000 and
$11,000; telephone: $16,000 and $17,000; travel: $32,000 and $135,000; marketing
& advertising: $1,600 and $13,000; stock transfer costs: $36,000 and $67,000;
statutory filing costs: $8,000 and $27,000; printing cost for filed materials:
$22,000 and $26,000; directors fees: $20,000 and $18,000; repairs & maintenance:
$4,000 and $23,000; taxes & licenses: $6,000 and $12,000; relinquished project
expenses: $107,000 and $274,000; discount on note receivable: $0 and $31,000;
cancellation of advisory contract: $0 and $30,000; other administrative costs:
$55,400 and $46,000.
16
<PAGE>
Minority Interest in Partnerships: Represents the 19% minority
interest in the operations of the Country Hearth Inn Hotels.
Amortization of Unearned Directors' Compensation has been calculated
based upon the terms of the independent directors' notes.
Liquidity and Capital Resources
Effective May 12, 1998, HVI entered into a new loan agreement (the
"HVI Modified Loan") with First Boston in which the principal amount of the
existing debt from First Boston to HVI 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 HVI Modified Loan provides 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 tenth anniversary date of the HVI Modified Loan.
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 the 30-day LIBOR
plus 500 basis points. Interest and principal, based on a 5 year
amortization, are due monthly. The Company subsequently formed Host
Enterprises, Inc. ("HEI"), as a wholly owned, special purpose entity of HVI,
for the purpose of transferring the Mezzanine Loan to HEI. The Company
guaranteed the performance by HEI of the terms of the Mezzanine Loan and
pledged the stock of HVI as security for the Mezzanine Loan.
On June 19, 1997, the Company executed a promissory note payable to
Blacor, Inc. ("Blacor") in the original principal amount of $70,000 (the
"Original Blacor Note"). On December 30, 1997, the Original Blacor Note was
extended by a new promissory note in the original principal amount of $86,600
(the "Blacor Note"). Effective December 30, 1998, the Blacor Note was extended
to April 30, 1999, at which time the Company anticipates the satisfaction of the
Blacor Note by converting the outstanding principal balance and all accrued
interest into 35,000 shares of Class A Common Stock.
In October 1997, B-H Findlay L.P. ("B-H Findlay") and B-H Auburn, L.P.
("B-H Auburn") executed notes payable to the sellers of the Country Hearths Inns
located in Findlay, Ohio and Auburn, Indiana (collectively, the "Country Hearth
Notes") in partial payment of the purchase price of the
17
<PAGE>
two hotel properties. The Country Hearth Notes have December 31, 1998
outstanding balances in the amounts of $563,611 and $243,721, respectively,
in addition to the Full Cash Payment (described below) in the amount of
$453,511. In addition, 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 approximately $750,000 in partial payment of the purchase
price of the Country Hearth Inns. The Country Hearth Notes were modified on
June 15, 1998 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
was less than $6.50 per share, the Company would make an additional cash
payment (the "Full Cash Payment") to Sellers so that the total value of the
Class A Common Stock at the per share price on October 21, 1998, plus the
amount of such Full Cash Payment to the Sellers, equaled $750,000.
As of December 31, 1998 and March 31, 1999 the Company was in
default under the Country Hearth Notes and the Full Cash Payment, however,
the Company has listed the Country Hearth Inn located in Findlay, Ohio (the
"Findlay Property") for sale. The Company anticipates that the Findlay
Property will be sold for a price, which will generate proceeds to retire the
majority of the balances of the Country Hearth Notes and the Full Cash
Payment. The remaining balance of the outstanding obligations would be
satisfied by the anticipated sale of The Mission Bay Property. The Company
has executed an option agreement with the potential purchaser to purchase
The Mission Bay Property for $3,225,000. In consideration for granting the
option, the potential purchaser paid the Company $500,000 in cash and placed
$300,000 in escrow.
The Company is the beneficial owner of 81% of both B-H Findlay and
B-H Auburn, and previously executed corporate guarantees pursuant to which
the Company guarantees the payment and performance of the Country Hearth
Notes. The Country Hearth Notes are further secured by a pledge of 90,000
shares of the Class B Common Stock of the Company.
The Company is currently in the process of addressing the "Year
2000 Problem", in which certain electronic systems may be affected by the
turn of the millenium. The manufacturer of the Company's accounting system
has represented that the Company's accounting system is year 2000 compliant.
Management has determined that the Company's remaining automated systems are
either compliant or will be made compliant for an immaterial cost.
The Company's principal source of cash to meet its cash
requirements, including distributions to shareholders and repayments of
indebtedness is the cash flow from Percentage Leases. For the year ended
December 31, 1998, cash flow provided by operating activities was $379,000.
Buckhead, Crossroads, and RPD are currently evaluating or have
evaluated the systems relating to the Company Properties that may be affected
by the year 2000 problem. This evaluation includes consideration of all front
office systems, electronic locks, telephone systems, credit card processing,
communications software with primary bankers, motel VCR's, FAX machines,
copiers, cash registers, Television systems, and elevators, among other
systems. The items which are considered mission critical are either currently
compliant or are in the process of being converted in order to reach
compliance. Further, if any lessee suffers material loss or significant
adverse effects to operations resulting from non-compliance, the Company may
terminate the related lease due to default by the lessee and execute leases
with a new lessee who is Year 2000 compliant.
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 shareholders, is its share of the
Company's cash flow from the Company Hotel leases. Although the obligations of
Buckhead, as lessee, under the Company Hotels leased by Buckhead are guaranteed
in part by Buckhead, the ability of Buckhead to make lease payments under the
Company Hotel leases, and, therefore, the Company's liquidity, including its
ability to make distributions to shareholders, is dependent on the ability of
18
<PAGE>
Buckhead to generate sufficient cash flow from such Company Hotels. The
following table sets forth certain financial information for Buckhead as of and
for the year ended December 31, 1998:
Total Assets $ 1,650,000
Total Liabilities $ 280,000
Shareholders' Equity $ 1,370,000
Revenues $ 2,950,000
Net Income $ 166,000
Other than debt service on the Company's loan facilities and notes,
the capital expenditures required under the Company Hotel leases or the
Company's loan facilities, property taxes on the Company Hotels, obligations
under employment agreements, and other administrative expenses, the Company is
not aware of any demands, commitments, events or uncertainties that will result
or are likely to result in a change in the Company's liquidity.
The Company intends to make additional investments in hotel
properties and may incur indebtedness to make such investments to the extent
that working capital and cash flow from the Company's investments are
insufficient to make such investments. 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. The
Company expects that future investments in hotel properties will be financed, in
whole or in part, with the capital stock of the Company, proceeds from
additional issuance of the capital stock of the Company, 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 reasonably prudent and in the best interest of the Company.
Inflation
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the ability of the
lessees and operators of the Company Hotels 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.
"The Safe Harbor" Statement Under The Private Securities Litigation Act of 1995.
This Annual Report on Form 10-K contains or incorporates statements
that constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those
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<PAGE>
statements appear in a number of places in this Annual Report on Form 10-K and
include statements regarding, among other matters, the Company's growth
opportunities, the Company's acquisition strategy, regulatory matters pertaining
to compliance with governmental regulations and other factors affecting the
Company's financial condition or results of operations. Stockholders are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to
the Company is incorporated herein by reference to the discussion under
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Liquidity and Capital Resources", or contained
elsewhere in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's Board of Directors consists of five (5) members, each
of whom was elected to a one-year term at the annual meeting of the stockholders
of the Company held on July 16, 1998. Set forth below is certain information
regarding the directors and executive officers of the Company.
Michael S. McNulty, Director and President
Michael S. McNulty, 51, received his Juris Doctorate from Southern
Methodist University in 1973. From 1977 to 1985, Mr. McNulty was employed by the
real estate development corporation of a multi-national family with business
interests in various countries. During that period, Mr. McNulty was responsible
for developing partnerships for investments in over thirty real estate projects
with gross investments exceeding $200,000,000. Prior to election in September
1995 as President of the Corporation, Mr. McNulty owned his own private
financial consulting firm. Mr. McNulty is also President and Director of a
controlling venture in a Napa Valley based winery. In addition, Mr. McNulty has
served from 1994 to the present as the President and a director of Blacor, Inc.,
the principal corporation of a group of companies controlled by a multi-national
investor, the primary purpose of which is to invest in real property in the
United States.
Guy E. Hatfield, Director
Guy E. Hatfield, 64, has been President of All American Group,
Inc., a Delaware corporation, since 1989. Mr. Hatfield earned a Bachelor of
Science degree from Bradley University in 1955 and a Juris Doctorate from the
University of San Diego in 1962. From 1984 to 1989, Mr. Hatfield was Chairman of
the Board and Chief Executive Officer of Motels of America, Inc., a corporation
which built and managed 107 Super 8 motels and had gross annual sales of
$80,000,000. Since 1989, Mr. Hatfield has served as President and Chairman of
Hatfield Inns, Inc., a corporation involved in the ownership and management of
hotel properties.
Don W. Cockroft, Director
Don W. Cockroft, 58, joined United Inns, Inc. in the early 1960s
and occupied a variety of positions over a period of 25 years, including
Chairman of the Board and President. Mr. Cockroft resigned from these positions
upon the recent purchase of United Inns, Inc. by Hampstead, Ltd. United Inns,
Inc. was traded on the New York Stock Exchange, and in 1994 achieved the New
York Stock Exchange's largest percentage gain. Mr. Cockroft's duties with United
Inns, Inc. included asset development, acquisitions, dispositions, and debt
restructure. United Inns, Inc. was also an initial franchisee of Holiday Inns
and opened the initial Hampton Inns in Jackson, Mississippi and Atlanta,
Georgia.
