SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 1-14280
Host Funding, Inc.
(Exact name of Company as specified in its charter)
Maryland 52-1907962
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1640 School Street, Suite 100, Moraga, California 94556
(Address of principal executive offices) (Zip Code)
(925) 631-7929
(Company's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act.
Class "A" Common Stock - $0.01 par value American Stock Exchange
(Title of Class) (Name of each exchange
on which registered)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K [X]
As of March 27, 2000, the Company had 1,720,000 shares of Class "A"
Common Stock and 500,000 shares of Series "A" Convertible Preferred Stock
outstanding. Of the total shares of Class "A" Common Stock outstanding, 932,158
shares were held by other than those who may be deemed affiliates, for an
aggregate market value held by non-affiliates of $1,864,316 based upon the
closing bid of the Company's Class "A" Common Stock on the American Stock
Exchange on March 27, 2000 of $2.00 per share. The basis of this calculation
does not constitute a determination by the Company that all of such persons or
entities are affiliates of the Company as defined in Rule 405 of the Securities
Act of 1933, as amended.
Documents Incorporated by Reference
None.
<PAGE>
TABLE OF CONTENTS
Item Page
Number Number
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Securities Holders 14
PART II
5. Market for the Company's Common Equity and Related
Shareholder Matters 14
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 22
PART III
10. Directors and Executive Officers of the Company 23
11. Executive Compensation 26
12. Security Ownership of Certain Beneficial Owners and Management 27
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K 31
15. Schedule III: Real Estate and Accumulated Depreciation 65
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PART I
Certain statements in this Form 10-K constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act"). The words "believe," "expect," "anticipate,"
"intend," "estimate," and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements and to note that they speak only as of the date
hereof. Although forward-looking statements reflect management's good faith
beliefs, reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance, or achievements of the Company to differ
materially from anticipated future results, performance, or achievements
expressed or implied by such forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise. Certain
factors that might cause a difference in actual results include, but are not
limited to, the Company's dependence upon rental payments from the lessees of
the Company's hotel properties for substantially all of the Company's income;
the Company's dependence upon the abilities of the lessees of the Company's
hotel properties to manage the hotel properties; risks associated with the hotel
industry and real estate markets in general; and risks associated with debt
financing.
ITEM 1. BUSINESS
General
Host Funding, Inc. (the "Company") was incorporated in the State of
Maryland in December 1994 and was inactive from inception to March 31, 1995. The
Company's Class "A" Common Stock began trading on the American Stock Exchange on
April 22, 1996, the date of the Company's initial public offering. Upon closing
of the Company's initial public offering, the Company owned five Super 8 Hotels
located in Somerset, Kentucky; Miner, Missouri; Poplar Bluff, Missouri; Rock
Falls, Illinois; and Mission Bay, California (the "Initial Hotels"). As of
December 31, 1999, the hotel property portfolio of the Company consisted of 11
hotels located in 8 states consisting of approximately 850 rooms.
The Company is engaged in the business of acquiring high quality,
limited-service and full service hotels throughout the United States, which are
affiliated with national or regional hotel chains. Although the Company was
initially structured as a real estate investment trust ("REIT"), it has not yet
elected REIT status under the Internal Revenue Code. Since the commencement of
Company operations and the acquisition of the Initial Hotels, the Company has
formed wholly-owned subsidiaries for the purpose of financing and owning the
Initial Hotels and acquiring additional hotel properties. Unless the context
otherwise requires, references to the Company include the Company and its
subsidiaries, and references to the hotel properties owned by the subsidiaries
of the Company are referred to as the "Company Hotels."
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Business Development
In January, 1999, the Company effectively entered into a new lease
agreement relating to the Company Hotel located in Mission Bay, California (the
"Mission Bay Property") with RPD Mission Bay, LLC, an affiliate of Vagabond Inns
("RPD"). RPD thereafter converted the Mission Bay Property from a Super 8 Hotel
to a Vagabond Inn, and pursuant to a services agreement, RPD also transferred
the day-to-day management of the Mission Bay Property to RPD 18, LLC, also an
affiliate of Vagabond Inns. The Company also granted RPD an option to purchase
the Mission Bay Property for a purchase price of $3,225,000.00, which was
exercised by RPD in March, 1999. The sale of the Mission Bay Property to RPD has
not yet closed due to a dispute with the Company's lender relating to the
governing deed of trust and the applicable defeasance and release requirements.
See Item 2. "Properties - Changes in Properties."
Effective November 12, 1999, the Company sold the Country Hearth Inn
located in Findlay, Ohio (the "Findlay Property") for a cash purchase price of
$2,400,000.00. The cash proceeds were used to pay the first lien indebtedness on
the Findlay Property and to satisfy the seller finance note held by the prior
owner of the Findlay Property, including the judgment lien held by the prior
owner. The Company did not receive any cash proceeds from the sale of the
Findlay Property. See Item 2. "Properties - Changes in Properties" and Item 3.
"Legal Proceedings."
On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a
California real estate venture capitalist ("MPI"), 500,000 shares of the Series
"A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A"
Preferred"), for a purchase price of $1,500,000.00. The proceeds from the sale
of the Series "A" Preferred were used by the Company for working capital. The
Company also issued to MPI warrants to purchase 500,000 shares of the Class "A"
Common Stock of the Company for an exercise price of $3.00 per share,
exercisable at any time for a period of six (6) years from the date of issuance
(the "Warrants"). Concurrently with the purchase of the shares of Series "A"
Preferred and the issuance of the Warrants, the Company and MPI entered into an
Advisory Agreement pursuant to which MPI assumed the day to day operations of
the Company and direction of new investments on behalf of the Company. In order
to implement the responsibilities of MPI under the Advisory Agreement, the
principal offices of the Company were moved from Dallas, Texas to Moraga,
California in January, 2000. See Item 13. "Certain Relationships and Related
Transactions."
Leases
In General
All of the Company Hotels are leased and operated pursuant to lease
agreements (the "Leases"), excluding the Company Hotel located in Tallahassee,
Florida (the "Tallahassee Property") which is managed and operated by BAC Hotel
Management, Inc. ("BAC Hotel"), a wholly owned subsidiary of Buckhead America
Corporation (NASDAQ:BUCK) pursuant to a management agreement. Except for the
Company Hotels located in Flagstaff, Arizona (the "Flagstaff Property") and
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Mission Bay, California (the "Mission Bay Property"), the Company Hotels are
leased and operated by either Buckhead America Corporation (as to the Company
Hotel located in Auburn, Indiana only) or BAC Hotel. The remaining Company
Hotels are leased, operated and/or managed by Crossroads Hospitality Tenant
Company, LLC (Flagstaff Property) and RPD Mission Bay, LLC and RPD 18, LLC
(Mission Bay Property). Except as otherwise set forth below, each Lease
generally contains the provisions described below.
Lease Terms
Each Lease has a term of fifteen (15) years (other than the Lease
relating to the Mission Bay Property, which has an initial term of twenty [20]
years). Each Lease is subject to earlier termination upon the occurrence of
certain contingencies described in the Leases (including, as applicable,
provisions relating to damage to the Company Hotels, condemnation of the Company
Hotels, defaults by the Company or the lessee under the Leases, lack of
compliance by lessee with certain of the terms of the associated loan documents
relating to the Company Hotels, and termination on disposition of the Company
Hotels). Other than the Leases with respect to the Mission Bay Property and the
Lease in effect with regard to the Company Hotel located in Auburn, Indiana (the
"Auburn Property"), the term of each Lease may, at the option of the lessee, be
extended for two (2) or more five (5) or ten (10) year periods, as more
particularly described in each Lease.
Amounts Payable Under the Leases
During the term of each Lease, the lessee is obligated to pay (i) base
rent, (ii) percentage rent, (iii) all personal property taxes relating to
lessee's personal property, ground rents, water, sewer or other rents and
charges, excises, tax inspection, authorization or similar fees and all other
governmental charges (the "Impositions"), except that the lessee of the Mission
Bay Property is not required to pay percentage rent, (iv) every fine, penalty,
interest and cost for non-payment or late payment of base rent, percentage rent,
or the Impositions and (v) franchise fees as described below. The Company is
obligated to pay real property taxes on all Company Hotels, except the Mission
Bay Property. Base rent accrues and is required to be paid monthly, and, except
for the Leases in effect with respect to the Auburn Property and the Mission Bay
Property, base rent is subject to potential reduction if a hotel or hotels
similar in nature to the Company Hotel in question are or will be constructed in
an area in the general vicinity of such Company Hotel (the "Competitive Set").
Percentage rent is based on percentages of gross revenues for each of the
Company Hotels, is due and payable quarterly, and (a) except for the Leases in
effect with respect to the Auburn Property and the Mission Bay Property,
percentage rent is subject to potential reduction pursuant to the Competitive
Set, (b) except for the Leases in effect with respect to the Auburn Property and
the Mission Bay Property, percentage rent is subject to potential reduction to
the extent, at any time during the first four (4) years of the Lease term, the
Company Hotel cash flow is less than the base rent, and (c) percentage rent
payable with regard to the Lease in effect with respect to the Auburn Property
is subject to a "CPI" adjustment factor. See Item 2. "Properties" for a
comprehensive analysis of base rent and percentage rent, as applicable, payable
under the Leases.
5
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Prohibition on Ownership and Operation of Additional Hotels
Generally, all of the Leases contain provisions prohibiting the Company
from owning, or having any interest in, any hotel or motel properties within a
five (5) mile radius of the applicable Company Hotel. All of the Leases also
generally prohibit the lessee from owning, operating or managing any hotel or
motel properties within a five (5) mile radius of the applicable Company Hotel.
Maintenance, Modifications and Capital Expenditures
Generally, the lessee, at its expense, is required to maintain the
Company Hotels in good order and repair, except for ordinary wear and tear, and
to make non-structural repairs, foreseen and unforeseen, and ordinary repairs,
which may be necessary and appropriate to keep the Company Hotels in good order
and repair. The Company is, at its expense, required to maintain the structural
elements of the Company Hotels, including the roof, except the lessee of the
Mission Bay Property is, at its expense, responsible for structural maintenance.
The lessee, at its expense and subject to approval by the Company, may
make non-capital and capital additions, modifications or improvements to the
Company Hotels, provided that such action does not significantly alter the
character or purposes of the Company Hotels or significantly detract from the
value or operating efficiencies of the Company Hotels. All such alterations,
replacements and improvements become the property of the Company upon
termination of the Leases. The Company owns substantially all personal property
(other than inventory, linens and other non-depreciable personal property) not
affixed to, or deemed a part of, the real estate or improvements.
Under the Leases, the Company is required to fund into replacement
reserve accounts (the "Reserve Accounts") amounts ranging from four percent (4%)
to six percent (6%) of gross room revenues for the preceding month. Deposits in
the Reserve Accounts are used to fund replacements of furniture, fixtures and
equipment, for capital additions to the Company Hotels, and, as appropriate, for
reconstruction or restoration of the Company Hotels incident to casualty damage
or condemnation. Expenditures from the Reserve Accounts generally must be
jointly approved by the Company and the lessee.
With respect to the Company Hotels leased to Buckhead America
Corporation (the Auburn Property only) or BAC Hotel, its wholly owned
subsidiary, the Company has previously entered into agreements with such parties
generally requiring the lessee to, at its expense, make various capital
improvements to such Company Hotels.
Insurance on Company Hotels
The lessee is required to pay for all insurance on the Company Hotels,
with extended coverage, including business interruption, casualty, comprehensive
general public liability, workers' compensation and other insurance, and must
name the Company as the insured or an additional named insured.
6
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Indemnification
Under each of the Leases, the lessee is obligated to indemnify and hold
harmless, the Company from and against all liabilities, costs and expenses
(including reasonable attorneys' fees and expenses) incurred by, imposed upon or
asserted against the Company. Such indemnification, however, will not be
construed to require the lessee to indemnify the Company against the Company's
own grossly negligent acts or omissions or willful misconduct.
First Right of Refusal
With the exception of the Lease regarding the Mission Bay Property,
each of the Leases contains provisions whereby, if the Company receives a bona
fide third party offer to purchase a Company Hotel, the lessee may purchase the
Company Hotel in question at the same price and otherwise upon the same terms
and conditions as are contained in any such bona fide offer.
Security Deposits
With the exception of the Lease regarding the Mission Bay Property,
each of the Leases requires the lessee, as security for the performance by
lessee of its obligations under the Leases, to deliver to the Company a security
deposit. In the instance of the Leases with Buckhead America Corporation or BAC
Hotel, its wholly owned subsidiary, each such deposit is in the form of shares
of the Company's Class "A" Common Stock, and with respect to the Lease in effect
for the Flagstaff Property, the security deposit is in the form of cash.
Certain Termination Rights
Except for the Lease relating to the Company Hotel located in Miner,
Missouri, the Leases with BAC Hotel, a wholly owned subsidiary of Buckhead
America Corporation, provide the lessee the right to without cause terminate
either one (1) or two (2) of such Leases after the first (1st) but prior to the
fifth (5th) anniversary of the Lease term, but, as to the second of such Lease
terminations, as applicable, only upon the payment to the Company of a
termination fee more specifically set forth in each Lease. Additionally, the
Lease with respect to the Flagstaff Property provides the lessee the right to
without cause terminate the Lease at any time after the first (1st) anniversary
of the Lease term, but only upon forfeiture of lessee's security deposit, and,
additionally provides the lessee the one-time right to terminate the Lease
without cause (and without forfeiture of the lessee's security deposit),
effective as of the fifth (5th) anniversary of the Lease term.
Lease Cancellation Fees
Except for the Lease relating to the Mission Bay Property, each of the
Leases contains provisions generally requiring the Company to pay a termination
fee to the lessee if a Company Hotel is sold during the Lease term and the
purchaser of the Company Hotel does not assume the obligations of the Company
under the associated Lease.
7
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Franchise Agreements
All of the Company Hotels are currently operated pursuant to franchise
agreements with Super 8 Motels, Sleep Inn Hotels or Country Hearth Inn Hotels
(the "Franchise Agreements"), other than the Mission Bay Property, which is
operated as a Vagabond Inn (but with no franchise agreement). The Company
expects that a majority of any additional hotel properties acquired by the
Company will also be subject to similar agreements. Franchises (including hotel
licenses) generally provide advantages to hotel operators through the use of
advertising on a much broader scale than would be possible for an individual
hotel or small group of hotels, nationally recognized brand names, nationally
accessible reservations systems, technical and business assistance to the
individual franchisee and substantial buying power over approved suppliers.
The Franchise Agreements generally require the franchisee to pay a
monthly franchise fee based on gross sales and to pay various other marketing
fees associated with certain marketing or advertising and centralized
reservation service funds, usually based on gross sales. The lessee, under the
Leases, is responsible for payment of franchise fees. Franchise fees may vary
between individual hotels within a franchise system based on the type of marks,
restaurants or other aspects of the particular franchise system.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels,
which are established by the franchisors to maintain uniformity in the system
created by each franchisor. Such standards generally regulate the hours of
operation, maintenance, appearance and cleanliness, quality and type of goods
and services offered, signage, protection of marks and advancement of marks.
Compliance with such standards could require significant expenditures by the
lessee for capital improvements. Any such improvements could increase the value
of the applicable hotel to the benefit of the Company.
The Franchise Agreements generally require the consent of the
franchisor to a transfer of an interest in the applicable franchise or
franchisee and the payment of a termination fee upon termination of the
franchise agreement prior to its expiration.
Business Plan
The Company intends to continue its core business strategy of
attempting to increase cash flow and enhance shareholder value by acquiring
additional existing hotels which meet the Company's investment criteria and by
participating in revenue growth of the Company Hotels through percentage leases.
The Company intends to make strategic investments in hotel properties through
the Company or its subsidiaries or in conjunction with business partners. Future
hotel investments may be financed in whole or in part, from borrowings, from the
balance of the net proceeds from future public offerings, if any, or through
private placements of the Company's stock or debt instruments.
8
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The Company intends to consider investments in hotel properties that
meet one or more of the following criteria, (i) properties in markets with
projected growth potential; (ii) properties which may be under-performing due to
poor management or weak franchise affiliation; (iii) properties with relatively
stable operating histories; and (iv) properties with attractive purchase prices.
The Company believes that the engagement of MacKenzie Patterson, Inc. ("MPI") in
January 2000 as the external advisor of the Company will increase the management
expertise of the Company and enable the Company to benefit from MPI's hotel,
real estate and finance industry contacts. The Company also believes that MPI
will further facilitate the Company's ability to identify, evaluate, negotiate
and finance potential hotel investment opportunities.
Environmental Matters
Under various federal, state and local environmental laws, ordinances,
regulations and common law, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under, or in such property, whether or not it was
responsible for their presence. Such laws and common law principles could also
be used to impose liability upon owners or operators of real properties for
release of asbestos containing materials that cause personal injury or other
damage. The policy of the Company is to obtain a Phase I environmental
assessment report for each of the hotels acquired by the Company, prepared by an
independent environmental consultant.
