<Page>
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 JULY 31, 2001
Commission File Number 1-7062
INNSUITES HOSPITALITY TRUST
(Exact name of registrant as specified in its charter)
Ohio 34-6647590
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
InnSuites Hotels Centre
1615 E. Northern Ave., Suite 102
Phoenix, AZ 85020
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 944-1500
Indicate by check mark whether the registrant: (l) has filed all
reports required to be filed by Section 13 or l5(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of outstanding Shares of Beneficial Interest, without par value,
as of September 11, 2001: 2,144,584
<Page>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JULY 31, 2001 JANUARY 31, 2001
---------------- ----------------
ASSETS (UNAUDITED) (AUDITED)
Hotel Properties, Net $ 62,207,274 62,591,376
Cash and Cash Equivalents 1,156,286 415,390
Accounts Receivable, Net of $24,629 and $0 Allowance, Respectively 1,005,323 --
Interest Receivable and Other Assets 1,085,235 898,795
------------- -------------
TOTAL ASSETS $ 65,454,118 63,905,561
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage Notes Payable $ 35,895,413 25,628,572
Notes Payable to Banks 2,955,241 11,300,000
Notes Payable to Related Parties 553,449 631,409
Advances Payable to Related Parties 6,753,911 6,840,298
Other Notes Payable 110,087 125,021
Accounts Payable and Accrued Expenses 3,686,003 1,251,237
------------- -------------
TOTAL LIABILITIES 49,954,104 45,776,537
MINORITY INTEREST IN PARTNERSHIP 12,307,079 13,091,117
SHAREHOLDERS' EQUITY
Shares of beneficial interest, without par value; unlimited
authorization; 2,145,784 and 2,126,484 shares issued and outstanding
at July 31 and January 31, 2001, respectively 4,711,567 6,532,348
Treasury Stock (1,518,632) (1,494,441)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 3,192,935 5,037,907
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,454,118 63,905,561
============= =============
</Table>
See accompanying notes to unaudited
consolidated financial statements
<Page>
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JULY 31,
2001 2000
----------- -----------
REVENUES
Rent Revenue from Affiliate $ -- 5,392,810
Room 14,079,984 --
Food and Beverage 907,784 --
Telecommunications 144,697 --
Interest and Other 576,701 14,758
----------- -----------
TOTAL REVENUES 15,709,166 5,407,568
----------- -----------
OPERATING EXPENSES
Room 3,660,040 --
Food and Beverage 775,913 --
Telecommunications 226,658 --
Other 260,248 --
General and Administrative 2,969,077 1,408,030
Sales and Marketing 1,137,564 --
Repairs and Maintenance 941,296 --
Hospitality 773,968 --
Utilities 973,467 --
Expenses Incurred in Acquiring Lessee 1,608,482 --
----------- -----------
TOTAL OPERATING EXPENSES 13,326,713 1,408,030
----------- -----------
INCOME BEFORE FIXED CHARGES 2,382,453 3,999,538
FIXED CHARGES
Real Estate Depreciation 1,593,230 1,350,909
Real Estate and Personal Property Taxes,
Insurance and Ground Rent 849,650 680,193
Interest on Mortgage Notes Payable 1,365,839 1,146,903
Interest on Notes Payable to Banks 275,854 520,241
Interest on Notes Payable and Advances to Related Parties 231,964 85,478
Interest on Other Notes Payable 25,834 15,495
----------- -----------
TOTAL FIXED CHARGES 4,342,371 3,799,219
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST (1,959,918) 200,319
EXTRAORDINARY ITEM
Loss on Early Extinguishment of Debt (576,842) --
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST (2,536,760) 200,319
LESS MINORITY INTEREST (639,196) 211,343
----------- -----------
NET LOSS ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $ (1,897,564) (11,024)
=========== ===========
LOSS PER SHARE - Basic and Diluted
Loss before Extraordinary Item $ (0.76) (0.00)
Extraordinary Item (0.13) --
----------- -----------
NET LOSS $ (0.89) (0.00)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and Diluted 2,139,487 2,458,366
=========== ===========
</Table>
See accompanying notes to unaudited
consolidated financial statements
<Page>
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE THREE MONTHS ENDED JULY 31,
2001 2000
----------- -----------
REVENUES
Rent Revenue from Affiliate $ -- 2,073,764
Room 6,013,828 --
Food and Beverage 417,223 --
Telecommunications 56,447 --
Interest and Other 354,072 12,495
----------- -----------
TOTAL REVENUES 6,841,570 2,086,259
----------- -----------
OPERATING EXPENSES
Room 1,750,198 --
Food and Beverage 341,062 --
Telecommunications 114,308 --
Other 134,228 --
General and Administrative 1,439,496 939,144
Sales and Marketing 577,251 --
Repairs and Maintenance 463,869 --
Hospitality 369,954 --
Utilities 506,878 --
----------- -----------
TOTAL OPERATING EXPENSES 5,697,244 939,144
----------- -----------
INCOME BEFORE FIXED CHARGES 1,144,326 1,147,115
FIXED CHARGES
Real Estate Depreciation 837,237 685,202
Real Estate and Personal Property Taxes,
Insurance and Ground Rent 421,995 337,341
Interest on Mortgage Notes Payable 713,603 564,485
Interest on Notes Payable to Banks 42,284 293,380
Interest on Notes Payable and Advances to Related Parties 119,867 51,143
Interest on Other Notes Payable 19,603 2,018
----------- -----------
TOTAL FIXED CHARGES 2,154,589 1,933,569
----------- -----------
LOSS BEFORE MINORITY INTEREST (1,010,263) (786,454)
LESS MINORITY INTEREST (319,905) (382,941)
----------- -----------
NET LOSS ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $ (690,358) (403,513)
=========== ===========
NET LOSS PER SHARE - Basic and Diluted $ (0.32) (0.17)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and Diluted 2,147,896 2,441,244
=========== ===========
</Table>
See accompanying notes to unaudited
consolidated financial statements
<Page>
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JULY 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss Attributable to Shares of Beneficial Interest $ (1,897,564) (11,024)
Adjustments to Reconcile Net Loss Attributable to Shares
Of Beneficial Interest to Net Cash Provided by
Operating Activities:
Stock Option Compensation Expense 26,258 26,258
Expenses Incurred in Acquiring the Lessee 1,608,482 --
Minority Interest (639,196) 211,343
Depreciation and Amortization 1,625,108 1,398,716
Changes in Assets and Liabilities (Net of Effect of
Acquisition of Subsidiary):
Decrease in Accounts Receivable 168,398 --
Increase in Rent Receivable from Affiliates -- (919,947)
Provision for Uncollectible Receivable from Affiliate -- 919,947
Increase in Interest Receivable and Other Assets (626,933) (110,000)
