**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

**(MarkOne)**

 
| ý | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------|-------------------------------------------------------------------------------------------|

 

**For thefiscal year ended January 31, 2002.**

 
| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from**                          **to**                          .

 

**CommissionFile No.  1-7062**

 

**InnSuites Hospitality Trust**

(Exact Name of Registrantas 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 registeredpursuant 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 registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check markwhether the Registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.  Yes ýNo o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S–Kis not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.ý

 

Aggregate market value ofvoting stock held by non-affiliates of the Registrant as of April 24,2002:  $1,691,442.

 

Number of shares ofvoting stock outstanding as of April 24, 2002: 2,134,434.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of the ProxyStatement for the June 12, 2002 Annual Meeting of Shareholders are incorporatedby reference into Part III hereof.

 

 

PART I

 

Item 1.    BUSINESS

 

INTRODUCTION TO OURBUSINESS

 

InnSuites Hospitality Trust (the “Trust”) wasorganized in 1971 and operates as an unincorporated Ohio real estate investmenttrust.  On January 31, 2002, theTrust owned a 48.73% sole general partner interest in RRF Limited Partnership,a Delaware limited partnership (the “Partnership”).  On January 31, 2002, the Partnership owned, directly orindirectly, eleven InnSuites® hotels located in Arizona, New Mexico, andsouthern California (all eleven InnSuites® hotels are hereinafter referred toas the “Hotels”).  The Trust employsseven people.

 

The Hotels feature 1,679 hotel suites and operate asmoderate and full-service hotels which apply a value studio and two-room suiteoperating philosophy formulated in 1980 by James F. Wirth, current Chairman,President and Chief Executive Officer of the Trust (“Mr. Wirth”).  The Trust attempts to acquireunder-performing hotel properties below replacement cost and, through intensiverefurbishment and management programs, repositions the acquired hotels asstudio and two-room suite hotels that offer services such as free breakfastbuffets and complementary afternoon social hours plus amenities, such asmicrowave ovens, refrigerators and coffee makers in each studio or two-roomsuite.

 

The Trust has elected to be taxed as a real estateinvestment trust (“REIT”), as that term is defined and used in Sections 856-860 of the Internal Revenue Code of 1986, and the Regulationsthereunder (all as amended, the “Code”). In order to maintain its REIT tax status, the Trust has affiliated withcertain other hotel hospitality companies. The Hotels are leased to InnSuites Hotels, Inc., formerly known asRealty Hotel Lessee Corp. (the “Lessee”), pursuant to leases which containprovisions for rent based on the revenues of the Hotels (the “PercentageLeases”). Each Percentage Lease obligates the Lessee to pay rent equal to thegreater of the minimum rent or a percentage rent based on the gross revenue ofeach Hotel.

 

Prior to February 1, 2001, the Lessee operated andmanaged all of the Hotels, with the assistance of InnSuites InnternationalHotels, Inc. (“InnSuites Innternational”). Pursuant to management contracts, the Lessee paid InnSuitesInnternational an annual management fee of 2.5% of gross room and otherrevenues for property management services. Following the acquisition of the Lessee by the Trust effective February1, 2001, the Lessee operates and manages the Hotels with the assistance ofSuite Hospitality Management, Inc. (the “New Management Company”) pursuant tosubstantially the same terms as the InnSuites Innternational managementagreements.  See “Item 1 - Business -Acquisition of the Lessee by the Trust” below.

 

The Lessee pays InnSuites Licensing Corp. (the“Licensing Corp.”) an annual licensing fee of 2.5% of gross room and otherrevenues (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.

 

                Pursuant torestrictions contained in certain credit agreements, management fee payments tothe New Management Company and licensing fee payments to the License Corp. werepermitted until May 1, 2002.  Suchpayments will be suspended until September 30, 2002.  If the Partnership complies with the debt coverage covenants ofsuch credit agreements for any given month after September 30, 2002, paymentsto the New Management Company and the License Corp. may be made for such monthand in an amount equal to one month of accrued but unpaid management andlicensing fees.

 

Effective October 12, 1999, the Partnership, theLessee and InnSuites Innternational entered into an Intercompany Agreement (the“Intercompany Agreement”) whereby, subject to certain terms and conditions, thePartnership will grant the Lessee a right of first refusal to lease, andInnSuites Innternational a right of first refusal to operate, any real propertyacquired by the Partnership.  In return,the Partnership will be granted a right of first refusal to pursueopportunities presented to the Lessee or InnSuites Innternational to purchase investmentsin real estate, hotel properties, real estate mortgages, derivatives orentities that invest in the foregoing. To date, the Trust has not purchased or used 

 

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derivatives. In connection with the acquisition of the Lessee by theTrust, the Intercompany Agreement was amended effective February 1, 2001 toprovide for the assumption by the New Management Company of the rights andobligations of InnSuites Innternational thereunder.  See “Item 1 - Business - Acquisition of the Lessee by the Trust”below.

 

HISTORICAL OPERATIONS ANDFORMATION TRANSACTIONS

 

On December 27, 1996, the Trust and HospitalityCorporation International (“HCI”), an Arizona corporation owned by Mr. Wirthand his wife, which controlled seven all-suite hotel properties, comprising1,036 hotel studio and two-room suites, in Tucson, Phoenix, Scottsdale, Tempe,Flagstaff and Yuma, Arizona and in Ontario, California (the “Initial Hotels”),executed a definitive Formation Agreement (the “Formation Agreement”) whereby,through a series of transactions, the Initial Hotels were combined with theTrust.  At the 1997 Annual Meeting ofShareholders held on January 28, 1998, the shareholders of the Trust approvedthe transactions contemplated by the Formation Agreement (the “FormationTransactions”).

 

The Formation Agreement provided for the organizationof the Partnership, of which the Trust would be the sole general partner,initially holding a 13.6% interest, with the former partners in the InitialHotels investing as limited partners, receiving a collective 86.4% interest,and for restructuring the Trust into an “umbrella partnership REIT”, or“UPREIT”.  The Partnership acquiredsubstantial interests in six of the Initial Hotels.  The seventh hotel, located in Scottsdale, Arizona, was acquireddirectly by RRF Sub Corp., a then newly-formed Nevada corporation andwholly-owned subsidiary of the Trust. RRF Sub Corp. subsequently contributed the Scottsdale, Arizona hotel tothe 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.

 

The Partnership has two outstanding classes of limitedpartnership interests, Class A and Class B, identical in all respects exceptthat each Class A limited partnership unit is convertible, at the option of theClass A holder, into one newly-issued Share of Beneficial Interest of theTrust.  No particular conversion will beallowed, however, if a determination is made that such conversion would causethe Trust to no longer qualify as a REIT under the Code.  A total of 2,174,931 Class A limitedpartnership units were issued to the former partners in the InitialHotels.  Class B limited partnershipunits may be converted only upon the approval of the Board of Trustees,provided that such conversion would not cause the Trust to fail to qualify as aREIT.  A total of 4,017,361 Class Blimited partnership units were issued to Mr. Wirth and certain of hisaffiliates in order to satisfy ownership concentration limitations placed uponREITs by the Code.  The PartnershipAgreement of the Partnership subjects both general and limited partner units torestrictions on transfer.

 

HOTEL ACQUISITIONS FOLLOWINGTHE FORMATION TRANSACTIONS

 

Following the Formation Transactions, the Partnershipacquired four additional all-suite hotels. First, effective as of February 1, 1998, the Partnership acquired theInnSuites Hotel Tucson St. Mary’s located in Tucson, Arizona.  The total consideration for the acquisitionwas $10,820,000 and was based upon an appraisal conducted by an independentthird party.  Mr. Wirth and his wifeindirectly owned the Tucson St. Mary’s hotel property.  Second, on April 29, 1998, the Partnershipacquired the Lafayette Hotel Ramada Inn & Conference Center located in SanDiego, California.  The Partnership paid$5,148,000 for this hotel property based on arms-length negotiations with theowners of that property.  Third, thePartnership acquired the InnSuites Hotel located in Buena Park, California,effective June 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 Buena Park hotel property.  Subsequent to this acquisition, Mr. Robsonwas elected as a Trustee of the Trust by 

 

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the shareholders of the Trust. Fourth, the Partnership acquired the Best Western Airport Inn located inAlbuquerque, New Mexico, effective August 30, 2000.  The total consideration for the acquisition was $2,100,000 basedon arms-length negotiations with the owners of that property. The Trustbelieves that the greatest opportunities for revenue growth and profitabilitywill arise from the skillful management of the Trust’s eleven existing Hotelsplus the skillful management and repositioning of current and future acquiredhotel properties.  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 pursuant to thePercentage Leases by intensive management and marketing, and (ii) selectiveacquisitions and expansion of the InnSuites Hotels in the southwestern regionof the United States.

 

ACQUISITION OF THE LESSEEBY THE TRUST

 

In December 2000, the Lessee and the Trust establishedindependent review groups to consider altering the current structure of themanagement and operations of the Hotels pursuant to the provisions of the REITModernization Act (the “RMA”). The RMA, among other things, permits the Trustto own the stock of a taxable REIT subsidiary (“TRS”) that may engage inbusinesses previously prohibited by the Trust, including leasing hotels,provided that such hotels are managed and operated by independent third parties.Effective February 1, 2001, the Trust acquired all of the common and preferredequity stock of the Lessee for $11,531 in cash consideration and the assumptionof approximately $1.6 million of net liabilities. The Lessee was owned 23% byMarc E. Berg, Executive Vice President, Secretary, Treasurer and Trustee of theTrust, 9.8% by InnSuites Innternational, a wholly-owned affiliate of Mr. andMrs. Wirth, and 67.2% by unrelated parties.

 

Following the acquisition, the Lessee elected to betreated as a TRS under the RMA. As a result, the management contracts relatingto the Hotels between the Lessee and InnSuites Innternational were terminatedeffective January 31, 2001 and new management contracts were entered into onsubstantially similar terms with the New Management Company, which qualifies asan independent third party manager and operator of the Hotels under the RMA. Inconnection with the acquisition, the rate structures of the Percentage Leasesfor the Hotels were amended to reflect current economic and market conditionsand the employees of the Lessee became employees of the New Management Company.The acquisition of the Lessee by the Trust resulted in the following benefits:a more direct relationship between the Hotels and the Trust, the inclusion ofLessee revenues in excess of required rent payments in the Trust’s consolidatedfinancial reports, the elimination of potential conflicts of interest and thereduction of certain administrative costs relative to the operation of theHotels and the administration of the Percentage Leases.

 

As described above, each of the Hotels is leased tothe Lessee under substantially identical Percentage Leases.  Following the Trust’s acquisition of theLessee effective February 1, 2001, the Lessee contracted for certain propertymanagement and employment services with the New Management Company andcontinues to contract for certain trademark and licensing services with theLicensing Corp.  The New ManagementCompany receives an annual management fee of 2.5% of gross revenues from theLessee for its property management services. The Licensing Corp. receives 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®) from the Lessee for itstrademark and licensing services.  Suchfees were determined through arms-length negotiations between the Trust andeach of the Lessee, the New Management Company and the Licensing Corp.  The Trust believes that such fees are commerciallyreasonable. As described above in “Introduction to Our Business,” however,payments of management fees to the New Management Company and payments oflicensing fees to the License Corp. will be affected by restrictions containedin certain credit agreements.

 

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Effective February 1, 2001, the Partnership, theLessee and the New Management Company entered into an amended IntercompanyAgreement whereby, subject to certain terms and conditions, the Partnershipwill grant the Lessee a right of first refusal to lease, and the New ManagementCompany a right of first refusal to operate, any real property acquired by thePartnership.  In return, the Partnershipwill be granted a right of first refusal to pursue opportunities presented tothe Lessee or the New Management Company to purchase investments in realestate, hotel properties, real estate mortgages, derivatives or entities thatinvest in the foregoing.

 

COMPETITION IN THE HOTELINDUSTRY

 

The hotel industry is highly competitive.  Each of the Hotels experiences competitionprimarily from other mid-market hotels in its immediate vicinity, but alsocompetes with other hotel properties in other geographic markets.  While none of the Hotels’ competitors dominateany of the Trust’s geographic markets, some of those competitors havesubstantially greater marketing and financial resources than the Trust and thePartnership.

 

A number of additional hotel property developmentshave been announced or have recently been completed by competitors in a numberof the Hotels’ markets, and additional hotel property developments may be builtin the future.  Such hotel developmentshave had, and could continue to have, an adverse effect on the revenue of theHotels in such competitive markets.

 

The Trust has chosen to focus its hotel investments inthe southwest region of the United States. The Trust has a concentration of assets in the metropolitan Phoenix andTucson, Arizona markets.  In the Phoenixand Tucson, Arizona and Albuquerque, New Mexico markets, the supply of hotelrooms has been increasing faster than the rate of demand.  Supply rates also generally increased fasterthan demand rates in the Flagstaff and Yuma, Arizona markets.  The Buena Park, San Diego and Ontario,California markets continue to support balanced supply and demand.

 

The Trust and the Partnership may also compete forinvestment opportunities with other entities that have substantially greaterfinancial resources.  These entitiesalso may generally accept more risk than the Trust and the Partnership canprudently manage.  Competition maygenerally reduce the number of suitable future investment opportunitiesavailable to the Trust and the Partnership and increase the bargaining power ofowners seeking to sell their properties.

 

SEASONALITY OF THE HOTELBUSINESS

 

The Hotels’ operations historically have beenseasonal.  The six southern Arizonahotels experience their highest occupancy in the first fiscal quarter and, to alesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period atthose six southern Arizona hotels.  Thisseasonality pattern can be expected to cause fluctuations in the Trust’squarterly revenues.  The hotels locatedin northern Arizona, California and New Mexico historically experience theirmost profitable periods during the second and third fiscal quarters (the summerseason), providing some balance to the general seasonality of the hotelbusiness.  To the extent that cash flowsfrom operations is insufficient during any quarter, due to temporary orseasonal fluctuations in lease revenue, the Trust may utilize other cash onhand or borrowings to make distributions to its shareholders.  No assurance can be given that the Trustwill make distributions in the future.

 

FINANCIAL INFORMATION

 

See “Item 6 - Selected Financial Data” herein forinformation regarding the Trust’s revenues, net loss and total assets.

 

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Item 2.    PROPERTIES

 

The Trust maintains its administrative offices at theInnSuites Hotels Centre in Phoenix, Arizona. At January 31, 2002, the Partnership owned, directly or indirectly,the eleven Hotels.  All of the Hotelsare operated as InnSuites® Hotels, while five are also marketed as BestWestern® Hotels and one is also marketed as a Holiday Inn® Hotel andSuites.  All of the Hotels are managedby the New Management Company and operate in the following locations:

 
| **PROPERTY**                                                       |   | **NUMBER  OF  SUITES** |   | **YEAR OF  CONSTRUCTION/  ADDITION** |   | **MOST  RECENT  RENOVATION** |   |
|--------------------------------------------------------------------|--------|------------------------|--------|--------------------------------------|--------|------------------------------|--------|
| InnSuites Hotels   Airport Inn Albuquerque Best Western            |   | 102                    |   | 1975/1985                            |   | 2000                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels   Phoenix Best Western                            |   | 105                    |   | 1980                                 |   | 2001                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels Tempe/  Phoenix Airport/South Mountain            |   | 170                    |   | 1982/1985                            |   | 2001                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels Tucson,  Catalina Foothills Best Western          |   | 159                    |   | 1981/1983                            |   | 2001                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels  Yuma Best Western                                |   | 166                    |   | 1982/1984                            |   | 2001                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| Holiday Inn Airport Hotel and  Suites/Ontario (an InnSuites Hotel) |   | 150                    |   | 1990                                 |   | 2001                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels Flagstaff/  Grand Canyon                          |   | 116                    |   | 1966/1972                            |   | 2002                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels Scottsdale/  El Dorado Park Resort                |   | 114                    |   | 1980                                 |   | 2002                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites  Hotels Tucson St. Mary’s                           |   | 279                    |   | 1960/1971                            |   | 1998                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites  Hotels San Diego                                        |   | 143                    |   | 1946/1989                            |   | 1998                         |   |
|                                                               |   |                   |   |                                 |   |                         |   |
| InnSuites Hotels  Buena Park Best Western                          |   | 175                    |   | 1972/1980                            |   | 2001                         |   |
| Total  suites                                                      |   | 1,679                  |   |                                 |   |                         |   |

 

See “Item 7 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations - General” herein for a discussion of occupancy rates at the Hotels.

 

See “Item 8 - FinancialStatements and Supplementary Data - Note 6” herein for a discussion ofmortgages encumbering the Hotels.

 

Item 3.    LEGAL PROCEEDINGS

 

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

 

Item 4.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

There were no matters submitted to a vote of securityholders during the fiscal quarter ended January 31, 2002.

 

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PART II

 

Item 5.    MARKET FOR THE TRUST’S SHARES AND RELATEDSECURITY HOLDER MATTERS

 

The Trust’s Shares of Beneficial Interest are tradedon the American Stock Exchange under the symbol “IHT”.  On April 24, 2002, the Trust had 2,134,434 shares outstanding and 490holders of record.

 

The following table sets forth, for the periodsindicated, the high and low sales prices of the Trust’s Shares of BeneficialInterest, as quoted by the American Stock Exchange, as well as dividendsdeclared thereon:

 
| **Fiscal Year 2002** |   | **High** |   | **Low** |   | **Dividends** |   |
|----------------------|--------|----------|--------|---------|--------|---------------|--------|
| First Quarter        |   | 2 9/16   |   | 2 1/16  |   | —        |   |
| Second Quarter       |   | 2 1/16   |   | 1 3/4   |   | —        |   |
| Third Quarter        |   | 2 1/16   |   | 1 1/2   |   | —        |   |
| Fourth Quarter       |   | 1 5/8    |   | 1       |   | .01           |   |

 
| **Fiscal Year 2001** |   | **High** |   | **Low** |   | **Dividends** | ** ** |
|----------------------|--------|----------|--------|---------|--------|---------------|------------|
| First Quarter        |   | 2 3/8    |   | 2 1/16  |   | .01           |       |
| Second Quarter       |   | 2 1/2    |   | 1 3/4   |   | .01           |       |
| Third Quarter        |   | 2 3/8    |   | 2 1/16  |   | .01           |       |
| Fourth Quarter       |   | 2 3/8    |   | 1 7/16  |   | .01           |       |

 

The Trust intends to maintain a conservative dividendpolicy to facilitate internal growth. In fiscal year 2002, the Trust paid dividends of $0.01 per share in thefourth quarter.  In fiscal year 2001,the Trust paid dividends of $.01 per share in the first, second, third andfourth quarters. 

 

The Partnership is 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. As a result, the Trust may not be able to pay dividends in excess of$0.01 per share during fiscal year 2003.

 

Item 6.    SELECTED FINANCIAL DATA 

 

The following selected financial data of the Trust asof and for the five fiscal years ended January 31, 2002, has been derivedfrom the audited consolidated financial statements of the Trust.  The consolidated financial statements of theTrust as of and for the fiscal year ended January 31, 1998 were audited byArthur Andersen LLP, independent public accountants.  The consolidated financial statements of the Trust as of and foreach of the four fiscal years ended January 31, 2002 were audited by KPMGLLP, independent public accountants. All of the data should be read in conjunction with the respectiveconsolidated financial statements and related notes included herein. 

 

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|                                                              |   | **2002** |       | **2001** |   | **2000**   |   | **1999** |       | **1998** |   |
|-------------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|----------|------------|----------|--------|
| Total  revenue                                                    |   | $        | 27,665,335 |     | $      | 9,738,455  |   | $        | 9,546,181  |     | $      | 9,909,758 |   | $ | 1,421,979 |   |
|                                                              |   |     |       |     |   |       |   |     |       |     |   |
| Net  loss                                                         |   | $        | (3,539,402 | )        | $      | (2,594,754 | )      | $        | (951,811   | )        | $      | (193,071 | ) | $ | (573,509 | ) |
|                                                              |   |     |       |     |   |       |   |     |       |     |   |
| Loss  per share-basic and diluted                                 |   | $        | (1.66      | )        | $      | (1.12      | )      | $        | (.40       | )        | $      | (.10 | ) | $ | (.56 | ) |
|                                                              |   |     |       |     |   |       |   |     |       |     |   |
| Cash  dividends paid and declared per share                       |   | $        | 0.01       |     | $      | 0.04       |   | $        | 0.02       |     | $      | 0.10 |   | $ | 0.15 |   |
|                                                              |   |     |       |     |   |       |   |     |       |     |   |
| Total  assets                                                     |   | $        | 64,146,177 |     | $      | 63,905,561 |   | $        | 65,305,519 |     | $      | 67,804,770 |   | $ | 43,619,639 |   |
|                                                              |   |     |       |     |   |       |   |     |       |     |   |
| Notes  and advances payable to banks, related parties, and others |   | $        | 47,264,466 |     | $      | 44,525,300 |   | $        | 38,746,662 |     | $      | 36,924,834 |   | $ | 22,428,880 |   |

 

See “Item 1 - Business -Historical Operations and the Formation Transactions, - Hotel Acquisitionsfollowing the Formation Transactions, and - Acquisition of the Lessee by theTrust” herein for a discussion of the change in the nature of the business ofthe Trust over the course of the years presented above.  As a result, the information presented aboveis not comparative from year to year. 

 

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

 

GENERAL 

 

The following discussion should be read in conjunctionwith the Trust’s consolidated financial statements and notes thereto. 

