<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Amended Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 30, 1998
------------------
Realty ReFund Trust
-------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Ohio
-------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
001-07062 34-6647590
- ----------------------------- --------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
925 Euclid Avenue, Suite 1750, Cleveland, Ohio 44115
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 622-0046
---------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
1385 Eaton Center, Cleveland, Ohio 44114
---------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 1. Changes in Control of Registrant.
In accordance with the terms of the Formation Agreement approved at the
1997 annual shareholders' meeting held on January 28, 1998, the trustees
(Alan M. Krause, James H. Berick, Alvin M. Kendis, Frank L. Kennard and
Samuel S. Pearlman) and executive officers (Alan M. Krause, Chairman and Co-
Chief Executive Officer, and James H. Berick, President and Treasurer) of
Realty ReFund Trust ("RRF") resigned effective January 30, 1998. James F.
Wirth, Gregory D. Bruhn, Marc E. Berg, Mark J. Nasca, Lee J. Flory and Edward
G. Hill were appointed the new trustees of RRF effective January 30, 1998.
Mr. Wirth was also appointed Chairman, President and Chief Executive Officer
of RRF and Mr. Bruhn was also appointed Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of RRF. The new trustees and
executive officers of RRF currently beneficially own 45.8% of the outstanding
shares of beneficial interest of RRF; all of those shares are beneficially
owned by Mr. Wirth and his wife, Gail J. Wirth. The Formation Agreement,
attached hereto as Exhibit 2.1 and incorporated herein by reference, more
fully describes the transactions which resulted in the change of control and
the consideration therefor. RRF is not presently aware of any arrangements
which may at a subsequent date result in a further change in control.
Item 2. Acquisition or Disposition of Assets.
On February 2, 1998, the "Formation Transactions" described generally
below were entered into by RRF in accordance with the terms of the Formation
Agreement. The Formation Transactions are more fully described in the Formation
Agreement, attached hereto as Exhibit 2.1 and incorporated herein by reference,
which Agreement was approved at the 1997 annual shareholders' meeting held on
January 28, 1998.
In general terms, the Formation Transactions resulted in the formation of a
limited partnership by RRF and Hospitality Corporation International ("HCI"), a
privately-held Arizona corporation. HCI and its principal, James F. Wirth,
through affiliated entities, controlled seven all-suite hotel properties,
comprising 1,036 hotel studio and two-room suites, in Tucson, Phoenix,
Scottsdale, Tempe, Flagstaff and Yuma, Arizona and in Ontario, California, five
of which were owned by partnerships and two of which were owned by corporations.
RRF is the 13% general partner, and the investors in the five partnerships and
one of the corporations are the 87% limited partners, in the newly-formed
limited partnership. This newly-formed limited partnership acquired substantial
interests in the five partnerships and the one corporation. The investors
(including Messrs. Wirth, Berg and Flory) received partnership interests in the
newly-formed limited partnership in exchange for their interests in the five
partnerships and the one corporation. The remaining corporation, which was owned
by Mr. Wirth and his wife, was acquired directly by a newly-formed subsidiary of
RRF in a stock- for-stock exchange. The partnership interests and RRF stock
issued in exchange for the seven hotel properties had an approximate aggregate
value of $35,608,000, which represents the appraised value (as determined by
independent appraisals) of the seven hotel properties less outstanding debt to
be assumed. That value was determined in arms-length negotiations between HCI
and RRF prior to the change in control described in Item 1, above. As
<PAGE> 3
described in Item 1, above, Mr. Wirth is now an officer and trustee of RRF and
Messrs. Berg and Flory are now trustees of RRF. RRF intends to utilize the
assets acquired by it in the Formation Transactions in accordance with their use
prior to the acquisition. The effect of the Formation Transactions is to
re-direct the investment focus of RRF from its prior investment strategy of
making wrap-around mortgage loans to the equity ownership of hotel properties,
initially located in the southwestern United States.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The following are filed as exhibits to this Form 8-K/A Amended Report:
Report of Independent Public Accountants.
Combined Balance Sheets as of December 31, 1996 and 1995 and
September 30, 1997.
Combined Statements of Operations for the three years ended
December 31, 1996 and for the nine months ended
September 30, 1996 and September 30, 1997.
Combined Statements of Equity for the three years ended
December 31, 1996 and for the six months ended June
30, 1997.
Combined Statements of Cash Flows for the three years ended
December 31, 1996 and for the nine months ended
September 30, 1996 and September 30, 1997.
Notes to Combined Financial Statements.
(b) Pro Forma Financial Information.
The following pro forma condensed statements of income for the period
ended October 31, 1997, are filed as exhibits to this Form 8-K/A Amended
Report, giving effect to the Formation Transactions based on the historical
consolidated financial statements of InnSuites Hotels and RRF and the
assumptions and adjustments set forth in the accompanying notes to the pro
forma condensed combined financial statements:
Pro Forma Condensed Consolidated Balance Sheet as of October
31, 1997.
Notes to Pro Forma Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statement of Income for the
year ended January 31, 1997.
Pro Forma Condensed Consolidated Statement of Income for the
nine months ended October 31, 1997.
Notes to Pro Forma Consolidated Statements of Income.
(c) Exhibits.
Formation Agreement, dated as of December 15, 1996, by and
among Realty ReFund Trust, Mid-America ReaFund Advisors, Inc.,
InnSuites Hotels, L.L.C., Hospitality Corporation
International, Alan M. Krause, James H. Berick, James F.
Wirth, and five hotel partnerships and two hotel corporations.
Financial Statements of Business Acquired and Pro Forma
Financial Statements of RRF and InnSuites Hotels.
<PAGE> 4
Exhibit
No. Document Description
- ------- --------------------
2.1 Formation Agreement, dated as of December 15, 1996,
by and among Realty ReFund Trust, Mid-America ReaFund
Advisors, Inc., InnSuites Hotels, L.L.C., Hospitality
Corporation International, Alan M. Krause, James H.
Berick, James F. Wirth, and five hotel partnerships
and two hotel corporations.
7.1 Financial Statements of Business Acquired and Pro
Forma Financial Statements of RRF and InnSuites
Hotels.
<PAGE> 5
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 hereunto duly authorized.
Realty ReFund Trust
(Registrant)
Dated: April 20, 1998 By: /s/ Gregory D. Bruhn
----------------------------------
Name: Gregory D. Bruhn
----------------------------------
Title: Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
----------------------------------
<PAGE> 6
INDEX TO EXHIBITS
Exhibit
No. Document Description
- ------- --------------------
2.1 Formation Agreement, dated as of December 15, 1996,
by and among Realty ReFund Trust, Mid-America ReaFund
Advisors, Inc., InnSuites Hotels, L.L.C., Hospitality
Corporation International, Alan M. Krause, James H.
Berick, James F. Wirth, and five hotel partnerships
and two hotel corporations.
7.1 Financial Statements of Business Acquired and
Pro Forma Financial Statements of RRF and InnSuites
Hotels.
<PAGE> 1
Exhibit 2.1
FORMATION AGREEMENT
This Formation Agreement is made and entered into this 15th day of
December, 1996, by and among Realty ReFund Trust, an unincorporated Ohio real
estate investment trust having an address at 1385 Eaton Center, Cleveland, Ohio
44114 ("RRF"); Mid-America ReaFund Advisors, Inc., an Ohio corporation having an
address at 1385 Eaton Center, Cleveland, Ohio 44114 ("MARA"); InnSuites Hotels,
L.L.C., an Arizona limited liability company having an address at Suite 105,
1615 East Northern Avenue, Phoenix, Arizona 85020 ("ISH"); Hospitality
Corporation International, an Arizona corporation having an address at Suite
105, 1615 East Northern Avenue, Phoenix, Arizona 85020 ("HCI"); Alan M. Krause,
a shareholder of RRF and MARA having an address in care of RRF ("Krause"); James
H. Berick, a shareholder of MARA having an address in care of RRF ("Berick");
James Wirth, the President of the managing member of ISH and the President of
HCI having an address in care of HCI ("Wirth"); and the seven limited
partnerships or corporations, as the case may be, listed on Schedule I hereto
(each, a "Hotel Company" and, collectively, the "Hotel Companies"). All seven of
the Hotel Companies are controlled by HCI and/or Wirth or an affiliate, and each
has an address in care of HCI. RRF, MARA, Krause and Berick sometimes are
referred to herein collectively as the "RRF Parties"; Wirth, ISH, HCI and the
Hotel Companies sometimes are referred to herein collectively as the "ISH
Parties".
RECITALS:
A. RRF was organized in 1971 and has qualified as a "real estate investment
trust" ("REIT") for federal income tax purposes since its organization. RRF's
shares of beneficial interest, without par value ("RRF Shares"), currently are
listed for trading on the New York Stock Exchange ("NYSE") under the symbol
"RRF".
B. The Hotel Companies own and/or manage a total of seven all-suite hotel
properties, comprising 1,037 hotel studio and two-room suites, in Tucson,
Phoenix, Scottsdale, Tempe, Flagstaff and Yuma, Arizona and in Ontario,
California (the "Hotels").
