**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

**FORANNUAL AND TRANSITION REPORTSPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 
| **ý**                                                                                                                                                                                                                                                                                                                                                                                | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934**     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **For the fiscal year ended January 31,  2003.**                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                                                                                                                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **For the transition period from                               to                             .** |
|                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                     |
| **Commission File No. 1-7062**                                                                                                                                                                                                                                                                                                                                                       |

 

| **InnSuites Hospitality Trust**                                                     |
|-------------------------------------------------------------------------------------|
| (Exact Name of Registrant as Specified in  Its Charter)                             |
|                                                                                |   |   |
| **Ohio**                                                                            |   | **34-6647590** |
| (State or Other Jurisdiction of  Incorporation or Organization)                     |   | (I.R.S. Employer Identification Number) |
|                                                                                |   |   |
| **InnSuites Hotels Centre, 1615 E. Northern  Avenue,  Suite 102, Phoenix, Arizona** |   | **85020** |
| (Address of Principal Executive Offices)                                            |   | (ZIP Code) |
|                                                                                |   |   |
| Registrant’s Telephone Number, including area code:                            | **(602) 944-1500** |

 

Securities registered pursuant to Section 12(b) of the Act:

 
| Title of Each Class                              |   | Name of Exchange on Which Registered |
|-------------------------------------------------------|--------|--------------------------------------|
| **Shares of Beneficial Interest,  without par value** |   | **American Stock Exchange**          |

 

Securities registered pursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).  Yes o No ý

 

Aggregate market value of voting stock held by non-affiliates of theRegistrant as of July 31, 2002: $3,076,659.

 

Number of shares of voting stock outstanding as of April 25,2003:  1,995,701.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the June 12, 2003 AnnualMeeting of Shareholders are incorporated by reference into Part IIIhereof.

 

 

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PART I

 

Item 1.                       BUSINESS

 

INTRODUCTION TO OUR BUSINESS

 

The discussionof our business is as of the date of this filing, unless otherwise noted.

 

InnSuitesHospitality Trust (the “Trust”) was organized in 1971 and operates as anunincorporated Ohio real estate investment trust.  On January 31, 2003, the Trust owned a 50.80% sole generalpartner interest in RRF Limited Partnership, a Delaware limited partnership(the “Partnership”).  OnJanuary 31, 2003, the Partnership owned eleven InnSuites® hotels locatedin Arizona, New Mexico and southern California (all eleven InnSuites® hotelsare hereinafter referred to as the “Hotels”). The Trust has 12 employees.

 

The Hotelsfeature 1,667 hotel suites and operate as moderate and full-service hotelswhich apply a value studio and two-room suite operating philosophy formulatedin 1980 by James F. Wirth, current Chairman, President and Chief Executive Officerof the Trust.  The Trust owns andoperates hotels as studio and two-room suite hotels that offer services such asfree breakfast buffets and complementary afternoon social hours plus amenities,such as microwave ovens, refrigerators, free high speed internet access andcoffee makers in each studio or two-room suite.

 

The Trust haselected to be taxed as a real estate investment trust (“REIT”), as that term isdefined and used in Sections 856-860 of the Internal Revenue Code of 1986,and the Regulations thereunder (all as amended, the “Code”).  The Hotels are leased to InnSuites Hotels,Inc. (“InnSuites Hotels”) pursuant to leases which contain provisions for rentbased on the revenues of the Hotels (the “Percentage Leases”) and which areeliminated upon consolidation for the years ended January 31, 2003 and2002.  To qualify as a REIT, the Trustmust meet a number of organizational and operational requirements, includingthe current requirement that it distribute at least 90% of its adjusted taxableincome to its shareholders.

 

Prior toFebruary 1, 2001, InnSuites Hotels operated and managed all of the Hotels,with the assistance of InnSuites Innternational Hotels, Inc. (“InnSuitesInnternational”), an entity owned by Mr. Wirth.  Pursuant to management contracts, InnSuites Hotels paid InnSuitesInnternational an annual management fee of 2.5% of gross revenues for propertymanagement services.  Following theacquisition of InnSuites Hotels by the Trust effective February 1, 2001,InnSuites Hotels operates and manages the Hotels with the assistance of SuiteHospitality Management, Inc. (the “Management Company”), an entity in whichMr. Wirth has a 9.8% ownership interest, pursuant to substantially thesame terms as the InnSuites Innternational management agreements.  In exchange for its assumption of themanagement agreements, the Management Company agreed to pay $911,320 toInnSuites Innternational in order for InnSuites Innternational to satisfy itsliabilities.  See “Item 1 -Business - Acquisition of InnSuites Hotels by the Trust” below.  Effective February 1, 2003, the annualmanagement fee charged by the Management Company to InnSuites Hotels wasreduced to 2.0% of gross room revenues. This reduction will be effective through January 31, 2005, when the annualmanagement fee will return to the level stated in the original agreement.

 

InnSuitesHotels pays InnSuites Licensing Corp. (the “Licensing Corp.”), an entity ownedby Mr. Wirth, an annual licensing fee of 2.5% of gross revenues (1.25% forthose hotel properties which also carry a third-party franchise (as discussedbelow), such as Best Western® or Holiday Inn®) for trademark and licensingservices relating to the use of the InnSuites® name and marks.  The agreements were modified onNovember 1, 2002 to reduce the annual licensing fee to 2.0% of gross roomrevenues (1.0% for those properties which also carry a third-partyfranchise).  The modification is ineffect until

 

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January 31, 2005, when thetrademark and licensing fees will return to the levels stated in the originalagreement.

 

InnSuitesHotels has entered into franchise arrangements with certain third parties withrespect to five of the hotel properties, with four Best Western hotels and oneHoliday Inn hotel.  In exchange for useof the Best Western name, trademark and reservation system, the participatinghotels pay fees to Best Western International based on reservations receivedthrough the use of the Best Western system and the number of available suitesat the participating hotels.  Theagreements with Best Western have no specific expiration terms and arecancelable at the option of either party. Best Western requires that participating hotels meet certainrequirements for room quality, and such hotels are subject to removal from itsreservation system if these requirements are not met.  In exchange for use of the Holiday Inn name, trademark andreservation system, the participating hotel pays fees based on gross roomrevenue.  The agreement with Holiday Innexpires on April 1, 2004.  HolidayInn requires that participating hotels meet certain requirements for roomquality, and such hotels are subject to removal from its reservation system ifthese requirements are not met.  Thehotels with third-party franchise agreements receive significant reservationsthrough the Best Western and Holiday Inn reservation systems.

 

EffectiveOctober 12, 1999, the Partnership, InnSuites Hotels and InnSuitesInnternational entered into an Intercompany Agreement (the “IntercompanyAgreement”) whereby, subject to certain terms and conditions, the Partnershipgranted InnSuites Hotels a right of first refusal to lease, and InnSuitesInnternational a right of first refusal to operate, any real property acquiredby the Partnership.  In return, thePartnership was granted a right of first refusal to pursue opportunitiespresented to InnSuites Hotels or InnSuites Innternational to purchaseinvestments in real estate, hotel properties, real estate mortgages, derivativesor entities that invest in the foregoing. To date, the Trust has not purchased or used derivatives.  In connection with the acquisition ofInnSuites Hotels by the Trust, the Intercompany Agreement was amended effectiveFebruary 1, 2001 to provide for the assumption by the Management Companyof the rights and obligations of InnSuites Innternational thereunder.  See “Item 1 - Business - Acquisition ofInnSuites Hotels by the Trust” below.

 

HISTORICAL OPERATIONS AND FORMATION TRANSACTIONS

 

OnDecember 27, 1996, the Trust and Hospitality Corporation International(“HCI”), an Arizona corporation owned by Mr. Wirth and his spouse, whichcontrolled seven all-suite hotel properties, comprising 1,036 hotel studio andtwo-room suites, in Tucson, Phoenix, Scottsdale, Tempe, Flagstaff and Yuma,Arizona and in Ontario, California (the “Initial Hotels”), executed adefinitive Formation Agreement (the “Formation Agreement”) whereby, through aseries of transactions, the Initial Hotels were combined with the Trust.  At the 1997 Annual Meeting of Shareholdersheld on January 28, 1998, the shareholders of the Trust approved thetransactions contemplated by the Formation Agreement (the “FormationTransactions”).

 

The FormationAgreement provided for the organization of the Partnership, of which the Trustwould be the sole general partner, initially holding a 13.6% interest, with theformer partners in the Initial Hotels investing as limited partners, receivinga collective 86.4% interest, and for restructuring the Trust into an “umbrellapartnership REIT,” or “UPREIT.”  ThePartnership acquired substantial interests in six of the Initial Hotels.  The seventh hotel, located in Scottsdale,Arizona, was acquired directly by RRF Sub Corp., a then newly-formed Nevadacorporation and wholly-owned subsidiary of the Trust.  RRF Sub Corp. subsequently contributed the Scottsdale, Arizonahotel to the Partnership in exchange for general partnership interests therein.  The Trust contributed $2,081,000 in cash tothe Partnership to obtain its initial 13.6% sole general partner interest.

 

ThePartnership has two outstanding classes of limited partnership interests,Class A and Class B, identical in all respects except that eachClass A limited partnership unit is convertible, at the option of

 

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the Class A holder, intoone newly-issued Share of Beneficial Interest of the Trust.  No particular conversion will be allowed,however, if a determination is made that such conversion would cause the Trustto no longer qualify as a REIT under the Code. A total of 2,174,931 Class A limited partnership units were issuedto the former partners in the Initial Hotels. Class B limited partnership units may be converted only upon theapproval of the Board of Trustees, provided that such conversion would notcause the Trust to fail to qualify as a REIT. A total of 4,017,361 Class B limited partnership units were issuedto Mr. Wirth and certain of his affiliates in order to satisfy ownershipconcentration limitations placed upon REITs by the Code.  The Partnership Agreement of the Partnershipsubjects both general and limited partner units to certain restrictions ontransfer.

 

HOTEL ACQUISITIONS FOLLOWING THE FORMATION TRANSACTIONS

 

Following theFormation Transactions, the Partnership acquired four additional all-suitehotels.  First, effective as ofFebruary 1, 1998, the Partnership acquired the InnSuites Hotel Tucson St.Mary’s located in Tucson, Arizona.  Thetotal consideration for the acquisition was $10,820,000 and was based upon anappraisal conducted by an independent third party.  Mr. Wirth and his spouse indirectly owned the Tucson St.Mary’s hotel property.  Second, onApril 29, 1998, the Partnership acquired the Lafayette Hotel RamadaInn & Conference Center located in San Diego, California.  The Partnership paid $5,148,000 for thishotel property based on arms-length negotiations with owners of thatproperty.  Third, the Partnershipacquired the InnSuites Hotel located in Buena Park, California, effectiveJune 1, 1998.  The totalconsideration for the acquisition was $7,100,000 and was based upon anappraisal conducted by an independent third party.  Mr. Wirth and Steven S. Robson indirectly owned the BuenaPark hotel property at the time of such acquisition.  Subsequent to this acquisition, Mr. Robson was elected as aTrustee of the Trust by the shareholders of the Trust.  Fourth, the Partnership acquired the Best WesternAirport Inn located in Albuquerque, New Mexico, effective August 30,2000.  The total consideration for theacquisition was $2,100,000 based on arms-length negotiations with the owners ofthat property.  The Trust believes thatthe greatest opportunities for revenue growth and profitability will arise fromthe skillful management of the Trust’s eleven existing Hotels plus the skillfulmanagement and repositioning of current and future acquired hotelproperties.  The Trust’s primarybusiness objectives are to maximize returns to its shareholders throughincreases in asset value and cash flow available for distribution and toincrease long-term total returns to shareholders.  The Trust seeks to achieve these objectives through(i) participation in increased revenues from the Hotels through intensivemanagement and marketing and (ii) selective acquisitions and expansion ofthe InnSuites Hotels in the southwestern region of the United States.  At this time, the Trust does not plan toacquire any additional hotels.

 

ACQUISITION OF INNSUITES HOTELS BY THE TRUST

 

InDecember 2000, InnSuites Hotels and the Trust established independentreview groups to consider altering the structure of the management andoperations of the Hotels pursuant to the provisions of the REIT ModernizationAct (the “RMA”).  The RMA, among otherthings, permits the Trust to own the stock of a taxable REIT subsidiary (“TRS”)that may engage in businesses previously prohibited to the Trust, includingleasing hotels, provided that such hotels are managed and operated byindependent third parties, as defined by the RMA.  Effective February 1, 2001, the Trust acquired all of theissued and outstanding common and preferred equity stock of InnSuites Hotelsfor $11,531 in cash consideration and the assumption of approximately$1.6 million of net liabilities. Prior to the acquisition, InnSuites Hotels was owned 23% by Marc E.Berg, Executive Vice President, Secretary, Treasurer and Trustee of the Trust,9.8% by InnSuites Innternational, a wholly-owned affiliate of Mr. Wirthand his spouse, and 67.2% by unrelated parties.

 

Following theacquisition, InnSuites Hotels elected to be treated as a TRS under theRMA.  As a result, the managementcontracts relating to the Hotels between InnSuites Hotels and InnSuites

 

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Innternational were terminatedeffective January 31, 2001 and new management contracts were entered intoon substantially similar terms with the Management Company, 9.8% of which isowned by Mr. Wirth and which qualifies as an independent third partymanager and operator of the Hotels under the RMA.  There were no termination fees charged in connection with thecancellation of the old management contracts. In exchange for its assumption of the management agreements, theManagement Company agreed to pay $911,320 to InnSuites Innternational in orderfor InnSuites Innternational to satisfy its liabilities.  Effective February 1, 2001, the Partnership,InnSuites Hotels and the Management Company entered into an amendedIntercompany Agreement whereby, subject to certain terms and conditions, thePartnership granted InnSuites Hotels a right a first refusal to lease, and theManagement Company a right of first refusal to operate, any real propertyacquired by the Partnership.  In return,the Partnership was granted a right of first refusal to pursue opportunitiespresented to InnSuites Hotels or the Management Company to purchase investmentsin real estate, hotel properties, real estate mortgages, derivatives orentities that invest in any of the foregoing. To date, the Trust has not purchased or used derivatives.  In connection with the acquisition, the ratestructures of the Percentage Leases for the Hotels were amended to reflectcurrent economic and market conditions and the employees of InnSuites Hotelsbecame employees of the Management Company. The acquisition of InnSuites Hotels by the Trust resulted in thefollowing benefits: (1) a more direct relationship between the Hotels andthe Trust, (2) the inclusion of InnSuites Hotels’ revenues in excess ofrequired rent payments in the Trust’s consolidated financial reports,(3) the elimination of potential conflicts of interest and (4) thereduction of certain administrative costs relative to the operation of theHotels and the administration of the Percentage Leases.

 

COMPETITION IN THE HOTEL INDUSTRY

 

The hotelindustry is highly competitive and competition has intensified over the pasttwo years due to the sluggish economy and a general slow down in the travel andhospitality industries primarily due to the negative impact of the threat ofterrorism and the war with Iraq.  Eachof the Hotels experiences competition primarily from other mid-market hotelslocated in its immediate vicinity, but also competes with hotel propertieslocated in other geographic markets. While none of the Hotels’ competitors dominate any of the Trust’sgeographic markets, some of those competitors have greater marketing andfinancial resources than the Trust and the Partnership.

 

A number ofadditional hotel property developments have been announced or have recentlybeen completed by competitors in a number of the Hotels’ markets, andadditional hotel property developments may be built in the future.  Such hotel developments have had, and couldcontinue to have, an adverse effect on the revenue of the Hotels in theirrespective markets.

 

The Trust haschosen to focus its hotel investments in the southwest region of the UnitedStates.  The Trust has a concentrationof assets in the metropolitan Phoenix and Tucson, Arizona markets.  In the Phoenix and Tucson, Arizona and theAlbuquerque, New Mexico markets, the supply of hotel rooms has been increasingfaster than the rate of demand.  Supplyrates also generally increased faster than demand rates in the Flagstaff andYuma, Arizona markets.  The Buena Park,San Diego and Ontario, California markets continue to support balanced supplyand demand rates.

 

The Trust mayalso compete for investment opportunities with other entities that have greaterfinancial resources.  These entitiesalso may generally accept more risk than the Trust can prudently manage.  Competition may generally reduce the numberof suitable future investment opportunities available to the Trust and increasethe bargaining power of owners seeking to sell their properties.

 

SEASONALITY OF THE HOTEL BUSINESS

 

The Hotels’operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy inthe first fiscal quarter and, to a lesser extent, the fourth fiscal

 

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quarter.  The second fiscal quarter tends to be thelowest occupancy period at those six southern Arizona hotels.  This seasonality pattern can be expected tocause fluctuations in the Trust’s quarterly revenues.  The five hotels located in northern Arizona, California and NewMexico historically experience their most profitable periods during the secondand third fiscal quarters (the summer season), providing some balance to thegeneral seasonality of the hotel business. To the extent that cash flows from operations is insufficient during anyquarter, due to temporary or seasonal fluctuations in lease revenue, the Trustmay utilize other cash on hand or borrowings to make distributions to itsshareholders.  No assurance can be giventhat the Trust will make distributions in the future.

 

FINANCIAL INFORMATION

 

See“Item 6 - Selected Financial Data” herein for information regarding theTrust’s revenues, net losses and total assets.

 

OTHER AVAILABLE INFORMATION

 

We also makeavailable, free of charge, on our Internet website at www.innsuitestrust.com,our annual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934 as soonas reasonably practicable after we file such material, or furnish it to, theSecurities and Exchange Commission.

 

Item 2.                       PROPERTIES

 

The Trustmaintains its administrative offices at the InnSuites Hotels Centre in Phoenix,Arizona.  At January 31, 2003, thePartnership owned the eleven Hotels. Subsequent to year end, the Trust sold its Scottsdale hotel for$3.1 million to Scottsdale Eldorado Resort, LLC, an affiliate ofMr. Wirth.  All of the Hotels areoperated as InnSuites® Hotels, while four are also marketed as Best Western®Hotels and one is also marketed as a Holiday Inn® Hotel and Suites.  All of the Hotels are managed by theManagement Company and operate in the following locations:

 
| **PROPERTY**                                                        |   | **NUMBER  OF  SUITES** |   | **YEAR OF  CONSTRUCTION/  ADDITION** |   | **MOST  RECENT  RENOVATION** |   |
|---------------------------------------------------------------------|--------|------------------------|--------|--------------------------------------|--------|------------------------------|--------|
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotel and Suites  Airport Albuquerque Best Western        |   | 102                    |   | 1975/1985                            |   | 2000                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotel and Suites  Phoenix Best Western                    |   | 105                    |   | 1980                                 |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites  Tempe/Phoenix Airport/South Mountain   |   | 170                    |   | 1982/1985                            |   | 2001                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotel and Suites  Tucson, Catalina Foothills Best Western |   | 159                    |   | 1981/1983                            |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites  Yuma                                   |   | 166                    |   | 1982/1984                            |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| Holiday Inn Airport Hotel and  Suites/Ontario (an InnSuites Hotel)  |   | 150                    |   | 1990                                 |   | 2001                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites Flagstaff/  Grand Canyon                |   | 116                    |   | 1966/1972                            |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites Scottsdale  El Dorado Park Resort*      |   | 112                    |   | 1980                                 |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites Tucson St. Mary’s                  |   | 280                    |   | 1960/1971                            |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels and Suites San Diego                               |   | 131                    |   | 1946/1989                            |   | 1998                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| InnSuites Hotel and Suites Buena Park Best Western                  |   | 176                    |   | 1972/1980                            |   | 2002                         |   |
|                                                                |   |                   |   |                                 |   |                         |   |
| Total suites                                                        |   | 1,667                  |   |                                 |   |                         |   |

 

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* Subsequent to January 31, 2003, this property was sold to anaffiliate of Mr. Wirth.

 

See “Item 7 — Management’s Discussion and Analysis of FinancialCondition and Results of Operations - General” herein for a discussion ofoccupancy rates at the Hotels.

 

See Note 6 to the Trust’s Consolidated Financial Statements — “MortgageNotes Payable” herein for a discussion of mortgages encumbering the Hotels.

 

Item 3.               LEGAL PROCEEDINGS

 

The Trust is not a party to, nor are any of its properties subject to,any material litigation or environmental regulatory proceedings.

 

Item 4.                       SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to a vote of security holders duringthe fiscal quarter ended January 31, 2003.

 

PART II

 

Item 5.                       MARKETFOR THE TRUST’S SHARES AND RELATED SECURITY HOLDER MATTERS

 

The Trust’sShares of Beneficial Interest are traded on the American Stock Exchange underthe symbol “IHT.”  On April 25,2003, the Trust had 1,995,701 shares outstanding and 544 holders of record.

 

The followingtable sets forth, for the periods indicated, the high and low sales prices ofthe Trust’s Shares of Beneficial Interest, as quoted by the American StockExchange, as well as dividends declared thereon:

 

| **Fiscal Year 2003** |   | **High** |   | **Low** |   | **Dividends** | ** ** |
|----------------------|--------|----------|--------|---------|--------|---------------|------------|
| First Quarter        |   | 1.39     |   | 0.95    |   | —        |       |
| Second Quarter       |   | 2.60     |   | 1.25    |   | —        |       |
| Third Quarter        |   | 2.35     |   | 1.71    |   | —        |       |
| Fourth Quarter       |   | 2.00     |   | 1.15    |   | .01           |       |

 

| **Fiscal Year 2002** |   | **High** |   | **Low** |   | **Dividends** | ** ** |
|----------------------|--------|----------|--------|---------|--------|---------------|------------|
| First Quarter        |   | 2.56     |   | 2.06    |   | —        |       |
| Second Quarter       |   | 2.06     |   | 1.75    |   | —        |       |
| Third Quarter        |   | 2.06     |   | 1.50    |   | —        |       |
| Fourth Quarter       |   | 1.63     |   | 1.00    |   | .01           |       |

 

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The Trustintends to maintain a conservative dividend policy to facilitate reduction ofdebt and internal growth.  In fiscalyears 2003 and 2002, the Trust paid dividends of $0.01 per share in the fourthquarter of each year.

 

Pursuant tothe terms of certain credit agreements, the Partnership was restricted from makingdistributions to the Trust during fiscal year 2003 in excess of the amountrequired for the Trust to pay dividends of $0.01 per outstanding Share ofBeneficial Interest for fiscal year 2003. Similarly, the Trust may not be able to pay dividends in excess of suchamount per share during fiscal year 2004. See “Item 7 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Liquidity and Capital Resources” for adiscussion of such restrictions.

 

Item 6.                       SELECTEDFINANCIAL DATA

 

The followingselected financial data of the Trust as of and for the five fiscal years endedJanuary 31, 2003, has been derived from the audited consolidated financialstatements of the Trust.  Theconsolidated financial statements of the Trust as of and for the fiscal yearended January 31, 2003 were audited by McGladrey & Pullen, LLP,independent public accountants.  Theconsolidated financial statements of the Trust as of and for each of the fourfiscal years ended January 31, 2002 were audited by KPMG LLP, independentpublic accountants.  All of the datashould be read in conjunction with the respective consolidated financialstatements and related notes included herein.

 
|                                                               |   | **Year Ended  January 31,** |       |
|--------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                               |   | **2003**                         |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Total revenue                                                      |   | $                                | 26,940,473 |   | $ | 27,656,009 |   | $ | 9,727,206 |   | $ | 9,546,181 |   | $ | 9,909,758 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss from continuing operations                                |   | $                                | (3,445,948 | ) | $ | (3,383,316 | ) | $ | (2,594,754 | ) | $ | (951,811 | ) | $ | (193,071 | ) |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Loss per share from continuing operations – basic and diluted |   | $                                | (1.67      | ) | $ | (1.59 | ) | $ | (1.12 | ) | $ | (.40 | ) | $ | (.10 | ) |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Net loss                                                           |   | $                                | (3,445,948 | ) | $ | (3,539,402 | ) | $ | (2,594,754 | ) | $ | (951,811 | ) | $ | (193,071 | ) |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Loss per share – basic and diluted                            |   | $                                | (1.67      | ) | $ | (1.66 | ) | $ | (1.12 | ) | $ | (.40 | ) | $ | (.10 | ) |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Cash dividends paid and declared per share                         |   | $                                | 0.01       |   | $ | 0.01 |   | $ | 0.03 |   | $ | 0.02 |   | $ | 0.10 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Total assets                                                       |   | $                                | 61,494,579 |   | $ | 64,264,516 |   | $ | 63,905,561 |   | $ | 65,305,519 |   | $ | 67,804,770 |   |
|                                                               |   |                             |       |   |   |   |   |   |   |   |   |
| Notes and advances payable to banks, related parties, and others   |   | $                                | 48,823,561 |   | $ | 47,264,466 |   | $ | 44,525,300 |   | $ | 38,746,662 |   | $ | 36,924,834 |   |

 

See “Item 1 - Business - Historical Operations and FormationTransactions, - Hotel Acquisitions Following the Formation Transactions, and -Acquisition of InnSuites Hotels by the Trust” herein for a discussion of thechange in the nature of the business of the Trust over the course of the yearspresented above.  As a result, theinformation presented above is not comparative from year to year.

