<PAGE>
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
March 31, 1999 Commission file number 1-14280
-------------- -------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
HOST FUNDING, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 52-1907962
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6116 N. Central Expressway, Suite 1313, Dallas, TX 75206
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 750-0760
--------------
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
--- ---
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
1,547,219 as of April 30, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C> <C>
PART I
1. Financial Statements 3
Notes to Financial Statements 8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II
1. Legal Proceedings 16
2. Changes in Securities 17
3. Defaults Upon Senior Securities 17
4. Submission of Matters to a Vote of Security Holders 17
5. Other Information 17
6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
LAND, PROPERTY AND EQUIPMENT - HELD FOR INVESTMENT:
Building and improvements $ 17,395,064 $ 17,323,312
Furnishings and equipment 2,996,644 2,873,180
Less accumulated depreciation (2,128,331) (1,906,466)
------------ ------------
18,263,377 18,290,026
Land 5,667,570 5,667,570
------------ ------------
Land, property and equipment - held for investment 23,930,947 23,957,596
LAND, PROPERTY AND EQUIPMENT - HELD FOR SALE:
Building and improvements 4,299,007 4,299,007
Furnishings and equipment 876,093 876,093
Less accumulated depreciation (450,764) (392,539)
Less impairment reserve (444,000) (444,000)
Land 1,239,206 1,239,206
------------ ------------
Land, property and equipment - held for sale 5,519,542 5,577,767
------------ ------------
Total Land, property and equipment 29,450,489 29,535,363
CASH AND CASH EQUIVALENTS 108,839 66,328
RESTRICTED CASH 626,715 486,573
RENT RECEIVABLE 227,529 236,754
NOTES AND OTHER RECEIVABLES, SALE OF LEASE RIGHTS 83,853 265,459
DUE FROM RELATED PARTIES 41,076 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
$717,062 AT MARCH 31, 1999 AND $703,211 AT
DECEMBER 31, 1998 1,091,552 1,105,402
FRANCHISE FEES - NET OF ACCUMULATED AMORTIZATION OF
$24,115 AT MARCH 31, 1999 AND $21,340 AT
DECEMBER 31, 1998 96,885 99,660
PREPAID AND OTHER ASSETS 251,038 219,417
------------ ------------
TOTAL ASSETS $ 32,376,066 $ 32,449,658
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Continued
- ------------------------------------------------------------------------------
3
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT $ 25,646,865 $ 25,790,837
SHORT TERM DEBT 1,008,937 1,025,941
LONG-TERM LEASE DEPOSIT 588,000 588,000
OPTION DEPOSITS 171,947
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 797,221 854,556
ACCRUED INTEREST 205,011 231,577
ACCRUED PROPERTY TAXES 195,332 132,465
------------ ------------
Total liabilities 28,613,313 28,623,376
------------ ------------
MINORITY INTEREST IN PARTNERSHIPS 224,399 238,782
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 shares and 1,546,369 shares at
March 31, 1999 and December 31, 1998 respectively 16,917 16,907
Additional Paid in Capital 8,808,193 8,805,953
Accumulated Deficit (4,102,804) (4,038,321)
Less: Unearned directors' compensation net of
accumulated amortization of $158,708 and
$145,208 at March 31, 1999 and December
31, 1998 respectively (129,292) (142,792)
------------ ------------
4,593,014 4,641,747
Less: Common stock in treasury at cost, 144,550 and
144,400 shares at March 31, 1999 and December
31, 1998, respectively (1,054,660) (1,054,247)
------------ ------------
Total shareholders' equity 3,538,354 3,587,500
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,376,066 $ 32,449,658
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- ------------------------------------------------------------------------------
4
<PAGE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES:
Lease revenue $ 812,504 $ 910,003
Interest income & Other income 61,122 5,159
--------------- ---------------
Total revenue 873,626 915,162
--------------- ---------------
EXPENSES:
Interest expense, including amortization of loan costs of $13,851
and $74,197 for the three months ended March 31, 1999 and 1998 665,780 703,442
Depreciation and amortization 282,864 265,061
Administrative expenses - other 177,746 212,074
Property taxes 91,464 82,884
Minority Interest in Partnerships (14,383) (3,695)
Amortization of unearned directors' compensation 13,500 13,500
------------------- --------------------
Total expenses 1,216,971 1,273,266
------------------- --------------------
NET LOSS FROM OPERATIONS $ (343,345) $ (358,104)
NET GAIN FROM TRANSFER OF LEASE 278,862
------------------- --------------------
NET LOSS $ (64,483) $ (358,104)
------------------- --------------------
------------------- --------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.23)
