10-K/A 1 mpihost10ka.txt AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment no. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act. Class "A" Common Stock - $0.01 par value OTCBB (Title of Class) (Name of each exchange on which registered) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of the Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K [X] As of March 29, 2002, the Company had 2,443,762 shares of Class "A" Common Stock and 1,000 shares of Series "A" Convertible Preferred Stock outstanding. Of the total shares of Class "A" Common Stock outstanding, 1,864,558 shares were held by other than those who may be deemed affiliates, for an aggregate market value held by non-affiliates of $121,196 based upon the closing bid of the Company's Class "A" Common Stock on the "Over The Counter Bulletin Board" of $0.065 per share. The basis of this calculation does not constitute a determination by the Company that all of such persons or entities are affiliates of the Company as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference None. TABLE OF CONTENTS Item Page Number Number PART I 1. Business 3 2. Properties 9 3. Legal Proceedings 11 4. Submission of Matters to a Vote of Securities Holders 12 PART II 5. Market for the Company's Common Equity and Related Shareholder Matters 12 6. Selected Financial Data 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 7A. Quantitative and Qualitative Disclosures About Market Risk 19 8. Financial Statements and Supplementary Data 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III 10. Directors and Executive Officers of the Company 20 11. Executive Compensation 21 12. Security Ownership of Certain Beneficial Owners and Management 21 13. Certain Relationships and Related Transactions 23 PART IV 14. Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K 24 15. Schedule III: Real Estate and Accumulated Depreciation 60 2 PART I Certain statements in this Form 10-K constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Although forward-looking statements reflect management's good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance, or achievements of the Company to differ materially from anticipated future results, performance, or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Certain factors that might cause a difference in actual results include, but are not limited to, 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. ITEM 1. BUSINESS General Host Funding, Inc. (the "Company") was incorporated in the State of Maryland in December 1994 and was inactive from inception to March 31, 1995. The Company's Class "A" Common Stock began trading on the American Stock Exchange on April 22, 1996, the date of the Company's initial public offering. Upon closing of the Company's initial public offering, the Company owned five Super 8 Hotels located in Somerset, Kentucky; Miner, Missouri; Poplar Bluff, Missouri; Rock Falls, Illinois; and Mission Bay, California (the "Initial Hotels"). As of December 31, 2001, the hotel property portfolio of the Company consisted of 8 hotels located in 7 states consisting of approximately 600 rooms. The Company's subsidiary, Crosshost, Inc. is the owner of hotels in Somerset, Kentucky, Miner Missouri, Poplar Bluff, Missouri, Rock Falls, Illinois, Tallahassee, Florida, and Mission Bay, California. The subsidiary, BH Auburn, L. P. is the owner of a hotel in Auburn, Indiana. The Company is engaged in the business of owning limited-service and full service hotels throughout the United States, which are affiliated with national or regional hotel chains. Although the Company was initially structured as a real estate investment trust ("REIT"), it has not yet elected REIT status under the Internal Revenue Code. Since the commencement of Company operations and the acquisition of the Initial Hotels, the Company has formed wholly-owned subsidiaries for the purpose of financing and owning the Initial Hotels and acquiring additional hotel properties. Unless the context otherwise requires, references to the Company include the Company and its subsidiaries, and references to the hotel properties owned by the subsidiaries of the Company are referred to as the "Company Hotels." On January 4, 2001, the Company received notice from the American Stock Exchange ("Exchange") Staff indicating that the Company no longer complied with the Exchange's continued listing guidelines and that, as a result, the Exchange intended 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 had indicated that its actions are in response to the following circumstances. The Company had 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 did 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. 3 The Exchange also took 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. In view of the above, the Company had 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 filed an application with the United States Securities and Exchange Commission to strike the company's stock from the exchange. The Company's common stock was delisted during the first quarter of 2001. During the fourth quarter of 2001, the Company terminated its leases with Buckhead America Corporation and BAC Hotel Management, Inc., and terminated the Management Agreement with BAC Hotel Management, Inc. with regard to the Tallahassee hotel, and subsequently entered into Management Agreements with Cornerstone Hospitality Group, Inc. to operate all of the Company Hotels other than Mission Bay, California. These agreements are discussed more fully below. As a result, the only Company Hotel subject to a lease is the Mission Bay, California Property. In 2001, the Company Hotels owned by the Company's wholly owned subsidiary, Host Ventures, Inc. were foreclosed upon by the lender. Two of the three hotels were transferred in 2001 as a result of foreclosure sales. The third hotel was transferred in January, 2002, through a foreclosure sale. In August of 2001, the lessee of the Destin, FL hotel exercised a right under the lease agreement to reduce rent due to the construction of a competitive hotel property in the Destin area. As a result of the decreased rent, the loan secured by the Crosshost, Inc. hotels fell into default due to the fact that cash flow generated from the properties after the competitive rent adjustment was inadequate to meet debt service. Negotiations are under way with Lennar Partners, Inc, the Special Servicer of the lender, to pay to the lender all of the proceeds generated from the Company Hotels owned by Crosshost, Inc., with the hope of renegotiating the terms of the loan to enable Crosshost to continue in an ownership status. If such negotiations are not successful, one or all of the Company Hotels will be foreclosed upon. Further, negotiations are under way with the lessee of the Mission Bay Hotel Property, and Lennar Partners, Inc., to allow the optionee to consummate the purchase of the Mission Bay hotel pursuant to the option agreement discussed below. Business Developments In January, 1999, the Company effectively entered into a new lease agreement relating to the Company Hotel located in Mission Bay, California (the "Mission Bay Property") with RPD Mission Bay, LLC, an affiliate of Vagabond Inns ("RPD"). RPD thereafter converted the Mission Bay Property from a Super 8 Hotel to a Vagabond Inn, and pursuant to a services agreement, RPD also transferred the day-to-day management of the Mission Bay Property to RPD 18, LLC, also an affiliate of Vagabond Inns. The Company also granted RPD an option to purchase the Mission Bay Property for a purchase price of $3,225,000.00, which was exercised by RPD in March, 1999. The sale of the Mission Bay Property to RPD has not yet closed due initially to a dispute with the Company's lender relating to the governing deed of trust and the applicable defeasance and release requirements, and later, due to the Company's inability to meet certain requirements of the Lender to release the property. See Item 2. "Properties - Changes in Properties." Effective November 12, 1999, the Company sold the Country Hearth Inn located in Findlay, Ohio (the "Findlay Property") for a cash purchase price of $2,400,000.00. The cash proceeds were used to pay the first lien indebtedness on the Findlay Property and to satisfy the seller finance note held by the prior owner of the Findlay Property, including the judgment lien held by the prior owner. The Company did not receive any cash proceeds from the sale of the Findlay Property. See Item 2. "Properties - Changes in Properties" and Item 3. "Legal Proceedings." 4 On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a California real estate venture capitalist ("MPI"), 500,000 shares of the Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"), for a purchase price of $1,500,000.00. The proceeds from the sale of the Series "A" Preferred were used by the Company for working capital. The Company also issued to MPI warrants to purchase 500,000 shares of the Class "A" Common Stock of the Company for an exercise price of $3.00 per share, exercisable at any time for a period of six (6) years from the date of issuance (the "Warrants"). Concurrently with the purchase of the shares of Series "A" Preferred and the issuance of the Warrants, the Company and MPI entered into an Advisory Agreement pursuant to which MPI assumed the day to day operations of the Company and direction of new investments on behalf of the Company. In order to implement the responsibilities of MPI under the Advisory Agreement, the principal offices of the Company were moved from Dallas, Texas to Moraga, California in January, 2000. See Item 13. "Certain Relationships and Related Transactions." On June 30, 2000, the Company entered into an agreement with Hotel International Advisors, LLC, whereby it was to acquire interests in four Mexican Hotel Properties from Bufete Grupo Internacional S.E. de C.V, ("Bufete") a Mexican company which controls several dozen hotel properties in Mexico, in exchange for 1,000,000 shares of the Company's Class A Common Stock. HIA 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 December 31, 2001, no payments have been received, and after conducting an independent investigation, the Company has doubts that the securities in question were actually transferred to the Company. The Company has initiated litigation against HIA and Bufete with regard to this transaction. 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 December 2000, the Company entered into a letter of intent with Carnegie International Corporation (Carnegie), calling for the Company to issue shares in exchange for shares of Carnegie. The merger required certain conditions of the agreement as follows: a) advancement of funds to the Company by Sutter Capital Management and MPI (Investors) for the redemption of the Company's preferred stock, b) completion of legal settlement payable to Auburn Equity Partners, c) the satisfaction of all liabilities to the Investors, d) the existence of working capital in the amount of $200,000, in the form of a note payable to the Investors, e) cancellation of the existing management agreement between the Company and MPI and commencement of a new management agreement between the Company, MPI, and Carnegie, f) cancellation of issued warrants, g) issuance of new class of preferred stock, and several other performance criteria required by Carnegie. In connection with the proposed transaction, Crosshost advanced funds to Carnegie in the amount of $150,000. The promissory note from Carnegie is in the amount of $175,000, which includes an amendment fee for an amendment to the merger agreement term sheet . A Guarantee Agreement and a Stock Pledge agreement secure the promissory note from Carnegie. Subsequently, the Company determined not to proceed with the merger, and Carnegie failed to pay the promissory note when it came due. A lawsuit was initiated to collect on the note and the guarantee, and a settlement agreement has been reached whereby Carnegie will confess judgement, and allow for judgment to be entered later in 2002. In September, 2001, the Company entered into an agreement with Leisure Living Properties PLF, LLC ("Leisure Living") calling for the sale of common stock of the Company to Leisure Living in exchange for the contribution of three properties owned by Leisure Living. In addition, the transaction anticipated the redemption of the Series A Preferred Stock of the Company in exchange for secured promissory notes payable to the preferred shareholders, the transfer of the Advisory Agreement to Leisure Living, and the execution of a separate Management Agreement between Crosshost, Inc. and MacKenzie Patterson, Inc. 5 At the time of its approval of the Leisure Living transaction, the Board of Directors of the Company authorized the redemption of the Series "A" Preferred stock in exchange for the Company's promissory note in the amount of $4,113,322, which note was guaranteed by Crosshost, Inc. The face amount of the note represented the redemption price of the preferred stock at $4.00 per share, plus other amounts which had been advanced to the Company by the preferred shareholders. Concurrently, the Board of Directors authorized the execution of a Financing Agreement with HALTA, LLC, a California limited liability company which agreed to provide the Company with additional working capital in exchange for the execution of second deeds of trust on the Crosshost properties, the pledge of the shares of Crosshost, Inc. to HALTA, LLC, and assurances that Crosshost, Inc. would continue to be operated by MacKenzie Patterson, Inc. The Leisure Living transaction did not take place due to the withdrawal of Leisure Living from the transaction. The redemption of all but 1,000 shares of Series "A" Preferred shares was concluded in October, 2001, with the execution of a promissory note ("Company Note") in favor of HFD Investors, LLC, ("HFDI") a California limited liability company which was formed by the holders of the preferred shares to facilitate the sale of the Company Note. The Company Note was subsequently sold to HALTA, LLC by HFDI. As of the end of 2001, and as of the date of this report, MacKenzie Patterson, Inc. has continued to perform its duties under the Advisory Agreement dated December, 1999, without compensation. Termination of Leases In General At the beginning of 2001, all of the Company Hotels were leased and operated pursuant to lease agreements (the "Leases"), except for the Company Hotel located in Tallahassee, Florida (the "Tallahassee Property") which was managed and operated by BAC Hotel Management, Inc. ("BAC Hotel"), a wholly owned subsidiary of Buckhead America Corporation (NASDAQ:BUCK) pursuant to a management agreement. Except for the Company Hotel at Mission Bay, California (the "Mission Bay Property"), the Company Hotels were leased and operated by either Buckhead America Corporation (as to the Company Hotel located in Auburn, Indiana only) or BAC Hotel. The Mission Bay Property is leased to RPD Mission Bay, LLC (Mission Bay Property). In August, 2001, BAC Hotel asserted rights in the lease to reduce monthly base rent on the Destin, FL Hotel Property, as a result of the presence of a competitive hotel in the Destin area, exercised its right to terminate the Rock Falls, IL lease, and BUCK defaulted on the Auburn, IN lease. As a result, a negotiated settlement agreement was entered into between the Company, its subsidiaries, BAC Hotel and BUCK, resulting in the termination of all of the remaining leases between BAC Hotel and Crosshost, Inc., and BUCK and BH Auburn, LP, and the payment to Crosshost, Inc. of $75,000.00 in consideration for the cancellation of lease termination fees, lease deposits and reserves for capital expenditures. As a result of the settlement agreement, a management agreement with Cornerstone Hospitality Group, Inc. ("Management Agreement") was entered into with respect to all of the Company Hotels except the Mission Bay Property. The Management Agreement provides for the net operating revenue from each of the Company Hotels to be forwarded to the Company on a monthly basis, less a management fee of 4.5% of Gross Revenue, and the agreed upon reimbursable costs of operating the facility. The Management Agreement is terminable by either party with respect to all or one or more properties on 30 days notice. Franchise Agreements All of the Company Hotels are currently operated pursuant to franchise agreements with Super 8 Motels, Sleep Inn Hotels or Country Hearth Inn Hotels (the "Franchise Agreements"), other than the Mission Bay Property, which is operated as a Vagabond Inn (but with no franchise agreement). Franchises (including hotel licenses) generally provide advantages to hotel operators through the use of advertising on a much broader scale than would be possible for an individual hotel or small group of hotels, nationally recognized brand names, nationally accessible reservations systems, technical and business assistance to the individual franchisee and substantial buying power over approved suppliers. 