 

The accounting policies that we believe are mostcritical and involve the most subjective judgments include our estimates andassumptions of future revenue and expenditures used to project cash flows.Future cash flows are used in the valuation calculation of our hotel propertiesto determine the recoverability (or impairment) of the carrying amounts ifmanagement is required to test the asset for recoverability of carrying value underStatement of Financial Accounting Standards No. 121. Our evaluation of futurecash flows is based on our historical experience and other factors, includingcertain economic conditions. 

 

The Trust is a real estate investment trust, whichowns the sole general partner interest in the Partnership.  In order for the Trust to qualify as a REITunder prior provisions of the Code, neither the Trust nor the Partnership couldoperate the Hotels.  Therefore, each ofthe Hotels is leased to, and operated by, the Lessee pursuant to a PercentageLease.  Each Percentage Lease obligatesthe Lessee to pay rent equal to the greater of a minimum rent or a percentagerent based on the gross revenue of each Hotel. The Lessee also holds the franchise agreement for each Hotel.  Prior to February 1, 2001, the Lessee wasowned 9.8% by InnSuites Innternational, an entity owned by Mr. Wirth and hiswife.  Effective February 1, 2001,however, the Lessee became a wholly-owned subsidiary of the Trust.  See “Item 1 - Business - Acquisition of theLessee by the Trust.” 

 

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The Trust’s principal source of cash flows isdistributions from the Partnership. Pursuant to restrictions contained in certain credit agreements,Partnership distributions to the Trust during fiscal year 2003 are limited toan amount equal to $0.01 per outstanding Share of Beneficial Interest.  Absent such restrictions, the Partnership’sability to make distributions to the Trust are dependent upon lease payments fromthe Lessee pursuant to the Percentage Leases. The Lessee’s ability to make payments to the Partnership pursuant to thePercentage Leases is dependent primarily upon the operations of the Hotels.  As a result of the Trust’s acquisition ofthe Lessee as of February 1, 2001, any profits earned by the Lessee in itsoperation of the Hotels may be distributed to the Trust. 

 

At January 31, 2002, the Trust owned a 48.73%interest in the Hotels through its sole general partner’s interest in thePartnership.  This change in ownershipresulted primarily from the following transactions: 

 

On March 15, 1999, the Trust purchased 1 millionadditional general partner units in the Partnership for $2 million.  This transaction was fully funded by Mr.Wirth who provided an unsecured loan to the Trust at 7% interest payableannually beginning March 15, 2000. The unpaid principal balance and accrued interest is due onMarch 15, 2004. 

 

On April 2, 1999, the Partnership made anunsecured loan to the Trust in the amount of $2.6 million.  Annual interest only payments are due onMarch 1 of each year and are based on a 7% interest rate.  The unpaid principal balance is due atmaturity on April 2, 2006.  TheTrust used the proceeds of that loan to purchase 1.3 million general partnerunits in the Partnership.  The moneyloaned by the Partnership was generated by refinancing the Northern Phoenixhotel and borrowing an additional $1.8 million that was secured by a mortgageon that property.  The original mortgagenote was 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, athistorical cost, its interest in the Scottsdale property to the Partnership(approximately $7 million) in exchange for 1.6 million general partner units. 

 

As a result of the aforementioned transactions, theTrust increased its ownership interest in the Partnership from approximately18% to approximately 42% as of April 2, 1999.  Other incremental, less material, transactions have contributedto the increase from 42% to the Trust’s 48.73% sole general partner’s interestin the Partnership at January 31, 2002. 

 

The expenses of the Trust consist primarily ofproperty taxes, insurance, corporate overhead, interest on mortgage debt,professional fees and depreciation of the Hotels.  Under the terms of its Partnership Agreement, the Partnership isrequired to reimburse the Trust for all such expenses.  Therefore, management believes that a reviewof the historical performance of the operations of the Hotels, particularlywith respect to occupancy, average daily rate (“ADR”), calculated as total roomrevenue divided by number of rooms sold, and revenue per available room(“REVPAR”), calculated as total room revenue divided by number of roomsavailable, is appropriate for understanding revenue from the PercentageLeases.  ADR increased slightly by $0.11to $66.57 in fiscal year 2002 from $66.46 in fiscal 2001.  Occupancy decreased 3.74% to 59.49% infiscal 2002 from 63.23% in fiscal year 2001 as a result a slowing economy andthe impact of the terrorist attacks of September 11, 2001 on the travel andhospitality industries.  This resultedin a significant decrease in REVPAR of $2.40 to $39.62 in fiscal 2002 from$42.02 in fiscal 2001. 

 

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The following table shows certain historical financialand other information for the periods indicated.

 
|                                 |   | **For the Year  Ended  January 31,** |   |
|--------------------------------------|--------|--------------------------------------|--------|
|                                 |   | **2002**                             |   | **2001** |   | **2000** |   |
| Occupancy                            |   | 59.49                                | %      | 63.23 | % | 59.80 | % |
| Average  Daily Rate (ADR)            |   | $                                    | 66.57  |   | $ | 66.46 |   | $ | 67.70 |   |
| Revenue  Per Available Room (REVPAR) |   | $                                    | 39.62  |   | $ | 42.02 |   | $ | 40.46 |   |

 

No assurance can be given that the trends reflected inthis data will continue or that Occupancy, ADR and REVPAR will not decrease asa result of changes in national or local economic or hospitality industryconditions. 

 

Results of Operations of the Trust for the year ended January 31,2002 compared to the year ended January 31, 2001. 

 

As of February 1, 2001, the financial statements ofthe Lessee are consolidated with those of the Trust. Therefore, all significantintercompany transactions and balances have been eliminated includingpercentage rent revenue for the Trust and percentage rent expense for theLessee.  See “Item 1 - Business -Acquisition of the Lessee by the Trust.” 

 

Results of operations for the Trust for the fiscalyear ended January 31, 2002 reflect a full-year of operations for the elevenHotels.  Results of operations for theTrust for the fiscal year ended January 31, 2001 reflect a full-year ofoperations of ten of the Hotels as well as a partial-year of operations for theBest Western Airport Inn located in Albuquerque, New Mexico. 

 

For the twelve months ended January 31, 2002, theTrust had total revenues of $27.7 million compared to $9.7 million for thetwelve months ended January 31, 2001, an increase of $17.9 million.  This increase is due to the acquisition ofthe Lessee and the inclusion of its revenues in the results of the Trust forthe twelve months ended January 31, 2002. Total revenues on a pro forma basis were $28.9 million for the twelvemonths ended January 31, 2001.  Thedecrease of $1.2 million in fiscal 2002 from the pro forma fiscal 2001 was dueto a slowing economy and the impact of the terrorist attacks of September 11,2001 on the hospitality industry.  Totalexpenses of $32.0 million for the twelve months ended January 31, 2002reflect an increase of $17.1 million compared to total expenses of $14.9million for the twelve months ended January 31, 2001.  The increase is due to the acquisition ofthe Lessee and the inclusion of its expenses in the results of the Trust forthe twelve months ended January 31, 2002.  Total expenses on a pro forma basis were $30.4 million and $34.3million for the twelve months ended January 31, 2002 and 2001,respectively.  This decrease of $3.9million is due primarily to the $3.2 million loss on impairment recorded infiscal year 2001 and cost-cutting measures at the hotels. 

 

Expenses incurred in acquiring Lessee for the yearended January 31, 2002 relate to the one-time assumption of net liabilities ofthe Lessee that were associated with acquiring the Lessee.  Comparable costs were not incurred in fiscalyear 2001. 

 

Loss on impairment of hotel property was $3.2 millionfor the twelve months ended January 31, 2001. This loss resulted from thewrite-down for an impairment of the Scottsdale hotel property. The performanceof the Scottsdale hotel property during that period indicated that the hotelasset significantly decreased in value, which then required management to testthe asset for recoverability of book value under SFAS No. 121, “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.”  Using management’s best estimateof undiscounted future cash flows from the hotel, 

 

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the hotel asset’s bookvalue was determined not to be recoverable. The hotel asset, including land,buildings and improvements, and furniture, fixtures and equipment, was writtendown by $3.2 million to the hotel’s market value and new basis of $3.7 million.The amount of impairment allocated to Shares of Beneficial Interest was $1.5million and the amount allocated to minority interest was $1.7 million. No suchloss was recorded for the twelve months ended January 31, 2002. 

 

General and administrative expenses include overheadcharges for management, accounting, shareholder and legal services for theTrust.  In comparing general andadministrative expenses for the twelve months ended January 31, 2002 and2001, these expenses increased $1.8 million to $5.4 million in fiscal 2002 from$3.6 million in fiscal 2001.  This 49.1%increase was primarily due to the incurrence of expenses associated with theacquisition of the Lessee and the inclusion of the expenses of the Lessee inthe results of the Trust. General and administrative expenses on a pro formabasis were $5.7 million in fiscal 2001. The decrease of $300,000 in fiscal year 2002 from the pro forma fiscalyear 2001 was due primarily to reduced licensing fees charged to the hotels andthe centralization of accounting functions during fiscal year 2002. 

 

Total operating expenses for the twelve months endedJanuary 31, 2002 were $23.4 million, an increase of $16.6 million from $6.8million in the twelve months ended January 31, 2001.  The increase was primarily due to the incurrence of expensesassociated with the acquisition of the Lessee and the inclusion of the expensesof the Lessee in the results of the Trust. On a pro forma basis, operating expenses were $21.8 million and $26.0million in fiscal years 2002 and 2001, respectively.  The decrease of $4.2 million in fiscal year 2002 is due primarilyto the loss on impairment of asset in the amount of $3.2 million recognized infiscal year 2001 and cost-cutting measures at the hotels during fiscal year2002. 

 

Total interest expense for the twelve months endedJanuary 31, 2002 was consistent with the 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 ofthe Ontario, California property, the incurrence of the new mortgage on theTucson (Oracle), Arizona property, and a full year of mortgage interest on theAlbuquerque, New Mexico property. Interest on notes payable 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 millionCredit Facility with mortgages on certain of the Hotels.  Interest on notes payable to related partiesincreased 99.3%, or $266,000, to $533,000 from $267,000 due to an increase innet borrowings from Mr. Wirth and his affiliates in the amount of $1.3 million.

 

Real estate and personal property taxes, insurance andground rent increased $307,000, or 21.2%, to $1.8 million from $1.5 million incomparing the twelve months ended January 31, 2002 and 2001,respectively.  Real estate and personalproperty taxes and property insurance increased due to the inclusion of theLessee’s insurance expense in the results of the Trust in fiscal year 2002, the

acquisition of the Albuquerque hotel during fiscal 2001, increasedinsurance premiums, and increased property tax assessments.  Real estate and personal property taxes,insurance and ground rent on a pro forma basis were $1.6 million for the twelvemonths ended January 31, 2001.

 

Hotel property depreciation for the twelve monthsended January 31, 2002 compared to 2001 increased approximately $216,000,or 7.7%, to $3.1 million from $2.8 million, respectively.  The increase resulted primarily from a fullyear of depreciation on the Albuquerque property, an increase in capitalizedrefurbishment costs of approximately $2.4 million in the current fiscal year,as well as a full year of depreciation on assets capitalized last year,partially offset by the suspension of depreciation on the Hotels which wereheld for sale beginning in the third quarter of fiscal year 2002.

 

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The Trust recognized extraordinary items of $322,000for the twelve months ended January 31, 2002 related to the extinguishments ofdebt.  This amount was a  $577,000 prepayment penalty related to therefinancing of the Ontario property, partially offset by a $255,000 gain on therefinancing of the previous mortgage note secured by the Tucson St. Mary’sproperty.

 

The Trust had a loss before minority interest of $4.7million for the twelve months ended January 31, 2002, compared to a lossbefore minority interest of $5.1 million in the prior year.  After deducting the loss allocated to theminority interest of $1.2 million, the Trust had a net loss attributable toShares of Beneficial 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 the Lessee and theinclusion of the expenses of the Lessee in the results of the Trust.   Basic and diluted net loss per share was$1.66 for the twelve months ended January 31, 2002 compared to $1.12 for2001. For the twelve months ended January 31, 2002, the Trust recorded a netloss from extraordinary items of $322,000, of which approximately $156,000 isattributable to Shares of Beneficial Interest. Comparing the twelve monthsended January 31, 2002 and 2001 on a pro forma basis, the Trust had a net lossbefore extraordinary items of $1,775,000, or $0.83 per basic and diluted share,for 2002 compared to a net loss of $2,870,000, or $1.24 per basic and dilutedshare, for 2001.

 

Results of Operations of the Trust for the year ended January 31,2001 compared to the year ended January 31, 2000.

 

Results of operations for the Trust for the fiscalyear ended January 31, 2001 reflect a full-year of operations of ten Hotels aswell as a partial-year of operations for the Best Western Airport Inn locatedin Albuquerque, New Mexico and for the fiscal year ended January 31, 2000reflect a full-year of operations of ten of the Hotels. For the twelve monthsended January 31, 2001, the Trust had total revenues of $9.7 millioncompared to $9.5 million for the twelve months ended January 31, 2000, anincrease of approximately $192,000, or 2.0%, due primarily to additionalrevenue of $144,000 generated by the newly acquired Albuquerque hotel.  Total expenses of $14.9 million for thetwelve months ended January 31, 2001 increased $3.3 million compared tototal expenses of $11.6 million for the twelve months ended January 31,2000.  The increase in total expensesincluded the write-down for an impairment of the Scottsdale hotel property of$3.2 million.  The remaining $118,000increase in total expenses was primarily due to the addition of operatingexpenses attributable to the newly acquired Albuquerque hotel. 

 

Loss on impairment of hotel property was $3.2 millionfor the twelve months ended January 31, 2001. This loss resulted from thewrite-down for an impairment of a hotel asset of $3.2 million. Recentperformance of the Scottsdale hotel property indicated that the hotel asset mayhave significantly decreased in value, which then required management to test theasset for recoverability of its book value under SFAS No. 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf.” Using management’s best estimate of undiscounted future cash flows fromthe hotel, the hotel asset’s book value was determined not to be recoverable.The hotel asset, including land, buildings and improvements, and fixtures,furniture and equipment, was written down by $3.2 million to the hotel’s marketvalue and new basis of $3.7 million. The amount of impairment allocated toShares of Beneficial Interest was $1.5 million and the amount allocated tominority interest was $1.7 million. 

 

General and administrative expenses include overheadcharges for management, accounting, shareholder and legal services for theTrust.  In comparing general andadministrative expenses for the twelve months ended January 31, 2001 and2000, these expenses decreased $653,000 to $3.6 million in fiscal 2001 from$4.2 million in fiscal 2000.  This 15.4%decrease was primarily due to charges to expense of $575,000 for deferredexpenses relating to a withdrawn public offering in fiscal year 2000.

 

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Total interest expense increased by $429,000, or12.8%, to $3.8 million from $3.3 million in comparing the twelve months endedJanuary 31, 2001 and January 31, 2000, respectively.  Interest on mortgage notes payable increased$205,000, or 9.5%, to $2.4 million from $2.2 million due to increased mortgagedebt related to the refinancing of the San Diego property and the acquisitionof the Albuquerque hotel during fiscal 2001. Interest on notes payable to banks increased by 16.9%, or $165,000, to$1.1 million from $977,000 due to increased interest on the Trust’s $12 millionCredit Facility, which bore a variable interest rate.  Interest on notes payable to related parties increased 25.1%, or$54,000, to $267,000 from $214,000 due to the additional loans made by Mr.Wirth. 

 

Real estate and personal property taxes, insurance andground rent increased $29,000, or 2.1%, to $1.5 million from $1.4 million incomparing the twelve months ended January 31, 2001 and 2000,respectively.  Real estate and personalproperty taxes and property insurance increased primarily due to theacquisition of the Albuquerque hotel during fiscal 2001. 

 

Real estate depreciation for the twelve months endedJanuary 31, 2001 compared to 2000 increased approximately $294,000, or11.6%, to $2.8 million from $2.5 million, respectively.  Of the $294,000 increase, approximately$54,000 related to the Trust’s acquisition of the Albuquerque hotel.  The remaining $240,000 resulted primarilyfrom an increase in capitalized refurbishment costs in the fiscal year endedJanuary 31, 2001, as well as a full year of depreciation on assets capitalizedthat year.

 

The Trust had a loss before minority interest of $5.1million for the twelve months ended January 31, 2001, a $3.1 millionincreased loss from the loss of $2.0 million in the prior year.  After deducting the loss allocated to theminority interest of $2.5 million, the Trust had a net loss attributable toShares of Beneficial Interest of approximately $2.6 million.  This represented an increase in net loss of$1.6 million attributable to Shares of Beneficial Interest comparing the twelvemonths ended January 31, 2001 and 2000. The results for the fiscal year ended January 31, 2001 included therecognition of a provision for uncollectible receivables of $2.4 million and nocomparable expense was recognized in the fiscal year ended January 31,2000.  Basic and diluted net loss pershare was $1.12 for the twelve months ended January 31, 2001 compared to$0.40 for 2000. 

 

Results of Operations ofthe Lessee for the year ended January 31, 2001 compared to the year endedJanuary 31, 2000.

 

The results of operations of the Lessee for the yearended January 31, 2002 are consolidated with the “Results of Operations of theTrust” above. Effective February 1, 2001, the beginning of the Trust’s fiscalyear 2002, the Lessee became a wholly-owned subsidiary of the Trust.  See “Item 1 - Business - Acquisition of theLessee by the Trust.”

 

Results of operations for the Lessee for the fiscalyear ended January 31, 2001 reflect a full-year of operations of ten ofthe Hotels as well as a partial-year of operations for the Best Western AirportInn located in Albuquerque, New Mexico. Results of operations for the fiscal year ended January 31, 2000reflect a full-year of operations of ten of the Hotels. 

 

Total revenues for the Lessee increased 3.2%, or$904,000, to $28.9 million from $28.0 million for the twelve months endedJanuary 31, 2001 and 2000, respectively. Room revenues increased 3.7%, or $932,000, to $26.1 million from $25.1million due to the addition of the Albuquerque hotel, which contributedrevenues of $548,000, and to an overall increase in occupancy.  Food and beverage revenues of $1.7 millionwere consistent with the prior year. Telecommunications revenues of $336,000 were also consistent with theprior year.  Other revenue of $734,000was consistent with the prior year.

 

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Total expenses increased 4.9%, or $1.5 million, to$31.5 million from $30.1 million for the twelve months ended January 31,2001 compared to the twelve months ended January 31, 2000, respectively. 

 

Guest room expense increased by 6.4%, or $429,000, to$7.1 million from $6.7 million for the twelve months ended January 31,2001 and 2000, respectively, primarily due to the addition of the Albuquerquehotel, which accounted for $193,000 of the increase, and increased occupancy.

 

Telecommunications expenses, which were primarilylong-distance service charges and high speed data communication services,increased by 14.9%, or $58,000, to $448,00 from $390,000 due to upgrading voiceand data communications lines in fiscal year 2001. 

 

General and administrative expenses increased by16.5%, or $643,000, to $4.6 million from $3.9 million for the twelve monthsended January 31, 2001 compared to the twelve months ended January 31,2000, respectively.  The increase isprimarily due to the addition of the Albuquerque hotel and increased salary andbenefits paid to key hotel employees.

 

Repairs and maintenance expenses decreased 10.5%, or$209,000, to $1.8 million from $2.0 million for the twelve months endedJanuary 31, 2001 compared with the twelve months ended January 31,2000, respectively.  The decrease isprimarily due to an intensified capital improvement program.

 

Hospitality expenses increased 6.5%, or $101,000, to$1.6 million from $1.5 million for the twelve months ended January 31,2001 compared with the twelve months ended January 31, 2000, respectively,primarily due to the addition of the Albuquerque hotel and increased occupancy.

 

Percentage rent increased 1.9%, or $183,000, to $9.7million from $9.5 million for the twelve months ended January 31, 2001compared with the twelve months ended January 31, 2000, respectively,primarily due to the addition of the Albuquerque hotel.

 

LIQUIDITY AND CAPITALRESOURCES 

 

Through its ownership interest in the Partnership and,effective February 1, 2001, the Lessee, the Trust has its proportionate shareof the benefits and obligations of the Partnership’s ownership interests andthe Lessee’s operational interests in the Hotels.  The Trust’s principal source of cash to meet its cashrequirements, including distributions to its shareholders, is its share of thePartnership’s cash flow.  ThePartnership’s principal source of revenue is rent payments under the PercentageLeases.  The Lessee’s obligations underthe Percentage Leases are unsecured and its ability to make rent payments tothe Partnership under the Percentage Leases, and the Trust’s liquidity,including its ability to make distributions to its shareholders, will depend uponthe ability of the Lessee to generate sufficient cash flow from hoteloperations.  Additionally, pursuant torestrictions contained in certain credit agreements, Partnership distributionsto the Trust during fiscal year 2003 are limited to an amount equal to $0.01per outstanding Share of Beneficial Interest.

 

As a result of the Trust’s acquisition of the Lesseeas of February 1, 2001, any profits earned by the Lessee in its operation ofthe Hotels may be distributed to the Trust. See “Item 1 - Business - Acquisition of the Lessee by the Trust”above.  For the twelve months endedJanuary 31, 2001 and 2000, the Trust recorded provisions of approximately $2.4million and $1.9 million, respectively, for uncollectible receivables as acomponent of general and operating expenses. These charges reflect the Trust’s assessment of the collectibility ofits receivables, which primarily consisted of rent receivable from the Lessee,based on an evaluation of the Lessee’s estimated future cash flows. 

 

As of January 31, 2002, the Trust has nocommitments for capital expenditures beyond a 4% reserve for refurbishment andreplacements set aside annually, as described below.