C. HCI wishes to provide, among other things, for the terms of the transfer
of its and its affiliates' ownership interests in the Hotel Companies to RRF
Operating Limited Partnership, a to-be-formed Delaware limited partnership (the
"Operating Partnership"), in which certain of the equity owners of the Hotel
Companies will be the initial limited partners and RRF will be the general
partner.
D. Wirth wishes to provide for the terms of his acquisition of all of the
outstanding capital stock of MARA and the acquisition by him or an affiliate of
200,000 presently issued and outstanding RRF Shares, and for his designees to
assume majority control of RRF's Board of Trustees.
E. The parties hereto desire that the transactions contemplated herein
regarding the organization of the Operating Partnership and the restructuring of
the ownership and control of the Hotel Companies, RRF and MARA (such
transactions, collectively, the "Formation") be implemented through the timely
execution and closing of the transactions contemplated by this Agreement and of
the agreements contemplated hereby (this Agreement and all other agreements and
instruments contemplated hereby which are required to be executed at or prior to
the closing of the Formation pursuant to this Agreement (such date, the "Closing
Date") hereinafter are referred to collectively as the "Transaction
Agreements"). Accordingly, the parties hereto wish to enter into this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein, and for other good, valuable and binding consideration, the
receipt and sufficiency of which hereby are acknowledged, and subject to the
terms hereof, the parties hereto, intending legally to be bound, hereby agree as
follows:
Section 1. Transaction Agreements.
Subject to the fulfillment or waiver of the conditions specified in Section
7, below, and pursuant to and in accordance with the Transaction Agreements, at
or prior to the Closing Date:
<PAGE> 2
(a) Operating Partnership Agreement. RRF, HCI and each equity owner
of each Hotel Company which is a limited partnership (each, a "Partnership
Hotel Company") who elects to participate in the Private Placement (as
hereinafter defined)(each, a "Participating Equity Owner") shall execute
and enter into an Agreement of Limited Partnership of the Operating
Partnership (the "Operating Partnership Agreement"). The Operating
Partnership Agreement will provide, inter alia, for the contribution by HCI
and each Participating Equity Owner of its respective ownership interests
in each Partnership Hotel Company to the Operating Partnership, and for HCI
to make certain representations and warranties to RRF including, without
limitation, as to the material accuracy of all information furnished to RRF
in respect of the Hotel Companies and the Hotels and as to customary real
estate matters. The Operating Partnership Agreement will specify that the
ownership interests of HCI and the Participating Equity Owners in the
Partnership Hotel Companies will be transferred to the Operating
Partnership; that the aggregate ownership interests of HCI and the
Participating Equity Owners in the Operating Partnership will equal the
"ISH Ownership Percentage" (as defined below); and that the aggregate
ownership interest of RRF in the Operating Partnership will equal the "RRF
Ownership Percentage" (as defined below). The Operating Partnership will
issue to RRF, as general partner, and to the Participating Equity Owners,
in the aggregate, as initial limited partners, such number of general or
limited partnership units, as the case may be, as shall equal the OP RRF
Contribution or the OP Hotel Contribution (each as defined below),
respectively, divided by five (5). Each Participating Equity Owner will
receive his ratable proportion of such aggregate number of limited
partnership units. The Operating Partnership Agreement further will provide
that the limited partnership units in the Operating Partnership shall be
convertible into RRF Shares, on a one-for-one basis. Notwithstanding the
foregoing, however, no such conversion will be permitted for a specific
limited partner if RRF determines that such conversion would be likely to
cause RRF no longer to qualify as a REIT. RRF will contribute to the
Operating Partnership, in exchange for its general partnership interest
therein, an amount of its cash and/or other property in such proportion to
its total assets as the Agreed Equity Value of the Hotels contributed to
the Operating Partnership bears to the ISH Portfolio Value (such
proportion, the "Partnership Hotel Percentage"). An example of the
foregoing calculation is set forth on Schedule III attached hereto.
For purposes of this Agreement, the term "ISH Ownership Percentage"
shall mean the fraction, expressed as a percentage, that is the product of
(i) the "ISH Portfolio Value", which for purposes of this Agreement shall
be the aggregate Agreed Equity Value (as hereinafter defined) of all seven
of the Hotels, divided by (ii) the sum of (x) the ISH Portfolio Value plus
(y) $5,102,930 [i.e., $5.00 per RRF Share multiplied by 1,020,586
outstanding RRF Shares](the "RRF Agreed Value").
For purposes of this Agreement, the term "RRF Ownership Percentage"
shall mean the fraction, expressed as a percentage, that is the product of
(i) the RRF Agreed Value, divided by (ii) the sum of (x) the ISH Portfolio
Value plus (y) the RRF Agreed Value.
For purposes of this Agreement, the term "Operating Partnership Value"
shall mean the sum of (x) the aggregate Agreed Equity Value of the Hotels
contributed to the Operating Partnership by the Partnership Hotel Companies
(the "OP Hotel Contribution"), plus (y) the product of the RRF Agreed Value
multiplied by the Partnership Hotel Percentage (the "OP RRF Contribution").
For purposes of this Agreement, the term "Agreed Equity Value" shall
mean the appraised value of the Hotels, less outstanding debt to be
assumed.
(b) Acquisition of Corporate Hotel Companies. Each of the two Hotel
Companies which is a corporation (a "Corporate Hotel Company") shall enter
into either an Agreement of Merger (a "Merger Agreement") and/or a Purchase
and Sale Agreement (a "Hotel Purchase Agreement") with RRF. It is
contemplated that the Corporate Hotel Company that owns the Flagstaff,
Arizona Hotel will receive RRF Shares as the consideration for transfer of
that Hotel to RRF, pursuant to either a Merger Agreement or a Hotel
Purchase Agreement, based upon the Agreed Equity Value of that Hotel and
that the Corporate Hotel Company that owns the Scottsdale, Arizona Hotel
will receive a combination of RRF Shares and cash, in the form of a
promissory note or notes of RRF in a principal amount of up to $4.4
million, bearing interest and otherwise payable in a manner similar to the
terms of the promissory note referenced in Section 1(f) of this
2
<PAGE> 3
Agreement, as the consideration for the transfer of that Hotel to RRF
pursuant to either a Merger Agreement or a Hotel Purchase Agreement. The
Corporate Hotel Company that owns the Flagstaff, Arizona Hotel will receive
such number of RRF Shares as shall equal the Agreed Equity Value of such
Hotel divided by five (5); the Corporate Hotel Company that owns the
Scottsdale, Arizona Hotel will receive such number of RRF Shares as shall
equal the Agreed Equity Value of such Hotel, minus the principal amount of
the promissory note referred to in the preceding sentence, divided by five
(5).
(c) Purchase of MARA Capital Stock. Wirth, or an affiliated nominee,
will enter into a Stock Purchase Agreement (the "MARA Purchase Agreement")
with Krause and Berick providing for the purchase by Wirth (or such
affiliated nominee) of all of the outstanding capital stock of MARA (the
"MARA Shares"), free and clear of all liens and encumbrances, for a
purchase price equal to $750,000, of which $300,000 will be payable in cash
on the Closing Date, with the balance payable in two equal annual
installments of $225,000 each, together with interest on the unpaid amount
at 7% per annum, compounded annually and computed on the basis of a 365-day
year. Interest shall be payable annually, together with the payment of
principal then due, on each of the first two anniversaries of the Closing
Date. The obligations of Wirth (or such affiliated nominee) to Krause and
Berick under the MARA Purchase Agreement will be secured by a pledge of the
MARA Shares, and the MARA Purchase Agreement will provide for the
acceleration of all unpaid amounts thereunder upon any sale, transfer,
assignment or pledge of all or substantially all of the capital stock
and/or assets of MARA to an unaffiliated third party prior to the payment
in full of all amounts owing thereunder to Krause and Berick.
(d) Purchase of Outstanding RRF Shares. ISH, or an affiliated
nominee, will enter into a Share Purchase Agreement (the "RRF Purchase
Agreement") with Krause providing for the purchase by ISH (or such
affiliated nominee) of 200,000 presently issued and outstanding RRF Shares
held as of the date hereof by Krause and/or certain other holders of RRF
Shares designated by Krause, free and clear of all liens and encumbrances,
for an aggregate purchase price equal to $1,000,000, which will be payable
in cash on the Closing Date.
(e) Issuance of RRF Shares. Concurrently with the Formation, RRF, at
Wirth's option, will issue to parties designated by Wirth, pursuant to an
Exchange Agreement between RRF and such parties (the "Exchange Agreement"),
200,000 presently authorized but unissued RRF Shares in exchange for
$1,000,000 of equity interests in the Hotel Companies which otherwise would
be transferred pursuant to the Operating Partnership Agreement, the Merger
Agreement or the Hotel Purchase Agreement.