21
<PAGE>
William M. Birdsall, Director
William M. Birdsall, 50, was Chairman of the Board and Chief
Executive Officer of the Company until March 31, 1998. Effective April 1, 1998,
Mr. Birdsall resigned his position as Chairman of the Board and Chief Executive
Officer, but continues to serve as an independent director of the Company. He
also serves as President of Birdsall & Corporation, a real estate investment and
finance firm located in Durango, Colorado. Before starting Birdsall &
Corporation in 1993, Mr. Birdsall was Chairman and CEO of the Price REIT, a
public corporation, which he co-founded and took public in 1991 in the form of a
Real Estate Investment Trust trading on NASDAQ. Mr. Birdsall has been involved
with real estate development since 1978. He was Chief Operating Officer of Estes
Properties, Inc., where he was responsible for operations of the Lowes Ventana
Canyon Resort and Golf Club in Tucson, Arizona, a 2,000-acre planned community
and resort hotel. From 1982 through 1987 he was Senior Vice-President of Real
Estate for Ramada, Inc., the international hotel chain. He now serves on the
Scripps Memorial Hospitals Foundation Board and is a member of the Young
Presidents Organization, Arizona Bar Association, Urban Land Institute, and
International Council of Shopping Centers.
Charles R. Dunn, Director
Charles R. Dunn, 53, is founder and Chief Executive Officer of
Hospitality Concepts, established in July of 1988. Hospitality Concepts provides
accounting and consulting services to the lodging and restaurant industry in the
Southwestern United States with clients located in California, Nevada, Arizona,
New Mexico, and Texas. Services range from financial statement production,
budgeting and related planning, to system design and consulting. Prior to July
1988, Mr. Dunn was Controller for the San Diego Princess Hotel, a 450-room,
full-service convention facility and resort located in San Diego, California.
Mr. Dunn graduated from Washington State University with a B.A. degree in Hotel
Administration.
Bona K. Allen, Chief Financial Officer
Bona K. Allen, 38, is the Chief Financial Officer and Secretary of
the Company, and has been involved in financial aspects of real estate
investment, development, management, and construction since graduating from
Birmingham-Southern College in 1982. Prior to appointment to the Corporation,
Mr. Allen served as a financial executive with The Myrick Company (Atlanta,
Georgia) and as a financial consultant from 1994 through 1996. From 1986 to
1994, Mr. Allen was employed by Wilma South Management Corporation (and
affiliates), the United States holding company of a Dutch-owned real estate
group. Mr. Allen served in several positions with increasing responsibility and
was named Vice President/Chief Financial Officer in 1991. He was responsible for
the financial operations of the Company at the time Wilma owned or controlled
assets with a cost totaling in excess of $500 million located in the Southwest,
Southeast and Southern California regions of the United States. Mr. Allen is a
member of the American Institute of Certified Public Accountants, the Georgia
Society of Certified Public Accountants, and the Alabama Society of Certified
Public Accountants. Mr. Allen was elected Chief Financial Officer of the Company
effective February 1, 1997.
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<PAGE>
Compensation of Directors
In 1996, Messrs. Cockroft, Birdsall, and Dunn purchased 10,000
shares of Class A Common Stock in the Company's initial public offering. The
purchase price for the Class A Common Stock was paid by the execution by each
director of a $100,000 non-recourse promissory note secured by the purchased
shares. In connection with the purchase of the shares, the Company agreed to
forgive the promissory notes (i) in increments of 18% of the principal amount
per annum for each year the director remains a director of the Company, and (ii)
upon the death, disability or resignation of the director (except for voluntary
resignation or failure to serve). Until the first quarter of 1998, the Company
paid the outside directors (Messrs. Cockroft, Dunn and Birdsall) $1,500 for each
attended meeting. The Company discontinued this policy for the fiscal year
1998, and in the alternative, elected to forgive quarterly interest payments,
and an additional 2% of the principal amount of the promissory notes from the
directors relating to the purchase of the Class A Common Stock.
The Company has not paid and does not anticipate paying
directors for service on committees. All of the directors of the Company are
entitled to participate in the Host Funding, Inc. 1997 Incentive Plan,
however, since adoption, no benefits have been issued under the 1997
Incentive Plan.
Section 16-(a): Beneficial Ownership Reporting Compliance
Section 16-(a) of the Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file reports of
ownership and change in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent (10%)
stockholders are required by SEC regulations to furnish the Company with
copies of all Section 16-(a) forms they file. Except as noted below and based
solely on its review of the copies of such forms received by it, or written
representation from certain reporting persons that no Forms 3, 4 or 5 were
required for those persons, the Company believes that, from January 1, 1998
to December 31, 1998, all filing requirements applicable to its officers,
directors, and greater than ten percent (10%) beneficial owners, were timely
met, excluding Mr. Guy E. Hatfield.
In August, 1998, the Company became aware that Mr. Hatfield, a
director of the Company, had filed certain forms with the SEC, subsequent to the
dates such forms were due to be filed pursuant to SEC regulations. In August,
1998, Mr. Hatfield filed an Annual Statement of Changes in Beneficial Ownership
on Form 5 ("Form 5") disclosing certain transactions that occurred in 1997. Such
Form 5 was required to have been filed with the SEC on or before February 14,
1998. Additionally, in August, 1998, Mr. Hatfield filed a Statement of Changes
in Beneficial Ownership on Form 4 ("Form 4") disclosing transactions that
occurred in February, 1998. Such Form 4 was required to have been filed with the
SEC on or before May 10, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years presented, the
compensation paid to the executive officers of the Company serving during 1998:
23
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Name and Other
Principal Year Salary ($) Bonus ($) Annual
Position (1) Compensation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William M. Birdsall, 1998 $ 27,000 $ 20,000 (2)
1998/Director - 1997/CEO 1997 $ 99,000 $ 21,000 (2)
- --------------------------------------------------------------------------------------------
Michael S. McNulty, 1998 $108,000
President 1997 $ 99,000
- --------------------------------------------------------------------------------------------
Bona K. Allen, 1998 $ 84,375
Chief Financial Officer 1997 $ 65,625
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Each of Messrs. McNulty and Allen was employed during fiscal years
1997 and 1998 pursuant to an employment agreement with the Company.
Mr. Birdsall was employed during fiscal year 1997 pursuant to an
employment agreement with the Company, which was terminated on
January 1, 1998. See "Employment Agreements and Other Compensation
Arrangements" below.
(2) Forgiveness of indebtedness on director promissory note. See
"Compensation of Directors" above.
Employment Agreements and other Compensation Arrangements
William M. Birdsall
The Company's employment agreement with Mr. Birdsall dated February
1, 1997, provided for an initial three-year term through January 31, 2000, with
automatic renewal for a period of one year on each anniversary date of February
1st ("Anniversary Date"), unless terminated for any reason by written notice
from either party given to the other at least one hundred twenty (120) days
prior to the next Anniversary Date, or unless otherwise terminated pursuant to
the terms of the agreement. On January 1, 1998, the employment agreement with
Mr. Birdsall was terminated and Mr. Birdsall resigned as Chairman of the Board
and Chief Executive Officer of the Company effective April 1, 1998. Pursuant to
such termination, the Company agreed to pay Mr. Birdsall the sum of $4,500 per
month for the period January 1, 1998 through June 30, 1998. Mr. Birdsall
continues to serve as an independent director of the Company.
Michael S. McNulty
The Company's employment agreement with Mr. McNulty dated February
1, 1997, provides for an initial three-year term through January 31, 2000, with
automatic renewal for a period of one year on each anniversary date of February
1st ("Anniversary Date"), unless terminated for any reason by
24
<PAGE>
written notice from either party given to the other at least one hundred twenty
(120) days prior to the next Anniversary Date, or unless otherwise terminated
pursuant to the terms of the agreement. The agreement vests Mr. McNulty with
full authority as President and Chief Operating Officer of the Company and
provides for an annual base salary of $108,000, subject to an annual increase to
(i) $150,000 if the assets of the Company exceed $150,000,000 and (ii) $250,000
if the assets of the Company exceed $250,000,000. The agreement also provides
for payment of a performance bonus calculated pursuant to a formula based on the
financial results achieved by the Company during any fiscal year. No employment
bonuses were owed to Mr. McNulty for fiscal year 1998.
Bona K. Allen
The Company's employment agreement with Mr. Allen dated February 1,
1997, provides for an initial three-year term through January 31, 2000, with
automatic renewal for a period of one year on each anniversary date of February
1st ("Anniversary Date"), unless terminated for any reason by written notice
from either party given to the other at least one hundred twenty (120) days
prior to the next Anniversary Date, or unless otherwise terminated pursuant to
the terms of the agreement. The agreement vests Mr. Allen with full authority as
Chief Financial Officer of the Company and provides for an annual base salary of
$75,000, subject to an annual increase to (i) $112,500 if the assets of the
Company exceed $150,000,000, and (ii) $150,000 if the assets of the Company
exceed $250,000,000. The agreement also provides for payment of a performance
bonus calculated pursuant to a formula based on the financial results achieved
by the Company during any fiscal year. No employment bonuses were owed to Mr.
Allen for fiscal year 1998.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company consists of Don W.
Cockroft, Charles R. Dunn, and Guy E. Hatfield, each of whom is a director and
non-employee of the Company. No member of the Compensation Committee was an
executive officer or employee of the Company or any of its subsidiaries at any
time during, or prior to, fiscal year 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 16, 1999, the
beneficial ownership, as defined by regulations of the Securities and Exchange
Commission (the "Commission"), of the Class A Common Stock (the "Common Stock")
held by: (i) each person or group of persons known to the Company to
beneficially own more than five percent (5%) of the outstanding shares of Common
Stock; (ii) each director of the Company; (iii) each current executive officer
of the Company named in the preceding Summary Compensation Table; and (iv) all
directors and executive officers as a group. The number of shares and percentage
ownership of Common Stock for each person assumes that shares of Class A Common
Stock issuable upon exercise of stock warrants to such person (exclusive of
others) exercisable within sixty (60) days from March 13, 1999 are outstanding.
Said information is taken from or based upon ownership filings made by such
persons with the Commission or upon information provided by such persons.