------------------- --------------------
------------------- --------------------
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,547,195 1,552,171
------------------- --------------------
------------------- --------------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
- -----------------------------------------------------------------------------
5
<PAGE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (64,483) $ (358,104)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 282,864 265,061
Amortization of loan fees 13,851 74,197
Amortization of unearned directors' compensation 13,500 13,500
Stock issued as compensation 2,250 1,125
Gain from transfer of lease (278,862)
Minority interest in partnerships (14,383) (2,839)
Changes in operating assets and liabilities:
Rent receivable 9,225 (50,843)
Rent, interest and other receivable - due from related party (4,464) (1,827)
Prepaid and other assets (31,621) 11,163
Accounts payable and accrued expenses (21,034) 255,330
------------ ------------
Net cash provided by (used in) operating activities (93,157) 206,763
------------ ------------
INVESTING ACTIVITIES:
Investment in land, property and equipment (13,610) (125,840)
Investment in Restricted cash (140,142) (68,176)
Long-term advances to lessee 17,524
Proceeds related to transfer of lease 500,000
Payments related to transfer of lease (221,138)
------------ ------------
Net cash provided by (used in) investing activities 125,110 (176,492)
------------ ------------
FINANCING ACTIVITIES:
Payment of loan fees (650)
Payment of short term debt (17,004)
Purchase of Company stock (413)
Payments on long-term debt (143,972) (73,291)
Receipt of Option Deposit 171,947
------------ ------------
Net cash provided by (used in) financing activities 10,558 (73,941)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 42,511 (43,670)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,328 48,867
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 108,839 $ 5,197
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 678,495 $ 597,132
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- -----------------------------------------------------------------------------
6
<PAGE>
HOST FUNDING, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Non-cash investing activities:
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ $ 114,925
Class A Common Stock 175
Land, property and equipment (115,100)
----------------- --------------
Net non-cash investing activity $ 0 $ 0
----------------- --------------
----------------- --------------
Common stock issued as compensation
Class A common $ 10 $ 2
Additional paid in capital 2,240 1,123
Salary expense (2,250) (1,125)
----------------- --------------
Net non-cash investing activity $ 0 $ 0
----------------- --------------
----------------- --------------
Property & equipment additions; repairs made by Buckhead
to certain properties
Notes and other receivables $ (181,606) $
Land, property & equipment 181,606
----------------- --------------
Net non-cash investing activity $ 0 $ 0
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- -----------------------------------------------------------------------------
7
<PAGE>
Host Funding, Inc. Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION.
The accompanying unaudited consolidated financial statements
of Host Funding, Inc., a Maryland corporation (the
"Registrant" or the "Company"), include the accounts of the
Company and its consolidated subsidiaries, Host Ventures, Inc.
("Host Ventures"), 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 & motel management Companies who operate and manage the
Company's hotels. As of March 31, 1999 the Company owned
interests in 12 hotels in 9 states.
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
three-month period ended March 31, 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 March
31, 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; 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 therewith the Company
entered into a lease agreement with an affiliate of Vagabond
Inns ("Vagabond") whereby Vagabond agreed to lease the Mission
Bay Property under substantially the same terms as the
previous lessee. In consideration for such transfer, Vagabond
paid the Company a non-refundable fee (the "Mission Bay Lease
Fee") in the amount of $500,000. Upon execution of the lease
with Vagabond, Vagabond converted the Mission Bay Property
from a Super
8
<PAGE>
8 motel to a Vagabond Inn. In conjunction with such
termination, 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".
Effective February 24, 1999 the Company granted an option to
purchase the Mission Bay Property to Vagabond. On February 23,
1999, Vagabond notified the Company that Vagabond was
exercising such option, and would purchase the Mission Bay
Property within 90 days.
