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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1999 Commission File Number 1-14280
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
HOST FUNDING, INC.
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(Exact name of Registrant as specified in its charter)
Maryland 52-1907962
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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, TX 75206
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 750-0760
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
The number of outstanding shares of the Registrant's Class A Common Stock was
1,597,219 as of July 31, 1999.
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TABLE OF CONTENTS
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Item Number Page
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PART I
1. Financial Statements 3
Notes to Financial Statements 9
2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations 16
3. Quantitative and Qualitative Disclosure
About Market Risk 19
PART II
1. Legal Proceedings 20
2. Changes in Securities 20
3. Defaults Upon Senior Securities 20
4. Submission of Matters to a Vote of Security Holders 20
5. Other Information 21
6. Exhibits and Reports on Form 8-K 22
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements
3
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HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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June 30, December 31,
1999 1998
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ASSETS
LAND, PROPERTY AND EQUIPMENT - HELD FOR INVESTMENT:
Building and improvements $ 17,512,686 $ 17,323,312
Furnishings and equipment 3,004,092 2,873,180
Less accumulated depreciation (2,355,652) (1,906,466)
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18,161,126 18,290,026
Land 5,667,570 5,667,570
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Land, property and equipment - held for investment 23,828,696 23,957,596
LAND, PROPERTY AND EQUIPMENT - HELD FOR SALE:
Building and improvements 4,317,200 4,299,007
Furnishings and equipment 885,443 876,093
Less accumulated depreciation (450,764) (392,539)
Less impairment reserve (964,000) (444,000)
Land 1,239,206 1,239,206
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Land, property and equipment - held for sale 5,027,085 5,577,767
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Total Land, property and equipment 28,855,781 29,535,363
CASH AND CASH EQUIVALENTS 8,843 66,328
RESTRICTED CASH 665,010 486,573
RENT RECEIVABLE 213,150 236,754
NOTES AND OTHER RECEIVABLES, SALE OF LEASE RIGHTS 83,853 265,459
DUE FROM RELATED PARTIES 48,079 36,612
LONG-TERM ADVANCES TO LESSEES 110,090 110,090
RESTRICTED INVESTMENTS 288,000 288,000
LOAN COMMITMENT FEES, NET OF ACCUMULATED AMORTIZATION OF
$730,913 AT June 30, 1999 AND $703,211 AT DECEMBER 31, 1998 1,077,701 1,105,402
FRANCHISE FEES - NET OF ACCUMULATED AMORTIZATION OF
$26,890 AT JUNE 30, 1999 AND $21,340 AT DECEMBER 31, 1998 94,110 99,660
PREPAID AND OTHER ASSETS 400,206 219,417
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TOTAL ASSETS $ 31,844,823 $ 32,449,658
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements. Continued
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HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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June 30, December 31,
1999 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT $ 25,510,255 $ 25,790,837
SHORT TERM DEBT 1,125,158 1,025,941
LONG-TERM LEASE DEPOSIT 588,000 588,000
OPTION DEPOSITS 171,947
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 893,004 854,556
ACCRUED INTEREST 280,419 231,577
ACCRUED PROPERTY TAXES 270,024 132,465
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Total liabilities 28,838,807 28,623,376
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MINORITY INTEREST IN PARTNERSHIPS 105,003 238,782
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized 50,000,000
shares; issued and outstanding 1,547,219 and 1,546,369
shares at June 30, 1999 and December 31, 1998 respectively 16,917 16,907
Additional Paid in Capital 8,808,193 8,805,953
Accumulated Deficit (4,830,840) (4,038,321)
Less: Unearned directors' compensation net of accumulated
amortization of $57,403 and $145,208 at June 30, 1999
and December 31, 1998 respectively (38,597) (142,792)
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3,955,673 4,641,747
Less: Common stock in treasury at cost, 144,550 and 144,400
shares at June 30, 1999 and December 31, 1998, respectively (1,054,660) (1,054,247)
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Total shareholders' equity 2,901,013 3,587,500
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,844,823 $ 32,449,658
================= ================
</TABLE>
Concluded
The accompanying notes are an integral part of the
consolidated financial statements.