The Company is not aware of any environmental condition with respect to
the Company Hotels that could have a material adverse affect on the Company's
financial condition or results of operations. No assurances can be given,
however, that (i) environmental assessments undertaken with respect to the
Company Hotels have revealed all potential environmental liabilities, (ii) any
prior owner or operator of the real property on which the Company Hotels are
located did not create any material environmental condition not known to the
Company, or (iii) a material environmental condition does not otherwise exist as
to any one or more Company Hotels. Pursuant to the Leases, the lessee has agreed
to comply with applicable environmental regulations.
Employees
As of December 31, 1999, the Company had two (2) full-time employees.
Competition
The hotel industry is highly competitive. All of the Company Hotels are
located in developed areas and experience competition primarily found in other
similarly priced hotels within their immediate vicinity. Each Company Hotel also
competes with other hotel properties in its particular geographic market. The
number of competitive hotel properties in a particular market or geographic area
could have a material and adverse affect on the rental market for the room units
at each Company Hotel and the rates which may be charged for such room units.
The Company Hotels must also compete for occupants with new hotels in the area.
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In addition, when the Company seeks to acquire hotel properties, the
Company competes for investment opportunities with entities that have
substantially greater financial resources than the Company. Competition
generally reduces the number of suitable investment opportunities offered to the
Company and increases the bargaining power of property owners seeking to sell.
Seasonality of the Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters
of a calendar year. All of the Company Hotels typically reflect the effects of
this industry seasonality. This seasonality may cause significant quarterly
fluctuations in the Company's lease revenues.
Regulatory Matters
General
Hotel properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities, such as
swimming pools, activity centers and other common areas. Based on its inspection
and evaluation of the Company Hotels, the Company believes that each Company
Hotel has the necessary permits and approvals required to enable the lessee or
manager of the particular hotel to operate and manage such hotel in the manner
contemplated by the applicable lease agreement or management agreement.
Americans with Disabilities Act
The Company Hotels must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Under the
public accommodations provisions of the ADA, the Company, as owner of the
Company Hotels, will be obligated to reasonably accommodate the patrons of the
Company Hotels who have physical, mental or other disabilities. This includes
the obligation to remove architectural and communication barriers at the Company
Hotel when doing so is "readily achievable". In addition, under the commercial
facilities provisions of the ADA, the Company is obligated to ensure that
alterations to any hotel properties conform to the specific requirements of the
ADA implementing regulations. Noncompliance could result in the imposition of
fines, injunctive relief, and an award of damages and attorneys' fees. The
lessee generally is obligated to remedy any ADA compliance matters pursuant to
the Leases. Currently, the Company believes that all Company Hotels are in
compliance with the ADA in all material respects.
ITEM 2. PROPERTIES
During the fiscal year ended December 31, 1999, the Company's principal
executive offices were located at 6116 North Central Expressway, Suite 1313,
Dallas, Texas 75206. Effective as of January 1, 2000, the principal offices were
relocated to 1640 School Street, Suite 100, Moraga, California 94556, in order
to implement MacKenzie Patterson, Inc. as the external advisor of the Company.
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See Item 13. "Certain Relationships and Related Transactions." The Company
leased approximately 1,200 square feet at an annual rate of approximately
$16,000 for the prior Dallas, Texas offices. The lease term expired on December
31, 1999. The Company believes that the size of both the prior and new principal
executive offices were and are adequate for the Company's needs. During all or
portions of the fiscal year ended December 31, 1999, the Company owned twelve
hotel properties located in nine states consisting of approximately 922 rooms.
Set forth below is certain summary information relating to the Company Hotels.
<TABLE>
<CAPTION>
Gross
Revenues
for the 12 Annual Year
Annual Percentage Months Ended Base Acquired/
Rooms Rent Formula (year to Date "YTD") (1) 12-31-99 Rent (1) Built
----- ------------------------------------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Miner, 63 35% YTD Revenues over initial Break-Even
Missouri Threshold of $706,860 on first $200,000
(Super 8) over Bread-Even Threshold, and 40% $727,000 $263,000 1995/85
thereafter, less Percentage Rent
previously paid YTD. (2)
Poplar Bluff, 63 35% YTD Revenues over initial Break-Even
Missouri Threshold of $586,500 on first $100,000
(Super 8) over Break-Even Threshold, and 37% $630,000 $226,000 1995/85
thereafter, less Percentage Rent
previously paid YTD. (2)
Rock Falls, 63 28.75% YTD Revenues over initial Break-Even
Illinois Threshold of $622,120 on first $200,000
(Super 8) over Break-Even Threshold, and 35% $671,000 $266,000 1995/85
thereafter, less Percentage Rent
previously paid YTD. (2)
Somerset, 63 32% YTD Revenues over initial Break-Even
Kentucky Threshold of $425,000 on first $200,000
(Super 8) over Break-Even Threshold, and 35% $416,000 $127,000 1995/85
thereafter, less Percentage Rent
previously paid YTD. (2)
Mission Bay,
California
(Vagabond Inn) 117 N/A $1,415,000 $280,200 1996/87
Flagstaff,
Arizona 90 32% YTD over $925,000 less Percentage
(Super 8) Rent previously paid. $1,132,000 $505,000 1997/85
Tallahassee, 78
Florida 10% of Revenues, payable 5% quarterly
(Sleep Inn) and 5% at expiration of Lease term (3) $917,000 $255,000 1996/94
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Destin, 77 30% YTD Revenues over initial Break-Even
Florida Threshold of $850,500 on first $350,000
(Sleep Inn) over Break-Even Threshold, and 35% $914,000 $382,000 1996/92
thereafter, less Percentage Rent
previously paid YTD. (2)
Ocean Springs, 78 30% YTD Revenues over initial Break-Even
Mississippi Threshold of $788,400 on first $350,000
(Sleep Inn) over Break-Even Threshold, and 35% $736,000 $369,000 1996/95
thereafter, less Percentage Rent
previously paid YTD. (2)
Sarasota, 80 30% YTD Revenues over initial Break-Even
Florida Threshold of $802,800 on first $300,000
(Sleep Inn) over Break-Even Threshold, and 35% $817,000 $303,500 1996/93
thereafter, less Percentage Rent
previously paid YTD. (2)
Auburn, 78 30% YTD Revenues over initial Break-Even
Indiana Threshold of $760,000 on first $260,000
(Country Hearth Inn) over Break-Even Threshold, and 40% $733,000 $303,000 1997/87
thereafter, less Percentage Rent
previously paid YTD (subject to CPI
adjustment).
Findlay, 72 30% YTD Revenues over initial $852,000 1997/88
Ohio Break-Even (4)
(Country Hearth Inn)
Consolidated Total for Hotels $9,960,000 $ 3,622,000
---------- ===========
11 (cont.)
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<FN>
(1) Unless otherwise set forth above, Base Rent and Percentage Rent
effective December 31, 1999
(2) Break-Even Threshold increases by 2% per year
(3) The Lease with Capital Circle Hotel Company was terminated on June 30,
1999; since termination the Tallahassee, Florida Sleep Inn has been
managed by BAC Hotel Management, Inc. See Item 2. "Properties - Changes
in Properties"
(4) The Findlay, Ohio Country Hearth Inn was sold on November 12, 1999, and
the Lease with Buckhead America Corporation relating to such Company
Hotel was terminated. See Item 2. "Properties - Change in Properties"
(5) Threshold of $740,000 for first $300,000 and 40% thereafter less
Percentage Rent previously paid YTD.
</FN>
</TABLE>
Changes in Properties
Mission Bay Property
In January, 1999, the Company effectively transferred leasing and
operation of the Company Hotel located in Mission Bay, California (the "Mission
Bay Property") to RPD Mission Bay, LLC, an affiliate of Vagabond Inns ("RPD"),
which in turn, pursuant to a services agreement, transferred the day-to-day
management of the Mission Bay Property to RPD 18, LLC, also an affiliate of
Vagabond Inns, a proven hotel operator located in California. RPD thereafter
terminated the prior franchise agreement with Super 8 Hotels and converted the
Mission Bay Property to a Vagabond Inn. In consideration for such lease
transfer, RPD paid the Company a non-refundable fee (the "Mission Bay Lease
Fee") in the amount of $500,000.00. The Mission Bay Lease Fee was used in part
to pay portions of certain termination fees to the previous franchisor, to pay
the termination fee to the previous lessee, and for general corporate purposes.
The Company also granted RPD an option to purchase the Mission Bay
Property for a base acquisition price of $3,225,000.00. The base acquisition
price incrementally reduces on a monthly basis through application of portions
of the base rent payments made to the Company by RPD under the Lease relating to
the Mission Bay Property (the "RPD Option"). RPD exercised the RPD 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 through the Subordination, Non-Disturbance, & Attornment Agreement
12
<PAGE>
previously executed by the Special Servicer. Upon giving notice to the Master
Servicer of the exercise of the RPD Option and requesting a release of the deed
of trust lien encumbering 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 or, in the alternative, pursuing legal action against the Master Servicer.
Findlay Property
Effective November 12, 1999, the Company sold the Company Hotel located
in Findlay, Ohio (the "Findlay Property") for a cash purchase price of
$2,400,000. The cash proceeds were used to satisfy closing costs and all
outstanding indebtedness relating to the Findlay Property, including a judgement
lien held by the seller of the Findlay Property. See Item 3. "Legal
Proceedings." The Company did not receive any cash proceeds from the sale of the
Findlay Property.
Tallahassee Property
During a portion of 1999, the Company Hotel located in Tallahassee,
Florida (the "Tallahassee Property") was leased to Capital Circle Hotel Company
("Capital Circle"), the prior owner of the Tallahassee Property. Effective as of
June 30, 1999, Capital Circle terminated the lease relating to the Tallahassee
Property and BAC Hotel Management, Inc. ("BAC"), a wholly owned subsidiary of
Buckhead America Corporation, currently operates and manages the Tallahassee
Property pursuant to a management agreement providing for the payment to BAC of
a management fee in an amount equal to five percent (5%) of gross revenues
generated from the Tallahassee Property (together with a $500.00 per month
accounting fee).
ITEM 3. LEGAL PROCEEDINGS
Five Lion, Inc. and Lion Investment Limited Partnership vs. Host
Funding, Inc.; United States District Court, District of Minnesota, Fifth
Division; Court File Number 98-2154-MJD/RLE.
The Company was named as a defendant in the above complaint filed on
September 24, 1998. The complaint alleges, among other things, that the Company
is obligated to reimburse $150,000 which the plaintiffs paid to the Company for
certain due diligence items pursuant to a letter agreement dated February 13,
1998. On January 20, 2000, the plaintiffs obtained a summary judgment for breach
of contract with regard to a portion of their claims. It is anticipated that the
Company will appeal the summary judgment; however, the Company has accrued the
full $150,000.00 in the consolidated financial statements of the Company.
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Auburn Equity Partners vs. BH-Auburn, L.P. and Host Funding, Inc., Case
No. 99 CVE-04-2725, and Findlay Equity Partners vs. BH-Findlay, L.P. and
Host Funding, Franklin County Common Please Court, Columbus, Ohio, Civil
Division, Case No. 99CVH-04-2726.
The Company was named as a defendant in the above complaints filed on
April 1, 1999. The complaints were filed based upon the default by BH-Auburn,
L.P. and BH-Findlay, L.P. (collectively, the "Partnerships") of their respective
payment obligations under two seller promissory notes (the "Country Hearth
Notes") delivered to the respective plaintiffs in partial payment of the
purchase price for the Company Hotels located in Findlay, Ohio and Auburn,
Indiana. The Company was named as a defendant in both complaints based upon the
Company's guaranty of the payment of the Country Hearth Notes. On July 30, 1999,
a judgment was rendered in favor of the plaintiffs against the Partnerships and
the Company in the approximate aggregate amount of $1,550,000.00. The
obligations of B-H Findlay under the seller promissory note, both principal and
interest, related to the Company Hotel located in Findlay, Ohio in the
approximate settlement amount of $650,000.00 were satisfied in full from the
proceeds of the sale of the property. The Company guaranty continues to secure
the obligations and judgment lien of B-H Auburn, L.P., in the approximate amount
of $800,000.00.
Vance Linge vs. Joseph Clarence Kuntz; Vira Louis Shamman; Louis
Shamman; RPD Hotels 18, LLC/Vagabond Inns; City of San Diego; CrossHost,
Inc.; et al, Superior Court of the State of California, San Diego County, Case
No. 730228.
CrossHost, Inc., a wholly owned subsidiary of the Company, and RPD
Mission Bay, LLC, and RPD Hotels 18, LLC ("RPD"), the Company's operators of the
Company Hotel located in Mission Bay, California, were named as defendants in
the above complaint filed August 4, 1999. The complaint alleges, among other
things, that inadequate safety precautions led in part to the occurrence of a
traffic accident and related personal injuries on the public thoroughfare
adjacent to the Company Hotel. The lawsuit is being defended on behalf of
CrossHost, Inc. by the insurance carrier of RPD.
The Company is a party to other, non-material legal procedures through
the ordinary course of business. The Company does not anticipate the losses, if
any, will have a material impact on the financial condition, results of
operation or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no submissions of matters to a vote of securities holders in
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Class "A" Common Stock trades and is reported on the
American Stock Exchange ("AMEX") under the symbol "HFD". The Class "A" Common
Stock began trading on April 22, 1996, the date of the Company's initial public
offering.
14
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The following table shows the range of high and low bid prices of the
Company's Class "A" Common Stock for the years 1997, 1998 and 1999 as reported
on the AMEX.
1997
High Low
First Quarter 10 1/2 7 1/2
Second Quarter 9 7/8 8 3/8
Third Quarter 9 5/8 8 5/8
Fourth Quarter 9 3/16 5
1998
High Low
First Quarter 7 3/4 5 1/4
Second Quarter 5 7/16 4 3/8
Third Quarter 4 3/4 1 7/8
Fourth Quarter 2 5/16 1 11/16
1999
High Low
First Quarter 3 2 1/4
Second Quarter 2 7/8 2 1/4
Third Quarter 2 7/8 2
Fourth Quarter 2 7/8 1 7/8
As of March 27, 2000, there were approximately 1,014 shareholders of
record of the Company's Class "A" Common Stock and the closing bid price was
$2.00.
During 1997, the Company declared dividends of $0.24 per share on
February 4, $0.24 per share on May 30, $0.24 per share on September 2, and $0.24
per share on December 12. No dividends were declared or paid by the Company in
1998 or 1999. Future distributions to stockholders will be dependent upon the
Company's net cash flow from the operations of the Company Hotels, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors of the Company.
15
<PAGE>
As of December 31, 1999, the Company had issued and outstanding two
series of warrants designated "Series A Warrants" and "Series B Warrants." The
Series A Warrants provide warrants to purchase 225,000 shares of Host Funding's
Class "A" Common Stock at $9.90 per share, and expired on February 2, 2000. The
Series B Warrants provide warrants to purchase 225,000 shares of the Company's
Class "A" Common Stock at $10.80 per share, and expired on February 2, 2001.
There were additional provisions in the Series A Warrants and the Series B
Warrants that allowed certain limited registration rights and pro-rata treatment
upon the occurrence of certain events, including, without limitation, stock
splits, mergers, reclassifications of stock, or a recapitalization of the
Company. The Series A Warrants expired on February 2, 2000.
On December 20, 1999, the Company filed Articles Supplementary with the
Maryland State Department of Taxation designating 2,000,000 shares of the
authorized but unissued shares of Preferred Stock of the Company as Series "A"
Convertible Preferred Stock, $0.01 par value per share (the "Series `A'
Preferred"). Of the 2,000,000 shares of the Series "A" Preferred designated by
the Company, Mackenzie Patterson, Inc., a California real estate venture
capitalist ("MPI"), purchased 500,000 shares for a purchase price of $3.00 per
share. MPI purchased the shares of Series "A" Preferred on December 22, 2000 in
an exempt transaction pursuant to Rule 506 of Regulation D under the Securities
Act of 1933. See Item 13. "Certain Relationships and Related Transactions." The
holders of the Series "A" Preferred are entitled to participate pro rata with
the holders of shares of the Class "A" Common Stock of the Company with respect
to dividend distributions and are entitled to a liquidation preference of $4.00
per share over the holders of shares of Class "A" Common Stock, upon the
voluntary or involuntary dissolution, liquidation or winding up the affairs of
the Company. The holders of shares of Series "A" Preferred also have the right,
exercisable at any time after December 23, 2002, to convert such shares into
shares of Class "A" Common Stock on a one-for-one basis (the "Conversion
Ratio"), or to require the Company to redeem all or any part of the shares of
Series "A" Preferred at the redemption price of $4.00 per share plus any accrued
and unpaid cash dividends. The Conversion Ratio is subject to adjustment upon
the occurrence of certain events, including issuance of additional shares of
Class "A" Common Stock, stock dividends, stock splits, mergers,
reclassifications of stock, or a recapitalization of the Company. The holders of
shares of Series "A" Preferred are entitled to the number of votes equal to the
number of shares of Class "A" Common Stock into which a share of Series "A"
Preferred is convertible and are further entitled to vote together as a single
group with the holders of Class "A" Common Stock on all matters submitted or
required to be submitted to the Company's common stockholders for approval. The
holders of Series "A" Preferred, voting together as a single voting group, have
the right to elect, at each annual stockholders meeting of the Company, two (2)
of the five (5) members of the Board of Directors of the Company.
