10-K 1 j0383_10k.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 2001. [X] 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, 1615 E. Northern Avenue, Suite 102, 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 / / 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 April 26, 2001: $4,513,706. Number of shares of voting stock outstanding as of April 26, 2001: 2,149,384. 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, 2001, the Trust owned a 48.17% sole general partner interest in RRF Limited Partnership, a Delaware limited partnership (the "Partnership"). On January 31, 2001, the Partnership owned, directly or indirectly, eleven InnSuites(R) hotels located in Arizona, New Mexico, and southern California (all eleven InnSuites(R) hotels are hereinafter referred to as the "Hotels"). The Trust employs seven people. The Hotels feature 1,751 hotel suites and operate as moderate- and full-service hotels which apply a value studio and two-room suite operating philosophy formulated in 1980 by James F. Wirth, current Chairman, President and Chief Executive Officer of the Trust ("Mr. Wirth"). 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 amenities, such as 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. The Partnership leases the Hotels to InnSuites Hotels, Inc. (the "Lessee"). The Lessee pays rent to the Partnership pursuant to percentage lease agreements (the "Percentage Leases") providing for periodic rental payments based primarily upon the revenues of the Hotels. The Trust obtains income from cash distributions made by the Partnership and those distributions largely depend upon the Partnership's earnings under the Percentage Leases. Further affiliations involve managing the Hotels and licensing the InnSuites brand. Prior to February 1, 2001, the Lessee operated and managed all of the Hotels, with the assistance of InnSuites Innternational Hotels, Inc. ("InnSuites Innternational"). Pursuant to management contracts, the Lessee paid InnSuites Innternational an annual management fee of 2.5% of gross room and other revenues for property management services. Following the acquisition of the Lessee by the Trust effective February 1, 2001, the Lessee will operate and manage the Hotels with the assistance of Suite Hospitality Management Company (the "New Management Company") pursuant to substantially the same terms as the InnSuites Innternational management agreements. See "Acquisition of the Lessee by the Trust" below. The Lessee pays InnSuites Licensing Corp. (the "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. Effective October 12, 1999, the Partnership, the Lessee and InnSuites Innternational entered into an Intercompany Agreement (the "Intercompany Agreement") whereby, subject to certain terms and conditions, the Partnership will grant the Lessee a right of first refusal to lease, and InnSuites Innternational a right of first refusal to operate, any real property acquired by the Partnership. In return, the Partnership will be granted a right of first refusal to pursue opportunities presented to the Lessee or InnSuites Innternational to purchase investments in real estate, hotel properties, real estate mortgages, real estate derivatives or entities that invest in the foregoing. In connection with the -1- acquisition of the Lessee by the Trust, the Intercompany Agreement was amended effective February 1, 2001 to provide for the assumption by the New Management Company of the rights and obligations of InnSuites Innternational thereunder. See "Acquisition of the Lessee by the Trust" below. 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. On December 27, 1996, the Trust and Hospitality Corporation International ("HCI"), an Arizona corporation owned by Mr. 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"), executed a definitive Formation Agreement (the "Formation Agreement") whereby, through a series of transactions, the Initial Hotels were combined with the Trust. The Formation Agreement provided for the organization of the 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 Partnership acquired substantial interests in six of the Initial Hotels. The seventh hotel, located in Scottsdale, Arizona, was acquired directly by RRF Sub Corp., a then newly-formed Nevada corporation and wholly-owned subsidiary of the Trust. RRF Sub Corp. subsequently contributed the Scottsdale, Arizona hotel to the Partnership in exchange for general partnership interests therein. The Trust contributed $2,081,000 in cash to the Partnership to obtain its initial 13.6% sole general partner interest. The 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 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 Partnership subjects both general and limited partner units to restrictions on transfer. Hotel Acquisitions following the Formation Transactions Following the Formation Transactions, the Partnership acquired four additional all-suite hotels. First, effective as of February 1, 1998, the 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 Partnership acquired the Lafayette Hotel Ramada Inn & Conference Center located in San Diego, California. The Partnership paid $5,148,000 for this hotel property based on arms-length negotiations with the owners of that property. Third, the Partnership acquired the InnSuites Hotel located in Buena Park, California, -2- 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. Mr. 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. Fourth, the Partnership acquired the Best Western Airport Inn located in Albuquerque, New Mexico, effective August 30, 2000. The total consideration for the acquisition was $2,100,000 based on arms-length negotiations with the owners of the property. The Trust believes that the greatest opportunities for revenue growth and profitability will arise from the skillful management of the Trust's eleven existing Hotels plus the skillful management and repositioning of current and future acquired hotel properties. The Trust's primary business objectives are to maximize returns to its shareholders through increases in asset value and 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 in the in the southwestern region of the United States. Acquisition of the Lessee by the Trust In December 2000, the Lessee and the Trust established independent review groups to consider altering the current structure of the management and operations of the Hotels pursuant to the provisions of the REIT Modernization Act (the "RMA"). The RMA, among other things, permits the Trust to own the stock of a taxable REIT subsidiary ("TRS") that may engage in businesses previously prohibited by the Trust, including leasing hotels, provided that such hotels are managed and operated by independent third parties. Based on discussions between the independent review groups, and in consultation with its legal and accounting advisors, effective February 1, 2001, the Trust acquired all of the common and preferred equity stock of the Lessee for $10,000 in cash consideration. The Lessee was owned 23% by Marc E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of the Trust, and 9.8% by InnSuites Innternational, an affiliate of Mr. Wirth. Following the acquisition, the Lessee elected to be treated as a TRS under the RMA. As a result, the management contracts relating to the Hotels between the Lessee and InnSuites Innternational were terminated effective January 31, 2001 and new management contracts were entered into on substantially similar terms with the New Management Company, which qualifies as an independent third party manager and operator of the Hotels under the RMA. In return, the New Management Company assumed certain liabilities of InnSuites Innternational, including its obligations under the Intercompany Agreement. In connection with acquisition, the rate structures of the Percentage Leases for the Hotels were also amended to reflect current economic and market conditions and employees of the Lessee became employees of the New Management Company. The benefits to the Trust are anticipated to include a more direct relationship between the Hotels and the Trust, the inclusion of Lessee revenues in excess of required rent payments in the Trust's consolidated financial reports, the elimination of potential conflicts of interest and the reduction of certain administrative costs relative to the operation of the Hotels and the administration of the Percentage Leases. 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 Partnership. -3- 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 hotel investments in the southwest region of the United States. The Trust has a concentration of assets in the metropolitan Phoenix and Tucson, Arizona markets. In the Phoenix and Tucson, Arizona markets, the supply of hotel rooms has been increasing faster than the rate of demand. Supply rates also generally increased faster than demand rates in the Flagstaff and Yuma, Arizona markets. The Buena Park, San Diego and Ontario, California markets continue to support balanced supply and demand. The Trust and the 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 Partnership can prudently manage. Competition may generally reduce the number of suitable future investment opportunities available to the Trust and the Partnership and increase the bargaining power of owners seeking to sell their properties. Seasonality of the Hotel Business The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona, California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, due to 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. Financial Information See "Item 6 -- Selected Financial Data" herein for information regarding the Trust's revenues, net loss and total assets. Item 2. PROPERTIES. ---------- The Trust maintains its administrative offices at the InnSuites Hotels Centre in Phoenix, Arizona. The Trust does not directly own any real property. At January 31, 2001, the Partnership owned, directly or indirectly, eleven hotels. All of the Hotels are operated as InnSuites(R) Hotels, while four 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 New Management Company and operate in the following locations:
NUMBER YEAR OF CONSTRUCTION/ MOST RECENT PROPERTY OF SUITES ADDITION RENOVATION -------- --------- --------------------- ----------- InnSuites Hotels Airport Inn Albuquerque Best Western...................... 104 1975/1985 2000 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
-4- Holiday Inn Airport Hotel and Suites/Ontario(an InnSuites Hotel)........................ 150 1990 1996 InnSuites Hotels Flagstaff/ Grand Canyon.............................................. 118 1966/1972 1997 InnSuites Hotels Scottsdale/ El Dorado Park Resort..................................... 132 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 1,751 =====
See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" herein for a discussion of occupancy rates at the Hotels. See "Item 8 - Financial Statements and Supplementary Data" herein for a discussion of mortgages encumbering the Hotels. 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, 2001. 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 January 31, 2001, the Trust had 2,126,484 shares outstanding and 536 holders of record. 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 American or New York Stock Exchange, as well as dividends declared thereon:
Fiscal Year 2001 High Low Dividends ---------------- ---- --- --------- First Quarter 2 3/8 2 1/16 .01 Second Quarter 2 1/2 1 3/4 .01 Third Quarter 2 3/8 2 1/16 .01 Fourth Quarter 2 3/8 1 7/16 .01 Fiscal Year 2000 High Low Dividends ---------------- ---- --- --------- First Quarter 3 1/16 2 1/4 -- Second Quarter 3 1/8 2 5/16 -- Third Quarter 2 15/16 2 .01 Fourth Quarter 2 7/8 1 3/4 .01
The Trust intends to maintain a conservative dividend policy to facilitate internal growth. In fiscal year 2001, the Trust paid dividends of $.01 per share in the first, second, third and fourth quarters. In fiscal year 2000, the Trust paid dividends of $.01 per share in the third and fourth quarters and in fiscal year 1999, the Trust paid a dividend in the third quarter of $.10 per share. -5- Item 6. SELECTED FINANCIAL DATA. ----------------------- The following selected financial data of the Trust for the five fiscal years ended January 31, 2001, has been derived from the audited consolidated financial statements of the Trust. The consolidated financial statements of the Trust for the two fiscal years ended January 31, 1998 were audited by Arthur Andersen LLP, independent public accountants. The consolidated financial statements of the Trust for the three fiscal years ended January 31, 2001 were audited by KPMG LLP, independent public accountants. All of the data should be read in conjunction with the respective consolidated financial statements and related notes included herein.
2001 2000 1999 1998 1997 Total revenues $ 9,738,455 $ 9,546,181 $ 9,909,758 $ 1,421,979 $3,915,506 Net loss $(2,594,754) $ (951,811) $ (193,071) $ (573,509) $ (888,365) Loss per share-basic and diluted $ (1.12) $ (.40) $ (.10) $ (.56) $ (.87) Cash dividends paid and declared per share $ .04 $ .02 $ .10 $ .15 $ .40 Total assets $63,905,561 $65,305,519 $67,804,770 $43,619,639 $6,416,123 Bank and other borrowings $44,525,300 $38,746,662 $36,924,834 $22,428,880 $2,300,000
See "Item 1 - Business - Historical Operations and the Formation Transactions" herein for a discussion of the change in the nature of the business of the Trust. -6- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------- RESULTS OF OPERATIONS. --------------------- GENERAL The following discussion should be read in conjunction with the InnSuites Hospitality Trust consolidated financial statements and notes thereto and the InnSuites Hotels, Inc. financial statements and notes thereto appearing elsewhere in this Annual Report. The Trust is a real estate investment trust which owns the sole general partner interest in the Partnership. In order for the Trust to qualify as a REIT under prior provisions of the Code, neither the Trust nor the Partnership could operate the Hotels. Therefore, each of the Hotels was leased to, and operated by, the Lessee pursuant to a Percentage Lease. Each Percentage Lease obligates the Lessee to pay rent equal to the greater of a minimum rent or a percentage rent based on the gross revenues of each Hotel. The Lessee also holds the franchise agreement for each Hotel. Prior to February 1, 2001, the Lessee was owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by Mr. Wirth and his wife. Effective February 1, 2001, however, the Lessee became a wholly-owned subsidiary of the Trust. See "Item 1 - Business - Acquisition of the Lessee by the Trust." The Trust's principal source of cash flows is distributions from the Partnership, which are dependent upon lease payments from the Lessee pursuant to the Percentage Leases. The Lessee's ability to make payments to the Partnership pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels. As a result of the Trust's acquisition of the Lessee as of February 1, 2001, any profits earned by the Lessee in its operation of the Hotels may be distributed to the Trust. At January 31, 2001, the Trust owned a 48.2% interest in the Hotels through its sole general partner's interest in the Partnership. This change in ownership resulted primarily from the following transactions: On March 15, 1999, the Trust purchased 1 million additional general partner units in the Partnership for $2 million. This transaction was fully funded -7- by Mr. Wirth who provided an unsecured loan to the Trust at 7% interest payable annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004. On April 2, 1999, the Partnership made an unsecured loan to the Trust in the amount of $2.6 million. Annual interest only payments are due on March 1 of each year and are based on a 7% interest rate. The unpaid principal balance is due at maturity on April 2, 2006. The Trust used the proceeds of that loan to purchase 1.3 million general partner units in the Partnership. The money lent by the Partnership was generated by refinancing the Northern Phoenix hotel and borrowing an additional $1.8 million that was secured by a mortgage on that property. 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. As of April 2, 1999, the Trust transferred, at historical cost, its interest in the Scottsdale property to the Partnership (approximately $7 million) in exchange for 1.6 million general partner units. As a result of the aforementioned transactions, the Trust increased its ownership interest in the Partnership from approximately 18% to approximately 42% as of April 2, 1999. Other incremental, less material, transactions have contributed to the increase from 42% to the Trust's 48.2% sole general partner's interest in the Partnership at January 31, 2001. The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees and depreciation of the Hotels. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. The Percentage Leases provide for the payment of base rent and percentage rent. For the year ended January 31, 2001, base rent and percentage rent in the aggregate amount of $9.7 million was earned by the Trust. The principal determinant of percentage rent is the Lessee's room revenues at the Hotels, as defined by the Percentage Leases. Therefore, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, average daily rate ("ADR"), calculated as total room revenue divided by number of rooms sold, and revenue per available room, calculated as total room revenue divided by number of rooms available (known as "REVPAR"), is appropriate for understanding revenue from the Percentage Leases. ADR decreased $1.24 to $66.46 in fiscal year 2001 from $67.70 in fiscal 2000 due to management's efforts to increase occupancy. Occupancy increased 3.4% to 63.2% in fiscal 2001 from 59.8% in fiscal year 2000 as a result management's concerted effort to drive occupancy with a more competitive ADR. This resulted in an increase in REVPAR of $1.56 to $42.02 in fiscal 2001 from $40.46 in fiscal 2000. The following table shows certain historical financial and other information for the periods indicated.
