<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 2000
REGISTRATION NO.
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HOST FUNDING, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 7012 52-1907962
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>
1640 SCHOOL STREET, SUITE 100, MORAGA, CALIFORNIA 94556, (925) 631-7929
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
GLEN FULLER
HOST FUNDING, INC.
1640 SCHOOL STREET
SUITE 100
MORAGA, CALIFORNIA 94556
(925) 631-7929
(Name, address including zip code, and telephone number, including area code, of
agent for service)
------------------------------
COPIES TO:
JOHN G. REBENSDORF, ESQ.
6116 N. CENTRAL EXPRESSWAY
SUITE 1313
DALLAS, TEXAS 75206
(214) 696-9388
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement in light of
market conditions and other factors.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Shares, $0.01 Par Value.............. $50,000,000 (4) $50,000,000 $13,200
Preferred Shares, $0.01 Par Value........... $50,000,000 (4) $50,000,000 $13,200
</TABLE>
(1) The amount to be registered consists of up to $50,000,000 of an
indeterminate amount of Common Shares and up to $50,000,000 of an
indeterminate amount of Preferred Shares.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933, as amended.
(4) Omitted pursuant to the General Instructions for Form S-1 under the
Securities Act of 1933, as amended.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE , 2000
INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON FORM S-1. THESE SECURITIES MAY NOT BE SOLD
NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
$50,000,000 COMMON SHARES
$50,000,000 PREFERRED SHARES
HOST FUNDING, INC.
---------------
Our Common Shares are traded on the American Stock Exchange under the symbol
"HFD." There is no public market for our Preferred Shares.
We intend to issue from time to time:
- our Preferred Shares, $0.01 par value per share, having an aggregate
initial public offering price not to exceed $50,000,000; and
- our Common Shares, $0.01 par value per share, having an initial public
offering price not to exceed $50,000,000.
The terms of the Preferred Shares and the Common Shares will be determined
at the time of sale. The Preferred Shares and Common Shares offered by this
prospectus may be offered separately or together, in separate series, in
amounts, at prices and on terms determined at the time of sale and set forth in
a prospectus supplement.
The prospectus supplement will include:
- for Preferred Shares, the series designation and number of shares, the
dividend, liquidation, redemption, conversion, voting and other rights and
the initial offering price;
- for Common Shares, the number of shares and initial public offering price;
and
- in the case of all Preferred Shares and Common Shares, whether the shares
will be offered separately or together.
Each prospectus supplement will also contain information, where applicable,
concerning certain United States federal income tax considerations relating to
the offered securities and any listing of the offered securities on a securities
exchange.
------------------------
Securities sold under this prospectus may be offered and sold from time to
time in open market or privately negotiated transactions that may involve
agents, underwriters, brokers or dealers. If any designated agents or
underwriters are involved in the sale of offered securities, they will be
identified and their compensation will be described in the applicable prospectus
supplement. No offered securities may be sold without delivery of the applicable
prospectus supplement describing the offered securities and the method and terms
of the offering.
------------------------
YOU SHOULD READ THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT CAREFULLY
BEFORE YOU INVEST IN OUR COMPANY. PLEASE PAY PARTICULAR ATTENTION TO THE "RISK
FACTORS" APPEARING ON PAGE 5 OF THIS PROSPECTUS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June , 2000.
<PAGE>
The following table of contents has been designed to help you find important
information contained in this Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- --------
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 5
Use of Proceeds............................................. 9
Plan of Distribution........................................ 9
Description of Offered Securities........................... 9
Our Company................................................. 13
Company Properties.......................................... 15
Litigation.................................................. 20
Market for Our Common Equity and Dividends History.......... 21
Selected Financial and Other Data........................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Directors and Executive Officers of the Company............. 27
Executive Compensation...................................... 29
Security Ownership of Certain Beneficial Owners and
Management................................................ 29
Certain Relationships and Related Transactions.............. 32
Description of Capital Stock................................ 33
Legal Matters............................................... 35
Experts..................................................... 35
Where To Find Additional Information........................ 36
Index to Combined Financial Information..................... F-1
</TABLE>
<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
In addition to historical information, this prospectus contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and information based on our current views of our
business and our assumptions concerning future events. The words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"believes," "estimates," "projects" or similar expressions are intended to
identify these forward-looking statements. These statements are subject to risks
and uncertainties that could cause our business and results of operations to
differ materially from those reflected in our forward-looking statements.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in the
lodging industry and the effect on those trends of such factors as industry
capacity, the seasonal nature of the lodging industry, product demand and
pricing and the other matters referred to in the "Risk Factors" section of this
prospectus. In addition, such forward-looking statements are subject to Host
Funding reversing the current negative trend in its business and financial
results. Accordingly, you are cautioned not to place undue reliance on our
forward-looking statements. We are not required to update any forward-looking
statements we make and we may not make any updates.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all of the information that may be important to you. For a more
complete description of this offering, you should read this entire prospectus as
well as the additional documents we refer to under the heading "Where To Find
Additional Information."
OUR COMPANY
Our principal business is the acquisition of high quality, limited service
and full service hotels throughout the United States, which are affiliated with
national or regional hotel chains. As of May 31, 2000, our hotel portfolio
included 11 hotels, located in 8 states and consisting of approximately 850
rooms. All of our hotels are leased and operated by third party lessees or
operators under lease agreements or operating agreements. We were initially
structured to operate as a real estate investment trust ("REIT"), but we do not
qualify for and have not elected REIT status under the Internal Revenue Code.
MANAGEMENT AND PRINCIPAL OFFICES
There are five (5) persons on our Board of Directors. C.E. Patterson is our
Chief Executive Officer and Robert E. Dixon is the Chairman of our Board of
Directors. Our principal executive offices are located at 1640 School Street,
Suite 100, Moraga, California 94556. Our telephone number is (925) 631-7929.
Although our Board of Directors is directly responsible for managing our affairs
and for setting the policies which guide us, our day-to-day operations are
performed by MacKenzie Patterson, Inc., a contractual external advisor under the
supervision of our Board of Directors. The duties of our advisor include, among
other things, investigating, evaluating and recommending real estate investment
and sales opportunities, and locating financing and refinancing sources. Our
advisor also serves as a consultant in connection with our business plan and
investment policy decisions made by our Board of Directors.
SECURITIES TO BE OFFERED
This prospectus relates to the offering of up to $50,000,000 of an
indeterminate amount of our shares of Common Stock and up to $50,000,000 of an
indeterminate amount of our shares of Preferred Stock.
USE OF PROCEEDS
Unless we advise you differently in a prospectus supplement, we will use the
net proceeds from the sale of any securities under this prospectus for general
corporate purposes. These general purposes may include repayment of indebtedness
and existing obligations, making improvements or renovations to our hotel
properties and the acquisition of additional hotel properties.
SUMMARY FINANCIAL AND OTHER DATA
We are providing the following summary financial information to aid you in
your analysis of the financial aspects of an investment in Host Funding. The
table sets forth summary historical financial data for Host Funding for the
years ended December 31, 1999, 1998 and 1997. We believe that this presentation
is informative to the reader.
3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
OPERATING RESULTS:
---------------------------------------------
GROSS REVENUES............................... $ 3,879,333 $ 3,926,042 $ 3,837,350
LOSS BEFORE INCOME TAXES..................... $(1,972,726) $ (904,316) $(1,025,514)
NET LOSS..................................... $(1,972,726) $ (904,316) $(1,025,514)
BASIC AND DILUTED NET LOSS PER COMMON
SHARE...................................... $ (1.22) $ (0.58) $ (0.68)
TOTAL ASSETS................................. $30,570,050 $32,449,658 $31,996,180
PREFERRED STOCK.............................. $ 1,500,000 -0 - -0 -
SHAREHOLDERS' EQUITY......................... $ 2,789,580 $ 3,587,500 $ 4,279,337
</TABLE>
4
<PAGE>
RISK FACTORS
WE HAVE EXPERIENCED A NEGATIVE TREND IN OUR RECENT FINANCIAL RESULTS
Our financial results have been negatively affected by a number of factors
during fiscal years 1999 and 1998 and, recently, that negative trend has
worsened. We expect that our revenues, operating income and net income for
fiscal year 2000 will be significantly less than those for the year ended
December 31, 1999. The recent decline in our financial performance is primarily
attributable to two factors. First, due to a lack of investment capital and the
diversion of senior management's focus as a result of attention to reducing
Company indebtedness and overhead, we have been generally unable to acquire new
hotel properties. Second, we have experienced significantly decreased revenue
from our portfolio of hotel properties due to increased competition, disruption
of hotel operations arising from improvements or repairs to our hotels and
general negative trends in the limited service hotel sector. These factors have
led to our poor recent financial performance. We cannot assure you that we will
be able to successfully address these issues and that our financial results will
not continue to decline.
OUR LEASE AGREEMENTS MAY EXPIRE OR BE TERMINATED
Almost all of our revenues for the foreseeable future will come from the
operation of our hotels by our lessees or operators. Our hotel lease and
operating agreements will expire and be terminated and renegotiated in the
ordinary course of our business. Typically, our hotel lease agreements may be
terminated for many reasons, including default by us or sale of, or foreclosure
on, the underlying property. We cannot assure you that upon expiration or
termination of our existing hotel lease and operating agreements that these
agreements will be renewed or extended by the lessees or operations. We also
cannot assure you that the terms of any renewals or extensions will be as
favorable to us as the terms of the existing agreements. If we are unable to
enter into new leases or operating agreements for all or a substantial portion
of our hotels or if the rental rates on renewal or reletting are significantly
lower than expected, our cash flow and ability to make distributions to our
shareholders could be adversely affected.
WE HAVE INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTIONS
Our primary source of cash for distribution to our shareholders is payments
received from the lessees and operators under our hotel lease and operating
agreements. During fiscal years 1999 and 1998, payments from our lessees and
operators were insufficient to enable us to pay dividends. We cannot assure you
that future lease payments will be sufficient to enable us to pay dividends to
our shareholders.
WE COMPETE FOR HOTEL ACQUISITIONS
We compete for hotel acquisitions with international, national, regional and
local hotel management and franchise companies. We compete with these companies
on factors such as relationships with hotel owners and investors, access to
capital, financial performance, lease terms, name recognition, marketing support
and the willingness to provide funds in connection with new leasing
arrangements. Many of our competitors have substantially greater financial
resources and better name recognition than we do. In order for us to expand our
hotel portfolio, we may be required to offer more attractive terms to hotel
owners to purchase properties and we may be required to make debt or equity
investments in hotel properties. We currently have limited capital available to
make these investments. Therefore, we may be required to obtain financing to
provide the necessary funds. We also cannot assure you that we will be able to
obtain financing on commercially reasonable terms.
5
<PAGE>
WE DEPEND ON A SMALL NUMBER OF HOTEL LESSEES
Nine of our eleven hotels are leased and operated by one lessee, BAC Hotel
Management, Inc., a wholly-owned subsidiary of Buckhead America Corporation.
Should this lessee decide to terminate its relationship with us, our financial
results would be negatively affected.
WE ARE SUBJECT TO THE OPERATING RISKS OF HOTEL INDUSTRY
The hotels we own and lease are subject to all of the operating risks common
to the hotel industry, such as:
- overbuilding of hotels and the corresponding oversupply of hotel rooms in
a particular geographic area;
- changes in travel patterns due to increases in travel expenses and other
factors; and
- changes in national, regional and local economic conditions.
All of these risks could adversely affect our average occupancy and average
daily room rates. These effects on average occupancy and average daily room
rates could reduce our revenues since a material portion of the lease payments
payable by the lessees and operators of our hotels are calculated as a
percentage of revenues and profits of our hotels.
WE COMPETE WITH OTHER HOTELS
Each of the hotels we lease competes with other hotels in its geographic
area. Additional hotel rooms have been or may be built in many of the geographic
areas in which we own and lease hotels, which could adversely affect our average
occupancy and average daily room rates in these areas. In addition, the overall
supply of hotel rooms in the United States as a whole has increased
substantially over the past several years. All of the hotels we operate face
competition on factors such as room rates, quality of accommodations, name
recognition, service levels, convenience of location and the quality and scope
of other amenities including food and beverage facilities.
WE ARE SUBJECT TO GOVERNMENT REGULATION
As a hotel company, we are subject to extensive governmental regulation,
including laws which relate to the licensing of hotels and restaurants,
recreational facilities, swimming pools, activity centers and other common
areas, the adaptation of public accommodations for use by the disabled, general
building and zoning requirements and the disposal of hazardous waste. Although
the lessees of our hotels are generally responsible for paying all costs,
expenses and liabilities incurred in the operation of the hotels we own,
including compliance with environmental laws, we may be contingently liable for
liabilities for which we do not maintain insurance, including claims arising
under the Americans With Disabilities Act of 1990.
WE DEPEND ON FRANCHISORS
All of our hotels are operated under franchise licenses with Super 8 Hotels,
Days Inn Hotels, and Country Hearth Inn Hotels. Although we intend to seek
diversification of our hotel portfolio, any significant decline in the
reputation of any of our franchisors could adversely affect our results of
operations.
