-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VPbGjGjikew0HjlTkiK6zW48vJQQMfpfW2rARw3dxSbbl1zxCDal2VwMX5a3xzKA 6enNqxgS3cpKJ5vgtI7WpA== 0000950152-99-004932.txt : 19990624 0000950152-99-004932.hdr.sgml : 19990624 ACCESSION NUMBER: 0000950152-99-004932 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNSUITES HOSPITALITY TRUST CENTRAL INDEX KEY: 0000082473 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 346647590 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-07062 FILM NUMBER: 99635932 BUSINESS ADDRESS: STREET 1: INNSUITES HOTELS CENTRE STREET 2: 1625 E NORTHERN AVENUE SUITE 201 CITY: PHOENIX STATE: AZ ZIP: 85020 BUSINESS PHONE: 2166220046 MAIL ADDRESS: STREET 1: 925 EUCLID AVENUE STREET 2: SUITE 1750 CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: REALTY REFUND TRUST DATE OF NAME CHANGE: 19920703 10-K/A 1 INNSUITES HOSPITALITY TRUST 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . -------- -------- Commission File No. 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 Incorporation or Organization) Identification Number) InnSuites Hotels Centre, 1625 E. Northern Avenue, Suite 201, Phoenix, Arizona 85020 - --------------------------------------------------------- ---------- (Address of Principal Executive Offices) (ZIP Code) Registrant's Telephone Number, including area code (602) 944-1500 ------------------ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered - -------------------- ------------------------------------ Shares of Beneficial American Stock Exchange Interest, without par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / [Cover Continued on Following Page ] 2 [Cover Continued From Previous Page] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'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. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant as of May 12, 1999: $3,872,864. Number of shares of voting stock outstanding as of May 12, 1999: 2,341,374 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the July 12, 1999 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. -2- 3 PART I --------- Item 1. BUSINESS. --------- Introduction to Our Business InnSuites Hospitality Trust (formerly known as Realty ReFund Trust)(the "Trust") was organized in 1971 and operates as an unincorporated Ohio real estate investment trust. On January 31, 1999, the Trust owned, through RRF Sub Corp., a wholly-owned subsidiary, an InnSuites(R) hotel located in Scottsdale, Arizona and a 17% sole general partner interest in RRF Limited Partnership, a Delaware limited partnership (the "Operating Partnership"). Events subsequent to January 31, 1999 have increased the Trust's general partner interest in the Operating Partnership to approximately 42%. The Operating Partnership, on January 31, 1999, owned or controlled interests, directly or indirectly, in nine InnSuites(R) hotels located in Arizona and southern California (all ten InnSuites(R) hotels are hereinafter referred to as the "Hotels"). Events subsequent to January 31, 1999 have resulted in all of the Hotels being owned, directly or indirectly, by the Operating Partnership. The Trust employs five people. The Hotels feature 1,665 hotel suites and operate as moderate- and full-service hotels which apply an operating philosophy formulated in 1980 by James F. Wirth, current Chairman, President and Chief Executive Officer of the Trust. Initially, the Trust attempts to acquire under-performing hotel properties below replacement cost. Through intensive refurbishment and management programs, the Trust repositions the acquired hotels as studio and two-room suite hotels that offer services such as free breakfast buffets and complementary afternoon social hours plus microwave ovens, refrigerators and coffee makers in each studio or two-room suite. The Trust has elected to be taxed as a real estate investment trust ("REIT"), as that term is defined and used in Sections 856-860 of the Internal Revenue Code of 1986, and the Regulations thereunder (all as amended, the "Code"). In order to maintain its REIT tax status, the Trust has affiliated with certain other hotel hospitality companies. Through one such affiliation, RRF Sub Corp. and the Operating Partnership lease the Hotels to InnSuites Hotels, Inc. (the "Initial Lessee"). The Initial Lessee pays rent to RRF Sub Corp. and the Operating Partnership pursuant to lease agreements providing for periodic rental payments based primarily upon the revenues of the Hotels ("Percentage Leases"). The Trust obtains income from cash distributions made by RRF Sub Corp. and the Operating Partnership and those distributions largely depend upon those entities' earnings under the Percentage Leases. Further affiliations involve managing the Hotels and licensing the InnSuites brand. The Initial Lessee currently operates and manages all of the Hotels, with the assistance of InnSuites Innternational Hotels, Inc. (the "Management Company"). Pursuant to management contracts, the Initial Lessee pays the Management Company an annual management fee of 2.5% of gross room and other revenues for property management services. The Initial Lessee pays InnSuites Licensing Corp. an annual licensing fee of 2.5% of gross room and other revenues (1.25% for those hotel properties which also carry a third-party franchise, such as Best Western(R) or Holiday Inn(R)) for trademark and licensing services relating to the use of the InnSuites(R) name and marks. -3- 4 Historical Operations and The Formation Transactions Until January 31, 1998, the Trust specialized in wrap-around mortgage lending, whereby the Trust offered borrowers a total mortgage loan (the wrap-around loan), the principal amount of which equaled the balance outstanding on an existing prior mortgage loan on the borrower's property, plus an additional amount supplied by the Trust, on existing income-producing commercial, industrial and multi-unit residential real property. The Trust originated no new mortgage loans since the fiscal year ended January 31, 1995 and the final two outstanding mortgage loans receivable matured and were fully paid and canceled during the fiscal year ended January 31, 1998. In August 1996, the Trust began to evaluate a combination with Hospitality Corporation International ("HCI"), an Arizona corporation owned by James F. Wirth and his wife, which controlled seven all-suite hotel properties, comprising 1,036 hotel studio and two-room suites, in Tucson, Phoenix, Scottsdale, Tempe, Flagstaff and Yuma, Arizona and in Ontario, California (the "Initial Hotels"). HCI proposed a series of transactions resulting in a combination of the Initial Hotels with the Trust. In late October 1996, the Trust and HCI reached a preliminary agreement as to the framework of the proposed transactions, culminating in the execution of a definitive Formation Agreement on December 27, 1996 (the "Formation Agreement"). The execution of the Formation Agreement was ratified and approved by the Trustees and by HCI's Board of Directors on February 14, 1997, at which time the Trust announced the proposed transaction to the public. At the 1997 annual shareholders' meeting held on January 28, 1998, the shareholders of the Trust approved the terms and execution of the Formation Agreement. The Formation Agreement provided for the organization of the Operating Partnership, of which the Trust would be the sole general partner, initially holding a 13.6% interest, with the former partners in the Initial Hotels investing as limited partners, receiving a collective 86.4% interest, and for restructuring the Trust into an "umbrella partnership REIT", or "UPREIT". The Operating Partnership acquired substantial interests in six of the Initial Hotels. The seventh hotel was acquired directly by RRF Sub Corp., a newly-formed Nevada corporation and wholly-owned subsidiary of the Trust. The Trust contributed $2,081,000 in cash to the Operating Partnership to obtain its initial 13.6% sole general partner interest. In accordance with the terms of the Formation Agreement, the previous Trustees and executive officers of the Trust resigned effective January 30, 1998. James F. Wirth, Gregory D. Bruhn, Marc E. Berg, Mark J. Nasca, Lee J. Flory and Edward G. Hill were appointed the new Trustees of the Trust effective January 30, 1998. Mr. Wirth was also appointed Chairman, President and Chief Executive Officer and Mr. Bruhn was also appointed Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Trust. The Operating Partnership has two outstanding classes of limited partnership interests, Class A and Class B, identical in all respects except that each Class A limited partnership unit is convertible, at the option of the Class A holder, into one newly-issued Share of Beneficial Interest of the Trust. No particular conversion will be allowed, however, if a determination is made that such conversion would cause the Trust to no longer qualify as a REIT -4- 5 under the Code. A total of 2,174,931 Class A limited partnership units were issued to the former partners in the Initial Hotels. Class B limited partnership units may be converted only upon the approval of the Board of Trustees, provided that such conversion would not cause the Trust to fail to qualify as a REIT. A total of 4,017,361 Class B limited partnership units were issued to Mr. Wirth and certain of his affiliates in order to satisfy ownership concentration limitations placed upon REITs by the Code. The Partnership Agreement of the Operating Partnership subjects both general and limited partner units to restrictions on transfer. In addition to the restructuring, the Trust's investment advisor, Mid-America ReaFund Advisors, Inc. ("MARA"), which was owned by the Trust's former Co-Chief Executive Officers, Messrs. Krause and Berick, was acquired by Mr. Wirth and his wife. MARA provided investment advisory and consulting services to and administered the day-to-day investment operations of the Operating Partnership and the Trust under the supervision of the Trustees pursuant to an Advisory Agreement executed between the Operating Partnership and MARA. The Advisory Agreement was terminated as of January 1, 1999. See "Advisory Agreement and MARA" below. Certain other formation transactions occurred, as contemplated by the Formation Agreement. The Trust, through its wholly-owned subsidiary, RRF Sub Corp., executed an Agreement of Merger, dated as of January 30, 1998, pursuant to which RRF Sub Corp. merged into and with Buenaventura Properties, Inc. ("BPI"), an Arizona corporation owned by Mr. Wirth and his wife. By virtue of the merger, the 1,000,000 shares of issued and outstanding BPI common stock were converted into the right to receive 647,231 Shares of Beneficial Interest of the Trust with an approximate aggregate value of $3,074,348, representing the independently appraised value of the InnSuites Hotels Scottsdale/El Dorado Park Resort. Hotel Acquisitions following the Formation Transactions Following the Formation Transactions, the Operating Partnership acquired three additional all-suite hotels. First, effective as of February 1, 1998, the Operating Partnership acquired the InnSuites Hotels Tucson St. Mary's located in Tucson, Arizona. The total consideration for the acquisition was $10,820,000 and was based upon an appraisal conducted by an independent third party. Mr. Wirth and his wife indirectly owned the Tucson St. Mary's hotel property. Second, on April 29, 1998, the Operating Partnership acquired the Lafayette Hotel Ramada Inn & Conference Center located in San Diego, California. The Operating Partnership paid $5,148,000 for this hotel property based on arms-length negotiations with the owners of that property. Third, the Operating Partnership acquired the InnSuites Hotel located in Buena -5- 6 Park, California, effective June 1, 1998. The total consideration for the acquisition was $7,100,000 and was based upon an appraisal conducted by an independent third party. James F. Wirth and Steven S. Robson indirectly owned the Buena Park hotel property. Subsequent to this acquisition, Mr. Robson was elected as a Trustee of the Trust by the shareholders of the Trust. The Trust believes that the greatest opportunities for revenue growth and profitability will arise from the skillful management and repositioning of current and future acquired hotel properties. The Trust's primary business objectives are to maximize current returns to its shareholders through increases in cash flow available for distribution and to increase long-term total returns to shareholders. The Trust will seek to achieve these objectives through (i) participation in increased revenues from the Hotels pursuant to the Percentage Leases by intensive management and marketing, and (ii) selective acquisitions and expansion of the InnSuites Hotels system in California and in the southwestern United States. Competition in the Hotel Industry The hotel industry is highly competitive. Each of the Hotels experiences competition primarily from other mid-market hotels in its immediate vicinity, but also competes with other hotel properties in other geographic markets. While none of the Hotels' competitors dominate any of the Trust's geographic markets, some of those competitors have substantially greater marketing and financial resources than the Trust and the Operating Partnership. A number of additional hotel property developments have been announced or have recently been completed by competitors in a number of the Hotels' markets, and additional hotel property developments may be built in the future. Such hotel developments have had, and could continue to have, an adverse effect on the revenues of the Hotels in such competitive markets. The Trust has chosen to focus its initial hotel investments in Arizona and southern California. Particularly, the Trust has a concentration of assets in the metropolitan Phoenix, Arizona market. In the Phoenix, Arizona market, hotel room supply is increasing faster than the rate of demand. Supply rates are also generally increasing faster than demand rates in the Flagstaff, Tucson and Yuma, Arizona and Ontario, California markets. The Buena Park and San Diego, California markets continue to support balanced supply and demand. The Trust and the Operating Partnership may also compete for investment opportunities with other entities that have substantially greater financial resources. These entities also may generally accept more risk than the Trust and the Operating Partnership can prudently manage. Competition may generally reduce the number of suitable future investment opportunities available to the Trust and the Operating Partnership and increase the bargaining power of owners seeking to sell their properties. Seasonality of the Hotel Business The hotel business is seasonal in nature. 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 significant fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona and California 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. Advisory Agreement and MARA The Operating Partnership was a party to an Advisory Agreement with MARA pursuant to which the Operating Partnership received certain investment -6- 7 advisory and administrative services regarding the day-to-day investment operations of the Hotels and pursuant to which MARA was responsible for providing the Operating Partnership and the Trust with a continuing and suitable investment program. The Advisory Agreement was terminated as of January 1, 1999. To terminate the Advisory Agreement the Operating Partnership paid $256,000 in February 1999 ($225,000 repayment of principal plus $31,500 of accrued interest) and on February 1, 2000 is obligated to pay $240,750 ($225,000 repayment of principal plus $15,750 of accrued interest) to satisfy two promissory notes which were originally issued by Mr. Wirth and his wife when they acquired MARA in January 1998. Additionally, the Operating Partnership issued 67,000 Class B limited partnership units to MARA and MARA forgave $85,331 in net liabilities in exchange for the termination of the Advisory Agreement. These amounts were recorded as one-time fourth quarter charges of the Operating Partnership. Pursuant to the Advisory Agreement, MARA received, subject to certain limitations, (a) a monthly fee equal to 1/12th of 1% of the appraised value of the total assets of the Operating Partnership during the next preceding month; (b) 15% of the commitment fees received by the Operating Partnership for any stand-by or gap commitment relating to a mortgage loan which is not closed; and (c) an incentive fee equal to 10% of the amount, if any, by which the net profits of the Operating Partnership exceed 8% of the monthly average net worth of the Operating Partnership for the year, plus 10% of the net realized capital gains of the Operating Partnership for such year less accumulated net realized capital loss. MARA was required to refund to the Operating Partnership the amount, if any, by which the operating expenses of the Operating Partnership in any fiscal year exceed the lesser of (x) 1 1/2% of the appraised value of the total assets of the Operating Partnership for such fiscal year or (y) 25% of the net income of the Operating Partnership for such fiscal year. For the twelve months ended January 31, 1999, the Operating Partnership paid MARA $364,041 for advisory and management services pursuant to the Advisory Agreement. Financial Information See "Item 6 -- Selected Financial Data" herein for information regarding the Trust's revenues, net income (loss) and total assets. Item 2. PROPERTIES. ----------- The Trust maintains its administrative offices at the InnSuites Hotels Centre in Phoenix, Arizona. The Trust directly owns no real property. At January 31, 1999, the Operating Partnership owned or controlled interests in nine hotels and the Trust, through its wholly-owned subsidiary, RRF Sub Corp., owned one hotel located in Scottsdale, Arizona. All of the Hotels are operated as InnSuites(R) Hotels, while three are also marketed as Best Western(R) Hotels and one is also marketed as a Holiday Inn(R) Hotel and Suites. All of the Hotels are managed by the Management Company and operate in the following locations: -7- 8
NUMBER YEAR OF CONSTRUCTION/ MOST RECENT PROPERTY OF SUITES ADDITION RENOVATION - -------- --------- ------------------- ----------- InnSuites Hotels Phoenix Best Western................................. 123 1980 1996 InnSuites Hotels Tempe/ Phoenix Airport/South Mountain....................... 170 1982/1985 1996 InnSuites Hotels Tucson, Catalina Foothills Best Western ..................... 159 1981/1983 1996 InnSuites Hotels Yuma Best Western.................................... 166 1982/1984 1996 Holiday Inn Airport Hotel and Suites/Ontario(an InnSuites Hotel) .................. 150 1990 1996 InnSuites Hotels Flagstaff/ Grand Canyon......................................... 134 1966/1972 1997 InnSuites Hotels Scottsdale/ El Dorado Park Resort ............................... 134 1980 1996 InnSuites Hotels Tucson St. Mary's................... 297 1960/1971 1997 InnSuites Hotels San Diego........................... 147 1946/1989 1998 InnSuites Hotels Buena Park.......................... 185 1972/1980 1998 --- Total suites 1665
Item 3. LEGAL PROCEEDINGS. ------------------ The Trust is not a party, nor are its properties subject to, any material litigation or environmental regulatory proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth fiscal quarter ended January 31, 1999. PART II ------- Item 5. MARKET FOR THE TRUST'S SHARES AND RELATED SECURITY HOLDER MATTERS. ------------------------------------------------------------------ Until February 23, 1999, the Trust's Shares of Beneficial Interest were traded on the New York Stock Exchange under the symbol "IHT". Since April 7, 1999, the Trust's Shares of Beneficial Interest have been traded on the American Stock Exchange under the symbol "IHT". On May 12, 1999, the Trust had 2,341,374 shares outstanding and 638 holders of record. -8- 9 The following table sets forth, for the periods indicated, the high and low sales prices of the Trust's Shares of Beneficial Interest, as quoted by the New York Stock Exchange, as well as dividends declared thereon:
Fiscal Year 1999 High Low Dividends ---------------- ---- --- --------- First Quarter 4 3/8 4 1/16 -- Second Quarter 5 3/8 4 1/4 -- Third Quarter 5 1/2 3 13/16 .10 Fourth Quarter 3 15/16 2 15/16 -- Fiscal Year 1998 High Low Dividends ---------------- ---- --- --------- First Quarter 5 3/8 4 1/2 .10 Second Quarter 4 7/8 4 3/8 .05 Third Quarter 5 4 5/8 -- Fourth Quarter 4 11/16 4 1/4 --
The Trust intends to maintain a conservative dividend policy to facilitate internal growth prior to issuing additional equity. Once the Trust secures the proceeds of the issuance of additional equity, a review of its dividend policy is planned. In fiscal 1998, the Trust paid dividends of $.10 and $.05 in the first and second quarters, respectively, and, in fiscal 1999, paid a dividend of $.10 in the third quarter. Since its organization in 1971, the Trust has paid a dividend or dividends each year. Item 6. SELECTED FINANCIAL DATA. ------------------------ The following selected financial data of the Trust for the five fiscal years ended January 31, 1999, has been derived from the audited financial statements of the Trust. The financial statements of the Trust for the four fiscal years ended January 31, 1998 were audited by Arthur Andersen LLP, independent public accountants. The financial statements of the Trust for the fiscal year ended January 31, 1999 were audited by KPMG LLP, independent public accountants. All of the data should be read in conjunction with the respective financial statements and related notes included herein.
