INNSUITES HOSPITALITY TRUST - Quarter Report: 2005 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2005
Commission File Number 1-7062
INNSUITES HOSPITALITY TRUST
(Exact name of registrant as specified in its charter)
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Ohio |
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34-6647590 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification Number) |
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incorporation or organization) |
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InnSuites Hotels Centre |
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1615 E. Northern Ave., Suite 102 |
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Phoenix, AZ 85020 |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (602) 944-1500 |
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Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Number of outstanding Shares of Beneficial Interest, without par value, as of May 31, 2005: 9,231,689.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNSUITES HOSPITALITY TRUST AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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APRIL 30, 2005 |
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JANUARY 31, 2005 |
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(UNAUDITED) |
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(AUDITED) |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
— |
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1,343 |
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Restricted Cash |
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243,327 |
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250,642 |
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Accounts Receivable, including $261,193 and $144,928 from related parties, net of Allowance for Doubtful Accounts of $388,000 and $278,000, respectively |
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976,816 |
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969,751 |
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Prepaid Expenses and Other Current Assets |
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530,220 |
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525,851 |
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Total Current Assets |
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1,750,363 |
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1,747,587 |
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Hotel Properties, net |
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30,861,090 |
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31,190,139 |
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Hotel Properties Held for Sale, net |
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3,198,586 |
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3,121,235 |
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Deferred Finance Costs, Long-Term Portion |
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217,197 |
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226,560 |
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Deferred Income Tax Benefit |
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170,000 |
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170,000 |
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TOTAL ASSETS |
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$ |
36,197,236 |
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36,455,521 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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LIABILITIES |
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Current Liabilities : |
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Accounts Payable and Accrued Expenses, including $53,379 and $153,811 accrued interest and payables to related parties as of April 30, and January 31, 2005, respectively |
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$ |
2,317,956 |
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2,762,693 |
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Outstanding Checks in Excess of Cash Balance |
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185,341 |
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— |
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Purchase Deposit from Related Party |
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700,000 |
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700,000 |
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Notes Payable to Banks |
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400,000 |
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500,000 |
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Current Portion of Mortgage and Other Notes Payable |
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1,156,064 |
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1,139,802 |
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Current Portion of Notes Payable to Related Parties |
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27,062 |
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33,735 |
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Total Current Liabilities |
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4,786,423 |
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5,136,230 |
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Mortgage Notes Payable |
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22,664,121 |
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22,946,618 |
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Notes and Advances Payable to Related Parties |
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55,870 |
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59,777 |
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Other Notes Payable |
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151,953 |
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169,438 |
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TOTAL LIABILITIES |
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27,658,367 |
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28,312,063 |
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MINORITY INTEREST IN PARTNERSHIP |
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1,720,155 |
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1,878,824 |
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SHAREHOLDERS’ EQUITY |
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Shares of Beneficial Interest, without par value; unlimited authorization; 9,058,446 and 8,719,649 shares issued and outstanding at April 30, and January 31, 2005, respectively |
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17,097,275 |
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16,568,246 |
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Treasury Stock, 7,375,270 and 7,391,825 shares held at April 30, and January 31, 2005, respectively |
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(10,278,561 |
) |
(10,303,612 |
) |
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TOTAL SHAREHOLDERS’ EQUITY |
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6,818,714 |
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6,264,634 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
36,197,236 |
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36,455,521 |
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See accompanying notes to unaudited
consolidated financial statements
2
INNSUITES HOSPITALITY TRUST AND
SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE MONTHS ENDED APRIL 30, |
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2005 |
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2004 |
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REVENUE |
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Room |
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$ |
5,255,107 |
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6,230,186 |
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Food and Beverage |
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297,342 |
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368,451 |
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Telecommunications |
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21,317 |
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30,204 |
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Other |
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199,314 |
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152,614 |
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Management and Trademark Fees, including $38,163 and $28,255 from related parties, respectively |
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76,735 |