 

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The Trust intends to acquire and develop additionalhotels and expects to incur indebtedness to fund those acquisitions anddevelopments.  The Trust may also incurindebtedness to meet distribution requirements imposed on a REIT under the Codeto the extent that working capital and cash flow from the Trust’s investmentsare insufficient to make the required distributions.

 

On April 18, 2001, the Trust refinanced its Ontarioproperty and used $4.2 million of the net proceeds to reduce the outstandingbalance of the $12 million Credit Facility obtained by the Trust on April 16,1998 from $11.3 million to $7.1 million. On April 27, 2001, the Trust closedthe financing of its Tucson Oracle property and used $4.8 million of the netproceeds to reduce the outstanding balance of the Credit Facility to approximately$2.3 million. On July 11, 2001, the Trust obtained a term loan in the amount$1,825,000 secured by the Scottsdale property and a $1,500,000 line of creditsecured by the Flagstaff property. The Trust used $2.3 million of the proceedsto settle the remaining balance of the Credit Facility. The term loan maturedon October 1, 2001 and was extended through November 1, 2002.  The line of credit matures on June 1,2003.  Both loans bear interest at theprime rate plus 1.0% and require the Trust to maintain a debt coverage ratio of1.5 to 1.0 and the Lessee to maintain a gross operating profit of 80% of theannual projections provided to the lender. As of January 31, 2002, the Trusthad drawn $1,500,000 on the new line of credit. As of January 31, 2002, theTrust was not in compliance with the covenant on the line of credit and termloan requiring the Trust to maintain a debt coverage ratio of not less than 1.5to 1.0.  The Trust has received a wavierfor the period ended January 31, 2002 and the lender has amended the debtcoverage ratio to 1.35 to 1.0 effective for fiscal year 2003.  Management believes that the Trust will beable to comply with the amended debt coverage ratio during fiscal year 2003.  In addition, management fee payments to theNew Management Company and licensing fee payments to the License Corp. will besuspended for a period of five months beginning May 1, 2002 and may resumeafter September 30, 2002 pending future compliance with the amended debtcoverage ratio, the Partnership is restricted from making distributions to theTrust during fiscal year 2003 in excess of the amount required for the Trust topay dividends of $0.01 per outstanding Share of Beneficial Interest for fiscalyear 2003, and the Trust has committed to not spend more than $1.4 million oncapital expenditures during fiscal year 2003. See “Item 1 - Business - Introduction to Our Business” and “Item 7 -Management’s Discussion and Analysis of Financial Condition and Results of Operations- General and - Liquidity and Capital Resources” for a discussion of suchrestrictions.

 

On April 28, 2001, the mortgage note payable to BankOne on the Tucson St. Mary’s property matured. The outstanding principalbalance was $3,762,839. Bank One extended the loan, waiving principal and interestpayments until December 31, 2001, provided the Trust pay $3.6 million to settlethe loan in full on or before December 31, 2001. On December 28, 2001, theTrust refinanced its Tucson St. Mary’s property and used $3.6 million of theproceeds to fully satisfy the Bank One mortgage note, which resulted in anextraordinary gain of $255,000. The new mortgage note in the amount of $3.6million bears interest at the prime rate plus 1.0% and matures on February 1,2005.  The mortgage agreement requiresthe Trust to maintain a debt coverage ratio of not less than 1.5 to 1.0.  As of January 31, 2002, the Trust was not incompliance with the debt coverage covenant on this new loan.  The Trust has received a wavier of suchnoncompliance for the period ended January 31, 2002.  Management believes that the Trust will be able to comply withthe debt coverage ratio during fiscal year 2003.

 

The Trust may seek to negotiate additional creditfacilities or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured,long-term, medium-term or short-term, bear interest at a fixed or variable rateand be subject to such other terms as the Trust considers prudent. 

 

The Trust will acquire or develop additional hotelsonly as suitable opportunities arise, and the Trust will not undertakeacquisition or redevelopment of properties unless adequate sources of financingare available.  Funds for futureacquisitions or development of hotels are expected to be derived, in whole orin part, from borrowings or from the proceeds of additional issuances of Sharesof Beneficial Interest or other securities. However, there can be no assurance that the Trust will successfullyacquire or develop additional hotels.

 

In August 2001, the Trust listed its Scottsdale andFlagstaff properties for sale. Since the market value of these propertiesexceeds the carrying value, the Trust does not expect to incur losses if theseproperties are sold. The Trust may or may not be successful in selling theseproperties in the listing period.

 

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On August 30, 2000, Albuquerque SuiteHospitality, LLC, a 100% owned subsidiary of the Partnership, purchased the122-suite Best Western Airport Inn located in Albuquerque, New Mexico for $2.1million.  The funds utilized for thepurchase price were secured by a first mortgage on the Albuquerque hotel in theamount of $1,575,000 and the remaining amount was loaned by Mr. Wirth and hisaffiliates.  

 

The Partnership continues to contribute to a CapitalExpenditures Fund (the “Fund”), from the rent paid under the Percentage Leases,an amount equal to 4% of the Lessee’s revenues from operation of theHotels.  The Fund is intended to be usedfor capital improvements to the Hotels and refurbishment and replacement offurniture, fixtures and equipment, in addition to other uses of amounts in theFund considered 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, 2002 and 2001, theHotels spent approximately $2.4 million and $2.2 million, respectively, forcapital expenditures.  The Trustconsiders the majority 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 may not spend more than$1.4 million on capital expenditures during fiscal year 2003.  The Lessee also spent approximately $1.8million during both fiscal years 2002 and 2001 on repairs and maintenance andthese amounts have been charged to expense as incurred. 

 

As of October 31, 2001, the Trust had commitments forcapital expenditures beyond the 4% reserve for refurbishment and replacementsset aside annually for each hotel property. The Trust committed an additional$114,000 for the refurbishment of its Buena Park property to satisfy theconditions of the newly acquired Best Western franchise for that property andcommitted $415,000 over the 4% reserved for the Ontario property for newfurnishings and refurbishment, which was a condition of the Ontario refinanceset by the franchisor. At closing of the Ontario refinancing, these funds wereescrowed from the proceeds received by the Trust. As of January 31, 2002, thesecommitments have been substantially satisfied. In addition, the Trust expects to spend $1.25 million for capitalexpenditures during fiscal year 2003. 

 

Management believes that cash on hand, future cashreceipts from operations, potential sales of certain hotel properties held forsale and borrowings from affiliates in fiscal year 2003 will be sufficient tomeet the Trust’s expansion plans and to pay all obligations as they become duefor the next twelve months.  The Trust’sprojection of future cash receipts includes certain revenue increases and costcutting measures. 

 

The Trust has been adversely affected in the aftermathof the terrorist attacks of September 11, 2001 (the “September 11Events”). Since the September 11 Events, the Hotels have experiencedsignificant short-term declines in occupancy compared to the prior year. Atpresent, it is not possible to predict either the severity or duration of suchdeclines in the medium- or long-term range, or the potential impact on theTrust’s results of operations, financial condition or cash flows. However, as aresult of the significant short-term declines in occupancy, the Trust has takensteps to reduce costs. The Trust has undertaken a comprehensive analysis of itscost structure including, among other things, facilities related costs.Furthermore, the Trust has evaluated hotel financial performance subsequent tothe September 11 Events and its impact on the Trust’s investments andcontingent obligations. The Trust has reviewed potential impairments toinvestments in hotel management contracts, receivables or other investments dueto declines in hotel profitability and reduced management and franchise fees.

 

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CONTRACTUAL OBLIGATIONS

 

The following summarizes our contractual obligations at January 31,2002, and the effect such obligations are expected to have on our liquidity andcash flow in future periods:

 
|                                                                                                                   |   | **PAYMENTS  DUE BY PERIOD** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
| **CONTRACTUAL OBLIGATIONS**                                                                                            |   | **TOTAL**                   | ** ** | **LESS THAN  1 YEAR** | ** ** | **1 – 5  YEARS** | ** ** | **THEREAFTER** | ** ** |
| Mortgage notes payable, notes payable to banks,  other notes payable and notes and advances payable to related parties |   | $                           | 47,264,466 |   | 9,588,600 |   | 19,789,064 |   | 17,886,802 |   |
|                                                                                                                   |   |                        |       |   |   |   |   |   |   |
| Operating  leases                                                                                                      |   | 7,232,800                   |       | 186,400 |   | 745,600 |   | 6,300,800 |   |
|                                                                                                                   |   |                        |       |   |   |   |   |   |   |
| TOTAL                                                                                                                  |   | $                           | 54,497,266 |   | 9,775,000 |   | 20,534,664 |   | 24,187,602 |   |

 

ACCOUNTING MATTERS 

 

In August 2001, the Financial Accounting StandardsBoard (“FASB”) issued FASB Statement No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets (“Statement 144”), which supersedes both FASBStatement No. 121, Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of (“Statement 121”) and the accounting andreporting provisions of APB Opinion No. 30, Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual  and Infrequently Occurring Events and Transactions (“Opinion 30”), for thedisposal of a segment of a business (as previously defined in Opinion 30).  Statement 144 retains the fundamentalprovisions of Statement 121 regarding the recognition and measurement ofimpairment losses on long-lived assets held for use and long-lived assets to bedisposed of by sale, while also resolving significant implementation issuesassociated with Statement 121. For example, Statement 144 provides guidance onhow a long-lived asset that is used as part of a group should be evaluated forimpairment, establishes criteria for when a long-lived asset is held for sale,and prescribes the accounting for a long-lived asset that will be disposed ofother than by sale. Statement 144 retains the basic provisions of Opinion 30regarding the presentation of discontinued operations in the income statementbut broadens that presentation to include a component of an entity  (rather than a segment of a business).  Unlike Statement 121, an impairmentassessment under Statement 144 will never result in a write-down of goodwill.Rather, goodwill is evaluated for impairment under FASB Statement No. 142,Goodwill and Other Intangible Assets (“Statement 142”).  

 

The Trust is required to adopt Statement 144 no laterthan the year beginning after December 15, 2001, and plans to adopt itsprovisions for the quarter ending April 30, 2002.  Management does not expect the adoption of Statement 144 to havea material impact on the Trust’s consolidated financial statements at the dateof adoption because the impairment assessment under Statement 144 is largelyunchanged from Statement 121. The provisions of Statement 144 regarding assetsheld for sale or other disposal generally are required to be appliedprospectively after the adoption date to newly initiated disposalactivities.  Therefore, managementcannot determine the potential future effects that adoption of Statement 144will have on the Trust’s consolidated financial statements.

 

In June 2001, the FASB issued Statement No. 141,Business Combinations (“Statement 141”) and Statement 142.  Statement 141 requires that the purchasemethod of accounting be used for all business combinations initiated after June30, 2001, as well as all purchase method business combinations completed afterJune 30, 2001.  Statement 141 alsospecifies the criteria that intangible assets acquired in

 

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a purchase methodbusiness combination must meet to be recognized and reported apart fromgoodwill.  Statement 142 will requirethat goodwill and intangible assets with indefinite useful lives no longer beamortized, but instead tested for impairment at least annually in accordancewith the provisions of Statement 142. Statement 142 will also require that theestimated residual values of intangible assets with definite useful lives beamortized over their respective estimated useful lives, and be reviewed forimpairment.

 

The Trust was required to adopt the provisions ofStatement 141 immediately after its issuance and was required to adoptStatement 142 effective February 1, 2002. Furthermore, any goodwill and any intangible asset determined to have anindefinite useful life that are acquired in a purchase business combinationcompleted after June 30, 2001 will not be amortized, but will continue to beevaluated for impairment in accordance with the appropriate pre-Statement 142accounting literature. Goodwill and intangible assets acquired in businesscombinations completed before July 1, 2001 will continue to be amortized inaccordance with the appropriate pre-Statement 142 accounting literature.

 

Statement 141 would require, upon adoption ofStatement 142, that the Trust evaluate any existing intangible assets andgoodwill that were acquired in a prior purchase business combination, and makeany necessary reclassifications in order to conform with the new criteria inStatement 141 for recognition apart from goodwill.  Upon adoption of Statement 142, the Trust would be required toreassess the useful lives and residual values of all intangible assets acquiredin purchase business combinations, and make any necessary amortization periodadjustments by the end of the first interim period after adoption.  In addition, to the extent an intangibleasset is identified as having an indefinite useful life, the Trust would berequired to test the intangible asset for impairment in accordance with theprovisions of Statement 142 within the first interim period.  Any impairment loss would be measured as ofthe date of adoption and recognized as the cumulative effect of a change inaccounting principle in the first interim period. As of January 31, 2002, theTrust has no recorded intangible assets or goodwill arising from a purchasebusiness combination.

 

Management does not expect the adoption of Statements141 and 142 to have a material impact on the Trust’s consolidated financialstatements.

 

INFLATION 

 

The Trust’s revenue is based on the underlying Hotelrevenue. Therefore, the Trust relies entirely on the performance of the Hotelsand the Lessee’s ability to increase revenue to keep pace with inflation.Operators of hotels in general, and the Lessee in particular, can change roomrates quickly, but competitive pressures may limit the Lessee’s ability toraise rates faster than inflation.

 

SEASONALITY 

 

The Hotels’ operations historically have beenseasonal. The six southern Arizona hotels experience their highest occupancy inthe first fiscal quarter and, to a lesser extent, the fourth fiscal quarter.The second fiscal quarter tends to be the lowest occupancy period at those sixsouthern Arizona hotels. This seasonality pattern can be expected to causefluctuations in the Trust’s quarterly revenue. The hotels located in northernArizona, California and New Mexico historically experience their mostprofitable periods during the second and third fiscal quarters (the summerseason), providing some balance to the general seasonality of the Trust’s hotelbusiness. To the extent that cash flow from operations is insufficient duringany quarter, because of temporary or seasonal fluctuations in revenue, theTrust may utilize other cash on hand or borrowings to make distributions to itsshareholders or meet operating needs. No assurance can be given that the Trustwill make distributions in the future. 

 

17

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FORWARD-LOOKINGSTATEMENTS 

 

Certain statements in this Form 10-K, includingstatements containing the phrases “believes,” “intends,” “expects,”“anticipates,” “predicted,” “will be,” “should be,” “looking ahead” or similarwords, constitute “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. The Trust intends that such forward-looking statements be subjectto the safe harbors created by such Acts. Those forward-looking statementsinclude statements regarding the intent, belief or current expectations of theTrust, 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’sfinancing plans; (v) the Trust’s position regarding investments, acquisitions,developments, financings, conflicts of interest and other matters; (vi) theTrust’s continued qualification as a REIT; and (vii) trends affecting theTrust’s or any Hotel’s financial condition or results of operations.

 

These forward-looking statements reflect the Trust’scurrent views in respect of future events and financial performance, but aresubject to many uncertainties and factors relating to the operations andbusiness environment of the Hotels which may cause the actual results of theTrust to differ materially from any future results expressed or implied by suchforward-looking statements. Examples of such uncertainties include, but are notlimited to: fluctuations in hotel occupancy rates; changes in room rental rateswhich may be charged by the Lessee in response to market rental rate changes orotherwise; interest rate fluctuations; changes in federal income tax laws andregulations; competition; any changes in the Trust’s financial condition oroperating results due to acquisitions or dispositions of hotel properties; realestate and hospitality market conditions; hospitality industry factors;terrorist attacks or other acts of war; and local or national economic andbusiness conditions, including, without limitation, conditions which may affectpublic securities markets generally, the hospitality industry, or the marketsin which the Trust operates or will operate. The Trust does not undertake anyobligation to update publicly or revise any forward-looking statements whetheras a result of new information, future events or otherwise. Pursuant to Section21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications setforth hereinabove are inapplicable to any forward-looking statements in thisForm 10-K relating to the operations of the Partnership.  

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK 

 

The Trust is exposed to interest rate risk primarilyas a result of its mortgage notes payable, notes payable to banks, other notespayable and notes and advances payable to related parties.  The proceeds from these loans were used tomaintain liquidity, fund capital expenditures and expand the Trust’s realestate investment portfolio and operations. The Trust’s interest rate risk management objective is to limit theimpact of interest rate changes on earnings and cash flows and to lower itsoverall borrowing costs.  To achieve itsobjectives, the Trust borrows using fixed rate debt, when possible.  The Trust could enter into derivativefinancial instruments such as interest rate swaps, caps and treasury locks inorder to mitigate its interest rate risk on a related financialinstrument.  To date, the Trust has notentered into any such derivative transactions. 

 

18

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The Trust’s interest rate risk is monitored using avariety of techniques.  The table belowpresents the principal amounts, weighted average interest rates, fair value andother terms required, by year of expected maturity, in order to evaluate theexpected cash flows and sensitivity to interest rate changes. 

 
|                                         |   | **Fiscal** |      |     |      |     |      |     |      |
|----------------------------------------------|--------|------------|-----------|----------|-----------|----------|-----------|----------|-----------|
| **Debt Type**                                |   | **2003**   |      | **2004** |      | **2005** |      | **2006** |      | **2007** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
| Fixed  rate debt(1)                          |   | $          | 7,522,567 |     | 1,415,062 |     | 6,626,958 |     | 2,545,745 |   | 1,083,204 |   | 17,886,802 |   | 37,116,338 |   | 29,286,747 |   |
| Average  interest rate                       |   | 8.13       | %         | 8.36     | %         | 8.37     | %         | 8.38     | %         | 8.36 | % | 8.35 | % | 8.32 | % | 8.00 | % |
| Variable  rate debt(1)                       |   | $          | 2,066,033 |     | 1,746,390 |     | 3,231,245 |     | 3,104,460 |   | — |   | — |   | 10,148,128 |   | 10,575,916 |   |
| Interest  rate available on January 31, 2002 |   | 6.07       | %         | 6.14     | %         | 6.23     | %         | 5.75     | %         | — |   | — |   | 6.05 | % | 6.07 | % |

 

----

(1)   The fair value of fixed rate debt andvariable rate debt were determined based on current rates offered for fixedrate debt and variable rate LIBOR debt with similar risks and maturities. 

 

(2)   Notes and advances payable to related partieswere excluded from the fair value total because it is not practical to estimatethe fair value of those borrowings due the uncertainty regarding timing ofrepayments.  

 

The table incorporates only those exposures that existas of January 31, 2002 and does not consider those exposures or positionswhich would arise after that date. Moreover, because firm commitments are not represented in the tableabove, the information presented therein has limited predictive value.  As a result, the Trust’s interest ratefluctuations will depend on the exposures that arise during the period andfuture interest rates. 

 

19

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Item 8.  FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA

 

INNSUITESHOSPITALITY TRUST

LIST OF CONSOLIDATEDFINANCIAL STATEMENTS AND SCHEDULE

 

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

 

Independent Auditors’Report; 

 

Consolidated Balance Sheets -January 31, 2002 and 2001; 

 

ConsolidatedStatements of Operations - Years Ended January 31, 2002, 2001 and 2000; 

 

ConsolidatedStatements of Shareholders’ Equity - Years Ended January 31, 2002, 2001and 2000; 

 

ConsolidatedStatements of Cash Flows - Years Ended January 31, 2002, 2001 and 2000;and 

 

Notes to theConsolidated Financial Statements - January 31, 2002, 2001 and 2000. 

 

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

 

ScheduleIII - 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 FINANCIALSTATEMENTS

 

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

 

Independent Auditors’ Report; 

 

Balance Sheet - January 31, 2001; 

 

Statementsof Operations - Years Ended January 31, 2001 and 2000; 

 

Statements of Shareholders’ Deficit- Years Ended January 31, 2001 and 2000;

 

Statementsof Cash Flows - Years Ended January 31, 2001 and 2000; and 

 

Notes to the Financial Statements -January 31, 2001 and 2000. 

 

All schedules are omitted, as the information is notrequired or is otherwise furnished. As of February 1, 2001, the financial statementsof  InnSuites Hotels, Inc., the Lessee,are consolidated with those of the Trust, when the Lessee became a wholly-ownedsubsidiary of the Trust.   See “Item 1 -Business - Acquisition of the Lessee by the Trust.”  

 

21

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INDEPENDENT AUDITORS’REPORT

 

The Shareholders and Trustees 

InnSuites Hospitality Trust: 

 

We have audited the accompanying consolidated balancesheets of InnSuites Hospitality Trust (an Ohio real estate investment trust)and subsidiaries (the “Trust”) as of January 31, 2002 and 2001, and therelated consolidated statements of operations, shareholders’ equity and cashflows for each of the years in the three-year period ended January 31,2002.  In connection with our audits ofthe consolidated financial statements, we also have audited the accompanyingfinancial statement schedule.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Trust’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits. 

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial 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 our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of InnSuites Hospitality Trust and subsidiaries as of January 31,2002 and 2001, and the results of their operations and their cash flows foreach of the years in the three-year period ended January 31, 2002, inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein. 