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HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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REVENUES:
Lease revenue $ 1,006,171 867,208 $ 1,818,675 1,777,211
Interest income & Other income 2,965 8,903 64,087 14,062
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Total revenue 1,009,136 876,111 1,882,762 1,791,273
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EXPENSES:
Interest expense, including amortization of loan
costs of $27,700 and $107,000 for the six months
ended June 30, 1999 and 1998 670,360 670,931 1,336,140 1,374,372
Depreciation and amortization 230,096 265,061 512,960 530,122
Administrative expenses - other 254,181 270,463 431,927 481,668
Property taxes 91,237 85,394 182,701 168,279
Minority Interest in Partnerships (119,396) (1,365) (133,779) (4,191)
Amortization of unearned directors' compensation 90,695 13,500 104,195 27,000
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Total expenses 1,217,173 1,303,984 2,434,144 2,577,250
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NET LOSS FROM OPERATIONS $ (208,037) (427,873) $ (551,382) (785,977)
VALUATION RESERVE (520,000) (520,000)
NET GAIN FROM TRANSFER OF LEASE 661,491 278,862 661,491
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NET LOSS $ (728,037) 233,618 $ (792,520) (124,486)
============================== ==============================
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.47) 0.15 $ (0.51) (0.08)
============================== ==============================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,547,195 1,554,243 1,547,207 1,554,243
============================== ==============================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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1999 1998
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OPERATING ACTIVITIES:
Net loss $ (792,520) $ (124,486)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 512,960 530,122
Amortization of loan fees 27,701 107,385
Amortization of unearned directors' compensation 104,195 27,000
Stock issued as compensation 2,250 1,125
Gain from transfer of lease (278,862)
Minority interest in partnerships (133,779) (4,191)
Impairment loss on assets held for sale 520,000
Changes in operating assets and liabilities:
Rent receivable 23,604 (145,751)
Rent, interest and other receivable - due from related party (11,467) (2,944)
Prepaid and other assets (40,789) 25,643
Security Deposits 288,000
Short Term Debt (426,222)
Notes receivable: directors 6,000
Deferred income 170,683
Accounts payable and accrued expenses 224,849 49,416
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Net cash provided by operating activities 158,142 501,780
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INVESTING ACTIVITIES:
Investment in land, property and equipment (166,221) (291,018)
Investment in restricted cash (178,437) (317,019)
Long-term advances to lessee 145,751
Proceeds related to transfer of lease 500,000
Payments related to transfer of lease (221,138)
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Net cash used in investing activities (65,796) (462,286)
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FINANCING ACTIVITIES:
Payment of loan fees (270,156)
Payment of short term debt (40,783)
Borrowings on long-term debt 1,175,000
Purchase of Company stock (413)
Payments on long-term debt (280,582) (161,531)
Notes & other receivables, sale of lease rights (800,000)
Receipt of Option Deposits 171,947
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Net cash used in financing activities (149,831) (56,687)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (57,485) (17,193)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 66,328 48,867
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,843 $ 31,674
============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 1,259,597 $ 597,132
============== ============
</TABLE>
Continued
The accompanying notes are an integral part of the
consolidated financial statements.
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
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1999 1998
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Continued)
Common stock issued as compensation
Class A common $ 10 $ 2
Additional paid in captial 2,240 1,123
Salary expense (2,250) (1,125)
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Net non-cash investing activity $ 0 $ 0
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Common stock issued for Acquired Properties Acquisition Fee
Additional paid in captial $ $ 114,925
Class A Common Stock 175
Land, Property and Equipment (115,100)
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Net non-cash investing activity $ 0 $ 0
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Property & equipment additions; repairs made by Buckhead
to certain properties
Notes and other receivables $ (181,606) $
Land, property & equipment 181,606
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Net non-cash investing activity $ 0 $ 0
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Common stock issued pursuant to the sale of lease rights
Class A common $ $ 622
Additional paid in capital 287,378
N/R: Buckhead (288,000)
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Net non-cash investing activity $ 0 $ 0
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Common stock pledged to Host Funding as security deposit
relating to leases to Buckhead
Restricted investments $ $ 288,000
Security deposits (288,000)
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Net non-cash investing activity $ 0 $ 0
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Acquisition costs funded by note payable
Other assets $ 140,000 $
Short term debt (140,000)
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Net non-cash investing activity $ 0 $ 0
================ ===============
</TABLE>
(Concluded)
The accompanying notes are an integral part of the
consolidated financial statements.
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Host Funding, Inc. Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION.
The accompanying unaudited consolidated financial statements
of Host Funding, Inc., a Maryland corporation (the
"Registrant" or the "Company"), include the accounts of the
Company and its consolidated subsidiaries, Host Ventures, Inc.
("Host Ventures"), CrossHost, Inc ("CrossHost"), and Host
Enterprises, Inc. ("Enterprises"), and the Company's interest
in the Country Hearth Inns located in Findlay, Ohio and
Auburn, Indiana. The Company is in the business of acquiring
motel properties and leasing such properties to professional
hotel and motel management companies who operate and manage
the Company's hotels. As of June 30, 1999 the Company owned
interests in 12 hotels in 9 states (the "Company Properties").
These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, these statements do
not include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management of the
Registrant, all adjustments necessary for a fair presentation
have been included. These adjustments are of a normal,
recurring nature. The financial statements presented herein
have been prepared in accordance with the accounting policies
described in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and should be read in
accordance therewith. The results of operations for the
six-month period ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. NET LOSS PER SHARE.
Net Income or Loss per share for the three months ended June
30, 1999 and 1998 is computed based on the weighted average
number of shares of common stock outstanding. There is no
impact of common stock equivalents to earnings per share,
therefore the numerator and denominator are the same in
computing basic and diluted Earnings per Share.