OUR BUSINESS IS CONCENTRATED IN A SINGLE INDUSTRY
Our business is entirely related to the hotel industry. In the event of a
general downturn in the hotel industry, the adverse effect on us may be greater
than on a more diversified company with assets or activities outside of the
hotel industry.
6
<PAGE>
WE HAVE LIMITED NUMBER OF HOTELS
We own and lease only eleven hotel properties. Any adverse change in the
operation of any one or more of our hotel properties could have a material
adverse effect on our revenues.
WE RELY ON OUR ADVISOR
We will be dependent on the efforts of our external advisor, MacKenzie
Patterson, with respect to our major policies, including acquisitions,
financing, growth, operations and debt capitalizations. Our future success and
our ability to manage future growth depends in large part on the efforts of our
advisor.
HOTEL INVESTMENT ACTIVITY INVOLVE RISKS
We expect to make investments in hotels in the future and these hotels may
fail to perform in accordance with our expectations.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR PLAN FOR GROWTH
We intend to pursue a growth-oriented business strategy focusing primarily
on adding significantly to our hotel portfolio. Our ability to pursue new growth
opportunities successfully will depend on a number of factors, including our
ability to:
- identify suitable growth opportunities;
- finance acquisitions;
- integrate new lessees and franchisors into our operations;
- adapt to our competition; and
- access sufficient capital on commercially reasonable terms.
We cannot assure you that our systems, procedures and controls, or our
management, financial and other resources will be adequate to support our
proposed growth and expansion.
OUR REAL ESTATE OWNERSHIP, LEASING AND INVESTMENT ACTIVITIES EXPOSE US TO RISKS
On May 31, 2000, we owned 11 hotels subject to lease and operating
agreements. We intend to make investments in hotels, which will subject us to
risks generally related to owning or leasing real estate, such as:
- changes in national, regional and local economic conditions;
- local real estate market conditions;
- changes in interest rates and the availability, cost and terms of
financing;
- the potential for uninsured casualty and other losses;
- the impact of environmental legislation and compliance with environmental
laws; and
- adverse changes in zoning laws and other regulations.
In addition, real estate investments in general are relatively illiquid,
which could limit our ability to adapt the portfolio of hotels we own or lease
in response to changes in economic and other conditions.
7
<PAGE>
CONTROL BY OUR EXECUTIVE OFFICERS AND DIRECTORS
Based solely on their ownership of our Common Stock and options to acquire
our Common Stock, our executive officers and directors beneficially own or have
the right to acquire 1,286,042 shares, or approximately 57.93%, of our
outstanding Common Stock. Also, MacKenzie Patterson, our external advisor, owns
500,000 shares, or 100%, of our outstanding Series "A" Convertible Preferred
Stock. C. E. Patterson, our president and chief executive officer, is the
controlling shareholder and president of MacKenzie Patterson. Based upon this
ownership of our outstanding shares of Common and Preferred Stock,
Mr. Patterson and our other executive officers and directors have substantial
influence over Host Funding and on the outcome of matters submitted to our
stockholders for approval. Also, this concentrated stock ownership could
discourage acquisition of our Common and Preferred Stock by potential investors,
and could have an anti-takeover effect, possibly depressing the trading price of
our Common Stock.
WE MAY ISSUE ADDITIONAL STOCK
Our charter authorizes our Board of Directors to cause Host Funding to issue
additional authorized but unissued shares of our Common or Preferred Stock and
to classify or reclassify any unissued shares of our Common or Preferred Stock.
Our Board of Directors may also set the preferences, rights and other terms of
any classified or reclassified shares. Any additional issuances of our Common or
Preferred Stock may significantly dilute the interests of the existing holders
of our securities.
WE ARE SUBJECT TO THE RISKS OF DEBT FINANCING
On March 31, 2000, we had outstanding debt equal to approximately 77% of our
gross assets. Our outstanding indebtedness is secured by our hotels. We are
subject to the risks normally associated with debt financing, including the risk
that cash flow from operations and investments will be insufficient to meet
required payments of principal and interest. We are also subject to the risks
that upon maturity we will not be able to refinance our indebtedness on
favorable terms. Adverse economic conditions could result in higher interest
rates which could increase our debt service requirements on floating rate debt.
If we are unable to meet our debt service obligations due to adverse economic
conditions, we risk the loss of some or all of our assets, including our hotels,
to foreclosure.
8
<PAGE>
USE OF PROCEEDS
Unless we advise you differently in an applicable prospectus supplement, we
will use the net proceeds from the sale of any securities under this prospectus
for general corporate purposes. These general purposes may include repayment of
indebtedness and existing obligations, making improvements or renovations to our
hotels and the acquisition of additional hotels.
PLAN OF DISTRIBUTION
We may sell securities offered under this prospectus and any prospectus
supplement in or outside the United States to or through underwriters. We may
also sell any offered securities to investors directly or through designated
agents. Any underwriter or agent involved in the offer or sale of our offered
securities will be identified in the applicable prospectus supplement.
Our underwriters may offer and sell securities under this prospectus at a
fixed price or prices, which may be changed, or at prevailing market prices at
the time of sale, or at negotiated prices. We may also, from time to time,
authorize underwriters acting as our agent, to offer and sell securities under
this prospectus upon the terms and conditions contained in any prospectus
supplement. Underwriters may sell offered securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters or purchasers for whom they act as an agent.
Any underwriting compensation paid by us to underwriters or agents relating
to securities offered under this prospectus and any discounts, concessions or
commissions allowed by underwriters to participating dealers will be described
in the applicable prospectus supplement. Certain underwriters and their
affiliates may engage in transactions with, or perform services for, Host
Funding.
DESCRIPTION OF OFFERED SECURITIES
The following information relating to our Common Shares and Preferred Shares
is subject to the detailed provisions of our charter and bylaws. These
statements do not purport to be complete or to give full effect to the
provisions of statutory or common law.
COMMON SHARES
All Common Shares offered under this prospectus will be duly authorized,
fully paid and nonassessable. All Common Shares will be subject to the
preferential rights of any other shares or series of shares which are entitled
to receive dividends if, as and when authorized and declared by our Board of
Directors out of legally available assets. Holders of Common Shares are also
entitled to share ratably in our assets legally available for distribution to
our shareholders in the event of our liquidation, dissolution or winding-up,
after payment of or provision for, all of our debts and liabilities.
Each outstanding Common Share entitles the holder to one vote on all matters
submitted to a vote of our shareholders, including the election of three of our
five directors. The holders of our outstanding Series "A" Convertible Preferred
Stock voting as a group are entitled to elect our remaining two directors. The
holders of Series "A" Preferred Stock are also entitled to one vote on all other
matters submitted to a vote of our shareholders, including, the election of the
three directors upon which the holders of Common Shares may vote. There is no
cumulative voting in the election of our directors.
Holders of Common Shares have no conversion, sinking fund, redemption
rights, or any preemptive rights to subscribe for any of our securities. Common
Shares have equal dividend, distribution, liquidation and other rights, and have
no preference, exchange or appraisal rights, except as provided by Maryland law.
9
<PAGE>
The transfer agent for our Common Shares is American Stock Transfer, New
York, New York. Our Common Shares are traded on the American Stock Exchange
under the symbol "HFD." We will apply to the AMEX to list the additional Common
Shares to be sold under any prospectus supplement, and we anticipate that AMEX
will list the Common Shares.
PREFERRED SHARES
We may issue from time to time Preferred Shares in one or more series. Prior
to the issuance of shares of each series, our Board of Directors is required by
Maryland law and our charter to set forth for each series, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each series. Our Board of Directors may authorize the issuance of
Preferred Shares with terms or conditions that could delay, defer or prevent a
takeover or other transaction which might be in the best interests of the
holders of Common Shares or in which holders of Common Shares might receive a
premium over the existing market price of our Common Shares.
All Preferred Shares will have the following dividend, liquidation,
redemption, conversion and voting rights unless otherwise provided in the
applicable prospectus supplement:
- the title, liquidation preference, and number of shares offered;
- the issuance price;
- the dividend rate;
- the dates on which dividends will be payable and will begin to accumulate;
- any redemption or sinking fund provisions;
- any conversion provisions; and
- any additional dividend, liquidation, redemption, sinking fund and other
rights, preferences, privileges, limitations and restrictions.
Preferred Shares will, when issued, be fully paid and nonassessable. Unless
otherwise specified in the applicable prospectus supplement, each series of
Preferred Shares will rank equal as to dividends and distributions in the event
of our liquidation with each other series of Preferred Shares and, in all cases,
senior to the Common Shares. There is no public market for our Preferred Shares.
Each prospectus supplement will contain information on listing of the Preferred
Shares on a securities exchange, if any.
DIVIDEND RIGHTS OF PREFERRED SHARES
Holders of Preferred Shares of each series will be entitled to receive,
when, as and if declared by our Board of Directors, out of our legally available
assets, cash dividends at such rates and on such dates as described in the
prospectus supplement relating to the series of Preferred Shares. The dividend
rate may be fixed or variable or both and may be cumulative, noncumulative or
partially cumulative.
If provided in the applicable prospectus supplement, if any Preferred Shares
are outstanding, no dividends will be declared or paid or any distributions made
on the Common Shares, except dividends payable in Common Shares, unless the
accrued dividends on each series of Preferred Shares have been fully paid or
declared and set apart for payment.
If provided in the applicable prospectus supplement, when dividends are not
paid in full upon any series of Preferred Shares and any other series of
Preferred Shares ranking equal as to dividends with the series of Preferred
Shares, all dividends declared upon a series of Preferred Shares and any other
series of Preferred Shares ranking equal as to dividends will be declared pro
rata. This means that the
10
<PAGE>
amount of dividends declared per share on a series of Preferred Shares and any
other series will bear to each other the same ratio that accrued dividends per
share on a series of Preferred Shares and any other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as described
in the applicable prospectus supplement, which may be based upon one or more
methods of determination. Different series of Preferred Shares may be entitled
to dividends at different dividend rates or based upon different methods of
determination. Except as provided in the applicable prospectus supplement, no
series of Preferred Shares will be entitled to participate in our earnings or
assets.
RIGHTS OF PREFERRED SHARES UPON LIQUIDATION. In the event of our voluntary
or involuntary liquidation or dissolution or winding up of our affairs, the
holders of each series of Preferred Shares will be entitled to receive out of
our assets available for distribution to shareholders the amount stated or
determined on the basis set forth in the prospectus supplement relating to each
series. These distributions may include accrued dividends, if the liquidation,
dissolution or winding up is involuntary or may equal the current redemption
price per share described in the applicable prospectus supplement, if the
liquidation, dissolution or winding up is voluntary, and on the preferential
basis described in the applicable prospectus supplement. If, upon our voluntary
or involuntary liquidation or, dissolution or winding up of our affairs, the
amounts payable with respect to Preferred Shares of any series and any other
shares ranking as to any distribution equal to that series of Preferred Shares
are not paid in full, the holders of Preferred Shares of a series and of any
other shares will share ratably in any distribution of our assets in proportion
to the full respective preferential amounts to which they are entitled or on
such other basis described in the applicable prospectus supplement. The rights,
if any, of the holders of any series of Preferred Shares to participate in our
assets remaining after all holders of other series of Preferred Shares have been
paid their specified liquidation preferences upon any liquidation or,
dissolution or winding up of our affairs will be described in the applicable
prospectus supplement.
REDEMPTION OF PREFERRED SHARES. A series of Preferred Shares may be
redeemable, in whole or in part, at our option, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times,
the redemption prices and for the types of consideration described in the
applicable prospectus supplement. The prospectus supplement relating to a series
of Preferred Shares which is subject to mandatory redemption will specify the
number of shares of the series that we will redeem in each year, commencing
after a specified date, at a specified redemption price per share, together with
an amount equal to any accrued and unpaid dividends on the series to the date of
redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Shares, we deposit with a designated bank, funds sufficient to redeem
the Preferred Shares, then from and after the deposit, all shares called for
redemption will no longer be outstanding for any purpose, other than the right
to receive the redemption price and the right to convert the shares into other
classes of our stock. The redemption price will be stated in the applicable
prospectus supplement.
Except as indicated in the applicable prospectus supplement, the Preferred
Shares are not subject to any mandatory redemption at the option of the holder.
SINKING FUND. The prospectus supplement for any series of Preferred Shares
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
CONVERSION RIGHTS. The prospectus supplement for any series of Preferred
Shares will state the terms, if any, on which shares of that series are
convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
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VOTING RIGHTS. Except as indicated in the prospectus supplement relating to
a particular series of Preferred Shares, or except as expressly required by
Maryland law, a holder of Preferred Shares will not be entitled to vote. Except
as indicated in the prospectus supplement relating to a particular series of
Preferred Shares, each Preferred Share will be entitled to one vote on matters
on which holders of that series of Preferred Shares are entitled to vote.
TRANSFER AGENT AND REGISTRAR. We will select the transfer agent, registrar
and dividend disbursement agent for a series of Preferred Shares. The transfer
agent will be described in the applicable prospectus supplement. The registrar
for shares of Preferred Shares will send notices to shareholders of any meetings
at which holders of Preferred Shares have the right to vote on any matter.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
Our Charter authorizes us to classify or reclassify any unissued Common
Shares or Preferred Shares, subject to any ownership limitations, by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or distributions, qualifications or
terms or conditions of redemption.