 

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Item 7.               MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

The followingdiscussion should be read in conjunction with the Trust’s consolidatedfinancial statements and notes thereto.

 

The accountingpolicies that we believe are most critical and involve the most subjectivejudgments include our estimates and assumptions of future revenue andexpenditures used to project cash flows. Future cash flows are used in the valuation calculation of our hotelproperties to determine the recoverability (or impairment) of the carryingamounts in the event management is required to test the asset forrecoverability of its carrying value under Statement of Financial AccountingStandards No. 144.  If the carryingamount of an asset exceeds the estimated future cash flows over its estimatedremaining life, the Trust recognizes an impairment expense to reduce theasset’s carrying value to its fair value. Fair value is determined by either the most current third-party propertyappraisal, if available, or the present value of future cash flows over theremaining life of the asset.  Ourevaluation of future cash flows is based on our historical experience and otherfactors, including certain economic conditions and committed future bookings.

 

AtJanuary 31, 2003, the Trust owned a 50.80% interest in the Hotels throughits sole general partner’s interest in the Partnership.  Recent transactions reflecting the Trust’scurrent ownership in the Partnership include the following:

 

On March 15, 1999, the Trust purchased 1 million additionalgeneral partner units in the Partnership for $2 million.  This transaction was fully funded byMr. Wirth who provided an unsecured loan to the Trust at 7% interestpayable annually beginning March 15, 2000.  On September 10, 2002, Mr. Wirth assigned his interestin this loan to Rare Earth Financial, L.L.C., an affiliate ofMr. Wirth.  A principal payment of $500,000is due on March 15, 2004 and the remaining principal and accrued interestis due on March 15, 2005.

 

On April 2, 1999, the Partnership made an unsecured loan to theTrust in the amount of $2.6 million. Annual interest only payments are due on March 1 of each year andare based on a 7% interest rate. The unpaid principal balance is due at maturity on April 2,2006.  The Trust used the proceeds ofthat loan to purchase 1.3 million general partner units in thePartnership.  The money loaned by the Partnershipwas generated by refinancing the Northern Phoenix hotel and borrowing anadditional $1.8 million that was secured by a mortgage on thatproperty.  The original mortgage notewas restructured to match the terms of the refinanced note, which bearsinterest 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.  Subsequent to the acquisition of theScottsdale property, the Trust recorded impairment charges on the property of$590,000 and $3.2 million in fiscal years 2003 and 2001, respectively.  Subsequent to fiscal year 2003, the Trustsold the Scottsdale property to an affiliate of Mr. Wirth.

 

As a result ofthe aforementioned transactions, the Trust increased its ownership interest inthe Partnership from approximately 18% to approximately 42% as of April 2,1999.  Other incremental, less material,transactions have contributed to the increase from 42% to the Trust’s 50.80%sole general partner’s interest in the Partnership at January 31, 2003.

 

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The expensesof the Trust consist primarily of property taxes, insurance, corporateoverhead, interest on mortgage debt, professional fees, depreciation of theHotels and hotel operating expenses. Under the terms of its Partnership Agreement, the Partnership isrequired to reimburse the Trust for all such expenses.  Accordingly, management believes that areview of the historical performance of the operations of the Hotels,particularly with respect to occupancy, average daily rate (“ADR”), calculatedas total room revenue divided by number of rooms sold, and revenue peravailable room (“REVPAR”), calculated as total room revenue divided by numberof rooms available, is appropriate for understanding revenue from thePercentage Leases.  ADR increasedslightly by $0.02 to $66.59 in fiscal year 2003 from $66.57 in fiscal year2002.  Occupancy increased 0.97% to60.46% in fiscal year 2003 from 59.49% in fiscal year 2002 primarily as aresult of the reduction in available rooms due to the conversion of studiosuites into two-room executive suites at certain of the properties.  This reduction in the number of suitesavailable also resulted in an increase in REVPAR of $0.64 to $40.26 in fiscalyear 2003 from $39.62 in fiscal year 2002.

 

The followingtable shows certain historical financial and other information for the periodsindicated:

 
|                                |   | **For the  Year Ended January 31,** |   |
|-------------------------------------|--------|------------------------------------------|--------|
|                                |   | **2003**                                 |   | **2002** |   | **2001** |   |
| Occupancy                           |   | 60.46                                    | %      | 59.49 | % | 63.23 | % |
| Average Daily Rate (ADR)            |   | $                                        | 66.59  |   | $ | 66.57 |   | $ | 66.46 |   |
| Revenue Per Available Room (REVPAR) |   | $                                        | 40.26  |   | $ | 39.62 |   | $ | 42.02 |   |

 

No assurance can be given that the trends reflected in this data willcontinue or that occupancy, ADR and REVPAR will not decrease as a result ofchanges in national or local economic or hospitality industry conditions.

 

The Trust enters into transactions with certain related parties fromtime to time.  For information relatingto such related party transactions see the following:

 

•                                          Fora discussion of management, licensing and intercompany agreements with certainrelated parties, see “Item 1 – Business – Introduction to Our Business, and –Acquisition of InnSuites Hotels by the Trust."

 

•                                          Fora discussion of acquisitions involving certain related parties, see “Item 1 –Business – Historical Operations and Formation Transactions, – HotelAcquisitions Following the Formation Transactions, and – Acquisition ofInnSuites Hotels by the Trust.”

 

•                                          Fora discussion of the sale of the Trust’s Scottsdale, Arizona hotel to a relatedparty subsequent to the close of fiscal year 2003, see Note 22 to the Trust’sConsolidated Financial Statements – “Subsequent Events.”

 

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•                                          Fora discussion of guarantees of the Trust’s mortgage notes payable by certainrelated parties, see Note 6 to the Trust’s Consolidated Financial Statements –“Mortgage Notes Payable.”

 

•                                          Fora discussion of notes and advances payable by the Trust to certain relatedparties, see Note 8 to the Trust’s Consolidated Financial Statements – “Notesand Advances Payable to Related Parties.”

 

•                                          Fora discussion of the Trust’s employment agreement with Mr.Wirth, see Note 13 tothe Trust’s Consolidated Financial Statements – “Advisory Agreement/EmploymentAgreements.”

 

***Results ofOperations of the Trust for the year ended January 31, 2003 compared tothe year ended January 31, 2002.***

 

As ofFebruary 1, 2001, the financial statements of InnSuites Hotels areconsolidated with those of the Trust. Therefore, all significant intercompany transactions and balances havebeen eliminated including percentage rent revenue for the Trust and percentagerent expense for InnSuites Hotels.  See“Item 1 - Business - Acquisition of InnSuites Hotels by the Trust.”

 

For the twelvemonths ended January 31, 2003, the Trust had total revenue of$26.9 million compared to $27.7 million for the twelve months endedJanuary 31, 2002, a decrease of approximately $716,000.  This decrease in total revenue is primarilydue to fewer occupied rooms caused by sluggish economic conditions, as well asthe general slow down in the travel and hospitality industries primarily due tothe negative impact of the threat of terrorism and the war with Iraq.  Total expenses of $31.8 million for thetwelve months ended January 31, 2003 reflect a decrease of approximately$224,000 compared to total expenses of $32.0 million for the twelve monthsended January 31, 2002.  Thedecrease is primarily due to the $1.6 million one-time charge for theacquisition of InnSuites Hotels incurred in fiscal year 2002, which was mostlyoffset by the $590,000 loss on impairment recorded in fiscal year 2003, anincrease of $300,000 in bad debt expense in fiscal year 2003 and an increase of$339,000 in depreciation expense in fiscal year 2003.

 

Expensesincurred in acquiring InnSuites Hotels for the year ended January 31, 2002relate to the one-time assumption of net liabilities of InnSuites Hotels thatwere associated with the acquisition. Comparable costs were not incurred in fiscal year 2003.

 

Loss onimpairment of hotel property was approximately $590,000 for the twelve monthsended January 31, 2003.  This lossresulted from the write-down for an impairment of the Scottsdale hotelproperty.  The operating performance ofthe Scottsdale property during that period indicated that the hotel propertysignificantly decreased in value, which required management to test theproperty for recoverability of book value under SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  Using management’s best estimate of undiscounted future cash flowsfrom the hotel, the hotel property’s carrying value was determined not to berecoverable.  The hotel property,including land, buildings and improvements and furniture, fixtures andequipment, was written down by $590,000 to the hotel’s market value and newbasis of $3.1 million.  The amountof impairment allocated to Shares

 

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of Beneficial Interest was$294,000 and the amount allocated to minority interest was $296,000.  The property’s decrease in value was due tochanges in the economic condition, and decreased prospects for futuredevelopment, in its immediate area.  Nosuch loss was recorded for the twelve months ended January 31, 2002.  Subsequent to year end, the impairedproperty was sold to Scottsdale Eldorado Resort, LLC, an affiliate of Mr.Wirth, for $3.1 million.

 

General andadministrative expenses include overhead charges for management, accounting,shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve monthsended January 31, 2003 and 2002, these expenses increased $453,000, or8.5%, to $5.8 million in fiscal year 2003 from $5.4 million in fiscalyear 2002.  This increase was primarilydue to $91,000 of expense related to the refinancing of the Tucson St. Mary’sand San Diego properties in fiscal year 2003, Best Western franchise fees of$88,000 related to the Buena Park property in fiscal year 2003 and an increaseof $300,000 in bad debt expense in fiscal year 2003.

 

Totaloperating expenses for the twelve months ended January 31, 2003 were$28.0 million, a decrease of approximately $227,000 from$28.2 million in the twelve months ended January 31, 2002.  The decrease was primarily due to theone-time charge associated with the acquisition of InnSuites Hotels in fiscalyear 2002 and was partially offset by the impairment charge related to theScottsdale property in fiscal year 2003 discussed above.

 

Total interestexpense was $3.8 million in both fiscal year 2003 and fiscal year 2002.  Interest on mortgage notes payable of$2.9 million was consistent with the prior year.  Interest on notes payable to banks decreased by 56.9%, or$218,000, to $165,000 from $384,000 due to lower outstanding balances on theTrust’s line of credit and term loans. Interest on notes payable to related parties increased 29.9%, or$159,000, to $692,000 from $533,000 due to an increase of $1.2 million innet borrowings from Mr. Wirth and his affiliates.

 

Real estateand personal property taxes, insurance and ground rent increased $131,000, or7.4%, to $1.9 million from $1.8 million in comparing the twelvemonths ended January 31, 2003 and 2002, respectively.  Real estate and personal property taxes andproperty insurance increased due to increased insurance premiums and increasedproperty tax assessments.

 

Hotel propertydepreciation for the twelve months ended January 31, 2003 compared to 2002increased approximately $339,000, or 11.1%, to $3.4 million from$3.1 million, respectively.  Theincrease resulted primarily from the recognition of depreciation in the fourthquarter on the Flagstaff property for the prior fifteen months.  Recording depreciation ceased on thisproperty between August 1, 2001 and October 31, 2002 while it wasclassified for accounting purposes as “held for sale.”  When on November 1, 2002 the propertywas reclassified for accounting purposes as “held and used,” the Trust begandepreciating the property again and had to take the fifteen months worth ofdepreciation that was suspended while the property was classified foraccounting purposes as “held for sale.”

 

The Trustrecognized extraordinary items of $322,000 for the twelve months endedJanuary 31, 2002 related to the early extinguishment of debt on itsOntario property.  This amount was comprisedof a  $577,000 prepayment penaltyrelated to the refinancing of the Ontario property, partially offset by a$255,000 gain on the refinancing of the mortgage note secured by the Trust’sTucson St. Mary’s property.

 

The Trust hada loss before minority interest of $4.9 million for the twelve monthsended January 31, 2003, compared to a loss before minority interest of$4.7 million in the prior year. After deducting the loss allocated to the minority interest of$1.4 million, the Trust had a net loss attributable to Shares ofBeneficial Interest of approximately $3.4 million.  This represented a decrease in net loss ofapproximately $93,000 attributable to Shares of Beneficial Interest comparingthe twelve months ended January 31, 2003 and 2002.   Basic and diluted net loss per share was$1.67 for the twelve months ended

 

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January 31, 2003 comparedto $1.66 for 2002.  For the twelvemonths ended January 31, 2002, the Trust recorded a net loss from extraordinaryitems of $322,000, of which approximately $156,000, or $0.07 per share, isattributable to Shares of Beneficial Interest.

 

***Results ofOperations of the Trust for the year ended January 31, 2002 compared tothe year ended January 31, 2001.***

 

Results ofoperations for the Trust for the fiscal year ended January 31, 2002reflect a full-year of operations for the eleven Hotels and InnSuitesHotels.  Results of operations for theTrust for the fiscal year ended January 31, 2001 reflect a full-year of operationsof ten of the Hotels, as well as a partial-year of operations for the BestWestern Airport Inn located in Albuquerque, New Mexico, but do not reflect theoperations of InnSuites Hotels.

 

For the twelvemonths ended January 31, 2002, the Trust had total revenues of$27.7 million compared to $9.7 million for the twelve months endedJanuary 31, 2001, an increase of $17.9 million.  This increase was due to the acquisition ofInnSuites Hotels and the inclusion of its revenues in the results of the Trustfor the twelve months ended January 31, 2002.  Total expenses of $32.0 million for the twelve months endedJanuary 31, 2002 reflect an increase of $17.1 million compared tototal expenses of $14.9 million for the twelve months endedJanuary 31, 2001.  The increase wasdue to the acquisition of InnSuites Hotels and the inclusion of its expenses inthe results of the Trust for the twelve months ended January 31, 2002.

 

Expensesincurred in acquiring InnSuites Hotels for the year ended January 31, 2002relate to the one-time assumption of net liabilities of InnSuites Hotels thatwere associated with the acquisition. Comparable costs were not incurred in fiscal year 2001.

 

Loss onimpairment of hotel property was $3.2 million for the twelve months endedJanuary 31, 2001.  This lossresulted from the write-down for an impairment of the Scottsdale hotelproperty.  The performance of theScottsdale hotel property during that period indicated that the hotel propertysignificantly decreased in value, which required management to evaluaterecoverability of the hotel property’s carrying value under SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.”  Using management’sbest estimate of undiscounted future cash flows from the hotel, the hotelproperty’s carrying value was determined not to be recoverable.  The hotel property, including land,buildings and improvements and furniture, fixtures and equipment, was written downby $3.2 million to the hotel’s market value and new basis of$3.7 million.  The amount ofimpairment allocated to Shares of Beneficial Interest was $1.5 million andthe amount allocated to minority interest was $1.7 million.  No such loss was recorded for the twelvemonths ended January 31, 2002.

 

General andadministrative expenses include overhead charges for management, accounting,shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve monthsended January 31, 2002 and 2001, these expenses increased$1.8 million to $5.4 million in fiscal year 2002 from$3.6 million in fiscal year 2001. This 49.1% increase was primarily due to the incurrence of expensesassociated with the acquisition of InnSuites Hotels and the inclusion of theexpenses of InnSuites Hotels in the results of the Trust.

 

Totaloperating expenses for the twelve months ended January 31, 2002 were$28.2 million, an increase of $17.1 million from $11.1 millionin the twelve months ended January 31, 2001.  The increase was primarily due to the incurrence of expensesassociated with the acquisition of InnSuites Hotels and the inclusion of theexpenses of InnSuites Hotels in the results of the Trust.

 

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Total interestexpense for the twelve months ended January 31, 2002 was consistent withthe prior year at $3.8 million. Interest on mortgage notes payable increased $516,000, or 21.9%, to$2.9 million from $2.4 million due to the refinancing of the Ontario,California property, the incurrence of the new mortgage on the Tucson (Oracle),Arizona property and a full year of mortgage interest on the Albuquerque, NewMexico property.  Interest on notespayable to banks decreased by 66.4%, or $758,000, to $384,000 from$1.1 million due to the replacement of the Trust’s $12 million CreditFacility with mortgages on certain of the Hotels.  Interest on notes payable to related parties increased 99.3%, or$266,000, to $533,000 from $267,000 due to an increase in net borrowings fromMr. Wirth and his affiliates in the amount of $1.3 million.

 

Real estateand personal property taxes, insurance and ground rent increased $307,000, or21.2%, to $1.8 million from $1.5 million in comparing the twelvemonths ended January 31, 2002 and 2001, respectively.  Real estate and personal property taxes andproperty insurance increased due to the inclusion of InnSuites Hotels’insurance expense in the results of the Trust in fiscal year 2002, theacquisition of the Albuquerque hotel during fiscal year 2001, increasedinsurance premiums and increased property tax assessments.

 

Hotel propertydepreciation for the twelve months ended January 31, 2002 compared to 2001increased approximately $216,000, or 7.7%, to $3.1 million from$2.8 million, respectively.  The increaseprimarily resulted from a full year of depreciation on the Albuquerque propertyand an increase in capitalized refurbishment costs of approximately$2.4 million in fiscal year 2002, as well as a full year of depreciationon assets capitalized in the prior year, partially offset by the suspension ofdepreciation on the Hotels which were held for sale beginning in the thirdquarter of fiscal year 2002.

 

The Trustrecognized extraordinary items of $322,000 for the twelve months endedJanuary 31, 2002 related to the extinguishments of debt.  This amount was a  $577,000 prepayment penalty related to the refinancing of theOntario property, partially offset by a $255,000 gain on the refinancing of theprevious mortgage note secured by the Tucson St. Mary’s property.

 

The Trust hada loss before minority interest of $4.7 million for the twelve monthsended January 31, 2002, compared to a loss before minority interest of$5.1 million in the prior year. After deducting the loss allocated to the minority interest of$1.2 million, the Trust had a net loss attributable to Shares ofBeneficial Interest of approximately $3.5 million.  This represented an increase in net loss of$945,000 attributable to Shares of Beneficial Interest comparing the twelvemonths ended January 31, 2002 and 2001, which was primarily due to theincurrence of expenses associated with the acquisition of InnSuites Hotels andthe inclusion of the expenses of InnSuites Hotels in the results of theTrust.  Basic and diluted net loss pershare was $1.66 for the twelve months ended January 31, 2002 compared to$1.12 for 2001.  For the twelve monthsended January 31, 2002, the Trust recorded a net loss from extraordinaryitems of $322,000, of which approximately $156,000, or $0.07 per share, was attributableto Shares of Beneficial Interest.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Through itsownership interest in the Partnership and, effective February 1, 2001,InnSuites Hotels, the Trust has its proportionate share of the benefits andobligations of the Partnership’s ownership interests and InnSuites Hotels’operational interests in the Hotels. The Trust’s principal source of cash to meet its cash requirements,including distributions to its shareholders, is its share of the Partnership’scash flow.  The Partnership’s principalsource of revenue is rent payments under the Percentage Leases.  InnSuites Hotels’ obligations under thePercentage Leases are unsecured and its ability to make rent payments to thePartnership under the Percentage Leases, and the Trust’s liquidity, includingits ability to make distributions to its shareholders, will depend upon theability of InnSuites Hotels to generate sufficient cash flow from hoteloperations.  Additionally, pursuant torestrictions contained in certain 

 

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credit agreements, Partnershipdistributions to the Trust during fiscal year 2003 were (and during fiscal year2004 will be) limited to an amount equal to $0.01 per outstanding Share ofBeneficial Interest.

 

As ofJanuary 31, 2003, the Trust has no commitments for capital expendituresbeyond a 4% reserve for refurbishment and replacements that is set asideannually, as described below.

 

On July 11,2001, the Trust obtained a term loan in the amount of $1,825,000 secured by itsScottsdale property and a $1,500,000 line of credit secured by its Flagstaffproperty.  The term loan and the line ofcredit mature on September 1, 2003.  Bothloans bear interest at the prime rate (4.25% at January 31, 2003) plus 1.0% andrequire the Trust to maintain a debt coverage ratio of 1.35 to 1.0 andInnSuites Hotels to maintain a gross operating profit of 80% of the annualprojections provided to the lender.  Asof January 31, 2003, the Trust had drawn $1,060,000 on the line of credit andthere was $1,587,250 outstanding on the term loan.  As of January 31, 2003, the Trust was not in compliance with thedebt coverage ratio covenant and the covenant restricting the Trust’s capitalexpenditures to $1.6 million during fiscal year 2003.  On April 30, 2003, the Trust received a waiver from the lenderfor the period ended January 31, 2003. The Management Company agreed to waive management fee payments and theLicensing Corp. agreed to waive licensing fee payments for a period of five monthsfrom May 1, 2002 through September 30, 2002, and the Partnership was restrictedfrom making distributions to the Trust during fiscal year 2003 in excess of theamount required****for the Trust topay dividends of $0.01 per outstanding Share of Beneficial Interest for fiscalyear 2003.  The waived management andlicensing fees have been expensed and recorded as a capital contribution due tothe related party relationship between the Trust and the Management Company andthe Licensing Corp.  If the Partnershipis in compliance with the debt coverage ratio covenant for any given monthafter September 30, 2002, the payments to the Management Company and theLicensing Corp. may be made for such month in an amount equal to one month ofaccrued but unpaid management and licensing fees.  Subsequent to September 30, 2002, the Trust was in compliancewith its debt coverage ratio covenant and made payments for one month to theManagement Company and made no payments to the Licensing Corp.

 

All feescharged by the Management Company and the Licensing Corp., except those waived,have been accrued for by the Trust.  TheTrust expects any suspension in fees during fiscal year 2004 to increase cashavailable to the Trust.  Subsequent toJanuary 31, 2003, the Trust sold its Scottsdale property to an affiliate of Mr.Wirth.  A portion of the proceeds ofthat sale were used to pay off the term loan described above.  The Trust expects to refinance its line ofcredit prior to its maturity on September 1, 2003.

 

InAugust 2001, the Trust listed its Scottsdale and Flagstaff properties forsale.  The Trust was not successful inselling the Flagstaff property during its listing period and reclassified itfor accounting purposes from “held for sale” to “held and used.”  Subsequent to the close of the Trust’sfiscal year 2003, an offer from an affiliate of Mr. Wirth was made topurchase the Scottsdale property at the property’s appraised value and wasaccepted by the Trust.  As discussedabove, the Trust incurred an impairment charge of approximately $590,000 on theScottsdale property during fiscal year 2003.

 

ThePartnership continues to contribute to a Capital Expenditures Fund (the“Fund”), from the rent paid under the Percentage Leases, an amount equal to 4%of InnSuites Hotels’ revenues from operation of the Hotels.  The Fund is restricted by the mortgagelender for six of the Trust’s properties. As of January 31, 2003, $45,787 was held in restricted capitalexpenditure funds and is included on the balance sheet as “Restricted Cash.”  The Fund is intended to be used for capitalimprovements to the Hotels and refurbishment and replacement of furniture,fixtures and equipment, in addition to other uses of amounts in the Fundconsidered appropriate from time to time. The Partnership anticipates making similar arrangements with respect tofuture hotels that it may acquire or develop. During the twelve months ended January 31, 2003 and 2002, theHotels spent approximately $1.7 million and $2.4 million,

 

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respectively, for capitalexpenditures.  The Trust considers themajority of these improvements to be revenue producing.  Therefore, these amounts have beencapitalized and are being depreciated over their estimated useful lives.  Pursuant to restrictions contained incertain credit agreements, however, the Partnership was not permitted to spendmore than $1.6 million on capital expenditures during fiscal year2003.  The Trust received a waiver fromthe lender for the period ending January 31, 2003.  The Trust plans to spend approximately$1.0 million for capital expenditures in fiscal year 2004.  InnSuites Hotels also spent approximately$1.9 million and $1.8 million during fiscal years 2003 and 2002,respectively, on repairs and maintenance and these amounts have been charged toexpense as incurred.