The Company also issued Warrants to MPI to purchase 500,000 shares of
Class "A" Common Stock of the Company for an exercise price of $3.00 per share
(the "Warrants"). The Warrants are exercisable at any time after the date of
issuance with an expiration date of December 21, 2005. The Warrants are subject
to exercise price adjustments upon the occurrence of certain events, including
stock dividends, stock splits, mergers, reclassifications of stock, or a
recapitalization of the Company.
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<PAGE>
Pursuant to the terms and conditions of a Registration Rights Agreement
(the "Registration Agreement") between the Company and MPI, the holders of the
Series "A" Preferred and the Warrants are entitled to certain demand and
"piggy-back" registration rights relating to the shares of Class "A" Common
Stock issuable upon conversion of the Series "A" Preferred or upon exercise of
the Warrants (the "Underlying Common Stock"). The Registration Agreement
provides that at any time after the date of issuance the holders of at least
twenty-five percent (25%) of the Series "A" Preferred and the Warrants may make
in the aggregate, up to four (4) written requests to register the number of
shares of Underlying Common Stock set forth in each written request. In
addition, if the Company proposes to file a registration statement under the
Securities Act of 1933 with respect to an offering by the Company of securities
for its own account (other than a registration statement on Form S-4 or Form
S-8), the holders of Series "A" Preferred and the Warrants shall be entitled to
participate in the Company registration, subject to the approval of the Company
underwriter.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial
information for the Company, all of which has been derived from the consolidated
financial statements included with this Annual Report on Form 10-K. The
following information should be read in conjunction with the consolidated
financial statements and the notes thereto for the Company and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Nine Months Ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
GROSS REVENUES $ 3,879,333 $ 3,926,042 $ 3,837,350 $ 1,768,783 $ 942,343
LOSS BEFORE INCOME TAXES $ (1,972,726) $ (904,316) $ (1,025,514) $ (149,276) $ (31,217)
NET LOSS $ (1,972,726) $ (904,316) $ (1,025,514) $ (149,276) $ (28,217)
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (1.22) $ (0.58) $ (0.68) $ (0.12) $ (0.04)
WEIGHTED AVERAGE NUMBER OF BASIC
AND DILUTED COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,615,894 1,559,916 1,516,652 690,000 690,000
DISTRIBUTIONS PER COMMON SHARE:
CLASS A -0- -0- $ 0.96 $ 0.465
CLASS B -0- -0- -0- -0-
CLASS C -0- -0- -0- -0-
TOTAL ASSETS $ 30,570,050 $ 32,449,658 $ 31,996,180 $ 20,435,575 $2,694,694
LONG TERM DEBT
(Including current portion) $ 23,611,300 $ 25,790,837 $ 25,036,346 $ 15,500,000 $4,230,565
PREFERRED STOCK $ 1,500,000 -0- -0- -0-
SHAREHOLDERS' EQUITY $ 2,789,580 $ 3,587,500 $ 4,279,337 $ 4,703,395 $(2,064,834)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Recent Developments
Effective November 12, 1999, the Company sold the Country Hearth Inn
located in Findlay, Ohio (the "Findlay Property") for a cash purchase price of
$2,400,000.00. The cash proceeds were used to pay the first lien indebtedness on
the Findlay Property and to satisfy the seller finance note held by the prior
owner of the Findlay Property, including the judgment lien held by the prior
owner. The Company did not receive any net proceeds from the sale of the Findlay
Property. See Item 2. "Properties - Changes in Properties" and Item 3.
"Legal Proceedings."
17 (cont.)
<PAGE>
On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a
California real estate venture capitalist ("MPI"), 500,000 shares of the Series
"A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A"
Preferred"), for a purchase price of $1,500,000.00. The proceeds from the sale
of the Series "A" Preferred were used by the Company for working capital. The
Company also issued to MPI warrants to purchase 500,000 shares of the Class "A"
Common Stock of the Company for an exercise price of $3.00 per share,
exercisable at any time for a period of six (6) years from the date of issuance
(the "Warrants"). Concurrently with the purchase of the shares of Series "A"
Preferred and the issuance of the Warrants, the Company and MPI entered into an
Advisory Agreement pursuant to which MPI assumed the day to day operations of
the Company and direction of new investments on behalf of the Company. In order
to implement the responsibilities of MPI under the Advisory Agreement, the
principal offices of the Company were moved from Dallas, Texas to Moraga,
California in January, 2000. See Item 13. "Certain Relationships and Related
Transactions."
Results of Operations
Years Ended December 31, 1999, 1998, and 1997:
Occupancy, average room rates, and revenue per available room of 60%,
$48.53, and $29.11 for the Company Hotels for the year ended December 31, 1999
resulted in total sales, including room sales, of approximately $9,960,000.
Property Operation: Effective July 1, 1999 the Company and BAC Hotel
Management, Inc. entered into a management agreement relating to the
Tallahassee property. Room revenue, operating expenses, and income from property
operations of approximately $425,000, $244,000, and $181,000 were realized
though December 31. 1999.
Lease Revenue: The 1999 amount of approximately $3,368,000 reflects a
reduction due to major renovations at the Company Hotel located in Sarasota,
Florida and is further reduced by reflecting room revenue and operating expenses
separately for the Company Hotel located in Tallahassee, Florida. The 1998
amount of $3,891,000 reflects a full year of operations for all properties; the
1997 amount of $3,679,000 reflects revenues associated with the acquisition of
the Super 8 Motel located in Flagstaff, Arizona and the Country Hearth Inns
located in Auburn, Indiana and Findlay, Ohio. The 1997 amount also reflects the
first full year of unrelated parties as lessees.
18
<PAGE>
Interest Income, Related Parties: Reduced to $0 in 1999 and 1998 from
$122,000 in 1997. The 1998 amount was reduced from the 1997 amount based upon
the satisfaction of a note receivable from a related party in 1997, and the
directors of Host Funding agreed to forego director fees, provided interest due
on the director notes is forgiven.
Interest Expense, Depreciation and Amortization, and Property Taxes:
The 1999 and 1998 amounts are greater than the 1997 amount because of the
additional debt, capitalized cost, loan cost, and property taxes associated with
the acquisition of the Super 8 motel located in Flagstaff, Arizona and the
Country Hearth Inn properties located in Findlay, Ohio and Auburn, Indiana (the
"1997 Properties"). 1998 was the first full year of operations for the 1997
Properties.
Depreciation expense, which is included in depreciation and
amortization, is calculated based upon the original historical cost of the five
initial hotels acquired by the Company and the acquisition value of the
remaining Company Hotels. The Company's hotel properties located in Mission Bay,
California and Findlay, Ohio were classified under "Land, Property, and
Equipment - Held for Sale" in the fourth quarter, 1998. Amortization and
Depreciation expense is not recognized for properties classified as "Land,
Property, and Equipment - Held for Sale", so the 1999 amounts are less than the
1998 amounts.
Administrative Expenses, Other: The 1999 amount is approximately
$862,000. The 1998 total amount of approximately $704,000 is reduced from the
1997 total of $1,020,000, primarily because of reductions in direct corporate
overhead in 1998, and certain one-time charges incurred in 1997 related to
moving the corporate office from California to Texas.
Administrative Expenses, Other totaled $862,000 and $704,000 for the
years ended 1999 and 1998, including the following approximate amounts:
salaries & benefits: $325,000 and $285,000; audit and accounting fees: $69,000
and $83,000; legal fees: $154,000 and $82,000; contract labor: $69,000 and
$52,000; corporate office rent: $12,000 and $16,000; office supplies: $3,000 and
$5,000; telephone: $17,000 and $17,000; travel: $30,000 and $32,000; marketing &
advertising: $18,000 and $2,000; stock transfer costs: $30,000 and $36,000;
statutory filing and printing costs: $28,000 and $30,000; taxes & licenses:
$21,000 and $6,000; other administrative costs: $86,000 and $58,000.
Directors Fees for 1999 totaled approximately $90,000 and is greater
than the 1998 and 1997 amounts of $20,000 and $18,000 due to shares of common
stock issued to former directors.
Minority Interest in Partnerships: Represents the 19% minority interest
in the operations of the Country Hearth Inn Hotels.
Relinquished project costs of $294,000 for the year ended 1999 include
costs incurred related to hotel acquisitions in Florida and other parts of the
southeastern United States.
Amortization of Unearned Directors Compensation has been calculated
based upon the terms of the independent directors' notes.
19
<PAGE>
The Net Loss from Sale of Property recognized in 1999 was $607,000.
This is greater than the amount recognized as Valuation Reserve in 1998 because
the contract for sale of the Country Hearth Inn was not finalized until 1999.
The Net Gain from Transfer of Lease of approximately $279,000 resulted
from the change in lessee on the property the Company owns in Mission Bay
California from Crossroads Hospitality Tenant Company to Vagabond Inns. The Net
Gain from Transfer of Lease of approximately $573,000 in 1998 resulted from the
change in lessees on seven of the Company properties in 1998.
Liquidity and Capital Resources
On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a
California real estate venture capitalist ("MPI"), 500,000 shares of the Series
"A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A"
Preferred"), for a purchase price of $1,500,000.00. The proceeds from the sale
of the Series "A" Preferred were used by the Company to satisfy current
obligations and for working capital. The Company also issued to MPI warrants to
purchase 500,000 shares of the Class "A" Common Stock of the Company for an
exercise price of $3.00 per share, exercisable at any time for a period of six
(6) years from the date of issuance (the "Warrants"). Concurrently with the
purchase of the shares of Series "A" Preferred and the issuance of the Warrants,
the Company and MPI entered into an Advisory Agreement pursuant to which MPI
assumed the day to day operations of the Company and direction of new
investments on behalf of the Company. In order to implement the responsibilities
of MPI under the Advisory Agreement, the principle offices of the Company were
moved from Dallas, Texas to Moraga, California in January 2000. See Item 13.
"Certain Relationships and Related Transactions."
Effective May 12, 1998, Host Ventures, Inc. ("HVI") entered into a new
loan agreement (the "HVI Modified Loan") with Credit Suisse First Boston ("First
Boston") in which the principal amount of the existing debt from First Boston to
HVI was increased from $8,725,000 to $9,075,000. The additional proceeds of the
loan were used for general corporate purposes. The term of the HVI Modified Loan
provides that all principal and outstanding interest is due and payable in June,
2023. The annual interest rate was modified to 8.12%, with interest and
principal amortized over a 25 year term, payable monthly. The HVI Modified Loan
provides for a "Hyperamortization Date," after which the annual interest rate
increases substantially. The hyperamortization provision is intended to provide
incentive for the loan to be paid off on the tenth anniversary date of the HVI
Modified Loan.
Also effective May 12, 1998, the Company entered into a new loan
agreement with First Boston (the "Mezzanine Loan") in which First Boston loaned
the Company $825,000. The proceeds of the loan were used for general corporate
purposes. Interest accrues at a floating rate of the 30-day LIBOR, plus 500
basis points. Interest and principal, based on a 5 year amortization, are due
monthly. The Company subsequently formed Host Enterprises, Inc. ("HEI"), as a
wholly owned, special purpose entity of HVI, for the purpose of transferring the
Mezzanine Loan to HEI. The Company guaranteed the performance by HEI of the
terms of the Mezzanine Loan and pledged the stock of HVI as security for the
Mezzanine Loan.
20
<PAGE>
On June 19, 1997, the Company executed a promissory note payable to
Blacor, Inc. ("Blacor") in the original principal amount of $70,000 (the
"Original Blacor Note"). On December 30, 1997, the Original Blacor Note was
extended by a new promissory note in the original principal amount of $86,600
(the "Blacor Note"). Effective December 30, 1998, the Blacor note was extended
to April 30, 1999. During 1999, the balance of the Blacor Note was increased to
$108,600. On September 29, 1999, the Company paid a portion of the outstanding
principal balance and all accrued interest on the Blacor Note by the issuance to
Blacor of 33,000 shares of the Class "A" Common Stock of the Company. The
remaining principal and interest outstanding was paid in full in December, 1999.
In October 1997, B-H Findlay, L.P. ("B-H Findlay") executed a note
payable (the "Findlay Note") to the seller of the Company Hotel located in
Findlay, Ohio (the "Findlay Property") and BH-Auburn, L.P. ("B-H Auburn")
executed a note payable (the "Auburn Note") to the seller of the Company Hotel
located in Auburn, Indiana (the "Auburn Property") in partial payment of the
purchase price of the hotel properties (collectively, the "Country Hearth
Notes"). The Company is the beneficial owner of 81% of the partnership interests
in each of B-H Findlay and B-H Auburn. The Country Hearth Notes were originally
secured by 90,000 shares of the Class "B" Common Stock of the Company (the
"Pledged Stock") and the corporate guaranty of the Company (the "Host Funding
Guaranty"). The Country Hearth Notes were modified on June 15,1998 to provide
that if, on October 21, 1998, the closing price of the Company's Class A Common
Stock as traded on the American Stock Exchange was less than $6.50 per share,
the Company would make an additional cash payment (the "Full Cash Payment") to
the sellers so that the total value of the Class "A" Common Stock at the per
share price on October 21, 1998, plus the amount of such Full Cash Payment to
the sellers, equaled $750,000.
B-H Findlay and B-H Auburn defaulted on their respective payment
obligations under the Country Hearth Notes in January 1999 and the holders of
the Country Hearth Notes filed a complaint in the Franklin County Common Pleas
Court, Columbus, Ohio, Civil Division against each of the partnerships, as
maker, and the Company, as guarantor. The complaints were filed in April 1999
and together demanded payment of the Country Hearth Notes in full and the
related Full Cash Payment in the aggregate amount of approximately $1,550,000.
On July 30, 1999, a judgment was rendered against B-H Findlay, B-H Auburn and
the Company in the approximate aggregate amount of $1,550,000. The obligations
of B-H Findlay under the Findlay Note, both principal and interest, in the
approximate settlement amount of $650,000.00 were satisfied in full from the net
proceeds of the sale of the Findlay Property in November 1999. The Host Guaranty
and the Pledged Stock continue to secure the obligations of B-H Auburn under the
Auburn Note and the Full Cash Payment in the approximate of $800,000.00, as of
December 31, 1999.
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is the
cash flow from the Leases. For the year ended December 31, 1999, cash flow used
in operating activities was approximately $358,000.
The Company has addressed the "Year 2000 Problem" and determined that
the Company's automated systems are "Y2K Compliant." The lessees and operators
of the Company Hotels have also advised the Company that the systems relating to
the Company Hotels are "Y2K Compliant." Such compliance includes all front
21
<PAGE>
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. If the
Company 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 "Y2K
Compliant." Any cost incurred by the Company to maintain compliance is expected
to be immaterial.
The Company has no committed additional sources of external liquidity
available; therefore, the Company will rely on its internal cash flow to meet
its liquidity needs. The Company's principal source of cash to meet its cash
requirements, including distributions to shareholders, is its share of the
Company's cash flow from the Company Hotels. Although the obligations of BAC
Hotel Management, Inc. ("BAC"), as lessee, under the Company Hotels leased by
BAC are guaranteed in part by Buckhead American Corporation (BUCK: NASDAQ), the
ability of BAC to make lease payments under the Company Hotel leases, and,
therefore, the Company's liquidity, including its ability to make distributions
to shareholders, is dependent on the ability of BAC to generate sufficient cash
flow from such Company Hotels.
Other than debt service on the Company's loan facilities and notes, the
capital expenditures required under the Company Hotel leases or the Company's
loan facilities, property taxes on the Company Hotels, obligations under
employment agreements, and other administrative expenses, the Company is not
aware of any demands, commitments, events or uncertainties that will result or
are likely to result in a change in the Company's liquidity.
The Company intends to make additional investments in hotel properties
and may incur indebtedness to make such investments to the extent that working
capital and cash flow from the Company's investments are insufficient to make
such investments. The Company will invest in additional hotel properties only as
suitable opportunities arise, and the Company will not undertake investments
unless adequate sources of financing are available. The Company expects that
future investments in hotel properties will be financed, in whole or in part,
with the capital stock of the Company, proceeds from additional issuances of the
capital stock of the Company, or from the issuance of other debt or equity
securities. The Company, in the future, may seek to obtain a line of credit or a
permanent credit facility, negotiate additional credit facilities, or issue
corporate debt instruments, all in compliance with its charter restrictions. Any
debt incurred or issued by the Company may be secured or unsecured, long-term or
short-term, charge a fixed or variable interest rate and may be subject to such
other terms as the Board of Directors of the Company deems reasonably prudent
and in the best interest of the Company.
Inflation
Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the ability of the
lessees and operators of the Company Hotels to raise room rates in the face of
inflation.
22
<PAGE>
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.
ITEM 7A. QUANTITATIVE 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 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22 (cont.)
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's Board of Directors consists of five (5) members. The
directors are elected at the annual meeting of stockholders or are appointed by
the incumbent Board of Directors and serve until the next annual meeting of
stockholders or until a successor has been elected or appointed. Set forth below
is certain information regarding the directors and executive officers of the
Company during fiscal year 1999.
