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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                -----------------

                                    FORM 10-Q

                                -----------------

                                QUARTERLY REPORT
                         PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JULYOCTOBER 31, 2000

                          Commission File Number 1-7062

                           INNSUITES HOSPITALITY TRUST
             (Exact name of registrant as specified in its charter)

             Ohio                                      34-6647590
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                             InnSuites Hotels Centre
                        1625 E. Northern Ave., Suite 201
                                Phoenix, AZ 85020
                    (Address of principal executive offices)

Registrant's telephone number, including area code (602) 944-1500

         Indicate by check mark whether the registrant: (l) has filed all
reports required to be filed by Section 13 or l5(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Number of outstanding Shares of Beneficial Interest, without par value,
as of September 1,December 11, 2000: 2,170,5692,197,227




                                     PART I

                              FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS.

                           INNSUITES HOSPITALITY TRUST
                           CONSOLIDATED BALANCE SHEETS

JULYOCTOBER 31, 2000 JANUARY 31, 2000 ------------- ---------------- ---------------- Assets (UNAUDITED) (AUDITED) Assets (UNAUDITED) (AUDITED) Hotel properties, net $ 63,800,71465,814,101 64,479,347 Cash and cash equivalents 306,724-- 208,109 Rent receivable from affiliates, net of $3,765,679$4,447,574 and $2,845,732 allowance respectively - --- -- Interest receivable and other assets 680,256514,121 618,063 ------------- ------------------------ Total assets $ 64,787,69466,328,222 65,305,519 ============= ======================= Liabilities and shareholders' equity Liabilities Mortgage notes payable 24,395,04125,785,747 24,251,662 Notes payable to banks 11,300,000 11,300,000 Notes payable to related parties 745,000688,700 225,000 Advances payable to related parties 3,650,0004,811,203 2,970,000 Accounts payable and accrued expenses 895,7351,041,544 1,138,168 ------------- ------------------------ Total liabilities 40,985,77643,627,194 39,884,830 Minority interest in partnership 16,015,58415,426,840 16,789,423 Shareholders' equity Shares of beneficial interest, without par value; unlimited authorization; 2,174,0692,180,272 and 2,507,949 shares issued and outstanding at JulyOctober 31 and January 31, 2000, respectively 9,144,3708,650,473 9,093,020 Treasury stock (1,358,036)(1,376,285) (461,754) ------------- ------------------------ Total shareholders' equity 7,786,3347,274,188 8,631,266 ------------- ------------------------ Total liabilities and shareholders' equity $ 64,787,69466,328,222 65,305,519 ============= ========================
See accompanying notes to unaudited consolidated financial statements. 2 INNSUITES HOSPITALITY TRUST UNAUDITED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
FOR THE SIXNINE MONTHS ENDED JULYOCTOBER 31, 2000 1999 --------- ---------- (restated)----------- ----------- Revenues Rent revenue from affiliate $ 5,392,810 5,358,4947,552,207 7,389,428 Interest income 4,446 19,8768,518 20,863 Other income 10,312 9,59120,587 15,210 ----------- ----------- Total revenues 5,407,568 5,387,9617,581,312 7,425,501 ----------- ----------- Expenses Real estate depreciation 1,350,909 1,277,2202,077,855 1,894,303 Real estate and personal property taxes, insurance and ground rent 680,193 643,9301,048,238 1,065,453 General and administrative 1,408,030 1,483,0852,446,705 1,902,937 Interest on mortgage notes payable 1,105,996 1,040,0321,693,112 1,544,610 Interest on notes payable to banks 513,341 484,213804,033 684,168 Interest on notes payable to related parties 100,973 85,391176,048 135,692 Amortization of loan fees 47,807 44,43489,929 48,998 ----------- ----------- Total expenses 5,207,249 5,058,3058,335,920 7,276,161 ----------- ----------- Income (loss) before minority interest 200,319 329,656(754,608) 149,340 Less: minority interest 211,343 239,030(248,709) 140,946 ----------- ----------- Net income (loss) attributable to shares of beneficial interest $ (11,024) 90,626(505,899) 8,394 =========== =========== Earnings (loss) per share - basic $ (0.00) 0.04 =========== =========== Weighted average number of shares outstanding - basic 2,458,366 2,311,196 =========== =========== Earnings (loss) per share - diluted $ (0.00) 0.03 =========== =========== Weighted average number of shares outstanding - diluted 2,458,366 10,047,282 =========== ===========
See accompanying notes to unaudited financial statements. INNSUITES HOSPITALITY TRUST UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2000 1999 --------- --------- (restated) Revenues Rent revenue from affiliate $ 2,073,764 2,102,983 Interest income 2,183 - Other income 10,312 - ----------- ----------- Total revenues 2,086,259 2,102,983 ----------- ----------- Expenses Real estate depreciation 685,202 658,857 Real estate and personal property taxes, insurance and ground rent 337,341 268,203 General and administrative 939,144 965,709 Interest on mortgage notes payable 560,896 536,482 Interest on notes payable to banks 267,444 233,007 Interest on notes payable to related parties 51,143 60,180 Amortization of loan fees 31,543 44,177 ----------- ----------- Total expenses 2,872,713 2,766,615 ----------- ----------- Loss before minority interest (786,454) (663,632) Less: minority interest (382,941) (367,811) ----------- ----------- Net loss attributable to shares of beneficial interest $ (403,513) (295,821) =========== =========== Loss per share - basic and diluted $ (0.17) (0.13)(0.21) 0.00 =========== =========== Weighted average number of shares outstanding - basic and diluted 2,441,244 2,301,2582,364,593 2,330,349 =========== ===========
See accompanying notes to unaudited consolidated financial statements. 3 INNSUITES HOSPITALITY TRUST UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2000 1999 ----------- ----------- Revenues Rent revenue from affiliate $ 2,159,397 2,030,934 Interest income 4,072 987 Other income 10,275 5,619 ----------- ----------- Total revenues 2,173,744 2,037,540 ----------- ----------- Expenses Real estate depreciation 726,947 617,083 Real estate and personal property taxes, insurance and ground rent 368,045 421,523 General and administrative 1,038,676 419,852 Interest on mortgage notes payable 587,116 504,578 Interest on notes payable to banks 290,692 199,955 Interest on notes payable to related parties 75,074 50,301 Amortization of loan fees 42,121 4,564 ----------- ----------- Total expenses 3,128,671 2,217,856 ----------- ----------- Loss before minority interest (954,927) (180,316) Less: minority interest (441,083) (81,341) ----------- ----------- Net loss attributable to shares of beneficial interest $ (513,844) (98,975) =========== =========== Loss per share - basic and diluted $ (0.24) (0.04) =========== =========== Weighted average number of shares outstanding - basic and diluted 2,177,047 2,368,656 =========== ===========