 

The Trust hasminimum debt payments of $5.1 million and $5.2 million due duringfiscal years 2004 and 2005, respectively. The Trust plans to refinance its term loan and line of credit, totaling$2.6 million, when they mature during fiscal year 2004.  The Trust also plans to refinance themortgage note on its Buena Park property, totaling $3.1 million, when itmatures in fiscal year 2005.  Theremainder of the Trust’s obligations during fiscal years 2004 and 2005 will bemet using revenue generated by the Hotels’ operations.  If revenue generated from operations isinsufficient to meet the Trust’s obligations as they come due, payments andterms for obligations owed to Mr. Wirth and affiliates in the amounts of$719,378 and $1.1 million due in 2004 and 2005, respectively, may berenegotiated to extend the terms of these loans.  Mr. Wirth and/or affiliates have also demonstrated theirwillingness to modify the terms of existing obligations and to create newobligations based on the cash needs of the Trust.  See Note 8 to the Trust’s Consolidated Financial Statements -“Notes and Advances Payable to Related Parties.”

 

Managementbelieves that cash on hand, future cash receipts from operations and borrowingsfrom affiliates in fiscal year 2004 will be sufficient to meet the Trust’sobligations as they become due for the next twelve months.  The Trust’s projection of future cashreceipts includes certain cost-cutting measures.  In addition, subsequent to January 31, 2003, the Trust sold itsScottsdale property, which had a history of net operating losses.  See Note 22 to the Trust’s ConsolidatedFinancial Statements – “Subsequent Events.”

 

The Trust mayseek to negotiate additional credit facilities or issue debt instruments.  Any debt incurred or issued by the Trust maybe secured or unsecured, long-term, medium-term or short-term, bear interest ata fixed or variable rate and be subject to such other terms as the Trustconsiders prudent.

 

The Trust willacquire or develop additional hotels only as suitable opportunities arise, andthe Trust will not undertake acquisition or redevelopment of properties unlessadequate sources of financing are available. Funds for future acquisitions or development of hotels are expected tobe derived, in whole or in part, from borrowings or from the proceeds ofadditional issuances of Shares of Beneficial Interest or other securities.  However, there can be no assurance that the Trustwill successfully acquire or develop additional hotels or that proceeds fromborrowings or issuances of Shares of Beneficial Interest will be available orin amounts and on terms sufficient to allow such transactions.

 

SHARE REPURCHASE PROGRAM

 

OnJanuary 2, 2001, the Board of Trustees approved a share repurchase programunder Rule 10b-18 of the Securities Exchange Act of 1934, as amended, forthe purchase of up to 250,000 limited partnership units in the Partnershipand/or Shares of Beneficial Interest in open market or privately negotiatedtransactions.  Additionally, onSeptember 10, 2002, the Board of Trustees approved the purchase of up to350,000 additional limited partnership units in the Partnership and/or Sharesof Beneficial Interest in open market or privately negotiated transactions.  Acquired Shares of Beneficial Interest areheld in treasury and are available for future acquisitions and financingsand/or for awards granted under the Trust’s 1997 Stock Incentive and OptionPlan.  During fiscal year 2003, theTrust acquired 32,330 Shares of Beneficial Interest in open market transactionsat an average price of $2.23 per share, an additional 159,013 Shares ofBeneficial Interest in privately negotiated transactions at an

 

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average price of $1.95 pershare and 257,101 limited partnership units in privately negotiatedtransactions at an average price of $2.02 per unit.  The Trust intends to continue repurchasing Shares of BeneficialInterest in compliance with applicable legal and American Stock Exchangerequirements.  The Trust is authorizedto repurchase an additional 329,900 limited partnership units and/or Shares ofBeneficial Interest pursuant to the share repurchase program.

 

OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

 

Other thanlease commitments, legal contingencies incurred in the normal course ofbusiness and employment contracts for key employees, the Trust does not haveany off-balance sheet financing arrangements or liabilities.  The Trust does not have any majority-owned subsidiariesthat are not included in the consolidated financial statements.  See “Item 7 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Accounting Matters”below for a discussion of new accounting interpretations with respect tovariable interest entities and the impact of such interpretations on the Trust;see also Note 2 to the Trust’s Consolidated Financial Statements – “Summary ofSignificant Accounting Policies – Application of New Accounting Standards.”

 

CONTRACTUAL OBLIGATIONS

 

The followingsummarizes our contractual obligations at January 31, 2003, and the effectsuch obligations are expected to have on our liquidity and cash flow in futureperiods:

 
|                                                                                                                   |   | **PAYMENTS  DUE BY PERIOD** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
| **CONTRACTUAL OBLIGATIONS**                                                                                            |   | **TOTAL**                   |       | **LESS  THAN  1 YEAR** |   | **1-3  YEARS** |   | **3-5  YEARS** |   | **THEREAFTER** |   |
|                                                                                                                   |   |                        |       |   |   |   |   |   |   |   |   |
| Mortgage notes payable, notes payable to  banks, other notes payable and notes and advances payable to related parties |   | $                           | 48,823,561 |   | $ | 5,064,041 |   | $ | 9,706,348 |   | $ | 8,503,204 |   | $ | 25,549,968 |   |
|                                                                                                                   |   |                        |       |   |   |   |   |   |   |   |   |
| Operating leases                                                                                                       |   | 7,053,873                   |       | 188,290 |   | 376,580 |   | 376,580 |   | 6,112,423 |   |
|                                                                                                                   |   |                        |       |   |   |   |   |   |   |   |   |
| TOTAL                                                                                                                  |   | $                           | 55,877,434 |   | $ | 5,252,331 |   | $ | 10,082,928 |   | $ | 8,879,784 |   | $ | 31,662,391 |   |

 

ACCOUNTING MATTERS

 

InJanuary 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities,” aninterpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements.”  Thisinterpretation requires an existing unconsolidated variable interest entity tobe consolidated by its primary beneficiary if the entity does not effectivelydisperse risk among all parties involved or if other parties do not havesignificant capital to finance activities without subordinated financial supportfrom the primary beneficiary.  Theprimary beneficiary is the party that absorbs a majority of the entity’sexpected losses, receives a majority of its expected residual returns, or both,as a result of holding variable interests, which are the ownership, contractualor other pecuniary interests in an entity. This interpretation is effective immediately for variable interestentities created after January 31, 2003 and no later than the beginning ofthe first interim or annual reporting period beginning after June 15, 2003for interests in variable interest entities that were acquired prior to

 

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February 1, 2003.  While management has not yet completed itsevaluation of the requirements of FIN 46, management believes it is reasonablypossible the Trust will consolidate, or be required to provide certainadditional disclosures with respect to, the Management Company and theLicensing Corp. when FIN 46 becomes effective.

 

InNovember 2002, the Financial Accounting Standards Board issued FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others,” aninterpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34.  Thisinterpretation outlines disclosure requirements in a guarantor’s financialstatements relating to any obligations under guarantees for which it may havepotential risk or liability, as well as clarifies a guarantor’s requirement torecognize a liability for the fair value, at the inception of the guarantee, ofan obligation under that guarantee.  Theinitial recognition and measurement provisions of this interpretation are effectivefor guarantees issued or modified after December 31, 2002 and thedisclosure requirements are effective for financial statements of interim orannual periods ending after December 15, 2002.  As of the date of this filing, we have not provided anyguarantees that would require recognition of liabilities under thisinterpretation.

 

InJune 2002, the Financial Accounting Standards Board issued SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  The standard requires therecognition of costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposalplan.  This standard is effective forexit or disposal activities initiated after December 31, 2002.  We do not expect the standard to have asignificant impact on our financial position or operating results.

 

InApril 2002, the Financial Accounting Standards Board issued SFASNo. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  The provisions of this standard, whichprimarily relate to the rescission of FASB Statement No. 4, eliminate therequirement that gains and losses from the extinguishment of debt be classifiedas extraordinary items unless they are considered unusual in nature andinfrequent in occurrence.  Theseprovisions are effective for fiscal years beginning after May 15,2002.  Accordingly, we will implementthe provisions of SFAS 145 beginning in fiscal year 2004.  At the time of implementation, we willreclassify any gains or losses from debt extinguishments in prior periods asincome (loss) from operations.  We donot expect that the implementation of this standard will have a significantimpact on our financial position or operating results.

 

InJune 2001, the Financial Accounting Standards Board issued SFAS 143,“Accounting for Asset Retirement Obligations,” which addresses financialaccounting and reporting obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  This standard is effective beginningFebruary 1, 2003.  We do not expectthat the implementation of this standard will have a material impact on ourconsolidated financial statements.

 

INFLATION

 

The Trust’srevenue is based on the underlying Hotel revenue.  Therefore, the Trust relies entirely on the performance of theHotels and InnSuites Hotels’ ability to increase revenue to keep pace withinflation.  Operators of hotels ingeneral, and InnSuites Hotels in particular, can change room rates quickly, butcompetitive pressures may limit InnSuites Hotels’ ability to raise rates fasterthan inflation.

 

FORWARD-LOOKING STATEMENTS

 

Certainstatements in this Form 10-K, including statements containing the phrases“believes,” “intends,” “expects,” “anticipates,” “predicted,” “will be,”“should be,” “looking ahead” or similar words,

 

17

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constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  The Trust intends that such forward-lookingstatements be subject to the safe harbors created by such Acts.  These forward-looking statements includestatements regarding the intent, belief or current expectations of the Trust,its Trustees or its officers in respect of (i) the declaration or paymentof 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 regardinginvestments, acquisitions, developments, financings, conflicts of interest andother 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 ofoperations.

 

Theseforward-looking statements reflect the Trust’s current views in respect offuture events and financial performance, but are subject to many uncertaintiesand factors relating to the operations and business environment of the Hotelswhich may cause the actual results of the Trust to differ materially from anyfuture results expressed or implied by such forward-looking statements.  Examples of such uncertainties include, butare not limited to:

 

•                  fluctuations inhotel occupancy rates;

•                  changes in roomrental rates which may be charged by InnSuites Hotels in response to marketrental rate changes or otherwise;

•                  interest ratefluctuations;

•                  changes infederal income tax laws and regulations;

•                  competition;

•                  any changes inthe Trust’s financial condition or operating results due to acquisitions ordispositions of hotel properties;

•                  real estate andhospitality market conditions;

•                  hospitalityindustry factors;

•                  terroristattacks or other acts of war;

•                  communicablediseases, such as SARS; and

•                  local ornational economic and business conditions, including, without limitation,conditions which may affect public securities markets generally, thehospitality industry or the markets in which the Trust operates or willoperate.

 

The Trust doesnot undertake any obligation to update publicly or revise any forward-lookingstatements whether as a result of new information, future events orotherwise.  Pursuant toSection 21E(b)(2)(E) of the Securities Exchange Act of 1934, thequalifications set forth hereinabove are inapplicable to any forward-lookingstatements in this Form 10-K relating to the operations of the Partnership.

 

Item 7A.             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Trust isexposed to interest rate risk primarily as a result of its mortgage notespayable, notes payable to banks, other notes payable and notes and advancespayable to related parties.  Theproceeds from these loans were used to maintain liquidity, fund capitalexpenditures and expand the Trust’s real estate investment portfolio andoperations.  The Trust’s interest raterisk management objective is to limit the impact of interest rate changes onearnings and cash flow and to lower its overall borrowing costs.  To achieve its objectives, the Trust borrowsusing fixed rate debt, when possible. The Trust could enter into derivative financial instruments such asinterest rate swaps, caps and treasury locks in order to mitigate its interestrate risk on a related financial instrument. To date, the Trust has not entered into any such derivativetransactions.

 

18

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The Trust’sinterest rate risk is monitored using a variety of techniques.  The table below presents the principalamounts, weighted average interest rates, fair value and other terms required,by year of expected maturity, in order to evaluate the expected cash flow andsensitivity to interest rate changes.

 
| **Debt Type**                                    |   | **Fiscal** |      | **Thereafter** |      | **Total** |      | **Fair Value** |      |
|--------------------------------------------------|--------|------------|-----------|----------------|-----------|-----------|-----------|----------------|-----------|
| **2004**                                         |   | **2005**   |      | **2006**       |      | **2007**  |      | **2008**       |
|                                             |   |       |      |           |      |      |      |           |      |   |   |   |   |   |   |   |   |
| Fixed rate debt (1)                              |   | $          | 2,181,433 |           | 2,094,888 |      | 4,434,728 |           | 3,334,339 |   | 4,963,093 |   | 21,565,595 |   | 38,574,076 |   | 38,866,979 |   |
|                                             |   |       |      |           |      |      |      |           |      |   |   |   |   |   |   |   |   |
| Average interest rate                            |   | 7.99       | %         | 8.00           | %         | 8.02      | %         | 8.04           | %         | 8.10 | % | 8.26 | % | 8.07 | % | 8.00 | % |
|                                             |   |       |      |           |      |      |      |           |      |   |   |   |   |   |   |   |   |
| Variable rate debt (1)                           |   | $          | 2,820,853 |           | 3,143,513 |      | 94,973    |           | 100,154   |   | 105,617 |   | 3,984,375 |   | 10,249,485 |   | 9,630,615 |   |
|                                             |   |       |      |           |      |      |      |           |      |   |   |   |   |   |   |   |   |
| Interest rate available on January 31, 2003 |   | 5.48       | %         | 5.56           | %         | 5.25      | %         | —         |      | — |   | — |   | 5.43 | % | 5.48 | % |

 

----

(1)          Thefair value of fixed rate debt and variable rate debt were determined based oncurrent rates offered for fixed rate debt and variable rate LIBOR debt withsimilar risks and maturities.

 

The tableincorporates only those exposures that exist as of January 31, 2003 anddoes not consider those exposures or positions which would arise after thatdate.  Moreover, because firmcommitments are not represented in the table above, the information presentedtherein has limited predictive value. As a result, the Trust’s interest rate fluctuations will depend on theexposures that arise during any particular period and future interest rates.

 

19

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Item 8.             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

INNSUITES HOSPITALITY TRUST

LIST OF CONSOLIDATED FINANCIAL STATEMENTS ANDSCHEDULE

 

The following consolidated financial statements of InnSuitesHospitality Trust are included in Item 8:

 

Independent Auditors’ Report – January 31, 2003;

 

Independent Auditors’ Report – January 31, 2002 and 2001;

 

Consolidated Balance Sheets – January 31, 2003 and 2002;

 

Consolidated Statements of Operations – YearsEnded January 31, 2003, 2002 and 2001;

 

Consolidated Statements of Shareholders’(Deficit) Equity – Years Ended January 31, 2003, 2002 and 2001;

 

Consolidated Statements of Cash Flow – YearsEnded January 31, 2003, 2002 and 2001; and

 

Notes to the Consolidated FinancialStatements – January 31, 2003, 2002 and 2001.

 

The following financial statement schedule of InnSuites HospitalityTrust is included in Item 14(a)1:

 

Schedule III– Real Estate and Accumulated Depreciation.

 

All other schedules are omitted, as the information is not required oris otherwise furnished.

 

20

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INNSUITES HOTELS, INC.

LIST OF FINANCIAL STATEMENTS

 

The following financial statements of InnSuites Hotels, Inc. areincluded in Item 8:

 

Independent Auditors’ Report;

 

BalanceSheet – January 31, 2001;

 

Statement of Operations – Year Ended January 31, 2001;

 

Statement of Shareholders’ Deficit – YearEnded January 31, 2001;

 

Statement of Cash Flows – Year Ended January 31, 2001; and

 

Notes to the Financial Statements – January 31, 2001.

 

All schedulesare omitted, as the information is not required or is otherwise furnished. Asof February 1, 2001, the financial statements of InnSuites Hotels, Inc.are consolidated with those of the Trust, when InnSuites Hotels, Inc. became awholly-owned subsidiary of the Trust.  See “Item 1 - Business - Acquisition of InnSuites Hotels by theTrust.”

 

21

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INDEPENDENTAUDITORS’ REPORT

 

To the Shareholders andBoard of Trustees

InnSuites Hospitality Trustand Subsidiaries

Phoenix, Arizona

 

We have audited theaccompanying consolidated balance sheet of InnSuites Hospitality Trust (the“Trust”) and Subsidiaries as of January 31, 2003 and the related consolidatedstatements of operation, shareholders’ (deficit) equity and cash flows for theyear then ended.  These financialstatements are the responsibility of the Trust’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of InnSuites Hospitality Trust andSubsidiaries as of January 31, 2003 and the results of their operations andtheir cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America.

 
| /s/  McGladrey & Pullen, LLP                                              |   |
|-------------------------------------------------------------------------------|--------|
|                                                                          |
| Phoenix, Arizona                                                              |
| March 21, 2003, except for  footnote 7 as to which the date is April 30, 2003 |

 

22

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INDEPENDENT AUDITORS’ REPORT

 

To the Shareholders andBoard of Trustees

InnSuites Hospitality Trustand Subsidiaries

Phoenix, Arizona

 

Our audit was made for thepurpose of forming an opinion on the basic consolidated financial statementstaken as a whole.  The consolidatedsupplemental schedule III is presented for purposes of complying with the Securitiesand Exchange Commission’s rules and is not a part of the basic consolidatedfinancial statements.  This schedule hasbeen subjected to the auditing procedures applied in our audit of the basicconsolidated financial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the basic consolidated financial statementstaken as a whole.

 
| /s/ McGladrey &  Pullen, LLP                                              |   |
|-------------------------------------------------------------------------------|--------|
|                                                                          |
| Phoenix, Arizona                                                              |
| March 21, 2003, except for  footnote 7 as to which the date is April 30, 2003 |

 

23

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INDEPENDENT AUDITORS’ REPORT

 

The Shareholders and Trustees

InnSuites Hospitality Trust:

 

We haveaudited the accompanying consolidated balance sheet of InnSuites HospitalityTrust (an Ohio real estate investment trust) and subsidiaries (the“Trust”) as of January 31, 2002, and the related consolidated statementsof operations, shareholders’ equity and cash flows for each of the years in thetwo-year period ended January 31, 2002. In connection with our audits of the aforementioned consolidatedfinancial statements, we have also audited the accompanying financial statementschedule. These consolidated financial statements and financial statementschedule are the responsibility of the Trust’s management.  Our responsibility is to express an opinionon these consolidated financial statements and financial statement schedulebased on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of InnSuitesHospitality Trust and subsidiaries as of January 31, 2002, and the resultsof their operations and their cash flows for each of the years in the two-yearperiod ended January 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.  Also in our opinion, the related financial statement schedule,when considered in relation to the basic 2002 and 2001 consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 
|                | /s/ KPMG LLP |   |
|---------------------|--------------|--------|
|                |         |
| Phoenix, Arizona    |         |
| April 30, 2002 |         |

 

24

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                                                               |   | **January 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                                                                                                               |   | **2003**             |       | **2002** |   |
| ASSETS                                                                                                                                                                             |   |                 |       |   |   |
| Hotel Properties, Net                                                                                                                                                              |   | $                    | 56,388,265 |   | $ | 55,626,720 |   |
| Hotel Properties Held for Sale                                                                                                                                                     |   | 3,100,000            |       | 6,229,233 |   |
| Cash and Cash Equivalents                                                                                                                                                          |   | 88,519               |       | — |   |
| Restricted Cash                                                                                                                                                                    |   | 45,787               |       | 174,980 |   |
| Accounts Receivable, net of Allowance for  Doubtful Accounts of $136,000 and $19,285, respectively                                                                                 |   | 596,665              |       | 965,875 |   |
| Prepaid Expenses and Other Assets                                                                                                                                                  |   | 1,275,343            |       | 267,708 |   |
| TOTAL ASSETS                                                                                                                                                                       |   | $                    | 61,494,579 |   | $ | 64,264,516 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                          |   |                 |       |   |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| LIABILITIES                                                                                                                                                                        |   |                 |       |   |   |
| Mortgage Notes Payable                                                                                                                                                             |   | $                    | 36,112,605 |   | $ | 35,202,069 |   |
| Notes Payable to Banks                                                                                                                                                             |   | 2,647,250            |       | 3,325,000 |   |
| Notes and Advances Payable to Related  Parties                                                                                                                                     |   | 9,901,153            |       | 8,666,360 |   |
| Other Notes Payable                                                                                                                                                                |   | 162,553              |       | 71,037 |   |
| Accounts Payable and Accrued Expenses,  including $626,758  and $417,207  payable to related parties in 2003 and 2002, respectively                                           |   | 3,903,274            |       | 3,744,442 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| TOTAL LIABILITIES                                                                                                                                                                  |   | 52,726,835           |       | 51,008,908 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| MINORITY INTEREST IN PARTNERSHIP                                                                                                                                                   |   | 10,017,926           |       | 11,728,792 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| SHAREHOLDERS’ (DEFICIT) EQUITY                                                                                                                                                |   |                 |       |   |   |
| Shares of beneficial interest, without par  value; unlimited authorization; 1,997,601 and 2,136,334 shares issued and  outstanding at January 31, 2003 and 2002, respectively |   | 626,122              |       | 3,101,878 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| Treasury Stock; 855,736 and 700,393 shares,  held at January 31, 2003 and 2002, respectively                                                                                  |   | (1,876,304           | )          | (1,575,062 | ) |
|                                                                                                                                                                               |   |                 |       |   |   |
| TOTAL SHAREHOLDERS’ (DEFICIT) EQUITY                                                                                                                                          |   | (1,250,182           | )          | 1,526,816 |   |
|                                                                                                                                                                               |   |                 |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                    |   | $                    | 61,494,579 |   | $ | 64,264,516 |   |

 

See accompanying notes toconsolidated financial statements

 