25
<PAGE>
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF OWNERSHIP
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) PERCENT
<S> <C> <C>
Guy E. Hatfield 481,643 (3) 31.13%
Ian Gardner-Smith 102,908 (4) 6.93%
Michael S. McNulty 59,004 (4) (5) 2.81%
William M. Birdsall 10,000 *
Don W. Cockroft 10,000 *
Charles R. Dunn 10,000 *
Bona K. Allen 1,800 *
All Directors and Officers
of the Company as a
Group (six persons,
including those named above) 573,627 27.05%
</TABLE>
* Less than one percent.
(1) The addresses of the more than five percent (5%) holders listed in the
table are as follows: Ian Gardner-Smith, 1025 Prospect Street, Suite 350,
La Jolla, California 92037.
(2) A person is considered to "beneficially own" the shares over which such
person holds or shares voting power or investment power or over which such
person can acquire such power within sixty (60) days (for example, through
the exercise of stock options, stock warrants or conversion of
securities). Except as otherwise noted, each director and officer has sole
voting and investment power with respect to the shares of Common Stock of
the Company.
(3) Includes 1,106 shares held in an Individual Retirement Account with
Sunwest Federal Credit Union for the benefit of Mr. Hatfield's wife,
Dorothy Hatfield; 1,574 shares held in an Individual Retirement Account
with Sunwest Federal Credit Union for the benefit of Mr. Hatfield; 425
shares held in trust by Mr. Hatfield, as trustee, for the benefit of Mr.
Hatfield and his wife; and 240,000 shares held in the Hatfield Family
Trust; 340 shares held by Sunwest Federal Credit Union for the benefit of
Mr. Hatfield's son, Scott J. Hatfield.
26
<PAGE>
(4) Includes shares of Class A Common Stock which may be acquired within sixty
(60) days of March 16, 1999 pursuant to the exercise of stock warrants as
follows: Ian Gardner-Smith 102,908 shares; Donegal Partners, Ltd., a
family limited partnership of which Mr. McNulty acts as General Partner,
11,959 shares; and Mark Grosvenor 30,083 shares. Also includes 11,960
shares issuable upon exercise of stock warrants to Blacor, Inc., of which
Mr. McNulty is President and a director, and of which, Mr. McNulty
disclaims beneficial ownership.
(5) Includes 10,519 shares of Class A Common Stock owned by Donegal Partners,
Ltd. "Donegal", a family partnership of which Mr. McNulty acts as General
Partner, 23,035 shares of Class A Common Stock owned by Blacor, Inc., of
which Mr. McNulty serves as President and a director, 845 shares owned by
MGB Partnership, and 686 shares owned by MSM Consulting, Inc., of which
Mr. McNulty serves as President. Mr. McNulty disclaims beneficial
ownership of Common Stock held by Blacor, Inc. and MGB Partnership. In
January 1999 Mr. McNulty transferred 4,738 of the shares owned by Donegal
to Blacor, Inc. in exchange for cash and repayment of debt owed from
Donegal to Blacor, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition Fees on Company Property Acquisitions
The Country Hearth Inns owned by the Company and located in
Auburn, Indiana and Findlay, Ohio, were acquired subject to the terms of the
Post-Formation Acquisition Agreement (the "Acquisition Agreement") between
the Company and Hotel Mortgage Resources, Inc. ("HMR"). The Acquisition
Agreement was terminated effective January 31, 1997, however, the Company
remained obligated for a period of one year for acquisition fees for certain
properties, including the Country Hearth Inns. The Company and HMR agreed
that the acquisition fee earned by HMR relating to the Country Hearth Inns
was 17,539 shares of the Class A Common Stock of the Company valued at $10
per share which was paid on January 7, 1998. Of the 17,539 shares issued to
HMR, each of Blacor, Inc. ("Blacor") and Donegal Partners, Ltd. ("Donegal")
received 3,692 shares in partial redemption of the membership units held by
each entity in HMR pursuant to the terms of that certain Redemption Agreement
among the parties dated effective as of April 8, 1997. Each of Blacor and
Donegal are affiliates of Michael S. McNulty, the president and a director of
the Company, based upon Mr. McNulty serving as President of Blacor and
General Partner of Donegal. The shares of Class A Common Stock of the
Company, in payment of the acquisition fees on the purchase of the Country
Hearth Inns, are restricted securities under the Securities Act of 1933, and
subject to the resale provisions of Rule 144 promulgated under the Act.
The remaining information required by this Item 13 is included
under the caption "Certain Transactions" of the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held on June 7, 1999, which
information is incorporated herein by reference.
Other Related Party Notes
The Company is indebted to Blacor, Inc. ("Blacor") pursuant to a
promissory note with the principal balance of $86,000 (the "Blacor Note"). See
"Liquidity and Capital Resources" for further discussion of the Blacor Note.
27
<PAGE>
On December 30, 1997, the Company executed a promissory note
payable to Guy and Dorothy Hatfield in the original principal amount of $100,000
(the "Hatfield Note"). The Hatfield Note bears interest at the rate of 12% per
annum, with all principal and accrued interest due and payable on May 31, 1998.
Proceeds from the Hatfield Note were used by the Company for general operating
purposes. The Hatfield Note was satisfied in the second quarter of 1998. Mr.
Hatfield is a director and principal stockholder of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K
Annual Report:
(1) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997.
Consolidated Statements of Cash Flow - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Report of Independent Accountants on Financial Statement Schedule
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation
(b) The Company did not file any reports on Form 8-K during the fourth quarter
of 1998.
28
<PAGE>
(c) Exhibits.
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment No. 8 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).
21.1 Subsidiaries of Registrant.
27 Financial Data Schedule.
The Company will furnish copies of these Exhibits upon request and the
payment of $.20 per page. Requests should be addressed to Bona K. Allen, c/o
Host Funding, Inc., 6116 North Central Expressway, Suite 1313, Dallas, Texas
75206.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Host Funding, Inc.
By: /s/ Michael S. McNulty
Michael S. McNulty
Title: President
Date: April 8, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ William M. Birdsall Director April 8, 1999
William M. Birdsall
/s/ Michael S. McNulty President and Director April 8, 1999
Michael S. McNulty
/s/ Bona K. Allen Chief Financial and April 8, 1999
Bona K. Allen Accounting Officer
/s/ Don W. Cockroft Director April 8, 1999
Don W. Cockroft
/s/ Guy E. Hatfield Director April 8, 1999
Guy E. Hatfield
/s/ Charles R. Dunn Director April 8, 1999
Charles R. Dunn
30
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOST FUNDING, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants 32
Consolidated Balance Sheets as of December 31, 1998 and 1997 33
Consolidated Statements of Operations for the years ended December 31, 1998,
1997, and 1996 34
Consolidated Statements of Shareholders' Equity for the year ended December 31,
1998, 1997, and 1996 35
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996 38
Notes to Consolidated Financial Statements 42
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Host Funding, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Host
Funding, Inc. and its subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
April 7, 1999
32
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
LAND, PROPERTY AND EQUIPMENT - HELD FOR INVESTMENT:
Building and improvements $ 17,323,312 $ 20,667,995
Furnishings and equipment 2,873,180 3,471,336
Less accumulated depreciation (1,906,466) (1,241,798)
------------ ------------
18,290,026 22,897,533
Land 5,667,570 6,844,650
------------ ------------
Land, property and equipment - held for investment 23,957,596 29,742,183
LAND, PROPERTY AND EQUIPMENT: HELD FOR SALE
Building and improvements 4,299,007
Furnishings and equipment 876,093
Less accumulated depreciation (392,539)
Less impairment reserve (444,000)
Land 1,239,206
------------ ------------
Land, property and equipment - held for sale 5,577,767
------------ ------------
Total land, property and equipment 29,535,363 29,742,183
CASH AND CASH EQUIVALENTS 66,328 48,867
RESTRICTED CASH 486,573 557,758
RENT RECEIVABLE 236,754 115,328
NOTES AND OTHER RECEIVABLES, SALE OF LEASE RIGHTS 265,459
DUE FROM RELATED PARTIES 36,612 19,942
LONG-TERM ADVANCES TO LESSEES 110,090 255,841
RESTRICTED INVESTMENTS 288,000
LOAN COMMITMENT FEES, NET OF ACCUMULATED AMORTIZATION OF $703,086 AND $568,000
AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY 1,105,402 964,551
FRANCHISE FEES - NET, OF ACCUMULATED AMORTIZATION OF $21,340 AND $10,240
AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY 99,660 110,760
PREPAID AND OTHER ASSETS 219,417 180,950
------------ ------------
TOTAL $ 32,449,658 $ 31,996,180
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT $ 25,790,837 $ 25,036,346
SHORT TERM DEBT 1,025,941 1,345,154
LONG-TERM LEASE DEPOSIT 588,000 300,000
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 854,556 335,645
ACCRUED INTEREST 231,577 196,053
ACCRUED PROPERTY TAXES 132,465 248,823
------------ ------------
Total liabilities 28,623,376 27,462,021
------------ ------------
MINORITY INTEREST IN PARTNERSHIPS 238,782 254,822
COMMITMENTS AND CONTINGENCIES (NOTE 3)
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized 50,000,000 shares; issued and
outstanding 1,546,369 shares and 1,535,868 shares at December 31, 1998 and 16,907 16,258
December 31, 1997
Additional Paid in Capital 8,805,953 8,499,876
Accumulated Deficit (4,038,321) (3,134,005)
Less: Unearned directors' compensation net of accumulated amortization
of $54,000 and $84,000 at December 31, 1998 and 1997, respectively (142,792) (202,792)
------------ ------------
4,641,747 5,179,337
Less: Common stock in treasury at cost, 144,400 shares and 90,000 shares
at December 31, 1998 and 1997, respectively (1,054,247) (900,000)
------------ ------------
Total shareholders' equity 3,587,500 4,279,337
------------ ------------
TOTAL $ 32,449,658 $ 31,996,180
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- --------------------------------------------------------------------------------
33
<PAGE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C>
REVENUES:
Lease revenue - related party $ 278,453
Lease revenue - Lessees $3,891,259 $3,679,355 1,262,165
Interest income - related parties 121,976 219,467
Interest income & other income 34,783 36,019 8,698
----------- ----------- -----------
Total revenue 3,926,042 3,837,350 1,768,783
----------- ----------- -----------
EXPENSES:
Interest expense (including amortization of loan costs) 2,693,219 2,375,059 780,015
Depreciation and amortization 1,068,307 861,031 289,098
Administrative expenses - other 831,272 1,293,918 427,980
Administrative expenses - related party 224,000
Advisory fees - related party 21,083
Property taxes 329,116 291,448 138,675
Minority Interest in Partnerships (16,710) (12,592)
Amortization of unearned directors' compensation 54,000 54,000 37,208
----------- ----------- -----------
Total expenses 4,959,204 4,862,864 1,918,059
----------- ----------- -----------
LOSS BEFORE INCOME TAXES, GAIN ON SALE,
AND IMPAIRMENT LOSS (1,033,162) (1,025,514) (149,276)
Impairment loss on assets held for sale (444,000)
Gain on sale of leasing rights 572,846
----------- ----------- -----------
NET LOSS $ (904,316) $(1,025,514) $ (149,276)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.58) $ (0.68) $ (0.12)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,559,916 1,516,652 1,244,668
=========== =========== ===========
</TABLE>
34
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Retained
Class A Additional Earnings Unearned Total
Common Paid in (Accumulated Directors' Treasury Shareholders'