See accompanying notes to unaudited consolidated financial statements. 4 INNSUITES HOSPITALITY TRUST UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED JULYOCTOBER 31, 2000 1999 --------- --------- (restated)----------- ----------- Cash flows from operating activities: Net income (loss) $ (11,024) 90,626(505,899) 8,394 Adjustments to reconcile net income to net cash provided by operating activities: Stock option compensation expense 26,258 -39,388 -- Minority interest 211,343 239,030(248,709) 140,946 Depreciation and amortization 1,398,716 1,321,6542,167,784 1,943,301 (Increase) in rent receivable from affiliates (919,947) (192,376)(1,601,842) (201,553) Provision for uncollectible receivable from affiliate 919,947 -1,601,842 -- (Increase) decrease in interest receivable and other assets (110,000) 280,27414,012 16,703 (Decrease) in accounts payable and accrued expenses (242,434) (570,927)(234,374) (1,318,881) ----------- ----------- Net cash provided by operating activities $ 1,272,859 1,168,281 ----------- -----------1,232,202 588,910 Cash flows from investing activities: Acquisition of hotel (2,100,000) -- Improvements and additions to hotel properties (790,341) (1,216,671)(1,430,675) (1,514,556) Disposal of FF&E 97,502 --- Sale of land 20,564 --- ----------- ----------- Net cash used in investing activities $ (672,275) (1,216,671) ----------- -----------$(3,412,609) (1,514,556) Cash flows from financing activities: Payments of mortgage notes payable (356,621) (879,674)(540,915) (1,078,098) Refinancing of mortgage notes payable 500,000 1,751,920 Payments of otherBorrowings on mortgage notes payable (225,000) (450,000)1,575,000 -- Repurchase of partnership units (823,822) (396,647)(876,665) (453,327) Repurchase of stock (896,282) -(914,531) (224,074) Payment of dividends (52,656) -(71,622) -- Other distributions to owners (72,588) -(141,621) -- Cash overdraft 137,750 Borrowings on notes payable to related parties 745,000 -- Payments on notes payable to related parties (281,300) (225,000) Advances from related parties 1,795,000 337,2182,654,943 836,218 Payments on advances from related parties (370,000) -(813,741) -- ----------- ----------- Net cash provided by (used in) financing activities $ (501,969) 362,817 ----------- -----------1,972,298 607,639 Net increase in cash and cash equivalents $ 98,615 314,427(208,109) (318,007) Cash at beginning of period $ 208,109 420,935 ----------- ----------- Cash at end of period $ 306,724 735,362-- 102,928 =========== ===========
See accompanying notes to unaudited consolidated financial statements. 5 INNSUITES HOSPITALITY TRUST AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS As of and for the sixnine months ended JulyOctober 31, 2000 and 1999 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION: InnSuites Hospitality Trust (the "Trust") is a Real Estate Investment Trustreal estate investment trust ("REIT"), which that owns, directly or indirectly, teneleven hotels with 1,6651,787 suites in Arizona, southern California and southern California.New Mexico. The hotels operate as InnSuites Hotels. Until January 31, 1998, the Trust, formerly known as Realty ReFund Trust, specialized in mortgage financing as its investment vehicle, refinancing existing income producing commercial, industrial and multi-unit residential real property by supplementing or replacing existing financing. The primary refinancing technique whichthat 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("InnSuites Hotels Scottsdale)Scottsdale"). These seven hotels are collectively referred to as the "Initial Hotels." The Initial Hotels, together with subsequent hotel acquisitions, are referred to herein as the "Hotels"."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)("Base Rent") or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F. Wirth, Chairman, President and Chief Executive Officer of the Trust ("Wirth") and his spouse. The Trust's general partnership interest in the Partnership was 47.75%48.01% on JulyOctober 31, 2000, and 45.13% (weighted average)the weighted average for the sixnine months ended JulyOctober 31, 2000.2000 was 46.04%. Partnership Agreement The Partnership Agreement of the Partnership provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of shares of beneficial interest of the Trust, at any time at the option of the particular limited partner, if the Trust determines that such conversion would not cause the Trust to fail to qualify as a REIT. As of JulyOctober 31, 2000, a total of 1,676,8351,642,282 Class A limited partnership units were issued and outstanding. Additionally a total of 5,226,364 Class B limited partnership units were outstanding to Wirth and his affiliates, in lieu of the issuance of Class A limited partnership units. If all of the Class A and B limited partnership units were to be converted, the limited partners in the Partnership would receive 6,903,1996,868,646 shares of beneficial interest of the Trust. The Class B limited partnership units may only become convertible with the approval of the Board of Trustees, in its sole discretion. Basis of Presentation As sole general partner, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements of the Partnership are consolidated with the Trust. All significant intercompany transactions and balances have been eliminated. 6 These consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-monthnine-month period ended JulyOctober 31, 2000 are not necessarily indicative of the results that may be expected for the year ended January 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Trust's Annual Report on Form 10-K/A as of and for the year ended January 31, 2000. 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. REVENUE RECOGNITION: Trust revenues are earned monthly as per the Percentage Leasesrecognized when earned. Minimum rent revenues are calculated and recognized when earned.monthly. Percentage rent is calculated quarterly and recognized if percentage rent is greater than minimum rent. 3. EARNINGS 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 sixnine months ended JulyOctober 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 7,257,3197,133,188 in the first sixnine months of fiscal 2001 and 7,736,0867,687,566 in the first sixnine months of fiscal 2000. These shares are anti-dilutive due to the loseslosses for the first sixnine months of fiscal year 2001 and are dilutive due to the earnings for the first sixnine months of fiscal 2000. For the sixnine months ended JulyOctober 31, 2000 and 1999, 357,600348,000 and 402,400394,300 stock options, respectively, are not included in the computation of diluted earnings per share since the option exercise prices were greater than the average market price of the shares of beneficial interest. 4. ACQUISITIONS: There were noACQUISITION: Effective August 30, 2000, Albuquerque Suite Hospitality, LLC, a wholly-owned subsidiary of the Partnership, acquired 100% of the ownership interest in a hotel acquisitions duringlocated in Albuquerque, New Mexico for $2,100,000. The acquisition was funded with a first mortgage on the first six monthsproperty in the amount of fiscal 2001.