For the Year Ended January 31, ----------------------------------- 2001 2000 1999 ------ ------ ------ Occupancy 63.23% 59.80% 60.80% Average Daily Rate (ADR) $66.46 $67.70 $66.89 Revenue Per Available Room (REVPAR) $42.02 $40.46 $40.65
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. -8- Results of Operations of the Trust for the year ended January 31, 2001 compared to the year ended January 31, 2000. Results of operations for the Trust for the fiscal year ended January 31, 2001 reflect a full-year of operations of ten of the Hotels as well as a partial-year of operations for the Best Western Airport Inn located in Albuquerque, New Mexico. Results of operations for the Trust for the fiscal year ended January 31, 2000 reflect a full-year of operations of ten of the Hotels. For the twelve months ended January 31, 2001, the Trust had total revenues of $9.7 million compared to $9.5 million for the twelve months ended January 31, 2000, an increase of approximately $192,000 or 2.0% due primarily to additional revenue of $144,000 generated by the newly acquired Albuquerque hotel. Total expenses of $14.9 million for the twelve months ended January 31, 2001 increased $3.3 million compared to total expenses of $11.6 million for the twelve months ended January 31, 2000. The increase in total expenses included the write-down for a partial impairment of the Scottsdale hotel property of $3.2 million. The hotel asset, including land, and fixtures, furniture, and equipment were written down by $3.2 million. The remaining $118,000 increase in total expenses was primarily due to the addition of operating expenses attributable to the newly acquired Albuquerque hotel. Loss on impairment of hotel property was $3.2 million for the twelve months ended January 31, 2001. This loss resulted from the write-down for a partial impairment of a hotel asset of $3.2 million. Recent performance of the Scottsdale hotel property indicated that the hotel asset may have significantly decreased in value, which then required management to test the asset for recoverability of book value under SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Using management's best estimate of undiscounted future cash flows from the hotel, the hotel asset's book value was determined not to be recoverable. The hotel asset, including land, buildings and improvements, and fixtures, furniture and equipment, was written down by $3.2 million to the hotel's market value and new basis of $3.7 million. The amount of impairment allocated to Shares of Beneficial Interest was $1.5 million and the amount allocated to minority interest was $1.7 million. General and administrative expenses include overhead charges for management, accounting, shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve months ended January 31, 2001 and 2000, these expenses decreased $653,000 to $3.6 million in fiscal 2001 from $4.2 million in fiscal 2000. This 15.4% decrease was primarily due to charges to expense of $575,000 for deferred expenses relating to a withdrawn public offering in fiscal year 2000. Total interest expense increased by $429,000 or 12.8% to $3.8 million from $3.3 million in comparing the twelve months ended January 31, 2001 and January 31, 2000, respectively. Interest on mortgage notes payable increased $205,000 or 9.5% to $2.4 million from $2.2 million due to increased mortgage debt related to the refinancing of the San Diego property and the acquisition of the Albuquerque hotel during fiscal 2001. Interest on notes payable to banks increased by 16.9% or $165,000 to $1.1 million from $977,000 due to increased interest on the $12 million Credit Facility, which bears a variable interest rate. Interest on notes payable to related parties increased 25.1% or $54,000 to $267,000 from $214,000 due to additional loans from Mr. Wirth. Real estate and personal property taxes, insurance and ground rent increased $29,000 or 2.1% to $1.5 million from $1.4 million in comparing the twelve months ended January 31, 2001 and 2000, respectively. Real estate and personal property taxes and property insurance increased primarily due to the acquisition of the Albuquerque hotel during fiscal 2001. -9- Real estate depreciation for the twelve months ended January 31, 2001 compared to 2000 increased approximately $294,000 or 11.6% to $2.8 million from $2.5 million, respectively. Of the $294,000 increase, approximately $54,000 was due to the Trust's acquisition of the Albuquerque hotel. The remaining $240,000 resulted primarily from an increase in capitalized refurbishment costs in the current fiscal year, as well as a full year of depreciation on assets capitalized last year. The Trust had a loss before minority interest of $5.1 million for the twelve months ended January 31, 2001, a $3.1 million increased loss from the loss of $2.0 million in the prior year. After deducting the loss allocated to the minority interest of $2.5 million, the Trust had a net loss attributable to Shares of Beneficial Interest of approximately $2.6 million. This represented an increase in net loss of $1.6 million attributable to Shares of Beneficial Interest comparing the twelve months ended January 31, 2001 and 2000. The results for the fiscal year ended January 31, 2001 included the recognition of a provision for uncollectible receivables of $2.4 million. Basic and diluted net loss per share was $(1.12) for the twelve months ended January 31, 2001 compared to $(0.40) for 2000. Results of Operations of the Trust for the year ended January 31, 2000 compared to the year ended January 31, 1999. Results of operations for the Trust for the fiscal year ended January 31, 2000 reflect a full-year of operations of ten of the Hotels (excluding the recently acquired Best Western Airport Inn located in Albuquerque, New Mexico) and the fiscal year ended January 31, 1999 reflects a full-year of operations of the Initial Hotels as well as a partial-year of operations for the Tucson St. Mary's, Buena Park and San Diego hotels. For the twelve months ended January 31, 2000, the Trust had total revenues of $9.5 million compared to $9.9 million for the twelve months ended January 31, 1999, a decrease of approximately $400,000 or 3.7% due primarily to the change in rent formulas effective August 1, 1999. Total expenses of $11.6 million for the twelve months ended January 31, 2000 increased $1.5 million compared to total expenses of $10.1 million for the twelve months ended January 31, 1999. The 14.3% increase in total expenses was primarily due to charges to expense of approximately $575,000 for deferred expenses related to a withdrawn public offering and a $1.9 million provision for uncollected rents receivable in fiscal 2000 which was partially offset by a $780,000 loss on the termination of the Advisory Agreement with Mid-America Reafund Advisors ("MARA") in fiscal 1999. General and administrative expenses include overhead charges for management, accounting, shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve months ended January 31, 2000 and 1999, these expenses increased $1.5 million to $4.2 million in fiscal 2000 from $2.7 million in fiscal 1999. This 54.5% increase was primarily due to charges to expense of approximately $575,000 for deferred expenses relating to a withdrawn public offering and a $1.9 million provision for uncollected rents receivable from the Lessee in fiscal 2000. These were offset by decreases primarily relating to the incurrence of Advisory Agreement fees of approximately $364,000 and the loss of approximately $780,000 for the termination of the Advisory Agreement with MARA in fiscal 1999. Total interest expense increased by $544,000 or 19.5% to $3.3 million from $2.8 million in comparing the twelve months ended January 31, 2000 and January 31, 1999, respectively. Interest on mortgage notes payable increased approximately $200,000 or 10% to $2.1 million from $1.9 million due to increased mortgage debt related to the acquisition of the Buena Park and San Diego properties during fiscal 1999 and net additional borrowings of approximately $2.3 million during fiscal 2000 for the loan modification relating to the Northern Phoenix property and the refinancing of the San Diego property. Interest on notes payable to banks increased by 52.8% or approximately $338,000 to $977,000 from $639,000 due to a full year of interest in fiscal 2000 on the $12 million Credit Facility obtained -10- during fiscal 1999, which bears a variable interest rate. Interest on notes payable to related parties increased 4.6% or approximately $10,000 to $214,000 from $204,000 due to additional loans of $956,000 (net of payments) from Mr. Wirth. Real estate and personal property taxes, insurance and ground rent increased approximately $200,000 or 16.4% to $1.4 million from $1.2 million in comparing the twelve months ended January 31, 2000 and 1999, respectively. Real estate and personal property taxes and property insurance increased $145,000 primarily due to the acquisition of the Buena Park and San Diego properties during fiscal 1999 resulting in a full year of expenses in fiscal 2000 compared to 9 months of expenses for San Diego and 8 months of expenses for Buena Park in fiscal 1999. Real estate depreciation for the twelve months ended January 31, 2000 compared to 1999 increased approximately $350,000 or 15.9% to $2.5 million from $2.2 million, respectively. Of the $350,000 increase, approximately $184,000 was due to the Trust's acquisitions of the Buena Park and San Diego properties resulting in a full year of depreciation in fiscal year 2000. The remaining $166,000 resulted primarily from an increase in capitalized refurbishment costs in the current year. The Trust had a loss before minority interest of $2.0 million for the twelve months ended January 31, 2000, a $1.8 million increase from the loss of $200,000 in the prior year. After deducting the loss allocated to the minority interest of $1.1 million, the Trust had a net loss attributable to Shares of Beneficial Interest of approximately $952,000. This represented an increase in net loss of $759,000 attributable to Shares of Beneficial Interest comparing the twelve months ended January 31, 2000 and 1999. The results for the fiscal year ended January 31, 2000 included the recognition of a provision for uncollectible receivables of $1.9 million and a charge of approximately $575,000 resulting from withdrawing a public offering. Basic and diluted net loss per share was $(0.40) for the twelve months ended January 31, 2000 compared to $(0.10) for 1999. Without considering the effect of the aforementioned charges, the Trust would have reported net income of approximately $23,000 and basic earnings per share of $0.01. Results of Operations of the Lessee Comparison of actual results for the year ended January 31, 2001 compared to the year ended January 31, 2000. Results of operations for the Lessee for the fiscal year ended January 31, 2001 reflect a full-year of operations of ten of the Hotels as well as a partial-year of operations for the Best Western Airport Inn located in Albuquerque, New Mexico. Results of operations for the fiscal year ended January 31, 2000 reflect a full-year of operations of ten of the Hotels. Total revenues for the Lessee increased 3.2% or $904,000 to $28.9 million from $28.0 million for the twelve months ended January 31, 2001 and 2000, respectively. Room revenues increased 3.7% or $932,000 to $26.1 million from $25.1 million due to the addition of the Albuquerque hotel, which contributed revenues of $548,000, and to an overall increase in occupancy. Food and beverage revenues of $1.7 million were consistent with the prior year. Telecommunications revenues of $336,000 were also consistent with the prior year. Other revenue of $734,000 was consistent with the prior year. Total expenses increased 4.9% or $1.5 million to $31.5 million from $30.1 million for the twelve months ended January 31, 2001 compared to the twelve months ended January 31, 2000, respectively. Guest room expense increased by 6.4% or $429,000 to $7.1 million from $6.7 million for the twelve months ended January 31, 2001 and 2000, respectively, primarily due to the addition of the Albuquerque hotel, which accounted for $193,000 of the increase, and increased occupancy. -11- Telecommunications expenses, which are primarily long-distance service charges and high speed data communication services, increased by 14.9% or $58,000 due to upgrading voice and data communications lines in fiscal year 2001. General and administrative expenses increased by 16.4% or $643,000 to $4.6 million from $3.9 million for the twelve months ended January 31, 2001 compared to the twelve months ended January 31, 2000, respectively. The increase is primarily to the addition of the Albuquerque hotel and increased salary and benefits paid to key hotel employees. Repairs and maintenance decreased 10.3% or approximately $209,000 to $1.8 million from $2.0 million for the twelve months ended January 31, 2001 compared with the twelve months ended January 31, 2000, respectively. The decrease is primarily due to an intensified capital improvement program. Hospitality expenses increased 6.5% or approximately $101,000 to $1.6 million from $1.5 million for the twelve months ended January 31, 2001 compared with the twelve months ended January 31, 2000, respectively, primarily due to the addition of the Albuquerque hotel and increased occupancy. Percentage rent increased 1.9% or $183,000 to $9.7 million from $9.5 million for the twelve months ended January 31, 2001 compared with the twelve months ended January 31, 2000, respectively, primarily due to the addition of the Albuquerque hotel. Comparison of actual results for the year ended January 31, 2000 compared to the year ended January 31, 1999. Results of operations for the Lessee for the fiscal year ended January 31, 2000 reflect a full-year of operations of ten of the Hotels (excluding the recently acquired Best Western Airport Inn located in Albuquerque, New Mexico) and the fiscal year ended January 31, 1999 reflects a full-year of operations of the Initial Hotels as well as a partial-year of operations for the Tucson St. Mary's, Buena Park and San Diego hotels. Total revenues for the Lessee increased 4.7% or approximately $1.2 million to $28.0 million from $26.7 million for the twelve months ended January 31, 2000 and 1999, respectively. Room revenues increased 3.3% or approximately $805,000 to $25.1 million from $24.3 million due to the addition of the California properties and from sharp increases in room revenues at the Tucson St. Mary's Arizona property due to increased occupancy rates and ADR for the year ended January 31, 2000, which was partially offset by the other six Arizona properties' room revenues slightly declining due to decreased occupancy. Food and beverage revenues increased 6.9% or approximately $112,000 to $1.7 million from $1.6 million primarily due to increased occupancy rates at the Ontario, California and Tucson St. Mary's Arizona properties, which feature full service restaurants. Telecommunications revenue declined 24.9% or approximately $115,000 to $346,000 from $461,000 for the twelve months ended January 31, 2000 and 1999, respectively, primarily due to decreased long-distance rates charged by the various long distance carriers. Other revenue increased $444,000 to $735,000 from $291,000 primarily due to the addition of the California properties and increased occupancy at the Ontario and Tucson St. Mary's properties. Total expenses increased 0.1% or approximately $19,000 to $30.1 million from $30.0 million for the twelve months ended January 31, 2000 compared to the twelve months ended January 31, 1999, respectively. Guest room expense decreased by 13.9% or approximately $1.1 million to $6.7 million from $7.8 million for the twelve months ended January 31, 2000 and 1999, respectively, primarily due to management's programs to increase efficiency and reduce costs associated with housekeeping. Food and beverage expense increased 15.4% or approximately $218,000 to $1.6 million from $1.4 million for the twelve months ended January 31, 2000 compared to the twelve months ended January 31, 1999. The increase is attributable to the increased room revenue and the addition of room service at ten of the Hotel properties. -12- Telecommunications expenses, which are primarily long-distance service charges, decreased due to decreased long-distance rates charged by the various long distance carriers by 21.4% or approximately $106,000 for the twelve months ended January 31, 2000 compared to the twelve months ended January 31, 1999, respectively. Other expenses increased greater than 100.0% or approximately $299,000 to $437,000 from $138,000 for the twelve months ended January 31, 2000 compared to the twelve months ended January 31, 1999, respectively, primarily due to the write-off of certain assets that management identified as having no future value. Repairs and maintenance increased 50.6% or approximately $681,000 to $2.0 million from $1.3 million for the twelve months ended January 31, 2000 compared with the twelve months ended January 31, 1999, respectively. The increase is due to a focused effort by management to maintain the quality of the Hotels and increase repeat business as a result of guest satisfaction. Hospitality expenses increased 28.7% or approximately $345,000 to $1.6 million from $1.2 million for the twelve months ended January 31, 2000 compared with the twelve months ended January 31, 1999, respectively, primarily due to increased hospitality programs in fiscal year 2000 over fiscal year 1999. Percentage rent decreased 4.6% or approximately $461,000 to $9.5 million from $10.0 million for the twelve months ended January 31, 2000 compared with the twelve months ended January 31, 1999, respectively, primarily due to an amendment of the calculation of rent payable under the Percentage Leases effective August 1, 1999. LIQUIDITY AND CAPITAL RESOURCES Through its ownership interest in the Partnership and, effective February 1, 2001, the Lessee, the Trust has its proportionate share of the benefits and obligations of the Partnership's ownership interests and Lessee's operational interests in the Hotels. The Trust's principal source of cash to meet its cash requirements, including distributions to its shareholders, is its share of the Partnership's cash flow. The Partnership's principal source of revenue is rent payments under the Percentage Leases. The Lessee's obligations under the Percentage Leases are unsecured and its ability to make rent payments to the Partnership under the Percentage Leases, and the Trust's liquidity, including its ability to make distributions to its shareholders, will depend upon the ability of the Lessee to generate sufficient cash flow from hotel operations. As a result of the Trust's acquisition of the Lessee as of February 1, 2001, any profits earned by the Lessee in its operation of the Hotels may be distributed to the Trust. See "Item 1 - Business - Acquisition of the Lessee by the Trust" above. For the twelve months ended January 31, 2001 and 2000, the Trust recorded provisions of approximately $2.4 million and $1.9 million for uncollectible receivables. These charges reflect the Trust's assessment of the collectibility of its receivables, which primarily consists of rent receivable from the Lessee, based on an evaluation of the Lessee's estimated future cash flows. As of January 31, 2001, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements set aside annually, as described below. The Trust intends to acquire and develop additional hotels and expects to incur indebtedness to fund those acquisitions and developments. The Trust may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Trust's investments are insufficient to make the required distributions. 