25

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS

 
|                                                                                                                                                            |   | **YEARS  ENDED JANUARY 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                                            |   | **2003**                     |       | **2002** |   | **2001** |   |
| REVENUE                                                                                                                                                         |   |                         |       |   |   |   |   |
| Room                                                                                                                                                            |   | $                            | 24,434,186 |   | $ | 24,790,737 |   | $ | — |   |
| Food and Beverage                                                                                                                                               |   | 1,514,896                    |       | 1,594,333 |   | — |   |
| Telecommunications                                                                                                                                              |   | 186,936                      |       | 256,172 |   | — |   |
| Rent Revenue from Affiliate                                                                                                                                     |   | —                       |       | — |   | 9,699,418 |   |
| Other                                                                                                                                                           |   | 804,455                      |       | 1,014,767 |   | 27,788 |   |
|                                                                                                                                                            |   |                         |       |   |   |   |   |
| TOTAL REVENUE                                                                                                                                                   |   | 26,940,473                   |       | 27,656,009 |   | 9,727,206 |   |
|                                                                                                                                                            |   |                         |       |   |   |   |   |
| OPERATING EXPENSES                                                                                                                                              |   |                         |       |   |   |   |   |
| Room                                                                                                                                                            |   | 6,737,985                    |       | 6,855,613 |   | — |   |
| Food and Beverage                                                                                                                                               |   | 1,563,778                    |       | 1,485,266 |   | — |   |
| Telecommunications                                                                                                                                              |   | 310,682                      |       | 359,775 |   | — |   |
| General and Administrative (includes  $1,119,333, $1,064,487 and $0 of management and licensing fees to related  parties for 2003, 2002 and 2001, respectively) |   | 5,809,698                    |       | 5,356,351 |   | 3,593,596 |   |
| Sales and Marketing                                                                                                                                             |   | 2,215,749                    |       | 2,148,347 |   | — |   |
| Repairs and Maintenance                                                                                                                                         |   | 1,893,859                    |       | 1,791,248 |   | — |   |
| Hospitality                                                                                                                                                     |   | 1,237,379                    |       | 1,360,039 |   | — |   |
| Utilities                                                                                                                                                       |   | 1,929,179                    |       | 1,972,060 |   | — |   |
| Hotel Property Depreciation                                                                                                                                     |   | 3,395,844                    |       | 3,056,489 |   | 2,840,819 |   |
| Real Estate and Personal Property Taxes,  Insurance and Ground Rent                                                                                             |   | 1,888,821                    |       | 1,757,991 |   | 1,450,921 |   |
| Other                                                                                                                                                           |   | 448,451                      |       | 496,334 |   | — |   |
| Expenses Incurred in Acquiring InnSuites  Hotels                                                                                                                |   | —                       |       | 1,608,482 |   | — |   |
| Loss on Impairment of Hotel Property                                                                                                                            |   | 589,687                      |       | — |   | 3,210,648 |   |
| TOTAL OPERATING EXPENSES (includes  $8,756,842, $8,524,902 and $0 in contract labor expense to related party for  2003, 2002 and 2001, respectively)            |   | 28,021,112                   |       | 28,247,995 |   | 11,095,984 |   |
| OPERATING LOSS                                                                                                                                                  |   | (1,080,639                   | )          | (591,986 | ) | (1,368,778 | ) |
| Interest Income                                                                                                                                                 |   | 1,453                        |       | 9,326 |   | 11,249 |   |
| TOTAL INTEREST INCOME                                                                                                                                           |   | 1,453                        |       | 9,326 |   | 11,249 |   |
| Interest on Mortgage Notes Payable                                                                                                                              |   | 2,930,253                    |       | 2,870,393 |   | 2,354,685 |   |
| Interest on Notes Payable to Banks                                                                                                                              |   | 165,362                      |       | 383,846 |   | 1,141,861 |   |
| Interest on Notes Payable and Advances  Payable to Related Parties                                                                                              |   | 691,978                      |       | 532,609 |   | 267,252 |   |
| Interest on Other Notes Payable                                                                                                                                 |   | 9,549                        |       | 7,373 |   | 5,492 |   |
| TOTAL INTEREST EXPENSE                                                                                                                                          |   | 3,797,142                    |       | 3,794,221 |   | 3,769,290 |   |
| LOSS BEFORE EXTRAORDINARY ITEMS AND  MINORITY INTEREST                                                                                                          |   | (4,876,328                   | )          | (4,376,881 | ) | (5,126,819 | ) |
| EXTRAORDINARY ITEMS                                                                                                                                             |   |                         |       |   |   |   |   |
| Loss on Early Extinguishment of Debt, net                                                                                                                       |   | —                       |       | (322,153 | ) | — |   |
| LOSS BEFORE MINORITY INTEREST                                                                                                                                   |   | (4,876,328                   | )          | (4,699,034 | ) | (5,126,819 | ) |
| LESS MINORITY INTEREST                                                                                                                                          |   | (1,430,380                   | )          | (1,159,632 | ) | (2,532,065 | ) |
| NET LOSS ATTRIBUTABLE TO SHARES OF  BENEFICIAL INTEREST                                                                                                         |   | $                            | (3,445,948 | ) | $ | (3,539,402 | ) | $ | (2,594,754 | ) |
| LOSS PER SHARE - Basic and Diluted                                                                                                                              |   |                         |       |   |   |   |   |
| Loss before Extraordinary Items                                                                                                                                 |   | $                            | (1.67      | ) | $ | (1.59 | ) | $ | (1.12 | ) |
| Extraordinary Items                                                                                                                                             |   | —                       |       | (0.07 | ) | — |   |
| NET LOSS                                                                                                                                                        |   | $                            | (1.67      | ) | $ | (1.66 | ) | $ | (1.12 | ) |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING                                                                                                                  |   |                         |       |   |   |   |   |
| – Basic and Diluted                                                                                                                                        |   | 2,068,508                    |       | 2,137,203 |   | 2,316,972 |   |
| CASH DIVIDENDS PER SHARE                                                                                                                                        |   | $                            | .01        |   | $ | .01 |   | $ | .03 |   |

 

See accompanying notes toconsolidated financial statements

 

26

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSHAREHOLDERS’ (DEFICIT) EQUITYFOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001

 
| BALANCE, JANUARY 31, 2000                 |   | $          | 8,631,266  |   |
|-------------------------------------------|--------|------------|------------|--------|
| Stock Compensation                        |   | 52,516     |       |
| Net Loss                                  |   | (2,594,754 | )          |
| Dividends                                 |   | (97,703    | )          |
| Purchase of Treasury Stock                |   | (1,032,687 | )          |
| Reallocation of Minority Interest         |   | 79,269     |       |
|                                      |   |       |       |
| BALANCE, JANUARY 31, 2001                 |   | 5,037,907  |       |
| Stock Compensation                        |   | 26,258     |       |
| Net Loss                                  |   | (3,539,402 | )          |
| Dividends                                 |   | (21,479    | )          |
| Purchase of Treasury Stock                |   | (80,621    | )          |
| Reallocation of Minority Interest         |   | 104,153    |       |
|                                      |   |       |       |
| BALANCE, JANUARY 31, 2002                 |   | 1,526,816  |       |
| Net Loss                                  |   | (3,445,948 | )          |
| Dividends                                 |   | (20,010    | )          |
| Purchase of Treasury Stock                |   | (382,135   | )          |
| Issuance of Shares of Beneficial Interest |   | 80,858     |       |
| Related Party Debt and Fees Forgiven      |   | 1,063,645  |       |
| Reallocation of Minority Interest         |   | (73,408    | )          |
|                                      |   |       |       |
| BALANCE, JANUARY 31, 2003                 |   | $          | (1,250,182 | )      |

 

See accompanying notes toconsolidated financial statements

 

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOW

 
|                                                                                                                                      |   | **YEARS  ENDED JANUARY 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                      |   | **2003**                     |       | **2002** |   | **2001** |   |
| CASH FLOW FROM OPERATING ACTIVITIES                                                                                                       |   |                         |       |   |   |   |   |
| Net Loss Attributable to Shares of  Beneficial Interest                                                                                   |   | $                            | (3,445,948 | ) | (3,539,402 | ) | (2,594,754 | ) |
| Adjustments to Reconcile Net Loss  Attributable to Shares of Beneficial Interest to Net Cash Provided by (Used  in) Operating Activities: |   |                         |       |   |   |   |   |
| Stock Compensation Expense                                                                                                                |   | —                       |       | 26,258 |   | 52,516 |   |
| Expenses Incurred in Acquiring InnSuites  Hotels                                                                                          |   | —                       |       | 1,608,482 |   |   |   |
| Impairment of Hotel Property                                                                                                              |   | 589,687                      |       | — |   | 3,210,648 |   |
| Provision for Uncollectible Receivable                                                                                                    |   | 375,209                      |       | — |   | 2,406,129 |   |
| Minority Interest                                                                                                                         |   | (1,430,380                   | )          | (1,159,632 | ) | (2,532,065 | ) |
| Hotel Property Depreciation                                                                                                               |   | 3,395,844                    |       | 3,056,489 |   | 2,840,819 |   |
| Loss on Disposal of Hotel Property                                                                                                        |   | 66,401                       |       | 45,866 |   | — |   |
| Amortization of Deferred Loan Fees                                                                                                        |   | 54,209                       |       | 54,690 |   | 117,440 |   |
| Capital Contribution from Waived Management  and Licensing Fee Expense                                                                    |   | 534,599                      |       | — |   | — |   |
| Changes in Assets and Liabilities  (Net of Effect of Acquisition of InnSuites Hotels in fiscal 2002):                                |   |                         |       |   |   |   |   |
| Increase in Rent Receivable from Affiliate                                                                                                |   | —                       |       | — |   | (2,406,129 | ) |
| (Increase) in Prepaid Expenses and Other  Assets                                                                                          |   | (61,844                      | )          | (608,104 | ) | (456,797 | ) |
| (Increase) Decrease in Accounts Receivable                                                                                                |   | (5,999                       | )          | 207,846 |   | — |   |
| Increase (Decrease) in Accounts Payable and  Accrued Expenses                                                                             |   | 1,058,596                    |       | 45,852 |   | (81,680 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES                                                                                      |   | 1,130,374                    |       | (261,655 | ) | 556,127 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH FLOW FROM INVESTING ACTIVITIES                                                                                                       |   |                         |       |   |   |   |   |
| Acquisition of InnSuites Hotels                                                                                                           |   | —                       |       | (11,531 | ) | — |   |
| Cash Acquired from InnSuites Hotels                                                                                                       |   | —                       |       | 85,294 |   |   |   |
| Improvements and Additions to Hotel  Properties                                                                                           |   | (1,684,244                   | )          | (2,366,932 | ) | (2,164,744 | ) |
| Change in Restricted Cash                                                                                                                 |   | 129,193                      |       | (88,599 | ) | 150,990 |   |
| Acquisition of Hotel                                                                                                                      |   | —                       |       | — |   | (525,000 | ) |
| Gain on Disposal of Furniture, Fixtures and  Equipment                                                                                    |   | —                       |       | — |   | 80,685 |   |
| Proceeds from Sale of Land                                                                                                                |   | —                       |       | — |   | 20,564 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                                                                     |   | (1,555,051                   | )          | (2,381,768 | ) | (2,437,505 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH FLOW FROM FINANCING ACTIVITIES                                                                                                       |   |                         |       |   |   |   |   |
| Principal Payments on Mortgage Notes Payable                                                                                              |   | (1,226,308                   | )          | (1,184,779 | ) | (698,090 | ) |
| Refinancing of Mortgage Notes Payable                                                                                                     |   | 2,136,844                    |       | 5,658,276 |   | 500,000 |   |
| Borrowings on Mortgage Notes Payable                                                                                                      |   | —                       |       | 5,100,000 |   | — |   |
| Payments on Notes Payable to Banks                                                                                                        |   | (677,750                     | )          | (11,300,000 | ) | — |   |
| Borrowings on Notes Payable to Banks                                                                                                      |   | —                       |       | 3,325,000 |   | — |   |
| Repurchase of Partnership Units                                                                                                           |   | (2,788                       | )          | (30,060 | ) | (876,665 | ) |
| Repurchase of Treasury Stock                                                                                                              |   | (73,066                      | )          | (80,621 | ) | (1,032,687 | ) |
| Payment of Dividends                                                                                                                      |   | (20,010                      | )          | (21,479 | ) | (97,703 | ) |
| Distributions to Minority Interest Holders                                                                                                |   | —                       |       | (68,480 | ) | (210,308 | ) |
| Payments on Notes and Advances Payable to  Related Parties                                                                                |   | (227,068                     | )          | (1,737,847 | ) | (2,583,743 | ) |
| Borrowings on Notes and Advances Payable to  Related Parties                                                                              |   | 668,826                      |       | 2,932,500 |   | 7,085,450 |   |
| Borrowings on Other Notes Payable                                                                                                         |   | —                       |       | 25,838 |   | 172,844 |   |
| Payments on Other Notes Payable                                                                                                           |   | (65,484                      | )          | (79,822 | ) | (272,823 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                                                                                 |   | 513,196                      |       | 2,538,526 |   | 1,986,275 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                                                                     |   | 88,519                       |       | (104,897 | ) | 104,897 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  YEAR                                                                                           |   | —                       |       | 104,897 |   | — |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                                                  |   | $                            | 88,519     |   | — |   | 104,897 |   |

 

See accompanying notes toconsolidated financial statements

 

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTSAS OF AND FOR THE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001

 

## 1.  NATURE OF OPERATIONS AND BASIS OFPRESENTATION

##  

InnSuitesHospitality Trust (the “Trust”) is a real estate investment trust (“REIT”) thatowns, through a partnership interest, eleven hotels with an aggregate of 1,667suites in Arizona, southern California and New Mexico.  The hotels operate as InnSuites Hotels.

 

The Trustoperates as a self-managed and self-administered “umbrellapartnership REIT,” with operations through an operating partnership, RRFLimited Partnership, a Delaware limited partnership (the “Partnership”).  The Trust is the sole general partner of thePartnership and owned 50.80% and 48.73% of the Partnership as ofJanuary 31, 2003 and 2002, respectively. The Trust’s weighted averageownership for the years ended January 31, 2003, 2002 and 2001 was 49.80%,48.45% and 46.57%, respectively.  ThePartnership holds hotel properties and incurs the related expenses.  The hotels are leased to InnSuites Hotels,Inc. (“InnSuites Hotels”), a wholly-owned subsidiary of the Trust.  InnSuites Hotels holds the franchiseagreement for each hotel and operates the hotels.  InnSuites Hotels contracted with Suite Hospitality Management,Inc. (the “Management Company”) for certain property management services andemployment services as of February 1, 2001.  The Management Company is owned 9.8% by the James F. Wirth,Chairman, President and Chief Executive Officer of the Trust.  The Management Company qualifies as anindependent third-party manager and operator of the hotels under the REITModernization Act (“RMA”) for income tax purposes.

 

InnSuitesHotels also contracts with InnSuites Licensing Corp. (the “Licensing Corp.”),an entity owned by Mr. Wirth, for certain trademark and licensingservices.

 

Prior toFebruary 1, 2001, InnSuites Hotels operated and managed all of the Hotels,with the assistance of InnSuites Innternational Hotels, Inc. (“InnSuitesInnternational”), an entity owned by Mr. Wirth.  Pursuant to management contracts, InnSuites Hotels paid InnSuitesInnternational an annual management fee of 2.5% of gross revenues for propertymanagement services.  Following theacquisition of InnSuites Hotels by the Trust effective February 1, 2001,InnSuites Hotels operates and manages the Hotels with the assistance of theManagement Company, an entity in which Mr. Wirth has a 9.8% ownershipinterest, pursuant to substantially the same terms as the InnSuitesInnternational management agreements. There were no termination fees charged in connection with thecancellation of the old management contracts. In exchange for its assumption of the management agreements, theManagement Company agreed to pay $911,320 to InnSuites Innternational in orderfor InnSuites Innternational to satisfy its liabilities.  Effective February 1, 2003, the annualmanagement fee charged by the Management Company to InnSuites Hotels was reducedto 2.0% of gross room revenues.  Thisreduction will be effective through January 31, 2005, when the annualmanagement fee will return to the level stated in the original agreement.

 

InnSuitesHotels pays the Licensing Corp. an annual licensing fee of 2.5% of grossrevenues (1.25% for those hotel properties which also carry a third-partyfranchise, such as Best Western® or Holiday Inn®) for trademark and licensingservices relating to the use of the InnSuites® name and marks.  The agreements were modified onNovember 1, 2002 to reduce the annual licensing fee to 2.0% of gross roomrevenues (1.0% for those properties which also carry a third-partyfranchise).  The modification is ineffect until January 31, 2005, when the trademark and licensing fees willreturn to the levels stated in the original agreement.

 

The RMAamended the tax laws to permit REITs, effective January 1, 2001, to leasehotels to a subsidiary that qualifies as a taxable REIT subsidiary.  As a result of the RMA restructuring effective

 

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February 1, 2001, theTrust’s operating results reflect property-level revenues and expenses in2003 and 2002 rather than rental income from InnSuites Hotels in 2001.

 

OnJanuary 31, 1998, the Trust contributed $2,081,000 to the Partnership inexchange for a 13.6% general partnership interest therein. The Trust is thesole general partner of the Partnership. The Partnership issued limitedpartnership interests representing 86.4% of the Partnership capital to acquiresix hotel properties from various entities. In addition, in order to acquire aseventh hotel property, through a wholly-owned subsidiary, RRF Sub Corp.,the Trust issued 647,231 Shares of Beneficial Interest in exchange for all ofthe outstanding shares of Buenaventura Properties, Inc., which owned a hotellocated in Scottsdale, Arizona. These seven hotels are collectively referred toas the “Initial Hotels.” The Initial Hotels, together with subsequent hotelacquisitions, are referred to herein as the “Hotels.” The Hotels are leased toInnSuites Hotels, formerly known as Realty Hotel Lessee Corp., pursuant toleases which contain provisions for rent based on the revenues of the Hotels(the “Percentage Leases”). Each Percentage Lease obligates InnSuites Hotels topay rent equal to the greater of the minimum rent (“Base Rent”) or a percentagerent based on the gross revenue of each Hotel. InnSuites Hotels holds thefranchise agreement for each Hotel. As of February 1, 2001, the Trust acquired100% of the ownership interests of InnSuites Hotels, which was owned 23% byMarc E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of theTrust, 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by  Mr. Wirth and his spouse, and 67.2% byunrelated third parties.

 

PARTNERSHIP AGREEMENT

 

ThePartnership Agreement of the Partnership provides for the issuance of twoclasses of limited partnership units, Class A and Class B. Suchclasses are identical in all respects, except that each Class A limitedpartnership unit in the Partnership shall be convertible into a like number ofShares of Beneficial Interest of the Trust, at any time at the option of theparticular limited partner, if the Trust determines that such conversion wouldnot cause the Trust to fail to qualify as a REIT.  The Class B limited partnership units may only becomeconvertible with the approval of the Board of Trustees, in its sole discretion.  As of January 31, 2003, 1,498,984Class A limited partnership units were issued and outstanding.  Additionally, as of January 31, 2003,5,000,974 Class B limited partnership units were outstanding toMr. Wirth and his affiliates, in lieu of the issuance of Class Alimited partnership units.  If all ofthe Class A and B limited partnership units were to be converted, thelimited partners in the Partnership would receive 6,499,958 Shares ofBeneficial Interest of the Trust.

 

BASIS OF PRESENTATION

 

As solegeneral partner of the Partnership, the Trust exercises unilateral control overthe Partnership and, since February 1, 2001, owned all of the issued andoutstanding classes of shares of InnSuites Hotels. Therefore, the financialstatements of the Partnership and InnSuites Hotels since February 1, 2001are consolidated with the Trust, and all significant intercompany transactionsand balances have been eliminated.

 

## 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

##  

USE OF ESTIMATES

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

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The Trust’soperations are affected by numerous factors, including the economy, competitionin the hotel industry and the effect of the economy on the travel andhospitality industries.  The Trustcannot predict if any of the above items will have a significant impact in thefuture, nor can it predict what impact, if any, the occurrence of these orother events might have on the Trust’s operations and cash flows.  Significant estimates and assumptions madeby management are used for, but not limited to, the estimated useful lives oflong-lived assets, the recoverability of such assets by their estimatedundiscounted future cash flows, the realization of the net operating losses andthe fair values of the long-lived assets.

 

HOTEL PROPERTIES

 

Hotelproperties are stated at cost and are depreciated using the straight-linemethod over estimated lives ranging from 5 to 40 years for buildings andimprovements and 3 to 15 years for furniture and equipment.

 

The Trustadopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LovedAssets,” in accounting for its hotel properties effective the beginning offiscal year 2003 and previously applied SFAS No. 121 in accounting for itshotel properties in fiscal years 2002 and 2001.  The adoption of SFAS No. 144 had no significant effect onthe financial statements.

 

Managementapplies SFAS No. 144 to determine when it is required to test an asset forrecoverability of its carrying value. If the carrying amount of an asset exceeds the estimated undiscountedfuture cash flows over its estimated remaining life, the Trust recognizes animpairment expense to reduce the asset’s carrying value to its fair value.  The estimated future cash flows are basedupon, among other things, assumptions about expected future operatingperformance, and may differ from actual cash flows.  Long-lived assets evaluated for impairment are grouped withother assets to the lowest level for which identifiable cash flows are largelyindependent of the cash flows of other groups of assets and liabilities.  If the sum of the projected undiscountedcash flows (excluding interest) is less than the carrying value of the assets,the assets will be written down to the estimated fair value in the period inwhich the determination is made. Management has determined that no impairment of long-lived assetscurrently exists.  The Trust determinesthe estimated useful lives of its assets based on the expected future economicbenefit of the asset.  Fair value isdetermined by either the most current third-party property appraisal, ifavailable, or the present value of future cash flows over the remaining life ofthe asset.  Evaluation of future cashflows is based on historical experience and other factors, including certaineconomic conditions and committed future bookings.

 

During fiscalyear 2001, underperformance of the Scottsdale hotel property indicated that thehotel property significantly decreased in value, which required management toevaluate recoverability of the hotel property carrying value under SFASNo. 121. Using management’s best estimate of undiscounted future cashflows from the hotel, the hotel property’s carrying value was determined not tobe recoverable. The hotel property, including land, buildings and improvementsand fixtures, furniture and equipment were written down by approximately$3.2 million to the hotel’s estimated fair value of $3.7 million.During fiscal year 2003, underperformance of the Scottsdale hotel propertyindicated that the hotel property sustained a further decrease in value, whichthen required management to evaluate recoverability of the hotel property’scarrying value under SFAS No. 144. Using management’s best estimate ofundiscounted future cash flows from the hotel, the hotel property’s carryingvalue was determined not to be recoverable. The hotel property, including land,buildings and improvements and fixtures, furniture and equipment were writtendown by approximately $590,000 to the hotel’s estimated fair value of$3.1 million based on an updated appraisal by an independent valuationfirm.  The property’s decrease in valuewas due to changes in the economic condition, and decreased prospects forfuture development, in its immediate area. The Scottsdale property was subsequently sold in March 2003 to

 

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Scottsdale Eldorado Resort,LLC, an affiliate of Mr. Wirth, for $3.1 million.  See Note 22 “Subsequent Events.”

 

Gains andlosses on sales of properties are recognized at the time of sale or deferred tothe extent required by GAAP.

 

The Trust willclassify a hotel as “held for sale” in the period in which (1) it has made thedecision to actively seek a buyer of the hotel and/or (2) a binding agreementto purchase the property has been signed under which the buyer has committed asignificant amount of refundable cash and no significant financingcontingencies exist which could cause the transaction not to be completed in atimely manner.  If these criteria aremet, the Trust will record an impairment loss if the fair value less the coststo sell is lower than the carrying amount of the hotel and will cease recordingdepreciation.

 

InAugust 2001, the Trust’s Flagstaff property was classified for accountingpurposes as “held for sale” and all depreciation on the property wassuspended.  On November 1, 2002,management changed its plans to sell the Flagstaff property.  Accordingly, the Trust reclassified theproperty for accounting purposes as “held and used” and recognized $186,000 ofdepreciation expense on that date as it was required to take all depreciationthat had been suspended during the period the property was classified foraccounting purposes as “held for sale.”

 

CASH AND CASH EQUIVALENTS

 

The Trustconsiders all highly liquid short-term investments with originalmaturities of three months or less to be cash equivalents.

 

REVENUE RECOGNITION

 

Room, food andbeverage and telecommunications revenue are recognized as earned as servicesare provided and items are sold.  Rentalincome from InnSuites Hotels in fiscal year 2001 was recognized as earned.

 

ALLOWANCE FOR UNCOLLECTIBLE RENT RECEIVABLES FROM AFFILIATE

 

For fiscalyear 2001, financial instruments, which potentially subjected the Trust tocredit risk, consisted of rent receivable from InnSuites Hotels.  The Trust periodically assessed thecollectibility of these receivables based on its evaluation of InnSuites Hotels’estimated future cash flows available for payment.  As a result, for fiscal year 2001, the Trust recorded a provisionof approximately $2.4 million for uncollectible receivables which arereflected in the accompanying consolidated statements of operations as acomponent of general and administrative expenses.

 

RECEIVABLES

 

Accountsreceivable are carried at original amounts less an estimate made for doubtfulreceivables based on a review of outstanding amounts on a quarterly basis.  Management records an allowance for doubtfulaccounts for 50% of the balances over 90 days and 100% of the balances over120 days.  Trade receivables arewritten off when deemed uncollectible. Recoveries, if any, of receivables previously written off are recordedwhen received.  The Trust does notcharge interest on accounts receivable balances.

 

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STOCK-BASED COMPENSATION

 

SFASNo. 123 “Accounting for Stock-Based Compensation” (“SFASNo. 123”), allows entities to apply the provisions of APB OpinionNo. 25 “Accounting for Stock Issued to Employees and Related Operations”(“APB No. 25”) and provide pro-forma net income and pro-formaearnings per share disclosures for employee stock option grants as if the fair-valuebased method defined in SFAS No. 123 had been applied.  The Trust has elected to apply theprovisions of APB No. 25. The following table illustrates the effect onnet loss and loss per share had compensation cost for its stock-basedcompensation plan been determined based on the grant date fair values of awardsas described in SFAS No. 123.

 
|                                         |   | **Years  ended January 31** |       |
|----------------------------------------------|--------|----------------------------------|------------|
|                                         |   | **2003**                         |       | **2002** |   | **2001** |   |
| Net loss:                                    |   |                             |       |   |   |   |   |
| As reported                                  |   | $                                | (3,445,948 | ) | $ | (3,539,402 | ) | $ | (2,594,754 | ) |
|                                         |   |                             |       |   |   |   |   |
| Deduct*                                      |   | $                                | (14,024    | ) | $ | (21,047 | ) | $ | (103,490 | ) |
|                                         |   |                             |       |   |   |   |   |
| Pro forma                                    |   | $                                | (3,459,972 | ) | $ | (3,560,449 | ) | $ | (2,698,244 | ) |
|                                         |   |                             |       |   |   |   |   |
| Net loss per share – basic and diluted: |   |                             |       |   |   |   |   |
| As reported                                  |   | $                                | (1.67      | ) | $ | (1.66 | ) | $ | (1.12 | ) |
|                                         |   |                             |       |   |   |   |   |
| Pro forma                                    |   | $                                | (1.67      | ) | $ | (1.67 | ) | $ | (1.16 | ) |

 

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*  Deduct:  Total stock-based employee compensationexpense determined under fair value based method for awards.