$1,575,000 and cash from loans made to the Partnership by Wirth and his affiliates. 5. CREDIT FACILITY: 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, 7 which charges interest at a variable interest rate (LIBOR + 2.75%). The interest rate was 9.37% on October 31, 2000. By its terms, the Credit Facility will expire in approximately ninefour months on April 16, 2001, subject to renewal.2001. 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 1.75 to 1.0, (renegotiated), 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. On December 12, 2000, the Trust notified Pacific Century Bank that the Trust was not in compliance with certain financial covenants contained in the Credit Facility. The Trust also applied for, but has not yet received, a waiver of such noncompliance from Pacific Century Bank. Under the terms of the Credit Facility, the Trust has 30 days from its receipt of written notice from Pacific Century Bank to cure its noncompliance, which 30-day period may be extended for up to an additional 90 days if noncompliance can not reasonably be cured within the 30-day period. If the Trust is not able to cure its noncompliance within the cure period, the Trust will be in default of the Credit Facility and the $11.3 million drawn from the Credit Facility by the Trust may become immediately due and payable. The Trust continues to actively seek individual loans on each of the three Hotels which are currently securing the Credit Facility and expects to have new financing in place to pay off the Credit Facility prior to its expiration on April 16, 2001. To date, Pacific Century Bank has not declared the Credit Facility due and payable. During the third quarter of fiscal 2001, the Trust was notified that Pacific Century Bank would not renew the Credit Facility when it expires on April 16, 2001 due to a decision by Pacific Century Bank to cease funding hospitality operations. Pacific Century Bank has also announced that they are selling their Arizona branches. The Trust is actively seeking individual loans on each of the three Hotels securing the Credit Facility and expects to have new financing in place before the expiration date. 6. 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: Fiscal Year --------- 2001 $ 3,425,000 2002 6,850,000 2003 6,850,000 2004 6,850,000 2005 6,850,000 Thereafter 20,550,000 ---------------- $ 51,375,000 ================
FISCAL YEAR ----------- 2001 $ 1,818,750 2002 6,850,000 2003 6,850,000 2004 6,850,000 2005 6,850,000 Thereafter 16,816,667 ------------- $ 46,035,417 =============
The Trust earned approximately $5.4$7.6 million and $7.4 million in rent revenue during both the first sixnine months of fiscal 2001 and 2000, of which approximately $2.0 million and $1.9 million, respectively, wasrespectively. The revenues during both nine month periods were in excess of base rent.rent by approximately $2.3 million. After a review of projected cash flows to assess the future collectiblitycollectibility of current rents, the Trust recorded a provision for uncollectible rent receivables of $919,947approximately $1.6 million for the first sixnine months of fiscal 2001. 7. RELATED PARTY TRANSACTIONS: The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement. 8 Wirth is a 9.8% indirect shareholder of the Lessee. At JulyDuring the third quarter ended October 31, 2000, the Trust had aLessee paid $215,000 receivable fromto the Lessee.Partnership to satisfy loan obligations. 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 JulyOctober 31, 2000, Wirth and his affiliates held 5,226,364 Class B limited partnership units. As of JulyOctober 31, 2000 Wirth and his affiliates held 572,813582,813 shares of beneficial interest in the Trust. At JulyOctober 31, 2000, the Trust owned a 47.75%48.01% interest in the teneleven 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 loaned 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 on the property 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 theInnSuites Hotels Scottsdale property to the Partnership in exchange for 1.6 million general partner units. The Trust repurchased 348,237370,487 of the Partnership's Class A units in the first sixnine months of fiscal 2001 and 131,493 in all of fiscal 2000 of the Partnership's Class A units in all of fiscal 2000 at a weighted average price per unit of $2.37 and $4.10, respectively. Of these units, 148,237160,904 were retired and 300,000341,076 units were reclassified from Class A units to General Partner units. The Trust paid interest on related party notes to James Wirth in the amount of $143,597$186,431 for the sixnine months ended JulyOctober 31, 2000. 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 cash expenses. Loans payable to related parties and notes payable to related parties consists of funds provided by James F. Wirth and his affiliates to repurchase Partnership units, acquire hotel properties and to fund working capital and capital improvement needs and a note payable to Steve Robson to repurchase Partnership Class A limited partnership units. The aggregate amounts outstanding were approximately $4.4$5.5 million and $3.0 million as of JulyOctober 31 and January 31, 2000, respectively. The loans payable to related parties 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. 9 Wirth received an unsecured promissory note that consolidated four outstanding unsecured loans to the Trust totaling $600,000. The loan amounts consolidated were $200,000, $120,000, $30,000 and $250,000, all bearing interest at 7% per year with varying maturities. Interest on these four notes through July 31, 2000 was approximately $41,999 which was subsequently paid on August 15, 2000 according to the unsecured consolidated promissory note. The loans were used to fund operations, to pay down the outstanding loan to the Partnership and to pay dividends declared October 12, 1999. The unsecured consolidated promissory note from the Trust in the amount of $600,000, bearing interest at 7% per year, became effective August 1, 2000. The unpaid principal balance and accrued interest on the unsecured consolidated promissory note is due on May 15, 2001. Suite Hotels Limited Liability Company, owned directly or indirectly by Wirth, made an unsecured loan to the Trust in the amount of $180,000, bearing interest at 7% per year, effective June 8, 2000. The unpaid principal balance and accrued interest is due on May 15, 2001. The Trust used the proceeds to fund operations. During the third quarter ended October 31, 2000, the Trust paid the loan in full. InnSuites Innternational Hotels, Inc., owned directly or indirectly by Wirth, made an unsecured loan to the Trust in the amount of $100,000, bearing interest at 7% per year, effective July 6, 2000. The unpaid principal balance and accrued interest is due on May 15, 2001. The Trust used the proceeds to fund operations. Pepper Tree/Freeway Community Limited Partnership, owned directly or indirectly by Wirth, made an unsecured loan toDuring the third quarter ended October 31, 2000, the Trust paid the loan in the amount of $50,000, bearing interest at 7% per year, effective July 28, 2000. The unpaid principal balance and accrued