3. TRANSFER OF LEASE AND GRANTING OF OPTION TO PURCHASE: MISSION
BAY PROPERTY
Effective January 1, 1999, the Company terminated the lease
and related franchise agreement on the Super 8 property
located in Mission Bay, California (the "Mission Bay
Property"). A termination fee of $84,400 was due and paid to
the previous lessee. Concurrently with such termination, the
Company entered into a lease agreement with RPD 18, LLC
("RPD"), an affiliate of Vagabond Inns, whereby RPD agreed to
lease the Mission Bay Property under substantially the same
terms and conditions as the previous lessee. In consideration
for such transfer, RPD paid the Company a non-refundable fee
(the "Mission Bay Lease Fee") in the amount
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of $500,000. Upon execution of the lease with RPD, RPD
converted the Mission Bay Property from a Super 8 motel to a
Vagabond Inn. In conjunction with such conversion, the
Company paid the amount of $71,000 to the previous
franchisor in termination fees. The Mission Bay Lease Fee,
the termination fee paid to the previous lessee, the
termination fee paid to the previous franchisor, and
certain other costs incurred by the Company are all reflected
in the Company's Consolidated Statement of Operations under
the title "Net Gain from Transfer of Lease." In February 1999,
the Company granted an option to purchase the Mission Bay
Property to RPD (the "RPD Option") for a purchase price of
$3,225,000, which was subsequently exercised by RPD in March
1999.
The sale of the Mission Bay Property to RPD resulting
from the exercise of the RPD Option has not yet closed due to
a dispute relating to the governing deed of trust and the
applicable defeasance and release requirements. RPD and the
Company, with the knowledge of First Union National Bank (the
"Master Servicer"), relied upon the Deed of Trust filed of
record in the Recorder's Office of San Diego County on March
17, 1997 as the basis for negotiating the terms of the RPD
Option. Additionally, Lennar Partners (the "Special
Servicer"), on behalf of the Master Servicer, acknowledged
such deed of trust through the Subordination, Non-Disturbance,
& Attornment Agreement executed by the Special Servicer in the
first quarter, 1999. Upon giving notice to the Master Servicer
of the exercise of the RPD Option and requesting a release of
the Mission Bay Property, the Master Servicer informed the
Company that the deed of trust filed of record was an
incorrect document. The Master Servicer further informed the
Company that the Mission Bay Property could not be released
until certain additional release and defeasance requirements
set forth in the deed of trust contained in the Master
Servicer's files (which the Master Servicer claims is the
correct deed of trust) were satisfied by the Company. Although
the Company and RPD dispute the Master Servicer's position as
to the governing deed of trust, the Company is currently
evaluating options as to the incremental costs associated with
meeting the additional requirements imposed by the Master
Servicer's version of the deed of trust.
4. EXECUTION OF LEASE AGREEMENT AND GRANTING OF OPTION TO
PURCHASE FLAGSTAFF PROPERTY
Effective February 24, 1999, the Company entered into
a lease agreement (the "Flagstaff Lease") with RPD Flagstaff,
LLC, an affiliate of Vagabond Hotels ("RPD Flagstaff"),
relating to the Super 8 motel located in Flagstaff, Arizona
(the "Flagstaff Property") and in connection therewith granted
RPD Flagstaff an option to purchase the Flagstaff Property for
a purchase price of $4,700,000 (the "RPD Flagstaff Option"),
less certain adjustments. The RPD Flagstaff Option requires
RPD Flagstaff to make an option payment of $300,000 (the
"Initial Option Payment") upon execution of the RPD Flagstaff
Option and an additional payment of $265,000 upon the
commencement date of the Flagstaff Lease. The term of the RPD
Flagstaff Option commences on March 1, 2001 and expires on the
termination date of the Flagstaff Lease. Approximately
$172,000 of the Initial Option Payment was paid to the
Company, and was recorded as a liability, with the remainder
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of the Initial Option Payment paid into a separate escrow
account. The Flagstaff Lease is subject to approval by the
Company's lender and contains substantially the same terms and
conditions as the currently existing lease. The commencement
date of the Flagstaff Lease has not yet occurred pending
lender approval and final agreement with RPD Flagstaff.
Pending such approval and final agreement, Crossroads Tenant
Hospitality Company, LLC continues to manage and operate the
Flagstaff Property pursuant to the existing lease.
5. CONTRACT TO SELL COUNTRY HEARTH INN LOCATED IN FINDLAY, OHIO
Effective June 28, 1999, the Company, on behalf of B-H
Findlay, L.P. ("B-H Findlay"), entered into an agreement to
sell the Country Hearth Inn located in Findlay, Ohio (the
"Findlay Property") for a sales price of $2,400,000. The
Company anticipates that the net sales proceeds will
significantly reduce seller financed debt related to the
purchase of the Findlay Property and the Country Hearth Inn
located in Auburn, Indiana (the "Auburn Property"). See
"Commitments and Contingencies: Litigation Related to the
Country Hearth Notes". The proposed sales price for the
Findlay Property is less than the carrying cost recorded on
the books of the Company, thus an impairment reserve was
recorded in the second quarter, 1999 in the total amount of
$520,000, bringing the total impairment reserve to
approximately $964,000. The Company's portion of the total
impairment reserve is approximately $824,000. This reserve
will be partially offset by approximately $200,000 in
unrecorded assets resulting from capital contributions that
Buckhead America Corporation ("Buckhead"), a member of B-H
Findlay, owes to BacHost, LLC, the managing member of B-H
Findlay. Generally Accepted Accounting Principals preclude
recording an increase in the assets and an increase in the
equity of an entity for capital amounts that are owed from a
member to such entity.
