10-Q 1 a2051880z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q --------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2001 Commission File Number 1-7062 INNSUITES HOSPITALITY TRUST (Exact name of registrant as specified in its charter) Ohio 34-6647590 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) InnSuites Hotels Centre 1615 E. Northern Ave., Suite 102 Phoenix, AZ 85020 (Address of principal executive offices) Registrant's telephone number, including area code: (602) 944-1500 Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of outstanding Shares of Beneficial Interest, without par value, as of June 12, 2001: 2,148,284 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
APRIL 30, 2001 JANUARY 31, 2001 -------------- ---------------- ASSETS (UNAUDITED) Hotel Properties, net $62,358,620 62,591,376 Cash and Cash Equivalents 1,402,557 415,390 Accounts Receivable, net of $114,243 and $0 allowance, 833,365 -- respectively Rent Receivable from Affiliates, net of $0 and $5,251,861 allowance respectively -- -- Interest Receivable and Other Assets 755,100 898,795 -------------- ---------------- TOTAL ASSETS $65,349,642 63,905,561 ============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Mortgage Notes Payable 36,178,122 25,628,572 Notes Payable to Banks 2,284,876 11,300,000 Notes Payable to Related Parties 573,110 631,409 Advances Payable to Related Parties 6,669,917 6,840,298 Other Notes Payable 132,003 125,021 Accounts Payable and Accrued Expenses 3,004,779 1,251,237 -------------- ---------------- TOTAL LIABILITIES 48,842,807 45,776,537 MINORITY INTEREST IN PARTNERSHIP 12,629,529 13,091,117 SHAREHOLDERS' EQUITY Shares of beneficial interest, without par value; unlimited authorization; 2,149,384 and 2,126,484 shares issued and outstanding at April 30 and January 31, 2001, respectively 5,386,252 6,532,348 Treasury Stock (1,508,946) (1,494,441) -------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 3,877,306 5,037,907 -------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $65,349,642 63,905,561 ============== ================
See accompanying notes to unaudited consolidated financial statements 2 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 2001 2000 ----------- --------- DEPARTMENTAL REVENUES Rent Revenue from Affiliate $ -- 3,319,046 Rooms 8,066,155 -- Food and Beverage 490,561 -- Telecommunications 88,250 -- Interest and Other 222,630 2,263 ----------- --------- TOTAL DEPARTMENTAL REVENUES $ 8,867,596 3,321,309 ----------- --------- OPERATING EXPENSES Rooms $ 1,909,842 -- Food and Beverage 434,851 -- Telecommunications 112,350 -- Other 126,020 -- General and Administrative 1,529,581 468,886 Sales and Marketing 560,313 -- Repairs and Maintenance 477,427 -- Hospitality 404,014 -- Utilities 466,589 -- Expenses Incurred in Acquiring Lessee 1,608,482 -- ----------- --------- TOTAL OPERATING EXPENSES $ 7,629,469 468,886 ----------- --------- INCOME BEFORE FIXED CHARGES $ 1,238,127 2,852,423 FIXED CHARGES Real Estate Depreciation $ 755,993 665,706 Real Estate and Personal Property Taxes, Insurance and Ground Rent 427,655 342,852 Interest on Mortgage Notes Payable 652,236 548,412 Interest on Notes Payable to Banks 228,272 245,897 Interest on Notes Payable and Advances to Related Parties 112,097 49,306 Interest on Other Notes Payable 11,529 13,477 ----------- --------- TOTAL FIXED CHARGES $ 2,187,782 1,865,650 ----------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST $ (949,655) 986,773 EXTRAORDINARY ITEM: Loss on Early Extinguishment of Debt (576,842) -- ----------- --------- INCOME BEFORE MINORITY INTEREST (1,526,497) 986,773 LESS: MINORITY INTEREST (319,294) 594,284 ----------- --------- NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $(1,207,203) 392,489 =========== ========= EARNINGS PER SHARE - (Basic) Income Before Extraordinary Item $ (0.44) 0.16 Extraordinary Item (0.13) -- ----------- --------- NET INCOME $ (0.57) 0.16 =========== ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - (Basic) 2,131,078 2,474,377 =========== ========= EARNINGS PER SHARE - (Diluted) Income Before Extraordinary Item $ (0.11) 0.10 Extraordinary Item (0.06) -- ----------- --------- NET INCOME $ (0.17) 0.10 =========== ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - (Diluted) 8,966,252 9,733,222 =========== =========
See accompanying notes to unaudited consolidated financial statements 3 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2001 2000 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $(1,207,203) 392,489 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities, excluding effects of acquiring Lessee Stock Option Compensation Expense 13,129 13,129 Expenses Incurred in Acquiring Lessee 1,608,482 -- Minority Interest (319,294) 594,284 Depreciation and Amortization 804,236 681,971 Decrease in Accounts Receivables 340,356 -- Increase in Rent Receivable from Affiliates -- (255,158) Provision for Uncollectible Receivable from Affiliate -- 255,158 (Increase) Decrease in Interest Receivable and Other Assets (313,162) 6,084 Decrease in Accounts Payable and Accrued Expenses (693,810) (357,805) ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 232,734 1,330,152 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Lessee (11,531) -- Cash