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OUR COMPANY
Host Funding, Inc. was incorporated in the State of Maryland in
December 1994, and was inactive from inception to March 31, 1995. Our Class "A"
Common Stock began trading on the American Stock Exchange on April 22, 1996, the
date of our initial public offering. Upon closing of our initial public
offering, we owned five Super 8 Hotels located in Somerset, Kentucky; Miner,
Missouri; Poplar Bluff, Missouri; Rock Falls, Illinois; and Mission Bay,
California. On May 31, 2000, our hotel property portfolio included 11 hotels,
located in 8 states and consisting of approximately 850 rooms.
We are 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 we were initially structured to
operate as a real estate investment trust ("REIT"), we have not yet elected REIT
status under the Internal Revenue Code. Since the commencement of our operations
and the acquisition of our five initial hotels, we have formed wholly-owned
subsidiaries for the purpose of financing and owning our existing hotels and
acquiring additional hotels.
RECENT DEVELOPMENTS
On December 22, 1999, we sold to MacKenzie Patterson, Inc., a California
real estate venture capitalist, 500,000 shares of our Series "A" Convertible
Preferred Stock, $0.01 par value per share, for a purchase price of
$1,500,000.00. We used the proceeds from the sale of the Series "A" Preferred to
satisfy current obligations and for working capital. We also issued warrants to
MacKenzie Patterson to purchase 500,000 shares of our Class "A" Common Stock for
an exercise price of $3.00 per share, exercisable at any time prior to
December 22, 2005. Concurrently with the purchase of the shares of Series "A"
Preferred and the issuance of the Warrants, we entered into an Advisory
Agreement with MacKenzie Patterson under which they assumed our day to day
operations and direction of new investments on our behalf.
OUR BUSINESS AND GROWTH STRATEGY
We intend to continue our core business strategy of attempting to increase
cash flow and enhance shareholder value by acquiring additional existing hotels
which meet our investment criteria and by participating in revenue growth of our
hotels through percentage leases. We intend to make strategic investments in
hotels through Host Funding 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 our stock or debt instruments.
We intend to consider investments in hotels that meet one or more of the
following criteria:
- hotels in markets with projected growth potential;
- hotels which may be under-performing due to poor management or weak
franchise affiliation;
- hotels with relatively stable operating histories; and
- hotels with attractive purchase prices.
We believe that the engagement of MacKenzie Patterson as our external
advisor will increase our management expertise and enable us to benefit from
MacKenzie Patterson's hotel, real estate and finance industry contacts. We also
believe that MacKenzie Patterson will further facilitate our ability to
identify, evaluate, negotiate and finance potential hotel investment
opportunities.
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OUR COMPETITION
The hotel industry is highly competitive. We compete for both
limited-service and full-service hotel properties with several hundred
companies, including international, national, regional and local franchise
companies and independent hotel management companies. Within the highly
fragmented limited-service hotel management industry, we compete with a large
and diverse group of competitors including hotel franchise companies,
owner-operators, and a number of independent operators. In our industry segment,
we also compete on such factors as relationships with hotel owners and
investors, access to capital, financial performance, contract terms, brand name
recognition, marketing support and the willingness to make debt or equity
investments in connection with new management arrangements.
Each of the hotels we own competes with other hotels in its geographic area.
The supply of hotel rooms in the United States has increased substantially over
the past several years, and we expect that it will continue to grow. The hotels
we own will compete with other hotels on factors such as room rates, quality of
accommodations, name recognition, service levels, convenience of location and
the quality and scope of other amenities including food and beverage facilities.
In addition to the above factors, we encounter other competitive
disadvantages, including the fact that:
- unlike hotels operated by many of the franchisors with whom we compete,
the lessees of our hotels must pay a franchise fee in addition to our
lease payments; and
- we generally will have less access to capital than larger companies and
companies that own a substantial amount of real estate.
OUR MANAGEMENT AND EMPLOYEES
Although our Board of Directors is directly responsible for managing our
affairs and for our policy decisions, our day-to-day operations are performed by
MacKenzie Patterson, our external contractual advisor. The duties of MacKenzie
Patterson include, among other things, locating, investigating, evaluating and
recommending hotel investment and sales opportunities, as well as financing and
refinancing sources. MacKenzie Patterson also serves as a consultant in
connection with our business plan and investment policy decisions made by our
Board of Directors. We have no employees, but employees of MacKenzie Patterson
render services to us under our advisory agreement with MacKenzie Patterson.
GOVERNMENT REGULATION
The lodging industry is subject to extensive government regulation,
including laws which regulate the licensing of hotels. Under the American with
Disabilities Act, all public accommodations are required to meet federal
requirements relating to access and use by disabled persons. We believe that our
hotels are substantially in compliance with the requirements of the Disabilities
Act. However, a determination that our hotels are not in compliance with the
Disabilities Act could result in liability for fines and damages. The lessees
and operator of our hotels are generally responsible for paying all costs,
expenses and liabilities incurred in the operation of our hotels, including
compliance with laws such as the Disabilities Act. We could be contingently
liable, however, for liabilities for which we do not maintain insurance,
including claims arising under the Disabilities Act.
ENVIRONMENTAL MATTERS
Various laws impose liability for the costs of removal or remediation of
hazardous or toxic substances on our hotels, regardless of whether we knew of or
were responsible for the presence of such hazardous or toxic substances.
Depending on the circumstances, we could also be liable for personal injury
associated with exposure to asbestos-containing materials. Environmental laws
also may restrict the manner in which property may be used or businesses may be
operated, and these restrictions may result in expenditures and require
interruption of such businesses. The lessees of our hotels have agreed to
indemnify us from environmental liabilities relating to our hotels, except to
the extent caused by our gross negligence.
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COMPANY PROPERTIES
During the fiscal year ended December 31, 1999, our principal offices were
located at 6116 North Central Expressway, Suite 1313, Dallas, Texas 75206.
Effective as of January 1, 2000, our principal offices were transferred to 1640
School Street, Suite 100, Moraga, California 94556. The transfer of our
principal offices was necessary to implement MacKenzie Patterson as our external
advisor. We leased approximately 1,200 square feet at an annual rate of
approximately $16,000 for our prior principal offices. The lease term expired on
December 31, 1999. We believe that the size of both the prior and new principal
offices were and are adequate for our needs. During the fiscal year ended
December 31, 1999, we owned twelve hotel properties located in nine states
consisting of approximately 922 rooms. The table below shows certain summary
information relating to our hotels.
<TABLE>
<CAPTION>
GROSS REVENUES
ANNUAL PERCENTAGE FOR THE 12 ANNUAL YEAR
RENT FORMULA MONTHS ENDED BASE ACQUIRED/
ROOMS (YEAR TO DATE "YTD")(1) 12-31-99 RENT(1) BUILT
-------- -------------------------------------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Miner, Missouri (Super 8) 63 35% YTD Revenues over initial Break-Even
Threshold of $706,860 on first $200,000
over Bread-Even Threshold, and 40%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 727,000 $ 263,000 1995/85
Poplar Bluff, Missouri 63 35% YTD Revenues over initial Break-Even
(Super 8) Threshold of $586,500 on first $100,000
over Break-Even Threshold, and 37%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 630,000 $ 226,000 1995/85
Rock Falls, Illinois 63 28.75% YTD Revenues over initial Break-Even
(Super 8) Threshold of $622,120 on first $200,000
over Break-Even Threshold, and 35%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 671,000 $ 266,000 1995/85
Somerset, Kentucky (Super 8) 63 32% YTD Revenues over initial Break-Even
Threshold of $425,000 on first $200,000
over Break-Even Threshold, and 35%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 416,000 $ 127,000 1995/85
Mission Bay, California 117 N/A.........................................
(Vagabond Inn) $1,415,000 $ 280,200 1996/87
Flagstaff, Arizona 90 32% YTD over $925,000 less Percentage Rent
(Super 8) previously paid........................... $1,132,000 $ 505,000 1997/85
Tallahassee, Florida 78 10% of Revenues, payable 5% quarterly and 5%
(Sleep Inn) at expiration of Lease term(3)............ $ 917,000 $ 255,000 1996/94
Destin, Florida 77 30% YTD Revenues over initial Break-Even
(Sleep Inn) Threshold of $850,500 on first $350,000
over Break-Even Threshold, and 35%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 914,000 $ 382,000 1996/92
Ocean Springs, Mississippi 78 30% YTD Revenues over initial Break-Even
(Sleep Inn) Threshold of $788,400 on first $350,000
over Break-Even Threshold, and 35%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 736,000 $ 369,000 1996/95
Sarasota, Florida 80 30% YTD Revenues over initial Break-Even
(Sleep Inn) Threshold of $802,800 on first $300,000
over Break-Even Threshold, and 35%
thereafter, less Percentage Rent
previously paid YTD.(2)................... $ 817,000 $ 303,500 1996/93
Auburn, Indiana 78 30% YTD Revenues over initial Break-Even
(Country Hearth Inn) Threshold of $760,000 on first $260,000
over Break-Even Threshold, and 40%
thereafter, less Percentage Rent
previously paid YTD (subject to CPI
adjustment)............................... $ 733,000 $ 303,000 1997/87
Findlay, Ohio 72 30% YTD Revenues over initial
(Country Hearth Inn) Break-Even(4)............................. $ 852,000 (5) 1997/88
Consolidated Total for Hotels $9,960,000 $3,622,000
========== ==========
</TABLE>
------------------------------
(1) Unless otherwise set forth above, Base Rent and Percentage Rent is effective
December 31, 1999
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(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 Sleep Inn has been managed by BAC Hotel
Management, Inc.
(4) The Findlay Country Hearth Inn was sold on November 12, 1999, and the lease
with Buckhead America Corporation on the hotel was terminated.
(5) Threshold of $740,000 for first $300,000 and 40% thereafter, less Percentage
Rent previously paid year-to-date.
RECENT CHANGES IN OUR HOTELS
MISSION BAY PROPERTY
In January, 1999, we transferred leasing and operation of our hotel located
in Mission Bay, California to RPD Mission Bay, LLC, an affiliate of Vagabond
Inns. RPD then transferred the day-to-day management of the Mission Bay Hotel to
RPD 18, LLC, also an affiliate of Vagabond Inns, a proven hotel operator located
in California. RPD also terminated the prior franchise agreement and converted
the Mission Bay Property to a Vagabond Inn. In consideration for the lease
transfer, RPD paid us a non-refundable fee in the amount of $500,000.00. The
non-refundable fee was used in part to pay portions of the termination fees to
the previous franchisor, the termination fee to the previous lessee, and for
general corporate purposes.
We also granted RPD an option to purchase the Mission Bay Hotel for a base
acquisition price of $3,225,000.00. The base acquisition price decreases on a
monthly basis through the application of portions of the base rent payments made
to us by RPD under our lease on the Mission Bay Hotel. RPD exercised the option
in March, 1999. The sale of the Mission Bay Hotel to RPD resulting from the
exercise of the option has not yet closed due to a dispute involving the
governing deed of trust and the applicable defeasance and release requirements.
Along with RPD and with the knowledge of the master servicer of the loan, we
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
option. Additionally, the special servicer of the loan, on behalf of the master
servicer, acknowledged the recorded 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
option and requesting a release of the deed of trust lien encumbering the
Mission Bay Hotel, the master servicer informed us that the deed of trust filed
of record was an incorrect document. The master servicer further informed us
that the Mission Bay Hotel 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 were satisfied by the Company. Although we dispute
the master servicer's position as to the governing deed of trust, we are
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.
FINDLAY PROPERTY
Effective November 12, 1999, we sold our hotel located in Findlay, Ohio for
a cash purchase price of $2,400,000. We used the cash proceeds from the sale to
satisfy closing costs and all outstanding indebtedness relating to the Findlay
Hotel, including a judgement lien held by the seller of the Findlay Hotel. See
"Litigation" on page 20 of this prospectus. We did not receive any net proceeds
from the sale of the Findlay Hotel.
TALLAHASSEE PROPERTY
During a portion of 1999, we leased our hotel located in Tallahassee,
Florida to Capital Circle Hotel Company, the prior owner of the Tallahassee
Hotel. Effective June 30, 1999, Capital Circle terminated the lease on the
Tallahassee Hotel and BAC Hotel Management, Inc., a wholly owned subsidiary of
Buckhead America Corporation, currently operates and manages the Tallahassee
Hotel
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under a management agreement. The management agreement provides for the payment
to BAC Hotel of a management fee in an amount equal to five percent (5%) of
gross revenues generated from the Tallahassee Hotel together with a $500.00 per
month accounting fee.
PROPERTY LEASES
All of our hotels are leased and operated under lease or operating
agreements except for our Tallahassee Hotel which is managed and operated under
a management agreement. Except for our hotels located in Flagstaff, Arizona and
Mission Bay, California, our hotels are leased and operated by either Buckhead
America Corporation or BAC Hotel. Crossroads Hospitality Tenant Company, LLC
operates our Flagstaff Hotel and RPD 18, LLC operates our Mission Bay Hotel.
Except as otherwise indicated below, our leases generally contain the provisions
described below.