Michael S. McNulty, Director and President
Michael S. McNulty has served as a director and president of the
Company since 1996. Mr. McNulty, 52, received his Juris Doctorate from Southern
Methodist University in 1973. From 1977 to 1985, Mr. McNulty was employed by the
real estate development corporation of a multi-national family with business
interests in various countries. During that period, Mr. McNulty was responsible
for developing partnerships for investments in over thirty real estate projects
with gross investments exceeding $200,000,000. Prior to election in September
1995 as President of the Corporation, Mr. McNulty owned his own private
financial consulting firm. Mr. McNulty is also President and Director of a
controlling venture in a Napa Valley based winery. In addition, Mr. McNulty has
served from 1994 to the present as the President and a director of Blacor, Inc.,
the principal corporation of a group of companies controlled by a multi-national
investor, the primary purpose of which is to invest in real property in the
United States. Mr. McNulty resigned as a director of the Company effective as of
December 23, 1999 and as President of the Company effective as of December 31,
1999.
Guy E. Hatfield, Director
Guy E. Hatfield has served as a director of the Company since 1996.
Mr. Hatfield, 65, has been President of All American Group, Inc., a
Delaware corporation, since 1989. Mr. Hatfield earned a Bachelor of Science
degree from Bradley University in 1955 and a Juris Doctorate from the University
of San Diego in 1962. From 1984 to 1989, Mr. Hatfield was Chairman of the Board
and Chief Executive Officer of Motels of America, Inc., a corporation which
built and managed 107 Super 8 motels and had gross annual sales of $80,000,000.
Since 1989, Mr. Hatfield has served as President and Chairman of Hatfield Inns,
Inc., a corporation involved in the ownership and management of hotel
properties.
23
<PAGE>
William M. Birdsall, Director
William M. Birdsall has served as a director of the Company since 1996.
Mr. Birdsall, 51, was Chairman of the Board and Chief Executive Officer of the
Company until March 31, 1998. Effective April 1, 1998, Mr. Birdsall resigned his
position as Chairman of the Board and Chief Executive Officer, but has continued
to serve as a director of the Company. He also serves as President of Birdsall &
Corporation, a real estate investment and finance firm located in Durango,
Colorado. Before starting Birdsall & Corporation in 1993, Mr. Birdsall was
Chairman and CEO of the Price REIT, a public corporation, which he co-founded
and took public in 1991 in the form of a Real Estate Investment Trust trading on
NASDAQ. Mr. Birdsall has been involved with real estate development since 1978.
He was Chief Operating Officer of Estes Properties, Inc., where he was
responsible for operations of the Lowes Ventana Canyon Resort and Golf Club in
Tucson, Arizona, a 2,000-acre planned community and resort hotel. From 1982
through 1987 he was Senior Vice-President of Real Estate for Ramada, Inc., the
international hotel chain. He now serves on the Scripps Memorial Hospitals
Foundation Board and is a member of the Young Presidents Organization, Arizona
Bar Association, Urban Land Institute, and International Council of Shopping
Centers.
Brian K. Rodgers, Director
Brian K. Rodgers was appointed a director of the Company in 1999 to
fill the vacancy created by the resignation of Don Cockroft. Mr. Rodgers, 28, is
an associate at HVS International, a worldwide hotel consulting and appraisal
firm serving hotel owners and lenders throughout the United States and abroad.
Mr. Rodgers has conducted appraisals on hotel assets and development projects
valued at over $1 billion. Prior to his employment at HVS International, Mr.
Rodgers gained hotel operational experience at Four Seasons Hotels and Resorts,
serving a management role in the opening of the Four Seasons Resort Aviara,
located in Carlsbad, California. Mr. Rodgers earned a Bachelor of Arts degree in
psychology from the University of California at San Diego in 1994 and a Master
of Management in Hospitality from Cornell University in 1998. Mr. Rodgers
resides in San Francisco, California and is an active member of the Cornell
Hotel Society.
Robert E. Dixon, Director
Robert E. Dixon was appointed a director of the Company in 1999 to
fill the vacancy created by the resignation of Charles Dunn. Mr. Dixon, 31,
is the managing member and controlling interest holder in Sutter Capital
Management, LLC. Mr. Dixon is a Canadian citizen and received his bachelors
degree from the University of California at Los Angeles in 1992. During 1993 and
1994, Mr. Dixon was employed by Lehman Brothers in equity sales and trading and
in October, 1994 joined MacKenzie Patterson, Inc., as a securities research
analyst. In June, 1996, Mr. Dixon left MacKenzie Patterson to begin buying and
selling securities for his own account and that of Sutter Opportunity Fund, LLC,
an entity which he controls. Mr. Dixon was a registered representative of North
Coast Securities from 1994 through 1997. In January 2000, Mr. Dixon was
appointed chairman of the Board of the Company.
Glen Fuller, Director
Glen Fuller, 26, was appointed a director of the Company by the
incumbent Board of Directors, effective as of December 23, 1999, to fill
the vacancy created by the resignation of Michael S. McNulty.
24
<PAGE>
Bona K. Allen, Chief Financial Officer
Bona K. Allen was elected Chief Financial Officer and Secretary of the
Company effective February 1, 1997. Mr. Allen, 39, has been involved in the
financial aspects of real estate investment, development, management, and
construction since graduating from Birmingham-Southern College in 1982. Prior to
appointment to the Company, Mr. Allen served as a financial executive with The
Myrick Company (Atlanta, Georgia) and as a financial consultant from 1994
through 1996. From 1986 to 1994, Mr. Allen was employed by Wilma South
Management Corporation (and affiliates), the United States holding company of a
Dutch-owned real estate group. Mr. Allen served in several positions with
increasing responsibility and was named Vice President/Chief Financial Officer
in 1991. He was responsible for the financial operations of the Company at the
time Wilma owned or controlled assets with a cost totaling in excess of $500
million located in the Southwest, Southeast and Southern California regions of
the United States. Mr. Allen is a member of the American Institute of Certified
Public Accountants, the Georgia Society of Certified Public Accountants, and the
Alabama Society of Certified Public Accountants.
Compensation of Directors
In 1999, Messrs. Dixon and Rodgers purchased 10,000 shares of the Class
"A" Common Stock of the Company. The purchase price for the Class "A" Common
Stock was paid by the execution by each director of a $25,000.00 non-recourse
promissory note secured by the purchased shares. In connection with the purchase
of the shares, the Company agreed to forgive the promissory notes (i) in
increments of 20% of the principal amount per annum for each year the director
remains a director of the Company, and (ii) upon the death, disability or
resignation of the director (except for voluntary resignation or failure to
serve). The Company did not pay any directors fees during fiscal year 1999.
The Company has not paid and does not anticipate paying directors for
service on committees. All of the directors of the Company are entitled to
participate in the Host Funding, Inc. 1997 Incentive Plan, however, since
adoption, no benefits have been issued under the Incentive Plan.
Section 16-(a): Beneficial Ownership Reporting Compliance
Section 16-(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent (10%) of a registered class
of the Company's equity securities, to file reports of ownership and change in
ownership with the Securities and Exchange Commission (the "SEC"). Officers,
directors and greater than ten percent (10%) stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16-(a) forms they
file. Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 3, 4 or 5
were required for those persons, the Company believes that, from January 1, 1999
to December 31, 1999, all filing requirements applicable to its officers,
directors, and greater than ten percent (10%) beneficial owners, were timely
met.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years presented, the
compensation paid to the executive officers of the Company serving during 1999:
Other All
Name and Annual Other
Principal Year Salary ($) Bonus ($) Compensation Compensation
Position (1)
Michael S. McNulty, 1999 $108,000
President 1998 $108,000
1997 $ 99,000
Bona K. Allen, 1999 $ 76,875
Chief Financial 1998 $ 84,375
Officer 1997 $ 65,625
[FN]
(1) Each of Messrs. McNulty and Allen was employed during fiscal years 1997,
1998 and 1999 pursuant to an employment agreement with the Company. See
"Employment Agreements and Other Compensation Arrangements" below.
</FN>
Employment Agreements and other Compensation Arrangements
Michael S. McNulty
The Company's employment agreement with Mr. McNulty dated February 1,
1997, provides for an initial thee-year term through January 31, 2000, with
automatic renewal for a period of one year on each anniversary date of February
1 ("Anniversary Date"), unless terminated for any reason by written notice from
either party given to the other at least one hundred twenty (120) days prior to
the next Anniversary Date, or unless otherwise terminated pursuant to the terms
of the agreement. The agreement vests Mr. McNulty with full authority as
President and Chief Operating Officer of the Company and provides for an annual
base salary of $108,000, subject to an annual increase to (i) $150,000 if the
assets of the Company exceed $150,000,000 and (ii) $250,000 if the assets of the
Company exceed $250,000,000. The agreement also provides for payment of a
performance bonus calculated pursuant to a formula based on the financial
results achieved by the Company during any fiscal year. No employment bonuses
were owed to Mr. McNulty for fiscal year 1999. Mr. McNulty resigned as a
director of the Company effective as of December 23, 1999 and as President of
the Company effective as of December 31, 1999. Mr. McNulty's employment
agreement terminated by its terms effective as of January 31, 2000. Mr. McNulty
was compensated through January 31, 2000, the date of termination of his
employment agreement, and received no further severance.
Bona K. Allen
The Company's employment agreement with Mr. Allen dated February 1,
1997, provides for an initial thee-year term through January 31, 2000, with
automatic renewal for a period of one year on each anniversary date of February
1 ("Anniversary Date"), unless terminated for any reason by written notice from
either party given to the other at least one hundred twenty (120) days prior to
the next Anniversary Date, or unless otherwise terminated pursuant to the terms
of the agreement. The agreement vests Mr. Allen with full authority as Chief
Financial Officer of the Company and provides for an annual base salary of
$75,000, subject to an annual increase to (i) $112,500 if the assets of the
Company exceed $150,000,000, and (ii) $150,000 if the assets of the Company
exceed $250,000,000. The agreement also provides for payment of a performance
26
<PAGE>
bonus calculated pursuant to a formula based on the financial results achieved
by the Company during any fiscal year. No employment bonuses were owed to Mr.
Allen for fiscal year 1999. The Company and Mr. Allen have agreed to terminate
Mr. Allen's employment agreement effective as of March 31, 2000. Mackenzie
Patterson, Inc., the external advisor of the Company, has agreed to retain Mr.
Allen on a month-to-month basis as a financial consultant to MPI. Mr. Allen will
provide consulting services to MPI on financial matters relating to the Company.
The Company has agreed to pay Mr. Allen a one-time severance payment in the
amount of $25,000 with respect to the termination of Mr. Allen's employment
agreement. The severance payment is due and payable on March 31, 2000.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Company consists of Brian K. Rodgers,
Robert E. Dixon, and Guy E. Hatfield, each of whom is a director and
non-employee of the Company. No member of the Compensation Committee was an
executive officer or employee of the Company or any of its subsidiaries at any
time during, or prior to, fiscal year 1999. Executive Compensation for Messrs.
McNulty and Allen for fiscal year 1999 was determined in accordance with the
terms and conditions of their respective employment agreements. See "Employment
Agreements and Other Compensation Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth the ownership of the voting securities
of the Company both beneficially and of record, both individually and in the
aggregate, for those persons or entities known by the Company to be the owner of
more than five percent (5%) of the voting securities of the Company as of the
close of business on March 27, 2000. The number of shares and percentage
ownership of Common Stock for each person or entity assumes that shares of
Common Stock issuable upon exercise of stock warrants to such person or entity
(exclusive of others) exercisable within sixty (60) days from March 27, 2000 are
outstanding. The information in the following table is taken from or based upon
ownership filings made by the listed persons or entities with the Securities and
Exchange Commission or upon information provided by such persons or entities.
<TABLE>
<CAPTION>
Amount
and
Nature of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership Class (1)
-------------- ------------------- --------- ---------
<S> <C> <C> <C>
Class "A" Common MacKenzie Patterson, Inc. 621,838(1) 28.01%
1640 School Street
Moraga, California 94556
Class "A" Common Guy E. Hatfield 378,716(2) 22.02%
230 West Laurel Street, #1003
San Diego, California 92101
Class "A" Common Sutter Opportunity Fund, LLC 255,488(3) 14.85%
595 Market Street, Suite 2100
San Francisco, California 94105
Series "A" Preferred MacKenzie Patterson, Inc. 500,000(4) 100 %
1640 School Street
Moraga, California 94556
27
<PAGE>
<FN>
(1) Includes warrants to purchase 500,000 shares of the Class "A" Common
Stock of the Company. Also includes 106,838 shares owned collectively
by MP Value Fund, LLC, Accelerated High Yield Pension Investors, Ltd.,
Accelerated High Yield Income Fund II, Ltd., and Accelerated High Yield
Income Fund, Ltd., of which MacKenzie Patterson, Inc. ("MPI") is either
the general partner or manager, and 15,000 shares owned individually
by C.E. Patterson, the president and a director of MPI and the
President and Chief Executive Officer of the Company. Mr. Patterson may
be deemed to be a beneficial owner of the shares owned by MPI by virtue
of his position as a director and President of MPI.
(2) Includes l,106 shares held in an Individual Retirement Account with
Sunwest Federal Credit Union for the benefit of Mr. Hatfield's wife,
Dorothy Hatfield; 1,574 shares held in an Individual Retirement Account
with Sunwest Federal Credit Union for the benefit of Mr. Hatfield; 425
shares held in trust by Mr. Hatfield, as trustee, for the benefit of
Mr. Hatfield and his wife; 240,000 shares held in the Hatfield Family
Trust; 340 shares held by Sunwest Federal Credit Union for the benefit
of Mr. Hatfield's son, Scott J. Hatfield; and 340 shares held in the
name of Scott J. Hatfield, of which Mr. Hatfield may be deemed the
beneficial owner.
(3) Includes 22,500 shares owned by Sutter Capital Management, LLC ("Sutter
Capital"), the manager of Sutter Opportunity Fund, LLC ("Sutter
Opportunity"). Robert E. Dixon, a director of the Company, is the
managing member of Sutter Capital and thereby controls Sutter
Opportunity. Mr. Dixon may be deemed to be a beneficial owner of the
shares owned by Sutter Capital and Sutter Opportunity by virtue of his
position as the managing member of Sutter Capital.
(4) C.E. Patterson, the President and Chief Executive Officer of the
Company, may be deemed to be a beneficial owner of the shares owned by
MacKenzie Patterson, Inc. ("MPI") by virtue of his position as a
director and president of MPI.
</FN>
</TABLE>
28
<PAGE>
Security Ownership of Management
The following table sets forth the ownership of each class of equity
securities of the Company, both beneficially and of record, both individually
and in the aggregate, for the directors and executive officers of the Company,
as of the close of business on March 27, 2000. The number of shares and
percentage ownership of Common Stock for each person or entity assumes that
shares of Common Stock issuable upon exercise of stock warrants to such person
or entity (exclusive of others) exercisable within sixty (60) days from March
27, 2000 are outstanding. The information in the following table is taken from
or based upon ownership filings made by the listed persons with the Securities
and Exchange Commission or upon information provided by such persons.
Amount and
Name of Nature of Percent
Title of Class Beneficial Beneficial of
Owner Ownership Class
- -------------- ---------- ----------- -------
Class "A" Common C.E. Patterson 621,838(1) 28.01%
Class "A" Common Guy E. Hatfield 378,716(2) 22.02%
Class "A" Common Robert E. Dixon 255,488(3) 14.85%
Class "A" Common William M. Birdsall 20,000 *
Class "A" Common Brian K. Rodgers 10,000 *
Class "A" Common Bona K. Allen 1,800 *
Series "A" Preferred C.E. Patterson 500,000(4) 100%
Class "A" Common All Directors and 1,287,842 58.01%
Executive Officers as a
Group (7 persons)(5)
Series "A" Preferred All Directors and 500,000 100%
Executive Officers as
a Group (7 persons)(6)
[FN]
(1) Includes warrants to purchase 500,000 shares of the Class "A" Common
Stock of the Company owned by MacKenzie Patterson, Inc. ("MPI"). Also
includes 106,838 shares owned collectively by MP Value Fund, LLC,
Accelerated High Yield Pension Investors, Ltd., Accelerated High Yield
Income Fund II, Ltd., and Accelerated High Yield Income Fund, Ltd., of
which MPI is either the general partner or manager. Mr. Patterson is
the president and a director of MPI. Mr. Glen Fuller may be deemed
to be a beneficial owner of the shares owned by MPI by virtue of his
position as a director and an executive officer of MPI. Mr. Fuller
disclaims beneficial ownership of such shares.
29
<PAGE>
(2) Includes l,106 shares held in an Individual Retirement Account with
Sunwest Federal Credit Union for the benefit of Mr. Hatfield's wife,
Dorothy Hatfield; 1,574 shares held in an Individual Retirement Account
with Sunwest Federal Credit Union for the benefit of Mr. Hatfield; 425
shares held in trust by Mr. Hatfield, as trustee, for the benefit of
Mr. Hatfield and his wife; 240,000 shares held in the Hatfield Family
Trust; 340 shares held by Sunwest Federal Credit Union for the benefit
of Mr. Hatfield's son, Scott J. Hatfield; and 340 shares held in the
name of Scott J. Hatfield, of which Mr. Hatfield may be deemed the
beneficial owner.