1999 1998 1997 1996 1995 Total revenues $ 9,909,758 $ 1,421,979 $3,915,506 $ 5,430,006 $ 6,592,051 Net income (loss) $ (193,071) $ (573,509) $ (888,365) $(7,554,351) $ 670,945 Earnings (loss) per share-basic and diluted $ (.10) $ (.56) $ (.87) $ (7.40) $ .66 Cash dividends paid and declared per share $ .10 $ .15 $ .40 $ .50 $ .80 Total assets $67,804,770 $43,619,639 $6,416,123 $24,555,330 $45,165,356 Bank and other borrowings $36,924,834 $22,428,880 $2,300,000 $10,795,000 $16,810,000
-9- 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------------------------------------------- Overview On January 31, 1998, the Trust contributed $2,081,000 to the Operating Partnership in exchange for a 13.6% general partner interest therein. The Trust is the sole general partner of the Operating Partnership. The Operating Partnership issued limited partnership interests representing 86.4% of the Operating Partnership to acquire six hotel properties from various entities. In addition, through RRF Sub Corp., the Trust issued 647,231 Shares of Beneficial Interest in exchange for all of the outstanding shares of a corporation controlled by James F. Wirth and his wife which owned the InnSuites Hotels Scottsdale/El Dorado Park Resort located in Scottsdale, Arizona. Effective February 1, 1998, the Operating Partnership acquired 100% of the ownership interests in the InnSuites Hotels Tucson St. Mary's located in Tucson, Arizona for $10,820,000. The Operating Partnership assumed $7,803,000 in mortgage debt and other obligations and issued 669,933 Class B limited partnership units to James F. Wirth and his wife (of which 28,800 units were subsequently paid to third parties as advisory fees), who each owned a 50% equity ownership interest in the InnSuites Hotels Tucson St. Mary's. On April 29, 1998, the Operating Partnership acquired the InnSuites Hotels San Diego for $5,148,000. The Operating Partnership invested $1,448,000 in cash and became obligated for $3,700,000 in seller financing in the form of two promissory notes secured by mortgage trust deeds on the property. Effective June 1, 1998, the Operating Partnership acquired 100% of the ownership interests of the InnSuites Hotels Buena Park/Anaheim for $7,100,000. The Operating Partnership assumed $4,116,754 in mortgage debt and other obligations and issued 681,739 limited partnership units to James F. Wirth and Steven S. Robson (of which 13,304 units were subsequently paid to a third party as an advisory fee), who each held a 50% equity ownership interest in the InnSuites Hotels Buena Park/Anaheim. On August 11, 1998, the Trust satisfied a $2.65 million participating mortgage obligation related to the Ontario Hospitality Properties Limited Partnership and caused the Operating Partnership to issue 133,492 Class B Units in the Operating Partnership to James F. Wirth and his affiliates for their respective interests. Having completed the acquisitions of the Hotels and having satisfied the Ontario participating mortgage, at January 31, 1999 the Trust held a 17% interest in nine of the Hotels through its sole general partner interest in the Operating Partnership and 100% of the Scottsdale hotel through RRF Sub Corp. In order for the Trust to qualify as a REIT, neither the Trust nor the Operating Partnership can operate the Hotels. Therefore, each of the Hotels is leased to the Initial Lessee pursuant to a Percentage Lease. Each Percentage Lease obligates the Initial Lessee to pay rent equal to the greater of the minimum rent or a percentage rent based on the gross revenues of each of the Hotels. The Initial Lessee is owned 9.8% by the Management Company, an entity owned by Mr. Wirth and his wife. The Trust's principal source of revenue is lease payments pursuant to the Percentage Leases. The Initial Lessee's ability to make payments to the Operating Partnership pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels. Therefore, management believes that a discussion of the pro forma operating results of the Initial Lessee and the historical operating results of the Hotels is important to an understanding of the business of the Trust. The following discusses (i) the historical results of the Trust for the years ended January 31, 1999 and January 31, 1998; (ii) the Trust's pro forma results of operations for the years ended January 31, 1998 and January 31, 1999; (iii) the Initial Lessee's pro forma results of operations for the years -10- 11 ended December 31, 1997 and December 31, 1998; and (iv) the historical results of the Initial Lessee for the years ended December 31, 1996 and December 31, 1997. General Results of operations are best explained by three key performance indicators: occupancy, average daily rate (calculated as total room revenue divided by number of rooms sold) (known as "ADR"), and revenue per available room (calculated as total room revenue divided by number of rooms available) (known as "REVPAR"). Increases in REVPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs. Increases in REVPAR attributable to increases in ADR are accompanied by increases in limited categories of operating costs, such as management fees and franchise and license fees. The following table sets forth key indicators for all of the Hotels combined (which includes the hotels under renovation), and are useful in understanding the underlying changes in the percentage rent for the Trust during the pro forma years ended January 31, 1998 and 1999.
ALL HOTELS (INCLUDES HOTELS UNDER RENOVATION) YEAR ENDED JANUARY 31, ---------------------- KEY FACTORS(1) 1999 1998 1997 -------------- -------- -------- --------- Occupancy 61.4% 60.6% 57.3% Average Daily Rate (ADR) $66.21 $63.88 $63.50 Revenue Per Available Room (REVPAR) $40.65 $38.70 $36.41
(1) No assurance can be given that the trends reflected in this data will continue or that Occupancy, ADR and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions. Results of Operations of the Trust for the years ended January 31, 1999 and January 31, 1998 During the fiscal year ended January 31, 1998, the Trust terminated its previous wrap-around mortgage business and disposed of its final real estate asset, an office building in Chicago which was sold in the third quarter of fiscal 1998. As a result of a change in investment focus, the Trust indirectly acquired the seven Initial Hotels on January 31, 1998. Results of operations for the Trust for the fiscal year ended January 31, 1999 reflected one full-year of operations of the Initial Hotels, plus additional full- or partial-year operations of the three hotels acquired during fiscal 1999. -11- 12 Total revenue of the Trust for the twelve months ended January 31, 1999 was $9,909,758 in its first full-year of operations. Of this revenue, rent revenue from the Hotels totaled $9,886,008. Included in this amount was rent revenue attributable to the Scottsdale hotel of $699,997. Interest income for the period was $23,750. For the fiscal year ended January 31, 1998, the Trust reported a loss of $(573,509) or $(.56) per share. For the fiscal year ended January 31, 1999, the Trust reported a loss of $(193,071) or $(.10) per share. While the revenues of the Trust increased significantly from $1,421,979 for the fiscal year ended January 31, 1998 to $9,909,758 for the fiscal year ended January 31, 1999, the Trust reported a net loss of $(193,071). That total net loss, however, was reduced from a net loss of $(573,509) in fiscal 1998. The results for the fiscal year ended January 31, 1999 included multiple fourth quarter charges, resulting from the recognition of a provision for uncollectable receivables ($900,000), net charge necessary to terminate the advisory agreement between the Operating Partnership and MARA ($499,000), and the recognition of expenses relating to stock options ($184,000). In addition, unusual legal and professional fees are included in fiscal 1999 expenses. Without the aforementioned fourth quarter charges, the Trust's earnings per share for the fiscal year ended January 31, 1999 would have improved by $.16 per share to a net income of $.06 per share for the year. Pro Forma Results of Operations of the Trust The unaudited pro forma financial information set forth below for the Trust is presented as if the Hotels had been acquired as of February 1, 1997. The pro forma financial information is not necessarily indicative of what actual results of operations of the Trust would have been assuming the Hotels had been acquired as of February 1, 1997, nor does it purport to represent the results of operations for future periods. -12- 13
PRO FORMA YEAR ENDED JANUARY 31, 1998 1999 ------------ ------------ (UNAUDITED, IN THOUSANDS) Percentage Lease Revenue .................... $ 9,929 $ 10,409 Interest Income ............................. 55 24 ------------ ------------ Total Revenues ..................... 9,984 10,433 ------------ ------------ Interest Expense on Mortgage and Other Notes Payable ...................... $ 2,536 $ 2,958 Depreciation and Amortization ............... 2,512 2,364 General and Administrative .................. 1,429 4,001 Real Estate and Personal Property Taxes and Casualty Insurance and Ground Rent . 1,133 1,269 Minority Interest ........................... 2,115 27 ------------ ------------ Total Expenses and Minority Interest 9,725 10,619 ------------ ------------ Net Income Attributable to Shares of Beneficial Interest ................ $ 259 $ (186) ============ ============ Net Income Per Share-basic and diluted ...... $ .25 $ (.10) ============ ============
For the year ended January 31, 1999, the Trust had pro forma revenues of $10.4 million from the Percentage Leases that would have been in place at the Hotels. The Trust had $24,000 in interest income compared to $55,000 in interest income from mortgage investments in 1998 due to loan repayments during fiscal 1999. Expenses included interest expense related to the mortgage notes payable, notes payable to banks and notes payable to affiliated parties. Interest expense increased by $422,000 in fiscal 1999 compared to fiscal 1998 due to refinancing costs of capital improvements and the acquisition of new properties. Net income to shareholders (after minority interest) decreased to a pro forma $(186,000) from $259,000 due to increased general and administrative expenses such as legal and accounting fees and charges relating to allowances for uncollectable rent receivable, the termination of an advisory agreement with MARA, and charges for stock option grants. For the year ended January 31, 1998, the Trust had pro forma revenues of $9.9 million from the Percentage Leases that would have been in place at the Hotels. The Trust also had $55,000 in interest income from mortgage notes which were repaid during the fiscal year. Expenses included interest expense related to the mortgage notes and notes payable to an affiliated party. Pro Forma Results of Operations of the Initial Lessee The unaudited pro forma financial information set forth below for the Initial Lessee is presented as if the acquisition of the Hotels and the beginning of the relevant lease years had occurred on January 1, 1997. The pro forma financial information is not necessarily indicative of what actual results of operations of the Initial Lessee would have been assuming the acquisition of the Hotels had occurred on January 1, 1997, nor does it purport to represent the results of operations for future periods. -13- 14 INITIAL LESSEE PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 (UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
1997 1998 PRO FORMA PRO FORMA INITIAL INITIAL LESSEE LESSEE ----------- ----------- REVENUES: Room revenue $ 23,901 $ 25,259 Food and beverage revenue 1,463 1,299 Other revenue 898 1,664 -------- -------- Total Revenues 26,262 28,222 -------- -------- EXPENSES: Departmental expenses of Hotels: Room 7,345 8,966 Food and beverage 1,614 1,147 General and administrative 3,257 2,854 Advertising and promotion 1,165 2,116 Utilities 1,489 1,626 Management fees 958 667 Franchisor royalties and other charges 836 797 Repairs and maintenance 1,597 1,894 Real estate and personal property taxes, insurance, and ground rent 106 106 Percentage Lease payments 9,847 10,342 -------- -------- Total Expenses 28,214 30,515 -------- -------- PRO FORMA INCOME (LOSS) $ (1,952) $ (2,293) ======== ========
The following table sets forth certain combined pro forma financial information for the Initial Lessee, as a percentage of revenues, for the periods indicated.