Decrease in Accounts Payable and Accrued Expenses (12,585) (242,434)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 251,968 1,272,859
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Lessee (11,531) --
Cash Acquired from Lessee 85,294 --
Improvements and Additions to Hotel Properties (1,209,127) (790,341)
Disposal of FF&E -- 97,502
Sale of Land -- 20,564
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $ (1,135,364) (672,275)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of Mortgage Notes Payable $ (491,435) (356,621)
Refinancing of Mortgage Notes Payable 5,658,276 500,000
Borrowings on Mortgage Notes Payable 5,100,000 --
Payments on Notes Payable to Banks (11,300,000) --
Borrowings on Notes Payable to Banks 2,955,241 --
Repurchase of Partnership Units (25,838) (823,822)
Repurchase of Stock (24,191) (896,282)
Payment of Dividends -- (52,656)
Other Distributions (68,480) (72,588)
Payments on Notes Payable to Related Parties (77,960) --
Advances from Related Parties 1,331,000 1,795,000
Payments on Advances from Related Parties (1,417,387) (370,000)
Borrowings on Other Notes Payable 25,839 --
Payments on Other Notes Payable (40,773) (225,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 1,624,292 (501,969)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 740,896 98,615
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 415,390 208,109
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,156,286 306,724
=========== ===========
</Table>
See Supplemental Disclosures at Note 9.
See accompanying notes to unaudited consolidated
financial statements
<Page>
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 2001 AND 2000
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
InnSuites Hospitality Trust (the "Trust") is a real estate investment trust
("REIT") that owns, directly or indirectly, eleven hotels with 1,698 suites in
Arizona, southern California and New Mexico. The hotels operate as InnSuites
Hotels.
Until January 31, 1998, the Trust, formerly known as Realty ReFund Trust,
specialized in mortgage financing as its investment vehicle, refinancing
existing income producing commercial, industrial and multi-unit residential real
property by supplementing or replacing existing financing. The primary
refinancing technique that the Trust employed was wrap-around mortgage lending.
On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership
(the "Partnership"), a Delaware limited partnership, in exchange for a 13.6%
general partnership interest therein. The Trust is the sole general partner of
the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership capital and the Trust issued 647,231
Shares of Beneficial Interest to acquire seven hotel properties. These seven
hotels are collectively referred to as the "Initial Hotels." The Initial
Hotels, together with subsequent hotel acquisitions, are referred to herein
as the "Hotels." The Hotels are leased to InnSuites Hotels, Inc., formerly
known as Realty Hotel Lessee Corp. (the "Lessee"), pursuant to leases which
contain provisions for rent based on the revenues of the Hotels (the
"Percentage Leases"). Each Percentage Lease obligates the Lessee to pay rent
equal to the greater of the minimum rent ("Base Rent") or a percentage rent
based on the gross revenues of each Hotel. The Lessee holds the franchise
agreement for each Hotel. As of February 1, 2001, the Trust acquired all of
the ownership interests of the Lessee, which was owned 23% by Marc E. Berg,
Executive Vice President, Secretary, Treasurer and Trustee of the Trust, and
9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F.
Wirth, Chairman, President and Chief Executive Officer of the Trust ("Wirth")
and his spouse.
The Trust's general partnership interest in the Partnership was 48.48% on July
31, 2001, and the weighted average ownership interest for the six months ended
July 31, 2001 was 48.37%.
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 July 31, 2001, a total of 1,580,323 Class A
limited partnership units were issued and outstanding. Additionally, a total of
5,226,364 Class B limited partnership units were outstanding to Wirth and his
affiliates, in lieu of the issuance of Class A limited partnership units. If all
of the Class A and B limited partnership units were to be converted, the limited
partners in the Partnership would receive 6,806,687 Shares of Beneficial
Interest of the Trust. The Class B limited partnership units may only become
convertible with the approval of the Board of Trustees, in its sole discretion.
BASIS OF PRESENTATION
As sole general partner of the Partnership, the Trust exercises unilateral
control over the Partnership and as of February 1, 2001 owns all of the
outstanding classes of shares of the Lessee. Therefore, the financial statements
of the Partnership and the Lessee as of February 1, 2001 are consolidated
with the Trust, and all significant intercompany transactions and balances
have been eliminated.
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions for Form 10-Q and
Article 10 of
<Page>
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended July 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
January 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Trust's Annual
Report on Form 10-K as of and for the year ended January 31, 2001.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. REVENUE RECOGNITION
Trust revenues are recognized as earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided, if needed,
against the portion of accounts receivable which is estimated to be
uncollectible.
4. EARNINGS PER SHARE
Basic and diluted earnings per share have been computed based on the
weighted-average number of shares outstanding during the periods and considering
the effect of potentially dilutive securities.
For the six months ended July 31, 2001 and 2000, there were Class A and Class B
limited partnership units outstanding, which are convertible to Shares of
Beneficial Interest of the Trust. Assuming conversion, the aggregate
weighted-average of these Shares of Beneficial Interest would be 6,820,543 and
7,257,038 for the first six months of fiscal 2002 and 2001, respectively.
For the six months ended July 31, 2001 and 2000, 307,400 and 357,600 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.
5. ACQUISITION
In December 2000, the Lessee and the Trust established independent review groups
to consider altering the current structure of the management and operations of
the Hotels pursuant to the provisions of the REIT Modernization Act (the "RMA").