(3) Includes 22,500 shares owned by Sutter Capital Management, LLC ("Sutter
Capital") and 232,988 shares owned by Sutter Opportunity Fund, LLC
("Sutter Opportunity"). Mr. Dixon is the managing member of Sutter
Capital which is the manager of Sutter Opportunity.
(4) Includes 500,000 shares owned by MacKenzie Patterson, Inc. ("MPI") of
which Mr. Patterson serves as president and a director. Mr. Glen Fuller
may be deemed to be a beneficial owner of the shares owned by MPI by
virtue of his position as a director and an executive officer of MPI.
Mr. Fuller disclaims beneficial ownership of such shares.
(5) See Note (4) above.
(6) See Notes (1), (2) and (3) above.
</FN>
30
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Note
In the third and fourth quarters of 1999, the Company paid the
outstanding principal balance, and all accrued interest, in the aggregate amount
of $114,828, due and payable on that certain promissory note (the "Blacor Note")
executed by the Company on December 30, 1998 in favor of Blacor, Inc.
("Blacor"). The proceeds of the Blacor Note were previously used by the Company
for general operating purposes. Mr. Michael S. McNulty, President of the Company
during fiscal year 1999, is the president and a director of Blacor. The Blacor
Note was paid by the issuance to Blacor of 33,000 shares of the Class "A" Common
Stock of the Company and the payment to Blacor of $53,118 in cash.
Advisory Agreement
Effective January 1, 2000, the Company entered into an Advisory
Agreement with MacKenzie Patterson, Inc. ("MPI") pursuant to which the Company
engaged MPI as the external advisor of the Company. Under the Advisory
Agreement, the Company appointed MPI as the Company's exclusive agent to
supervise the day-to-day operations of the Company, including, overseeing the
lessees of the Company Hotels, serving as the Company's advisor and consultant
in connection with the administrative, policy and investment decisions made by
the Board of Directors of the Company, and performing or supervising the various
administrative and accounting functions necessary for the management of the
Company. The Company agreed to pay MPI an advisory fee of $350,000 per year for
the advisory and administrative services provided by MPI under the Advisory
Agreement. In order to implement the responsibilities of MPI under the Advisory
Agreement, the principal offices of the Company were relocated to Moraga,
California in January, 2000. Mr. C.E. Patterson, Chief Executive Officer of the
Company, and Mr. Glen Fuller, Chief Operating Officer of the Company, are also
executive officers and directors of MPI. MPI is also the direct or indirect
beneficial owner of 621,838 shares of the Class "A" Common Stock and 500,000
shares of the Series "A" Convertible Preferred Stock of the Company. See Item
12. "Security Ownership of Certain Beneficial Owners and Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K
Annual Report:
(1) Financial Statements:
The Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
31
<PAGE>
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Report of Independent Accountants
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation
(b) The Company did not file any reports on Form 8-K during the fourth
quarter of 1999. The Company did, however, file a report on Form 8-K on
January 6, 2000 relating to (i) the acquisition by MacKenzie Patterson,
Inc. ("MPI") of 500,000 shares of the Series "A" Convertible Preferred
Stock of the Company, (ii) the issuance to MPI of warrants to purchase
500,000 shares of the Class "A" Common Stock of the Company, and (iii)
the engagement of MPI as the external advisor of the Company.
(c) Exhibits.
Exhibit Number Description
3.1 Amended and Restated Charter of the Company (incorporated
by reference to Exhibit 3.1 to Company's Amendment No. 8 to
Form S-11, effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 to Company's Amendment No. 8 to Form
S-11, effective April 17, 1996).
3.3 Articles Supplementary filed with the State Department of
Assessments and Taxation of the State of Maryland on December
20, 1999 (incorporated by reference to Exhibit 2.3 to Company's
Report on Form 8-K filed on January 6, 2000).
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" Convertible Preferred Stock Certificate.
32
<PAGE>
4.3 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).
4.4 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).
4.5 Form of Common Stock Warrant dated effective as of December 22,
1999 (incorporated by reference to Exhibit 2.4 to Company's
Report on Form 8-K filed on January 6, 2000).
10.1 Stock Purchase Agreement dated effective as of December 21, 1999
by and between the Company and MacKenzie Patterson, Inc.
(incorporated by reference to Exhibit 2.1 to Company's Report on
Form 8-K filed on January 6, 2000).
10.2 Advisory Agreement dated effective as of January 1, 2000 by and
between the Company and MacKenzie Patterson, Inc. (incorporated
by reference to Exhibit 2.2 to Company's Report on Form 8-K
filed on January 6, 2000).
10.3 Registration Rights Agreement dated effective as of December 21,
1999 by and between the Company and MacKenzie Patterson, Inc.
(incorporated by reference to Exhibit 2.5 to Company's Report on
Form 8-K filed on January 6, 2000).
21.1 Subsidiaries of Registrant.
27 Financial Data Schedule.
The Company will furnish copies of these Exhibits upon request and the
payment of $.20 per page. Requests should be addressed to Glen Fuller, c/o Host
Funding, Inc., 1640 School Street, Suite 100, Moraga, California 94556.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Host Funding, Inc.
By: /s/ C. E. Patterson
----------------------
C. E. Patterson
Title: President
Date: April 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ William M. Birdsall Director April 13, 2000
- ---------------------------
William M. Birdsall
/s/ Robert E. Dixon Director April 13, 2000
- ---------------------------
Robert E. Dixon
/s/ Guy E. Hatfield Director April 13, 2000
- ---------------------------
Guy E. Hatfield
/s/ Glen Fuller Director April 13, 2000
- ---------------------------
Glen Fuller
/s/ Brian K. Rodgers Director April 13, 2000
- ---------------------------
Brian K. Rodgers
/s/ C. E. Patterson President and Chief April 13, 2000
- --------------------------- Executive Officer
C. E. Patterson
/s/ Bona K. Allen Chief Financial and April 13, 2000
- --------------------------- Accounting Officer
Bona K. Allen
34
<PAGE>
Exhibit 21.1
Subsidiaries of Registrant
Name or Organization State of Incorporation
CrossHost, Inc. Maryland
Host Ventures, Inc. Maryland
Host Enterprises, Inc. Maryland
Host Findlay GP, Inc. Maryland
Host Auburn GP, Inc. Maryland
BacHost, LLC Texas
B-H Findlay, L.P. Ohio
B-H Auburn, L.P. Indiana
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOST FUNDING, INC.
Page
Number
Report of Independent Accountants 37
Consolidated Balance Sheet as of December 31, 1999 and 1998 38
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997 39
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 43
Notes to Financial Statements 46
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Host Funding, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Host
Funding, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
March 24, 2000
37
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
ASSETS
------
LAND, PROPERTY AND EQUIPMENT - HELD
FOR INVESTMENT:
Building and improvements $17,664,925 $17,323,312
Furnishings and equipment 3,200,271 2,873,180
Less accumulated depreciation (2,832,258) (1,906,466)
------------ ------------
18,032,938 18,290,026
Land 5,667,570 5,667,570
------------ ------------
Land, property and equipment 23,700,508 23,957,596
- held for investment
LAND, PROPERTY AND EQUIPMENT - HELD
FOR SALE:
Building and improvements 1,912,730 4,299,007
Furnishings and equipment 379,698 876,093
Less accumulated depreciation (275,774) (392,539)
Less impairment reserve (444,000)
Land 702,500 1,239,206
------------ ------------
Land, property and equipment
- held for sale 2,719,154 5,577,767
------------ ------------
Total Land, property and
equipment 26,419,662 29,535,363
CASH AND CASH EQUIVLANTS 1,129,115 66,328
RESTRICTED CASH 271,341 486,573
RENT RECEIVABLE 49,823 236,754
NOTES AND OTHER RECEIVABLES, SALE OF
LEASE RIGHTS 0 265,459
DUE FROM RELATED PARTIES 4,223 36,612
LONG-TERM ADVANCES TO LESSEES 110,090 110,090
RESTRICTED INVESTMENTS 288,000 288,000
DEFERRED ADVISORY FEE 750,000
LOAN COMMITMENT FEES, NET OF ACCUMULATED
AMORTIZATION OF $755,338 AT DECEMBER
31, 1999 AND $703,211 AT DECEMBER 31,
1998 1,023,212 1,105,402
FRANCHISE FEES - NET OF ACCUMULATED
AMORTIZATION OF $27,989 AT DECEMBER
31, 1999 AND $21,340 AT DECEMBER 31,
1998 73,011 99,660
PREPAID AND OTHER ASSETS 451,573 219,417
------------ ------------
TOTAL ASSETS $30,570,050 $32,449,658
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
- --------------------------------------------------------------------------------
38
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
LONG-TERM DEBT $23,611,300 $25,790,837
SHORT TERM DEBT 386,691 1,025,941
LONG-TERM LEASE DEPOSIT 588,000 588,000
OPTION DEPOSITS 20,000
ACCOUNTS PAYABLE AND OTHER ACCRUED
LIABILITIES 1,167,444 854,556
ACCRUED INTEREST 311,971 231,577
ACCRUED PROPERTY TAXES 107,111 132,465
------------ ------------
Total liabilities 26,192,517 28,623,376
------------ ------------
MINORITY INTEREST IN PARTNERSHIPS 87,953 238,782
Series A Preferred stock; $0.01 par
value; $4.00 liquidation perference;
authorized 2,000,000 shares; issued
and outstanding 500,000 and 0 shares
at December 31, 1999 and December 31,
1998 respectively 1,500,000
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value;
authorized 50,000,000 shares; issued
and outstanding 1,720,000 and
1,546,369 shares at December 31, 1999
and December 31, 1998 respectively 18,645 16,907
Warrants to purchase 500,000 shares of
Class A Common Stock; exercise price
$3.00 per share; exercisable any time
through December 22, 2005 750,000
Additional Paid in Capital 9,160,237 8,805,953
Accumulated Deficit (6,011,046) (4,038,321)
Less: Unearned directors' compensation
net of accumulated amorttization of
$72,402 and $145,208 at December 31,
1999 and December 31, 1998,
respectively (73,597) (142,792)
------------ ------------
3,844,239 4,641,747
Less: Common stock in treasury at cost,
144,550 and 144,400 shares at
December 31, 1999 and December 31,
1998, respectively (1,054,659) (1,054,247)
------------ ------------
Total shareholders' equity 2,789,580 3,587,500
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,570,050 $32,449,658
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
- --------------------------------------------------------------------------------
39
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31,
1999 1998 1997
------------------------------------------
NET INCOME/LOSS FROM OPERATIONS
Room revenue $ 424,637 $ $
Operating expenses 243,628
------------ ------------ ------------
Income from property
operations 181,009 - -
CORPORATE REVENUES:
Lease revenue 3,368,330 3,891,259 3,679,355
Interest income - related
parties - 121,976
Interest other income 86,366 34,783 36,019
------------ ------------ ------------
Total revenue 3,454,696 3,926,042 3,837,350
------------------------------------------
CORPORATE EXPENSES:
Interest expense, including
amortization of loan
costs 2,660,667 2,693,219 2,375,059
Depreciation and amortization 994,849 1,068,308 861,031
Administrative expenses - other 862,407 704,271 1,019,918
Director fees 88,700 20,000 -
Property taxes 354,543 329,116 291,448
Other Expenses 56,456
Amortization of unearned
directors' compensation 119,195 54,000 54,000
------------ ------------ ------------
Total expenses 5,136,817 4,868,913 4,601,456
------------------------------------------
NET LOSS FROM OPERATIONS (1,501,112) (942,871) (746,106)
VALUATION RESERVE 0 (444,000)
NET LOSS FROM SALE OF PROPERTY (607,299)
NET GAIN FROM TRANSER OF LEASE 278,862 572,846
RELINQUISHED PROJECT COSTS (294,005) (107,000) (274,000)
MINORITY INTEREST IN PARTNERSHIPS 150,829 16,710 12,592
------------ ------------ ------------
NET LOSS (1,972,725) (904,315) (1,025,514)
============ ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (1.22) $ (0.58) $ (0.68)
==========================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,615,894 1,559,916 1,516,652
==========================================
The accompanying notes are an integral part
of the consolidated financial statements.
- --------------------------------------------------------------------------------
39
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Total
Class A Class B Class C Additional Earnings Related Unearned Share-
Common Common Common Paid in (Accumulat- Party Note Directors' Treasury holders'
Stock Stock Stock Warrants Capital ed Deficit) Receivable Compensation Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1996 $ 12,340 $ 1,400 $ 1,400 $7,501,494 $(744,772) $(1,805,675) $(262,792) $ $4,703,395
COMMON STOCK
ISSUED FOR
ACQUIRED
PROPERTIES
ACQUISTION FEE 160 151,840 152,000
COMMON STOCK
ISSUED AS DEP-
OSITS AND HELD
IN ESCROW SUB-
JECT TO THE
RELATED PURCHASE
CONTRACTS (AS
AMENDED) 55 49,745 49,800
PRINCIPAL REDUC-
TION: NOTES
RECEIVABLE:
DIRECTORS 6,000 6,000
AMORTIZATION OF
UNEARNED DIREC-
TORS COMPENSA-
TION 54,000 54,000
CONVERSION OF CLASS
C COMMON STOCK TO
CLASS A COMMON
STOCK 1,400 (1,400)
CONVERSION OF CLASS
B COMMON STOCK TO
CLASS A COMMON
STOCK 1,400 (1,400)
90,000 SHARES OF
COMMON STOCK IN
TREASURY AT COST (900,000) (900,000)
PRINCIPAL REDUC-
TION:NOTES RE-
CEIVABLE:
HATFIELD 1,805,675 1,805,675
ISSUED AND CON-
TRIBUTED TO
BACHOST, L.L.C. 808 749,192 750,000
COMMON STOCK
ISSUED AS DEPO-
SIT FOR LEGAL
FE 150 97,350 97,500
REFUND OF COMMON
STOCK ISSUED AS
DEPOSIT AND HELD
PURSUANT TO RE-
LATED ADQUISTION
FEE (55) (49,745) (49,800)
DISTRIBUTIONS (1,363,719) (1,363,719)
NET LOSS (1,025,514) (1,025,514)
------- ------ ------- -------- ---------- ------------ ---------- ----------- ---------- ----------
BALANCE, DECEMBER
31, 1997 $16,258 $ 0 $ 0 $ 0 $8,499,876 $(3,134,005) $ 0 $ (202,792) $(900,000) $4,279,337
</TABLE>
The accompanying notes are an integral part 40
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Total
Class A Class B Class C Additional Earnings Related Unearned Share-
Common Common Common Paid in (Accumulat- Party Note Directors' Treasury holders'
Stock Stock Stock Warrants Capital ed Deficit) Receivable Compensation Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1997 $16,258 $ 0 $ 0 $ 0 $ 8,499,876 $(3,134,005) $ 0 $ (202,792) $(900,000) $4,279,337
AMORTIZATION OF
UNEARNED DIR-
ECTORS COMPEN-
SATION 54,000 54,000
COMMON STOCK
ISSUED FOR
ACQUIRED PRO-
PERTIES AC-
QUISITION FEE 175 114,925 115,100
COMMON STOCK
ISSUED AS COM-
PENSATION TO
EMPLOYEE 2 1,124 1,126
COMMON STOCK
ISSUED PURSU-
ANT TO SALE OF
LEASE RIGHTS 622 287,378 288,000
PRINCIPAL REDUC-
TION: NOTES
RECEIVABLE
DIRECTORS 6,000 6,000
54,400 SHARES OF
COMMON STOCK IN
TREASURY AT COST (154,247) (154,247)
COMMON STOCK
ISSUED AS DEPO-
SIT FOR LEGAL
FEES RETURNED (150) (97,350) (97,500)
NET LOSS (904,316) (904,316)
------- ------ ------- -------- --------- ------------ ---------- ----------- ----------- ----------
BALANCE, DECEMBER
31, 1998 $16,907 $ 0 $ 0 $ 0 $8,805,953 $(4,038,321) $ 0 $ (142,792) $(1,054,247) $3,587,500
</TABLE>
The accompanying notes are an integral part 41
of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Total
Class A Class B Class C Additional Earnings Related Unearned Share-
Common Common Common Paid in (Accumulat- Party Note Directors' Treasury holders'
Stock Stock Stock Warrants Capital ed Deficit) Receivable Compensation Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER
31, 1998 $16,907 $ 0 $ 0 $ 0 $8,805,953 $(4,038,321) $ 0 $ (142,792) $(1,054,247) $3,587,500
COMMON STOCK
ISSUED AS
COMPENSATION
TO EMPLOYEE 10 2,240 2,250
AMORTIZATION OF
UNEARNED DIR-
ECTORS COMPEN-
SATION 24,000 24,000
FORGIVENESS OF
BALANCE OF UN-
EARNED COMPEN-
SATION TO FORM-
ER DIRECTORS 95,195 95,195
COMMON STOCK SOLD
TO DIRECTOR 200 19,800 20,000
COMMON STOCK
REDEEMED (412) (412)
COMMON STOCK
ISSUED TO FORMER
DIRECTORS AND
CHAIRMAN 300 82,200 82,500
COMMON STOCK
ISSUED TO NEW
DIRECTORS 200 49,800 (50,000) -
COMMON STOCK
ISSUED IN PAY-
MENT OF DEBT 1,028 200,244 201,272
WARRANTS ISSUED
TO NEW INVESTOR 750,000 750,000
NET LOSS (1,972,725) (1,972,725)
------- ------ ------- -------- --------- ------------ --------- ----------- ----------- ----------
BALANCE, DECEMBER
31, 1999 $18,645 $ - $ - $750,000 $9,160,237 $(6,011,046) $ - $ (73,597) $(1,054,659) $2,789,580
</TABLE>
The accompanying notes are an integral part 42
of the consolidated financial statements.