6. COMMITMENTS AND CONTINGENCIES
REIT STATUS
The Company, as a requirement under the Internal Revenue Code
(the "Code") to elect REIT status, must have no more than five
(5) shareholders, who own no more than 50% of the common
stock, common stock equivalents, or other forms of equity
outstanding of the Company. The Company has not satisfied this
requirement and therefore, has not elected to qualify as a
REIT during the 1998 tax year and currently is subject to the
corporate tax provisions. However, the Company has a net
deferred tax asset under SFAS 109, Accounting for Income
Taxes, that has been fully reserved. The Company's decision
not to elect REIT qualification should not adversely affect
the stockholders of the Company in that the Company had no
taxable income for the 1998 year and expects no material
federal income tax liability for the year ended 1999.
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FRANCHISE AGREEMENTS
Host Funding has been granted franchise license agreements
relating to the Super 8 Motels, Sleep Inns, and Country Hearth
Inns owned by the Company or its affiliates for terms expiring
in 2005, 2011, and 2012, respectively. Pursuant to the terms
of the agreements, the Company is required to pay royalty fees
and advertising fees of 5% to 4% and 3% to 1.3%, respectively,
reservation fees due under the Sleep Inn agreements of 1.75%
of gross room revenue, and reservation fees due under the
Country Hearth agreements of 1% of gross room revenues plus
$1.00 per each room night generated by the Country Hearth
reservation system. Pursuant to the lease agreements for each
of the hotel properties owned by the Company, the
responsibility for payment of the fees on the Super 8 Motel
located in Flagstaff, Arizona has been assigned to Crossroads,
as lessee. The Company is not responsible for any franchise
costs associated with the Mission Bay Property. The
responsibility for payment of the fees on the remaining
Company Properties has been assigned to Buckhead or its
affiliates.
NOTES PAYABLE RELATED TO PROPERTY ACQUISITIONS
In May 1999 the Company entered into negotiations to purchase
certain properties, see Note 7, "Negotiations to Purchase
Southeast Properties". In connection therewith, the Company
executed an application with a lender to obtain financing for
the Southeast Properties. $140,000 was funded to the lender by
an unaffiliated party on behalf of the Company in prepayment
of certain due diligence costs related to such financing.
Repayment of the $140,000 is evidenced by two notes payable to
the unaffiliated party. Each note had an outstanding balance
of $70,000 as of June 30, 1999; interest accrues on each
outstanding balance at an annual interest rate of 12%; and
each note matures on August 25, 1999. The beneficiary of such
notes may, at the beneficiary's option, elect to receive
shares of the Company in full or partial satisfaction of the
notes. The number of shares to be issued in payment of the
notes is determined by dividing the result of (i) the then
outstanding balance (or portion thereof) of the note divided
by 67%, by (ii) $2.00.
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LITIGATION RELATED TO THE COUNTRY HEARTH NOTES
In October, 1997, B-H Findlay, L.P. ("Findlay") entered into a
note payable (the "Findlay Note") to the sellers of the
Country Hearth Inn in Findlay, Ohio (the "Findlay Country
Hearth Inn") and B-H Auburn, L.P. ("Auburn") entered into a
note payable (the "Auburn Note") to the sellers of the Country
Hearth Inn located in Auburn, Indiana (the "Auburn Country
Hearth Inn"). The Auburn Note and the Findlay Note are herein
referred to collectively as the "Country Hearth Notes." The
sellers of the Findlay Country Hearth Inn and the Auburn
Country Hearth Inn are herein referred to as the "Sellers."
The Company is the beneficial owner of 81% of both Findlay and
Auburn, and executed corporate guarantees pursuant to which
the Company guarantees the performance of Findlay and Auburn
under the Country Hearth Notes. The Country Hearth Notes are
further secured by 90,000 shares of Class B Common Stock of
the Company.
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 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 be obligated to make
an additional cash payment (the "Price Protection Amount") to
the Sellers so that the total value of Class A Common Stock
issued to the Sellers at the per share price on October 21,
1998, plus the amount of such Price Protection Amount equaled
$750,000. The Company has recorded a liability in the
approximate amount of $455,000 related to the Price Protection
Amount for the Class A Common Stock that the Sellers currently
hold based upon a closing price of $2.00 per share on October
21, 1998. The Company believes the obligation related to the
Price Protection Amount may be reduced based on a per share
price of $3.00 per share on the basis that each of the Sellers
had the opportunity to sell their respective shares of Class A
Common Stock in a tender offer that was filed with the
Securities and Exchange Commission in February, 1999.