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47,177 |
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Payroll Reimbursements, including $543,501 and $473,347 from related parties, respectively |
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723,618 |
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530,008 |
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TOTAL REVENUE |
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6,573,433 |
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7,358,640 |
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OPERATING EXPENSES |
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Room |
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1,205,113 |
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1,540,053 |
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Food and Beverage |
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292,357 |
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345,331 |
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Telecommunications |
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51,492 |
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55,862 |
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General and Administrative |
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1,256,244 |
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1,135,066 |
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Sales and Marketing |
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389,675 |
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533,433 |
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Repairs and Maintenance |
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368,408 |
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417,783 |
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Hospitality |
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200,404 |
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252,909 |
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Utilities |
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273,280 |
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336,259 |
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Hotel Property Depreciation |
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516,465 |
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753,756 |
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Real Estate and Personal Property Taxes, Insurance and Ground Rent |
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337,869 |
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372,143 |
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Other |
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49,463 |
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65,391 |
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Payroll Expenses |
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723,618 |
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530,008 |
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TOTAL OPERATING EXPENSES |
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5,664,388 |
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6,337,994 |
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OPERATING INCOME |
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909,045 |
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1,020,646 |
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Gain on Disposition of Hotels |
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— |
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5,113,540 |
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Interest Income |
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472 |
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223 |
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TOTAL OTHER INCOME |
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472 |
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5,113,763 |
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Interest on Mortgage Notes Payable |
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489,469 |
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599,342 |
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Interest on Notes Payable to Banks |
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5,685 |
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8,916 |
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Interest on Notes Payable and Advances to Related Parties |
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3,798 |
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81,084 |
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Interest on Other Notes Payable |
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4,217 |
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3,806 |
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TOTAL INTEREST EXPENSE |
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503,169 |
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693,148 |
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INCOME BEFORE MINORITY INTEREST, INCOME TAXES AND CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE |
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406,348 |
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5,441,261 |
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LESS MINORITY INTEREST |
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(29,953 |
) |
2,438,616 |
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INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE |
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$ |
436,301 |
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3,002,645 |
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INCOME TAX PROVISION (Note 8) |
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(32,000 |
) |
(120,000 |
) |
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CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE |
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— |
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(854,402 |
) |
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INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST |
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$ |
404,301 |
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2,028,243 |
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NET INCOME PER SHARE FROM CONTINUING OPERATIONS - BASIC |
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$ |
0.05 |
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1.33 |
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NET LOSS FROM CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE - BASIC |
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— |
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(0.39 |
) |
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NET INCOME PER SHARE - BASIC |
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$ |
0.05 |
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0.94 |
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC |
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8,838,189 |
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2,164,243 |
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NET INCOME PER SHARE FROM CONTINUING OPERATIONS - DILUTED |
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$ |
0.03 |
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0.67 |
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NET LOSS FROM CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE - DILUTED |
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— |
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(0.11 |
) |
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NET INCOME PER SHARE - DILUTED |
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$ |
0.03 |
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0.56 |
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED |
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13,376,030 |
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7,991,574 |
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See accompanying notes to unaudited
consolidated financial statements
3
INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED APRIL 30, |
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2005 |
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2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Income Attributable to Shares of |
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Beneficial Interest |
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$ |
404,301 |
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2,028,243 |