The RMA, among other things, permits the Trust to own the stock of a taxable
REIT subsidiary ("TRS") that may engage in businesses previously prohibited by
the Trust, including leasing hotels, provided that such hotels are managed and
operated by independent third parties. As such, effective February 1, 2001, the
Trust acquired all of the common and preferred equity stock of the Lessee for
$11,531 in cash consideration. The Lessee was owned 23% by Marc E. Berg,
Executive Vice President, Secretary, Treasurer and Trustee of the Trust, and
9.8% by InnSuites Innternational Hotels, Inc., an affiliate of Wirth.
Following the acquisition, the Lessee elected to be treated as a TRS under the
RMA. As a result, the management contracts relating to the Hotels between the
Lessee and InnSuites Innternational Hotels, Inc. were terminated effective
January 31, 2001, and new management contracts were entered into on
substantially similar terms with Suite Hospitality Management, Inc. ("the New
Management Company"), which qualifies as an independent third party manager and
operator of the Hotels under the RMA. In connection with the acquisition, the
rate structures of the Percentage Leases for the Hotels were also amended to
reflect current economic and market conditions and employees of the Lessee
became employees of the New Management Company. The benefits to the Trust are a
more direct relationship between the Hotels and the Trust, the
<Page>
inclusion of Lessee revenues in excess of required rent payments in the
Trust's consolidated financial reports, the elimination of potential
conflicts of interest and the reduction of certain administrative costs
relative to the operation of the Hotels and the administration of the
Percentage Leases.
In connection with the acquisition of the Lessee, the Trust paid $11,531 for
all of the outstanding classes of stock of the Lessee. The $1.6 million
difference between the cash paid to the owners of the Lessee and the
estimated value of the net liabilities assumed was recorded as "Expenses
Incurred in Acquiring Lessee" (a non-recurring expense) in the Trust's
unaudited consolidated Statements of Operations in the first quarter of
fiscal 2002. Since the Lessee did not have significant operations other than
the management of the Hotels and its assets, the transaction did not quality
as the acquisition of a "business" for purpose of applying APB Opinion No. 16
- -Business Combinations. Consequently, the difference between the cash paid to
the owners of the Lessee and the fair value of the net tangible liabilities
acquired was recorded as an operating expense rather than goodwill.
The management team of the Lessee has become employees of the New Management
Company and continues to oversee and manage all activities of the Hotels.
The pro forma information provided for the six months and the three months ended
July 31, 2000 was derived by consolidating the actual statements of operations
of the Trust and the Lessee and eliminating all intercompany transactions. In
addition, the Expenses Incurred in Acquiring Lessee of $1.6 million was recorded
in the six months ended July 31, 2000 pro forma information assuming these costs
would have been incurred in the prior year.
INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
PRO FORMA INCOME STATEMENT
(in thousands)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JULY 31, FOR THE THREE MONTHS ENDED JULY 31,
2001 2000 2001 2000
------------ ---------- ---------- ---------
Total Revenue $ 15,709 15,599 $ 6,842 6,390
Total Operating Expenses (11,718) (12,889) (5,697) (5,620)
Total Fixed Charges (4,342) (3,881) (2,155) (1,976)
------------ ---------- ---------- ---------
Income Before Extraordinary Item and
Minority Interest $ (351) (1,171) $ (1,010) (1,206)
Extraordinary Item (577) -- -- --
----------- ---------- ---------- ---------
Income Before Minority Interest (928) (1,171) (1,010) (1,206)
Less: Minority Interest (639) 211 (320) (383)
----------- ---------- ---------- ---------
Net Income Attributable
to Shares of Beneficial Interest $ (289) (1,382) (690) (823)
=========== ========== ========== =========
EARNINGS PER SHARE - Basic and Diluted
Income Before Extraordinary Item $ (0.01) (0.56) $ (0.32) (0.34)
Extraordinary Item (0.13) -- -- --
----------- ----------- ---------- ---------
NET INCOME $ (0.14) (0.56) $ (0.32) (0.34)
=========== =========== ========== =========
</Table>
6. NOTES PAYABLE
On April 16, 1998, the Trust obtained a $12 million Credit Facility from Pacific
Century Bank to assist in its funding of the acquisition and development of
additional hotels and for certain other business purposes. Borrowings under the
Credit Facility were secured by first mortgages on three of the Hotels. By its
terms, the Credit Facility expired on April 16, 2001.
In order to replace the liquidity provided by the Credit Facility, the Trust
actively sought individual loans on the Tucson Oracle, Flagstaff and Scottsdale
properties that secured the Credit Facility. On April 18, 2001, the Trust
refinanced its Ontario property and used $4.2 million of the net proceeds to
reduce the outstanding balance of the Credit Facility from $11.3 million to $7.1
million. On April 27, 2001, the Trust closed the financing of its Tucson Oracle
property and
<Page>
used $4.8 million of the net proceeds to reduce the outstanding balance of
the Credit Facility to approximately $2.3 million. On July 11, 2001, the
Trust obtained a three-month term loan in the amount of $1,825,000 secured by
its Scottsdale property and a $1,500,000 line of credit secured by the its
Flagstaff property and used $2.3 million of the proceeds to settle the
remaining balance of the Credit Facility. The term loan and the line of
credit mature on October 1, 2001 and June 1, 2003, respectively. Both loans
bear interest at the prime rate plus 1.0% and require that the Trust maintain
a debt coverage ratio of 1.5 to 1.0 and that the Lessee maintain a gross
operating profit of 80% of the annual projections provided to the lender. The
Trust is currently in negotiations with the lender to extend the maturity
date of the term loan for a minimum of two years. As of July 31, 2001, the
Trust had drawn $1,130,241 on the new line of credit.
On July 27, 2001, the mortgage note payable on the Tucson St. Mary's hotel
matured. The outstanding principal balance was $3,742,573. On September 7,
2001, the lender agreed to extend the mortgage note on the St. Mary's
property for eight months to March 2002 and granted the Trust an option,
assuming compliance with the debt coverage and constant coverage ratios
described below, to extend an additional five and one-half months to
September 2002. The agreement requires the Trust to maintain various debt
coverage ratios ranging from 1.15 to 1.0 up to 1.5 to 1.0 and constant
coverage ratios ranging from 12.0% to 15.5%.