LEASE TERMS
Each lease has a term of fifteen (15) years, other than the lease on the
Mission Bay Hotel, 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 the following:
- provisions relating to damage to the hotel;
- condemnation of the hotel;
- default by us or the lessee under the lease;
- failure of the lessee to comply with terms of our loan documents
associated with the hotel; and
- termination upon our disposition of the hotel.
Except for the leases on the Mission Bay Hotel and our hotel located in
Auburn, Indiana, the term of each Lease may, at the option of our 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, our lessee is obligated to pay:
- base rent;
- percentage rent (except for the Mission Bay Hotel);
- all personal property taxes on the lessee's personal property, ground
rents, water, sewer or other rents and charges, excise, tax inspection,
authorization or similar fees and all other governmental charges;
- every fine, penalty, interest and cost for non-payment or late payment
of base rent, percentage rent, or other costs, expenses or charges
which are the responsibility of the lessee under the leases; and
- franchise fees.
We are responsible for the payment of all real property taxes on our hotels,
except the Mission Bay Hotel. Base rent accrues and is required to be paid
monthly, and, except for the leases for the Auburn Hotel and the Mission Bay
Hotel, base rent is subject to potential reduction if a hotel or hotels similar
in nature to our hotel are or will be constructed in an area in the general
vicinity of our hotel. This concept is referred to in the hotel industry as the
"competitive set." Percentage rent is based on percentages of gross revenues for
each of our hotels, is due and payable quarterly, and except for:
- the leases in effect for the Auburn Hotel and the Mission Bay Hotel,
percentage rent is subject to potential reduction when compared to the
"competitive set";
- the leases in effect for the Auburn Hotel and the Mission Bay Hotel,
percentage rent is subject to potential reduction to the extent, at any
time during the first four (4) years of the lease term, the hotel cash
flow is less than the base rent; and
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- percentage rent payable under the lease for the Auburn Hotel is subject to
a consumer price index adjustment factor.
See "Company Properties" on page 15 of this prospectus for a comprehensive
analysis of base rent and percentage rent payable under our Leases.
PROHIBITION ON OWNERSHIP AND OPERATION OF ADDITIONAL HOTELS
Generally, all of our hotel leases prohibit us from owning, or having any
interest in, any hotel or motel properties within a five (5) mile radius of any
of our hotels. All of our hotel leases also prohibit our lessee from owning,
operating or managing any hotel or motel properties within a five (5) mile
radius of any of our hotels.
MAINTENANCE, MODIFICATIONS AND CAPITAL EXPENDITURES
Generally, our lessee, at its expense, is required to maintain our hotels in
good order and repair, except for ordinary wear and tear, and to make
non-structural repairs, foreseen and unforeseen repairs, and ordinary repairs
which may be necessary and appropriate to keep our hotels in good order and
repair. We are required, at our expense, to maintain the structural elements of
our hotels, including the roof, except for the Mission Bay Hotel which is the
responsibility of our lessee.
Our lessee, at its expense and subject to our approval, may make non-capital
and capital additions, modifications or improvements to our hotels, if the
lessee's action does not significantly alter the character or purposes of our
hotels or significantly detract from the value or operating efficiencies of the
hotels. All alterations, replacements and improvements become our property upon
termination of the leases. We own 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, we are required to fund into replacement 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
our hotels, and, as appropriate, for reconstruction or restoration of the hotels
due to casualty damage or condemnation. Expenditures from the reserve accounts
generally must be jointly approved by us and the lessee.
With respect to our hotels leased to Buckhead America Corporation or BAC
Hotel, we have entered into agreements with our lessees, which generally require
the lessee to, at its expense, make various capital improvements to our hotels.
INSURANCE ON OUR HOTELS
Our lessee is required to pay for all insurance on our hotels, with extended
coverage, including business interruption, casualty, comprehensive general
public liability, workers' compensation and other insurance, and must name us as
the insured or an additional named insured.
INDEMNIFICATION FROM OUR LESSEES
Under each of the leases, our lessee is obligated to indemnify us and hold
us harmless, from and against all liabilities, costs and expenses, including
reasonable attorneys' fees and expenses, incurred by, imposed upon or asserted
against us. This indemnification, however, may not be interpreted to require the
lessee to indemnify us against our own grossly negligent acts or omissions or
willful misconduct.
FIRST RIGHT OF REFUSAL OF OUR LESSEES
Except for the Lease on the Mission Bay Hotel, each of leases contains
provisions that, if we receive a third party offer to purchase a particular
hotel, our lessee may purchase the hotel in question at the same price and
otherwise upon the same terms and conditions as are contained in our offer.
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SECURITY DEPOSITS FROM OUR LESSEES
Except for the Lease on the Mission Bay Hotel, each of our leases requires
our lessee, as security for the performance by the lessee of its obligations
under the leases, to deposit with us a security deposit. Under our leases with
Buckhead America Corporation and BAC Hotel, the security deposit is in the form
of shares of our Common Stock. Under the lease for the Flagstaff Hotel, the
security deposit is in the form of cash.
CERTAIN TERMINATION RIGHTS OF OUR LESSEES
Except for the Lease on our hotel located in Miner, Missouri, our leases
with BAC Hotel entitle the lessee to without cause terminate either one (1) or
two (2) of the leases after the first (1st) but prior to the fifth (5th)
anniversary of the lease term. As to the second of any lease terminations, the
lessee must pay us a termination fee more specifically set forth in each lease.
Additionally, the lease on the Flagstaff Hotel, provides our 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.
The Flagstaff Hotel lease additionally provides our 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 on the Mission Bay Hotel, each of our leases contains
provisions generally requiring us to pay a termination fee to our lessee if we
sell a hotel during the lease term and the purchaser of the hotel does not
assume our obligations under the associated lease.
FRANCHISE AGREEMENTS
All of our hotels are currently operated pursuant to franchise agreements
with Super 8 Motels, Sleep Inn Hotels or Country Hearth Inn Hotels, except for
the Mission Bay Hotel, which is operated as a Vagabond Inn with no franchise
agreement. We expect that a majority of any additional hotels we acquire will
also be subject to similar agreements. We believe franchises and 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.
Our 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. Our lessees, under the leases are
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.
Our franchise agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of our hotels,
which are established by the franchisors to maintain uniformity in the system
created by each franchisor. These standards 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
these standards could require significant expenditures by our lessee for capital
improvements. Any improvements, however, could increase the value of the
applicable hotel to our benefit.
Our 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.
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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 our hotels typically reflect the effects of this
industry seasonality. This seasonality may cause significant quarterly
fluctuations in our lease revenues.
LITIGATION
We are a party to the following 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.
We were named as a defendant in the above complaint filed on September 24,
1998. The complaint alleges, among other things, that we are obligated to
reimburse $150,000 which the plaintiffs paid to us for certain due diligence
items under 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. On May 10, 2000, we entered into a settlement agreement
with the plaintiffs in satisfaction of the judgment, including pre-judgment
interest. The settlement agreement provides for a one time cash payment of
$64,276.00 to the plaintiffs accompanied by the execution and delivery of a
promissory note in the principal amount of $100,000. The promissory note is
payable in twelve equal monthly installments of $8,606.64 and is secured by
50,000 shares of our Series "A" Convertible Preferred Stock.
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.
We were 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. of their payment obligations under two seller promissory notes
delivered to each plaintiff in partial payment of the purchase price for the
hotels located in Findlay, Ohio and Auburn, Indiana. We were named as a
defendant in both complaints based upon our guaranty of the payment of the
seller notes. On July 30, 1999, a judgment was rendered in favor of the
plaintiffs against the partnerships and us 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 hotel located in Findlay, Ohio
in the approximate amount of $650,000.00 were satisfied in full from the
proceeds of the sale of the property. We continue to guaranty 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., our wholly owned subsidiary, and RPD Mission Bay, LLC, and
RPD Hotels 18, LLC, the operator of our 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 a public thoroughfare adjacent to our hotel. The lawsuit is
being defended on behalf of CrossHost by the insurance carrier of the hotel
operator.
We are a party to other, non-material legal proceedings through the ordinary
course of business. We do not anticipate the losses, if any, will have a
material impact on our financial condition, results of operation or liquidity.
20
<PAGE>
MARKET FOR OUR COMMON EQUITY AND DIVIDEND HISTORY
Our Class "A" Common Stock trades and is reported on the American Stock
Exchange ("AMEX") under the symbol "HFD". Our Common Stock began trading on
April 22, 1996, the date of our initial public offering. The following table
shows the range of high and low bid prices of our Common Stock for the indicated
periods as reported on the AMEX.
<TABLE>
<CAPTION>
1998
--------------------------
HIGH LOW
----------- ------------
<S> <C> <C>
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
<CAPTION>
1999
--------------------------
HIGH LOW
----------- ------------
<S> <C> <C>
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
<CAPTION>
2000
--------------------------
HIGH LOW
----------- ------------
<S> <C> <C>
First Quarter............................................. $ 2 7/16 $ 1 1/4
</TABLE>
As of May 19, 2000, there were 1,720,000 outstanding shares and
approximately 1,100 shareholders of record of our Class "A" Common Stock. The
closing bid price was $1.25.
During 1997, we 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. We did not declare or pay any dividends in 1998 or 1999. Future
distributions to our stockholders will be dependent upon our net cash flow from
the operations of our hotels, financial condition, capital requirements and
other factors deemed relevant by our Board of Directors.
21
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table shows selected historical financial information for Host
Funding, all of which was derived from the consolidated financial statements
included with this prospectus. You should read the following information in
conjunction with the consolidated financial statements and related notes
included with this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" starting on page 23 of this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
-----------------------------
GROSS REVENUES............... $3,879,333 $3,926,042 $3,837,350 $1,768,783
LOSS BEFORE INCOME TAXES..... ($1,972,726) $(904,316) ($1,025,514) $(149,276)
NET LOSS..................... ($1,972,726) $(904,316) ($1,025,514) $(149,276)
BASIC AND DILUTED NET LOSS
PER COMMON SHARE........... $(1.22) $(0.58) $(0.68) $(0.12)
WEIGHTED AVERAGE NUMBER OF
BASIC AND DILUTED COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING......... 1,615,894 1,559,916 1,516,652 690,000
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................. 3$0,570,050 3$2,449,658 3$1,996,180 2$0,435,575
LONG TERM DEBT
(Including current
portion)................... 2$3,611,300 2$5,790,837 2$5,036,346 1$5,500,000
PREFERRED STOCK.............. $1,500,000 -0 - -0 - -0 -
SHAREHOLDERS' EQUITY......... $2,789,850 $3,587,500 $4,279,337 ($2,064,834)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 we entered into a management
agreement with BAC Hotel Management relating to the Tallahassee Hotel.
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 to our hotel located in Sarasota, Florida and
is further reduced by reflecting room revenue and operating expenses separately
for the 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.
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 our
directors agreeing to forego director fees, in return for forgiveness of
interest due on the director notes.
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 hotels located in Findlay, Ohio and Auburn, Indiana. 1998 was the
first full year of operations for the Findlay and Auburn Hotels.
Depreciation expense, which is included in depreciation and amortization, is
calculated based upon the original historical cost of the five initial hotels we
acquired and the acquisition value of the remaining hotels. Our hotels 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: The amounts of $862,000 and $704,000 for the
years ended 1999 and 1998, included 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.
23
<PAGE>
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 potential hotel acquisitions in Florida and other parts of
the southeastern United States.
Amortization of Unearned Directors Compensation was calculated based upon
the terms of the independent directors' notes.
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 Findlay Hotel was not finalized until 1999.
The Net Gain from Transfer of Lease of approximately $279,000 resulted from
the change in lessee on our hotel 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 our hotels in 1998.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Occupancy and average room rates of approximately 59% and $48.02 for our
hotels for the three months ended March 31, 2000 resulted in total sales of
approximately $2,215,000 and generated total lease and net operating revenues of
approximately $690,000. Occupancy and average room rates of approximately 56%
and $46.74 for our hotels for the three months ended March 31, 1999 resulted in
total sales of approximately $2,260,000, which generated total lease revenues of
approximately $812,000. 1999 included sales and revenues of $63,000 from the
Findlay Hotel subsequently sold in 1999. Lease revenues were negatively impacted
in the first quarter of 2000 by reductions to base rent as a result of
competition adjustments.
Administrative expenses--other were approximately $181,000 and $177,000 for
the three month periods ended March 31, 2000 and 1999, and consisted primarily
of the following approximate amounts: advisory fees paid to our advisor of
$87,000 and $0; insurance of $15,000 and $0; legal fees of $28,000 and $26,000;
settlement claims not accrued of $40,000 and $0; and other costs of $11,000 and
$38,000. Costs incurred in 1999 but included in advisory fee paid to our advisor
in 2000 were $0 and $113,000.
LIQUIDITY AND CAPITAL RESOURCES
On December 22, 1999, we sold to Mackenzie Patterson 500,000 shares of our
Series "A" Convertible Preferred Stock, $0.01 par value per share, for a
purchase price of $1,500,000.00. We used the proceeds from the sale of the
Series "A" Preferred to satisfy current obligations and for working capital. We
also issued to MacKenzie Patterson Warrants to purchase 500,000 shares of our
Class "A" Common Stock 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. Concurrently
with the purchase of the shares of Series "A" Preferred and the issuance of the
Warrants, we entered into an Advisory Agreement under which MacKenzie Patterson
assumed responsibility for our day to day operations and direction of our new
investments. In order to implement the responsibilities of MacKenzie Patterson
under the Advisory Agreement, the principle offices of the Company were moved
from Dallas, Texas to Moraga, California in January 2000.