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Adjustments to Reconcile Net Income Attributable to Shares of Beneficial Interest to Net Cash Provided by (Used In) Operating Activities: |
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Cumulative Effect of adoption of accounting principle |
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— |
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854,402 |
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Minority Interest |
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(29,953 |
) |
2,438,616 |
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Provision for uncollectible receivables |
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109,728 |
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61,018 |
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Depreciation and Amortization |
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525,828 |
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763,970 |
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Loss (Gain) on Disposal |
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5,179 |
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(5,100,745 |
) |
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Changes in Assets and Liabilities, net of effect of consolidation of Suite Hospitality Management and InnSuites Licensing Corp: |
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(Increase) in Accounts Receivable |
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(116,793 |
) |
(27,867 |
) |
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(Increase) Decrease in Prepaid Expenses and Other Assets |
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(4,369 |
) |
107,759 |
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(Decrease) in Accounts Payable and Accrued Expenses |
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(221,508 |
) |
(1,634,111 |
) |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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672,413 |
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(508,715 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Change in Restricted Cash |
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7,315 |
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39,956 |
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Cash Received from Disposition of Hotel Properties |
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— |
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9,612,137 |
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Improvements and Additions to Hotel Properties |
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(269,946 |
) |
(243,205 |
) |
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
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(262,631 |
) |
9,408,888 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Principal Payments on Mortgage Notes Payable |
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(260,265 |
) |
(5,088,042 |
) |
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Payments on Notes Payable to Banks |
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(770,000 |
) |
(115,000 |
) |
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Borrowings on Notes Payable to Banks |
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670,000 |
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— |
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Repurchase of Partnership Units |
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— |
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(452,908 |
) |
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Repurchase of Treasury Stock |
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(16,825 |
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(1,560 |
) |
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Payments on Notes and Advances Payable to Related Parties |
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(10,580 |
) |
(1,487,194 |
) |
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Borrowings on Notes and Advances Payable to Related Parties |
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— |
|
198,000 |
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Payments on Other Notes Payable |
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(23,455 |
) |
(26,408 |
) |
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Distribution to Owners from Variable Interest Entities |
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— |
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(63,500 |
) |
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NET CASH USED IN FINANCING ACTIVITIES |
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(411,125 |
) |
(7,036,612 |
) |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(1,343 |
) |
1,863,561 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
— |
|
— |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
— |
|
1,863,561 |
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See Supplemental Disclosures at Note 5
See accompanying notes to unaudited
consolidated financial statements
4
INNSUITES HOSPITALITY TRUST AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE
THREE MONTHS ENDED APRIL 30, 2005 AND 2004
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
InnSuites Hospitality Trust (the “Trust”) is an unincorporated real estate investment trust in the state of Ohio that at April 30, 2005 owned, through a partnership interest in RRF Limited Partnership (the “Partnership”), five hotels and one hotel directly (the “Hotels”) with an aggregate of 947 suites in Arizona, southern California and New Mexico. The Trust is the sole general partner in the Partnership. The hotels are managed by InnSuites Hotels, Inc. (“InnSuites Hotels”).
InnSuites Hotels holds management contracts under which it provides hotel management services to the Trust hotels, as well as three hotels with an aggregate of 440 suites owned by affiliates of James F. Wirth (“Wirth”) and one unrelated hotel property with 131 suites. Under the management agreements, InnSuites Hotels provides the personnel at the hotels, the expenses of which are reimbursed at cost, and manages the hotels’ daily operations. All such expenses and reimbursements between InnSuites Hotels and the Partnership have been eliminated in consolidation. InnSuites Hotels also holds licensing agreements and the “InnSuites” trademarks and provides licensing services to the Trust hotels, as well as the three hotels owned by affiliates of Wirth with an aggregate of 440 suites and two unrelated hotel properties with an aggregate of 305 suites. The revenue and expenses related to these contracts have been eliminated in consolidation.
The Trust’s general partnership interest in the Partnership was 67.19% and 57.12% on April 30, 2005 and 2004, respectively, and the weighted average for the three months ended April 30, 2005 and 2004 was 65.65% and 55.89%, respectively.
PARTNERSHIP AGREEMENT
The Partnership Agreement of the Partnership (the “Partnership Agreement”) provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of Shares of Beneficial Interest of the Trust at any time at the option of the particular limited partner. As of April 30, 2005, a total of 867,144 Class A limited partnership units were issued and outstanding. Additionally, a total of 3,467,938 Class B limited partnership units were held by Wirth and his affiliates on that date, in lieu of the issuance of Class A limited partnership units. The Class B limited partnership units may only become convertible with the approval of the Board of Trustees, in its sole discretion. If all of the Class A and B limited partnership units were to be converted, the limited partners in the Partnership would receive 4,335,082 Shares of Beneficial Interest of the Trust.
BASIS OF PRESENTATION
The financial statements of the Partnership and InnSuites Hotels are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated. For the three months ended April 30, 2004, financial results of Suite Hospitality Management, Inc. (the “Management Company”) and InnSuites Licensing Corp. (“Licensing Corp.”) are consolidated with the Trust in compliance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, and all significant intercompany transactions and balances have been eliminated. As of June 8, 2004, when the Trust acquired the management and licensing agreements, the Management Company and Licensing Corp. do not meet the criteria to be considered variable interest entities and have not been consolidated for the three months ended April 30, 2005.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended April 30, 2005 are not necessarily indicative of the results that may be expected for the year ended January 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Trust’s Annual Report on Form 10-K as of and for the year ended January 31, 2005.