4. EXECUTION OF LEASE AGREEMENT; GRANTING OF OPTION TO PURCHASE:
FLAGSTAFF PROPERTY
Effective February 24, 1999 the Company granted an option (the
"Flagstaff Option") to purchase the Super 8 motel located in
Flagstaff, Arizona (the "Flagstaff Property") to RPD
Flagstaff, LLC ("RPD Flagstaff"). Also effective February 24,
1999 the Company executed a lease with RPD Flagstaff, (the
"Flagstaff Lease") to lease the Flagstaff Property to RPD
Flagstaff.
The Flagstaff Option provides that RPD Flagstaff make an
option payment (the "Initial Option Payment") in the amount of
$300,000 upon execution of the option, and a second option
payment of $265,000 upon the commencement date of the
Flagstaff Lease (the "Lease Commencement Date"). Approximately
$172,000 of the Initial Option Payment was paid to the
Company, and was recorded as a liability, with the remainder
of the Initial Option Payment paid into an escrow account.
The term of the Flagstaff Option begins on March 1, 2001 (the
"Option Commencement Date") and expires on the termination
date of the Flagstaff Lease; the Flagstaff Option provides
that RPD Flagstaff may purchase the Flagstaff property on the
earlier to occur of the Option Commencement Date or the date
any person or entity (other than RPD Flagstaff) acquires fee
title to the Property. The purchase price for the Flagstaff
Property is $4,700,000, less certain adjustments.
The Flagstaff Lease is subject to approval by the Company's
lender, and is substantially the same as the lease currently
in place on the Flagstaff Property. The Lease Commencement
Date has not occurred as of March 31, 1999.
5. COMMITMENTS AND CONTINGENCIES
REIT STATUS
The Company, as a requirement under the Internal Revenue Code
(the "Code") to elect REIT status, must have no more than five
(5) shareholders, who own no more than 50% of the common
stock, common stock equivalents, or other forms of equity
outstanding of the Company. The Company has not satisfied this
requirement and therefore, has not elected to qualify as a
REIT during the 1998 tax year and currently is subject to the
corporate tax provisions. However, the Company has a net
deferred
9
<PAGE>
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.
CONTRACTS TO PURCHASE PROPERTIES
The Company has modified previously executed contracts (the
"Modified Contracts") to purchase two properties along the
West Coast of Florida for an approximate aggregate price of
$13 million. The Modified Contracts provide for an extended
closing date, and further provide that earnest money in the
amount of $100,000, which was previously funded in escrow, is
at risk if the Company does not consummate the purchase. The
properties are located in Clearwater and Port Richey and
contain an aggregate of 258 rooms. The Company anticipates
either consummating the purchase of the properties, or
assigning the Modified Contracts to another purchaser. The
Company anticipates that, if the Company assigns the Modified
Contracts, the Company will be reimbursed for 100% of the
Company's costs, plus an additional amount over and above such
costs.
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.
DEFAULT UNDER 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
10
<PAGE>
herein referred to as the "Sellers". The Company is the
beneficial owner of 81% of both Findlay and Auburn, and
previously executed corporate guarantees pursuant to which
the Company guarantees the performance of Findlay and
Auburn under the Country Hearth Notes. The Country Hearth
Notes are further collateralized 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 shares
at the per share price on October 21, 1998, plus the amount of
such Price Protection Amount to the sellers equals $750,000.
The Company has recorded a liability in the approximate amount
of $455,000 related to the Price Protection Amount for the
shares that the Sellers still hold base upon a closing price
of $2.00 per share on October 21, 1998.
As of March 31, 1999, the Company was in default under the
County Hearth Notes, and a total of approximately $1,365,000
was owed under the Country Hearth Notes and the Price
Protection Amount, including interest accruing at the default
rate. See Note 7 "Subsequent Events--Litigation Related to the
Country Hearth Notes".
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. FAS No. 133 is
effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company believes that upon
implementation, FAS 133 will not have a material impact on the
financial statements of the Company.