Stock Capital Deficit) Compensation Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ 16,258 8,499,876 (3,134,005) $ (202,792) $ (900,000) $ 4,279,337
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION 54,000 54,000
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE 175 114,925 115,100
COMMON STOCK ISSUED AS COMPENSATION TO AN
EMPLOYEE 2 1,124 1,126
COMMON STOCK ISSUED PURSUANT TO SALE
OF LEASE RIGHTS 622 287,378 288,000
PRINCIPAL REDUCTION: NOTES RECEIVABLE DIRECTORS 6,000 6,000
54,400 SHARES OF COMMON STOCK IN TREASURY
AT COST (154,247) (154,247)
RETURN OF COMMON STOCK ISSUED AS DEPOSIT FOR (150) (97,350) (97,500)
LEGAL FEES
NET LOSS (904,316) (904,316)
----------- ----------- ------------ ------------- ------------- -------------
BALANCE, December 31, 1998 $ 16,907 $8,805,953 $(4,038,321) $ (142,792) $ (1,054,247) $ 3,587,500
=========== =========== ============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
35
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Retained
Class A Class B Class C Additional Earnings
Common Common Common Paid in (Accumulated
Stock Stock Stock Capital Deficit)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $12,340 $ 1,400 $ 1,400 $7,501,494 $ (744,772)
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 160 151,840
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 55 49,745
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK 1,400 (1,400)
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK 1,400 (1,400)
90,000 SHARES OF COMMON STOCK IN TREASURY
AT COST
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD
COMMON STOCK ISSUED IN CONNECTION WITH
ACQUISITION OF HOTELS 808 749,192
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL FEES 150 97,350
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ACQUISITION FEE (55) (49,745)
DISTRIBUTIONS (1,363,719)
NET LOSS (1,025,514)
-------- --------- --------- ------------ -------------
BALANCE, December 31, 1997 $16,258 $ 0 $ 0 $ 8,499,876 $(3,134,005)
- -------------------------------------------------------------------------------------------------------------------
Related Unearned Total
Party Note Directors' Treasury Shareholders'
Receivable Compensation Stock Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 $(1,805,675) $(262,792) $ - $4,703,395
COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE 152,000
COMMON STOCK ISSUED AS DEPOSITS AND HELD
IN ESCROW SUBJECT TO THE RELATED
PURCHASE CONTRACTS (AS AMENDED) 49,800
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS 6,000 6,000
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION 54,000 54,000
CONVERSION OF CLASS C COMMON STOCK
TO CLASS A COMMON STOCK
CONVERSION OF CLASS B COMMON STOCK
TO CLASS A COMMON STOCK
90,000 SHARES OF COMMON STOCK IN TREASURY
AT COST (900,000) (900,000)
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD 1,805,675 1,805,675
COMMON STOCK ISSUED AND CONTRIBUTED TO
BACHOST, L.L.C 750,000
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL FEES 97,500
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ACQUISITION FEE (49,800)
DISTRIBUTIONS (1,363,719)
NET LOSS (1,025,514)
------------- ----------- ----------- ------------
BALANCE, December 31, 1997 $ 0 $(202,792) $ (900,000) $ 4,279,337
</TABLE>
36
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Retained
Class A Class B Class C Additional Earnings
Common Common Common Paid in (Accumulated
Stock Stock Stock Capital Deficit)
- ---------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ 1 $ 0 $ 0 $ 0 $(259,160)
COMMON STOCK ISSUED IN PUBLIC OFFERING 3,000 2,697,000
COMMON STOCK ISSUED IN PRIVATE PLACEMENT 2,000 1,798,000
COMMON STOCK ISSUED PURSUANT TO MISSION 2,520 2,517,970
BAY ACQUISITION AGREEMENT
COMMON STOCK ISSUED TO PARTNERS OF AAG 4,099 1,400 1,400 (6,899)
COMMON STOCK ISSUED TO INDEPENDENT DIRECTORS 300 299,700
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE 420 338,205
RECLASS OF STOCK ISSUANCE COSTS AGAINST
ADDITIONAL PAID IN CAPITAL (64,943) 64,943
INCREASE IN STOCK ISSUANCE COSTS (77,539)
AMORTIZATION OF UNEARNED DIRECTORS' COMPENSATION
ELIMINATION OF DEFERRED INCOME TAXES FROM
CONVERSION TO REIT 163,000
DISTRIBUTIONS PAID (564,279)
NET LOSS (149,276)
--------- -------- -------- ------------ -----------
BALANCE, December 31, 1996 $12,340 $1,400 $1,400 $7,501,494 $(744,772)
- -----------------------------------------------------------------------------------------------------------
Related Unearned Total
Party Note Directors' Treasury Shareholders'
Receivable Compensation Stock Equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 (1,805,675) 0 0 (2,064,834)
COMMON STOCK ISSUED IN PUBLIC OFFERING 2,700,000
COMMON STOCK ISSUED IN PRIVATE PLACEMENT 1,800,000
COMMON STOCK ISSUED PURSUANT TO MISSION 2,520,490
BAY ACQUISITION AGREEMENT
COMMON STOCK ISSUED TO PARTNERS OF AAG
COMMON STOCK ISSUED TO INDEPENDENT DIRECTORS (300,000)
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE 338,625
RECLASS OF STOCK ISSUANCE COSTS AGAINST
ADDITIONAL PAID IN CAPITAL
INCREASE IN STOCK ISSUANCE COSTS (77,539)
AMORTIZATION OF UNEARNED DIRECTORS' COMPENSATION 37,208 37,208
ELIMINATION OF DEFERRED INCOME TAXES FROM
CONVERSION TO REIT 163,000
DISTRIBUTIONS PAID (564,279)
NET LOSS (149,276)
------------- ----------- ----- -------------
BALANCE, December 31, 1996 $(1,805,675) $(262,792) $ 0 $ 4,703,395
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (904,316) $ (1,025,514) $(149,276)
Adjustments to reconcile net loss to net cash:
provided by (used in) operating activities
Depreciation and amortization 1,068,307 861,031 289,098
Amortization of loan fees 135,086 372,772 216,500
Amortization of unearned directors' compensation 54,000 54,000 37,208
Stock issued as compensation 1,126
Minority interest in partnerships (16,040) (12,592)
Gain from sale of lease rights (572,846)
Impairment loss on assets held for sale 444,000
Changes in operating assets and liabilities:
Rent receivable (121,426) 107,832 4,844
Rent, interest and other receivable - due from related party (16,670) 10,448 (223,160)
Prepaid and other assets (135,967) (22,985) (14,800)
Notes receivable: directors 6,000 6,000
Credit on note receivable, related party 31,397
Accounts payable and accrued expenses 438,077 548,341 191,217
----------- ------------ -----------
Net cash (used in) provided by operating activities 379,331 930,730 351,631
----------- ------------ -----------
INVESTING ACTIVITIES:
Investment in land, property and equipment (1,044,746) (10,435,232) (13,803,929)
Restricted cash 71,185 (428,806) (128,952)
Long-term advances to lessee (110,090) (30,841) (225,000)
Reimbursement of advances to lessee 255,841
Other assets (20,482)
Franchise fees (62,750) (60,000)
Proceeds related to sale of leasing rights 807,200
Payments related to sale of leasing rights (346,354)
----------- ------------ -----------
Net cash used in investing activities (366,964) (10,957,629) (14,238,363)
----------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from common stock issued in Stock Offering 4,500,000
Stock issuance costs (402,539)
Cash portion of related party note receivable payment 874,278
Payment of loan fees (275,937) (834,985) (697,692)
Short term debt (319,213) 1,345,154
Borrowings on long-term debt 1,175,000 9,682,645 15,500,000
Payments on long-term debt (420,509) (146,300) (4,230,565)
Purchase of Company stock (154,247)
Long-term lease deposit 300,000
Distributions (1,363,719) (564,279)
----------- ------------ -----------
Net cash provided by financing activities 5,094 9,857,073 14,104,925
----------- ------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 17,461 (169,826) 218,193
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,867 218,693 500
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 66,328 $ 48,867 218,693
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
38
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 2,522,609 $ 1,921,127 $ 610,408
=========== =========== ===========
Non-cash investing activities:
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ 114,925 $ 151,840 $ 338,205
Class A Common Stock 175 160 420
Land, property and equipment (115,100) (152,000) (338,625)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Common stock issued as compensation
Class A common $ 2 $ $
Additional paid in capital 1,124
Salary expense (1,126)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
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)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Common stock pledged to Host Funding as security deposit
relating to leases to Buckhead
Restricted investments $ (288,000) $ $
Security deposits 288,000
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Common stock issued in 1997 as deposit for legal fee,
stock returned in 1998
Deposits $ 97,500 $ (97,500) $
Additional paid in capital (97,350) 97,350
Class A Common (150) 150
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Sale of leasing rights
Buckhead stock receivable $ (400,000) $ $
Acquisition finance note receivable (212,000)
Sale of lease rights 612,000
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
</TABLE>
39
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (CONTINUED)
Receipt of Buckhead stock
Buckhead stock receivable $ 400,000 $ $
Investment in Buckhead (400,000)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Reimbursement of capital expenditures relating to property
leased to Buckhead
Capital expenditure reserve $ (100,000) $ $
Note receivable, Buckhead 100,000
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $
=========== =========== ===========
Repairs paid by Buckhead for Destin Property
Notes and other receivables $ 134,541 $ $
Land, property & equipment (134,541)
----------- ----------- -----------
$ $ $
=========== =========== ===========
Conversion of Class C common stock
to Class A common stock
Class A common stock $ $ 1,400 $
Class C common stock (1,400)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
Conversion of Class B common stock
to Class A common stock
Class A common stock $ $ 1,400 $
Class B common stock (1,400)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
Receipt of Class A common stock in partial
payment of related party note receivable
Class A common stock held in treasury (at cost) $ $ 900,000 $
Related party note receivable (900,000)
----------- ----------- -----------
Net non-cash investing activity $ $ $
=========== =========== ===========
Common stock issued to partners of AAG:
Class A common stock $ $ $ 4,099
Class B common stock 1,400
Class C common stock 1,400
Additional paid in capital (6,899)
----------- ----------- -----------
Net non cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
Common stock issued to independent directors
Class A common stock $ $ $ 300
Additional paid in capital 299,700
Unearned directors' compensation (300,000)
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
40
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (CONCLUDED)
Common stock issued pursuant to Mission Bay
Acquisition Agreement
Land, property and equipment $ $ $(2,520,490)
Class A Common Stock 2,520
Additional paid in capital 2,517,970
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
Reclass of deferred income taxes and stock issuance
cost due to Stock Offering
Deferred income taxes $ $ $ (163,000)
Additional paid in capital (64,943)
Retained earnings 227,943
----------- ----------- -----------
Net non-cash investing activity $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
(Concluded)
41
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BACKGROUND:
Host Funding, Inc., a Maryland corporation ("Host Funding" or the
"Company"), was initially formed on December 22, 1994, and was
structured to qualify as a Real Estate Investment Trust ("REIT"),
but has not elected REIT Status. The principle business of the
Company is to acquire and lease limited service and full service
hotels/motels to proven hotel operators, which manage and operate the
Company Properties pursuant to such leases (the "Percentage Leases").