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

 

22

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCESHEETS

 
|                                                                                                                                                                                       |   | **January  31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                                       |   | **2002**         |       | **2001** |   |
| ASSETS                                                                                                                                                                                     |   |             |       |   |   |
| Hotel  Properties, Net                                                                                                                                                                     |   | $                | 55,626,720 |   | $ | 62,591,376 |   |
| Hotel  Properties Held for Sale                                                                                                                                                            |   | 6,229,233        |       | — |   |
| Cash  and Cash Equivalents                                                                                                                                                                 |   | 426,264          |       | 415,390 |   |
| Rent  Receivable from Affiliate, net of Allowance for Doubtful Accounts of $0 and  $5,251,861, respectively                                                                                |   | —           |       | — |   |
| Accounts  Receivable, net of Allowance for Doubtful Accounts of $19,285 and $0, respectively                                                                                               |   | 965,875          |       | — |   |
| Prepaid  Expenses and Other Assets                                                                                                                                                         |   | 898,085          |       | 898,795 |   |
| TOTAL  ASSETS                                                                                                                                                                              |   | $                | 64,146,177 |   | $ | 63,905,561 |   |
|                                                                                                                                                                                       |   |             |       |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                  |   |             |       |   |   |
|                                                                                                                                                                                       |   |             |       |   |   |
| LIABILITIES                                                                                                                                                                                |   |             |       |   |   |
| Mortgage  Notes Payable                                                                                                                                                                    |   | $                | 35,202,069 |   | $ | 25,628,572 |   |
| Notes  Payable to Banks                                                                                                                                                                    |   | 3,325,000        |       | 11,300,000 |   |
| Notes  and Advances Payable to Related Parties                                                                                                                                             |   | 8,666,360        |       | 7,471,707 |   |
| Other  Notes Payable                                                                                                                                                                       |   | 71,037           |       | 125,021 |   |
| Accounts  Payable and Accrued Expenses                                                                                                                                                     |   | 3,626,103        |       | 1,251,237 |   |
| TOTAL  LIABILITIES                                                                                                                                                                         |   | 50,890,569       |       | 45,776,537 |   |
|                                                                                                                                                                                       |   |             |       |   |   |
| MINORITY  INTEREST IN PARTNERSHIP                                                                                                                                                          |   | 11,728,792       |       | 13,091,117 |   |
|                                                                                                                                                                                       |   |             |       |   |   |
| SHAREHOLDERS’  EQUITY                                                                                                                                                                 |   |             |       |   |   |
| Shares  of beneficial interest, without par value; unlimited  authorization; 2,136,334 and 2,126,484  shares issued and  outstanding at  January 31, 2002 and 2001, respectively |   | 3,101,878        |       | 6,532,348 |   |
| Treasury  Stock; 700,393 and 651,243 shares, respectively                                                                                                                                  |   | (1,575,062       | )          | (1,494,441 | ) |
|                                                                                                                                                                                       |   |             |       |   |   |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                                           |   | 1,526,816        |       | 5,037,907 |   |
|                                                                                                                                                                                       |   |             |       |   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                           |   | $                | 64,146,177 |   | $ | 63,905,561 |   |

 

See accompanyingnotes toconsolidated financial statements

 

23

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES 

CONSOLIDATED STATEMENTSOF OPERATIONS

 
|                                                                           |   | **YEARS  ENDED JANUARY 31,** |       |
|--------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                           |   | **2002**                     |       | **2001** |   | **2000** |   |
| REVENUE                                                                        |   |                         |       |   |   |   |   |
| Room                                                                           |   | $                            | 24,790,737 |   | $ | — |   | $ | — |   |
| Food  and Beverage                                                             |   | 1,594,333                    |       | — |   | — |   |
| Telecommunications                                                             |   | 256,172                      |       | — |   | — |   |
| Rent  Revenue from Affiliate                                                   |   | —                       |       | 9,699,418 |   | 9,503,041 |   |
| Interest  and Other                                                            |   | 1,024,093                    |       | 39,037 |   | 43,140 |   |
| TOTAL  REVENUE                                                                 |   | 27,665,335                   |       | 9,738,455 |   | 9,546,181 |   |
| OPERATING  EXPENSES                                                            |   |                         |       |   |   |   |   |
| Room                                                                           |   | 6,855,613                    |       | — |   | — |   |
| Food  and Beverage                                                             |   | 1,485,266                    |       | — |   | — |   |
| Telecommunications                                                             |   | 359,775                      |       | — |   | — |   |
| General  and Administrative                                                    |   | 5,356,351                    |       | 3,593,596 |   | 4,247,063 |   |
| Sales  and Marketing                                                           |   | 2,148,347                    |       | — |   | — |   |
| Repairs  and Maintenance                                                       |   | 1,791,248                    |       | — |   | — |   |
| Hospitality                                                                    |   | 1,360,039                    |       | — |   | — |   |
| Utilities                                                                      |   | 1,972,060                    |       | — |   | — |   |
| Other                                                                          |   | 496,334                      |       | — |   | — |   |
| Expenses  Incurred in Acquiring Lessee                                         |   | 1,608,482                    |       | — |   | — |   |
| Loss  on Impairment of Hotel Property                                          |   | —                       |       | 3,210,648 |   | — |   |
| TOTAL  OPERATING EXPENSES                                                      |   | 23,433,515                   |       | 6,804,244 |   | 4,247,063 |   |
| INCOME  BEFORE FIXED CHARGES                                                   |   | 4,231,820                    |       | 2,934,211 |   | 5,299,118 |   |
| FIXED  CHARGES                                                                 |   |                         |       |   |   |   |   |
| Hotel  Property Depreciation                                                   |   | 3,056,489                    |       | 2,840,819 |   | 2,546,381 |   |
| Real  Estate and Personal Property Taxes,   Insurance and Ground Rent     |   | 1,757,991                    |       | 1,450,921 |   | 1,421,646 |   |
| Interest  on Mortgage Notes Payable                                            |   | 2,870,393                    |       | 2,354,685 |   | 2,150,144 |   |
| Interest  on Notes Payable to Banks                                            |   | 383,846                      |       | 1,141,861 |   | 976,861 |   |
| Interest  on Notes Payable and Advances Payable to Related Parties             |   | 532,609                      |       | 267,252 |   | 213,563 |   |
| Interest  on Other Notes Payable                                               |   | 7,373                        |       | 5,492 |   | — |   |
| TOTAL  FIXED CHARGES                                                           |   | 8,608,701                    |       | 8,061,030 |   | 7,308,595 |   |
| LOSS  BEFORE EXTRAORDINARY ITEMS AND MINORITY INTEREST                         |   | (4,376,881                   | )          | (5,126,819 | ) | (2,009,477 | ) |
| EXTRAORDINARY  ITEMS                                                           |   |                         |       |   |   |   |   |
| Loss  on Early Extinguishment of Debt, net                                     |   | (322,153                     | )          | — |   | — |   |
| LOSS  BEFORE MINORITY INTEREST                                                 |   | (4,699,034                   | )          | (5,126,819 | ) | (2,009,477 | ) |
| LESS  MINORITY INTEREST                                                        |   | (1,159,632                   | )          | (2,532,065 | ) | (1,057,666 | ) |
| NET  LOSS ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST                        |   | $                            | (3,539,402 | ) | $ | (2,594,754 | ) | $ | (951,811 | ) |
| LOSS  PER SHARE – Basic and Diluted                                       |   |                         |       |   |   |   |   |
| Loss  before Extraordinary Items                                               |   | $                            | (1.59      | ) | $ | (1.12 | ) | $ | (0.40 | ) |
| Extraordinary  Items                                                           |   | (0.07                        | )          | – |   | – |   |
| NET  LOSS                                                                      |   | $                            | (1.66      | ) | $ | (1.12 | ) | $ | (0.40 | ) |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING   – Basic and Diluted |   | $                            | 2,137,203  |   | $ | 2,316,972 |   | $ | 2,376,770 |   |
| CASH  DIVIDENDS PER SHARE                                                      |   | $                            | .01        |   | $ | .04 |   | $ | .02 |   |

 

See accompanyingnotes to

consolidatedfinancial statements 

 

24

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARSENDED JANUARY 31, 2002, 2001 AND 2000

 
| BALANCE, JANUARY 31, 1999          |   | $          | 7,580,035 |   |
|------------------------------------|--------|------------|-----------|--------|
| Stock  Compensation                |   | 57,400     |      |
| Net  Loss                          |   | (951,811   | )         |
| Dividends                          |   | (52,889    | )         |
| Purchase  of Treasury Stock        |   | (461,754   | )         |
| Reallocation  of Minority Interest |   | 2,460,285  |      |
|                               |   |       |      |
| BALANCE,  JANUARY 31, 2000         |   | 8,631,266  |      |
| 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 |   |

 

See accompanyingnotes to

consolidatedfinancial statements 

 

25

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF CASH FLOWS

 
|                                                                                                                                      |   | **YEARS  ENDED JANUARY 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                      |   | **2002**                     |       | **2001** |   | **2000** |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                                                                     |   |                         |       |   |   |   |   |
| Net  Loss Attributable to Shares of Beneficial Interest                                                                                   |   | $                            | (3,539,402 | ) | (2,594,754 | ) | (951,811 | ) |
| Adjustments  to Reconcile Net Loss Attributable to Shares of Beneficial Interest to Net  Cash (Used in) Provided by Operating Activities: |   |                         |       |   |   |   |   |
| Stock  Compensation Expense                                                                                                               |   | 26,258                       |       | 52,516 |   | 57,400 |   |
| Expenses  Incurred in Acquiring Lessee                                                                                                    |   | 1,608,482                    |       | — |   | — |   |
| Impairment  of Hotel Property                                                                                                             |   | —                       |       | 3,210,648 |   | — |   |
| Provision  for Uncollectible Rent Receivable from Affiliate                                                                               |   | —                       |       | 2,406,129 |   | 1,945,732 |   |
| Minority  Interest                                                                                                                        |   | (1,159,632                   | )          | (2,532,065 | ) | (1,057,666 | ) |
| Hotel  Property Depreciation                                                                                                              |   | 3,056,489                    |       | 2,840,819 |   | 2,546,381 |   |
| Loss  on Disposal of Hotel Property                                                                                                       |   | 45,866                       |       | — |   | — |   |
| Amortization  of Deferred Loan Fees                                                                                                       |   | 54,690                       |       | 117,440 |   | 53,937 |   |
| Changes in  Assets and Liabilities (Net of Effect of Acquisition of Lessee) :                                                             |   |                         |       |   |   |   |   |
| Increase  in Rent Receivable from Affiliate                                                                                               |   | —                       |       | (2,406,129 | ) | (1,157,553 | ) |
| (Increase)  Decrease in Prepaid Expenses and Other Assets                                                                                 |   | (462,593                     | )          | (398,172 | ) | 414,469 |   |
| Decrease  in Accounts Receivable                                                                                                          |   | 207,846                      |       | — |   | — |   |
| Increase  (Decrease) in Accounts Payable and Accrued Expenses                                                                             |   | (72,487                      | )          | 113,069 |   | (1,050,540 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET  CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                                                                      |   | (234,483                     | )          | 809,501 |   | 800,349 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                                                                     |   |                         |       |   |   |   |   |
| Acquisition  of Lessee                                                                                                                    |   | (11,531                      | )          | — |   | — |   |
| Cash  Acquired from Lessee                                                                                                                |   | 85,294                       |       |   |   |   |   |
| Improvements  and Additions to Hotel Properties                                                                                           |   | (2,366,932                   | )          | (2,164,744 | ) | (1,516,543 | ) |
| 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                                                                                                    |   | (2,293,169                   | )          | (2,588,495 | ) | (1,516,543 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                                                    |   |                         |       |   |   |   |   |
| Principal  Payments on Mortgage Notes Payable                                                                                             |   | (1,184,779                   | )          | (698,090 | ) | (4,159,391 | ) |
| Refinancing  of Mortgage Notes Payable                                                                                                    |   | 5,658,276                    |       | 500,000 |   | — |   |
| Borrowings  on Mortgage Notes Payable                                                                                                     |   | 5,100,000                    |       | — |   | 5,250,000 |   |
| Payments  on Notes Payable to Banks                                                                                                       |   | (11,300,000                  | )          | — |   | — |   |
| Borrowings  on Notes Payable to Banks                                                                                                     |   | 3,325,000                    |       | — |   | — |   |
| Repurchase  of Partnership Units                                                                                                          |   | (30,060                      | )          | (876,665 | ) | (538,847 | ) |
| Repurchase  of Treasury Stock                                                                                                             |   | (80,621                      | )          | (1,032,687 | ) | (461,754 | ) |
| Payment  of Dividends                                                                                                                     |   | (21,479                      | )          | (97,703 | ) | (52,889 | ) |
| Other  Distributions to Minority Interest Holders                                                                                         |   | (68,480                      | )          | (210,308 | ) | (264,969 | ) |
| Payments  on Notes and Advances Payable to Related Parties                                                                                |   | (1,737,847                   | )          | (2,583,743 | ) | — |   |
| Borrowings  on Notes and Advances Payable to Related Parties                                                                              |   | 2,932,500                    |       | 7,085,450 |   | 956,218 |   |
| Borrowings  on Other Notes Payable                                                                                                        |   | 25,838                       |       | 172,844 |   | — |   |
| Payments  on Other Notes Payable                                                                                                          |   | (79,822                      | )          | (272,823 | ) | (225,000 | ) |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET  CASH PROVIDED BY FINANCING ACTIVITIES                                                                                                |   | 2,538,526                    |       | 1,986,275 |   | 503,368 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                     |   | 10,874                       |       | 207,281 |   | (212,826 | ) |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                                                           |   | 415,390                      |       | 208,109 |   | 420,935 |   |
|                                                                                                                                      |   |                         |       |   |   |   |   |
| CASH  AND CASH EQUIVALENTS AT END OF YEAR                                                                                                 |   | $                            | 426,264    |   | 415,390 |   | 208,109 |   |

 

See accompanyingnotes to

consolidatedfinancial statements

 

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THEYEARS ENDED JANUARY 31, 2002, 2001 AND 2000

 

1.  NATURE OF OPERATIONS AND BASIS OFPRESENTATION 

 

InnSuites Hospitality Trust (the “Trust”) is a realestate investment trust (“REIT”) that owns, directly or indirectly, elevenhotels with an aggregate of 1,679 suites in Arizona, southern California andNew Mexico.  The hotels operate asInnSuites Hotels. 

 

Until January 31, 1998, the Trust, formerly knownas Realty ReFund Trust, specialized in mortgage financing as its investmentvehicle, refinancing existing income producing commercial, industrial andmulti-unit residential real property by supplementing or replacing existingfinancing.  The primary refinancingtechnique that the Trust employed was wrap-around mortgage lending. 

 

On January 31, 1998, the Trust contributed $2,081,000to RRF Limited Partnership (the “Partnership”), a Delaware limited partnership,in exchange 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., theTrust issued 647,231 Shares of Beneficial Interest in exchange for all of theoutstanding shares of Buenaventura Properties, Inc. which owned a hotel locatedin Scottsdale, Arizona (“InnSuites Hotels Scottsdale”). These seven hotels arecollectively referred to as the “Initial Hotels.” The Initial Hotels, togetherwith subsequent hotel acquisitions, are referred to herein as the “Hotels.” TheHotels are leased to InnSuites Hotels, Inc., formerly known as Realty HotelLessee Corp. (the “Lessee”), pursuant to leases which contain provisions forrent based on the revenues of the Hotels (the “Percentage Leases”). EachPercentage Lease obligates the Lessee to pay rent equal to the greater of theminimum rent (“Base Rent”) or a percentage rent based on the gross revenue ofeach Hotel. The Lessee holds the franchise agreement for each Hotel. As ofFebruary 1, 2001, the Trust acquired 100% ownership interest of the Lessee,which was owned 23% by Marc E. Berg, Executive Vice President, Secretary,Treasurer and Trustee of the Trust, 9.8% by InnSuites Innternational Hotels,Inc., an entity owned by James F. Wirth, Chairman, President and ChiefExecutive Officer of the Trust (“Wirth”) and his spouse, and 67.2% by unrelatedthird parties. 

 

The Trust’s general partnership interest in thePartnership was 48.73% and 48.17% on January 31, 2002 and 2001,respectively, and the weighted average for the twelve months ended January 31,2002, 2001, and 2000 was 48.45%, 46.57%, and 39.4%, respectively. 

 

PARTNERSHIP AGREEMENT 

 

The Partnership Agreementof the Partnership provides for the issuance of two classes of limitedpartnership units, Class A and Class B. Such classes are identical in allrespects, except that each Class A limited partnership unit in the Partnershipshall be convertible into a like number of Shares of Beneficial Interest of theTrust, at any time at the option of the particular limited partner, if theTrust determines that such conversion would not cause the Trust to fail toqualify as a REIT.  As ofJanuary 31, 2002, 1,547,305 Class A limited partnership units were issuedand outstanding.  Additionally,5,226,364 Class B limited partnership units were outstanding to Wirth and hisaffiliates, in lieu of the issuance of Class A limited partnership units.  If all of the Class A and B limitedpartnership units were to be converted, the limited partners in the Partnershipwould receive 6,773,669 Shares of Beneficial Interest of the Trust.

 

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The Class B limitedpartnership units may only become convertible with the approval of the Board ofTrustees, in its sole discretion. 

 

BASIS OF PRESENTATION 

 

As sole general partner of the Partnership, the Trustexercises unilateral control over the Partnership and, as of February 1, 2001,owned all of the outstanding classes of shares of the Lessee. Therefore, thefinancial statements of the Partnership and the Lessee as of 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 ANDCRITICAL ACCOUNTING POLICIES 

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. 

 

The accounting policies that we believe most criticaland involve the most subjective judgments include our estimates and assumptionsof future revenue  and expenditures usedto project cash flows. Future cash flows are used in the valuation calculationof our hotel properties to determine the recoverability (or impairment) of thecarrying amounts if management is required to test the asset for recoverabilityof carrying value under Statement of Financial Accounting Standards (“SFAS”)No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of” (“SFAS No. 121”). Our evaluation of future cash flowsis based on our historical experience and other factors, including certaineconomic conditions. 

 

HOTEL PROPERTIES 

 

Hotel properties are stated at cost and aredepreciated using the straight-line method over estimated lives ranging from 5to 40 years for buildings and improvements and 3 to 15 years for furniture andequipment. 

 

The Trust applies SFAS No. 121 in accounting for itshotel properties. The Trust plans to adopt SFAS No. 144, which supersedes bothSFAS No. 121 and APB Opinion No. 30, for the quarter beginning February 1,2002. 

 

During fiscal 2001, underperformance of the Scottsdalehotel property indicated that the hotel asset significantly decreased in value,which then required management to test the asset for recoverability of carryingvalue under SFAS No. 121. Using management’s best estimate of undiscountedfuture cash flows from the hotel, the hotel asset’s book value was determinednot to be recoverable. The hotel asset, including land, buildings andimprovements, and fixtures, furniture and equipment were written down byapproximately $3.2 million to the hotel’s estimated fair value of $3.7 million.

 

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HOTEL PROPERTIES HELD FOR SALE 

 

Hotel properties held for sale are carried at thelower of cost or estimated fair value less costs to sell.  In addition, upon reclassification of ahotel property to held for sale, the Trust ceases depreciation of the property andrecognizes any reduction in the value of the property through recording animpairment loss in the period of reclassification.  Depreciation expense that would have been taken for the twelvemonths ended January 31, 2002 was approximately $160,000.  The Trust does not anticipate a loss on theultimate sale of these properties. 

 

CASH AND CASH EQUIVALENTS 

 

The Trust considers all highly liquid short–terminvestments with original maturities of three months or less to be cashequivalents.

 

REVENUE RECOGNITION 

 

Room, food and beverage, and telecommunicationsrevenue are recognized as earned as services are provided and items are sold.Ongoing credit evaluations are performed and an allowance for doubtful accountsis provided, if needed, against the portion of accounts receivable which isestimated to be uncollectible.

 

ALLOWANCE FOR UNCOLLECTIBLE RENT RECEIVABLES FROM AFFILIATE 

 

For fiscal years 2001 and 2000, financial instruments,which potentially subjected the Trust to credit risk, consisted of rent receivablefrom the Lessee.  The Trust periodicallyassessed the collectibility of these receivables based on its evaluation of theLessee’s estimated future cash flows available for payment.  As a result, for the fiscal years 2001 and2000, the Trust recorded a provision of approximately $2.4 million and $1.9million, respectively, for uncollectible receivables which are reflected in theaccompanying consolidated statements of operations as a component of generaland administrative expenses. 

 

DIVIDENDS AND DISTRIBUTIONS 

 

The Trust expects to pay dividends that are largelydependent upon the receipt of distributions from the Partnership. 

 

STOCK-BASED COMPENSATION 

 

The Trust accounts for its stock option plan inaccordance with the provisions of SFAS No. 123 “Accounting for Stock-basedCompensation” (“SFAS No. 123”), which permits entities to recognize as expenseover the vesting period, the fair value of all stock based awards on the dateof grant.  Alternatively, SFAS No. 123also allows entities to apply the provisions of APB Opinion No. 25 “Accountingfor Stock Issued to Employees and Related Operations” (“APB No. 25”) andprovide pro-forma net income and pro-forma earnings per share disclosures foremployee stock option grants as if the fair-value based method defined in SFASNo. 123 had been applied.  The Trust haselected to apply the provisions of APB No. 25.

 

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INCOME TAXES 

 

The Trust has elected to be taxed as a REIT underSections 856 through 860 of the Internal Revenue Code (the “Code”).  To qualify as a REIT, the Trust must meet anumber of organizational and operational requirements, including a requirementthat it currently distribute at least 90% of its adjusted taxable income to itsshareholders.  It is management’scurrent intentions to adhere to these requirements and maintain the Trust’sREIT status.  As a REIT, the Trustgenerally will not be subject to federal corporate income tax on that portionof its net income that is currently distributed to shareholders.  If the Trust fails to qualify as a REIT inany taxable year, it will be subject to federal income taxes at regularcorporate rates (including any applicable alternative minimum tax) and may notbe able to qualify as a REIT for four subsequent taxable years.  Even if the Trust qualifies for taxation asa REIT, the Trust may be subject to certain state and local taxes on its incomeand property, and to federal income and excise taxes on its undistributedtaxable income.  In addition, taxableincome from non-REIT activities managed through taxable REIT subsidiaries issubject to federal, state and local income taxes. 