interest is due on May 15, 2001. The Trust used the proceeds to fund operations.full. On July 27, 2000, the TrustPartnership repurchased 300,00300,000 of itsthe Trust's shares from Wirth and/or affiliates, owned directly or indirectly by Wirth, issuing 10 secured promissory notes in the amount of $723,000. The promissory notes are secured by the repurchased shares. The secured promissory notes in the aggregate amount of $723,000 bear interest at 7% per year, effective July 27, 2000. The unpaid principal balances and accrued interest are due at various dates ranging from August 27, 2000 to July 27, 2003. All payments have been made as scheduled. The balance on October 31, 2000 was $654,009. On July 27, 2000, the Trust purchased 311,326 of the Partnership's Class A limited partnership units from Steve Robson, Trustee of the Trust, for $750,000. The Trust made an initial payment of $5,000 and issued a secured promissory note in the amount of $745,000. The promissory note is secured by the purchased Partnership units. The secured promissory note in the amount of $745,000 bears interest at 7% per year, effective July 27, 2000. The unpaid principal balance and accrued interest is to be amortized over 36 months. The final payment is due August 27, 2003. All payments have been made as scheduled. The balance on October 31, 2000 was $688,700. Pepper Tree/Freeway Community Limited Partnership, owned directly or indirectly by Wirth, made an unsecured loan to the Trust in the amount of $50,000, bearing interest at 7% per year, effective July 28, 2000. The unpaid principal balance and accrued interest is due on May 15, 2001. The Trust used the proceeds to fund operations. During the third quarter ended October 31, 2000, the Trust paid the loan in full. Pepper Tree/Freeway Community Limited Partnership, owned directly or indirectly by Wirth, made two (2) unsecured loans to the Trust in the amount of $200,000 and $150,000, both bearing interest at 7% per year, effective August 14 and September 12, 2000, respectively. The unpaid principal balance and accrued interest is due on May 15 and May 30, 2001, respectively. The Trust used the proceeds to fund operations. During the third quarter ended October 31, 2000, the Trust paid the loans in full. Wirth made six (6) unsecured loans to the Trust in the total amount of $1,317,000, all bearing interest at 7% per year, effective varying from August 15 to October 23, 2000. The unpaid principal balances and accrued interest are due ranging from May 15 to June 1, 2001. The Trust used the 10 proceeds to invest in the Albuquerque, New Mexico acquisition and to fund operations. InnSuites Innternational Hotels Inc., owned directly or indirectly by Wirth, made an unsecured loan to the Partnership in the amount of $90,000, bearing interest at 7% per year, effective September 19, 2000. The unpaid principal balance and accrued interest is due on May 15, 2001. The Trust used the proceeds to fund startup costs for the Albuquerque, New Mexico hotel property. 8. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES: The Trust issued 47,32059,623 shares of beneficial interest during the sixnine months ended JulyOctober 31, 2000 valued at $102,285$131,505 in exchange for Class A limited partnership units. The Trust paid $125,244$213,243 in dividends and distributions in the sixnine months ended JulyOctober 31, 2000. The Trust paid $2,606,387 in interest for the nine months ended October 31, 2000. 9. STATEMENTS OF OPERATIONS OF INNSUITES HOTELS, INC. (LESSEE) Certain condensed financial information related to the Lessee's operations is as follows:
INNSUITES HOTELS, INC. UNAUDITED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS) SIX
NINE MONTHS ENDED JULYOCTOBER 31, 2000 1999 -------- ---------------- Revenues from hotel operations Room, food and beverage $ 15,031 15,08021,490 20,974 Other 553 467787 730 -------- -------- Total revenues 15,584 15,54722,277 21,704 Expenses Departmental 4,783 4,6207,157 6,750 Percentage rent 5,393 5,4197,552 7,434 Advertising 1,144 1,1081,639 1,621 Other 4,946 4,4367,452 6,551 -------- -------- Total expenses 16,266 15,58323,800 22,356 -------- -------- Net loss $ (682) (36)(1,523) (652) ======== ========
10. SUBSEQUENT EVENTS: On August 30, 2000, Albuquerque Suite Hospitality, LLC, a 100% owned subsidiary of the Partnership, purchased the 122 suite Albuquerque Best Western Airport Inn located in Albuquerque, New Mexico for $2.1 million. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion should be read in conjunction with the InnSuites Hospitality Trust condensedunaudited consolidated financial statements and notes thereto and the InnSuites Hotels, Inc. (the "Lessee") unaudited condensed statements of operations appearing elsewhere in this quarterly report. The Trust is a real estate investment trust which owns the sole general partner interest in the Partnership. In order for the Trust to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), neither the Trust 11 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.Hotel. The Lessee also holds the franchise agreement for each hotel.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 mayexpects to restructure and acquire the Lessee in Januaryon February 1, 2001 following the guidelines of the REIT Modernization Act.Act ("RMA"). Restructuring pursuant to the RMA will simplify the structure of the Trust and allow all profits of the Lessee to flow directly to the Trust instead of the Lessee retaining profits. At JulyOctober 31, 2000, the Trust owned a 47.75%48.01% interest in the Hotels through its sole general partner's interest in the Partnership. 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 cash expenses. The Percentage Leases provide for the payment of base rent and percentage rent. For the six-monthnine-month period ended JulyOctober 31, 2000, base rent and percentage rent in the aggregate amount of $5.4$7.6 million was earned by the Trust. The principal determinant of percentage rent is the Lessee's room revenues at the Hotels, as defined by the Percentage Leases. Therefore, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, average daily rate ("ADR"), calculated as total room revenue divided by number of rooms sold, and revenue per available room, calculated as total room revenue divided by number of rooms available (known as "REVPAR"), is appropriate for understanding revenue from the Percentage Leases. In comparing the first sixnine months of fiscal 2001 and 2000, ADR decreased $0.82$0.10, or 1.16%0.1%, to $69.80$67.48 in the first sixnine months of fiscal 2001 from $70.62$67.58 in the first sixnine months of fiscal 2000, primarily due to a conscious effort to drive additional occupancy by managing down the ADR. Occupancy increased by 3.5%3.3% to 68.1%65.4% in the first sixnine months of fiscal 2001 from 64.6%62.1% in the first sixnine months of fiscal 2000 primarily as the result of the rate management activity. This resulted in an increase in REVPAR of $1.92$2.20, or 4.21%5.2%, to $47.53$44.16 in the first sixnine months of fiscal 2001 from $45.61$41.96 in the first sixnine months of fiscal 2000. The following table shows certain historical financial and other information for the periods indicated.