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVTIES:
Net loss $ (1,972,725) $ (904,316) $(1,025,514)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amorti-
zation 994,849 1,068,307 861,031
Amortization of loan fees 55,207 135,086 372,772
Amortization of unearned
directors' compensation 119,195 54,000 54,000
Common stock issued as
compensation 2,250 1,126
Gain from transfer of
lease (278,862) (572,846)
Minority interest in
partnerships (150,829) (16,040) (12,592)
Impairment loss on assets
held for sale 444,000
Loss from sale of property 607,299
Common stock issued to
directors for director
fees 82,500
Common stock issued in
payment of interest 19,335
Changes in operating assets
and liabilities:
Rent receivable 186,931 (121,426) 107,832
Rent, interest and other
receivable - due from
related party 32,389 (16,670) 10,448
Prepaid and other assets (230,573) (135,967) (22,985)
Notes receivable: directors 6,000 6,000
Credit on note receivable,
related party 31,397
Accounts payable and
accrued expenses 176,358 438,077 548,341
----------- ----------- ----------
Net cash provided by (used
in) operating activities (356,676) 379,331 930,730
----------- ----------- ----------
43
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment in land, property
and equipment (211,675) (1,044,746) (10,435,232)
Investment in restricted cash 215,232 71,185 (428,806)
Long-term advances to lessee (110,090) (30,841)
Proceeds from sale of property 2,400,000
Costs of property sale (165,690)
Proceeds related to transfer
of lease 500,000
Payments related to transfer
of lease (221,138)
Reimbursement of advances to
lessee 255,841
Franchise fees (62,750)
Proceeds related to sale of
leasing rights 807,200
Payments related to sale of
leasing rights (346,354)
----------- ----------- ----------
Net cash provided by (used
in) investing activities 2,516,729 (366,964) (10,957,629)
----------- ----------- ----------
FINANCING ACTIVITIES:
Stock sold to director 20,000
Cash portion of related
party note receivable
payment 874,278
Preferred stock sold 1,500,000
Fees related to preferred
stock sale
Payment of loan fees (275,937) (834,985)
Borrowings on short-term
debt 207,000 1,345,154
Payment of short term debt (664,314) (319,213)
Borrowings on long-term
debt 1,175,000 9,682,645
Payments on long-term debt (2,179,536) (420,509) (146,300)
Long-term lease deposit 300,000
Distributions (1,363,719)
Receipt of option deposits 20,000
----------- ----------- -----------
Net cash provided by (used
in) financing activities (1,097,265) 5,094 9,857,073
----------- ----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 1,062,787 17,461 (169,926)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 66,328 48,867 218,693
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 1,129,115 66,328 48,867
============ ============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
43 (cont.)
<PAGE>
<TABLE>
<CAPTION>
Host Funding, Inc.
Consolidated Statements Of Cash Flows
For The Years Ended December 31, 1999, 1998, AND 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for interst $ 2,525,067 $ 2,522,609 $ 1,921,127
Non-cash investing activities:
Common stock issued as compensation
Class A common $ 10 $ 2 $
Additional paid in capital 2,240 1,124
Salary expense (2,250) (1,126)
Net non-cash investing act$vity $ $ $
Property & equipment additions; repairs
made by Buckhead
To certain properties
Notes and other receivable $ (265,459) $ (134,541) $
Other accrued expenses (191,570)
Land, property & equipment 457,02 134,541
Net non-cash investing actvity $ $ $
Acquisition costs funded by note payable
Other assets $ 190,000 $ $
Short term debt (190,000)
Net non-cash investing actvity $ $ $
Common stock issued in payment of interest and principal on
short term debt
Common stock $ 1,028 $ $
Additional paid in capital 200,244
Interest (19,336)
Short term debt (181,936)
Net non-cash financing actvity $ $ $
Common stock issued to former directors
and Chairman
Common Stock $ 300 $ $
Additional paid in capital 82,200
Directors fees (82,500)
Total non cash activity $ $ $
Common Stock issued to new directors
Common stock $ 200 $ $
Additional paid in capital 19,800
Notes receivable, directors (20,000)
Net non-cash investing actvity $ $ $
Common stock issued pursuant to the sale of lease rights
Common stock $ $ 622 $
Additional paid in capital 287,378
N/R: Buckhead (288,000)
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
44
Commonstock pledged to Host
Funding as security deposit
<PAGE>
<TABLE>
<CAPTION>
Host Funding, Inc.
Consolidated Statements Of Cash Flows
For The Years Ended December 31, 1999, 1998, AND 1997
(cont.) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net non-cash investing actvity $ $ $
relating to leases to Buckland
Restricted investments $ $ 288,000 $
Security deposits (288,000)
Net non-cash investing activity $ $ $
Common stock issued for Acquired Properties
Acquisition Fee
Additional paid in capital $ $ 114,925 $ 151,840
Common stock 175 160
Land, property and equipment (115,000) (152,000)
Net non-cash investing activity $ $ $
Common stock returned as deposit for legal fee
Deposits $ $ 97,500 $ (97,500)
Additional paid in capital (97,350) 97,350
Common stock 150 150
Net non-cash investing activity $ $ $
Sale of leasing rights
Buckhead stock receivable $ $ (400,000) $
Acquisition finance note receivable (212,000)
Sale of lease rights 612,000 $
Net non-cash investing activity $ $ $
Receipt of Buckhead stock
Buckhead stock receivable $ $ 400,000 $
Investment in Buckhead (400,000)
Net non-cash investing activity $ $ $
Reimbursement of capital expenditures
relating to property
Leased to Buckhead
Capital expenditure reserve $ $ 100,000 $
Note receivable, Buckhead (100,000)
Net non-cash investing activity $ $ $
Conversion of Class C common stock to
Class A common stock
Class A common stock $ $ $ 1,400
Class C common stock (1,400)
Net non-cash investing activity $ $ $
Receipt of Class A common stock in partial payment
of related party note receivable
Class A common stock held in
treasury (at cost) $ $ $ 900,000
Related party note receivable (900,000)
Net non-cash investing activity $ $ $
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
45
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Background:
Host Funding, Inc., a Maryland corporation ("Host Funding" or the "Company"),
was initially formed on December 22, 1994, and structured to qualify as a Real
Estate Investment Trust ("REIT"). The principal business of the Company is to
acquire and then lease limited service and full service hotels/motels to proven
hotel operators, which manage and operate the hotels/motels pursuant to such
leases.
On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a
California real estate venture capitalist ("MPI"), 500,000 shares of the Series
"A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A"
Preferred"), of the Company for a purchase price of $1,500,000.00. The proceeds
from the sale of the Series "A" Preferred were used by the Company to satisfy
current obligations and for working capital. The Company also issued to MPI
warrants to purchase 500,000 shares of the Class "A" Common Stock of the Company
for an exercise price of $3.00 per share, exercisable at any time for a period
of six (6) years from December 22, 1999 (the "Warrants"). Concurrently with the
purchase of the shares of Series "A" Preferred and the issuance of the Warrants,
the Company and MPI entered into an Advisory Agreement pursuant to which MPI
assumed the day to day operations of the Company and direction of new
investments on behalf of the Company.
Unless stated otherwise, the hotel properties owned by the subsidiaries of the
Company are herein referred to as the "Company Hotels" or "Company Properties."
Host Funding is listed and traded on the American Stock Exchange under the
symbol "HFD."
Summary of Significant Accounting Policies:
Operating Segments
The Company's business consists of a single operating segment, hotel ownership
and leasing, and is reliant upon revenues from its eleven hotel lease as
described in Note 2. The Company does not have revenues derived from foreign
operations
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Host Funding and its wholly owned subsidiaries, CrossHost, Inc., Host
Enterprises, Inc. and Host Ventures, Inc., an 81% ownership interest in BacHost,
LLC ("BacHost"), the accounts of the limited partnerships which own (or owned)
two Country Hearth Inns, and of which BacHost owns 99%. 19% of BacHost is owned
by an affiliate of Buckhead America Corporation.
46
<PAGE>
Land, Property, and Equipment Held for Investment; Land, Property and Equipment
Held for Sale
Buildings and improvements are stated at historical cost and depreciated over
useful lives of 35 years from the original date of acquisition using the
straight-line method. Hotel furnishings and equipment are stated at historical
cost and depreciated using primarily straight-line methods over useful lives
ranging from 3 to 7 years from the original historical date of acquisition. The
Vagabond Inn property (formerly a Super 8 Motel) located in Mission Bay,
California (the "Mission Bay Property") has been included under Land, Property
and Equipment Held for Sale, and is subject to an option agreement whereby the
lessee has the right to purchase the Mission Bay Property upon written notice.
The Company has received such notice, see Note 2 for a further description of
the pending Mission Bay Property sale.
The Country Hearth Inn located in Findlay, Ohio (the "Findlay Property") was
sold in the fourth quarter, 1999, see Note 2 for a further description of the
sale of the Findlay Property. Prior to the sale, the Findlay property was
included under Land, Property, and Equipment Held for Sale.
The Company periodically evaluates the carrying value of its real estate
properties to determine if circumstances exist indicating impairment in the
carrying value of such properties. If facts or circumstances support the
possibility of impairment, the Company will prepare a projection of the
undiscounted future cash flows from each individual property. In cases when the
Company does not expect to recover the carrying value, the Company recognizes an
impairment loss. When management identifies an asset held for sale, the Company
estimates the fair value of such assets. If in management's opinion the fair
value of the asset is less than the carrying amount of the asset, a reserve for
impairment is established. Fair value is estimated as the amount at which the
carrying asset could be bought or sold, less costs to sell.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in banks plus all
short-term investments with a maturity, at the date of purchase, of three months
or less.
Restricted CashR
Restricted cash represents cash deposited in escrow accounts under contractual
agreements for property taxes, capital improvements and other uses that are set
forth in such agreements.
Restricted Investments
Buckhead America Corporation, or its affiliates ("Buckhead"), agreed to purchase
$288,000 in Class "A" Common Stock of the Company and return such stock to the
Company to hold as security deposits (the "Buckhead Security Deposit") against
the Country Hearth Leases (defined in Note 2). As the Company is holding the
Buckhead Security Deposit, it is reflected as a restricted investment and a
security deposit obligation on the balance sheet of the Company. Since the stock
is held as a security deposit, the Company did not recognize a reduction of the
asset and correlating liability to reflect the value of the stock at December
31, 1999 in accordance with SFAS No. 115.
47
<PAGE>
Rent Receivable
Represents rent outstanding and receivable pursuant to the Percentage Leases.
Notes and Other Receivables, Sale of Lease Rights
In connection with the execution of the Country Hearth Leases, Buckhead executed
separate notes payable to Host Ventures, Inc. and CrossHost, Inc. with the net
face amount of the notes aggregating $400,000. Such notes are to be satisfied by
periodic disbursements made by Buckhead, with approval from the Company, to
satisfy obligations related to certain capital expenditures under the Country
Hearth Leases. As of December 31, 1999, Buckhead has disbursed funds in full
satisfaction of the above notes.
Loan Commitment Fees
Loan commitment fees are amortized over the terms of the loans using the
straight-line method, which approximates the effective interest rate method.
Accumulated amortization of loan fees totaled approximately $755,000 and
$703,000 as of December 31, 1999 and 1998, respectively.
Franchise Fees
Franchise fees are amortized on a straight-line basis over the life of the
franchise agreements. Accumulated amortization of franchise fees totaled
approximately $28,000 and $21,000 as of December 31, 1999, and 1998,
respectively.
Revenues
The Company recognizes base and contingent lease revenue on an accrual basis as
earned in accordance with the terms of the lease agreements.
Fair Value of Financial Instruments and Concentration of Credit Risk
Statement of Financial Accounting Standards ("SFAS") 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements.
The following disclosure of estimated fair value was determined by available
market information and appropriate valuation methodologies. However,
considerable judgement is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material affect on the
estimated fair value amounts.
Notes and Other Receivables: Sale of Lease Rights; and Long-term Advances
to Lessees are carried at amounts which approximate their value.
The carrying value of long-term debt approximates fair value as the related
interest rate is variable and approximates market rates.
48
<PAGE>
Seasonality
The hotel industry is seasonal in nature. Revenues are generally greater in the
first and second quarters of a calendar year. Seasonal variations in revenues at
the hotels may cause quarterly fluctuations in he Company's lease revenue.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
their reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The Company has not qualified as a REIT under Sections 856 through 860 of the
Internal Revenue Code for the three years ended December 31, 1999. Under the
Internal Revenue Code, if certain requirements are not met in a given year, a
corporation will be subject to Federal Income Tax with respect to all income,
including that which is distributed to Shareholders. Therefore, the Company
records its provision for income taxes in accordance with SFAS No. 109. Under
the liability method of SFAS 109, deferred taxes are determined based on the
difference between the financial statement amounts for tax and financial
reporting purposes.
NOTE 2: REAL ESTATE INVESTMENTS
The Company's acquisition of hotel properties for the years 1999, 1998, 1997,
and 1996 may be summarized as follows:
Purchase Cost Number of Number
Year (in Thousands) Hotel Properties of Rooms
---- -------------- ---------------- --------
1996 $16,664 5 430
1997 11,530 3 240
1998 - 0 - - 0 - - 0 -
1999 - 0 - - 0 - - 0 -
As of December 31, 1999, the Company owned 11 Company Hotels, located in 8
states, and comprised of 850 rooms. The Company Hotels are subject to leases as
described in Note 5.
The purchase cost of all 11 hotel properties totaled approximately $24,528,000,
including the purchase cost related to one property held for sale of
approximately $2,528,000.
The purchase costs above include purchase prices, as well as related commissions
and closing costs.
In April, 1996, the Company acquired a 117 room Super 8 motel located in San
Diego, California from Mission Bay Super 8, Ltd., a California limited
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partnership. The acquisition price of $2,810,000 was funded by the Company
issuing 252,049 shares of Class "A" Common Stock at a stated value of $10.00 per
share ($2,520,490), plus cash of $290,000.
In September 1996, the Company formed CrossHost, Inc., a Maryland corporation
("CrossHost"), as a wholly owned, REIT qualified subsidiary. Upon formation,
CrossHost acquired four (4) Sleep Inn properties located in Destin, Sarasota,
and Tallahassee, Florida and Ocean Springs, Mississippi. This purchase was
completed with a loan facility (the "Initial CrossHost Facility") provided by
Credit Suisse First Boston, LLC ("First Boston").
In March 1997, the Company formed Host Ventures, Inc., a Maryland Corporation
"Host Ventures"), a wholly owned, special purpose subsidiary of Host Funding.
Upon formation, Host Ventures entered into a loan (the "Host Ventures Loan
Facility") totaling $8,725,000 and CrossHost entered into a loan facility (the
"CrossHost Loan Facility") totaling $13,000,000. Host Ventures used a portion of
the Host Ventures Loan Facility to acquire a Super 8 motel located in Flagstaff,
Arizona. Additionally, CrossHost assigned, transferred, and conveyed the Sleep
Inn properties located in Sarasota, Florida and Ocean Springs, Mississippi to
Host Ventures, and satisfied the Initial CrossHost Facility.
On October 21, 1997, the Company purchased from Findlay Equity Partners, an Ohio
general partnership, a Country Hearth Inn (the "Findlay Property") located in
Findlay, Ohio and from Auburn Equity Partners, an Indiana general partnership, a
Country Hearth Inn (the "Auburn Property") located in Auburn, Indiana
(collectively, the "Country Hearth Inns"), including an aggregate of
approximately 150 rooms, which increased the Company's real estate portfolio to
twelve hotel properties containing approximately 922 rooms.
The Company completed the purchase of the Country Hearth Inns by forming two
separate, special purpose limited partnerships with Buckhead America
Corporation, a publicly traded hotel company, or its affiliates ("Buckhead").
Wholly owned subsidiaries of Host Funding (Host Findlay GP, Inc. and Host Auburn
GP, Inc.) own 1% of the respective limited partnerships and BacHost, L.L.C.
(BacHost) owns 99% of each limited partnership. Host Funding owns 81% of BacHost
and Buckhead owns 19% of BacHost. Each limited partnership leased its respective
Country Hearth Inn to Buckhead (or to affiliates of Buckhead) pursuant to a
separate percentage lease agreement (collectively, the "Country Hearth Leases").
Buckhead also manages the hotel properties and holds the franchise for each of
the Country Hearth Inns outside of the limited partnerships (collectively, the
"Country Hearth Franchise Agreements").