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. As of January 31, 2001, the Trust had drawn $11.3 million from the Credit Facility, which charges interest at a -13- variable interest rate. By its terms, the Credit Facility expired on April 16, 2001. During the third quarter of fiscal 2001, the Trust was notified that Pacific Century Bank would not renew the Credit Facility when it expired on April 16, 2001 due to a decision by Pacific Century Bank to cease funding hospitality operations. Pacific Century Bank also announced that it would commence selling its Arizona branches. In order to replace the liquidity provided by the Credit Facility, the Trust actively sought individual loans on the Tucson Oracle, Flagstaff and Scottsdale properties that secure the Credit Facility. On April 18, 2001, the Trust refinanced its Ontario property and utilized $4.2 million of the net proceeds to reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Pacific Century Bank has proposed the issuance of a term loan to replace the portion of the Credit Facility that is secured by the Flagstaff and Scottsdale properties. The terms of the replacement term loan are subject to review and approval by Pacific Century Bank. If, for any reason, Pacific Century Bank does not issue the replacement term loan, the Trust has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the $2.3 million outstanding balance of the Credit Facility with another lending institution and therefore satisfy the outstanding balance of the Credit Facility. In the unlikely event that Pacific Century Bank forecloses on the Flagstaff and Scottsdale properties, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. Pacific Century Bank has agreed to waive all covenants relating to the Credit Facility and to extend the effectiveness of the Credit Facility until July 26, 2001 to structure the replacement term loan to be secured by the Flagstaff and Scottsdale properties. The terms of the Credit Facility required the Trust to maintain a net worth (combined with minority interest) 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 1.75 to 1.0, a net operating income to debt service relating to encumbered properties ratio of not less than 1.30 to 1.0, and a net operating income to debt service ratio of not less than 1.25 to 1.0. The Trust was permitted to 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 could not further encumber its collateral, sell its collateral, change the nature of its business or unreasonably suspend its business. On December 12, 2000 and again on April 18, 2001, the Trust notified Pacific Century Bank that the Trust was not in compliance with certain financial covenants contained in the Credit Facility. The Trust applied for, and received, waivers of such noncompliance from Pacific Century Bank. The Trust may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as the Trust considers prudent. The Trust will acquire or develop additional hotels only as suitable opportunities arise, and the Trust will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings or from the proceeds of additional issuances of Shares of Beneficial Interest or other securities. However, there can be no assurance that the Trust will successfully acquire or develop additional hotels. Effective August 30, 2000, Albuquerque Suite Hospitality, LLC, a 100% owned subsidiary of the Partnership, purchased the 122-suite Best Western Airport Inn located in Albuquerque, New Mexico for $2.1 million. The funds utilized for the purchase price were secured by a first mortgage on the Albuquerque hotel in the amount of $1,575,000 and the remaining amount was loaned by Mr. Wirth and his affiliates to the Trust. On April 28, 2001, the mortgage note payable to Bank One on the Tucson St. Mary's hotel matured. The outstanding principal balance was $3,762,839. Bank One has proposed an extension of the term of the mortgage note for twelve months until April 28, 2002. The extended note will bear interest at the Bank One Prime Rate plus one percent (1%). On April 30, 2001, the Bank One Prime Rate was seven and one-half percent (7.5%). These terms are subject to formal review and approval by the Bank One Credit Committee. If, for any reason, Bank One does not extend the mortgage note, the Trust has sufficient unencumbered equity in the Tucson St. Mary's property to refinance the outstanding balance of the mortgage note with another lending institution and therefore satisfy the outstanding balance of the mortgage note. In the unlikely event that Bank One forecloses on the Tucson St. Mary's property, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. The Partnership continues to contribute to a Capital Expenditures Fund (the "Fund") from the rent paid under the Percentage Leases, an amount equal to 4% of the Lessee's revenues from operation of the Hotels. The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. The Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the twelve months ended January 31, 2001 and 2000, the Hotels spent approximately $2.2 million and $1.5 million, respectively, for capital expenditures. The Trust considers the majority of these improvements to be revenue -14- producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Lessee also spent approximately $1.8 million and $2.0 million, during fiscal years 2001 and 2000, respectively, on repairs and maintenance and these amounts have been charged to expense as incurred. Management believes that cash on hand, future cash receipts and borrowings from affiliates in fiscal year 2002 will be sufficient to meet the Trust's expansion plans and to pay all obligations as they become due for the next twelve months. NEW ACCOUNTING STANDARDS In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which established standards for the accounting and reporting for all derivative instruments and hedging activities. This statement requires that all derivatives are recognized as assets or liabilities in the balance sheet and measured at fair value, and that recognition of gains and losses are required on hedging instruments based on changes in fair value or the earnings effect of forecasted transactions. This new standard, as amended by SFAS No. 137 and No. 138, is effective beginning January 1, 2001. This pronouncement did not have an impact on our consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB No. 101) which summarizes the SEC staff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. SAB No. 101 was amended by SAB No. 101A and No. No. 101B in March and June, 2000, respectively, to delay the implementations date of SAB No. 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 16, 1999. We have adopted the provisions of SAB No. 101 and the adoption did not have a material effect on our consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25." The Interpretation clarifies the application of APB Opinion No. 25 in certain situations, as defined. The Interpretation was effective July 1, 2000, but covers certain events having occurred after December 15, 1998. We have adopted this Interpretation and the adoption did not have a material impact on our consolidated financial statements. INFLATION The Trust's revenues are based on the Percentage Leases which result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust relies entirely on the performance of the Hotels and the Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Lessee in particular, can change room rates quickly, but competitive pressures may limit the Lessee's ability to raise rates faster than inflation. SEASONALITY The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona, California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders. No assurance can be given that the Trust will make distributions in the future. FORWARD-LOOKING STATEMENTS Certain statements in this 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 its officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust's financing plans; (v) the Trust's position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) the Trust's continued qualification as a REIT; and (vii) trends affecting the Trust's or any Hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements reflect the Trust's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. -15- Examples of such uncertainties include, but are not limited to: fluctuations in hotel occupancy rates; changes in room rental rates which may be charged by the Lessee in response to market rental rate changes or otherwise; interest rate fluctuations; changes in federal income tax laws and regulations; competition; any changes in the Trust's financial condition or operating results due to acquisitions or dispositions of hotel properties; real estate and hospitality market conditions; hospitality industry factors; and local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry, or the markets in which the Trust operates or will operate. The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Annual Report relating to the operations of the 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 ----------------------------------------------------- DEBT TYPE 2002 2003 2004 2005 2006 THEREAFTER TOTAL(1) FAIR VALUE --------- ---- ---- ---- ---- ---- ---------- -------- ---------- Fixed rate debt(2) $ 5,315,735 1,417,755 1,247,077 6,438,401 2,321,893 9,104,989 25,845,850 26,899,006 Average interest rate 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.00% Variable rate debt(2) $15,119,589 43,573 48,812 3,167,471 18,379,445 18,301,020 Interest rate available on January 31, 2001 9.61% - - - - - 9.61% 9.61%
------------------------- (1) Approximately $300,000 of debt was repaid by February 09, 2001 and is not included in the aforementioned summary. (2) The fair value of fixed rate debt and variable rate debt were determined based on current rates offered for fixed rate debt and variable rate LIBOR debt with similar risks and maturities. The table incorporates only those exposures that exist as of January 31, 2001 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. -16- Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- INNSUITES HOSPITALITY TRUST LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements of InnSuites Hospitality Trust are included in Item 8: Independent Auditors' Report; Consolidated Balance Sheets - January 31, 2001 and 2000; Consolidated Statements of Operations - For the Years Ended January 31, 2001, 2000 and 1999; Consolidated Statements of Shareholders' Equity - For the Years Ended January 31, 2001, 2000 and 1999; Consolidated Statements of Cash Flows - For the Years Ended January 31, 2001, 2000 and 1999; and Notes to the Consolidated Financial Statements - January 31, 2001, 2000 and 1999. 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. -17- INNSUITES HOTELS, INC. LIST OF FINANCIAL STATEMENTS The following financial statements of InnSuites Hotels, Inc. are included in Item 8: KPMG LLP Independent Auditors' Report; Michael Maastricht, CPA Report of Independent Public Accountants; Balance Sheets - January 31, 2001 and 2000; Statements of Operations - For the Years Ended January 31, 2001, 2000 and 1999; Statements of Shareholders' Deficit - For the Years Ended January 31, 2001, 2000 and 1999; Statements of Cash Flows - For the Years Ended January 31, 2001, 2000 and 1999; and Notes to the Financial Statements - January 31, 2001, 2000 and 1999. All schedules are omitted, as the information is not required or is otherwise furnished. -18- INDEPENDENT AUDITORS' REPORT The Shareholders and Trustees InnSuites Hospitality Trust: We have audited the accompanying consolidated balance sheets of InnSuites Hospitality Trust (an Ohio real estate investment trust) and subsidiary (the "Trust") as of January 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended January 31, 2001. In connection with our audits 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statement presentation. We believe that our audits provide 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 and subsidiary as of January 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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. /s/ KPMG LLP Phoenix, Arizona April 30, 2001 -19- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
January 31, --------------------------- 2001 2000 ------------ ----------- ASSETS Hotel Properties, net $ 62,591,376 64,479,347 Cash and Cash Equivalents 415,390 208,109 Rent Receivable from Affiliate, net of $5,251,861 and $2,845,732 allowance, respectively -- -- Interest Receivable and Other Assets 898,795 618,063 ------------ ----------- TOTAL ASSETS $ 63,905,561 65,305,519 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Mortgage Notes Payable $ 25,628,572 24,251,662 Notes Payable to Banks 11,300,000 11,300,000 Other Notes Payable 125,021 225,000 Notes Payable to Related Parties 631,409 -- Advances Payable to Related Parties 6,840,298 2,970,000 Accounts Payable and Accrued Expenses 1,251,237 1,138,168 ------------ ----------- TOTAL LIABILITIES 45,776,537 39,884,830 MINORITY INTEREST IN PARTNERSHIP 13,091,117 16,789,423 SHAREHOLDERS' EQUITY: Shares of beneficial interest without par value; unlimited authorization; 2,126,484 and 2,507,949 shares issued and outstanding in 2001 and 2000, respectively 6,532,348 9,093,020 Treasury Stock (1,494,441) (461,754) ------------ ----------- TOTAL SHAREHOLDER'S EQUITY 5,037,907 8,631,266 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,905,561 65,305,519 ============ ===========
See accompanying notes to consolidated financial statements -20- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2001 2000 1999 ------------ ----------- ----------- REVENUES: Rent revenue from affiliate $ 9,699,418 9,503,041 9,886,008 Interest and other income 39,037 43,140 23,750 ------------ ----------- ----------- TOTAL REVENUES: $ 9,738,455 9,546,181 9,909,758 ------------ ----------- ----------- EXPENSES: Real estate depreciation $ 2,840,819 2,546,381 2,196,797 Real estate, personal taxes, insurance and ground rent 1,450,921 1,421,646 1,221,255 General and administrative 3,593,596 4,247,063 2,748,623 Loss on termination of advisory agreement -- -- 780,746 Interest on mortgage notes payable 2,354,685 2,150,144 1,952,661 Interest on notes payable to banks 1,141,861 976,861 639,278 Interest on other notes payable 5,492 -- -- Interest on notes payable and advances payable to related parties 267,252 213,563 204,145 Loss on impairment of hotel property 3,210,648 -- -- Fees to related party investment advisor -- -- 364,041 Legal expense to related party -- -- 2,400 ------------ ----------- ----------- TOTAL EXPENSES 14,865,274 11,555,658 10,109,946 ------------ ----------- ----------- LOSS BEFORE MINORITY INTEREST (5,126,819) (2,009,477) (200,188) ------------ ----------- ----------- LESS: MINORITY INTEREST (2,532,065) (1,057,666) (7,117) NET LOSS $ (2,594,754) (951,811) (193,071) ============ =========== =========== NET LOSS PER SHARE - (Basic and diluted) $ (1.12) (.40) (.10) ============ =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - (Basic and diluted) 2,316,972 2,376,770 1,921,902 CASH DIVIDENDS PER SHARE $ .04 $ .02 $ .10 ============ =========== ===========
See accompanying notes to consolidated financial statements -21- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999 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) Reallocation of minority interest (489,292) --------- BALANCE, JANUARY 31, 1999 7,580,035 Stock option plan 57,400 Net loss (951,811) Dividends (52,889) Purchase of treasury stock (461,754) Reallocation of minority interest 2,460,285 --------- BALANCE, JANYUARY 31, 2000 8,631,266 Stock option plan 52,516 Net loss (2,594,754) Dividends (97,703) Purchase of treasury stock (1,032,687) Reallocation of minority interest 79,269 ---------- BALANCE, JANUARY 31, 2001 $5,037,907 ==========
See accompanying notes to consolidated financial statements -22- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2001 2000 1999 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,594,754) (951,811) (193,071) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock compensation expense 52,516 57,400 183,518 Non-cash portion of loss on termination of advisory agreement -- -- 498,669 Impairment of hotel property 3,210,648 -- -- Provision for uncollectible rent receivable from affiliate 2,406,129 1,945,732 900,000 Minority interest (2,532,065) (1,057,666) (7,117) Real estate depreciation 2,840,819 2,546,381 2,196,797 Amortization of deferred loan fees 117,440 53,937 39,346 (Increase) in rent receivable from affiliate (2,406,129) (1,157,553) (1,473,539) (Increase) Decrease in interest receivable and other assets (398,172) 414,469 (905,613) (Decrease) in due to Lessee -- -- (944,234) Increase (Decrease) in accounts payable and accrued expense 113,069 (1,050,540) (1,136,115) ----------- ---------- ----------- Net cash provided by (used in) operating activities 809,501 800,349 (841,359) ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel properties (2,164,744) (1,516,543) (2,277,890) Acquisition of hotel (525,000) -- (1,448,000) Disposal of furniture, fixtures and equipment 80,685 -- -- Proceeds from sale of land 20,564 -- -- ----------- ---------- ----------- Net cash (used in) investing activities (2,588,495) (1,516,543) (3,725,890) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage notes payable (698,090) (4,159,391) (19,388,537) Proceeds from mortgage notes payable 500,000 -- -- Borrowings on mortgage notes payable -- 5,250,000 11,705,374 Borrowings on other notes payable 172,844 Payments on other notes payable (272,823) (225,000) (218,000) Bank borrowings -- -- 11,300,000 Bank repayments -- -- (155,000) Payment of dividends (97,703) (52,889) (166,781) Distributions to minority interest holders (210,308) (264,969) (781,451) Repurchase of Partnership units (876,665) (538,847) -- Repurchase of treasury stock (1,032,687) (461,754) -- Advances from related parties 6,340,450 956,218 1,235,628 Principal payments on advances payable to related parties (2,470,152) -- (921,447) Borrowings on notes payable to related parties 745,000 -- -- Payments on notes payable to related parties (113,591) -- -- ----------- ---------- ----------- Net cash provided by (used in) financing activities 1,986,275 503,368 2,609,786 ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 207,281 (212,826) (1,957,463) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 208,109 420,935 2,378,398 ----------- ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 415,390 208,109 420,935 =========== ========== ===========
