-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/GWID7FUP1GbRrVPx473U2YGfymJvGR5BjUm0o2VUOneo2kTS3EChkY3+e+1pln 5RxT4xP3/P+fmBeuq6EOHQ== 0001077604-00-000182.txt : 20000517 0001077604-00-000182.hdr.sgml : 20000517 ACCESSION NUMBER: 0001077604-00-000182 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNSUITES HOSPITALITY TRUST CENTRAL INDEX KEY: 0000082473 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 346647590 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07062 FILM NUMBER: 637795 BUSINESS ADDRESS: STREET 1: INNSUITES HOTELS CENTRE STREET 2: 1625 E NORTHERN AVENUE SUITE 201 CITY: PHOENIX STATE: AZ ZIP: 85020 BUSINESS PHONE: 2166220046 MAIL ADDRESS: STREET 1: 925 EUCLID AVENUE STREET 2: SUITE 1750 CITY: CLEVELAND STATE: OH ZIP: 44115 FORMER COMPANY: FORMER CONFORMED NAME: REALTY REFUND TRUST DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 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, 2000. [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________. Commission File No. 1-7062 --------- InnSuites Hospitality Trust - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Ohio 34-6647590 - ------------------------------------------ --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) InnSuites Hotels Centre, 1625 E. Northern Avenue, Suite 201, Phoenix, Arizona 85020 - --------------------------------------------------------- ---------- (Address of Principal Executive Offices) (ZIP Code) Registrant's Telephone Number, including area code (602) 944-1500 ------------------ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered - -------------------- ------------------------------------ Shares of Beneficial American Stock Exchange Interest, without par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / [Cover Continued on Following Page] -1- [Cover Continued From Previous Page] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of voting stock held by non-affiliates of the Registrant as of May 10, 2000: $3,248,304. Number of shares of voting stock outstanding as of May 10, 2000: 2,511,157. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the July 17, 2000 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. -2- 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, 2000, the Trust owned a 44.9% sole general partner interest in RRF Limited Partnership, a Delaware limited partnership (the "Partnership"). On January 31, 2000, the Partnership owned, directly or indirectly, ten InnSuites(R) hotels located in Arizona and southern California (all ten InnSuites(R) hotels are hereinafter referred to as the "Hotels"). The Trust employs five people. The Hotels feature 1,665 hotel suites and operate as moderate- and full- service hotels which apply an operating philosophy formulated in 1980 by James F. Wirth, current Chairman, President and Chief Executive Officer of the Trust. Initially, the Trust attempts to acquire under-performing hotel properties below replacement cost. Through intensive refurbishment and management programs, the Trust repositions the acquired hotels as studio and two-room suite hotels that offer services such as free breakfast buffets and complementary afternoon social hours plus 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. The Lessee currently operates and manages all of the Hotels, with the assistance of InnSuites Innternational Hotels, Inc., (the "Management Company"). Pursuant to management contracts, the Lessee pays the Management Company an annual management fee of 2.5% of gross room and other revenues for property management services. The Lessee pays InnSuites Licensing Corp. an annual licensing fee of 2.5% of gross room and other revenues (1.25% for those hotel properties which also carry a third-party franchise, such as Best Western(R) or Holiday Inn(R)) for trademark and licensing services relating to the use of the InnSuites(R) name and marks. Effective October 12, 1999, the Partnership, the Lessee and the Management Company 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 the Management Company 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 the Management Company to purchase investments in real estate, hotel properties, real estate mortgages, real estate derivatives or entities that invest in the foregoing. 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 -3- residential real property. The Trust originated no new mortgage loans since the fiscal year ended January 31, 1995 and the final two outstanding mortgage loans receivable matured and were fully paid and canceled during the fiscal year ended January 31, 1998. In August 1996, the Trust began to evaluate a combination with Hospitality Corporation International ("HCI"), an Arizona corporation owned by James F. Wirth and his wife, which controlled seven all-suite hotel properties, comprising 1,036 hotel studio and two-room suites, in Tucson, Phoenix, Scottsdale, Tempe, Flagstaff and Yuma, Arizona and in Ontario, California (the "Initial Hotels"). HCI proposed a series of transactions resulting in a combination of the Initial Hotels with the Trust. In late October 1996, the Trust and HCI reached a preliminary agreement as to the framework of the proposed transactions, culminating in the execution of a definitive Formation Agreement on December 27, 1996 (the "Formation Agreement"). The execution of the Formation Agreement was ratified and approved by the Trustees and by HCI's Board of Directors on February 14, 1997, at which time the Trust announced the proposed transaction to the public. At the 1997 annual shareholders' meeting held on January 28, 1998, the shareholders of the Trust approved the terms and execution of the Formation Agreement. The Formation Agreement provided for the organization of the 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. In accordance with the terms of the Formation Agreement, the previous Trustees and executive officers of the Trust resigned, and new Trustees and executive officers were appointed, effective January 30, 1998. 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. In addition to the restructuring, the Trust's investment advisor, Mid- America ReaFund Advisors, Inc. ("MARA"), which was owned by the Trusts former Co-Chief Executive Officers, Messrs. Krause and Berick, was acquired by Mr. Wirth and his wife. MARA provided investment advisory and consulting services to and administered the day-to-day investment operations of the Partnership and the Trust under the supervision of the Trustees pursuant to an Advisory Agreement executed between the Partnership and MARA. The Advisory Agreement was terminated as of January 1, 1999. See "Advisory Agreement and MARA" below. -4- Hotel Acquisitions following the Formation Transactions Following the Formation Transactions, the Partnership acquired three 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, effective June 1, 1998. The total consideration for the acquisition was $7,100,000 and was based upon an appraisal conducted by an independent third party. James F. Wirth and Steven S. Robson indirectly owned the Buena Park hotel property. Subsequent to this acquisition, Mr. Robson was elected as a Trustee of the Trust by the shareholders of the Trust. The Trust believes that the greatest opportunities for revenue growth and profitability will arise from the skillful management and repositioning of current and future acquired hotel properties. The Trust's primary business objectives are to maximize current returns to its shareholders through increases in cash flow available for distribution and to increase long-term total returns to shareholders. The Trust will seek to achieve these objectives through (i) participation in increased revenues from the Hotels pursuant to the Percentage Leases by intensive management and marketing, and (ii) selective acquisitions and expansion of the InnSuites Hotels in California and in the southwestern United States. Competition in the Hotel Industry The hotel industry is highly competitive. Each of the Hotels experiences competition primarily from other mid-market hotels in its immediate vicinity, but also competes with other hotel properties in other geographic markets. While none of the Hotels' competitors dominate any of the Trust's geographic markets, some of those competitors have substantially greater marketing and financial resources than the Trust and the Partnership. A number of additional hotel property developments have been announced or have recently been completed by competitors in a number of the Hotels' markets, and additional hotel property developments may be built in the future. Such hotel developments have had, and could continue to have, an adverse effect on the revenues of the Hotels in such competitive markets. The Trust has chosen to focus its hotel investments in Arizona and southern California. Particularly, the Trust has a concentration of assets in the metropolitan Phoenix, Arizona market. In the Phoenix, Arizona market, hotel room supply is increasing faster than the rate of demand. Supply rates are also generally increasing faster than demand rates in the Flagstaff, Tucson and Yuma, Arizona and Ontario, California markets. The Buena Park and San Diego, California markets continue to support balanced supply and demand. The Trust and the 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. -5- Seasonality of the Hotel Business The hotel business is seasonal in nature. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause significant fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. Despite this seasonality in revenues, all revenue is recorded as earned. The hotels located in northern Arizona and California historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. Advisory Agreement and MARA The Partnership was a party to an Advisory Agreement with MARA pursuant to which the Partnership received certain investment advisory and administrative services regarding the day-to-day investment operations of the Hotels and pursuant to which MARA was responsible for providing the Partnership and the Trust with a continuing and suitable investment program. The Advisory Agreement was terminated as of January 1, 1999. To terminate the Advisory Agreement the Partnership paid $256,500 in February 1999 ($225,000 repayment of principal plus $31,500 of accrued interest) and on February 1, 2000 was obligated to pay $240,750 ($225,000 repayment of principal plus $15,750 of accrued interest) to satisfy two promissory notes which were originally issued by Mr. Wirth and his wife when they acquired MARA in January 1998. Additionally, in fiscal 1999, the Partnership issued 67,000 Class B limited partnership units to MARA and MARA forgave $85,331 in net liabilities in exchange for the termination of the Advisory Agreement. Pursuant to the Advisory Agreement, MARA received, subject to certain limitations, (a) a monthly fee equal to 1/12th of 1% of the appraised value of the total assets of the Partnership during the next preceding month; (b) 15% of the commitment fees received by the Partnership for any stand-by or gap commitment relating to a mortgage loan which is not closed; and (c) an incentive fee equal to 10% of the amount, if any, by which the net profits of the Partnership exceed 8% of the monthly average net worth of the Partnership for the year, plus 10% of the net realized capital gains of the Partnership for such year less accumulated net realized capital loss. MARA was required to refund to the Partnership the amount, if any, by which the operating expenses of the Partnership in any fiscal year exceed the lesser of (x) 1 1/2% of the appraised value of the total assets of the Partnership for such fiscal year or (y) 25% of the net income of the Partnership for such fiscal year. For the twelve months ended January 31, 1999, the Partnership paid MARA $364,041 for advisory and management services pursuant to the Advisory Agreement. Financial Information See "Item 6 -- Selected Financial Data" herein for information regarding the Trust's revenues, net (loss) and total assets. Item 2. PROPERTIES. ----------- The Trust maintains its administrative offices at the InnSuites Hotels Centre in Phoenix, Arizona. The Trust directly owns no real property. At January 31, 2000, the Partnership owned, directly or indirectly, ten hotels. All of the Hotels are operated as InnSuites(R) Hotels, while three are also marketed as Best Western(R) Hotels and one is also marketed as a Holiday Inn(R) Hotel and Suites. All of the Hotels are managed by the Management Company and operate in the following locations: -6-
NUMBER YEAR OF CONSTRUCTION/ MOST RECENT PROPERTY OF SUITES ADDITION RENOVATION - -------- ---------- --------------------- ----------- InnSuites Hotels Phoenix Best Western............................. 123 1980 1996 InnSuites Hotels Tempe/ Phoenix Airport/South Mountain................... 170 1982/1985 1996 InnSuites Hotels Tucson, Catalina Foothills Best Western ................. 159 1981/1983 1996 InnSuites Hotels Yuma Best Western................................ 166 1982/1984 1996 Holiday Inn Airport Hotel and Suites/Ontario(an InnSuites Hotel) .............. 150 1990 1996 InnSuites Hotels Flagstaff/ Grand Canyon..................................... 134 1966/1972 1997 InnSuites Hotels Scottsdale/ El Dorado Park Resort ........................... 134 1980 1996 InnSuites Hotels Tucson St. Mary's............... 297 1960/1971 1997 InnSuites Hotels San Diego....................... 147 1946/1989 1998 InnSuites Hotels Buena Park...................... 185 1972/1980 1998 ----- Total suites 1,665 =====
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, 2000. PART II ------- Item 5. MARKET FOR THE TRUST'S SHARES AND RELATED SECURITY HOLDER MATTERS. ------------------------------------------------------------------ Until February 23, 1999, the Trust's Shares of Beneficial Interest were traded on the New York Stock Exchange under the symbol "IHT". Since April 7, 1999, the Trust's Shares of Beneficial Interest have been traded on the American Stock Exchange under the symbol "IHT". On May 10, 2000, the Trust had 2,511,157 shares outstanding and 579 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: -7- 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 Fiscal Year 1999 High Low Dividends ---------------- ---- --- --------- First Quarter 4 3/8 4 1/16 -- Second Quarter 5 3/8 4 1/4 -- Third Quarter 5 1/2 3 13/16 .10 Fourth Quarter 3 15/16 2 15/16 -- The Trust intends to maintain a conservative dividend policy to facilitate internal growth. In fiscal 2000, the Trust paid dividends of $.01 in the third and fourth quarters. In fiscal 1999, the Trust paid a dividend in the third quarter of $.10 and in fiscal 1998, the Trust paid dividends of $.10 and $.05 in the first and second quarters, respectively. Since its organization in 1971, the Trust has paid a dividend or dividends each year. Item 6. SELECTED FINANCIAL DATA. ----------------------- The following selected financial data of the Trust for the five fiscal years ended January 31, 2000, has been derived from the audited consolidated financial statements of the Trust. The consolidated financial statements of the Trust for the three fiscal years ended January 31, 1998 were audited by Arthur Andersen LLP, independent public accountants. The consolidated financial statements of the Trust for the two fiscal years ended January 31, 2000 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.