acquired from Lessee 85,294 -- Improvements and Additions to Hotel Properties (523,237) (311,494) ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES $ (449,474) (311,494) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments on Notes Payable to Banks $(9,015,124) -- Payments of Mortgage Notes Payable (208,726) (180,572) Refinancing of Mortgage Notes Payable 5,658,276 -- Borrowings on Mortgage Notes Payable 5,100,000 -- Repurchase of Partnership Units (25,838) (73,822) Repurchase of Stock (14,504) (150,120) Payment of Dividends -- (26,407) Other Distributions to Owners (68,480) -- Payments on Notes Payable to Related Parties (58,299) -- Advances from Related Parties 428,000 -- Payments on Advances from Related Parties (598,380) (345,000) Borrowings on Other Notes Payable 25,839 -- Payments on Other Notes Payable (18,857) (225,000) ----------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 1,203,907 (1,000,921) ----------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS $ 987,167 17,737 CASH AT BEGINNING OF PERIOD $ 415,390 208,109 ----------- ------------ CASH AT END OF PERIOD $ 1,402,557 225,846 =========== ============
See accompanying notes to unaudited consolidated financial statements. 4 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION InnSuites Hospitality Trust (the "Trust") is a real estate investment trust ("REIT") that owns, directly or indirectly, eleven hotels with 1,751 suites in Arizona, southern California and New Mexico. The hotels operate as InnSuites Hotels. Until January 31, 1998, the Trust, formerly known as Realty ReFund Trust, specialized in mortgage financing as its investment vehicle, refinancing existing income producing commercial, industrial and multi-unit residential real property by supplementing or replacing existing financing. The primary refinancing technique that the Trust employed was wrap-around mortgage lending. On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership (the "Partnership"), a Delaware limited partnership, in exchange for a 13.6% general partnership interest therein. The Trust is the sole general partner of the Partnership. The Partnership issued limited partnership interests representing 86.4% of the Partnership to acquire six hotel properties from various entities. In addition, in order to acquire a seventh hotel property, through a wholly-owned subsidiary, RRF Sub Corp., the Trust issued 647,231 Shares of Beneficial Interest in exchange for all of the outstanding shares of Buenaventura Properties, Inc. which owned a hotel located in Scottsdale, Arizona ("InnSuites Hotels Scottsdale"). These seven hotels are collectively referred to as the "Initial Hotels." The Initial Hotels, together with subsequent hotel acquisitions, are referred to herein as the "Hotels." The Hotels are leased to InnSuites Hotels, Inc., formerly known as Realty Hotel Lessee Corp. (the "Lessee"), pursuant to leases, which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the Lessee to pay rent equal to the greater of the minimum rent ("Base Rent") or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. As of February 1, 2001, the Trust acquired 100% ownership interest of the Lessee, which was owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F. Wirth, Chairman, President and Chief Executive Officer of the Trust ("Wirth") and his spouse. The Trust's general partnership interest in the Partnership was 48.48% on April 30, 2001, and the weighted average for the three months ended April 30, 2001 was 48.26%. PARTNERSHIP AGREEMENT The Partnership Agreement of the Partnership provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of Shares of Beneficial Interest of the Trust, at any time at the option of the particular limited partner, if the Trust determines that such conversion would not cause the Trust to fail to qualify as a REIT. As of April 30, 2001, a total of 1,580,323 Class A limited partnership units were issued and outstanding. Additionally, a total of 5,226,364 Class B limited partnership units were outstanding to Wirth and his affiliates, in lieu of the issuance of Class A limited partnership units. If all of the Class A and B limited partnership units were to be converted, the limited partners in the Partnership would receive 6,806,687 Shares of Beneficial Interest of the Trust. The Class B limited partnership units may only become convertible with the approval of the Board of Trustees, in its sole discretion. 5 BASIS OF PRESENTATION As sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership and owns 100% of all the outstanding stock of the Lessee, InnSuites Hotels, Inc. Therefore, the financial statements of the Partnership and the Lessee are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended April 30, 2001 are not necessarily indicative of the results that may be expected for the year ended January 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Trust's Annual Report on Form 10-K as of and for the year ended January 31, 2001. 2. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. REVENUE RECOGNITION Trust revenues are recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided, if needed, against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been minimal and within management's expectations. 