Effective May 12, 1998, Host Ventures, Inc., our wholly owned subsidiary
entered into a new loan agreement with Credit Suisse First Boston in which the
principal amount of the existing debt from First Boston to Host Ventures was
increased from $8,725,000 to $9,075,000. We used the additional proceeds of the
loan for general corporate purposes. The term of the 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 loan provides for a
24
<PAGE>
"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 loan.
Effective May 12, 1998, we entered into a mezzanine loan agreement with
Credit Suisse First Boston in which Credit Suisse First Boston loaned the
Company $825,000. We used the proceeds of the loan 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. We subsequently formed Host Enterprises, Inc., as a wholly owned,
special purpose entity for the purpose of transferring the mezzanine loan to
Host Enterprises. We guaranteed the performance by Host Ventures of the terms of
the mezzanine loan and pledged the stock of Host Ventures as security for the
mezzanine loan.
On June 19, 1997, we executed a promissory note payable to Blacor, Inc. in
the original principal amount of $70,000. On December 30, 1997, the note was
extended by a new promissory note in the original principal amount of $86,600.
Effective December 30, 1998, the note was again extended to April 30, 1999.
During 1999, the balance of the note was increased to $108,600. On
September 29, 1999, we paid a portion of the outstanding principal balance and
all accrued interest on the note by the issuance to Blacor of 33,000 shares of
our Class "A" Common Stock. The remaining principal and interest outstanding was
paid in full in December, 1999.
In October 1997, B-H Findlay, L.P. executed a note payable to the seller of
our hotel located in Findlay, Ohio and BH-Auburn, L.P. executed a note payable
to the seller of our hotel located in Auburn, Indiana in partial payment of the
purchase price of the hotels. We are the beneficial owner of 81% of the
partnership interests in each of B-H Findlay and B-H Auburn. The seller notes
were originally secured by 90,000 shares of our Class "B" Common Stock and our
corporate guaranty. The notes were modified on June 15,1998 to provide that if,
on October 21, 1998, the closing price of our Common Stock as traded on the
American Stock Exchange was less than $6.50 per share, we would make an
additional 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 the
cash payment to the sellers, equaled $750,000.
B-H Findlay and B-H Auburn defaulted on their payment obligations under the
seller 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 us, as guarantor. The
complaints were filed in April 1999 and together demanded payment of the seller
notes in full and the related 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 us 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. Our guaranty and the pledged stock continue to secure the
obligations of B-H Auburn under the Auburn Note and the cash payment in the
approximate of $800,000.00, as of December 31, 1999.
Our principal source of cash to meet our cash requirements, including
distributions to our shareholders and repayments of indebtedness, is the cash
flow from our hotel leases. For the year ended December 31, 1999, cash flow used
in operating activities was approximately $358,000.
We have addressed the "Year 2000 Problem" and determined that our automated
systems are "Y2K Compliant." The lessees and operators of our hotels have also
advised us that the systems relating to the hotels are "Y2K Compliant." This
compliance includes all front office systems, electronic locks, telephone
systems, credit card processing, communications software with primary bankers,
motel VCRs, FAX machines, copiers, cash registers, television systems, and
elevators, among other systems. If we suffer material loss or significant
adverse effects to operations resulting from non-
25
<PAGE>
compliance, we 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 us
to maintain compliance is expected to be immaterial.
We have no committed additional sources of external liquidity available and
must rely on our internal cash flow to meet our liquidity needs. Our principal
source of cash to meet our cash requirements, including distributions to our
shareholders, is our share of the cash flow from our hotels. Although the
obligations of BAC Hotel Management, as lessee, under the hotels leased by BAC
Hotel are guaranteed in part by Buckhead American Corporation, the ability of
BAC Hotel to make lease payments under our hotel leases, and, therefore, our
liquidity, including our ability to make distributions to our shareholders, is
dependent on the ability of BAC Hotel to generate sufficient cash flow from our
hotels.
Other than debt service on our loan facilities and notes, the capital
expenditures required under our hotel leases or our loan facilities, property
taxes on our hotels, and other administrative expenses, we are not aware of any
demands, commitments, events or uncertainties that will result or are likely to
result in a change in our liquidity.
We intend to make additional investments in hotels and may incur
indebtedness to make these investments to the extent that working capital and
cash flow from our investments are insufficient to make these investments. We
will invest in additional hotels only as suitable opportunities arise, and we
will not undertake investments unless adequate sources of financing are
available. We expect that future investments in hotels will be financed, in
whole or in part, with our capital stock, proceeds from additional issuances of
our capital stock, or from the issuance of other debt or equity securities. In
the future, we 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 our charter restrictions. Any debt incurred
or issued by us 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 our
Board of Directors deems reasonably prudent and in our best interest.
INFLATION
Operators of hotels generally possess the ability to adjust room rates
quickly. Competitive pressures may, however, limit the ability of the lessees
and operators of our hotels to raise room rates in the face of inflation.
SEASONALITY
Hotel operations are generally seasonal in nature based upon geographic
locations. This seasonality can be expected to cause fluctuations in our
quarterly lease revenues to the extent that we receive percentage rent.
26
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Our Board of Directors consists of five (5) members. Our directors are
elected at the annual meeting of our stockholders and serve until the next
annual meeting of our stockholders or until a successor has been elected or
appointed. Set forth below is certain information regarding directors and
executive officers.
GUY E. HATFIELD, DIRECTOR
Guy E. Hatfield has served as a director 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.
WILLIAM M. BIRDSALL, DIRECTOR
William M. Birdsall has served as a director since 1996. Mr. Birdsall, 51,
was our Chairman of the Board and Chief Executive Officer until March 31, 1998.
Effective April 1, 1998, Mr. Birdsall resigned his position as Chairman of the
Board and Chief Executive Officer, but continues to serve as a director. 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 has served as a director since March 1999. 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 has served as a director since March 1999. 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,
27
<PAGE>
Mr. Dixon left MacKenzie Patterson to begin buying and selling securities for
his own account and that of Sutter Opportunity Fund, and 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 Host Funding.
GLEN FULLER, DIRECTOR AND CHIEF OPERATING OFFICER
Glen Fuller, 27, was appointed a director by the incumbent Board of
Directors, effective as of December 23, 1999, to fill the vacancy created by the
resignation of Michael S. McNulty. Mr Fuller was also appointed our Chief
Operating Officer in January 2000. Mr. Fuller is also senior vice president,
chief operating officer, and a director of MacKenzie Patterson, Inc., our
external advisor, with responsibility for new product development. Prior to
becoming a senior vice president, Mr. Fuller served MacKenzie Patterson for two
years as a portfolio manager and research analyst. Prior to joining MacKenzie
Patterson, Mr. Fuller spent two years managing the over the counter trading desk
for North Coast Securities Corp., a registered broker-dealer, with
responsibility for both the proprietary and retail trading desks. Mr. Fuller was
also the registered options principal and registered municipal bond principal
for North Coast Securities. Mr. Fuller currently is a NASD registered options
principal, registered bond principal, and holds a NASD Series 7, general
securities licence. Mr. Fuller has also spent time working on the floor of the
New York Stock Exchange as a trading clerk and on the floor of the Pacific Stock
Exchange in San Francisco as an assistant specialist for LIT America.
C. E. PATTERSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER
C. E. Patterson has served as our President and Chief Financial Officer
since January 1, 2000. Mr. Patterson, 59, has spent his entire business career
in the financial services industry. From 1976 to 1981, Mr. Patterson was
associated with Smith Barney, Harris Upham, Inc., as a vice president of sales,
Merrill, Lynch, Pierce, Fenner and Smith, as a senior account executive, and
Paine, Webber, Jackson & Curtis, as an account vice president. During this
period, Mr. Patterson's primary responsibilities were the counseling of
individual clients and the research and marketing of specialized financial
products. In 1981, Mr. Patterson co-founded Patterson Financial Services, Inc.,
as a financial planning firm, of which he continues to serve as president. In
1988, Mr. Patterson also co-founded the predecessor of MacKenzie
Patterson, Inc., which serves as the manager of numerous investment funds.
MacKenzie Patterson also serves as the external advisor of the Company.
Mr. Patterson is the controlling shareholder and president of MacKenzie
Patterson.
COMPENSATION OF DIRECTORS
In 1999, Messrs. Dixon and Rodgers purchased 10,000 shares of our Class "A"
Common Stock. The purchase price for the Class "A" Common Stock was paid by the
execution by each director of a $25,000 non-recourse promissory note secured by
the purchased shares. In connection with the purchase of the shares, we agreed
to forgive the promissory notes (i) in increments of 18% of the principal amount
per annum for each year the director remains a director, and (ii) upon the
death, disability or resignation of the director, except for voluntary
resignation or failure to serve. We did not pay any directors fees during fiscal
year 1999, and do not anticipate paying directors fees for fiscal year 2000.
We have not paid and do not anticipate paying directors for service on
committees. All of our directors are entitled to participate in the Host
Funding, Inc. 1997 Incentive Plan, however, since adoption, no benefits have
been issued under the 1997 Incentive Plan.
28
<PAGE>
EXECUTIVE COMPENSATION
The following table shows for the years presented, the compensation paid to
our executive officers serving during 1999:
<TABLE>
<CAPTION>
OTHER ALL
ANNUAL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) COMPENSATION COMPENSATION
------------------------------ -------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael S. McNulty, ............ 1999 $108,000
President 1998 $108,000
1997 $ 99,000
Bona K. Allen, ................. 1999 $ 76,875
Chief Financial Officer 1998 $ 84,375
1997 $ 65,625
</TABLE>
------------------------
(1) Each of Messrs. McNulty and Allen was employed during fiscal years 1997,
1998 and 1999 pursuant to an employment agreement with Host Funding. Mr
McNulty's employment agreement was terminated effective December 31, 1999.
Mr. Allen's employment agreement was terminated effective as of March 31,
2000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the ownership of our voting securities both
beneficially and of record and both individually and in the aggregate, for those
persons or entities known to us to be the owner of more than five percent (5%)
of our voting securities as of the close of business on May 31, 2000. The number
of shares and percentage ownership of Common Stock for each person or entity
assumes that shares of our Common Stock issuable upon exercise of stock warrants
to that person or entity (exclusive of others) exercisable within sixty (60)
days from May 31, 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 to us by each person or entity.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ------------------------------- ---------- ----------
<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
</TABLE>
------------------------
(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
29
<PAGE>
Income Fund, Ltd., of which MacKenzie Patterson, Inc. is either the general
partner or manager, and 15,000 shares owned individually by C.E. Patterson,
the President and a director of MacKenzie Patterson and the Chief Executive
Officer of Host Funding. Mr. Patterson may be deemed to be a beneficial
owner of the shares owned by MacKenzie Patterson by virtue of his position
as a director and president of MacKenzie Patterson.
(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, the manager
of Sutter Opportunity Fund, LLC. Robert E. Dixon, one of our directors, 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, our Chief Executive Officer may be deemed to be a beneficial
owner of the shares owned by MacKenzie Patterson by virtue of his position
as a director and president of MacKenzie Patterson.
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the ownership of each class of our equity
securities, both beneficially and of record and both individually and in the
aggregate, for our directors and executive officers, as of the close of business
on May 31, 2000. The number of shares and percentage ownership of Common Stock
for each person assumes that shares of our Common Stock issuable upon exercise
of stock warrants to that person (exclusive of others) exercisable within sixty
(60) days from May 31, 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 to us
by each person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ---------------------- ----------------- ----------
<S> <C> <C> <C>
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 *
Series "A" Preferred............... C.E. Patterson 500,000(4) 100%
Class "A" Common................... All Directors and 1,286,042 57.93%
Executive Officers as
a Group (6 persons)(5)
Series "A" Preferred............... All Directors and 500,000 100%
Executive Officers as
a Group (6 persons)(6)
</TABLE>
------------------------
(1) Includes warrants to purchase 500,000 shares of the Class "A" Common Stock
of the Company owned by MacKenzie Patterson, Inc. Also includes 106,838
shares owned collectively by MP Value
30
<PAGE>
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 is either the general partner or manager.
Mr. Patterson is the president and a director of MacKenzie Patterson.
Mr. Glen Fuller may be deemed to be a beneficial owner of the shares owned
by MacKenzie Patterson by virtue of his position as a director and an
executive officer of MacKenzie Patterson. Mr. Fuller disclaims beneficial
ownership of such shares.
(2) Includes 1,106 shares held in an Individual Retirement Account with Sunwest
Federal Credit Union for the benefit of Mr. Hatfield's wife, Dorothy
Hatfield; 1,574 shares held in an Individual Retirement Account with Sunwest
Federal Credit Union for the benefit of Mr. Hatfield; 425 shares held in
trust by Mr. Hatfield, as trustee, for the benefit of Mr. Hatfield and his
wife; 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 and 232,988
shares owned by Sutter Opportunity Fund, LLC. 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 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 MacKenzie Patterson by virtue of his
position as a director and an executive officer of MacKenzie Patterson.
Mr. Fuller disclaims beneficial ownership of such shares.