2000 1999 1998 1997 1996 Total revenues $ 9,546,181 $ 9,909,758 $ 1,421,979 $3,915,506 $ 5,430,006 Net loss $ (951,811) $ (193,071) $ (573,509) $ (888,365) $(7,554,351) Loss per share-basic and diluted $ (.40) $ (.10) $ (.56) $ (.87) $ (7.40) Cash dividends paid and declared per share $ .02 $ .10 $ .15 $ .40 $ .50 Total assets $65,305,519 $67,804,770 $43,619,639 $6,416,123 $24,555,330 Bank and other borrowings $38,746,662 $36,924,834 $22,428,880 $2,300,000 $10,795,000
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. -8- 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 the Code, neither the Trust nor the Partnership can operate the Hotels. Therefore, each of the hotels is 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. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F. Wirth and his wife. 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. The Trust's Management intends to restructure and acquire the Lessee in January 2001 following the guidelines of the REIT Modernization Act. At January 31, 2000, the Trust owned a 44.9% interest in the Hotels through its sole general partner's interest in the Partnership. This change in ownership resulted primarily from the following transactions occuring between February 1, 1999 and April 2, 1999: 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, 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. The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt 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, 2000, base rent and percentage rent in the aggregate amount of $9.5 million was earned by the Trust. The -9- 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 increased $0.81 to $67.70 in fiscal year 2000 from $66.89 in fiscal 1999 due to an overall market increase in room rates. Occupancy decreased 1.0% to 59.8% in fiscal 2000 from 60.8% in fiscal year 1999 due to increased supply exceeding demand growth. This resulted in a decrease in REVPAR of $0.19 to $40.46 in fiscal 2000 from $40.65 in fiscal 1999. ADR improved in fiscal 1999 due to acquisitions in fiscal 1999 and the successful repositioning of those hotels as studio and two room suite hotels that contribute more revenue per available room. While ADR increased $1.22 to $66.89 in 1999 from $65.67 in 1998, occupancy increased 1.9% in 1999 to 60.8% from 58.9% due to increased occupancy rates in our California properties complimenting slight declines in occupancy at our Arizona properties. This resulted in an increase in REVPAR of $1.95 for the twelve months ended January 31, 1999. The following table shows certain historical financial and other information for the periods indicated. For the Year Ended January 31, -------------------------- 2000 1999 1998 ------ ------ ------ Occupancy 59.80% 60.80% 58.90% Average Daily Rate (ADR) $67.70 $66.89 $65.67 Revenue Per Available Room (REVPAR) $40.46 $40.65 $38.70 No assurance can be given that the trends reflected in this data will continue or that Occupancy, ADR and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions. Results of Operations of the Trust for the 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 the Hotels 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 which was partially offset by a $780,000 loss on the termination of the Advisory Agreement 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. These were offset by decreases primarily relating to MARA fees of approximately $364,000 and the loss of approximately $499,000 for the termination of the MARA agreement in fiscal year 1999. -10- 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 years interest in fiscal 2000 on the $12 million credit facility obtained in 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 James F. Wirth, current Chairman, President and Chief Executive Officer of the Trust. 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 expense for San Diego and 8 months of expense 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 Trust for the year ended January 31, 1999 compared to January 31, 1998 During the fiscal year ended January 31, 1998, the Trust terminated its previous wrap-around mortgage business and disposed of its final real estate asset, an office building in Chicago which was sold in the third quarter of fiscal 1998. As a result of a change in investment focus, the Trust indirectly acquired the seven Initial Hotels on January 31, 1998. Results of operations for the Trust for the fiscal year ended January 31, 1999 reflected one full-year of operations of the Initial Hotels, plus additional full- or partial-year operations of the three hotels acquired during fiscal 1999. Total revenues of the Trust for the twelve months ended January 31, 1999 was $9.9 million in its first full-year of operations. Of this revenue, rent revenue from the Hotels represented 99% of total revenue. Included in this amount was rent revenue attributable to the Scottsdale hotel of $699,997. Interest income for the period was $23,750. -11- For the fiscal year ended January 31, 1999, the Trust reported a net loss of approximately $193,000 or $(0.10) per share. For the fiscal year ended January 31, 1998, the Trust reported a net loss of approximately $574,000 or $(0.56) per share. While the revenues of the Trust increased significantly to $9.9 million for the fiscal year ended January 31, 1999 from $1.4 million for the fiscal year ended January 31, 1998 the Trust reported a net loss of approximately $193,000. That total net loss, however, was reduced from a net loss of approximately $574,000 in fiscal 1998. The results for the fiscal year ended January 31, 1999 included multiple fourth quarter charges, resulting from the recognition of a provision for uncollectible receivables ($900,000), a net charge recognized upon the termination of the Advisory Agreement between the Partnership and MARA ($499,000), and the recognition of expenses relating to stock options ($184,000). In addition, unusual legal and professional fees are included in fiscal 1999 expenses. Without the aforementioned fourth quarter charges, the Trust's earnings per share for the fiscal year ended January 31, 1999 would have improved by $0.16 per share to a net income of $0.06 per share (basic) for the year. -12- Results of Operations of the Lessee Comparison of actual results for the year ended January 31, 2000 compared to 1999 Results of operations for the Lessee for the fiscal year ended January 31, 2000 reflect a full-year of operations of the Hotels 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 2.4% or approximately $630,000 to $27.3 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 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 rates. 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 decreased 57.4% or approximately $167,000 to $124,000 from $291,000 for the 12 months ended January 31, 2000 compared with the period ended January 31, 1999, respectively, primarily due to an increase in amenities that were previously charged to guests in the prior year. Total expenses decreased 2.0% or approximately $592,000 to $29.5 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 12 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 12 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 all 10 of the Hotel properties. Telecommunications expenses, which are primarily long-distance service charges, decreased due to decreased long-distance rates charged by the various long distance carriers. They decreased 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 expense increased greater than 100.0% or approximately $739,000 to $878,000 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. General and administrative expense decreased by 27.9% or approximately $1.1 million to $2.9 million from $4.0 million for the twelve months ended January 31, 2000 compared to the twelve months ended January 31, 1999, respectively. The decrease is primarily attributable to large accounting and legal expenses incurred -13- in fiscal 1999 related to the formation of the Lessee in conjunction with the formation of the Trust. Sales and marketing expense was consistent with the prior year. 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. While total revenues increased 2.4% in fiscal 2000 compared to fiscal 1999, total expenses decreased by 2.3% or approximately $681,000 for the twelve months ended January 31, 2000 compared with the twelve months ended January 31, 1999, respectively, reflecting management's effort to reduce costs and maintain a high ADR. Liquidity and Capital Resources The Trust, through its ownership interest in the Partnership, will have its proportionate share of the benefits and obligations of the Partnership's ownership interests in the Hotels. The Trust's principal sources 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. During fiscal 2000 and 1999, the Trust recorded $1.9 million and $900,000, respectively, as provisions for uncollectible receivables. These charges reflect the Trust's assessment of the collectability of its receivables which primarily consists of rent receivable from the Lessee, based on an evaluation of the Lessee's future cash flows. The Trust's management may restructure and acquire the Lessee in January 2001 following the guidelines of the REIT Modernization Act. As of January 31, 2000, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements set aside annually, 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. The terms of the line of credit discussed below permit borrowings for that purpose, but impose certain limitations on the Trust's ability to engage in other borrowings. On April 16, 1998, the Trust obtained a $12 million Credit Facility (the "Credit Facility") from Pacific Century Bank to assist it in its funding of the acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are secured by first mortgages on three of the Hotels. The Trust has drawn $11.3 million from its line of credit, which charges interest at a variable interest rate. By its terms, the Credit Facility will expire in approximately one year on April 16, 2001, subject to renewal. The terms of the Credit Facility require 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 1.50 -14- 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 may prepay the Credit Facility, subject to a prepayment penalty of $250 plus a yield-maintenance penalty. During the term of the Credit Facility the Trust may not further encumber its collateral, sell its collateral, change the nature of its business, or unreasonably suspend its business. At January 31, 2000, the Trust was not in compliance with certain covenant requirements associated with the Credit Facility; however, the Trust obtained a waiver from the lender indicating that the debt would not be called as a result of defaults occurring through January 31, 2000. Subsequent to January 31, 2000, the Trust negotiated a change in the covenant covering "Debt to Tangible Net Worth" from 1.5 to 1.75. As a result, the Trust is in compliance with all covenants subsequent to January 31, 2000. The Trust may seek to increase the amount of its Credit Facility, negotiate additional credit facilities, or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as the Trust considers prudent. The Trust will acquire or develop additional hotels only as suitable opportunities arise, and the Trust will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings under the Credit Facility or other borrowings or from the proceeds of additional issuances of Shares of Beneficial Interest or other securities. There is no agreement or understanding to invest in any other properties, and there can be no assurance that the Trust will successfully acquire or develop additional hotels. The Partnership will contribute to a Capital Expenditures Fund (the "Fund") on a continuing basis, 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 fiscal years ended January 31, 2000 and 1999, the Hotels spent approximately $1.5 million and $2.3 million, respectively, for capital expenditures, excluding hotel acquisitions. The Trust considers the majority of these improvements to be revenue-producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Hotels also spent $2.0 million and $1.3 million, respectively, during fiscal years 2000 and 1999 on repairs and maintenance and these amounts have been charged to expense as incurred. Inflation The Trust's revenues are based on the Percentage Leases, which will result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust will be relying 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. The Trust's largest fixed expense is the depreciation of the investment in hotel properties. The Trust's variable expenses, which are subject to inflation, represented approximately 59.4% of total revenues in fiscal 2000. These variable expenses (general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent) are expected to grow with the general rate of inflation. -15- 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 and California historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders. No assurance can be given that the Trust will make distributions in the future. Year 2000 Compliance The Trust and the Lessee have upgraded their computer accounting programs and the Lessee upgraded its computerized property management system along with necessary hardware. The new systems have been warranted to be Year 2000 compliant. The Trust incurred total costs to date of approximately $140,000 to upgrade these systems. While these new systems represent virtually all of the Trust's computer systems, the Trust and the Lessee cannot predict the effect of the Year 2000 problem on vendors, customers and other entities with which the Trust and the Lessee transact business, and there can be no assurance that the effect of the Year 2000 problem on such entities will not adversely affect the Trust's or the Lessee's operations. Although the Trust is not aware of any threatened claims related to the Year 2000, the Trust may become subject to litigation arising from such claims, and depending on the outcome, such litigation could have a material adverse effect on the Trust. It is not clear whether the Trust's insurance coverage would be adequate to offset these and other business risks related to the Year 2000. In the event of any failure of any of the computer systems, the Trust and the Lessee intend to perform necessary functions without the aid of the affected computer systems until any Year 2000 problems are resolved. As of May 10, 2000, no computer or software problems relating to the year 2000 have been discovered. However, problems relating to the Year 2000 could still arise. Forward-Looking Statements Certain statements in this Annual Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust's financing plans; (v) the Trust's position regarding investments, acquisitions, financings, conflicts of interest and other matters; (vi) the Trust's continued qualification as a REIT; and (vii) trends affecting the Trust's or any hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements reflect the Trust's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to, fluctuations in hotel occupancy -16- 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. The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Exchange Act, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Annual Report relating to the operations of the 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 2001 2002 2003 2004 2005 Thereafter Total(1) Fair Value --------- ---- ---- ---- ---- ---- ---------- -------- ---------- Fixed rate debt(2) $ 550,802 810,984 775,719 846,363 6,016,948 10,081,103 19,081,919 17,285,132 Average interest rate 8.49% 8.49% 8.49% 8.49% 8.49% 8.49% 8.49% 9.25% Variable rate debt(2) $ 75,677 15,138,878 40,158 44,536 3,170,492 - 18,469,741 18,538,285 Interest rate available on January 31, 2000 9.04% - - - - - 9.04% 9.04%