The Company owned twelve (12) limited service hotels comprising 922
rooms as of December 31, 1998.
Unless stated otherwise, the hotel properties owned by the subsidiaries
of the Company are herein referred to as the "Company Hotels" or
"Company Properties."
Host Funding is listed on the American Stock Exchange under the
symbol "HFD."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Host Funding and its wholly owned subsidiaries, Cross Host, Inc. and
Host Ventures, Inc., an 81% ownership interest in BacHost, LLC
("BacHost"), the accounts of the limited partnerships which own two
Country Hearth Inns and of which BacHost owns 99%. 19% of BacHost is
owned by an affiliate of Buckhead America Corporation.
LAND, PROPERTY, AND EQUIPMENT HELD FOR INVESTMENT; LAND, PROPERTY, AND
EQUIPMENT HELD FOR SALE
Buildings and improvements are stated at historical cost and
depreciated over useful lives of 35 years from the original date of
acquisition using the straight-line method. Hotel furnishings and
equipment are stated at historical cost and depreciated using primarily
straight-line methods over useful lives ranging from 3 to 7 years from
the original historical date of acquisition.
The Country Hearth Inn located in Findlay, Ohio (the "Findlay
Property") and the Super 8 motel located in Mission Bay, California
(the "Mission Bay Property") have been included under Land, Property,
and Equipment Held for Sale. The Findlay Property has been listed for
sale with a broker specializing in marketing and sales of motel
properties in that region. The Mission Bay Property is subject to an
option agreement whereby the
42
<PAGE>
lessee has the right to purchase the Mission Bay Property upon written
notice. The Company received such notice in the first quarter, 1999.
The Company expects both the Findlay Property and the Mission Bay
Property sale transactions to be consummated in the second quarter,
1999.
The Company periodically evaluates the carrying value of its real
estate properties to determine if circumstances exist indicating
impairment in the carrying value. If facts or circumstances support
the possibility of impairment, the Company will prepare a projection
of the undiscounted future cash flows from each individual property.
In cases when the Company does not expect to recover the carrying
value, the Company recognizes an impairment loss. When management
identifies an asset held for sale, the Company estimates the fair
value of such assets. If in management's opinion the fair value of
the asset is less than the carrying amount of the asset, a reserve
for impairment is established. Fair value is estimated as the amount
at which the carrying asset could be bought or sold less costs to
sell. For the year ended December 31, 1998, the Company has recorded
a loss in the amount of $444,000 related to the Findlay Property in
order to reduce the carrying value of the Findlay Property to an
amount that approximates its estimated realizable value. No other
impairment has occurred as of December 31, 1998, nor have other
impairment amounts been required to be recorded in accordance with
the Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to
Be Disposed of."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and in banks plus
all short-term investments with a maturity, at the date of purchase, of
three months or less.
RESTRICTED CASH
Restricted cash represents cash deposited in escrow accounts under
contractual agreements for property taxes and capital improvements.
RESTRICTED INVESTMENTS
Buckhead America Corporation, or its affiliates ("Buckhead") agreed to
purchase $288,000 in Class A Common Stock of the Company and return
such stock to the Company to hold as security deposits (the "Buckhead
Security Deposit") against the Buckhead Leases (defined in Note 2). As
the Company is holding the Buckhead Security Deposit, it is reflected
as a restricted investment and a security deposit obligation on the
balance sheet of the Company. Since the stock is held as a security
deposit, the Company did not recognize a reduction of the asset
and correlating liability to reflect the value of the stock at
December 31, 1998 in accordance with SFAS No. 115.
RENT RECEIVABLE
Represents rent outstanding and receivable pursuant to the Percentage
Leases.
NOTES AND OTHER RECEIVABLES, SALE OF LEASE RIGHTS
Pursuant to the HVI Agreement and the CHI Agreement (defined in Note
2), Buckhead executed separate notes payable to Host Ventures, Inc.
("Host Ventures") and CrossHost,
43
<PAGE>
Inc. ("CrossHost") with the aggregate net face amount of the notes
aggregating $400,000. Such notes are to be satisfied by periodic
disbursements made by Buckhead, with approval from the Company, to
satisfy obligations related to certain capital expenditures which are
set forth in the HVI Agreement and the CHI Agreement, or as may be
mutually agreed upon by Buckhead and HVI or CHI, as applicable. As of
December 31, 1998 Buckhead has disbursed approximately $135,000 in
partial satisfaction of the above notes; primarily related to repairs
to the Sleep Inn property located in Destin, Florida.
LOAN COMMITMENT FEES
The loan commitment fees are amortized over the terms of the loans
using the straight-line method, which approximates the effective
interest rate method. Accumulated amortization of loan fees totaled
$703,086 and $568,000 as of December 31, 1998, and 1997, respectively.
FRANCHISE FEES
Franchise fees are amortized on a straight-line basis over the life of
the franchise agreements. Accumulated amortization of franchise fees
totaled $21,340 and $10,240 as of December 31, 1998 and 1997
respectively.
REVENUES
Host Funding recognizes lease revenue on an accrual basis as earned
in accordance with the terms of the the lease agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards ("SFAS") 107 requires all
entities to disclose the fair value of certain financial instruments
in their financial statements.
The following disclosure of estimated fair value was determined by
available market information and appropriate valuation methodologies.
However, considerable judgement is necessary to interpret market data
and develop the related estimates of fair value.
44
<PAGE>
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, Restricted Cash, Restricted Investments,
Notes and Other Receivables, Sale of Lease Rights, Long-term Advances
to Lessees, are carried at amounts which reasonably approximate their
value, due to the short maturity of these investments.
The carrying amount of long-term debt approximates fair value as the
related interest rate is variable and approximates market rates due
to the Company's ability to obtain such borrowings at comparable
rates.
SEASONALITY
The hotel industry is seasonal in nature. Revenues are generally
greater in the first and second quarters of a calendar year.
Seasonal variations in revenues at the hotels may cause quarterly
fluctuations in the Company's lease revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES
The Company has not qualified to be a REIT under Sections 856
through 860 of the Internal Revenue Code for the three years ended
December 31, 1998. Under the Internal Revenue Code, if certain
requirements are not met in a given year, a corporation will be
subject to Federal Income Tax with respect to all income, including
that which is distributed to Shareholders. Therefore the Company
records its provision for income taxes in accordance with SFAS No.
109. Under the liability method of SFAS 109, deferred taxes are
determined based on the difference between the financial statement
amounts for tax and financial reporting purposes.
45
<PAGE>
NOTE 2: REAL ESTATE INVESTMENTS
The Company's acquisition of hotel properties for the years 1998, 1997,
and 1996 may be summarized as follows:
<TABLE>
<CAPTION>
Purchase Cost Number of Number
Year (In Thousands) Hotel Properties of Rooms
<S> <C> <C> <C>
1996 16,664 5 430
1997 11,530 3 240
1998 -0- 0 0
</TABLE>
The Company Hotels are located in nine states comprising 922 rooms and
are subject to leases as described in Note 5.
Purchase costs for all 12 of the Company's properties total
approximately $27,267,000 with purchase costs related to two assets
held for sale of approximately $5,066,000.
The purchase costs above include purchase prices as well as related
commissions and closing costs.
In April 1996, the Company acquired a 117 room Super 8 motel located in
San Diego, California from Mission Bay Super 8, Ltd., a California
limited partnership. The acquisition price of $2,810,000 was funded by
the Company issuing 252,049 shares of Class A common stock at a stated
value of $10.00 per share ($2,520,490) plus cash of ($290,000).