In April, 1999, subsequent to the filing of the Company's
Annual Report on Form 10-K for the year ended December 31,
1998, the Company was notified that Auburn Equity Partners
filed a complaint, case number 99CVE-04-2725 (the "Auburn
Complaint"), in the Franklin County Common Pleas Court,
Columbus, Ohio, Civil Division (the "Franklin County Court").
The Auburn Complaint named BH-Auburn LP and Host Funding,
Inc., as defendants. Concurrently with receiving notice of the
Auburn Complaint, the Company received notice that Findlay
Equity Partners had also filed a complaint, case number
99CVH-04-2726 (the "Findlay Complaint"), in the Franklin
County Court. The Findlay Complaint named BH-Findlay, LP and
Host Funding, Inc., as defendants.
The Auburn Complaint and the Findlay Complaint together demand
payment of
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the Country Hearth Notes and the Price Protection Amounts
in the aggregate amount of approximately $1,249,000. The
Company's portion of this amount will be partially offset by
approximately $200,000 in unrecorded assets resulting from
capital contributions that Buckhead America Corporation, a
member of each of Findlay and Auburn, owes to BacHost, LLC,
the managing member of each of Findlay and Auburn. The Company
has previously treated these amounts as being due and owing.
On July 30, 1999, the Franklin County Court entered a
judgement for the plaintiffs in both the Auburn Complaint and
the Auburn Complaint which are appealable within thirty (30)
days after the date of entry. The Company is currently
analyzing its options and basis for appeal.
Effective June 28, 1999, the Company, on behalf of Findlay,
entered into an agreement to sell the Findlay Property for a
sales price of $2,450,000. The Company anticipates that the
net sales proceeds will significantly reduce the seller
financed debt owed on the Findlay Country Hearth Inn and the
Auburn Country Hearth Inn.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS
No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively
referred to as "derivatives") and for hedging activities.
It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In
June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities, Deferral of the
effective date of FASB Statement No. 133" ("FAS No. 137").
FAS No. 133 was originally effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. FAS
No. 137 deferred the effective date of FAS No. 133 until
June 15, 2000. The Company believes that upon
implementation, FAS 133 will not have a material impact on
the financial statements of the Company.
7. SUBSEQUENT EVENTS.
NEGOTIATIONS TO PURCHASE SOUTHEAST HOTEL PROPERTIES
The Company has entered into an agreement (the "Purchase Agreement")
to purchase four (4) or five (5) hotel properties located in the southeast
United States (the "Southeast Properties"). The Southeast Properties contain
an aggregate of approximately 662 to 526 rooms and are comprised of Comfort
Suite, Hampton Inn and Holiday Inn Express hotels. The Company proposes to
pay the purchase price for the Southeast Properties through a combination of
cash funded by new investment in the Company and the issuance to the sellers
of the Southeast Properties of shares of the Series "A" Convertible Preferred
Stock of the Company (the "Preferred Stock"). The Preferred Stock would be
convertible into shares of the Class "A" Common Stock of the Company based
upon the lesser of the average per share market price of the Class "A" Common
Stock of the Company and $4.00 per share. The holders of the Preferred Stock
would be entitled to certain demand registration rights upon conversion of
the shares of Preferred Stock. The Company has also agreed to issue warrants
to the sellers of the Southeast
14
<PAGE>
Properties to purchase 100,000 shares of the Class "A" Common Stock of the
Company at an exercise price of $3.00 per share. The closing of the purchase
of the Southeast Hotels is subject to final agreed upon documentation and the
satisfaction of certain additional due diligence items and other customary
closing conditions typical of hotel properties. The Company anticipates
closing the Southeast Properties during the third or forth quarters of 1999.
COUNTRY HEARTH LITIGATION
On August 6, 1999 the Company was notified that an entry which may
be a final appealable order has been filed with the Clerk of the Common Pleas
Court for both the Findlay and the Auburn Complaints.
LETTER OF INTENT WITH POTENTIAL INVESTORS IN THE COMPANY
In July 1999 the Company entered into a letter of intent with an
investor group whereby the investors would, through a private placement,
purchase up to six million dollars ($6,000,000) of the Company's Class A
Common Stock. The investment is proposed to be funded three million dollars
($3,000,000) at closing and approximately three million dollars ($3,000,000)
within 120 days of closing. Closing is subject to definitive documentation
and compliance with all applicable exchange regulations and securities laws.
The Company anticipates the consummation of this transaction by September 10,
1999.
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains or incorporates
statements that constitute forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Those statements appear
in a number of places in this Quarterly Report on Form 10-Q and include
statements regarding, among other matters, the Company's growth
opportunities, the Company's acquisition strategy, regulatory matters
pertaining to compliance with governmental regulations and other factors
affecting the Company's financial condition or results of operations.
Stockholders are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks, uncertainties and other
factors which may cause actual results, performance or achievements to differ
materially from the future results, performance or achievements, expressed or
implied in such forward looking statements. Certain factors that might cause
a difference in actual results include, but are not limited to, the Company's
ability to locate and acquire hotel properties on economically suitable terms
and conditions; 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 and its availability.