4. EARNINGS PER SHARE Basic and diluted earnings per share have been computed based on the weighted-average number of shares outstanding during the periods and potentially dilutive securities. For the three months ended April 30, 2001 and 2000, there were Class A and Class B limited partnership units outstanding, which are convertible to Shares of Beneficial Interest of the Trust. Assuming conversion, the aggregate weighted-average of these Shares of Beneficial Interest would be 6,835,174 and 7,258,845 for the first quarters of fiscal 2002 and 2001, respectively. For the three months ended April 30, 2001 and 2000, 331,400 and 365,100 stock options, respectively, were not included in the computation of diluted earnings per share since the option exercise prices were greater than the average market price of the Shares of Beneficial Interest. 6 5. ACQUISITION In December 2000, the Lessee and the Trust established independent review groups to consider altering the current structure of the management and operations of the Hotels pursuant to the provisions of the REIT Modernization Act (the "RMA"). The RMA, among other things, permits the Trust to own the stock of a taxable REIT subsidiary ("TRS") that may engage in businesses previously prohibited by the Trust, including leasing hotels, provided that such hotels are managed and operated by independent third parties. Therefore, effective February 1, 2001, the Trust acquired all of the common and preferred equity stock of the Lessee for $11,531 in cash consideration. The Lessee was owned 23% by Marc E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of the Trust, and 9.8% by InnSuites Innternational, an affiliate of Mr. Wirth. Following the acquisition, the Lessee elected to be treated as a TRS under the RMA. As a result, the management contracts relating to the Hotels between the Lessee and InnSuites Innternational were terminated effective January 31, 2001 and new management contracts were entered into on substantially similar terms with Suite Hospitality Management, Inc. (the "New Management Company"), which qualifies as an independent third party manager and operator of the Hotels under the RMA. In connection with the acquisition, the rate structures of the Percentage Leases for the Hotels were also amended to reflect current economic and market conditions and employees of the Lessee became employees of the New Management Company. The benefits to the Trust are a more direct relationship between the Hotels and the Trust, the inclusion of Lessee revenues in excess of required rent payments in the Trust's consolidated financial reports, the elimination of potential conflicts of interest and the reduction of certain administrative costs relative to the operation of the Hotels and the administration of the Percentage Leases. In connection with the acquisition of the Lessee, the Trust paid $11,531 for all of the outstanding classes of stock of the Lessee. The $1.6 million difference between the market value of the Shares of Beneficial Interest issued to the owners of the Lessee and the estimated value of the net liabilities assumed was recorded as "Expenses Incurred in Acquiring Lessee" (a non-recurring expense) in the Trust's unaudited consolidated Statements of Operations. Since the Lessee did not have significant operations other than the management of the Hotels and its assets, the transaction did not qualify as the acquisition of a "business" for purpose of applying APB Opinion No. 16 - Business Combinations. Consequently, the market value of the Shares of Beneficial Interest issued to the owners of the Lessee in excess of the fair value of the net tangible assets acquired was recorded as an operating expense rather than capitalized goodwill. The management team of the Lessee has become employees of the New Management Company and continues to oversee and manage all activities of the Hotels. INNSUITES HOSPITALITY TRUST AND SUBSIDIARY PRO FORMA INCOME STATEMENT (in thousands)
FOR THE THREE MONTHS ENDED APRIL 30, 2001 2000 ------------ ---------- Total Revenue $ 8,868 9,209 Total Operating Expenses (6,021) (7,269) Total Fixed Charges (2,188) (1,904) ------------ ---------- Income Before Extraordinary Item and Minority Interest $ 659 36 Extraordinary Item (577) -- ------------ ---------- Income Before Minority Interest 82 36 Less: Minority Interest (319) 594 ------------ ---------- Net Income Attributable to Shares of Beneficial Interest $ 401 (558) ============ ========== EARNINGS PER SHARE- (Basic) Income Before Extraordinary Item 0.32 (0.23) Extraordinary Item (0.13) -- ------------ ---------- NET INCOME 0.19 (0.23) ============ ========== EARNINGS PER SHARE - (Diluted) Income Before Extraordinary Item 0.07 --
7 Extraordinary Item (0.06) -- ------------ ---------- NET INCOME $ 0.01 -- ============ ==========