FOR THE SIXNINE MONTHS ENDED JULYOCTOBER 31, 2000 1999 ------- --------------- -------- Occupancy 68.1% 64.6%65.4% 62.1% Average daily rate (ADR) $ 69.8067.48 $ 70.6267.58 Revenue per available room (REPAR)(REVPAR) $ 47.5344.16 $ 45.6141.96
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. New Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 - "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" (SAB No. 101) which was subsequently amended by SAB No. 101A and 101B in March and June 2000, respectively. These amendments delayed the implementation date of SAB No. 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101 provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Trust's management believes that the implementation of SAB No. 101 will not have a material effect on the financial statements. Results of Operations of the Trust for the sixnine months ended JulyOctober 31, 2000 compared to the sixnine months ended JulyOctober 31, 1999 For the sixnine months ended JulyOctober 31, 2000 compared to the nine months ended October 31, 1999, Trust revenues increased $155,000, or 2.1%, to $7.6 million from $7.4 million, respectively. The increase was primarily due to the addition of revenues attributable to the Albuquerque, New Mexico hotel acquired in August 2000. Total expenses increased $1.1 million, or 14.6%, to $8.3 million from $7.3 million 12 comparing the nine months ended October 31, 2000 and 1999, respectively. The increase was primarily due to provisions for uncollectible rent totaling $1.6 million, an increase in depreciation and interest expense of $493,000, or 11.6%, and additional expenses of $94,000 attributable to the Albuquerque, New Mexico hotel in the nine months ended October 31, 2000, offset by the elimination of a complementary rooms program which reduced expenses by $383,000 in the nine months ended October 31, 2000, the Trust had revenuesone-time write-off of approximately $5.4 million compared to$575,000 for a similar amount forwithdrawn public offering in the sixnine months ended JulyOctober 31, 1999. Total expenses increased approximately $149,000 or 2.9% primarily due to a combination1999, and the final settlement of accounting and legal charges of $300,000 associated with the Trust's closing of the reductionCleveland office in variable expenses by approximately $39,000 or 1.8% and an increase in fixed expenses by approximately $188,000 or 6.4%. Variable expenses are general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent. Fixed expenses are depreciation and amortization and interest expense.the nine months ended October 31, 1999. Real estate depreciation for the sixnine months ended JulyOctober 31, 2000 compared to the sixnine months ended JulyOctober 31, 1999 increased approximately $74,000$184,000, or 5.8%9.7%, to approximately $1,351,000$2.1 million from approximately $1,277,000,$1.9 million, respectively. The increase was primarily due to an increase in capitalized refurbishment incosts and the periodsaddition of shorter life categories for assets purchased after JulyOctober 31, 1999. RealFor the nine months ended October 31, 2000, real estate and personal property taxes, insurance and ground rent increased approximately $36,000 or 5.6%totaled $1.0 million compared to approximately $680,000 from approximately $644,000 in comparinga similar amount of $1.1 million for the sixnine months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to increased property tax assessments made by local and state governments on our San Diego and Tucson Oracle properties.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 sixnine months ended JulyOctober 31, 2000 and 1999, general and administrative expenses decreased approximately $75,000increased $544,000, or 5.1%28.6%, to approximately $1,408,000$2.4 million from approximately $1,483,000,$1.9 million, respectively. The decrease of approximately $75,000increase was primarily due to the provision for uncollectible rent totaling $1.6 million in the nine months ended October 31, 2000, offset by the elimination of a combinationcomplementary rooms program which reduced expenses by $383,000 in the nine months ended October 31, 2000, the write-off of $575,000 for a withdrawn public offering in the nine months ended October 31, 1999, the final settlement of accounting and legal charges of approximately $300,000 associated with the Trust's closing of the Cleveland office and the write off of approximately $575,000 for a withdrawn public offering in the sixnine months ended JulyOctober 31, 1999, and the provisions for uncollectible rent in the six months ended July 31, 2000 of approximately $920,000.other miscellaneous expenses. Total interest expense increased approximately $110,000$309,000, or 6.9%13.1%, to approximately $1,720,000$2.7 million from approximately $1,610,000 in$2.4 million comparing the sixnine months ended JulyOctober 31, 2000 and 1999, respectively. Interest on mortgage notes payable increased approximately $66,000$149,000, or 6.3%9.6%, to approximately $1,106,000$1.7 million from approximately $1,040,000 in$1.5 million comparing the sixnine months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to net additional borrowings of approximately $2.3 million during fiscal 2000 for a loan modification relating to the Northern Phoenix, Arizona hotel property, and the refinancing of the San Diego, property. Interest on notes payableCalifornia property, and the addition of interests costs attributable to related parties increased approximately $16,000 or 18.2% to approximately $101,000 from approximately $85,000 due to additional loans from Wirth during the second half ofAlbuquerque, New Mexico hotel acquired in fiscal 2000.2001. Interest on notes payable to banks increased approximately $29,000$120,000, or 6.0%17.5%, to approximately $513,000$804,000 from approximately $484,000 in$684,000 comparing the sixnine months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to a slightan increase in the variable rate paid on the $12 million credit facility. AmortizationCredit Facility. Interest on notes payable to related parties increased $40,000, or 29.7%, to $176,000 from $136,000 due to additional loans from Wirth and his affiliates during the second half of loan fees was approximately $48,000 forfiscal 2000 and the sixfirst nine months ended July 31, 2000.of fiscal 2001. Results of Operations of the Trust for the three months ended JulyOctober 31, 2000 compared to the three months ended JulyOctober 31, 1999 For the three months ended JulyOctober 31, 2000 the Trust had revenues of approximately $2.1 million compared to a similar amount for the three months ended JulyOctober 31, 1999.1999, Trust revenues increased $136,000, or 6.7%, to $2.2 million from $2.0 million, respectively. The increase was primarily due to the addition of revenues attributable to the Albuquerque, New Mexico hotel acquired in August 2000. Total expenses increased approximately $106,000$911,000, or 3.8%41.1%, primarily due to provisions for uncollectible rent totaling $682,000 in the three months ended October 31, 2000, the elimination of a combination ofcomplementary rooms program which reduced expenses by $248,000 in the three months ended October 31, 2000, an increase in variable expenses by approximately $42,000 or 3.5% and an increase in fixed expenses by approximately $64,000 or 4.1%. Variable expenses are general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent. Fixed expenses are depreciation and amortizationinterest expenses of $308,000 in the three months ended October 31, 2000 and interest expense.additional expenses in the amount of $94,000 related to the acquisition of the Albuquerque, New Mexico hotel in August 2000. 