- ----------------------------- (1) Approximately $345,000 of debt was repaid by February 11, 2000 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, 2000 and does not consider those exposures or positions which would arise after that date. Moreover, because firm commitments are not represented in the table above, the information presented therein has limited predictive value. As a result, the Trust's interest rate fluctuations will depend on the exposures that arise during the period and future interest rates. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- INNSUITES HOSPITALITY TRUST LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements of InnSuites Hospitality Trust, formerly Realty ReFund Trust, are included in Item 8: -17- KPMG LLP Independent Auditors' Report; Arthur Andersen LLP Report of Independent Public Accountants; Consolidated Balance Sheets - January 31, 2000 and 1999; Consolidated Statements of Operations - For the Years Ended January 31, 2000, 1999 and 1998; Consolidated Statements of Shareholders' Equity - For the Years Ended January 31, 2000, 1999 and 1998; Consolidated Statements of Cash Flows - For the Years Ended January 31, 2000, 1999 and 1998; and Notes to the Consolidated Financial Statements - January 31, 2000, 1999 and 1998. 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. INNSUITES HOTELS, INC. LIST OF FINANCIAL STATEMENTS AND SCHEDULE The following financial statements of InnSuites Hotels, Inc.: KPMG LLP Independent Auditors' Report; Michael Maastricht, CPA Report of Independent Public Accountants; Balance Sheets - January 31, 2000 and 1999; Statements of Operations - For the Years Ended January 31, 2000 and 1999; Statements of Shareholders' Deficit - For the Years Ended January 31, 2000 and 1999; Statements of Cash Flows - For the Years Ended January 31, 2000 and 1999; and Notes to the Financial Statements - January 31, 2000 and 1999. All other 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 subsidiaries (the "Trust") as of January 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the two-year period ended January 31, 2000. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our 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 as of January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the two-year period ended January 31, 2000 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Phoenix, Arizona May 5, 2000 -19- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Trustees, InnSuites Hospitality Trust We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of InnSuites Hospitality Trust (formerly Realty ReFund Trust) (an Ohio unincorporated business trust) and subsidiaries for the year ended January 31, 1998. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our 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. The statements of operations, shareholders' equity and cash flows of InnSuites Hospitality Trust (formerly Realty Refund Trust) were prepared for the purpose of complying with the Rules and Regulations of the Securities and Exchange Commission. In our opinion, the financial statements referred to above present fairly, in all material respects, the operations and cash flows of InnSuites Hospitality Trust (formerly Realty ReFund Trust) for the year ended January 31, 1998 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998. -20- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JANUARY 31, ------------------------- 2000 1999 ---- ---- ASSETS Hotel Properties, net $64,479,347 65,509,187 Cash and Cash Equivalents 208,109 420,935 Rent Receivable from Affiliate, net of $2,845,732 and $900,000 allowance, respectively - 788,179 Interest Receivable and Other Assets 618,063 1,086,469 ----------- ---------- TOTAL ASSETS $65,305,519 67,804,770 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Mortgage Notes Payable $24,251,662 23,161,052 Notes Payable to Banks 11,300,000 11,300,000 Other Notes Payable 225,000 450,000 Loans Payable to Related Parties 2,970,000 2,013,782 Accounts Payable and Accrued Expenses 1,138,168 2,188,709 ----------- ---------- TOTAL LIABILITIES 39,884,830 39,113,543 MINORITY INTEREST IN PARTNERSHIP 16,789,423 21,111,192 SHAREHOLDERS' EQUITY: Shares of beneficial interest without par value; unlimited authorization; 2,507,949 and 2,286,951 shares issued and outstanding in 2000 and 1999, respectively 9,093,020 7,580,035 Treasury Stock (461,754) - ----------- ---------- TOTAL SHAREHOLDER'S EQUITY 8,631,266 7,580,035 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $65,305,519 67,804,770 =========== ==========
Commitments and Contingencies (notes 14, 18 and 19) See accompanying notes to consolidated financial statements -21- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2000 1999 1998 ----------- ----------- ----------- REVENUES: Rent revenue from affiliate $ 9,503,041 9,886,008 - Rental revenue from real estate held for sale - - 1,367,366 Interest and other income 43,140 23,750 54,613 ----------- ----------- --------- TOTAL REVENUES: $ 9,546,181 9,909,758 1,421,979 ----------- ----------- --------- EXPENSES: Real estate depreciation $ 2,546,381 2,196,797 - Real estate, personal property taxes, insurance and ground rent 1,421,646 1,221,255 - General and administrative 4,247,063 2,748,623 - Loss on sale of real estate - - 35,620 Loss on termination of advisory agreement - 780,746 - Interest on mortgage notes payable 2,150,144 1,952,661 - Interest on notes payable to bank 976,861 639,278 - Interest on note payable to related party 213,563 204,145 118,082 Fees to related party investment advisor - 364,041 - Legal expense to related party - 2,400 84,000 Operating expenses of real estate held for sale - - 1,379,389 Amortization of tenant improvements and deferred leasing commissions - - 21,724 Other operating expenses - - 356,673 ----------- ----------- --------- TOTAL EXPENSES: 11,555,658 10,109,946 1,995,488 ----------- ----------- --------- LOSS BEFORE MINORITY INTEREST (2,009,477) (200,188) (573,509) ----------- ----------- --------- LESS: MINORITY INTEREST (1,057,666) (7,117) - ----------- ----------- --------- NET LOSS $ (951,811) (193,071) (573,509) =========== =========== ========= NET LOSS PER SHARE - (Basic and diluted) $ (.40) (.10) (.56) =========== =========== ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - (Basic and diluted) 2,376,770 1,921,902 1,022,359 CASH DIVIDENDS PER SHARE $ .02 $ .10 $ .15 =========== =========== =========
See accompanying notes to consolidated financial statements -22- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998 BALANCE, JANUARY 31, 1997 $3,251,220 Net loss (573,509) Issuance of shares 3,074,348 Dividends (153,088) ---------- BALANCE, JANUARY 31, 1998 5,598,971 Debt converted to equity 2,646,690 Stock option plan 183,518 Net loss (193,071) Dividends (166,781) 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, JANUARY 31, 2000 $8,631,266 ========== See accompanying notes to consolidated financial statements -23- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2000 1999 1998 ----------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (951,811) (193,071) (573,509) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Stock compensation expense 57,400 183,518 - Non-cash portion of loss on termination of advisory agreement - 498,669 - Provision for uncollectible rent receivable from affiliate 1,945,732 900,000 Minority interest (1,057,666) (7,117) - Real estate depreciation 2,546,381 2,196,797 - Amortization of tenant improvements and deferred leasing commissions - - 21,724 Amortization of deferred loan fees 53,937 39,346 (Increase) in rent receivable from affiliate (1,157,553) (1,473,539) - Decrease (increase) in interest receivable and other assets 414,469 (905,613) 263,280 (Decrease) in due to Lessee - (944,234) - (Decrease) in accounts payable and accrued expenses (1,050,540) (1,136,115) (676,274) ------------ ----------- ---------- Net cash provided by (used in) operating activities 800,348 (841,359) (964,779) ------------ ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel properties (1,516,543) (2,277,890) - Acquisition of hotel - (1,448,000) - Payment of transaction costs - - (334,854) Proceeds from sale of real estate, net - - 5,599,122 ------------ ----------- ---------- Net cash provided by (used in) investing activities (1,516,543) (3,725,890) 5,264,268 ------------ ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage notes payable (4,159,391) (19,388,537) - Borrowings on mortgage notes payable 5,250,000 11,705,374 - Payments on other notes payable (225,000) (218,000) - Bank borrowings - 11,300,000 - Bank repayments - (155,000) - Payment of dividends (52,889) (166,781) (153,088) Distributions to minority interest holders (264,969) (781,451) - Repurchase of Partnership units (538,847) - - Repurchase of treasury stock (461,754) - - Advances from related parties 956,218 1,235,628 - Principal payments on advances payable to related parties - (921,447) (2,300,000) ------------ ----------- ---------- Net cash provided by (used in) financing activities 503,368 2,609,786 (2,453,088) ------------ ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (212,826) (1,957,463) 1,846,401 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 420,935 2,378,398 531,997 ------------ ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 208,109 420,935 2,378,398 ============ =========== ==========
See accompanying notes to consolidated financial statements -24- INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended JANUARY 31, 2000, 1999 AND 1998 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION: InnSuites Hospitality Trust (the "Trust") is a Real Estate Investment Trust ("REIT"), which owns directly or indirectly, ten hotels with 1,665 suites in Arizona and southern California. 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, which the Trust employed, was wrap-around mortgage lending. On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership (the "Partnership"), a Delaware limited partnership, in exchange for a 13.6% general partnership interest therein. The Trust is the sole general partner of the Partnership. The Partnership issued limited partnership interests representing 86.4% of the Partnership to acquire six hotel properties from various entities. In addition, in order to acquire a seventh hotel property, through a wholly-owned subsidiary, RRF Sub Corp., the Trust issued 647,231 shares of beneficial interest in exchange for all of the outstanding shares of Buenaventura Properties, Inc. (BPI), which owned a hotel located in Scottsdale, Arizona (InnSuites Hotels Scottsdale). These seven hotels are collectively referred to as the Initial Hotels. The Initial Hotels, together with the hotels described in Note 4, are referred to herein as the "Hotels". The Hotels are leased to InnSuites Hotels, Inc., formerly known as Realty Hotel Lessee Corp. (the "Lessee"), pursuant to leases which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the Lessee to pay rent equal to the greater of the minimum rent (Base Rent) or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F. Wirth, Chairman, President and Chief Executive Officer of the Trust ("Wirth") and his spouse. As of and for the year ended January 31, 2000, the Trust's general partnership interest in the Partnership was 44.9% and 39.4% (weighted average), respectively. PARTNERSHIP AGREEMENT The Partnership Agreement provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of shares of beneficial interest of the Trust, at any time at the option of the particular limited partner, if the Trust determines that such conversion would not cause the Trust to fail to qualify as a REIT. As of January 31, 2000, a total of 2,072,392 Class A limited partnership units were issued and outstanding. As of January 31, 2000, 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 limited partnership units outstanding at January 31, 2000 were to be converted to shares of beneficial interest, the limited partners in the Partnership would hold 2,072,392 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. -25- 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. All significant intercompany transactions and balances have been eliminated. RECLASSIFICATIONS Certain prior period amounts in the consolidated financial statements and notes thereon have been reclassified to conform with current year 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. 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 BPI were adjusted to their respective fair values based upon the aggregate fair market value of shares of beneficial interest issued to acquire the outstanding shares of BPI. The Trust's purchase of its 13.6% general partnership interest in the Partnership and the Partnership's acquisition of interests in the 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 BPI held by Wirth and his affiliates did not result in purchase accounting adjustments to historical net carrying values as such transactions were between entities under common control. Hotels purchased subsequent to January 31, 1998 have been recorded at fair value. 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. 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 flow available for payment. As a result, during the fourth quarters of fiscal 2000 and 1999, the Trust recorded a $1.9 million and a $900,000 charge to operations, respectively, as a provision for uncollectible receivables which is reflected in the accompanying consolidated statements of operations as a component of general and administrative expenses. -26- REVENUE RECOGNITION In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued EITF number 98-9, "Accounting for Contingent Rent in Interim Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. In July 1998, the Task Force issued transition guidance stating that the consensus could be applied on a prospective basis or in a manner similar to a change in accounting principle. Effective August 1, 1998, the Trust amended its percentage lease agreements to eliminate the annualization of interim hotel revenue. During the third quarter of fiscal 1999, accounting for contingent rent under EITF 98-9 was rescinded; the Trust believes that eliminating annualization of hotel revenue will provide for recognition of Percentage Rent more consistently with the generation of revenue from the Hotels. DIVIDEND AND DISTRIBUTIONS The Trust expects to pay dividends which 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 provision of APB Opinion No. 25 "Accounting for Stock Issued to Employees and Related Operations" (APB 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 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. For federal income tax purposes, the cash distributions paid to shareholders may be characterized as ordinary income, return of capital or capital gains. 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 Shareholder's Equity. -27- LOSS PER SHARE SFAS No. 128, "Earnings per Share" eliminates the concept of common stock equivalents and replaces "primary" and "fully diluted" earnings per share with "basic" and "diluted" earnings per share. Basic and diluted earnings per share have been computed based on the weighted-average number of shares outstanding during the periods. For the fiscal year ended January 31, 2000 and 1999, there were Class A and Class B partnership units outstanding, which are convertible to shares of beneficial interest of the Trust. Assuming conversion, the aggregated weighted- average of these shares of beneficial interest would be 7,604,166 in fiscal 2000 and 7,822,562 in fiscal 1999. These shares are anti-dilutive due to the loss for fiscal years 2000 and 1999. For fiscal 1998 there were no dilutive or anti- dilutive securities. 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 amounts that reasonably approximate fair value. The fair value mortgage notes payable, notes payable to banks, other note payables and advances to related parties is estimated by discounting the future cash flows using the current rates which would be available for similar loans having the same remaining maturities. 3. HOTEL PROPERTIES Hotel properties as of January 31, 2000 and 1999 consisted of the following: 2000 1999 ---- ---- Land $ 5,685,590 5,685,590 Building and improvements 55,027,116 54,331,878 Furniture and equipment 8,457,257 7,688,516 ----------- ----------- Total hotel properties 69,169,963 67,705,984 Less accumulated depreciation 4,736,061 2,196,797 ----------- ----------- Hotel properties (net) $64,433,902 65,509,187 =========== =========== Seven of the hotels are located in Arizona and three of the hotels are located in California. All hotels are subject to Percentage Leases as described in Note 12. 4. ACQUISITIONS There were no hotel acquisitions during fiscal 2000. Effective February 1, 1998, the Partnership acquired 100% of the ownership interests in the Tucson St. Mary's Hotel and Resort for $10,820,000. The Partnership issued 699,933 Class B limited partnership units to Wirth, and his spouse, who each held a 50% equity ownership interest in the Tucson St. Mary's hotel. Effective April 29, 1998, the Trust acquired a hotel property located in San Diego, California for an aggregate consideration of $5,148,000, which was funded with cash, proceeds from the Trust's credit facility and two promissory notes secured by mortgage trust deeds on the property. Effective June 1, 1998, the Partnership acquired 100% of the ownership of the InnSuites Hotels Buena Park for $7,100,000. The Partnership assumed $4,116,754 in mortgage debt and other obligations and issued 627,377 limited partnership units to Wirth and Steve S. Robson (of which 13,034 units were subsequently paid to a third -28- party as an advisory fee), who each held a 50% equity ownership interest in the Buena Park hotel. Mr. Robson is a Trustee of the Trust. Wirth and his affiliates also received an additional 53,681 Class B limited partnership units as payment for debt owed to Wirth and his affiliates at time of acquisition. All of the aforementioned acquisitions have been accounted for as purchases. 