RECENT DEVELOPMENTS
The Company currently owns 12 properties, all of which are subject
to percentage leases (the "Percentage Leases") pursuant to which an affiliate
of Buckhead America Corporation ("Buckhead") is responsible for management
and operation of ten properties, Crossroads Hospitality Tenant Company, LLC
("Crossroads") is responsible for management and operation of one property,
and RPD Mission Bay, LLC ("Vagabond") is responsible for management and
operation of one property.
Effective January 1, 1999 the Company transferred leasing and
management of the Super 8 motel located in Mission Bay, California (the
"Mission Bay Property") to an affiliate of Vagabond, a proven hotel operator
located in California. Upon execution of the leasing documents, Vagabond
converted the Mission Bay property to a Vagabond Inn. In consideration for
such lease transfer, Vagabond paid the Company a non-refundable fee (the
"Mission Bay Lease Fee") in the amount of $500,000. The Mission Bay Lease Fee
was used to pay certain termination fees to the previous franchisor, to pay
the termination fee to the previous lessee, and for general corporate
purposes.
In February, 1999, the Company granted Vagabond an option to purchase the
Mission Bay Property. Vagabond exercised such option in March, 1999. The sale
of the Mission Bay Property to RPD resulting from the exercise of the RPD
Option has not yet closed due to a dispute relating to the governing deed of
trust and the applicable defeasance and release requirements. RPD and the
Company, with the knowledge of First Union National Bank (the "Master
Servicer"), relied upon the Deed of Trust filed of record in the Recorder's
Office of San Diego County on March 17, 1997 as the basis for negotiating the
terms of the RPD Option. Additionally, Lennar Partners (the "Special
Servicer"), on behalf of the Master Servicer, acknowledged such deed of trust
16
<PAGE>
through the Subordination, Non-Disturbance, & Attornment Agreement executed
by the Special Servicer in the first quarter, 1999. Upon giving notice to the
Master Servicer of the exercise of the RPD Option and requesting a release of
the Mission Bay Property, the Master Servicer informed the Company that the
deed of trust filed of record was an incorrect document. The Master Servicer
further informed the Company that the Mission Bay Property could not be
released until certain additional release and defeasance requirements set
forth in the deed of trust contained in the Master Servicer's files (which
the Master Servicer claims is the correct deed of trust) were satisfied by
the Company. Although the Company and RPD dispute the Master Servicer's
position as to the governing deed of trust, the Company is currently
evaluating options as to the incremental costs associated with meeting the
additional requirements imposed by the Master Servicer's version of the deed
of trust.
YEAR 2000
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 millennium. 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.
Buckhead, Crossroads, and Vagabond 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 VCRs, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998:
Occupancy and average room rates of approximately 68% and $48.83 for
the Company Properties for the three months ended June 30, 1999 resulted in
total sales of approximately $2,824,000 and generated total lease revenues of
approximately $1,006,000. Occupancy and average room rates of 67% and $47.74
for the Company Properties for the three months ended June 30, 1998 resulted
in total sales of approximately $2,804,000 which generated total lease
revenues of approximately $912,000, of which $867,000 was recognized and
$45,000 deferred pursuant to EITF 98-9, which was reversed in the fourth
quarter 1998. Lease revenues were negatively impacted the second quarter of
1999 by the significant refurbishment activities at the Sleep Inn motel in
Sarasota, Florida and the reduction in percentage rent on the Company
Properties located in Somerset, Kentucky, Ocean Springs, Mississippi,
Flagstaff, Arizona, and Auburn, Indiana.
The 1999 increase in minority interest in partnerships from 1998 is
attributable to the partner's portion of the valuation reserve recorded
related to the Findlay Property.
The increase in amortization of unearned directors' compensation
resulted from Mr. Charles Dunn and Mr. Don Cockroft no longer being on the
Company's Board of Directors. The Board of Directors approved the release of
the notes that were due from Mr. Dunn and Mr. Cockroft, thus the related
amortization was written off.
The 1999 Net Gain from Transfer of Lease consists of the Mission Bay
Lease Fee reduced by termination fees to the previous lessee of $84,000;
termination fees to the previous franchisor of $71,000; fees and legal costs
to the Company's lender related to obtaining the lender's consent to the
transfer of approximately $40,000; and legal and other costs to the Company
related to the transfer. Effective June 3, 1998, the Company terminated lease
agreements with Crossroads pertaining to certain of the Company hotels, sold
the right to lease such properties to Buckhead, and entered into lease
agreements with Buckhead. The leases with Buckhead are substantially the same
in all material respects as the previous leases with Crossroads. The sale of
lease rights generated a net book gain in 1998 of approximately $661,000. Net
cash received by the Company at the close of the transaction was
approximately $86,000. In connection with the sale by the Company of the
hotel lease rights to Buckhead, the Company received 53,647 shares of
Buckhead common stock which the company sold on August 11, 1998, and received
approximately $319,000 in cash.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998:
Occupancy and average room rates of approximately 62% and $47.94 for
the Company Properties for the six months ended June 30, 1999 resulted in
total sales of approximately $5,168,000 and generated total lease revenues of
approximately $1,818,000. Occupancy and average room rates of 64.2% and
$48.41 for the Company Properties for the six months ended June 30, 1998
resulted in total sales of approximately $4,900,000 which generated total
lease revenues of approximately $1,927,000, $1,777,000 of which was
recognized and, approximately $150,000 was deferred pursuant to EITF 98-9,
which was reversed in the fourth quarter 1998. Lease revenues were negatively
impacted in 1999 by the significant refurbishment expenses related to the
Sleep Inn motels in Destin and Sarasota, Florida; the reduction in percentage
rent on the Company Properties located in Somerset, Kentucky, Ocean Springs,
Mississippi, Flagstaff, Arizona, and Auburn, Indiana; and the delayed
recognition of certain 1997 rental amounts into 1998.