In January, 1999, the Company effectively transferred leasing and operation of
the Company Hotel located in Mission Bay, California (the "Mission Bay
Property") to RPD Mission Bay, LLC, an affiliate of Vagabond Inns ("RPD"), which
in turn, pursuant to a services agreement, transferred the day-to-day management
of the Mission Bay Property to RPD 18, LLC, also an affiliate of Vagabond Inns,
a proven hotel operator located in California. RPD thereafter terminated the
prior franchise agreement with Super 8 Hotels and converted the Mission Bay
Property to a Vagabond Inn. In consideration for such lease transfer, RPD 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 in part to pay portions of certain
termination fees to the previous franchisor, to pay the termination fee to the
previous lessee, and for general corporate purposes.
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The Company also granted RPD an option to purchase the Mission Bay Property for
a base acquisition price of $3,225,000. The base acquisition price incrementally
reduces on a monthly basis through application of portions of the base rent
payments made to the Company by RPD under the Lease relating to the Mission Bay
Property (the "RPD Option"). RPD exercised the RPD 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 through the
Subordination, Non-Disturbance, & Attornment Agreement previously executed by
the Special Servicer. Upon giving notice to the Master Servicer of the exercise
of the RPD Option and requesting a release of the deed of trust lien encumbering
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 or, in the alternative, pursuing legal
action against the Master Servicer.
Effective November 12, 1999, the Company sold the Findlay Property for a cash
purchase price of $2,400,000.00. The cash proceeds were used to pay the first
lien indebtedness on the Findlay Property and to satisfy the seller finance note
held by the prior owner of the Findlay Property, including the judgment lien
held by the prior owner. The Company did not receive any net proceeds from the
sale of the Findlay Property.
Approximately $202,000 in percentage rentals were paid to the Company in 1999
and are included in net income. Approximate minimum future base rents (excluding
contingent rents) due under the operating leases are as follows:
2000 $ 3,024,700
2001 $ 3,024,700
2002 $ 3,024,700
2003 $ 3,024,700
2004 $ 3,024,700
Thereafter $29,187,308
-----------
Total $44,310,808
NOTE 3: LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN
NOTES PAYABLE)
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Long-Term Debt:
The following presents a summary of the long-term debt of Host Funding and its
subsidiaries as of December 31:
1999 1998
Host Ventures first mortgage
note payable, collateralized
by the properties owned by Host
Ventures, interest of 8.12% per
annum, interest and principal
payable in monthly installments
of $70,765, due June, 2023 $ 8,905,472 $ 9,016,516
Mezzanine loan, collateralized
by the stock in Host Ventures,
interest at LIBOR plus 500 basis
points (LIBOR was ___at 12/31/99),
payable in monthly installments
of $17,184, due in June of 2003 $ 608,718 $ 750,030
First mortgage note payable,
collateralized by the properties
owned by CrossHost, interest at
9.46% per annum, interest and
principal payable in monthly
installments of $120,838, due in
March 2017 $ 12,388,055 $ 12,636,889
First mortgage payable,
collateralized by the property
owned by B-H Auburn, interest at
10.78% per annum, interest and
principal payments due in
monthly installments of $17,405,
due in August, 2016 $ 1,709,053 $ 1,740,855
First mortgage note payable,
collateralized by the property
owned by B-H Findlay, interest
at 10.78% per annum, interest
and principal payable in monthly
installments of $18,402, originally
due in August, 2016, fully
satisfied in the 4th quarter, 1999 $ 0 $ 1,646,547
--------------- --------------
$ 23,611,298 $ 25,790,837
=============== ==============
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Short Term Debt/Notes Payable (Including Default on Certain Notes):
In 1998 the Company entered into a note payable in the original principal amount
of $141,000 to Beta Construction for certain improvements to the Sleep Inn
property located in Tallahassee, Florida. The note is amortized over 24 months,
with a maturity date of November, 2000, and an annual interest rate of 9.25%. In
May, 1999 the Company discontinued monthly payments of interest and principal as
an offset against rental amounts owed to the Company by Capital Circle Hotel
Corporation ("Capital Circle") related to the Tallahassee property. The amount
offset by the Company approximated the principal balance the Company owes to
Capital Circle. The Company has received no notice of default.
In May 1999, the Company entered into negotiations to purchase certain
properties. In connection with the negotiations, the Company executed an
application with a lender to obtain financing for the 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. In
September, 1999 an additional $50,000 was advanced by the same unaffiliated
party in partial payment of certain legal fees. Approximately $140,000 in
principal and interest was repaid by the issuance of 69,781 shares of the
Company's Class "A" Common Stock in September, 1999. Repayment of the remaining
amount of approximately $56,746 is evidenced by two notes payable to the
unaffiliated party. Interest accrues on each outstanding balance at an annual
interest rate of 12%. The notes matured on December 31, 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 at a per share price of
$2.00 per share.
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 (collectively, the "Host Guaranty").
The Country Hearth Notes are further secured by 90,000 shares of the Class "B"
Common Stock of the Company (the "Pledged Stock").
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 Findlay Country Hearth
Inn and the Auburn Country Hearth Inn. 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 currently held by
the Sellers based upon a closing price of $2.00 per share on October 21, 1998.
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In April 1999, 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 demanded
payment of the Country Hearth Notes and the Price Protection amounts in the
aggregate amount of approximately $1,550,000. On July 30, 1999, the Franklin
County Court entered a judgement for the plaintiffs in both the Findlay
Complaint and the Auburn Complaint.
In November, 1999 the Country Hearth Note related to the Findlay Property was
satisfied by the payment of $650,000 from the proceeds of the sale of the
Findlay Property. The Host Guaranty and the Pledged Stock continue to secure the
obligations of Auburn under the Auburn Note and the Price Protection Amount in
the approximate amount of $800,000, as of December 31, 1999.
Five Year Debt Maturity Schedule:
Aggregate principal payments under long-term and short-term debt for the next
five (5) calendar years ended December 31, 2004 and thereafter are as follows:
2000 $ 960,000
2001 638,000
2002 703,000
2003 661,000
2004 562,000
Thereafter 20,473,988
-----------
Total $23,997,988
NOTE 4: PREFERRED STOCK
On December 20, 1999, the Company filed Articles Supplementary with the Maryland
State Department of Taxation designating 2,000,000 shares of the authorized but
unissued shares of Preferred Stock of the Company as Series "A" Convertible
Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"). Of the
2,000,000 shares of the Series "A" Preferred designated by the Company,
Mackenzie Patterson, Inc., a California real estate venture capitalist ("MPI"),
purchased 500,000 shares for a purchase price of $3.00 per share. MPI purchased
the shares of Series "A" Preferred on December 22, 2000 in an exempt transaction
pursuant to Rule 506 of Regulation D under the Securities Act of 1933. The
holders of the Series "A" Preferred are entitled to participate pro rata with
the holders of shares of the Class "A" Common Stock of the Company with respect
to dividend distributions and are entitled to a liquidation preference of $4.00
per share over the holders of shares of Class "A" Common Stock, upon the
voluntary or involuntary dissolution, liquidation or winding up the affairs of
the Company. The holders of shares of Series "A" Preferred also have the right,
exercisable at any time after December 23, 2002, to convert such shares into
shares of Class "A" Common Stock on a one-for-one basis (the "Conversion
Ratio"), or to require the Company to redeem all or any part of the shares of
Series "A" Preferred at the redemption price of $4.00 per share plus any accrued
and unpaid cash dividends. The Conversion Ratio is subject to adjustment upon
the occurrence of certain events, including, without limitation, issuance of
additional shares of Class "A" Common Stock, stock dividends, stock splits,
mergers, reclassifications of stock, or a recapitalization of the Company. The
holders of shares of Series "A" Preferred are entitled to the number of votes
equal to the number of shares of Class "A" Common Stock into which a share of
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Series "A" Preferred is convertible and are further entitled to vote together as
a single group with the holders of Class "A" Common Stock on all matters
submitted or required to be submitted to the Company's common stockholders for
approval. The holders of Series "A" Preferred, voting together as a single
voting group, have the right to elect, at each annual stockholders meeting of
the Company, two (2) of the five (5) members of the Board of Directors of the
Company.
NOTE 5: SHAREHOLDERS' EQUITY
Host Funding is authorized to issue 55,000,000 shares of Common Stock,
consisting of 50,000,000 shares of Class "A" Common Stock, $.01 par value per
share, and 4,000,000 shares of Class "B" Common Stock, $.01 par value per share,
and 1,000,000 shares of Class "C" Common Stock, $.01 par value per share. The
Company is also authorized to issue 20,000,000 shares of Preferred Stock, $0.01
par value per share.
As of December 31, 1999, the Company had issued and outstanding two series of
warrants designated "Series A Warrants" and "Series B Warrants." The Series A
Warrants provide warrants to purchase 225,000 shares of Host Funding's Class "A"
Common Stock at $9.90 per share, and expires on February 2, 2000. The Series B
Warrants provide warrants to purchase 225,000 shares of the Company's Class "A"
Common Stock at $10.80 per share, and expire on February 2, 2001. There are
additional provisions in the Series A Warrants and the Series B Warrants that
allow certain limited registration rights and pro-rata treatment upon the
occurrence of certain events, including, without limitation, stock splits,
mergers, reclassifications of stock, or a recapitalization of the Company. The
Series A Warrants expired on February 2, 2000.
The Company also issued Warrants to MPI to purchase 500,000 shares of Class "A"
Common Stock of the Company for an exercise price of $3.00 per share (the
"Warrants"). The Warrants are exercisable at any time after the date of issuance
with an expiration date of December 21, 2005. The Warrants are subject to
exercise price adjustments upon the occurrence of certain events, including,
without limitation, stock dividends, stock splits, mergers, reclassifications of
stock, or a recapitalization of the Company. The Company placed a value of $1.50
per share on the Warrants for an aggregate value of $750,000. The value was
determined using the Black-Scholes Option Pricing Model. The aggregate value has
been capitalized as a deferred advisory fee and will be amortized on a straight
line basis over three years.
Pursuant to the terms and conditions of a Registration Rights Agreement (the
"Registration Agreement") between the Company and MPI, the holders of the Series
"A" Preferred and the Warrants are entitled to certain demand and "piggy-back"
registration rights relating to the shares of Class "A" Common Stock issuable
upon conversion of the Series "A" Preferred or upon exercise of the Warrants
(the "Underlying Common Stock"). The Registration Agreement provides that at any
time after the date of issuance the holders of at least twenty-five percent
(25%) of the Series "A" Preferred and the Warrants may make in the aggregate, up
to four (4) written requests to register the number of shares of Underlying
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Common Stock set forth in each written request. In addition, if the Company
proposes to file a registration statement under the Securities Act of 1933 with
respect to an offering by the Company of securities for its own account (other
than a registration statement on Form S-4 or Form S-8), the holders of Series
"A" Preferred and the Warrants shall be entitled to participate in the Company
registration, subject to the approval of the Company underwriter.
Diluted earnings per share for the year ended December 31, 1999 has not included
the effect of conversion of Series "A" Preferred Shares nor the Warrants since
conversion would be antidilutive.
On or about April 26, 1996, the Company sold to each independent director then
in office 10,000 shares of Class "A" Common Stock at a price per share equal to
$10 per share. The purchase price ($300,000) was paid through the delivery of a
five year promissory note executed in favor of Host Funding by each purchaser,
which bears interest, payable quarterly, at a fixed rate equal to 7% per annum.
The company has agreed to forgive the promissory notes issued in exchange for
the shares of common stock in increments of 18% of the principal amount per
annum for each year the maker remains a director of the Company. The Company
also subsequently agreed to forgive quarterly interest payments and an
additional 2% of the principal amounts of the promissory notes from each
director in lieu of payment of director's fees to the Directors. The Company
suspended directors fees for fiscal years 1998 and 1999. The shares of Common
Stock purchased by each independent director are pledged to the Company to
collateralize payment of the promissory note, which is non-recourse to the
maker, except for 10% of the principal amount.
In the second quarter of 1999, the Board approved the release of the
outstanding balances of the notes receivable from Mr. Charles Dunn and Mr. Don
Cockroft as a result of Mr. Dunn and Mr. Cockroft resigning their seats on the
Board. The Board also approved the issuance of 10,000 shares each to Messrs.
Dunn and Cockroft, as well as Mr. William Birdsall.
Concurrently with the resignation of Messrs. Dunn and Cockroft, the Board
appointed Mr. Robert Dixon and Mr. Brian Rodgers as directors of the Company.
The Board approved the issuance of 10,000 shares each to Messrs. Dixon and
Rodgers. Payment of such shares are evidenced by promissory notes in the amount
of $25,000 due from Mr. Dixon and Mr. Rodgers, under the same terms and
conditions as the director notes described above.
NOTE 6. COMMITMENTS AND CONTINGENCIES
REIT Status:
The Company, as a requirement under the Code to elect REIT status, must have no
more than five (5) shareholders who own no more than 50% of the common stock,
common stock equivalents, or other forms of equity outstanding. The Company has
not met this requirement as of December 31, 1999. Under the Code, the Company is
allowed a six-month exemption after the tax year in which the election is to be
effective to meet the requirement. Management of the Company does not anticipate
that such requirement will be met during fiscal year 2000.
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Leases:
In General
All of the Company Hotels are leased and operated pursuant to lease agreements
(the "Leases"), excluding the Company Hotel located in Tallahassee, Florida (the
"Tallahassee Property") which is managed and operated by BAC Hotel Management,
Inc., a wholly owned subsidiary of Buckhead America Corporation pursuant to a
management agreement. Except for the Company Hotels located in Flagstaff,
Arizona (the "Flagstaff Property") and Mission Bay, California (the "Mission Bay
Property"), the Company Hotels are leased and operated by either Buckhead
America Corporation (as to the Company Hotel located in Auburn, Indiana only) or
BAC Hotel Management, Inc., a wholly owned subsidiary of Buckhead America
Corporation (NASDAQ: BUCK). The remaining Company Hotels are leased, operated
and/or managed by Crossroads Hospitality Tenant Company, LLC (Flagstaff
Property) and RPD Mission Bay, LLC and RPD 18, LLC (Mission Bay Property).
Except as otherwise set forth herein, each Lease generally contains the
provisions described below.
Lease TermsLease Terms
Each Lease has a term of fifteen (15) years (other than the Lease relating to
the Mission Bay Property), which has an initial term of twenty (20) years,
subject to earlier termination upon the occurrence of certain contingencies
described in the Leases including, as applicable, provisions relating to damage
to the Company Hotels, condemnation of the Company Hotels, defaults by the
Company or the lessee thereunder, lack of compliance by the lessee with certain
of the terms of the associated loan documents, and termination on disposition of
the Company Hotels. Other than the Leases with respect to the Mission Bay
Property and the Lease in effect with regard to the Company Hotel located in
Auburn, Indiana (the "Auburn Property"), the term of each Lease may, at the
option of the lessee, be extended for two (2) or more five (5) or ten (10) year
periods, as more particularly described in such Leases.
Amounts Payable Under the Leases Amounts Payable Under the Leases
During the term of each Lease, the lessee is obligated to pay (i) base rent,
(ii) percentage rent, (iii) all personal property taxes relating to lessee's
personal property, ground rents, water, sewer or other rents and charges,
excises, tax inspection, authorization or similar fees and all other
governmental charges (the "Impositions"), except the Company is obligated to pay
real property taxes on all Company Hotels except for the Mission Bay Property),
and except that the lessee of the Mission Bay Property is not required to pay
percentage rent, (iv) every fine, penalty, interest and cost for non-payment or
late payment of base rent, percentage rent, or the Impositions and (v) franchise
fees as described below. Base rent accrues and is required to be paid monthly,
and, except for the Leases in effect with respect to the Auburn Property and the
Mission Bay Property, base rent is subject to potential reduction if a hotel or
hotels similar in nature to the Company Hotel in question are or will be
constructed in an area in the general vicinity of such Company Hotel (the
"Competitive Set"). Percentage rent is based on percentages of gross revenues
for each of the Company Hotels, is due and payable quarterly, and (a) except for
the Leases in effect with respect to the Auburn Property and the Mission Bay
Property, percentage rent is subject to potential reduction pursuant to the
Competitive Set, (b) except for the Leases in effect with respect to the Auburn
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Property and the Mission Bay Property, percentage rent is subject to potential
reduction to the extent, at any time during the first four (4) years of the
Lease term, the Company Hotel cash flow is less than the base rent, and (c)
percentage rent payable with regard to the Lease in effect with respect to the
Auburn Property is subject to a "CPI" adjustment factor.
Prohibition on Ownership and Operation of Additional Hotels
Generally, all of the Leases contain provisions prohibiting the Company from
owning, or having any interest in, any hotel or motel properties within a five
(5) mile radius of the Company Hotel in question, and prohibiting the lessee
from owning, operating or managing any hotel or motel properties within a five
(5) mile radius of such Company Hotel.
Maintenance, Modifications and Capital Expenditures
Generally, the lessee, at its expense, is required to maintain the Company
Hotels in good order and repair, except for ordinary wear and tear, and to make
non-structural repairs, foreseen and unforeseen, and ordinary repairs, which may
be necessary and appropriate to keep the Company Hotels in good order and
repair. The Company is, at its expense, required to maintain the structural
elements of the Company Hotels, including the roof, except, with respect to the
Mission Bay Property, the lessee is, at its expense, responsible for structural
maintenance.