See accompanying notes to consolidated financial statements -23- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended JANUARY 31, 2001, 2000 and 1999 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION InnSuites Hospitality Trust (the "Trust") is a real estate investment trust ("REIT") that owns, directly or indirectly, eleven hotels with 1,751 suites in Arizona, southern California and New Mexico. The hotels operate as InnSuites Hotels. Until January 31, 1998, the Trust, formerly known as Realty ReFund Trust, specialized in mortgage financing as its investment vehicle, refinancing existing income producing commercial, industrial and multi-unit residential real property by supplementing or replacing existing financing. The primary refinancing technique that the Trust employed was wrap-around mortgage lending. On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership (the "Partnership"), a Delaware limited partnership, in exchange for a 13.6% general partnership interest therein. The Trust is the sole general partner of the Partnership. The Partnership issued limited partnership interests representing 86.4% of the Partnership to acquire six hotel properties from various entities. In addition, in order to acquire a seventh hotel property, through a wholly-owned subsidiary, RRF Sub Corp., the Trust issued 647,231 Shares of Beneficial Interest in exchange for all of the outstanding shares of Buenaventura Properties, Inc. which owned a hotel located in Scottsdale, Arizona ("InnSuites Hotels Scottsdale"). These seven hotels are collectively referred to as the "Initial Hotels." The Initial Hotels, together with subsequent hotel acquisitions, are referred to herein as the "Hotels." The Hotels are leased to InnSuites Hotels, Inc., formerly known as Realty Hotel Lessee Corp. (the "Lessee"), pursuant to leases, which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the Lessee to pay rent equal to the greater of the minimum rent ("Base Rent") or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. 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. The Trust's general partnership interest in the Partnership was 48.17% on January 31, 2001, and the weighted average for the twelve months ended January 31, 2001 was 46.57%. PARTNERSHIP AGREEMENT The Partnership Agreement of the Partnership provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of Shares of Beneficial Interest of the Trust, at any time at the option of the particular limited partner, if the Trust determines that such conversion would not cause the Trust to fail to qualify as a REIT. As of January 31, 2001, a total of 1,621,627 Class A limited partnership units were issued and outstanding. Additionally a total of 5,226,364 Class B limited partnership units were outstanding to Wirth and his affiliates, in lieu of the issuance of Class A limited partnership units. If all of the Class A and B limited partnership units were to be converted, the limited partners in the Partnership would receive 6,847,991 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. -24- BASIS OF PRESENTATION As sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements of the Partnership are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to be consistent with current year financial statement presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. HOTEL PROPERTIES Hotel properties are stated at cost and are depreciated using the straight-line method over estimated lives ranging from 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. The Trust applies Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in accounting for its hotel properties. Recent performance of the Scottsdale hotel property indicated that the hotel asset may have significantly decreased in value, which then required management to test the asset for recoverability of book value under SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Using management's best estimate of undiscounted future cash flows from the hotel, the hotel asset's book value was determined not to be recoverable. The hotel asset, including land, buildings and improvements, and fixtures, furniture, and equipment were written down by $3.2 million to the hotel's market value and new basis of $3.7 million. In accounting for the acquisitions of the Hotels discussed in Note 1, purchase accounting was applied. The historical carrying values of the assets and liabilities of the Buena Park hotel property 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 Buena Park Suite Hospitality LCC. The Trust's purchase of its initial 13.6% general partnership interest in the Partnership and the Partnership's acquisition of interests in the 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 Hotels (other than the Buena Park hotel property) 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. 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. -25- ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES Financial instruments, which potentially subject the Trust to credit risk, primarily consist of rent receivable from the Lessee. The Trust periodically assesses the collectibility of its receivables based on its evaluation of the Lessee's estimated future cash flows available for payment. As a result, for the fiscal years 2001, 2000, and 1999 the Trust recorded a provision of $2.4 million, $1.9 million and $900,000, respectively, for uncollectible receivables which is reflected in the accompanying consolidated statements of operations as a component of general and administrative expenses. REVENUE RECOGNITION Trust revenues are recognized when earned. Minimum rent revenues are calculated and recognized monthly. Percentage rent is calculated quarterly and recognized if percentage rent is greater than minimum rent. DIVIDENDS AND DISTRIBUTIONS The Trust expects to pay dividends that are largely dependent upon the receipt of distributions from the Partnership. 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" (SFAS No. 123) 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 provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees and Related Operations" (APB No. 25) and provide pro-forma net income and pro-forma earnings per share 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 No. 25. 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. MINORITY INTEREST The Trust accounts for Minority Interest in accordance with EITF number 94-2 "Treatment of Minority Interests in Certain Real Estate Investments" and EITF number 95-7 "Implementation Issues Related to the Treatment of Minority Interest in Certain Real Estate Investment Trusts." 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 and equity is allocated based on the ownership percentage at year-end. Any difference is recorded as a reallocation of minority interest in Shareholders' Equity. -26- EARNINGS PER SHARE Basic and diluted earnings per share have been computed based on the weighted-average number of shares outstanding during the periods and potentially dilutive securities. For the twelve months ended January 31, 2001, 2000 and 1999, there were Class A and Class B limited partnership units outstanding, which are convertible to Shares of Beneficial Interest of the Trust. Assuming conversion, the aggregate weighted-average of these Shares of Beneficial Interest would be 7,062,778, 7,604,166, and 7,822,562 for fiscal 2001, 2000, and 1999, respectively. These shares are anti-dilutive due to the losses for each of the aforementioned years. Therefore, these shares have not been used in the calculation of diluted earnings per share. For the twelve months ended January 31, 2001, 2000 and 1999, 344,100, 375,600 and 389,700 stock options, respectively, are not included in the computation of diluted earnings per share since the option exercise prices were greater than the average market price of the Shares of Beneficial Interest. FAIR VALUE OF FINANCIAL INSTRUMENTS For disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Due to their short maturities, cash and cash equivalents and rent receivable from affiliate are carried at cost, which reasonably approximates fair value. The fair value of mortgage notes payable and notes payable to banks is estimated by discounting the future cash flows using the current rates which would be available for similar loans having the same remaining maturities. The carrying value of other note payables and advances to related parties approximates fair value. SEGMENT REPORTING The Trust views its operations as one operating business segment, a real estate investment trust that owns, directly or indirectly, eleven hotels with 1,751 suites in Arizona, southern California and New Mexico. 3. HOTEL PROPERTIES Hotel properties as of January 31, 2001 and 2000 consisted of the following:
2001 2000 ---- ---- Land $ 5,501,235 5,685,590 Building and improvements 54,523,741 55,027,114 Furniture and equipment 9,224,971 8,509,821 ----------- ---------- Total hotel properties 69,249,947 69,222,525 Less accumulated depreciation 6,658,571 4,743,178 ----------- ---------- Hotel properties (net) $62,591,376 64,479,347 =========== ==========
Seven of the Hotels are located in Arizona, three of the Hotels are located in California, and one of the Hotels is located in New Mexico. All hotels are subject to Percentage Leases as described in Note 12. -27- 4. ACQUISITIONS Effective August 30, 2000, Albuquerque Suite Hospitality, LLC, a wholly-owned subsidiary of the Partnership, acquired 100% of the ownership interest in a hotel located in Albuquerque, New Mexico for $2,100,000. The acquisition was funded with a first mortgage on the Albuquerque property in the amount of $1,575,000 and cash from loans made to the Partnership by Wirth and his affiliates. 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. 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. All of the aforementioned acquisitions have been accounted for as purchases. 5. ALLOWANCE FOR UNCOLLECTIBLE RENT RECEIVABLE At January 31, 2001, the Trust had an accumulated allowance for uncollectible rents receivable from the Lessee totaling approximately $5.3 million. After review of the estimated cash flow projections for fiscal year 2002 and actual fiscal year 2001 and 2000 cash flows, management recorded a provision for uncollectible rent receivable in the amounts of approximately $2.4 million, $1.9 million and $900,000 for the fiscal years 2001, 2000, and 1999, respectively. The following reconciles the allowance for uncollectible rent receivable from the Lessee: As of and for the years ended January 31, 2001, 2000, and 1999
ALLOWANCE FOR UNCOLLECTIBLE RENT RECEIVABLE ------------------------------------------- Balance as of January 31, 1998 $ - Provision 900,000 ---------- Balance as of January 31, 1999 900,000 Provision 1,945,732 ---------- Balance as of January 31, 2000 2,845,732 Provision 2,406,129 ---------- Balance as of January 31, 2001 $5,251,861 ----------
6. MORTGAGE NOTES PAYABLE At January 31, 2001, the Trust had mortgage notes payable outstanding with respect to eight of the Hotels. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from April 28, 2001 to September 1, 2015. Weighted average interest rates on the mortgage notes for the years ended January 31, 2001, 2000, and 1999 was 8.25%, 8.49%, and 8.9%, respectively. At -28- January 31, 2001, all of the Hotels were in compliance with their respective debt covenants. On April 28, 2001, the mortgage note payable to Bank One on the Tucson St. Mary's hotel matured. The outstanding principal balance was $3,762,839. Bank One has proposed an extension of the term of the note for twelve months until April 28, 2002. The extended note will bear interest at the Bank One Prime Rate plus one percent (1%). On April 30, 2001, the Bank One Prime Rate was seven and one-half percent (7.5%). These terms are subject to formal review and approval by the Bank One Credit Committee. If, for any reason, Bank One does not extend the mortgage note, the Trust has sufficient unencumbered equity in the Tuscon St. Mary's property to refinance the outstanding balance of the mortgage note with another lending institution and therefore satisfy the outstanding balance of the mortgage note. In the unlikely event that Bank One forecloses on the Tucson St. Mary's property, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. On August 30, 2000, Albuquerque Suite Hospitality, LLC, a wholly-owned subsidiary of the Partnership, acquired 100% of the ownership interest in a hotel located in Albuquerque, New Mexico for $2,100,000. The acquisition was funded in part with a first mortgage on the property in the amount of $1,575,000 which bears interest at 8.875% and has a maturity date of September 1, 2015. On November 3, 1999, The Trust refinanced its mortgage note on the San Diego property. The principal amount of the new loan was $4,000,000 with an interest rate of 9.0%. The loan matures on November 23, 2004. A special condition limited the initial amount to be funded at closing to $3,500,000. Subsequently, on May 2, 2000, the lender funded the additional $500,000. Financial covenants require (as defined in the loan agreement) a debt coverage ratio of no less than 1.2. In the event of noncompliance, the lenders commitment to fund the additional $500,000 would become null and void. As of January 31, 2001, the Trust was in compliance with its financial covenants. On March 30, 1999, the Trust modified and extended the mortgage agreement on its Northern Phoenix property. The Partnership borrowed an additional $1,750,000 at 8.25% that matures on April 1, 2014. The original note was restructured to match the terms of the new note. The maturity date of the original note was extended from April 1, 2007 to April 1, 2014. Wirth and certain of his affliates have guaranteed $10,742,202 of the mortgage notes payable. The net book value of properties securing the mortgage notes payable at January 31, 2001, 2000, and 1999 was $50,224,805, $48,581,869, and $49,258,778 respectively. See Note 10 for scheduled minimum payments. 7. NOTES PAYABLE TO BANKS On April 16, 1998, the Trust obtained the $12 million Credit Facility from Pacific Century Bank to assist in its funding of the acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are secured by first mortgages on three of the Hotels. As of January 31, 2001, the Trust has drawn $11.3 million from the Credit Facility, which charges interest at a variable interest rate. By its terms, the Credit Facility expired on April 16, 2001. During the third quarter of fiscal 2001, the Trust was notified that Pacific Century Bank would not renew the Credit Facility when it expired on April 16, 2001 due to a decision by Pacific Century Bank to cease funding hospitality operations. Pacific Century Bank has also announced that they are selling their Arizona branches. In order to replace the liquidity provided by the Credit Facility, the Trust actively sought individual loans on the Tucson Oracle, Flagstaff and Scottsdale properties that secure the Credit Facility. On April 18, 2001, the Trust refinanced its Ontario property and utilized $4.2 million of the net proceeds to reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Pacific Century Bank has proposed the issuance of a term loan to replace the portion of the Credit Facility that is secured by the Flagstaff and Scottsdale properties. The terms of the replacement term loan are subject to review and approval by Pacific Century Bank. If, for any reason, Pacific Century Bank does not issue the replacement term loan, the Trust has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the $2.3 million outstanding balance of the Credit Facility with another lending institution and therefore satisfy the outstanding balance of the Credit Facility. In the unlikely event that Pacific Century Bank forecloses on the Flagstaff and Scottsdale properties, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. Pacific Century Bank has agreed to waive all covenants relating to the Credit Facility and to extend the effectiveness of the Credit Facility until July 26, 2001 to structure the replacement term loan to be secured by the Flagstaff and Scottsdale properties. On December 12, 2000 and again on April 18, 2001, the Trust notified Pacific Century Bank that the Trust was not in compliance with certain financial covenants contained in the Credit Facility. The Trust applied for, and received, waivers of such noncompliance from Pacific Century Bank. The terms of the Credit Facility required the Trust to maintain a net worth (combined with minority interest) 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 1.75 to 1.0, a net operating income to debt service relating to encumbered properties ratio of not less than 1.30 to 1.0, and a net operating income to debt service ratio of not less than 1.25 to 1.0. The Trust was permitted to 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. -29- In accordance with the Credit Facility, 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) London Interbank Offering Rate ("LIBOR") plus 2.75 basis points and requires quarterly interest-only payments. The Credit Facility is secured by the Scottsdale, Flagstaff, and Tucson Oracle hotel properties. The net book value of properties securing the Credit Facility at January 31, 2001, 2000, and 1999 was $12.3 million, $15.9 million, and $16.3 million, respectively. Interest is based on LIBOR plus 2.75 basis points (9.0%, 9.04%, and 7.59% at January 31, 2001, 2000, and 1999 respectively). 