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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For Quarter Ended September 30, 2002

Commission File no. 2-64309

GOLF HOST RESORTS, INC.

(727) 942-2000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to the filing requirements for the past 90 days. – Yes    X        No      

     Issuer has no common stock subject to this report.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
CONSOLIDATED BALANCE SHEETS

ASSETS
(Substantially all pledged)

The accompanying notes are an integral part of these consolidated financial statements.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDER’S DEFICIT

The accompanying notes are an integral part of these consolidated financial statements.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GOLF HOST RESORTS, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S DEFICIT

The accompanying notes are an integral part of these consolidated financial statements.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)		BASIS OF PRESENTATION
		The financial statements for December 31, 2001 were prepared assuming the Company will continue as a going concern. As discussed in the notes to the consolidated financial statements on Form 10-K dated December 31, 2001, the Company has suffered recurring losses from operations, has negative working capital and has a shareholder’s deficit. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in the footnotes. Additionally, as described in Note 7 of the notes to the consolidated financial statements on Form 10-K, the Company had defaulted under the terms of its debt agreement and Golf Hosts, Inc., the Company’s parent company, is a defendant to a class action lawsuit. These financial statements do not include any adjustments that might result from the outcome of these uncertainties.
		These financial statements and related notes are presented for interim periods in accordance with the requirements of Form 10-Q and, consequently, do not include all disclosures normally provided in the Company’s Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
		The accompanying consolidated balance sheet for September 30, 2002, and consolidated statements of operations and cash flows for the periods ended September 30, 2002 and 2001, are unaudited but reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.
		The Company’s business is seasonal. Therefore, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal years.
(2)		INTANGIBLE ASSETS
		The Company recorded at closing in 1997, a resort intangible asset of approximately $30,400,000. This intangible related to the purchase of the Innisbrook Resort, which contained an existing rental pool agreement and a recently executed management agreement with Westin Hotels. The intangible is being amortized over twenty years on a straight-line basis. Amortization expense for all intangible assets was approximately $644,000 and $1,157,000 for the nine months ended September 30, 2002 and 2001, respectively.
		As noted in the Company’s 10-K for December 31, 2001, management had determined that due to declining demand in the resort business and reduced rental pool participation which led to declines in operating results, impairment had occurred. At December 31, 2000, an impairment charge of $7,441,000 was recorded. As a result of the continued decline in destination golf resort business during 2001 and the events of September 11, 2001, the Company determined that further impairment had occurred and consequently had recognized an additional $3,000,000 impairment charge during the quarter ended September 30, 2001.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)		Debt
		Debt consists of the following:

(4)		CONTINGENCIES
		Golf Hosts, Inc., the Company’s parent, has been named as a defendant in a consolidated class action lawsuit whereby the plaintiffs allege breaches of contract, including breaches in connection with the Rental Pool Master Lease Agreement. The plaintiffs are seeking unspecified damages and declaratory judgment stating that the plaintiffs are entitled to participate in the rental pool if one exists, a restriction of the total number of Club members and a limitation of golf course access to persons who are either condominium owners, members, their accompanied guests, or guests of the resort. Deposition of class members and others, including depositions of prior executives of Golf Host Resorts, Inc. have been taken and additional discovery remains. The previously scheduled trial date of February 3, 2002 has been postponed by the Court; a new trial date has not yet been set. As this litigation is still in progress, the Company is not yet able to determine whether the resolution of this matter will have a material adverse effect on the Company’s financial condition or results of operations although the Company believes Golf Hosts, Inc. has successful defenses based upon consultations with legal counsel and intends to vigorously defend this action.
		The Company has recorded a liability and related asset, in the approximate amount of $3,256,000, in recognition of the Master Lease Agreement refurbishment reimbursement program. The liability and asset will be amortized consistent with the repayment schedule, as defined in the Master Lease Agreement.

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GOLF HOST RESORTS, INC. AND SUBSIDIARY
(a wholly owned subsidiary of Golf Hosts, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)		TAMARRON’S RESULTS OF OPERATIONS
		The Company assumed responsibility for the net income (loss) of Tamarron under the terms of the lease agreement between the Company and Golf Host II, Inc. entered into during 2000. The net loss is as follows and is included in loss on leased asset and assets held for sale in the statement of operations:

On November 19, 2001, GH II, an affiliated company and lessor of Tamarron, sold Tamarron for $9,500,000. A portion of the proceeds were contributed to the Company as a capital contribution and were used to settle the remaining balance due under the $5,000,000 mortgage note from the previous owners.

