SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 1-14280
Host Funding, Inc.
(Exact name of Company as specified in its charter)
Maryland 52-1907962
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1640 School Street, Suite 100, Moraga, California 94556
(Address of principal executive offices) (Zip Code)
(925) 631-7929
(Company's Telephone Number, Including Area Code)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the Company's
classes of Common Stock, as the latest practicable date.
As of April 30, 2000, the Company had 1,720,000 shares of Class "A"
Common Stock outstanding.
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TABLE OF CONTENTS
Item Number Page
PART I
1. Financial Statements 2
2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II
1. Legal Proceedings 14
2. Changes in Securities 16
3. Defaults Upon Senior Securities 16
4. Submission of Matters to a Vote of Security Holders 16
5. Other Information 16
6. Exhibits and Reports on Form 8-K 16
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
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 23,464,397 23,700,508
- held for investment
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
============ ============
Continued
The accompanying notes are an integral part
of the consolidated financial statements
- --------------------------------------------------------------------------------
2
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HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
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
============ ============
Concluded
The accompanying notes are an integral part
of the consolidated financial statements
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3
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
2000 1999
------------ -------------
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
============== ============
The accompanying notes are an integral part
of the consolidated financial statements
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4
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
- --------------------------------------------------------------------------------
OPERATING ACTIVTIES:
Net loss $ (457,020) $ (64,483)
Adjustments to reconcile net
income to net cash (used in)
provided by operating activities:
Depreciation and amorti-
zation 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
============ ============
Continued
The accompanying notes are an integral part
of the consolidated financial statements
5
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
- --------------------------------------------------------------------------------
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 $ - $ -
========== ===========
(Concluded)
The accompanying notes are an integral
part of the consolidated financial statements
6
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Host Funding, Inc.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
of Host Funding, Inc., a Maryland corporation (the
"Registrant" or the "Company"), include the accounts of the
Company and its consolidated subsidiaries, Host Ventures, Inc.
("Host Ventures"), CrossHost, Inc ("CrossHost"), and Host
Enterprises, Inc. ("Enterprises"), and the Company's interest
in the Country Hearth 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.
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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 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.
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5. 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 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
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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.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains or incorporates
statements that constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places in this
Quarterly Report on Form 10-Q and include statements
regarding, among other matters, the Company's growth
opportunities, the Company's acquisition strategy, regulatory
matters pertaining to compliance with governmental regulations
and other factors affecting the Company's financial condition
or results of operations. Stockholders are cautioned that any
such forward looking statements are not guarantees of future
performance, and involve risks, uncertainties and other
factors which may cause actual results, performance or
achievements to differ materially from the future results,
performance or achievements, expressed or implied, in such
forward-looking statements. Certain factors that might cause a
difference in actual results include, but are not limited to,
the Company's ability to locate and acquire hotel properties
on economically suitable terms and conditions; the Company's
dependence upon rental payments from the lessees of the
Company's hotel properties for substantially all of the
Company's income; the Company's dependence upon the abilities
of the lessees of the Company's hotel properties to manage the
hotel properties; risks associated with the hotel industry and
real estate markets in general; and risks associated with debt
financing and its availability.
Recent Developments
The Company currently owns 11 properties, all of which are
subject to percentage leases (the "Percentage Leases")
pursuant to which an affiliate of Buckhead America Corporation
("Buckhead") is responsible for management and operation of 9
properties, Crossroads Hospitality Tenant Company, LLC
("Crossroads") is responsible for management and operation of
one property, and RPD Mission Bay, LLC ("Vagabond") is
responsible for management and operation of one property.
On December 22, 1999, the Company sold to Mackenzie Patterson,
Inc., a California real estate venture capitalist ("MPI"),
500,000 shares of the Series "A" Convertible Preferred Stock,
$0.01 par value per share (the "Series "A" Preferred"), for a
purchase price of $1,500,000.00. The proceeds from the sale of
the Series "A" Preferred were used by the Company for working
capital. The Company also issued to MPI warrants to purchase
500,000 shares of the Class "A" Common Stock of the Company
for an exercise price of $3.00 per share, exercisable at any
time for a period of six (6) years from the date of issuance
(the "Warrants"). Concurrently with the purchase of the shares
of Series "A" Preferred and the issuance of the Warrants, the
Company and MPI entered into an Advisory Agreement pursuant to
which MPI assumed the day to day operations of the Company and
direction of new investments on behalf of the Company.
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In order to implement the responsibilities of MPI under the
Advisory Agreement, the principal offices of the Company were
moved from Dallas, Texas to Moraga, California in January,
2000.