During the quarter ended July 31, 2001, the lender with respect to the
mortgage note on the Trust's San Diego property notified the Trust that it
was not in compliance with the debt coverage ratio required in the covenants
of that mortgage note. On July 30, 2001, the Trust received a waiver from the
lender until October 31, 2001. The Trust expects to be in compliance at that
time.
7. PERCENTAGE LEASE AGREEMENTS
With the purchase of the Lessee effective February 1, 2001, the financial
statements of the Lessee are consolidated with those of the Trust. Therefore,
all significant intercompany transactions are eliminated including rent revenues
and expenses that are calculated pursuant to the Percentage Leases.
8. RELATED PARTY TRANSACTIONS
The Partnership is responsible for all expenses incurred by the Trust in
accordance with the Partnership Agreement.
The Initial Hotels were acquired by the Partnership from entities in which Wirth
and his affiliates had substantial ownership interests. Wirth and his affiliates
received 4,017,361 Class B limited partnership units and 647,231 Shares of
Beneficial Interest in the Trust in exchange for their interests in the Initial
Hotels. As of July 31, 2001 and 2000, Wirth and his affiliates held 5,226,364
Class B limited partnership units. As of July 31, 2001 and 2000, Wirth and his
affiliates held 633,513 and 572,813, respectively, Shares of Beneficial Interest
in the Trust.
At July 31, 2001, the Trust owned a 48.48% interest in the Hotels through its
sole general partner's interest in the Partnership.
The Trust paid interest on related party notes to Wirth and his affiliates in
the amounts of $222,047 and $143,597 for the six months ended July 31, 2001 and
2000, respectively.
The expenses of the Trust consist primarily of property taxes, insurance,
corporate overhead, interest on mortgage debt, professional fees and
depreciation of the Hotels. Under the terms of its Partnership Agreement, the
Partnership is required to reimburse the Trust for all such expenses.
Notes and advances payable to related parties consists of funds provided by
Wirth and other related parties to repurchase Partnership units and to fund
working capital and capital improvement needs. The aggregate amounts
outstanding were approximately $7.3 million and $7.5 million as of July 31,
2001 and January 31, 2001, respectively. The notes and advances payable to
related parties are as follows:
<Page>
Wirth made an unsecured loan to the Trust in the amount of $2 million,
bearing interest at 7% per year, effective March 15, 1999. Interest
only payments were due annually beginning March 15, 2000. The unpaid
principal balance and accrued interest is due on March 15, 2004. The
Trust used the proceeds to purchase general partner units in the
Partnership. The principal balance as of July 31, 2001 was $2,000,000.
Wirth received an unsecured promissory note that consolidated four
outstanding unsecured loans to the Trust totaling $600,000. The loan
amounts consolidated were $200,000, $120,000, $30,000 and $250,000, all
bearing interest at 7% per year with varying maturities. Accrued
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 was due on May 15, 2001. However, the term of the note
was extended to July 15, 2002. The principal balance as of July 31,
2001 was $600,000.
Wirth made nine unsecured loans to the Trust in the total amount of
$2,066,000, all bearing interest at 7% per year, effective on dates
ranging from August 15, 2000 to April 27, 2001. The unpaid principal
balances and accrued interest were due ranging from May 15 to July
1, 2001. However, the terms of the loans were extended to July 15,
2002. The Trust used the proceeds to acquire the Albuquerque, New
Mexico hotel and to fund operations. The principal balance as of
July 31, 2001 was $1,347,000.
On July 27, 2000, the Partnership repurchased 300,000 of the Trust's
shares from Wirth and/or affiliates, owned directly or indirectly by
Wirth, issuing 10 secured promissory notes in the aggregate amount of
$720,000 and $3,000 cash. The promissory notes are secured by the
repurchased shares. The secured promissory notes in the aggregate
amount of $720,000 bear interest at 7% per year, effective July 27,
2000. The unpaid principal balances and accrued interest are due at
various dates ranging from August 27, 2000 to July 27, 2003. Beginning
June 1, 2001, payments have been deferred until October 1, 2001, when
payments are to resume as scheduled. The principal balance on July 31,
2001 was $506,911.
On July 27, 2000, the Trust purchased 311,326 of the Partnership's
Class A limited partnership units from Steve Robson, Trustee of the
Trust, for $750,000. The Trust made an initial payment of $5,000 and
issued a promissory note in the amount of $745,000. The promissory note
is secured by the purchased Partnership units. The secured promissory
note bears interest at 7% per year, effective July 27, 2000. The unpaid
principal balance and accrued interest is amortized over 36 months. The
final payment is due August 27, 2003. Beginning June 1, 2001, payments
have been deferred until October 1, 2001, when payments are to resume
as scheduled. The principal balance as of July 31, 2001 was $553,449.
Rare Earth Development Company, owned by Wirth or his affiliates, made
five unsecured loans to the Trust in the total amount of $2,494,000
all bearing interest at 7% per year, effective on dates ranging from
December 29, 2000 through June 12, 2001. The unpaid principal
balances and accrued interest were due on July 15, 2001. However,
the term of the loans were extended to July 15, 2002. The Trust used
the proceeds to fund operations. The principal balance as of July
31, 2001 was $2,300,000.
9. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The Trust issued 29,000 Shares of Beneficial Interest during the six months
ended July 31, 2001 valued at $60,900 in exchange for Class A limited
partnership units.
<Page>
The Trust paid $1,918,725 and $1,800,344 in cash for interest for the six months
ended July 31, 2001 and 2000, respectively.
10. EXTRAORDINARY ITEM
The Trust refinanced its Ontario, California property paying $576,842 in
prepayment penalties on April 18, 2001. The Trust classified the prepayment
penalty as an extraordinary item.
11. SUBSEQUENT EVENTS
Subsequent to the close of the second quarter ended July 31, 2001, the Trust
listed its Scottsdale and Flagstaff properties for sale. Since the market
value of these properties exceed the carrying value, the Trust does not
expect to incur a loss if the properties are sold. The Trust may or may not
be successful in selling these properties during the six-month listing period.