 

INCOME TAXES

 

The Trust haselected to be taxed as a REIT under Sections 856 through 860 of the U.S.Internal Revenue Code (the “Code”).  Toqualify as a REIT, the Trust must meet a number of organizational andoperational requirements, including a requirement that it currently distributeat least 90% of its adjusted taxable income to its shareholders.  It is management’s current intention toadhere to these requirements and maintain the Trust’s REIT status.  As a REIT, the Trust generally will not besubject to federal corporate income tax on that portion of its net income thatis currently distributed to shareholders. If the Trust fails to qualify as a REIT in any taxable year, it will besubject to federal income taxes at regular corporate rates (including anyapplicable alternative minimum tax) and may not be able to qualify as a REITfor four subsequent taxable years.  Evenif the Trust qualifies for taxation as a REIT, the Trust may be subject tocertain state and local taxes on its income and property, and to federal incomeand excise taxes on its undistributed taxable income.  In addition, taxable income from non-REIT activitiesmanaged through taxable REIT subsidiaries is subject to federal, state andlocal income taxes.

 

EffectiveFebruary 1, 2001, InnSuites Hotels became a wholly-owned taxableREIT subsidiary (“TRS”) of the Trust and, as such, is required to pay incometaxes at the applicable rates.  For theyears ended January 31, 2003 and 2002, InnSuites Hotels did not record anyincome tax provision since InnSuites Hotels incurred a net loss during eachfiscal year. Deferred tax assets of $560,000 and $255,000, as of January 31,2003 and January 31, 2002, respectively, were offset by 100% valuationallowances. The net operating loss carryforward as of January 31, 2003 isapproximately $1.4 million.

 

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Deferred taxesare provided on a liability method whereby deferred tax assets are recognizedfor deductible temporary differences and deferred tax liabilities arerecognized for taxable temporary differences. Temporary differences are the differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it isdetermined to be more likely than not that some portion or all of the deferredtax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

DIVIDENDS AND DISTRIBUTIONS

 

The Trustexpects to pay dividends that are largely dependent upon the receipt ofdistributions from the Partnership.

 

MINORITY INTEREST

 

The Trust accountsfor minority interest in accordance with EITF Issue No. 94-2“Treatment of Minority Interests in Certain Real Estate Investments” and EITFIssue No. 95-7 “Implementation Issues Related to the Treatment ofMinority Interest in Certain Real Estate Investment Trusts.”

 

Minorityinterest in the Partnership represents the limited partners’ proportionateshare of the capital and earnings of the Partnership.  Income or loss is allocated to the minority interest based on theweighted average limited partnership percentage ownership throughout the periodand capital is allocated based on the ownership percentage at year-end.  Any difference is recorded as a reallocationof minority interest as a component of shareholders’ equity.

 

LOSS PER SHARE

 

Basic anddiluted loss per share have been computed based on the weighted-averagenumber of shares outstanding during the periods and potentially dilutivesecurities.

 

For the twelvemonths ended January 31, 2003, 2002 and 2001, there were Class A andClass B limited partnership units outstanding, which are convertible intoShares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregateweighted-average of these Shares of Beneficial Interest would have been6,673,808, 6,810,436 and 7,062,778 for fiscal year 2003, 2002 and 2001,respectively.  These shares are anti-dilutivedue to the losses for each of the aforementioned years.  Therefore, these shares have not been usedin the calculation of diluted earnings per share.

 

For the twelvemonths ended January 31, 2003, 2002 and 2001, 253,200, 272,300 and344,100 stock options, respectively, are not included in the computationof diluted earnings per share as their inclusion would have an antidilutiveeffect because of losses and the fact that the option exercise prices aregreater than the average market price of the Trust’s Shares of BeneficialInterest.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

For disclosurepurposes, fair value is determined by using available market information andappropriate valuation methodologies. Due to their short maturities, cash and cash equivalents are carried atcost, which reasonably approximates fair value.

 

The fair valueof mortgage notes payable, notes payable to banks and notes and advances payableto related parties is estimated by discounting the future cash flows using thecurrent rates which would be available for similar loans having the sameremaining maturities.  The carryingvalue of accounts payable

 

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and accrued expenses and othernotes payable approximates fair value, due to their short-termnature.  See Note 15 “Fair Value ofFinancial Instruments.”

 

SEGMENT REPORTING

 

The Trustviews its operations as one operating business segment, a real estateinvestment trust that owns eleven hotels with an aggregate of 1,667 suites inArizona, southern California and New Mexico.

 

ADVERTISING COSTS

 

Amountsincurred for advertising costs with third parties are expensed asincurred.  Advertising expense totaledapproximately $1,205,213, $1,209,560 and $0 for the years endedJanuary 31, 2003, 2002 and 2001, respectively.

 

APPLICATION OF NEW ACCOUNTING STANDARDS

 

InJanuary 2003, the Financial Accounting Standards Board issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities,” aninterpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements.”  Thisinterpretation requires an existing unconsolidated variable interest entity tobe consolidated by their primary beneficiary if the entity does not effectivelydisperse risk among all parties involved or if other parties do not havesignificant capital to finance activities without subordinated financialsupport from the primary beneficiary. The primary beneficiary is the party that absorbs a majority of theentity’s expected losses, receives a majority of its expected residual returns,or both, as a result of holding variable interests, which are the ownership,contractual or other pecuniary interests in an entity.  This interpretation is effective immediatelyfor variable interest entities created after January 31, 2003 and no laterthan the beginning of the first interim or annual reporting period beginningafter June 15, 2003 for interests in variable interest entities that wereacquired prior to February 1, 2003. While management has not yet completed its evaluation of therequirements of FIN 46, management believes it is reasonably possible the Trustwill consolidate, or be required to provide certain additional disclosures withrespect to, the Management Company and the Licensing Corp. when FIN 46 becomeseffective.  The unaudited financialstatements of these entities for the year ended January 31, 2003 includedthe following:

 

| Gross revenue                 |   | $         | 9,999,082 |   |
|-------------------------------|--------|-----------|-----------|--------|
| Net income                    |   | 153,185   |      |
| Assets, primarily receivables |   | 1,706,716 |      |
| Liabilities, primarily debt   |   | 1,198,329 |      |
| Equity                        |   | 508,386   |      |

 

The Trust paida total of $369,896, $679,619 and $0 to the Management Company for managementfees for the years ended January 31, 2003, 2002 and 2001, respectively,and $8,756,842, $8,524,902 and $0 to the Management Company for leased laborfor the years ended January 31, 2003, 2002 and 2001, respectively.  The Trust also paid $214,838, $384,868 and$0 to the Licensing Corp. for licensing fees for the years endedJanuary 31, 2003, 2002 and 2001, respectively.

 

When FIN 46becomes effective, the net amount that may be added to the Trust’s balancesheet may be either reported as the cumulative effect of an accounting change,or by restating previously issued financial statements with a cumulative effectadjustment as of the beginning of the first year restated.  Since the Trust is not required to restateits financial statements it does not intend to do so.

 

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InNovember 2002, the Financial Accounting Standards Board issued FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others,” an interpretationof FASB Statements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34. This interpretation outlines disclosurerequirements in a guarantor’s financial statements relating to any obligationsunder guarantees for which it may have potential risk or liability, as well asclarifies a guarantor’s requirement to recognize a liability for the fairvalue, at the inception of the guarantee, of an obligation under thatguarantee. The initial recognition and measurement provisions of this interpretationare effective for guarantees issued or modified after December 31, 2002and the disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002. As of the dateof this filing, the Trust has not provided any guarantees that would requirerecognition as liabilities under this interpretation.

 

InJune 2002, the Financial Accounting Standards Board issued SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities.” The standard requires the recognition of costs associated withexit or disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. This standard is effective for exit ordisposal activities initiated after December 31, 2002. The Trust does notexpect the standard to have a significant impact on its financial position oroperating results.

 

InApril 2002, the Financial Accounting Standards Board issued SFASNo. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  The provisions of this standard, whichprimarily relate to the rescission of FASB Statement No. 4, eliminate therequirement that gains and losses from the extinguishment of debt be classifiedas extraordinary items unless they are considered unusual in nature andinfrequent in occurrence.  Theseprovisions are effective for fiscal years beginning after May 15, 2002.  Accordingly, the Trust will implement theprovisions of SFAS 145 beginning in fiscal year 2004.  At the time of implementation, the Trust will reclassify anygains or losses from debt extinguishments in prior periods as income (loss)from operations.  The Trust does notexpect that the implementation of this standard will have a significant impacton its financial position or operating results.

 

InJune 2001, the Financial Accounting Standards Board issued SFAS 143,“Accounting for Asset Retirement Obligations,” which addresses financialaccounting and reporting obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  This standard is effective beginningFebruary 1, 2003.  The Trust doesnot expect that the implementation of this standard will have a material impacton its consolidated financial statements.

 

RECLASSIFICATIONS

 

Certain prioryear balances on the balance sheet and statement of operations have beenreclassified to conform to current year presentation with no effect on net lossor total shareholders’ (deficit) equity.

 

36

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## 3.  HOTEL PROPERTIES

##  

As ofJanuary 31 of the respective years, hotel properties, including hotelproperties held for sale, consisted of the following:

 
|                              |   | **2003**   |       | **2002**   |   |
|-----------------------------------|--------|------------|------------|------------|--------|
|                              |   |       |       |       |   |
| Land                              |   | $          | 5,471,475  |       | $      | 5,501,235 |   |
| Building and improvements         |   | 56,279,307 |       | 56,089,725 |   |
| Furniture, fixtures and equipment |   | 10,438,749 |       | 9,746,604  |   |
|                              |   |       |       |       |   |
| Total hotel properties            |   | 72,189,531 |       | 71,337,564 |   |
| Less accumulated depreciation     |   | 12,701,266 |       | 9,481,611  |   |
|                              |   |       |       |       |   |
| Hotel properties, net             |   | $          | 59,488,265 |       | $      | 61,855,953 |   |

 

## 4.  ACQUISITIONS

##  

InDecember 2000, InnSuites Hotels and the Trust established independentreview groups to consider altering the current structure of the management andoperations of the Hotels pursuant to the provisions of the REIT ModernizationAct (the “RMA”). The RMA, among other things, permits the Trust to own thestock of a taxable REIT subsidiary (“TRS”) that may engage in businessespreviously prohibited by the Trust, including leasing hotels, provided thatsuch hotels are managed and operated by independent third parties, as definedby the RMA. Effective February 1, 2001, the Trust acquired all of theissued and outstanding common and preferred equity stock of InnSuites Hotels for$11,531 in cash consideration and the assumption of approximately$1.6 million of net liabilities. Prior to the acquisition, InnSuitesHotels was owned 23% by Marc E. Berg, Executive Vice President, Secretary,Treasurer and Trustee of the Trust, 9.8% by InnSuites Innternational Hotels,Inc., a wholly-owned affiliate of Mr. Wirth and his spouse, and 67.2% byunrelated parties.

 

Following theacquisition, InnSuites Hotels elected to be treated as a TRS under the RMA. Asa result, the management contracts relating to the Hotels between InnSuitesHotels and InnSuites Innternational Hotels, Inc. were terminated effectiveJanuary 31, 2001 and new management contracts were entered into onsubstantially similar terms with the Management Company, 9.8% of which is ownedby Mr. Wirth and which qualifies as an independent third party manager andoperator of the Hotels under the RMA. There were no termination fees charged in connection with thecancellation of the old management contracts. In exchange for its assumption of the management agreements, theManagement Company agreed to pay $911,320 to InnSuites Innternational in orderfor InnSuites Innternational to satisfy its liabilities.  Effective February 1, 2001, the Partnership,InnSuites Hotels and the Management Company entered into an amendedIntercompany Agreement whereby, subject to certain terms and conditions, thePartnership granted InnSuites Hotels a right a first refusal to lease, and theManagement Company a right of first refusal to operate, any real property acquiredby the Partnership.  In return, thePartnership was granted a right of first refusal to pursue opportunitiespresented to InnSuites Hotels or the Management Company to purchase investmentsin real estate, hotel properties, real estate mortgages, derivatives orentities that invest in any of the foregoing. To date, the Trust has not purchased or used derivatives.  In connection with the acquisition, the ratestructures of the Percentage Leases for the Hotels were amended to reflectcurrent economic and market conditions and the employees of InnSuites Hotelsbecame employees of the Management Company. The acquisition of InnSuites Hotels by the Trust resulted in thefollowing benefits: (1) a more direct relationship between the Hotels andthe Trust, (2) the inclusion of InnSuites Hotels’ revenues in excess ofrequired rent payments in the Trust’s consolidated

 

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financial reports, (3) theelimination of potential conflicts of interest and (4) the reduction ofcertain administrative costs relative to the operation of the Hotels and theadministration of the Percentage Leases.

 

EffectiveAugust 30, 2000, Albuquerque Suite Hospitality, LLC, a wholly-ownedsubsidiary of the Partnership, acquired 100% of the ownership interest in ahotel located in Albuquerque, New Mexico for $2,100,000.  The acquisition was funded with a firstmortgage on the Albuquerque property in the amount of $1,575,000 and cash fromloans made to the Partnership by Mr. Wirth and his affiliates. Thisacquisition was accounted for as a purchase.

 

## 5.  ALLOWANCE FOR DOUBTFUL ACCOUNTS

##  

After reviewof the estimated cash flow projection for fiscal year 2002, management recordeda provision for uncollectible rent receivable in the amount of approximately$2.4 million for the fiscal year 2001. The following reconciles the allowance for uncollectible rent receivablefrom InnSuites Hotels as of and for the years ended January 31, 2003, 2002and 2001:

 

Allowance for Uncollectible Rent Receivable

 

| Balance as of January 31, 2000 |   | $          | 2,845,732 |   |
|-------------------------------------|--------|------------|-----------|--------|
| Provision                           |   | 2,406,129  |      |
|                                |   |       |      |
| Balance as of January 31, 2001 |   | 5,251,861  |      |
| Write-offs                          |   | (5,251,861 | )         |
| Provision                           |   | —     |      |
|                                |   |       |      |
| Balance as of January 31, 2002 |   | —     |      |
| Write-offs                          |   | —     |      |
| Provision                           |   | —     |      |
|                                |   |       |      |
| Balance as of January 31, 2003 |   | $          | —    |   |

 

## 6.  MORTGAGE NOTES PAYABLE

##  

AtJanuary 31, 2003, the Trust had mortgage notes payable outstanding withrespect to nine of the eleven Hotels. The mortgage notes payable have various repayment terms and havescheduled maturity dates ranging from May 20, 2004 to April 27,2016.  Weighted average interest rateson the mortgage notes payable for the years ended January 31, 2003, 2002and 2001 were 8.33%, 8.13% and 8.25%, respectively.

 

OnAugust 23, 2002, the Trust refinanced the mortgage note payable on the SanDiego, California property.  The newmortgage note of $4.9 million bears interest at 8% per year for the firstfive years and at the prime rate plus 0.5% for the remaining term and matureson August 23, 2009.  The Trustmakes monthly principal and interest payments of $38,196.  The principal balance of the old note atJanuary 31, 2002 was $3,815,733.  Theprincipal balance of the new note at January 31, 2003 was $4,878,637.

 

OnJuly 26, 2002, the Trust refinanced the mortgage note payable on theTucson, Arizona St. Mary’s property. The new mortgage note of$4.5 million bears interest at the prime rate plus 1.0% and matures onJuly 29, 2009.  The Trust makesvariable monthly principal and interest payments.  The principal balance of the old note at January 31, 2002 was$3,600,000.  The principal balance ofthe new note at January 31, 2003 was $4,459,983.

 

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OnApril 27, 2001, the Trust secured a mortgage note payable on its Tucson,Arizona Oracle property in the amount of $5,100,000, which bears interest at 8.0% and matures on April 27,2016.  The Trust makes monthly principaland interest payments of $48,738.  Theprincipal balance of the note at January 31, 2003 and 2002 was $4,785,798and $4,979,306, respectively.

 

OnApril 18, 2001, the Trust refinanced its Ontario, California property for$9,000,000. The new mortgage note bears interest at 8.28% and matures onMay 11, 2011.  The Trust makesmonthly principal and interest payments of $71,141.  The principal balance of the note at January 31, 2003 and2002 was $8,828,766 and $8,936,480, respectively.

 

OnAugust 30, 2000, Albuquerque Suite Hospitality, LLC, a wholly-ownedsubsidiary of the Partnership, acquired 100% of the ownership interests in ahotel located in Albuquerque, New Mexico for $2,100,000.  The acquisition was funded in part with afirst mortgage on the property in the amount of $1,575,000 which bears interestat 8.875% and has a maturity date of September 1, 2015.  The Trust makes monthly principal andinterest payments of $15,858.  Theprincipal balance of the note at January 31, 2003 and 2002 was $1,444,580and $1,503,782, respectively.

 

OnMarch 30, 1999, the Trust modified and extended the mortgage agreement onits Northern Phoenix, Arizona property. An additional $1,750,000 was borrowed at 8.25% and matures onApril 1, 2014.  The original notewas restructured to match the terms of the new note.  The Trust makes monthly principal and interest payments of$42,886.  The principal balance of thenote at January 31, 2003 and 2002 was $3,737,720 and $3,935,061,respectively.

 

The Trust hasa mortgage note secured by its Yuma, Arizona property.  The note bears interest at 9.25% and matureson August 1, 2011.  The Trust makesmonthly principal and interest payments of $41,168.  The principal balance of the note at January 31, 2003 and2002 was $2,919,051 and $3,132,220, respectively.

 

The Trust hasa mortgage note secured by its Tempe, Arizona property.  The note bears interest at 8.5% and matureson January 1, 2006.  The Trustmakes monthly principal and interest payments of $27,573.  The principal balance of the note atJanuary 31, 2003 and 2002 was $1,915,818 and $2,076,359, respectively.

 

The Trust hasa mortgage note secured by its Buena Park, California property.  The note bears interest at the prime rate(4.25% at January 31, 2003) plus 1.5% and matures on May 20,2004.  The Trust makes variable monthlyprincipal and interest payments.  Theprincipal balance of the note at January 31, 2003 and 2002 was $3,142,252and $3,223,128, respectively.

 

Mr. Wirthand certain of his affiliates have guaranteed $9,833,128 of the mortgage notespayable.  The net book value ofproperties securing the mortgage notes payable at January 31, 2003 and2002 was $53,869,622 and $50,224,805, respectively.  See Note 10 “Minimum Debt Payments” for scheduled minimumpayments.

 

## 7.  NOTES PAYABLE TO BANKS

##  

On July 11,2001, the Trust obtained a term loan in the amount of $1,825,000 secured by itsScottsdale property and a $1,500,000 line of credit secured by its Flagstaffproperty.  The term loan and the line ofcredit mature on September 1, 2003. Both loans bear interest at the prime rate (4.25% at January 31, 2003)plus 1.0% and require the Trust to maintain a debt coverage ratio of 1.35 to1.0 and InnSuites Hotels to maintain a gross operating profit of 80% of theannual projections provided to the lender. As of January 31, 2003, the Trust had drawn $1,060,000 on the line ofcredit and there was $1,587,250 outstanding on the term loan.  As of January 31, 2003, the Trust was not incompliance with

 

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the debt coverage ratiocovenant and the covenant restricting the Trust’s capital expenditures to $1.6million during fiscal year 2003.  OnApril 30, 2003, the Trust received a waiver from the lender for the periodended January 31, 2003.  The ManagementCompany agreed to waive management fee payments and the Licensing Corp. agreedto waive licensing fee payments for a period of five months from May 1, 2002through September 30, 2002, and the Partnership was restricted from makingdistributions to the Trust during fiscal year 2003 in excess of the amountrequired****for the Trust to paydividends of $0.01 per outstanding Share of Beneficial Interest for fiscal year2003.  The waived management andlicensing fees have been expensed and recorded as a capital contribution due tothe related party relationship between the Trust and the Management Company andthe Licensing Corp.  If the Partnershipis in compliance with the debt coverage ratio covenant for any given monthafter September 30, 2002, the payments to the Management Company and theLicensing Corp. may be made for such month in an amount equal to one month ofaccrued but unpaid management and licensing fees.  Subsequent to September 30, 2002, the Trust was in compliancewith its debt coverage ratio covenant and made payments for one month to theManagement Company and made no payments to the Licensing Corp.

 

All feescharged by the Management Company and the Licensing Corp., except those waived,have been accrued for by the Trust.  TheTrust expects any suspension in fees during fiscal year 2004 to increase cashavailable to the Trust.  Subsequent to January31, 2003, the Trust sold its Scottsdale property to an affiliate of Mr.Wirth.  A portion of the proceeds ofthat sale were used to pay off the term loan described above.  The Trust expects to refinance its line ofcredit prior to its maturity on September 1, 2003.

 

## 8.  NOTES AND ADVANCES PAYABLE TO RELATEDPARTIES

##  

Notes andadvances payable to related parties consist of funds provided by Mr. Wirthand other related parties to repurchase Partnership units and to fund workingcapital and capital improvement needs. The aggregate amounts outstanding wereapproximately $9.9 million and $8.7 million as of January 31,2003 and January 31, 2002, respectively. The notes and advances payable torelated parties are as follows:

 

Notes Payable

 

OnJuly 27, 2000, the Trust purchased 311,326 of the Partnership’sClass 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 apromissory note in the amount of $745,000. The promissory note is secured bythe purchased Partnership units and bears interest at 7% per year.  The unpaid principal balance and accruedinterest is amortized over 36 months. The final payment is due August 27,2003. Beginning June 1, 2001, the Trust and Mr. Robson agreed todefer payments until March 2002, when payments resumed as scheduled.  Beginning May 1, 2002, the Trust andMr. Robson again agreed to defer payments until February 2003, whenpayments resumed as scheduled.  Theprincipal balance as of January 31, 2003 and 2002 was $553,449 for bothyears.

 

Advances Payable

 

Mr. Wirthmade an unsecured loan to the Trust in the amount of $2 million, bearinginterest at 7% per year, effective March 15, 1999. Interest only paymentswere due annually beginning March 15, 2000.  A principal payment of $500,000 is due on March 1,2004.  The remaining unpaid principalbalance and accrued interest is due on March 15, 2005. The Trust used theproceeds to purchase general partner units in the Partnership. OnSeptember 10, 2002, Mr. Wirth assigned his interest in this note toRare Earth Financial, L.L.C., an affiliate of Mr. Wirth.  The principal balance as of January 31,2003 and 2002 was $2,000,000 for both years.

 

40

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Mr. Wirthmade a secured loan that replaced four outstanding unsecured loans to the Trusttotaling $600,000. The promissory note is secured by second and third mortgageson the Flagstaff and Scottsdale, Arizona hotels, respectively, as well as thePartnership’s equity holdings in Baseline Hospitality Properties LimitedPartnership, which owns the Tempe, Arizona hotel.  The secured consolidated promissory note from the Trust in theamount of $600,000, bearing interest at 7% per year, became effectiveAugust 1, 2000.  The unpaidprincipal balance and accrued interest on the secured consolidated promissorynote is due on July 15, 2006.  OnSeptember 10, 2002, Mr. Wirth assigned his interest in this note toRare Earth Financial, L.L.C., an affiliate of Mr. Wirth. The principalbalance as of January 31, 2003 and 2002 was $600,000 for both years.

 

Mr. Wirthmade nine secured loans to the Trust in the total amount of $2,066,000, allbearing interest at 7% per year, effective varying from August 15, 2000 toApril 27, 2001. The Trust used the proceeds to acquire the Albuquerque,New Mexico hotel and to fund operations. The promissory note is secured bysecond and third mortgages on the Flagstaff and Scottsdale, Arizona hotels,respectively, as well as the Partnership’s equity holdings in BaselineHospitality Properties Limited Partnership, which owns the Tempe, Arizonahotel.  The unpaid principal balance andaccrued interest on the unsecured promissory note is due on July 15, 2006.On September 10, 2002, Mr. Wirth assigned his interest in this noteto Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth. The principalbalance as of January 31, 2003 and 2002 was $1,347,000 for both years.