5. ALLOWANCE FOR UNCOLLECTIBLE RENT RECEIVABLE At January 31, 2000, the Trust had an accumulated allowance for uncollectible rents receivable from the Lessee totaling approximately $2.8 million. After review of the estimated cash flow projections for fiscal year 2001 and actual fiscal year 2000 cash flows, management recorded a provision for uncollectible rent receivable in the amounts of approximately $1.9 million and $900,000 for the twelve months ended January 31, 2000 and 1999, respectively. The following reconciles the allowance account for uncollectible rent receivable from the Lessee: As of and for the years ended January 31, 2000, 1999 and 1998 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 ========== 6. MORTGAGE NOTES PAYABLE At January 31, 2000, the Trust had mortgage notes payable outstanding with respect to seven of the Hotels. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from April 28, 2001 to April 1, 2014. Weighted average interest rates on the mortgage notes for the years ended January 31, 2000 and 1999 was 8.49% and 8.9%, respectively. At January 31, 2000, all of the Hotels were in compliance with their respective debt covenants. On November 3, 1999, The Trust refinanced its mortgage note on the San Diego property. The principal amount of the new loan is $4,000,000 with an interest rate of 9.0%. The loan matures on November 4, 2004. A special condition limits the initial amount to be funded at closing to $3,500,000. The Partnership must submit a 12-month trailing operating statement for the San Diego property no earlier than May 1, 2000 and no later than June 1, 2000. Financial covenants require (as defined in the agreement) debt coverage ratio of no less than 1.2. In the event of noncompliance, the lenders commitment to fund the additional $500,000 will become null and void. As of January 31, 2000, the Trust was in compliance with its financial covenants. Subsequently, on May 2, 2000, the lender funded the additional $500,000. 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. -29- A portion of the mortgage notes payable are guaranteed by Wirth and certain of his affiliates. The net book value of properties securing the mortgage notes payable at January 31, 2000 and 1999 was $48,581,869 and $49,258,778 respectively. See footnote 10 for scheduled minimum payments. 7. NOTES PAYABLE TO BANKS During the first quarter of fiscal 1999, the Trust established a $12,000,000 revolving line of credit with Pacific Century Bank. The credit facility requires the Trust, among other things, to maintain a minimum net worth, a specified coverage ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to debt service, and a specified coverage ratio of EBITDA to debt service and fixed charges. Further, the Trust is required to maintain its franchise agreement at each of the hotel properties and to maintain its REIT status. At January 31, 2000, the Trust was not in compliance with certain debt covenant requirements associated with the line of credit; however, the Trust obtained a waiver from the lender indicating that the debt would not be called as a result of defaults occurring through January 31, 2000. Subsequent to January 31, 2000, the Trust negotiated a change in the covenant covering "Debt to Tangible Net Worth" from 1.5 to 1.75. As a result, the Trust is in compliance with all covenants subsequent to January 31, 2000. In accordance with the line of credit agreement, the Trust may choose interest rates based on: 1) Base Rate, as defined plus .5 basis points; 2) Treasury Bill Rate plus 2.75 basis points; or 3) London Interbank Offering Rate ("LIBOR") plus 2.75 basis points and requires quarterly interest-only payments. The line of credit is secured by the Scottsdale, Flagstaff, and Tucson Oracle hotel properties. The net book value of properties securing the line of credit totaled approximately $15.9 million at January 31, 2000 and approximately $16.3 million at January 31, 1999. Borrowings under this line of credit at January 31, 2000 amounted to $11,300,000. Interest is based on LIBOR plus 2.75 basis points (9.04% and 7.59% at January 31, 2000 and 1999 respectively). The total principal balance is due April 16, 2001. 8. OTHER NOTES PAYABLE In connection with the termination of an advisory agreement between the Partnership and Mid-America ReaFund Advisors, Inc. (the "Advisor"), as further described at Note 14, the Trust assumed the Advisor's outstanding debt totaling $450,000. The note bears interest at 7% and matures January 30, 2000. The Trust paid the final principal payment and all interest due on February 11, 2000. 9. LOANS PAYABLE TO RELATED PARTIES Loans payable to related parties consists of funds provided by James F. Wirth to repurchase Partnership units and to fund working capital and capital improvement needs. The aggregate amounts outstanding were approximately $3.0 million and $2.0 million as of January 31, 2000 and 1999, 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 are 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. -30- Wirth made an unsecured loan to the Trust in the amount of $200,000, bearing interest at 7% per year effective June 14, 1999. The unpaid principal balance and accrued interest is due on June 14, 2000. The Trust used the proceeds to fund operations. Wirth made an unsecured loan to the Trust in the amount of $120,000, bearing interest at 7% per year effective July 27, 1999. The unpaid principal balance and accrued interest is due on July 27, 2000. The Trust used the proceeds to fund operations. Wirth made an unsecured loan to the Trust in the amount of $30,000, bearing interest at 7% per year effective August 17, 1999. The unpaid principal balance and accrued interest is due on August 17, 2000. The Trust used the proceeds to pay down the outstanding loan from the Partnership. Wirth made an unsecured loan to the Trust in the amount of $250,000, bearing interest at 7% per year effective October 12, 1999. The unpaid principal balance and accrued interest is due on June 1, 2000. The Trust used the proceeds to pay dividends declared on October 12, 1999 and to pay down the outstanding loan from the Partnership. Wirth made an unsecured loan to the Trust in the amount of $250,000, bearing interest at 7% per year effective October 14, 1999. The unpaid principal balance and accrued interest is due on March 1, 2000. The Trust used the proceeds to pay down the outstanding loan from the Partnership, which then was used by the Partnership to pay deposits and other fees related to the pending refinancing of the San Diego Hotel. InnSuites Innternational Hotels made an unsecured loan in the amount of $120,000 to the Trust bearing no stated interest rate or maturity date on January 12, 2000. Subsequently on March 8, 2000, the loan was paid in full. 10. MINIMUM DEBT PAYMENTS Scheduled minimum payments of debt as of January 31, 2000 are as follows: FISCAL YEAR ENDED AMOUNT(1) ----------------- --------- 2001 $ 1,476,479 2002 15,949,862 2003 815,877 2004 890,899 2005 9,187,440 Thereafter 10,081,103 ----------- $38,401,660 =========== (1) Approximately $345,000 of debt was repaid by February 11, 2000 and is not included in the aforementioned summary. 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-up of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The shares of beneficial interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of shares of beneficial interest do not have cumulative voting rights in the election of directors and do not have preemptive rights. For the year ended January 31, 2000, the Trust repurchased 189,500 shares of beneficial interest at an average price of $2.44 per share. Repurchase of these shares are accounted for on the Treasury Stock Method and are reported as such in the Statement of Shareholder's Equity. -31- 12. PERCENTAGE LEASE AGREEMENTS Effective August 1, 1998, 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, 2008, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each Percentage Lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated on a quarterly basis by multiplying fixed percentages by the actual quarterly amounts of such gross revenues in excess of specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments beginning January 1, 1999, based on increases in the United States Consumer Price Index. Percentage rent applicable to food and beverage revenues is calculated as 5% of such revenue over a minimum threshold. Future minimum rentals (ignoring CPI increases) to be received by the Trust from the Lessee pursuant to the Percentage Leases for each of the next five years and in total thereafter are as follows: 2001 $ 6,850,000 2002 6,850,000 2003 6,850,000 2004 6,850,000 2005 6,850,000 Thereafter 20,550,000 ----------- $54,800,000 =========== The Trust earned approximately $9.5 million and $9.9 million in rent revenue during fiscal 2000 and 1999, respectively, of which approximately $2.7 million and $3.3 million respectively, was in excess of base rent. No percentage rent was earned in fiscal 1998 from the Hotels. 13. FEDERAL INCOME TAXES No provision for current or deferred income taxes has been made by the Trust. The Trust has elected to be a 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, 2000 and 1999. As a REIT, the Trust normally distributes 95% of its taxable income to its shareholders. For the years ended January 31, 2000 and 1999, the Trust had a taxable income (loss) of approximately ($850,000) and ($1,164,000), respectively, before consideration of net operating loss carry forwards. In fiscal years 2000 and 1999, 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, 2000, 1999 and 1998, amounted to $0.02 per share, $0.10 per share and $0.15 per share, respectively. The Trust has an income tax net operating loss of approximately $15.4 million. Net operating loss carryforwards expire beginning in fiscal 2008 and ending in fiscal 2020. 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: -32-
CALENDAR 1999 CALENDAR 1998 CALENDAR 1997 ------------- ------------- ------------- Ordinary Return Total Ordinary Return Total Ordinary Return Total Month Paid Income of Capital Paid Income of Capital Paid Income of Capital Paid - -------------------------------------------------------------------------------------------------------------------- March - - - - .10 .10 June - - - - .05 .05 September - .10 .10 - - - October $.01 .01 - - - - - - --- --- --- --- --- --- --- --- --- $.01 .01 - .10 .10 - .15 .15 === === === === === === === === ===
The tax status of distributions to shareholders in calendar 2000 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. 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. Certain employment agreements with the former Chairman and President of the Trust were terminated at January 30, 1998. 15. OTHER RELATED PARTY TRANSACTIONS The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement. -33- Wirth is a 9.8% indirect shareholder of the Lessee. At January 31, 2000 the Trust had a $155,000 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, 2000 and 1999 Wirth and his affiliates held 5,226,364 and 5,246,364 Class B limited partnership units, respectively. As of January 31, 2000 and 1999 Wirth and his affiliates held 834,613 and 777,663, respectively, shares of beneficial interest in the Trust. At January 31, 2000, the Trust owned a 44.9% interest in the ten 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 units in fiscal 2000 at a weighted average price per unit of $4.10. The units were then retired. No Partnership units were repurchased in fiscal 1999. The Trust recorded expenses of approximately $17,000, $2,400, and $84,000 in fiscal years 2000, 1999 and 1998, 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 James Wirth in the amounts of $14,000 and $135,000 for the twelve months ended January 31, 2000 and 1999, respectively. The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt and depreciation of the Hotels. Under the terms of the Partnership agreement, the Partnership is required to reimburse the Trust for all such expenses. -34- 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Trust's significant financial instruments at January 31, 2000, 1999 and 1998 are as follows: 2000 1999 ----------- ---------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ---------- ---------- ---------- Mortgage notes payable $24,251,662 22,523,421 23,161,052 23,279,651 Notes payable to banks 11,300,000 11,300,000 11,300,000 11,300,000 Other notes payable 225,000 225,000 450,000 450,000 Loans payable to related parties $ 2,970,000 * 2,013,782 2,013,782 * It is not practical to estimate the fair value of related party payables. 17. SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid amounted to approximately $3.4 million, $2.4 million, and $118,000 for fiscal years 2000, 1999 and 1998, respectively. The Trust satisfied its approximately $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. As of January 31, 1998, the Trust acquired all of the outstanding shares of BPI in exchange for 647,231 shares of beneficial interest having an aggregate value of approximately $3.1 million. In connection with the formation of the Partnership as of January 31, 1998, approximately $24.9 million of historical net book value in hotel properties was contributed to the Partnership in exchange for Partnership units and the Partnership assumed approximately $16.8 million of debt. 18. COMMITMENTS AND CONTINGENCIES One of the Hotels is subject to a non-cancelable ground lease expiring December 31, 2051. Total expense for the fiscal years ended January 31, 2000 and 1999 was $70,000 each year plus a variable component that totaled approximately $67,000, and $77,000 respectively. -35- Future minimum lease payments are as follows: Fiscal Year Ended 2001 75,000 2002 75,000 2003 75,000 2004 75,000 2005 75,000 Thereafter 3,680,000 ---------- $4,055,000 ========== 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 amount obligated under the Reserve Funds are 4% of the individual Hotel's total revenues. The nature of the operations of the Hotels exposes them to risks of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position, operations or liquidity of the Hotels. The Trust is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Trust's consolidated financial position, results of operations or liquidity. 19. STOCK OPTION PLAN During fiscal 1999, the shareholders of the Trust adopted the 1997 Stock Incentive and Option Plan (the "Plan") at the annual shareholder meeting. Pursuant to the Plan, the Compensation Committee may grant options to the Trustees, Trust Officers, other key employees, consultants, advisors, and similar employees of the Trust's subsidiaries and affiliates. The number of options that may be granted is limited to 10% of the total Common Stock and Units (Class A and Class B) as of the first day of such year. 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 an employee of the Trust. 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, 2000 1999 ---- ---- Dividend yield 2.5% - Expected volatility 34.0% 37.5% Risk-free interest rate 5.7% 5.0% Expected lives 3 years 2.5 years -36- At January 31, 2000, the exercise price and weighted average remaining contractual life of options was $2.50 and 9 years, respectively. The following table summarizes the stock option activity during the 2000 and 1999 fiscal years and provides information about the stock options outstanding at January 31, 2000: 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 390,100 $ 4.31 Granted 88,200 2.50 Forfeited (102,300) 3.83 Exercised - - ----------------- -------------- Outstanding, January 31, 2000 375,600 $ 2.50 ================= ============== Stock Option Information January 31, 2000 - -------------------------------------------------------------------------------- Options exercisable 97,000 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, 2000 and 1999, the Trust granted 28,200 and 214,100 stock options to non-employees, respectively, resulting in the recognition of compensation expense of approximately $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: Years ended January 31, ----------------------- 2000 1999 ---- ---- Net loss: As reported $ (951,811) $(193,071) =========== ========= Pro forma $(1,058,408) $(293,468) =========== ========= Net loss per share - basic and diluted: As reported $ (0.40) $ (0.10) =========== ========= Pro forma $ (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. -37- 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 (2,376,770, 1,921,902 and 1,022,359 shares for the years ended January 31, 2000, 1999, and 1998, respectively). Diluted net loss per share is the same as basic net loss per share for the years ended January 31, 2000, 1999 and 1998 due to the antidilutive effect of potentially dilutive securities on loss from continuing operations. Potentially dilutive securities excluded from diluted loss per share totaled 7,608,321, 7,753,890 and 0 for the years ended January 31, 2000, 1999 and 1998, respectively. Had these securities been dilutive, loss per share would have been $(0.20), $(0.05) and no effect, respectively. 21. QUARTERLY RESULTS (UNAUDITED) The following is an unaudited summary of the results of operations, by quarter, for the fiscal years ended January 31, 2000 and 1999. Management believes that all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of such interim results have been included. The results of operations for any interim period are not necessarily indicative of those for the entire fiscal year.