 

Effective February 1, 2002, the Lessee became a wholly-owned taxableREIT subsidiary (“TRS”) of the Trust and as such is required to pay incometaxes at the applicable rates.  For theyear ended January 31, 2002, the Lessee did not record any income tax provisionsince the Lessee incurred a net loss during that fiscal year, and recorded adeferred tax asset that was offset by a 100% valuation allowance.

 

MINORITY INTEREST 

 

The Trust accounts for minority interest in accordancewith EITF Issue No. 94-2 “Treatment of Minority Interests in Certain RealEstate Investments” and EITF Issue No. 95-7 “Implementation Issues Related tothe Treatment of Minority Interest in Certain Real Estate Investment Trusts.” 

 

Minority interest in the Partnership represents thelimited partners’ proportionate share of the capital and earnings of thePartnership.  Income or loss isallocated to the minority interest based on the weighted average limitedpartnership percentage ownership throughout the period and capital is allocatedbased on the ownership percentage at year-end. Any difference is recorded as a reallocation of minority interest as a componentof shareholders’ equity. 

 

EARNINGS PER SHARE 

 

Basic and diluted earnings per share have beencomputed based on the weighted-average number of shares outstanding during theperiods and potentially dilutive securities. 

 

For the twelve months ended January 31, 2002,2001 and 2000, there were Class A and Class B limited partnership unitsoutstanding, which are convertible into Shares of Beneficial Interest of theTrust.  Assuming conversion at thebeginning of each period, the aggregate weighted-average of these Shares ofBeneficial Interest would be 6,810,436, 7,062,778, and 7,604,166 for fiscal2002, 2001, and 2000, respectively. These shares are anti-dilutive due to the losses for each of theaforementioned years.  Therefore, theseshares have not been used in the calculation of diluted earnings per share. 

 

For the twelve months ended January 31, 2002,2001 and 2000, 272,300, 344,100 and 375,600 stock options, respectively, arenot included in the computation of diluted earnings per share since the optionexercise prices were greater than the average market price of the Shares ofBeneficial Interest.

 

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FAIR VALUE OF FINANCIAL INSTRUMENTS 

 

For disclosure purposes, fair value is determined byusing available market information and appropriate valuationmethodologies.  Due to their shortmaturities, cash and cash equivalents and rent receivable from affiliate arecarried at cost, which reasonably approximates fair value. 

 

The fair value of mortgage notes payable and notespayable to banks is estimated by discounting the future cash flows using thecurrent rates which would be available for similar loans having the sameremaining maturities.  The carrying valueof accounts payable and accrued expenses and other notes payable approximatesfair value, due to their short-term nature. It is not practical to estimate the fair value of notes and advancespayable to related parties.  See Note 15“Fair Value of Financial Instruments”. 

 

SEGMENT REPORTING 

 

The Trust views its operations as one operatingbusiness segment, a real estate investment trust that owns, directly orindirectly, eleven hotels with an aggregate of 1,679 suites in Arizona,southern California and New Mexico. 

 

RECLASSIFICATIONS 

 

Certain prior year balances have been reclassified toconform to current year presentation. 

 

3.  HOTEL PROPERTIES 

 

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

 
|                               |   | **2002**   |       | **2001**   |       |
|------------------------------------|--------|------------|------------|------------|------------|
| Land                               |   | $          | 5,501,235  |       | 5,501,235  |   |
| Building  and improvements         |   | 56,089,725 |       | 54,523,741 |       |
| Furniture,  fixtures and equipment |   | 9,746,604  |       | 9,244,971  |       |
|                               |   |       |       |       |       |
| Total  hotel properties            |   | 71,337,564 |       | 69,249,947 |       |
| Less  accumulated depreciation     |   | 9,481,611  |       | 6,658,571  |       |
|                               |   |       |       |       |       |
| Hotel  properties, net             |   | $          | 61,855,953 |       | 62,591,376 |   |

 

4.  ACQUISITIONS 

 

In December 2000, the Lessee and the Trust establishedindependent review groups to consider altering the current structure of themanagement and operations of the Hotels pursuant to the provisions of the REITModernization Act (the “RMA”). The RMA, among other things, permits the Trustto own the stock of a TRS that may engage in businesses previously prohibitedby the Trust, including leasing hotels, provided that such hotels are managedand operated by independent third parties. Effective February 1, 2001, theTrust acquired all of the common and preferred equity stock of the Lessee for$11,531 in cash consideration and the assumption of approximately $1.6 millionof net liabilities. The Lessee was owned 23% by Marc E. Berg, Executive VicePresident, Secretary, Treasurer and Trustee of the Trust, 9.8% by InnSuitesInnternational Hotels, Inc., a wholly-owned affiliate of Mr. and Mrs. Wirth,and 67.2% by unrelated parties.

 

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Following the acquisition, the Lessee elected to betreated as a TRS under the RMA. As a result, the management contracts relatingto the Hotels between the Lessee and InnSuites Innternational Hotels, Inc. wereterminated effective January 31, 2001 and new management contracts were enteredinto on substantially similar terms with Suite Hospitality Management, Inc.(the “New Management Company”), which qualifies as an independent third partymanager and operator of the Hotels under the RMA. In connection with theacquisition, the rate structures of the Percentage Leases for the Hotels wereamended to reflect current economic and market conditions and the employees ofthe Lessee became employees of the New Management Company. The acquisition ofthe Lessee by the Trust resulted in the following benefits: a more directrelationship between the Hotels and the Trust, the inclusion of Lessee revenuesin excess of required rent payments in the Trust’s consolidated financialreports, the elimination of potential conflicts of interest and the reductionof certain administrative costs relative to the operation of the Hotels and theadministration of the Percentage Leases.

 

The following unaudited pro forma information providedfor the years ended January 31, 2002, 2001 and 2000 were derived byconsolidating the actual statements of operations of the Trust and the Lesseeand eliminating all intercompany transactions. In addition, the ExpensesIncurred in Acquiring Lessee of $1.6 million was recorded in the year endedJanuary 31, 2000 pro forma information assuming these costs would have beenincurred in the first year presented. The pro forma data does not necessarily reflect the actual results ofoperations that would have occurred had the Trust acquired the Lessee onFebruary 1, 1999, nor is it necessarily indicative of future results ofoperations of the combined entities.

 

INNSUITESHOSPITALITY TRUST AND SUBSIDIARY

PRO FORMASTATEMENT OF OPERATIONS

(in thousands)

(UNAUDITED)

 
|                                                    |   | **FOR THE  YEARS ENDED JANUARY 31,** |   |
|---------------------------------------------------------|--------|--------------------------------------|--------|
|                                                    |   | **2002**                             |   | **2001** |   | **2000** |   |
| Total  Revenue                                          |   | $                                    | 27,665 |   | 28,895 |   | 27,983 |   |
| Total  Operating Expenses                               |   | (21,825                              | )      | (26,071 | ) | (24,355 | ) |
| Total  Fixed Charges                                    |   | (8,609                               | )      | (8,229 | ) | (7,414 | ) |
|                                                    |   |                                 |   |   |   |   |   |
| Loss  Before Extraordinary Items and Minority Interest  |   | $                                    | (2,769 | ) | (5,405 | ) | (3,786 | ) |
| Extraordinary  Items                                    |   | (322                                 | )      | — |   | — |   |
|                                                    |   |                                 |   |   |   |   |   |
| Loss  Before Minority Interest                          |   | (3,091                               | )      | (5,405 | ) | (3,786 | ) |
| Less:  Minority Interest                                |   | (1,160                               | )      | (2,535 | ) | (1,434 | ) |
|                                                    |   |                                 |   |   |   |   |   |
| Net  Loss Attributable to Shares of Beneficial Interest |   | $                                    | (1,931 | ) | (2,870 | ) | (2,352 | ) |
|                                                    |   |                                 |   |   |   |   |   |
| LOSS  PER SHARE – Basic and Diluted                |   |                                 |   |   |   |   |   |
| Loss  Before Extraordinary Items                        |   | $                                    | (0.83  | ) | (1.24 | ) | (0.99 | ) |
| Extraordinary  Items                                    |   | (0.07                                | )      | — |   | — |   |
|                                                    |   |                                 |   |   |   |   |   |
| NET  LOSS                                               |   | $                                    | (0.90  | ) | (1.24 | ) | (0.99 | ) |

 

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Effective August 30, 2000, Albuquerque SuiteHospitality, LLC, a wholly-owned subsidiary of the Partnership, acquired 100%of the ownership interest in a hotel located in Albuquerque, New Mexico for$2,100,000.  The acquisition was fundedwith a first mortgage on the Albuquerque property in the amount of $1,575,000and cash from loans made to the Partnership by Wirth and his affiliates. Thisacquisition was accounted for as a purchase. 

 

5.  ALLOWANCE FOR DOUBTFUL ACCOUNTS 

 

At January 31, 2001, the Trust had an accumulatedallowance for uncollectible rents receivable from the Lessee totalingapproximately $5.3 million.  Afterreview of the estimated cash flow projections for fiscal year 2002 and 2001,management recorded a provision for uncollectible rent receivable in theamounts of approximately $2.4 million and $1.9 million for the fiscal years2001 and 2000, respectively.  Thefollowing reconciles the allowance for uncollectible rent receivable from theLessee as of and for the years ended January 31, 2002, 2001 and 2000:

 

Allowance for Uncollectible Rent Receivable

 

| Balance  as of January 31, 1999 |   | $          | 900,000 |   |
|---------------------------------|--------|------------|---------|--------|
| Provision                       |   | 1,945,732  |    |
|                            |   |       |    |
| Balance  as of January 31, 2000 |   | 2,845,732  |    |
| Provision                       |   | 2,406,129  |    |
|                            |   |       |    |
| Balance  as of January 31, 2001 |   | 5,251,861  |    |
| Write-offs                      |   | (5,251,861 | )       |
| Provision                       |   | —     |    |
|                            |   |       |    |
| Balance  as of January 31, 2002 |   | $          | —  |   |

 

6.  MORTGAGE NOTES PAYABLE 

 

At January 31, 2002, the Trust had mortgage notespayable outstanding with respect to nine of the Hotels.  The mortgage notes payable have variousrepayment terms and have scheduled maturity dates ranging from May 20, 2004 toApril 27, 2016.  Weighted average interestrates on the mortgage notes payable for the years ended January 31, 2002, 2001and 2000 were 8.13%, 8.25% and 8.49%, respectively. 

 

On April 28, 2001, the mortgage note payable to BankOne on the Tucson St. Mary’s hotel matured. The outstanding principal balancewas $3,762,839. Bank One extended the loan, waving principal and interestpayments until December 31, 2001, provided the Trust pay $3.6 million to settlethe loan in full on or before December 31, 2001. On December 28, 2001, theTrust refinanced its St. Mary’s property and used $3.6 million of the proceedsto fully satisfy the Bank One mortgage note, which resulted in an extraordinarygain of $255,000.  The new mortgage notein the amount of $3.6 million bears interest at the prime rate plus 1.0% andmatures on February 1, 2005. The mortgage agreement requires the Trust tomaintain a debt coverage ratio of not less than 1.5 to 1.0.  The Trust makes monthly principal paymentsof $13,765 with variable monthly interest payments.  The principal balance of the new note at January 31, 2002 was$3,600,000.  As of January 31, 2002, theTrust was not in compliance with the debt coverage covenant on this loan.  The Trust has received a wavier of suchnoncompliance for the period ended January 31, 2002.  Management believes that the Trust will be able to comply withthe debt coverage ratio during fiscal year 2003.

 

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On April 27, 2001, the Trust secured a mortgage notepayable on its Tucson Oracle property in the amount of  $5,100,000, which bears interest at 8.0% andmatures on April 27, 2016.  The Trustmakes monthly principal and interest payments of $48,738.  The principal balance of the note at January31, 2002 was $4,979,306. 

 

On April 18, 2001, the Trust refinanced its Ontario,California property for $9,000,000. The new mortgage note bears interest at8.28% and matures on May 11, 2011.  TheTrust makes monthly principal and interest payments of $71,141.  The principal balance of the note at Janaury31, 2002 was $8,936,480. 

 

On August 30, 2000, Albuquerque Suite Hospitality, LLC,a wholly-owned subsidiary of the Partnership, acquired 100% of the ownershipinterest in a hotel 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, 2002 was $1,503,782. 

 

On November 3, 1999, the Trust refinanced its mortgagenote on the San Diego property.  Theprincipal amount of the new loan was $4,000,000 with an interest rate of9.0%.  The loan matures onNovember 23, 2004.  A specialcondition limited the initial amount to be funded at closing to $3,500,000.  Subsequently, on May 2, 2000, thelender funded the additional $500,000. Financial covenants require (as defined in the loan agreement) a debtcoverage ratio of no less than 1.2.  Asof January 31, 2002, the Trust was in compliance with its financial covenants.  The Trust makes monthly principal andinterest payments of $40,222.  Theprincipal balance of the note at January 31, 2002 was $3,815,733. 

 

On March 30, 1999, the Trust modified and extended themortgage agreement on its Northern Phoenix property.  The Partnership borrowed an additional $1,750,000 at 8.25% thatmatures on April 1, 2014.  Theoriginal note was restructured to match the terms of the new note.  The maturity date of the original note wasextended from April 1, 2007 to April 1, 2014.  The Trust makes monthly principal andinterest payments of $42,886.  Theprincipal balance of the note at January 31, 2002 was $3,935,061. 

 

The Trust has a mortgage note secured by its Yumaproperty.  The note bears interest at8.5% and matures on August 1, 2011.  TheTrust makes monthly principal and interest payments of $41,168.  The principal balance of the note at January31, 2002 was $3,132,220.

 

The Trust has a mortgage note secured by its Tempeproperty.  The note bears interest at9.25% and matures on January 1, 2006. The Trust makes monthly principal and interest payments of $27,573.  The principal balance of the note at January31, 2002 was $2,076,359. 

 

The Trust has a mortgage note secured by its BuenaPark property.  The note bears interestat the prime rate (5.75% at January 31, 2002) plus 1.5% and matures on August1, 2011.  The Trust makes variablemonthly principal and interest payments. The principal balance of the note at January 31, 2002 was $3,223,128. 

 

Wirth and certain of his affiliates have guaranteed$12,433,118 of the mortgage notes payable. The net book value of properties securing the mortgage notes payable atJanuary 31, 2002 and 2001 was $50,224,805 and $50,224,805, respectively.  See Note 10 for scheduled minimum payments.

 

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7.  NOTES PAYABLE TO BANKS

 

On April 16, 1998, the Trust obtained a $12 millionCredit Facility from Pacific Century Bank to assist in its funding of theacquisition and development of additional hotels and for certain other businesspurposes. Borrowings under the Credit Facility were secured by first mortgageson three of the Hotels. By its terms, the Credit Facility expired on April 16,2001.

 

In order to replace the liquidity provided by theCredit Facility, the Trust actively sought individual loans on the TucsonOracle, Flagstaff and Scottsdale properties that secured the Credit Facility.On April 18, 2001, the Trust refinanced its Ontario property and used $4.2million of the net proceeds to reduce the outstanding balance of the CreditFacility from $11.3 million to $7.1 million. On April 27, 2001, the Trustclosed the financing of its Tucson Oracle property and used $4.8 million of thenet proceeds to reduce the outstanding balance of the Credit Facility toapproximately $2.3 million. On July 11, 2001, the Trust obtained a three-monthterm loan in the amount of $1,825,000 secured by its Scottsdale property and a$1,500,000 line of credit secured by the Flagstaff property and used $2.3million of the proceeds to settle the remaining balance of the $12 millionCredit Facility.  The term loan maturedon October 1, 2001 and was extended through November 1, 2002.  The line of credit expires on June 1,2003.  Both loans bear interest at theprime rate (5.75% at January 31, 2002) plus 1.0% and require the Trust tomaintain a debt coverage ratio of 1.5 to 1.0 and that the Lessee maintain agross operating profit of 80% of the annual projections provided to thelender.  As of January 31, 2002, theTrust had drawn $1,500,000 on the new line of credit and there was $1,825,000outstanding on the term loan.  As ofJanuary 31, 2002, the Trust was not in compliance with the covenant on the lineof credit and term loan requiring the Trust to maintain a debt coverage ratioof not less than 1.5 to 1.0.  The Trusthas received a wavier for the period ended January 31, 2002 and the lender hasamended the debt coverage ratio to 1.35 to 1.0 effective for fiscal year 2003.  Management believes that the trust will beable to comply with the amended debt coverage ratio during fiscal year2003.  In addition, management feepayments to the New Management Company and licensing fee payments to theLicense Corp. will be suspended for a period of five months beginning May 1,2002 and may resume after September 30, 2002 pending future compliance with theamended debt coverage ratio, the Partnership is 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, and the Trust has committed to notspend more than $1.4 million on capital expenditures during fiscal year 2003.

 

8.  NOTES AND ADVANCES PAYABLETO RELATED PARTIES

 

Notes and advances payable to related parties consistof funds provided by Wirth and other related parties to repurchase Partnershipunits and to fund working capital and capital improvement needs. The aggregateamounts outstanding were approximately $8.7 million and $7.5 million as ofJanuary 31, 2002 and January 31, 2001, respectively. The notes and advancespayable to related parties are as follows:

 

Notes Payable

 

On July 27, 2000, the Trust purchased 311,326 of thePartnership’s Class A limited partnership units from Steve Robson, Trustee ofthe Trust, for $750,000. The Trust made an initial payment of $5,000 and issueda promissory note in the amount of $745,000. The promissory note is secured bythe purchased Partnership units. The secured promissory note bears interest at7% per year, effective July 27, 2000. 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 to defer payments untilMarch 2002, when payments resumed as scheduled.  The principal balance as of January 31, 2002 was $553,449.

 

Advances Payable

 

Wirth made an unsecured loan to the Trust in theamount of $2 million, bearing interest at 7% per year, effective March 15,1999. Interest only payments were due annually beginning March 15, 2000. Theunpaid principal balance and accrued interest is due on March 15, 2004. TheTrust used the proceeds to purchase general partner units in the Partnership.The principal balance as of January 31, 2002 was $2,000,000.

 

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Wirth made an unsecured loan that replaced fouroutstanding unsecured loans to the Trust totaling $600,000. The loan amountsconsolidated were $200,000, $120,000, $30,000 and $250,000, all bearinginterest at 7% per year with varying maturities. The loans were used to fundoperations, to pay down the outstanding loan to the Partnership and to paydividends declared October 12, 1999. The unsecured consolidated promissory notefrom the Trust in the amount of $600,000, bearing interest at 7% per year,became effective August 1, 2000. The unpaid principal balance and accruedinterest on the unsecured consolidated promissory note was due on May 15, 2001.However, the term of the note was extended to July 15, 2002. The principalbalance as of January 31, 2002 was $600,000.

 

Wirth made nine unsecured loans to the Trust in thetotal amount of $2,066,000, all bearing interest at 7% per year, effectivevarying from August 15, 2000 to April 27, 2001. The unpaid principal balancesand accrued interest were due ranging from May 15 to July 1, 2001. However, theterms of the loans were extended to July 15, 2002. The Trust used the proceedsto acquire the Albuquerque, New Mexico hotel and to fund operations. Theprincipal balance as of January 31, 2002 was $1,347,000.

 

On July 27, 2000, the Partnership repurchased 300,000of the Trust’s shares from Wirth and/or affiliates, owned directly orindirectly by Wirth, issuing 10 secured promissory notes in the aggregateamount of $720,000 and $3,000 cash. The promissory notes are secured by therepurchased shares. The secured promissory notes in the aggregate amount of$720,000 bear interest at 7% per year, effective July 27, 2000. The unpaidprincipal balances and accrued interest are due at various dates ranging fromAugust 27, 2000 to July 27, 2003. Beginning June 1, 2001, the Trust and thenoteholders agreed to defer payments until March 2002, when payments resumed asscheduled. The principal balance as of January 31, 2002 was $506,911.

 

Rare Earth DevelopmentCompany, owned directly or indirectly by Wirth, made five unsecured loans tothe Trust in the total amount of $2,494,000, all bearing interest at 7% peryear, effective on dates ranging from December 29, 2000 through June 12, 2001.The unpaid principal balances and accrued interest were due on July 15, 2001.However, the term of the loans were extended to July 15, 2002.  During the third and fourth quarters of fiscalyear 2002, Rare Earth Development Company made an additional nine unsecuredloans to the Trust in thetotal amount of $1,434,000, all bearing interest at 7% per year, effective ondates ranging from August 22, 2001 through January 9, 2002.  The unpaid principal balances and accruedinterest are due on July 15, 2002.  TheTrust used the proceeds to fund operations. The principal balance as of January31, 2002 was $3,659,000.

 

9.  OTHER NOTES PAYABLE

 

On September 26, 2000, the Trust purchased 22,500Class A limited partnership units from Diane Jones by making an $844 downpayment and issuing an unsecured promissory note in the amount of $52,000. Thepromissory note in the amount of $52,000 bears interest at 7% per year. Theunpaid principal balance and accrued interest are due in 36 monthly payments of$1,606 beginning on November 27, 2000 and ending on October 27, 2003.  As of January 31, 2002, all payments havebeen made as scheduled. The principal balance on January 31, 2002 was $31,648.

 

On April 3, 2000, the Partnership repurchased 60,000 ofthe Trust’s shares from the Anderson Charitable Remainder Trust by issuing asecured promissory note in the amount of $120,000. The promissory note issecured by the repurchased shares. The secured promissory note bears interestat 7% per year. The unpaid principal balance and accrued interest are due in 24monthly payments of $5,373 beginning on May 1, 2000 and ending on April 1,2002. As of January 31, 2002, all payments have been made as scheduled. Theprincipal balance on January 31, 2002 was $15,932.