6 The Franchise Agreements generally require the franchisee to pay a monthly franchise fee based on gross sales and to pay various other marketing fees associated with certain marketing or advertising and centralized reservation service funds, usually based on gross sales. The lessee, under the Leases, is responsible for payment of franchise fees. Franchise fees may vary between individual hotels within a franchise system based on the type of marks, restaurants or other aspects of the particular franchise system. The Franchise Agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels, which are established by the franchisors to maintain uniformity in the system created by each franchisor. Such standards generally regulate the hours of operation, maintenance, appearance and cleanliness, quality and type of goods and services offered, signage, protection of marks and advancement of marks. Compliance with such standards could require significant expenditures by the lessee for capital improvements. Any such improvements could increase the value of the applicable hotel to the benefit of the Company. The Franchise Agreements generally require the consent of the franchisor to a transfer of an interest in the applicable franchise or franchisee and the payment of a termination fee upon termination of the franchise agreement prior to its expiration. Business Plan For the calendar year 2001, the Company's business plan was (a) to locate a strategic partner which would provide additional working capital to the Company, or provide other business opportunities for the Company in the hotel industry or in a complementary business, (b) to pursue the Company's claims against HIA arising out of the Mexican Transactions, and (3) to resolve the claims against the Company from Keystone Advisors, Inc. / Crossroads Investments, LLC, and Choice Hotels, International. Further to those ends, the Company considered, but declined to proceed with the Carnegie International transaction, which is more fully discussed in the Business Developments section above, entered into an agreement with Leisure Living Properties PLF, LLC, to acquire three income producing properties in exchange for common stock of the Company, and investigated a number of other possible transactions, none of which resulted in a completed transaction. Litigation was initiated against HIA and Bufete arising out of the Mexican Transactions, and settlement agreements were reached to resolve the Keystone and Choice matters. On March 27, 2002, a settlement agreement was reached with Carnegie and E. David Gable wherein Carnegie and Gable agreed to the entry of a judgement against them in favor of Crosshost, Inc. the amount of $240,000.00. Entry of Judgment against Carnegie is postponed until October 30, 2002, and against Gable until January 1, 2003. In August, 2001, BAC Hotel Management, Inc., lessee of the Destin, FL property, notified the Company that it was exercising its right to reduce base rent under a Competitive Set rent adjustment clause in the lease, commencing as of August 1, 2001. As a result, cash flow from Company operations was no longer sufficient to meet the Company's ongoing debt service requirements, and the loan, secured by all of the Crosshost, Inc. hotel properties fell into default. In addition, Buckhead America Corporation defaulted on the Auburn lease, and the Company terminated that lease in September, 2001. Payments on the Auburn, IN note are also in default. Management Agreements have been put into place with Cornerstone Hospitality Group, Inc. with respect to each of the Company Hotels other than the Mission Bay Property. Negotiations with the lenders are underway with a view towards restructuring the loans to allow the Company to retain its ownership interests in the properties, and to allow the optionee on the Mission Bay Property to consummate the purchase of the Mission Bay Property. Environmental Matters Under various federal, state and local environmental laws, ordinances, regulations and common law, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, or in such property, whether or not it was responsible for their presence. Such laws and common law principles could also be used to impose liability upon owners or operators of real properties for release of asbestos containing materials that cause personal injury or other damage. The policy of the Company is to obtain a Phase I environmental assessment report for each of the hotels acquired by the Company, prepared by an independent environmental consultant. 7 The Company is not aware of any environmental condition with respect to the Company Hotels that could have a material adverse affect on the Company's financial condition or results of operations. No assurances can be given, however, that (i) environmental assessments undertaken with respect to the Company Hotels have revealed all potential environmental liabilities, (ii) any prior owner or operator of the real property on which the Company Hotels are located did not create any material environmental condition not known to the Company, or (iii) a material environmental condition does not otherwise exist as to any one or more Company Hotels. Pursuant to the Leases, the lessee has agreed to comply with applicable environmental regulations. Employees As of December 31, 2001, the Company had no full-time employees. Competition The hotel industry is highly competitive. All of the Company Hotels are located in developed areas and experience competition primarily found in other similarly priced hotels within their immediate vicinity. Each Company Hotel also competes with other hotel properties in its particular geographic market. The number of competitive hotel properties in a particular market or geographic area could have a material and adverse affect on the rental market for the room units at each Company Hotel and the rates which may be charged for such room units. The Company Hotels must also compete for occupants with new hotels in the area. Seasonality of the Hotel Business The hotel industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters of a calendar year. All of the Company Hotels typically reflect the effects of this industry seasonality. This seasonality may cause significant quarterly fluctuations in the Company's lease revenues. Regulatory Matters General Hotel properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities, such as swimming pools, activity centers and other common areas. Based on its inspection and evaluation of the Company Hotels, the Company believes that each Company Hotel has the necessary permits and approvals required to enable the lessee or manager of the particular hotel to operate and manage such hotel in the manner contemplated by the applicable lease agreement or management agreement. Americans with Disabilities Act The Company Hotels must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Under the public accommodations provisions of the ADA, the Company, as owner of the Company Hotels, will be obligated to reasonably accommodate the patrons of the Company Hotels who have physical, mental or other disabilities. This includes the obligation to remove architectural and communication barriers at the Company Hotel when doing so is "readily achievable". In addition, under the commercial facilities provisions of the ADA, the Company is obligated to ensure that alterations to any hotel properties conform to the specific requirements of the ADA implementing regulations. Noncompliance could result in the imposition of fines, injunctive relief, and an award of damages and attorneys' fees. The 8 lessee generally is obligated to remedy any ADA compliance matters pursuant to the Leases. Currently, the Company believes that all Company Hotels are in compliance with the ADA in all material respects. ITEM 2. PROPERTIES During the fiscal year ended December 31, 2001, the Company's principal executive offices were located at 1640, School St. Moraga, CA 94556. See Item 13. "Certain Relationships and Related Transactions." During all or portions of the fiscal year ended December 31, 2001, the Company owned eight hotel properties located in seven states consisting of approximately 600 rooms. Set forth below is certain summary information relating to the Company Hotels.

Changes in Properties In January 2000, Buckhead America Corporation (BAC) notified the Company that pursuant to certain Competitive Set Clauses in the leases, the annual base rent on these properties would be reduced as follows: 2001 Base Rent Previous Base Rent Ocean Springs $179,000 $369,000 Sarasota $217,500 $303,500 Rock Falls $228,000 $266,000 Somerset $ 90,000 $127,000 In August, 2001, BAC notified the company that pursuant to the Competitive Set Clause in the Destin, FL lease, it would be reducing base rent. As a result of that change, the Company's cash flow was insufficient to meet the Company's debt service requirements. Further, the lessee of the Auburn, IN hotel defaulted, the lease was terminated, and the loan securing the Auburn, IN hotel is now in default. In December, 2001 the Company terminated its remaining leases with BAC and BUCK and entered into management agreements by which Buckhead will operate the properties for a fee. As of February 1, 2002, a management agreement with Cornerstone Hospitality Group, Inc. ("Management Agreement") was entered into with respect to all of the Company Hotels except the Mission Bay Property. The Management Agreement provides for the net operating revenue from each of the Company Hotels to be forwarded to the Company on a monthly basis, less a management fee of 4.5% of Gross Revenue, and the agreed upon reimbursable costs of operating the facility. The Management Agreement is terminable by either party with respect to all or one or more properties on 30 days notice. 10 ITEM 3. 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. 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. All amounts were paid pursuant to the Settlement Agreement by 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, Inc. Franklin County Common Please Court, Columbus, Ohio, Civil Division, Case No. 99CVH-04-2726. The Company was named as a defendant in the above complaints filed on April 1, 1999. The complaints were filed based upon the default by BH-Auburn, L.P. and BH-Findlay, L.P. (collectively, the "Partnerships") of their respective payment obligations under two seller promissory notes (the "Country Hearth Notes") delivered to the respective plaintiffs in partial payment of the purchase price for the Company Hotels located in Findlay, Ohio and Auburn, Indiana. The Company was named as a defendant in both complaints based upon the Company's guaranty of the payment of the Country Hearth Notes. On July 30, 1999, a judgment was rendered in favor of the plaintiffs against the Partnerships and the Company in the approximate aggregate amount of $1,550,000.00. The obligations of B-H Findlay under the seller promissory note, both principal and interest, related to the Company Hotel located in Findlay, Ohio in the approximate settlement amount of $650,000.00 were satisfied in full from the proceeds of the sale of the property. In December 2000, the Company settled all outstanding litigation regarding the above with a payment of $500,000.00 and an agreement to pay an additional $200,000.00 by April 30, 2001 and $125,000.00 by June 1, 2001. All payments were made pursuant to the Agreement Keystone Advisors, Inc and Crossroads Investments, LLC vs. Host Funding Inc.; Superior Court of the State of California, Santa Barbara County, Anacapa Division, Case No. 1035199. 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. During the year 2001, the Company entered into a Settlement Agreement with Keystone/Crossroads whereby the Company agreed to make monthly installments of $15,000 to satisfy the obligation. Installment payments in the amounts of $95,000.00 were made. However, in October, 2001, such payments were terminated due to the lack of sufficient cash flow from the Company Hotels to make such payments. Nevertheless, the plaintiffs continue to pursue collection efforts against the Company. Choice Hotels International v. Host Ventures Inc. Demand for Arbitration The Company and its operating subsidiaries, Host Ventures, Inc. and Crosshost, Inc., received a claim from Choice Hotels, International ("Choice") arising out of the termination for default of the Franchise Agreement for the Ocean Springs, MI Sleep Inn. The Agreement was between Choice and Host Ventures, Inc., but had been guaranteed by both Crosshost, Inc and the Company. A negotiated settlement was reached with Choice, resulting in the agreement of the Company to pay 174 monthly payments of $1,494.25. 