(f) Wirth Option. At his option, Wirth may elect to receive, in lieu
of up to $4,400,000 of consideration otherwise to be received by him in
exchange for his equity interests in the Hotel Companies in the form of RRF
Shares or limited partnership interests in the Operating Partnership, a
payment from the Operating Partnership or RRF in the form of a promissory
note or notes in an aggregate principal amount not to exceed $4,400,000 of
the Operating Partnership or RRF, as the case may be, bearing interest on
the principal amount thereof at the rate of 7% per annum, compounded
annually and computed on the basis of a 365-day year, payable in thirty-six
(36) equal monthly installments of principal and interest.
(g) MARA and the Operating Partnership. Concurrently with the
Formation, RRF's Board of Trustees, acting pursuant to Section 3.4 of RRF's
First Amended and Restated Declaration of Trust, will request, and MARA
will so agree, that MARA enter into an advisory arrangement with the
Operating Partnership that will provide MARA with the same level of
advisory compensation in respect of assets of the Operating Partnership as
MARA currently receives in respect of assets of RRF pursuant to its
Advisory Agreement with RRF.
(h) Related ISH Entities. Upon the consummation of the Formation,
Wirth, ISH and/or HCI will make available to MARA such additional personnel
as shall be necessary to enable MARA to provide appropriate asset
management and advisory services to RRF and the Operating Partnership.
Wirth shall cause his affiliate, InnSuites Innternational Hotels, Inc.
("ISIH"), a to-be-formed Arizona or Nevada corporation, to enter into
substantially identical standard percentage leases of each Hotel from the
Operating Partnership (or RRF, in the case of the corporate-owned Hotels).
The terms of such leases (including, without limitation, rent, lease term,
and provisions for termination by the Operating Partnership or RRF, as
3
<PAGE> 4
the case may be,) will be reasonably satisfactory in form and substance to
RRF. In addition, Wirth will cause his affiliates to transfer rights and
resources to ISIH to enable it to provide property management services and
trademark and licensing services, subject to terms and conditions
reasonably satisfactory to RRF in form and substance.
(i) Termination of Krause and Berick Employment Agreements. At the
Closing Date, Krause and Berick each will execute such documents as
reasonably requested by Wirth in order to effect the termination of their
respective Employment Agreements with RRF, without any cost or liability to
RRF.
Section 2. Management of RRF. RRF, as of the Closing Date, shall secure
the resignations from its Board of Trustees of each of the current Trustees
other than Alan M. Krause, who will appoint James Wirth, Marc E. Berg, Mark J.
Nasca and Gregory D. Bruhn to fill the vacancies thus created, which parties
will expand the size of the Board by one and will appoint M. William Isbell to
the vacancy thus created. Alan M. Krause agrees to continue to serve on RRF's
Board of Trustees until the date of RRF's 1997 Annual Meeting of Shareholders
and agrees to resign at that time unless requested to remain a Trustee, which
request he may accept or decline at his sole option. Wirth, ISH and HCI agree
that they will, or will cause their designees to the Board of Trustees of RRF
and the Board of Directors of MARA, as the case may be, to, enter into
agreements with each of the trustees, officers and directors of RRF and MARA
serving as of the date hereof (each such person, an "Indemnified Person")
whereby RRF and MARA each agree to continue to indemnify each Indemnified Person
to the maximum extent permitted by applicable law from and against any
liability, cost or expense arising out of any act or omission on the part of
such Indemnified Person taken (or alleged to have been taken) at any time in his
or her capacity as a trustee, officer and/or director of RRF and/or MARA, as the
case may be.
Section 3. RRF Shareholder Approval. RRF shall prepare and, following
completion of the Private Placement (as hereinafter defined), submit to its
shareholders, as promptly as may be practicable, proxy materials soliciting the
approval of such shareholders for the transactions comprising the Formation. The
parties hereto acknowledge that RRF will be required to submit such proxy
materials to the Securities and Exchange Commission and the NYSE for their
respective comment and approval prior to the distribution of such materials to
its shareholders. Wirth, ISH, HCI, the Hotel Companies and their respective
affiliates, attorneys, accountants and other advisors each shall cooperate fully
in the preparation of said proxy materials and shall furnish such assistance as
RRF reasonably may request in connection therewith.
RRF shall use all reasonable efforts to obtain SEC and NYSE clearance of
the Proxy Statement and, to the extent required, approval of the transactions
comprising the Formation. Each of ISH and HCI shall furnish all information
concerning it and the Hotel Companies and the holders of equity interests
therein, and RRF shall furnish all information concerning it and the holders of
its shares, as may be required by the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or the regulations promulgated thereunder, or as
the other may reasonably request in connection with such actions. As promptly as
practicable after clearance of the Proxy Statement, RRF shall mail the proxy
statement to its shareholders. The Proxy Statement shall include the
recommendation of RRF's Board of Trustees in favor of shareholder approval of
the transactions comprising the Formation.
RRF shall, promptly after the date of this Agreement, take all action
necessary to convene a meeting of RRF's shareholders to act on approval of the
transactions comprising the Formation, and shall consult with ISH and HCI in
connection therewith. RRF shall use its reasonable best efforts to solicit from
its shareholders proxies in favor of the approval of the transactions comprising
the Formation and to secure the vote or consent of shareholders required to
approve the transactions comprising the Formation. Such solicitation shall not
be commenced by RRF until such time as the Private Placement (as defined below)
shall have been completed, with the closing thereof being subject only to the
consummation of the other transactions contemplated by this Agreement.
RRF shall, promptly after the date of this Agreement, take all action
necessary to obtain the listing on NYSE of a number of additional shares of RRF
equal to or in excess of the maximum number of RRF shares issuable upon
conversion of partnership interests in the Operating Partnership as contemplated
by Section 1(a) above and in connection with the transactions contemplated by
Sections 1(b) and (e) above and shall consult with HCI and ISH in connection
therewith.
4
<PAGE> 5
Section 4. Approvals of the Hotel Companies. HCI shall, promptly after
the date of this Agreement, prepare and submit to each equity holder in the
Hotel Companies a private placement memorandum (the "PPM") pursuant to which
such equity holders will be offered the opportunity to exchange their equity
interests in the respective Hotel Companies for partnership interests in the
Operating Partnership which shall be convertible into RRF shares as contemplated
by Section 1(a) above and as provided in the Operating Partnership Agreement
(such offer, the "Private Placement"). The PPM shall also solicit the consent of
such equity holders to the transactions comprising the Formation to the extent
such consent may be required by the organizational documents of the respective
Hotel Companies. The terms of the Private Placement shall provide, among other
things, that the equity owners in the Hotel Companies shall have the right to
accept the Private Placement, accept cash in an amount determined as provided in
the PPM as an alternative to accepting the Private Placement, or decline to
accept the Private Placement or cash; provided, however, that the PPM will
provide that the Private Placement shall not be concluded unless HCI and ISH, in
consultation with counsel, determine to their satisfaction that the Private
Placement will be effected in compliance with the requirements of Rule 506 under
the Securities Act of 1933, as amended (the "Securities Act"), including,
without limitation, the limitation on the number of purchasers set forth in Rule
506(b)(2). The PPM shall include the recommendation of the general partners or
managing members of each Hotel Company in favor of the exchange and the Private
Placement shall be completed, subject only to the consummation of the other
transactions contemplated by this Agreement.
Each of ISH and HCI shall furnish all information concerning it and the
Hotel Companies and the holders of equity interests therein, and RRF shall
furnish all information concerning it and the holders of its shares for
inclusion in the PPM, as may be required to be included in the PPM by the
Securities Act or the regulations promulgated thereunder, or as the other may
reasonably request in connection with such actions. RRF, MARA and their
respective affiliates, attorneys, accountants and advisors each shall cooperate
fully in the preparation of said consent materials and furnish such assistance
as HCI reasonably may request in connection therewith.
Section 5. Representations and Warranties.
(a) Organization and Good Standing. RRF, MARA, HCI, ISH, and each Hotel
Company each represents and warrants to each of the other parties hereto that it
has been duly organized and is validly existing in good standing under the laws
of its respective jurisdiction of organization. RRF represents to each of the
ISH Parties that: to its best knowledge, it has maintained continuous
qualification as an REIT within the meaning of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended; such qualification will not be
jeopardized by the consummation of the Formation; and there is not pending, nor
to its knowledge is there threatened, any action or proceeding to effect the
delisting of the RRF Shares from the NYSE.
(b) Authority. Each party hereto represents and warrants to each of the
other parties hereto that, subject only to the receipt of the approvals
described in Sections 3 and 4, above, as applicable, such party has the power
and authority to execute, deliver and perform this Agreement and the Transaction
Agreements to be executed by such party and to consummate the transactions
contemplated hereby and thereby; that this Agreement has been (or, upon the
receipt of such approvals, will be) duly and validly executed and delivered on
such party's behalf; that each of such Transaction Agreements to be executed by
such party, when executed and delivered, will be duly authorized, executed and
delivered on its behalf; and that this Agreement is, and when executed and
delivered by such party each of the Transaction Agreements will be, upon the due
execution and delivery thereof by each of the other parties thereto, the legal,
valid and binding obligation of such party, enforceable against such party in
accordance with the respective terms thereof, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement thereof or relating to creditors' rights
generally.
