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 September 30, 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 September 30, 2000, the Company had 2,650,219 shares of Class "A" Common
Stock outstanding.
<PAGE>
TABLE OF CONTENTS
Item Number Page
PART I
1. Financial Statements 2
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II
1. Legal Proceedings 17
2. Changes in Securities 19
3. Defaults Upon Senior Securities 19
4. Submission of Matters to a Vote of Security Holders 19
5. Other Information 19
6. Exhibits and Reports on Form 8-K 19
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HOST FUNDING, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
ASSETS
------
REAL ESTATE PROPERTIES:
LAND, PROPERTY AND EQUIPMENT - HELD
FOR INVESTMENT:
Building and improvements $17,664,925 $17,664,925
Furnishings and equipment 3,356,456 3,200,271
Less accumulated depreciation (3,543,725) (2,832,258)
------------ ------------
17,477,656 18,032,938
Land 5,667,570 5,667,570
------------ ------------
Total land, property
and equipment
- held for investment 23,145,226 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
------------ ------------
Total land, property
and equipment
- held for sale 2,719,154 2,719,154
MINORITY INVESTMENT IN HOTEL PROPERTIES 3,190,000 -
------------ ------------
Total real estate properties 29,054,380 26,419,662
CASH AND CASH EQUIVALENTS 6,035 1,129,115
RESTRICTED CASH 629,915 271,341
RENT RECEIVABLE 273,766 49,823
DUE FROM RELATED PARTIES 3,557 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 $187,500 AT SEPTEMBER
30, 2000 AND $0 AT DECEMBER 31, 1999 562,500 750,000
LOAN COMMITMENT FEES, NET OF ACCUMULATED
AMORTIZATION OF $795,786 AT SEPTEMBER
30, 2000 AND $755,338 AT DECEMBER 31,
1999 982,764 1,023,212
FRANCHISE FEES - NET OF ACCUMULATED
AMORTIZATION OF $34,813 AT SEPTEMBER
30, 2000 AND $27,989 DECEMBER 31,
1999 66,187 73,011
PREPAID EXPENSES AND OTHER ASSETS 493,786 451,573
------------ ------------
TOTAL ASSETS $32,470,980 $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 SHEETS
(UNAUDITED)
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
LONG-TERM DEBT $23,179,893 $23,611,300
SHORT-TERM DEBT 739,505 386,691
LONG-TERM LEASE DEPOSIT 588,000 588,000
OPTION DEPOSITS 20,000 20,000
ACCOUNTS PAYABLE AND OTHER ACCRUED
LIABILITIES 843,548 1,167,444
ACCRUED INTEREST 428,880 311,971
ACCRUED PROPERTY TAXES 248,222 107,111
------------ ------------
Total liabilities 26,048,048 26,192,517
------------ ------------
MINORITY INTEREST IN PARTNERSHIPS 79,215 87,953
Series A Preferred stock; $0.01 par
value; $4.00 liquidation perference;
authorized 2,000,000 shares; issued
and outstanding 500,000 shares at
September 30, 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 2,720,000 and
1,720,000 shares at September 30, 2000
and December 31, 1999, respectively 28,645 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 12,340,237 9,160,237
Accumulated Deficit (7,018,502) (6,011,046)
Less: Unearned directors' compensation
net of accumulated amortization of
$92,113 and $72,403 at September 30,
2000 and December 31, 1999,
respectively (53,887) (73,597)
------------ ------------
6,046,493 3,844,239
Less: Common stock in treasury at cost,
218,131 and 144,550 shares at
September 30, 2000 and December 31,
1999, respectively (1,202,776) (1,054,659)
------------ ------------
Total shareholders' equity 4,843,717 2,789,580
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $32,470,980 $30,570,050
============ ============
Concluded
The accompanying notes are an integral part
of the consolidated financial statements
3
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET INCOME/LOSS FROM OPERATIONS
Room revenue $ 200,795 - $ 665,083 -
Operating expenses 128,747 - 392,201 -
------------ ------------ ------------ ------------
Total income from property
operations 72,048 - 272,882 -
CORPORATE REVENUES:
Lease revenue-Lessees 838,519 1,151,497 2,189,358 2,970,172
Interest income and other
income 5,606 6,521 19,908 70,609
------------ ------------ ------------ ------------
Total corporate
revenues 844,125 1,158,018 2,209,266 3,040,781
------------ ------------ ------------ ------------
Total revenue 916,173 1,158,018 2,482,148 3,040,781
------------ ------------ ------------ ------------
EXPENSES:
Interest expense, including
amortization of loan
costs 615,965 675,766 1,793,722 2,011,907
Depreciation and amortization 301,931 234,078 905,793 747,038
Administrative expenses - other 188,519 207,526 524,759 622,072
Director fees - 83,800 - 88,700
Property taxes 84,762 91,174 254,358 273,875