17
<PAGE>
The increase in Interest Income and Other Income for the six months
ended June 30, 1999 to $64,087 from $14,062 in the same period in 1998
results from the recognition of payments to the Company from an investor
group (the "Investor Group") which was exploring making a significant
investment in the Company in late 1998 and early 1999. The payments from the
Investor Group were offset by costs incurred by the Company.
The net decrease in Interest Expense and Amortization of Loan Cost
to approximately $1,334,000 for the six months ended June 30, 1999 from
$1,374,000 the same period in 1998 results from an increase in interest
expense and a decrease in loan cost amortization. An increase in outstanding
debt caused the increase in Interest Expense to $1,306,000 from $1,267,000.
The 1999 and 1998 amounts include approximately $27,000 and $107,000 in loan
fee amortization; the decrease in loan fees is attributable to the refinance
of the Host Ventures loan from two years to 25 years.
Administrative expenses - other totaled approximately $432,000 and
$482,000 for the six months ended June 30, 1999 and 1998, including the
following approximate amounts: salary and benefit costs of $132,000 and
$155,000, audit and accounting fees of $24,000 and $40,000, contract labor of
$36,000 and $19,000, rent of $5,000 and $7,000, bank and late charges of
$23,000 and 2,000, fees to the American Stock Exchange of $7,000 and $7,000;
fees to the stock transfer agent of $15,000 and $25,000, filing and printing
costs of $15,000 and $20,000, relinquished project costs of $12,000 and
$104,000, legal fees of $70,000 and $40,000, travel costs of $15,000 and
$16,000, directors fees of $5,000 and $4,000, repairs and maintenance of
$25,000 and ($1,000) and other costs of $48,000 and $44,000.
Net Gain from Transfer of Lease consists of the Mission Bay Lease
Fee reduced by termination fees to the previous lessee of $84,000;
termination fees to the previous franchisor of $71,000; fees and legal costs
to the Company's lender related to obtaining the lender's consent to the
transfer of approximately $40,000; and legal and other costs to the Company
related to the transfer.
Net income or loss per share and weighted average shares outstanding
have been calculated based upon the daily average of the number of shares
outstanding for the applicable reporting periods.
LIQUIDITY AND CAPITAL RESOURCES
In July, 1999 the Company entered into a letter of intent with an
investor group whereby the investors would, through a private placement,
purchase up to six million dollars ($6,000,000) of the Company's Class A
Common Stock. The investment is proposed to be funded three million dollars
($3,000,000) at closing and approximately three million dollars ($3,000,000)
within 120 days of closing. Closing is subject to definitive documentation
and compliance with all applicable exchange regulations and securities laws.
The Company anticipates the consummation of this transaction by September 10,
1999.
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
18
<PAGE>
principal source of cash to meet its cash requirements, including
distributions to stockholders and any amounts owing under the Country Hearth
Notes and Price Protection Amounts (if ultimately adjudged against the
Company), are its share of the Company's cash flow from the Percentage Leases
relating to the hotel properties owned by the Company and anticipated
proceeds from the sale of certain of the Company properties. Although the
obligations of the lessees under the Percentage Leases are guaranteed in part
by the parent companies of each lessee, the ability of the lessees to make
lease payments under the Percentage Leases, and therefore the Company's
liquidity, including its ability to make distributions to stockholders, is
dependent on the ability of the lessees to generate sufficient cash flow from
the hotels.
The Company is currently in negotiations with several outside
investors to acquire hotel properties and may incur indebtedness to make such
acquisitions or to meet distribution requirements imposed on a REIT under the
Code to the extent that working capital and cash flow from the Company's
investments are insufficient to make such distributions. The Company will
invest in additional hotel properties only as suitable opportunities arise,
and the Company will not undertake investments unless adequate sources of
financing are available. Based upon potential REIT distribution requirements,
the Company expects that future investments in hotel properties will be
financed, in whole or in part, with common stock, proceeds from additional
issuances of common stock in the form of future public offerings or private
placements, or from the issuance of other debt or equity securities. The
Company in the future may seek to obtain a line of credit or a permanent
credit facility, negotiate additional credit facilities, or issue corporate
debt instruments, all in compliance with its charter restrictions. Any debt
incurred or issued by the Company may be secured or unsecured, long-term or
short-term, charge a fixed or variable interest rate and may be subject to
such other terms as the Board of Directors of the Company deems prudent.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the ability of the
lessee to raise room rates in the face of inflation.