 

36

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On April 8, 2001, the Trust purchased 12,304 Class Alimited partnership units from J. Earl Ray by making an $838 down payment andissuing a secured promissory note in the amount of $25,000.  The promissory note is secured by therepurchased units.  The securedpromissory note bears interest at 7% per year. The unpaid principal balance and accrued interest are due in 36 monthlypayments of $772 beginning on May 15, 2001 and ending on April 15, 2004.  As of January 31, 2002, all payments havebeen made as scheduled.  The principalbalance on January 31, 2002 was $19,232.

 

On November 6, 2001, the Trust purchased 3,018 Class Alimited partnership units from John Bull by making a $225 down payment and issuinga secured promissory note in the amount of $4,000.  The promissory note is secured by the repurchased units.  The secured promissory note bears interestat 7% per year, effective November 6, 2001. The unpaid principal balance and accrued interest are due in 36 monthlypayments of $124 beginning on November 6, 2001 and ending on October 6,2004.  The first three payments, alongwith the down payment, were not paid until February 13, 2002, as agreed by theparties.  The principal balance andunpaid down payment on January 31, 2002 totaled $4,225.

 

In connection with the termination of an advisoryagreement between the Partnership and Mid-America ReaFund Advisors, Inc. (the“Advisor”), as further described at Note 14, the Trust assumed the Advisor’soutstanding debt totaling $450,000.  Thenote bore interest at 7% and matured January 30, 2000.  The Trust paid the final principal paymentand all interest due on February 11, 2000.

 

10.  MINIMUM DEBT PAYMENTS

 

Scheduled minimum payments of debt as ofJanuary 31, 2002 are as follows:

 

| **FISCAL  YEAR ENDED** |   | **AMOUNT** |       |
|------------------------|--------|------------|------------|
| 2003                   |   | $          | 9,588,600  |   |
| 2004                   |   | 3,197,452  |       |
| 2005                   |   | 9,858,203  |       |
| 2006                   |   | 5,650,205  |       |
| 2007                   |   | 1,083,204  |       |
| Thereafter             |   | 17,886,802 |       |
|                   |   | $          | 47,264,466 |   |

 

11.  DESCRIPTION OF CAPITALSTOCK

 

Holders of the Trust’s Shares of Beneficial Interestare entitled to receive dividends when and if declared by the Board of Trusteesof the Trust out of funds legally available therefore.  The holders of Shares of BeneficialInterest, upon any liquidation, dissolution or winding-down of the Trust, areentitled to share ratably in any assets remaining after payment in full of allliabilities of the Trust.  The Shares ofBeneficial Interest possess ordinary voting rights, each share entitling theholder thereof to one vote.  Holders ofShares of Beneficial Interest do not have cumulative voting rights in theelection of Trustees and do not have preemptive rights.

 

For the years ended January 31, 2002, 2001 and2000, the Trust repurchased 49,150, 461,743 and 189,500 Shares of BeneficialInterest at an average price of $1.64, $2.24 and $2.44 per share,respectively.  These shares areaccounted for as treasury stock in the statement of shareholders’ equity.

 

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12.  FEDERAL INCOME TAXES

 

The Trust has an income tax net operating loss ofapproximately $20.0 million at January 31, 2002. Net operating losscarryforwards expire beginning in fiscal 2008 and ending in fiscal 2021. Thequarterly allocation of cash dividends paid per share and the characterizationof dividends as either ordinary income or return of capital for individualshareholders’ income tax purposes were as follows:

 
|           |   | **CALENDAR  2001**   |   | **CALENDAR  2000**           |   | **CALENDAR  1999** |   |
|----------------|--------|----------------------|--------|------------------------------|--------|--------------------|--------|
| **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 |   | — |   | — |   | — |   |
| May            |   | —               |   | —                       |   | —             |   | — |   | $ | .01 |   | .01 |   | — |   | — |   | — |   |
| July           |   | —               |   | —                       |   | —             |   | — |   | $ | .01 |   | .01 |   | — |   | — |   | — |   |
| October        |   | —               |   | —                       |   | —             |   | — |   | $ | .01 |   | .01 |   | — |   | $ | .01 |   | $ | .01 |   |
|           |   | —               |   | —                       |   | —             |   | — |   | $ | .04 |   | .04 |   | — |   | .01 |   | .01 |   |
|                |        |                      |        |                              |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The tax status of distributions to shareholders incalendar 2002 will be dependent on the level of the Trust’s earnings in thatyear.  If certain changes in the Trust’sownership should occur, there could be an annual limitation on the amount ofcarryforwards that can be utilized, which could potentially impair the abilityto utilize the full amount of the carryforwards.

 

The total dividends per share applicable to operatingresults for the years ended January 31, 2002, 2001 and 2000, amounted to $0.01per share, $0.04 per share and $0.01 per share, respectively.

 

13.  ADVISORYAGREEMENT/EMPLOYMENT AGREEMENTS

 

Wirth has an employment agreement with the Trust whichexpires in December 2007.  Theemployment agreement provides that Wirth received no compensation from theTrust as 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, Wirth is to becompensated at an amount up to the same annual basis as the Advisor would havebeen compensated under the terms of the advisory agreement had it remained ineffect.  Wirth is currently beingcompensated, however, at a lesser rate of $126,000 a year.

 

14.  OTHER RELATED PARTYTRANSACTIONS

 

The Partnership is responsible for all expensesincurred by the Trust in accordance with the Partnership Agreement.

 

The Initial Hotels were acquired by the Partnershipfrom entities in which Wirth and his affiliates had substantial ownershipinterests.  Wirth and his affiliatesreceived 4,017,361 Class B limited partnership units and 647,231 Shares of BeneficialInterest in the Trust in exchange for their interests in the InitialHotels.  As of January 31, 2002 and2001 Wirth and his affiliates held 5,226,364 Class B limited partnership units.  As of January 31, 2002 and 2001 Wirthand his affiliates held 633,513 and 630,713, respectively, Shares of BeneficialInterest in the Trust.

 

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At January 31, 2002, the Trust owned a 48.73%interest in the eleven hotels (the “Hotels”) through its sole general partner’sinterest in the Partnership.  Thischange in ownership resulted primarily from the following transactions:

 

On March 15, 1999, the Trust purchased 1 millionadditional general partner units in the Partnership for $2 million.  This transaction was fully funded by Mr.Wirth who provided an unsecured loan to the Trust at 7% interest payableannually beginning March 15, 2000. The unpaid principal balance and accrued interest is due onMarch 15, 2004.

 

On April 2, 1999, the Partnership made anunsecured loan to the Trust in the amount of $2.6 million.  Annual interest only payments are due onMarch 1 of each year and are based on a 7% interest rate.  The unpaid principal balance is due atmaturity on April 2, 2006.  TheTrust used the proceeds of that loan to purchase 1.3 million general partnerunits in the Partnership.  The moneylent by the Partnership was generated by refinancing the Northern Phoenix hoteland borrowing an additional $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, athistorical cost of approximately $7 million, its interest in the Scottsdaleproperty to the Partnership in exchange for 1.6 million general partner units.

 

The Trust repurchased 131,493 of the Partnership’sClass A limited partnership units in fiscal 2000 at a weighted average priceper unit of $4.10.  The units were thenretired.

 

The Trust repurchased 370,487 of the Partnership’sClass A limited partnership units in fiscal 2001 at a weighted average priceper unit of $2.37.  Of these units,36,911 were then retired and the remaining 333,576 then became general partnerunits.

 

The Trust recorded expenses of $17,000 in fiscal year2000, for legal services provided by a law firm of which the former Presidentof the Trust and another former Trustee are principals.  No such expenses were incurred in 2002 or2001.

 

The Trust paid interest on related party notes to Mr.Wirth and his affiliates in the amounts of $222,047, $185,597 and $14,000 forthe twelve months ended January 31, 2002, 2001 and 2000, respectively.

 

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15.  FAIR VALUE OF FINANCIALINSTRUMENTS

 

The carrying amounts and fair values of the Trust’ssignificant financial instruments at January 31, 2002 and 2001 are asfollows:

 
|                                           |   | **2002**             |       | **2001**        |       |
|------------------------------------------------|--------|----------------------|------------|-----------------|------------|
|                                           |   | **CARRYING  AMOUNT** |       | **FAIR  VALUE** |       | **CARRYING  AMOUNT** |   | **FAIR  VALUE** |   |
| Mortgage notes  payable                        |   | $                    | 35,202,069 |            | 36,466,626 |   | 25,628,572 |   | 26,303,299 |   |
|                                           |   |                 |       |            |       |   |   |   |   |
| Notes payable to  banks                        |   | $                    | 3,325,000  |            | 3,325,000  |   | 11,300,000 |   | 11,300,000 |   |
|                                           |   |                 |       |            |       |   |   |   |   |
| Notes and  advances payable to related parties |   | $                    | 8,666,360  |            | *          |   | 7,471,707 |   | * |   |
|                                           |   |                 |       |            |       |   |   |   |   |
| Other notes  payable                           |   | $                    | 71,037     |            | 71,037     |   | 125,021 |   | 125,021 |   |

 

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* It is not practical to estimate the fair value of related partypayables due to the uncertainty regarding timing of repayments.

 

16.  SUPPLEMENTAL CASH FLOWDISCLOSURES

 

Cash paid for interest amounted to approximately $3.5million, $3.4 million and $3.4 million for fiscal years 2002, 2001 and 2000,respectively.

 

The Trust issued 59,000, 80,278, and 390,318 Shares ofBeneficial Interest during the years ended January 31, 2002, 2001, and 2000,respectively, in exchange for Class A limited partnership units.  The shares were valued at $104,400, $172,540and $1.1 million, respectively.

 

In connection with the acquisition of the Albuquerquehotel, approximately $1.6 million of the purchase price was satisfied throughusing a mortgage note payable to a third party lender.

 

The acquisition of the Lessee in fiscal year 2002resulted in the following changes in assets and liabilities, and expenserecognition:

 
| 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 Lessee              |   | (1,608,482 | )       |
|                                               |   |       |    |
| Net cash paid  for acquisition                     |   | $          | (11,531 | ) |

 

 

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17.  COMMITMENTS ANDCONTINGENCIES

 

Two of the Hotels are subject to non-cancelable groundleases expiring on December 31, 2051 and January 9, 2029.  Total expense for the fiscal years endedJanuary 31, 2002, 2001 and 2000 was $178,665, $104,805, and $70,000, plusa variable component based on gross revenues of each property that totaledapproximately $75,000, $64,000, and $67,000, respectively.

 

Future minimum lease payments under these leases areas follows:

 
| Fiscal Year Ending |   |      |      |
|--------------------|--------|-----------|-----------|
| 2003               |   | 186,400   |      |
| 2004               |   | 186,400   |      |
| 2005               |   | 186,400   |      |
| 2006               |   | 186,400   |      |
| 2007               |   | 186,400   |      |
| Thereafter         |   | 6,300,800 |      |
|               |   |      |      |
|               |   | $         | 7,232,800 |   |
|                    |        |           |           |  |

 

The Trust is obligated to make funds available to theHotels for capital expenditures (the “Reserve Funds”), as determined inaccordance with the Percentage Leases. The Reserve Funds have not been recorded on the books and records of theTrust as such amounts are capitalized as incurred.  The amounts obligated under the Reserve Funds are 4% of theindividual Hotels’ total revenues.  Pursuantto restrictions contained in certain credit agreements, however, the Trust maynot spend more than $1.4 million on capital expenditures during fiscal year2003.

 

The nature of the operations of the Hotels exposesthem to risks of claims and litigation in the normal course of theirbusiness.  Although the outcome of thesematters cannot be determined, management does not expect that the ultimateresolution of these matters will have a material adverse effect on thefinancial position, results of operations or liquidity of the Hotels.

 

The Trust is involved from time-to-time in variousother claims and legal actions arising in the ordinary course of business.  In the opinion of management, the ultimatedisposition of these matters will not have a material adverse effect on theTrust’s consolidated financial position, results of operations or liquidity.

 

18.  STOCK OPTION PLAN

 

During fiscal 1999, the shareholders of the Trustadopted the 1997 Stock Incentive and Option Plan (the “Plan”).  Pursuant to the Plan, the CompensationCommittee may grant options to the Trustees, Trust officers, other keyemployees, consultants, advisors and similar employees of the Trust’ssubsidiaries and affiliates.  The numberof options that may be granted is limited to 10% of the total Common Stock andUnits (Class A and Class B) as of the first day of such year.

 

Generally, options granted expire in 10 years, areexercisable during the optionee’s lifetime only by the recipient and arenon-transferable.  Unexercised optionsheld by employees of the Trust generally terminate on the date the individual ceasesto be an employee of the Trust.

 

There were no options granted in fiscal year 2002 or2001.

 

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The per share weighted average fair value of stockoptions granted under the Plan for the year ended January 31, 2000 was$1.12 calculated using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions used for grants in 2000:

 
|                     |   | **Years  ended January 31,** |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **2002**                     |   | **2001** |   | **2000** |   |
| Dividend yield           |   | —                       |   | — |   | 2.5 | % |
| Expected  volatility     |   | —                       |   | — |   | 34.0 | % |
| Risk-free  interest rate |   | —                       |   | — |   | 5.7 | % |
| Expected lives  (years)  |   | —                       |   | — |   | 3.0 |   |

 

The following table summarizes the stock optionactivity during the 2002, 2001 and 2000 fiscal years and provides informationabout the stock options outstanding at January 31, 2002:

 
|                           |   | **Number Of  Options** |   | **Weighted-  Average   Exercise Price** |       |
|--------------------------------|--------|------------------------|--------|-----------------------------------------|------------|
| Stock Option Activity          |   |                   |   |                                    |       |
|                           |   |                   |   |                                    |       |
| Outstanding,  January 31, 1999 |   | 389,700                |   | $                                       |  4.31 |   |
| Granted                        |   | 88,200                 |   | 2.50                                    |       |
| Forfeited                      |   | (102,300               | )      | 3.83                                    |       |
| Exercised                      |   | —                 |   | —                                  |       |
|                           |   |                   |   |                                    |       |
| Outstanding,  January 31, 2000 |   | 375,600                |   | $                                       |  2.50 |   |
| Granted                        |   | —                 |   | —                                  |       |
| Forfeited                      |   | (31,500                | )      | 2.50                                    |       |
| Exercised                      |   | —                 |   | —                                  |       |
|                           |   |                   |   |                                    |       |
| Outstanding,  January 31, 2001 |   | 344,100                |   | $                                       |  2.50 |   |
| Granted                        |   | —                 |   | —                                  |       |
| Forfeited                      |   | (71,800                | )      | 2.50                                    |       |
| Exercised                      |   | —                 |   | —                                  |       |
|                           |   |                   |   |                                    |       |
| Outstanding,  January 31, 2002 |   | 272,300                |   | $                                       |  2.50 |   |

 
| **Stock  Option Information**               |   | **January 31,  2002** |   |
|---------------------------------------------|--------|----------------------------|--------|
| Options exercisable                         |   | 162,567                    |   |
| Weighted Average Exercise Price             |   | $                          | 2.50   |   |
| Weighted Average Remaining Contractual Life |   | 6.66                       |   |
|                                             |        |                            |        |  |

 

For stock options granted to non-employees of theTrust, compensation is recognized over the respective vesting period based uponthe fair value of the options as calculated using the Black-Scholes pricingmodel.  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 2002 or 2001. The fiscal 2000 grants resulted in the recognition of compensationexpense of approximately $26,000, $53,000, and $57,000 for the years ended January31, 2002, 2001, and 2000, respectively.

 

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The Trust applies APB Opinion No. 25 in accounting forstock options granted to its employees under the Plan and, accordingly, nocompensation expense has been recognized for these stock options in theconsolidated financial statements.  Hadthe Trust determined compensation expense based on the fair value at the grantdate for its stock options under SFAS No. 123, the Trust’s net loss would havebeen increased to the pro-forma amounts indicated below:

 
|                                         |   | **Years  ended January 31** |        |
|----------------------------------------------|--------|-----------------------------|-------------|
|                                         |   | **2002**                    |        | **2001** |   | **2000** |   |
| Net loss:                                    |   |                        |        |   |   |   |   |
| As reported                                  |   | $                           | (3,539,402  | ) | $ | (2,594,754 | ) | $ | (951,811 | ) |
|                                         |   |                        |        |   |   |   |   |
| Pro forma                                    |   | $                           | (3,560,449  | ) | $ |  (2,698,244 | ) | $ |  (1,058,408 | ) |
|                                         |   |                        |        |   |   |   |   |
| Net loss per  share – basic and diluted |   |                        |        |   |   |   |   |
| As reported                                  |   | $                           |  (1.66 | ) | $ |  (1.12 | ) | $ |  (0.40 | ) |
|                                         |   |                        |        |   |   |   |   |
| Pro forma                                    |   | $                           | (1.67       | ) | $ | (1.16 | ) | $ | (0.45 | ) |

 

Effective September 14, 1999, the Trust modifiedall outstanding stock options, reducing the exercise price from the existingexercise price per share to $2.50, to be consistent with the trading value ofunderlying beneficial interest as of this date.  As a result of the modification of exercise price, the Trustrecognized approximately $10,000 compensation expense for the year endedJanuary 31, 2000.  There have beenno other modifications to date.

 

19.  NET LOSS PER SHARE

 

The Trust calculates basic and diluted net income(loss) per share in accordance with the provisions of Statement of FinancialAccounting Standards No. 128, “Earnings Per Share.”  Basic net income (loss) per share is computed using the weightedaverage number of common shares outstanding during each period (2,137,203,2,316,972 and 2,376,770 shares for the years ended January 31, 2002, 2001and 2000, respectively).  Diluted netloss per share is the same as basic net loss per share for the years endedJanuary 31, 2002, 2001 and 2000 due to the anti-dilutive effect ofpotentially dilutive securities.

 

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20.  QUARTERLY RESULTS(UNAUDITED)

 

The following is a summary of the results ofoperations, by quarter, for the fiscal years ended January 31, 2002 and2001.  Management believes that alladjustments (consisting of normal recurring accruals) necessary for a fairpresentation of such interim results have been included.  The results of operations for any interimperiod are not necessarily indicative of those for the entire fiscal year.

 
| **FISCAL  2002**                                                                                                                      |   | **APRIL 30** |       | **JULY 31** |      | **OCTOBER 31** |      | **JANUARY 31** |      | **FISCAL 2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|-------------|-----------|----------------|-----------|----------------|-----------|-----------------|--------|
| Total revenue                                                                                                                         |   | $            | 8,867,596  |        | 6,841,570 |           | 6,065,364 |           | 5,890,805 |            | $      | 27,665,335 |   |
|                                                                                                                                  |   |         |       |        |      |           |      |           |      |            |   |
| Total revenue  less interest expense on mortgage loans and operating expenses, and  amortization expense of real estate held for sale |   | $            | 585,891    |        | 430,723   |           | 114,524   |           | 230,289   |            | $      | 1,361,427 |   |
|                                                                                                                                  |   |         |       |        |      |           |      |           |      |            |   |
| Net income  (loss)                                                                                                                    |   | $            | (1,207,203 | )           | (690,358  | )              | (780,995  | )              | (860,846  | )               | $      | (3,539,402 | ) |
|                                                                                                                                  |   |         |       |        |      |           |      |           |      |            |   |
| Loss per share –  basic                                                                                                          |   | $            | (.57       | )           | (.32      | )              | (.36      | )              | (.40      | )               | $      | (1.66 | ) |
|                                                                                                                                  |   |         |       |        |      |           |      |           |      |            |   |
| Loss per share –  diluted                                                                                                        |   | $            | (.57       | )           | (.32      | )              | (.36      | )              | (.40      | )               | $      | (1.66 | ) |
|                                                                                                                                  |   |         |       |        |      |           |      |           |      |            |   |
| Dividends  declared per share                                                                                                         |   | $            | —     |        | —    |           | —    |           | .01       |            | $      | .01 |   |
|                                                                                                                                       |        |              |            |             |           |                |           |                |           |                 |        |  |  |  |  |

 
| **FISCAL 2001**                                                                                                                       |   | **APRIL 30** |      | **JULY 31** |      | **OCTOBER 31** |      | **JANUARY 31** |       | **FISCAL 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|-----------|-------------|-----------|----------------|-----------|----------------|------------|-----------------|--------|
| Total revenue                                                                                                                         |   | $            | 3,321,309 |        | 2,086,259 |           | 2,173,744 |           | 2,157,143  |            | $      | 9,738,455 |   |
|                                                                                                                                  |   |         |      |        |      |           |      |           |       |            |   |
| Total revenue  less interest expense on mortgage loans and operating expenses, and  amortization expense of real estate held for sale |   | $            | 2,464,217 |        | 1,175,233 |           | 1,178,741 |           | 1,150,975  |            | $      | 5,969,166 |   |
|                                                                                                                                  |   |         |      |        |      |           |      |           |       |            |   |
| Net income  (loss)                                                                                                                    |   | $            | 392,489   |        | (403,513  | )              | (513,844  | )              | (2,150,668 | )               | $      | (2,594,754) |   |
|                                                                                                                                  |   |         |      |        |      |           |      |           |       |            |   |
| Income (loss)  per share – basic                                                                                                 |   | $            | .16       |        | (.17      | )              | (.24      | )              | (.99       | )               | $      | (1.12 | ) |
|                                                                                                                                  |   |         |      |        |      |           |      |           |       |            |   |
| Income (loss)  per share – diluted                                                                                               |   | $            | .10       |        | (.17      | )              | (.24      | )              | (.99       | )               | $      | (1.12 | ) |
|                                                                                                                                  |   |         |      |        |      |           |      |           |       |            |   |
| Dividends  declared per share                                                                                                         |   | $            | .01       |        | .01       |           | .01       |           | .01        |            | $      | .04 |   |
|                                                                                                                                       |        |              |           |             |           |                |           |                |            |                 |        |  |  |  |  |  |

 

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21.  LIQUIDITY AND CAPITALRESOURCES

 

The Trust has experienced a net loss applicable toShares of Beneficial Interest of $3,539,402, $2,594,754 and $951,811 for the years ended January 31,2002, 2001 and 2000, respectively. Cash flows from operations for each of theserespective years have been $(234,483), $809,501 and $800,349, respectively, andthe Trust has shareholders’ equity of approximately $1.5 million at January 31,2002.