8. OTHER NOTES PAYABLE On September 26, 2000, the Trust purchased 22,500 Class A limited partnership units from Diane Jones by making an $844 down payment and issuing an unsecured promissory note in the amount of $52,000. The promissory note in the amount of $52,000 bears interest at 7% per year, effective September 26, 2000. The unpaid principal balance and accrued interest are due in 36 monthly payments of $1,606 beginning on November 27, 2000 and ending on October 27, 2003. To date, all payments have been made as scheduled. The balance on January 31, 2001 was $48,070. On April 3, 2000, the Partnership repurchased 60,000 of the Trust's shares from Anderson Charitable Remainder Trust by issuing a secured promissory note in the amount of $120,000. The promissory note is secured by the repurchased shares. The secured promissory note bears interest at 7% per year, effective April 3, 2000. The unpaid principal balance and accrued interest are due in 24 monthly payments of $5,373 beginning on May 1, 2000 and ending on April 1, 2002. All payments have been made as scheduled. The balance on January 31, 2001 was $76,951. 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 bore interest at 7% and matured January 30, 2000. The Trust paid the final principal payment and all interest due on February 11, 2000. 9. NOTES AND ADVANCES PAYABLE TO RELATED PARTIES Notes and advances payable to related parties consists of funds provided by James F. Wirth and other related parties to repurchase Partnership units and to fund working capital and capital improvement needs. The aggregate amounts outstanding were approximately $7.5 million and $3.0 million as of January 31, 2001 and 2000, respectively. The loans payable to related party are as follows: Wirth made an unsecured loan to the Trust in the amount of $2 million, bearing interest at 7% per year, effective March 15, 1999. Interest only payments were due annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004. The Trust used the proceeds to purchase general partner units in the Partnership. The balance as of January 31, 2001 was $2,000,000. -30- Wirth received an unsecured promissory note that consolidated four outstanding unsecured loans to the Trust totaling $600,000. The loan amounts consolidated were $200,000, $120,000, $30,000 and $250,000, all bearing interest at 7% per year with varying maturities. Interest on these four notes through July 31, 2000 was approximately $41,999 which was subsequently paid on August 15, 2000 according to the unsecured consolidated promissory note. The loans were used to fund operations, to pay down the outstanding loan to the Partnership and to pay dividends declared October 12, 1999. The unsecured consolidated promissory note from the Trust in the amount of $600,000, bearing interest at 7% per year, became effective August 1, 2000. The unpaid principal balance and accrued interest on the unsecured consolidated promissory note is due on May 15, 2001. The balance as of January 31, 2001 was $600,000. Wirth made eight unsecured loans to the Trust in the total amount of $2,036,000, all bearing interest at 7% per year, effective varying from August 15 to December 8, 2000. The unpaid principal balances and accrued interest are due ranging from May 15 to July 1, 2001. The Trust used the proceeds to acquire the Albuquerque, New Mexico hotel and to fund operations. The balance as of January 31, 2001 was $1,472,000. On July 27, 2000, the Partnership repurchased 300,000 of the Trust's shares from Wirth and/or affiliates, owned directly or indirectly by Wirth, issuing 10 secured promissory notes in the aggregate amount of $720,000 and $3,000 cash. The promissory notes are secured by the repurchased shares. The secured promissory notes in the aggregate amount of $720,000 bear interest at 7% per year, effective July 27, 2000. The unpaid principal balances and accrued interest are due at various dates ranging from August 27, 2000 to July 27, 2003. All payments have been made as scheduled. The balance on January 31, 2001 was $568,298. On July 27, 2000, the Trust purchased 311,326 of the Partnership's Class A limited partnership units from Steve Robson, Trustee of the Trust, for $750,000. The Trust made an initial payment of $5,000 and issued a promissory note in the amount of $745,000. The promissory note is secured by the purchased Partnership units. The secured promissory note bears interest at 7% per year, effective July 27, 2000. The unpaid principal balance and accrued interest is amortized over 36 months. The final payment is due August 27, 2003. All payments have been made as scheduled. The balance as of January 31, 2001 was $631,409. Rare Earth Development Company, owned directly or indirectly by Wirth, made two unsecured loans to the Trust in the total amount of $2,200,000 both bearing interest at 7% per year, effective on December 29, 2000 and January 26, 2001. The unpaid principal balances and accrued interest are due on July 15, 2001. The Trust used the proceeds to fund operations. The balance as of January 31, 2001 was $2,200,000. 10. MINIMUM DEBT PAYMENTS Scheduled minimum payments of debt as of January 31, 2001 are as follows:
FISCAL YEAR ENDED AMOUNT ----------------- ------ 2002 $ 5,412,929(2) 2003 7,739,206 2004 1,486,954 2005 9,811,081 2006 2,542,271 Thereafter 18,957,896 ----------- $45,950,337(1) ===========
(1) Three hundred thousand dollars ($300,000) of debt was repaid by February 9, 2001 and is not included in the aforementioned summary. See also note (2) below. -31- (2) In the first quarter of fiscal year 2002, the Trust refinanced approximately $9 million in mortgage debt on two of its hotel properties and utilized the funds to pay-down the amount outstanding on its $11.3 million Credit Facility. The remaining balance of $2.3 million is being transferred to a term loan, which, for purposes of this schedule, is included in the fiscal year 2003 payments. Principal payments on the $9 million refinanced has been included in the respective years applicable. Also, on April 28, 2001, the mortgage note payable on the Tucson St. Mary's hotel matured and the Bank has proposed an extension of the term of the mortgage note for twelve months until April 28, 2002. Therefore, this amount has been included in the fiscal 2003 minimum payments. For more information, see Note 22 "Subsequent Events" and Note 23 "Liquidity and Capital Resources." 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 therefore. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or winding-down 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. For the years ended January 31, 2001 and 2000, the Trust repurchased 461,743 and 189,500 Shares of Beneficial Interest at an average price of $2.24 and $2.44 per share, respectively. Repurchase of these shares are accounted for on the Treasury Stock Method and are reported as such in the Statement of Shareholders' Equity. 12. PERCENTAGE LEASE AGREEMENTS Effective February 1, 2001, the Trust 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, 2009, 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: 2002 $ 7,275,000 2003 7,275,000 2004 7,275,000 2005 7,275,000 2006 7,275,000 Thereafter 21,825,000 ----------- $58,200,000 ===========
The Trust earned approximately $9.7 million, $9.5 million and $ 9.9 million in rent revenue during fiscal 2001, 2000 and 1999, respectively, of which, approximately $2.7 million, $2.6 million and $3.3 million, respectively, was in excess of base rent. 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 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, 2001 and 2000. As a REIT, the Trust normally distributes 95% of its taxable income to its -32- shareholders. For the years ended January 31, 2001, 2000 and 1999, the Trust had a taxable income (loss) of approximately ($80,000), ($1,980,000) and ($1,164,000), respectively, before consideration of net operating loss carry forwards. In fiscal years 2001 and 2000, the primary difference between book loss and taxable income relates to excess book depreciation over tax depreciation. The total dividends per share applicable to operating results for the years ended January 31, 2001, 2000, and 1999, amounted to $0.04 per share, $0.01 per share, and $0.10 per share, respectively. The Trust has an income tax net operating loss of approximately $16.6 million at January 31, 2001. Net operating loss carryforwards expire beginning in fiscal 2008 and ending in fiscal 2021. 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 2000 CALENDAR 1999 CALENDAR 1998 ------------- ------------- ------------- Ordinary Return Total Ordinary Return Total Ordinary Return Total Month Paid Income of Capital Paid Income of Capital Paid Income of Capital Paid -------------------------------------------------------------------------------------------------------------------- January - $.01 .01 - - - - - - May - $.01 .01 - - - - - - July - $.01 .01 - - - - - - September - - - - - - - .10 .10 October - $.01 .01 - $.01 .01 - - - --- --- --- --- --- --- --- --- --- - $.04 .04 - $.01 .01 - .10 .10 === === === === ==== === === === ===
The tax status of distributions to shareholders in calendar 2001 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 2000, such dividends will represent ordinary income to the recipients irrespective of the net operating loss carryforward. If certain changes in the Trust's ownership should occur, there could be an annual limitation on the amount of carryforwards that can be utilized, which could potentially impair the ability to utilize the full amount of the carryforwards. 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. 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. -33- 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 $130,000 a year. 15. OTHER RELATED PARTY TRANSACTIONS The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement. At January 31, 2001, Wirth was a 9.8% indirect shareholder of the Lessee. See Note 22 "Subsequent Events." At January 31, 2001 the Trust had a $493,500 receivable from the Lessee. The Initial Hotels were acquired by the Partnership from entities in which Wirth and his affiliates had substantial ownership interests. Wirth and his affiliates received 4,017,361 Class B limited partnership units and 647,231 Shares of Beneficial Interest in the Trust in exchange for their interests in the Initial Hotels. As of January 31, 2001 and 2000 Wirth and his affiliates held 5,226,364 Class B limited partnership units. As of January 31, 2001 and 2000 Wirth and his affiliates held 630,713 and 834,613, respectively, Shares of Beneficial Interest in the Trust. At January 31, 2001, the Trust owned a 48.17% interest in the eleven hotels (the "Hotels") through its sole general partner's interest in the Partnership. This change in ownership resulted primarily from the following transactions: On March 15, 1999, the Trust purchased 1 million additional general partner units in the Partnership for $2 million. This transaction was fully funded by Mr. Wirth who provided an unsecured loan to the Trust at 7% interest payable annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004. On April 2, 1999, the Partnership made an unsecured loan to the Trust in the amount of $2.6 million. Annual interest only payments are due on March 1 of each year and are based on a 7% interest rate. The unpaid principal balance is due at maturity on April 2, 2006. The Trust used the proceeds of that loan to purchase 1.3 million general partner units in the Partnership. The money lent by the Partnership was generated by refinancing the Northern Phoenix hotel and borrowing an additional $1.8 million that was secured by a mortgage on that property. 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. As of April 2, 1999, the Trust transferred, at historical cost of approximately $7 million, its interest in the Scottsdale property to the Partnership in exchange for 1.6 million general partner units. The Trust repurchased 131,493 of the Partnership's Class A limited partnership units in fiscal 2000 at a weighted average price per unit of $4.10. The units were then retired. The Trust repurchased 370,487 of the Partnership's Class A limited partnership units in fiscal 2001 at a weighted average price per unit of $2.37. Of these units, 36,911 were then retired and the remaining 333,576 then became general partner units. -34- The Trust recorded expenses of $0, $17,000, and $2,400, in fiscal years 2001, 2000 and 1999, respectively, for legal services provided by a law firm of which the former President of the Trust and another former Trustee are principals. The Trust paid interest on related party notes to Mr. Wirth in the amounts of $185,597, $14,000, and $135,000 for the twelve months ended January 31, 2001, 2000 and 1999, respectively. The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees, and depreciation of the Hotels. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Trust's significant financial instruments at January 31, 2001 and 2000 are as follows:
2001 2000 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Mortgage notes payable $25,628,572 26,303,299 24,251,662 22,523,421 Notes payable to banks $11,300,000 11,300,000 11,300,000 11,300,000 Other notes payable 125,021 125,021 125,000 125,000 Notes and advances payable to related parties $ 7,471,707 * 2,970,000 *
* It is not practical to estimate the fair value of related party payables. 17. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest amounted to approximately $3.4 million, $3.4 million, and $2.4 million for fiscal years 2001, 2000, and 1999, respectively. The Trust satisfied its $2.6 million 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 in fiscal 1999. 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 approximately $1.0 million. In connection with the acquisition of the Buena Park hotel during the second quarter of fiscal 1999, approximately $4.5 million of historical net book value in hotel properties was contributed to the Partnership in exchange for partnership units and the Partnership assumed approximately $4.1 million of debt and other obligations. In connection with the acquisition of the San Diego hotel, approximately $3.7 million of the purchase price was satisfied through promissory notes payable to the sellers. In connection with the acquisition of the Albuquerque hotel, approximately $1.6 million of the purchase price was satisfied through a mortgage note payable to a third party lender. 18. COMMITMENTS AND CONTINGENCIES Two of the Hotels are subject to non-cancelable ground leases expiring December 31, 2051 and January 9, 2029. Total expense for the fiscal years ended January 31, -35- 2001, 2000 and 1999 was $104,805, $70,000 and $70,000 plus a variable component that totaled approximately $64,000, $67,000 and $77,000, respectively. Future minimum lease payments are as follows:
Fiscal Year Ended 2002 159,780 2003 159,780 2004 159,780 2005 159,780 2006 159,780 Thereafter 5,549,940 ---------- $6,348,840 ==========
The Trust is obligated to make funds available to the Hotels for capital expenditures (the "Reserve Funds"), as determined in accordance with the Percentage Leases. The Reserve Funds have not been recorded on the books and records of the Trust as such amounts are capitalized as incurred. The amounts obligated under the Reserve Funds are 4% of the individual Hotels' 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 cannot be determined, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position, results of operations or liquidity of the Hotels. The Trust is involved from time-to-time 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. 19. STOCK OPTION PLAN During fiscal 1999, the shareholders of the Trust adopted the 1997 Stock Incentive and Option Plan (the "Plan"). 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. Generally, options granted expire in 10 years, are exercisable during the optionee's lifetime only by the recipient and are non-transferable. Unexercised options held by employees of the Trust generally terminate on the date the individual ceases to be an employee of the Trust. There were no options granted in fiscal year 2001. The per share weighted average fair value of stock options granted under the Plan for the years ended January 31, 2000 and 1999 was $1.12 and $1.26, respectively, using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000 and 1999:
Years ended January 31 2001 2000 1999 ---- ---- ---- Dividend yield - 2.5% - Expected volatility - 34.0% 37.5%
-36- Risk-free interest rate - 5.7% 5.0% Expected lives (years) - 3.0 2.5
At January 31, 2001, the exercise price and weighted average remaining contractual life of options was $2.50 and 7.6 years, respectively. The following table summarizes the stock option activity during the 2001, 2000 and 1999 fiscal years and provides information about the stock options outstanding at January 31, 2001:
Weighted- Average Number of Options Exercise Price ----------------- -------------- Stock Option Activity Outstanding, January 31, 1998 -- $ -- Granted 405,000 4.31 Forfeited (15,300) 4.31 Exercised -- -- ----------------- -------------- Outstanding, January 31, 1999 389,700 $ 4.31 Granted 88,200 2.50 Forfeited (102,300) 3.83 Exercised -- -- ----------------- -------------- Outstanding, January 31, 2000 375,600 $ 2.50 Granted -- -- Forfeited (31,500) 2.50 Exercised -- -- ----------------- -------------- Outstanding, January 31, 2001 344,100 $ 2.50 ================= ==============
Stock Option Information January 31, 2001 ------------------------ ---------------- Options exercisable 89,400 Weighted Average Exercise Price $ 2.50
For stock options granted to non-employees of the Trust, compensation is recognized over the respective vesting period based upon the fair value of the options as calculated using the Black-Scholes pricing model. During the years ended January 31, 2001, 2000, and 1999, the Trust granted 0, 28,200, and 214,100 stock options to non-employees, respectively. This resulted in the recognition of compensation expense of $0, $57,000, and $184,000 during the respective years. The Trust applies APB Opinion No. 25 in accounting for stock options granted its employees under the plan and, accordingly, no compensation cost has been recognized for these stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro-forma amount indicated below: -37-