PRO FORMA YEAR ENDED DECEMBER 31, ----------------------- FINANCIAL DATA 1997 1998 ----- ----- Room revenue 91.0 89.5 Food and beverage revenue 5.6 4.6 Other revenue 3.4 5.9 ----- ----- Total revenue 100.0 100.0 ----- ----- Departmental and other expenses 69.5 71.1 Real estate and personal property taxes, insurance and rent 0.4 0.4 Percentage rent 37.5 36.7 ----- ----- Net income (7.4) (8.1) ===== =====
Comparison of actual results for the years ended December 31, 1998 and 1997. For the year ended December 31, 1998, the Initial Lessee had pro forma total revenues of $28.2 million compared to $26.3 million for the year ended December 31, 1997, an increase of $1.9 million (7.5%). This was due to increases in occupancy from 60.6% for the twelve months ended January 31, 1998 to 61.4% for the twelve months ended January 31, 1999 and an increase in ADR from $63.88 to $66.21 for the same respective periods. Total expenses increased $2.3 million from $28.2 million in the year ended December 31, 1997 to $30.5 million in the year ended December 31, 1998. The decreases in the categories of expenses shown above were consistent with the change in the ownership structure after the formation transactions, with the underlying ownership companies having holdings of property, furniture, fixtures and equipment. The increases in the categories of expenses shown above were consistent with increased occupancy. The increase in advertising and promotion was due to enhancement of the "Suite Concept" and the increase in percentage lease payments was due to increased revenues at the Hotels. Room costs and overhead were high due to the ongoing multi-year refurbishment program of the Hotels. The larger increase in expenses of $2.3 million as compared to the $2.0 million increase in revenues resulted in a $2.3 million loss in the year ended December 31, 1998 as compared to the $2.0 million loss for the year ended December 31, 1997. Room revenues increased $1.4 million, or 5.7%, from 1997 to 1998. This was driven by increases in ADR at almost all of the Hotels, along with an increase in occupancy. These increases were attributable to the general improvement in the business travel and tourism industries, lack of any significant new competition in the markets were the Hotels operate and the InnSuites' refurbishment program. The continuation of InnSuites' focus on maximizing REVPAR by focusing on increasing ADR while improving occupancy during this period had a significant effect on revenues. Departmental and other expenses grew by $1.8 million, or 6.4%, between the years because of increased occupancy. These costs increased as a percentage of revenues from 69.5% in 1997 to 71.1% in 1998. As previously mentioned, promotion and advertising costs grew faster than revenues, primarily to integrate the new Hotels which represented a 60% increase in the InnSuites System based on the number of suites. Net income decreased by $341,000 from $(1,952,000) in 1997 to $(2,293,000) in 1998 due to the acquisition, integration and refurbishment of the Hotels. Mr. and Mrs. Wirth's management and trademark corporations have agreed to subordinate their receipt of management fees and trademark fees from the Initial Lessee, to the extent that Flagstaff has not generated sufficient operating cash flow to meet its $250,000 minimum annual rent payment in 1999, 2000 and 2001. The elimination of the maintenance expense associated with refurbishment and Mr. Wirth's subsidy of Flagstaff should enable the Initial Lessee to generate a positive cash flow. -14- 15 Historical Results of Operations of the Initial Lessee INNSUITES HOTELS, INC. STATEMENT OF OPERATIONS
DECEMBER 31, ------------------------------- 1997 1996 ---- ---- Revenue from hotel operations: Room revenue $18,800,566 $17,613,618 Food and beverage revenue 519,440 197,064 Other revenue 828,022 513,143 ----------- ----------- Total Revenues 20,148,028 18,323,825 ----------- ----------- Expenses: Department expenses: Rooms 5,610,906 4,629,652 Food and beverage 462,514 487,367 General and administrative 3,925,820 3,305,161 Advertising and Promotion 1,415,732 919,887 Utilities 933,994 894,121 Repairs and maintenance 2,473,074 2,621,472 Real estate, personal property taxes, and insurance 911,870 876,816 Interest expense 1,853,800 1,569,850 Depreciation 1,225,898 1,147,326 ----------- ----------- Total Expenses 18,813,608 16,451,652 ----------- ----------- Income before extraordinary items 1,334,420 1,872,173 Gain on early extinguishment of debt -- 307,000 ----------- ----------- Net Income (loss) $ 1,334,420 $ 2,179,173 =========== ===========
-15- 16 Comparison of actual results for the years ended December 31, 1997 and 1996 Room revenues increased $1.19 million, or 6.7%, from 1996 to 1997. As can be seen by the growth of REVPAR, revenues as reported were driven by increases in ADR which occurred at almost all of the Hotels, along with an increase in occupancy. This was attributable in part to the general improvement in the business travel and tourism industries, lack of any new competition in the markets where the Hotels operate and InnSuites' refurbishment program which was substantially completed at the existing Hotels. The continuation of InnSuites' focus on maximizing REVPAR by focusing on increasing ADR while maintaining stable occupancy during this period had a significant effect on revenues. Departmental and other expenses increased by $1.96 million or 15.3% between the years, primarily because of an increase in maintenance expenses associated with the refurbishment program, the expansion of food service, increases in payroll costs, and general inflationary pressures. These costs increased slightly as a percentage of revenues from 70.2% in 1996 to 73.6% in 1997, as expenses grew faster than revenues, in particular, payroll costs. Depreciation and amortization expense increased slightly between 1996 and 1997. Interest expense increased $283,950 in 1997 compared to 1996 due to refinancing costs of capital improvements. Income before extraordinary items decreased $537,753 primarily due to increased expenses discussed above. The gain on early extinguishment of debt of $307,000 recorded in May 1996 related to the extinguishment of debt at the Flagstaff property. No gain or loss from the extinguishment of debt were recognized in 1997. EBITDA declined $447,000 or 7.8% from 1996 to 1997. This was attributable to increases in expenses during the periods. Liquidity and Capital Resources The Trust, through its ownership interest in the Operating Partnership, will have its proportionate share of the benefits and obligations of the Operating Partnership's ownership interests in the Hotels. The Trust's principal sources of cash to meet its cash requirements, including distributions to its shareholders, will be its share of the Operating Partnership's cash flow. The Operating Partnership's principal source of revenue will be rent payments under the Percentage Leases. The Initial Lessee's obligations under the Percentage Leases are unsecured and its ability to make rent payments to the Operating 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 Initial Lessee to generate sufficient cash flow from hotel operations. During the fourth quarter of fiscal 1999, the Trust recorded a $900,000 charge to operations as a provision for bad debts. This charge reflects the Trust's assessment of the collectibility of its receivables which primarily consists of rent receivable from the Initial Lessee, based on an evaluation of the Initial Lessee's future cash flows. -16- 17 Beyond the 4% reserve for refurbishment and replacements set aside annually, an additional $140,000 for the Nova Front Desk Systems to be installed in 1999 in response to potential computer systems problems associated with the Year 2000, and $450,000 in anticipated refurbishing costs at the recently acquired InnSuites Hotels San Diego, the Trust has no present commitments for extraordinary capital expenditures. 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 Internal Revenue Code to the extent that working capital and cash flow from the Trust's investments are insufficient to make the required distributions. The terms of the line of credit discussed below permit borrowings for that purpose, but impose certain limitations on the Trust's ability to engage in other borrowings. On April 16, 1998, the Trust obtained a $12 million Credit Facility from Pacific Century Bank to assist it in its funding of the acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are secured by first mortgages on three of the Hotels. The Trust has drawn $11.3 million from its line of credit, which charges interest at a variable interest rate. By its terms, the Credit Facility will expire in approximately two years, subject to renewal. The terms of the Credit Facility require the Trust to maintain a net worth of not less than $15 million and, as of the end of each fiscal quarter, maintain a debt to net worth ratio of not greater than 1.50 to 1.0, a net operating income to debt service relating to encumbered properties ratio of not less than 1.25 to 1.0, and a net operating income to debt service ratio of not less than 1.30 to 1.0. The Trust may prepay the Credit Facility, subject to a prepayment penalty of $250 plus a yield-maintenance penalty. During the term of the Credit Facility the Trust may not further encumber its collateral, sell its collateral, change the nature of its business, or unreasonably suspend its business. The Trust obtained waivers for certain debt covenant violations occurring as of January 31, 1999. Management has commenced negotiating with the Trust's lenders to modify such covenants. The Trust may seek to increase the amount of its Credit Facility, 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 under the Credit Facility or other borrowings or from the proceeds of additional issuances of Shares of Beneficial Interest or other securities. There is no agreement or understanding to invest in any other properties, and there can be no assurance that the Trust will successfully acquire or develop additional hotels. The Operating Partnership will contribute to a Capital Expenditures Fund on a continuing basis, from the rent paid under the Percentage Leases, an amount equal to 4% of the Initial Lessee's revenues from operation of the Hotels. The Capital Expenditures 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 Operating Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the fiscal year ended January 31, 1999, the Hotels spent approximately $2.3 million for capital expenditures, excluding hotel acquisitions. The Trust considers the majority of these improvements to -17- 18 be revenue producing and therefore these amounts have been capitalized and are being depreciated over their estimated useful lives. The Hotels also spent $6.7 million during the period from January 1, 1996 through December 31, 1998 on repairs and maintenance and these amounts have been charged to expense as incurred. Inflation The Trust's revenues initially will be based on the Percentage Leases which will result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust initially will be relying entirely on the performance of the Hotels and the Initial Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Initial Lessee in particular, can change room rates quickly, but competitive pressures may limit the Initial Lessee's ability to raise rates faster than inflation. The Trust's largest fixed expense is the depreciation of the investment in Hotel properties. The Trust's variable expenses, which are subject to inflation, represented approximately 40.1% of pro forma revenues in fiscal 1999. These variable expenses (general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent) are expected to grow with the general rate of 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. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or 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. Year 2000 Compliance The Year 2000 problem is the result of computer programs having been written using two digits instead of four digits to define the applicable year. Any of the Trust's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could potentially result in a system failure or miscalculations, causing disruptions of operations and normal business activity. The Trust and the Initial Lessee have upgraded their computer accounting programs and the Initial Lessee is completing the installation of a new property management system along with necessary hardware. These new systems have been warranted to be Year 2000 compliant. The Trust has estimated the total cost which will be incurred in connection with these installations to be approximately $400,000, which will be capitalized and amortized over seven years. To date, the Trust has already spent $260,000 toward the completion of these installations and anticipates completing the project by September 1999. The Trust believes that such costs will not result in a material adverse effect on its financial condition or results of operations. -18- 19 While these new systems represent virtually all of the Trust's computer systems, the Trust and the Initial Lessee cannot predict the effect of the Year 2000 problem on vendors, customers and other entities with which the Trust and the Initial Lessee transact business, and there can be no assurance that the effect of the Year 2000 problem on such entities will not adversely affect the Trust's or the Initial Lessee's operations. Although the Trust is not aware of any threatened claims related to the Year 2000, the Trust may become subject to litigation arising from such claims, and depending on the outcome, such litigation could have a material adverse effect on the Trust. It is not clear whether the Trust's insurance coverage would be adequate to offset these and other business risks related to the Year 2000. In the event of any failure of any of the computer systems, the Trust and the Initial Lessee intend to perform necessary functions without the aid of the affected computer systems until any Year 2000 problems are resolved. Forward-Looking Statements Certain statements in this Annual Report 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 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, 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 Initial 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. 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 Exchange Act, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Annual Report relating to the operations of the Operating Partnership. Item 7a. 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. The 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. The Trust could enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. To date, the Trust has not entered into any such derivative transactions. The Trust's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts, weighted average interest rates, fair value and other terms required, by year of expected maturity, in order to evaluate the expected cash flows and sensitivity to interest rate changes.
Fiscal 2000 2001 2002 2003 2004 Thereafter Total Fair Value ------ ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate debt(1) $2,431,923 2,826,996 792,100 865,013 944,658 11,802,718 19,663,408 19,782,007 Average interest rate 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.25% Variable rate LIBOR debt(1) 112,249 11,421,670 130,586 140,848 151,918 3,290,973 15,247,644 15,247,644 Average interest rate 7.59% - - - - - 7.59% 7.59%
(1) The fair value of fixed rate debt and variable rate LIBOR debt were determined based on current rates offered for fixed rate debt and variable rate LIBOR with similar risks and maturities. The table incorporates only those exposures that exist as of January 31, 1999 and does not consider those exposures or positions which would arise after that date. Moreover, because firm commitments are not represented in the table above, the information presented therein has limited predictive value. As a result, the Trust's interest rate fluctuations will depend on the exposures that arise during the period and future interest rates. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- -19- 20 INNSUITES HOSPITALITY TRUST LIST OF FINANCIAL STATEMENTS AND SCHEDULE The following financial statements of InnSuites Hospitality Trust, formerly Realty ReFund Trust, are included in Item 8: KPMG LLP Independent Auditors' Report; Arthur Andersen LLP Report of Independent Public Accountants; Consolidated Balance Sheets - January 31, 1999 and 1998; Consolidated Statements of Operations - For the Years Ended January 31, 1999, 1998 and 1997; Consolidated Statements of Shareholders' Equity - For the Years Ended January 31, 1999, 1998 and 1997; Consolidated Statements of Cash Flows - For the Years Ended January 31, 1999, 1998 and 1997; and Notes to the Consolidated Financial Statements - January 31, 1999, 1998 and 1997. The following financial statement schedule of InnSuites Hospitality Trust is included in Item 14(a)1: Schedule III - Real Estate and Accumulated Depreciation. All other schedules are omitted, as the information is not required or is otherwise furnished. -20- 21 INDEPENDENT AUDITORS' REPORT The Shareholders and Trustees InnSuites Hospitality Trust: We have audited the accompanying consolidated balance sheet of InnSuites Hospitality Trust (an Ohio real estate investment trust) and subsidiary as of January 31, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InnSuites Hospitality Trust as of January 31, 1999, and the results of their operations and their cash flows for year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Phoenix, Arizona May 14, 1999 -21- 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Trustees, InnSuites Hospitality Trust We have audited the accompanying consolidated balance sheets of InnSuites Hospitality Trust (formerly Realty ReFund Trust) (an Ohio unincorporated business trust) and subsidiaries as of January 31, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended January 31, 1998 and 1997. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InnSuites Hospitality Trust, formerly Realty ReFund Trust, as of January 31, 1998, and the results of its operations and its cash flows for years ended January 31, 1998 and 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio May 12, 1998. -22- 23 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JANUARY 31 ---------- 1999 1998 ---- ---- ASSETS HOTEL PROPERTIES, net $65,509,187 41,241,241 CASH AND CASH EQUIVALENTS 420,935 2,378,398 RENT RECEIVABLE FROM AFFILIATE, net of $900,000 allowance 788,179 - INTEREST RECEIVABLE AND OTHER ASSETS 1,086,469 - ----------- ----------- TOTAL ASSETS $67,804,770 43,619,639 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY MORTGAGE NOTES PAYABLE $23,161,052 17,709,589 NOTES PAYABLE TO BANKS 11,300,000 155,000 OTHER NOTES PAYABLE 450,000 2,864,690 ADVANCES PAYABLE TO RELATED PARTIES 2,013,782 1,699,601 DUE TO LESSEE - 944,234 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,188,709 572,031 MINORITY INTEREST IN PARTNERSHIP 20,621,900 14,075,523 SHAREHOLDERS' EQUITY: Shares of beneficial interest without par value; unlimited authorization; 2,286,951 and 1,667,817 shares issued and outstanding in 1999 and 1998, respectively 8,069,327 5,598,971 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $67,804,770 43,619,639 =========== ===========
COMMITMENTS AND CONTINGENCIES (notes 7, 8, 9, 10, 13, 14, 20 and 21) See accompanying notes to consolidated financial statements -23- 24 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1999 1998 1997 ---- ---- ---- REVENUES: Rent revenue from affiliate $ 9,886,008 - - Interest income from loans receivable - - 1,077,757 Interest income from loan receivable from related party - - 560,139 Rental revenue from real estate held for sale - 1,367,366 2,277,610 Interest income 23,750 54,613 - ------------ ------------ ------------ 9,909,758 1,421,979 3,915,506 ------------ ------------ ------------ EXPENSES: Real estate depreciation 2,196,797 - - Real estate, personal property taxes, insurance and ground rent 1,221,255 - - General and administrative 2,748,623 - - Provision for write-down of loan receivable from related party - - 111,498 Provision for write-down of real estate held for sale - 1,085,000 Loss on sale of real estate - 35,620 - Loss on termination of advisory agreement 780,746 - - Interest on loans underlying wrap-around mortgages - - 150,184 Interest on loan underlying wrap-around mortgage to related party - - 89,223 Interest on mortgage notes payable 1,944,541 - - Loan fee amortization 39,346 - - Interest on notes payable to bank 608,052 - 381,368 Interest on note payable to related party 204,145 118,082 332,308 Fees to related party investment advisor 364,041 - 169,961 Legal expense to related party 2,400 84,000 56,000 Operating expenses of real estate held for sale - 1,379,389 2,085,807 Amortization of tenant improvements and deferred leasing commissions - 21,724 43,080 Other operating expenses - 356,673 299,442 ------------ ------------ ------------ 10,109,946 1,995,488 4,803,871 ------------ ------------ ------------ LOSS BEFORE MINORITY INTEREST (200,188) (573,509) (888,365) ------------ ------------ ------------ LESS: MINORITY INTEREST (7,117) - - ------------ ------------ ------------ NET LOSS $ (193,071) (573,509) (888,365) ============ ============ ============ NET LOSS PER SHARE - (Basic and Diluted) $ (.10) (.56) (.87) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - (Basic and Diluted) 1,921,902 1,022,359 1,020,586 CASH DIVIDENDS PER SHARE: Paid $.10 .15 .30 Declared .00 .00 .10 ---- ---- --- Total Cash Dividends per Share $.10 .15 .40 ==== ==== ===