7. SUBSEQUENT EVENTS.
LITIGATION RELATED TO THE COUNTRY HEARTH NOTES
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 Auburn Complaint named
BH-Auburn LP and Host Funding, Inc. as defendants.
11
<PAGE>
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 Common Pleas Court,
Columbus, Ohio, Civil Division. 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
Amounts. While the Company has previously treated these
amounts as due and owing, the Company intends to vigorously
defend itself against these complaints and believes that an
unfavorable ruling will not have a material adverse effect on
the financial condition of the Company. Discovery in the
cases will reveal the lawful defenses or credits and offsets,
if any, to which the Company is entitled to assert. The
trial date for both complaints has been set for April 3, 2000.
The Company has listed the Findlay Property for sale and
expects the proceeds from the sale to be sufficient to satisfy
the majority of the amounts alleged to be owing under the
Country Hearth Notes and Price Protection Amounts. The Company
anticipates the sale of the Findlay Country Hearth Inn to be
consummated in the second or third quarters, 1999.
ELECTION OF NEW DIRECTORS
On May 4, 1999 the Company announced the appointment of two
new directors. Recognizing that the Sutter Opportunity Fund
and other parties have acquired a 26% interest in the Company,
the existing Board of Directors offered to the new
shareholders the opportunity to present two nominees for
directors, with one designated an inside director and the
other being an independent director. In order to fill these
seats, the Board accepted the resignations of Charles R. Dunn
and Don W. Cockroft to maintain the Board at five members. On
May 4, 1999, the remaining Board members appointed Mr. Robert
E. Dixon of Sutter Opportunity Fund, who will replace Mr. Dunn
as an inside director, and Mr. Brian K. Rodgers of Hospitality
Valuation Services, Inc. will replace Mr. Cockroft as an
outside director. Messrs. Dixon and Rodgers were appointed to
serve until the Annual Meeting of Shareholders of the Company
set for June 7, 1999. Biographical information on the new
directors is included in the Company's annual proxy dated
April 30, 1999, in which each of Mr. Dixon and Mr. Rodgers is
a nominee for director.
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
12
<PAGE>
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
lessee's of the Company's hotel properties for substantially all of the
Company's income; the Company's dependence upon the abilities of the lessee's
of the Company's hotel property's to manage the hotel properties; risks
associated with the hotel industry and real estate markets in general; and
risks associated with debt financing and it's 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 9 properties, Crossroads Hospitality Tenant Company, L.L.C.
("Crossroads") is responsible for management and operation of 1 property, RPD
Mission Bay, LLC ("Vagabond") is responsible for management and operation of 1
property, and the seller of the Sleep Inn motel located in Tallahassee is
responsible for management and operation of 1 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.
On February 24, 1999, the Company granted Vagabond an option to
purchase the Mission Bay Property. Effective May 5, 1999, Vagabond gave
the Company notice that Vagabond was exercising the option, and would
purchase the Mission Bay property within 90 days. Upon consummation of the
sale, the Company anticipates the monthly debt service of CrossHost will be
reduced by an amount greater than the rental payments previously made from
the lessee to the Company from Mission Bay.
In February, 1999 the Company received notice that a tender offer to
purchase up to 300,000 shares of the Company's Class A common stock (the
"Shares") at $3.00 per share had been filed on Schedule 14D-1 with the
Securities and Exchange Commission on February 17, 1999. The Purchasers listed
in the tender offer included the Sutter Opportunity Fund, LLC; MP Value fund 5,
LLC; and a number of other entities (the "Bidders"). 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.
The Company announced on March 19, 1999 that the amended Schedule
14D-1 filed by the purchasers on March 17, 1999 disclosed that 54,046 Shares
had been tendered and not withdrawn. Since management and the directors of
the Company own a significant number of the Company's outstanding Shares
(approximately 35%), and due to the relatively small number of shares
tendered to date, certain directors announced they would tender a portion of
their Shares, up to a maximum of 150,000 shares, so that the Bidders goal of
acquiring up to 300,000 Shares could be achieved. Without commenting as to
the pricing of the Tender Offer, management believes it to be a positive sign
that a group of investors is seeking to make a significant investment in the
Company's stock.
