10-Q 1 host10q.txt INITIAL FILING 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 June 30, 2001 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 June 30, 2001, the Company had 2,650,100 shares of Class A Common Stock outstanding. 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 14 PART II 1. Legal Proceedings 18 2. Changes in Securities 19 3. Defaults Upon Senior Securities 20 4. Submission of Matters to a Vote of Security Holders 20 5. Other Information 20 6. Exhibits and Reports on Form 8-K 21 1 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

2 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)

3 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

4 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

5 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (continued) (Unaudited)

6 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 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 June 30, 2001, 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, 2000 and should be read in accordance therewith. The results of operations for the six-month period ended June 30, 2001 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 assets and liabilities and 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 six months ended June 30, 2001 and 2000 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 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 4. INTENT TO MERGE WITH CARNEGIE INTERNATIONAL CORP. In December 2000, the Company entered into a letter of intent with Carnegie International Corporation (Carnegie), whereby the Company would issue shares in exchange for shares of Carnegie. The merger did not occur as anticipated and discussions have been suspended indefinitely. In connection with the proposed transaction, Crosshost advanced funds to Carnegie in the amount of $150,000. Carnegie executed a promissory note in the amount of $175,000, which includes an amendment fee for an amendment to the merger letter of intent. A Guarantee Agreement and a Stock Pledge agreement secure the promissory note from Carnegie. As of June 30, 2001 Carnegie was in default on the note. The Company has initiated collection actions seeking recovery of amounts due. 5. FORECLOSURE OF HOST VENTURES PROPERTIES The lender on the deeds of trust covering the three Host Ventures properties has initiated judicial foreclosure actions in the jurisdictions where the properties are located. The Company has pledged its full cooperation with the lender to minimize costs. The Company has reclassified the properties to "held for sale" pending final transfer of the assets. Additionally, the Company recorded a write-down of the assets in the first quarter, 2001, in the amount of $2,826,091 reflecting the excess of book value over expected debt relief. As of June 30, 2001 the Company maintained title to all three properties pending the foreclosure process. 6. 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 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. 8 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 In December 2000, the Company sold to MPI and Sutter Opportunity Fund, LLC (Sutter), an additional 377,112 shares of the Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"), for a purchase price of $754,224. The proceeds were used to settle outstanding litigation regarding the Auburn and Findlay properties as well as fund working capital obligations. In the second quarter, 2001, the Company sold to MPI and Sutter Opportunity Fund 2, LLC (Sutter), an additional 162,500 shares of the Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"), for a purchase price of $325,000. The proceeds were used to settle outstanding litigation regarding the Auburn and Findlay properties. 7. MISSION BAY PROPERTY SALE In February 1999, The Company granted an option to purchase the Mission Bay, CA property to RPD, LLC. This option was subsequently exercised in March 1999. The sale of the property to RPD has not yet closed due to a dispute with the lender regarding the governing deed of trust and the applicable defeasance and release requirements. This dispute was settled in December 2000. The Company has held discussions with the buyer and the lender in an effort to complete the sale of the property and is hopeful that the sale will close in the third quarter, 2001. 8. ACQUISITION OF MEXICAN HOTEL PROPERTIES On June 30, 2000, the Company acquired 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 stock had 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 June 30, 2001, no payments have been received. The Company is considering its legal remedies. 9. 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 9 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 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 2000 year and expects no material federal income tax liability for the year ended 2001. 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. 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. The Company reported that it had 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 $281,819. On July 1, 2001, an agreement was reached. The terms of the agreement provide for monthly payments of $15,000, a reduction of the interest rate to 8% and a reduction of legal fees to $25,000. The revised terms are in effect as long as the Company makes each scheduled payment. As of July 31, 2001, the Company had paid $116,522 towards settlement of the claim. 10 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 Other Notes Payable 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 had originally 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 judgment for the plaintiffs in both the Findlay Complaint and the Auburn Complaint. In November 1999, the Country Hearth Note related to the Findlay Property was satisfied by the payment of $650,000 from the proceeds of the sale of the Findlay Property. In 2000, the Company settled with Auburn for the remainder of the amounts due in the amount of $825,000, of which $500,000 was paid prior to December 31, 2000 and the balance of $325,000 was paid as of June 4, 2001. In March 2000, a judgment was entered against the Company for payment of $150,000 to Five Lion, Inc. and Lion Investment Limited Partnership for reimbursement of due diligence fees. The Company made the final settlement payment on May 11, 2001. In November 2000, five individual MPI funds, affiliates