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Golf Host Resorts, Inc.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The comparative results for 2001 exclude the activities of the Tamarron Resort, which the Company assumed responsibility for the new income (loss) under the terms of a lease agreement entered into between the Company and Golf Host II during 2000. Golf Host II sold the Tamarron Resort on November 19, 2001. The exclusion of Tamarron's results allows for comparison on a period to period basis for the Innisbrook property.

Quarter ended September 30, 2002

During the third quarter of 2002, the Company’s results of operations continued to reflect the economic downward trend within the hospitality industry. Occupancy percentages at the Innisbrook property were down 4.2% or 810 room nights as compared to the same quarter in 2001. Total room nights for 2002 and 2001 were 18,328 and 19,138, respectively. Revenue per room night for the third quarter improved by $37.54 or 11.9% per room night over the 2001 amounts. Total room night spending in the third quarter of 2002 was $353.05 as compared to $315.51 in the third quarter of 2001. These reductions in room nights coupled with the increased spending produced a net increase in total revenue of approximately $433,000 or 7.2%. Total revenue for the third quarter of 2002 was approximately $6,471,000 as compared to approximately $6,038,000 in 2001. Room nights in the period were down in the social/transient and up in the group sectors. Social/transient was down 1,454 room nights or 20.4% while group room nights were up 644 or 5.4% as compared to the same period last year.

Operating expenses, inclusive of depreciation, amortization and income/loss on leased asset, were down as compared to last year by approximately $3,289,000 or 27.9%. Depreciation and amortization on a combined basis decreased from approximately $968,000 to approximately $905,000 for the comparative quarters.

Interest expense, net reflects the continuing accrual of the GTA mortgage interest obligation. Interest for the quarter was down approximately $97,000. This decrease reflects the contractual increase associated with the GTA loan of approximately $13,000 for the $9,000,000 portion, offset by the reduction of other interest factors related to capital leases and short term borrowings.

Capital expenditure reserves in the approximate amount of $580,000 were set-aside during the period. Of this amount, approximately $104,800 was used to fund capital lease payments on operating assets while approximately $120,200 was spent on repairs and replacements of operating assets such as the roofs of the reception center, rear guard house and fitness center.

Year to Date September 30, 2002

During the nine months ended September 31, 2002, gross revenues declined by approximately $6,904,000 or 17.4% from the same nine-month period last year. Total revenue in 2002 was approximately $32,678,000 as compared to $39,582,000 in 2001. Room nights also declined from the 2001 levels. Total room nights for the nine months of 2002 were down by 15,634 or 17.4% as compared to 2001. Both the social/transient and group nights were down in the amounts of 2,958 and 12,676 respectively. These reductions continue to reflect our customers' concerns about the current economy. Gross room night spending increased by $.02 per room night. In 2001 the gross spending was $441.75 per room night, versus spending in 2002 of $444.77 per room night. The combined reduction in room nights and increased room night spending produced the reduction in gross revenues noted above.

Operating expenses for the nine-month period ended September 30, 2002, inclusive of depreciation, amortization and income/loss on assets held for sale and leased assets were down by approximately $7,916,000 as compared to the same period in 2001. Total operating expenses in 2002 and 2001 were approximately $31,390,000 and $39,306,000, respectively. Depreciation and amortization decreased by approximately $267,000 or 9.2% from the 2001 level.

Loss on leased assets and assets held for sale in the approximate amount of $109,000 in 2001 reflects a gain on the sale of Innisbrook land in the amount of $1,165,000 offset by losses on the leased asset of $1,274,000.

Interest expense for the nine months ended September 30, 2002, was approximately $402,000 less than the same period in 2001. This decrease is a result of the contractual increase in the GTA mortgage loan of approximately $39,000 for the $9,000,000 portion being offset by reductions in the interest expense associated with the prior shareholders' loans and accounts receivable revolving credit line loans.

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Golf Host Resorts, Inc.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The Company set aside approximately $1,739,000 in capital expenditure reserves during the nine months ended September 30, 2002. These funds are identified as restricted cash on the balance sheet and have been set aside to provide for capital improvements and repairs. Of this amount, $324,000 has been used to fund operating leases such as golf carts, golf course maintenance equipment, computer, telephone equipment and other resort operating leases. An additional $298,000 has been spent to build a new front entrance guard house, install new water heaters in the clubhouses and conference centers, replace the roofing on the reception center, island clubhouse and tennis facility, upgrade the computer systems and numerous deferred maintenance projects.

Liquidity and Capital Resources

The Company’s working capital position has decreased to a deficit of approximately $95,001,000. This is a $4,979,000 reduction in working capital from the December 31, 2001 deficit of approximately $90,022,000.