Minority Interest in
Partnerships (1,986) 7,812 (8,738) (125,967)
Amortization of unearned
directors' compensation 6,570 4,916 19,710 109,111
------------ ------------ ------------ ------------
Total expenses 1,195,761 1,305,072 3,489,604 3,726,736
------------ ------------ ------------ ------------
LOSS BEFORE OPTION PAYMENT,
TRANSFER OF LEASE TO
VAGABOND AND VALUATION
RESERVE (279,588) (147,054) (1,007,456) (685,955)
Relinquished project cost - (247,889) - (260,369)
Option payment - - - 500,000
Costs related to lease
transfer - - - (221,138)
Valuation Reserve - - - (520,000)
------------ ------------ ------------ ------------
NET LOSS $ (279,588) (394,943) $(1,007,456) (1,187,462)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.10) (0.25) $ (0.49) (0.76)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,673,732 1,597,173 2,054,830 1,558,378
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
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HOST FUNDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
--------------------------------------------------------------------------------
OPERATING ACTIVTIES:
Net loss $ (1,007,456) $ (1,187,462)
Adjustments to reconcile net
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 905,793 747,038
Amortization of loan fees 40,488 41,552
Amortization of unearned
directors' compensation 19,710 109,111
Stock issued as compensation - 2,250
Gain from transfer of lease - (278,862)
Minority interest in
partnerships (8,738) (125,967)
Impairment loss on assets held
for sale - 520,000
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 (223,943) (415)
Rent, interest and other
receivable - due from
related party 666 (24,172)
Prepaid and other assets (42,213) (70,206)
Accounts payable and
accrued expenses (65,878) 410,025
----------- -----------
Net cash (used in) provided by
operating activities (318,611) 244,727
----------- -----------
INVESTING ACTIVITIES:
Investment in land, property
and equipment (156,185) (165,178)
Restricted cash (358,574) (294,220)
Proceeds related to sale of
leasing rights - 500,000
Payments related to sale of
leasing rights - (221,138)
----------- -----------
Net cash (used in)
investing activities (514,759) (180,536)
----------- -----------
FINANCING ACTIVITIES:
Stock sold to director - 20,000
Write-off loan fees - 1,585
Proceeds from issuance of
short-term debt 301,971 190,000
Payments on short-term debt (88,719) (40,785)
Purchase of Company stock (8,555) (413)
Payments on long-term debt (431,407) (420,444)
Long-term lease deposit - 171,947
----------- -----------
Net cash (used in)
financing activities (226,710) (78,110)
----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (1,123,080) (13,919)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,129,115 66,328
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 6,035 $ 52,409
============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interst $1,636,364 $1,874,292
---------- ----------
Non-cash investing activities:
Common stock issued in exchange
for investment property
Class A common $ 10,000 $ -
Additional paid in capital 3,319,562 -
Land, property & equipment (3,190,000) -
---------- ----------
Net non-cash investing activity $ - $ -
========== ==========
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 receivables $ - $ (181,606)
Land, property & equipment - 181,606
---------- ----------
Net non-cash investing activity $ - $ -
========== ===========
Retire stock previously issued in
payment of interest and principal
on short term debt
Treasury stock $ (139,562) $ -
Short term debt 139,562 -
---------- ----------
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 September 30, 2000, the Company owned interests
in 15 hotels located in 8 states and Mexico (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
consolidated financial statements. In the opinion of
management of the Registrant, all adjustments necessary for a
fair presentation have been included. The consolidated
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 nine-month period ended
September 30, 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 conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect 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 nine months ended
September 30, 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.
7
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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 Mission Bay,
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 purportedly 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.