13 Real estate depreciation for the three months ended JulyOctober 31, 2000 compared to the three months ended JulyOctober 31, 1999 increased approximately $26,000$110,000, or 4.0%17.8%, to approximately $685,000$727,000 from approximately $659,000,$617,000, respectively. The increase was primarily due to an increase in capitalized refurbishment costs in fiscal 2001 and the latter half of fiscal 2000. Real2000 and the addition of shorter life categories for assets purchased after October 31, 1999. For the three months ended October 31, 2000 real estate and personal property taxes, insurance and ground rent increased approximately $69,000 or 25.8%totaled $368,000 compared to approximately $337,000 from approximately $268,000 in comparinga similar amount of $422,000 for the three months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to increased property tax assessments made by local and state governments on our San Diego and Tucson Oracle properties.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 quartersthree months ended JulyOctober 31, 2000 and 1999, general and administrative expenses decreased approximately $27,000increased $619,000, or 2.8%147.4%, to approximately $939,000$1.0 million from approximately $966,000,$420,000, respectively. The decrease of approximately $27,000increase was primarily due to a combination of the write off of $575,000provisions for a withdrawn public offeringuncollectible rent totaling $682,000 in the three months ended July 31, 1999 and the provision of approximately $665,000 for uncollected rent in the three months ended July 31,2000 partially offset by the elimination of a complimentary rooms program which reduced expenses by approximately $135,000 in the three months ended JulyOctober 31, 2000. Total interest expense increased approximately $49,000$198,000, or 6.0%26.2%, to approximately $879,000$952,000 from approximately $830,000 in$755,000 comparing the three months ended JulyOctober 31, 2000 and 1999, respectively. Interest on mortgage notes payable increased approximately $25,000$82,000, or 4.6%16.4%, to approximately $561,000$587,000 from approximately $536,000 in$505,000 comparing the three months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to net additional borrowings of approximately $2.3 million during fiscal 2000 for a loan modification relating to the Northern Phoenix, Arizona property, and the refinancing of the San Diego, property. Interest on notes payable to related parties decreased approximately $9,000 or 15% to approximately $51,000 from approximately $60,000 due toCalifornia property and the payoffacquisition of loans from Wirth during the first quarter ofAlbuquerque, New Mexico hotel in fiscal 2001. Interest on notes payable to banks increased approximately $34,000$91,000, or 14.8%45.4%, to approximately $267,000$291,000 from approximately $233,000 in$200,000 comparing the three months ended JulyOctober 31, 2000 and 1999, respectively. The increase was primarily due to a slightan increase in the variable rate paid on the $12 million credit facility. AmortizationCredit Facility. Interest on notes payable to related parties increased $25,000, or 49.2%, to $75,000 from $50,000 due to additional loans from Wirth and his affiliates during the second half of loan fees was approximately $32,000fiscal 2000 and the first nine months of fiscal 2001. Minority interest decreased by $390,000, or more than 100%, to a loss of $249,000 for the threenine months ended JulyOctober 31, 2000.2000 from income of $141,000 for the nine months ended October 31, 1999. The decrease was due to the minority interest's 53.96% weighted average share of the $755,000 loss for the nine months ended October 31, 2000 compared to the minority interest's 61.53% weighted average share of the $149,000 income for the nine months ended October 31, 1999. Funds from Operations (FFO) The Trust notes that industry analysts and investors use Funds From Operations (FFO)("FFO") as another tool to evaluate and compare equity REITs. The Trust also believes it is meaningful as an indicator of net income excluding most non-cash items and provides information about the Trust's cash available for distributions, debt service and capital expenditures. The Trust follows the March 1995 interpretation of the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, as amended January 1, 2000, which is calculated (in the Trust's case) as net income (computed in accordance with accounting principles generally accepted in the United States ("GAAP")), excluding gains (or losses) from sales of property, plus depreciation and amortization and loss on disposals and extraordinary items, if applicable.real estate property. FFO does not represent cash flow from operating activities in accordance with generally accepted accounting principles ("GAAP")GAAP and is not indicative of cash available to fund all of the Trust's cash needs. FFO should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flows as a measure of liquidity. In addition, the Trust's FFO may not be comparable to other companies' FFO due to differing methods of calculating FFO and varying interpretations of the NAREIT definition. 14
FUNDS FROM OPERATIONS FOR THE SIXNINE MONTHS ENDED JULYOCTOBER 31, (Unaudited) (Amounts in thousands) 2000 1999 ------ -------------- -------- Net income (loss) attributable to common stockholders $ (11) 91(506) 8 Depreciation 1,351 1,2772,078 1,894 Minority interest share of depreciation (741) (811)(1,121) (1,165) ------ ----------- Funds from operations (FFO) $ 599 557451 737 ====== ===========