RECLASSIFICATIONS
The Trust has reclassified certain balances on the January 31, 2005 balance sheet to conform to the April 30, 2005 presentation of a classified balance sheet. The reclassifications had no effect on net income or total shareholders’ equity.
5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accounting policies that the Trust believes are most critical and involve the most subjective judgments include estimates and assumptions of future revenue and expenditures used to project cash flows. Future cash flows are used to determine the recoverability (or impairment) of the carrying values of the Trust’s assets in the event management is required to test an asset for recoverability of carrying value under Statement of Financial Accounting Standards No. 144. If the carrying value of an asset exceeds the estimated future cash flows over its estimated remaining life, the Trust recognizes an impairment expense to reduce the asset’s carrying value to its fair value. Fair value is determined by either the most current third-party property appraisal, if available, or the present value of future cash flows over the remaining life of the asset. The Trust’s evaluation of future cash flows is based on historical experience and other factors, including certain economic conditions and committed future bookings. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows.
REVENUE RECOGNITION
Room, food and beverage, telecommunications, management and licensing fees, and other revenue are recognized as earned as services are provided and items are sold. Payroll reimbursements are recorded as personnel are provided and are not netted with the corresponding payroll expense.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, Statement of Financial Accounting Standards No. 123 (revised 2004) was issued. This Statement is a revision of FASB Statement No. 123, Accounting for Stock Based Compensation, and supercedes Auditing Practices Board Opinion No. 25, Accounting for Stock Issued to Employees. This Statement establishes standards for accounting for transactions in which an entity exchanges its equity securities for goods and services. The Trust is required to adopt this Statement as of August 31, 2005. The Trust believes that the adoption of this Statement will not affect future financial results, as all options granted by the Trust are fully vested.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share have been computed based on the weighted-average number of shares outstanding during the periods and potentially dilutive securities.
For the three months ended April 30, 2005 and 2004, there were Class A and Class B limited partnership units outstanding, which are convertible to Shares of Beneficial Interest of the Trust. Assuming conversion, the aggregate weighted-average of these Shares of Beneficial Interest would be 4,537,841 and 5,827,331 for the first three months of fiscal year 2006 and 2005, respectively.
For the three months ended April 30, 2005 and 2004, 232,600 and 243,600 stock options, respectively, are not included in the computation of diluted earnings (loss) per share as their inclusion would have an anti-dilutive effect.
3. RELATED PARTY TRANSACTIONS
As of April 30, 2005 and 2004, Wirth and his affiliates held 3,467,938 and 4,467,938 Class B limited partnership units, respectively. As of April 30, 2005 and 2004, Wirth and his affiliates held 5,817,869 and 610,563 Shares of Beneficial Interest of the Trust, respectively.
The Trust paid interest on related party notes to Wirth and his affiliates in the amounts of $8,905 and $396,594 (most of which was accrued in prior periods) for the three months ended April 30, 2005 and 2004, respectively. The Trust recognized interest expense on related party notes to Wirth and affiliates in the amounts of $2,223 and $75,983 for the three months ended April 30, 2005 and 2004, respectively. The Trust had accrued but unpaid interest on related party notes to Wirth and affiliates of $0 and $6,682 as of April 30, 2005 and January 31, 2005, respectively.
6
The Trust paid interest on other related party notes in the amounts of $1,575 and $5,101 for the three months ended April 30, 2005 and 2004, respectively. The Trust recognized interest expense on these notes in the amounts of $1,575 and $5,101 for the three months ended April 30, 2005 and 2004, respectively. The Trust had no unpaid interest on these notes as of April 30, 2005 and January 31, 2005.