The Pro Forma information provided for the three months ended April 30, 2000 was derived by consolidating the actual statements of operations of the Trust and the Lessee and eliminating all intercompany transactions. In addition, the Expenses Incurred in Acquiring Lessee of $1.6 million was recorded in the three months ended April 30, 2000 pro forma information assuming these costs would have been incurred in the prior year. 6. CREDIT FACILITY On April 16, 1998, the Trust obtained a $12 million Credit Facility from Pacific Century Bank to assist in its funding of the acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility were secured by first mortgages on three of the Hotels. By its terms, the Credit Facility expired on April 16, 2001. In order to replace the liquidity provided by the Credit Facility, the Trust actively sought individual loans on the Tucson Oracle, Flagstaff and Scottsdale properties that secure the Credit Facility. On April 18, 2001, the Trust refinanced its Ontario property and utilized $4.2 million of the net proceeds to reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Effective May 16, 2001, Pacific Century Bank modified the terms of the Credit Facility extending its maturity date to July 20, 2001 and decreasing the available limit to $2,284,876, with an interest rate equal to the published prime rate plus 0.5%. The Credit Facility is secured by the Flagstaff and Scottsdale properties. The Trust may submit a written request together with an $11,300 deposit for the lender to consider converting the revolving Credit Facility to a term loan. The terms of the replacement term loan are subject to review and approval by Pacific Century Bank. If, for any reason, Pacific Century Bank does not issue the replacement term loan, the Trust believes it has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the $2.3 million balance of the Credit Facility with another lending institution and therefore satisfy the Credit Facility. In the unlikely event that Pacific Century Bank forecloses on the Flagstaff and Scottsdale properties, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. Pacific Century Bank has agreed to waive all covenants relating to the Credit Facility, except as noted below. The modified terms of the Credit Facility requires the Trust to maintain a minimum tangible net worth (combined with minority interest) of not less than $5 million and a minimum interest coverage of 1.1 to 1.0. 7. PERCENTAGE LEASE AGREEMENTS: With the purchase of the Lessee effective February 1, 2001, the financial statements of the Lessee are consolidated with those of the Trust. Therefore, all intercompany transactions are eliminated including rent revenues and expenses that are calculated pursuant to the percentage lease agreements. 8 8. RELATED PARTY TRANSACTIONS: The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement. The Initial Hotels were acquired by the Partnership from entities in which Wirth and his affiliates had substantial ownership interests. Wirth and his affiliates received 4,017,361 Class B limited partnership units and 647,231 Shares of Beneficial Interest in the Trust in exchange for their interests in the Initial Hotels. As of April 30, 2001 and 2000 Wirth and his affiliates held 5,226,364 Class B limited partnership units. As of April 30, 2001 and 2000 Wirth and his affiliates held 630,713 and 834,613, respectively, Shares of Beneficial Interest in the Trust. At April 30, 2001, the Trust owned a 48.48% interest in the eleven hotels (the "Hotels") through its sole general partner's interest in the Partnership. 9 The Trust paid interest on related party notes to Mr. Wirth and his affiliates in the amounts of $218,985 and $143,597 for the three months ended April 30, 2001 and 2000, respectively. The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees, and depreciation of the Hotels. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. Notes and advances payable to related parties consists of funds provided by James F. Wirth and other related parties to repurchase Partnership units and to fund working capital and capital improvement needs. The aggregate amounts outstanding were approximately $7.2 million and $7.5 million as of April 30, 2001 and January 31, 2001, respectively. The loans payable to related party are as follows: Wirth made an unsecured loan to the Trust in the amount of $2 million, bearing interest at 7% per year, effective March 15, 1999. Interest only payments were due annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004. The Trust used the proceeds to purchase general partner units in the Partnership. The balance as of April 30, 2001 was $2,000,000. Wirth received an unsecured promissory note that consolidated four outstanding unsecured loans to the Trust totaling $600,000. The loan amounts consolidated were $200,000, $120,000, $30,000 and $250,000, all bearing interest at 7% per year with varying maturities. Interest on these four notes through July 31, 2000 was approximately $41,999 which was subsequently paid on August 15, 2000 according to the unsecured consolidated promissory note. The loans were used to fund operations, to pay down the outstanding loan to the Partnership and to pay dividends declared October 12, 1999. The unsecured consolidated promissory note from the Trust in the amount of $600,000, bearing interest at 7% per year, became effective August 1, 2000. The unpaid principal balance and accrued interest on the unsecured consolidated promissory note is due on May 15, 2001. The balance as of April 30, 2001 was $600,000. Wirth made nine unsecured loans to the Trust in the total amount of $2,066,000, all bearing interest at 7% per year, with