FFO increaseddecreased to approximately $599,000$451,000 from approximately $557,000$737,000 when comparing the first sixnine months of fiscal 2001 and 2000, respectively. The increasedecrease of approximately $42,000$286,000, or 7.5%38.8%, was primarily due to the increased ownership interest that the Trust hashigher general and administrative expenses in the Partnership.nine month period ended October 31,2000. Results of Operations of the Innsuites Hotels Inc., the Lessee for the sixnine months ended JulyOctober 31, 2000 compared to the sixnine months ended JulyOctober 31, 1999 For the sixnine months ended JulyOctober 31, 2000, the Lessee had total revenues of approximately $15.6$22.3 million compared to approximately $15.5$21.7 million for the sixnine months ended JulyOctober 31, 1999. This slightThe increase of $573,000, or 2.6%, in total revenue was primarily due to a decrease in room, foodthe addition of the Albuquerque, New Mexico hotel's total revenues of $300,000 and beverage revenue of approximately $49,000 offset by an increase in total revenues of approximately $86,000 or 18.4% inthe other revenue. Hotels of $273,000. Departmental expenses, which include operating expenses for the rooms, food and beverage, telecommunications and miscellaneous departments, increased approximately $163,000$407,000, or 3.5%6.0%, to approximately $4.8$7.2 million from approximately $4.6$6.8 million for the sixnine months ended JulyOctober 31, 2000 and 1999, respectively. This increase was primarily due to an overall increase in operating expenses in all departments consistent with the rate of inflation.inflation and the addition of expenses attributable to the Albuquerque, New Mexico hotel. Percentage leaseLease expense decreasedincreased by approximately $26,000$118,000, or less than 1.0% remaining at approximately $5.41.6%, to $7.6 million from $7.4 million for the sixnine month periods ended JulyOctober 31, 2000 and 1999.1999, respectively. The slight decreaseincrease was primarily due to a decrease in room revenues, which the percentageaddition of $74,000 lease expenses are primarily based on, for the six months ended July 31, 2000. Advertising expense for the six months ended July 31, 2000 increased approximately $36,000 or approximately 3.3%.Albuquerque, New Mexico hotel. Other expenses include general and administrative, maintenance, hospitality, utility and insurance expenses. These expenses were approximately $4.9$7.5 million for the sixnine months ended JulyOctober 31, 2000 compared to approximately $4.4$6.6 million for the sixnine months ended JulyOctober 31, 1999. The increase of approximately $510,000$902,000, or 11.5%13.8%, was primarily due to increased general and administrative expenses of approximately $320,000 and$434,000, inflationary increases in utility, hospitality, maintenance and insurances expenses.insurance expenses and the addition of the Albuquerque, New Mexico hotel's other expenses totaling $90,000. LIQUIDITY AND CAPITAL RESOURCES The Trust, through its ownership interest in the Partnership, has 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. For the sixnine months ended JulyOctober 31, 2000, and 1999, the Trust recorded a provision of approximately $920,000 and $0$1.6 million for uncollectible receivables, respectively.receivables. No such provision was made with respect to the nine 15 months ended October 31, 1999. These charges reflect the Trust's assessment of the collectibility of its receivables, which primarily consists of rent receivable from the Lessee, based on an evaluation of the Lessee's estimated future cash flows. The Trust's management mayexpects to restructure and acquire the Lessee in Januaryon February 1, 2001 following the guidelines of the REIT Modernization Act.RMA which will allow all profits to flow directly to the Trust. As of JulyOctober 31, 2000, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements set aside annually, as described below. The Trust intends to acquire and develop additional hotels and expects to incur indebtedness to fund those acquisitions and developments. The Trust may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Trust's investments are insufficient to make the required distributions. 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 athe $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 ninefour months on April 16, 2001, subject to renewal.2001. 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 1.75 to 1.0, (renegotiated), 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. During the third quarter of fiscal 2001, the Trust was notified that Pacific Century Bank would not renew the Credit Facility when it expires on April 16, 2001 due to a decision by Pacific Century Bank to cease funding hospitality operations. Pacific Century Bank has also announced that they are selling their Arizona branches. In order to replace the liquidity provided by the Credit Facility, the Trust is actively seeking individual loans on each of the three Hotels which are currently securing the Credit Facility and expects to have new financing in place to pay off the Credit Facility prior to its expiration. On December 12, 2000, the Trust notified Pacific Century Bank that the Trust was not in compliance with certain financial covenants contained in the Credit Facility. The Trust also applied for, but has not yet received, a waiver of such noncompliance from Pacific Century Bank. Under the terms of the Credit Facility, the Trust has 30 days from its receipt of written notice from Pacific Century Bank to cure its noncompliance, which 30-day period may be extended for up to an additional 90 days if noncompliance can not reasonably be cured within the 30-day period. If the Trust is not able to cure its noncompliance within the cure period, the Trust will be in default of the Credit Facility and the $11.3 million drawn from the Credit Facility by the Trust may become immediately due and payable. The Trust continues to actively seek individual loans on each of the three Hotels which are currently securing the Credit Facility and expects to have new financing in place to pay off the Credit Facility prior to its expiration on April 16, 2001. To date, Pacific Century Bank has not declared the Credit Facility due and payable. In addition, as of October 31, 2000, the Trust reported a zero cash balance on its unaudited consolidated Statement of Cash Flows. In order to provide sufficient cash for operations, the Trust anticipates utilizing the financing proceeds described in the preceding paragraph. In addition, the Trust is seeking refinancing on additional Hotels that will provide positive cash flow to fund operations. The Trust also plans to reduce refurbishment expenditures and other cash outlays during fiscal 2002. 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. However, there can be no assurance that the Trust will successfully acquire or develop additional hotels. Subsequent to July 31, 2000, onOn August 30, 2000, Albuquerque Suite Hospitality, LLC, a 100% owned subsidiary of the Partnership, purchased the 122 suite122-suite Albuquerque Best Western Airport Inn located in Albuquerque, New Mexico for $2.1 million. The funds utilized 16 for the purchase price were secured by a first mortgage in the amount of $1,575,000 and the remaining amount was loaned by Wirth.Wirth and his affiliates. The Partnership continues to contribute to a Capital Expenditures Fund (the "Fund") from the rent paid under the Percentage Leases, an amount equal to 4% of the Lessee's revenues from operation of the Hotels. The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. The Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During the sixnine months ended JulyOctober 31, 2000, the Hotels spent approximately $790,000$1.4 million for capital expenditures. 