11 Crosshost, Inc. vs Carnegie International Prior to the proposed completion of the merger with Carnegie, Crosshost, Inc. advanced $150,000 to Carnegie in exchange for Carnegie's promissory note, which was guaranteed by the personal guarantee of E. David Gable, Carnegie's Chairman, and the pledge of the shares of Romnet Data Services, Inc. The promissory note was in the amount of $175,000, which includes Carnegie's agreement to pay a fee of $25,000 for an amendment to the merger agreement term sheet. In addition, Carnegie agreed to pay a break-up fee of $150,000 to the Company if the merger was not consummated. Subsequently, the Company determined not to proceed with the merger, and Carnegie failed to pay the promissory note when it came due and failed to pay the break-up fee. The Company filed an action in Contra Costa County Superior Court entitled Crosshost, Inc., a Maryland Corporation, Plaintiff, v. E. David Gable, an individual, Defendant, identified as Case Number C01-02232, to collect on the guarantee of Gable. Gable and Carnegie cross complained, and Crosshost then filed an action in Superior Court, Contra Costa County, California, entitled Crosshost, Inc., a Maryland Corporation, Cross-Complainant, v. Carnegie International Corporation, a Colorado Corporation, and ROES 1 through 10, inclusive. In March, 2002, a settlement agreement was reached whereby Carnegie agreed to future entry of judgement, if the amounts agreed to be paid in the settlement have not been paid by October 30, 2002. Gable agreed to future entry of the judgement against him on January 1, 2003, if any amounts remain unpaid at that date. The Settlement Agreement calls for Gable and Carnegie to pay the total amount of $240,000 to Crosshost, plus interest on $200,000 at a rate of 9 percent beginning on April 5, 2002. This total amount of $240,000 is comprised of the following: $175,000 on the Promissory Note dated January 3, 2001 that is the subject of Crosshost's cross-action referred to above; $25,000, which is a compromised amount of the break up fee; $22,000 for Crosshost's and the Company's attorneys' fees; and $18,000 in interest from April 5, 2001 to April 5, 2002 at a rate of 9 percent per annum. Interest will continue to run on the sum of $200,000 at the rate of 9 percent per annum until the $200,000 is paid. The Company is a party to other, non-material legal procedures through the ordinary course of business. The Company does not anticipate the losses, if any, will have a material impact on the financial condition, results of operation or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS There were no submissions of matters to a vote of securities holders in the fourth quarter of 2001. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Class "A" Common Stock was traded on the American Stock Exchange ("AMEX") under the symbol "HFD". The Class "A" Common Stock began trading on April 22, 1996, the date of the Company's initial public offering. On January 4, 2001, the Company received notice from the American Stock Exchange ("Exchange") Staff indicating that the Company no longer complied with the Exchange's continued listing guidelines and that, as a result, the Exchange intended 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 were in response to the following circumstances. The Company had 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 did not meet the continued listing guidelines due to its 12 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 had 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. In view of the above, the Company had 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 filed an application with the United States Securities and Exchange Commission to strike the company's stock from the exchange. The Company's common stock was delisted during the first quarter of 2001. Shares of the Company are now traded on the Over the Counter Bulletin Board under the symbol HFDI.OB As of December 31, 2001, there were approximately 900 shareholders of record of the Company's Class "A" Common Stock and the closing bid price on the Bulletin Board was $0.065 During 1997, the Company declared dividends of $0.24 per share on February 4, $0.24 per share on May 30, $0.24 per share on September 2, and $0.24 per share on December 12. No dividends were declared or paid by the Company in 1998, 1999, 2000, or 2001. Future distributions to shareholders will be dependent upon the Company's net cash flow from the operations of the Company Hotels, financial condition, capital requirements and other factors deemed relevant by the Board of Directors of the Company. As of December 31, 2000, the Company had issued and outstanding one series of warrants "Series B Warrants." The Series B Warrants provide warrants to purchase 225,000 shares of the Company's Class "A" Common Stock at $10.80 per share, and expired on February 2, 2001. There were additional provisions in the Series A Warrants and the Series B Warrants that allowed certain limited registration rights and pro-rata treatment upon the occurrence of certain events, including, without limitation, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. During 2000, the Company also had Series "A" Warrants outstanding. The Series A Warrants provided warrants to purchase 225,000 shares of Host Funding's Class "A" Common Stock at $9.90 per share. The Series A Warrants expired on February 2, 2000. The Company also issued warrants to MPI to purchase 500,000 shares of Class "A" Common Stock of the Company for an exercise price of $3.00 per share (the "Warrants"). The Warrants are exercisable at any time after the date of issuance with an expiration date of December 21, 2005. The Warrants are subject to exercise price adjustments upon the occurrence of certain events, including stock dividends, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. On December 20, 1999, the Company filed Articles Supplementary with the Maryland State Department of Taxation designating 2,000,000 shares of the authorized but unissued shares of Preferred Stock of the Company as Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"). Of the 2,000,000 shares of the Series "A" Preferred designated by the Company, MPI purchased 500,000 shares for a purchase price of $3.00 per share. MPI purchased the shares of Series "A" Preferred on December 22, 1999 in an exempt transaction pursuant to Rule 506 of Regulation D under the Securities Act of 1933. See Item 13. "Certain Relationships and Related Transactions." The holders of the Series "A" Preferred are entitled to participate pro rata with the holders of shares of the Class "A" Common Stock of the Company with respect 13 to dividend distributions and are entitled to a liquidation preference of $4.00 per share over the holders of shares of Class "A" Common Stock, upon the voluntary or involuntary dissolution, liquidation or winding up the affairs of the Company. The holders of shares of Series "A" Preferred also have the right, exercisable at any time after December 23, 2002, to convert such shares into shares of Class "A" Common Stock on a one-for-one basis (the "Conversion Ratio"), or to require the Company to redeem all or any part of the shares of Series "A" Preferred at the redemption price of $4.00 per share plus any accrued and unpaid cash dividends. The Conversion Ratio is subject to adjustment upon the occurrence of certain events, including issuance of additional shares of Class "A" Common Stock, stock dividends, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. The holders of shares of Series "A" Preferred are entitled to the number of votes equal to the number of shares of Class "A" Common Stock into which a share of Series "A" Preferred is convertible and are further entitled to vote together as a single group with the holders of Class "A" Common Stock on all matters submitted or required to be submitted to the Company's common stockholders for approval. The holders of Series "A" Preferred, voting together as a single voting group, have the right to elect, at each annual stockholders meeting of the Company, two (2) of the five (5) members of the Board of Directors of the Company. In December 2000, the Company sold to MPI and 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 of which were used to settle outstanding litigation regarding the Auburn and Findlay properties as well as fund working capital obligations. In 2001, the Company sold to MPI and Sutter 162,500 shares of the Series "A" Preferred for a purchase price of $325,000. The proceeds were used to settle the balance of the claim regarding the Auburn and Findlay properties. Pursuant to the terms and conditions of a Registration Rights Agreement (the "Registration Agreement") between the Company and MPI and Sutter Opportunity Fund, LLC, the holders of the Series "A" Preferred and the Warrants are entitled to certain demand and "piggy-back" registration rights relating to the shares of Class "A" Common Stock issuable upon conversion of the Series "A" Preferred or upon exercise of the Warrants (the "Underlying Common Stock"). The Registration Agreement provides that at any time after the date of issuance the holders of at least twenty-five percent (25%) of the Series "A" Preferred and the Warrants may make in the aggregate, up to four (4) written requests to register the number of shares of Underlying Common Stock set forth in each written request. In addition, if the Company proposes to file a registration statement under the Securities Act of 1933 with respect to an offering by the Company of securities for its own account (other than a registration statement on Form S-4 or Form S-8), the holders of Series "A" Preferred and the Warrants shall be entitled to participate in the Company registration, subject to the approval of the Company underwriter. In December, 2001, all but 1,000 shares of Series "A" Preferred stock were redeemed in exchange for the secured promissory note of the Company in the face amount of $4,113,322 As a result, 1,000 shares of Series "A" Preferred stock remain outstanding, and are issued to MacKenzie Patterson, Inc. ("MPI"). MPI continues to operate the Company pursuant to the Advisory Agreement, although it has received no compensation in 2001 for so doing. The Advisory Agreement provides for an annual base advisory fee of $350,000.00. 14 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial information for the Company, all of which has been derived from the consolidated financial statements included with this Annual Report on Form 10-K. The following information should be read in conjunction with the consolidated financial statements and the notes thereto for the Company and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Developments On June 30, 2000, the Company purportedly acquired interests in four Mexican Hotel Properties from Hotel International Advisors, LLC,("HIA") in exchange for 1,000,000 shares of the Company's Class A Common Stock. HIA 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. No such payments have been received, and the Company has initiated legal proceedings against HIA. At the end of 2000 The Company initiated litigation regarding the sale of the Mission Bay Property, against the Master Servicer, the Special Servicer, and Credit Suisse First Boston ("the mortgage holder") Said litigation was settled during the fourth quarter of 2000 with the payment to the Company of $185,000. The company endeavored to close the sale of Mission Bay in the third quarter of 2001, but was unable to do so because of its inability to pay the defeasance costs involved, and its inability to meet post-closing debt service covenants . In December 2000, the Company settled all outstanding litigation regarding the Auburn and Findlay notes and judgments in the aggregate amount of $1,550,000.00 previously held by Auburn Equity Partners and Findlay Equity Partners. Such settlement was made with a payment $500,000.00 and an agreement to pay an additional $200,000.00 by April 30, 2001 and $125,000.00 by June 1, 2001, for a total of $825,000.00. The Company was notified in 2001 by Orix Real Estate Capital Markets, LLC, who is the mortgage holder of the Host Ventures, Inc. properties, that they intend 15 to foreclose on the properties due to the Company's default on the mortgage payments. The Host Ventures, Inc. properties consist of the Sarasota, FL, Ocean Springs, MS, and Flagstaff, AZ properties. The default is a result of competitive rent-reduction clauses in the respective leases which resulted in the lessees paying less rent on the properties than the debt service cost. The Company was unsuccessful in its efforts to re-structure the loans. During 2001, the three Host Ventures, Inc. properties were foreclosed upon. In December, 2001 the Company terminated its remaining leases with Buckhead America Corp. and entered into management agreements by which Buckhead will operate the properties for a fee. As of February 1, 2002, a management agreement with Cornerstone Hospitality Group, Inc. ("Management Agreement") was entered into with respect to all of the Company Hotels except the Mission Bay Property. The Management Agreement provides for the net operating revenue from each of the Company Hotels to be forwarded to the Company on a monthly basis, less a management fee of 4.5% of Gross Revenue, and the agreed upon reimbursable costs of operating the facility. The Management Agreement is terminable by either party with respect to all or one or more properties on 30 days notice. Results of Operations Years Ended December 31, 2001, 2000, and 1999: Occupancy, average room rates, and revenue per available room of 54%, $48.20, and $26.15 for the Company Hotels for the year ended December 31, 2001 resulted in total sales, including room sales, of approximately $5,744,000. Property Operation: Property operations include the Tallahassee results effective July 1, 1999 and the operations of Poplar Bluff, Rock Falls, Destin, Miner, Somerset and Auburn effective December 18, 2001. Room revenue, operating expenses, and income from property operations were approximately $950,000, $715,000 and $235,000 for 2001, $858,000, $715,000, and $338,000 for 2000 and $425,000, 244,000 and 181,000 for 1999. Lease Revenue: Lease Revenues were approximately $1,765,000 for 2001, $2,909,000 for 2000 and $3,368,000 for 1999. The reduction is a result of the foreclosure of the three Host Ventures properties for all of 2001 as well as the termination of the lease agreements in December, 2001. The reduction from 1999 levels was due to the termination of the Tallahassee lease July 1, 1999 and the sale of the Findlay, Ohio property in November, 1999. Interest Expense: Interest expense of approximately $1,509,000 decreased from the prior years levels due to the foreclosure of the Host Ventures properties and the sale of the Findlay, Ohio property November, 1999. Depreciation expense, which is included in depreciation and amortization, is calculated based upon the original historical cost of the five initial hotels acquired by the Company and the acquisition value of the remaining Company Hotels. The Company had various properties sold or Held for Sale since 1999. Since amortization and Depreciation expense is not recognized for properties classified as "Land, Property, and Equipment - Held for Sale", the 2001 amounts are less than the 2000 and 1999 amounts. The 2001 amount is further reduced as compared to 1999 as a result of the sale of the Findlay property in November, 1999. Administrative Expenses, Other: The 2001 amount of approximately $415,000 is $554,000 less than 2000 due to the assumption by MPI of costs of approximately $323,000as well as a reduction in legal and settlement expenses. Administrative Expenses, Other were approximately $415,000, $768,000 and $862,000 for the years ended 2001, 2000 and 1999, respectively, and consisted primarily of the following approximate amounts: advisory fees of $350,000, $350,000 and $0; insurance of $2,000, 61,000, and $0; legal fees of $7,000, $211,000 and $154,000; settlement claims of $0, $40,000 and $0; and other costs of $56,000, $106,000 and $86,000. Directors Fees for 2001 and 2000 totaled approximately $4,000 which is less than the 1999 amount of $89,000. The amount in 1999 was due primarily to shares of common stock issued to former directors. There were no fees paid to directors in 2001. 