In September 1996, the Company formed CrossHost, Inc., a Maryland
Corporation ("CrossHost"), as a wholly owned, REIT qualified
subsidiary. Upon formation, CrossHost acquired four (4) Sleep Inn
Properties located in Destin, Sarasota, and Tallahassee, Florida and
Ocean Springs, Mississippi. This purchase was completed with a loan
facility (the "Initial CrossHost Facility") provided by Credit Suisse
First Boston, LLC ("First Boston").
In March 1997, the Company formed Host Ventures, Inc., a Maryland
Corporation ("Host Ventures"), a wholly owned, special purpose
subsidiary of Host Funding. Upon formation, Host Ventures entered into
a loan (the "Host Ventures Loan Facility") totaling $8,725,000 and
CrossHost entered into a loan facility (the "CrossHost Loan Facility")
totaling $13,000,000. Host Ventures used a portion of the Host Ventures
Loan Facility to
46
<PAGE>
acquire a Super 8 motel located in Flagstaff, Arizona. Additionally,
CrossHost assigned, transferred, and conveyed the Sleep Inn properties
located in Sarasota, Florida and Ocean Springs, Mississippi to Host
Ventures; and satisfied the Initial CrossHost Facility.
On October 21, 1997, the Company purchased from Findlay Equity
Partners, an Ohio general partnership, a Country Hearth Inn (the
"Findlay Property") located in Findlay, Ohio and from Auburn Equity
Partners, an Indiana general partnership, a Country Hearth Inn (the
"Auburn Property") located in Auburn, Indiana (collectively, the
"Country Hearth Inns") including an aggregate of approximately 150
rooms, which increased the Company's real estate portfolio to twelve
hotel properties containing approximately 922 rooms.
The Company completed the purchase of the Country Hearth Inns by
forming two separate, special purpose limited partnerships with
Buckhead America Corporation, a publicly traded hotel company, or its
affiliates ("Buckhead"). Wholly owned subsidiaries of Host Funding
(Host Findlay G.P., Inc. and Host Auburn G.P., Inc.) own 1% of the
respective limited partnerships and BacHost, L.L.C. (BacHost) owns 99%
of each limited partnership. Host Funding owns 81% of BacHost and
Buckhead owns 19% of BacHost. Each limited partnership has leased its
respective Country Hearth Inn to Buckhead (or to affiliates of
Buckhead) pursuant to a separate percentage lease agreement
(collectively, the "Country Hearth Leases"). Buckhead also manages the
hotel properties and holds the franchise for each of the Country Hearth
Inns outside of the limited partnerships (collectively, the "Country
Hearth Franchise Agreements").
For the period beginning January 1, 1998 and ending June 2, 1998,
Crossroads Hospitality Tenant Company, LLC ("Crossroads") operated 10
of the Company Hotels pursuant to certain Percentage Leases (the
"Crossroads Leases") and Buckhead operated 2 of the Company Hotels
pursuant to certain Percentage Leases (the "Buckhead Leases").
Effective June 3, 1998 the Company terminated the Crossroads Leases
relating to the Sleep Inn properties owned by Host Ventures located in
Ocean Springs, Mississippi, and Sarasota, Florida (collectively, the
"Host Ventures/Buckhead Properties"). Also effective June 3, 1998 the
Company terminated the Crossroads Leases relating to properties owned
by CrossHost relating to the Sleep Inn properties located in Destin,
and Tallahassee, Florida; and the Super Eight properties located in
Rock Falls, Illinois; Minor, Missouri; Poplar Bluff, Missouri; and
Somerset Kentucky (collectively, the "CrossHost/Buckhead
Properties"). The termination of the leases resulted in the Company
paying approximately $402,000 in total costs.
Concurrently with the termination of the Crossroads Leases discussed
above, Host Ventures and CrossHost separately entered into separate
Restated and Amended Agreements Regarding Hotel Leases with Buckhead
(separately, the "HVI Agreement" and the "CHI Agreement") pursuant to
which Buckhead agreed to lease the Host Ventures/Buckhead Properties
and the CrossHost/Buckhead Properties, except for the Sleep Inn
property located in Tallahassee, Florida, which is leased and managed
by the previous owner of that property.
47
<PAGE>
Minimum future base rents due under operating leases are as follows:
<TABLE>
<S> <C>
1999 $ 3,358,000
2000 3,273,000
2001 3,273,000
2002 3,273,000
2003 3,273,000
Thereafter $ 31,353,000
------------
Total $ 47,803,000
------------
------------
</TABLE>
NOTE 3: LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES
PAYABLE)
LONG-TERM DEBT:
A summary of the Company's long-term debt as of
December 31 follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Host Ventures first mortgage note
payable, collateralized by the properties owned
by Host Ventures, interest of 8.12% per annum,
interest and principal payable in monthly
installments of $70,765, due
June, 2023 ("Host Ventures Modified Loan") $ 9,016,516
Mezzanine loan, collateralized by the stock in
Host Ventures, interest at LIBOR plus
500 basis points (LIBOR was 5.03% at
12/31/98), payable in monthly installments of
$17,184, due in June of 2003. ("Host
Enterprises Loan") $ 750,030
First mortgage note payable, collateralized
by the properties owned by Host Ventures, interest
at LIBOR plus 350 basis points ("Host Ventures
Loan Facility") $ 8,725,000
First mortgage note payable, collateralized by
the properties owned by CrossHost, interest at
9.46% per annum, interest and principal
payable in monthly installments of
$120,838, due in March, 2017
("CrossHost Loan Facility") $12,636,889 $12,863,031
First mortgage note payable, collateralized by
the property owned by B-H Auburn, interest at
10.78% per annum, interest and principal payments
due in monthly installments of $17,405,
due in August, 2016 ("B-H Auburn Mortgage") $ 1,740,855 $ 1,772,159
48
<PAGE>
First mortgage note payable, collateralized by
the property owned by B-H Findlay, interest at
10.78% per annum, interest and principal
payable in monthly installments of
$18,402, due in August, 2016 ("B-H
Findlay Mortgage") $ 1,646,547 $ 1,676,156
----------- -----------
$25,790,837 $25,036,346
=========== ===========
</TABLE>
The effective date for the Host Ventures Modified Loan is May 12, 1998.
The Company modified the Host Ventures Loan Facility to increase it
from an initial amount of $8,725,000 to $9,075,000. The additional
proceeds were used for general corporate purposes. The Host Ventures
Modified Loan is secured by the Host Ventures Properties.
The effective date for the Host Enterprises Loan is also May 12, 1998.
The initial principal balance was $825,000. The Company has executed an
agreement whereby the Company has guaranteed the performance by Host
Enterprises, Inc. ("HEI") of the terms of the Host Enterprises Loan.
Additionally, the Company has pledged the stock of Host Ventures as
security for the Host Enterprises Loan.
SHORT TERM DEBT/NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES):
In June, 1997 the Company entered into a note payable to Blacor, Inc.
(an affiliate of Michael McNulty, President of Host Funding). The
December 31, 1998 balance is $86,600, the note has an amended maturity
date of April 30,1999 with interest at 12% per annum. The Company
anticipates satisfying this obligation through exchanging newly issued
Class A common stock of the Company for the note.
In October, 1997 B-H Findlay L.P. ("B-H Findlay") and B-H Auburn, L.P.
("B-H Auburn") entered into notes payable to the seller of the Country
Hearth Inns (collectively, the "Country Hearth Notes"). The notes have
December 31, 1998 outstanding balances in the amounts of $563,611 and
$243,721, respectively, in addition to the Full Cash Payment (defined
below) in the amount of $453,511. The Country Hearth Notes had a
modified maturity date of October 21, 1998, and were in default as of
December 31, 1998.
The Company issued 80,819 shares of the Company's Class A Common
Stock with a per share value of approximately
49
<PAGE>
$9.27 and an aggregate value of approximately $750,000 in partial
payment of the purchase price of the Country Hearth Inns. The Country
Hearth Notes were 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 shall
make an additional cash payment (the "Full Cash Payment") to Sellers so
that the total value of Class A Common shares at the per share price on
October 21, 1998 plus the amount of such Full Cash Payment to the
Sellers equals $750,000. The Company has recorded a liability in the
approximate amount of $455,000 related to the Full Cash Payment.
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 payment and performance of the
Country Hearth Notes. The Country Hearth Notes are further
collateralized by a pledge of 90,000 shares of Class B Common Stock
of the Company.
B-H Findlay and the sellers of the Findlay Property and B-H Auburn
and the sellers of the Auburn Property have executed separate
agreements further modifying each of the Country Hearth Notes. Such
modifications are each titled the "Third Modification of Promissory
Note, Stock Pledge Agreement, Guaranty and Collateral Assignment of
Membership Interest", herein collectively referred to as the "Third
Modifications". The terms and conditions of the Third Modifications
are summarized as follows; some of which have not been satisfied:
1) The Third Modifications are subject to the occurrence of the
following events:
a) The Sellers shall receive partial payments of
$100,000 cash on or before January 7,1999.
b) All interest due as of December 31, 1998 shall be
paid to the Sellers on or before January 7, 1999. The
total amount due as of January 7, 1999 was
approximately $47,200.
2) Interest accrues on the principal balance of the Country
Hearth Notes and the Full Cash payment amount at the per annum
rate of prime plus 10%. The interest calculated in 1 (b) above
was at the rate of 12%. If payments are made in accordance
with the above terms, interest accrued on the principal
balances and on the Full Cash Payment balances will be
forgiven to the extent such interest exceeds $47,200. No
interest has been forgiven because not all of the above
payments have been made. Interest in the amount of $33,000 has
been recorded.