QUARTER ENDED ------------- FISCAL 2000 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 - ----------- -------- ------- ---------- ---------- (As restated) (As restated) 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 $ - - .01 .01 ========== ========= ========= =========
-38-
QUARTER ENDED ------------- FISCAL 1999 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 - ----------- -------- ------- ---------- ---------- Total revenues $3,782,584 2,021,597 2,936,504 1,169,073 ========== ========= ========= ========= Total revenues less interest expense on mortgage loans and operating expenses, and amortization expense of real estate held for sale $3,154,072 1,565,900 2,483,259 761,986 ========== ========= ========= ========= Net income (loss) $ 435,169 (99,816) 45,425 (573,849) ========== ========= ========= ========= Income (loss) per share - basic and diluted $ .26 (.06) .02 (.27) ========== ========= ========= ========= Dividends declared per share $ - - .10 - ========== ========= ========= =========
-39- SCHEDULE III INNSUITES HOSPITALITY TRUST AND SUBSIDIARY REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF JANUARY 31, 2000
Cost Initial Capitalized Gross Amounts at Cost Subsequent to Which Carried at to Trust Acquisition Close of Period --------------------------- ------------------------ --------------------------- Buildings and Building and Buildings and Encumbrances Land Improvements Land Improvements Land Improvements ------------ ------------ ------------- ---------- ------------ --------------------------- InnSuites Hotels Phoenix Best Western Phoenix, Arizona $ 4,270,812 $ 418,219 $ 2,922,884 $ - $ 106,958 $ 418,219 $ 3,029,842 InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 2,359,386 686,806 6,548,348 - 151,099 686,806 6,699,447 InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) - - 4,220,820 - 1,754,059 - 5,974,879 InnSuites Hotels Yuma Best Western Yuma, Arizona 3,489,758 251,649 4,983,292 - 677,202 251,649 5,660,494 Holiday Inn Airport Ontario Hotel and Suites Ontario, California 3,472,198 1,633,064 5,450,872 - 209,116 1,633,064 5,659,988 InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) - 100,000 1,194,691 - 1,013,802 100,000 2,208,493 InnSuites Hotels Tucson St. Mary's Tucson, Arizona 3,846,625 900,000 9,166,549 - 308,843 900,000 9,475,392 Buena Park Suite Hospitality Buena Park Suites Buena Park, California 3,323,115 645,852 4,336,476 - 1,658,768 645,852 5,995,244 InnSuites Hotels San Diego Hospitality San Diego, California 3,489,768 700,000 3,972,785 - 151,053 700,000 4,123,838 InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) - 350,000 6,074,400 - 125,099 350,000 6,199,499 ----------- ------------ ----------- ----------- ------------ ------------- ------------ $24,251,662 $ 5,685,590 $48,871,117 $ - $ 6,155,999 $ 5,685,590 $ 55,027,116 =========== ============ =========== =========== ============ ============= ============
-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 $ 3,448,061 $ 150,293 $ 3,297,768 1980 1998 5-40 years InnSuites Hotels Tempe/Phoenix Airport/South Mountain Tempe, Arizona 7,386,253 333,466 7,052,787 1982 1998 5-40 years InnSuites Hotels Tucson, Catalina Foothills Best Western Tucson, Arizona (B) 5,974,879 297,526 5,677,353 1981 1998 5-40 years InnSuites Hotels Yuma Best Western Yuma, Arizona 5,912,143 277,932 5,634,211 1982 1998 5-40 years Holiday Inn Airport Ontario Hotel and Suites Ontario, California 7,293,052 276,828 7,016,224 1990 1998 5-40 years InnSuites Hotels Flagstaff/Grand Canyon Flagstaff, Arizona (B) 2,308,493 104,725 2,203,768 1966 1998 5-40 years InnSuites Hotels Tucson St. Mary's Tucson, Arizona 10,375,392 458,840 9,916,552 1960 1998 5-40 years Buena Park Suite Hospitality Buena Park Suites Buena Park, California 6,641,096 239,677 6,401,419 1972 1998 5-40 years InnSuites Hotels San Diego Hospitality San Diego, California 4,823,838 178,891 4,644,947 1946 1998 5-40 years InnSuites Hotels Scottsdale/ El Dorado Park Resort Scottsdale, Arizona (B) 6,549,499 307,396 6,242,103 1980 1998 5-40 years ------------------------------------------- $60,712,706 $2,625,574 $58,087,132 =========== ========== ===========
(See accompanying independent auditors report.) (A) Aggregate cost for federal income tax purposes at January 31, 2000 is as follows: Land $ 5,566,892 Buildings and improvements 21,980,332 ----------- $27,547,224 =========== (B) These properties secure the $12 million Trust and Partnership line of credit. Reconciliation of Real Estate: Balance at January 31, 1998 $ 34,835,043 Acquisition of hotel properties 23,923,131 Improvement to hotel properties 1,259,294 -------------- Balance at January 31, 1999 $ 60,017,468 Improvement to Hotel Properties 695,238 -------------- Balance at January 31, 2000 $ 60,712,706 ============== All acquisitions of hotel properties, other than approximately $1,448,000 in cash paid in connection with the purchase of the Buena Park Property, were acquired through the exchange of limited partnership units in the Partnership. -41- 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 ========== -42- Independent Auditors' Report The Board of Directors InnSuites Hotels, Inc.: We have audited the accompanying balance sheet of InnSuites Hotels, Inc. (the "Company") as of January 31, 2000, and the related statement of operations, 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 2000, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG LLP Phoenix, Arizona May 5, 2000 -43- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- The Board of Directors InnSuites Hotels, Inc: We have audited the accompanying balance sheet 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 generally accepted accounting principles. Phoenix, Arizona MICHAEL MAASTRICHT, CPA April 14, 2000 -44- INNSUITES HOTELS, INC. BALANCE SHEETS
As of January 31, ------------------- 2000 1999 ----------- ---------- Assets Cash and cash equivalents $ 203,166 436,179 Accounts receivable 790,323 667,081 Prepaid and other assets 41,938 120,555 ----------- ---------- Total Assets $1,035,427 1,223,815 =========== ========== Liabilities and Stockholders' Deficit Liabilities Accounts payable $1,418,469 1,199,245 Loans from affiliates 375,000 136,448 Percentage rent payable 2,845,732 1,688,178 Accrued expenses and other liabilities 865,953 805,903 ----------- ---------- Total Liabilities 5,505,154 3,829,774 Stockholders' Deficit Preferred stock, $1 par value, 100 shares authorized, 100 shares issued and outstanding as of January 31, 2000 and 1999 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 31, 2000 and 1999 2,431 2,431 Accumulated Deficit (4,722,158) (2,858,390) ----------- ---------- Total Stockholders' Deficit (4,469,727) (2,605,959) ----------- ---------- Total Liabilities and Stockholders' Deficit $ 1,035,427 1,223,815 =========== ==========
See accompanying notes to financial statements. -45- INNSUITES HOTELS, INC. STATEMENTS OF OPERATIONS
For the twelve months ended January 31, 2000 1999 ----------- ---------- Revenue from hotel operations: Room $25,146,035 24,341,384 Food and beverage 1,725,730 1,613,766 Telecommunications 346,091 460,770 Other 124,079 291,281 ----------- ----------- Total revenues $27,341,935 26,707,201 ----------- ----------- Department expenses: Rooms $ 6,706,503 7,787,234 Food and beverage 1,626,532 1,409,010 Telecommunications 389,664 495,566 Other 877,676 138,468 General and administrative 2,867,806 3,975,266 Sales and marketing 2,149,781 2,082,812 Repairs and maintenance 2,025,576 1,344,715 Hospitality 1,546,766 1,202,005 Utilities 1,643,788 1,572,819 Insurance 105,573 62,437 Percentage rent 9,516,038 9,976,880 ----------- ----------- Total expenses $29,455,703 30,047,212 ----------- ----------- Net loss $(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, 2000 and 1999
RETAINED COMBINED PREFERRED COMMON EARNINGS EQUITY STOCK STOCK (ACCUMULATED DEFICIT) (ACCUMULATED DEFICIT) --------- ------ --------------------- --------------------- 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 -- -- (2,133,768) (2,113,768) -------- ----- ---------- ---------- BALANCE, January 31, 2000 $250,000 $2,431 $(4,722,158) $(4,469,727) ======== ====== =========== ===========
See accompanying notes to financial statements. -47- INNSUITES HOTELS, INC. STATEMENTS OF CASH FLOWS
For the twelve months ended January 31, 2000 1999 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,113,768) (3,340,011) Adjustments to reconcile net loss to net cash used in operating activities: (Increase) decrease in Accounts receivable (123,242) 142,978 Decrease in Inventories - 493,648 Decrease in Due from affiliates 599,520 Decrease in Other assets 78,617 39,760 Increase in Accounts payable 219,224 229,067 Increase (decrease) in Accrued expenses and other liabilities 60,050 (6,936) Increase in Percentage rent payable 1,157,554 1,688,178 ----------- ---------- Net cash (used in) operating activities $ (721,565) (153,796) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of loans from affiliates 238,552 (212,120) Contributions 250,000 480,000 ----------- ---------- Net cash provided by financing activities $ 488,552 267,880 ----------- ---------- Net change in cash and cash equivalents (233,013) 114,084 Cash and cash equivalents at beginning of year 436,179 322,095 ----------- ---------- Cash and cash equivalents at end of year $ 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, 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, 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 134 InnSuites Flagstaff Grand Canyon Flagstaff, AZ 134 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 ----- Total Suites 1,665 ===== The Company leases these 10 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. In the current year, the Company changed its accounting period from a calendar year basis to a fiscal year-ended January 31. Therefore, the financial statements presented for comparative purposes are presented as of and for the 12 month periods ending January 31, 2000 and 1999. The Company did not exist prior to February 1, 1998. -49- 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) Basis of Presentation The financial statements include the accounts of InnSuites Hotels, Inc. and the results of operations of the 10 leased hotels. c) Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. d) 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. e) 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. f) 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. g) 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. h) Advertising and Promotion The costs of advertising and promotional events are expensed as incurred. i) Fair Value of Financial Instruments Fair value is determined by using available market information and valuation methodologies. Financial instruments include cash and cash equivalents, 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. -50- 3. Percentage Lease Agreements Percentage Leases exist between the Company's individual lessee hotels and the Lessors. The Percentage Leases have noncancellable lease terms which expire on January 31, 2008, and are subject to earlier termination on the occurrence of certain contingencies, as defined in the lease agreements. The rent due under each Percentage Lease agreement is the greater of the minimum rent, also defined by the lease agreement, 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, 2000 and 1999 was $9.5 million and $10.0 million, respectively, of which $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 Lease agreements for fiscal years 2001 to 2005 and in total thereafter are as follows: 2001 $ 6,850,000 2002 6,850,000 2003 6,850,000 2004 6,850,000 2005 6,850,000 Thereafter 20,550,000 ----------- $54,800,000 =========== 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, 2000 and 1999, 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 $731,000 and $645,000 at January 31, 2000 and 1999, 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. 4. Income Taxes The components of the income tax expense (benefit) were as follows: For the year ended, January 31 2000 1999 ------------------- Federal: Current $ - - Deferred - - State and local: Current - - Deferred - - --------- -------- $ - $ - ========= ======== -51- 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 2000 1999 ---------- ---------- Computed "expected" tax Expense (benefit) $ (688,313) (954,818) State income taxes, net of federal income tax effect (106,469) (147,894) Change in valuation allowance 792,062 1,100,240 Other, net 2,720 2,472 ---------- ---------- Income tax expense (benefit) $ - - ========== ========== The components of the Company's deferred tax assets as of January 31 were as follows: 2000 1999 ----------- ---------- Deferred tax assets: Operating loss carryforward $ 774,000 550,000 Accrued expenses 1,118,000 550,000 ----------- ---------- Gross deferred tax assets 1,892,000 1,100,000 Less: valuation allowance (1,892,000) (1,100,000) ----------- ---------- 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 $2.8 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. 5. Related Party Transactions Loans from Affiliates primarily represents $170,000 and $155,000 due to InnSuites Innternational Hotels, Inc. ("InnSuites") and the Partnership, respectively, primarily for working capital advances. InnSuites is 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. Amounts are repaid by the Company when cash flows are adequate to cover current expenses as well as amounts advanced. InnSuites holds a management agreement with the Company whereby the Company incurs fees of 2.5% of hotel revenues for management, administrative and accounting related services. InnSuites Licensing Corporation, which is owned by James F. 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 also pays advertising fees to InnSuites in the amount of 1.5% of hotel revenues for purposes of centralized advertising programs. Amounts paid under these agreements are as follows: -52- For the Year-ended January 31, 2000 1999 ---- ---- Management fees $ 694,736 768,501 Trademark license fees 533,865 300,144 Advertising fees 413,079 429,225 ---------- --------- Total $1,641,680 1,497,870 ========== ========= James F. Wirth contributed $250,000 and $480,000 for the years ended January 31, 2000 and 1999 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 25% of the employee contribution. Benefit expense under the plan amounted to $25,022 and $17,822 for the years ended January 31, 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, 2000. 