16 Minority Interest in Partnerships: Represents the 19% minority interest in the operations of the Country Hearth Inn Hotels. During 2001, Buckhead America Corporation relinquished its 19% interest in the entity which owns the Auburn, IN property, thus the Company now owns all of the beneficial interest in the property. Amortization of Unearned Directors Compensation has been calculated based upon the terms of the independent directors' notes. The 2001 Valuation Reserve of $1,581,146 and the Loss from Sale of Property of $997,331 were as a result of the foreclosure of the three Host Ventures properties in 2001. The valuation reserve was established to write-down the value of the Sarasota, Florida property for which title had not transferred as of December 31, 2001. The loss on sale of property reflects the loss on the foreclosure sales of the Flagstaff, Arizona and Ocean Springs, Mississippi properties. The 1999 loss form sale of property of $607,000 was due to the sale of the Findlay, Ohio property. Loss from Transfer of Lease: The Company recognized a loss of $489,000 on the termination of its lease agreements with Buckhead in December, 2001. The loss was primarily due to the release of capital expenditure reserves, rent receivable and deposits in exchange for a waiver by Buckhead of any lease termination fees due them as a result of the cancellation of the leases. The gain recognized in 1999 of approximately $279,000 resulted from the change in lessee on the property the Company owns in Mission Bay California from Crossroads Hospitality Tenant Company to Vagabond Inns Franchise Termination Reserve: The Company recorded a charge of $154,000 in 2001 resulting from a settlement with Choice Hotels International over a default on the franchise agreement on the Ocean Springs, Mississippi property. Preferred Stock Premium: The Company recorded a charge of $902,000 in 2001 as a result of the conversion of the Company's Series "A" Preferred stock to a note payable in favor of HFD Investors, LLC (representing the holders of the Series "A" Preferred). The Board of Directors authorized the conversation of the preferred to facilitate an anticipated merger with Leisure Living. Relinquished project costs of $227,000 for the year ended 2000 include costs incurred related to potential hotel acquisitions in the Northeastern United States. As the Company had written off all acquisition costs during 2000, there were no charges for 2001. Liquidity and Capital Resources The Company's principal source of cash to meet its cash requirements, including repayments of indebtedness, is the cash flow from the Company Hotels. For the year ended December 31, 2001, cash flow used in operating activities was approximately $920,000. For the year ended December 31, 2001, cash flow provided by operating activities was approximately $140,000. The Company has no committed additional sources of external liquidity available; therefore, the Company relies exclusively on its internal cash flow to meet its liquidity needs. The Company's principal source of cash to meet its cash requirements, is its share of the Company's cash flow from the Company Hotels. Without any additional capital or a restructuring of the Crosshost loan, the Company will be unable to meet its ongoing obligations. It is therefore highly unlikely that the Company will be able to continue as a going concern. In December 2000, the Company sold to MPI and 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 property as well as fund working capital obligations. 17 On December 23, 2000 the Company settled outstanding litigation with Credit Suisse First Boston. Part of the terms of the settlement was a payment of $185,000 to the Company. The proceeds from the settlement were used to pay current obligations and for working capital. On December 22, 1999, the Company sold to Mackenzie Patterson, Inc., a California real estate venture capitalist ("MPI"), 500,000 shares of the Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"), for a purchase price of $1,500,000.00. The proceeds from the sale of the Series "A" Preferred were used by the Company to satisfy current obligations and for working capital. The Company also issued to MPI warrants to purchase 500,000 shares of the Class "A" Common Stock of the Company for an exercise price of $3.00 per share, exercisable at any time for a period of six (6) years from the date of issuance (the "Warrants"). Concurrently with the purchase of the shares of Series "A" Preferred and the issuance of the Warrants, the Company and MPI entered into an Advisory Agreement pursuant to which MPI assumed the day to day operations of the Company and direction of new investments on behalf of the Company. In order to implement the responsibilities of MPI under the Advisory Agreement, the principle offices of the Company were moved from Dallas, Texas to Moraga, California in January 2000. See Item 13. "Certain Relationships and Related Transactions." Effective May 12, 1998, Host Ventures, Inc. ("HVI") entered into a new loan agreement (the "HVI Modified Loan") with Credit Suisse First Boston ("First Boston") in which the principal amount of the existing debt from First Boston to HVI was increased from $8,725,000 to $9,075,000. The additional proceeds of the loan were used for general corporate purposes. The term of the HVI Modified Loan provides that all principal and outstanding interest is due and payable in June, 2023. The annual interest rate was modified to 8.12%, with interest and principal amortized over a 25 year term, payable monthly. The HVI Modified Loan provides for a "Hyperamortization Date," after which the annual interest rate increases substantially. The hyperamortization provision is intended to provide incentive for the loan to be paid off on the tenth anniversary date of the HVI Modified Loan. Also effective May 12, 1998, the Company entered into a new loan agreement with First Boston (the "Mezzanine Loan") in which First Boston loaned the Company $825,000. The proceeds of the loan were used for general corporate purposes. Interest accrues at a floating rate of the 30-day LIBOR, plus 500 basis points. Interest and principal, based on a 5 year amortization, are due monthly. The Company subsequently formed Host Enterprises, Inc. ("HEI"), as a wholly owned, special purpose entity of HVI, for the purpose of transferring the Mezzanine Loan to HEI. The Company guaranteed the performance by HEI of the terms of the Mezzanine Loan and pledged the stock of HVI as security for the Mezzanine Loan. On June 19, 1997, the Company executed a promissory note payable to Blacor, Inc. ("Blacor") in the original principal amount of $70,000 (the "Original Blacor Note"). On December 30, 1997, the Original Blacor Note was extended by a new promissory note in the original principal amount of $86,600 (the "Blacor Note"). Effective December 30, 1998, the Blacor note was extended to April 30, 1999. During 1999, the balance of the Blacor Note was increased to $108,600. On September 29, 1999, the Company paid a portion of the outstanding principal balance and all accrued interest on the Blacor Note by the issuance to Blacor of 33,000 shares of the Class "A" Common Stock of the Company. The remaining principal and interest outstanding was paid in full in December, 1999. In October 1997, B-H Findlay, L.P. ("B-H Findlay") executed a note payable (the "Findlay Note") to the seller of the Company Hotel located in Findlay, Ohio (the "Findlay Property") and BH-Auburn, L.P. ("B-H Auburn") executed a note payable (the "Auburn Note") to the seller of the Company Hotel located in Auburn, Indiana (the "Auburn Property") in partial payment of the purchase price of the hotel properties (collectively, the "Country Hearth Notes"). The Company is the beneficial owner of 81% of the partnership interests in each of B-H Findlay and B-H Auburn. The Country Hearth Notes were originally secured by 90,000 shares of the Class "B" Common Stock of the Company (the "Pledged Stock") and the corporate guaranty of the Company (the "Host Funding Guaranty"). The Country Hearth Notes were modified on June 15,1998 to provide that if, on October 21, 1998, the closing price of the Company's Class A Common 18 Stock as traded on the American Stock Exchange was less than $6.50 per share, the Company would make an additional cash payment (the "Full Cash Payment") to the sellers so that the total value of the Class "A" Common Stock at the per share price on October 21, 1998, plus the amount of such Full Cash Payment to the sellers, equaled $750,000. B-H Findlay and B-H Auburn defaulted on their respective payment obligations under the Country Hearth Notes in January 1999 and the holders of the Country Hearth Notes filed a complaint in the Franklin County Common Pleas Court, Columbus, Ohio, Civil Division against each of the partnerships, as maker, and the Company, as guarantor. The complaints were filed in April 1999 and together demanded payment of the Country Hearth Notes in full and the related Full Cash Payment in the aggregate amount of approximately $1,550,000. On July 30, 1999, a judgment was rendered against B-H Findlay, B-H Auburn and the Company in the approximate aggregate amount of $1,550,000. The obligations of B-H Findlay under the Findlay Note, both principal and interest, in the approximate settlement amount of $650,000.00 were satisfied in full from the net proceeds of the sale of the Findlay Property in November 1999. The Host Guaranty and the Pledged Stock continued to secure the obligations of B-H Auburn under the Auburn Note and the Full Cash Payment in the approximate of $800,000. This obligation was settled on December 22, 2000 with the payment of $500,000 and an agreement to pay $200,000 by April 30,2001 and $125,000 by June 1, 2001, which payments were made as required. During the first quarter of 2002, all of the agreements with Buckhead America Corp. were terminated and replaced with Management Agreements with Cornerstone Hospitality Group, Inc. The Management Agreement provides for the net operating revenue from each of the Company Hotels to be forwarded to the Company on a monthly basis, less a management fee of 4.5% of Gross Revenue, and the agreed upon reimbursable costs of operating the facility. The Management Agreement is terminable by either party with respect to all or one or more properties on 30 days notice.The Company has advised the manager to forward the net operating revenues received from the Crosshost, Inc. Hotel Properties directly to Lennar Partners, Inc., Special Servicer for the Lender. Other than debt service on the Company's loan facilities and notes, the capital expenditures required the Company Hotels or the Company's loan facilities, property taxes on the Company Hotels, administrative expenses, and the unpaid liabilities to Keystone and Choice, and unpaid advisory fees under the Advisory Agreement with MPI, as discussed above, the Company is not aware of any demands, commitments, events or circumstances that will result or are likely to result in a change in the Company's liquidity. Inflation Operators of hotels, in general, possess the ability to adjust room rates quickly. Competitive pressures may, however, limit the ability of the operators of the Company Hotels to raise room rates in the face of inflation. Seasonality ITEM 7A. 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 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and Capital Resources." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a). 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective July 10, 2000 the Company's independent accountant and auditor, PriceWaterhouse Coopers, LLP, elected to resign. PriceWaterhouse Coopers, LLP, issued an unqualified independent accountant's report on the Company's 1999 consolidated financial statements that contained no adverse opinion or disclaimer of opinion. There have not been any disagreements between the Company and PriceWaterhouse Coopers, LLP, on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, nor have there been any reportable events as defined under Item 304(a)(1)(v). The Audit Committee approved the engagement of Merdinger, Fruchter, Rosen, and Corso, P.C. as the Company's independent accountant and auditor. The Board of Directors, on recommendation of the Audit Committee, has selected the firm as the Company's independent accountant and auditor for the year ending December 31, 2001. Due to insufficient funding to pay for an audit, there will be no independent audit of the Company's 2001 financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Company's Board of Directors consists of five (5) members (although 2 seats remain vacant). The directors are elected at the annual meeting of shareholders or are appointed by the incumbent Board of Directors and serve until the next annual meeting of shareholders or until a successor has been elected or appointed. Set forth below is certain information regarding the directors and executive officers of the Company during fiscal year 2001. Guy E. Hatfield, Director Mr. Hatfield has served as a Director of the Company since 1996. Mr. Hatfield, 67, has been President of All American Group, Inc., a Delaware corporation, since 1989. Mr. Hatfield earned a Bachelor of Science degree from Bradley University in 1955 and a J.D. from the University of San Diego in 1962. From 1984 to 1989, Mr. Hatfield was Chairman of the Board and Chief Executive Officer of Motels of America, Inc., a corporation that built and managed 107 Super 8 motels and had gross annual sales of $80,000,000. Since 1989, Mr. Hatfield has served as President and Chairman of Hatfield Inns, Inc., a corporation involved in the ownership and management of hotel properties. Brian K. Rodgers, Director Mr. Rodgers has served as a Director of the Company since 1999. Mr. Rodgers, 30, is an associate of HVS International, a worldwide hotel consulting and appraisal firm serving hotel owners and lenders throughout the United States and abroad. Mr. Rodgers has conducted appraisals on hotel assets and development projects valued at over $1 billion. Prior to his employment at HVS International, Mr. Rodgers gained hotel operational experience at Four Seasons Hotels and Resorts, serving a management role in the opening of the Four Seasons Resort Aviara, located in Carlsbad, California. Mr. Rodgers earned a Bachelor of Arts degree in Psychology from the University of California at San Diego in 1994 and a Masters of Management in Hospitality from Cornell University in 1998. Mr. Rodgers resides in San Francisco, California and is an active member of the Cornell Hotel Society. Robert E. Dixon, Director (resigned January, 2002) Robert E. Dixon was appointed a director of the Company in 1999 to fill the vacancy created by the resignation of Charles Dunn. Mr. Dixon, 31, is the managing member and controlling interest holder in Sutter Capital Management, LLC. Mr. Dixon is a Canadian citizen and received his bachelors degree from the University of California at Los Angeles in 1992. During 1993 and 1994, Mr. Dixon was employed by Lehman Brothers in equity sales and trading and in October, 1994 joined MacKenzie Patterson, Inc., as a securities research analyst. In June, 1996, Mr. Dixon left MacKenzie Patterson to begin buying and selling securities for his own account and that of Sutter Opportunity Fund, LLC, an entity which he controls. Mr. Dixon was a registered representative of North Coast Securities from 1994 through 1997. In January 2000, Mr. Dixon was appointed chairman of the Board of the Company. 