Year 2000
The Company has addressed the "Year 2000 Problem" and
determined that the Company's automated systems are "Y2K
Compliant." The lessees and operators of the Company Hotels
have also advised the Company that the systems relating to the
Company Hotels are "Y2K Compliant." Such compliance includes
all front office systems, electronic locks, telephone systems,
credit card processing, communications software with primary
bankers, motel VCRs, FAX machines, copiers, cash registers,
television systems, and elevators, among other systems. If the
Company suffers material loss or significant adverse effects
to operations resulting from non- compliance, the Company may
terminate the related lease due to default by the lessee and
execute leases with a new lessee who is "Y2K Compliant."
Results of Operations
Three Months Ended March 31, 2000 And 1999
Occupancy and average room rates of approximately 59% and
$48.02 for the Company Properties 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 the Company
Properties 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, Ohio property
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, respectively, and consisted primarily of the
following approximate amounts: advisory fees paid to MPI of
$87,000 and $0; insurance of $15,000 and $0; legal fees of
$28,000 and $26,000; settlement claims 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 MPI in 2000 were $0 and
$113,000.
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Liquidity and Capital Resources
On December 22, 1999, the Company sold to Mackenzie Patterson,
Inc., a California real estate venture capitalist ("MPI"),
500,000 shares of the Series "A" Convertible Preferred Stock,
$0.01 par value per share (the "Series "A" Preferred"), for a
purchase price of $1,500,000.00. The proceeds from the sale of
the Series "A" Preferred were used by the Company to satisfy
current obligations and for working capital. The Company also
issued to MPI warrants to purchase 500,000 shares of the Class
"A" Common Stock of the Company for an exercise price of $3.00
per share, exercisable at any time for a period of six (6)
years from the date of issuance (the "Warrants"). Concurrently
with the purchase of the shares of Series "A" Preferred and
the issuance of the Warrants, the Company and MPI entered into
an Advisory Agreement pursuant to which MPI assumed the day to
day operations of the Company and direction of new investments
on behalf of the Company. In order to implement the
responsibilities of MPI under the Advisory Agreement, the
principle offices of the Company were moved from Dallas, Texas
to Moraga, California in January 2000.
The Company has no committed additional sources of external
liquidity available; therefore, the Company will rely on its
internal cash flow to meet its liquidity needs. The Company's
principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the
Company's cash flow from the Company Hotels. Although the
obligations of BAC Hotel Management, Inc. ("BAC"), as lessee,
under the Company Hotels leased by BAC are guaranteed in part
by Buckhead American Corporation (BUCK: NASDAQ), the ability
of BAC to make lease payments under the Company Hotel leases,
and, therefore, the Company's liquidity, including its ability
to make distributions to shareholders, is dependent on the
ability of BAC to generate sufficient cash flow from such
Company Hotels.
On February 1, 2000, the Company purchased 1,100 shares of its
Class A Common Stock at the market price of $2.1875 per share.
On February 4, 2000, the Company purchased 2,000 shares of its
Class A Common Stock at the market price of $2.3125 per share.
On March 16, 2000, the Company purchased 700 shares of its
Class A Common Stock at the market price of $2.00 per share.
These acquisitions increased the Company's Treasury Stock to
148,350 shares purchased at an average price of $7.17.
Other than debt service on the Company's loan facilities and
notes, the capital expenditures required under the Company
Hotel leases or the Company's loan facilities, property taxes
on the Company Hotels, and other administrative expenses, the
Company is not aware of any demands, commitments, events or
uncertainties that will result or are likely to result in a
change in the Company's liquidity.
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The Company intends to make additional investments in hotel
properties and may incur indebtedness to make such investments
to the extent that working capital and cash flow from the
Company's investments are insufficient to make such
investments. The Company will invest in additional hotel
properties only as suitable opportunities arise, and the
Company will not undertake investments unless adequate sources
of financing are available. The Company expects that future
investments in hotel properties will be financed, in whole or
in part, with the capital stock of the Company, proceeds from
additional issuances of the capital stock of the Company, or
from the issuance of other debt or equity securities. The
Company, in the future, may seek to obtain a line of credit or
a permanent credit facility, negotiate additional credit
facilities, or issue corporate debt instruments, all in
compliance with its charter restrictions. Any debt incurred or
issued by the Company may be secured or unsecured, long-term
or short-term, charge a fixed or variable interest rate and
may be subject to such other terms as the Board of Directors
of the Company deems reasonably prudent and in the best
interest of the Company.
Inflation
Operators of hotels, in general, possess the ability to adjust
room rates quickly. Competitive pressures may, however, limit
the ability of the lessee to raise room rates in the face of
inflation.
Seasonality
Hotel operations are generally seasonal in nature based upon
geographic locations. This seasonality can be expected to
cause fluctuations in the Company's quarterly lease revenue to
the extent that it receives percentage rent.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Information and disclosures regarding market risks applicable
to the Company are incorporated herein by reference to the
discussion under "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Liquidity
and Capital Resources", or as contained elsewhere in this
Quarterly Report on Form 10-Q for the three months ended March
31, 2000.
-14-
<PAGE>
PART II-OTHER INFORMATION
Item 1. 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.