SEASONALITY
Hotel operations are generally seasonal in nature based upon
geographic locations. This seasonality can be expected to cause fluctuations
in the Company's quarterly lease revenue to the extent that it receives
percentage rent. To the extent that cash flow form operations is insufficient
during any quarter, due to temporary or seasonal fluctuations in lease
revenue, the Company expects to utilize other cash on hand or borrowings to
make distributions to its shareholders. No assurance can be given, however,
that the Company will make distributions in the future.
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to the
Company are incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Liquidity and Capital Resources", or as contained elsewhere in
this Quarterly Report on Form 10-Q for the six months ended June 30, 1999.
19
<PAGE>
PART II-OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In April, 1999, subsequent to the Company's filing of the Annual
Report on Form 10-K for the year ended December 31, 1998, the Company was
notified that Auburn Equity Partners filed a complaint, case number
99CVE-04-2725 (the "Auburn Complaint"), in the Franklin County Common Pleas
Court, Columbus, Ohio, Civil Division (the "Franklin County Court"). The
Auburn Complaint named BH-Auburn LP and Host Funding, Inc., as defendants.
Concurrently with receiving notice of the Auburn Complaint, the Company
received notice that Findlay Equity Partners had filed a complaint, case
number 99CVH-04-2726 (the "Findlay Complaint"), in the Franklin County Court.
The Findlay Complaint named BH-Findlay, LP and Host Funding, Inc., as
defendants. The Auburn Complaint and the Findlay Complaint together demand
payment of the Country Hearth Notes and the Price Protection Amount. On July
30, 1999, the Franklin County Court entered a judgement for the plaintiffs in
both the Auburn Complaint and the Auburn Complaint which are appealable
within thirty (30) days after the date of entry. The Company is currently
analyzing its options and basis for appeal.
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 operation.
Item 2. CHANGES IN SECURITIES.
There were no material changes in securities in the current
quarter.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Stockholders of the Company (the
"Meeting") was held on June 7, 1999 in Dallas, Texas.
(b) Proxies for the election of directors of the Company were
solicited pursuant to a Proxy Statement prepared in accordance
with Regulation 14 of the Securities and Exchange Act of 1934,
there was no solicitation in opposition to management's
nominees listed in the Proxy Statement, and all nominees were
elected by the stock-holders.
(c) Three matters were submitted to a vote of the stockholders
at the Annual Meeting held on June 7, 1999, as follows:
ELECTION OF DIRECTORS
20
<PAGE>
The stockholders elected five directors, each of whom was a nominee
of management, with the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----- -------- -------
<S> <C> <C> <C>
Michael S. McNulty 1,155,192 39,725
Brian K. Rodgers 1,156,384 38,533
Guy E. Hatfield 1,156,257 38,660
William M. Birdsall 1,156,681 38,236
Robert E. Dixon 1,156,554 38,363
</TABLE>
DESIGNATION OF SERIES OF PREFERRED STOCK
The stockholders approved the designation and subsequent issuance of up
to 5,000,000 shares of the Class A Cumulative Convertible Preferred Stock, $0.01
par value, of the Company, with the following vote:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----- ------- -------
<S> <C> <C>
805,883 50,379 7,842
There were 330,813 non-broker votes.
</TABLE>
RESERVATION OF COMMON STOCK FOR CONVERSION
The stockholders approved the reservation and subsequent issuance of up
to 4,000,000 shares of the authorized but unissued shares of Class A Common
Stock of the Company, which shares are issuable upon conversion of membership
units in certain operating companies to be formed by the Company, with the
following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----- ------- -------
<S> <C> <C>
807,037 49,025 330,813
There were 330,813 non-broker votes.
</TABLE>
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11
effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to
Form S-11 effective April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to Company's Amendment No. 8 to Form S-11
effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.2 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
4.3 Form of Series B Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.3 to Company's
Annual Report on Form 10-K filed on March 31, 1997).
27 Financial Data Schedule.
</TABLE>
Reports on Form 8-K
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized and in the capacity as the Registrant's
President and Chief Executive Officer and Chief Financial and Accounting
Officer, respectively.
Dated: August 23, 1999 HOST FUNDING, INC.
/s/ Michael S. McNulty
---------------------------------------------
By: Michael S. McNulty
Its: President and Chief Executive Officer
/s/ Bona K. Allen
---------------------------------------------
By: Bona K. Allen
Its: Chief Financial and Accounting Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 345
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 354
<PP&E> 31,387
<DEPRECIATION> (2,806)
<TOTAL-ASSETS> 31,845
<CURRENT-LIABILITIES> 2,569
<BONDS> 0
7,770
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,845
<SALES> 0
<TOTAL-REVENUES> 1,883
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,336
<INCOME-PRETAX> (551)
<INCOME-TAX> 0
<INCOME-CONTINUING> (551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