The Company continues to experience seasonal fluctuations in its net working capital position. These fluctuations have been managed in the past through the utilization of an Accounts receivable revolving credit facility with Wells Fargo Business Credit. Effective May 23, 2002, Wells Fargo Business Credit elected to terminate the Company’s credit because the Company had defaulted on the mortgage with Golf Trust of America (GTA).

The Company was informed by GTA on November 29, 2001 that the Company is in default on the $78,975,000 mortgage with GTA arising from the Company’s failure to pay the October 2001 interest installment. GTA has asserted its right to accelerate payment of the total outstanding principal and interest amounts.

As of March 2003, the Company is seeking to negotiate a Settlement Agreement with GTA. In connection with the proposed Settlement Agreement, the Company would transfer to GTA the resort property, three condominium properties located at the Innisbrook resort, the Company’s GTA stock interests, and all rights, title and interests of the Company under existing contracts and agreements. In addition, the Company would provide limited indemnity to defend and hold harmless GTA (and its affiliates) from and against any and all costs, liabilities, claims, losses, judgements or damages arising out of or in connection with the Class Action Lawsuit, as well as liabilities accruing on or before the closing date relating to employee benefits and liabilities for contracts or agreements not disclosed by the Company to GTA. In return, it is anticipated that GTA would deliver to the Company a duly executed release. No settlement Agreement has yet been signed and no terms are definite. Neither GTA nor any of its affiliates is under any obligation to continue negotiating with the Company or to execute the Settlement Agreement and could initiate foreclosure proceedings and pursue its other remedies at any time.

As noted in the Company’s 10-K for December 31, 2001, management had determined that due to declining demand in the hotel golf resort business and reduced rental pool participation which led to declines in operating results, impairment in the intangible asset had occurred. At December 31, 2000, an impairment charge of $7,441,000 was recorded. As a result of continued decline in destination golf resort business during 2001 and the events of September 11, 2001, the Company had determined that further impairment had occurred and consequently recognized an additional $3,000,000 impairment charge during the quarter ended September 30, 2001. No further impairment has been recognized in the nine months ended September 30, 2002.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

The Registrant does not have significant market risk with respect to foreign currency exchanges or other market rates. The Registrant’s debt has a fixed contractual interest rate through the year 2027, and, accordingly, fluctuations in interest rates are not expected to affect financial results.

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GOLF HOST RESORTS, INC.

ITEM 4.

Controls and Procedures

Within the 90 days prior to the date of this report, the Registrant’s management, including the Chief Executive Officer, the Principal Financial Officer and the Registrant’s agent (Westin North American Management Company), carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation, the Registrant’s Chief Executive Officer and the Principal Financial Officer concluded that the Registrant’s disclosure controls and procedures are effective in timely alerting them to material information to be included in the Registrant’s periodic SEC filings.

There have been no significant changes in the Registrant’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Chief Financial Officer and the Principal Financial Officer carried out this evaluation.

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INNISBROOK RENTAL POOL LEASE OPERATION

The following unaudited financial statements of the Innisbrook Rental Pool Lease Operation (the Rental Pool) are for the quarters and six months ended June 30, 2002 and 2001.

The operation of the Rental Pool is tied closely to that of Golf Host Resorts, Inc. (the Company), and provide for distribution of a percentage of the Company’s room revenues, as defined in the Rental Pool Master Lease Agreements ("MLA"), to participating condominium owners (Participants).

Effective January 1, 2002, the Company replaced the MLA which expired on December 31, 2001, with a new Master Lease Agreement ("NMLA"). The NMLA provides for Adjusted Gross Revenues, as defined, to be divided 40% to the Innisbrook participants and 60% to the Company. At December 31, 2001, 605 condominium units had elected to participate in the NMLA while 13 had elected to participate or remain in the Guaranteed Distribution Master Lease Agreement ("GMLA").

The Innisbrook Rental Pool Operation is party to lease agreements with an affiliated entity, whose ability to continue as a going concern is in substantial doubt.

The operation of the Rental Pool is more fully discussed in Form 10-K, for the fiscal year ended December 31, 2001 (file No. 2-64309).

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INNISBROOK RENTAL POOL LEASE OPERATION
BALANCE SHEETS

DISTRIBUTION FUND

These statements were prepared from the books and records of the Rental Pool without audit and, in the opinion of the Rental Pool Operator, include all adjustments which are necessary for a fair presentation.

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INNISBROOK RENTAL POOL LEASE OPERATION
STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)

DISTRIBUTION FUND

These statements were prepared from the books and records of the Rental Pool without audit and, in the opinion of the Rental Pool Operator, include all adjustments which are necessary for a fair presentation.

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INNISBROOK RENTAL POOL LEASE OPERATION
STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(unaudited)

DISTRIBUTION FUND