 

OnJuly 27, 2000, the Partnership repurchased 300,000 of the Trust’s Sharesof Beneficial Interest from Mr. Wirth and/or his affiliates, issuing 10secured promissory notes in the aggregate amount of $720,000 and $3,000 cash.The promissory notes are secured by the repurchased shares and bear interest at7% per year.  The unpaid principal balancesand accrued interest are due at various dates ranging from August 27, 2000to July 27, 2003. Beginning June 1, 2001, the Trust and thenoteholders agreed to defer payments until March 2002, when paymentsresumed as scheduled. Beginning March 2002, the Trust and the noteholdersagain agreed to defer payments until May 2003 when payments will resume asscheduled.  The principal balance as ofJanuary 31, 2003 and 2002 was $282,454 and $506,911, respectively.

 

Rare EarthDevelopment Company, an affiliate of Mr. Wirth, made fifteen unsecuredloans to the Trust in the total amount of $3,802,500, all bearing interest at7% per year. The Trust used the proceeds to fund operations. The unpaidprincipal balances and accrued interest were due on July 15, 2002. However,the term of the loans were extended to July 15, 2007.  On September 10, 2002, Rare EarthDevelopment Company assigned its interest in the note to Rare Earth Financial,L.L.C., an affiliate of Mr. Wirth. The principal balance as of January 31, 2003 and 2002 was$3,802,500 and $3,659,000, respectively. Subsequent to fiscal year 2003, the Trust sold its Scottsdale, Arizonaproperty to an affiliate of Mr. Wirth. In connection with the sale of the Scottsdale property, $1.1 million ofthis note was paid off using proceeds from such sale.  See Note 22 “Subsequent Events.”

 

On May 1,2002, Mr. Wirth received an unsecured promissory note from the Trust forinterest due and payable totaling $158,667. The unsecured promissory note bears interest at 7% per year and matureson March 15, 2004.  OnJanuary 31, 2003, Mr. Wirth forgave the note and the Trust recognizeda capital contribution of $158,667.

 

OnJuly 15, 2002, Mr. Wirth received an unsecured promissory note fromthe Trust for interest due and payable totaling $200,153.  The unsecured promissory note bears interestat 7% per year and matures on July 15, 2006.  On January 31, 2003, Mr. Wirth forgave the note and theTrust recognized a capital contribution of $200,153.

 

OnJuly 15, 2002, Rare Earth Development Company, an affiliate of Mr. Wirth,received an unsecured promissory note from the Partnership for interest due andpayable totaling $311,809.  Theunsecured promissory note bears interest at 7% per year and matures onJuly 15, 2007.  On January 31,2003,

 

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Rare Earth Development Companyforgave the note from the Partnership and the Trust recognized its share of the$311,809 capital contribution.

 

OnJuly 25, 2002, the Trust purchased 225,390 Class B Partnership Unitsin the Partnership from Hulsey Hotels Corporation, an affiliate ofMr. Wirth, for $439,511, issuing a secured promissory note for $438,000and $1,511 cash.  The note is secured bythe purchased units, bears interest at 7% per year and is amortized over 48months, with monthly principal and interest payments beginning on April 1,2003.  The principal balance as ofJanuary 31, 2003 was $438,000.

 

OnJuly 26, 2002, the Trust repurchased 118,513 Shares of Beneficial Interestin the Trust from Mr. Wirth for $231,100, issuing a secured promissorynote for $230,000 and $1,100 cash.  Thenote is secured by the repurchased shares, bears interest at 7% per year and isamortized over 48 months, with monthly principal and interest paymentsbeginning on April 1, 2003.  Theprincipal balance as of January 31, 2003 was $230,000.

 

OnJuly 26, 2002, InnSuites Hotels purchased 65,000 Shares of BeneficialInterest in the Trust from Mr. Wirth for $126,750, issuing an unsecuredpromissory note for $125,000 and $1,750 cash. The unsecured promissory note bears interest at 7% per year and isamortized over 48 months, with monthly principal and interest paymentsbeginning on April 1, 2003.  Theprincipal balance as of January 31, 2003 was $125,000.

 

OnOctober 8, 2002, Capital Resource Lenders-I, L.L.C., an affiliate ofMr. Wirth, received a secured promissory note in the amount of $125,000from the Partnership.  The promissorynote is secured by the Scottsdale, Arizona hotel.  The funds were used to pay down the term loan on the Scottsdaleproperty.  The secured promissory notebears interest at the greater of 8.0% or the prime rate plus 0.5% per year, notto exceed 10.0% per year, with monthly payments based on a twenty year amortizationwith the remaining unpaid principal and interest due on September 30,2009.  The principal balance as ofJanuary 31, 2003 was $125,000.

 

CapitalResource Lenders-I, L.L.C., an affiliate of Mr. Wirth, received threesecured promissory notes in the amount of $287,750 from the Partnership witheffective dates ranging from November 21, 2002 to January 7,2003.  The promissory note is secured bythe Scottsdale, Arizona hotel.  Thefunds will be used to pay down the term loan on the Scottsdale property.  The secured promissory notes bears interestat the greater of 8.0% or the prime rate plus 0.5% per year, not to exceed10.0% per year, with monthly payments based on a twenty year amortization withthe remaining unpaid principal and interest due on September 30, 2009.  The principal balance as of January 31,2003 was $287,750.

 

OnJanuary 31, 2003, Fort Worth/Dallas Suite Hospitality Partnership, anaffiliate of Mr. Wirth, received an unsecured promissory note in theamount of $110,000 from the Partnership. The Partnership used the proceeds to fund operations.  The secured promissory note bears interestat 7.0% and matures on February 5, 2003. The note was paid in full onFebruary 5, 2003.  The principal balanceas of January 31, 2003 was $110,000.

 

The Trust paidinterest on related party notes to Mr. Wirth and his affiliates in theamounts of $28,373, $222,047 and $185,597 for the twelve months endedJanuary 31, 2003, 2002 and 2001, respectively.

 

## 9.  OTHER NOTES PAYABLE

##  

As ofJanuary 31, 2003, the Trust had outstanding $162,542 in secured promissorynotes to unrelated third parties arising from the repurchase of 69,533Class A limited partnership units and 40,500 Shares of BeneficialInterest.  The promissory notes bearinterest at 7% per year and are due in varying

 

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monthly payments throughOctober 2004.  The repurchasedunits and shares secure the notes.  Asof January 31, 2002, the Trust had outstanding $71,037 in secured promissorynotes to unrelated third parties arising from the repurchase of certain limitedpartnership units and Shares of Beneficial Interest.

 

## 10.  MINIMUM DEBT PAYMENTS

##  

Scheduledminimum payments of debt as of January 31, 2003 are as follows:

 

| **FISCAL  YEAR ENDED** |   | **AMOUNT** |       |
|------------------------|--------|------------|------------|
| 2004                   |   | $          | 5,064,041  |   |
| 2005                   |   | 5,176,647  |       |
| 2006                   |   | 4,529,701  |       |
| 2007                   |   | 3,434,492  |       |
| 2008                   |   | 5,068,710  |       |
| Thereafter             |   | 25,549,970 |       |
|                   |   |       |       |
|                   |   | $          | 48,823,561 |   |

 

## 11.  DESCRIPTION OF CAPITAL STOCK

##  

Holders of theTrust’s Shares of Beneficial Interest are entitled to receive dividends whenand if declared by the Board of Trustees of the Trust out of funds legallyavailable therefore.  The holders ofShares of Beneficial Interest, upon any liquidation, dissolution or winding-downof the Trust, are entitled to share ratably in any assets remaining afterpayment in full of all liabilities of the Trust.  The Shares of Beneficial Interest possess ordinary voting rights,each share entitling the holder thereof to one vote.  Holders of Shares of Beneficial Interest do not have cumulativevoting rights in the election of Trustees and do not have preemptive rights.

 

OnJanuary 2, 2001, the Board of Trustees approved a share repurchase programunder Rule 10b-18 of the Securities Exchange Act of 1934, asamended, for the purchase of up to 250,000 limited partnership units in the Partnershipand/or Shares of Beneficial Interest in open market or privately negotiatedtransactions. Additionally, on September 10, 2002, the Board of Trusteesapproved the purchase of up to 350,000 additional limited partnership units inthe Partnership and/or Shares of Beneficial Interest in open market orprivately negotiated transactions. Acquired Shares of Beneficial Interest are held in treasury and areavailable for future acquisitions and financings and/or for awards grantedunder the Trust’s 1997 Stock Incentive and Option Plan.  During fiscal year 2003, the Trust acquired32,330 Shares of Beneficial Interest in open market transactions at an averageprice of $2.23 per share, an additional 159,013 Shares of Beneficial Interestin privately negotiated transactions at an average price of $1.95 per share,and 257,101 limited partnership units in privately negotiated transactions atan average price of $2.02 per unit.  TheTrust intends to continue repurchasing Shares of Beneficial Interest incompliance with applicable legal and American Stock Exchange requirements.  The Trust is authorized to repurchase anadditional 329,900 limited partnership units and/or Shares of BeneficialInterest pursuant to the share repurchase program.

 

For the yearsended January 31, 2003, 2002 and 2001, the Trust repurchased 191,343,49,150 and 461,743 Shares of Beneficial Interest at an average price of $2.00,$1.64 and $2.24 per share, respectively. These shares are accounted for as treasury stock in the statement ofshareholders’ (deficit) equity.

 

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## 12.  FEDERAL INCOME TAXES

##  

The Trust has an income tax net operating loss carryforward ofapproximately $20.0 million at January 31, 2003. Net operating losscarryforwards expire beginning in fiscal year 2008 and ending in fiscal year2023. The quarterly allocation of cash dividends paid per share and thecharacterization of dividends as either ordinary income or return of capitalfor individual shareholders’ income tax purposes were as follows:

 
|            |   | **CALENDAR  2002**   |   | **CALENDAR  2001**     |   | **CALENDAR  2000** |   |
|-----------------|--------|----------------------|--------|------------------------|--------|--------------------|--------|
| **Month  Paid** |   | **Ordinary  Income** |   | **Return of  Capital** |   | **Total  Paid**    |   | **Ordinary  Income** |   | **Return of  Capital** |   | **Total  Paid** |   | **Ordinary  Income** |   | **Return of  Capital** |   | **Total  Paid** |   |
|            |   |                 |   |                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| January         |   | —               |   | $                      | .01    |               | $      | .01 |   | — |   | — |   | — |   | — |   | $ | .01 |   | $ | .01 |   |
| May             |   | —               |   | —                 |   | —             |   | — |   | — |   | — |   | — |   | .01 |   | .01 |   |
| July            |   | —               |   | —                 |   | —             |   | — |   | — |   | — |   | — |   | .01 |   | .01 |   |
| October         |   | —               |   | —                 |   | —             |   | — |   | — |   | — |   | — |   | .01 |   | .01 |   |
| Total           |   | —               |   | $                      | .01    |               | $      | .01 |   | — |   | — |   | — |   | — |   | $ | .04 |   | $ | .04 |   |

 

The tax statusof distributions to shareholders in calendar 2003 will be dependent on thelevel of the Trust’s earnings in that year. If certain changes in the Trust’s ownership should occur, there could bean annual limitation on the amount of carryforwards that can be utilized, whichcould potentially impair the ability to utilize the full amount of thecarryforwards.

 

The totaldividends per share applicable to operating results for the years endedJanuary 31, 2003, 2002 and 2001, amounted to $0.01 per share, $0.01 pershare and $0.03 per share, respectively.

 

The Trust andInnSuites Hotels have federal net operating loss carryforwards as follows:

 
|     |   | **Amount** |       |
|----------|--------|------------|------------|
| **Year** |   | **Trust**  |       | **InnSuites Hotels** |   |
| 2008     |   | $          | 4,476,203  |   | $ | — |   |
| 2012     |   | 5,056,761  |       | — |   |
| 2018     |   | 3,883,556  |       | — |   |
| 2019     |   | 1,163,799  |       | — |   |
| 2020     |   | 1,979,025  |       | — |   |
| 2021     |   | 250,847    |       | — |   |
| 2022     |   | 1,580,590  |       | 637,793 |   |
| 2023     |   | 1,439,000  |       | 730,000 |   |
|     |   | $          | 19,829,781 |   | $ | 1,367,793 |   |

##  

## 13.  ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS

##  

Mr. Wirthhas an employment agreement with the Trust that expires inDecember 2007.  The employmentagreement provides that Mr. Wirth received no compensation from the Trustas long as a previously enforceable advisory agreement was in effect.  However, pursuant to the terms of theemployment agreement, since the Advisor (as defined in the advisory agreement)no longer provides services to the Partnership or the Trust, Mr. Wirth isto be compensated at an amount up to the same annual basis as the Advisor wouldhave been compensated under the terms of the advisory agreement had it remainedin effect.  Mr. Wirth is currentlybeing compensated, however, at a lesser rate of $126,000 a year.

 

44

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## 14.  OTHER RELATED PARTY TRANSACTIONS

##  

The Partnershipis responsible for all expenses incurred by the Trust in accordance with thePartnership Agreement.

 

The InitialHotels were acquired by the Partnership from entities in which Mr. Wirthand his affiliates had substantial ownership interests.  Mr. Wirth and his affiliates received4,017,361 Class B limited partnership units and 647,231 Shares ofBeneficial Interest in the Trust in exchange for their interests in the InitialHotels.  As of January 31, 2003 and2002, Mr. Wirth and his affiliates held 5,000,974 and 5,226,364Class B limited partnership units, respectively.  As of January 31, 2003 and 2002, Mr. Wirth and hisaffiliates held 455,000 and 633,513 Shares of Beneficial Interest in the Trust,respectively.

 

AtJanuary 31, 2003 and 2002, the Trust owned a 50.80% interest and 48.73%interest, respectively, in the Hotels through its sole general partner’sinterest in the Partnership.

 

## 15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

##  

The carryingamounts and fair values of the Trust’s significant financial instruments atJanuary 31, 2003 and 2002 are as follows:

 
|                                           |   | **2003**             |       | **2002**        |   |
|------------------------------------------------|--------|----------------------|------------|-----------------|--------|
|                                           |   | **CARRYING  AMOUNT** |       | **FAIR  VALUE** |   | **CARRYING  AMOUNT** |   | **FAIR  VALUE** |   |
| Mortgage notes payable                         |   | $                    | 36,112,605 |            | $      | 36,216,060 |   | $ | 35,202,069 |   | $ | 36,466,626 |   |
| Notes payable to banks                         |   | 2,647,250            |       | 2,647,250       |   | 3,325,000 |   | 3,325,000 |   |
| Notes and advances payable to related  parties |   | 9,901,153            |       | 9,472,511       |   | 8,666,360 |   | 8,611,497 |   |
| Other notes payable                            |   | 162,553              |       | 161,773         |   | 71,037 |   | 71,037 |   |
|                                                |        |                      |            |                 |        |  |  |  |  |  |  |  |  |

 

## 16.  SUPPLEMENTAL CASH FLOW DISCLOSURES

##  

Cash paid forinterest amounted to approximately $3.1 million, $3.5 million and$3.4 million for fiscal years 2003, 2002 and 2001, respectively.

 

The Trustissued 16,610, 59,000 and 80,278 Shares of Beneficial Interest during the yearsended January 31, 2003, 2002 and 2001, respectively, in exchange forClass A limited partnership units. The shares were valued at $23,254, $104,000 and $172,540, respectively.

 

In connectionwith the acquisition of the Albuquerque, New Mexico hotel in fiscal year 2001,approximately $1.6 million of the purchase price was satisfied throughusing a mortgage note payable to a third party lender.

 

45

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Theacquisition of InnSuites Hotels in fiscal year 2002 resulted in the followingchanges in assets and liabilities, and expense recognition:

 
| Increase in cash and cash equivalents              |   | $          | (85,294 | ) |
|----------------------------------------------------|--------|------------|---------|---|
| Increase in accounts receivable                    |   | (1,173,721 | )       |
| Increase in prepaid expenses and other  assets     |   | (223,221   | )       |
| Increase in accounts payable and accrued  expenses |   | 2,447,353  |    |
| Increase in loans payable to Trust                 |   | 631,834    |    |
| Expense incurred in acquiring InnSuites  Hotels    |   | (1,608,482 | )       |
|                                               |   |       |    |
| Net cash paid for acquisition                      |   | $          | (11,531 | ) |

 

During fiscalyear 2001, the Trust issued promissory notes in the amount of $52,000 toacquire 22,250 Class A Partnership units from a third party.  These units were repurchased pursuant to theTrust’s share repurchase program.

 

During fiscal year 2001, the Trust issued a promissory note in theamount of $745,000 to acquire 311,326 Class A Partnership units from SteveRobson, a Trustee.

 

During fiscalyear 2001, the Partnership issued a promissory note in the amount of $720,000to acquire 300,000 Shares of Beneficial Interest from Mr. Wirth andaffiliates.

 

During fiscalyear 2002, the Trust issued a promissory note in the amount of $25,838 toacquire 12,304 Class A Partnership units from a third party.  These units were repurchased pursuant to theTrust’s share repurchase program.

 

During fiscalyear 2003, the Trust and InnSuites Hotels issued promissory notes in the amountof $355,000 to acquire 183,513 Shares of Beneficial Interest fromMr. Wirth and affiliates. InnSuites Hotels transferred 65,000 of these Shares of BeneficialInterest to the Management Company as payment for fees owed to the ManagementCompany.

 

During fiscalyear 2003, the Trust issued a promissory note in the amount of $79,000 toacquire 31,711 Class A Partnership units from a third party.  These units were repurchased pursuant to theTrust’s share repurchase program.

 

During fiscalyear 2003, the Trust issued a promissory note in the amount of $78,000 toacquire 40,500 Shares of Beneficial Interest from a third party.  These shares were repurchased pursuant tothe Trust’s share repurchase program.

 

During fiscalyear 2003, the Trust issued a promissory note in the amount of $438,000 toacquire 225,390 Class B Partnership units from Hulsey Hotels Corporation,an affiliate of Mr. Wirth.

 

During fiscalyear 2003, the Trust issued 36,000 Shares of Beneficial Interest to theTrustees to satisfy fees owed for their services which totaled $80,858.

 

During fiscalyear 2003, the Partnership issued a promissory note to Rare Earth DevelopmentCompany, an affiliate of Mr. Wirth, for $311,809 for accrued interest.  This note was subsequently forgiven and theTrust recognized its share of the capital contribution.

 

During fiscalyear 2003, the Trust issued a promissory note to Mr. Wirth and certain of hisaffiliates for $358,820 for accrued interest. This note was subsequently forgiven and the Trust recorded the amount asa capital contribution.

 

46

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During fiscalyear 2003, the Trust refinanced two mortgage notes payable in the aggregateamount of $7,263,156.  

 

## 17.  COMMITMENTS AND CONTINGENCIES

##  

Two of theHotels are subject to non-cancelable ground leases expiring onDecember 31, 2050 and January 9, 2029.  Total expense for the fiscal years ended January 31, 2003,2002 and 2001 was $186,850, $178,665 and $104,805, plus a variable componentbased on gross revenues of each property that totaled approximately $82,000,$75,000 and $64,000, respectively.

 

Future minimumlease payments under these leases are as follows:

 

| **Fiscal Year Ending** |   |      |      |
|------------------------|--------|-----------|-----------|
|                   |   |      |      |
| 2004                   |   | $         | 188,290   |   |
| 2005                   |   | 188,290   |      |
| 2006                   |   | 188,290   |      |
| 2007                   |   | 188,290   |      |
| 2008                   |   | 188,290   |      |
| Thereafter             |   | 6,112,423 |      |
|                   |   |      |      |
| Total                  |   | $         | 7,053,873 |   |

 

InnSuitesHotels has agreements with the Management Company for hotel management servicesand the Licensing Corp. for licensing and trademark services.  Both agreements expire on January 31,2007.  These agreements are based onhotel revenue and do not include any minimum payment provisions.

 

As of January 31, 2003, the Trust was not in compliance with the debtcoverage ratio covenant and the covenant restricting the Trust’s capitalexpenditures to $1.6 million during fiscal year 2003 in connection with itsterm loan and line of credit.  On April30, 2003, the Trust received a waiver from the lender for the period endedJanuary 31, 2003.  The ManagementCompany agreed to waive management fee payments and the Licensing Corp. agreedto waive licensing fee payments for a period of five months from May 1, 2002through September 30, 2002, and the Partnership was restricted from makingdistributions to the Trust during fiscal year 2003 in excess of the amountrequired****for the Trust to paydividends of $0.01 per outstanding Share of Beneficial Interest for fiscal year2003.  The waived management andlicensing fees have been expensed and recorded as a capital contribution due tothe related party relationship between the Trust and the Management Company andthe Licensing Corp.  If the Partnershipis in compliance with the debt coverage ratio covenant for any given monthafter September 30, 2002, the payments to the Management Company and theLicensing Corp. may be made for such month in an amount equal to one month ofaccrued but unpaid management and licensing fees.  Subsequent to September 30, 2002, the Trust was in compliancewith its debt coverage ratio covenant and made payments for one month to theManagement Company and made no payments to the Licensing Corp.

 

All feescharged by the Management Company and the Licensing Corp., except those waived,have been accrued for by the Trust.  TheTrust expects any suspension in fees during fiscal year 2004 to increase cashavailable to the Trust.  Subsequent toJanuary 31, 2003, the Trust sold its Scottsdale property to an affiliate of Mr.Wirth.  A portion of the proceeds ofthat sale were used to pay off the term loan described above.  The Trust expects to refinance its line ofcredit prior to its maturity on September 1, 2003.

 

47

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The Trust isobligated to make funds available to the Hotels for capital expenditures (the“Reserve Funds”), as determined in accordance with the Percentage Leases.  The Reserve Funds for the six hotelproperties for which a mortgage lender escrow exists are recorded on theTrust’s books as restricted cash.  Theamounts obligated under the Reserve Funds are 4% of the individual Hotels’total revenues.

 

InnSuitesHotels has entered into franchise arrangements with certain third parties withrespect to five of the hotel properties, with four Best Western hotels and oneHoliday Inn hotel.  These agreementsprovide for fees to be paid by InnSuites Hotels based on revenue andreservations received, and contain no minimum payment provisions.

 

The nature ofthe operations of the Hotels exposes them to risks of claims and litigation inthe normal course of their business. Although the outcome of these matters cannot be determined, managementdoes not expect that the ultimate resolution of these matters will have amaterial adverse effect on the financial position, results of operations orliquidity of the Trust.

 

The Trust isinvolved from time to time in various other claims and legal actions arising inthe ordinary course of business.  In theopinion of management, the ultimate disposition of these matters will not havea material adverse effect on the Trust’s consolidated financial position,results of operations or liquidity.

 

## 18.  STOCK OPTION PLAN

##  

During fiscal1999, the shareholders of the Trust adopted the 1997 Stock Incentive and OptionPlan (the “Plan”).  Pursuant to thePlan, the Compensation Committee may grant options to the Trustees, Trustofficers, other key employees, consultants, advisors and similar employees ofthe Trust’s subsidiaries and affiliates. The number of options that may be granted is limited to 10% of the totalShares of Beneficial Interest and Partnership Units (Class A andClass B) as of the first day of such year.

 

Generally,options granted expire in 10 years, are exercisable during the optionee’slifetime only by the recipient and are non-transferable.  Unexercised options held by employees of theTrust generally terminate on the date the individual ceases to be an employeeof the Trust.

 

There were nooptions granted in fiscal year 2003, 2002 or 2001.  All outstanding options vest in July 2003.