Notes and advances payable to related parties consist of notes payable to Mason Anderson, Trustee of the Trust, and his affiliates to repurchase Shares of Beneficial Interest in the Trust. The aggregate amounts outstanding were approximately $83,000 and $94,000 as of April 30, 2005 and January 31, 2005, respectively. The notes and advances payable to related parties consist of:
|
|
|
April 30, 2005 |
|
January 31, 2005 |
|
||
|
Note payable to The Anderson Charitable Remainder Unitrust, an affiliate of Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $2,408 through September 2005. |
|
$ |
11,834 |
|
$ |
18,771 |
|
|
|
|
|
|
|
|
|
|
|
Note payable to Wayne Anderson, son of Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $574 through June 2009. |
|
24,841 |
|
26,114 |
|
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||
|
Note payable to Karen Anderson, daughter of Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $574 through June 2009. |
|
24,842 |
|
26,115 |
|
||
|
|
|
|
|
|
|
||
|
Note payable to Kathy Anderson, daughter of Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $495 through June 2009. |
|
21,415 |
|
22,512 |
|
||
|
|
|
|
|
|
|
||
|
Totals |
|
$ |
82,932 |
|
$ |
93,512 |
|
4. NOTES PAYABLE TO BANKS
The Trust has a bank line of credit secured by a security agreement, business loan agreement and commercial guaranty of the Partnership all dated July 21, 2004. The line of credit is secured by the assets of the Trust alone, which is comprised mainly of its investment in the subsidiaries. Under the terms of the line of credit, the Trust can draw up to $500,000, bearing interest at prime plus 1.0% (6.75% as of April 30, 2005) per annum, and is required to make monthly interest-only payments. The line of credit matures on July 20, 2005. The Trust is currently negotiating an extension to the line of credit. As of April 30, 2005, the Trust had drawn $400,000 under the line of credit.
5. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES
The Trust paid $504,047 and $1,011,285 in cash for interest for the three months ended April 30, 2005 and 2004, respectively.
During the first quarter of fiscal year 2005, the Trust issued five promissory notes totaling $971,831 to Wirth and affiliates in exchange for 433,036 Class B limited partnership units in the Partnership.
During the first quarter of fiscal year 2005, the Trust issued two promissory notes totaling $166,000 to unrelated third parties in exchange for 91,409 Class A limited partnership units in the Partnership.
During the first quarter of fiscal year 2005, an affiliate of Wirth assumed the Trust’s $1.7 million mortgage note payable secured by its Tempe, Arizona property and $5.1 million of related party notes payable by the Trust in connection with the sale of the Tempe, Arizona property.
7
For purposes of preparing the Trust’s Unaudited Consolidated Statements of Cash Flows for the first quarter of fiscal year 2005, the following adjustments were made to the January 31, 2004 balances of certain assets and liabilities as a result of the consolidation of the financial results of the Management Company and Licensing Corp. with the financial results of the Trust:
|
Accounts Receivable |
|
$ |
120,705 |
|
|
Prepaids and Other Assets |
|
$ |
2,515 |
|
|
Accounts Payable and Accrued Expenses |
|
$ |
250,821 |
|
|
Notes Payable to Banks |
|
$ |
720,000 |
|
|
Other Notes Payable |
|
$ |
43,026 |
|
During the first quarter of fiscal year 2005, the Trust reduced the principal balance of its note payable to Hulsey Hotels Corporation, an affiliate of Wirth, by $11,427 to offset receivables in the same amount that were owed to the Trust by other entities affiliated with Wirth.
During the first quarter of fiscal year 2005, J.R. Chase, the sole shareholder of the Management Company, agreed to transfer 32,363 Shares of Beneficial Interest to the Management Company in order to facilitate the Management Company’s acquisition of Licensing Corp. from Wirth. In consideration of the transfer of those Shares of Beneficial Interest, the Management Company agreed to pay Mr. Chase $72,817.
During the first quarter of fiscal year 2005, the Trust issued 30,800 Shares of Beneficial Interest with an aggregate value of $49,280 to its Trustees and an officer in exchange for services rendered.
During the first quarter of fiscal year 2005, the Trust recorded an increase in its hotel properties’ carrying values in the aggregate amount of $98,684 which reflects the excess of the amount paid by the Trust to purchase limited partnership units in the Partnership from minority interest holders over the book value of such purchased units.
During the first quarter of fiscal year 2006, the Trust issued 29,600 Shares of Beneficial Interest with an aggregate value of $37,888 to its Trustees and an officer in exchange for services rendered.
During the first quarter of fiscal year 2006, the Trust issued 322,242 Shares of Beneficial Interest with an aggregate value of $406,025 in exchange for 322,242 Class A limited partnership units in the Partnership.