See accompanying notes to consolidated financial statements -24- 25 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 31, 1999, 1998 AND 1997 BALANCE, JANUARY 31, 1996 $4,547,819 Net loss (888,365) Dividends (408,234) ---------- BALANCE, JANUARY 31, 1997 3,251,220 Net loss (573,509) Issuance of shares 3,074,348 Dividends (153,088) ---------- BALANCE, JANUARY 31, 1998 5,598,971 Debt converted to equity 2,646,690 Stock option plan 183,518 Net loss (193,071) Dividends (166,781) ---------- BALANCE, JANUARY 31, 1999 $8,069,327 ==========
See accompanying notes to consolidated financial statements -25- 26 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (193,071) (573,509) (888,365) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Stock compensation expense 183,518 Non-cash portion of loss on termination of advisory agreement 498,669 - - Provision for uncollectible receivable from related party 900,000 111,498 Provision for write-down of real estate held for sale - - 1,085,000 Minority interest (7,117) - - Real estate depreciation 2,196,797 - - Amortization of tenant improvements and deferred leasing commissions - 21,724 43,080 Amortization of deferred loan fees 39,346 (15,000) Increase in rent receivable (1,473,539) - - (Increase) decrease in interest receivable and other assets (905,613) 263,280 392,587 Decrease in due to Lessee (944,234) - - Decrease in accounts payable and accrued expenses (1,136,115) (676,274) (600,158) ------------ ------------ ------------ Net cash used in operating activities (841,359) (964,779) 128,642 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on mortgage loans receivable - - 14,569,483 Principal payments on mortgage notes payable - - (4,991,421) Improvements and additions to hotel properties (2,277,890) - - Acquisition of hotel (1,448,000) - - Borrowings on mortgage notes payable - - - Payments on other notes payable - - - Borrowings on other notes payable - - Payment of transaction costs - (334,854) - Proceeds from sale of real estate, net - 5,599,122 - Purchase of fee interest in land - - (287,758) ------------ ------------ ------------ Net cash provided by (used in) investing activities (3,725,890) 5,264,268 9,290,304 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage notes payable (19,388,537) - - Borrowings on mortgage notes payable 11,705,374 - - Payments on other notes payable (218,000) - - Bank borrowings 11,300,000 - 625,000 Bank repayments (155,000) - (6,920,000) Payment of dividends (166,781) (153,088) (408,234) Distributions to minority interest holders (781,451) - - Advances from related parties 1,235,628 - - Principal payments on advances payable to related parties (921,447) (2,300,000) (2,200,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities 2,609,786 (2,453,088) (8,903,234) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,957,463) 1,846,401 515,712 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,378,398 531,997 16,285 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 420,935 2,378,398 531,997 ============ ============ ============
See accompanying notes to consolidated financial statements -26- 27 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1999, 1998 AND 1997 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION: InnSuites Hospitality Trust (the Trust, or the Company) owns, directly or indirectly, ten hotels with 1,665 suites in Arizona and southern California. The hotels operate as InnSuites Hotels. Prior to the fiscal year ended January 31,1999, 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, which 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. (BPI), which owned a hotel located in Scottsdale, Arizona. These seven hotels are referred to as the Initial Hotels. The Initial Hotels, together with the hotels described in Note 4, 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. The Lessee is 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. At January 31, 1999, the Trust's general partnership interest in the Partnership was 17.2%. PARTNERSHIP AGREEMENT The Partnership Agreement 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 January 31, 1999, a total of 2,586,883 Class A limited partnership units were issued and outstanding. Additionally, 39,046 Class A limited partnership units were reserved for issuance to those partners who did not accept the formation exchange offer. As of January 31, 1999, a total of 5,246,364 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 limited partnership units outstanding at January 31, 1999 were to be converted, the limited partners in the Partnership would hold 2,586,883 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. BASIS OF PRESENTATION As sole general partner, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements of the Partnership are consolidated with the Trust and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated. -27- 28 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HOTEL PROPERTIES Hotel properties are stated at cost and are depreciated using the straight-line method over estimated lives of 40 years for buildings and improvements and seven years for furniture and equipment. In accounting for the acquisitions of the Initial Hotels discussed in Note 1, purchase accounting was applied. The historical carrying values of the assets and liabilities of BPI were adjusted to their respective fair values based upon the aggregate fair market value of shares of beneficial interest issued to acquire the outstanding shares of BPI. The Trust's purchase of its 13.6% general partnership interest in the Partnership and the Partnership's acquisition of interests in the Initial Hotels from third parties resulted in adjustments to the historical net carrying values of such hotel properties in amounts equal to 34% of the difference between the fair values and the historical net carrying values of the respective hotel properties. The Partnership's acquisition of interests in the Initial Hotels other than BPI held by Wirth and his affiliates did not result in purchase accounting adjustments to historical net carrying values as such transactions were between entities under common control. Hotels purchased subsequent to January 31, 1998 have been recorded at fair value. In the first quarter of fiscal 1997, the Trust adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Pursuant to this standard, long-lived assets to be disposed of are to be reported at the lower of carrying amount or fair value less costs to sell. Long-lived assets to be disposed of shall not be depreciated while being held for disposal. The Trust's real estate held for sale was within the scope of FAS No. 121. As the Trust established a $3,000,000 valuation allowance at January 31, 1997 to reduce the carrying value of the real estate held for sale to its estimated net realizable value, adoption of FAS No. 121 did not have a material impact on the Trust's financial position or results of operations except that no depreciation expense was recorded on the real estate held for sale during fiscal 1998. REVENUE RECOGNITION In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. In July 1998, the Task Force issued transition guidance stating that the consensus could be applied on a prospective basis or in a manner similar to a change in accounting principle. Effective August 1, 1998, the Company amended its percentage lease agreements to eliminate the annualization of interim hotel revenue. During the third quarter of fiscal 1999, accounting for contingent rent under EITF 98-9 was rescinded; the Trust believes that eliminating annualization of hotel revenue will provide for recognition of Percentage Rent more consistently with the generation of revenue from the Hotels. -28- 29 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 ALLOWANCE FOR UNCOLLECTED RECEIVABLES Financial instruments, which potentially subject the Trust to credit risk, primarily consist of rent receivable from an affiliate. The Trust periodically assesses the collectability of its receivables based on its evaluation of the Lessee's future cash flow available for payment. As a result, during the fourth quarter of fiscal 1999, the Trust recorded a $900,000 charge to operations as a provision for bad debt, which is reflected in the accompanying consolidated statements of operations. INVESTMENTS IN WRAP-AROUND MORTGAGES AND RELATED UNDERLYING LOANS In a wrap-around mortgage structure, the principal amount secured by the mortgage note held by the Trust was equal to the outstanding balance under the prior mortgage loan plus the amount of funds advanced by the Trust. The notes held by the Trust were subordinate to the underlying prior indebtedness. The Trust agreed with the borrower to make principal and interest payments to the holder of the existing prior mortgage, but only to the extent scheduled payments were received from the borrower and no other default existed. Generally, the Trust had the right to pay off the prior indebtedness and succeed to its priority. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for Impairment of a Loan." This standard allows a creditor to measure the impairment of a loan based on the fair value of the collateral if a loan is collateral dependent. FAS No. 118 "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures," issued in October 1994, amended FAS No. 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans. The Trust adopted the provisions of FAS Nos. 114 and 118 in fiscal 1996. See Note 5 for a discussion of the impairment of the Trust's loan on the Toledo, Ohio property. DIVIDEND AND DISTRIBUTIONS The Trust expects to pay dividends which are largely dependent upon the receipt of distributions from the Partnership. MINORITY INTEREST Minority interest in the Partnership represents the limited partners' proportionate share of the equity in the Partnership. Income or loss is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period. -29- 30 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 FAIR VALUE OF FINANCIAL INSTRUMENTS For disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Cash and cash equivalents, due to their short maturities, are carried at amounts that reasonably approximate fair value. For mortgage notes payable, notes payable to banks, other note payables and advances to related parties, the fair value is estimated by discounting the future cash flows using the current rates which would be available for similar loans having the same remaining maturities. EARNINGS (LOSS) PER SHARE In February 1997, FAS No. 128, "Earnings per Share" was issued which eliminated the concept of common stock equivalents and replaces "primary" and "fully diluted" earnings per share with "basic" and "diluted" earnings per share. Basic and diluted earnings per share have been computed based on the weighted-average number of shares outstanding during the periods. For the fiscal year ended January 31, 1999, there were Class A partnership units outstanding which are convertible to shares of beneficial interest of the Trust. Assuming conversion, the weighted-average of these shares of beneficial interest would be 2,510,216. These shares are anti-dilutive due to the loss for fiscal 1999. For fiscal 1998 and 1997, there were no dilutive or anti-dilutive securities. STOCK-BASED COMPENSATION The Trust accounts for its stock option plan in accordance with the provisions of SFAS No. 123, "Accounting for Stock-based Compensation" which permits entities to recognize as expense over the vesting period, the fair value of all stock based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to apply the provision of APB Opinion No. 25 "Accounting for Stock Issued to Employees and Related Operations" and provide pro-forma net income and pro-forma earnings per share and disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. The Trust has elected to apply the provisions of APB Opinion No. 25. CASH AND CASH EQUIVALENTS The Trust considers all highly liquid short term investments with original maturities of three months or less to be cash equivalents. INCOME TAXES The Trust has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. If the Trust qualifies for taxation as a REIT, the Trust generally will not be subject to Federal corporate income tax on that portion of its net income that is currently distributed to shareholders. Accordingly, no provision for income taxes has been included in the accompanying consolidated financial statements. For federal income tax purposes, the cash distributions paid to shareholders may be characterized as ordinary income, return of capital or capital gains. 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -30- 31 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 In July 1995, the Trust established a valuation allowance of $5,000,000 on its investment in the Toledo, Ohio wrap-around mortgage loan. The loan was retired in fiscal 1997 and an additional loss of $111,000 was recorded. In the fourth quarter of fiscal 1996, the Trust established a valuation allowance of $3,000,000 to write-down the Chicago real estate held for sale to its estimated net realizable value. The Trust recorded an additional valuation allowance of $1,085,000 at January 31, 1997 to further reduce the real estate held for sale to its estimated net realizable value. The building was sold during fiscal 1998. 3. HOTEL PROPERTIES Hotel properties as of January 31, 1999 and 1998 consist of the following:
1999 1998 Land $ 5,685,590 3,439,738 Building and improvements 54,331,878 31,395,305 Furniture and equipment 7,688,516 6,406,198 ----------- ----------- 67,705,984 41,241,241 Less accumulated depreciation 2,196,797 - ----------- ----------- $65,509,187 41,241,241 =========== ===========
Seven of the hotels are located in Arizona and three of the hotels are located in California and are subject to Percentage Leases as described in Note 12. 4. ACQUISITIONS Effective February 1, 1998, the Partnership acquired 100% of the ownership interests in the Tucson St. Mary's Hotel and Resort for $10,820,000. The Partnership issued 699,933 Class B limited partnership units to Wirth, and his spouse, who each held a 50% equity ownership interest in the Tucson St. Mary's hotel. Effective April 29, 1998, the Trust acquired a hotel property located in San Diego, California for an aggregate consideration of $5,148,000, which was funded with cash, proceeds from the Trust's credit facility and two promissory notes secured by mortgage trust deeds on the property. Effective June 1, 1998, the Partnership acquired 100% of the ownership of the InnSuites Hotels Buena Park for $7,100,000. The Partnership assumed $4,116,754 in mortgage debt and other obligations and issued 627,377 limited partnership units to Wirth and Steve S. Robson (of which 13,034 units were subsequently paid to a third party as an advisory fee), who each held a 50% equity ownership interest in the Buena Park hotel. Mr. Robson is a Trustee of the Trust. Wirth and his affiliates also received an additional 53,681 Class B limited partnership units as payment for debt owed to Wirth and his affiliates at time of acquisition. All of the aforementioned acquisitions have been accounted for as purchases. -31- 32 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 5. LOAN IMPAIRMENT In July 1995, the Trust recorded a $5,000,000 loss provision on its investment in the Toledo, Ohio wraparound mortgage loan. The owner of the property was pursuing, among other things, the sale of the property. As the Trust's loan was made on a nonrecourse basis, the Trust had written down its investment to reflect the estimated sale price of the property and the estimated net proceeds to be received by the Trust as repayment of its loan as of January 31, 1996. The commercial building that secured the loan was owned by a partnership of which a corporation owned by the former Chairman of the Trust was the general partner. The building was sold by the partnership in fiscal 1997. In connection with that sale, the Trust was released by the new owner from any claims or liabilities relating to that property, and the Trust released its rights to any obligations from the partnership. As a result, in the fourth quarter of fiscal 1997, the Trust recorded a $111,000 loss provision on the Toledo, Ohio loan based on its final actual net realized value. 6. REAL ESTATE HELD FOR SALE In July 1992, the Trust accepted title in lieu of foreclosure on a commercial building in Chicago, Illinois. At the time of title acceptance, the Trust recorded a provision to write down its investment to estimated net realizable value as it was the Trust's intention to sell the real estate. The carrying value of the investment increased as a result of considerable investment in building and tenant improvements. Based on both market conditions for similar commercial property in Chicago and the operating performance of the property, the Trust recorded a $3,000,000 provision in the fourth quarter of fiscal 1996 to reduce the carrying value of the property to its then estimated net realizable value. The amount of the write-down was based upon the Trust's best estimate at January 31, 1996 of the amount of net proceeds which would be realized upon sale of the real estate in the near term future. In the fourth quarter of fiscal 1997, the Trust entered into a contract to sell the Chicago building for $6,000,000. Accordingly, the Trust recorded an additional provision of $1,085,000 to reduce the carrying value of the real estate held for sale to its estimated net realizable value based upon a pending contract price and estimated costs associated with the potential sale. In the third quarter of fiscal 1998, the Trust sold the Chicago building and received approximately $6,000,000 before consideration of closing and other costs related to the sale. A loss of approximately $36,000 was recorded as a result of the sale. 7. MORTGAGE NOTES PAYABLE At January 31, 1999, the Trust had mortgage notes payable outstanding with respect to seven of the Hotels. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from April 2001 to August 2011. Interest rates on the mortgage notes at January 31, 1999 range from 7.6% to 10.25%. At January 31, 1999, two of the Hotels were not in compliance with certain debt covenants; however, the Trust obtained waivers from each of the lenders indicating that the respective loans would not be called as a result of defaults occurring through January 31, 1999. Management is currently in the process of revising these loan agreements to ensure on-going compliance. -32- 33 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 At January 31, 1998, the Trust had mortgage notes payable outstanding with respect to six of the Initial Hotels. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from fiscal 1999 to 2012. Interest rates on the mortgage notes at January 31, 1998 ranged from 8.50% to 9.75%. A portion of the mortgage notes payable are guaranteed by Wirth and certain of his affiliates. The net book value of properties securing the mortgage notes payable at January 31, 1999 and 1998 was $49,258,778 and $35,179,000, respectively. Scheduled minimum payments of mortgage notes payable as of January 31, 1999 are as follows:
FISCAL YEAR ENDED AMOUNT ----------------- -------- 2000 $2,319,172 2001 2,723,066 2002 922,686 2003 1,005,861 2004 1,096,576 Thereafter 15,093,691 ----------- $23,161,052 ===========