20 Glen Fuller, Director Glen W. Fuller, 28, was appointed a Director by the incumbent Board of Directors, effective as of December 23, 1999, to fill the vacancy created by the resignation of Michael S. McNulty. Mr. Fuller was appointed Chief Operating Officer in January 2000. Mr. Fuller is also senior vice president, chief operating officer, and a director of MacKenzie Patterson, Inc., the Company's external advisor. Prior to becoming a senior vice president, Mr. Fuller served MacKenzie Patterson for two years as a portfolio manager and research analyst. Prior to joining MacKenzie Patterson, Mr. Fuller was responsible for managing the over the counter trading desk for North Coast Securities Corp., a registered broker-dealer, with responsibility for both the proprietary and retail trading desks. Mr. Fuller was also the registered options principal and registered municipal bond principal for North Coast Securities. Mr. Fuller currently is a NASD registered options principal, registered bond principal, and holds a NASD Series 7, general securities license. Mr. Fuller has also worked on the floor of the New York Stock Exchange as a trading clerk and on the floor of the Pacific Stock Exchange in San Francisco as an assistant specialist for LIT America. Compensation of Directors In 1999, Messrs. Dixon and Rodgers purchased 10,000 shares of the Class "A" Common Stock of the Company. The purchase price for the Class "A" Common Stock was paid by the execution by each director of a $25,000.00 non-recourse promissory note secured by the purchased shares. In connection with the purchase of the shares, the Company agreed to forgive the promissory notes (i) in increments of 20% of the principal amount per annum for each year the director remains a director of the Company, and (ii) upon the death, disability or resignation of the director (except for voluntary resignation or failure to serve). The Company did not pay any directors fees during fiscal year 2000 however, the Company forgave $4,200 in interest due on notes. This amount was considered directors fees in 2000. The Company has not paid and does not anticipate paying directors for service on committees. All of the directors of the Company are entitled to participate in the Host Funding, Inc. 1997 Incentive Plan, however, since adoption, no benefits have been issued under the Incentive Plan Section 16-(a): Beneficial Ownership Reporting Compliance Section 16-(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities, to file reports of ownership and change in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than ten percent (10%) stockholders are required by SEC regulations to furnish the Company with copies of all Section 16-(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 3, 4 or 5 were required for those persons, the Company believes that, from January 1, 2000 to December 31, 2000, all filing requirements applicable to its officers, directors, and greater than ten percent (10%) beneficial owners, were timely met. ITEM 11. EXECUTIVE COMPENSATION none ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following table sets forth the ownership of the voting securities of the Company both beneficially and of record, both individually and in the aggregate, for those persons or entities known by the Company to be the owner of more than five percent (5%) of the voting securities of the Company as of the 21 close of business on March 29, 2002. The number of shares and percentage ownership of Common Stock for each person or entity assumes that shares of Common Stock issuable upon exercise of stock warrants to such person or entity (exclusive of others) exercisable within sixty (60) days from March 27, 2002 are outstanding. The information in the following table is taken from or based upon ownership filings made by the listed persons or entities with the Securities and Exchange Commission or upon information provided by such persons or entities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Advisory Agreement Effective January 1, 2000, the Company entered into an Advisory Agreement with MPI pursuant to which the Company engaged MPI as the external advisor of the Company. Under the Advisory Agreement, the Company appointed MPI as the Company's exclusive agent to supervise the day-to-day operations of the Company, including, overseeing the lessees of the Company Hotels, serving as the Company's advisor and consultant in connection with the administrative, policy and investment decisions made by the Board of Directors of the Company, and performing or supervising the various administrative and accounting functions necessary for the management of the Company. The Company agreed to pay MPI an advisory fee of $350,000 per year for the advisory and administrative services provided by MPI under the Advisory Agreement. In order to implement the responsibilities of MPI under the Advisory Agreement, the principal offices of the Company were relocated to Moraga, California in January, 2000. Mr. C.E. Patterson, Chief Executive Officer of the Company, and Mr. Glen Fuller, Chief Operating Officer of the Company, are also executive officers and directors of MPI. MPI is also the direct or indirect beneficial owner of 606,838 shares of the Class "A" Common Stock and 1000 shares of the Series "A" Convertible Preferred Stock of the Company. During 2001, no amounts were paid to MPI for advisory fees under the Advisory Agreement. See Item 12. "Security Ownership of Certain Beneficial Owners and Management." 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on Form 10-K Annual Report: (1) Financial Statements: Consolidated Balance Sheets at December 31, 2001 and 2000 (unaudited) Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (unaudited) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999 (unaudited) Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 (unaudited) Notes to Consolidated Financial Statements (unaudited) (2) Financial Statement Schedule: Report on Supplemental Information (unaudited) Schedule III - Real Estate and Accumulated Depreciation (unaudited) (b) The Company did not file any reports on Form 8-K during the fourth quarter of 2001. (c) 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). 24 4.2 Form of Series "A" Convertible Preferred Stock Certificate. 4.3 Form of Series A Warrant dated effective as of February 3, 1997 (incorporated by reference to Exhibit 4.2 to Company's Annual Report on Form 10-K filed on March 31, 1997). 4.4 Form of Series B Warrant dated effective as of February 3, 1997 (incorporated by reference to Exhibit 4.3 to Company's Annual Report on Form 10-K filed on March 31, 1997). 4.5 Form of Common Stock Warrant dated effective as of December 22, 1999 (incorporated by reference to Exhibit 2.4 to Company's Report on Form 8-K filed on January 6, 2000). 10.1 Stock Purchase Agreement dated effective as of December 21, 1999 by and between the Company and MacKenzie Patterson, Inc. (incorporated by reference to Exhibit 2.1 to Company's Report on Form 8-K filed on January 6, 2000). 10.2 Advisory Agreement dated effective as of January 1, 2000 by and between the Company and MacKenzie Patterson, Inc. (incorporated by reference to Exhibit 2.2 to Company's Report on Form 8-K filed on January 6, 2000). 10.3 Registration Rights Agreement dated effective as of December 21, 1999 by and between the Company and MacKenzie Patterson, Inc. (incorporated by reference to Exhibit 2.5 to Company's Report on Form 8-K filed on January 6, 2000). 21.1 Subsidiaries of Registrant. 27 Financial Data Schedule. The Company will furnish copies of these Exhibits upon request and the payment of $.20 per page. Requests should be addressed to Glen Fuller, c/o Host Funding, Inc., 1640 School Street, Suite 100, Moraga, California 94556. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Host Funding, Inc. By: /s/ C. E. Patterson C. E. Patterson Title: President Date: April 18, 2002 25 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date /s/ Guy E. Hatfield Director April 18, 2002 -------------------- Guy E. Hatfield /s/ Glen Fuller Director April 18, 2002 --------------- Glen Fuller /s/ Brian K. Rodgers Director April 18, 2002 -------------------- Brian K. Rodgers /s/ C. E. Patterson President and Chief April 18, 2002 ------------------- Executive Officer C. E. Patterson /s/ Paul Koslosky Chief Financial and April 18, 2002 ----------------- Accounting Officer Paul Koslosky Exhibit 21.1 Subsidiaries of Registrant Name or Organization State of Incorporation CrossHost, Inc. Maryland Host Ventures, Inc. Maryland Host Enterprises, Inc. Maryland Host Findlay GP, Inc. Maryland Host Auburn GP, Inc. Maryland BacHost, LLC Texas B-H Findlay, L.P. Ohio B-H Auburn, L.P. Indiana 26 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX Page Number Independent Auditors' Report (Omitted) - Consolidated Balance Sheets 28 Consolidated Statements of Operations 30 Consolidated Statement of Shareholders' Equity 31 Consolidated Statements of Cash Flows 33 Notes to Consolidated Financial Statements 36 Independent Auditors' Report on Supplementary Information (Omitted) - Schedule III Real Estate and Accumulated Depreciation 60 27 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, ----------------------------------- ASSETS 2001 2000 (Unaudited) (Unaudited) ---------------- -------------- Land, Property and Equipment - Held for Investment: Buildings and improvements $9,322,477 $17,664,925 Furnishings and equipment 1,946,226 3,319,371 Less accumulated depreciation (2,573,276) (3,767,068) ------------- ------------- 8,695,427 17,217,228 Land 2,586,618 5,667,570 ------------- ------------- Total land, property and equipment - held for investment 11,282,045 22,884,798 ------------- ------------- Land, Property and Equipment - Held for Sale: Building and improvements 4,372,489 1,912,730 Furnishings and equipment 874,301 379,698 Less accumulated depreciation (787,604) (275,774) Less impairment reserve (1,538,199) - Land 1,537,490 702,500 ------------- --------------- Land, property and equipment - held for sale 4,458,477 2,719,154 ------------- -------------- Investment in Hotel Properties 3,266,146 3,266,146 ------------- -------------- Total land, property and equipment 19,006,668 28,870,098 Cash and Cash Equivalents 9,456 36,744 Restricted Cash 289,738 622,593 Rent Receivable 229,917 309,661 Due from Related Parties 525 20,611 Long-Term Advances to Lessees - 110,090 Restricted Investments - 288,000 Loan Commitment Fees, net of accumulated amortization of $503,570 and $809,269 622,196 967,547 Franchise Fees - net of accumulated amortization of $25,963 and $37,088 39,037 63,912 Prepaid Expenses and Other Current Assets 200,877 333,041 ------------- -------------- TOTAL ASSETS $20,398,414 $31,622,297 =========== =========== (Unaudited) The accompanying notes are an integral part of these consolidated financial statements. 28 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited) December 31, ----------------------------------- 2001 2000 (Unaudited) (Unaudited) ---------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Long-term Debt $17,646,043 $22,460,998 Short-term Debt 2,424,618 1,194,597 Long-term Lease Deposit - 468,000 Advances by Lessee - 191,571 Option Deposits - 20,000 Accounts Payable and Other Accrued Expenses 193,849 212,027 Due to Related Parties 684,753 269,245 Accrued Interest 662,528 425,592 Accrued Property Taxes 141,575 178,772 ------------- -------------- Total liabilities 21,753,366 25,420,802 --------------- -------------- Minority Interest in Partnerships 43,065 75,975 --------------- -------------- Series A Preferred stock; $0.01 par value; $4.00 liquidation preference; 2,000,000 shares authorized; 1,000 and 877,112 shares issued and outstanding 3,000 2,254,222 Commitments and Contingencies (Note 6) SHAREHOLDERS' EQUITY Class A Common stock, $.01 par value; 50,000,000 shares authorized; 2,443,762 and 2,650,000 shares issued and outstanding 24,438 26,501 Additional Paid-In Capital 10,590,223 11,148,160 Accumulated Deficit (11,981,123) (7,248,211) Less: Unearned directors' compensation net of accumulated amortization of $120,000 and $99,403 (26,000) (46,597) --------------- -------------- (1,392,462) 3,879,853 Less: Common stock in treasury, at cost, 3,800 and 3,800 shares (8,555) (8,555) --------------- -------------- Total shareholders' Equity (1,401,017) 3,871,298 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,398,414 $31,622,297 =========== =========== (Unaudited) The accompanying notes are an integral part of these consolidated financial statements. 29 HOST FUNDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