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 are cash flow positive and generated net income for the year ended January 31, 2000. The Trust may restructure and acquire the Company in January 2001 following the guidelines of the REIT Modernization Act. Therefore, Management believes the Company will continue as a going concern over the next twelve months. -53- PART III -------- Item 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST. --------------------------------------------- Trustees of the Trust The Trust incorporates herein by reference the information appearing under the caption "Election of Trustees" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about May 30, 2000. Executive Officers of the Trust The name, age (as of January 31, 2000), business experience during the past five years, and offices presently held by each of the Trust's executive officers are reported below. The Trust's By-Laws provide that officers shall hold office until their successors are duly elected and qualified and that any officer may be removed from office at any time by the Trust's Trustees. JAMES F. WIRTH: Age 53; Chairman, President and Chief Executive Officer of the Trust since January 30, 1998. Chairman of InnSuites Innternational Hotels, Inc., Hospitality Corporation International and affiliated entities, owners and operators of hotels, since 1980. Chairman and President of Rare Earth Development Company, a real estate investment company, since 1973. MARC E. BERG: Age 47; Executive Vice President, Secretary and Treasurer of the Trust since February 10, 1999. Vice President - Acquisitions for the Trust from December 16, 1998 to February 10, 1999. Trustee since January 30, 1998. Consultant to InnSuites Hotels system and self-employed as a registered investment advisor since 1985. ANTHONY B. WATERS: Age 53; Chief Financial Officer of the Trust since February 29, 2000. Controller for the Trust since June 17, 1999. Accountant and auditor for 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. Section 16(a) Beneficial Ownership Reporting Compliance The Trust incorporates herein by reference the information appearing under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about May 30, 2000. Item 11. EXECUTIVE COMPENSATION. ---------------------- The Trust incorporates herein by reference the information appearing under the caption "Compensation of Trustees and Executive Officers" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about May 30, 2000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- The Trust incorporates herein by reference the information appearing under the caption "Ownership of Common Shares" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about May 30, 2000. -54- Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- The Trust incorporates herein by reference the information appearing under the caption "Certain Transactions" in the Trust's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or about May 30, 2000. 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). 10(c) Formation Agreement among the Trust; MARA; Alan M. Krause; James H. Berick; Hospitality Corporation International; InnSuites Hotels, L.L.C.; James F. Wirth; Tucson Hospitality Properties, Ltd.; Yuma Hospitality Properties, Ltd.; Baseline Hospitality Properties, Ltd.; Northern Phoenix Investment Limited Partnership; Ontario Hospitality Properties Limited Partnership; Hulsey Hotels Corporation; and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on February 17, 1998). 10(d) Contribution Agreement dated as of February 1, 1998, among James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on March 16, 1998). 10(e) Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on May 14, 1998). 10(f) Contribution Agreement dated as of June 1, 1998, among James F. Wirth, Steven S. Robson and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8- K, filed with the Securities and Exchange Commission on September 2, 1998). -55- 10(g) Consent Agreement dated as of January 31, 1999, among RRF Limited Partnership, James F. Wirth, Gail J. Wirth, Alan M. Krause and James H. Berick (incorporated by reference to Exhibit 10(g) of the Registrant's Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999, filed with the Securities and Exchange Commission on May 27, 1999). 10(h) Continuing Guaranty dated as of January 31, 1999, by RRF Limited Partnership (incorporated by reference to Exhibit 10(h) of the Registrant's Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999, filed with the Securities and Exchange Commission on May 27, 1999). 10(i) Promissory Note dated March 15, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended April 30, 1999, filed with the Securities and Exchange Commission on June 14, 1999). 10(j) Promissory Note dated June 14, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 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(k) Promissory Note dated July 27, 1999 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 year ended July 31, 1999, filed with the Securities and Exchange Commission on September 14, 1999). 10(l) Promissory Note dated August 17, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(m) Promissory Note dated October 12, 1999 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 year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(n) Promissory Note dated October 14, 1999 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 year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(o) Intercompany Agreement dated October 12, 1999, among RRF Limited Partnership, InnSuites Hotels, Inc., and InnSuites Innternational Hotels, Inc. 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998). 27** Financial Data Schedule. 99.1 Form of Percentage Lease (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K. -56- Forms 8-K - --------- No Current Reports on Form 8-K were filed by the Trust during the fourth fiscal quarter ended January 31, 2000. -57- 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 16, 2000 By: /s/ James F. Wirth ----------------------------- James F. Wirth, Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: May 16, 2000 By: /s/ Anthony B. Waters ----------------------------- Anthony B. Waters, Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Trust and in the capacities and on the dates indicated. /s/ James F. Wirth Dated: May 16, 2000 ----------------------------- James F. Wirth, Trustee, Chairman, President and Chief Executive Officer /s/ Anthony B. Waters Dated: May 16, 2000 ----------------------------- Anthony B. Waters, Chief Financial Officer /s/ Marc E. Berg Dated: May 16, 2000 ----------------------------- Marc E. Berg, Trustee /s/ Steven S. Robson Dated: May 16, 2000 ----------------------------- Steven S. Robson, Trustee /s/ Lee J. Flory Dated: May 16, 2000 ----------------------------- Lee J. Flory -58- 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) Formation Agreement among the Trust; MARA; Alan M. Krause; James H. Berick; Hospitality Corporation International; InnSuites Hotels, L.L.C.; James F. Wirth; Tucson Hospitality Properties, Ltd.; Yuma Hospitality Properties, Ltd.; Baseline Hospitality Properties, Ltd.; Northern Phoenix Investment Limited Partnership; Ontario Hospitality Properties Limited Partnership; Hulsey Hotels Corporation; and Buenaventura Properties, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on February 17, 1998). 10(d) Contribution Agreement dated as of February 1, 1998, among James F. Wirth, Gail J. Wirth and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8- K, dated and filed with the Securities and Exchange Commission on March 16, 1998). 10(e) Agreement of Purchase and Sale and Joint Escrow Instructions dated March 20, 1998, between Lafayette Hotel, LLC and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K, dated and filed with the Securities and Exchange Commission on May 14, 1998). 10(f) Contribution Agreement dated as of June 1, 1998, among James F. Wirth, Steven S. Robson and RRF Limited Partnership (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8- K, filed with the Securities and Exchange Commission on September 2, 1998). 10(g) Consent Agreement dated as of January 31, 1999, among RRF Limited Partnership, James F. Wirth, Gail J. Wirth, Alan M. Krause and James H. Berick (incorporated by reference to Exhibit 10(g) of the Registrant's Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999, filed with the Securities and Exchange Commission on May 27, 1999). 10(h) Continuing Guaranty dated as of January 31, 1999, by RRF Limited Partnership (incorporated by reference to Exhibit 10(h) of the Registrant's Annual Report on Form 10-K/A for the fiscal year ended January 31, 1999, filed with the Securities and Exchange Commission on May 27, 1999). -59- 10(i) Promissory Note dated March 15, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended April 30, 1999, filed with the Securities and Exchange Commission on June 14, 1999). 10(j) Promissory Note dated June 14, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 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(k) Promissory Note dated July 27, 1999 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 year ended July 31, 1999, filed with the Securities and Exchange Commission on September 14, 1999). 10(l) Promissory Note dated August 17, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(m) Promissory Note dated October 12, 1999 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 year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(n) Promissory Note dated October 14, 1999 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 year ended October 31, 1999, filed with the Securities and Exchange Commission on December 15, 1999). 10(o) Intercompany Agreement dated October 12, 1999, among RRF Limited Partnership, InnSuites Hotels, Inc., and InnSuites Innternational Hotels, Inc. 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, filed with the Securities and Exchange Commission on May 18, 1998). 27** Financial Data Schedule. 99.1 Form of Percentage Lease (incorporated by reference to Exhibit 99.1 of the Registrant's Registration Statement on Form S-2 filed with the Securities and Exchange Commission on September 8, 1998). * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. ** Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K. -60- EX-10.(O) 2 INTERCOMPANY AGREEMENT DATED OCTOBER 12, 1999 EXHIBIT 10(o) INTERCOMPANY AGREEMENT THIS INTERCOMPANY AGREEMENT (the "Agreement") is made and entered into as of the 12th day of October, 1999, among RRF Limited Partnership, a Delaware limited partnership (the "Operating Partnership"), InnSuites Hotels, Inc., a Nevada corporation ("InnSuites Lessee"), and InnSuites Innternational Hotels, Inc., a Nevada corporation ("InnSuites Management") (InnSuites Lessee and InnSuites Management sometimes being collectively referred to herein as the "Tenants"). W I T N E S S E T H: ------------------- WHEREAS, InnSuites Hospitality Trust, an Ohio real estate investment trust ("InnSuites Trust"), owns, directly or indirectly, an approximate 42.5 percent general partnership in the Operating Partnership; WHEREAS, the Operating Partnership may in certain circumstances determine that it is precluded from pursuing, or is limited in the manner in which it pursues, various business opportunities due to the status of InnSuites Trust as a real estate investment trust ("REIT") under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, InnSuites Lessee is a corporation formed for the purposes of, among other things, to be a lessee of real estate owned by the Operating Partnership; WHEREAS, InnSuites Management is a recently created corporation that operates the real estate leased by InnSuites Lessee from the Operating Partnership, and was formed for the purposes of, among other things, becoming a lessee and/or operator of various types of assets, including real estate owned by the Operating Partnership and others; and WHEREAS, in light of the current operations of InnSuites Lessee and the purposes for which InnSuites Management was formed, the Operating Partnership, InnSuites Lessee, and InnSuites Management desire to enter into this Agreement in order to provide to each other a right of first opportunity and notification right with respect to certain investment opportunities available to each of them. NOW, THEREFORE, in consideration of the premises and mutual undertakings herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the undersigned parties hereby agree as follows: -1- 1. Definitions. Except as may be otherwise herein expressly provided, the following terms and phrases shall have the meanings set forth below: (a) "Company Affiliate" means any entity in which a majority of the beneficial ownership interests are owned by the Operating Partnership or by any entity controlled by, controlling or under common control with the Operating Partnership. (b) "Insider" means James F. Wirth or any senior officer or director of the Operating Partnership or of any entity controlled by, controlling or under common control with the Operating Partnership. (c) "REIT Opportunity" means a direct or indirect opportunity to invest in (i) real estate (including without limitation the opportunity to provide services related to real estate or to invest in a hotel property), real estate mortgages, real estate derivatives, or entities that invest primarily in or have a substantial portion of their assets in the aforementioned types of real estate assets, or (ii) any other investments which may be structured in a manner so as to be REIT-Qualified Investments (as hereinafter defined), as determined by the Operating Partnership in its sole discretion. The Operating Partnership shall have the right from time to time to provide written notice to InnSuites Management and InnSuites Lessee specifying certain criteria for a REIT Opportunity in addition to the criteria specified above in this definition of REIT Opportunity. Any such written notice from the Operating Partnership may be modified or canceled by written notice given by the Operating Partnership at any time. The definition of REIT Opportunity shall be modified as appropriate from time to time in accordance with any such written notices sent by the Operating Partnership. (d) "Tenant Opportunity" means the opportunity for InnSuites Lessee to become the lessee under a "master" lease arrangement of a property owned or subsequently acquired by the Operating Partnership if the Operating Partnership, in its sole discretion, determines that, consistent with the status of InnSuites Trust as a REIT, the Operating Partnership is required to enter into such a "master" lease arrangement for such property, including without limitation a hotel or similar type of facility, so long as the Operating Partnership determines, in its sole discretion, that InnSuites Lessee, or an entity controlled by InnSuites Lessee, is qualified to be the lessee based on experience in the industry and financial and legal qualifications, provided that all determinations relating to both (i) the ability or inability of the Operating Partnership to pursue an opportunity or acquire assets and (ii) the necessity for the Operating Partnership to enter into a "master" lease arrangement for a property, shall be made by the Operating Partnership in its sole discretion. A Tenant Opportunity shall not include (1) a property which already has an existing "master" lessee as of the date of this Agreement (or, with respect to a property acquired subsequent to the date of this Agreement, which has an existing binding "master" lessee arrangement that predates the acquisition of the property by the Operating Partnership, provided that the Operating Partnership shall offer any such "master" lessee interest to InnSuites Lessee if the lessee interest subsequently becomes available), or (2) an opportunity in which the seller of the property (or any affiliate or designee of the seller) desires to enter into a "master" lease agreement with the Operating -2- Partnership. InnSuites Lessee shall have the right from time to time to provide written notice to the Operating Partnership specifying certain criteria for a Tenant Opportunity in addition to the criteria specified above in this definition of Tenant Opportunity. Any such written notice from InnSuites Lessee may be modified or canceled by written notice given by InnSuites Lessee at any time. The definition of Tenant Opportunity shall be modified as appropriate from time to time in accordance with any such written notices sent by InnSuites Lessee. (e) "Operating Opportunity" means the opportunity for InnSuites Management to become the operator under an operating arrangement for any and all properties which are the subject of a "master" lease arrangement between the Operating Partnership and InnSuites Lessee pursuant to this Agreement. An Operating Opportunity shall not include a property which already has an existing operating arrangement as of the date of this Agreement (or, with respect to a property acquired subsequent to the date of this Agreement, which has an existing binding operating arrangement that predates the lease of the property by InnSuites Lessee, provided that InnSuites Lessee shall offer any such operating interest to InnSuites Management if the operating interest subsequently becomes available). InnSuites Management shall have the right from time to time to provide written notice to InnSuites Lessee specifying certain criteria for an Operating Opportunity in addition to the criteria specified above in this definition of Operating Opportunity. Any such written notice from InnSuites Management may be modified or canceled by written notice given by InnSuites Management at any time. The definition of Operating Opportunity shall be modified as appropriate from time to time in accordance with any such written notices sent by InnSuites Management. 