50
<PAGE>
3) The Third Modifications provide that the payment of all
principal and other sums payable to the Sellers shall be due
and payable as follows:
a) On January 31, 1999 an interest payment is due for
interest accruing on the principal balances and on
the Full Cash Payment amounts for the period from
January 1, 1999 through January 31, 1999, such
payment shall be calculated using the annual interest
rate of prime plus 1%;
b) On February 28, 1999 an interest payment is due and
payable for interest accruing on the principal
balances and on the Full Cash Payment amounts for the
period from February 1, 1999 through February 28,
1999, such payment shall be calculated using the
annual interest rate of prime plus 2%;
c) On March 15, 1999 an interest payment is due and
payable for interest accruing on the principal
balance and on the Full Cash Balance for the period
from March 1, 1999 through March 15, 1999, such
payment shall be calculated using an annual interest
rate of prime plus 2%.
d) On March 15, 1999 the outstanding principal balance
of the Country Hearth notes and the outstanding
balance of the Full Cash Balances shall be due and
payable.
4) The Company, as guarantor under the Country Hearth Notes,
agreed to purchase from the Sellers the 66,218 shares of
Class A Common Stock of the Company, which are currently held
by seller. Such purchase was required to be accomplished
by the Company on or before March 15, 1999 for a price of
$1.50 per share. However, the Company did not repurchase
the shares before March 15, 1999. The seller may refuse to
sell such shares to Company if any payment under 3 above has
not been made.
The Company has not made any of the payments due on January 7,
January 31, nor February 28, 1999. On March 12, 1999 the Company made
a payment in the amount of $70,000, which payment was applied to
interest and principal. The Company is in default under the Country
Hearth Notes and accordingly such amounts are currently due. These
obligations are collateralized by a guarantee from the Company.
In order to fully satisfy the obligations due under the Country
Hearth Notes, the Company has listed the Findlay Property for sale.
The Company anticipates the consummation of the sale of the Findlay
Property to occur in the second quarter, 1999. The Company expects
that the proceeds from this sale should be sufficient to
substantially satisfy the amounts due under the Third Modifications
described above. The remaining balance of the outstanding
obligations would be satisfied by the anticipated sale of
Mission Bay (see Note 7).
51
<PAGE>
In May 1998 the Company executed a note payable to Beta Construction
(the "Beta Note") in the amount of $141,000 for capital improvement
items related to the Sleep Inn motel owned by the Company and located
in Tallahassee, Florida. Interest accrues on the Beta Note at a rate of
9.25% per annum, monthly interest and principal payments are due in the
amount of $6,458.
FIVE- YEAR DEBT MATURITY SCHEDULE
Aggregate principal payments under long term and short-term debt for
the next five (5) calendar years ended December 31, 1999 and thereafter
are as follows:
<TABLE>
<S> <C>
1999 $ 1,553,795
2000 649,146
2001 672,000
2002 742,000
2003 681,000
Thereafter 22,518,837
------------
TOTAL $ 22,815,778
============
</TABLE>
NOTE 4. SHAREHOLDERS'EQUITY
Host Funding is authorized to issue 55,000,000 shares of common stock,
consisting of 50,000,000 shares of Class A common stock, $.0l par value
per share, and 4,000,000 shares of Class B common stock, $.0l par value
per share and 1,000,000 shares of Class C common stock, $0.01 par value
per share.
On or about April 26, 1996 the Company sold to each independent
director then in office 10,000 shares of Class A common stock at a
price per share equal to $10 per share. The purchase price ($300,000)
was paid through the delivery of a five year promissory note executed
in favor of Host Funding by each purchaser, which bears interest,
payable quarterly, at a fixed rate equal to 7% per annum. The
Company has agreed to forgive the promissory notes issued in
exchange for the shares of common stock in increments of 18% of the
principal amount per annum for each year the maker remains a
director of the Company. The Company also subsequently agreed to
forgive quarterly interest payments and an additional 2% of the
principal amounts of the promissory notes from each director in lieu
of payment of directors fees to the directors. The Company suspended
payment of directors' fees for fiscal year 1998. The shares of
common stock purchased by each independent director are pledged to
the Company to collateralize payment of the promissory note, which
is non-recourse to the maker, except to 10% of the principal amount
due from directors.
52
<PAGE>
The annual amortization of unearned director's compensation is
approximately $54,000 per year based upon the issuance of a total of
30,000 shares to three directors.
In July 1998 the Company's Board of Directors authorized the Company
to purchase up to $200,000 of the Company's Class A Common Stock in the
open market. From that time through December 31, 1998, the Company
purchased 54,400 shares for a total amount of approximately $155,000,
including transaction fees.
The Company also has 20,000,000 authorized preferred shares, $.0l par
value, none of which are issued or outstanding.
The calculation of weighted average shares to determine diluted
earnings per share, in accordance with SFAS No. 128 excludes stock
warrants as they are anti-dilutive.
NOTE 5. COMMITMENTS AND CONTINGENCIES
REIT STATUS:
The Company, as a requirement under the Code to elect REIT status,
must have no more than five (5) shareholders, own no more than 50% of
the common stock, common stock equivalents, or other forms of equity
outstanding. The Company has not met this requirement as of December
31, 1998. Under the Code, the Company is allowed a six month exemption
after the tax year in which the election is to be effective to meet the
requirement. Management of the Company does not anticipate that such
requirement will be met during 1999.
PERCENTAGE LEASE AGREEMENTS:
Each Percentage Lease has an initial term of fifteen years, subject
to earlier termination upon the occurrence of certain contingencies.
The lessees are required to pay base and percentage rents and are
entitled to all profits from the operations of the Company Hotels
after the payment of certain specified operating expenses. The
Company is required to set aside replacement reserve amounts of 4%
to 6% of gross room revenues to be used for capital expenditures
which generally must be jointly approved by the Company and the
lessee.
FRANCHISE AGREEMENTS:
The Company has been granted franchise license agreements from Super 8
and Sleep Inns for terms expiring in 2005 and 2011, respectively.
Pursuant to the terms of the agreement, Host Funding is required to pay
royalty fees and advertising fees of 5% to 4% and 3% to 1.3%,
respectively, and reservation fees due under the Sleep Inn agreements
of 1.75%, of gross room revenue. The responsibility for payment of the
fees has been assigned to the lessees pursuant to the Percentage
Leases.
Findlay and Auburn have each been granted franchise license agreements
from Buckhead under terms and conditions that are typical of the hotel
industry and substantially similar to the franchise agreements relating
to the Super 8 Hotels and the Sleep Inn Hotels currently owned directly
or indirectly by the Company.
53
<PAGE>
TERMINATION OF ADVISORY AGREEMENT, AMENDMENT OF ACQUISITION AGREEMENT
AND ISSUANCE OF WARRANTS:
Effective April 22, 1996, the Company entered into that certain
Advisory Agreement (the "Advisory Agreement") whereby Host Funding
Advisors, Inc., a Delaware corporation (the "Advisor") provided
information, advice, assistance, and facilities to the Company in
connection with the Company's investment in Hotel Properties.
Also effective April 22, 1996 the Company entered into that certain
Post-Formation Acquisition Agreement (as amended, the "Acquisition
Agreement") with HMR Capital, LLC, a Delaware limited liability
company, (the "Acquisition Company").
On February 3, 1997 the Company entered into an agreement with the
Acquisition Company whereby the Acquisition Company and
the Company agreed to amend the Acquisition Agreement. Additionally,
on February 3, 1997, the Advisor and the Company terminated the
Advisory Agreement.
On August 5, 1997 the Company delivered notice to the Acquisition
Company canceling the Acquisition Agreement effective thirty (30) days
after the date of receipt of the termination letter by the Acquisition
Company. As compensation to the Acquisition Company for amending the
Acquisition Agreement allowing a thirty (30) day cancellation, the
Company agreed to issue 225,000 Series A Warrants (the "Series A
Warrants") and 225,000 Series B Warrants (the "Series B Warrants") to
the Acquisition Company.
The Series A Warrants provide warrants to purchase 225,000 shares of
the Company's Class A Common Stock, at $9.90 per share, and expire
on February 2, 2000. There are additional provisions in the Series A
Warrants that allow pro rata treatment upon recapitalization of Host
Funding.
The Series B Warrants provide warrants to purchase 225,000 shares of
the Company's Class A Common Stock, at $10.80 per share, and expire
on February 2, 2001. There are additional provisions in the Series B
Warrants that allow pari passu treatment upon recapitalization of
the Company and certain restrictions with the first twenty-four
months of issuance as to the price allowed upon exercise of the
Series B Warrants based upon consummation of a public offering in
which proceeds to the Company are not less than $50 million.
EMPLOYMENT AGREEMENTS:
Host Funding has entered into Employment Agreements (the "Employment
Agreements") with Michael S. McNulty, President; and Bona K. Allen,
Chief Financial Officer, for a term of three years from February
1997. The Employment Agreements provide for combined base salaries
of $183,000 with a minimum bonus of 15% up to a maximum of 50%,
based upon a prescribed formula in the Employment Agreements, of
base compensation in the first year. The Employment Agreements also
provide for base salary
54
<PAGE>
increases based upon prescribed increases in the Company's asset size.
The Employment Agreements are terminable by the Company, for cause,
upon thirty (30) days written notice, or upon death or disability, with
severance payments due employees ranging from nothing or two years of
current base salary then in effect.
HOST FUNDING, INC. 1997 INCENTIVE PLAN:
At the Annual Meeting of the Stockholders of Host Funding, Inc., the
Stockholders approved the Host Funding, Inc. 1997 Incentive Plan (the
"1997 Plan") pursuant to which certain individuals, including officers
and directors of the Company, may be granted awards for incentive stock
options, non-statutory stock options, stock awards, performance shares
and incentive awards. No such awards have been awarded as of December
31, 1998 and 1997.
LITIGATION
The Company has been named as defendant in that certain complaint
filed on September 24, 1998, in United States District Court,
District of Minnesota, Fifth Division under court file number
98-2154-MJD/RLE (the "Complaint") by Five Lion, Inc and Lion
Investment Limited Partnership (the "Plaintiffs"). The Complaint
alleges, among other things, that the Company is obligated to
reimburse $150,000 that the Plaintiffs paid to the Company pursuant
to a letter agreement dated February 13, 1998. The Company believes
the Plaintiffs are not entitled to reimbursement of the $150,000 and
intends to vigorously defend the Complaint. However, the Company has
reserved the full $150,000 in the accompanying consolidated financial
statements.