8. NOTES PAYABLE TO BANKS During the first quarter of fiscal 1999, the Trust established a $12,000,000 revolving line of credit with Pacific Century Bank. The credit facility requires, among other things, the Trust to maintain a minimum net worth, a specified coverage ratio of EBITDA to debt service, and a specified coverage ratio of EBITDA to debt service and fixed charges. Further, the Trust is required to maintain its franchise agreement at each of the hotel properties and to maintain its REIT status. At January 31, 1999, the Trust was not in compliance with certain debt requirements associated with the line of credit; however, the Trust obtained a waiver from the lender indicating that the line would not be called. Management is currently in the process of revising these covenants to ensure on-going compliance. In accordance with the line of credit agreement, the Trust may choose interest rates based on 1) Base Rate, as defined plus .5 basis points, 2) Treasury Bill Rate plus 2.75 basis points or 3) LIBOR Rate plus 2.75 basis points and requires quarterly interest-only payments. The line of credit is secured by the Scottsdale, Flagstaff, and Tucson Oracle hotel properties. The net book value of properties securing the line of credit totaled $16,250,409 at January 31, 1999. Borrowings under this line of credit at January 31, 1999 amounted to $11,300,000 and bear interest based on the LIBOR Rate plus 2.75 basis points (7.59% at January 31, 1999). The total principal balance is due April 2002. At January 31, 1998, the Trust had various lines of credit totaling $350,000 with outstanding balances totaling $155,000 at interest rates floating with the banks' respective reference rates plus 1.5% to 3.0%. -33- 34 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 9. OTHER NOTES PAYABLE In connection with the termination of an advisory agreement between the Partnership and Mid-America ReaFund Advisors, Inc. (the Advisor), as further described at Note 14, the Trust assumed the Advisor's outstanding debt totaling $450,000. The note bears interest at 7% and matures January 30, 2000. As of January 31, 1999, the Trust had not made the first principal payment of $225,000 and was in default; however, the Trust obtained a waiver from the parties whereby the loan would not be called. In February 1999, the Trust made the first principal payment on the loan. For the Ontario hotel, loan participation investors' rights to repayment were converted into the right to receive forty-five percent of the profits from any future sale of that hotel property, over a fixed base amount of approximately $4,100,000 and after payment of all outstanding liabilities. Other notes payable at January 31, 1998 include a contingent liability of $2,647,000 which represents the participants' original investment plus certain accrued interest and management's estimate of the potential liability upon a future sale of the hotel property. The balance consists of the original $1,950,000 of loan participation units subscribed to by investors, plus $745,000 of accrued but unpaid interest during the construction period, as defined. On August 11, 1998, the Trust satisfied its $2,647,000 participating mortgage obligation related to the Ontario hotel through the issuance of 423,687 shares of beneficial interest to former partners of Ontario Hospitality Properties Limited Partnership and 133,492 Class B limited partnership units in the Partnership to Wirth and his affiliates for their respective interests. Prior to the Formation Transactions, certain partners of the partnerships that previously owned the Initial Hotels sold their interests therein in exchange for notes. These notes are payable over 2 years. At January 31, 1998, $218,000 in principal amounts of such notes remain outstanding. During fiscal 1999, the notes were paid in full. 10. ADVANCES PAYABLE TO RELATED PARTIES Advances payable to related parties consists of funds provided to fund working capital and capital improvement needs. The aggregate amounts outstanding were approximately $2,014,000 and $1,700,000 as of January 31, 1999 and 1998, respectively. In March 1993, the Trust sold a $5,000,000 secured note to the former Chairman of the Trust, at par. The note bore interest at the prime lending rate and had a stated maturity date of August 1994. The Trust exercised its option to extend the maturity of the note. Pursuant to the terms of the note, the Trust made scheduled principal payments of $500,000 for each of the years ended January 31, 1997 and 1996. In addition, $1,700,000 of the proceeds from the repayment of the Fort Worth, Texas loan was utilized to reduce the note. The remaining $2,300,000 of the note was retired with proceeds from the sale of the Chicago property. -34- 35 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 11. DESCRIPTION OF CAPITAL STOCK Holders of the Trust's shares of beneficial interest are entitled to receive dividends when, and if declared by the Board of Trustees of the Trust out of funds legally available therefor. The holders of shares of beneficial interest, upon any liquidation, dissolution or winding-up of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The shares of beneficial interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of shares of beneficial interest do not have cumulative voting rights in the election of directors and do not have preemptive rights. 12. PERCENTAGE LEASE AGREEMENTS As previously stated, effective August 1, 1998, the Company amended its Percentage Leases modifying the interim calculations of percentage rent and the expiration dates of the agreements. The Percentage Leases have non-cancelable terms, which expire on January 31, 2008, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each Percentage Lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated on a quarterly basis by multiplying fixed percentages by the actual quarterly amounts of such gross revenues in excess of specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments beginning January 1, 1999, based on increases in the United States Consumer Price Index. Percentage rent applicable to food and beverage revenues is calculated as 5% of such revenue over a minimum threshold. Future minimum rentals (ignoring CPI increases) to be received by the Trust from the Lessee pursuant to the Percentage Leases for each of the next five years and in total thereafter are as follows: 2000 $6,850,000 2001 6,850,000 2002 6,850,000 2003 6,850,000 2004 6,850,000 Thereafter 27,400,000 ----------- $61,650,000 ===========
The Trust earned $9,886,008 in rent revenue during fiscal 1999 of which $3,324,933 was in excess of base rent. No percentage rent was earned in fiscal 1998 or 1997 from the Initial Hotels. 13. FEDERAL INCOME TAXES No provision for current or deferred income taxes has been made by the Trust. The Trust has elected to be a real estate investment trust (REIT) and is therefore subject to the requirements of Sections 856 to 860 of the Internal Revenue Code, all of the requirements of which management believes have been met for the years ended January 31, 1999 and 1998. As a REIT, the Trust normally distributes 95% of its taxable income to its shareholders. For the years ended January 31, 1999 and 1998, the Trust had a taxable income (loss) of approximately $250,000, before consideration of net operating loss carry forwards and ($4,000,000), respectively. In fiscal 1998, the primary difference between the timing of book provisions for write-downs and when such amounts are allowed as deductions for Federal income tax purposes is attributable to the foreclosure property described in Note 5. In fiscal 1998, the net tax deductions related to such property were $3,570,000 that related primarily to amounts that had been expensed in previous years for book purposes. In fiscal 1999, the primary differences between book loss and taxable income primarily relate to a provision for bad debts which is not deductible for tax purposes and excess book depreciation over tax depreciation. -35- 36 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 The total dividends per share applicable to operating results for the years ended January 31, 1999 and 1998, amounted to $.10 per share and $.15 per share, respectively. The Trust has an income tax net operating loss of approximately $13,533,000 of which $4,476,000 originated in fiscal 1993, $5,057,000 originated in fiscal 1997, and $4,000,000 originated in fiscal 1998. Net operating loss carryforwards expire beginning in fiscal 2008 and ending in fiscal 2013. During fiscal 1999, the Trust utilized approximately $250,000 in net operating loss carryforwards. The quarterly allocation of cash dividends paid per share and the characterization of dividends as either ordinary income or return of capital for individual shareholders' income tax purposes were as follows:
CALENDAR 1998 CALENDAR 1997 CALENDAR 1996 ------------- ------------- ------------- Ordinary Return Total Ordinary Return Total Ordinary Return Total Month Paid Income of Capital Paid Income of Capital Paid Income of Capital Paid - ---------- ------ ---------- ---- ------ ---------- ---- ------ ---------- ---- March $ - - - - .10 .10 - .10 .10 June - - - - .05 .05 - .10 .10 September - .10 .10 - - - - .10 .10 December - - - - - - - .10 .10 --- --- --- --- --- --- --- --- --- $ - .10 .10 - .15 .15 - .40 .40 === === === === === === === === ===
The tax status of distributions to shareholders in calendar 1999 will be dependent on the level of the Trust's earnings in that year. If current and accumulated earnings and profits of the Trust exceed dividends paid in calendar 1999, such dividends will represent ordinary income to the recipients irrespective of the net operating loss carryforward. 14. ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS On January 31, 1998, Wirth and his spouse purchased the stock of the Advisor which provided the administration of the day-to-day investment operations of the Trust and the Partnership. The Advisor was formerly owned by the former Chairman and President of the Trust. Under the terms of an advisory agreement between the Partnership and the Advisor, the Advisor received, subject to certain limitations, a monthly fee equal to 1/12 of 1% of invested assets, as defined in the advisory agreement, and an annual incentive fee equal to (a) 10% of the amount by which the net income of the Partnership exceeded 8% of the average net worth for the year and (b) 10% of any net realized capital gains less accumulated net realized capital losses, as defined. For any fiscal year in which operating expenses of the Partnership exceeded certain thresholds specified in the advisory agreement, the Advisor was required to refund to the Partnership the amount of such excess. For fiscal year 1997, operating expenses exceeded the specified thresholds by approximately $6,000. There was no fee to the Advisor during fiscal year 1998 due to the reduction in the Trust's investment in mortgage loans. During fiscal 1999, the Advisor received approximately $364,000 in fees. Effective January 1, 1999, the Partnership terminated its agreement with the Advisor in exchange for the Trust's assumption of $450,000 of outstanding notes, the issuance of 67,000 Class B limited partnership units valued at $2 per unit and the forgiveness of $85,331 in net liabilities. As a result, the Trust recorded a net $498,669 charge to operations resulting from $780,746 loss on termination of advisory agreement offset by $282,077 of forgiven fees to related party investment advisor. -36- 37 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 Wirth has an employment agreement with the Trust which expires in December 2007. The employment agreement provides that Wirth received no compensation from the Trust as long as the advisory agreement was in effect. However, pursuant to the terms of the employment agreement, since the Advisor no longer provides services to the Partnership or the Trust, Wirth will be compensated at an amount up to the same annual basis as the Advisor would have been compensated under the terms of the advisory agreement had it remained in effect. Wirth is currently being compensated, however, at a lesser rate of $110,000 a year. Certain employment agreements with the former Chairman and President of the Trust were terminated at January 30, 1998. 15. OTHER RELATED PARTY TRANSACTIONS The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement. Wirth is a 9.8% indirect shareholder of the Lessee. At January 31, 1998, the Trust had a payable to the Lessee of $944,000 primarily for the reimbursement of costs and expenses incurred on behalf of the Trust. 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. The Trust recorded provisions of approximately $2,400, $84,000 and $56,000 in fiscal years 1999, 1998 and 1997, respectively, for legal services provided by a law firm of which the former President of the Trust and another former Trustee are principals. The Toledo, Ohio loan investment was secured by a commercial building owned by a partnership of which the former Chairman of the Trust was the general partner. In September 1996, the Toledo, Ohio loan investment was converted from a wrap-around mortgage loan to a junior mortgage loan. Accordingly, the Trust's loan receivable from related party and loan payable underlying mortgage to related party were reduced by approximately $2,741,000, representing the balance of the underlying mortgage loan at the time the status of the Toledo loan was changed. In addition, a principal prepayment of $600,000 was received and approximately $401,000 of escrow funds held by the Trust was applied against the mortgage loan receivable balance. The remaining portion ($111,498) of the loan was written off in the fourth quarter of fiscal 1997. For the year ended January 31, 1997, the Trust earned approximately $560,000 of interest income on this loan. The Trust incurred interest expense of approximately $89,000 in connection with the related underlying loan payable for the year ended January 31, 1997. -37- 38 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Trust's significant financial instruments at January 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Mortgage notes payable $23,161,052 23,279,651 $17,709,589 18,103,824 Notes payable to banks 11,300,000 11,300,000 155,000 155,000 Other notes payable 450,000 450,000 2,864,690 2,864,690 Advances payable to related parties 2,013,782 2,013,782 1,699,601 1,699,601
17. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES In connection with the formation of the Partnership as of January 31, 1998, approximately $24,899,000 of historical net book value in hotel properties was contributed to the Partnership in exchange for Partnership units and the Partnership assumed approximately $16,844,000 of debt. As of January 31, 1998, the Trust acquired all of the outstanding shares of BPI in exchange for 647,231 shares of beneficial interest having an aggregate value of $3,074,000. In connection with the acquisition of the Buena Park hotel during the second quarter of fiscal 1999, approximately $4,544,000 of historical net book value in hotel properties was contributed to the Partnership in exchange for partnership units and the Partnership assumed approximately $4,103,000 of debt and other obligations. During the second quarter of fiscal 1999, several non-exchanging partners from the formation exchange offer exchanged their interests in the hotels for interests in the Partnership. The fair value in excess of the historical net carrying values of the respective hotels resulted in a write-up of $1,033,573. In connection with the acquisition of the San Diego hotel, $3,700,000 of the purchase price was satisfied through promissory notes payable to the sellers. -38- 39 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 As described in Note 9, the Trust satisfied its $2,647,000 participating mortgage obligation related to the Ontario hotel through the issuance of 423,687 shares of beneficial interest to former partners of Ontario Hospitality Properties Limited Partnership and 133,492 Class B limited partnership units in the Partnership to Wirth and his affiliates for their respective interests. Interest paid amounted to $2,395,000, $118,000 and $995,000 for fiscal years 1999, 1998 and 1997, respectively. 18. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The pro forma financial information set forth below is presented as if the Formation Transactions and the acquisitions of the hotels discussed in Note 4 had been consummated and leased as of February 1, 1997. The pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the Formation Transactions and the acquisitions had been consummated and all the Hotels had been leased as of February 1, 1997, nor does it purport to represent the results of operations for future periods.
(UNAUDITED, IN THOUSANDS) YEAR ENDED JANUARY 31, ----------- 1999 1998 ---- ---- RENT REVENUE FROM AFFILIATE $10,409 9,929 INTEREST INCOME 24 55 -------- -------- TOTAL REVENUE 10,433 9,984 -------- -------- INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE 2,958 2,536 ADVISORY FEE TO RELATED PARTY ADVISOR 381 627 DEPRECIATION AND AMORTIZATION 2,364 2,512 GENERAL AND ADMINISTRATIVE 3,620 802 REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY INSURANCE AND GROUND RENT 1,269 1,133 MINORITY INTEREST 27 2,115 -------- -------- TOTAL EXPENSES AND MINORITY INTEREST 10,619 9,725 -------- -------- NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $(186) 259 ======== ======== NET INCOME (LOSS) PER SHARE (basic and diluted) $(.10) .25 ======== ========
-39- 40 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 19. SUBSEQUENT EVENTS Certain investors converted 40,842 Class A limited partnership units in the Partnership into shares of beneficial interest. Effective March 15, 1999, Wirth made an unsecured loan to the Trust of $2 million, bearing interest at 7% per year. Interest only payments are due annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004. The Trust is using the proceeds to purchase general partnership units in the Partnership. Effective March 30, 1999, the Partnership's mortgage on the North Phoenix property was refinanced and an additional $1.75 million was borrowed. The original mortgage note was restructured to match the terms of the refinanced note, which bears interest at 8.25% and matures on April 1, 2014. Monthly principal and interest payments began on April 1, 1999. Effective April 2, 1999, the Trust contributed the Scottsdale property to the Partnership in exchange for 1,600,000 general partnership units. On April 2, 1999, the Partnership loaned the Trust approximately $2,615,000. Annual interest only payments are due in March of each year and are based on a 7% interest rate. The unpaid principal balance is due on April 2, 2006, its maturity. The Trust is using the proceeds to purchase general partnership units in the Partnership. The net effect of all of the above subsequent transactions increased the Trust's ownership percentage in the Partnership to 42%. 20. COMMITMENTS AND CONTINGENCIES One of the Hotels is subject to a non-cancelable lease expiring December 31, 2051. Total expense for the fiscal year ended January 31, 1999 was $70,000. Future minimum lease payments are as follows:
Fiscal Year Ended 2000 $70,000 2001 75,000 2002 75,000 2003 75,000 2004 75,000 Thereafter 3,755,000 ---------- $4,125,000 ==========
-40- 41 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 The Trust is obligated to make funds available to the Hotels for capital expenditures (the Reserve Fund), as determined in accordance with the Participating Leases. The Reserve Funds have not been recorded on the books and records of the Trust as such amounts are capitalized as incurred. The amount obligated under the Reserve Funds is 4% of the individual Hotel's total revenues. The nature of the operations of the Hotels exposes them to risks of claims and litigation in the normal course of their business. Although the outcome of these matters can not be determined, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position, operations or liquidity of the Hotels. The Trust is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust's consolidated financial position, results of operations or liquidity. 21. STOCK OPTION PLAN During fiscal 1999, the shareholders of the Trust adopted the 1997 Stock Incentive and Option Plan (the Plan) at the annual shareholder meeting. Pursuant to the Plan, the Compensation Committee may grant options to the Trustees, Trust officers, other key employees, consultants, advisors, and similar employees of the Trust's subsidiaries and affiliates. The number of options that may be granted is limited to 10% of the total Common Stock and Units (Class A and Class B) as of the first day of such year. On June 22, 1998, 405,400 options were granted under the Plan with an exercise price of $4.31. Each option -41- 42 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 is convertible into one share of beneficial interest. The per share compensation value of the stock options is $1.26 using the Black-Scholes options-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 37.5%, risk-free interest rate of 5% and expected life of 2.5 years. As the stock options were granted for non-employees of the Trust, the options are regarded as compensation to contractors and the Trust may not apply APB Opinion 25 in accounting for the compensation cost. In applying SFAS No. 123, total compensation expense using the Black-Scholes fair value is $510,804. The Trust recognized $183,518 of compensation expense for the options in the current year. Stock option activity during the 1999 fiscal year is as follows:
NUMBER OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE ------- -------------- Balance at January 31, 1998 - - Granted 405,400 $4.31 Exercised - - Forfeited 15,300 4.31 Expired - - Balance at January 31, 1999 390,100
As of January 31, 1999, no options were exercised and the entire balance of the 390,100 options remains outstanding. -42- 43 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED JANUARY 31, 1999, 1998 AND 1997 22. QUARTERLY RESULTS (UNAUDITED) The following is an unaudited summary of the results of operations, by quarter, for the fiscal years ended January 31, 1999 and 1998. Management believes that all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of such interim results have been included. The results of operations for any interim period are not necessarily indicative of those for the entire fiscal year.