As previously disclosed in the Company's Annual Report on Form
10-K for the year ended December 31,1999, the Company was
named as a defendant in the above complaint filed on September
24, 1998. The complaint alleges, among other things, that the
Company is obligated to reimburse $150,000 which the
plaintiffs paid to the Company for certain due diligence items
pursuant to a letter agreement dated February 13, 1998. On
January 20, 2000, the plaintiffs obtained a summary judgment
for breach of contract with regard to a portion of their
claims. On May 10, 2000, the Company 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 12 equal annual installments of
$8,606.64 and is secured by 50,000 shares of the Series "A"
Convertible Preferred Stock of the Company.
Auburn Equity Partners vs. BH-Auburn, L.P. and Host Funding,
Inc., Case No. 99 CVE- 04-2725, and Findlay Equity Partners
vs. BH-Findlay, L.P. and Host Funding, Franklin County Common
Please Court, Columbus, Ohio, Civil Division, Case No. 99CVH-
04-2726.
As previously disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, the Company was
named as a defendant in the above complaints filed on April 1,
1999. The complaints were filed based upon the default by
BH-Auburn, L.P. and BH-Findlay, L.P. (collectively, the
"Partnerships") of their respective payment obligations under
two seller promissory notes (the "Country Hearth Notes")
delivered to the respective plaintiffs in partial payment of
the purchase price for the Company Hotels located in Findlay,
Ohio and Auburn, Indiana. The Company was named as a defendant
in both complaints based upon the Company's guaranty of the
payment of the Country Hearth Notes. On July 30, 1999, a
judgment was rendered in favor of the plaintiffs against the
Partnerships and the Company in the approximate aggregate
amount of $1,550,000.00. The obligations of B-H Findlay under
the seller promissory note, both principal and interest,
related to the Company Hotel located in Findlay, Ohio in the
approximate settlement amount of $650,000.00 were satisfied in
full from the proceeds of the sale of the property. The
Company guaranty continues to secure the obligations and
judgment lien of B-H Auburn, L.P., in the approximate amount
of $800,000.00.
Vance Linge vs. Joseph Clarence Kuntz; Vira Louis Shamman;
Louis Shamman; RPD Hotels 18, LLC/Vagabond Inns; City of San
Diego; CrossHost, Inc.; et al, Superior Court of the State of
California, San Diego County, Case No. 730228.
-15-
<PAGE>
As previously disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, CrossHost, Inc., a
wholly owned subsidiary of the Company, and RPD Mission Bay,
LLC, and RPD Hotels 18, LLC ("RPD"), the Company's operators
of the Company Hotel located in Mission Bay, California, were
named as defendants in the above complaint filed August 4,
1999. The complaint alleges, among other things, that
inadequate safety precautions led in part to the occurrence of
a traffic accident and related personal injuries on the public
thoroughfare adjacent to the Company Hotel. The lawsuit is
being defended on behalf of CrossHost, Inc. by the insurance
carrier of RPD.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
3.1 Amended and Restated Charter of the Company
(incorporated by reference to Exhibit 3.1 to
Company's Amendment No. 8 to Form S-11,
effective April 17, 1996).
3.2 Amended and Restated By-Laws of the Company
(incorporated by reference to Exhibit 3.2 to
Company's Amendment No. 8 to Form S-11,
effective April 17, 1996).
3.3 Articles Supplementary filed with the State
Department of Assessments and Taxation of
the State of Maryland on December 20, 1999
(incorporated by reference to Exhibit 2.3 to
Company's Report on Form
-16-
<PAGE>
8-K filed on January 6, 2000).
4.1 Form of Share Certificate (incorporated by
reference to Exhibit 4.1 to Company's
Amendment No. 8 to Form S-11, effective
April 17, 1996).
4.2 Form of Series "A" Convertible Preferred Stock
Certificate.
4.3 Form of Series A Warrant dated effective as
of February 3, 1997 (incorporated by
reference to Exhibit 4.2 to Company's Annual
Report on Form 10-K filed on March 31,
1997).
4.4 Form of Series B Warrant dated effective as
of February 3, 1997 (incorporated by
reference to Exhibit 4.3 to Company's Annual
Report on Form 10-K filed on March 31,
1997).
4.5 Form of Common Stock Warrant dated effective
as of December 22, 1999 (incorporated by
reference to Exhibit 2.4 to Company's Report
on Form 8-K filed on January 6, 2000).
27 Financial Data Schedule.
Reports on Form 8-K
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized and in the capacity as the Registrant's
President and Chief Executive Officer and Chief Financial and Accounting
Officer, respectively.
Dated: May 19, 2000 HOST FUNDING, INC.
/s/ C. E. Patterson
--------------------------
By: C. E. Patterson
Its: President and Chief Executive Officer
/s/ Glen Fuller
--------------------------
By: Glen Fuller
Its: Chief Financial and Accounting Officer
-18-
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