YEARS ENDED JANUARY 31 ---------------------- 2001 2000 1999 ---- ---- ---- Net loss: As reported $ (2,594,754) $ (951,811) $ (193,071) ================ ================ ================ Pro forma $ (2,698,244) $ (1,058,408) $ (293,468) ================ ================ ================ Net loss per share - basic and diluted: As reported $ (1.12) $ (0.40) $ (0.10) ================ ================ ================ Pro forma $ (1.16) $ (0.45) $ (0.15) ================ ================ ================
Effective September 14, 1999, the Trust modified all outstanding stock options, reducing the exercise price from the existing exercise price per share to $2.50, to be consistent with the trading value of underlying beneficial interest as of this date. As a result of the modification of exercise price, the Trust recognized approximately $10,000 compensation expense for the year ended January 31, 2000. 20. NET LOSS PER SHARE The Trust calculates basic and diluted net income (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during each period (2,316,972, 2,376,770 and 1,921,902 shares for the years ended January 31, 2001, 2000, and 1999, respectively). Diluted net loss per share is the same as basic net loss per share for the years ended January 31, 2001, 2000 and 1999 due to the anti-dilutive effect of potentially dilutive securities on loss from continuing operations. 21. QUARTERLY RESULTS (UNAUDITED) The following is a summary of the results of operations, by quarter, for the fiscal years ended January 31, 2001 and 2000. 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. -38-
QUARTER ENDED FISCAL 2001 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 ----------- -------- ------- ---------- ---------- Total revenues $3,321,309 2,086,259 2,173,744 2,157,143 ========== ========== ============= ============= Total revenues less interest expense on mortgage loans and operating expenses, and amortization expense of real estate held for sale $2,464,217 1,175,233 1,178,741 1,150,975 ========== ========== ============= ============= Net income (loss) $ 392,489 (403,513) (513,844) (2,150,668) ========== ========== ============= ============= Income (loss) per share - Basic $ .16 (.17) (.24) (.99) ========== ========== ============= ============= Income (loss) per share - diluted $ .10 (.17) (.24) (.99) ========== ========== ============= ============= Dividends declared per share $ .10 .01 .01 .01 ========== ========== ============= ============= QUARTER ENDED FISCAL 2000 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 ----------- -------- ------- ---------- ---------- Total revenues $3,284,978 2,102,983 2,037,540 2,120,679 ========== ============= ============= ============= Total revenues less interest expense on mortgage loans and operating expenses, and amortization expense of real estate held for sale $2,527,452 653,656 1,278,142 1,769,061 ========== ============= ============= ============= Net income (loss) $ 379,307 (295,821) (98,975) (936,322) ========== ============= ============= ============= Income (loss) per share - basic $ .16 (.13) (.04) (.39) ========== ============= ============= ============= Income (loss) per share - diluted $ .10 (.13) (.04) (.39) ========== ============= ============= ============= Dividends declared per share $ .10 - .01 .01 ========== ============= ============= =============
22. SUSEQUENT EVENTS Effective February 1, 2001, the Trust acquired the Lessee, InnSuites Hotels Inc., following the guidelines of the REIT Modernization Act. The rate structures of the Percentage Leases for the Hotels were amended to reflect current economic and market conditions. Concurrent with these changes, a new management company, Suite Hospitality Management, Inc., contracted with the Lessee to assume management of the Hotels, replacing InnSuites Innternational Hotels, Inc. On April 18, 2001, the Trust refinanced its Ontario property and used the net proceeds of $4.2 million to reduce the Trust's outstanding balance of $11.3 million on its Credit Facility to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Pacific Century Bank has proposed the issuance of a term loan to replace the remaining balance of the Credit Facility. The terms of the replacement term loan are subject to review and approval by Pacific Century Bank. If, for any reason, Pacific Century Bank does not issue the replacement term loan, the Trust has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the $2.3 million outstanding balance of the Credit Facility with another lending institution and therefore satisfy the outstanding balance of the Credit Facility. In the unlikely event that Pacific Century Bank forecloses on the Flagstaff and Scottsdale properties, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. Pacific Century Bank has agreed to waive all covenants relating to the Credit Facility and to extend the effectiveness of the Credit Facility until July 16, 2001 to allow time to structure the replacement term loan which will be secured by the Flagstaff and Scottsdale properties. On April 28, 2001, the mortgage note payable to Bank One on the Tucson St. Mary's hotel matured. The outstanding principal balance is $3,762,839. Bank One has proposed an extension of the term of the mortgage note for twelve months until April 28, 2002. The extended mortgage note will bear interest at the Bank One Prime Rate plus one percent (1%). On April 30, 2001, the Bank One Prime Rate was seven and one-half percent (7.5%). These terms are subject to formal review and approval by the Bank One Credit Committee. If, for any reason, Bank One does not extend the mortgage note, the Trust has sufficient unencumbered equity in the Tucson St. Mary's property to refinance the outstanding balance of the mortgage note with another lending institution and therefore satisfy the outstanding balance of the mortgage note. In the unlikely event that Bank One forecloses on the Tucson St. Mary's property, management believes that the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. 23. LIQUIDITY AND CAPITAL RESOURCES The Trust has experienced a net loss applicable to Shares of Beneficial Interest of $2,594,754 and $951,811 for the years ended January 31, 2001 and 2000, respectively. However, cash flows from operations for each of these respective years have been $809,501 and $800,349 and the Trust has shareholders' equity of approximately $5 million at January 31, 2001. The Trust's principal source of cash to meet its cash requirements, including distributions to its shareholders, is its share of the Partnership's cash flow. The Partnership's principal source of revenue is rent payments under the Percentage Leases. The Lessee's obligations under the Percentage Leases are unsecured and its ability to make rent payments to the Partnership under the Percentage Leases, and the Trust's liquidity, including its ability to make distributions to its shareholders, will depend upon the ability of the Lessee to generate sufficient cash flow from hotel operations. As a result of the Trust's acquisition of the Lessee as of February 1, 2001, any profits earned by the Lessee in its operation of the Hotels may be distributed to the Trust. See "Item 1 - Business - Acquisition of the Lessee by the Trust." For the twelve months ended January 31, 2001 and 2000, the Trust recorded provisions of approximately $2.4 million and $1.9 million for uncollectible receivables. These charges reflect the Trust's assessment of the collectibility of its receivables, which primarily consists of rent receivable from the Lessee, based on an evaluation of the Lessee's estimated future cash flows. On April 18, 2001, the Trust refinanced its Ontario property and utilized $4.2 million of the net proceeds to reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1 million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle property and used $4.8 million of the net proceeds to reduce the outstanding balance of the Credit Facility to approximately $2.3 million. Pacific Century Bank has proposed the issuance of a term loan (twelve months) to replace the portion of the Credit Facility that is secured by the Flagstaff and Scottsdale properties. The terms of the replacement term loan are subject to review and approval by Pacific Century Bank. However, if for any reason, Pacific Century Bank does not issue the replacement term loan, the Trust has sufficient unencumbered equity in the Flagstaff and Scottsdale properties to refinance the outstanding balance (and satisfy the balance due to Pacific Century Bank) with another lending institution. In the unlikely event that Pacific Century Bank forecloses on the property, management believes the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. On April 28, 2001, the mortgage note payable to Bank One on the Tucson St. Mary's hotel matured. The outstanding principal balance was $3,762,839. Bank One has proposed an extension of the term of the mortgage note for twelve months until April 28, 2002. The extended note will bear interest at the Bank One Prime Rate plus one percent (1%). On April 30, 2001, the Bank One Prime Rate was seven and one-half percent (7.5%). These terms are subject to formal review and approval by the Bank One Credit Committee. If, for any reason, Bank One does not extend the mortgage note, the Trust has sufficient unencumbered equity in the Tucson St. Mary's property to refinance the outstanding balance (and satisfy the balance due to Bank One) with another lending institution. In the unlikely event that Bank One forecloses on the property, management believes the unencumbered equity will be sufficient to prevent a loss at a foreclosure sale. The Trust has approximately $4.8 million due and payable in fiscal year 2002 under notes and advances payable to Wirth. To the extent the Trust can not satisfy these amounts as they come due, Wirth has agreed to extend the terms of these borrowings to future dates. Management believes that cash on hand, future cash receipts and borrowings from affiliates in fiscal year 2002 will be sufficient to meet the Trust's expansion plans and to pay all obligations as they become due for the next twelve months. -39- SCHEDULE III INNSUITES HOSPITALITY TRUST AND SUBSIDIARY REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF JANUARY 31, 2001
Cost Initial Capitalized Gross Amounts At Cost Subsequent to Which Carried At to Trust Acquisition Close of Period ------------------------- -------------------- ------------------- Building and Building and Building and Encumbrances Land Improvements Land Improvements Land Improvements ------------ ---- ------------ ---- ------------ ---- ------------ InnSuites Hotels Phoenix Best Western Phoenix, Arizona $ 4,116,825 $ 418,219 $ 2,922,884 $ - $ 159,295 $ 418,219 $3,082,179 InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 2,223,862 686,806 6,548,348 - 196,578 686,806 6,744,926 InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) - - 4,220,820 - 1,807,910 - 6,028,730 InnSuites Hotels Yuma Best Western Yuma, Arizona 3,326,624 251,649 4,983,292 - 797,327 251,649 5,780,619 Holiday Inn Airport Ontario Hotel and Suites Ontario, California 3,368,969 1,633,064 5,450,872 - 273,760 1,633,064 5,724,632 InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) - 100,000 1,194,691 - 1,073,503 100,000 2,268,194 InnSuites Hotels Tucson St. Mary's Tucson, Arizona 3,780,692 900,000 9,166,549 (20,564) 368,760 879,436 9,535,309 Buena Park Suite Hospitality Buena Park Suites Buena Park, California 3,298,754 645,852 4,336,476 - 1,764,521 645,852 6,100,997 InnSuites Hotels San Diego Hospitality San Diego, California 3,959,206 700,000 3,972,785 - 205,964 700,000 4,178,749 InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) - 350,000 6,074,400 (163,791) (3,005,262) 186,209 3,069,138 Airport Inn Albuquerque Albuquerque, New Mexico 1,553,640 - 1,903,970 - 106,298 - 2,010,268 ----------- ---------- ----------- --------- ---------- ---------- ----------- $25,628,572 $5,685,590 $50,775,087 $(184,355) $3,748,654 $5,501,235 $54,523,741 =========== ========== =========== ========= ========== ========== ===========
-40- SCHEDULE III (continued)
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 $ 3,500,398 $ 234,921 $ 3,265,477 1980 1998 5-40 years InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 7,431,732 506,133 6,925,599 1982 1998 5-40 years InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) 6,028,730 452,107 5,576,623 1981 1998 5-40 years InnSuites Hotels Yuma Best Western Yuma, Arizona 6,032,268 432,187 5,600,081 1982 1998 5-40 years Holiday Inn Airport Ontario Hotel and Suites Ontario, California 7,357,696 428,288 6,929,408 1990 1998 5-40 years InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) 2,368,194 163,017 2,205,177 1966 1998 5-40 years InnSuites Hotels Tucson St. Mary's Tucson, Arizona 10,414,745 698,799 9,715,946 1960 1998 5-40 years Buena Park Suite Hospitality Buena Park Suites Buena Park, California 6,746,849 401,637 6,345,212 1972 1998 5-40 years InnSuites Hotels San Diego Hospitality San Diego, California 4,878,749 288,794 4,589,955 1946 1998 5-40 years InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) 3,255,347 - 3,255,347 1980 1998 5-40 years Airport Inn Albuquerque Albuquerque, New Mexico 2,010,268 27,373 1,982,895 1975 2000 5-40 years ------------------------------------------- $60,024,976 $3,633,256 $56,391,720 =========== ========== ===========
(See accompanying independent auditors report.) (A) Aggregate cost for federal income tax purposes at January 31, 2001 is as follows: Land $ 5,666,892 Buildings and improvements 24,568,835 ----------- $30,235,727 ===========
(B) These properties secure the $12 million Credit Facility. Reconciliation of Real Estate: Balance at January 31 1999 $ 60,017,468 Improvement to hotel properties 695,238 ------------ Balance at January 31, 200 $ 60,712,706 Acquisition of Hotel Properties 1,903,970 Improvement to Hotel Properties 758,213 Impairment of Hotel Property (3,329,349) Sale of Land (20,564) ------------ Balance at January 31, 2001 $ 60,024,976 ============
All acquisitions of hotel properties, other than approximately $1,448,000 in cash paid in connection with the purchase of the Buena Park property and $2,100,000 paid -41- for the Albuquerque 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 Depreciation 1,368,788 ---------- Balance at January 31, 2000 2,675,574 Depreciation 1,423,533 Impairment of hotel property (465,851) ---------- Balance at January 31, 2001 $3,633,256 ==========
-42- Independent Auditors' Report The Board of Directors InnSuites Hotels, Inc.: We have audited the accompanying balance sheets of InnSuites Hotels, Inc. (the "Company") as of January 31, 2001 and 2000, and the related statements of operations, stockholders' deficit and cash flows for each of the years in the two-year period ended January 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 Hotels, Inc. as of January 31, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the two-year period ended January 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Phoenix, Arizona April 30, 2001 -43- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- The Board of Directors InnSuites Hotels, Inc: We have audited the balance sheet (not presented herein) of InnSuites Hotels, Inc., as of January 31, 1999, and the related statements of operations and stockholders' deficit and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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, Inc., as of January 31, 1999, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Phoenix, Arizona MICHAEL MAASTRICHT, CPA April 14, 2000 -44- INNSUITES HOTELS, INC. BALANCE SHEETS
JANUARY 31, ---------- 2001 2000 ---- ---- Assets Cash and cash equivalents $ 71,491 203,166 Accounts receivable, net 1,132,274 790,323 Prepaids and other assets 223,222 41,938 ----------- ---------- Total Assets $ 1,426,987 1,035,427 ----------- ---------- Liabilities and Stockholders' Deficit Liabilities Accounts payable 1,671,562 1,418,469 Loans from affiliates 631,834 375,000 Percentage rent payable 5,251,862 2,845,732 Accrued expenses and other liabilities 775,790 865,953 ----------- ---------- Total Liabilities 8,331,048 5,505,154 Stockholders' Deficit Preferred stock, $1 par value, 100 shares authorized, 100 shares issued and outstanding as of January 31, 2000 and 2000 100 100 Additional paid-in-capital 249,900 249,900 Common stock, no par value, 100,000 shares authorized, 76,555 shares issued and outstanding as of January 21, 2001 and 2000 2,431 2,431 Accumulated Deficit (7,156,492) (4,722,158) ----------- ---------- Total Stockholders' Deficit (6,904,061) (4,469,727) ----------- ---------- Total Liabilities and Stockholders' Deficit $ 1,426,987 1,035,427 =========== ==========
See accompanying notes to financial statements. -45- INNSUITES HOTELS, INC. STATEMENTS OF OPERATIONS
For the years ended January 31, 2001 2000 1999 ---- ---- ---- Revenue from hotel operations: Room $ 26,077,800 25,146,035 24,341,384 Food and beverage 1,709,045 1,725,730 1,613,766 Telecommunications 335,932 346,091 460,770 Other 733,637 734,585 291,281 ------------ ----------- ----------- Total revenues $ 28,856,414 27,952,441 26,707,201 ------------ ----------- ----------- Department expenses: Rooms $ 7,136,313 6,706,503 7,787,234 Food and beverage 1,620,049 1,626,532 1,409,010 Telecommunications 447,758 389,664 495,566 Other 445,236 437,240 138,468 General and administrative 4,562,012 3,918,748 3,975,266 Sales and marketing 2,173,381 2,149,781 2,082,812 Repairs and maintenance 1,816,917 2,025,576 1,344,715 Hospitality 1,647,599 1,546,766 1,202,005 Utilities 1,824,198 1,643,788 1,572,819 Insurance 167,867 105,573 62,437 Percentage rent 9,699,418 9,516,038 9,976,880 ------------ ----------- ----------- Total expenses $ 31,540,748 30,066,209 30,047,212 ------------ ----------- ----------- Net loss $ (2,684,334) (2,113,768) (3,340,011) ============ =========== ===========
See accompanying notes to financial statements. -46- INNSUITES HOTELS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT For the years ended January 31, 2001, 2000 and 1999