6. HOTEL PROPERTY HELD FOR SALE
On January 4, 2005, the Board of Trustees approved the sale of the Phoenix, Arizona hotel to Phoenix Northern Resort LLC, an affiliate of Wirth, for its appraised value of $5.1 million. The property’s carrying value is $3.2 million. On January 15, 2005, Rare Earth Financial, another affiliate of Wirth, converted its $700,000 loan receivable into a non-interest bearing deposit for the purchase of the hotel. The Trust expects to complete the sale during the second quarter of fiscal year 2006. Any gain or loss recognized on the transaction will be recorded as a contribution or distribution because the purchaser is a related party. The Trust does not expect to incur a loss on the sale of the property.
7. SUBSEQUENT EVENTS
Subsequent to April 30, 2005, Phoenix Northern Resort LLC, an affiliate of Wirth, deposited an additional $1.0 million to increase its deposit for the purchase of the Phoenix, Arizona hotel. The Trust used $500,000 of this to pay down its line of credit in full.
8. INCOME TAXES
The Trust has recorded income tax provisions of $32,000 and $120,000 for the three months ended April 30, 2005 and 2004, respectively. The Trust has a net deferred tax asset of $170,000 at both April 30 and January 31, 2005. The Trust has a current income tax liability of $322,000 and $330,000 as of April 30, 2005 and January 31, 2005, respectively.
8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the InnSuites Hospitality Trust unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q.
The Trust owns the sole general partner’s interest in the Partnership. The Trust’s principal source of cash flows is the operations of the hotels and management and licensing contracts held with non-Trust hotels.
RESULTS OF OPERATIONS
The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees, depreciation of the Hotels and hotel operating expenses. The operating performance of the Trust is principally related to the performance of the Hotels. Therefore, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, average daily rate (“ADR”), calculated as total room revenue divided by number of rooms sold, and revenue per available room (“REVPAR”), calculated as total room revenue divided by the total number of rooms available, is appropriate for understanding revenue from the Hotels. Occupancy increased to 78.6%, an increase of 1.6% from the prior year period. ADR increased $2.33, or 3.0%, from the prior year period due to the continuing improvement in the travel industry. These factors also caused REVPAR to increase $3.08, or 5.2%, from the prior year period.
The following table shows certain historical financial and other information for the periods indicated:
|
|
|
FOR THE THREE MONTHS ENDED |
|
|||||
|
|
|
APRIL 30, |
|
|||||
|
|
|
2005 |
|
2004 |
|
|||
|
OCCUPANCY |
|
|
78.6% |
|
|
77.0% |
|
|
|
AVERAGE DAILY RATE (ADR) |
|
$ |
|
79.32 |
|
|
76.99 |
|
|
REVENUE PER AVAILABLE ROOM (REVPAR) |
|
$ |
|
62.35 |
|
|
59.27 |
|
No assurance can be given that the trends reflected in this data will continue or that occupancy, ADR or REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions.
RESULTS OF OPERATIONS OF THE TRUST FOR THE THREE MONTHS ENDED APRIL 30, 2005 COMPARED TO THE THREE MONTHS ENDED APRIL 30, 2004
A summary of the operating results for the three months ended April 30, 2005 and 2004 is:
|
|
|
2005 |
|
2004 |
|
Change |
|
% Change |
|
|||
|
Revenue |
|
$ |
6,573,433 |
|
$ |
7,358,640 |
|
$ |
(785,207 |
) |
(10.7 |
)% |
|
Operating Income |
|
$ |
909,045 |
|
$ |
1,020,646 |
|
$ |
(111,601 |
) |
(10.9 |
)% |
|
Loss from Cumulative Effect of Adoption of Accounting Principle |
|
$ |
— |
|
$ |
(854,402 |
) |
$ |
854,402 |
|
100.0 |
% |
|
Net Income Attributable to Shares of Beneficial Interest |
|
$ |
404,301 |
|
$ |
2,028,243 |
|
$ |
(1,623,942 |
) |
(80.1 |
)% |
|
Net Income Per Share - Basic |
|
$ |
0.05 |
|
$ |
0.94 |
|
$ |
(0.89 |
) |
(94.7 |
)% |
|
Net Income Per Share - Diluted |
|
$ |
0.03 |
|
$ |
0.56 |
|
$ |
(0.53 |
) |
(94.6 |
)% |
Total Trust revenue decreased $785,000, or 10.7%, to $6.6 million from $7.4 million when comparing the three months ended April 30, 2005 and 2004, respectively. The decrease was primarily due to the disposition of the Tempe, Arizona and San Diego, California properties during the first quarter of fiscal year 2005. These properties resulted in $905,000 in total revenues reported in the consolidated Trust financials for the first quarter ended April 30, 2004. Revenues from hotel operations, which include Room, Food and Beverage, Telecommunications and Other revenues, decreased $1.0 million, or 14.9%, due primarily to the dispositions discussed above.