(c) Consents. Each party hereto represents and warrants to each of the
other parties hereto that, except as set forth in Sections 3 and 4, above, as
applicable, no consent, approval, permit or order of, nor filing with, any
individual, partnership, corporation, trust or other entity, government agency
or political subdivision, is required in connection with: (i) the execution,
delivery and performance of this Agreement or the Transaction Agreements by such
party or (ii) the consummation by such party of the transactions contemplated
hereby or thereby (including, without limitation, any required consent of the
spouse of any natural person who is a party hereto and is subject to the
community property laws of any jurisdiction), other than any such consent,
approval, permit or
5
<PAGE> 6
order obtained, or filing made, prior to the Closing Date in a form reasonably
satisfactory to the other parties hereto. RRF represents and warrants to each of
the ISH Parties that the transactions contemplated hereby will not result in the
triggering of any "poison pill" or similar shareholder rights plan in respect of
its securities. MARA and RRF represent and warrant to each of the ISH Parties
that MARA is not currently in default in its obligations to RRF under the
Advisory Agreement between MARA and RRF, as in effect on the date hereof, that
such Advisory Agreement is enforceable in accordance with its terms, and that
the sale of the MARA Shares pursuant to the MARA Purchase Agreement will
transfer to the purchaser(s) thereof all of the rights which currently inure to
the benefit of Krause and Berick, as the sole shareholders of MARA, in respect
of such Advisory Agreement.
(d) No Violation. Each party hereto represents and warrants to each of the
other parties hereto that, upon receipt of the approvals contemplated by
Sections 3 and 4, above, and the approvals from mortgage lenders (the "Lender
Approvals") which have a right to approve the transactions contemplated hereby,
as referred to in Section 6(g), below, none of the execution, delivery and
performance by such party of this Agreement or the execution, delivery or
performance by such party of the Transaction Agreements to be executed by such
party, nor the consummation by such party of the transactions contemplated
hereby or thereby, will violate any provision of the organizational documents of
such party or violate or be in conflict with, or constitute a default (or an
event or condition which, with notice or lapse of time or both, would constitute
a default) under, or result in the termination or acceleration of, or result in
the creation or imposition of any lien or encumbrance under, any agreement,
note, mortgage or other instrument to which such party is a party or by which
such party may be bound or subject, or violate any statutes, orders, rules and
regulations promulgated by any governmental body, or violate any court order or
decree binding upon such party.
(e) Brokers'/Finders' Fees. Each party hereto represents and warrants to
each of the other parties hereto that it has not employed a broker or finder in
connection with any transactions contemplated by the Formation other than, in
the case of RRF and MARA: Brown, Gibbons, Lang & Company, L.P.; and in the case
of Wirth, ISH, HCI and the Hotel Companies: JDI Realty, LLC and Berg Investment
Advisers. Each party ("First Party") agrees to indemnify and hold harmless any
other party hereto from and against any claim asserted against any such other
party for a brokerage, agent's, finder's or originator's commission or other
similar compensation in respect of the transaction contemplated by this
Agreement by any person purporting to act on behalf of First Party.
(f) Ownership of MARA Shares and RRF Shares. Each of Krause and Berick,
severally and not jointly, represents and warrants to each of the ISH Parties
that he is the lawful owner of fifty (50) MARA Shares, each such person's
shareholdings comprising 50% of the outstanding capital stock of MARA, and that
he has good and marketable title to such MARA Shares, free and clear of any
liens, encumbrances, equities, restrictions and claims of every kind and nature
whatsoever, and that he has full right, power and authority to transfer such
interests as contemplated by the MARA Purchase Agreement. Krause represents and
warrants to each of the ISH Parties that he is the lawful owner as of the date
hereof of approximately 164,000 of the 200,000 RRF shares to be sold to Wirth
pursuant to Section 1(d), above, and that he and each other seller of any of
such RRF Shares has good and marketable title to the RRF Shares to be sold by
such person pursuant to the RRF Purchase Agreement, in each case free and clear
of any liens, encumbrances, equities, restrictions and claims of every kind and
nature whatsoever, and that he and each other seller of any of such RRF Shares
has full right, power and authority to transfer such RRF Shares as contemplated
by the RRF Purchase Agreement.
(g) Ownership of the Hotel Companies. HCI represents and warrants to each
of the RRF Parties that the ownership of the Hotel Companies as of the date
hereof is as set forth on Schedule I hereto, and that, subject to the approvals
set forth in Section 4, above, and any required Lender Approvals, the persons or
entities indicated thereon have good and marketable title to such equity
interests, free and clear of any liens, encumbrances, equities, restrictions and
claims of every kind and nature whatsoever, and that such owners have full
right, power and authority to transfer such interests as contemplated by the
Operating Partnership Agreement, the Merger Agreement and/or the Exchange
Agreement, as the case may be.
(h) Investment Intent. Each of Wirth, ISH, and HCI, severally and not
jointly, represents and warrants to each of the RRF Parties and to RRF for the
benefit of the Operating Partnership, that it is acquiring its respective RRF
Shares, MARA Shares and/or limited partnership interests in the Operating
Partnership for its own account
6
<PAGE> 7
for purposes of investment and not with a view to effecting a public
distribution thereof, subject to its respective rights under the Operating
Partnership Agreement to sell or otherwise transfer such limited partnership
interests pursuant to an exemption from registration under applicable securities
laws.
(i) Execution on Behalf of the Hotel Companies. Each Hotel Company
represents and warrants to each of the RRF Parties that the general partners (or
managing members or officers, as the case may be) of such Hotel Company
executing this Agreement will have full power and will have been duly
authorized, as of the Closing Date, in accordance with the organizational
documents of such Hotel Company, to execute on behalf of such Hotel Company the
Transaction Agreements and all other documents and instruments necessary to
effect the intention of the parties hereto to carry out the Formation.
(j) Ownership of Assets of RRF. RRF hereby represents and warrants to each
of the ISH Parties that it is the lawful owner of each and every asset to be
transferred to the Operating Partnership as contemplated by Section 1(a), above,
and has and will have good and marketable title to such assets, free and clear
of any liens, encumbrances, equities, restrictions and claims of every kind and
nature whatsoever, except as set forth on Schedule II hereto, and that it has
and will have full right, power and authority to transfer such interests as
contemplated by the Formation, subject to the receipt of the shareholder
approval specified in Section 3, above.
(k) Insurance. RRF hereby represents and warrants to each ISH Party, and
ISH, HCI and each Hotel Company jointly and severally represent to each RRF
Party, that the real property owned by them, respectively, as of the date hereof
is and as of the Closing Date will be fully insured against casualty loss and
that the entity owning the real property in question is the owner and primary
beneficiary of such policies of insurance.
(l) Financial Information. Each ISH Party, jointly and severally,
represents to each RRF Party that the financial information furnished or to be
furnished to any RRF Party by or on behalf of any ISH Party is true and correct
in all material respects as of the date thereof and that there has been no, and
as of the Closing Date there will not have been any, material adverse change in
the financial condition or results of operations of any ISH Party or any Hotel
since the dates of any of such financial information which previously has not
been disclosed to the RRF Parties.
(m) NYSE Listing. RRF represents to HCI and ISH that the RRF shares are
listed on NYSE and that RRF has received no notice from NYSE terminating or
proposing to terminate or otherwise limit the trading of RRF shares on NYSE and
has no notice that any such termination or limitation is pending or threatened.
The representations and warranties set forth in this Section 5 shall be
deemed to be repeated on and as of the Closing Date.
Section 6. Covenants and Other Agreements.
(a) Further Assurances; Additional Documentation. From time to time upon
request, and without the granting of further consideration, each of the parties
hereto agrees to execute, deliver and acknowledge any and all such further
instruments and do such further acts as any other party hereto reasonably may
require to evidence or effectuate more fully the transactions contemplated by
this Agreement, the Transaction Agreements and the Formation. The parties hereto
acknowledge and agree that this Agreement sets forth the documentary framework
and the principal terms of the understandings of the parties in respect of the
Formation, that it would be impracticable for this Agreement to set forth all of
the terms to be contained in the Transaction Agreements, and that each party
hereto will negotiate in good faith such terms of the Transaction Agreements as
are not expressly set forth herein.
(b) The Formation. The parties hereto agree that the sequence of events
constituting the Formation shall be effected as substantially concurrently as
possible on the earliest date as may be practicable following the receipt of the
approvals specified in Sections 3 and 4, above, but not prior to January 2,
1997.
(c) Notice of Sale. The parties hereto agree to cooperate to cause the
Operating Partnership to prepare a notice of sale of securities on Securities
and Exchange Commission Form D in respect of the distribution of limited
partnership interests in the Operating Partnership to the partners/members of
the Partnership Hotel Companies, and to file such notice as soon as possible
after the Closing Date, but in no event later than 15 days thereafter.