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 unaudited consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q.
The Trust is a real estate investment trust, which owns the sole general
partner's interest in the Partnership. In order for the Trust to qualify as a
REIT under prior provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), neither the Trust nor the Partnership could operate the Hotels.
Therefore, each of the Hotels was leased to and operated by the Lessee pursuant
to a Percentage Lease. Each Percentage Lease obligates the Lessee to pay rent
equal to the greater of a minimum rent or a percentage rent based on the gross
revenues of each Hotel. The Lessee also holds the franchise agreement for each
Hotel. Prior to February 1, 2001, the Lessee was owned 23% by Marc E. Berg,
Executive Vice President, Secretary, Treasurer and Trustee of the Trust, and
9.8% by InnSuites Innternational Hotels, Inc., an entity owned by Wirth and his
wife. Effective February 1, 2001, however, the Lessee became a wholly-owned
subsidiary of the Trust. See Note 5 - Acquisition.
The Trust's principal source of cash flows is distributions from the
Partnership, which are dependent upon lease payments from the Lessee pursuant to
the Percentage Leases. The Lessee's ability to make payments to the Partnership
pursuant to the Percentage Leases is dependent primarily upon the operations of
the Hotels. As a result of the Trust's acquisition of the Lessee as of February
1, 2001, any profits earned by the Lessee in its operation of the Hotels may be
distributed to the Trust.
At July 31, 2001, the Trust owned a 48.48% interest in the Hotels through its
sole general partner's interest in the Partnership. This change in ownership
from Trust formation to July 31, 2001 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 Wirth who provided an unsecured loan to the Trust at 7% interest payable
annually beginning March 15, 2000. The unpaid principal balance and accrued
interest is due on March 15, 2004.
On April 2, 1999, the Partnership made an unsecured loan to the Trust in the
amount of $2.6 million. Annual interest only payments are due on March 1 of
each year and are based on a 7% interest rate. The unpaid principal balance
is due at maturity on April 2, 2006. The Trust used the proceeds of that
loan to purchase 1.3 million general partner units in the Partnership. The
money lent by the Partnership was generated by refinancing the Northern
Phoenix hotel and borrowing an additional $1.8 million that was secured by a
mortgage on that property. The original mortgage note was restructured to
match the terms of the refinanced note, which bears interest at 8.25% and
matures on April 1, 2014. Monthly principal and interest payments began on
April 1, 1999.
As of April 2, 1999, the Trust transferred, at historical cost, its interest
in the Scottsdale property to the Partnership (approximately $7 million) in
exchange for 1.6 million general partner units. As a result of the
aforementioned transactions, the Trust increased its ownership interest in
the Partnership from approximately 18% to approximately 42% as of April 2,
1999. Other incremental, less material, transactions have contributed to the
increase from 42% to the
<Page>
Trust's 48.48% sole general partner's interest in the Partnership at
July 31, 2001.
The expenses of the Trust consist primarily of property taxes, insurance,
corporate overhead, interest on mortgage debt, professional fees and
depreciation of the Hotels. Under the terms of its Partnership Agreement, the
Partnership is required to reimburse the Trust for all such expenses. The
Percentage Leases provide for the payment of base rent and percentage rent. For
the six months ended July 31, 2001, base rent and percentage rent in the
aggregate amount of $3.8 million was earned by the Trust. However, percentage
rent revenue was eliminated in consolidation. 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, calculated as total room revenue
divided by number of rooms sold ("ADR"), and revenue per available room,
calculated as total room revenue divided by number of rooms available (known as
"REVPAR"), is appropriate for understanding revenue from the Percentage Leases.
ADR decreased $0.78 to $69.02 for the first six months of fiscal 2002 from
$69.80 for the first six months of fiscal 2001 due primarily to a slow winter
season and an oversupply of rooms in the Arizona markets. Occupancy decreased
3.2% to 64.9% for the first six months of fiscal 2002 from 68.1% for the first
six months of fiscal 2001. This resulted in a decrease in REVPAR of $2.75 to
$44.78 for the first six months of fiscal 2002 from $47.53 for the first six
months of fiscal 2001.
The following table shows certain historical financial and other information for
the periods indicated:
FOR THE SIX MONTHS ENDED
JULY 31,
--------------------------
2001 2000
------ ------
OCCUPANCY 64.9% 68.1%
AVERAGE DAILY RATE (ADR) $ 69.02 69.80
REVENUE PER AVAILABLE ROOM (REVPAR) $ 44.78 47.53
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 six months ended July 31, 2001
compared to the six months ended July 31, 2000.
As of February 1, 2001, the financial statements of the Lessee are
consolidated with those of the Trust. Therefore, all significant intercompany
transactions and balances have been eliminated including rent revenue for the
Trust and rent expense for the Lessee. See Note 5 - Acquisition.
For the six months ended July 31, 2001 compared to the six months ended
July 31, 2000, Trust revenues increased $10.3 million to $15.7 million from $5.4
million, respectively, primarily due to the acquisition of the Lessee. Rent
revenue from affiliate for the first six months of fiscal year 2002 decreased
$5.4 million to zero due to the consolidation of the Trust's and the Lessee's
operating results and the elimination of percentage rent from the Lessee.
Percentage rent earned and paid to the Trust by the Lessee for the six months
ended July 31, 2001 was $3.8 million, which was eliminated in consolidation.
When comparing total revenues for the six months ended July 31, 2001 with pro
forma data for the prior year period, total revenues increased by $110,000 or
0.7% to $15.7 million from $15.6 million.
Total expenses increased $12.5 million to $17.7 million from $5.2
million primarily due to the acquisition of the Lessee, including $1.6 million
in expenses incurred by the Trust to acquire the Lessee. Comparing the six
months ended July 31, 2001 and 2000, total operating expenses increased $11.9
million to $13.3 million primarily due to the acquisition of the Lessee. When
comparing total operating expenses for the six months ended July 31, 2001 with
pro forma data for the prior year period, total operating expenses increased
$438,000 (excluding the effect of
<Page>
expenses incurred in acquiring the Lessee) due to the $608,000 expense
related to the addition of the Albuquerque hotel which was partially offset
by cost cutting programs at the Hotels.