35 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The foregoing financial statements and these footnotes have not been audited by an independent accountant and are therefore not accompanied by an accountant's report. The Company will amend this report to include audited financial statements as soon as possible. However, as of the date of the report in which these financial statements are included, the Company has insufficient funds to pay for audit services. Accordingly, no audit is scheduled and the Company cannot predict when, or if, any audit services will be performed or when any audited financial statements for the recently completed fiscal year, or any future year, may be available or published. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Host Funding ("Host Funding" or the "Company"), incorporated under the laws of the state of Maryland on December 22, 1994, and structured to qualify as a Real Estate Investment Trust ("REIT") and its subsidiaries: a) CrossHost, Inc. ("CrossHost"), (owned 100% by the Company); b) Host Enterprises, Inc. ("Enterprise"), (owned 100% by the Company); c) Host Ventures, Inc., ("Ventures"), (owned 100% by Enterprise); d) BacHost, LLC ("BacHost"), (an 81% ownership interest by the Company through December 18, 2001; 100% by the Company thereafter); e) BH Findlay LP ("BHF"), (owned 99% by BacHost) and; f) BH Auburn LP ("BHA"), (owned 99% by BacHost). Organization and Background The principal business of the Company is to acquire and then lease limited service and full service hotels/motels to proven hotel operators, which manage and operate the hotels/motels pursuant to such leases. On December 22, 1999, the Company sold to Mackenzie Patterson, Inc. ("MPI"), a California real estate venture capitalist, 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 from the sale of the Series "A" Preferred were used by the Company to satisfy current obligations and for working capital. The Company also issued to MPI warrants to purchase 500,000 shares of the Class "A" Common Stock of the Company for an exercise price of $3.00 per share, exercisable at any time for a period of six 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 (see Note 6). During 2001, the Company issued additional Series "A" Preferred stock to MPI, its affiliates, and Sutter Opportunity Fund and Sutter Opportunity Fund 2 for amounts advanced to meet working capital needs. As of October 5, 2001, the Company had issued 1,233,740 shares of the Series "A" Preferred at an average price of $2.60 per share. On October 5, 2001, the Company exchanged 1,232,740 shares of the Series "A" Preferred for a note payable to HFD Investors, LLC (representing the Series "A" Preferred shareholders) in the amount of $4,113,322. The Company recognized a Preferred Premium charge in the amount of $902,099. 36 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The HFD Investors note accrues interest at 5% and is due October 5, 2003. The Company was notified by HFD Investors, LLC that it sold the note to HALTA, LLC, an unaffiliated third party. Unless stated otherwise, the hotel properties owned by the subsidiaries of the Company are herein referred to as the "Company Hotels" or "Company Properties". Host Funding is listed and traded on the Over the Counter Bulletin Board under the symbol "HFDI." Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company records its leases as operating leases, and recognizes base and contingent lease revenue on an accrual basis as earned in accordance with the terms of the lease agreements. Land, Property, and Equipment Held for Investment/ Land, Property and Equipment Held for Sale Buildings and improvements are stated at historical cost and depreciated over useful lives of 35 years from the original date of acquisition using the straight-line method. Hotel furnishings and equipment are stated at historical cost and depreciated using primarily straight-line methods over useful lives ranging from 3 to 7 years from the original historical date of acquisition. Depreciation expense as of December 31, 2001 and 2000 is $521,431 and $959,780, respectively. The Vagabond Inn property (formerly a Super 8 Motel) located in Mission Bay, California (the "Mission Bay Property") has been included under Land, Property and Equipment Held for Sale, and is subject to an option agreement whereby the lessee has the right to purchase the Mission Bay Property upon written notice. The Company has received such notice. The Host Ventures properties located in Flagstaff, Arizona and Ocean Springs, Mississippi were sold in foreclosure sales during 2001. The Host Ventures property located in Sarasota, Florida is also subject to a foreclosure sale but, as of December 31, 2001, was still owned by The Company and is included under Land, Property and Equipment Held for Sale. The property was foreclosed upon in 2002. 37 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Land, Property, and Equipment Held for Investment/ Land, Property and Equipment Held for Sale (continued) The Company periodically evaluates the carrying value of its real estate properties to determine if circumstances exist indicating impairment in the carrying value of such properties. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows from each individual property. In cases when the Company does not expect to recover the carrying value, the Company recognizes an impairment loss. When management identifies an asset held for sale, the Company estimates the fair value of such assets. If, in management's opinion, the fair value of the asset is less than the carrying amount of the asset, a reserve for impairment is established. Fair value is estimated as the amount at which the carrying asset could be bought or sold, less costs to sell. In 2001, the Company recorded an impairment charge of $1,581,146 related to the property located in Sarasota, Florida reflecting the anticipated loss when the foreclosure sale of the property is completed. Investment in Hotel Properties In connection with the Investment Letter Agreement between the Company and Hotel International Advisers, LLC, effective June 2000, the Company exchanged 1,000,000 shares of its Class A Common Stock for interests in four hotel properties owned by Bufete Grupo Internacional, a subsidiary of Hotel International Advisers, LLC. The Company received a 25% equity interest in each of the properties and is recording the investment using the equity method. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Concentration of Credit Risk The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances may exceed FDIC insured levels at various times during the year. Restricted Cash Restricted cash represents cash deposited in escrow accounts under contractual agreements for property taxes, capital improvements and other uses that are set forth in such agreements. 38 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Rent Receivable Rent receivable represents rent outstanding and receivable pursuant to the management agreements. Long-term Advances to Lessees Long-term advances represent amounts forwarded, per the lease contracts, to lessees at the inception of the lease, which are used by the lessees for operating expenses incurred upon lease inception. These advances were waived by the Company in 2001 as part of a lease cancellation agreement. Restricted Investments Buckhead America Corporation, or its affiliates ("Buckhead"), agreed to purchase $288,000 in Class "A" Common Stock of the Company and return such stock to the Company to hold as security deposits (the "Buckhead Security Deposit") against the Country Hearth Leases (defined in Note 7). The deposits were released by the Company in 2001 as part of a lease cancellation agreement. Loan Commitment Fees Loan commitment fees are amortized over the terms of the loans using the straight-line method, which approximates the effective interest rate method. Amortization expense is included in interest expense in the statement of operations. Accumulated amortization of loan fees totaled approximately $504,000 and $809,000 as of December 31, 2001 and 2000, respectively. Franchise Fees Franchise fees are amortized on a straight-line basis over the life of the franchise agreements. Accumulated amortization of franchise fees totaled approximately $26,000 and $37,000 as of December 31, 2001, and 2000, respectively. Long-Lived Assets Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has adopted this statement and has recorded an impairment reserve for the property located in Sarasota, Florida which is subject to foreclosure proceedings and was transferred to the lender in 2002. 39 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation", establishes financial accounting and reporting standards for stock-based employee compensation plans. Transactions in which goods or services are received for the issuance of equity securities are accounted for based on the fair value of the consideration received. Compensation to employees and directors paid for by issuance of equity securities is accounted for based on the fair value of the services provided. Loss Per Share SFAS No. 128, "Earnings Per Share" requires presentation of basic loss per share ("Basic LPS") and diluted loss per share ("Diluted LPS"). The computation of basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted LPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses. The shares used in the computation of loss per share, were as follows: For The Year Ended December 31, --------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Basic 2,600,918 2,163,753 1,615,894 =========== =========== =========== Diluted 2,600,918 2,163,753 1,615,894 =========== =========== =========== Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of December 31, 2001, 2000, and 1999, the Company has no items that represent comprehensive income and, therefore, has not included a schedule of comprehensive income in the financial statements. 40 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments SFAS 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. The fair value of financial instruments was estimated based on the following methods and assumptions: a. Cash and cash equivalents, restricted cash, receivables, long-term advances to lessees, accounts payable and notes payable are recorded at carrying amounts which approximate fair value due to the short maturity of these instruments. b. The carrying value of long-term debt approximates fair value as the related interest rate is variable and approximates market rates. Seasonality The hotel industry is seasonal in nature. Revenues are generally greater in the first and second quarters of a calendar year. Seasonal variations in revenues at the hotels may cause quarterly fluctuations in the Company's lease revenue. Reclassifications Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation. Income Taxes The Company has not qualified as a REIT under Sections 856 through 860 of the Internal Revenue Code for the three years ended December 31, 2001. Under the Internal Revenue Code, if certain requirements are not met in a given year, a corporation will be subject to Federal Income Tax with respect to all income, including that which is distributed to Shareholders. Therefore, the Company records its provision for income taxes in accordance with SFAS No. 109. Under the liability method of SFAS 109, deferred taxes are determined based on the difference between the financial statement amounts for tax and financial reporting purposes. 41 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 2 - REAL ESTATE INVESTMENTS As of December 31, 2001, the Company owns 9 Company Hotels, 8 held for investment, 1 held for sale, located in seven states, and comprised of 602 rooms. The original purchase cost of the nine hotel properties totaled approximately $16,400,000. The amount reflected in the financial statements of $20,639,601 at December 31, 2001 includes the original purchase cost and capital expenditures subsequent to acquisition (see financial statement schedule III). The purchase costs above include purchase prices, as well as related commissions and closing costs. In April 1996, the Company acquired a 117 room Super 8 motel located in San Diego, California from Mission Bay Super 8, Ltd., a California limited partnership. The acquisition price of $2,529,000 was funded by the Crosshost, Inc. loan facility. In September 1996, the Company formed CrossHost, Inc., a Maryland corporation ("CrossHost"), as a wholly owned, REIT qualified subsidiary. Upon formation, CrossHost acquired four Sleep Inn properties located in Destin, Sarasota, and Tallahassee, Florida and Ocean Springs, Mississippi. This purchase was completed with a loan facility (the "Initial CrossHost Facility") provided by Credit Suisse First Boston, LLC ("First Boston"). The Company subsequently acquired properties in Somerset, Kentucky; Miner, Missouri; Poplar Bluff, Missouri; and Rock Falls, Illinois. In March 1997, the Company formed Host Ventures, Inc. ("Host Ventures"), a Maryland corporation, a wholly owned, special purpose subsidiary of Host Funding. Upon formation, Host Ventures entered into a loan (the "Host Ventures Loan Facility") totaling $8,725,000 and CrossHost entered into a loan facility (the "CrossHost Loan Facility") totaling $13,000,000. Host Ventures used a portion of the Host Ventures Loan Facility to acquire a Super 8 motel located in Flagstaff, Arizona. Additionally, CrossHost assigned, transferred, and conveyed the Sleep Inn properties located in Sarasota, Florida and Ocean Springs, Mississippi to Host Ventures, and satisfied the Initial CrossHost Facility. On October 21, 1997, the Company purchased from Findlay Equity Partners, an Ohio general partnership, a Country Hearth Inn (the "Findlay Property") located in Findlay, Ohio and from Auburn Equity Partners, an Indiana general partnership, a Country Hearth Inn (the "Auburn Property") located in Auburn, Indiana (collectively, the "Country Hearth Inns"), including an aggregate of approximately 150 rooms, which increased the Company's real estate portfolio to twelve hotel properties containing approximately 922 rooms. 42 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 2 - REAL ESTATE INVESTMENTS (Continued) The Company completed the purchase of the Country Hearth Inns by forming two separate, special purpose limited partnerships with Buckhead America Corporation, a publicly-traded hotel company, or its affiliates ("Buckhead"). Wholly owned subsidiaries of Host Funding (Host Findlay GP, Inc. and Host Auburn GP, Inc.) own 1% of the respective limited partnerships and BacHost, LLC (BacHost) owns 99% of each limited partnership. Host Funding owns 81% of BacHost and Buckhead owns 19% of BacHost. Each limited partnership leased its respective Country Hearth Inn to Buckhead (or to affiliates of Buckhead) pursuant to a separate percentage lease agreement (collectively, the "Country Hearth Leases"). Buckhead also manages the hotel properties and holds the franchise for each of the Country Hearth Inns outside of the limited partnerships (collectively, the "Country Hearth Franchise Agreements"). In January 1999, the Company effectively transferred leasing and operation of the Company Hotel located in Mission Bay, California (the "Mission Bay Property") to RPD Mission Bay, LLC, an affiliate of Vagabond Inns ("RPD"), which in turn, pursuant to a services agreement, transferred the day-to-day management of the Mission Bay Property to RPD 18, LLC, also an affiliate of Vagabond Inns, a proven hotel operator located in California. RPD thereafter terminated the prior franchise agreement with Super 8 Hotels and converted the Mission Bay Property to a Vagabond Inn. In consideration for such lease transfer, RPD paid the Company a non-refundable fee (the "Mission Bay Lease Fee") in the amount of $500,000. The Mission Bay Lease Fee was used in part to pay portions of certain termination fees to the previous franchisor, to pay the termination fee to the previous lessee, and for general corporate purposes. The Company also granted RPD an option to purchase the Mission Bay Property for a base acquisition price of $3,225,000. The base acquisition price incrementally reduces on a monthly basis through application of portions of the base rent payments made to the Company by RPD under the Lease relating to the Mission Bay Property (the "RPD Option"). RPD exercised the RPD Option in March 1999. The Company has been unable to complete the sale of the property due to defeasance requirements of the loan. The Company continues to pursue the consummation of this transaction. The Company has recorded this property as Land, Property, and Equipment - Held for Sale at December 31, 2001. Effective November 12, 1999, the Company sold the Findlay Property for a cash purchase price of $2,400,000. The cash proceeds were used to pay the first lien indebtedness on the Findlay Property and to satisfy the seller finance note held by the prior owner of the Findlay Property, including the judgment lien held by the prior owner. The Company did not receive any net proceeds from the sale of the Findlay Property. 