13
<PAGE>
As discussed in the Notes to Consolidated Financial Statements
included herein, the Company's Board of Directors offered representatives of
the Bidders the opportunity to nominate two individuals to the Board of
Directors. Robert Dixon and Brian Rogers were nominated, the Board accepted
the resignations of Charles Dunn and Don Cockroft, and the then existing
board elected Messrs. Dixon and Rogers to fill Messrs. Dunn and Cockroft's
slots. The Company believes the appointment of Messrs. Dixon and Rogers to be
a very positive step in the growth of the company.
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
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.
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 MARCH 31, 1999 AND 1998:
The Company acquired four hotel properties on April 1, 1995 (the
"Initial Hotels"), one property on April 1, 1996 (the "Mission Bay Hotel"), four
properties on September 13, 1996 (the "Sleep Inn Properties"), one property on
March 14, 1997 (the "Flagstaff Property"), and two properties on October 21,
1997 (the "Country Hearth Inns"). Collectively, the twelve properties owned by
the Company are herein referred to as the "Company Properties".
Occupancy and average room rates of approximately 56% and $46.74 for
the Company Properties for the three months ended March 31, 1999 resulted in
total sales of approximately $2,260,000 and generated total lease revenues of
approximately $812,000. Occupancy and average room rates of 52% and $52.97 for
the Company Properties for the three months ended March 31, 1998 resulted in
total sales of approximately $2,309,000 which generated lease revenues of
approximately $910,000. The reduction in lease revenues from 1998 to 1999 was
primarily caused 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.
14
<PAGE>
The increase in Interest Income & Other Income for the three months
ended March 31, 1999 to $61,122 from $5,159 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. Due to the termination
of the previously executed letter of intent, 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 $666,000 for the three months ended March 31, 1999 from $703,000
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 $652,000 from $629,000. The 1999 and 1998
amounts include approximately $13,000 and $72,000 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 $177,000 and
$212,000 for the three months ended March 31, 1999 and 1998, including the
following approximate amounts: salary and benefit costs of $68,000 and $77,000,
audit and accounting fees of $11,000 and $19,000, contract labor of $20,000 and
$11,000, rent of $2,000 and $3,000, fees to the American Stock Exchange of $0
and $7,000; fees to the stock transfer agent of $7,000 and $15,500, filing and
printing costs of $7,000 and $10,000, relinquished project costs of $6,000 and
$33,000, legal fees of $26,000 and $11,000, travel costs of $3,000 and $2,000,
directors fees of $3,000 and $4,000, and other costs of $17,500 and $37,000.
Net Gain from Transfer of Lease consists of the Mission Bay Lease
Fee reduced by termination fees to the previous leasee 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
The Company has no committed additional sources of external
liquidity available, therefore the Company will rely on its internal cash
flow to meet its liquidity needs. The Company's principal source of cash to
meet its cash requirements, including distributions to stockholders 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
15
<PAGE>
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.
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 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 Country Common
Pleas Court, Columbus, Ohio, Civil Division. 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. The cases are in the early stages of discovery
with a trial date for both complaints has been set for April 3, 2000.
16
<PAGE>
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.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
3.1 Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to Company's Amendment to Form S-11 effective April
17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to Form S-11 effective
April 17, 1996).
4.1 Form of Share Certificate (incorporated by reference to Exhibit 4.1 to Company's
Amendment No. 8 to Form S-11 effective April 17, 1996).
4.2 Form of Series A Warrant dated effective as of February 3, 1997 (incorporated
by reference to Exhibit 4.2 to Company's Annual Report on Form 10-K filed on
March 31, 1997).
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
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>
(b) Reports on Form 8-K
None.
18
<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: May 17, 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
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 109
<SECURITIES> 0
<RECEIVABLES> 353
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 462
<PP&E> 32,028
<DEPRECIATION> (2,579)
<TOTAL-ASSETS> 32,376
<CURRENT-LIABILITIES> 2,207
<BONDS> 0
7,770
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,376
<SALES> 0
<TOTAL-REVENUES> 874
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 666
<INCOME-PRETAX> (343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (343)
<DISCONTINUED> 0
<EXTRAORDINARY> 279
<CHANGES> 0
<NET-INCOME> (64)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