 

48

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 The followingtable summarizes the stock option activity during the 2003, 2002 and 2001fiscal years and provides information about the stock options outstanding atJanuary 31, 2003:

 
| **Stock  Option Activity**         |   | **Number of Options** |   | **Weighted-  Average  Exercise Price** |   |
|------------------------------------|--------|-----------------------|--------|----------------------------------------|--------|
|                               |   |                  |   |                                   |   |
| Outstanding, January 31, 2000 |   | 375,600               |   | $                                      | 2.50   |   |
| Granted                            |   | —                |   | —                                 |   |
| Forfeited                          |   | (31,500               | )      | 2.50                                   |   |
| Exercised                          |   | —                |   | —                                 |   |
|                               |   |                  |   |                                   |   |
| Outstanding, January 31, 2001 |   | 344,100               |   | $                                      | 2.50   |   |
| Granted                            |   | —                |   | —                                 |   |
| Forfeited                          |   | (71,800               | )      | 2.50                                   |   |
| Exercised                          |   | —                |   | —                                 |   |
|                               |   |                  |   |                                   |   |
| Outstanding, January 31, 2002 |   | 272,300               |   | $                                      | 2.50   |   |
| Granted                            |   | —                |   | —                                 |   |
| Forfeited                          |   | (19,100               | )      | 2.50                                   |   |
| Exercised                          |   | —                |   | —                                 |   |
|                               |   |                  |   |                                   |   |
| Outstanding, January 31, 2003 |   | 253,200               |   | $                                      | 2.50   |   |

 
| **Stock Option Information**                |   | **January 31, 2003** |   |
|---------------------------------------------|--------|---------------------------|--------|
|                                        |   |                      |   |
| Options exercisable                         |   | 234,433                   |   |
| Weighted Average Exercise Price             |   | $2.50                     |   |
| Weighted Average Remaining Contractual Life |   | 5.64                      |   |

 

For stockoptions granted to non-employees of the Trust, compensation wasrecognized over the respective vesting period based upon the fair value of theoptions as calculated using the Black-Scholes pricing model.  During the year ended January 31, 2000,the Trust granted 28,200 stock options to non-employees.  The Trust did not grant any stock options tonon-employees during fiscal year 2003, 2002 or 2001.  The fiscal year 2000 grants resulted in therecognition of compensation expense of approximately $0, $26,000 and $53,000for the years ended January 31, 2003, 2002 and 2001, respectively.

 

19.  QUARTERLY RESULTS (UNAUDITED)

 

The followingis a summary of the results of operations, by quarter, for the fiscal yearsended January 31, 2003 and 2002. Management believes that all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation of such interim results have beenincluded.  The results of operations forany interim period are not necessarily indicative of those for the entirefiscal year.

 

49

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| **FISCAL 2003**                                                               |   | **APRIL 30** |       | **JULY 31** |      | **OCTOBER 31** |       | **JANUARY 31** |       | **FISCAL 2003** |   |
|-------------------------------------------------------------------------------|--------|--------------|------------|-------------|-----------|----------------|------------|----------------|------------|-----------------|--------|
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Total revenue                                                                 |   | $            | 8,256,553  |        | 6,661,704 |           | 6,122,555  |           | 5,899,661  |            | $      | 26,940,473 |   |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Total revenue less interest expense on  mortgage loans and operating expenses |   | $            | 765,565    |        | (891,229  | )              | (1,193,481 | )              | (2,691,737 | )               | $      | (4,010,892 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Net income (loss) before extraordinary  items                                 |   | $            | 618,422    |        | (730,999  | )              | (977,581   | )              | (2,691,737 | )               | $      | (3,445,948 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) before extraordinary items  per share – basic              |   | $            | .29        |        | (.34      | )              | (.49       | )              | (1.35      | )               | $      | (1.67 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) before extraordinary items  per share – diluted            |   | $            | .06        |        | (.34      | )              | (.49       | )              | (1.35      | )               | $      | (1.67 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Net income (loss)                                                             |   | $            | 618,422    |        | (730,999  | )              | (977,581   | )              | (2,691,737 | )               | $      | (3,445,948 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) per share – basic                                          |   | $            | .29        |        | (.34      | )              | (.49       | )              | (1.35      | )               | $      | (1.67 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) per share – diluted                                        |   | $            | .06        |        | (.34      | )              | (.49       | )              | (1.35      | )               | $      | (1.67 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Dividends declared per share                                                  |   | $            | —     |        | —    |           | —     |           | .01        |            | $      | .01 |   |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| **FISCAL 2002**                                                               |   | **APRIL 30** |       | **JULY 31** |      | **OCTOBER 31** |       | **JANUARY 31** |       | **FISCAL 2002** |   |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Total revenue                                                                 |   | $            | 8,865,486  |        | 6,838,360 |           | 6,062,566  |           | 5,889,597  |            | $      | 27,656,009 |   |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Total revenue less interest expense on  mortgage loans and operating expenses |   | $            | (599,867   | )           | (831,739  | )              | (1,082,338 | )              | (948,435   | )               | $      | (3,462,379 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Net income (loss) before extraordinary  items                                 |   | $            | (928,793   | )           | (690,358  | )              | (780,995   | )              | (984,554   | )               | $      | (3,383,316 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) before extraordinary items  per share – basic              |   | $            | (.44       | )           | (.32      | )              | (.36       | )              | (.46       | )               | $      | (1.59 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) before extraordinary items  per share – diluted            |   | $            | (.44       | )           | (.32      | )              | (.36       | )              | (.46       | )               | $      | (1.59 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Net income (loss)                                                             |   | $            | (1,207,203 | )           | (690,358  | )              | (780,995   | )              | (860,846   | )               | $      | (3,539,402 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) per share – basic                                          |   | $            | (.57       | )           | (.32      | )              | (.36       | )              | (.40       | )               | $      | (1.66 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Income (loss) per share – diluted                                        |   | $            | (.57       | )           | (.32      | )              | (.36       | )              | (.40       | )               | $      | (1.66 | ) |
|                                                                          |   |         |       |        |      |           |       |           |       |            |   |
| Dividends declared per share                                                  |   | $            | —     |        | —    |           | —     |           | .01        |            | $      | .01 |   |

 

50

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20.  EXTRAORDINARY ITEMS

 

OnApril 18, 2001, the Trust refinanced its Ontario, California property,paying $576,842 in prepayment penalties. The Trust classified the prepaymentpenalty as an extraordinary item.

 

OnDecember 31, 2001, the Trust refinanced its Tucson, Arizona St. Mary’sproperty, recording a gain on extinguishment of debt in the amount of $254,689.The Trust classified the gain as an extraordinary item.

 

21.  HOTEL PROPERTIES HELD FOR SALE

 

Hotelproperties held for sale are carried at the lower of cost or estimated fairvalue less costs to sell.  In addition,upon reclassification of a hotel property for accounting purposes to “held forsale,” the Trust ceases depreciation of the property and recognizes anyreduction in the value of the property through recording an impairment loss inthe period of reclassification. Depreciation expense that would have been taken for the twelve monthsended January 31, 2002 was approximately $160,000.  On November 1, 2002, the Trustreclassified its Flagstaff property for accounting purposes as “held and used”and recognized $186,000 of depreciation expense on that date.  Subsequent to the close of the Trust’sfiscal year 2003, an offer from an affiliate of Mr. Wirth was made to purchasethe Scottsdale property at the property’s appraised value and was accepted bythe Trust.  See Note 22 “SubsequentEvents.”

 

22.  SUBSEQUENT EVENTS

 

OnMarch 21, 2003, the Trust sold its Scottsdale property to an affiliate ofMr. Wirth, Scottsdale Eldorado Resort, LLC, for the property’sFebruary 2003 appraised value of $3.1 million. Scottsdale EldoradoResort, LLC, assumed $1.1 million of the Trust’s notes payable to RareEarth Financial, L.L.C., an affiliate of Mr. Wirth, assumed the Trust’s$500,000 note payable to Capital Resource Lenders-I, L.L.C., an affiliate ofMr. Wirth, and paid the $1.5 million balance on the Trust’s term loanto the lender to satisfy the purchase price.

 

51

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SCHEDULE III

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARY

REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF JANUARY 31, 2003

 
|                                                                                                  |   | **Initial  Cost  to Tenant** |            | **Cost  Capitalized  Subsequent to  Acquisition** |   | **Gross  Amounts at  Which Carried at  Close of Period** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------------|---------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                                                                  |   | **Encumbrances**             |            | **Land**                                          |   | **Building  and  Improvements**                          |   | **Land** |   | **Building  and  Improvements** |   | **Land** |   | **Building  and  Improvements** |   |
|                                                                                                  |   |                         |            |                                              |   |                                                     |   |   |   |   |   |   |   |   |   |
| InnSuites Hotel and Suites Phoenix Best Western  Phoenix, Arizona                                     |   | $                            |  3,737,720 |                                              | $      |  418,219                                            |   | $ |  2,922,884 |   | $ |  — |   | $ |  (12,230 | ) | $ |  418,219 |   | $ |  2,910,654 |   |
| InnSuites Hotels and Suites Tempe/Phoenix  Airport/South   Mountain  Tempe, Arizona         |   | 1,915,818                    |            | 686,806                                           |   | 6,548,348                                                |   | — |   | 94,162 |   | 686,806 |   | 6,642,510 |   |
| InnSuites Hotel and Suites Tucson, Catalina Foothills Best Western  Tucson, Arizona                   |   | 4,785,798                    |            | —                                            |   | 4,220,820                                                |   | — |   | 2,025,584 |   | — |   | 6,246,404 |   |
| InnSuites Hotels and Suites Yuma  Yuma, Arizona                                                       |   | 2,919,051                    |            | 251,649                                           |   | 4,983,292                                                |   | — |   | 986,899 |   | 251,649 |   | 5,970,191 |   |
| Holiday Inn Airport Ontario Hotel and Suites  Ontario, California                                     |   | 8,828,766                    |            | 1,633,064                                         |   | 5,450,872                                                |   | — |   | 1,272,775 |   | 1,633,064 |   | 6,723,647 |   |
| InnSuites Hotels and Suites Flagstaff/Grand Canyon  Flagstaff, Arizona(B)                             |   | 1,060,000                    |            | 100,000                                           |   | 1,194,691                                                |   | — |   | 1,263,119 |   | 100,000 |   | 2,457,810 |   |
| InnSuites Hotels and Suites Tucson St. Mary’s  Tucson, Arizona                                   |   | 4,459,983                    |            | 900,000                                           |   | 9,166,549                                                |   | (20,564 | ) | 423,873 |   | 879,436 |   | 9,590,422 |   |
| InnSuites Hotel and Suites Best Western  Buena Park Suites  Buena Park, California               |   | 3,142,252                    |            | 645,852                                           |   | 4,336,476                                                |   | — |   | 2,331,707 |   | 645,852 |   | 6,668,183 |   |
| InnSuites Hotels and Suites San Diego Hospitality  San Diego, California                              |   | 4,878,637                    |            | 700,000                                           |   | 3,972,785                                                |   | — |   | 358,411 |   | 700,000 |   | 4,331,196 |   |
| InnSuites Hotels and Suites Scottsdale/ El Dorado  Park   Resort  Scottsdale, Arizona(C)(D) |   | 2,000,000                    |            | 350,000                                           |   | 6,074,400                                                |   | (193,551 | ) | (3,482,541 | ) | 156,449 |   | 2,591,859 |   |
| InnSuites Hotels and Suites Albuquerque Airport  Best   Western  Albuquerque, New Mexico    |   | 1,444,580                    |            | —                                            |   | 1,903,970                                                |   | — |   | 242,461 |   | — |   | 2,146,431 |   |
|                                                                                                  |   |                         |            |                                              |   |                                                     |   |   |   |   |   |   |   |   |   |
| Multi-property Encumbrances(E)                                                                        |   | 7,749,500                    |            | —                                            |   | —                                                   |   | — |   | — |   | — |   | — |   |
|                                                                                                  |   |                         |            |                                              |   |                                                     |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   | $                            | 46,922,105      |                                              | $      | 5,685,590                                                |   | $ | 50,775,087 |   | $ | (214,115 | ) | $ | 5,504,220 |   | $ | 5,471,475 |   | $ | 56,279,307 |   |

 

52

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|                                                                                                 |   | **Total  (A)** |            | **Accumulated  Depreciation** |   | **Net  Book Value  Land and  Buildings  and Improvements** |   | **Date of  Construction** |            | **Date of  Acquisition** |   | **Depreciation  in Income  Statement is  Computed** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------|-----------------|-------------------------------|--------|------------------------------------------------------------|--------|---------------------------|-----------------|--------------------------|--------|-----------------------------------------------------|--------|
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotel and Suites Phoenix Best  Western  Phoenix, Arizona                                   |   | $              |  3,328,873 |                          | $      |  406,495                                              |   | $                         |  2,922,378 |                     | 1980   |                                                | 1998   |   | 5-40 years |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Tempe/Phoenix  Airport/South Mountain  Tempe, Arizona                    |   | 7,329,316      |            | 854,578                       |   | 6,474,738                                                  |   | 1982                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotel and Suites Tucson, Catalina  Foothills Best Western  Tucson, Arizona                 |   | 6,246,404      |            | 850,199                       |   | 5,396,205                                                  |   | 1981                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Yuma  Yuma, Arizona                                                      |   | 6,221,840      |            | 808,452                       |   | 5,413,388                                                  |   | 1982                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| Holiday Inn Airport Ontario Hotel and  Suites  Ontario, California                                   |   | 8,356,711      |            | 1,208,005                     |   | 7,148,706                                                  |   | 1990                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Flagstaff/Grand  Canyon  Flagstaff, Arizona(B)                           |   | 2,557,810      |            | 331,061                       |   | 2,226,749                                                  |   | 1966                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Tucson St.  Mary’s  Tucson, Arizona                                 |   | 10,469,858     |            | 1,199,920                     |   | 9,269,938                                                  |   | 1960                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotel and Suites Best Western  Buena Park   Suites  Buena Park, California       |   | 7,314,035      |            | 917,332                       |   | 6,396,703                                                  |   | 1972                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites San Diego  Hospitality  San Diego, California                            |   | 5,031,196      |            | 572,056                       |   | 4,459,140                                                  |   | 1946                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Scottsdale/El  Dorado Park   Resort  Scottsdale, Arizona(C)(D) |   | 2,748,308      |            | —                        |   | 2,748,308                                                  |   | 1980                      |            | 1998                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
| InnSuites Hotels and Suites Albuquerque  Airport Best   Western  Albuquerque, New Mexico   |   | 2,146,431      |            | 247,477                       |   | 1,898,954                                                  |   | 1975                      |            | 2000                     |   | 5-40 years                                          |   |
|                                                                                                 |   |           |            |                          |   |                                                       |   |                      |            |                     |   |                                                |   |
|                                                                                                 |   | $              | 61,750,782      |                          | $      | 7,395,575                                                  |   | $                         | 54,355,207      |                     |   |                                                |   |   |   |   |
|                                                                                                      |        |                |                 |                               |        |                                                            |        |                           |                 |                          |        |                                                     |        |  |  |  |  |  |  |

 

(See accompanying independent auditors report.)

 

----

(A)                             Aggregate cost for federalincome tax purposes at January 31, 2003 is as follows:

 
| Land                       |   | $          | 4,638,585  |   |
|----------------------------|--------|------------|------------|--------|
| Buildings and improvements |   | 35,269,919 |       |
|                       |   | $          | 39,908,504 |   |

 

(B)                              Thisproperty secures the $1.5 million line of credit.

 

(C)                              This property secures the$1.825 million term loan and is classified as Hotel Properties Held forSale in the accompanying balance sheet as of January 31, 2003.

 

53

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(D)                             TheTrust sold this property subsequent to year end.  See Note 22 – “Subsequent Events.”

 

(E)                               Thesenotes encumber the Scottsdale, Tempe and Flagstaff, Arizona properties.

 

Reconciliationof Real Estate:

 
| Balance at  January 31, 2001                        |   | $         | 60,024,976 |   |
|----------------------------------------------------------|--------|-----------|------------|--------|
| Improvement  to Hotel Properties                         |   | 1,043,790 |       |
| Reclassification  from Fixtures, Furniture and Equipment |   | 522,194   |       |
|                                                     |   |      |       |
| Balance at  January 31, 2002                        |   | $         | 61,590,960 |   |
| Impairment  of Hotel Property                            |   | (567,798  | )          |
| Improvement  to Hotel Properties                         |   | 727,620   |       |
|                                                     |   |      |       |
| Balance at  January 31, 2003                        |   | $         | 61,750,782 |   |
|                                                     |   |      |       |

 

All acquisitions of hotelproperties, other than approximately $1,448,000 in cash paid in connection withthe purchase of the San Diego, California property and $2,100,000 paid for theAlbuquerque, New Mexico property, were acquired through the exchange of limitedpartnership units in the Partnership.

 

Reconciliationof Accumulated Depreciation:

 
| Balance at January 31, 2000 |   | $         | 2,675,574 |   |
|----------------------------------|--------|-----------|-----------|--------|
| Depreciation                     |   | 1,423,533 |      |
| Impairment of hotel property     |   | (465,851  | )         |
|                             |   |      |      |
| Balance at January 31, 2001 |   | $         | 3,633,256 |   |
| Depreciation                     |   | 1,506,772 |      |
| Reclassification from FF&E   |   | 544,310   |      |
|                             |   |      |      |
| Balance at January 31, 2002 |   | $         | 5,684,338 |   |
| Depreciation                     |   | 1,756,248 |      |
| Impairment of hotel property     |   | (45,011   | )         |
|                             |   |      |      |
| Balance at January 31, 2003 |   | $         | 7,395,575 |   |

 

54

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IndependentAuditors’ Report

 

The Board of DirectorsInnSuites Hotels, Inc.:

 

We haveaudited the accompanying balance sheet of InnSuites Hotels, Inc. (the“Company”) as of January 31, 2001, and the related statements ofoperations, stockholders’ deficit and cash flows for the year then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conductedour audit in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of InnSuites Hotels, Inc. as ofJanuary 31, 2001, and the results of its operations and its cash flows forthe year then ended in conformity with accounting principles generally acceptedin the United States of America.

 
|   | /s/  KPMG LLP |   |
|--------|--------------------|--------|

 

Phoenix, ArizonaApril 30, 2001

 

55

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The financialstatements of InnSuites Hotels, Inc. as of and for the period endedJanuary 31, 2002 and 2003 are not presented separately due to theacquisition of InnSuites Hotels, Inc. by the Trust. See “Item 1 -Business - Acquisition of InnSuites Hotels by the Trust.”

 

INNSUITES HOTELS, INC.BALANCE SHEET

 
|                                                                                                                               |   | **January 31,  2001** |      |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
| Assets                                                                                                                             |   |                       |      |
|                                                                                                                               |   |                       |      |
| Cash and cash equivalents                                                                                                          |   | $                          | 71,491    |   |
| Accounts receivable, net                                                                                                           |   | 1,132,274                  |      |
| Prepaids and other assets                                                                                                          |   | 223,222                    |      |
|                                                                                                                               |   |                       |      |
| Total Assets                                                                                                                       |   | $                          | 1,426,987 |   |
|                                                                                                                               |   |                       |      |
| Liabilities and Stockholders’ Deficit                                                                                         |   |                       |      |
|                                                                                                                               |   |                       |      |
| Liabilities                                                                                                                        |   |                       |      |
|                                                                                                                               |   |                       |      |
| Accounts payable                                                                                                                   |   | 1,671,562                  |      |
| Loans from affiliates                                                                                                              |   | 631,834                    |      |
| Percentage rent payable                                                                                                            |   | 5,251,862                  |      |
| Accrued expenses and other liabilities                                                                                             |   | 775,790                    |      |
|                                                                                                                               |   |                       |      |
| Total Liabilities                                                                                                                  |   | 8,331,048                  |      |
|                                                                                                                               |   |                       |      |
| Stockholders’ Deficit                                                                                                         |   |                       |      |
| Preferred stock, $1 par value, 100 shares  authorized, 100 shares issued  and outstanding as of January 31, 2001 and 2000     |   | 100                        |      |
| Additional paid-in-capital                                                                                                         |   | 249,900                    |      |
| Common stock, no par value, 100,000 shares  authorized, 76,555 shares issued  and outstanding as of January 31, 2001 and 2000 |   | 2,431                      |      |
| Accumulated Deficit                                                                                                                |   | (7,156,492                 | )         |
|                                                                                                                               |   |                       |      |
| Total Stockholders’ Deficit                                                                                                   |   | (6,904,061                 | )         |
|                                                                                                                               |   |                       |      |
| Total Liabilities and Stockholders’ Deficit                                                                                   |   | $                          | 1,426,987 |   |

 

See accompanying notes to financial statements.

 

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INNSUITES HOTELS, INC.STATEMENT OF OPERATIONS

 
|                           |   | **For the  year ended  January 31, 2001** |       |
|--------------------------------|--------|------------------------------------------------|------------|
| Revenue from hotel operations: |   |                                           |       |
| Room                           |   | $                                              | 26,077,800 |   |
| Food and beverage              |   | 1,709,045                                      |       |
| Telecommunications             |   | 335,932                                        |       |
| Other                          |   | 733,637                                        |       |
|                           |   |                                           |       |
| Total revenues                 |   | $                                              | 28,856,414 |   |
|                           |   |                                           |       |
| Department expenses:           |   |                                           |       |
| Rooms                          |   | $                                              | 7,136,313  |   |
| Food and beverage              |   | 1,620,049                                      |       |
| Telecommunications             |   | 447,758                                        |       |
| Other                          |   | 445,236                                        |       |
| General and administrative     |   | 4,562,012                                      |       |
| Sales and marketing            |   | 2,173,381                                      |       |
| Repairs and maintenance        |   | 1,816,917                                      |       |
| Hospitality                    |   | 1,647,599                                      |       |
| Utilities                      |   | 1,824,198                                      |       |
| Insurance                      |   | 167,867                                        |       |
| Percentage rent                |   | 9,699,418                                      |       |
|                           |   |                                           |       |
| Total expenses                 |   | $                                              | 31,540,748 |   |
|                           |   |                                           |       |
| Net loss                       |   | $                                              | (2,684,334 | ) |

 

See accompanying notes to financial statements.

 

57

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INNSUITES HOTELS, INC.STATEMENT OF STOCKHOLDERS’ DEFICIT

 

For the year ended January 31, 2001

 
|                           |   | **PREFERRED  STOCK AND  ADDITIONAL  PAID IN  CAPITAL** |    | **COMMON  STOCK** |   | **RETAINED  EARNINGS  (ACCUMULATED  DEFICIT)** |   | **TOTAL**  |       |
|--------------------------------|--------|--------------------------------------------------------|---------|-------------------|--------|------------------------------------------------|--------|------------|------------|
|                           |   |                                                   |    |              |   |                                           |   |       |       |
| BALANCE, January 31, 2000 |   | $                                                      | 250,000 |              | $      | 2,431                                          |   | $          | (4,722,158 | ) | $ | (4,469,727 | ) |
| Contributions                  |   | —                                                 |    | —            |   | 250,000                                        |   | 250,000    |       |
| Net Loss                       |   | —                                                 |    | —            |   | (2,684,334                                     | )      | (2,684,334 | )          |
| BALANCE, January 31, 2001 |   | $                                                      | 250,000 |              | $      | 2,431                                          |   | $          | (7,156,492 | ) | $ | (6,904,061 | ) |

 

See accompanying notes to financial statements.

 

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INNSUITES HOTELS, INC.STATEMENT OF CASH FLOWS

 
|                                                                         |   | **For the  year ended  January 31, 2001** |       |
|------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                         |   |                                           |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                                         |   |                                           |       |
| Net loss                                                                     |   | $                                              | (2,684,334 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                           |       |
| (Increase) decrease in Accounts receivable                                   |   | (341,951                                       | )          |
| (Increase) decrease in Prepaids and Other  assets                            |   | (181,284                                       | )          |
| Increase in Accounts payable                                                 |   | 253,093                                        |       |
| Increase in Percentage rent payable                                          |   | 2,406,130                                      |       |
| Increase (decrease) in Accrued expenses and  other liabilities               |   | (90,163                                        | )          |
| Net cash (used in) operating activities                                      |   | $                                              | (638,509   | ) |
|                                                                         |   |                                           |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                         |   |                                           |       |
| Borrowings on loans from affiliates                                          |   | 256,834                                        |       |
| Contributions                                                                |   | 250,000                                        |       |
| Net cash provided by financing activities                                    |   | $                                              | 506,834    |   |
| Net change in cash and cash equivalents                                      |   | (131,675                                       | )          |
| Cash and cash equivalents at beginning of  year                              |   | 203,166                                        |       |
| Cash and cash equivalents at end of year                                     |   | $                                              | 71,491     |   |

 

See accompanying notes to financial statements.