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 (Lessee)Lessee also spent $899,604approximately $1.3 million during the sixnine months ended JulyOctober 31, 2000 on repairs and maintenance and these amounts have been charged to expense as incurred. INFLATION The Trust's revenues initially will beare based on the Percentage Leases which will result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust initially will be relyingrelies 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 38.6% of revenues for the six months ended July 31, 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. SEASONALITY The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona, California and CaliforniaNew Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders. No assurance can be given that the Trust will make distributions in the future. FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust's financing plans; (v) the Trust's position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) the Trust's continued qualification as a REIT; and (vii) trends affecting the Trust's or any Hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", expect""expect", "anticipate" and similar expressions identify forward-looking statements. 17 These forward-looking statements reflect the Trust's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to: fluctuations in hotel occupancy rates; changes in room rental rates which may be charged by the Lessee in response to market rental rate changes or otherwise; interest rate fluctuations; changes in federal income tax laws and regulations; competition; any changes in the Trust's financial condition or operating results due to acquisitions or dispositions of hotel properties; real estate and hospitality market conditions; hospitality industry factors; and local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry, or the markets in which the Trust operates or will operate. The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-Q relating to the operations of the Partnership. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Trust is exposed to interest rate risk primarily as a result of its mortgage notes payable, notes payable to banks and other notes payable. Proceeds from these loans were used to maintain liquidity, fund capital expenditures and expand the Trust's real estate investment portfolio and operations. The Trust's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Trust borrows using fixed rate debt, when possible. There have been no significant changes in the Trust's debt structure during the sixnine months ended JulyOctober 31, 2000. 18 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On July 17, 2000, the Trust held its Annual Meeting of Shareholders to consider the election of Trustees. Prior to such meeting, the Trust provided notice of the Annual Meeting and solicited proxies through the Trust's definitive Proxy Statement, dated June 16, 2000, wherein the considered transactions were described to the shareholders. Shareholders representing 2,320,488 of the voting shares of the Trust were present at the Annual Meeting, in person or by proxy, representing a quorum for such Annual Meeting. The considered transactions were properly placed before the shareholders for adoption and approval. Following the votes of the shareholders, such votes were certified by the Inspector of Election of the Annual Meeting as follows:
ABSTENTION AND FOR AGAINST BROKER NON-VOTES ------ ----------- ---------------- ELECTION OF TRUSTEES: Marc E. Berg .......................................... 2,253,246 0 67,242 Lee J. Flory .......................................... 2,262,494 0 57,994
Based upon the above-described votes of the shareholders, Marc E. Berg and Lee J. Flory were elected as trustees whose terms expire in 2003. The current terms of James F. Wirth and Peter A. Thoma will expire in 2001 and the current terms of Edward G. Hill and Steven S. Robson will expire in 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBIT NUMBER EXHIBIT ------------- ------- 10.1 Promissory Note dated June 8, 2000 by RRF Limited Partnership in favor of Suite Hotels Limited Liability Company. 10.2 Promissory Note dated July 6, 2000 by InnSuites Hospitality Trust in favor of InnSuites Innternational Hotels, Inc. 10.3 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Hulsey Hotels Corporation. 10.4 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Hotels America Limited Liability Company. 10.5 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Innternational Suites Corporation. 10.6 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of InnSuites Innternational Inns & Resorts, Inc. (Az). 10.7 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Trust FBO Eric Wirth. 10.8 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Trust FBO Christopher Wirth. 10.9 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Trust FBO Brian Wirth. 10.10 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Trust FBO Pamela Wirth. 10.11 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Pepper Tree/Freeway Community Limited Partnership. 10.12 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of James F. Wirth. 10.13 Promissory Note dated July 27, 2000 by RRF Limited Partnership in favor of Steve S. Robson. 10.14 Promissory Note dated July 28,August 14, 2000 by InnSuites Hospitality Trust in favor of Pepper Tree/Freeway Community Limited Partnership. 10.1510.2 Promissory Note dated August 1,15, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.3 Promissory Note dated August 29, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.4 Promissory Note dated September 8, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.5 Promissory Note dated September 12, 2000 by InnSuites Hospitality Trust in favor of Pepper Tree/Freeway Community Limited Partnership. 10.6 Promissory Note dated September 19, 2000 by RRF Limited Partnership in favor of InnSuites Innternational Hotels Inc. 10.7 Promissory Note dated September 25, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.8 Promissory Note dated October 19, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 10.9 Promissory Note dated October 23, 2000 by InnSuites Hospitality Trust in favor of James F. Wirth. 27.1 Financial Data Schedule. (1) (1) Filed only in electronic format pursuant to Item 601(c) of Regulation S-K. (b) REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed by the Trust during the fiscal quarter ended JulyOctober 31, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: September 14,December 15, 2000 INNSUITES HOSPITALITY TRUST (Registrant) By: /s/ Anthony B. Waters ---------------------------------------------------------------------------------- Anthony B. Waters, Chief Financial Officer 19