 

The Trust’s principal source of cash to meet its cashrequirements, including distributions to its shareholders, is its share of thePartnership’s cash flow. The Partnership’s principal source of revenue is rentpayments under the Percentage Leases. The Lessee’s obligations under the Percentage Leases are unsecured andits ability to make rent payments to the Partnership under the PercentageLeases, and the Trust’s liquidity, including its ability to make distributionsto its shareholders, will depend upon the ability of the Lessee to generatesufficient cash flow from hotel operations. Additionally, pursuant to restrictions contained in certain creditagreements, Partnership distributions to the Trust during fiscal year 2003 arelimited to an amount equal to $0.01 per outstanding Share of BeneficialInterest.

 

As a result of the Trust’s acquisition of the Lesseeas of February 1, 2001, any profits earned by the Lessee in its operation ofthe Hotels may be distributed to the Trust. See “Item 1 - Business - Acquisition of the Lessee by the Trust.”

 

On April 18, 2001, the Trust refinanced its Ontarioproperty and used $4.2 million of the net proceeds to reduce the outstandingbalance of the Credit Facility from $11.3 million to $7.1 million. On April 27,2001, the Trust closed the financing of its Tucson Oracle property and used$4.8 million of the net proceeds to reduce the outstanding balance of theCredit Facility to approximately $2.3 million. On July 11, 2001, the Trustobtained a term loan in the amount $1,825,000 secured by the Scottsdaleproperty and a $1,500,000 line of credit secured by the Flagstaff property. TheTrust used $2.3 million of the proceeds to settle the remaining balance of theCredit Facility. The term loan matured on October 1, 2001 and was extendedthrough November 1, 2002.  The line ofcredit matures on June 1, 2003.  Bothloans bear interest at the prime rate plus 1.0% and require the Trust tomaintain a debt coverage ratio of not less than 1.5 to 1.0 and the Lessee tomaintain a gross operating profit of 80% of the annual projections provided tothe lender. As of January 31, 2002, the Trust had drawn $1.5 million on the newline of credit.  As of January 31, 2002,the Trust was not in compliance with the covenant on the line of credit andterm loan requiring the Trust to maintain a debt coverage ratio of not lessthan 1.5 to 1.0.  The Trust has receiveda wavier for the period ended January 31, 2002 and the lender has amended thedebt coverage ratio to 1.35 to 1.0 effective for fiscal year 2003. Managementbelieves that the Trust will be able to comply with the amended debt coverageratio during fiscal year 2003.  In addition,management fee payments to the New Management Company and licensing feepayments to the License Corp. will be suspended for a period of five monthsbeginning May 1, 2002 and may resume after September 30, 2002 pending futurecompliance with the amended debt coverage ratio, the Partnership is restrictedfrom making distributions to the Trust during fiscal year 2003 in excess of theamount required for the Trust to pay dividends of $0.01 per outstanding Shareof Beneficial Interest for fiscal year 2003, and the Trust has committed to notspend more than $1.4 million on capital expenditures during fiscal year 2003.

 

On April 28, 2001, the mortgage note payable to BankOne on the Tucson St. Mary’s hotel matured. The outstanding principal balancewas $3,762,839. Bank One extended the loan to December 31, 2001, wavingprincipal and interest payments from April 28, 2001 to December 31, 2001,provided the Trust pay $3,600,000 to settle the loan in full on or beforeDecember 31, 2001. On December 28, 2001, the Trust refinanced its St. Mary’sproperty securing a mortgage note payable for $3,600,000 bearing interest atprime plus one percentage point. The mortgage agreement requires the Trust tomaintain a debt coverage ratio of not less than 1.5 to 1.0. The new loanmatures on February 1, 2005. The Trust settled the Bank One mortgage notepayable for $3,600,000 on December 31, 2001 resulting in an extraordinary gainin the amount of $254,689.  As ofJanuary 31, 2002, the Trust was not in compliance with the debt coveragecovenant on this loan.  The Trust hasreceived a wavier of such noncompliance for the period ended January 31,2002.  Management believes that theTrust will be able to comply with the debt coverage ratio during fiscal year2003.

 

The Trust has approximately $6.0 million due andpayable in fiscal year 2003 under notes and advances payable to Wirth and hisaffiliates.  To the extent the Trustcannot satisfy these amounts as they come due, Wirth has agreed to extend theterms of these borrowings to future dates.

 

45

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Management believes that cash on hand, future cashreceipts from operations and potential sales of certain hotel properties heldfor sale and borrowings from affiliates in fiscal year 2003 will be sufficientto meet the Trust’s expansion plans and to pay all obligations as they becomedue for the next twelve months.  TheTrust’s projection of future cash receipts includes certain revenue increasesand cost cutting measures.

 

22.  EXTRAORDINARY ITEMS

 

On April 18, 2001, The Trust refinanced its Ontario,California property, paying $576,842 in prepayment penalties. The Trustclassified the prepayment penalty as an extraordinary item.

 

On December 31, 2001, the Trust refinanced its St.Mary’s property, recording a gain on extinguishment of debt in the amount of$254,689. The Trust classified the gain as an extraordinary item.

 

23.  HOTEL PROPERTIES HELD FORSALE

 

In August 2001, the Trust listed its Scottsdale andFlagstaff properties for sale. Management’s estimate of the market value, lessselling costs, of these properties exceeds the carrying value.  The Trust does not expect to incur losses ifthese properties are sold. The Trust may or may not be successful in sellingthese properties in the listing period.

 

46

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SCHEDULE III

 

INNSUITES HOSPITALITYTRUST AND SUBSIDIARYREAL ESTATE AND ACCUMULATED DEPRECIATIONAS OF JANUARY 31, 2002

 
|                                     |   |             |       | **Initial   Cost   to Trust** |   | **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 Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Phoenix Best Western                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Phoenix, Arizona                         |   | $                | 3,935,061  |                          | $      | 418,219                                              |   | $                                                          | 2,922,884  |   | $ | — |   | $ | (105,479 | ) | $ | 418,219 |   | $ | 2,817,405 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tempe/Phoenix  Airport/South Mountain    |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tempe, Arizona                           |   | 2,076,359        |       | 686,806                       |   | 6,548,348                                            |   | —                                                     |       | 11,788 |   | 686,806 |   | 6,560,136 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tucson, Catalina  Foothills Best Western |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tucson, Arizona                          |   | 4,979,306        |       | —                        |   | 4,220,820                                            |   | —                                                     |       | 1,951,233 |   | — |   | 6,172,053 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Yuma Best Western                        |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Yuma, Arizona                            |   | 3,132,220        |       | 251,649                       |   | 4,983,292                                            |   | —                                                     |       | 857,080 |   | 251,649 |   | 5,840,372 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Holiday Inn                              |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Airport Ontario  Hotel and Suites        |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Ontario,  California                     |   | 8,936,480        |       | 1,633,064                     |   | 5,450,872                                            |   | —                                                     |       | 1,243,169 |   | 1,633,064 |   | 6,694,041 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Flagstaff/Grand  Canyon                  |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Flagstaff,  Arizona (B)                  |   | —           |       | 100,000                       |   | 1,194,691                                            |   | —                                                     |       | 1,183,949 |   | 100,000 |   | 2,378,640 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tucson St.  Mary’s                  |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Tucson, Arizona                          |   | 3,600,000        |       | 900,000                       |   | 9,166,549                                            |   | (20,564                                                    | )          | 326,093 |   | 879,436 |   | 9,492,642 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Buena Park Suite  Hospitality            |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Buena Park  Suites                       |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Buena Park,  California                  |   | 3,223,128        |       | 645,852                       |   | 4,336,476                                            |   | —                                                     |       | 2,304,131 |   | 645,852 |   | 6,640,607 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| San Diego  Hospitality                   |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| San Diego,  California                   |   | 3,815,733        |       | 700,000                       |   | 3,972,785                                            |   | —                                                     |       | 318,633 |   | 700,000 |   | 4,291,418 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| InnSuites Hotels                         |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Scottsdale/ El  Dorado Park Resort       |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Scottsdale,  Arizona (C)                 |   | —           |       | 350,000                       |   | 6,074,400                                            |   | (163,791                                                   | )          | (2,977,316 | ) | 186,209 |   | 3,097,084 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Airport Inn  Albuquerque                 |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
| Albuquerque, New  Mexico                 |   | 1,503,782        |       | —                        |   | 1,903,970                                            |   | —                                                     |       | 201,357 |   | — |   | 2,105,327 |   |
|                                     |   |             |       |                          |   |                                                 |   |                                                       |       |   |   |   |   |   |   |
|                                     |   | $                | 35,202,069 |                          | $      | 5,685,590                                            |   | $                                                          | 50,775,087 |   | $ | (184,355 | ) | $ | 5,314,638 |   | $ | 5,501,235 |   | $ | 56,089,725 |   |

 

 

47

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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 Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Phoenix Best  Western                    |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Phoenix, Arizona                         |   | $             | 3,235,624  |                              | $      | 304,153                                                             |   | $                          | 2,931,471  |                         | 1980   |                                                   | 1998   |   | 5-40 years |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tempe/Phoenix  Airport/South Mountain    |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tempe, Arizona                           |   | 7,246,942     |       | 664,655                           |   | 6,582,287                                                           |   | 1982                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tucson, Catalina  Foothills Best Western |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tucson, Arizona                          |   | 6,172,053     |       | 672,753                           |   | 5,499,300                                                           |   | 1981                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Yuma Best  Western                       |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Yuma, Arizona                            |   | 6,092,021     |       | 617,765                           |   | 5,474,256                                                           |   | 1982                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Holiday Inn                              |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Airport Ontario  Hotel and Suites        |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Ontario,  California                     |   | 8,327,105     |       | 986,591                           |   | 7,340,514                                                           |   | 1990                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Flagstaff/Grand  Canyon                  |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Flagstaff,  Arizona (B)                  |   | 2,478,640     |       | 209,354                           |   | 2,269,286                                                           |   | 1966                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tucson St.  Mary’s                  |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Tucson, Arizona                          |   | 10,372,078    |       | 938,703                           |   | 9,433,375                                                           |   | 1960                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Buena Park Suite  Hospitality            |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Buena Park  Suites                       |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Buena Park,  California                  |   | 7,286,459     |       | 686,616                           |   | 6,599,843                                                           |   | 1972                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| San Diego  Hospitality                   |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| San Diego,  California                   |   | 4,991,418     |       | 447,127                           |   | 4,544,291                                                           |   | 1946                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| InnSuites Hotels                         |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Scottsdale/El  Dorado Park Resort        |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Scottsdale,  Arizona (C)                 |   | 3,283,293     |       | 45,011                            |   | 3,238,282                                                           |   | 1980                       |       | 1998                         |   | 5-40 years                                             |   |
|                                     |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Airport Inn  Albuquerque                 |   |          |       |                              |   |                                                                |   |                       |       |                         |   |                                                   |   |
| Albuquerque, New  Mexico                 |   | 2,105,327     |       | 111,610                           |   | 1,993,717                                                           |   | 1975                       |       | 2000                         |   | 5-40 years                                             |   |
|                                     |   | $             | 61,590,960 |                              | $      | 5,684,338                                                           |   | $                          | 55,906,622 |                         |   |                                                   |   |   |   |   |

 

(See accompanyingindependent auditors report.)

 

(A)  Aggregate cost for federalincome tax purposes at January 31, 2002 is as follows:

 

| Land                        |   | $          | 4,638,585  |   |
|-----------------------------|--------|------------|------------|--------|
| Buildings and  improvements |   | 33,535,242 |       |
|                        |   | $          | 38,173,827 |   |

 

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

 

(C) This property secures the $1.825 million term loan.

 

48

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| Reconciliation  of Real Estate:                          |   |       |       |
|----------------------------------------------------------|--------|------------|------------|
|                                                     |   |       |       |
| Balance at January 31, 2000                              |   | $          | 60,017,468 |   |
| Acquisition of  Hotel Properties                         |   | 1,903,970  |       |
| Improvement to  Hotel Properties                         |   | 758,213    |       |
| Impairment of  Hotel Property                            |   | (3,329,349 | )          |
| Sale of Land                                             |   | (20,564    | )          |
|                                                     |   |       |       |
| Balance at  January 31, 2001                             |   | $          | 60,024,976 |   |
| Improvement to  Hotel Properties                         |   | 1,043,790  |       |
| Reclassification  from Fixtures, Furniture and Equipment |   | 522,194    |       |
|                                                     |   |       |       |
| Balance at  January 31, 2002                             |   | $          | 61,590,960 |   |

 

All acquisitions of hotel properties, other than approximately$1,448,000 in cash paid in connection with the purchase of the Buena Parkproperty and $2,100,000 paid for the Albuquerque property, were acquiredthrough the exchange of limited partnership units in the Partnership.

 
| Reconciliation of Accumulated Depreciation: |   |      |      |
|---------------------------------------------|--------|-----------|-----------|
| Balance at  January 31, 1999                |   | $         | 1,306,786 |   |
| Depreciation                                |   | 1,368,788 |      |
|                                        |   |      |      |
| Balance at January  31, 2000                |   | 2,675,574 |      |
| Depreciation                                |   | 1,423,533 |      |
| Impairment of  hotel property               |   | (465,851  | )         |
|                                        |   |      |      |
| Balance at  January 31, 2001                |   | 3,633,256 |      |
| Depreciation                                |   | 1,506,772 |      |
| Reclassification  from FF&E             |   | 544,310   |      |
|                                        |   |      |      |
| Balance at  January 31, 2002                |   | $         | 5,684,338 |   |

 

49

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Independent Auditors’ Report

 

The Board of DirectorsInnSuites Hotels, Inc.:

 

We have audited the accompanying balance sheets ofInnSuites Hotels, Inc. (the “Company”) as of January 31, 2001 and 2000,and the related statements of operations, stockholders’ deficit and cash flowsfor each of the years in the two-year period ended January 31, 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofInnSuites Hotels, Inc. as of January 31, 2001 and 2000, and the results ofits operations and its cash flows for each of the years in the two-year periodended January 31, 2001 in conformity with accounting principles generallyaccepted in the United States of America.

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

 

Phoenix, ArizonaApril 30, 2001

 

50

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The financial statements of Innsuites Hotels, Inc. asof and for the period ended January 31, 2002 are not presented separately dueto the acquisition of Innsuites Hotels, Inc by the Trust. See “Item 1 -Business - Acquisition of the Lessee by the Trust”

 

INNSUITESHOTELS, INC.BALANCE SHEETS

 
|                                                                                                                               |   | **January 31,** |      |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------|
|                                                                                                                               |   | **2001**        |      | **2000** |   |
| Assets                                                                                                                             |   |            |      |   |   |
|                                                                                                                               |   |            |      |   |   |
| Cash and cash  equivalents                                                                                                         |   | $               | 71,491    |   | 203,166 |   |
| Accounts  receivable, net                                                                                                          |   | 1,132,274       |      | 790,323 |   |
| Prepaids and  other assets                                                                                                         |   | 223,222         |      | 41,938 |   |
|                                                                                                                               |   |            |      |   |   |
| Total Assets                                                                                                                       |   | $               | 1,426,987 |   | 1,035,427 |   |
|                                                                                                                               |   |            |      |   |   |
| Liabilities and  Stockholders’ Deficit                                                                                        |   |            |      |   |   |
|                                                                                                                               |   |            |      |   |   |
| Liabilities                                                                                                                        |   |            |      |   |   |
|                                                                                                                               |   |            |      |   |   |
| Accounts payable                                                                                                                   |   | 1,671,562       |      | 1,418,469 |   |
| Loans from  affiliates                                                                                                             |   | 631,834         |      | 375,000 |   |
| Percentage rent  payable                                                                                                           |   | 5,251,862       |      | 2,845,732 |   |
| Accrued expenses  and other liabilities                                                                                            |   | 775,790         |      | 865,953 |   |
|                                                                                                                               |   |            |      |   |   |
| Total  Liabilities                                                                                                                 |   | 8,331,048       |      | 5,505,154 |   |
|                                                                                                                               |   |            |      |   |   |
|                                                                                                                               |   |            |      |   |   |
| Stockholders’  Deficit                                                                                                        |   |            |      |   |   |
| Preferred stock,  $1 par value, 100 shares authorized, 100 shares issued and outstanding as of  January 31, 2001 and 2000     |   | 100             |      | 100 |   |
| Additional  paid-in-capital                                                                                                        |   | 249,900         |      | 249,900 |   |
| Common stock, no  par value, 100,000 shares authorized, 76,555 shares issued and outstanding as  of January 31, 2001 and 2000 |   | 2,431           |      | 2,431 |   |
| Accumulated  Deficit                                                                                                               |   | (7,156,492      | )         | (4,722,158 | ) |
|                                                                                                                               |   |            |      |   |   |
| Total Stockholders’  Deficit                                                                                                  |   | (6,904,061      | )         | (4,469,727 | ) |
|                                                                                                                               |   |            |      |   |   |
| Total  Liabilities and Stockholders’ Deficit                                                                                  |   | $               | 1,426,987 |   | 1,035,427 |   |

 

See accompanying notes tofinancial statements. 

 

51

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INNSUITESHOTELS, INC.STATEMENTS OF OPERATIONS

 
|                            |   | **For the  years ended January 31,** |       |
|---------------------------------|--------|--------------------------------------|------------|
|                            |   | **2001**                             |       | **2000** |   |
| Revenue from  hotel operations: |   |                                 |       |   |   |
| Room                            |   | $                                    | 26,077,800 |   | 25,146,035 |   |
| Food and  beverage              |   | 1,709,045                            |       | 1,725,730 |   |
| Telecommunications              |   | 335,932                              |       | 346,091 |   |
| Other                           |   | 733,637                              |       | 734,585 |   |
|                            |   |                                 |       |   |   |
| Total revenues                  |   | $                                    | 28,856,414 |   | 27,952,441 |   |
|                            |   |                                 |       |   |   |
| Department  expenses:           |   |                                 |       |   |   |
| Rooms                           |   | $                                    | 7,136,313  |   | 6,706,503 |   |
| Food and  beverage              |   | 1,620,049                            |       | 1,626,532 |   |
| Telecommunications              |   | 447,758                              |       | 389,664 |   |
| Other                           |   | 445,236                              |       | 437,240 |   |
| General and administrative      |   | 4,562,012                            |       | 3,918,748 |   |
| Sales and  marketing            |   | 2,173,381                            |       | 2,149,781 |   |
| Repairs and  maintenance        |   | 1,816,917                            |       | 2,025,576 |   |
| Hospitality                     |   | 1,647,599                            |       | 1,546,766 |   |
| Utilities                       |   | 1,824,198                            |       | 1,643,788 |   |
| Insurance                       |   | 167,867                              |       | 105,573 |   |
| Percentage rent                 |   | 9,699,418                            |       | 9,516,038 |   |
|                            |   |                                 |       |   |   |
| Total expenses                  |   | $                                    | 31,540,748 |   | 30,066,209 |   |
|                            |   |                                 |       |   |   |
| Net loss                        |   | $                                    | (2,684,334 | ) | (2,113,768 | ) |

 

See accompanying notes tofinancial statements.

 

52

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INNSUITESHOTELS, INC.STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

For the years endedJanuary 31, 2001 and 2000

 
|                       |   | **PREFERRED   STOCK AND   ADDITIONAL   PAID IN CAPITAL** |    | **COMMON   STOCK** |   | **RETAINED   EARNINGS   (ACCUMULATED   DEFICIT)** |   | **TOTAL**  |       |
|----------------------------|--------|----------------------------------------------------------|---------|--------------------|--------|---------------------------------------------------|--------|------------|------------|
|                       |   |                                                     |    |               |   |                                              |   |       |       |
| BALANCE, January  31, 1999 |   | $                                                        | 250,000 |               | 2,431  |                                              | $      | (2,858,390 | )          | $ | (2,605,959 | ) |
| Contributions              |   | —                                                   |    | —             |   | 250,000                                           |   | 250,000    |       |
| Net Loss                   |   | —                                                   |    | —             |   | (2,113,768                                        | )      | (2,113,768 | )          |
| BALANCE, January  31, 2000 |   | $                                                        | 250,000 |               | $      | 2,431                                             |   | $          | (4,722,158 | ) | $ | (4,469,727 | ) |
| Contributions              |   | —                                                   |    | —             |   | 250,000                                           |   | 250,000    |       |
| Net Loss                   |   | —                                                   |    | —             |   | (2,684,334                                        | )      | (2,684,334 | )          |
| BALANCE, January  31, 2001 |   | $                                                        | 250,000 |               | $      | 2,431                                             |   | $          | (7,156,492 | ) | $ | (6,904,061 | ) |

 

See accompanying notes tofinancial statements.