(5) See Note (4) above.
(6) See Notes (1), (2) and (3) above.
31
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ADVISOR
Although our Board of Directors is directly responsible for managing our
affairs and for setting the policies which guide us, our day-to-day operations
are performed by MacKenzie Patterson, Inc., a contractual external advisor under
the supervision of our Board of Directors. The duties of our advisor include,
among other things, investigating, evaluating and recommending real estate
investment and sales opportunities, and locating financing and refinancing
sources. Our advisor also serves as a consultant in connection with our business
plan and investment policy decisions made by our Board of Directors.
MacKenzie Patterson has served as our external advisor since January 1,
2000. The controlling shareholder and president of MacKenzie Patterson is C. E.
Patterson who also serves as our President and Chief Financial Officer. Glen W.
Fuller, who serves as our Chief Operating Officer, is also an executive officer
of MacKenzie Patterson. As of May 31, 2000, MacKenzie Patterson was the
beneficial owner of 28.01% of our outstanding shares of Common Stock and 100% of
our outstanding shares of Series "A" Convertible Preferred Stock.
The Advisory Agreement provides for MacKenzie Patterson to receive a base
annual fee of $350,000, payable in equal monthly installments of $29,167, in
advance. In addition to the base annual fee, MacKenzie Patterson receives the
following forms of additional compensation:
- an acquisition fee upon the consummation or making of each acquisition,
loan or investment by us involving improved or unimproved real property in
an amount equal to the fee generally paid to independent advisors and
consultants in the geographical area of the acquired property, but in no
event less than 1% of the purchase price of each acquisition or 1% of each
loan or investment
- a disposition fee upon the consummation of the sale or disposition of any
of our assets in an amount equal to the fee generally paid to independent
advisors and consultants in the geographical area of the disposed asset,
but in no event less than one-half of one percent of the sales price
- an additional annual fee equal to 20% of any remaining cash available for
distribution to our shareholders after payment or reservation for payment
of an amount equal to $0.40 per annum for each of our outstanding shares
The Advisory Agreement further provides that MacKenzie Patterson shall bear
the following costs and expenses:
- expenses and salaries of personnel employed by MacKenzie Patterson;
- rent and office expenses of both MacKenzie Patterson and us (unless we
maintain office space separate from that of MacKenzie Patterson);
- our ordinary and recurring administrative expenses;
- all expenses connected with ordinary and recurring communications to
holders of our securities; and
- transfer agent and registration fees and charges
The Advisory Agreement is for an initial term which expires December 31,
2000 and automatically renews for additional three year periods unless otherwise
terminated in accordance with its terms.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We have summarized below the material provisions of our Articles of
Incorporation and Bylaws. Our summary may not contain all of the information
that is important to you. See "Where To Find Additional Information" for
information about how to obtain a copy of the documents we refer to in this
section.
CAPITAL STOCK
Under our Articles of Incorporation, we are authorized to issue up to 75
million shares of stock, consisting of:
- fifty million shares of Class "A" Common Stock;
- four million shares of Class "B" Common Stock;
- one million shares of Class "C" Common Stock; and
- twenty million shares of Preferred Stock.
CLASS "A" COMMON STOCK
Shares of our Class "A" Common Stock are not redeemable, do not have any
conversion rights and are not subject to call. Holders of shares of our Class
"A" Common Stock have no preemptive, redemption, conversion or other
subscription rights and are entitled to one vote per share on any matter
submitted to a vote of our shareholders. Cumulative voting is prohibited in the
election of our directors. The holders of shares of our Class "A" Common Stock
are entitled to receive dividends, if any, as and when declared from time to
time by our Board of Directors, out of legally available funds, but subject to
the prior payment of dividends to the holders of any outstanding shares of our
Preferred Stock. Subject to the rights of the holders of our Preferred Stock, if
any, upon liquidation dissolution or winding up of our affairs, the holders of
shares of our Class "A" Common Stock will be entitled to participate equally and
ratably, in proportion to the number of shares held, in our net assets available
for distribution to holders of all shares of Common Stock. The shares of our
Class "A" Common Stock currently outstanding are validly issued, fully paid and
nonassessable.
CLASS "B" COMMON STOCK
Shares of our Class "B" Common Stock are not redeemable, do not have any
conversion rights and are not subject to call. Holders of shares of our
Class "B" Common Stock have no preemptive, redemption, conversion or other
subscription rights and are entitled to one vote per share on any matter
submitted to a vote of our shareholders. The holders of shares of our Class "B"
Common Stock are entitled to receive dividends, if any, as and when declared
from time to time by our Board of Directors, out of legally available funds, but
subject to the prior payment of dividends to the holders of any outstanding
shares of our Class "A" Common Stock or Preferred Stock. Subject to the rights
of the holders of our Preferred Stock, if any, upon liquidation dissolution or
winding up of our affairs, the holders of shares of our Class "B" Common Stock
will be entitled to participate equally and ratably, in proportion to the number
of shares held, in our net assets available for distribution to holders of all
shares of Common Stock. No shares of Class "B" Common Stock are currently
outstanding. We have pledged 90,000 treasury shares of Class "B" Common Stock to
secure seller financing and certain other obligations relating to the hotels
located in Auburn, Indiana and previously located in Findlay, Ohio.
CLASS "C" COMMON STOCK
Shares of our Class "C" Common Stock are not redeemable, do not have any
conversion rights and are not subject to call. Holders of shares of our
Class "C" Common Stock have no preemptive,
33
<PAGE>
redemption, conversion or other subscription rights and are entitled to one vote
per share on any matter submitted to a vote of our shareholders. The holders of
shares of our Class "C" Common Stock are entitled to receive dividends, if any,
as and when declared from time to time by our Board of Directors, out of legally
available funds, but subject to the prior payment of dividends to the holders of
any outstanding shares of our Class "A" Common Stock or Preferred Stock. Subject
to the rights of the holders of Preferred Stock, if any, upon liquidation
dissolution or winding up of our affairs, the holders of shares of our
Class "C" Common Stock will be entitled to participate equally and ratably, in
proportion to the number of shares held, in our net assets available for
distribution to holders of all shares of Common Stock. No shares of Class "C"
Common Stock are currently outstanding.
WARRANTS TO PURCHASE COMMON STOCK
We have issued and outstanding a series of warrants designated "Series B
Warrants." The Series B Warrants provide warrants to purchase 225,000 shares of
our Class "A" Common Stock at $10.80 per share and expire on February 2, 2001.
There are additional provisions in the Series B Warrants that allow 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.
We also have issued and outstanding Warrants to purchase 500,000 shares of
our Company's Class "A" Common Stock for an exercise price of $3.00 per share.
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, reclassification of stock,
or a recapitalization. The holders of the Warrants are entitled to certain
demand registration rights upon exercise of the Warrants. This means that at any
time after the date of issuance, the holders of at least 25% of the Warrants may
make in the aggregate, up to four (4) written requests to register the shares
issuable upon exercise of the Warrants. The holders of the Warrants are also
entitled to certain "piggy-back" registration rights if we file a registration
statement relating to the sale of securities for our own account. This means the
holders of the Warrants may participate and sell shares in our public offering,
except for shares registered by us for issuance under our employee stock option
plans or in a merger or exchange in which our shares are issued in exchange for
other securities.
SERIES "A" CONVERTIBLE PREFERRED STOCK
On December 20, 1999, we filed Articles Supplementary with the Maryland
State Department of Taxation designating 2,000,000 shares of the authorized but
unissued shares of our Series "A" Convertible Preferred Stock, $0.01 par value
per share. Of the 2,000,000 shares of the Series "A" Preferred Stock, 500,000
shares are issued and outstanding. The holders of our Series "A" Preferred Stock
are entitled to participate pro rata with the holders of shares of our
Class "A" Common Stock with respect to dividend distributions and to a
liquidation preference of $4.00 per share over the holders of shares of our
Class "A" Common Stock, upon our voluntary or involuntary dissolution,
liquidation or the winding up of our affairs. The holders of our Series "A"
Preferred Stock also have the right, exercisable at any time after December 23,
2002, to convert their shares into shares of Class "A" Common Stock on a
one-for-one basis, or to require us to redeem all or any part of their shares 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
recapitalization. The holders of Series "A" Preferred Stock 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 Stock 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 our stockholders
for approval. The holders of Series "A" Preferred Stock, voting together as a
single voting group, have the
34
<PAGE>
right to elect, at our annual stockholders meeting, two (2) of the five
(5) members of our Board of Directors.
The holders of Series "A" Preferred Stock are entitled to certain demand
registration rights relating to the shares of Class "A" Common Stock issuable
upon conversion of the Series "A" Preferred Stock. This means that at any time
after the date of issuance the holders of at least twenty-five percent (25%) of
the Series "A" Preferred Stock may make in the aggregate, up to four
(4) written requests to register the number of shares issuable upon conversion
of the Series "A" Preferred Stock. In addition, the holders of our Series "A"
Preferred Stock are entitled to certain "piggy-back" registration rights if we
file a registration statement relating to the sale of our securities for our own
account. This means the holders of our Series "A" Preferred Stock may
participate and sell shares in our public offering, except for shares registered
by us for issuance under our employee stock option plans or in a merger or
exchange in which our shares are issued in exchange for other securities.
STOCK EXCHANGE LISTING
Our Class "A" Common Stock is traded on the American Stock Exchange under
the trading symbol "HFD."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
We have agreed to indemnify our officers and directors to the maximum extent
authorized or permitted under applicable law. Maryland's corporation law
generally permits the liability of directors and officers to a corporation for
monetary damages to be limited, unless it is proven that:
- the director or officer actually received an improper personal benefit in
money, property or services;
- the director or officer acted in bad faith; or
- the director's or officer's act or omission was the result of active and
deliberate dishonesty.
In addition, it must be proven that the director's or officer's act or
omission was material to the matter giving rise to the proceeding. In the case
of a suit by us or in our right, however, a director or officer may not be
indemnified in respect of any proceeding in which he shall have been adjudged
liable to us unless a court of appropriate jurisdiction determines that the
director or officer is fairly and reasonably entitled to indemnification for
such expenses as a court may deem proper. Any amendment or repeal of our charter
may not adversely affect the rights of any person entitled to indemnification
for any event occurring prior to the amendment or repeal.
AMENDMENT OF THE BYLAWS
Except as provided by law, our Board of Directors has the exclusive power to
alter or repeal our Bylaws by the affirmative vote of a majority of our Board of
Directors.
LEGAL MATTERS
The validity of the issuance of our securities offered by this prospectus is
being passed upon by John G. Rebensdorf, P.C.
EXPERTS
Our consolidated financial statements included in this prospectus and the
related Registration Statement were audited by PricewaterhouseCoopers, LLP,
independent certified accountants, to the extent and for the periods set forth
in their report appearing elsewhere in this Prospectus. The
35
<PAGE>
consolidated financial statements are included in this prospectus in reliance
upon such report given upon the authority of PricewaterhouseCoopers, LLP, as
experts in auditing and accounting.
WHERE TO FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 in
connection with the securities offered under this Prospectus. As permitted by
SEC rules, this prospectus does not contain all of the information contained in
the registration statement or in the exhibits to the registration statement. For
further information you may read and copy documents at the public reference room
of the SEC at 450 5th Street, N.W., Washington, D.C. 20549, and at the regional
offices of the SEC at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Citicorp Center, Suite 1400 and 500 West Madison Street, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. The SEC charges a fee for copies. Copies of this
material should also be available through the Internet at the SEC EDGAR Archive,
the address of which is
http://www.sec.gov.
No person is authorized by the Company to give any information or to make
any representations other than those contained in this Prospectus, and, if given
or made, you should not rely upon such information.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE SECURITIES OFFERED UNDER THIS PROSPECTUS.
IF ANYONE GIVES YOU ANY SUCH INFORMATION OR MAKES ANY SUCH REPRESENTATIONS, YOU
SHOULD NOT RELY ON IT OR THEM AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE
AFFAIRS OF THE COMPANY MAY CHANGE AND YOU SHOULD NOT ASSUME THAT THE INFORMATION
IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
36
<PAGE>
INDEX TO COMBINED FINANCIAL INFORMATION
HOST FUNDING, INC.
<TABLE>
<CAPTION>
ITEM PAGE
---- --------
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years Ended
December 31, 1999 and 1998................................ F-5
Consolidated Statements of Stockholders' Equity for the
years Ended December 31, 1999 and 1998.................... F-6
Consolidated Statements of Cash Flows for the years Ended
December 31, 1999 and 1998................................ F-9
Notes to Financial Statements for December 31, 1999 and
1998...................................................... F-13
Consolidated Financial Statements for the Three Months Ended
March 31, 2000............................................ F-24
</TABLE>
F-1
<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
F-2
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
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--held for investment........... 23,700,508 23,957,596
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS B CLASS C ADDITIONAL EARNINGS RELATED
COMMON COMMON COMMON PAID IN (ACCUMULATED PARTY NOTE
STOCK STOCK STOCK WARRANTS CAPITAL DEFICIT) RECEIVABLE
-------- -------- -------- --------- ---------- ------------ -----------
<S> <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)
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISTION FEE........................... 160 151,840
COMMON STOCK ISSUED AS DEPOSITS AND HELD IN
ESCROW SUBJECT TO THE RELATED PURCHASE
CONTRACTS (AS AMENDED)................... 55 49,745
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS..................................