2. Operating Partnership Right of First Opportunity; Notification Right. (a) Right of First Opportunity. (i) During the term of this Agreement, if either of the Tenants develops a REIT Opportunity, or if any REIT Opportunity otherwise becomes available to them, such Tenant shall first offer such REIT Opportunity to the Operating Partnership. The offer shall be made by written notice from the appropriate Tenant to the Operating Partnership (the "REIT Opportunity Notice"), which REIT Opportunity Notice shall contain a detailed description of the material terms and conditions of the REIT Opportunity. The Operating Partnership shall have ten (10) days (the "REIT Opportunity Period") from the date of its receipt of the REIT Opportunity Notice to notify the appropriate Tenant in writing that it has accepted or rejected the REIT Opportunity. If the Operating Partnership does not so respond by the end of the REIT Opportunity Period, the Operating Partnership shall be deemed to have rejected the REIT Opportunity. If the Operating Partnership accepts a REIT Opportunity, but subsequently decides not to pursue such opportunity, or for any other reason fails to consummate the REIT Opportunity, the Operating Partnership shall immediately provide written notice that it is no longer pursuing such REIT Opportunity to both Tenants. -3- (ii) If the Operating Partnership rejects a REIT Opportunity, or accepts such REIT Opportunity but thereafter provides, or is required by the provisions hereof to provide, written notice to both Tenants that it is no longer pursuing such REIT Opportunity, InnSuites Management shall, for a period of one year after the Operating Partnership Withdrawal Date (as hereinafter defined) (the "One-Year Period"), be entitled to acquire the REIT Opportunity (A) at a price and on terms and conditions that are not more favorable to InnSuites Management in any material respect than the price and terms and conditions set forth in the REIT Opportunity Notice relating to such REIT Opportunity, or (B) if the Operating Partnership, at any time after the REIT Opportunity Notice, negotiated a different price, terms, or conditions with the seller, then at a price, and on terms and conditions, that are not more favorable than such price and terms and conditions negotiated by the Operating Partnership with the seller. If InnSuites Management does not enter into a binding agreement to acquire the REIT Opportunity within the One-Year Period, InnSuites Lessee shall, for a period of one year following the expiration of the One-Year Period, be entitled to acquire the REIT Opportunity (A) at a price and on terms and conditions that are not more favorable to InnSuites Lessee in any material respect than the price and terms and conditions set forth in REIT Opportunity Notice relating to such REIT Opportunity, or (B) if the Operating Partnership or InnSuites Management, at any time after the REIT Opportunity Notice, negotiated a different price, terms, or conditions with the seller, then at a price, and on terms and conditions, that are not more favorable than such price and terms and conditions negotiated by the Operating Partnership or InnSuites Management with the seller. If neither InnSuites Management nor InnSuites Lessee enter into a binding agreement to acquire the REIT Opportunity within their respective allotted periods, or if the price and terms and conditions are more favorable to InnSuites Management or InnSuites Lessee in any material respect than the price and terms and conditions set forth in the REIT Opportunity Notice (or, if applicable, than the price and terms and conditions negotiated by the Operating Partnership with the seller subsequent to the REIT Opportunity Notice), InnSuites Management or InnSuites Lessee (as the case may be) shall again be required to comply with the procedures set forth above in Section 2(a)(i) if it desires to acquire such REIT Opportunity. The "Operating Partnership Withdrawal Date" means any one of the following dates, as applicable: (A) the date that the Operating Partnership notifies the appropriate Tenant that it has rejected the REIT Opportunity, (B) if the Operating Partnership does not respond to such Tenant regarding the REIT Opportunity, the expiration date of the Ten-Day Period, or (C) if the Operating Partnership accepts the REIT Opportunity but subsequently ceases to pursue the opportunity, the earlier of (i) thirty (30) days after the date on which the Operating Partnership ceases to pursue the REIT Opportunity or (ii) the date of receipt by such Tenant of written notice from the Operating Partnership that it is no longer pursuing the REIT Opportunity. (iii) Each of the Tenants agrees to use its commercially reasonable best efforts to assist the Operating Partnership in structuring and consummating any REIT Opportunity accepted by the Operating Partnership, on terms determined by -4- the Operating Partnership (including without limitation structuring such investment opportunity as a "REIT-Qualified Investment," as hereinafter defined). A "REIT-Qualified Investment" means an investment, the income from which would qualify under the 95% gross income test set forth in section 856(c)(2) of the Code, the ownership of which would not cause a REIT to violate the asset limitations set forth in section 856(c)(5) of the Code, and which otherwise meets the federal income tax requirements applicable to REITs. Any expenses incurred that are directly related to structuring an investment as a REIT-Qualified Investment shall be borne solely by the Operating Partnership. (b) Notification Right. In the event that either of the Tenants develops or becomes aware of any investment opportunity during the term of this Agreement (other than a REIT Opportunity), and such Tenant is not interested in pursuing such opportunity, or the opportunity is otherwise unavailable to the Tenant, such Tenant shall immediately notify the Operating Partnership of such opportunity and provide to the Operating Partnership a copy of all written information, and a description of all material terms not set forth in writing, available to the Tenant concerning such opportunity. 3. Operating Partnership Right of First Opportunity Following Tenant Acquisition of a REIT Opportunity (a) If either of the Tenants acquires a REIT Opportunity pursuant to the provisions of Section 2(a)(ii) of this Agreement and desires to sell, dispose, or otherwise transfer any portion of its interest in such REIT Opportunity within five (5) years of the acquisition of such REIT Opportunity (a "Disposition Opportunity"), such Tenant shall first offer such Disposition Opportunity to the Operating Partnership. The offer shall be made by written notice from the appropriate Tenant to the Operating Partnership (the "Disposition Opportunity Notice"). The Operating Partnership shall have thirty (30) days (the "Thirty-Day Disposition Period") from the date of its receipt of the Disposition Opportunity Notice regarding such Disposition Opportunity to notify the appropriate Tenant in writing that it has accepted or rejected the Disposition Opportunity. If the Operating Partnership does not so respond by the end of the Thirty-Day Disposition Period, the Operating Partnership shall be deemed to have rejected the Disposition Opportunity. If the Operating Partnership accepts a Disposition Opportunity, but subsequently decides not to pursue such opportunity, or for any other reason fails to consummate such Disposition Opportunity, the Operating Partnership shall immediately provide written notice that it is no longer pursuing such Disposition Opportunity to the appropriate Tenant. (b) If the Tenant does not enter into a binding agreement to exercise the Disposition Opportunity within one year of the termination of the Thirty-Day Disposition Period, the Tenant shall again be required to comply with the procedures set forth above in Section 3(a) if it desires to exercise such Disposition Opportunity. -5- 4. Operating Partnership Option to Purchase Following Tenant Acquisition of a REIT Opportunity (a) If either of the Tenants acquires a REIT Opportunity pursuant to the provisions of Section 2(a)(ii) of this Agreement, such Tenant shall grant the Operating Partnership an option to acquire (an "Option") the property that was the subject of such REIT opportunity. The Operating Partnership may exercise an Option for an amount equal to the greater of (i) 90% of the value of an Option Property established by an appraisal conducted by a Member of the Appraisal Institute (MAI) (which appraisal shall be completed within sixty (60) days of the delivery of an exercise notice to the Operating Partnership), or (ii) the sum of (A) the total cost to the Tenant to acquire such Option Property, (B) any interest charges or expenses incurred by the Tenant relating to, and during its ownership of, such Option Property, (C) any net operating losses incurred by the Tenant relating to its ownership of such Option Property, and (D) an annual return of ten percent (10%) computed on the equity invested by Tenant in the Option Property. The Operating Partnership shall have thirty (30) days (the "Thirty-Day Period") from the date of its receipt of the MAI appraisal report regarding such Option to notify the appropriate Tenant in writing that it has decided to proceed to acquire the Option Property. If the Operating Partnership does not so respond by the end of the Thirty-Day Period, the Operating Partnership shall be deemed to have rejected the Option. (b) An Option shall be exercisable until the earlier to occur of (i) three (3) years from the date of Tenant's acquisition of an Option Property, or (ii) the prior disposition of such Option Property in accordance with the provisions of this Agreement. 5. InnSuites Lessee Right of First Opportunity for Tenant Opportunity. (a) From and after the date hereof, and throughout the remaining term of this Agreement, if the Operating Partnership develops a Tenant Opportunity, or if a Tenant Opportunity otherwise becomes available to the Operating Partnership, the Operating Partnership shall first offer such Tenant Opportunity to InnSuites Lessee. The offer shall be made by written notice from the Operating Partnership to InnSuites Lessee (the "Tennant Opportunity Notice"), which Tennant Opportunity Notice shall contain a detailed description of the material terms and conditions under which the Operating Partnership proposes to offer such Tenant Opportunity to InnSuites Lessee. The Operating Partnership shall thereafter provide or cause to be provided promptly to InnSuites Lessee such additional information relating to the Tenant Opportunity as InnSuites Lessee reasonably may request. For a period of thirty (30) days after the date that the Operating Partnership delivers the Tennant Opportunity Notice to InnSuites Lessee, the Operating Partnership and InnSuites Lessee shall negotiate with each other on an exclusive basis with respect to such Tenant Opportunity. If the Operating Partnership and InnSuites Lessee are unable to enter into a mutually satisfactory arrangement with respect to the Tenant Opportunity within such 30-day period, or if InnSuites Lessee indicates that it is not interested in pursuing such Tenant Opportunity (in which event InnSuites Lessee shall provide written notice to the Operating Partnership as soon as InnSuites Lessee decides against pursuing such opportunity), then the Operating Partnership shall be free for a period of one year after the expiration of such 30-day period to enter into a binding agreement with respect to such Tenant Opportunity with -6- InnSuites Management or any other party at a price and on terms and conditions that are not more favorable to the Operating Partnership in any material respect than the price and terms and conditions set forth in the Tennant Opportunity Notice relating to such Tenant Opportunity. If the Operating Partnership does not enter into a binding agreement with respect to such Tenant Opportunity within such one-year period, or if the price and terms and conditions are more favorable to the Operating Partnership in any material respect than the price and terms and conditions set forth in the Tennant Opportunity Notice relating to such tenant Opportunity, the Operating Partnership shall again be required to comply with the procedures set forth above in this Section 4(a) if it thereafter desires to pursue such Tenant Opportunity. (b) Notwithstanding anything to the contrary contained in this Agreement, (1) the Operating Partnership shall not be required to offer to InnSuites Lessee any Tenant Opportunity in connection with a proposed acquisition until a binding contract has been entered into with respect to such acquisition, and the consummation of any agreement between the Operating Partnership and InnSuites Lessee with respect to a Tenant Opportunity shall be subject to the actual closing of such acquisition by the Operating Partnership, (2) the Operating Partnership shall have the right in its sole discretion to decide not to pursue, or to discontinue at any time pursuing, any investment opportunity, even if such opportunity, if pursued, would create a Tenant Opportunity, and (3) the Operating Partnership shall have no obligation to offer any opportunity other than a Tenant Opportunity to InnSuites Lessee. (c) InnSuites Lessee agrees to cooperate with the Operating Partnership in structuring all dealings with outside parties in connection with any Tenant Opportunity that InnSuites Lessee and the Operating Partnership agree to enter into pursuant to Section 4(a) above. InnSuites Lessee agrees to cooperate with the Operating Partnership in structuring any Tenant Opportunity with the Operating Partnership as a "REIT-Qualified Investment" for the Operating Partnership. The Operating Partnership shall have the right, in its sole discretion, to structure any investment as a REIT-Qualified Investment, even if such structuring prevents the Operating Partnership from creating a Tenant Opportunity for InnSuites Lessee. 