QUARTER ENDED ------------- FISCAL 1999 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 - ----------- -------- ------- ---------- ---------- Total revenues $3,782,584 2,021,597 2,936,504 1,169,073 ========== ========== ========== ========== Total revenues less interest expense on mortgage loans and operating expenses, and amortization expense of real estate held for sale $3,154,072 1,565,900 2,483,259 761,986 ========== ========== ========== ========== Net income (loss) $ 435,169 (99,816) 45,425 (573,849) ========== ========== ========== ========== Income (loss) per share- basic and diluted $ .26 (.06) .02 (.27) ====== ====== ====== ====== Dividends declared per share $ .00 .00 .10 .00 ====== ====== ====== ======
QUARTER ENDED ------------- FISCAL 1998 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 - ----------- -------- ------- ---------- ---------- Total revenues $558,933 545,926 262,507 54,613 ======== ======== ======== ======== Total revenues less interest expense on mortgage loans and operating expenses, and amortization expense of real estate held for sale $ 14,423 55,036 (127,379) (187,447) ======== ======== ======== ======== Net loss $(90,973) (48,889) (246,200) (187,447) ======== ======== ======== ======== Loss per share - basic and diluted $ (.09) (.05) (.24) (.18) ====== ====== ====== ====== Dividends declared per share $ .05 .00 .00 .00 ====== ====== ====== ======
-43- 44 SCHEDULE III INNSUITES HOSPITALITY TRUST AND SUBSIDIARY REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF JANUARY 31, 1999
Cost Capitalized Gross Amounts at Initial Cost Subsequent to Which Carried at to Trust Acquisition Close of Period ---------------------------- ---------------------------- ------------------------- Buildings and Building and Buildings and Encumbrances Land Improvements Land Improvements Land Improvements -------------- ---------------------------- ---------------------------- ------------------------- InnSuites Hotels Phoenix Best Western Phoenix, Arizona $ 2,709,223 $ 418,219 $ 2,969,640 $ - $ 28,451 $ 418,219 $ 2,998,091 InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 2,483,903 686,806 6,580,276 - 98,233 686,806 6,678,509 InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) - - 5,891,258 - 72,580 - 5,963,838 InnSuites Hotels Yuma Best Western Yuma, Arizona 3,665,601 251,649 5,478,057 - 136,411 251,649 5,614,468 Holiday Inn Airport Ontario Hotel and Suites Ontario, California 3,566,809 1,633,064 5,450,872 - 71,228 1,633,064 5,522,100 InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) - 100,000 1,915,664 - 233,193 100,000 2,148,857 InnSuites Hotels Tucson St. Mary's Tucson, Arizona 3,947,644 900,000 8,964,608 - 244,586 900,000 9,209,194 Buena Park Suite Hospitality Buena Park Suites Buena Park, California 3,368,778 645,852 5,775,026 - 203,120 645,852 5,978,146 InnSuites Hotels San Diego Hospitality San Diego, California 3,419,094 700,000 3,972,785 - 86,512 700,000 4,059,297 InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) - 350,000 6,074,398 - 84,980 350,000 6,159,378 -------------- ---------------------------- ---------------------------- ------------------------- $ 23,161,052 $ 5,685,590 $ 53,072,584 $ - $ 1,259,294 5,685,590 $ 54,331,878 ============== ============================ ============================ =========================
Net Book Value Land and Depreciation -------------- Buildings in Income Total Accumulated and Date of Date of Statement is (A) Depreciation Improvements Construction Acquisition Computed --------------------------------------------------------------------------------- InnSuites Hotels Phoenix Best Western Phoenix, Arizona $ 3,416,310 $ 74,597 $ 3,341,713 1980 1998 40 years InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 7,365,315 165,735 7,199,580 1982 1998 40 years InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) 5,963,838 148,189 5,815,649 1981 1998 40 years InnSuites Hotels Yuma Best Western Yuma, Arizona 5,866,117 136,571 5,729,546 1982 1998 40 years Holiday Inn Airport Ontario Hotel and Suites Ontario, California 7,155,164 137,162 7,018,002 1990 1998 40 years InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) 2,248,857 49,423 2,199,434 1996 1998 40 years InnSuites Hotels Tucson St. Mary's Tucson, Arizona 10,109,194 277,173 9,832,021 1960 1998 40 years Buena Park Suite Hospitality Buena Park Suites Buena Park, California 6,623,998 89,647 6,534,351 1972 1998 40 years InnSuites Hotels San Diego Hospitality San Diego, California 4,759,297 75,301 4,683,996 1946 1998 40 years InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) 6,509,378 152,988 6,356,390 1980 1998 40 years ------------------------------------------ $ 60,017,468 $ 1,306,786 $ 58,710,682 ==========================================
(A) Aggregate cost for federal income tax purposes at January 31, 1999 is as follows: Land $ 5,566,892 Buildings and improvements 20,463,791 ------------- $ 26,030,683 ============== (B) These properties secure the $12 million Trust and Partnership line of credit. Reconciliation of Real Estate: Balance at January 31, 1998 $ 34,835,043 Acquisitions of Hotel Properties 23,923,131 Improvement to Hotel Properties 1,259,294 ------------- Balance at January 31, 1999 $ 60,017,468 ============= All acquisitions of hotel properties, other than approximately $1,448,000 in cash paid in connection with the purchase of the Buena Park Property, were acquired through the exchange of limited partnership units in the Partnership. Reconciliation of Accumulated Depreciation: Balance at January 31, 1998 $ -- Depreciation 1,306,786 ------------- Balance at January 31, 1999 $ 1,306,786 ============= -44- 45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- The Board of Directors InnSuites Hotels, Inc: We have audited the accompanying balance sheets of InnSuites Hotels System, the predecessor, as defined in Note 1 to the financial statements, as of December 31, 1997 and January 30, 1998 and InnSuites Hotels, Inc., as of December 31, 1998, and the related statements of operations, equity and cash flows for each of the two years in the period ended December 31, 1997 and the thirty days ended January 30, 1998 and the eleven months ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InnSuites Hotels System as of December 31, 1997 and January 30, 1998 and InnSuites Hotels, Inc., as of December 31, 1998, and the results of their operations, equity and cash flows for each of the two years in the period ended December 31, 1997 and the thirty days ended January 30, 1998 and the eleven months ended December 31, 1998, in conformity with generally accepted accounting principles. MICHAEL MAASTRICHT, CPA May 6, 1999 Phoenix, Arizona -45- 46 INNSUITES HOTELS, INC. BALANCE SHEETS
Predecessor --------------------------------------- As of As of As of December 31, 1997 January 30, 1998 December 31, 1998 ------------------- ------------------ --------------------- ASSETS INVESTMENT IN HOTEL PROPERTIES, at cost: Land $ 3,439,738 3,439,738 - Buildings and improvements 24,831,670 24,831,670 - Furniture and equipment 10,845,586 10,958,829 - --------------- --------------- --------------- 39,116,994 39,230,237 - Less - Accumulated depreciation 12,184,479 12,322,787 - --------------- --------------- --------------- Net investment in hotel properties 26,932,515 26,907,450 - Cash and cash equivalents 129,871 322,095 178,863 Accounts receivable 571,301 591,869 407,432 Payments on behalf of RRFLP - - - Loans to affiliates - - 5,000 Inventories 415,575 397,807 649,916 Other assets 295,440 121,691 213,237 Cash held in escrow 296,099 297,811 - Deferred expenses, net 252,430 248,227 - --------------- --------------- --------------- $ 28,893,231 28,886,950 1,454,448 =============== =============== =============== LIABILITIES AND COMBINED EQUITY Mortgage notes payable $ 17,776,627 17,709,589 - Accounts payable Trade 678,637 621,073 1,169,138 Affiliates 1,260,601 1,699,601 - Bank overdrafts 121,052 409,196 146,363 Partner's capital repurchase payable 275,366 218,063 - Lines of credit 131,000 155,000 - Percentage rent payable - - 482,013 Capital lease obligation 22,437 20,226 - Land lease payable 80,441 88,286 - Participation investors contingent liability 2,646,627 2,646,627 - Accrued expenses and other liabilities 867,267 1,622,317 847,657 --------------- --------------- --------------- 23,860,055 25,189,978 2,645,170 EQUITY 5,033,176 3,696,972 (1,190,722) --------------- --------------- --------------- $ 28,893,231 28,886,950 1,454,448 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. -46- 47 INNSUITES HOTELS, INC. STATEMENTS OF OPERATIONS
Predecessor ----------------------------------------------- Eleven Months Ended December 31, January 31, December 31, 1996 1997 1998 1998 ------------ ------------ ------------ ------------ Revenue from hotel operations: Room revenue $ 17,613,618 18,800,566 1,833,441 22,184,056 Food and beverage revenue 197,064 519,440 61,623 1,169,312 Other revenue 513,143 828,022 60,999 1,513,413 ------------ ------------ ------------ ------------ Total revenues 18,323,825 20,148,028 1,956,063 24,866,781 Expenses: Department expenses: Rooms 4,629,652 5,610,906 667,892 7,748,489 Food and beverage 487,367 462,514 84,590 943,327 General and administrative 3,305,161 3,925,820 1,393,290 3,795,975 Advertising and promotion 919,887 1,415,732 76,619 1,893,117 Utilities 894,121 933,994 90,416 1,431,429 Repairs and maintenance 2,621,472 2,473,074 233,804 1,391,274 Real estate, personal property taxes, and insurance 876,816 911,870 79,518 Percentage rent -- -- 9,160,058 Interest expense 1,569,850 1,853,800 137,580 -- Depreciation 1,147,326 1,225,898 110,155 -- Land lease -- -- 13,678 -- ------------ ------------ ------------ ------------ Total expenses 16,451,652 18,813,608 2,887,542 26,363,669 Income before extraordinary items 1,872,173 1,334,420 (931,479) (1,496,888) Extraordinary Items Gain on early extinguishment of debt 307,000 -- -- -- ------------ ------------ ------------ ------------ Net income (loss) $ 2,179,173 1,334,420 (931,479) (1,496,888) ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. -47- 48 INNSUITES HOTELS, INC. STATEMENTS OF EQUITY
GENERAL LIMITED Predecessor PARTNERS' PARTNERS' COMMON RETAINED COMBINED CAPITAL CAPITAL STOCK (1) EARNINGS EQUITY ---------- ---------- ---------- ---------- ---------- BALANCE, December 31, 1996 $ 56,032 8,049,434 205,000 96,734 8,407,200 NET INCOME 117,283 1,829,275 (612,138) 1,334,420 DISTRIBUTIONS (217,138) (2,699,213) (1,950,000) (4,866,351) PARTNERS' CAPITAL PURCHASES 157,907 157,907 ---------- ---------- ---------- ---------- ---------- BALANCE, December 31, 1997 (43,823) 7,337,403 205,000 (2,465,404) 5,033,176 NET INCOME (46,304) (722,215) (162,960) (931,479) DISTRIBUTIONS (23,211) (338,814) (42,700) (404,725) ---------- ---------- ---------- ---------- ---------- BALANCE, January 30, 1998 $ (113,338) 6,276,374 205,000 (2,671,064) 3,696,972 ========== ========== ========== ========== ==========
(1) Hulsey Hotels Corporation - Common stock, no par value, 1,000,000 shares authorized, 1,000,000 issued and outstanding (1) Buenaventura Properties, Inc. - Common stock, no par value, 10,000,000 shares authorized, 1,000,000 issued and outstanding The Company
PREFERRED COMMON RETAINED COMBINED STOCK (1) STOCK (2) EARNINGS EQUITY ------------ ------------ ------------ ------------ BALANCE, January 31, 1998 $ 250,000 1,000 1,621 252,621 ISSUANCE OF COMMON STOCK 53,545 53,545 NET LOSS (1,496,888) (1,496,888) ------------ ------------ ------------ ------------ BALANCE, December 31, 1998 $ 250,000 54,545 (1,495,267) (1,190,722) ============ ============ ============ ============
(1) Preferred stock, $1 par value, 100 shares authorized, 100 issued and outstanding. (2) Common stock, no par value, 100,000 shares authorized, 54,545 issued and outstanding. The accompanying notes are an integral part of these financial statements. -48- 49 INNSUITES HOTELS, INC. STATEMENTS OF CASH FLOWS
Predecessor -------------------------------------------- One month Eleven months Year Ended Ended Ended December 31, December 31, January 31, December 31, 1996 1997 1998 1998 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,179,173 1,334,420 (931,479) (1,496,888) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,175,804 1,264,424 114,361 - Gain on early extinguishment of debt (307,000) - - (Increase) decrease in: Accounts receivable 56,431 (226,419) (20,568) 402,627 Inventories (17,610) (68,323) 17,768 (156,268) Cash held in escrow - (30,039) (1,712) - Other assets (231,090) 581,474 173,749 (52,922) Payments on behalf of RRFLP - - - (683,694) Increase (decrease) in: Accounts payable 38,764 321,975 (57,564) 198,960 Accrued expenses (251,944) 737,618 791,045 34,818 Percentage rent payable - - - 1,765,227 ------------ ------------ ------------ ------------ Net cash provided by operating activities 2,642,528 3,915,130 85,600 11,860 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of furniture, fixtures, and equipment (753,741) (361,705) (113,243) - Guest room refurbishing (1,250,000) (565,471) - - Capitalization of partners' capital - (742,576) - - ------------ ------------ ------------ ------------ Net cash used by investing activities (2,003,741) (1,669,752) (113,243) - CASH FLOWS FROM FINANCING ACTIVITIES Payment of mortgage notes payable (1,612,687) (612,092) (60,147) - Refinancing of mortgage notes payable - (5,017,226) - - Payment of loans from affiliates 500,353 678,456 439,000 (355,000) Increase of mortgage notes payable 990,000 7,000,000 - - Increase in bank overdrafts - - 288,144 146,363 Purchases of partners' capital - (157,907) (57,303) - Distributions (969,375) (4,866,351) - - Distribution of REIT shares - - (404,725) - Line of credit (6,728) 24,000 - Loan fees (251,711) (29,000) - - Capital lease obligations - (24,838) (9,102) - Other (31,715) 291,382 - - Capitalization of common stock 200,000 - - 53,545 ------------ ------------ ------------ ------------ Net cash (used) provided by financing activities (1,175,135) (2,744,304) 219,867 (155,092) Net change in cash and cash equivalents (536,348) (498,926) 192,224 (143,233) Cash and cash equivalents at beginning of year 1,165,145 628,797 129,871 322,095 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year $ 628,797 129,871 322,095 178,863 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. -49- 50 INNSUITES HOTELS, INC. Notes to Financial Statements 1. BASIS OF PRESENTATION: The InnSuites Hotels System consists of the following full-service hotels:
NUMBER OF PROPERTY NAME LOCATION SUITES ------------- -------- --------- InnSuites Tempe/Airport ("Tempe") Tempe, Arizona 170 InnSuites Scottsdale ("Scottsdale") Scottsdale, Arizona 134 InnSuites Flagstaff Grand Canyon ("Flagstaff") Flagstaff, Arizona 134 InnSuites Phoenix Best Western ("Phoenix") Phoenix, Arizona 123 InnSuites Tucson Best Western ("Tucson") Tucson, Arizona 159 InnSuites Yuma Best Western ("Yuma") Yuma, Arizona 166 Holiday Inn Airport InnSuites Ontario ("Ontario") Ontario, California 150 InnSuites Tucson Saint Mary's ("St. Mary's") Tucson, Arizona 297 InnSuites San Diego ("San Diego") San Diego, California 147 InnSuites Buena Park ("Buena Park") Buena Park, California 185 --- Total suites 1,665 =====
InnSuites Innternational Hotels, Inc. ("InnSuites") and its affiliates, officers and employees were involved in the development of each of the above hotels, except Flagstaff, St. Mary's, San Diego, and Buena Park which were purchased January 1, 1996, February 1, 1998, April 30, 1998 and May 31, 1998, respectively, and have managed all of the InnSuites Hotels since their respective inceptions or purchase. The hotels with three exceptions were owned by partnerships ("InnSuites Partnerships") in which the shareholders of InnSuites and certain officers of InnSuites (collectively, "InnSuites Affiliates") had significant direct and indirect ownership interests. Flagstaff and Scottsdale were owned by corporations controlled by principals of InnSuites. San Diego was purchased from a third party. The partnerships and corporations were referred to collectively as the InnSuites System Entities ("predecessors"). -50- 51 INNSUITES HOTELS, INC. Notes to Financial Statements As of December 31, 1997, prior to the Formation Transaction, the InnSuites Entities were owned as follows:
ENTITY INTEREST --------------- INNSUITES THIRD AFFILIATES PARTY ---------- ----- InnSuites Tempe/Airport 46% 54% InnSuites Scottsdale 100% 0% InnSuites Flagstaff Grand Canyon 100% 0% InnSuites Phoenix Best Western 96% 4% InnSuites Tucson Best Western 28% 72% InnSuites Yuma Best Western 33% 67% Holiday Inn Airport InnSuites Ontario 100% 0% InnSuites Tucson Saint Mary's 100% 0% InnSuites San Diego 0% 100% InnSuites Buena Park 50% 50%
InnSuites Hospitality Trust (formerly Realty ReFund Trust) is an unincorporated Ohio real estate investment trust (the "REIT") which agreed to acquire equity interests in existing hotel properties on January 31, 1998 (the "Formation Transaction") and to consider selectively the purchase or development of additional hotels. The REIT acquired the general partnership interest, representing a 13.6% equity interest in RRF Limited Partnership (the "Partnership"), as of January 31, 1998. The partners and shareholders of the entities owning the InnSuites Hotels contributed their respective partnership and corporate interests to the Partnership, or a subsidiary of the REIT in exchange for cash, partnership interests or REIT stock on January 31, 1998. All of the InnSuites Hotels were leased to InnSuites Hotels, Inc. (the "Company") (formerly Realty Hotel Lessee Corp.)(the InnSuites Lessee) pursuant to operating leases (see Percentage Leases) which contain provisions for rent based on the revenues of the InnSuites Hotels. The Lessee is an affiliate of InnSuites. Management believes that these combined financial statements of the predecessor result in a more meaningful presentation of the InnSuites Hotel System businesses acquired by the Partnership or REIT and thus appropriately reflect the historical financial positions and results of operations of the predecessor of the Lessee. All significant intercompany balances and transactions have been eliminated. Effective with the Formation Transaction on January 31, 1998, the REIT purchased substantially all of the assets and liabilities of the predecessors. Subsequent activity of those assets and liabilities are reflected in the financial statements of the REIT which are presented elsewhere in this document. The financial statements of the Company (InnSuites Lessee), shown here, reflect the operations of the hotel operators since formation. Subsequent footnotes apply to the predecessor, the Company or both, as indicated. -51- 52 INNSUITES HOTELS, INC. Notes to Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounting Periods For annual reporting purposes, all of the InnSuites System Entities, the predecessor and the Company have been included in the accompanying financial statements based on a December 31 year-end. Hotel Properties Hotel properties were stated at cost. Depreciation was computed using primarily the straight-line method based upon estimated useful lives, 40 years for building and improvements, 7 years for furniture and equipment. The management of the Company reviews the hotel properties for impairment when events or changes in circumstance indicate the carrying amounts of the hotel properties may not be recoverable. When such conditions exist, management estimates the future cash flows from operations and disposition of the hotel properties. If the estimated undiscounted future cash flows from operations and disposition of the hotel properties are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property's estimated fair market value would be recorded and an impairment loss would be recognized. No such impairment losses have been recognized. Deferred Expenses Deferred expenses of the predecessor consisted principally of deferred loan costs. Deferred loan costs were amortized over the terms of the related loan agreements. The amortization of deferred loan costs of $42,187, $37,925, and $4,203 for the years ended December 31, 1996, 1997 and the month ended January 30, 1998 are included in interest expense in the accompanying predecessor statements of operations. Accumulated amortization of deferred expenses was $258,673 at December 31, 1997 and $262,876 at January 30, 1998. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist primarily of trade receivables. Credit evaluations of guest's accounts are performed regularly. The receivables are unsecured. Revenue Recognition Revenue is recognized as earned. Ongoing credit evaluations are performed and credit losses -52- 53 INNSUITES HOTELS, INC. Notes to Financial Statements are charged off when deemed to be uncollectible. Such losses have been minimal and within management's expectations. Income Taxes The predecessors were not subject to federal or state income taxes; however, they filed informational income tax returns and the partners and stockholders took income or loss of the InnSuites Partnerships and S-Corporations into consideration when filing their respective tax returns. The Company has a net operating loss for the year ended December 31, 1998, therefore, there is no provision or liability for income taxes. Management's Use of Estimates in the Preparation of Financial Statements 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Maintenance and Repairs Maintenance and repairs of the predecessor were charged to operations as incurred; major renewals and betterments were capitalized. The hotel properties had scheduled guest room refurbishing programs, the cost of which was expensed as incurred by the predecessor. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation were removed from the accounts, and the gain or loss was included in the determination of net income or loss. Advertising and Promotion The cost of advertising and promotion is expensed as incurred which approximates the time such advertising takes place. There are no capitalized advertising costs. Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less when purchased are considered to be cash equivalents. Management believes that the fair value of cash equivalents approximates carrying value due to the relatively short maturity of these instruments. -53- 54 INNSUITES HOTELS, INC. Notes to Financial Statements Inventories Inventories consisting primarily of linen, food, and beverages and gift store merchandise are stated at the lower of first-in, first-out cost or market. Cash Held in Escrow Cash held in escrow by the predecessor consisted of amounts for real estate taxes and property insurance remitted to the lenders which hold the mortgages on the hotel properties and amounts deposited for the replacement of hotel real and personal property pursuant to the terms of certain mortgage and franchise agreements. 3. MORTGAGE NOTES PAYABLE AND OTHER DEBT All debt of the predecessor was assumed by the REIT at the Formation Transaction. The predecessor's mortgage notes payable consisted of six notes secured by hotel properties. As of January 31, 1998, the notes ranged from $886,000 to $3,835,000 with interest rates from 8.5% to 9.75% and maturities dates ranging from February 1998 to August 2011. Interest paid on the notes, including interest on several lines of credit, was $1,527,663, $1,815,875 and $105,952 in the years ended December 31, 1996 and 1997, and one month ended January 31, 1998. 4. DEBT EXTINGUISHMENT In 1996 Flagstaff refinanced its existing mortgage indebtedness, realizing a net extraordinary gain of $112,780 and an extraordinary gain related to the forgiveness debt of $194,220 due to a related party. 5. RELATED PARTY TRANSACTIONS A substantial portion of the predecessor hotels' management functions were performed by two related management companies for a fee computed as specified in each hotel's management agreement. The management fee was based on a percentage of hotel revenues of 4.5%. In addition, the management companies had trademark agreements with the hotels, excluding Ontario which operated under licensing with Holiday Inns, for which the fees were .5% of revenues. They also operated an advertising trust to which the hotels contributed 1% of revenues. Certain properties paid different rates or no fees during certain periods. -54- 55 INNSUITES HOTELS, INC. Notes to Financial Statements For the eleven months ended December 31, 1998, InnSuites holds a management agreement for which fees are 2.5% of hotel revenues and InnSuites Licensing Corporation holds trademark agreements for which fees are from 1.25% to 2.5% of hotel revenues. The hotels pay advertising trust fees for purposes of centralized advertising programs to InnSuites, generally based on 1.5% of hotel revenues. The payable to affiliates represents amounts due primarily for working capital advances. There are no terms or covenants connected with the advances. The hotels paid fees to InnSuites Affiliates for these services as follows:
Predecessor Eleven ---------------------------------------------- Months Ended December 31, January 30, December 31, 1996 1997 1998 1998 --------- ------- ----------- ------------ Management fees $ 840,518 902,938 90,051 650,688 Trademark license fees 80,596 81,935 9,785 485,563 Advertising trust fees 189,231 201,296 16,594 380,819
6. COMMITMENTS AND CONTINGENCIES: Claims and Legal Matters Certain of the hotels are involved in claims and legal matters incidental to their business. In the opinion of management, the ultimate resolution of these matters will not have a material impact on the financial position or the results of operations of the hotels. Trademark License Agreements Under the terms of hotel trademark license agreements, monthly payments for trademark royalties and reservation and advertising services are due from the hotels. Fees are computed based upon a percentage of total revenues. At December 31, 1998, the trademark royalty fees are payable by the hotels from 1.25% to 2.5% of revenues to InnSuites Affiliates while the fees for advertising services are 1.5% of revenues. The franchise agreements expire in 2000. The Best Western and Holiday Inn hotels have additional franchise agreements in which fees generally approximate 3% of revenues for Best Western and 9% for Holiday Inn. -55- 56 INNSUITES HOTELS, INC. Notes to Financial Statements Percentage Lease Agreements The Percentage Leases have noncancellable terms which expire on January 31, 2008, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each Percentage Lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue is calculated by multiplying fixed percentages by the total amounts of such gross revenues in excess of specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments beginning January 1, 1999, based on the United States Consumer Price Index ("CPI"). Percentage rent applicable to food and beverage revenues is calculated as 5% of such revenues over a minimum threshold. Future minimum rentals (ignoring the CPI) to be received by the Partnership from the Lessee pursuant to the Percentage Lease follows:
January 31 ---------- 2000 $ 6,850,000 2001 6,850,000 2002 6,850,000 2003 6,850,000 2004 6,850,000 Thereafter 27,400,000 ---------- $ 61,650,000 ============
7. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1997, January 30, 1998 and December 31, 1998. Considerable judgement is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 8. CERTAIN PREDECESSOR MATTERS On January 31, 1998, the InnSuites System Entities were acquired by RRF Limited Partnership, the general partner of which is InnSuites Hospitality Trust, an unincorporated Ohio real estate investment trust ("REIT"). In accordance with the acquisition agreements, the InnSuites System -56- 57 INNSUITES HOTELS, INC. Notes to Financial Statements Entities were responsible for certain preacquisition costs, primarily professional fees, which were not reimbursed by the REIT and were not a part of the purchase price. These costs of $445,414 in 1997 and $651,198 in January 1998 were expensed and included in professional services. As part of the acquisition, the InnSuites System Entities purchased for $950,000 certain shares from the REIT's prior owners. It then distributed $404,725 in shares to the partners of the Partnership and $545,275 in shares to employees which is included in general and administrative expense in 1997 and January 1998 wages and salaries. The participation investors contingent liability of $2,647,000 consisting of $1,950,000 in original loan participation units plus approximately $700,000 of interest accrued during the construction period was assumed by the REIT at the formation date. Prior to the Formation Transactions, certain partners of the partnerships that previously owned the InnSuites System Entities sold their interests therein in exchange for notes. These notes were payable over 2 years. At January 30, 1998, $218,000 principal amounts of such notes was outstanding. Certain expense items in the predecessor financial statements have been reclassified to conform to the Company's presentation. -57- 58 Item 9. CHANGES IN ACCOUNTANTS. ----------------------- The Trust incorporates herein by reference its Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on March 25, 1999, relating to the resignation of Arthur Andersen LLP as the Trust's independent accountants, and its Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on April 22, 1999, relating to the appointment of KPMG LLP as the the Trust's independent accountants. PART III --------- Item 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST. --------------------------------------------- Trustees of the Trust The Trust incorporates herein by reference the information appearing under the caption "Election of Trustees" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about June 1, 1999. -58- 59 Executive Officers of the Trust The name, age (as of January 31, 1999), business experience during the past five years, and offices presently held by each of the Trust's executive officers are reported below. The Trust's By-Laws provide that officers shall hold office until their successors are duly elected and qualified and that any officer may be removed from office at any time by the Trust's Trustees. JAMES F. WIRTH: Age 52 ; Chairman, President and Chief Executive Officer of the Trust since January 30, 1998. Chairman of InnSuites International Hotels, Inc., Hospitality Corporation International and affiliated entities, owners and operators of hotels, since 1980. Chairman and President of Rare Earth Development Company, a real estate investment company, since 1973. MARC E. BERG: Age 46; Executive Vice President, Secretary and Treasurer of the Trust since February 10, 1999. Vice President - Acquisitions for the Trust from December 16, 1998 to February 10, 1999. Trustee since January 30, 1998. Consultant to InnSuites Hotels system and self-employed as a registered investment advisor since 1985. CHARLES F. SONNEBORN: Age 38; Chief Financial Officer of the Trust since May 18, 1999. Financial consultant to the Trust from May 3, 1999 to May 18, 1999. Chief Financial Officer and General Manager of Professional Chemicals Corporation, manufacturers, retail sellers and lessors of carpet cleaning equipment and chemicals, from June 1997 to April 1999. Chief Financial Officer and General Manager of Eastwood Company, direct marketers, distributors and retail sellers of automobile restoration tools and collectibles, from February 1995 to June 1997. Corporate Controller and Strategist for Group Dekko International, manufacturers and distributors of commercial and consumer electrical products, from August 1986 to February 1995. Section 16(a) Beneficial Ownership Reporting Compliance The Trust incorporates herein by reference the information appearing under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about June 1, 1999. Item 11. EXECUTIVE COMPENSATION. ----------------------- The Trust incorporates herein by reference the information appearing under the caption "Compensation of Trustees and Executive Officers" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about June 1, 1999. -59- 60 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------------------------------------- The Trust incorporates herein by reference the information appearing under the caption "Ownership of Common Shares" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about June 1, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- The Trust incorporates herein by reference the information appearing under the caption "Certain Transactions" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about June 1, 1999. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. ------------------------------------------------------------- Exhibits - -------- 3(a) Second Amended and Restated Declaration of Trust (incorporated by reference to Annex A of the Registrant's definitive 1998 Proxy Statement, filed with the Securities and Exchange Commission on May 15, 1998). 10(a) First Amended and Restated Agreement of Limited Partnership of RRF Limited Partnership dated January 31, 1998 (incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). 10(b)* Employment Agreement dated as of January 31, 1998, between the Trust and James F. Wirth. (incorporated by reference to Exhibit 10(b) of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998). 10(c) Formation Agreement among the Trust; MARA; Alan M. Krause; James H. Berick; Hospitality Corporation International; InnSuites Hotels, L.L.C.; James F. Wirth; Tucson Hospitality Properties, Ltd.; Yuma Hospitality Properties, Ltd.; Baseline Hospitality Properties, Ltd.; Northern Phoenix Investment Limited Partnership; Ontario Hospitality Properties Limited Partnership; Hulsey Hotels Corporation; and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on February 17, 1998). -60- 61 10(d) Contribution Agreement dated as of February 1, 1998, among James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on March 16, 1998). 10(e) Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated and filed with the Securities and Exchange Commission on May 14, 1998). 10(f) Contribution Agreement dated as of June 1, 1998, among James F. Wirth, Steven S. Robson and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 2, 1998). 10(g) Consent Agreement dated as of January 31, 1999, among RRF Limited Partnership, James F. Wirth, Gail J. Wirth, Alan M. Krause and James H. Berick. 10(h) Continuing Guaranty dated as of January 31, 1999, by RRF Limited Partnership. 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998). 27** Financial Data Schedule. 99.1 Form of Percentage Lease (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K. Financial Statement Schedules - ------------------------------- Not Applicable. Forms 8-K - --------- No Current Reports on Form 8-K were filed by the Trust during the fourth fiscal quarter ended January 31, 1999. -61- 62 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange Act of 1934, the Trust has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNSUITES HOSPITALITY TRUST Dated: May 26, 1999 By: /s/ James F. Wirth ----------------------------- James F. Wirth, Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: May 26, 1999 By: /s/ Marc E. Berg ----------------------------- Marc E. Berg, Executive Vice President, Secretary and Treasurer (Principal Accounting Officer) 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 Trust and in the capacities and on the dates indicated. /s/ James F. Wirth Dated: May 26, 1999 ----------------------------- James F. Wirth, Trustee, Chairman, President, and Chief Executive Officer /s/ Marc E. Berg Dated: May 26, 1999 ----------------------------- Marc E. Berg, Trustee, Executive Vice President, Secretary, and Treasurer /s/ Edward G. Hill Dated: May 26, 1999 ----------------------------- Edward G. Hill, Trustee /s/ Steven S. Robson Dated: May 26, 1999 ----------------------------- Steven S. Robson, Trustee -62- 63 Index of Exhibits - ----------------- Exhibit Number 3(a) Second Amended and Restated Declaration of Trust (incorporated by reference to Annex A of the Registrant's definitive 1998 Proxy Statement, filed with the Securities and Exchange Commission on May 15, 1998). 10(a) First Amended and Restated Agreement of Limited Partnership dated January 31, 1998 (incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). 10(b)* Employment Agreement dated as of January 31, 1998, between the Trust and James F. Wirth. (incorporated by reference to Exhibit 10(b) of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998). 10(c) Formation Agreement among the Trust; MARA; Alan M. Krause; James H. Berick; Hospitality Corporation International; InnSuites Hotels, L.L.C.; James F. Wirth; Tucson Hospitality Properties, Ltd.; Yuma Hospitality Properties, Ltd.; Baseline Hospitality Properties, Ltd.; Northern Phoenix Investment Limited Partnership; Ontario Hospitality Properties Limited Partnership; Hulsey Hotels Corporation; and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K dated and filed with the Securities and Exchange Commission on February 17, 1998). 10(d) Contribution Agreement dated as of February 1, 1998, between James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K dated and filed with the Securities and Exchange Commission on March 16, 1998). 10(e) Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K dated and filed with the Securities and Exchange Commission on May 14, 1998). 10(f) Contribution Agreement dated as of June 1, 1998, among James F. Wirth, Steven S. Robson and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 2, 1998). 10(g) Consent Agreement dated as of January 31, 1999, among RRF Limited Partnership, James F. Wirth, Gail J. Wirth, Alan M. Krause and James H. Berick. 10(h) Continuing Guaranty dated as of January 31, 1999, by RRF Limited Partnership. -63- 64 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998 filed with the Securities and Exchange Commission on May 18, 1998). 27** Financial Data Schedule. 99.1 Form of Percentage Lease (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K. -64- EX-10.G 2 EXHIBIT 10(G) 1 Exhibit 10(g) CONSENT AGREEMENT THIS CONSENT AGREEMENT is executed and delivered as of the 31st day of January, 1999 by JAMES F. WIRTH and GAIL J. WIRTH (collectively referred to herein as the "Wirths"), RRF LIMITED PARTNERSHIP, a Delaware limited partnership ("RRFLP"), JAMES H. BERICK ("Berick"), and ALAN M. KRAUSE ("Krause") (Krause and Berick are sometimes collectively referred to herein as the "Payees"). RECITALS -------- 1. The Wirths executed and delivered promissory notes to each of Krause and Berick on January 30, 1998, each note in the principal amount of Two Hundred Twenty-Five Thousand Dollars ($225,000) (herein collectively referred to as the "Wirth Promissory Notes"), in connection with the Wirths' acquisition of all of the capital stock of Mid-America ReaFund Advisors, Inc., an Ohio corporation ("MARA"), from the Payees pursuant to a Purchase Agreement dated January 30, 1998 (the "MARA Purchase Agreement"). Copies of the Wirth Promissory Notes are attached hereto as EXHIBIT A. 2. As security for the payment of the liabilities and obligations evidenced by the Wirth Promissory Notes, the Wirths also executed and delivered pledge agreements to each of Krause and Berick on January 30, 1998 (the pledge agreements collectively referred to herein as the "Pledge Agreements"), granting to each of the Payees a security interest in the capital stock of MARA acquired by the Wirths. Copies of the Pledge Agreements are attached hereto as EXHIBIT B. 3. The termination of the Advisory Agreement dated as of January 31, 1998 between RRFLP and MARA (the "Advisory Agreement") constitutes an event of default under Section 7(f) of each of the Pledge Agreements and, at the Wirths' request, Krause and Berick have each -1- 2 agreed to waive such defaults under their respective Pledge Agreements in consideration of the covenants and agreements set forth herein. 4. In consideration of such waiver by Krause and Berick, RRFLP has agreed unconditionally to guarantee the obligations of the Wirths under the Wirth Promissory Notes. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. CONFIRMATION OF INDEBTEDNESS. The Wirths hereby confirm to the Payees that the execution of this Consent Agreement affects no obligation, liability or agreement of the Wirths under the Wirth Promissory Notes, which obligations remain unmodified and in full force and effect as the joint and several obligations of the Wirths. 2. CONSENT TO TERMINATION OF ADVISORY AGREEMENT. Each Payee, in consideration of the covenants and agreements set forth herein, severally and not jointly (a) consents to the termination of the Advisory Agreement and (b) agrees to waive the resulting default under Section 7(f) of the respective Pledge Agreement to which he is a party. 3. RRFLP GUARANTEE OF OBLIGATIONS. In consideration of the Payees consent to the termination of the Advisory Agreement and their waiver of default under the Pledge Agreements, RRFLP hereby agrees to irrevocably guarantee to Payees and their successor and assigns the full and due performance by the Wirths of all of the terms, obligations, covenants, and agreements under the Wirth Promissory Notes, as evidenced by the guarantee of even date herewith and attached hereto as EXHIBIT C. 4. REQUIRED PREPAYMENT OF THE WIRTH PROMISSORY NOTES. In consideration of the Payees consent to the termination of the Advisory Agreement and their waiver of default under the Pledge Agreements, the Wirths hereby agree that the entire unpaid balance of the Wirth -2- 3 Notes and all accrued and unpaid interest thereon must be repaid within thirty (30) days of the receipt of cumulative gross proceeds of Ten Million Dollars ($10,000,000) or more by InnSuites Hospitality Trust, an Ohio unincorporated real estate investment trust (the "Trust"), from any one or more debt or equity offerings, whether public or private, of securities or obligations of the Trust. 5. ATTORNEYS' FEES. RRFLP agrees to pay the reasonable attorneys' fees incurred by both Krause and Berick in connection with the consummation of the transactions contemplated by this Agreement. Such payment shall be a condition to the effectiveness of this Consent Agreement. 6. SINGLE WAIVER. This waiver shall not apply to any other provisions of the Wirth Promissory Notes or any other provisions of the Pledge Agreements. The foregoing waiver is limited to its express terms and shall not be deemed a waiver of any other event of default or possible default which may have existed on or prior to the date hereof or which may arise hereafter under any provision of the Wirth Promissory Notes or the Pledge Agreements. Further, the granting of this waiver shall not be construed as an agreement or understanding by the Payees to grant any other waiver or other accommodation in respect to the Wirth Promissory Notes or the Pledge Agreements. 