effective dates varying from August 15, 2000 to April 27, 2001. The unpaid principal balances and accrued interest are due ranging from May 15 to July 1, 2001. The Trust used the proceeds to acquire the Albuquerque, New Mexico hotel and to fund operations. The balance as of April 30, 2001 was $1,347,000. On July 27, 2000, the Partnership repurchased 300,000 of the Trust's shares from Wirth and/or affiliates, owned directly or indirectly by Wirth, issuing 10 secured promissory notes in the aggregate amount of $720,000 and $3,000 cash. The promissory notes are secured by the repurchased shares. The secured promissory notes in the aggregate amount of $720,000 bear interest at 7% per year, effective July 27, 2000. The unpaid principal balances and accrued interest are due at various dates ranging from August 27, 2000 to July 27, 2003. All payments have been made as scheduled. The balance on April 30, 2001 was $524,918. On July 27, 2000, the Trust purchased 311,326 of the Partnership's Class A limited partnership units from Steve Robson, Trustee of the Trust, for $750,000. The Trust made an initial payment of $5,000 and issued a promissory note in the amount of $745,000. The promissory note is secured by the purchased Partnership units. The secured promissory note bears interest 10 at 7% per year, effective July 27, 2000. The unpaid principal balance and accrued interest is amortized over 36 months. The final payment is due August 27, 2003. All payments have been made as scheduled. The balance as of April 30, 2001 was $573,110. Rare Earth Development Company, owned directly or indirectly by Wirth, made four unsecured loans to the Trust in the total amount of $2,494,000 all bearing interest at 7% per year, effective on dates ranging from December 29, 2000 through April 27, 2001. The unpaid principal balances and accrued interest are due on July 15, 2001. The Trust used the proceeds to fund operations. The balance as of April 30, 2001 was $2,094,000 Suite Hotels Limited Liability Company, owned directly or indirectly by Wirth, made an unsecured loan to the Trust in the total amount of $104,000 bearing interest at 7% per year, effective on April 23, 2001. The unpaid principal balance and accrued interest are due on July 1, 2001. The Trust used the proceeds to fund operations. The balance as of April 30, 2001 was $104,000. 9. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES The Trust repurchased 6,100 Shares of Beneficial Interest and 12,304 partnership units valued at $40,342. The Trust issued 29,000 Shares of Beneficial Interest during the three months ended April 30, 2001 valued at $60,900 in exchange for Class A limited partnership units. The Trust paid $1,154,000 and $974,000 in cash for interest for the three months ended April 30, 2001 and 2000, respectively. 10. EXTRAORDINARY ITEM The Trust refinanced its Ontario, California property paying $576,842 in prepayment penalties on April 18, 2001. Following the provisions of SFAS 4 "Reporting Gains and Losses From Early Extinguishment of Debt" the Trust classified the transaction as an extraordinary item. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion should be read in conjunction with the InnSuites Hospitality Trust consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report. The Trust is a real estate investment trust which owns the sole general partner interest in the Partnership. In order for the Trust to qualify as a REIT under prior provisions of the Internal Revenue Code of 1986, as amended (the "Code"), neither the Trust nor the Partnership could operate the Hotels. Therefore, each of the Hotels was leased to, and operated by, the Lessee pursuant to a Percentage Lease. Each Percentage Lease obligates the Lessee to pay rent equal to the greater of a minimum rent or a percentage rent based on the gross revenues of each Hotel. The Lessee also holds the franchise agreement for each Hotel. Prior to February 1, 2001, the Lessee was owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by Mr. Wirth and his wife. Effective February 1, 2001, however, the Lessee became a wholly-owned subsidiary of the Trust. See Note 5 - Acquisition. The Trust's principal source of cash flows is distributions from the Partnership, which are dependent upon lease payments from the Lessee pursuant to the Percentage Leases. The Lessee's ability to make payments to the Partnership pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels. As a result of the Trust's acquisition of the Lessee as of February 1, 2001, any profits earned by the Lessee in its operation of the Hotels will be recorded by the Trust in consolidation. At April 30, 2001, the Trust owned a 48.48% interest in the Hotels through its sole general partner's interest in the Partnership. 12 The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees and depreciation of the Hotels. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. The Percentage Leases provide for the payment of base rent and percentage rent. For the three months ended April 30, 2001, base rent and percentage rent in the aggregate amount of $2.3 million was earned by the Trust. The principal determinant of percentage rent is the Lessee's room revenues at the Hotels, as defined by the Percentage Leases. Therefore, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, average daily rate ("ADR"), calculated as total room revenue divided by number of rooms sold, and revenue per available room, calculated as total room revenue divided by number of rooms available (known as "REVPAR"), is appropriate for understanding revenue from the Percentage Leases. ADR decreased $2.95 to $71.54 for the first quarter of fiscal 2002 from $74.49 for the first quarter of fiscal 2001 due primarily to a slow winter season and an oversupply of rooms in the Arizona markets. Occupancy decreased 3.2% to 71.8% for the first quarter of fiscal 2002 from 75.0% for the first quarter of fiscal 2001. This resulted in a decrease in REVPAR of $4.89 to $51.38 for the first quarter of fiscal 2002 from $56.27 for the first quarter of fiscal 2001. The following table shows certain historical financial and other information for the periods indicated.
FOR THE THREE MONTHS ENDED APRIL 30, ------------------------------------ 2001 2000 ------------- ------------- OCCUPANCY 71.8% 75.0% AVERAGE DAILY RATE (ADR) $71.54 74.49 REVENUE PER AVAILABLE ROOM (REVPAR) $51.38 56.27
No assurance can be given that the trends reflected in this data will not continue or that Occupancy, ADR and REVPAR will not continue to decrease as a result of changes in national or local economic or hospitality industry conditions. Results of Operations of the Trust for the three months ended April 30, 2001 compared to the three months ended April 30, 2000. As of February 1, 2001, the financial statements of the Lessee are consolidated with those of the Trust. Therefore, all intercompany transactions and balances have been eliminated including rent revenue for the Trust and rent expense for the Lessee. See Note 5 - Acquisition. For the three months ended April 30, 2001 compared to the three months ended April 30, 2000, Trust revenues increased more than $5.5 million to $8.9 million from $3.3 million, respectively, primarily due to the acquisition of the Lessee. Rent revenue from affiliate for the first quarter of fiscal year 2002 decreased $3.3 million to zero compared to the prior year quarter due to the consolidation and elimination of percentage rent from the Lessee. Percentage rent earned and paid to the Trust by the Lessee for the quarter ended April 30, 2001 was $2.3 million which was eliminated in consolidation. When comparing actual total revenues for the three months ended April 30, 2001 with pro forma data for the prior year period, total revenues decreased by $342,000 or 3.7% to $8.9 million from $9.2 million primarily due to decreased occupancy in the Arizona hotels. Total expenses increased $7.5 million to $9.8 million from $2.3 million primarily due to the acquisition of the Lessee which includes the $1.6 million incurred in expenses to acquire the Lessee. For the three months ended April 30, 2001 and 2000, total operating expenses increased $7.2 million to $7.6 million primarily due to the acquisition of the Lessee. Real estate depreciation for the three months ended April 30, 2001 compared to the three months ended April 30, 2000 increased $90,000, or 13.6%, to $756,000 from $666,000, respectively. The increase was primarily due to the acquisition of 13 the Albuquerque hotel, $42,000, and increased depreciation expense due to shorter useful life categories for assets purchased after October 31, 1999. For the three months ended April 30, 2001 and 2000, real estate and personal property taxes, insurance and ground rent increased $85,000 or 24.7% to $428,000 from $343,000. The increase was due to the acquisition of the Albuquerque hotel, $41,000, and increased insurance costs. Total interest expense increased $147,000, or 17.2%, to $1.0 million from $857,000 comparing the three months ended April, 2001 and 2000, respectively. Interest on mortgage notes payable increased $104,000, or 18.9%, to $652,000 from $548,000 comparing the three months ended April 30, 2001 and 2000, respectively. The increase was primarily due to the refinancing of the San Diego, California property, the refinancing of the Ontario, California property and the addition of interest expense attributable to the Albuquerque, New Mexico hotel acquired in fiscal 2001. Interest on notes payable to banks decreased $18,000, or 7.2%, to $228,000 from $246,000 comparing the three months ended April 30, 2001 and 2000, respectively. The decrease was primarily due to a decrease in the variable rate paid on the $12 million Credit Facility. Interest on notes and advances payable to related parties increased $63,000 to $112,000 from $49,000 due to additional loans from Wirth and his affiliates during the second half of fiscal 2001 and the first three months of fiscal 2002 and the purchase of Steve Robson's partnership units. Expenses Incurred in Acquiring the Lessee for the current quarter relates to the acquisition costs incurred in the purchase of the Lessee. These are one-time expenses associated with becoming a self-managed REIT. These costs were not included in fiscal year 2001. Funds from Operations (FFO) The Trust notes that industry analysts and investors use Funds From Operations ("FFO") as another tool to evaluate and compare equity REITs. The Trust also believes it is meaningful as an indicator