8
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5. SALE OF CONVERTIBLE PREFERRED STOCK
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. 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 nine (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 affect the 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
9
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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. On
behalf of the Company, an unaffiliated party funded $140,000
to the lender 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. In the Company's report for the
quarter ending June 30,2000, it was reported that the Company
issued 69,781 shares of the Company's Class A common stock in
satisfaction of approximately $140,000 of principal and
interest, leaving approximately $50,000 unpaid, accruing
interest on the unpaid balance at the rate of 12% per annum. A
civil action was filed by the lenders, however, seeking
repayment of the $190,000 advanced plus interest fully in
cash. The lenders prevailed in the action, and judgment was
entered in their favor for the full amount advanced together
with interest and attorneys fees in the total amount of
$281,818.60. The plaintiff has taken aggressive collection
action, including the issuance of writs of execution to
collect on the judgment. Management is currently in
discussions with plaintiff aimed at reaching agreement on
mutually acceptable payment arrangements and reduction of the
total amount of the judgment.
Other Notes Payable
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
10
<PAGE>
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. The Company was unable to make
scheduled payments on September 11, 2000 and October 11, 2000.
As of September 30, 2000 the total amount owed Five Lions was
$75,936.
In July, 2000 the Company was advanced $50,000 by Sutter
Capital Management, LLC an affiliate of company director
Robert Dixon to fund current debt service payments. Interest
on the note was accrued at a rate of 12%. As of September 30,
2000 the total amount owed Sutter Capital Management, LLC was
$51,417.
In July, 2000 the Company was advanced $50,000 by MacKenzie
Patterson, Inc. to fund current debt service payments. In
September, 2000 the Company was advanced an additional $44,000
by MacKenzie Patterson, Inc. to fund current debt service
payments. Interest on the notes was accrued at a rate of 12%.
As of September 30, 2000 the total amount MacKenzie Patterson,
Inc. was $95,497.
7. SUBSEQUENT EVENTS
On August 14, 2000 the Company's Audit Committee approved the
engagement of Regalia & Associates Certified Public
Accountants as independent accountant and auditor. Following
this appointment the Company learned that Regalia & Associates
may not be eligible to serve as auditor. The Company is
currently in the process of retaining a new independent
accountant, but has not been able to do so at this time.
Accordingly, the interim financial statements filed herewith
have not been reviewed by an independent accountant.
Crossroads Hospitality, the manager of the Flagstaff, Arizona
property withheld rent payments due October 10, 2000 and
November 10, 2000 totaling $131,262 to recover a portion of a
lease deposit which they believed was owed to them. As a
result, Host Ventures, Inc. and Host Enterprises, Inc. were
unable to meet debt service payments due October 11, 2000 and
November 11, 2000. Management is in discussion with both
Crossroads Hospitality regarding the lease deposit obligation
and the lender, Orix Real Estate Capital Markets, LLC,
regarding the non-payment and expects to reach agreements on
both issues shortly.
In October, 2000 amounts totaling $51,522 were garnished from
the Company's accounts to partially satisfy a judgement
awarded Keystone Advisors and Crossroads Investments as
previously described in "Notes Payable Related To Property
Acquisitions". As a result, Crosshost, Inc. was unable to meet
debt service payments due October 11, 2000. The Company
received a Notice of Default from First Union National Bank
which required immediate payment of the amounts due as well as
late charges. The Company was able to satisfy the notice on
November 2, 2000 by utilizing October rent payments. The
Company is seeking additional sources of funding in order to
make up the November deficit and expects to meet future debt
service payments.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains or incorporates
statements that constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places in this
Quarterly Report on Form 10-Q and include statements
regarding, among other matters, the Company"s growth
opportunities, the Company"s acquisition strategy, regulatory
matters pertaining to compliance with governmental regulations
and other factors affecting the Company"s financial condition
or results of operations. Stockholders are cautioned that any
such forward-looking statements are not guarantees of future
performance, and involve risks, uncertainties and other
factors which may cause actual results, performance or
achievements to differ materially from the future results,
performance or achievements, expressed or implied, in such
forward-looking statements. Certain factors that might cause a
difference in actual results include, but are not limited to,
the Company"s ability to locate and acquire hotel properties
on economically suitable terms and conditions; the Company"s
dependence upon rental payments from the lessees of the
Company"s hotel properties for substantially all of the
Company"s income; the Company"s dependence upon the abilities
of the lessees of the Company"s hotel properties to manage the
hotel properties; risks associated with the hotel industry and
real estate markets in general; and risks associated with debt
financing and its availability.