7
<PAGE> 8
(d) Conduct of Business. Each party hereto covenants and agrees to each of
the other parties hereto that, between the date hereof and the Closing Date, its
respective business will continue to be operated in the regular and ordinary
course thereof commensurate with relevant industry standards, and in connection
therewith each such party shall not, without the prior consent of the other
parties hereto:
(i) Sell or transfer any assets other than in the regular and ordinary
course of business or encumber any assets, whether or not in the regular
and ordinary course of business; provided, however, it is expressly agreed
that RRF shall be entitled to (A) continue to declare and pay regular
dividends of not more than ten cents per share to its shareholders in
accordance with its past practice in the sole discretion of its Board of
Trustees, and that any such dividend declaration and payment shall have no
effect on the interest of RRF in the Operating Partnership set forth in
Section 1(a), above, and (B) consummate a sale of its Chicago office
property on such terms as it may agree to in its sole discretion but at a
gross cash purchase price of not less than $6.0 million, and that ISH may
(C) refinance the existing indebtedness encumbering the Phoenix Hotel with
a new first mortgage loan of not more than $4.9 million, bearing interest
at the rate of 8.5% and maturing in not more than fifteen (15) years and
encumber the Scottsdale Hotel with up to an additional $4.5 million of
mortgage debt and (D) admit InnSuites Innternational Inns & Resorts, Inc.,
an Arizona corporation, as a general partner of each Hotel Company of which
it is not currently a general partner.
(ii) Terminate or cause or permit the termination of, any contract,
lease or other agreement which in any case either individually or in the
aggregate has a materially adverse effect on the assets, operations or
prospects of such covenanting party.
(iii) Agree to do any of the things specified in (i) or (ii), above.
Each ISH Party represents and warrants to each RRF Party that the Hotels are
being operated in a manner commensurate with relevant industry standards and
there have not been any changes in basic operating procedures. Between the date
hereof and the Closing Date, each party hereto shall use its respective best
efforts to keep the services of its respective present employees and preserve
their respective present relations with suppliers and other vendors.
(e) RRF Information in Proxy Statement and PPM. None of the information to
be supplied by RRF or any of its accountants, counsel or other authorized
representatives for inclusion in the Proxy Statement or the PPM will, at the
time of the mailing of the Proxy Statement or the PPM, as the case may be, and
any amendments or supplements thereto, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, or, at the time of the shareholders' meeting or the conclusion of
the Private Placement, as the case may be, omit to state any material fact
necessary to correct any statement that has become false or misleading, it being
understood and agreed that no representation or warranty is made by RRF with
respect to any information supplied by ISH or HCI or their accountants, counsel
or other authorized representatives. If at any time prior to the Closing Date
any event with respect to RRF shall occur which is or should be described in an
amendment of or supplement to the Proxy Statement or the PPM, such event shall
be so described and the presentation in such amendment or supplement will not
contain any statement which, at the time and in light of the circumstances under
which it is made, is false or misleading in any material respect or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not false or misleading. The Proxy Statement will comply as to form in all
material respects with all applicable laws, including the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
(f) HCI/ISH Information in Proxy Statement and PPM. None of the
information to be supplied by HCI or ISH or any of their accountants, counsel or
other authorized representatives for inclusion in the Proxy Statement or the PPM
will, at the time of the mailing of the Proxy Statement or the PPM, as the case
may be, and any amendments or supplements thereto, contain any untrue statement
of a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading, or, at the time of the shareholders' meeting or the conclusion
of the Private Placement, as the case may be, omit to state any material fact
necessary to correct any statement that has become false or misleading, it being
understood and agreed that no representation or warranty is made by HCI or ISH
with respect to any information supplied by RRF or its accountants, counsel or
other authorized representatives. If at any time prior
8
<PAGE> 9
to the Closing Date any event with respect to HCI, ISH, or the Hotel Companies
shall occur which is or should be described in an amendment of or supplement to
the Proxy Statement or the PPM, such event shall be so described and the
presentation in such amendment or supplement will not contain any statement
which, at the time and in light of the circumstances under which it is made, is
false or misleading in any material respect or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not false or
misleading. The PPM will comply as to form in all material respects with all
applicable laws, including the provisions of the Securities Act and the rules
and regulations promulgated thereunder.
(g) Lender Approvals. The ISH Parties will use their best efforts to
obtain the Lender Approvals as promptly as practicable and, in any event, prior
to the mailing by RRF to its shareholders of the Proxy Statement.
Section 7. Conditions Precedent and Termination.
(a) Conditions Precedent. The obligations of each of the parties hereto to
consummate the transactions contemplated hereunder are subject to the
satisfaction or waiver of the following conditions at or prior to the Closing
Date:
(i) each of the Transaction Agreements shall be duly executed and
acknowledged by all of the parties thereto;
(ii) any further instruments and acts properly requested pursuant
hereto shall have been executed and delivered or done, as the case may be;
(iii) the approvals required by Sections 3 and 4, above, shall have
been obtained;
(iv) the representations and warranties contained in Section 5 hereof
shall be true and correct in all material respects on the date hereof and
on the Closing Date with the same effect as though such representations and
warranties had been made or given on the Closing Date;
(v) all of the parties to all of the Transaction Agreements shall have
performed all of their obligations under the Transaction Agreements to be
performed at or prior to the closing of the Formation;
(vi) the following legal opinions and memorandum shall have been
delivered by and to the parties specified below, and such legal opinions
and memorandum shall be reasonably satisfactory in form and substance to
the respective addressees thereof:
(A) counsel for RRF and MARA shall have delivered its opinion to
the ISH Parties in respect of the matters relating to RRF and MARA set
forth in Sections 5(a), (b), (c) and (d), above;
(B) counsel for the ISH Parties shall have delivered its opinion to
RRF and MARA in respect of the matters set forth in Sections 5(a), (b),
(c), (d) and (i), above, and to the effect that the Private Placement
constitutes a transaction exempt from the registration requirements of
(1) the Securities Act and (2) all applicable state securities laws; and
(C) counsel for the Hotel Companies shall have delivered to RRF and
the Operating Partnership a blue-sky memorandum indicating the basis for
compliance with or exemption from all applicable state securities laws
in respect of the distribution by the Partnership Hotel Companies of
their respective limited partnership interests in the Operating
Partnership to their partners/members;
(vii) the RRF Shares, including the additional RRF Shares contemplated
to be listed by Section 3, above, or otherwise in connection with the
transactions contemplated by this Agreement, shall be listed on the NYSE
and no proceedings shall be pending or, to RRF's knowledge, threatened, in
respect of any delisting or suspension of listing thereof;
(viii) there shall not be pending an injunction or order or decree of
a court of competent jurisdiction restraining or prohibiting the
consummation of the Formation; and
(ix) no more than thirty-five (35) Participating Equity Owners shall
be persons who do not constitute "accredited investors" as such term is
defined in Securities Act Rule 501.
9
<PAGE> 10
(b) Termination.
(i) This Agreement shall automatically terminate on March 31, 1997 if
the Closing Date shall not have occurred on or before such date, unless
otherwise extended by mutual written agreement of each and every party
hereto. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing Date by any party
by the delivery of written notice of termination to each other party
hereto, subject to the expense reimbursement provisions of Section 8(h),
below.
(ii) In the event of the termination of this Agreement, this Agreement
forthwith shall become void and of no further force and effect and there
shall be no liability hereunder or thereunder on the part of any party
hereto or any of its affiliates, directors, officers, partners or
shareholders, provided, however, that nothing herein shall relieve any
party from liability for any breach hereof or thereof or from such party's
obligations in respect of reimbursement of expenses set forth in Section
8(h), below.
Section 8. Miscellaneous.
(a) Waiver. Any failure of any of the parties hereto to comply with any
obligation, covenant, agreement or condition herein may be waived by the parties
entitled to the benefit thereof only by a written instrument signed by each such
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, representation, warranty, covenant, agreement
or condition shall not operate as a waiver of or estoppel in respect of any
subsequent or other failure.
(b) GOVERNING LAW. THIS FORMATION AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OHIO REGARDLESS OF THE
LAWS THAT WOULD OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF
LAWS. The parties hereto consent to personal jurisdiction in the Court of Common
Pleas for Cuyahoga County, Ohio, or the United States District Court for the
Northern District of Ohio, in connection with any claim, allegation, cause of
action or legal proceeding relating in any way to this Agreement. The parties
hereto agree, to the fullest extent permitted by law, to venue in such court, to
waive any claim that such court is an inconvenient forum and to accept service
of process in any such claim, action or proceeding in the manner set forth in
Section 8(f) (in addition to any other means of service permitted by law).
(c) Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, and
delivered by means of facsimile transmission or otherwise, each of which when so
executed and delivered shall be deemed to be an original and all of which when
taken together shall constitute but one and the same agreement.
(d) Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of, and be enforceable by, the parties
hereto and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations herein shall be
assigned or delegated by any party hereto without the prior written consent of
the other parties hereto.
(e) Amendment. This Agreement may not be amended except by an instrument
in writing signed by each of the parties hereto.