of net income excluding most non-cash items and provides information about the Trust's cash available for distributions, debt service and capital expenditures. The Trust follows the March 1995 interpretation of the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, as amended January 1, 2000, which is calculated (in the Trust's case) as net income (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains (or losses) from sales of property, depreciation and amortization on real estate property and extraordinary items. FFO does not represent cash flow from operating activities in accordance with GAAP and is not indicative of cash available to fund all of the Trust's cash needs. FFO should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flows as a measure of liquidity. In addition, the Trust's FFO may not be comparable to other companies' FFO due to differing methods of calculating FFO and varying interpretations of the NAREIT definition. Comparable FFO is defined as FFO before one-time items (the purchase of the Lessee).
FUNDS FROM OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, (UNAUDITED) (AMOUNTS IN THOUSANDS) 2001 2000 Net income attributable to common stockholders $ (1,207) 392 Depreciation 756 666 Extraordinary item 577 -- Minority interest share of depreciation and extraordinary item (690) (366) --------- ----- Funds from operations (FFO) $ (564) 692 ========= ===== One-time lessee purchase charge 1,608 -- --------- ----- Comparable FFO 1,044 692 ========= ===== ------------------------------------------------------------------------------------------------------
Comparable FFO increased to approximately $1,044,000 from approximately $692,000 when comparing the first three months of fiscal 2002 and 2001, respectively. The increase of approximately $352,000, or 51%, was a combination of higher general and administrative expenses for the Trust during the three-month period ended April 30, 2000, the acquisition of the Lessee and a greater ownership interest in the Partnership. 14 LIQUIDITY AND CAPITAL RESOURCES The Trust's principal source of cash to meet its cash requirements, including distributions to its shareholders, is its share of the Partnership's cash flow. The Partnership's principal source of revenue is rent payments under the Percentage Leases. The Lessee's obligations under the Percentage Leases are unsecured and its ability to make rent payments to the Partnership under the Percentage Leases, and the Trust's liquidity, including its ability to make distributions to its shareholders, will depend upon the ability of the Lessee to generate sufficient cash flow from hotel operations. As a result of the Trust's acquisition of the Lessee as of February 1, 2001, any profits earned by the Lessee in its operation of the Hotels may be distributed to the Trust. See Note 5 - Acquisition. On April 18, 2001, the Trust refinanced its Ontario property and utilized $4.2 million of the net proceeds to reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Effective May 16, 2001, Pacific Century Bank modified the terms of the Credit Facility extending the maturity date to July 20, 2001 and decreasing the available limit to $2,284,876, the principal balance at that date, with an interest rate equal to the published prime rate plus 0.5%. The Credit Facility is secured by the Flagstaff and Scottsdale properties. The Trust may submit a written request together with an $11,300 deposit for the lender to consider converting the revolving Credit Facility to a term loan. The terms of the term loan are subject to review and approval by Pacific Century Bank. If, for any reason, Pacific Century Bank does not issue the term loan, the Trust believes it has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the $2.3 million outstanding balance of the Credit Facility with another lending institution and therefore satisfy the outstanding balance of the Credit Facility. In the unlikely event that Pacific Century Bank forecloses on the Flagstaff and Scottsdale properties, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. Pacific Century Bank has agreed to waive all covenants relating to the Credit Facility, except that the Trust must maintain a minimum tangible net worth (combined with minority interest) of not less than $5 million and a minimum interest coverage of 1.1 to 1.0. On April 28, 2001, the mortgage note payable to Bank One on the Tucson St. Mary's hotel matured. The outstanding principal balance was $3,762,839. Bank One has extended the term of the mortgage note until June 27, 2001 to process a new loan with Bank One or another lender. The Trust notified Bank One that for the three months ended April 30, 2001 the Trust did not comply with certain covenants. The Trust and Bank One are working together to insure future compliance. If, for any reason, Bank One does not extend the mortgage note, the Trust has sufficient unencumbered equity in the Tucson St. Mary's property to refinance the outstanding balance (and satisfy the balance due to Bank One) with another lending institution. In the unlikely event that Bank One forecloses on the property, management believes the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. The Trust has approximately $4.3 million due and payable in fiscal year 2002 under notes and advances payable to Wirth and his affiliates. To the extent the Trust cannot satisfy these amounts as they come due, Wirth has agreed to extend the terms of these borrowings to future dates. As of April 30, 2001, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements set aside annually, as described below. 