Total expenses decreased $864,000, or 12.3%, to $6.2 million from $7.0 million when comparing the three months ended April 30, 2005 and 2004. Total operating expenses decreased $674,000, or 10.6%, to $5.7 million from $6.3 million for three months ended April 30, 2005 and 2004, respectively. The decrease was primarily due to the disposition
9
of the Tempe, Arizona and San Diego, California properties during the first quarter of fiscal year 2005, which resulted in $574,000 of reduced expenses.
General and administrative expenses increased $121,000, or 10.7%, to $1.3 million from $1.1 million when comparing the three months ended April 30, 2005 and 2004, respectively. The increase was primarily due to increased legal and accounting fees in the first quarter of fiscal year 2006.
Hotel property depreciation decreased $237,000, or 31.5%, to $516,000 from $754,000 when comparing the three months ended April 30, 2005 and 2004, respectively. The decrease was primarily due to a large portion of the Trust’s assets becoming fully depreciated at the end of fiscal year 2005 and the cessation of depreciation on the Phoenix, Arizona hotel in the first quarter of fiscal year 2006, as it is being held for sale.
Total interest expense decreased $190,000, or 27.4%, to $503,000 from $693,000 when comparing the three months ended April 30, 2005 and 2004, respectively. Interest on mortgage notes payable decreased $110,000, or 18.3%, due to the sale of properties discussed above. Interest on notes payable and advances payable to related parties decreased $77,000, or 95.3%, to $4,000 from $81,000 when comparing the three months ended April 30, 2005 and 2004, respectively. The decrease was due to the reduction of debt owed to related parties in connection with the sales of the Tempe, Arizona and San Diego, California properties.
LIQUIDITY AND CAPITAL RESOURCES
Through its ownership interest in the Partnership, Yuma Hospitality LP and InnSuites Hotels, the Trust has its proportionate share of the benefits and obligations of the Partnership’s and Yuma Hospitality LP’s ownership interests, as well as InnSuites Hotels’ operational interests, in the Hotels. The Trust’s principal source of cash to meet its cash requirements, including distributions to its shareholders, is its share of these cash flows. The Trust’s liquidity, including its ability to make distributions to its shareholders, will depend upon the ability to generate sufficient cash flows from Hotel operations.
The Trust has principal of $800,429 due and payable for the remainder of fiscal year 2006 under mortgage notes payable. For the twelve months between May 1, 2005 and April 30, 2006, the Trust has principal of $1,083,059 due and payable under mortgage notes payable. The Trust anticipates that cash flow from operations will be sufficient to satisfy these obligations as they become due.
The Trust has no principal due and payable in fiscal year 2006 under notes and advances payable to Wirth and his affiliates.
The Trust had outstanding checks in excess of its cash balance as of April 30, 2005. Subsequent to the end of the quarter, the Trust received $1.0 million from Northern Phoenix Resort LLC, an affiliate of Wirth, as additional deposits for its purchase of the Trust’s Phoenix, Arizona hotel. The Trust used $500,000 of these funds to pay down its line of credit in full, and retained the remainder as cash.
The Trust’s line of credit expires during July 2005. The Trust is currently in negotiations to extend the line of credit. The Trust may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as the Trust considers prudent.
The Trust continues to contribute to a Capital Expenditures Fund (the “Fund”), an amount equal to 4% of the InnSuites Hotels’ revenues from operation of the Hotels. The Fund is restricted by the mortgage lender for five of the Trust’s properties. As of April 30, 2005, $243,000 was held in restricted capital expenditure funds and is included on the Trust’s Balance Sheet as “Restricted Cash.” The Fund is intended to be used for capital improvements to the Hotels and for refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. During the three months ended April 30, 2005, the Hotels spent approximately $270,000 for capital expenditures. The Trust considers the majority of these improvements to be revenue producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Hotels also spent approximately $368,000 during the three months ended April 30, 2005 on repairs and maintenance and these amounts have been charged to expense as incurred.