 

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INNSUITES HOTELS, INC.Notes to Financial StatementsAs of and for the year-endedJanuary 31, 2001

 

1.             Organization & Basis of Presentation

 

InnSuitesHotels, Inc., (the “Company”) leases and operates hotels owned by RRF LimitedPartnership (the “Partnership”).  ThePartnership is owned by several Limited Partners and a General Partner,InnSuites Hospitality Trust (the “Trust”). The Trust is an unincorporated Ohio real estate investment trust (the“REIT”) which agreed to acquire equity interests in several existing hotelproperties on January 31, 1998 and to consider selectively the purchase ordevelopment of additional hotels in the expansion of its business.  The Trust acquired its General Partnerinterest, originally representing a 13.6% equity interest in thePartnership, as of January 31, 1998. The partners and shareholders of the original InnSuites Hotels, Inc.contributed their respective partnership and corporate interests to thePartnership in exchange for cash, partnership interests or REIT common stock onJanuary 31, 1998.

 

The followingfull-service hotels are leased and operated by the Company:

 
| **Property**                             |   | **Location**    |   | **Number of Suites** |   |
|------------------------------------------|--------|-----------------|--------|----------------------|--------|
|                                     |   |            |   |                 |   |
| InnSuites Tempe/Airport                  |   | Tempe, AZ       |   | 170                  |   |
| InnSuites Scottsdale                     |   | Scottsdale, AZ  |   | 132                  |   |
| InnSuites Flagstaff Grand Canyon         |   | Flagstaff, AZ   |   | 118                  |   |
| InnSuites Phoenix Best Western           |   | Phoenix, AZ     |   | 123                  |   |
| InnSuites Tucson Best Western            |   | Tucson, AZ      |   | 159                  |   |
| InnSuites Yuma Best Western              |   | Yuma, AZ        |   | 166                  |   |
| Holiday Inn Airport InnSuites Ontario    |   | Ontario, CA     |   | 150                  |   |
| InnSuites Tucson St. Mary’s         |   | Tucson, AZ      |   | 297                  |   |
| InnSuites San Diego                      |   | San Diego, CA   |   | 147                  |   |
| InnSuites Buena Park                     |   | Buena Park, CA  |   | 185                  |   |
| InnSuites Hotels Airport Inn Albuquerque |   | Albuquerque, NM |   | 104                  |   |
|                                     |   |            |   |                 |   |
|                                     |   | Total Suites    |   | 1,751                |   |

 

The Companyleases these 11 hotels pursuant to individual operating leases which arestructured on a hotel-by-hotel basis.  The lessors of these leases are subsidiaries of the Partnership(the “Lessors”).  In accordance with thelessor/lessee relationship, the operating hotels are required to makepercentage lease payments to the Lessors based on a percentage of hotel roomrevenues.  The amount of the leasepayments is calculated on an individual hotel basis and is governed by anexecuted lease agreement which details the method of lease paymentcalculation.  The calculation todetermine each hotel percentage lease payment is based on quarterly hotelrevenues.

 

All of thehotels offer studio and two-room suites with a variety of room upgradesavailable, such as the two-room “Executive/Family Suite,” the “BoardroomMeeting Suite” or a “Presidential Jacuzzi Suite.”  In addition, the hotels operate as moderate and full-servicehotels near premier vacation areas such as the Grand Canyon and Disneylandalong with other attractions and business centers.

 

The financialstatements include the accounts of InnSuites Hotels, Inc. and the results ofoperations of the 11 leased hotels.  Allsignificant intercompany transactions have been eliminated, and certain priorperiod amounts have been reclassified to be consistent with current periodfinancial statement presentation.

 

60

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2.             Summary of Significant Accounting Policies

 

a)             Use of Estimates

 

Thepreparation of the financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of certain assets and liabilities anddisclosure of contingent assets and liabilities at the balance sheet date andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

b)            Cash and Cash Equivalents

 

All highlyliquid investments with a maturity of three months or less when purchased areconsidered to be cash equivalents.

 

c)             Income Taxes

 

The Companyaccounts for income taxes under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future consequences attributed to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Differences between income for financial and taxreporting purposes arise primarily from accrued expenses not deducted fortax.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

 

d)            Concentration of Credit Risk

 

Financialinstruments which potentially subject the Company to concentrations of creditrisk are principally trade accounts receivable.  The Company’s receivables are unsecured.

 

e)             Revenue Recognition

 

Revenue isrecognized as earned.  Ongoing creditevaluations are performed and an allowance for potential credit losses isprovided, if needed, against the portion of accounts receivable which isestimated to be uncollectible.  Suchlosses have been minimal and within management’s expectations.

 

f)             Repairs and Maintenance

 

Repairs andmaintenance are charged to operations as incurred by the Company.  Costs incurred for major renovations andfixed asset purchases are reimbursed and capitalized by the Lessors.

 

g)            Advertising and Promotion

 

The costs ofadvertising and promotional events are expensed as incurred.

 

h)            Fair Value of Financial Instruments

 

Fair value isdetermined by using available market information and valuationmethodologies.  Financial instrumentsinclude cash and cash equivalents, accounts receivable, accounts payable

 

61

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and accruedexpenses and other liabilities, which due to their short maturities, arecarried at amounts, which reasonably approximate fair value.

 

3.             Percentage Lease Agreements

 

PercentageLeases exist between the Company’s individual leased hotels and theLessors.  The Percentage Leases havenoncancellable lease terms which expire on January 31, 2009, and aresubject to earlier termination on the occurrence of certain contingencies, asdefined in the Percentage Leases.  Therent due under each Percentage Lease is the greater of the minimum rent, alsodefined by the Percentage Lease, or percentage rent.  Percentage rent applicable to room and other hotel revenue iscalculated by multiplying fixed percentages by the total amounts of such grossrevenues in excess of specified threshold amounts.  Both the minimum rent and the revenue thresholds used incomputing percentage rents are subject to annual adjustments based on theUnited States Consumer Price Index (“CPI”). Percentage rent applicable to food and beverage revenues is calculatedas 5% of such revenues over a minimum threshold.  Percentage rent expense for the year ended January 31, 2001was $9.7 million, of which $2.7 million, respectively, was in excessof minimum rent.

 

Future minimalrentals (without reflecting future CPI increases) to be paid by the Companypursuant to the Percentage Leases for fiscal years 2002 to 2006 and in totalthereafter are as follows:

 

| 2002       |   | $          | 7,275,000  |   |
|------------|--------|------------|------------|--------|
| 2003       |   | 7,275,000  |       |
| 2004       |   | 7,275,000  |       |
| 2005       |   | 7,275,000  |       |
| 2006       |   | 7,275,000  |       |
| Thereafter |   | 21,825,000 |       |
|       |   |       |       |
|       |   | $          | 58,200,000 |   |

 

Other thanreal estate and personal property taxes, casualty insurance and capitalimprovements which are obligations of the Lessor, the Percentage Leases requirethe Company to pay rent, liability insurance premiums, and all costs, expenses,utilities and other charges incurred in the operation of the leasedhotels.  Property insurance premiums areallocated 50% to the Lessor and 50% to the Company.  In addition, at January 31, 2001, outstanding receivablesdue the Company from the Lessor for the reimbursement of capital improvements,which were paid for by the Company, were netted with percentage rent payable tothe Lessor.  The amounts netted againstpercentage rent payable were approximately $1.6 million atJanuary 31, 2001.

 

The Company isrequired to indemnify the Lessor against all liabilities, costs and expensesincurred by or asserted against the Lessor in the normal course of operatingthe hotels.

 

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4.             Income Taxes

 

The componentsof the income tax expense (benefit) were as follows:

 
|             |   | **For the year ended   January 31, 2001** |   |
|------------------|--------|------------------------------------------------|--------|
| Federal:         |   |                                           |   |
| Current          |   | $                                              | — |   |
| Deferred         |   | —                                         |   |
| State and local: |   |                                           |   |
| Current          |   | 950                                            |   |
| Deferred         |   | —                                         |   |
|             |   | $                                              | 950    |   |

 

The provisionfor income taxes differs from the amount of income tax determined by applyingthe applicable U.S. statutory federal income tax rate to pretax income as aresult of the following differences:

 
|                                                  |   | **For the year ended   January 31, 2001** |     |
|-------------------------------------------------------|--------|-----------------------------------------------------|----------|
|                                                  |   |                                                |     |
| Computed “expected” tax expense (benefit)   |   | $                                                   | (912,673 | ) |
| State income taxes, net of federal income  tax effect |   | 627                                                 |     |
| Change in valuation allowance                         |   | 622,052                                             |     |
| Change due to differences in federal rate             |   | 254,438                                             |     |
| Adjustment to Federal Net Operating Loss              |   | 16,914                                              |     |
| Other, net                                            |   | 19,592                                              |     |
| Income tax expense (benefit)                          |   | $                                                   | 950      |   |

 

The componentsof the Company’s deferred tax assets as of January 31 were as follows:

 
|                                  |   | **2001**   |      |
|---------------------------------------|--------|------------|-----------|
| Deferred tax assets:                  |   |       |      |
| Operating loss carryforward           |   | $          | 2,730,889 |   |
| Charitable contributions carryforward |   | 1,385      |      |
| Accrued expenses                      |   | 21,195     |      |
| Gross deferred tax assets             |   | 2,753,469  |      |
| Less:   valuation allowance      |   | (2,753,469 | )         |
| Deferred tax assets, net              |   | $          | —    |   |

 

The deferredtax assets consist of differences resulting from accrued expenses not deductiblefor tax purposes and net operating loss carryforwards of approximately$7.3 million, which expire at various dates through January 31, 2020.

 

In assessingthe realizability of deferred tax assets, management considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment. Based upon the projections in future taxable incomeover the periods in which the deferred tax assets are deductible, managementbelieves it is prudent to fully reserve the Company’s net deferred tax assets.

 

63

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5.             Related Party Transactions

 

Loans fromAffiliates represents $631,834 due the Partnership, primarily for workingcapital advances. Amounts are repaid by the Company when cash flows areadequate to cover current expenses as well as amounts advanced. UntilFebruary 1, 2001, the Company was 9.8% indirectly owned by James F. Wirth,Chairman of the Company, who is also Chairman, President and  CEO of the Trust.  There are no terms or covenants governing these advances.

 

EffectiveFebruary 1, 2001, the Trust acquired the Company, following the guidelinesof the REIT Modernization Act.  The ratestructures of the Percentage Leases for the Hotels were amended to reflectcurrent economic and market conditions. Until February 1, 2001, InnSuites Innternational Hotels, Inc. helda management agreement with the Company whereby the Company paid fees of 2.5%of hotel revenues for management, administrative and accounting relatedservices. Effective February 1, 2001, Suite Hospitality Management, Inc.entered into a management agreement with the Company on substantially the sameterms.  InnSuites Licensing Corp., whichis owned by Mr. Wirth, holds a trademark license agreement with theCompany whereby the Company incurs fees from 1.25% to 2.5% of hotel revenuesfor the use of certain brand names.  TheCompany contributes advertising fees to a fund in the amount of 1.5% of hotelrevenues for purposes of centralized advertising programs. Amounts paid underthese agreements are as follows:

 
|                   |   | **For the year ended  January 31, 2001** |      |
|------------------------|--------|-----------------------------------------------|-----------|
| Management fees        |   | $                                             | 722,284   |   |
| Trademark license fees |   | 552,368                                       |      |
| Advertising fees       |   | 387,082                                       |      |
| Total                  |   | $                                             | 1,661,734 |   |

 

Mr. Wirthcontributed $250,000 for the year ended January 31, 2001 for workingcapital needs of certain hotels. These amounts are recorded as capitalcontributions.

 

6.             Commitments and Contingencies

 

Claims and Legal Matters

 

The nature ofthe operations of the Company and its hotels exposes them to the risk of claimsand litigation in the normal course of business.  Although the outcome of these matters cannot be determined,management believes the aggregate potential losses, if any, would not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

 

Franchise Agreements

 

The Companyhas franchise agreements with Best Western® and Holiday Inn® hotels in whichfees generally approximate 3% of monthly revenues for Best Western® and 9% ofmonthly revenues for Holiday Inn®.

 

7.             401(k) Benefit Plan

 

All employeesof the Company who have attained the age of twenty-one and havecompleted one year’s service are eligible to participate in a contributorydefined contribution 401(k) benefit plan. Under the plan, participants may contribute up to 6% of their salary.  The Company matches 50% of the employeecontribution.  Benefit expense under theplan amounted to $38,523 for the year ended January 31, 2001.

 

64

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8.             Liquidity

 

The financialstatements of the Trust disclose that a provision was recorded for allpercentage rent receivables from the Company as of January 31, 2001.  The Company has the ability to obtain fundsfor working capital needs from third parties or affiliates to fund short-termworking capital needs.  Based on thestructure of the Company and its relationship with the Trust as the exclusivelessee, all payments of percentage rent expense are not called.  Excluding percentage rent expense, all ofthe Hotels combined are cash flow positive and generated net income for theyear ended January 31, 2001.  TheTrust acquired the Company effective February 1, 2001.

 

65

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Item 9.             CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

OnJanuary 6, 2003, the Trust engaged McGladrey & Pullen, LLP to actas the Trust’s principal independent accountant to audit the Trust’s financialstatements, replacing KPMG LLP which was dismissed as the Trust’s principalindependent accountant on the same date. This change in accountants was previously reported by the Trust on aCurrent Report on Form 8-K filed with the Securities and ExchangeCommission on January 13, 2003.

 

PART III

 

Item 10.       TRUSTEESAND EXECUTIVE OFFICERS OF THE TRUST

 

The Trustincorporates herein by reference the information appearing under the captions“Election of Trustees” and “Section 16(a) Beneficial OwnershipReporting Compliance” in the Trust’s definitive Proxy Statement to be filedwith the Securities and Exchange Commission on or about May 12, 2003.

 

Item 11.  EXECUTIVE COMPENSATION

 

The Trustincorporates herein by reference the information appearing under the caption“Compensation of Trustees and Executive Officers” in the Trust’s definitiveProxy Statement to be filed with the Securities and Exchange Commission on orabout May 12, 2003.

 

Item 12.       SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The Trustincorporates herein by reference the information appearing under the caption“Ownership of Shares” in the Trust’s definitive Proxy Statement to be filed withthe Securities and Exchange Commission on or about May 12, 2003.

 

The followingtable provides information about the Trust’s equity compensation plans (otherthan qualified employee benefits plans and plans available to shareholders on apro rata basis) as of January 31, 2003:

 

**Equity Compensation Plan Information**

 
| **Plan Category**                                           |   | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** |   | **Weighted -Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |   | **Number of Securities  Available for Future  Issuance Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column(a))** |   |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                        |   |                                                                                               |   |                                                                                |   |                                                                                                                                      |   |
| Equity compensation plans approved by  security holders     |   | 253,200                                                                                            |   | $2.50                                                                               |   | 506,800                                                                                                                                   |   |
|                                                        |   |                                                                                               |   |                                                                                |   |                                                                                                                                      |   |
| Equity compensation plans not approved by  security holders |   | None                                                                                               |   | None                                                                                |   | None                                                                                                                                      |   |

 

66

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Item 13.       CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The Trustincorporates herein by reference the information appearing under the caption“Certain Transactions” in the Trust’s definitive Proxy Statement to be filedwith the Securities and Exchange Commission on or about May 12, 2003.

 

Item 14.       CONTROLSAND PROCEDURES

 

Based upontheir evaluation, as of a date within 90 days prior to the date of the filingof this report, of the effectiveness of our disclosure controls and procedures,our Chief Executive Officer and Chief Financial Officer have each concludedthat our disclosure controls and procedures are effective and sufficient toensure that we record, process, summarize and report information required to bedisclosed by us in our periodic reports filed under the Securities Exchange Actof 1934 within the time periods specified by the Securities and ExchangeCommission’s rules and forms. Subsequent to the date of their evaluation, therehave not been any significant changes in our internal controls or in otherfactors that could significantly affect these controls, including anycorrective action with regard to significant deficiencies and materialweaknesses.

 

PART IV

 

Item 15.       EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)(1) and(2)         Financial Statements andSchedules

 

Financial Statements/Schedules of InnSuites Hospitality Trust

 

1.               Reports ofIndependent Certified Public Accountants

2.               ConsolidatedBalance Sheets at January 31, 2003 and 2002

3.               ConsolidatedStatements of Operations for the years ended January 31, 2003, 2002 and2001

4.               ConsolidatedStatements of Shareholders’ (Deficit) Equity for the years ended January 31,2003, 2002 and 2001

5.               ConsolidatedStatements of Cash Flows for the years ended January 31, 2003, 2002 and2001

6.               Notes toConsolidated Financial Statements for the years ended January 31, 2003,2002 and 2001

7.               Schedule III -Real Estate and Accumulated Depreciation

 

Financial Statements/Schedules of InnSuites Hotels, Inc.

 

1.               Report ofIndependent Certified Public Accountant

2.               Balance Sheet atJanuary 31, 2001

3.               Statement ofOperations for the year ended January 31, 2001

4.               Statement ofShareholders’ Deficit for the year ended January 31, 2001

5.               Statement of CashFlows for the year ended January 31, 2001

6.               Notes to FinancialStatements for the year ended January 31, 2001

 

67

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| (a)(3) |   | Exhibit List |
|--------|--------|-------------------|

 
| **Exhibit No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |   | Second  Amended and Restated Declaration of Trust dated June 16, 1999, as  further amended on July 12, 1999 (incorporated by reference to  Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended July 31, 1999, filed with the Securities and Exchange  Commission on September 14, 1999).                                                    |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                 |   | First  Amended and Restated Agreement of Limited Partnership of RRF Limited  Partnership dated January 31, 1998 (incorporated by reference to  Exhibit 10.1 of the Registrant’s Registration Statement on Form S-2,  filed with the Securities and Exchange Commission on September 8, 1998).                                                                                          |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2*                |   | Employment  Agreement dated as of January 31, 1998, between InnSuites Hospitality  Trust and James F. Wirth (incorporated by reference to  Exhibit 10(b) of the Registrant’s Annual Report on Form 10-K for  the fiscal year ended January 31, 1998, filed with the Securities and  Exchange Commission on May 18, 1998).                                                    |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                 |   | Promissory  Note dated March 15, 1999 by InnSuites Hospitality Trust in favor of  James F. Wirth (incorporated by reference to Exhibit 10.1 of the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  April 30, 1999, filed with the Securities and Exchange Commission on  June 14, 1999).                                                                       |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                 |   | Promissory  Note dated July 27, 2000 by RRF Limited Partnership in favor of James F.  Wirth (incorporated by reference to Exhibit 10.12 of the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed  with the Securities and Exchange Commission on September 14, 2000).                                                                        |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5                 |   | Promissory  Note dated July 27, 2000 by RRF Limited Partnership in favor of Steve S.  Robson (incorporated by reference to Exhibit 10.13 of the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended July 31, 2000, filed  with the Securities and Exchange Commission on September 14, 2000).                                                                       |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                 |   | Addendum to  Note Due dated June 1, 2002 amending that certain Promissory Note dated  March 15, 1999 by InnSuites Hospitality Trust in favor of James F. Wirth  (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended July 31, 2002, filed with the  Securities and Exchange Commission on September 6, 2002). |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                 |   | Promissory  Note dated July 15, 2002 by RRF Limited Partnership in favor of Rare  Earth Development Company (incorporated by reference to Exhibit 10.5 of  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  July 31, 2002, filed with the Securities and Exchange Commission on  September 6, 2002).                                                         |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8                 |   | Promissory  Note dated July 15, 2002 by InnSuites Hospitality Trust in favor of  James F. Wirth (incorporated by reference to Exhibit 10.6 of the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  July 31, 2002, filed with the Securities and Exchange Commission on  September 6, 2002).                                                                     |

 

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| 10.9   |   | Promissory  Note dated July 25, 2002 by InnSuites Hospitality Trust in favor of  Hulsey Hotels Corporation (incorporated by reference to Exhibit 10.7 of  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  July 31, 2002, filed with the Securities and Exchange Commission on  September 6, 2002).          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Promissory  Note dated July 26, 2002 by InnSuites Hotels Inc. in favor of James F.  Wirth (incorporated by reference to Exhibit 10.8 of the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended July 31, 2002, filed  with the Securities and Exchange Commission on September 6, 2002).                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Promissory  Note dated July 26, 2002 by InnSuites Hospitality Trust in favor of  James F. Wirth (incorporated by reference to Exhibit 10.9 of the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  July 31, 2002, filed with the Securities and Exchange Commission on  September 6, 2002).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Promissory  Note dated October 8, 2002 by RRF Limited Partnership in favor of  Capital Resource Lenders-I, L.L.C. (incorporated by reference to  Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2002, filed with the Securities and Exchange  Commission on December 9, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.13+ |   | Promissory  Note dated November 21, 2002 by RRF Limited Partnership in favor of  Capital Resource Lenders-I, L.L.C.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.14+ |   | Promissory  Note dated December 26, 2002 by RRF Limited Partnership in favor of  Capital Resource Lenders-I, L.L.C.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.15+ |   | Promissory  Note dated January 7, 2003 by RRF Limited Partnership in favor of  Capital Resource Lenders-I, L.L.C.                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.16+ |   | Promissory  Note dated January 31, 2003 by RRF Limited Partnership in favor of Fort  Worth/Dallas Suite Hospitality Partnership.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 21+    |   | Subsidiaries  of the Registrant.                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 23.1+  |   | Consent of  McGladrey & Pullen, LLP, Independent Certified Public Accountants.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 23.2+  |   | Consent of  KPMG LLP, Independent Certified Public Accountants.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 99.1   |   | Form of  Percentage Lease (incorporated by reference to Exhibit 99.1 of the  Registrant’s Registration Statement on Form S-2, filed with the Securities  and Exchange Commission on September 8, 1998).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 99.2+  |   | Certificate  of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 99.3+  |   | Certificate  of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                   |

 

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* Management contract or compensatory plan or arrangement.

+ Filed herewith.

 

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(b)           Reports on Form 8-K

 

A CurrentReport on Form 8-K was filed by the Trust on January 13, 2003 to report onItem 4, Changes in the Registrant’s Certifying Accountant.

 

70

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SIGNATURES

 

Pursuant tothe requirements of Section 13 or 15(d) of Securities Exchange Act of1934, the Trust has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| Dated:  April 30, 2003 | INNSUITES  HOSPITALITY TRUST |
|----------------------------------|------------------------------|
|                             |                         |
|                             | By:                          | /s/  James F. Wirth |
|                             |                         | James F.  Wirth, Chairman, |
|                             |                         | President  and Chief Executive Officer |
|                             |                         | (Principal  Executive Officer) |
|                             |                         |
|                             |                         |
| Dated:  April 30, 2003 | By:                          | /s/  Anthony B. Waters |
|                             |                         | Anthony B.  Waters, Chief Financial Officer |
|                             |                         | (Principal  Financial Officer) |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Trust and in thecapacities and on the dates indicated.

 
| Dated:  April 30, 2003 | By:    | /s/  James F. Wirth                    |
|----------------------------------|--------|---------------------------------------------|
|                             |   | James F.  Wirth, Chairman,                  |
|                             |   | President  and Chief Executive Officer      |
|                             |   | (Principal  Executive Officer)              |
|                             |   |
|                             |   |
| Dated:  April 30, 2003 | By:    | /s/  Anthony B. Waters                 |
|                             |   | Anthony B.  Waters, Chief Financial Officer |
|                             |   | (Principal  Financial Officer)              |
|                             |   |
|                             |   |
| Dated:  April 30, 2003 | By:    | /s/  Marc E. Berg                      |
|                             |   | Marc E.  Berg, Trustee                      |
|                             |   |
|                             |   |
| Dated:  April 30, 2003 | By:    | /s/  Steven S. Robson                  |
|                             |   | Steven S.  Robson, Trustee                  |

 

71

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**CERTIFICATION**

 

I, James F. Wirth, certifythat:

 

1.             I have reviewed this annual report on Form 10-K ofInnSuites Hospitality Trust;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      Presented in this annual report ourconclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  April 30, 2003 | By:    | /s/  James F. Wirth |
|---------------------------------|--------|--------------------------|
|                            |   | Name:                    | James F.  Wirth |
|                            |   | Title:                   | Chief  Executive Officer |

 

----

 

**CERTIFICATION**

 

I, Anthony B. Waters, certifythat:

 

1.             I have reviewed this annual report on Form 10-K ofInnSuites Hospitality Trust;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      Designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b)                                     Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)                                      Presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      All significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                                     Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  April 30, 2003 | By:    | /s/  Anthony B. Waters |
|---------------------------------|--------|-----------------------------|
|                            |   | Name:                       | Anthony B.  Waters |
|                            |   | Title:                      | Chief  Financial Officer |

 

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