(f) Notices. All notices and other communications hereunder must be in
writing and will be deemed to have been duly given when personally delivered or
on the date of receipt or refusal indicated on the return receipt if mailed
(registered or certified mail, postage prepaid, return receipt requested) or
sent by express courier service to the addresses set forth in the preamble
hereto, with a copy, in the case of notices to any of the ISH Parties, to James
B. Aronoff, Esq., Thompson, Hine & Flory LLP, 3900 Key Tower, 127 Public Square,
Cleveland, Ohio 44114, and, in the case of notices to any of the RRF Parties, to
Daniel G. Berick, Esq., Berick, Pearlman & Mills Co., L.P.A., 1350 Eaton Center,
1111 Superior Avenue, Cleveland, Ohio 44114.
(g) Severability. If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be modified to the extent necessary to render it
legal, valid and enforceable, and if no such modification shall render it legal,
valid and enforceable, then this Agreement shall be construed as if not
10
<PAGE> 11
containing the provision held to be invalid, and the rights and obligations of
the parties shall be construed and enforced accordingly.
(h) Expenses. RRF shall bear the costs and expenses incurred by the RRF
Parties (except as set forth in the following sentence) in connection with this
Agreement, the Transaction Agreements and the transactions contemplated hereby
and thereby, including but not limited to the reasonable fees and expenses of
their counsel. MARA and Krause shall bear the costs and expenses, including but
not limited to the reasonable fees and expenses of their counsel, incurred in
connection with the MARA Purchase Agreement and the RRF Purchase Agreement,
respectively. The ISH Parties shall bear their own costs and expenses incurred
in connection with this Agreement, the Transaction Agreements and the
transactions contemplated hereby and thereby, including but not limited to the
reasonable fees and expenses of their respective counsel. Notwithstanding the
foregoing, (i) if subsequent to the execution hereof, the Formation is not
consummated because of any determination not to proceed with the Formation or
other action or omission by or on behalf of any ISH Party, including a failure
of any representation or warranty made herein by or on behalf of any ISH Party
to be true and correct as of the date hereof or as of the Closing Date (any of
the foregoing, an "ISH Termination") by or on behalf of any ISH Party, then and
in such event ISH shall be obligated to reimburse the RRF Parties for respective
costs and expenses incurred in connection herewith, up to an aggregate maximum
of:
(A) $25,000, if such ISH Termination occurs subsequent to the date
which is thirty (30) days after the date this Agreement is executed by each
party hereto but prior to the occurrence of any of the events set forth in
subclauses (B) through (D) of this clause (i);
(B) $75,000, if such ISH Termination occurs subsequent to the initial
submission of the proxy materials referred to in Section 3, above, to a
financial printer but prior to the occurrence of any of the events set
forth in subclauses (C) or (D) of this clause (i);
(C) $100,000, if such ISH Termination occurs subsequent to the initial
distribution of the proxy materials referred to in Section 3, above, to
RRF's shareholders but prior to the occurrence of the event set forth in
subclause (D) of this clause (i); and
(D) $250,000, if such ISH Termination occurs subsequent to the receipt
by RRF of the approval required by Section 3, above;
or (ii) if subsequent to the execution hereof, the Formation is not consummated
because of any determination not to proceed with the Formation or other action
or omission by or on behalf of any RRF Party, including a failure of any
representation or warranty made herein by or on behalf of any RRF Party to be
true and correct as of the date hereof or as of the Closing Date (any of the
foregoing, an "RRF Termination") (other than the failure to obtain the
shareholder approval required by Section 3, above, which failure shall not
create the following obligations on the part of RRF), then and in such event RRF
shall be obligated to reimburse the ISH Parties for their respective costs and
expenses incurred in connection herewith, up to an aggregate maximum of:
(A) $25,000, if such RRF Termination occurs subsequent to the date
which is thirty (30) days after the date this Agreement is executed by each
party hereto but prior to the occurrence of any of the events set forth in
subclauses (B) through (D) of this clause (ii);
(B) $75,000, if such RRF Termination occurs subsequent to the initial
submission of the proxy materials referred to in Section 3, above, to a
financial printer but prior to the occurrence of any of the events set
forth in subclauses (C) or (D) of this clause (ii);
(C) $100,000, if such RRF Termination occurs subsequent to the initial
distribution of the proxy materials referred to in Section 3, above, to
RRF's shareholders but prior to the occurrence of the event set forth in
subclause (D) of this clause (ii);
(D) $250,000, if such RRF Termination occurs subsequent to the receipt
by RRF of the approval required by Section 3, above.
In addition to the foregoing, should the Formation not be consummated because
the RRF Parties have elected to enter into a transaction substantially similar
to the Formation or otherwise effectuate a sale or change in control
11
<PAGE> 12
of RRF with any third party prior to March 31, 1997 (an "Outside Transaction"),
RRF shall pay to the ISH Parties an additional aggregate sum of $500,000. RRF
agrees that it will not so elect to enter into an Outside Transaction unless its
Board of Trustees determines, in the exercise of its independent business
judgment and discretion, that it has a fiduciary duty to the holders of the RRF
Shares to enter into such Outside Transaction rather than proceed with the
Formation.
Notwithstanding anything herein to the contrary, (x) the foregoing expense
reimbursement obligations of the ISH Parties shall not be applicable in the
event that the ISH Parties determine not to consummate the Formation as a result
of the failure of the RRF Parties to satisfy the conditions set forth in
Sections 7(a)(iii), (vi) or (viii) relating to RRF or in Section 7(a)(vii) if
the RRF Parties have satisfied the remaining conditions set forth in Section
7(a) to be satisfied by them; and (y) the foregoing expense reimbursement
obligations of the RRF Parties shall not be applicable in the event that the RRF
Parties determine not to consummate the Formation as a result of the failure of
the ISH Parties to satisfy the conditions set forth in Sections 7(a)(iii), (vi)
or (viii) relating to the ISH Parties if the ISH Parties have satisfied the
remaining conditions set forth in Section 7(a) to be satisfied by them.
(i) No Solicitation. Each of the RRF Parties agrees that it will not,
after the date hereof and prior to the date of termination of this Agreement,
seek, directly or through agents, representatives or affiliates, or permit any
of its officers or directors to seek (whether in their capacity as officers or
directors or in their individual capacities) or otherwise solicit or encourage
the initiation of inquiries or proposals from any person or persons (other than
the ISH Parties or any of them) to purchase all or a substantial portion of the
assets of any of the RRF Parties or all or a substantial portion of the capital
stock or other securities of any of the RRF Parties or any of their respective
affiliates, or for any of the RRF Parties or any of their respective affiliates
to purchase in one or more related transactions the capital stock or other
securities or assets of persons (other than the ISH Parties or any of them)
whereby any of the RRF Parties would issue (or commit to issue) shares of its
capital stock or other securities or to effect a consolidation or merger or
other business combination or recapitalization (other than the transactions
comprising the Formation)(an "Acquisition Proposal"). The RRF Parties shall
immediately cease and cause to be terminated all existing discussions and
negotiations, if any, with any parties conducted heretofore with respect to any
Acquisition Proposal (other than the ISH Parties or any of them). Nothing
contained in this Section 8(i) shall prevent the Board of Trustees of RRF from
considering, negotiating, approving and recommending to shareholders of RRF a
bona fide Acquisition Proposal not solicited, directly or indirectly, in
violation of this Agreement, provided the Board of Trustees determines in good
faith that it is required to do so in order to discharge properly its fiduciary
duties.
RRF shall immediately notify the ISH Parties after receipt of any
Acquisition Proposal (whether written or oral), or any modification of or
amendment to any Acquisition Proposal, or any request for any nonpublic
information relating to the RRF parties or any of them in connection with any
Acquisition Proposal or for access to the properties, books or records of the
RRF Parties or any of them by any person or entity that informs the Board of
Trustees or management of RRF or of any of the RRF Parties that it is
considering making or has made an Acquisition Proposal. Such notice to the ISH
Parties shall be made orally and in writing and shall indicate whether RRF is
providing or intends to provide the person making the Acquisition Proposal with
access to information concerning the RRF Parties or any of them, the identity of
the person making the Acquisition Proposal and the terms and conditions of the
transaction contemplated by the Acquisition Proposal. Notwithstanding the
foregoing, RRF shall not be obligated to inform the ISH Parties of any
unsolicited inquiry received by it in respect of an Acquisition Proposal if such
inquiry is preliminary in nature and RRF responds to such inquiry by advising
the inquiring party that RRF is in exclusive negotiations regarding the
transaction contemplated by this Agreement.
(j) Publicity. The RRF Parties, on the one hand, and the ISH Parties, on
the other hand, agree that neither will make any public statement or issue any
press release disclosing the existence of this Agreement or the terms hereof
without the prior consent of the other, which consent shall not be unreasonably
withheld or delayed.