Recent Developments
Crossroads Hospitality Tenant Company, LLC, the lessee of the
Flagstaff, Arizona property, is in default of its lease for
failure to pay the monthly base rent payment for September, in
the amount of approximately $50,000, which was due in October
and the base rent for October, of approximately $51,000, which
was due in November, and in default of its obligation to pay
quarterly percentage rent of approximately $30,000, which was
also due in October. Rent was withheld by the tenant arising
out of the failure of the lessor, Host Ventures, Inc., to make
a payment to tenant of $120,000, to reduce tenant's security
deposit, as provided for in the lease. Management is currently
in discussions with the tenant looking towards a resolution of
the matter which will cure the tenant's default and satisfy
the lessor's obligations to the tenant with regard to the
deposit.
As a result of the rental offset by Crossroads Hospitality,
Host Ventures, Inc. and Host Enterprises, Inc. were unable to
meet debt service payments due October 11, 2000 and November
11, 2000. Management is in discussion with the lender, Orix
Real Estate Capital Markets, LLC, regarding the non-payment
and potential restructuring of the loans in order to meet
future obligations.
12
<PAGE>
In September, 1999 the Company issued shares of the Company's
Class A Common Stock to Keystone Advisors and Crossroads
Investments (Keystone/Crossroads) in repayment of
approximately $140,000 of advances made to the Company.
Keystone/Crossroads disputed the stock payment and was awarded
a judgement regarding these claims. A levy was granted on
certain Company bank accounts and approximately $51,000 was
awarded to Keystone/Crossroads to partially satisfy their
claim. As a result of this garnishment, Crosshost, Inc. was
unable to meet the October debt service owed First Union
National Bank. The Company was subsequently able to satisfy
the indebtedness using October rent payments. The Company is
seeking additional sources of funding in order to make up the
November deficit and expects to meet future debt service
payments.
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".
Changes in Financial Condition
Nine months ended September 30, 2000:
The Company completed the acquisition of interests in four
Mexican Hotel Properties from Bufete Grupo Internacional S.E.
de C.V, ("Bufete") in exchange for 1,000,000 shares of the
Company's Class A Common Stock. Bufete has guaranteed that the
Interests exchanged for the common stock have a value of
$3,000,000 and has further guaranteed that distributions from
the interests to the Company will be at least $450,000 per
year.
As of September 30, 2000 cash, cash equivalents and restricted
cash were approximately $636,000. As of December 31, 1999
cash, cash equivalents and restricted cash were approximately
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$1,400,000. The decrease was due primarily to the payment of
past-due payables and the Company's contributions necessary to
satisfy current mortgage obligations on the Hotel properties.
Results of Operations
Three months ended September 30, 2000 and 1999:
Occupancy and average room rates of approximately 60% and
$53.74 for the Company Properties for the three months ended
September 30, 2000 resulted in total sales of approximately
$2,484,000 and generated total lease and net operating
revenues of approximately $910,000. Occupancy and average room
rates of 65% and $53.02 for the Company Properties for the
three months ended September 30, 1999 resulted in total sales
of approximately $2,900,000, which generated total lease
revenues of approximately $1,151,000. Lease revenues for the
three months ended September 30, 2000 were negatively impacted
approximately $99,000 by reductions to base rent as a result
of competition adjustments. Results for the three months ended
September 30, 1999 included sales and revenues of $110,000
from the Findlay, Ohio property sold in November.
Administrative expenses - other were approximately $132,000
and $208,000 for the three month periods ended September 30,
2000 and 1999, respectively, and consisted primarily of the
following approximate amounts: advisory fees of $88,000 and
$0; insurance of $15,000 and $0; legal fees of $25,000 and
$46,000; and other costs of $4,000 and $28,000. Costs incurred
in 1999 but included in advisory fee to MPI in 2000 were $0
and $134,000.
Nine months ended September 30, 2000 and 1999
Occupancy and average room rates of approximately 59% and
$50.75 for the Company Properties for the nine months ended
September 30, 2000 resulted in total sales of approximately
$6,924,000 and generated total lease and net operating
revenues of approximately $2,462,000. Occupancy and average
room rates of approximately 62% and $49.63 for the Company
Properties for the nine months ended September 30, 1999
resulted in total sales of approximately $8,007,000, which
generated total lease revenues of approximately $2,970,000.
Lease revenues for the nine months ended September 30, 2000
were negatively impacted approximately $263,000 by reductions
to base rent as a result of competition adjustments. Results
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for the nine months ended September 30, 1999 included sales
and revenues of $285,000 from the Findlay, Ohio property sold
in November, 1999.