As of April 30, 2005, the Trust has no commitments for capital expenditures beyond the 4% reserve for refurbishment and replacements set aside annually for each hotel property.
10
The Trust will acquire or develop additional hotels only as suitable opportunities arise, and the Trust will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings or from the proceeds of additional issuances of Shares of Beneficial Interest or other securities. However, there can be no assurance that the Trust will successfully acquire or develop additional hotels.
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
Other than lease commitments, legal contingencies incurred in the normal course of business and an employment contract with Wirth, the Trust does not have any off-balance sheet financing arrangements or liabilities. The Trust does not have any majority-owned subsidiaries that are not included in the consolidated financial statements. (See Note 2 - “Summary of Significant Accounting Policies.”)
SEASONALITY
The Hotels’ operations historically have been seasonal. The four southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest period of occupancy at those four southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenue. The two hotels located in California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the Trust’s hotel business. To the extent that cash flows from operations are insufficient during any quarter, because of temporary or seasonal fluctuations in revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders or to meet operating needs. No assurance can be given that the Trust will make distributions in the future.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements containing the phrases “believes,” “intends,” “expects,” “anticipates,” “predicts,” “will be,” “should be,” “looking ahead” or similar words, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. These forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust’s financing plans; (v) the Trust’s position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; and (vi) trends affecting the Trust’s or any Hotel’s financial condition or results of operations.
These forward-looking statements reflect the Trust’s current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to:
• fluctuations in hotel occupancy rates;
• changes in room rental rates which may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;
• interest rate fluctuations;
• changes in federal income tax laws and regulations;
• competition;
• any changes in the Trust’s financial condition or operating results due to acquisitions or dispositions of hotel properties;
• real estate and hospitality market conditions;
• hospitality industry factors;
• terrorist attacks or other acts of war;
• outbreaks of communicable diseases;
• natural disasters;
• local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry or the markets in which the Trust operates or will operate; and
• uncertainties the Trust might encounter in changing from a Real Estate Investment Trust to a tax-paying entity.
11
The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-Q relating to the operations of the Partnership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is exposed to interest rate risk primarily as a result of its mortgage notes payable, notes payable to banks and other notes payable. Proceeds from these loans were used to maintain liquidity, fund capital expenditures and expand the Trust’s real estate investment portfolio and operations.
The Trust’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Trust borrows using fixed rate debt, when possible. There have been no significant changes in the Trust’s debt structure during the three months ended April 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Trust conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Trust’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Trust in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There was no change in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on September 10, 2002, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan. During the three months ended April 30, 2005, the Trust acquired 13,045 Shares of Beneficial Interest in open market transactions at an average price of $1.29 per share. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and American Stock Exchange requirements. The Trust remains authorized to repurchase an additional 34,720 limited partnership units and/or Shares of Beneficial Interest pursuant to the share repurchase program, which has no expiration date.
12
|
|
|
Issuer Purchases of Equity Securities |
|
||||||
|
Period |
|
Total Number |
|
Average |
|
Total Number of Shares |
|
Maximum Number of |
|
|
February 1 - February 28, 2005 |
|
9,000 |
|
$1.30 |
|
9,000 |
|
38,765 |
|
|
March 1 - March 31, 2005 |
|
1,545 |
|
$1.32 |
|
1,545 |
|
37,220 |
|
|
April 1 - April 30, 2005 |
|
2,500 |
|
$1.25 |
|
2,500 |
|
34,720 |
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
a) Exhibits
|
31.1 |
|
Section 302 Certification By Chief Executive Officer |
|
31.2 |
|
Section 302 Certification By Chief Financial Officer |
|
32.1 |
|
Section 906 Certification of Principal Executive Officer and Principal Financial Officer |
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
INNSUITES HOSPITALITY TRUST |
|||
|
|
|
|
|||
|
|
|
|
|||
|
Dated: |
June 14, 2005 |
|
/s/ James F. Wirth |
|
|
|
|
|
James F. Wirth |
|||
|
|
|
Chairman, President and Chief Executive |
|||
|
|
|
|
|||
|
|
|
|
|||
|
Dated: |
June 14, 2005 |
|
/s/ Anthony B. Waters |
|
|
|
|
|
Anthony B. Waters |
|||
|
|
|
Chief Financial Officer |
|||
14