(k) Trust Disclaimer; Personal Liability. As provided in the First Amended
and Restated Declaration of Trust establishing RRF, dated June 11, 1971, no
trustee, officer, shareholder, employee or agent of RRF shall be held to any
personal liability, jointly or severally, for any obligation of, or claim
against, RRF. All persons
12
<PAGE> 13
dealing with RRF in any way shall look only to the assets of RRF for the payment
of any sum or the performance of any obligation. Wirth and any other officers of
any of the ISH Parties executing this Agreement shall not be held personally
liable solely for having so executed this Agreement in a representative capacity
and all persons dealing with the ISH Parties shall only look to the assets of
the ISH Parties for the payment of any sum or the performance of any obligation
by the ISH Parties. It is further agreed that the respective personal liability
of Wirth, Krause or Berick for any breach of any representation, warranty or
covenant made by such person in his individual capacity shall be limited to, and
recourse shall be had solely against, (x) in the case of Wirth, the assets of
HCI, and (y) in the case of either Krause or Berick, the assets of MARA; it
being understood that none of the aforesaid persons shall have any personal
liability in respect of any such breach made by an entity for which such person
has signed in a representative capacity.
IN WITNESS WHEREOF, the undersigned have executed this Agreement this 15th
day of December, 1996.
<TABLE>
<S> <C>
REALTY REFUND TRUST INNSUITES HOTELS L.L.C.
International Suites Corp., Managing Member
By: /s/ ALAN M. KRAUSE
----------------------------------------
Its: Chairman By: /s/ JAMES F. WIRTH
--------------------------------------------
Its: President
MID-AMERICA REAFUND ADVISORS, INC.
By: /s/ ALAN M. KRAUSE /s/ JAMES F. WIRTH
---------------------------------------- --------------------------------------------
Its: Chairman James F. Wirth
HOSPITALITY CORPORATION INTERNATIONAL
By: /s/ JAMES F. WIRTH
----------------------------------------
James F. Wirth, President
/s/ ALAN M. KRAUSE /s/ JAMES H. BERICK
- -------------------------------------------- --------------------------------------------
Alan M. Krause James H. Berick
TUCSON HOSPITALITY PROPERTIES, LTD., an YUMA HOSPITALITY PROPERTIES, LTD., an
Arizona limited partnership Arizona limited partnership
By: Hospitality Corporation International, By: Hospitality Corporation International,
its general partner its general partner
By: /s/ JAMES F. WIRTH By: /s/ JAMES F. WIRTH
---------------------------------------- ----------------------------------------
James F. Wirth, President James F. Wirth, President
BASELINE HOSPITALITY PROPERTIES, LTD., an NORTHERN PHOENIX INVESTMENT LIMITED
Arizona limited partnership PARTNERSHIP, an Arizona limited partnership
By: Hospitality Corporation International, By: Hospitality Corporation International,
its general partner its general partner
By: /s/ JAMES F. WIRTH By: /s/ JAMES F. WIRTH
---------------------------------------- ----------------------------------------
James F. Wirth, President James F. Wirth, President
(signatures continued on following page)
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
(signatures continued from previous page)
ONTARIO HOSPITALITY PROPERTIES, LIMITED HULSEY HOTELS CORPORATION
PARTNERSHIP, an Arizona limited partnership
By: InnSuites Innternational Inns & Resorts, By: /s/ JAMES F. WIRTH
Inc., its general partner ----------------------------------------
James F. Wirth, President
By: /s/ JAMES F. WIRTH
- ---------------------------------------- BUENAVENTURA PROPERTIES, INC.
James F. Wirth, President
By: /s/ JAMES F. WIRTH
----------------------------------------
James F. Wirth, President
</TABLE>
14
<PAGE> 15
SCHEDULE I
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF ENTITY TYPE OF ENTITY LOCATION OF HOTEL ORGANIZATION
- ------------------------------------------- -------------------- ----------------- ---------------
<S> <C> <C> <C>
Tucson Hospitality Properties, Ltd......... Limited Partnership Tucson, AZ Arizona
Yuma Hospitality Properties, Ltd........... Limited Partnership Yuma, AZ Arizona
Baseline Hospitality Properties, Ltd....... Limited Partnership Tempe, AZ Arizona
Northern Phoenix Investment Limited
Partnership.............................. Limited Partnership Phoenix, AZ Arizona
Ontario Hospitality Properties Limited
Partnership.............................. Limited Partnership Ontario, CA Arizona
Hulsey Hotels Corporation.................. Corporation Flagstaff, AZ Arizona
Buenaventura Properties, Inc............... Corporation Scottsdale, AZ Arizona
</TABLE>
15
<PAGE> 16
SCHEDULE II
1. Carbide and Carbon Building (Chicago):
a. Listing Agreement, dated September 27, 1996, between RRF and CB
Commercial. This agreement terminates on December 31, 1996, unless
renewed.
2. Riverview Tower (Toledo):
a. First Mortgage, dated May 1, 1967, securing a loan in the original
principal amount of $12,000,000, in favor of New York Life Insurance
Company. Such loan is in default.
b. Lucas County Common Pleas Court has appointed a receiver for the
building effective November 1, 1996.
16
<PAGE> 17
REALTY REFUND TRUST/INNSUITE HOTELS
SAMPLE SHARE OF OP UNIT CALCULATIONS
<TABLE>
<CAPTION>
WIRTH PARTNERS'
APPROXIMATE TOTAL RRF OPERATING OPERATING
APPRAISED MORTGAGE AGREED SHARES OR PARTNERSHIP PARTNERSHIP
VALUE BALANCE EQUITY VALUE OP UNITS % UNITS % UNITS %
----------- ----------- ------------ --------- --- ----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tempe.............. $10,715,000 $2,800,000 $ 7,915,000 1,583,000 20% 712,350 45% 870,850 55%
Tucson............. 8,715,000 0 8,715,000 1,743,000 22% 610,050 35% 1,132,950 65%
Flagstaff.......... 3,325,000 990,000 2,335,000 467,000 6%
Yuma............... 9,000,000 4,000,000 5,000,000 1,000,000 13% 400,000 40% 600,000 60%
Phoenix............ 7,900,000 3,100,000 4,800,000 960,000 12% 921,600 96% 38,400 4%
Scottsdale......... 7,225,000 6,225,000 1,000,000 200,000 3%
Ontario............ 8,775,000 3,800,000 4,975,000 995,000 12% 666,650 67% 328,350 33%
----------- ----------- ----------- --------- --- --------- -- --------- --
Total ISH.......... $55,655,000 $20,915,000 34,740,000 6,948,000 87% 3,310,650 2,970,350
=========== ===========
Realty ReFund
Trust............ 5,102,930 1,020,586 13%
----------- --------- ---
$39,842,930 7,968,586 100%
=========== ========= ===
<CAPTION>
WIRTH RRF
SHARES %
--------- ---
<S> <C> <C>
Tempe..............
Tucson.............
Flagstaff.......... 467,000 100%
Yuma...............
Phoenix............
Scottsdale......... 200,000 100%
Ontario............
------- ---
Total ISH.......... 667,000
Realty ReFund
Trust............
</TABLE>
- ---------------
Note: The above calculations are based on the summary of appraised values and
approximate mortgage balances for the seven "Accountable Properties"
supplied by JDI Realty.
17
<PAGE> 1
Exhibit 7.1
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth selected unaudited pro forma condensed
consolidated financial information for RRf for the year ended January 31, 1997,
and for the nine-month period ended October 31, 1997.
The Pro Forma Condensed Consolidated Balance Sheet of RRF (i) is
presented as if the Formation Transactions had occurred on October 31, 1997;
and (ii) combines the historical balance sheet of RRF as of October 31, 1997
with the historical combined balance sheet of the various hotel companies as of
September 30, 1997. The Pro Forma Condensed Consolidated Statements of Income
for RRF for the year ended January 31, 1997 and for the nine-month period ended
October 31, 1997 (i) are presented as if the Formation Transactions, the sale
of the Carbon and Carbide building and the beginning of the relevant lease year
had occurred on February 1, 1996, and therefore incorporates certain
assumptions that are included in the Notes to the Pro Forma Condensed
Consolidated Statements of Income; and (ii) combines the historical operating
results of RRF for the year ended January 31, 1997 and the nine-month period
ended October 31, 1997 with the combined operating results of the various hotel
companies for the year ended December 31, 1996 and the nine-month period ended
September 30, 1997, respectively. In the opinion of the Trustees, the effect of
non-conforming period ends on the unaudited pro forma information is not
material.