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION.............................
CONVERSION OF CLASS C COMMON STOCK TO CLASS
A COMMON STOCK........................... 1,400 (1,400)
CONVERSION OF CLASS B COMMON STOCK TO CLASS
A COMMON STOCK........................... 1,400 (1,400)
90,000 SHARES OF COMMON STOCK IN TREASURY
AT COST..................................
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD................................... 1,805,675
ISSUED AND CONTRIBUTED TO BACHOST,
L.L.C.................................... 808 749,192
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL
FE....................................... 150 97,350
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ADQUISTION
FEE...................................... (55) (49,745)
DISTRIBUTIONS.............................. (1,363,719)
NET LOSS................................... (1,025,514)
------- ------ ------ ---- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997................. $16,258 $ 0 $ 0 $ 0 $8,499,876 $(3,134,005) $ 0
<CAPTION>
UNEARNED TOTAL
DIRECTORS' TREASURY SHAREHOLDERS'
COMPENSATION STOCK EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996................. $ (262,792) $ $ 4,703,395
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISTION FEE........................... 152,000
COMMON STOCK ISSUED AS DEPOSITS AND HELD IN
ESCROW SUBJECT TO THE RELATED PURCHASE
CONTRACTS (AS AMENDED)................... 49,800
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
DIRECTORS.................................. 6,000 6,000
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION............................. 54,000 54,000
CONVERSION OF CLASS C COMMON STOCK TO CLASS
A COMMON STOCK...........................
CONVERSION OF CLASS B COMMON STOCK TO CLASS
A COMMON STOCK...........................
90,000 SHARES OF COMMON STOCK IN TREASURY
AT COST.................................. (900,000) (900,000)
PRINCIPAL REDUCTION: NOTES RECEIVABLE:
HATFIELD................................... 1,805,675
ISSUED AND CONTRIBUTED TO BACHOST,
L.L.C.................................... 750,000
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL
FE....................................... 97,500
REFUND OF COMMON STOCK ISSUED AS DEPOSIT
AND HELD PURSUANT TO RELATED ADQUISTION
FEE...................................... (49,800)
DISTRIBUTIONS.............................. (1,363,719)
NET LOSS................................... (1,025,514)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997................. $ (202,792) $ (900,000) $ 4,279,337
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS B CLASS C ADDITIONAL EARNINGS RELATED
COMMON COMMON COMMON PAID IN (ACCUMULATED PARTY NOTE
STOCK STOCK STOCK WARRANTS CAPITAL DEFICIT) RECEIVABLE
-------- -------- -------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997................. $16,258 $ 0 $ 0 $ 0 $8,499,876 $(3,134,005) $ 0
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION.............................
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE.......................... 175 114,925
COMMON STOCK ISSUED AS COMPENSATION TO
EMPLOYEE................................. 2 1,124
COMMON STOCK ISSUED PURSUANT TO SALE OF
LEASE RIGHTS............................. 622 287,378
PRINCIPAL REDUCTION: NOTES RECEIVABLE
DIRECTORS................................
54,400 SHARES OF COMMON STOCK IN TREASURY
AT COST..................................
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL
FEES RETURNED............................ (150) (97,350)
NET LOSS................................... (904,316)
------- ------ -------- -------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998................. $16,907 $ 0 $ 0 $ 0 $8,805,953 $(4,038,321) $ 0
<CAPTION>
UNEARNED TOTAL
DIRECTORS' TREASURY SHAREHOLDERS'
COMPENSATION STOCK EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997................. $ (202,792) $ (900,000) $ 4,279,337
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION............................. 54,000 54,000
COMMON STOCK ISSUED FOR ACQUIRED PROPERTIES
ACQUISITION FEE.......................... 115,100
COMMON STOCK ISSUED AS COMPENSATION TO
EMPLOYEE................................. 1,126
COMMON STOCK ISSUED PURSUANT TO SALE OF
LEASE RIGHTS............................. 288,000
PRINCIPAL REDUCTION: NOTES RECEIVABLE
DIRECTORS................................ 6,000 6,000
54,400 SHARES OF COMMON STOCK IN TREASURY
AT COST.................................. (154,247) (154,247)
COMMON STOCK ISSUED AS DEPOSIT FOR LEGAL
FEES RETURNED............................ (97,500)
NET LOSS................................... (904,316)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998................. $ (142,792) $(1,054,247) $ 3,587,500
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
RETAINED
CLASS A CLASS B CLASS C ADDITIONAL EARNINGS RELATED
COMMON COMMON COMMON PAID IN (ACCUMULATED PARTY NOTE
STOCK STOCK STOCK WARRANTS CAPITAL DEFICIT) RECEIVABLE
-------- -------- -------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998................. $16,907 $ 0 $ 0 $ 0 $8,805,953 $(4,038,321) $ 0
COMMON STOCK ISSUED AS COMPENSATION TO
EMPLOYEE................................. 10 2,240
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION.............................
FORGIVENESS OF BALANCE OF UNEARNED
COMPENSATION TO FORMER DIRECTORS.........
COMMON STOCK SOLD TO DIRECTOR.............. 200 19,800
COMMON STOCK REDEEMED......................
COMMON STOCK ISSUED TO FORMER DIRECTORS AND
CHAIRMAN................................. 300 82,200
COMMON STOCK ISSUED TO NEW DIRECTORS....... 200 49,800
COMMON STOCK ISSUED IN PAYMENT OF DEBT..... 1,028 200,244
WARRANTS ISSUED TO NEW INVESTOR............ 750,000
NET LOSS................................... (1,972,725)
------- ------ ------ -------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999................. $18,645 $ -- $ -- $750,000 $9,160,237 $(6,011,046) $ --
<CAPTION>
UNEARNED TOTAL
DIRECTORS' TREASURY SHAREHOLDERS'
COMPENSATION STOCK EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998................. $ (142,792) $(1,054,247) $ 3,587,500
COMMON STOCK ISSUED AS COMPENSATION TO
EMPLOYEE................................. 2,250
AMORTIZATION OF UNEARNED DIRECTORS
COMPENSATION............................. 24,000 24,000
FORGIVENESS OF BALANCE OF UNEARNED
COMPENSATION TO FORMER DIRECTORS......... 95,195 95,195
COMMON STOCK SOLD TO DIRECTOR.............. 20,000
COMMON STOCK REDEEMED...................... (412) (412)
COMMON STOCK ISSUED TO FORMER DIRECTORS AND
CHAIRMAN................................. 82,500
COMMON STOCK ISSUED TO NEW DIRECTORS....... (50,000) --
COMMON STOCK ISSUED IN PAYMENT OF DEBT..... 201,272
WARRANTS ISSUED TO NEW INVESTOR............ 750,000
NET LOSS................................... (1,972,725)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1999................. $ (73,597) $(1,054,659) $ 2,789,580
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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 amortization...................... 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
----------- ----------- -----------
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
</TABLE>
F-9
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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
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............................ $ $ $
</TABLE>
F-10
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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)
Commonstock pledged to Host
Funding as security deposit
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.................. $ $ $
</TABLE>
F-11
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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.
F-12
<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.
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.
F-13
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-14
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-15
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<CAPTION>
PURCHASE COST
(IN NUMBER OF NUMBER
YEAR THOUSANDS) HOTEL PROPERTIES OF ROOMS
---- ------------- ---------------- --------
<S> <C> <C> <C>
1996 $16,664 5 430
1997 11,530 3 240
1998 0 0 0
1999 0 0 0
</TABLE>
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
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
F-16
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: REAL ESTATE INVESTMENTS (CONTINUED)
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.
F-17
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: REAL ESTATE INVESTMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
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
</TABLE>
F-18
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES
PAYABLE)
LONG-TERM DEBT:
The following presents a summary of the long-term debt of Host Funding and
its subsidiaries as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Host Ventures first mortgage note payable,
collateralized by the properties owned by Host
Ventures, interest of 8.12% per annum, interest
and principal payable in monthly installments of
$70,765, due June, 2023.......................... $ 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
=========== ===========
</TABLE>
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
F-19
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES
PAYABLE) (CONTINUED)
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.
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.
F-20
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES
PAYABLE) (CONTINUED)
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:
<TABLE>
<S> <C>
2000........................................................ $ 960,000
2001........................................................ 638,000
2002........................................................ 703,000
2003........................................................ 661,000
2004........................................................ 562,000
Thereafter.................................................. 20,473,988
-----------
Total....................................................... $23,997,988
</TABLE>
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
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
F-21
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: PREFERRED STOCK (CONTINUED)
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
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.
F-22
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: SHAREHOLDERS' EQUITY (CONTINUED)
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.
F-23
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
<S> <C> <C>
ASSETS
LAND, PROPERTY AND EQUIPMENT--HELD FOR INVESTMENT:
Building and improvements................................. $17,664,925 $17,664,925
Furnishings and equipment................................. 3,200,271 3,200,271
Less accumulated depreciation............................. (3,068,369) (2,832,258)
----------- -----------
17,796,827 18,032,938
Land...................................................... 5,667,570 5,667,570
----------- -----------
Land, property and equipment--held for investment....... 23,464,397 23,700,508
LAND, PROPERTY AND EQUIPMENT: HELD FOR SALE
Building and improvements................................. 1,912,730 1,912,730
Furnishings and equipment................................. 379,698 379,698
Less accumulated depreciation............................. (275,774) (275,774)
Land...................................................... 702,500 702,500
----------- -----------
Land, property and equipment--held for sale............. 2,719,154 2,719,154
----------- -----------
Total Land, property and equipment...................... 26,183,551 26,419,662
CASH AND CASH EQUIVALENTS................................... 411,591 1,129,115
RESTRICTED CASH............................................. 357,775 271,341
RENT RECEIVABLE............................................. 92,971 49,823
DUE FROM RELATED PARTIES.................................... 4,282 4,223
LONG-TERM ADVANCES TO LESSEES............................... 110,090 110,090
RESTRICTED INVESTMENTS...................................... 288,000 288,000
DEFERRED ADVISORY FEE, NET OF ACCUMULATED AMORTIZATION OF
$62,500 AT MARCH 31, 2000 AND $0 AT DECEMBER 31, 1999..... 687,500 750,000
LOAN COMMITMENT FEES, NET OF ACCUMULATED AMORTIZATION OF
$768,820 AT MARCH 31, 2000 AND $755,338 AT DECEMBER 31,
1999...................................................... 1,009,730 1,023,212
FRANCHISE FEES--NET OF ACCUMULATED AMORTIZATION OF $30,264
AT MARCH 31, 2000 AND $21,340 AT DECEMBER 31, 1999........ 70,736 73,011
PREPAID AND OTHER ASSETS.................................... 497,227 451,573
----------- -----------
TOTAL ASSETS............................................ $29,713,453 $30,570,050
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-24
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
LONG-TERM DEBT.............................................. $23,465,186 $23,611,300
SHORT TERM DEBT............................................. 386,691 386,691
LONG-TERM LEASE DEPOSIT..................................... 588,000 588,000
OPTION DEPOSITS............................................. 20,000 20,000
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES.............. 872,827 1,167,444
ACCRUED INTEREST............................................ 330,845 311,971
ACCRUED PROPERTY TAXES...................................... 137,159 107,111
----------- -----------
Total liabilities....................................... 25,800,708 26,192,517
----------- -----------
MINORITY INTEREST IN PARTNERSHIPS........................... 82,170 87,953
Series A Preferred stock; $0.01 par value; $4.00
liquidation perference; authorized 2,000,000 shares;
issued and outstanding 500,000 at March 31, 2000 and
December 31, 1999....................................... 1,500,000 1,500,000
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding 1,720,000
shares at March 31, 2000 and December 31, 1999.......... 18,645 18,645
Warrants to purchase 500,000 shares of Class A Common
Stock; exercise price $3.00 per share; exercisable any
time through December 22, 2005.......................... 750,000 750,000
Additional Paid in Capital................................ 9,160,237 9,160,237
Accumulated Deficit....................................... (6,468,066) (6,011,046)
Less: Unearned directors' compensation net of accumulated
amortization of $78,973 and $72,403 at March 31, 2000
and December 31, 1999 respectively...................... (67,027) (73,597)
----------- -----------
3,393,789 3,844,239
----------- -----------
Less: Common stock in treasury at cost, 148,350 and
144,550 shares at March 31, 2000 and December 31, 1999,
respectively............................................ (1,063,214) (1,054,659)
----------- -----------
Total shareholders' equity.............................. 2,330,575 2,789,580
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $29,713,453 $30,570,050
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-25
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
NET INCOME/LOSS FROM OPERATIONS
Room revenue.............................................. $ 232,418 $
Operating expenses........................................ 131,291
----------- -----------
Income from property operations........................... 101,127 --
CORPORATE REVENUES:
Lease revenue-Lessees..................................... 589,387 812,504
Interest income & Other income............................ 10,354 61,122
----------- -----------
Total revenue........................................... 599,741 873,626
----------- -----------
EXPENSES:
Interest expense, including amortization of loan costs.... 590,611 665,780
Depreciation and amortization............................. 300,887 282,864
Administrative expenses--other............................ 180,793 177,746
Property taxes............................................ 84,810 91,464
Minority Interest in Partnerships......................... (5,783) (14,383)
Amortization of unearned directors' compensation.......... 6,570 13,500
----------- -----------
Total expenses.......................................... 1,157,888 1,216,971
----------- -----------
LOSS BEFORE OPTION PAYMENT AND TRANSFER OF LEASE TO
VAGABOND.................................................. (457,020) (343,345)
Option payment............................................ 0 500,000
Costs related to lease transfer............................. 0 (221,138)
----------- -----------
NET INCOME (LOSS)........................................... $ (457,020) $ (64,483)
=========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE............... $ (0.27) $ (0.04)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 1,720,000 1,547,195
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-26
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVTIES:
Net loss.................................................. $ (457,020) $ (64,483)
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 300,887 271,095
Amortization of loan fees............................... 13,483 13,851
Amortization of unearned directors' compensation........ 6,570 13,500
Stock issued as compensation............................ -- 2,250
Minority interest in partnerships....................... (5,783) (13,851)
Changes in operating assets and liabilities:
Rent receivable......................................... (43,148) 9,225
Rent, interest and other receivable--due from related
party................................................... (59) (4,464)
Prepaid and other assets.................................. (45,654) (31,621)
Accounts payable and accrued expenses..................... (245,697) (21,034)
----------- -----------
Net cash (used in) provided by operating activities......... (476,421) 174,468
----------- -----------
INVESTING ACTIVITIES:
Investment in land, property and equipment................ -- (13,610)
Restricted cash........................................... (86,434) (140,142)
----------- -----------
Net cash (used in) investing activities................... (86,434) (153,752)
----------- -----------
FINANCING ACTIVITIES:
Short term debt........................................... -- (17,004)
Purchase of Company stock................................. (8,555) (413)
Payments on long-term debt................................ (146,114) (143,972)
Long-term lease deposit................................... -- 171,947
----------- -----------
Net cash (used in) provided by financing activities..... (154,669) 10,558
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (717,524) 31,274
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,129,115 66,328
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 411,591 $ 97,602
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-27
<PAGE>
HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interst................... $ 558,254 $ 699,187
--------- ---------
Non-cash investing activities:
Common stock issued as compensation Class A common...... $ - $ 10
Additional paid in capital............................ -- 2,240
Salary expense........................................ -- (2,250)
--------- ---------
Net non-cash investing activity....................... $ -- $ --
=========
Property & equipment additions; repairs made by Buckhead
to certain properties.................................