Real estate depreciation for the six months ended July 31, 2001
compared to the six months ended July 31, 2000 increased $242,000, or 17.9%, to
$1.6 million from $1.4 million, respectively. The increase was primarily due to
the acquisition of the Albuquerque hotel, $88,000, and increased depreciation
expense due to the use of shorter useful life categories for assets purchased
after October 31, 1999.
For the six months ended July 31, 2001 and 2000, real estate and
personal property taxes, insurance and ground rent increased $170,000 or 24.9%
to $850,000 from $680,000. The increase was due to the acquisition of the
Albuquerque hotel, $81,000, and increased insurance costs.
Total interest expense increased $131,000, or 7.4%, to $1.9 million
from $1.8 million comparing the six months ended July 31, 2001 and 2000,
respectively. Interest on mortgage notes payable increased $219,000, or 19.1%,
to $1.4 million from $1.1 million comparing the six months ended July 31, 2001
and 2000, respectively. The increase was primarily due to the refinancing of the
San Diego, California property, the refinancing of the Ontario, California
property, the incurrence of the new mortgage on the Tucson (Oracle), Arizona
property and the addition of interest expense attributable to the Albuquerque,
New Mexico hotel acquired in fiscal 2001. Interest on notes payable to banks
decreased $244,000, or 47.0%, to $276,000 from $520,000 comparing the six months
ended July 31, 2001 and 2000, respectively. The decrease was primarily due to
the replacement of the Pacific Century Credit Facility with mortgages on certain
of the Hotels. Interest on notes payable and advances payable to related parties
increased $146,000 to $232,000 from $85,000 due to additional loans from Wirth
and his affiliates during the second half of fiscal 2001 and the first six
months of fiscal 2002 and the purchase of Steve Robson's Class A limited
partnership units in the Partnership.
Expenses incurred in acquiring the Lessee for the six months ended July
31, 2001 relate to acquisition costs incurred in the purchase of the Lessee.
These are one-time expenses associated with acquiring the Lessee. These
costs were not incurred in fiscal year 2001.
Results of Operations of the Trust for the three months ended July 31, 2001
compared to the three months ended July 31, 2000.
For the three months ended July 31, 2001 compared to the three months
ended July 31, 2000, Trust revenues increased $4.7 million to $6.8 million from
$2.1 million, respectively, primarily due to the acquisition of the Lessee. Rent
revenue from affiliate for the three months ended July 31, 2001 decreased $2.1
million to zero due to the consolidation of the Trust's and the Lessee's
operating results and the elimination of percentage rent from the Lessee.
Percentage rent earned and paid to the Trust by the Lessee for the three months
ended July 31, 2001 was $1.5 million, which was eliminated in consolidation.
When comparing total revenues for the three months ended July 31, 2001 with
pro forma data for the prior year period, total revenues increased by
$452,000 or 7.1% to $6.8 million from $6.4 million, due primarily to the
addition of Albuquerque revenue in the amount of $459,000.
Total expenses increased $5.0 million to $7.9 million from $2.9
million. For the three months ended July 31, 2001 and 2000, total operating
expenses increased $4.8 million to $5.7 million primarily due to the acquisition
of the Lessee. Total operating expenses for the three months ended July 31, 2001
increased $77,000 when compared to pro forma data from the same period in the
prior year due to $332,000 of expenses incurred by the Trust for the addition of
the Albuquerque hotel, partially offset, however, by the effects of cost cutting
programs at the Hotels.
Real estate depreciation for the three months ended July 31, 2001
compared to the three months ended July 31, 2000 increased $152,000, or 22.2%,
to $837,000 from $685,000, respectively. The increase was primarily due to the
acquisition of the Albuquerque hotel, $46,000, and increased depreciation
expense due to the use of shorter useful life categories for assets purchased
after October 31, 1999.
<Page>
For the three months ended July 31, 2001 and 2000, real estate and
personal property taxes, insurance and ground rent increased $85,000 or 25.1% to
$422,000 from $337,000. The increase was due to the acquisition of the
Albuquerque hotel, $40,000, and increased insurance costs.
Total interest expense decreased $16,000, or 1.7%, to $895,000 from
$911,000 comparing the three months ended July 31, 2001 and 2000, respectively.
Interest on mortgage notes payable increased $149,000, or 26.4%, to $714,000
from $564,000 comparing the three months ended July 31, 2001 and 2000,
respectively. The increase was primarily due to the refinancing of the San
Diego, California property, the refinancing of the Ontario, California property,
incurrence of the new mortgage on the Tucson (Oracle), Arizona property and the
addition of interest expense attributable to the Albuquerque, New Mexico hotel
acquired in fiscal 2001. Interest on notes payable to banks decreased $251,000,
or 85.6%, to $42,000 from $293,000 comparing the three months ended July 31,
2001 and 2000, respectively. The decrease was primarily due to the replacement
of the Pacific Century Credit Facility with mortgages on certain of the Hotels.
Interest on notes and advances payable to related parties increased $69,000 to
$120,000 from $51,000 due to additional loans from Wirth and his affiliates
during the second half of fiscal 2001 and the first three months of fiscal 2002
and the purchase of Steve Robson's Class A limited partnership units in the
Partnership.
Funds from Operations (FFO)
The Trust notes that industry analysts and investors use Funds From
Operations ("FFO") as another tool to evaluate and compare equity REITs. The
Trust also believes it is meaningful as an indicator of net income excluding
most non-cash items and provides information about the Trust's cash available
for distributions, debt service and capital expenditures. The Trust follows the
March 1995 interpretation of the National Association of Real Estate Investment
Trusts ("NAREIT") definition of FFO, as amended January 1, 2000, which is
calculated (in the Trust's case) as net income (computed in accordance with
accounting principles generally accepted in the United States ("GAAP")),
excluding gains (or losses) from sales of property, depreciation and
amortization on real estate property and extraordinary items. FFO does not
represent cash flow from operating activities in accordance with GAAP and is not
indicative of cash available to fund all of the Trust's cash needs. FFO should
not be considered as an alternative to net income or any other GAAP measure as
an indicator of performance and should not be considered as an alternative to
cash flows as a measure of liquidity. In addition, the Trust's FFO may not be
comparable to other companies' FFO due to differing methods of calculating FFO
and varying interpretations of the NAREIT definition.