 

53

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INNSUITESHOTELS, INC.STATEMENTS OF CASH FLOWS

 
|                                                                         |   | **For the  years ended January 31,** |       |
|------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                         |   | **2001**                             |       | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                        |   |                                 |       |   |   |
| Net loss                                                                     |   | $                                    | (2,684,334 | ) | $ | (2,113,768 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                 |       |   |   |
| (Increase)  decrease in Accounts receivable                                  |   | (341,951                             | )          | (123,242 | ) |
| (Increase)  decrease in Prepaids and Other assets                            |   | (181,284                             | )          | 78,617 |   |
| Increase in  Accounts payable                                                |   | 253,093                              |       | 219,224 |   |
| Increase in  Percentage rent payable                                         |   | 2,406,130                            |       | 1,157,554 |   |
| Increase  (decrease) in Accrued expenses                                     |   |                                 |       |   |   |
| and other  liabilities                                                       |   | (90,163                              | )          | 60,050 |   |
| Net cash (used  in) operating activities                                     |   | $                                    | (638,509   | ) | $ | (721,565 | ) |
|                                                                         |   |                                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                        |   |                                 |       |   |   |
| Borrowings on  loans from affiliates                                         |   | 256,834                              |       | 238,552 |   |
| Contributions                                                                |   | 250,000                              |       | 250,000 |   |
| Net cash  provided by financing activities                                   |   | $                                    | 506,834    |   | $ | 488,552 |   |
| Net change in  cash and cash equivalents                                     |   | (131,675                             | )          | (233,013 | ) |
| Cash and cash  equivalents at beginning of year                              |   | 203,166                              |       | 436,179 |   |
| Cash and cash  equivalents at end of year                                    |   | $                                    | 71,491     |   | $ | 203,166 |   |

 

See accompanying notes tofinancial statements.

 

54

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INNSUITESHOTELS, INC.Notes to Financial StatementsAs of and for the years-endedJanuary 31, 2001 and 2000

 

1.             Organization &Basis of Presentation

 

InnSuites Hotels, Inc., (the “Company”) leases andoperates hotels owned by RRF Limited Partnership (the “Partnership”).  The Partnership is owned by several LimitedPartners and a General Partner, InnSuites Hospitality Trust (the “Trust”).  The Trust is an unincorporated Ohio realestate investment trust (the “REIT”) which agreed to acquire equity interestsin several existing hotel properties on January 31, 1998 and to considerselectively the purchase or development of additional hotels in the expansionof its business.  The Trust acquired itsGeneral Partner interest, originally representing a 13.6% equity interest inthe Partnership, 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 following full-service hotels are leased and operated by theCompany:

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

 

The Company leases these 11 hotels pursuant toindividual operating leases which are structured on a hotel-by-hotelbasis.  The lessors of these leases aresubsidiaries of the Partnership (the “Lessors”).  In accordance with the lessor/lessee relationship, the operatinghotels are required to make percentage lease payments to the Lessors based on apercentage of hotel room revenues.  Theamount of the lease payments is calculated on an individual hotel basis and isgoverned by an executed lease agreement which details the method of leasepayment calculation.  The calculation todetermine each hotel percentage lease payment is based on quarterly hotelrevenues.

 

All of the hotels offer studio and two-room suiteswith a variety of room upgrades available, such as the two-room“Executive/Family Suite”, the “Boardroom Meeting Suite” or a “PresidentialJacuzzi Suite.”  In addition, the hotelsoperate as moderate and full-service hotels near premier vacation areas such asthe Grand Canyon and Disneyland along with other attractions and businesscenters.

 

55

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The financial statements include the accounts ofInnSuites Hotels, Inc. and the results of operations of the 11 leasedhotels.  All significant intercompanytransactions have been eliminated, and certain prior period amounts have beenreclassified to be consistent with current period financial statementpresentation.

 

2.             Summary ofSignificant Accounting Policies

 

a)             Use of Estimates

 

The preparation of the financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of certainassets and liabilities and disclosure of contingent assets and liabilities atthe balance sheet date and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

b)            Cash and CashEquivalents

 

All highly liquid investments with a maturity of threemonths or less when purchased are considered to be cash equivalents.

 

c)             Income Taxes

 

The Company accounts for income taxes under the assetand liability method.  Deferred taxassets and liabilities are recognized for the future consequences attributed todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Differences between income forfinancial and tax reporting purposes arise primarily from accrued expenses notdeducted for tax.  Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.

 

d)            Concentration ofCredit Risk

 

Financial instruments which potentially subject theCompany to concentrations of credit risk are principally trade accountsreceivable.  The Company’s receivablesare unsecured.

 

e)             Revenue Recognition

 

Revenue is recognized as earned.  Ongoing credit evaluations are performed andan allowance for potential credit losses is provided, if needed, against theportion of accounts receivable which is estimated to be uncollectible.  Such losses have been minimal and withinmanagement’s expectations.

 

f)             Repairs andMaintenance

 

Repairs and maintenance are charged to operations asincurred by the Company.  Costs incurredfor major renovations and fixed asset purchases are reimbursed and capitalizedby the Lessors.

 

g)            Advertising andPromotion

 

The costs of advertising and promotional events areexpensed as incurred.

 

56

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h)            Fair Value ofFinancial Instruments

 

Fair value is determined by using available marketinformation and valuation methodologies. Financial instruments include cash and cash equivalents, accountsreceivable, accounts payable and accrued expenses and other liabilities, whichdue to their short maturities, are carried at amounts, which reasonablyapproximate fair value.

 

3.             Percentage LeaseAgreements

 

Percentage Leases exist between the Company’sindividual leased hotels and the Lessors. The Percentage Leases have noncancellable lease terms which expire onJanuary 31, 2009, and are subject to earlier termination on the occurrenceof certain contingencies, as defined in the Percentage Leases.  The rent due under each Percentage Lease isthe greater of the minimum rent, also defined by the Percentage Lease, orpercentage rent.  Percentage rentapplicable to room and other hotel revenue is calculated by multiplying fixedpercentages by the total amounts of such gross revenues in excess of specifiedthreshold amounts.  Both the minimumrent and the revenue thresholds used in computing percentage rents are subjectto annual adjustments based on the United States Consumer Price Index (“CPI”).  Percentage rent applicable to food andbeverage revenues is calculated as 5% of such revenues over a minimumthreshold.  Percentage rent expense forthe years ended January 31, 2001 and 2000 was $9.7 million and $9.5million, respectively, of which $2.7 million and $2.6 million, respectively,was in excess of minimum rent.

 

Future minimal rentals (without reflecting future CPIincreases) to be paid by the Company pursuant to the Percentage Leases forfiscal years 2002 to 2006 and in total thereafter are as follows:

 

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

 

Other than real estate and personal property taxes,casualty insurance and capital improvements which are obligations of theLessor, the Percentage Leases require the Company to pay rent, liabilityinsurance premiums, and all costs, expenses, utilities and other chargesincurred in the operation of the leased hotels.  Property insurance premiums are allocated 50% to the Lessor and50% to the Company.  In addition, atJanuary 31, 2001 and 2000, outstanding receivables due the Company fromthe Lessor for the reimbursement of capital improvements, which were paid for bythe Company, were netted with percentage rent payable to the Lessor.  The amounts netted against percentage rentpayable were approximately $1.6 million and $731,000 at January 31, 2001and 2000, respectively.

 

The Company is required to indemnify the Lessoragainst all liabilities, costs and expenses incurred by or asserted against theLessor in the normal course of operating the hotels.

 

57

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4.             Income Taxes

 

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

 

|             |   | **For the  year ended, January 31,** |   |
|------------------|--------|--------------------------------------|--------|
|             |   | **2001**                             |   | **2000** |   |
| Federal:         |   |                                 |   |   |   |
| Current          |   | $                                    | — |   | — |   |
| Deferred         |   | —                               |   | — |   |
| State and local: |   |                                 |   |   |   |
| Current          |   | 950                                  |   | — |   |
| Deferred         |   | —                               |   | — |   |
|             |   | $                                    | 950    |   | $ | — |   |
|                  |        |                                      |        |  |  |  |  |

 

The provision for income taxes differs from the amountof income tax determined by applying the applicable U.S. statutory federalincome tax rate to pretax income as a result of the following differences:

 
|                                                  |   | **For the  year ended, January 31,** |     |
|-------------------------------------------------------|--------|--------------------------------------|----------|
|                                                  |   | **2001**                             |     | **2000** |   |
| Computed  “expected” tax expense (benefit)  |   | $                                    | (912,673 | ) | (688,313 | ) |
| State income  taxes, net of federal income tax effect |   | 627                                  |     | (106,469 | ) |
| Change in  valuation allowance                        |   | 622,052                              |     | 792,062 |   |
| Change due to  differences in federal rate            |   | 254,438                              |     | — |   |
| Adjustment to  Federal Net Operating Loss             |   | 16,914                               |     | — |   |
| Other, net                                            |   | 19,592                               |     | 2,720 |   |
| Income tax  expense (benefit)                         |   | $                                    | 950      |   | — |   |

 

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

 
|                                   |   | **2001**   |      | **2000**   |    |
|----------------------------------------|--------|------------|-----------|------------|---------|
| Deferred tax  assets:                  |   |       |      |       |    |
| Operating loss  carryforward           |   | $          | 2,730,889 |       | 774,000 |   |
| Charitable  contributions carryforward |   | 1,385      |      | —     |    |
| Accrued expenses                       |   | 21,195     |      | 1,118,000  |    |
|                                   |   |       |      |       |    |
| Gross deferred  tax assets             |   | 2,753,469  |      | 1,892,000  |    |
| Less: valuation  allowance             |   | (2,753,469 | )         | (1,892,000 | )       |
| Deferred tax  assets, net              |   | $          | —    |       | —  |   |

 

58

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The deferred tax assets consist of differencesresulting from accrued expenses not deductible for tax purposes and netoperating loss carryforwards of approximately $7.3 million, which expire atvarious dates through January 31, 2020.

 

In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. Management considers thescheduled reversal of deferred tax liabilities, projected future taxable incomeand tax planning strategies in making this assessment. Based upon theprojections in future taxable income over the periods in which the deferred taxassets are deductible, management believes it is prudent to fully reserve theCompany’s net deferred tax assets.

 

5.             Related PartyTransactions

 

Loans from Affiliates represents $631,834 due thePartnership, primarily for working capital advances. Amounts are repaid by theCompany when cash flows are adequate to cover current expenses as well asamounts advanced. Until February 1, 2001, the Company was 9.8% indirectly ownedby James F. Wirth, Chairman of the Company, who is also Chairman, Presidentand  CEO of the Trust.  There are no terms or covenants governingthese advances.

 

Effective February 1, 2001, the Trust acquired theCompany, following the guidelines of the REIT Modernization Act.  The rate structures of the Percentage Leasesfor the Hotels were amended to reflect current economic and marketconditions.  Until February 1, 2001, InnSuitesInnternational Hotels, Inc. held a management agreement with the Companywhereby the Company paid fees of 2.5% of hotel revenues for management,administrative and accounting related services. Effective February 1, 2001,Suite Hospitality Management, Inc. entered into a management agreement with theCompany on substantially the same terms. InnSuites Licensing Corp., which is owned by Mr. Wirth, holds atrademark license agreement with the Company whereby the Company incurs feesfrom 1.25% to 2.5% of hotel revenues for the use of certain brand names.  The Company contributes advertising fees toa fund in the amount of 1.5% of hotel revenues for purposes of centralizedadvertising programs. Amounts paid under these agreements are as follows:

 
|                    |   | **For the  years ended January 31** |
|-------------------------|--------|-------------------------------------|
|                    |   | **2001**                            |   | **2000** |
| Management fees         |   | $                                   | 722,284 |   | $ | 694,736 |
| Trademark  license fees |   | 552,368                             |   | 533,865 |
| Advertising fees        |   | 387,082                             |   | 413,079 |
| Total                   |   | $                                   | 1,661,734 |   | $ | 1,641,680 |

 

Mr. Wirth contributed $250,000 for each of the yearsended January 31, 2001 and 2000 for working capital needs of certainhotels. These amounts are recorded as capital contributions.

 

6.             Commitments andContingencies

 

Claims and Legal Matters

 

The nature of the operations of the Company and itshotels exposes them to the risk of claims and litigation in the normal courseof business.  Although the outcome ofthese matters cannot be determined, management believes the aggregate potentiallosses, if any, would not have a material adverse effect on the Company’sconsolidated financial position or results of operations.

 

59

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Franchise Agreements

 

The Company has franchise agreements with BestWestern® and Holiday Inn® hotels in which fees generally approximate 3% ofmonthly revenues for Best Western® and 9% of monthly revenues for Holiday Inn®.

 

7.             401(k) Benefit Plan

 

All employees of the Company who have attained the ageof twenty-one and have completed one year’s service are eligible to participatein a contributory defined contribution 401(k) benefit plan.  Under the plan, participants may contributeup to 6% of their salary.  The Companymatches 50% of the employee contribution. Benefit expense under the plan amounted to $38,523 and $25,022 for theyears ended January 31, 2001 and 2000 respectively.

 

8.             Liquidity

 

The financial statements of the Trust disclose that aprovision was recorded for all percentage rent receivables from the Company asof January 31, 2001.  The Companyhas the ability to obtain funds for working capital needs from third parties oraffiliates to fund short-term working capital needs.  Based on the structure of the Company and its relationship withthe Trust as the exclusive lessee, all payments of percentage rent expense arenot called.  Excluding percentage rentexpense, all of the Hotels combined are cash flow positive and generated netincome for the year ended January 31, 2001.  The Trust acquired the Company effective February 1, 2001.

 

60

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

 

None.

 

PART III

 

Item 10.                                                       TRUSTEESAND EXECUTIVE OFFICERS OF THE TRUST

 

The Trust incorporates herein by reference theinformation appearing under the captions “Election of Trustees” and “Section16(a) Beneficial Ownership Reporting Compliance” in the Trust’s definitiveProxy Statement to be filed with the Securities and Exchange Commission on orabout May 10, 2002.

 

Item 11.  EXECUTIVE COMPENSATION

 

The Trust incorporates herein by reference theinformation appearing under the caption “Compensation of Trustees and ExecutiveOfficers” in the Trust’s definitive Proxy Statement to be filed with theSecurities and Exchange Commission on or about May 10, 2002.

 

Item 12.  SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The Trust incorporates herein by reference theinformation appearing under the caption “Ownership of Shares” in the Trust’sdefinitive Proxy Statement to be filed with the Securities and ExchangeCommission on or about May 10, 2002.

 

Item 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The Trust incorporates herein by reference theinformation appearing under the caption “Certain Transactions” in the Trust’sdefinitive Proxy Statement to be filed with the Securities and ExchangeCommission on or about May 10, 2002.

 

61

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Item 14.  EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM8-K

 

(a)           Exhibits

 

Exhibits

 
| 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   |   | Promissory Note dated August 1, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended July 31, 2000, filed with the Securities and Exchange  Commission on September 14, 2000).                  |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Promissory Note dated August 15, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).                |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Promissory Note dated August 29, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).                |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Promissory Note dated September 8, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).              |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Promissory Note dated September 25, 2000 by  InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by  reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2000, filed with the Securities and  Exchange Commission on December 15, 2000).             |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Promissory Note dated October 19, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).               |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | Promissory Note dated October 23, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).               |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | Promissory Note dated December 29, 2000 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10(o) of the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 2001, filed with the Securities and  Exchange Commission on May 4, 2001).      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | Promissory Note dated January 26, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10(p) of the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 2001, filed with the Securities and  Exchange Commission on May 4, 2001).       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.15  |   | Promissory Note dated April 27, 2001 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended April 30, 2001, filed with the Securities and Exchange  Commission on June 14, 2001).                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.16  |   | Promissory Note dated April 27, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended April 30, 2001, filed with the Securities and Exchange  Commission on June 14, 2001).           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.17  |   | Promissory Note dated June 12, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended July 31, 2001, filed with the Securities and Exchange  Commission on September 14, 2001).        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.18  |   | Promissory Note dated August 22, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.19  |   | Promissory Note dated September 10, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form  10-Q for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.20  |   | Promissory Note dated September 18, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form  10-Q for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.21  |   | Promissory Note dated October 5, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | Promissory Note dated October 9, 2001 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 October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.23+ |   | Promissory Note dated November 30, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.24+ |   | Promissory Note dated December 7, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.25+ |   | Promissory Note dated December 28, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.26+ |   | Promissory Note dated January 9, 2002 by RRF Limited  Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 21     |   | Subsidiaries of the Registrant (incorporated by  reference to Exhibit 21 of the Registrant’s Annual Report on Form 10-K for  the fiscal year ended January 31, 2000, filed with the Securities and  Exchange Commission on May 4, 2001).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 99.1   |   | Form of Percentage Lease (incorporated by reference  to Exhibit 99.1 of the Registrant’s Registration Statement on Form S-2, filed  with the Securities and Exchange Commission on September 8, 1998).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| *      |   | Management contract or compensatory plan or  arrangement required to be filed as an exhibit hereto.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| +      |   | Filed herewith.                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                   |

 

No Current Reports on Form 8-K were filed by the Trustduring the fiscal quarter ended January 31, 2002.

 

62

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofSecurities Exchange Act of 1934, the Trust has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                         | INNSUITES HOSPITALITY TRUST |
|------------------------------|-----------------------------|
|                         |                        |
| Dated:  April  29, 2002 | By:                         | /s/  James F.  Wirth  |   |
|                         |                        | James F. Wirth, Chairman, |
|                         |                        | President and Chief Executive Officer |
|                         |                        | (Principal Executive Officer) |
|                         |                        |   |
| Dated:  April  29, 2002 | By:                         | /s/  Anthony  B. Waters   |   |
|                         |                        | Anthony B. Waters, Chief Financial Officer |
|                         |                        | (Principal Financial Officer) |
|                         |                        |
|                              |                             |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Trust and in the capacities and on the datesindicated.

 
| Dated:  April  29, 2002 | /s/  James F.  Wirth             |   |
|------------------------------|--------------------------------------------|--------|
|                         | James F. Wirth, Chairman,                  |
|                         | President and Chief Executive Officer      |
|                         | (Principal Executive Officer)              |
|                         |                                       |
| Dated:  April  29, 2002 | /s/  Anthony  B. Waters          |   |
|                         | Anthony B. Waters, Chief Financial Officer |
|                         | (Principal Financial Officer)              |
|                         |                                       |
| Dated:  April  29, 2002 | /s/  Marc E.  Berg               |   |
|                         | Marc E. Berg, Trustee                      |
|                         |                                       |
| Dated:  April  29, 2002 | /s/  Steven  S. Robson           |   |
|                         | Steven S. Robson, Trustee                  |
|                         |                                       |
| Dated:  April  29, 2002 | /s/  Edward  G. Hill             |   |
|                         | Edward G. Hill, Trustee                    |
|                              |                                            |        |  |

 

63

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**INDEX TOEXHIBITS**

 

Exhibits

 
| 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   |   | Promissory Note dated August 1, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.15 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended July 31, 2000, filed with the Securities and Exchange  Commission on September 14, 2000).                  |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Promissory Note dated August 15, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange Commission  on December 15, 2000).                |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Promissory Note dated August 29, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).                |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Promissory Note dated September 8, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).              |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Promissory Note dated September 25, 2000 by  InnSuites Hospitality Trust in favor of James F. Wirth (incorporated by  reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2000, filed with the Securities and  Exchange Commission on December 15, 2000).             |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Promissory Note dated October 19, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).               |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | Promissory Note dated October 23, 2000 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2000, filed with the Securities and Exchange  Commission on December 15, 2000).               |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | Promissory Note dated December 29, 2000 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10(o) of the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 2001, filed with the Securities and  Exchange Commission on May 4, 2001).      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | Promissory Note dated January 26, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10(p) of the Registrant’s Annual Report on Form 10-K  for the fiscal year ended January 31, 2001, filed with the Securities and  Exchange Commission on May 4, 2001).       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.15  |   | Promissory Note dated April 27, 2001 by InnSuites  Hospitality Trust in favor of James F. Wirth (incorporated by reference to  Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended April 30, 2001, filed with the Securities and Exchange  Commission on June 14, 2001).                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.16  |   | Promissory Note dated April 27, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended April 30, 2001, filed with the Securities and Exchange  Commission on June 14, 2001).           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.17  |   | Promissory Note dated June 12, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended July 31, 2001, filed with the Securities and Exchange  Commission on September 14, 2001).        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.18  |   | Promissory Note dated August 22, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.19  |   | Promissory Note dated September 10, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form  10-Q for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.20  |   | Promissory Note dated September 18, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company (incorporated  by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form  10-Q for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.21  |   | Promissory Note dated October 5, 2001 by RRF Limited  Partnership in favor of Rare Earth Development Company (incorporated by  reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | Promissory Note dated October 9, 2001 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 October 31, 2001, filed with the Securities and  Exchange Commission on December 17, 2001).    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.23+ |   | Promissory Note dated November 30, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.24+ |   | Promissory Note dated December 7, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.25+ |   | Promissory Note dated December 28, 2001 by RRF  Limited Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 10.26+ |   | Promissory Note dated January 9, 2002 by RRF Limited  Partnership in favor of Rare Earth Development Company.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 21     |   | Subsidiaries of the Registrant (incorporated by  reference to Exhibit 21 of the Registrant’s Annual Report on Form 10-K for  the fiscal year ended January 31, 2000, filed with the Securities and  Exchange Commission on May 4, 2001).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 99.1   |   | Form of Percentage Lease (incorporated by reference  to Exhibit 99.1 of the Registrant’s Registration Statement on Form S-2, filed  with the Securities and Exchange Commission on September 8, 1998).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| *      |   | Management contract or compensatory plan or  arrangement required to be filed as an exhibit hereto.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| +      |   | Filed herewith.                                                                                                                                                                                                                                                                                                                       |

 

64

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