7. OTHER DOCUMENTS. Payees, for themselves and their successors and assigns, severally and not jointly, further agree, at RRFLP's request and expense but without further consideration, to prepare, execute, acknowledge and deliver to RRFLP or its designee such other instruments and acknowledgments, or take such further action as RRFLP may reasonably request, to effectuate the agreements contained herein. 8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. -3- 4 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Ohio. 10. COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties or their duly authorized officers or designees have executed and delivered this Agreement as of the date and year first above written. /s/ James H. Berick /s/ JAMES F. WIRTH - --------------------------- ------------------------------------- JAMES H. BERICK JAMES F. WIRTH /s/ Alan M. Krause /s/ Gail J. Wirth - --------------------------- ------------------------------------- ALAN M. KRAUSE GAIL J. WIRTH RRF LIMITED PARTNERSHIP By: INNSUITES HOSPITALITY TRUST, its Sole General Partner By: /s/ MARC E. BERG Marc E. Berg Executive Vice President and Secretary -4- EX-10.H 3 EXHIBIT 10(H) 1 Exhibit 10(h) CONTINUING GUARANTY WHEREAS, James F. Wirth and Gail J. Wirth (collectively, the "Makers") executed and delivered that certain promissory note dated January 30, 1998 in the face principal amount of $225,000 (as heretofore and hereafter amended, supplemented or replaced, the "Note") to JAMES H. BERICK, a resident of Cleveland, Ohio (together with his heirs, personal representatives and assigns as holders of the Note, the "Holder"); WHEREAS, in connection with certain transactions involving the Makers, the undersigned RRF LIMITED PARTNERSHIP, a Delaware limited partnership (the "Guarantor"), and Mid-America ReaFund Advisors, Inc., the Makers and the Guarantor have requested that the Holder enter into that certain Consent Agreement of even date herewith (the "Consent Agreement"); WHEREAS, without the Consent Agreement, certain transactions contemplated by the Makers and the Guarantor would constitute a default under the Note and entitle the Holder to accelerate the maturity of the indebtedness evidenced thereby and exercise various other remedies; and the Guarantor desires that no such default so arise and will derive substantial economic benefits as a result of the Consent Agreement; and WHEREAS, it is a condition precedent to the Holder's entering into the Consent Agreement and to its effectiveness against the Holder that the Guarantor execute and deliver this Guaranty; and the Guarantor desires that the Consent Agreement become effective; NOW, THEREFORE, in order to induce the Holder to enter into the Consent Agreement, and in consideration of the benefits expected to accrue to the Guarantor by reason thereof, and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby represents and warrants to, and covenants and agrees with the Holder, as follows: The Guarantor does hereby irrevocably and unconditionally guarantee to the Holder the punctual (i) payment of the full amount, when due (whether by demand, acceleration or otherwise), of the principal and interest on the Note, and any amendment or supplement thereto whether now outstanding or hereafter issued (including interest accruing thereon after the commencement of any case or proceeding under any federal or state bankruptcy, insolvency or similar law (a "Proceeding") whether or not a claim for such interest is allowable in such Proceeding ("Post-Petition Interest")), and (ii) payment and performance of all other obligations and liabilities of the Makers to the Holder under the Note and each of the other documents pursuant to which it is obligated (including, without limitation, the pledge agreement securing the Note), whether now or hereafter existing, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whether Page 1 of 8 2 matured or unmatured (including Post-Petition Interest) (all of the liabilities included in clauses (i) and (ii) of this paragraph are hereinafter collectively referred to as the "Guaranteed Obligations"). This is a guaranty of payment and performance and not of collection, and is the primary obligation of the Guarantor; and the Holder may enforce this Guaranty against the Guarantor without any prior pursuit or enforcement of the Guaranteed Obligations against the Makers, any collateral, any right of set-off or similar right, any other guarantor or other obligor or any other recourse or remedy in the power of the Holder. All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Holder at his office at 1350 Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114 or such other place as the Holder may hereafter designate in writing. The Guarantor hereby agrees to make all payments under or by virtue of this Guaranty to the Holder as aforesaid on demand. The Guarantor hereby waives (i) notice of acceptance of this Guaranty, notice of the creation, renewal or accrual of any of the Guaranteed Obligations and notice of any other liability to which it may apply, and notice of or proof of reliance by the Holder upon this Guaranty, (ii) diligence, protest, notice of protest, presentment, demand of payment, notice of dishonor or nonpayment of any of the Guaranteed Obligations, suit or taking other action or making any demand against, and any other notice to the Makers or any other party liable thereon, (iii) any defense based upon any statute or rule of law to the effect that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal, (iv) any defense based upon the Holder's administration or handling of the Guaranteed Obligations, except behavior which amounts to bad faith, and (v) to the fullest extent permitted by law, any defenses or benefits which may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with terms of this Guaranty. So far as the Guarantor is concerned, the Holder may, at any time and from time to time, without the consent of, or notice to, the Guarantor, and without impairing or releasing any of the Guaranteed Obligations hereunder, upon or without any terms or conditions and in whole or in part: 1. modify or change the manner, place or terms of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and this Guaranty shall apply to the Guaranteed Obligations as so modified, changed, extended, renewed or altered; 2. request, accept, sell, exchange, release, subordinate, surrender, realize upon or otherwise deal with, in any manner and in any order, (a) any other guaranty by whomsoever at any time made of the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto, and (b) any property by Page 2 of 8 3 whomsoever at any time pledged, mortgaged or otherwise encumbered to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset or right with respect thereto; 3. exercise or refrain from exercising any rights against the Makers or against any collateral or others (including, without limitation, any other guarantor) or otherwise act or refrain from acting; 4. settle or compromise any of the Guaranteed Obligations, and security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Makers to creditors of the Makers other than the Holder when, in the Holder's sole judgment, he considers such subordination necessary or helpful in the protection of his interest or the exercise of his remedies, including, without limitation, the sale or other realization upon collateral; 5. assign the Guaranteed Obligations or any rights related thereto in whole or in part; 6. apply in the manner determined by the Holder any sums by whomsoever paid or howsoever realized to any of the Guaranteed Obligations, regardless of what liability or liabilities of the Makers remain unpaid; and 7. amend or otherwise modify, consent to or waive any breach of, or any act, omission or default under the Note, or any agreements, instruments or documents referred to therein or executed and delivered pursuant thereto or in connection therewith. This Guaranty and the obligations of the Guarantor hereunder shall be valid and enforceable and shall not be subject to limitation, impairment or discharge for any reason (other than the payment in full of the Guaranteed Obligations), including, without limitation, the occurrence of any of the following, whether or not the Guarantor shall have had notice or knowledge of any of them: (i) any failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand of any right power or remedy with respect to the Guaranteed Obligations or any agreement relating thereto or with respect to any other guaranty thereof or security therefor, (ii) any waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including, without limitation, provisions relating to default) of the Note or any other agreement at any time executed in connection therewith, (iii) the Guaranteed Obligations or any portion thereof at any time being found to be illegal, invalid or unenforceable in any respect, (iv) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Page 3 of 8 4 Obligations, even though the Holder might have elected to apply such payment to the payment of all or any part of the Guaranteed Obligations, (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations, (vi) any defenses, set-offs or counterclaims which the Makers may allege or assert against the Holder in respect of the Guaranteed Obligations, (vii) the avoidance or voidability of the Guaranteed Obligations under the Bankruptcy Code or other applicable laws, (viii) any defense based upon the negligence of the Holder, including, without limitation, the failure to record an interest under any mortgage, the failure to perfect any security interest, or the failure to file a claim in any bankruptcy of the Makers or either of them or of any other guarantor, (ix) any defense based upon the impairment of any subrogation or reimbursement rights that the Guarantor might have, and (x) any other act or thing or omission which may or might in any manner or to any extent vary the risk of the Guarantor as an obligor in respect of the Guaranteed Obligations. The Guarantor makes the following representations and warranties, which shall survive the execution and delivery of this Guaranty: The execution and delivery of this Guaranty has been duly authorized by all necessary partnership action on the part of the general partner of the Guarantor and has been duly authorized by all necessary action of the board of trustees of such general partner. Neither the execution and delivery of this Guaranty nor the consummation of the transactions herein contemplated, nor compliance with the terms and provisions hereof, will contravene any provision of law, statute, rule or regulation to which the Guarantor is subject or any judgment, decree, award, franchise, order or permit, or will conflict or will be inconsistent with, or will result in any breach of, any of the terms, covenants or provisions of, or constitute a default under, or result in the creation or imposition of any lien, security interest, charge or other encumbrance upon any of the properties or assets of the Guarantor pursuant to the terms of any indenture, mortgage, deed of trust, agreement or other instrument to which the Guarantor is a party or by which it be bound or to which it may be subject, including, without limitation, the Guarantor's limited partnership agreement. Any and all rights and claims of the Guarantor against the Makers or any of their property, arising by reason of any payment by the Guarantor to the Holder pursuant to the provisions of this Guaranty, shall be subordinate and subject in right of payment to the prior and indefeasible payment in full of all Guaranteed Obligations to the Holder, and until such time, the Guarantor shall have no right of subrogation, contribution, reimbursement or similar right and hereby waives any right to enforce any remedy the Holder or the Guarantor may now or hereafter have against the Makers, any endorser of any other guarantor of all or any part of the Guaranteed Obligations of the Makers and any right to participate in, or benefit from, any security given to the Holder to secure any Guaranteed Page 4 of 8 5 Obligations. Any promissory note evidencing such liability of the Makers to the Guarantor shall be non-negotiable and shall expressly state that it is subordinated pursuant to this Guaranty. All liens and security interests of the Guarantor, whether now or hereafter arising and however existing, in any assets of the Makers or any assets securing Guaranteed Obligations shall be and hereby are subordinated to the rights and interests of the Holder in those assets until the prior and indefeasible payment in full of all Guaranteed Obligations to the Holder and termination of all financing arrangements between the Makers and the Holder. The Guarantor hereby agrees to defend, indemnify and hold harmless the Holder from and against any losses, costs or expenses (including, without limitation, reasonable attorneys' fees and litigation costs) incurred by the Holder in connection with the Holder's collection of any sum due hereunder or his enforcement of his rights hereunder. All notices, requests, demands or other communications hereunder shall be in writing, either by letter (delivered by hand or commercial delivery service or sent by certified mail, return receipt requested) or telegram, addressed as follows: If to the Guarantor: Suite 201 1625 E. Northern Avenue Phoenix, AZ 85020 Attn: James F. Wirth If to the Holder: 1350 Eaton Center 1111 Superior Avenue Cleveland, Ohio 44114 Any notice, request, demand or other communication hereunder shall be deemed to have been duly given when deposited in the mails, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, addressed as aforesaid. The Holder and any Guarantor may change the person or address to whom or which notices are to be given hereunder, by notice duly given hereunder. The Guarantor acknowledges that the Guarantor is relying upon the Guarantor's own knowledge and is fully informed with respect to the financial condition of each of the Makers. The Guarantor assumes full responsibility for keeping fully informed of the financial condition of the Makers and all other circumstances affecting the Makers' ability to perform their obligations to the Holder, and agrees that the Holder will have no duty to report to the Guarantor any information that Page 5 of 8 6 the Holder receives about the Makers' financial condition or any circumstances bearing on the Makers' ability to perform all or any portion of the Guaranteed Obligations, regardless of whether the Holder has reason to believe that any such facts materially increase the risk beyond that which the Guarantor intends to assume or has reason to believe that such facts are unknown to the Guarantor or has a reasonable opportunity to communicate such facts to the Guarantor. No delay on the part of the Holder in exercising any of his options, powers or rights, and no partial or single exercise thereof, whether arising hereunder, under the Note, or otherwise, shall constitute a waiver thereof or affect any right hereunder. No waiver of any such rights and no modification, amendment or discharge of this Guaranty shall be deemed to be made by the Holder or shall be effective unless the same shall be in writing signed by the Holder, and then such waiver shall apply only with respect to the specific instance involved and shall in no way impair the rights of the Holder or the obligations of the Guarantor to the Holder in any other respect at any other time. Whenever the Holder shall credit any payment to the Guaranteed Obligations or any part thereof, whatever the source or form of payment, the credit shall be conditional as to the Guarantor unless and until the payment shall be final and valid and indefeasible as to all the world. Without limiting the generality of the foregoing, the Guarantor agrees that if any check or other instrument so applied shall be dishonored by the drawer or any party thereto, or if any proceeds of collateral so applied shall thereafter be recovered by any trustee in bankruptcy or anyone else, the Holder in each case may reverse any entry relating thereto in his books and the Guarantor shall remain liable therefor even if the Holder may no longer have in his possession any evidence of the Guaranteed Obligations to which the payment in question was applied. This Guaranty and the respective rights and obligations of the Holder and the Guarantor hereunder shall be construed and enforced in accordance with the laws of the State of Ohio applicable to contracts made and to be performed wholly within such state. The Guarantor irrevocably consents that service of notice, summons or other process in any action or suit in any court of record to enforce this Guaranty may be made upon the Guarantor by mailing a copy of the summons to the Guarantor by certified or registered mail, at the address specified above. The Guarantor hereby waives the right to interpose counterclaims or set-offs of any kind and description in any such action or suit arising hereunder or in connection herewith. This Guaranty shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of the Holder and his heirs, personal representatives and assigns. This Guaranty embodies the entire agreement and understanding between the Holder and the Guarantor and supersedes all prior agreements and understandings relating to the subject matter hereof. If this Guaranty by the Guarantor is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect the validity and enforceability of any clause or provision not so held to be void, invalid or unenforceable. If this Page 6 of 8 7 Guaranty as to the Guarantor would be held or determined by a court or tribunal having competent jurisdiction to be void, invalid or unenforceable on account of the amount of its aggregate liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the aggregate amount of the liability of the Guarantor under this Guaranty shall, without any further action by the Guarantor, the Holder or any other person, be automatically limited and reduced to an amount which is valid and enforceable. The Guarantor (a) hereby irrevocably submits to the jurisdiction of the state courts of the State of Ohio and to the jurisdiction of the United States District Court for the Northern District of Ohio, for the purpose of any suit, action or other proceeding arising out of or based upon this Guaranty or the subject matter hereof brought by the Holder and (b) hereby waives, and agrees not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Guaranty or the subject matter hereof may not be enforced in or by such court and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such Ohio state or federal court. The Guarantor agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the Holder. Final judgment against the Guarantor in any such action, suit or proceeding may be enforced in other jurisdictions (a) by suit, action or proceeding on the judgment, or (b) in any other manner provided by or pursuant to the laws of such other jurisdiction; PROVIDED, HOWEVER, that the Holder may at his option bring suit, or institute other judicial proceedings, against the Guarantor in any state or federal court of the United States or of any country or place where the Guarantor or its property may be found. Without limiting the effect or intentions of the warrant of attorney contained in the following paragraph, THE GUARANTOR AND, BY HIS ACCEPTANCE OF THIS GUARANTY, THE HOLDER HEREBY IRREVOCABLY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE NOTE, OR THIS GUARANTY OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THE NOTE OR THIS GUARANTY AND THE RELATIONSHIPS THEREBY ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other statutory and common law claims. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS GUARANTY. In the event of litigation, this provision may be filed as a written consent to a trial by the court. Page 7 of 8 8 The Guarantor authorizes any attorney at law to appear in any Court of Record in the State of Ohio or in any other state or territory of the United States of America after the above indebtedness becomes due, whether by acceleration or otherwise, to waive the issuance and service of process, and to confess judgment or judgments against the Guarantor in favor of the Holder for the amount then appearing due together with costs of suit, and thereupon to waive all errors and all rights of appeal and stays of execution. The foregoing warrant of attorney shall survive any such judgment and should any such judgment be vacated for any reason, and the foregoing warrant of attorney nevertheless may thereafter be utilized for obtaining judgment or judgments. IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed as fully written above as of this 31st day of January, 1999. WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. RRF LIMITED PARTNERSHIP By: INNSUITES HOSPITALITY TRUST Its Sole General Partner By: /s/ Marc E. Berg ------------------------------------ Marc E. Berg Executive Vice President and Secretary EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF THE REGISTRANT AS OF JANUARY 31, 1999 AND 1998 AND THE STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE THREE YEARS ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-31-1999 FEB-01-1998 JAN-31-1999 420,935 0 1,874,648 0 0 0 65,509,187 0 67,804,770 0 59,735,443 0 0 0 8,069,327 67,804,770 0 9,909,758 0 0 10,109,946 0 0 (193,071) 0 (193,071) 0 0 0 (193,071) (.10) (.10) THE REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE THE CAPTIONS "TOTAL CURRENT ASSETS" AND "TOTAL CURRENT LIABILITITE" ARE NOT APPLICABLE.
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