6. InnSuites Management Right of First Opportunity for Operating Opportunity. (a) From and after the date hereof, and throughout the remaining term of this Agreement, if InnSuites Lessee develops an Operating Opportunity, or if an Operating Opportunity otherwise becomes available to InnSuites Lessee, InnSuites Lessee shall first offer such Operating Opportunity to InnSuites Management. The offer shall be made by written notice from InnSuites Lessee to InnSuites Management (the "Operating Opportunity Notice"), which Operating Opportunity Notice shall contain a detailed description of the material terms and conditions under which InnSuites Lessee proposes to offer such Operating Opportunity to InnSuites Management. InnSuites Lessee shall thereafter provide or cause to be provided promptly to InnSuites Management such additional information relating to the Operating Opportunity as InnSuites Management reasonably may request. For a period of thirty (30) days after the date that InnSuites Lessee delivers the Operating Opportunity Notice to InnSuites Management, InnSuites Lessee and InnSuites Management shall negotiate with each other on an exclusive basis with respect to such Operating Opportunity. If InnSuites Lessee and InnSuites -7- Management are unable to enter into a mutually satisfactory arrangement with respect to the Operating Opportunity within such 30-day period, or if InnSuites Management indicates that it is not interested in pursuing such Operating Opportunity (in which event InnSuites Management shall provide written notice to InnSuites Lessee as soon as InnSuites Management decides against pursuing such opportunity), then InnSuites Lessee shall be free for a period of one year after the expiration of such 30-day period to enter into a binding agreement with respect to such Operating Opportunity with any party at a price and on terms and conditions that are not more favorable to InnSuites Lessee in any material respect than the price and terms and conditions set forth in the Operating Opportunity Notice relating to such Operating Opportunity. If InnSuites Lessee does not enter into a binding agreement with respect to such Operating Opportunity within such one-year period, or if the price and terms and conditions are more favorable to InnSuites Lessee in any material respect than the price and terms and conditions set forth in the Operating Opportunity Notice relating to such Operating Opportunity, InnSuites Lessee shall again be required to comply with the procedures set forth above in this Section 5(a) if it thereafter desires to pursue such Operating Opportunity. (b) Notwithstanding anything to the contrary contained in this Agreement, (1) InnSuites Lessee shall not be required to offer to InnSuites Management any Operating Opportunity in connection with a proposed lease of any property until a binding contract has been entered into with respect to such property, and the consummation of any agreement between InnSuites Lessee and InnSuites Management with respect to a Operating Opportunity shall be subject to the actual lease of such property by InnSuites Lessee, (2) InnSuites Lessee shall have the right in its sole discretion to decide not to pursue, or to discontinue at any time pursuing, any lease opportunity, even if such opportunity, if pursued, would create an Operating Opportunity, and (3) InnSuites Lessee shall have no obligation to offer any opportunity other than an Operating Opportunity to InnSuites Management. (c) InnSuites Management agrees to cooperate with InnSuites Lessee in structuring all dealings with outside parties in connection with any Operating Opportunity that InnSuites Lessee and InnSuites Management agree to enter into pursuant to Section 5(a) above. InnSuites Management agrees to cooperate with InnSuites Lessee and the Operating Partnership in structuring any Operating Opportunity with InnSuites Lessee as a "REIT-Qualified Investment" for the Operating Partnership. The Operating Partnership shall have the right, in its sole discretion, to structure any investment as a REIT-Qualified Investment, even if such structuring prevents InnSuites Lessee from creating an Operating Opportunity for InnSuites Management. 7. General Terms and Conditions for Rights of First Opportunity/Notification Rights. (a) Unless waived or unless agreed to as part of an investment and/or lease, each party shall bear its own expenses with respect to any opportunity to which this Agreement is applicable, and each party agrees that it shall not be entitled to any compensation from the other party with respect to any such opportunity. -8- (b) A party shall not be required to comply with the rights of first opportunity and notification requirements set forth in this Agreement during any period in which the other party or any Controlled Affiliate of such other party (as hereinafter defined) is in default of this Agreement or any other agreement entered into by the parties hereto or any of their Controlled Affiliates, if such default is material and remains uncured for fifteen days after receipt of notice thereof. A "Controlled Affiliate" of a party means any entity controlled by, controlling or under common control with such party. (c) Any opportunity which is offered to a party under this Agreement and rejected by such party may thereafter be offered to Insiders, subject to the reoffer provisions set forth in Sections 2(a)(ii), 3(b), 5(a), and 6(a) above. (d) Any opportunity which is offered to and accepted by the Operating Partnership under this Agreement may be entered into by or on behalf of the Operating Partnership or by any designee which is a Company Affiliate or Controlled Affiliate of the Operating Partnership. Any opportunity which is offered to and accepted by either of the Tenants under this Agreement may be entered into by or on behalf of such Tenant or by any designee which is a Controlled Affiliate of such Tenant. (e) All rights of first opportunity and notification rights set forth in this Agreement shall be subordinated to any seller consent and confidentiality requirements; no party shall be required to comply with the rights of first opportunity and notification rights set forth in this Agreement if such compliance would violate any seller consent or confidentiality requirements. (f) While it is the intention of the parties to align their businesses in accordance with the terms of this Agreement, each party shall act independently in its own best interests, and neither party shall be considered a partner or agent of the other party or to owe any fiduciary or other common law duties to the other party. 8. Specific Performance. Each party hereto hereby acknowledges that the obligations undertaken by it pursuant to this Agreement are unique and that the other party hereto would likely have no adequate remedy at law if such party shall fail to perform its obligations hereunder, and such party therefor confirms that the other party's right to specific performance of the terms of this Agreement is essential to protect the rights and interests of the other party. Accordingly, in addition to any other remedies that a party hereto may have at law or in equity, such party shall have the right to have all obligations, covenants, agreements, and other provisions of this Agreement specifically performed by the other party hereto and the right to obtain a temporary restraining order or a temporary or permanent injunction to secure specific performance and to prevent a breach or threatened breach of this Agreement by the other party hereto. Each party submits to the jurisdiction of the courts of the State of Ohio for this purpose. -9- 9. Affiliates. Each party hereto shall cause all entities that are under its control to comply with the terms hereof. InnSuites Trust, by its signature below, hereby agrees that it shall comply with the terms of this Agreement applicable to the Operating Partnership. 10. Term. The term of the Agreement shall commence as of the date first written above and shall terminate on January 31, 2009. Notwithstanding the foregoing, a party hereto may terminate this Agreement if the other party or any Controlled Affiliate of such other party is in default of this Agreement or any other agreement entered into by the parties hereto or any of their Controlled Affiliates, if such default is material and remains uncured for fifteen days after receipt of notice thereof. 11. Miscellaneous. (a) Notices. Notices shall be sent to the parties at the following addresses: RRF Limited Partnership (Operating Parthership) c/o InnSuites Hospitality Trust 1625 E. Northern Avenue Suite 201 Phoenix, Arizona 85020 Attention: Executive Vice President Phone: 602-944-1500 Facsimile: 602-678-0281 with a copy to: James B. Aronoff, Esq. Thompson Hine & Flory LLP 3900 Key Center 127 Public Square Cleveland, Ohio 44114 Phone: 216-566-5500 Facsimile: 216-566-5800 InnSuites Hotels, Inc. (InnSuites Lessee) 1625 E. Northern Avenue Suite 201 Phoenix, Arizona 85020 Attention: President Phone: 602-944-1500 Facsimile: 602-678-0281 -10- with a copy to: James W. Reynolds, Esq. Dillingham Cross, P.L.C. 5080 North 40/th/ Street Suite 335 Phoenix, Arizona 85018 Phone: 602-468-1811 Facsimile: 602-468-0442 InnSuites Innternational Hotels, Inc. (InnSuites Management) 1625 E. Northern Avenue Suite 201 Phoenix, Arizona 85020 Attention: President Phone: 602-944-1500 Facsimile: 602-678-0281 with a copy to: James W. Reynolds, Esq. Dillingham Cross, P.L.C. 5080 North 40/th/ Street Suite 335 Phoenix, Arizona 85018 Phone: 602-468-1811 Facsimile: 602-468-0442 Notices shall first be sent by facsimile, with confirming copy to be sent by certified mail, return receipt requested, Federal Express or comparable overnight delivery service. Notice will be deemed received on the fourth business day following deposit in U.S. mail or deposit with Federal Express or other delivery service. Any party to this Agreement may change its address for notice by giving written notice to the other party at the address and in accordance with the procedures provided above. (b) Reasonable and Necessary Restrictions. Each of the parties hereto hereby acknowledges and agrees that the restrictions, prohibitions and other provisions of this Agreement are reasonable, fair and equitable in scope, term and duration, are necessary to protect the legitimate business interests of the parties hereto and are a material inducement to the parties hereto to enter into the transactions described in and contemplated by the recitals hereto. Each party hereto covenants that it will not sue to challenge the enforceability of this Agreement or raise any equitable defense to its enforcement. (c) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. This Agreement shall not be assigned without the express written consent of each of the parties hereto. Notwithstanding the foregoing, this Agreement may be assigned without the consent of any party -11- hereto in connection with any merger, consolidation, reorganization or other combination of a party with or into another entity where the party is not the surviving entity. (d) Amendments; Waivers. No termination, cancellation, modification, amendment, deletion, addition or other change in this Agreement, or any provision hereof, or waiver of any right or remedy herein provided, shall be effective for any purpose unless such change or waiver is specifically set forth in a writing signed by the party or parties to be bound thereby. The waiver of any right or remedy with respect to any occurrence on one occasion shall not be deemed a waiver of such right or remedy with respect to such occurrence on any other occasion. (e) Choice of Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by the laws of the State of Ohio, without regard to the principles of choice of law thereof. (f) Severability. In the event that one or more of the terms or provisions of this Agreement or the application thereof to any person(s) or in any circumstance(s) shall, for any reason and to any extent be found by a court of competent jurisdiction to be invalid, illegal or unenforceable, such court shall have the power, and hereby is directed, to substitute for or limit such invalid term(s), provision(s) or application(s) and to enforce such substituted or limited terms or provisions, or the application thereof. Subject to the foregoing, the invalidity, illegality or enforceability of any one or more of the terms or provisions of this Agreement, as the same may be amended from time to time, shall not affect the validity, legality or enforceability of any other term or provision hereof. (g) Entire Agreement; No Third-Party Beneficiaries. This Agreement (i) constitutes the entire agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral, between the parties hereto with respect to the subject matter hereof, so that no such external or separate agreement relating to the subject matter of this Agreement shall have any effect or be binding, unless the same is referred to specifically in this Agreement or is executed by the parties after the date hereof; and (ii) is not intended to confer upon any other person any rights or remedies hereunder, and shall not be enforceable by any party not a signatory to this Agreement. (h) Gender; Number. As the context requires, any word used herein in the singular shall extend to and include the plural, any word used in the plural shall extend to and include the singular and any word used in any gender or the neuter shall extend to and include each other gender or be neutral. (i) Headings. The headings of the sections hereof are inserted for convenience of reference only and are not intended to be a part of or affect the meaning or interpretation of this Agreement or of any term or provision hereof. (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which together shall be deemed to be an original and all of which together shall be deemed to constitute one and the same agreement. -12- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by one of its duly authorized corporate officers, as of the date first above written. RRF LIMITED PARTNERSHIP, a Delaware limited partnership By: InnSuites Hospitality Trust, an Ohio real estate investment trust, its sole general partner By: /s/ James F. Wirth ----------------------------------- Name: James F. Wirth ---------------------------- Title: President --------------------------- INNSUITES HOTELS, INC., a Nevada corporation By: /s/ William Kidwell ----------------------------------- Name: William Kidwell ---------------------------- Title: President --------------------------- INNSUITES INNTERNATIONAL HOTELS, INC., a Nevada corporation By: /s/ James F. Wirth ----------------------------------- Name: James F. Wirth ---------------------------- Title: President --------------------------- The undersigned, the sole general partner of the Operating Partnership, hereby agrees to the restrictions imposed upon it pursuant to Section 7 of the Agreement. INNSUITES HOSPITALITY TRUST, an Ohio real estate investment trust By: /s/ James F. Wirth ----------------------------------- Name: James F. Wirth ------------------------------ Title: President ----------------------------- -13- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF THE REGISTRANT AS OF JANUARY 31, 2000 AND 1999 AND THE STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE THREE YEARS ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-31-2000 FEB-01-1999 JAN-31-2000 208,109 0 618,063 0 0 0 64,479,347 0 65,305,519 0 56,674,253 0 0 0 8,631,266 65,305,519 0 9,546,181 0 0 11,555,658 1,945,732 3,340,568 (951,811) 0 (951,811) 0 0 0 (951,811) (.40) (.40) THE REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE THE CAPTIONS "TOTAL CURRENT ASSETS" AND "TOTAL CURRENT LIABILITIES" ARE NOT APPLICABLE.
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