of MPI, granted a loan to the Company in the amount of $75,000, 11 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 which accrues interest at 10% and was due in May 2001. The amounts were not repaid and repayment options are being discussed. This amount is included in Due to Related Parties in the June 30, 2001, consolidated balance sheet. In January 2001, the MPI Funds granted a loan to the Company to fund the advance to Carnegie in the amount of $112,500, which accrues interest at 10% and was due in April 2001. The amounts were not repaid and repayment options are being discussed. This amount is included in Due to Related Parties in the June 30, 2001, consolidated balance sheet. In January, 2001 Sutter Capital Management, LLC ("Sutter") an affiliate of company director Robert Dixon granted a loan to the Company to fund the advance to Carnegie in the amount of $37,500, which accrues interest at 10% and was due in April 2001. The amounts were not repaid and repayment options are being discussed. This amount is included in Due to Related Parties in the June 30, 2001, consolidated balance sheet. In the second quarter 2001, MPI advanced $110,000 to the Company. The funds were used to make a settlement payment on the property acquisition note and to fund working capital needs. This amount is included in Due to Related Parties in the June 30, 2001, consolidated balance sheet. Related Party Advances As of June 30, 2001, the Company has recorded advances due to related parties of approximately $724,000. Of this amount, approximately $360,000 is owed to MPI for unpaid advisory fees, $139,000 is owed to MPI for legal and other costs advanced, $75,000 is owed to MPI Funds for a working capital advance made in November, 2000, $112,500 is owed to MPI Funds for the loan made to Carnegie in January, 2001 and $37,500 is owed to Sutter Capital also for the Carnegie loan. Choice Hotel Franchise Termination Fee The Company received a demand from Choice Hotels based on the termination of the Super Eight franchise on the Ocean Springs, MS property. The franchise agreement was guaranteed by Host Funding and Crosshost. As a result of this demand, the Company recorded a franchise termination reserve in the amount of $428,510. Management has been in contact with the property managers, and representatives of Choice Hotels with a view towards reinstating the Sleep Inn franchise and is hopeful that the matter can be resolved through negotiation of a mutually acceptable arrangement. 12 Host Funding, Inc. Notes to Consolidated Financial Statements June 30, 2001 The Company received a notice of termination of the franchise located in Tallahassee, FL. Management has been in contact with the property managers, and representatives of Choice Hotels and is in the process of having the franchise reinstated. 10. SUBSEQUENT EVENTS The company has reached an agreement with Choice Hotels to reinstate the franchise located in Tallahassee, FL. 13 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 On January 4, 2001, the Company received notice from the American Stock Exchange ("Exchange") Staff indicating that the Company no longer complies with the Exchange's continued listing guidelines and that, as a result, the Exchange intends to file an application with the Securities and Exchange Commission to strike the Company's common stock from listing and registration on the Exchange. The Exchange has indicated that its actions are in response to the following circumstances. The Company has fallen below the continued listing guidelines triggered by losses from continuing operations in each of its last five most recent fiscal years as set forth in Section 1003(a)(iii) of the Company Guide. In addition, the Company does not meet the continued listing guidelines due to its unsatisfactory operating results and an impaired financial condition for the fiscal year ending December 31, 1999 and the period ending September 30, 2000 as set forth in Section 1003(a)(iv) of the Company Guide. The Exchange also has taken the position that the Company failed to comply with its listing agreement with the Exchange by effecting a transaction on June 30, 2000 with Bufete Grupo Internacional S.A. de C.V. ("Bufete") and its U.S. affiliate Hotel International Advisors, LLC by issuing shares without shareholder approval which were not listed with the Exchange prior to their issuance as required in Sections 301, 705 and 712 of the Company Guide. 14 In view of the above, the Company has fallen below the continued listing guidelines. The Company appealed this determination and requested a hearing before a committee of the Exchange. The Company received notification from the Amex Adjudicatory Council of the American Stock Exchange Board of Governors that the Council has affirmed the decision of the Amex Committee on Securities to strike Host Funding's common stock from listing and registration on the exchange. Accordingly, the Exchange has informed Host Funding that it plans to file an application with the United States Securities and Exchange Commission to strike the company's stock from the exchange. Changes in Financial Condition Six months ended June 30, 2001: The Company was unsuccessful in renegotiating the terms of the debt on three properties ("the Host Ventures properties"). Consequently, the lender has begun foreclosure proceedings against the Company for failure to make scheduled debt service payments. The respective leases have been assigned to the lender who is now operating these properties. The Company has reclassified the properties to "held for sale" pending final transfer of the assets. Additionally, the Company recorded a write-down of the assets in the amount of $2,826,091 reflecting the excess of book value over expected debt relief. The Company's statement of operations does not include activity for these properties. As of June 30, 2001 cash, cash equivalents and restricted cash were approximately $835,000. As of December 31, 2000 cash, cash equivalents and restricted cash were approximately $659,000. Of these amounts, restricted cash was approximately $833,000 and $623,000 for 2001 and 2000, respectively. Results of Operations Three months ended June 30, 2001 and 2000: Occupancy and average room rates of approximately 62% and $49.39 for the Company Properties for the three months ended June 30, 2001 resulted in total sales of approximately $1,680,000 