RETAINED PREFERRED COMMON EARNINGS STOCK STOCK (ACCUMULATED DEFICIT) TOTAL ----- ----- ----- BALANCE, January 31, 1998 $250,000 $2,431 $ 1,621 $ 254,052 Contributions -- -- 480,000 480,000 Net Loss -- -- (3,340,011) (3,340,011) -------- ------ ------------ ----------- BALANCE, January 31, 1999 $250,000 2,431 $ (2,858,390) $(2,605,959) -------- ------ ------------ ----------- Contributions -- -- 250,000 250,000 Net Loss -- -- (2,113,768) (2,113,768) -------- ------ ------------ ----------- BALANCE, January 31, 2000 $250,000 $2,431 $ (4,722,158) $(4,469,727) -------- ------ ------------ ----------- Contributions -- -- 250,000 250,000 Net loss -- -- (2,684,334) (2,684,334) -------- ------ ------------ ----------- BALANCE, January 31, 2001 $250,000 $2,431 $ (7,156,492) $(6,904,061) ======== ====== ============ ===========
See accompanying notes to financial statements. -47- INNSUITES HOTELS, INC. STATEMENTS OF CASH FLOWS
For the years ended January 31, 2001 2000 1999 ----------- ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,684,334) (2,113,768) (3,340,011) Adjustments to reconcile net loss to net cash used in operating activities: (Increase) in Accounts receivable (341,951) (123,242) 142,978 (Increase) decrease in Prepaids and Other Assets (181,284) 78,617 639,280 Decrease in Inventories -- -- 493,648 Increase in Accounts payable 253,093 219,224 229,067 Increase in Percentage rent payable 2,406,130 1,157,554 1,688,178 Increase (decrease) in Accrued expenses and other liabilities (90,163) 60,050 (6,936) ----------- ---------- ---------- Net cash (used in) operating activities $ (638,509) (721,565) (153,796) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on loans from affiliates 256,834 238,552 -- Payments on loans from affiliates -- -- (212,120) Contributions 250,000 250,000 480,000 ----------- ---------- ---------- Net cash provided by financing activities $ 506,834 488,552 267,880 ----------- ---------- ---------- Net change in cash and cash equivalents (131,675) (233,013) 114,084 Cash and cash equivalents at beginning of year 203,166 436,179 322,095 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 71,491 203,166 436,179 =========== ========== ==========
See accompanying notes to financial statements. -48- INNSUITES HOTELS, INC. Notes to Financial Statements As of and for the years-ended January 31, 2001, 2000 and 1999 1. Organization & Basis of Presentation InnSuites Hotels, Inc., (the "Company") leases and operates hotels owned by RRF Limited Partnership (the "Partnership"). The Partnership is owned by several Limited Partners and a General Partner, InnSuites Hospitality Trust(the "Trust"). The Trust is an unincorporated Ohio real estate investment trust (the "REIT") which agreed to acquire equity interests in several existing hotel properties on January 31, 1998 and to consider selectively the purchase or development of additional hotels in the expansion of its business. The Trust acquired its General Partner interest, representing a 13.6% equity interest in the Partnership as of January 31, 1998. The partners and shareholders of the original InnSuites Hotels, Inc. contributed their respective partnership and corporate interests to the Partnership in exchange for cash, partnership interests or REIT Common stock on January 31, 1998. The following full-service hotels are leased and operated by the Company:
Property Location Number of Suites -------- -------- ---------------- InnSuites Tempe/Airport Tempe, AZ 170 InnSuites Scottsdale Scottsdale, AZ 132 InnSuites Flagstaff Grand Canyon Flagstaff, AZ 118 InnSuites Phoenix Best Western Phoenix, AZ 123 InnSuites Tucson Best Western Tucson, AZ 159 InnSuites Yuma Best Western Yuma, AZ 166 Holiday Inn Airport InnSuites Ontario Ontario, CA 150 InnSuites Tucson St. Mary's Tucson, AZ 297 InnSuites San Diego San Diego, CA 147 InnSuites Buena Park Buena Park, CA 185 InnSuites Hotels Airport Inn Albuquerque Albuquerque, NM 104 ----- Total Suites 1,751 =====
The Company leases these 11 hotels pursuant to individual operating leases which are structured on a hotel-by-hotel basis. The lessors of these leases are subsidiaries of the Partnership (the "Lessors"). In accordance with the lessor/lessee relationship, the operating hotels are required to make percentage lease payments to the Lessors based on a percentage of hotel room revenues. The amount of the lease payments is calculated on an individual hotel basis and is governed by an executed lease agreement which details the method of lease payment calculation. The calculation to determine each hotel percentage lease payment is based on quarterly hotel revenues. All of the hotels offer studio and two-room suites with a variety of room upgrades available, such as the two-room "Executive/Family Suite", the "Boardroom Meeting Suite" or a "Presidential Jacuzzi Suite." In addition, the hotels operate as moderate and full-service hotels near premier vacation areas such as the Grand Canyon and Disneyland along with other attractions and business centers. The financial statements include the accounts of InnSuites Hotels, Inc. and the results of operations of the 11 leased hotels. All significant intercompany -49- transactions have been eliminated, and certain prior period amounts have been reclassified to be consistent with current period financial statement presentation. 2. Summary of Significant Accounting Policies a) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b) Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. c) Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from accrued expenses not deducted for tax. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. d) Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk are principally trade accounts receivable. The Company's receivables are unsecured. e) Revenue Recognition Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided, if needed, against the portion of accounts receivable which is estimated to be uncollectible. Such losses have been minimal and within management's expectations. f) Repairs and Maintenance Repairs and maintenance are charged to operations as incurred by the Company. Costs incurred for major renovations and fixed asset purchases are reimbursed and capitalized by the Lessors. g) Advertising and Promotion The costs of advertising and promotional events are expensed as incurred. h) Fair Value of Financial Instruments Fair value is determined by using available market information and valuation methodologies. Financial instruments include cash and cash equivalents, -50- accounts receivable, accounts payable and accrued expenses and other liabilities, which due to their short maturities, are carried at amounts, which reasonably approximate fair value. 3. Percentage Lease Agreements Percentage Leases exist between the Company's individual leased hotels and the Lessors. The Percentage Leases have noncancellable lease terms which expire on January 31, 2009, and are subject to earlier termination on the occurrence of certain contingencies, as defined in the Percentage Leases. The rent due under each Percentage Lease is the greater of the minimum rent, also defined by the Percentage Lease, 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 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. Percentage rent expense for the years ended January 31, 2001, 2000 and 1999 was $9.7 million, $9.5 million and $10 million, respectively, of which $2.7 million, $2.6 million and $3.1 million, respectively, was in excess of minimum rent. Future minimal rentals (without reflecting future CPI increases) to be paid by the Company pursuant to the Percentage Leases for fiscal years 2002 to 2006 and in total thereafter are as follows: 2002 $ 7,275,000 2003 7,275,000 2004 7,275,000 2005 7,275,000 2006 7,275,000 Thereafter 21,825,000 ----------- $58,200,000 ===========
Other than real estate and personal property taxes, casualty insurance and capital improvements which are obligations of the Lessor, the Percentage Leases require the Company to pay rent, liability insurance premiums, and all costs, expenses, utilities and other charges incurred in the operation of the leased hotels. Property insurance premiums are allocated 50% to the Lessor and 50% to the Company. In addition, at January 31, 2001 and 2000, outstanding receivables due the Company from the Lessor for the reimbursement of capital improvements, which were paid for by the Company, were netted with percentage rent payable to the Lessor. The amounts netted against percentage rent payable were approximately $1.6 million and $731,000 at January 31, 2001 and 2000, respectively. The Company is required to indemnify the Lessor against all liabilities, costs and expenses incurred by or asserted against the Lessor in the normal course of operating the hotels. -51- 4. Income Taxes The components of the income tax expense (benefit) were as follows:
For the year ended, January 31, 2001 2000 ---------------------------------------- Federal: Current $ - $ - Deferred - - State and local: Current 950 - Deferred - - ----- ----- $ 950 $ - ===== =====
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
For the year ended, January 31, 2001 2000 ---- ---- Computed "expected" tax expense (benefit) $(912,673) (688,313) State income taxes, net of federal income tax effect 627 (106,469) Change in valuation allowance 622,052 792,062 Change due to difference in federal rate 254,438 - Adjustment to Federal Net Operating Loss 16,914 - Other, net 19,592 2,720 --------- --------- Income tax expense (benefit) $ 950 - ========= =========
The components of the Company's deferred tax assets as of January 31 were as follows:
2001 2000 ---- ---- Deferred tax assets: Operating loss carryforward $ 2,730,889 774,000 Charitable Contributions carryfoward 1,385 - Accrued expenses 21,195 1,118,000 ----------- ----------- Gross deferred tax assets 2,753,469 1,892,000 Less: valuation allowance (2,753,469) (1,892,000) ----------- ----------- Deferred tax assets, net $ - - =========== ===========
The deferred tax assets consist of differences resulting from accrued expenses not deductible for tax purposes and net operating loss carryforwards of approximately $7.3 million, which expire at various dates through January 31, 2020. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the projections in future taxable income over the periods in which the deferred tax assets are deductible, management believes it is prudent to fully reserve the Company's net deferred tax assets. -52- 5. Related Party Transactions Loans from Affiliates represents $631,834 due the Partnership, primarily for working capital advances. Amounts are repaid by the Company when cash flows are adequate to cover current expenses as well as amounts advanced. Until February 1, 2001, the Company was 9.8% indirectly owned by James F. Wirth, Chairman of the Company, who is also Chairman, President and CEO of the Trust. There are no terms or covenants governing these advances. Effective February 1, 2001, the Trust acquired the Company, following the guidelines of the REIT Modernization Act. The rate structures of the Percentage Leases for the Hotels were amended to reflect current economic and market conditions. Until February 1, 2001, InnSuites Innternational Hotels held a management agreement with the Company whereby the Company paid fees of 2.5% of hotel revenues for management, administrative and accounting related services. Effective February 1, 2001, Suite Hospitality Management, Inc. entered into a management agreement with the Company on substantially the same terms. InnSuites Licensing Corp., which is owned by Mr. Wirth, holds a trademark license agreement with the Company whereby the Company incurs fees from 1.25% to 2.5% of hotel revenues for the use of certain brand names. The Company contributes advertising fees to a fund in the amount of 1.5% of hotel revenues for purposes of centralized advertising programs. Amounts paid under these agreements are as follows:
For the year ended January 31 2001 2000 1999 ---- ---- ---- Management fees $ 722,284 $694,736 $768,501 Trademark license fees 552,368 533,865 300,144 Advertising fees 387,082 413,079 429,225 ---------- --------- --------- Total $1,661,734 1,641,680 1,497,870 ========== ========= =========
Mr. Wirth contributed $250,000 for each of the years ended January 31, 2001 and 2000 for working capital needs of certain hotels. These amounts are recorded as capital contributions. 6. Commitments and Contingencies Claims and Legal Matters The nature of the operations of the Company and its hotels exposes them to the risk of claims and litigation in the normal course of business. Although the outcome of these matters cannot be determined, management believes the aggregate potential losses, if any, would not have a material adverse effect on the Company's consolidated financial position or results of operations. Franchise Agreements The Company has franchise agreements with Best Western(R) and Holiday Inn(R) hotels in which fees generally approximate 3% of monthly revenues for Best Western(R) and 9% of monthly revenues for Holiday Inn(R). 7. 401(k) Benefit Plan All employees of the Company who have attained the age of twenty-one and have completed one year's service are eligible to participate in a contributory defined contribution 401(k) benefit plan. Under the plan, participants may contribute up to 6% of their salary. The Company matches 50% of the employee contribution. -53- Benefit expense under the plan amounted to $38,523, $25,022 and $17,822 for the years ended January 31, 2001, 2000 and 1999, respectively. 8. Liquidity The financial statements of the Trust disclose that a provision was recorded for all percentage rent receivables from the Company as of January 31, 2001. The Company has the ability to obtain funds for working capital needs from third parties or affiliates to fund short-term working capital needs. Based on the structure of the Company and its relationship with the Trust as the exclusive lessee, all payments of percentage rent expense are not called. Excluding percentage rent expense, all of the Hotels combined are cash flow positive and generated net income for the year ended January 31, 2001. The Trust has acquired the Company effective February 1, 2001 following the guidelines of the REIT Modernization Act. See "Item 1 - Business - Acquisition of the Lessee by the Trust." Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES. ---------------------- Arthur Andersen LLP resigned as principal auditors of the Trust as of March 18, 1999. Due to the magnitude of certain outstanding invoices payable to Arthur Andersen LLP for accounting and tax-related services provided to the Trust and its affiliates, Arthur Andersen LLP informed the Trust that it would no longer be considered independent with respect to the Trust under interpretations of the Securities and Exchange Commission and professional standards. On April 16, 1999 the audit committee of the Board of Trustees of the Trust approved KPMG LLP to succeed to Arthur Andersen LLP as the principal auditors of the Trust. The reports of KPMG LLP for the fiscal years ended January 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audits of the Trust's financial statements for the fiscal years ended January 31, 1999 and 1998, there were no disagreements with KPMG LLP or Arthur Andersen LLP, respectively, on any matters of accounting principles or practices, financial statement disclosure or auditing scope and procedure which, if not resolved to the satisfaction of the respective auditors, would have caused the auditors to make reference to the matter in their reports. In connection with the audits of the Trust's financial statements for the fiscal year ended January 31, 1999 and 1998, there were no "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K. During the fiscal years ended January 31, 1999 and 1998, and during all subsequent interim periods, the Trust did not consult with any other accountant regarding the application of accounting principles to a specified transaction either completed or proposed, the type of audit opinion that might be rendered on the Trust's financial statements, or any of the matters described above. -54- PART III -------- Item 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST. -------------------------------------------- The information concerning the Trustees and executive officers of the Trust set forth in the following table is based in part on information received from the respective Trustees and executive officers and in part on the Trust's records. The following table sets forth the name, age, term of office and principal business experience for each Trustee, nominee as a Trustee and executive officer of the Trust, as applicable.
Principal Occupations During Past Five Years, Age as of April 19, 2001 Trustee Name and Directorships Held Since ---- ---------------------- ----- Nominees for Terms Expiring in 2004 James F. Wirth(1) Chairman, President and Chief Executive Officer of the January 30, 1998 Trust since January 30, 1998. President and owner of Suite Hotels LLC and affiliated entities, owners and operators of hotels, since 1980; President of Rare Earth Development Company, a real estate investment company, since 1973. Age: 55. Peter A. Thoma Owner and operator of A&T Verleigh, Hamburg, Germany, a April 13, 1999 hospitality service and rental company, since 1997. Owner and operator of Thoma Zeltsysteme, Hamburg, Germany, an import and sales company, since 1997. Age: 35. Trustees Whose Terms Expire in 2003 Marc E. Berg(1) Executive Vice President, Secretary and Treasurer of the January 30, 1998 Trust since February 10, 1999. Vice President - Acquisitions of the Trust from December 16, 1998 to February 10, 1999. Consultant to InnSuites Hotels since 1989. Self-employed as a registered investment advisor since 1985. Age: 48. Lee J. Flory(2,3,4) Vice President, Secretary and Director of The Grainger January 30, 1998 Foundation Inc., a private charitable organization, since 1972. From 1969 until his retirement in 1991, Vice President and Secretary of W. W. Grainger, Inc., the leading North American provider of maintenance, repair and operating supplies to businesses and institutions. Age: 74.
-55-
Trustees Whose Terms Expire in 2002 Edward G. Hill(1,2,3,4) President of E. G. Hill & Associates, a management January 30, 1998 consulting company, since 1999. Former President of ABCO Foods, a division of Fleming Companies, Inc., an owner and operator of grocery stores, from 1984 to 1998. Age: 56. Steven S. Robson(2,3,4) President of Robson Communities, Inc. and Scott Homes and June 16, 1998 Scott Homes Multifamily, Inc., residential real estate developers, since 1979. Age: 45.