Notes and other receivable............................ $ -- $(181,606)
Land, property & equipment............................ -- 181,606
--------- ---------
Net non-cash investing activity....................... $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-28
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Host
Funding, Inc., a Maryland corporation (the "Registrant" or the "Company"),
include the accounts of the Company and its consolidated subsidiaries, Host
Ventures, Inc. ("Host Ventures"), CrossHost, Inc ("CrossHost"), and Host
Enterprises, Inc. ("Enterprises"), and the Company's interest in the Country
Hearth Inn located in Auburn, Indiana. The Company is in the business of
acquiring motel properties and leasing such properties to professional hotel and
motel management companies who operate and manage the Company's hotels. As of
March 31, 2000, the Company owned interests located in 11 hotels in 8 states
(the "Company Properties").
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q. Accordingly, these
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management of the Registrant, all adjustments necessary for a
fair presentation have been included. The financial statements presented herein
have been prepared in accordance with the accounting policies described in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and
should be read in accordance therewith. The results of operations for the
three-month period ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
2. USE OF ESTIMATES
The preparation of the financial statements in conforming with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. NET INCOME/(LOSS) PER SHARE
Net Income or Loss per share for the three months ended March 31, 2000 and
1999 is computed based on the weighted average number of shares of common stock
outstanding. The impact of common stock equivalents to earnings per share is
antidilutive.
4. TRANSFER OF LEASE AND GRANTING OF OPTION TO PURCHASE: MISSION BAY PROPERTY
Effective January 1, 1999, the Company terminated the lease and related
franchise agreement on the Super 8 property located in Mission Bay, California
(the "Mission Bay Property"). A termination fee of $84,400 was due and paid to
the previous lessee. Concurrently with such termination, the Company entered
into a lease agreement with RPD 18, LLC ("RPD"), an affiliate of Vagabond Inns,
whereby RPD agreed to lease the Mission Bay Property under substantially the
same terms and conditions as the previous lessee. In consideration for such
transfer, RPD paid the Company a non-refundable fee (the "Mission Bay Lease
Fee") in the amount of $500,000. Upon execution of the lease with RPD, RPD
converted the Mission Bay Property from a Super 8 motel to a Vagabond Inn. In
conjunction with such conversion, the Company paid the amount of $71,000 to the
previous franchisor in termination fees. The Mission Bay Lease Fee, the
termination fee paid to the previous lessee, the termination fee paid to the
previous franchisor, and certain other costs incurred by the Company are all
reflected in the Company's Consolidated Statement of Operations. In
February 1999, the Company
F-29
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. TRANSFER OF LEASE AND GRANTING OF OPTION TO PURCHASE: MISSION BAY PROPERTY
(CONTINUED)
granted an option to purchase the Mission Bay Property to RPD (the "RPD Option")
for a purchase price of $3,225,000, which was subsequently exercised by RPD in
March 1999.
The sale of the Mission Bay Property to RPD resulting from the exercise of
the RPD Option has not yet closed due to a dispute relating to the governing
deed of trust and the applicable defeasance and release requirements. RPD and
the Company, with the knowledge of First Union National Bank (the "Master
Servicer"), relied upon the Deed of Trust filed of record in the Recorder's
Office of San Diego County on March 17, 1997, as the basis for negotiating the
terms of the RPD Option. Additionally, Lennar Partners (the "Special Servicer"),
on behalf of the Master Servicer, acknowledged such deed of trust through the
Subordination, Non-Disturbance, & Attornment Agreement executed by the Special
Servicer in the first quarter 1999. Upon giving notice to the Master Servicer of
the exercise of the RPD Option and requesting a release of the Mission Bay
Property, the Master Servicer informed the Company that the deed of trust filed
of record (the "Recorded Deed of Trust") 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. On
June 24, 1999 a second deed of trust was filed of record (the "Slander of Title
Deed of Trust"). The Slander of Title Deed of Trust amended and restated the
Recorded Deed of Trust. The Company has been informed by the Company's
California legal counsel that, unless the Slander of Title Deed of Trust is
removed, all defeasance costs may, at a minimum, be negated.
5. PREFERRED STOCK
On December 22, 1999, the Company sold 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 of 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. 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.
6. COMMITMENTS & CONTINGENCIES
REIT STATUS
The Company, as a requirement under the Internal Revenue Code (the "Code")
to elect REIT status, must have no more than five (5) shareholders, who own no
more than 50% of the common stock, common stock equivalents, or other forms of
equity outstanding of the Company. The Company has not satisfied this
requirement and therefore, has not elected to qualify as a REIT and currently is
subject to the corporate tax provisions. However, the Company has a net deferred
tax asset under SFAS 109, Accounting for Income Taxes, that has been fully
reserved. The Company's decision not to elect
F-30
<PAGE>
HOST FUNDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS & CONTINGENCIES (CONTINUED)
REIT qualification should not adversely affectthe stockholders of the Company in
that the Company had no taxable income for the 1999 year and expects no material
federal income tax liability for the year ended 2000.
FRANCHISE AGREEMENTS
The Company has been granted franchise license agreements relating to the
Super 8 Motels, Sleep Inns, and Country Hearth Inn owned by the Company or its
affiliates for terms expiring in 2005, 2011, and 2012, respectively. Pursuant to
the terms of the agreement, the Company is required to pay royalty fees and
advertising fees of 5% to 4% and 3% to 1.3%, respectively, reservation fees due
under the Sleep Inn agreements of 1.75% of gross room revenue, and reservation
fees due under the Country Hearth agreements of 1% of gross room revenues plus
$1.00 per each room night generated by the Country Hearth reservation system.
Pursuant to the lease agreements for each of the hotel properties owned by the
Company, the responsibility for payment of the fees on the Super 8 Motel located
in Flagstaff, Arizona has been assigned to Crossroads, as lessee. The Company is
not responsible for any franchise costs associated with the Mission Bay
Property. The responsibility for payment of the fees on the remaining Company
Properties has been assigned to Buckhead or its affiliates.
NOTES PAYABLE RELATED TO PROPERTY ACQUISITIONS
In May 1999, the Company entered into negotiations to purchase certain
properties, located primarily in the southeastern portion of the United States
(the "Southeast Properties"). In connection therewith, the Company executed an
application with a lender to obtain financing for the Southeast Properties.
$140,000 was funded to the lender by an unaffiliated party on behalf of the
Company in prepayment of certain due diligence costs related to such financing.
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%; and each note matures on December 31, 1999. The holder of
the notes may, at the holder'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. As of March 31, 2000 the notes remain unpaid and interest continues to
accrue at the stated rate. Management is in discussion with the holder of the
notes regarding alternative repayment terms.
7. SUBSEQUENT EVENTS
SETTLEMENT OF LITIGATION
The Company was named a defendant in the case styled Five Lion, Inc. and
Lion Investment Limited Partnership vs. Host Funding, Inc., United States
District Court, District of Minnesota, Fifth Division, Court File No.
98-2154-MJD/RLE filed on September 24, 1998. In January, 2000, the plaintiffs
obtained a summary judgement with regard to a portion of their claims. On
May 10, 2000, the Company entered into a settlement agreement with the
plaintiffs. Said agreement calls for an immediate lump sum payment of $64,276.00
and the execution of a promissory note in the amount of $100,000. The Company
recorded an additional liability relative to this matter in the amount of
$14,276 to a total of $164,276.
F-31
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 26,400
AMEX filing fees............................................ $ 20,000
Accounting fees and expenses................................ $ 2,500
Blue Sky fees and expenses.................................. $ 5,000
Legal fees and expenses..................................... $ 35,000
Printing.................................................... $ 15,000
Miscellaneous............................................... $ 5,000
--------
TOTAL............................................... $118,900
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its shareholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (ii) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. Maryland law
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or
II-1
<PAGE>
(ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
has reasonable cause to believe that the act or omission was unlawful. However,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, Maryland law requires, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately by determined that the standard
of conduct was not met.
ITEM 16. EXHIBITS
The Exhibits to this Registration Statement are listed in the Exhibit Index
commencing at page EX-1 of this Registration Statement.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a) (3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective Registration
Statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that the undertakings set forth in subparagraphs (i) and (ii) above do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in this registration statement;
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver to cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
give, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Moraga, State of
California, on the 8th day of June, 2000.
<TABLE>
<S> <C> <C>
HOST FUNDING, INC., a Maryland corporation
(Registrant)
By: /s/ GLEN FULLER
-----------------------------------------
Glen Fuller
CHIEF OPERATING OFFICER
</TABLE>
II-4
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Glen Fuller and Robert E. Dixon, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any registration statement that is to be effective upon filing pursuant to
Rule 462 under the Securities Act of 1933, as amended, and to cause the same to
be filed with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting to said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing whatsoever requisite or desirable to be
done in and about the premises, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorneys-in-fact and agents, or either of them, or
their substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 8th day of June, 2000 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT E. DIXON
------------------------------------------- Director and Chairman of the
Robert E. Dixon Board June 8, 2000
/s/ BRIAN K. RODGERS
------------------------------------------- Director
Brian K. Rodgers June 8, 2000
/s/ WILLIAM M. BIRDSALL
------------------------------------------- Director
William M. Birdsall June 8, 2000
/s/ GUY E. HATFIELD
------------------------------------------- Director
Guy E. Hatfield June 8, 2000
/s/ GLEN FULLER
------------------------------------------- Chief Operating Officer
Glen Fuller June 8, 2000
/s/ C.E. PATTERSON Chief Executive Officer,
------------------------------------------- Principal Financial Officer
C.E. Patterson and Chief Accounting Officer June 8, 2000
</TABLE>
II-5
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
EXHIBITS
HOST FUNDING, INC.
(Exact name of Registered as specified in its Charter)
EX-1
<PAGE>
EXHIBIT INDEX
Host Funding, Inc.
The following exhibits are included as part of this Registration Statement,
except those exhibits which are referenced as previously filed with the
Securities and Exchange Commission and are incorporated by reference to another
registration statement, report or document. References to the "Company" in the
Exhibit Index mean HOST FUNDING, INC., a Maryland corporation.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
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 Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.2 to
Company's Annual Report on Form 10-K filed on March 31,
1997).
4.3 Form of Series B Warrant dated effective as of February 3,
1997 (incorporated by reference to Exhibit 4.3 to
Company's Annual Report on Form 10-K filed on March 31,
1997).
4.4 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).
4.5 Form of Series "A" Convertible Preferred Stock Certificate
(to be filed by amendment)
5.1 Legal Opinion of John G. Rebensdorf, P.C. (to be filed by
amendment)
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 Subsidiaries of Registrant.
23 Consent of Price Waterhouse Coopers, LLC. (to be filed by
amendment)
24 Power of Attorney (included in Part II of the Registration
Statement).
</TABLE>
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.
EX-2