43 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 2 - REAL ESTATE INVESTMENTS (Continued) Effective October 5, 2001, the Flagstaff, Arizona property was sold in a foreclosure auction. The Company was relieved of its debt obligations in exchange for the property. The Company did not receive any net proceeds from the sale of the Flagstaff Property. Effective October 10, 2001, the Ocean Springs, Mississippi property was sold in a foreclosure auction. The Company was relieved of its debt obligations in exchange for the property. The Company did not receive any net proceeds from the sale of the Ocean Springs Property. As discussed in Note 1, in connection with the Investment Letter Agreement between the Company and Hotel International Advisers, LLC, effective June 2000, the Company exchanged 1,000,000 shares of its Class A Common Stock for a 25% interest in each of four hotel properties owned by Bufete Grupo Internacional, a subsidiary of Hotel International Advisers, LLC. The Company has recorded the exchange at the investments' fair market value of $3,000,000, plus capitalized purchase costs of $266,146, at December 31, 2001. NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES PAYABLE) Long-Term Debt The following is a summary of the long-term debt of the Company: December 31, -------------------------------- 2001 2000 ------------- -------------- Host Ventures first mortgage note payable, collateralized by the Sarasota, FL property in foreclosure proceedings $ 1,794,072 $ 8,818,572 Mezzanine loan, collateralized by the stock in Host Ventures, interest at LIBOR plus 500 basis points (LIBOR was 2.0225% at 12/31/01), payable in monthly installments of $17,314, due in June of 2003 494,926 494,679 44 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES PAYABLE) (Continued) First mortgage note payable, collateralized by the properties owned by CrossHost, interest at 9.46% per annum, interest and principal payable in monthly installments of $120,838, due in March 2017 11,895,552 12,117,744 First mortgage payable, collateralized by the property owned by B-H Auburn, interest at 10.78% per annum, interest and principal payments due in monthly installments of $17,405, due in August 2016 1,627,790 1,667,205 Note payable collateralized by all outstanding shares of Crosshost, Inc. and Host Funding Acquisition Corp, interest at 5% per annum, principal and interest due October 5, 2003 4,163,321 - ------------- -------------- $ 19,975,661 $ 23,098,200 ============= ============== Less: current maturities of long-term debt (2,329,618) (637,202) ------------- -------------- Total long-term debt $ 17,646,043 $ 22,460,998 ============= ============== 45 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES PAYABLE) (Continued) Short Term Debt/Notes Payable (Including Default on Certain Notes) The following is a summary of the short-term debt of the Company, including current maturities of long-term debt: December 31, -------------------------------- 2001 2000 ------------- -------------- Auburn/Findlay Equity Partners (a) $ - $ 325,000 Crossroads/Keystone Investments (b) 95,000 190,000 Five Lions (c ) - 42,395 ------------- -------------- Total $ 95,000 $ 557,395 Current maturities of long-term debt 2,329,618 637,202 ------------- -------------- Total short-term debt $ 2,424,618 $ 1,194,597 ------------- -------------- (a) In October, 1997, B-H Findlay, L.P. ("Findlay") entered into a note payable (the "Findlay Note") to the sellers of the Country Hearth Inn in Findlay, Ohio (the "Findlay Country Hearth Inn") and B-H Auburn, L.P. ("Auburn") entered into a note payable (the "Auburn Note") to the sellers of the Country Hearth Inn located in Auburn, Indiana (the "Auburn Country Hearth Inn"). The Auburn Note and the Findlay Note are herein referred to, collectively, as the "Country Hearth Notes". The sellers of the Findlay Country Hearth Inn and the Auburn Country Hearth Inn are herein referred to as the "Sellers". The Company is the beneficial owner of 81% of both Findlay and Auburn, and executed corporate guarantees pursuant to which the Company guarantees the performance of Findlay and Auburn under the Country Hearth Notes (collectively, the "Host Guaranty"). The Country Hearth Notes are further secured by 90,000 shares of the Class "B" Common Stock of the Company (the "Pledged Stock"). 46 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES PAYABLE) (Continued) Short Term Debt/Notes Payable (Including Default on Certain Notes) (continued) 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 judgement 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 during 2000 and the balance paid during 2001. 47 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE (INCLUDING DEFAULT ON CERTAIN NOTES PAYABLE) (Continued) Short Term Debt/Notes Payable (Including Default on Certain Notes) (continued) (b) In May 1999, the Company entered into negotiations to purchase certain properties. In connection with the negotiations, the Company executed an application with a lender to obtain financing for the properties. $140,000 was funded to the lender by an unaffiliated party (Crossroads/Keystone Investments) on behalf of the Company in prepayment of certain due diligence costs related to such financing. In September 1999, an additional $50,000 was advanced by the same unaffiliated party in partial payment of certain legal fees. Approximately $140,000 in principal and interest was repaid by the issuance of 69,781 shares of the Company's Class "A" Common Stock in September 1999. In 2000, the unaffiliated parties informed the Company that the issued shares would not be accepted as payment, and sued the Company for default on the notes. The parties reached a settlement during 2001 calling for a reduction in the interest rate and costs awarded. The Company made payments totaling $95,000 during 2001 but was unable to make any further payments. As of December 31, 2001, the Company owes a total of $161,028 in principal and accrued interest on the notes. (c ) 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 balance of the settlement of$42,395 was paid during 2001. Five Year Debt Maturity Schedule Aggregate principal payments under long-term and short-term debt for the next five calendar years ended December 31, 2006 and thereafter are as follows: 2002 $ 2,435,458 2003 4,760,470 2004 572,819 2005 492,950 2006 543,285 Thereafter 11,265,679 ------------ Total $ 20,070,661 ============ 48 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 4 - PREFERRED STOCK On December 20, 1999, the Company filed Articles Supplementary with the Maryland State Department of Taxation designating 2,000,000 shares of the authorized, but unissued, shares of Preferred Stock of the Company as Series "A" Convertible Preferred Stock, $0.01 par value per share (the "Series "A" Preferred"). Of the 2,000,000 shares of the Series "A" Preferred designated by the Company, Mackenzie Patterson, Inc., a California real estate venture capitalist ("MPI"), purchased 500,000 shares for a purchase price of $3.00 per share. MPI purchased the shares of Series "A" Preferred on December 22, 1999 in an exempt transaction pursuant to Rule 506 of Regulation D under the Securities Act of 1933. The holders of the Series "A" Preferred are entitled to participate pro rata with the holders of shares of the Class "A" Common Stock of the Company with respect to dividend distributions and are entitled to a liquidation preference of $4.00 per share over the holders of shares of Class "A" Common Stock, upon the voluntary or involuntary dissolution, liquidation or winding up the affairs of the Company. The holders of shares of Series "A" Preferred also have the right, exercisable at any time after December 23, 2002, to convert such shares into shares of Class "A" Common Stock on a one-for-one basis (the "Conversion Ratio"), or to require the Company to redeem all or any part of the shares of Series "A" Preferred at the redemption price of $4.00 per share plus any accrued and unpaid cash dividends. The Conversion Ratio is subject to adjustment upon the occurrence of certain events, including, without limitation, issuance of additional shares of Class "A" Common Stock, stock dividends, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. The holders of shares of Series "A" Preferred are entitled to the number of votes equal to the number of shares of Class "A" Common Stock into which a share of Series "A" Preferred is convertible and are further entitled to vote together as a single group with the holders of Class "A" Common Stock on all matters submitted or required to be submitted to the Company's common stockholders for approval. The holders of Series "A" Preferred, voting together as a single voting group, have the right to elect, at each annual stockholders meeting of the Company, two of the five members of the Board of Directors of the Company. In July 2000, the Company received advances of $50,000 each from Sutter Opportunity Fund, LLC and MPI for working capital purposes, each of which were secured by 25,000 shares of preferred stock of the Company. Such advances were not repaid in accordance with their terms, and as of December 31, 2000, the respective secured parties have elected to retain the pledged shares with respect to such unpaid loans, plus additional shares to represent accrued but unpaid interest. In addition, Sutter Opportunity Fund 2, LLC advanced the Company $125,000 in December 2000 for payment of a legal settlement. Also due to default on the note by the Company, the Company converted the note into 62,500 shares of Series A Preferred Stock. 49 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 4 - PREFERRED STOCK (Continued) During 2000, MPI had advanced to the Company a total of $505,000, with a commitment to advance an additional $20,000, which was advanced in January 2001. The advances were used by the Company for working capital purposes and for payment of a legal settlement. As a result of default on the note, the Company converted the note to 262,500 shares of Series A Preferred Stock. During 2001, MPI and Sutter purchased 162,500 shares of the Series "A" Preferred for a purchase price of $325,000. The proceeds were used to fund the balance of the Auburn/Findlay settlement. In order to facilitate the anticipated merger between the Company and Leisure Living, Inc. the Board of Directors authorized the conversion of 206,338 shares of the Company's Class "A" Common stock held by affiliates of MPI and Sutter as well as notes held by the same affiliates into 194,128 shares of the Series"A" Preferred. All but 1,000 shares of the outstanding Series "A" Preferred were then converted to a note in the amount of $4,113,322 in favor of HFD Investors, LLC (representing the owners of all the Series "A" Preferred). MPI holds the remaining 1,000 shares of preferred stock. NOTE 5 - SHAREHOLDERS' EQUITY Common Stock Host Funding is authorized to issue 55,000,000 shares of Common Stock, consisting of 50,000,000 shares of Class "A" Common Stock, $.01 par value per share, and 4,000,000 shares of Class "B" Common Stock, $.01 par value per share, and 1,000,000 shares of Class "C" Common Stock, $.01 par value per share. The Company is also authorized to issue 2,000,000 shares of Preferred Stock, $0.01 par value per share. Warrants As of December 31, 1999, the Company had issued and outstanding two series of warrants designated "Series A Warrants" and "Series B Warrants". The Series A Warrants provide warrants to purchase 225,000 shares of Host Funding's Class "A" Common Stock at $9.90 per share, and expired on February 2, 2000. The Series B Warrants provide warrants to purchase 225,000 shares of the Company's Class "A" Common Stock at $10.80 per share, and expire on February 2, 2001. There are additional provisions in the warrants that allow certain limited registration rights and pro-rata treatment upon the occurrence of certain events, including, without limitation, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. 