(1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. (4) Member of the Litigation Committee. Other Executive Officers Anthony B. Waters Chief Financial Officer of the Trust since February 29, 2000. Controller of the Trust since June 17, 1999. Accountant and auditor with Michael Maastricht, CPA from June 16, 1998 to June 15, 1999, performing audits for InnSuites Hotels, Inc. Self-employed, concentrating in computerized accounting and information systems since 1990. Age: 54. Section 16(a) Beneficial Ownership Reporting Compliance Based on Trust records and information, the Trust believes that all Securities and Exchange Commission filing requirements applicable to Trustees and executive officers under Section 16(a) of the Securities Exchange Act of 1934 , as amended (the "Exchange Act"), for the fiscal year ended January 31, 2001, were complied with, except that purchases of 15,200 Shares of Beneficial Interest by James F. Wirth and his wife in June 2000 were inadvertently reported nine days late by the Trust on their behalf. Section 16(b) of the Exchange Act provides that any profits realized by a Trustee, officer or beneficial owner of more than 10% of the Shares of Beneficial Interest as the result of matching sale and purchase transactions of Shares of Beneficial Interest that have occurred within a six month period must be disgorged to the Trust. Mrs. Gail J. Wirth, wife of James F. Wirth, voluntarily disgorged approximately $37,900 of imputed profits in accordance with Section 16(b) for certain sales of Shares of Beneficial Interest during the fiscal year ended January 31, 2001. Item 11. EXECUTIVE COMPENSATION. ---------------------- For fiscal year 2001, the Trust paid Trustees' fees to each Trustee, other than Messrs. Wirth and Berg, in the amount of $12,000 per year. For fiscal year 2002, the Trust will pay Trustees' fees to each Trustee, other than Messrs. Wirth and Berg, in the amount of $18,000 per year. The Trust compensates members of the Litigation Committee $100 per hour for their services in connection with that committee, up to a maximum of $5,000 per year. -56- SUMMARY COMPENSATION TABLE The table below shows individual compensation information for the Trust's Chief Executive Officer and any other executive officer whose total annual salary and bonus for the fiscal year ended January 31, 2001 exceeded $100,000.
Securities Underlying Name and Principal Position Year Annual Salary Options --------------------------- ---- ------------- ------- James F. Wirth President and Chief Executive Officer(1) 1999 --- 50,000(2) 2000 $130,000 --- 2001 $130,000 ---
----------------- (1) Mr. Wirth has served as President, Chief Executive Officer and Chairman of the Board since January 30, 1998. The terms of Mr. Wirth's Employment Agreement are summarized below. (2) The exercise price for these options is $2.50 per share. James F. Wirth, Chairman, President and Chief Executive Officer of the Trust, has an Employment Agreement with the Trust expiring in December 2007 which provides that he would receive no compensation from the Trust as long as the Partnership maintained an Advisory Agreement with MARA, a company owned by Mr. Wirth and his wife. The Advisory Agreement was terminated effective January 1, 1999. In fiscal 1999, MARA was paid $364,041 by the Trust for advisory services. For periods after the termination of the Advisory Agreement, Mr. Wirth may receive up to the amount MARA would have received for advisory and management services under the Advisory Agreement, not to exceed $160,000 per year. For fiscal year 2001, Mr. Wirth received $130,000 salary per year. For fiscal year 2002, the Compensation Committee has determined to increase Mr. Wirth's salary to $136,000 per year. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- The following table sets forth information as of April 19, 2001 in respect of any persons known to the Trust to be the beneficial owner of more than 5% of the Shares of Beneficial Interest and the number of Shares of Beneficial Interest owned beneficially by each Trustee, nominee and executive officer, and the Trustees, nominees and executive officers as a group. -57- Five Percent Beneficial Owners and Beneficial Ownership of Trustees, Nominees and Executive Officers
Shares % of Outstanding Name Beneficially Owned Shares ---- ------------------ ------------- Mason E. Andersen(1) 292,606 13.61% Dan Z. Bochner(2) 234,900 10.93% James F. Wirth(3) 647,380 29.89% Marc E. Berg(4) 121,225 5.61% Lee J. Flory(5) 163,883 7.21% Edward G. Hill(6) 16,919 (8) Steven S. Robson(7) 23,167 1.07% Peter A. Thoma 300 (8) Anthony B. Waters 2,000 (8) Trustees, Nominees and Executive Officers as a group (seven persons) 974,874 42.12%
------------------------------ (1)Consists of 152,606 Class A Limited Partnership Units in the Partnership that are convertible at any time, at the option of the holder thereof, into Shares of Beneficial Interest, 96,000 Shares of Beneficial Interest held by the Andersen Trust dated August 27, 1980, of which Mr. Andersen and his wife are co-trustees and income beneficiaries, and 44,000 Shares of Beneficial Interest held by the Andersen Charitable Remainder Unitrust dated August 11, 1999, of which Mr. Andersen and his wife are co-trustees and income beneficiaries. The address for Mr. Anderson is 3024 West Sahuaro Drive, Phoenix, Arizona 85029. (2)Pursuant to Amendment No. 2 to Schedule 13-D, dated December 30, 1996, filed with the Securities and Exchange Commission on December 31, 1996 by Mr. Bochner. The address for Mr. Bochner is 1618 Cotner Avenue, Los Angeles, California 90025. (3)Consists of 16,667 Shares of Beneficial Interest that may be acquired within 60 days of April 19, 2001 pursuant to the exercise of stock options and 630,713 Shares of Beneficial Interest. These Shares of Beneficial Interest are owned jointly by Mr. Wirth and his wife. Mr. and Mrs. Wirth also own 5,226,364 Class B Limited Partnership Units in the Partnership, the conversion of which is restricted and permitted only at the discretion of the Board of Trustees of the Trust. (4)Consists of 10,000 Shares of Beneficial Interest that may be acquired within 60 days of April 19, 2001 pursuant to the exercise of stock options and 111,225 Shares of Beneficial Interest. (5)Consists of 118,344 Class A Limited Partnership Units in the Partnership that are convertible at any time, at the option of the holder thereof, into Shares of Beneficial Interest, 6,667 Shares of Beneficial Interest that may be acquired within 60 days of April 19, 2001 pursuant to the exercise of stock options and 38,872 Shares of Beneficial Interest. (6)Consists of 6,667 Shares of Beneficial Interest that may be acquired within 60 days of April 19, 2001 pursuant to the exercise of stock options and 10,252 Shares of Beneficial Interest. (7)Consists of 6,667 Shares of Beneficial Interest that may be acquired within 60 days of April 19, 2001 pursuant to the exercise of stock options, and 16,500 Shares of Beneficial Interest (8)Less than one percent (1.0%). -58- Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- Mr. Wirth has an Employment Agreement with the Trust, expiring in December 2007. See "Executive Compensation." Mr. Wirth derived, and in the future will derive, benefits from the management of the Trust's hotel properties by InnSuites Innternational and the New Management Company and the license agreements with the Licensing Corp. Mr. and Mrs. Wirth are 9.8% owners of the New Management Company and 100% owners of InnSuites Innternational and the Licensing Corp. Each of the hotel properties is leased to the Lessee under substantially identical Percentage Leases. Prior to its acquisition by the Trust effective February 1, 2001, the Lessee contracted for certain property management and employment services with InnSuites Innternational. Following the Trust's acquisition, the Lessee has contracted for such services with the New Management Company and continues to contract for certain trademark and licensing services with the Licensing Corp. InnSuites Innternational received and the New Management Company will receive an annual management fee of 2.5% of gross revenues from the Lessee for its property management services. The Licensing Corp. will receive an annual licensing fee of 2.5% of gross revenues (1.25% for those hotel properties which also carry a third-party franchise, such as Best Western or Holiday Inn) from the Lessee for its trademark and licensing services. Such fees were determined through arms-length negotiations between the Trust and each of the Lessee, InnSuites Innternational, the New Management Company and the Licensing Corp. The Trust believes that such fees are commercially reasonable. Effective October 12, 1999, the Partnership, the Lessee and InnSuites Innternational entered into an Intercompany Agreement whereby, subject to certain terms and conditions, the Partnership will grant the Lessee a right of first refusal to lease, and InnSuites Innternational a right of first refusal to operate, any real property acquired by the Partnership. In return, the Partnership will be granted a right of first refusal to pursue opportunities presented to the Lessee or InnSuites Innternational to purchase investments in real estate, hotel properties, real estate mortgages, real estate derivatives or entities that invest in the foregoing. In connection with the acquisition of the Lessee by the Trust, The Intercompany Agreement was amended effective February 1, 2001 to provide for the assumption by the New Management Company of the rights and obligations of InnSuites Innternational thereunder. See "Item 1 - Business - Acquisition of the Lessee by the Trust". On July 27, 2000 the Trust issued a series of 10 promissory notes to Mr. Wirth and/or his affiliates in the aggregate amount of $720,000, each bearing interest at 7% per year. The promissory notes, which are due on dates ranging from August 27, 2000 to July 27, 2003, were payment for the repurchase of 300,000 of the Trust's Shares of Beneficial Interest from Mr. Wirth and/or his affiliates. Eight of the promissory notes in an aggregate principal amount of $151,702 were paid in full by the Trust during the second, third and fourth quarters of fiscal year 2001. On August 1, 2000 the Trust issued to Mr. Wirth a master promissory note in the amount of $600,000, bearing interest at 7% per year and due May 15, 2001, to consolidate four outstanding loans that were made by Mr. Wirth in 1999 and used by the Trust to fund operations, pay dividends and pay down an outstanding loan to the Partnership. Additionally, Mr. Wirth made the following loans to the Trust, each bearing interest at 7% per year: (a) $50,000, effective August 15, 2000 and due May 15, 2001; (b) $602,000, effective August 29, 2000 and due May 30, 2001; (c) $350,000, effective September 8, 2000 and due May 30, 2001; (d) $200,000, effective September 25, 2000 and due May 30, 2001; (e) $65,000, effective October 19, 2000 and due June 1, 2001; (f) $50,000, effective October 23, 2000 and due June 1, 2001; (g) $145,000, effective November 10, 2000 and due July 1, 2001; (h) $574,000, effective December 8, 2000 and due July 1, 2001; (i) $346,000, effective December 14, 2000 and due July 2, 2001; and (j) $159,000, effective December 28, 2000 and due July 1, 2001. The $346,000 and $159,000 loans were paid in full by the Trust during the fourth quarter ended January 31, 2001. These funds were used by the Trust to acquire a hotel property in Albuquerque, New Mexico and fund operations, refurbishment of the Hotels, equity repurchases by the Trust and for reducing the Trust's debt. -59- InnSuites Innternational Hotels, Inc., an affiliate of Mr. Wirth, made the following loans to the Trust, each bearing interest at 7% per year: (a) $100,000, effective July 6, 2000 and due May 15, 2001; and (b) $90,000, effective September 19, 2000 and due May 15, 2001. The $100,000 loan was paid in full by the Trust during the third quarter ended October 31, 2000 and the $90,000 loan was paid in full by the Trust during the fourth quarter ended January 31, 2001. These funds were used by the Trust to fund operations and startup costs for the recently acquired Albuquerque, New Mexico property. Pepper Tree/Freeway Community Limited Partnership, an affiliate of Mr. Wirth, made the following loans to the Trust, each bearing interest at 7% per year: (a) $50,000, effective July 28, 2000 and due May 15, 2001; (b) $200,000, effective August 14, 2000 and due May 15, 2001; and (c) $150,000, effective September 12, 2000 and due May 30, 2001. Each of these loans was paid in full by the Trust during the fourth quarter ended January 31, 2001. These funds were used by the Trust to fund operations and startup costs for the recently acquired Albuquerque, New Mexico property. Suite Hotels LLC, an affiliate of Mr. Wirth, made the following loan to the Trust, bearing interest at 7% per year: $180,000, effective June 8, 2000 and due May 15, 2001. The loan was paid in full by the Trust during the third quarter ended October 31, 2000. These funds were used by the Trust to fund operations and startup costs for the recently acquired Albuquerque, New Mexico property. Rare Earth Development Company, an affiliate of Mr. Wirth, made the following loans to the Trust, bearing interest at 7% per year: (a) $750,000, effective December 29, 2000 and due July 15, 2001; and (b) $1,450,000, effective January 26, 2001 and due July 15, 2001. These funds were used by the Trust to fund operations. The Trust issued a promissory note to Mr. Robson in the amount of $745,000, bearing interest at 7% per year, effective on July 27, 2000 and due August 27, 2003, as payment for the repurchase of 311,326 of the Partnership's Class A limited partnership units from Mr. Robson. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------------------------------------
EXHIBITS -------- 3(a) Second Amended and Restated Declaration of Trust dated June 16, 1999, as further amended on July 12, 1999 (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended July 31, 1999, filed with the Securities and Exchange Commission on September 14, 1999). 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).
-60- 10(c) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Pepper Tree/Freeway Community Limited Partnership (incorporated by reference to Exhibit 10.11 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(d) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of James F. Wirth (incorporated by reference to Exhibit 10.12 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(e) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Steve S. Robson (incorporated by reference to Exhibit 10.13 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(f) Promissory Note dated August 1, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(g) Promissory Note dated August 15, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended
-61- October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(h) Promissory Note dated August 29, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(i) Promissory Note dated September 8, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(j) Promissory Note dated September 25, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.7 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(k) Promissory Note dated October 19, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(l) Promissory Note dated October 23, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.9 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(m) Promissory Note dated November 10, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10(n) Promissory Note dated December 8, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10(o) Promissory Note dated December 29, 2000 by RRF Limited Partnership in favor of Rare Earth Development Company. 10(p) Promissory Note dated January 26, 2001 by RRF Limited Partnership in favor of Rare Earth Development Company. 21 Subsidiaries of the Registrant. 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. -62- FORMS 8-K --------- No Current Reports on Form 8-K were filed by the Trust during the fourth fiscal quarter ended January 31, 2001. -63- 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 4, 2001 By: /s/ James F. Wirth ------------------------------------- James F. Wirth, Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: May 4, 2001 By: /s/ Anthony B. Waters ------------------------------------- Anthony B. Waters, Chief Financial Officer (Principal Financial 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. Dated: May 4, 2001 /s/ James F. Wirth ------------------------------------------ James F. Wirth, Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: May 4, 2001 /s/ Anthony B. Waters ------------------------------------------ Anthony B. Waters, Chief Financial Officer (Principal Financial Officer) Dated: May 1, 2001 /s/ Marc E. Berg ------------------------------------------ Marc E. Berg, Trustee Dated: May 1, 2001 /s/ Steven S. Robson ------------------------------------------ Steven S. Robson, Trustee Dated: May 1, 2001 /s/ Lee J. Flory ------------------------------------------ Lee J. Flory, Trustee Dated: May 1, 2001 /s/ Edward G. Hill ------------------------------------------ Edward G. Hill, Trustee
-64- Index of Exhibits
Exhibit Number 3(a) Second Amended and Restated Declaration of Trust dated June 16, 1999, as further amended on July 12, 1999 (incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended July 31, 1999, filed with the Securities and Exchange Commission on September 14, 1999). 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) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Pepper Tree/Freeway Community Limited Partnership (incorporated by
-65- reference to Exhibit 10.11 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(d) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of James F. Wirth (incorporated by reference to Exhibit 10.12 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(e) Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Steve S. Robson (incorporated by reference to Exhibit 10.13 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(f) Promissory Note dated August 1, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed with the Securities and Exchange Commission on September 14, 2000). 10(g) Promissory Note dated August 15, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(h) Promissory Note dated August 29, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(i) Promissory Note dated September 8, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(j) Promissory Note dated September 25, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.7 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(k) Promissory Note dated October 19, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(l) Promissory Note dated October 23, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.9 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2000, filed with the Securities and Exchange Commission on December 15, 2000). 10(m) Promissory Note dated November 10, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth.
-65- 10(n) Promissory Note dated December 8, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10(o) Promissory Note dated December 29, 2000 by RRF Limited Partnership in favor of Rare Earth Development Company. 10(p) Promissory Note dated January 26, 2001 by RRF Limited Partnership in favor of Rare Earth Development Company. 21 Subsidiaries of the Registrant. 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. -66-