Administrative expenses - other were approximately $468,000
and $622,000 for the nine month periods ended September 30,
2000 and 1999, respectively, and consisted primarily of the
following approximate amounts: advisory fees of $262,000 and
$0; insurance of $45,000 and $0; legal fees of $104,000 and
$117,000; settlement claims of $40,000 and $0; and other costs
of $17,000 and $112,000. Costs incurred in 1999 but included
in advisory fee to MPI in 2000 were $0 and $393,000.
Liquidity and Capital Resources
The Company has experienced liquidity problems arising from
the previously discussed circumstances and has been unable to
meet current obligations. The Company continues to discuss all
options with creditors and continues to seek additional
sources of funding in an effort to satisfy all claims.
However, the Company has no committed additional sources of
external liquidity currently 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.
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
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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 nine months ended
September 30, 2000.
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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 Quarterly Report on
Form 10-Q for the three months ended March 31, 2000, 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 Quarterly Report on
Form 10-Q for the three months ended March 31, 2000, 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
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full from the proceeds of the sale of the property. The
Company guaranty continues to secure the obligations and
judgment lien of BH-Auburn, L.P., in the approximate amount of
$806,000.00.
Super 8 Motels, Inc. v. Host Funding, Inc.; United States
District Court, Southern District of California; Case No.
CV-01163-E.
The Company was named as a defendant in the above complaint
filed on June 8, 2000. The complaint alleges, among other
things, that the Company breached its franchise agreement with
Super 8 relating to the Company Hotel located in Mission Bay,
California. The alleged breach occurred based upon the lease
by the Company to RPD 18, LLC of the Mission Bay Hotel and
subsequent conversion of the Mission Bay Hotel by RPD to a
Vagabond Inn. The suit alleges that upon conversion of the
Mission Bay Hotel to a Vagabond Inn the Company was obligated
to pay Super 8 a franchise termination fee of approximately
$287,000. The Company intends to vigorously defend the
lawsuit.
Crosshost, Inc. ("Crosshost") v. Credit Suisse First Boston
Mortgage Capital, LLC ("CSFB") et. al.
Crosshost is plaintiff in a civil action filed in California
Superior Court, San Diego County on April 20, 2000, Case No.
GIC 747127. The complaint is for declaratory relief, breach of
contract and other causes of action arising out of Defendants'
failure to reconvey real property owned by Plaintiff and
encumbered by a Deed of Trust in favor of Defendants.
Plaintiff entered into a lease and option agreement with RPD
Mission Bay LLC with respect to the property encumbered by
Deed of Trust. RPD excercised its option to purchase, and
plaintiff tendered the amount due under the note and Deed of
Trust. However, Defendants demanded that Plaintiff pay a
prepayment penalty in addition to the amount tendered,
notwithstanding that the note and the Deed of Trust did not
provide for such a prepayment penalty. Plaintiff has refused
to pay the prepayment penalty demanded by Defendants. As a
result of Defendant's failure to reconvey the Deed of Trust,
Plaintiff is now in default under the contract to sell the
property to RDP.
No significant activity has yet occurred in the case although
negotiations aimed at possible settlement have been initiated
with several defendants.
Keystone Advisors, Inc, and Crossroads Investments, LLC, v.
Host Funding, Inc, Superior Court of the State of California,
for the County of Santa Barbara, Anacapa Division, Case No.
1035199.
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This is a collection action against the Company for repayment
of advances made to the company by the two named plaintiffs.
The company had previously issued Class A common stock in
partial satisfaction of the debt, which the plaintiffs
rejected. Judgment was entered against the company in the
amount of $281,818.60. Plaintiff has taken aggressive
collection action, including issuance of writs of execution.
Management is currently in discussions with plaintiffs to
arrange a mutually acceptable payment plan, looking towards a
reduction in the principal amount of the judgement and
reduction of the attorneys fees awarded by the court.
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).
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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 June 30,
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 June 30, 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).
10.1 Letter Agreement dated effective as of June
27, 2000 by and among Bufete Grupo
Internacional, S.A. de C.V., Hotel
International Advisors, LLC and Host Funding,
Inc. (incorporated by reference to Exhibit
2.1 to Company's Report on Form 8-K filed on
July 17, 2000).
10.2 Investment Letter Agreement dated effective as
of June 22, 2000 executed by Hotel
International Advisors, LLC (incorporated by
reference to Exhibit 2.2 to Company's Report
on Form 8-K filed on July 17, 2000).
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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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: November 14, 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
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