and generated total lease and net operating revenues of approximately $563,000. Occupancy and average room rates of 59% and $52.11 for comparable Company Properties for the three months ended June 30, 2000 resulted in total sales of approximately $1,686,000, which generated total lease revenues of approximately $569,000. The Host Ventures properties held for sale had sales and lease revenue of $539,000 and $292,000 in 2000 with no sales or revenue for 2001. Administrative expenses - other were approximately $135,000 and $155,000 for the three month periods ended June 30, 2001 and 2000, respectively, and consisted primarily of the following approximate amounts: advisory fees of $88,000 and 15 $88,000; insurance of $19,000 and $15,000; legal fees of $28,000 and $51,000; and other costs of $0 and $1,000. Six months ended June 30, 2001 and 2000: Occupancy and average room rates of approximately 57% and $46.35 for the Company Properties for the six months ended June 30, 2001 resulted in total sales of approximately $2,895,000 and generated total lease and net operating revenues of approximately $1,043,000. Occupancy and average room rates of 56% and $48.76 for comparable Company Properties for the six months ended June 30, 2000 resulted in total sales of approximately $2,973,000, which generated total lease revenues of approximately $1,057,000. The Host Ventures properties held for sale had sales and lease revenue of $1,468,000 and $495,000 in 2000 with no sales or revenue for 2001. Administrative expenses - other were approximately $298,000 and $336,000 for the six month periods ended June 30, 2001 and 2000, respectively, and consisted primarily of the following approximate amounts: advisory fees of $175,000 and $175,000; insurance of $38,000 and $30,000; legal fees of $79,000 and $79,000; settlement claims of $0 and $40,000; and other costs of $6,000 and $12,000. Liquidity and Capital Resources The Company has experienced liquidity problems as previously described 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 16 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 six months ended June 30, 2001. 17 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. The Company made the final payment on May 11, 2001. 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. 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 were satisfied in full from the proceeds of the sale of the property. In December 2000, the Company settled all outstanding litigation regarding the above with a payment of $500,000 and an agreement to pay an additional $200,000 by April 30, 2001 and $125,000 by June 1, 2001. The Company made the final settlement payment on June 4, 2001. 18 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. 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 $281,819. Plaintiff has taken aggressive collection action, including issuance of writs of execution. A settlement agreement has been reached which calls for monthly payments in the amount of $15,000, a reduction of the interest rate from 12% to 8%, and a reduction of legal fees awarded from $56,614 to $25,000. The settlement agreement is contingent on the Company making the monthly payments as scheduled. Choice Hotels International v. Host Ventures Inc. Demand for Arbitration We are in receipt of a demand for arbitration from Choice Hotels, International, arising out of the termination of a franchise agreement on the Ocean Springs, MS hotel. Management has been in contact with the property managers, and representatives of Choice Hotels with a view towards reinstatement of the Sleep Inn franchise, and is hopeful that the matter can be resolved through negotiation of a mutually acceptable arrangement. Choice Hotels International v. Crosshost, Inc. The Company has been notified by Choice Hotels, International of the termination of the franchise agreement on the Tallahassee, FL property. Management has been in contact with the property managers, and representatives of Choice Hotels, and has reached an agreement to reinstate the franchise. Host Ventures Inc. Foreclosure The lender on the deeds of trust covering the three Host Ventures properties has initiated judicial foreclosure actions in the jurisdictions where the properties are located. The company has pledged its full cooperation with the lender to minimize costs. Item 2. Changes in Securities. On April 30, 2001 the Company sold 75,000 and 25,000 shares of its Series A Preferred Stock to MPI and Sutter, respectively, pursuant to the Stock Purchase Agreement of March 13, 2001 between the Company, MPI and Sutter. On June 4, 2001 the Company sold 46,875 and 15,625 shares of its Series A Preferred Stock to MPI and Sutter, respectively, pursuant to the Stock Purchase Agreement of March 13, 2001 between the Company, MPI and Sutter. 19 Item 3. Defaults upon Senior Securities. The Company is in default on the deeds of trust covering the three Host Ventures properties for failure to make scheduled debt service payments. The lender has initiated judicial foreclosure actions in the jurisdictions where the properties are located. The Company has pledged its full cooperation with the lender. The Company is in default on the deeds of trust covering the seven Crosshost properties as a result of the termination of the franchise agreement on the Tallahassee, FL property. Management has been in contact with representatives of the lender and the franchiser, and is in the process of having the franchise reinstated. Item 4. Submission of Matters to a Vote of Security Holders. On May 1, 2001 a special meeting of the shareholders was held at the offices of the Company in Moraga, CA. A quorum of shareholder was present by person or proxy, and the following directors were elected: Directors elected by common shareholders: William M. Birdsall Guy E. Hatfield Brian K. Rodgers Directors elected by preferred shareholders: Robert E. Dixon Glen W. Fuller Ratification of appointment of independent auditors: The firm of Merdinger, Fruchter, Rosen, and Corso was ratified as the Company's independent auditor. Item 5. Other Information. None. 20 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 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). 21 (b) Reports on Form 8-K None 22 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: August 14, 2001 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 23

HOST FUNDING INC 10-Q