15 The Trust intends to acquire and develop additional hotels and expects to incur indebtedness to fund those acquisitions and developments. The Trust may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Trust's investments are insufficient to make the required distributions. The Trust may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as the Trust considers prudent. The Trust will acquire or develop additional hotels only as suitable opportunities arise, and the Trust will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings or from the proceeds of additional issuances of Shares of Beneficial Interest or other securities. However, there can be no assurance that the Trust will successfully acquire or develop additional hotels. On August 30, 2000, Albuquerque Suite Hospitality, LLC, an 100% owned subsidiary of the Partnership, purchased the 122-suite Albuquerque Best Western Airport Inn located in Albuquerque, New Mexico for $2.1 million. The funds utilized for the purchase price were secured by a first mortgage in the amount of $1,575,000 and the remaining amount was loaned by Wirth and his affiliates. The Partnership continues to contribute to a Capital Expenditures Fund (the "Fund") from the rent paid under the Percentage Leases, an amount equal to 4% of the Lessee's revenues from operation of the Hotels. The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. The Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the three months ended April 30, 2001, the Hotels spent approximately $523,000 for capital expenditures. These amounts have been capitalized and are being depreciated over their estimated useful lives. The Lessee also spent approximately $477,000 during the three months ended April 30, 2001 on repairs and maintenance and these amounts have been charged to expense as incurred. INFLATION The Trust's revenues are based on the Percentage Leases which result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust relies entirely on the performance of the Hotels and the Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Lessee in particular, can change room rates quickly, but competitive pressures may limit the Lessee's ability to raise rates faster than inflation. SEASONALITY The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona, California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or 16 seasonal fluctuations in lease revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders. No assurance can be given that the Trust will make distributions in the future. FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust's financing plans; (v) the Trust's position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) the Trust's continued qualification as a REIT; and (vii) trends affecting the Trust's or any Hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements reflect the Trust's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to: fluctuations in hotel occupancy rates; changes in room rental rates which may be charged by the Lessee in response to market rental rate changes or otherwise; interest rate fluctuations; changes in federal income tax laws and regulations; competition; any changes in the Trust's financial condition or operating results due to acquisitions or dispositions of hotel properties; real estate and hospitality market conditions; hospitality industry factors; and local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry, or the markets in which the Trust operates or will operate. The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-Q relating to the operations of the Partnership. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Trust is exposed to interest rate risk primarily as a result of its mortgage notes payable, notes payable to banks and other notes payable. Proceeds from these loans were used to maintain liquidity, fund capital expenditures and expand the Trust's real estate investment portfolio and operations. The Trust's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Trust borrows using fixed rate debt, when possible. There have been no significant changes in the Trust's debt structure during the three months ended April 30, 2001. 17 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)
EXHIBIT NUMBER EXHIBIT ------ ------- 10.1 Promissory Note dated April 23, 2001 by RRF Limited Partnership in favor of Suite Hotels LLC. 10.2 Promissory Note dated April 27, 2001 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.3 Promissory Note dated April 27, 2001 by RRF Limited Partnership in favor of Rare Earth Development Company
(b) REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed by the Trust during the fiscal quarter ended April 30, 2001. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: June 14, 2001 INNSUITES HOSPITALITY TRUST (Registrant) By: /s/ Anthony B. Waters ------------------------------------------ Anthony B. Waters, Chief Financial Officer 19