50 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 5 - SHAREHOLDERS' EQUITY (Continued) The Company also issued Warrants to MPI to purchase 500,000 shares of Class "A" Common Stock of the Company for an exercise price of $3.00 per share (the "Warrants"). The Warrants are exercisable at any time after the date of issuance with an expiration date of December 21, 2005. The Warrants are subject to exercise price adjustments upon the occurrence of certain events, including, without limitation, stock dividends, stock splits, mergers, reclassifications of stock, or a recapitalization of the Company. The Company has determined that the warrants possess no value. Pursuant to the terms and conditions of a Registration Rights Agreement (the "Registration Agreement") between the Company and MPI, the holders of the Series "A" Preferred and the Warrants are entitled to certain demand and "piggy-back" registration rights relating to the shares of Class "A" Common Stock issuable upon conversion of the Series "A" Preferred or upon exercise of the Warrants (the "Underlying Common Stock"). The Registration Agreement provides that at any time after the date of issuance the holders of at least 25% of the Series "A" Preferred and the Warrants may make in the aggregate, up to four written requests to register the number of shares of Underlying Common Stock set forth in each written request. In addition, if the Company proposes to file a registration statement under the Securities Act of 1933, with respect to an offering by the Company of securities for its own account (other than a registration statement on Form S-4 or Form S-8), the holders of Series "A" Preferred and the Warrants shall be entitled to participate in the Company registration, subject to the approval of the Company underwriter. Diluted earnings per share for the year ended December 31, 2001, has not included the effect of conversion of Series "A" Preferred Shares nor the Warrants since conversion would be antidilutive. Other Equity Transactions On or about April 26, 1996, the Company sold to each independent director then in office 10,000 shares of Class "A" Common Stock at a price per share equal to $10 per share. The purchase price ($300,000) was paid through the delivery of a five year promissory note executed in favor of Host Funding by each purchaser, which bears interest, payable quarterly, at a fixed rate equal to 7% per annum. The Company has agreed to forgive the promissory notes issued in exchange for the shares of common stock in increments of 18% of the principal amount per annum for each year the maker remains a director of the Company. The Company also subsequently agreed to forgive quarterly interest payments and an additional 2% of the principal amounts of the promissory notes from each director in lieu of payment of director's fees to the Directors. The Company suspended director's fees for fiscal years 1998 and 1999. The shares of Common Stock purchased by each independent director are pledged to the Company to collateralize payment of the promissory note, which is non-recourse to the maker, except for 10% of the principal amount. 51 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 5 - SHAREHOLDERS' EQUITY (Continued) In the second quarter of 1999, the Board approved the release of the outstanding balances of the notes receivable from Mr. Charles Dunn and Mr. Don Cockroft as a result of Mr. Dunn and Mr. Cockroft resigning their seats on the Board. The Board also approved the issuance of 10,000 shares each to Messrs. Dunn and Cockroft, as well as Mr. William Birdsall. Concurrently with the resignation of Messrs. Dunn and Cockroft, the Board appointed Mr. Robert Dixon and Mr. Brian Rodgers as directors of the Company. The Board approved the issuance of 10,000 shares each to Messrs. Dixon and Rodgers. Payment of such shares are evidenced by promissory notes in the amount of $25,000 due from Mr. Dixon and Mr. Rodgers, under the same terms and conditions as the director notes described above. NOTE 6 - COMMITMENTS AND CONTINGENCIES REIT Status The Company, as a requirement under the Code to elect REIT status, must have no more than five shareholders who own no more than 50% of the common stock, common stock equivalents, or other forms of equity outstanding. The Company has not met this requirement as of December 31, 2001. Under the Code, the Company is allowed a six-month exemption after the tax year in which the election is to be effective to meet the requirement. Management of the Company does not anticipate that such requirement will be met during fiscal year 2002. Leases In General At the beginning of 2001, all of the Company Hotels were leased and operated pursuant to lease agreements (the "Leases"), except for the Company Hotel located in Tallahassee, Florida which was managed and operated by BAC Hotel Management, Inc. pursuant to a management agreement. In August, 2001, BAC Hotel asserted rights in the lease to reduce monthly base rent on the Destin, Florida Hotel Property, as a result of the presence of a competitive hotel in the Destin area, exercised its right to terminate the Rock Falls, Illinois lease, and defaulted on the Auburn, Indiana lease. As a result, a negotiated settlement agreement was entered into between the Company, its subsidiaries and BAC Hotel resulting in the termination of all of the remaining leases between BAC Hotel and Crosshost, Inc., and BUCK and BH Auburn, LP, and the payment to Crosshost, Inc. of $75,000.00 in consideration for the cancellation of lease termination fees, lease deposits and reserves for capital expenditures. 52 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued) As a result of the settlement agreement, a management agreement was entered into with Cornerstone Hospitality with respect to all of the Company Hotels except the Mission Bay Property. The Management Agreement provides for the net operating revenue from each of the Company Hotels to be forwarded to the Company on a monthly basis, less a management fee of 4.5% of Gross Revenue, and the agreed upon reimbursable costs of operating the facility. The Management Agreement is terminable by either party with respect to all or one or more properties on 30 days notice. As of December 31, 2001, the Mission Bay Property is the only property under lease. It has an initial term of twenty years, subject to earlier termination upon the occurrence of certain contingencies described in the Leases including, as applicable, provisions relating to damage to the Company Hotels, condemnation of the Company Hotels, defaults by the Company or the lessee thereunder, lack of compliance by the lessee with certain of the terms of the associated loan documents, and termination on disposition of the Company Hotels. Franchise Agreements The Company has been granted franchise license agreements from Super 8 and Sleep Inns for terms expiring in 2005 and 2011, respectively. Pursuant to the terms of the franchise agreements, the Company is required to pay royalty fees and advertising fees of 4% to 5% and 1.3% to 3%, respectively, and reservation fees due under the Sleep Inn agreements of 1.75%, of gross room revenue. The responsibility for payment of the fees has been assigned to the property managers pursuant to the management agreements. Auburn has been granted a Country Hearth franchise license under terms and conditions that are typical of the hotel industry and substantially similar to the franchise agreements relating to the Super 8 Hotels and the Sleep Inn Hotels currently owned directly or indirectly by the Company. Host Funding, Inc. 1997 Incentive Plan: Under the Host Funding, Inc. 1997 Incentive Plan certain individuals, including officers and directors of the Company, may be granted awards for incentive stock options, non-statutory stock options, stock awards, performance shares and incentive awards. No such awards have been awarded for the years ended December 31, 2001, 2000 and 1999. Litigation 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. 53 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (Continued) The Company was named as a defendant in the preceding 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 March 9, 2000, judgment was rendered against the Company for $164,000 (includes legal fees) plus interest. The Company paid $121,882 during 2000; and the balance owing during 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, Inc., Case No. 99CVH-04-2726. The Company was named as a defendant in the preceding 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 1999. In 2000, the Company settled with Auburn for the remainder of the amounts due in the amount of $825,000. In December 2000, the Company paid $500,000 against the settlement. The balance of $325,000 was paid during 2001 per the terms of the agreement. 54 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued) Litigation (continued) Keystone Advisers, Inc. and Crossroads Investments, LLC vs. Host Funding, Inc., California Superior Court, Santa Barbara County, Anacapa Division, Case No. 1035199. In September 1999, the Company issued shares of the Company's Class A Common Stock to Keystone Advisers and Crossroads Investments ("Keystone/Crossroads") in repayment of approximately $140,000 of advances made to the Company. Keystone/Crossroads rejected the stock payment and was awarded a judgment regarding these claims for approximately $282,000, which includes interest and legal fees. A levy was granted on certain Company bank accounts and approximately $51,000 was awarded to Keystone/Crossroads to partially satisfy the settlement. During 2001 a settlement was reached which called for monthly payments of $15,000. The Company made payments totaling $95,000 but was unable to make payments due October, 2001 and following. As of December 31, 2001, the Company has accrued approximately $161,000 which includes interest and legal fees. Choice Hotels International v. Host Ventures, Inc. The Company received a claim from Choice Hotels International, the franchisor for the Ocean Springs hotel, as a result of a default on the franchise agreement on the Ocean Springs Sleep Inn. The Company settled the dispute by agreeing to 174 monthly payments of $1,494.25. The Company has recorded a liability in the amount of approximately $153,000 representing the present value of said payments. Crosshost, Inc. vs. Carnegie International The Company filed a claim against Carnegie International and its owner David Gable for failure to repay a loan issued in conjunction with a planned merger of Carnegie and Host as previously discussed. The Company sought repayment of its note totaling $175,000 as well as a break-up fee of $150,000. In March, 2002, a settlement agreement was reached whereby Carnegie agreed to future entry of judgement, if the amounts agreed to be paid in the settlement have not been paid by October 30, 2002. The Settlement Agreement calls for Gable and Carnegie to pay the total amount of $240,000 to Crosshost, plus interest on $200,000 at a rate of 9 percent beginning on April 5, 2002. The Company has recorded only the note in the amount of $175,000 as collection of additional amounts was deemed questionable. 55 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued) Advisory Agreement Effective January 1, 2000, the Company entered into an Advisory Agreement with MPI pursuant to which the Company engaged MPI as the external advisor of the Company. Under the Advisory Agreement, the Company appointed MPI as the Company's exclusive agent to supervise the day-to-day operations of the Company, including overseeing the lessees of the Company Hotels, serving as the Company's advisor and consultant in connection with the administrative, policy and investment decisions made by the Board of Directors of the Company, and performing or supervising the various administrative and accounting functions necessary for the management of the Company. The Company agreed to pay MPI an advisory fee of $350,000 per year for the advisory and administrative services provided by MPI under the Advisory Agreement. In order to implement the responsibilities of MPI under the Advisory Agreement, the principal offices of the Company were relocated to Moraga, California in January 2000. Mr. C. E. Patterson, Chief Executive Officer of the Company, and Mr. Glen Fuller, Chief Operating Officer of the Company, are also executive officers and directors of MPI. The Company did not pay MPI the advisory fee owed for 2001. Note Payable-HALTA, LLC The Company issued a note payable in the amount of $4,117,322 to HFD Investors, LLC in exchange for all but 1,000 shares of the Series "A" Preferred stock. The note accrues interest at 5% per annum and is payable on October 5, 2003. HFD Investors sold the note to HALTA, LLC who agreed to make additional advances to the Company. Accordingly, HALTA advanced an additional $50,000 to the Company during 2001. As of December 31, 2001, the total amount owed HALTA is $4,212,940. 56 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 7 - INCOME TAXES The primary components of the Company's deferred income tax liabilities and assets are as follows:

At December 31, 2001, the Company had approximately $8,600,000 of net operating loss carry forwards, which will expire between December 31, 2010 and 2020. In assessing the realizability of a deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. The Company and its subsidiaries file a consolidated federal income tax return. Due to the Company's net operating loss position and the valuation allowance on the net deferred tax assets, the Company will not recognize a current or deferred tax expense/benefit. 57 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 7 - INCOME TAXES (Continued) The Company, as a requirement under the Internal Revenue Code (the "Code") to elect REIT status, must have no more than five 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 had expected to make an election to be treated as a REIT under the provisions of the Code beginning with the 1996 year. As a result, the Company would not be subject to federal income tax on its taxable income at corporate rates to the extent it distributes annually 95% of its taxable income to its shareholders and complies with certain other requirements. The Company did not satisfy the REIT shareholder requirement as of December 31, 2001, and therefore, will not elect to qualify as a REIT for the 2000 tax year and is, thus, subject to the corporate tax provisions. The Company's decision not to elect REIT qualification will not adversely affect the shareholders of the Company in that the Company will have no taxable income for the 2001 tax year. NOTE 8 - RELATED PARTY TRANSACTIONS The Company has recorded amounts due to related parties of $684,753 at December 31, 2001. The amount primarily relates to amounts owed to MPI for advisory services and a working capital advance owed to an affiliate of MPI. NOTE 9 - PROPOSED MERGER In December 2000, the Company entered into a letter of intent with Carnegie International Corporation (Carnegie), whereas the Company will issue shares in exchange for shares of Carnegie. The merger, expected to occur in May, 2001, did not materialize. The Company has terminated discussions with Carnegie and is seeking repayment of amounts advanced during the merger discussions. NOTE 10 - GOING CONCERN As reflected in the accompanying financial statements, the Company has suffered from recurring losses from operations as well as negative cash flows from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Furthermore, the loans securing the Company Hotels are in default. The Company is attempting to renegotiate the terms of the loans to enable it to continue in an ownership position of one or more of the properties, but there is no assurance that it will be successful in doing so. 58 HOST FUNDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (Unaudited) NOTE 10 - GOING CONCERN (Continued In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company's ability to continue to raise capital and generate positive cash flows from operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The ability of the Company to continue to operate its existing properties depends primarily on management's ability to restructure current debt service obligations. NOTE 11 - SUBSEQUENT EVENTS The Company property located in Sarasota, Florida was sold in a foreclosure sale in January, 2002. The Company recorded a valuation reserve of $1,581,146 in 2001 to reflect the anticipated transfer. 59

HOST FUNDING INC 10-K/A