<Table>
<Caption>
FUNDS FROM OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31,
(UNAUDITED)
(amounts in thousands)
2001 2000
-------- --------
Net Income Attributable to Shares of Beneficial Interest $ (1,898) (11)
Depreciation 1,593 1,351
Extraordinary Item 577 --
Minority Interest Share of Depreciation and
Extraordinary Item (1,119) (741)
------ ------
Funds from Operations (FFO) $ (847) 599
------ ------
One-Time Lessee Purchase Charge 1,608 --
------ ------
Comparable FFO $ 761 599
====== ======
</Table>
Comparable FFO increased to approximately $761,000 from approximately
$599,000 when comparing the first six months of fiscal 2002 and 2001,
respectively. The increase of approximately $162,000, or 27.1%, was attributable
to a combination of higher general and administrative expenses incurred by the
Trust during the six-month period ended July 31, 2000, the acquisition of the
Lessee and a greater ownership interest in the Partnership.
<Page>
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of cash to meet its cash requirements, including
distributions to its shareholders, is its share of the Partnership's cash flow.
The Partnership's principal source of cash is rent payments under the Percentage
Leases. The Lessee's principal source of cash is guest room revenue. The
Lessee's obligations under the Percentage Leases are unsecured and its ability
to make rent payments to the Partnership under the Percentage Leases, and the
Trust's liquidity, including its ability to make distributions to its
shareholders, will depend upon the ability of the Lessee to generate sufficient
cash flow from hotel operations. As a result of the Trust's acquisition of the
Lessee as of February 1, 2001, any profits earned by the Lessee in its operation
of the Hotels may be distributed to the Trust. See Note 5 - Acquisition.
On April 18, 2001, the Trust refinanced its Ontario property and used $4.2
million of the net proceeds to reduce the outstanding balance of its $12
million Credit Facility from $11.3 million to $7.1 million. On April 27,
2001, the Trust closed the financing of its Tucson Oracle property and used
$4.8 million of the net proceeds to reduce the outstanding balance of the
Credit Facility to approximately $2.3 million. On July 11, 2001, the Trust
obtained a term loan in the amount $1,825,000 secured by the Scottsdale
property and a $1,500,000 line of credit secured by the Flagstaff property.
The Trust used $2.3 million of the proceeds to settle the remaining balance
of the Credit Facility. The term loan and the line of credit mature on
October 1, 2001 and June 1, 2003, respectively. Both loans bear interest at
the prime rate plus 1.0% and require that the Trust maintain a debt coverage
ratio of 1.5 to 1.0 and that the Lessee maintain a gross operating profit of
80% of the annual projections provided to the lender. The Trust is currently
in negotiations with the lender to extend the maturity date of the term loan
for a minimum of two years. As of July 31, 2001, the Trust had drawn
$1,130,241 on the new line of credit.
On July 27, 2001, the mortgage note payable on the Tucson St. Mary's hotel
matured. The outstanding principal balance was $3,742,573. On September 7,
2001, the lender agreed to extend the mortgage note on the St. Mary's
property for eight months to March 2002 and granted the Trust an option,
assuming compliance with the debt coverage and constant coverage ratios
described below, to extend an additional five and one-half months to
September 2002. The agreement requires the Trust to maintain various debt
coverage ratios ranging from 1.15 to 1.0 up to 1.5 to 1.0 and constant
coverage ratios ranging from 12.0% to 15.5%.
During the quarter ended July 31, 2001, the lender with respect to the
mortgage note on the Trust's San Diego property notified the Trust that it
was not in compliance with the debt coverage ratio required in the covenants
of that mortgage note. On July 30, 2001, the Trust received a waiver from the
lender until October 31, 2001. The Trust expects to be in compliance at that
time.
The Trust has approximately $80,000 due and payable in fiscal year 2002 under
notes and advances payable to Wirth and his affiliates. To the extent the Trust
cannot satisfy these amounts as they come due, Wirth has agreed to extend the
terms of these borrowings to future dates. During the six months ended July
31, 2001, the Trust borrowed $1.3 million from Wirth and his affiliates and
during the same period repaid $1.4 million to Wirth and his affiliates.
The Trust intends to acquire and develop additional hotels and expects to incur
indebtedness to fund those acquisitions and developments. The Trust may also
incur indebtedness to meet distribution requirements imposed on a REIT under the
Code to the extent that working capital and cash flow from the Trust's
investments are insufficient to make the required distributions.
The Trust may seek to negotiate additional credit facilities or issue debt
instruments. Any debt incurred or issued by the Trust may be secured or
unsecured, long-term, medium-term or short-term, bear interest at a fixed or
variable rate and be subject to such other terms as the Trust considers prudent.
The Trust will acquire or develop additional hotels only as suitable
opportunities arise, and the Trust will not undertake acquisition or
redevelopment of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings or from the proceeds of additional
issuances of Shares of Beneficial
<Page>
Interest or other securities. However, there can be no assurance that the
Trust will successfully acquire or develop additional hotels.
On August 30, 2000, Albuquerque Suite Hospitality, LLC, 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. The funds utilized for the
purchase price were secured by a first mortgage in the amount of $1,575,000 and
the remaining amount was loaned by Wirth and his affiliates.
The Partnership continues to contribute to a Capital Expenditures Fund (the
"Fund") from the rent paid under the Percentage Leases, an amount equal to 4% of
the Lessee's revenues from operation of the Hotels. The Fund is intended to be
used for capital improvements to the Hotels and refurbishment and replacement of
furniture, fixtures and equipment, in addition to other uses of amounts in the
Fund considered appropriate from time to time. The Partnership anticipates
making similar arrangements with respect to future hotels that it may acquire or
develop. During the six months ended July 31, 2001, the Hotels spent
approximately $1.2 million for capital expenditures. These amounts have been
capitalized and are being depreciated over their estimated useful lives. The
Lessee also spent approximately $941,000 during the six months ended July 31,
2001 on repairs and maintenance and these amounts have been charged to expense
as incurred.