The lessee, at its expense and subject to approval by the Company, may make
non-capital and capital additions, modifications or improvements to the hotels,
provided that such action does not significantly alter the character or purposes
of the hotels or significantly detract from the value or operating efficiencies
of the hotels. All such alterations, replacements and improvements become the
property of the Company upon termination of the Leases. The Company owns
substantially all personal property (other than inventory, linens and other
non-depreciable personal property) not affixed to, or deemed a part of, the real
estate or improvements.
Under the Leases, the Company is required to fund into replacement reserve
accounts (the "Reserve Accounts") amounts ranging from four percent (4%) to six
percent (6%) of gross room revenues for the preceding month. Deposits in the
Reserve Accounts are used to fund replacements of furniture, fixtures and
equipment, for capital additions to the Company Hotels, and, as appropriate, for
reconstruction or restoration of the Company Hotels incident to casualty damage
or condemnation. Expenditures from the Reserve Accounts generally must be
jointly approved by the Company and the lessee.
With respect to the Company Hotels leased to Buckhead America Corporation (the
Auburn Property only) or BAC Hotel Management, Inc., a wholly owned subsidiary
of Buckhead America Corporation, the Company has previously entered into
agreements with such parties generally requiring the lessee to, at its expense,
make various capital improvements to such Company Hotels.
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Insurance on Company Hotels
The lessee is required to pay for all insurance on the Company Hotels, with
extended coverage, including business interruption, casualty, comprehensive
general public liability, workers' compensation and other insurance, and must
name the Company as the insured or an additional named insured.
Indemnification
Under each of the Percentage Leases, the lessee is obligated to indemnify and
hold harmless, the Company from and against all liabilities, costs and expenses
(including reasonable attorneys' fees and expenses) incurred by, imposed upon or
asserted against the Company; provided, however, that such indemnification will
not be construed to require the lessee to indemnify the Company against the
Company's own grossly negligent acts or omissions or willful misconduct.
First Right of RefusalFirst Right of Refusal
With the exception of the Lease relating to the Mission Bay Property, each of
the Leases contains provisions whereby, if the Company receives a bona fide
third party offer to purchase a Company Hotel, the lessee may purchase the
Company Hotel in question at the same price and otherwise upon the same terms
and conditions as are contained in any such bona fide offer.
Security DepositsSecurity Deposits
With the exception of the Lease relating to the Mission Bay Property, each of
the Leases requires the lessor, as security for the performance by the lessee of
its obligations under the Leases, to deliver to the Company a security deposit.
In the instance of the Leases with Buckhead America Corporation or BAC Hotel
Management, Inc., its wholly owned subsidiary, each such deposit is in the form
of shares of the Company's Class "A" Common Stock, and with regard to the Lease
in effect for the Company Hotel located in Flagstaff, Arizona, the security
deposit is in the form of cash.
Certain Termination RightsCertain Termination Rights
Other than the Lease with regard to the Company Hotel located in Miner,
Missouri, the Leases with BAC Hotel Management, Inc., a wholly owned subsidiary
of Buckhead America Corporation, provide the lessee the right to, without cause,
terminate either one (1) or two (2) of such Leases after the first (1st) but
prior to the fifth (5th) anniversary of the Lease term, but, as to the second of
such Lease terminations, as applicable, only upon the payment to Lessor of a
termination fee more specifically set forth therein. Additionally, the Lease
with respect to the Company Hotel located in Flagstaff, Arizona, provides lessee
the right to, without cause, terminate the Lease at any time after the first
(1st) anniversary of the Lease term, but only upon forfeiture of the lessee's
security deposit, and, notwithstanding the foregoing, additionally provides the
lessee the one-time right to terminate the Lease without cause (and without
forfeiture of the lessee's security deposit), effective as of the fifth (5th)
anniversary of the Lease term.
59
<PAGE>
Lease Cancellation FeesLease Cancellation Fees
With the exception of the Lease regarding the Company Hotel located in Mission
Bay, California, each of the Leases contains provisions generally requiring the
Company to pay a termination fee to lessee if a Company Hotel is sold during the
Lease term and the purchaser thereof does not assume the obligations of the
Company under the associated Lease.
Franchise Agreements
The Company has been granted franchise license agreements from Super 8 and Sleep
Inns for terms expiring in 2005 and 2011, respectively. Pursuant to the terms of
the franchise agreements, the Company is required to pay royalty fees and
advertising fees of 5% to 4% and 3% to 1.3%, respectively, and reservation fees
due under the Sleep Inn agreements of 1.75%, of gross room revenue. The
responsibility for payment of the fees has been assigned to the lessees pursuant
to the Percentage Leases.
Findlay and Auburn have each been granted franchise license agreements from
Buckhead under terms and conditions that are typical of the hotel industry and
substantially similar to the franchise agreements relating to the Super 8 Hotels
and the Sleep Inn Hotels currently owned directly or indirectly by the Company.
Employment Agreements:
Host Funding has entered into Employment Agreements (the "Employment
Agreements") with Michael S. McNulty, President; and Bona K. Allen, Chief
Financial Officer, for a term of three years from February 1997. The Employment
Agreements provide for combined base salaries of $183,000, with a minimum bonus
of 15% up to a maximum of 50%, based upon a prescribed formula in the Employment
Agreements, of base compensation in the first year. The Employment Agreements
also provide for base salary increases based upon prescribed increases in the
Company's asset size. The Employment Agreements are terminable by the Company,
for cause, upon thirty (30) days' written notice, or upon death or disability,
with severance payments due employees ranging from nothing or two years of
current base salary then in effect.
Mr. McNulty resigned as a director of the Company effective as of December
23, 1999 and as President of the Company effective as of December 31, 1999. Mr.
McNulty's employment agreement terminated by its terms effective as of January
31, 2000. Mr. McNulty was compensated through January 31, 2000, the date of
termination of his employment agreement, and received no further severance. The
Company and Mr. Allen have agreed to terminate Mr. Allen's employment agreement
effective as of March 31, 2000. Mackenzie Patterson, Inc., the external advisor
of the Company, has agreed to retain Mr. Allen on a month-to-month basis as a
financial consultant to MPI. Mr. Allen will provide consulting services to MPI
on financial matters relating to the Company. The Company has agreed to pay Mr.
Allen a one-time severance payment in the amount of $25,000 with respect to the
termination of Mr. Allen's employment agreement. The severance payment is due
and payable on March 31, 2000.
60
<PAGE>
Host Funding, Inc. 1997 Incentive Plan:
At the Annual Meeting of the Stockholders of Host Funding, Inc., the
Stockholders approved the Host Funding, Inc. 1997 Incentive Plan (the "1997
Plan"), pursuant to which certain individuals, including officers and directors
of the Company, may be granted awards for incentive stock options, non-statutory
stock options, stock awards, performance shares and incentive awards. No such
awards have been awarded for the years ended December 31, 1999, 1998 and 1997.
Litigation:Litigation:
Five Lion, Inc. and Lion Investment Limited Partnership vs. Host Funding,
Inc.; United States District Court; District of Minnesota, Fifth Division; court
file number 98-2154-MJD/RLE.
The Company was named as a defendant in the preceding complaint filed on
September 24, 1998. The complaint alleges, among other things, that the Company
is obligated to reimburse $150,000 which the plaintiffs paid to the Company for
certain due diligence items pursuant to a letter agreement dated February 13,
1998. On January 20, 2000, the plaintiffs obtained a summary judgment for breach
of contract with regard to a portion of their claims. It is anticipated that the
Company will appeal the summary judgment; however, the Company has accrued the
full $150,000.00 in the consolidated financial statements of the Company.
Auburn Equity Partners vs. BH-Auburn, L.P. and Host Funding, Inc., Case No.
99 CVE-04-2725, and Findlay Equity Partners vs. BH-Findlay, L.P., Case No.
99CVH-04-2726.
The Company was named as a defendant in the preceding complaints filed on April
1, 1999. The complaints were filed based upon the default by BH-Auburn, L.P. and
BH-Findlay, L.P. (collectively, the "Partnerships") of their respective payment
obligations under two seller promissory notes (the "Country Hearth Notes")
delivered to the respective plaintiffs in partial payment of the purchase price
for the Company Hotels located in Findlay, Ohio and Auburn, Indiana. The Company
was named as a defendant in both complaints based upon the Company's guaranty of
the payment of the Country Hearth Notes. On July 30, 1999, a judgment was
rendered in favor of the plaintiffs against the Partnerships and the Company in
the approximate aggregate amount of $1,550,000.00. The obligations of B-H
Findlay under the seller promissory note, both principal and interest, related
to the Company Hotel located in Findlay, Ohio in the approximate settlement
amount of $650,000.00 were satisfied in full from the proceeds of the sale of
the property. The Company guaranty continues to secure the obligations and
judgment lien of B-H Auburn, L.P., in the approximate amount of $800,000.00.
Vance Linge vs. Joseph Clarence Kuntz; Vira Louis Shamman; Louis Shamman;
RPD Hotels 18, LLC/Vagabond Inns; City of San Diego; CrossHost, Inc.; et al,
Case No. 730228.
CrossHost, Inc., a wholly owned subsidiary of the Company, and RPD Mission Bay,
LLC, and RPD Hotels 18, LLC ("RPD"), the Company's operators of the Company
Hotel located in Mission Bay, California, were named as defendants in the
preceding complaint filed August 4, 1999. The complaint alleges, among other
things, that inadequate safety precautions led in part to the occurrence of a
traffic accident and related personal injuries on the public thoroughfare
adjacent to the Company Hotel. The lawsuit is being defended on behalf of
CrossHost, Inc. by the insurance carrier of RPD.
61
<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 operations.
Advisory Agreement:
Effective January 1, 2000, the Company entered into an Advisory Agreement with
MacKenzie Patterson, Inc. ("MPI") pursuant to which the Company engaged MPI as
the external advisor of the Company. Under the Advisory Agreement, the Company
appointed MPI as the Company's exclusive agent to supervise the day-to-day
operations of the Company, including, overseeing the lessees of the Company
Hotels, serving as the Company's advisor and consultant in connection with the
administrative, policy and investment decisions made by the Board of Directors
of the Company, and performing or supervising the various administrative and
accounting functions necessary for the management of the Company. The Company
agreed to pay MPI an advisory fee of $350,000 per year for the advisory and
administrative services provided by MPI under the Advisory Agreement. In order
to implement the responsibilities of MPI under the Advisory Agreement, the
principal offices of the Company were relocated to Moraga, California in
January, 2000. Mr. C.E. Patterson, Chief Executive Officer of the Company, and
Mr. Glen Fuller, Chief Operating Officer of the Company, are also executive
officers and directors of MPI. MPI is also the direct or indirect beneficial
owner of 621,838 shares of the Class "A" Common Stock and 500,000 shares of the
Series "A" Convertible Preferred Stock of the Company.
NOTE 6. INCOME TAXES
The primary components of the Company's deferred income tax liabilities and
assets as of December 31, 1999 were as follows:
1999 1998 1997
---- ---- ----
Deferred Tax Liabilities
Depreciation $ 250,000 $ 360,000 $ 284,000
Total Deferred Tax Liabilities $ 250,000 $ 360,000 $ 284,000
========= =========== ==========
Deferred Tax Assets
Accrued Expenses $ 67,000 $ 67,000 $ 109,000
Net Operating Loss $ 1,677,000 $ 825,000 $ 499,000
Impairment Loss $ $ 173,000 $
-------------- ----------- ----------
Total Deferred Tax Assets $ 1,744,000 $1,065,000 $ 608,000
=========== ========== ==========
Net Deferred Tax Assets $ 1,494,000 $ 705,000 $ 324,000
Valuation Allowance $ (1,494,000 $( 705,000) $( 324,000)
------------ ----------- ----------
-0- -0- -0-
============================================
At December 31, 1999, the Company had approximately $ 4,300,000 of net
operating loss carry forwards, which will expire -- between December 31, 2010
and 2019.
62
<PAGE>
In assessing the realizability of a deferred tax asset, management considers
whether it is more likely than not that some portion or the entire deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not that the Company will not realize the benefits of these
deductible differences.
Income tax benefit differs from the amount computed by applying the statutory
rate of loss before tax, due to the valuation allowance. The Company and its
subsidiaries file a consolidated federal income tax return. Due to the Company's
net operating loss position and the valuation allowance on the net deferred tax
assets, the Company will not recognize a current or deferred tax
expense/benefit.
The Company, as a requirement under the Internal Revenue Code (the "Code") to
elect REIT status, must have no more than five (5) shareholders, who own no more
than 50% of the common stock, common stock equivalents, or other forms of equity
outstanding of the Company. The Company had expected to make an election to be
treated as a REIT under the provisions of the Code beginning with the 1996 year.
As a result, the Company would not be subject to federal income tax on its
taxable income at corporate rates to the extent it distributes annually 95% of
its taxable income to its shareholders and complies with certain other
requirements. The Company did not satisfy the REIT shareholder requirement as of
June 30, 1997, and therefore, did not elect to qualify as a REIT during the 1996
tax year and was subject to the corporate tax provisions. However, at that date,
the Company was in a net operating loss position, and has a net deferred tax
asset under SFAS 109, Accounting for Income Taxes, that has been fully reserved.
The Company's decision not to elect REIT qualification will not adversely affect
the stockholders of the Company in that the Company will have no taxable income
for the 1999 tax year.
63
<PAGE>
<TABLE>
<CAPTION>
HOST FUNDING, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
SCHEDULE III
Gross amount at which
Initial Costs Costs Subsequent which Carried at close
to Company to Acquisition of period
---------------------------- ----------------------- -----------------------------
Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements
- ----------- ------------ ---------- -------------- --------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Super 8, Rock Falls, IL $ (A) 131,627 $ 491,711 - $ 5,521 $ 131,627 $ 497,232
Super 8, Somerset, KY (A) 170,000 449,541 - 5,017 170,000 454,558
Super 8, Miner, MO (A) 187,660 461,494 - 17,655 187,660 479,149
Super 8, Poplar Bluff, MO (A) 153,000 410,515 - 23,534 153,000 434,049
Super 8, San Diego, CA (A) 702,500 1,826,500 - 86,230 702,500 1,912,730
Sleep Inn, Ocean Springs, MS (B) 924,162 2,402,821 - 13,247 924,162 2,416,068
Sleep Inn, Destin, FL (B) 993,429 2,382,915 - 499,278 993,429 2,882,193
Sleep Inn, Sarasota, FL (B) 834,990 2,170,975 - 288,784 834,990 2,459,759
Sleep Inn, Tallahassee, FL (B) 710,679 1,847,767 - 231,054 710,679 2,078,821
Super 8, Flagstaff, AZ (A) 1,321,800 3,436,680 - 29,941 1,321,800 3,466,621
Country Hearth Inn, Auburn, IN 1,709,053 229,896 2,287,655 10,327 208,820 240,223 2,496,475
------------- -------------- ------------- --------- ------------ ---------- ------------
$23,002,580 $6,359,743 $18,168,574 $10,327 $1,409,081 $6,370,070 $ 19,577,655
============= =============== ============= ======== ============= ============ =============
Land $ 6,370,070
Furniture &
equipment 3,579,969 1,153,725
------------ -------------
$29,527,694 $ 3,108,032
Accumulated
Depreciation & Year of Date
Description (cont.) Amortization Construction Acquired Life
- ------------------- -------------- ------------ -------- ----
<S> <C> <C> <C> <C>
Super 8, Rock Falls, IL 91,422 1985 4/1/1995 35
Super 8, Somerset, KY 90,433 1985 4/1/1995 35
Super 8, Miner, MO 94,967 1985 4/1/1995 35
Super 8, Poplar Bluff, MO 85,731 1985 4/1/1995 35
Super 8, San Diego, CA 189,786 1987 4/22/1995 35
Sleep Inn, Ocean Springs, MS 262,314 1995 9/13/1996 35
Sleep Inn, Destin, FL 280,960 1992 9/13/1996 35
Sleep Inn, Sarasota, FL 235,439 1993 9/13/1996 35
Sleep Inn, Tallahassee, FL 202,414 1994 9/13/1996 35
Super 8, Flagstaff, AZ 273,682 1985 3/14/1997 35
Country Hearth Inn, Auburn, IN 147,159 1987 10/21/1997 35
----------
$1,954,307
<FN>
(A)CrossHost hotel assets are cross collateralized and encumbered by a
first mortgage note payable with an outstanding principal balance of $12,388,055
at December 31, 1999.
(B) Host Ventures hotel assets are cross collateralized and encumbered by a
first mortgage note payable with an outstanding principal balance of $8,905,472
at December 31, 1999.
</FN>
</TABLE>
65
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,129
<SECURITIES> 0
<RECEIVABLES> 54
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,183
<PP&E> 29,526
<DEPRECIATION> (3,107)
<TOTAL-ASSETS> 30,570
<CURRENT-LIABILITIES> 1,992
<BONDS> 0
0
0
<COMMON> 8,124
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,570
<SALES> 0
<TOTAL-REVENUES> 3,636
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,661
<INCOME-PRETAX> (1,973)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,973)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