The Company is a party to other, non-material legal proceedings
through the normal course of business. The Company does not
anticipate the losses, if any, will have a material impact on
the financial position or results of operations.
NOTE 6. INCOME TAXES
The primary components of the Company's deferred income tax liabilities
and assets as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred Tax Liabilities
Depreciation $ 360,000 $ 284,000
Total Deferred Tax Liabilities $ 360,000 $ 284,000
---------- ---------
Deferred Tax Assets
Accrued Expenses $ 67,000 $ 109,000
Net Operating Loss $ 825,000 $ 499,000
Impairment Loss $ 173,000
---------- ---------
Total Deferred Tax Assets $1,065,000 $ 608,000
---------- ---------
Net Deferred Tax Assets $ 705,000 $ 324,000
Valuation Allowance $ (705,000) $(324,000)
---------- ---------
0 0
---------- ---------
---------- ---------
</TABLE>
At December 31, 1998 the Company had approximately $2,116,000 of net
operating loss carry forwards which will expire between on December 31,
2010 and 2018.
In assessing the realizability of a deferred tax asset, management
considers whether it is more likely than not that some portion or
the entire deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. Based upon the level of historical
taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will not realize
the benefits of these deductible differences.
Income tax benefit differs from the amount computed by applying the
statutory rate of loss before tax, due to the valuation allowance.
The company and its subsidiaries file a consolidated federal income
tax return. Due to the Company's net operating loss position and the
valuation allowance on the net deferred tax assets, the Company will
not recognize a current or deferred tax expense/benefit.
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 had expected to make an election to be treated
as a REIT under the provisions of the Code beginning with the 1996
year. As as result, the Company would not be subject to federal
income tax on its taxable income at corporate rates to the extent it
distributes annually 95% of its taxable income to its shareholders
and complies with certain other requirements. The Company did not
satisfy the REIT shareholder requirement as of June 30, 1997, and
therefore, did not elect to qualify as a REIT during the 1996 tax
year and was subject to the corporate tax provisions. However, at
that date, the Company was in a net operating loss position, and has
a net deferred tax asset under SFAS 109, Accounting for Income Taxes,
that has been fully reserved. The Company's decision not to elect
REIT qualification will not adversely affect the stockholders of the
Company in that the Company will have no taxable income for the 1997
tax year. The Company plans to continue its efforts to qualify for
REIT status effective for the 1998 tax year.
NOTE 7. SUBSEQUENT EVENTS
TRANSFER OF LEASE: SUPER 8 PROPERTY LOCATED IN MISSION BAY, CALIFORNIA
Effective January 1, 1999, the Company terminated the lease with
Crossroads and entered into a new lease with RPD 18, LLC ("RPD")
relating to the Mission Bay Property. RPD is an affiliate of Vagabond
Inns, a proven motel owner/operator with motel properties located
throughout the Western United States. RPD has converted the Mission Bay
Property from a Super 8 Motel to a Vagabond Inn.
The Company and Vagabond had previously executed an option agreement
(the "Mission Bay Option") whereby Vagabond has the option to
purchase the Mission Bay Property for a purchase price of
$3,225,000. In consideration for granting the Mission Bay Option,
Vagabond agreed to pay the Company a non-refundable option payment
of $500,000 and $300,000 of the purchase price to be held in escrow.
These funds were received in the first quarter, 1999 and were used to
pay termination fees to Crossroads, termination fees to the franchisor,
and for general corporate purposes.
OPTION AGREEMENT: SUPER 8 MOTEL, FLAGSTAFF, ARIZONA
Effective February 24, 1999 HVI and RPD Flagstaff, LLC ("RPD
Flagstaff") entered into an option agreement (the "Flagstaff
Option") whereby HVI granted RPD Flagstaff an option to purchase the
Flagstaff property. The Flagstaff Option may be exercised at the
earlier of March 2000 or upon conveyance of the Flagstaff property
to a third party by HVI. The total consideration to HVI upon
exercise of the Flagstaff Option is approximately $5,265,000.
55
<PAGE>
LETTER OF INTENT
The Company entered into an exclusive Letter of Intent in January,
1999 which provided for the private placement of 2,000,000 new
shares of Class "A" Common Stock at $3.00 per share to a private
investment group (the "Investors"). The Investors completed due
diligence and the parties were in the process of completing
definitive documentation. As structured, the transaction would have
provided that the Company's Class "A" shareholders of record, prior
to the private placement, would have received aggregate cash
distributions of $.27 per share, of which $.135 was to have been
distributed within thirty days of closing, and $.135 was distributed
within ninety days of closing. Closing was contemplated to occur
prior to March 15, 1999. The closing and distributions were subject
to the parties arriving at mutually acceptable definitive
documentation. The Company terminated the letter of intent on
February 16, 1999.
56
<PAGE>
The Company is currently negotiating with several other potential
investors concerning an investment in on of the Company's subsidiaries
and/or investment in the Company itself. The board of directors is also
considering a rights offering to raise additional capital. Such an
investment could significantly change the current ownership of the
Company.
TENDER OFFER
In an unrelated transaction, the Company, on February 18, 1999,
received notice that a tender offer to purchase up to 300,000 shares
of the Company's Class A common stock at $3.00 per share had been
filed on Schedule 14D-1 with the Securities and Exchange Commission
on February 17, 1999. The Schedule 14D-1 stated that the tender
offer would expire on March 17, 1999. On March 17, 1999 an amendment
to Schedule 14D-1 was filed with the Securities and Exchange
Commission extending the termination date of the tender offer through
March 31, 1999.
57
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
Host Funding, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 31, 1999, appearing on page 32 of the 1998 Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PriceWaterhouseCoopers
April 7, 1999
<PAGE>
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
December 31, 1998
<TABLE>
<CAPTION> Costs
Initial Cost to Company Subsequent to Acquisition
------------------------------------------------------------
Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ (A) $ 131,627 $ 491,711 $ - $ 3,283
Super 8, Somerset, KY (A) 170,000 449,541 - 3,490
Super 8, Miner, MO (A) 187,660 461,494 - 14,652
Super 8, Poplar Bluff, MO (A) 153,000 410,515 - 7,164
Super 8, San Diego, CA (A) 702,500 1,826,500 - 85,619
Sleep Inn, Ocean Springs, MS (B) 924,162 2,402,821 - 16,576
Sleep Inn, Destin, FL (A) 993,429 2,582,915 - 171,384
Sleep Inn, Sarasota, FL (B) 834,990 2,170,975 - 104,735
Sleep Inn, Tallahassee, FL (A) 710,679 1,847,767 - 232,204
Super 8, Flagstaff, AZ (B) 1,321,800 3,436,680 - 16,497
Country Hearth Inn, Findlay, OH 1,646,548 482,991 2,053,380 53,715 333,508
Country Hearth Inn, Auburn, IN 1,740,855 229,896 2,287,655 10,326 211,253
--------------- ---------- ------------- --------- -----------
$ 25,040,808 $6,842,734 $20,421,954 $64,041 $1,200,365
=============== ============ ============= ========= ===========
Gross Amount at which
Carried at close of period
----------------------------
Accumulated
Buildings and Depreciation & Year of Date
Description Land Improvements Amortization Construction Acquired Life
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Super 8, Rock Falls, IL $ 131,627 $ 494,994 $ 77,286 1985 4/1/95 35
Super 8, Somerset, KY 170,000 453,031 77,547 1985 4/1/95 35
Super 8, Miner, MO 187,660 476,146 81,400 1985 4/1/95 35
Super 8, Poplar Bluff, MO 153,000 417,679 73,577 1985 4/1/95 35
Super 8, San Diego, CA 702,500 1,912,119 176,507 1987 4/22/95 35
Sleep Inn, Ocean Springs, MS 924,162 2,419,397 193,693 1995 9/19/96 35
Sleep Inn, Destin, FL 993,429 2,754,299 200,028 1992 9/13/96 35
Sleep Inn, Sarasota, FL 834,990 2,275,710 168,406 1993 9/13/96 35
Sleep Inn, Tallahassee, FL 710,679 2,079,971 143,407 1994 9/13/96 35
Super 8, Flagstaff, AZ 1,321,800 3,453,177 176,103 1985 3/14/97 35
Country Hearth Inn, Findlay, OH 536,706 2,386,888 71,768 1988 10/21/97 35
Country Hearth Inn, Auburn, IN 240,223 2,498,908 79,973 1987 10/21/97 35
----------- ------------ --------------
$6,906,776 $21,622,319 $ 1,519,695
===========
Land 6,906,776
Furniture and equipment 3,749,273 779,310
---------------------- -------------
$32,278,368 $ 2,299,005
====================== =============
</TABLE>
(A) Crosshost hotel assets are cross collateralized and encumbered by the
Crosshost Loan Facility. The outstanding principal balance at December 31, 1998
was $12,636,889
(B) Host Ventures hotel assets are cross collateralized and encumbered by the
Host Ventures Loan Facility. The outstanding principal balance at December 31,
1998 was $9,016,516
<PAGE>
List of Subsidiaries
<TABLE>
<CAPTION>
Name Jurisdiction
- ---- ------------
<S> <C>
CrossHost Inc. Maryland
Host Ventures, Inc. Maryland
Host Enterprises, Inc. Maryland
Host Auburn GP, Inc. Maryland
Host Findley GP, Inc. Maryland
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 537
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 603
<PP&E> 31,834
<DEPRECIATION> (2,298)
<TOTAL-ASSETS> 32,450
<CURRENT-LIABILITIES> 2,245
<BONDS> 0
7,769
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,450
<SALES> 0
<TOTAL-REVENUES> 3,926
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,693
<INCOME-PRETAX> (1,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 573
<CHANGES> 0
<NET-INCOME> (904)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