As of July 31, 2001, the Trust has commitments for capital expenditures beyond
the 4% reserve for refurbishment and replacements set aside annually for each
hotel property. The Trust has committed an additional $110,000 for the
refurbishment of its Buena Park property to satisfy the conditions of the newly
acquired Best Western franchise for that property and has committed $396,000
over the 4% reserved for the Ontario property for new furnishings and
refurbishment, which was a condition of the Ontario refinancing. At the closing
of the Ontario refinancing, $563,000 was escrowed from the proceeds received
by the Trust to cover the Trust's commitment for new furnishings and
refurbishment at the Ontario property.
SHARE REPURCHASE PROGRAM
On January 2, 2001, the Board of Trustees approved a share repurchase program
under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the
purchase of up to 250,000 limited partnership units in the Partnership and/or
Shares of Beneficial Interest in open market or privately negotiated
transactions. Acquired Shares of Beneficial Interest will be held in treasury
and will be available for future acquisitions and financings and/or for awards
granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option
Plan. As of July 31, 2001, the Trust had acquired 9,700 Shares of Beneficial
Interest in open market transactions at an average price of $2.22 per share.
The Trust intends to continue repurchasing Shares of Beneficial Interest in
compliance with applicable legal and American Stock Exchange requirements.
INFLATION
The Trust's revenues are based on the underlying Hotel revenues. Therefore, the
Trust relies entirely on the performance of the Hotels and the Lessee's ability
to increase revenues to keep pace with inflation. Operators of hotels in
general, and the Lessee in particular, can change room rates quickly, but
competitive pressures may limit the Lessee's ability to raise rates faster than
inflation.
SEASONALITY
The Hotels' operations historically have been seasonal. The six southern Arizona
hotels experience their highest occupancy in the first fiscal quarter and, to a
lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be
the lowest occupancy period at those six southern Arizona hotels. This
seasonality pattern can be expected to cause fluctuations in the Trust's
quarterly revenue. The hotels located in northern Arizona, California and New
Mexico historically experience their most profitable periods during the second
and third fiscal quarters (the summer season), providing some balance to the
general seasonality of the hotel business. To the extent that cash flow from
operations is insufficient during any quarter, because of temporary or seasonal
fluctuations in revenue, the Trust may utilize other cash on hand or borrowings
to make distributions to its shareholders
<Page>
or meet operating needs. No assurance can be given that the Trust will make
distributions in the future.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. The Trust intends
that such forward-looking statements be subject to the safe harbors created
by such Acts. Those forward-looking statements include statements regarding
the intent, belief or current expectations of the Trust, its Trustees or its
officers in respect of (i) the declaration or payment of dividends; (ii) the
leasing, management or operation of the Hotels; (iii) the adequacy of
reserves for renovation and refurbishment; (iv) the Trust's financing plans;
(v) the Trust's position regarding investments, acquisitions, developments,
financings, conflicts of interest and other matters; (vi) the Trust's
continued qualification as a REIT; and (vii) trends affecting the Trust's or
any Hotel's financial condition or results of operations. The words and
phrases "looking ahead", "we are confident", "should be", "will be",
"predicted", "believe", "expect", "anticipate" and similar expressions
identify forward-looking statements.
These forward-looking statements reflect the Trust's current views in
respect of future events and financial performance, but are subject to many
uncertainties and factors relating to the operations and business environment of
the Hotels which may cause the actual results of the Trust to differ materially
from any future results expressed or implied by such forward-looking statements.
Examples of such uncertainties include, but are not limited to: fluctuations in
hotel occupancy rates; changes in room rental rates which may be charged by the
Lessee in response to market rental rate changes or otherwise; interest rate
fluctuations; changes in federal income tax laws and regulations; competition;
any changes in the Trust's financial condition or operating results due to
acquisitions or dispositions of hotel properties; real estate and hospitality
market conditions; hospitality industry factors; and local or national economic
and business conditions, including, without limitation, conditions which may
affect public securities markets generally, the hospitality industry, or the
markets in which the Trust operates or will operate. The Trust does not
undertake any obligation to update publicly or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the
qualifications set forth hereinabove are inapplicable to any forward-looking
statements in this Form 10-Q relating to the operations of the Partnership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is exposed to interest rate risk primarily as a result of its
mortgage notes payable, notes payable to banks and other notes payable. Proceeds
from these loans were used to maintain liquidity, fund capital expenditures and
expand the Trust's real estate investment portfolio and operations. The Trust's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Trust borrows using fixed rate debt, when possible.
During the six months ended July 31, 2001, the Trust replaced $9.0 million of
its variable-rate line of credit with fixed-rate mortgages on certain of the
Hotels. There have been no other significant changes in the Trust's debt
structure during the six months ended July 31, 2001.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 18, 2001, 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 May 18, 2001, wherein the considered
transactions were described to the shareholders.
<Page>
Shareholders representing 1,834,520 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:
<Table>
<Caption>
ABSTENTION AND
FOR AGAINST BROKER NON-VOTES
------ ----------- ----------------
ELECTION OF TRUSTEES:
James F. Wirth .......................................... 1,806,913 0 27,607
Peter A. Thoma .......................................... 1,797,413 0 37,107
</Table>
Based upon the above-described votes of the shareholders, James F.
Wirth and Peter A. Thoma were elected as trustees whose terms expire in 2004.
The current terms of Edward G. Hill and Steven S. Robson will expire in 2002 and
the current terms of Marc E. Berg and Lee J. Flory will expire in 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
EXHIBIT
NUMBER EXHIBIT
------- -------
10.1 Promissory Note dated June 12, 2001 by RRF Limited
Partnership in favor of Rare Earth Development
Company.
(b) REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed by the Trust during the
fiscal quarter ended July 31, 2001.
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, 2001 INNSUITES HOSPITALITY TRUST (Registrant)
By: /s/ Anthony B. Waters
------------------------------------------
Anthony B. Waters, Chief Financial Officer