<PAGE> 2
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ADJUSTMENTS
REALTY ---------------------------
REFUND CONTRIBUTED FORMATION OTHER PRO
TRUST HOTELS TRANSACTIONS TRANSACTIONS FORMA
------ ----------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
ASSETS
INVESTMENTS IN HOTEL PROPERTIES, net......... $ -- $26,885 $ 16,850 (A) $43,735
CASH AND CASH EQUIVALENTS.................... 2,683 826 (950) (B) 172
259 (C)
$ (113)(D)
(675) (E)
(175)(F)
(1,500)(I)
(183) (H)
ACCOUNTS RECEIVABLE, net..................... -- 489 (489) (C) --
INVENTORIES.................................. -- 401 (401) (C) --
DEFERRED COSTS, net.......................... -- 527 (46) (G) 656
175(F)
INTEREST RECEIVABLE AND OTHER ASSETS......... 47 1,350 (1,178) (C) 402
183 (H)
------ ------- ------- ------- -------
TOTAL ASSETS................................. $2,730 $30,478 $ 13,370 $ (1,613) $44,965
====== ======= ======= ======= =======
LIABILITIES AND EQUITY
MORTGAGE NOTES PAYABLE....................... $ -- $17,963 $ (4,750)(G) $13,213
LINE OF CREDIT............................... -- 90 (90)(D) 3,250
4,750(G)
(1,500)(I)
OTHER NOTES PAYABLE.......................... -- 2,699 (23)(D) 2,676
ADVANCES PAYABLE TO AFFILIATES............... -- 946 946
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........ 18 1,198 $ (1,052) (C) 164
MINORITY INTEREST IN PARTNERSHIP............. -- -- 18,627 (J) 18,627
EQUITY:
COMBINED ACCUMULATED EQUITY................ -- 7,582 (950) (B) --
(6,632) (K)
SHARES OF BENEFICIAL INTEREST
(unlimited authorized; 1,020,586 issued
and outstanding prior to Formation
Transactions, 1,731,527 issued and
outstanding upon consummation of
Formation Transactions)................. 2,712 -- 3,377 (A) 6,089
------ ------- ------- ------- -------
TOTAL EQUITY....................... 2,712 7,582 (4,205) -- 6,089
------ ------- ------- ------- -------
TOTAL LIABILITIES AND EQUITY....... $2,730 $30,478 $ 13,370 $ (1,613) $44,965
====== ======= ======= ======= =======
See Notes to Pro Forma Condensed Consolidated Balance Sheet.
</TABLE>
<PAGE> 3
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands)
(A) Increase in investment in hotel properties attributable to the application
of purchase accounting to the extent of (1) the Trust's acquisition of a
13.1% general partnership interest in RRF-LP, (2) the exchange transactions
with limited partners other than Wirth, and (3) the Trust's acquisition of
100% of the stock of BPI through the issuance of Shares having an aggregate
value of $3,377 (711 Shares at $4.75 per Share).
<TABLE>
<CAPTION>
BPI OTHER HOTELS TOTAL
------ ------------ -------
<S> <C> <C> <C>
Value of Units issued.................................... $ -- $ 32,231
Value of Common Shares issued............................ 3,377 --
Historical adjusted deficit (equity) of interests
purchased by the Trust or RRF-LP, as applicable........ 1,758(a) (8,390)(b)
------ -------
Excess of purchase consideration over historical net book
values................................................. 5,135 23,841
Allowable writeup based on change in percentage ownership
interests.............................................. 100% 49%
------ -------
Allowable writeup based on change in percentage ownership
interests.............................................. 5,135 11,673(c) $16,808
Trust's cash purchase price for 13.1% interest in
RRF-LP................................................. -- 2,175(d) 2,175
The Trust's 13.1% interest in the net assets of RRF-LP... -- (2,808)(e) (2,808)
Transfer costs and commissions (See (E))................. 68 607 675
------ ------- -------
Purchase accounting writeup.............................. $5,203 $ 11,647 $16,850
====== ======= =======
The exchanges of ownership interests by Mr. Wirth do not result in adjustments to historical
basis as such transactions are between entities under common control.
</TABLE>
(B) Reflects the purchase by the Hotel Partnerships and Hotel Companies of
200,000 Common Shares currently held by Alan Krause and certain other
shareholders for a purchase price of $4.75 per share and the distribution
of such Common Shares to the respective partners of the Hotel Partnerships
and the owners of the Hotel Companies.
(C) Reflects the sale of certain non-real estate assets, net of the Lessee's
assumption of certain non-real estate liabilities. Units issued by RRF-LP
in exchange for the Flagstaff Hotel will be used by Hulsey Hotels
Corporation to acquire a preferred stock interest in the Lessee. Upon
receipt of the Units, the Lessee will exchange a portion of the Units to
acquire the non-real estate assets and assume the non-real estate related
liabilities of RRF-LP. RRF-LP will then distribute the Units so received to
its respective limited partners.
<TABLE>
<CAPTION>
BPI OTHER HOTELS TOTALS
------ ------------ -------
<S> <C> <C> <C>
Accounts receivable...................................... $ 39 $ 450 $ 489
Inventories.............................................. 62 339 401
Other assets............................................. 1,063 115 1,178
Accounts payable and accrued expenses.................... (905) (147) (1,052)
------ ------- -------
Consideration to be received............................. $ 259 $ 757(f) $ 1,016
====== ======= =======
</TABLE>
(D) Reflects the retirement of certain line of credit indebtedness and capital
lease obligations of the Hotel Corporations and the Hotel Partnerships.
(E) Reflects the cash payments of transaction costs and commissions to be made
by the Hotel Partnerships and the Hotel Corporations. See (A) above.
(F) Reflects the payment of deferred financing costs related to the new
revolving credit agreement.
<PAGE> 4
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1997 (CONTINUED)
(G) Represents the refinancing of existing mortgage indebtedness of BPI and the
Flagstaff Hotel with borrowings against the new credit facility and the
writeoff of unamortized deferred financing costs associated with the
mortgages.
(H) Represents the initial deposit posted by RRF-LP to the Capital Expenditures
Fund held for the benefit of Lessee.
(I) Represents the paydown of borrowings against the new revolving credit
facility with available cash.
(J) Represents the recognition of minority interest in RRF-LP that will not be
owned by the Trust. The calculation of minority interest is as follows:
<TABLE>
<S> <C>
Trust contribution for general partnership interest........................ $ 2,175(d)
Historical equity of Hotel Partnerships.................................... 9,340(g)
Distributions by the Hotel Partnerships of Common Shares purchased per
(B)...................................................................... (950)(h)
Value of Units received and distributed as discussed in (C)................ (757)(f)
Writeoff of deferred financing costs associated with the mortgage
refinanced in (G)........................................................ (46)
Allowable writeup based on change in percentage ownership interests........ 11,673(c)
-------
Total equity of RRF-LP..................................................... 21,435
Minority interest percentage............................................... 86.9%
-------
$18,627
=======
Minority interest in RRF-LP................................................ $18,627
Trust's interest in RRF-LP................................................. 2,808(e)
-------
Total equity of RRF-LP................................................... $21,435
=======
The Units received and issued in adjustment (C) have been considered in the
determination of the minority interest percentage.
</TABLE>
(K) Elimination of the adjusted historical equity accounts of:
<TABLE>
<S> <C> <C>
Hotel Company that owns the Flagstaff Hotel and the Hotel Partnerships
Historical equity........................................ (9,340)(g)
Less distribution discussed in (B)....................... 950(h)
------
Adjusted historical equity............................... (8,390)(b)
BPI
Historical equity........................................ 1,758(a)
------
$(6,632)
======
</TABLE>
<PAGE> 5
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1997
(Unaudited, Dollar Amounts in Thousands except for Per Share Data)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
PERCENTAGE LEASE REVENUE............................... $ -- $ 7,376(A) $ 7,376
OTHER RENTAL REVENUE................................... 2,278 (2,278)(B) --
INTEREST INCOME........................................ 1,638 -- 1,638
------ ------ ------
TOTAL REVENUES............................... 3,916 5,098 9,014
------ ------ ------
PROVISION FOR WRITEDOWN OF LOAN RECEIVABLE............. 111 -- 111
PROVISION FOR WRITEDOWN OF REAL ESTATE HELD FOR SALE... 1,085 (1,085)(B) --
INTEREST ON LOANS UNDERLYING WRAP MORTGAGES............ 239 -- 239
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE... 714 58(I) 1,929
(332)(C)
1,489(D)
ADVISORY FEE TO RELATED PARTY ADVISOR.................. 170 406(E) 576
OPERATING EXPENSES OF REAL ESTATE HELD FOR SALE........ 2,086 (2,086)(B) --
DEPRECIATION AND AMORTIZATION.......................... 43 1,334(F) 1,377
GENERAL AND ADMINISTRATIVE............................. 355 223(G) 578
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY
INSURANCE AND GROUND RENT............................ -- 942(H) 942
MINORITY INTEREST...................................... -- 1,790(J) 1,790
------ ------ ------
TOTAL EXPENSES AND MINORITY INTEREST......... 4,803 2,739 7,542
------ ------ ------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL
INTEREST............................................. $ (887) $ 2,359 $ 1,472
====== ====== ======
NET INCOME (LOSS) PER SHARE............................ $ (0.87) $ .85
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,020,586 710,941 1,731,427
</TABLE>
See notes to pro forma condensed consolidated statements of income.
<PAGE> 6
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 31, 1997
(Unaudited, Dollar Amounts in Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
PERCENTAGE LEASE REVENUE............................... $ -- $ 5,997(A) $ 5,997
OTHER RENTAL REVENUE................................... 1,367 (1,367)(B) --
INTEREST INCOME........................................ -- --
------ ------ ------
TOTAL REVENUES............................... 1,367 4,630 5,997
------ ------ ------
LOSS ON SALE OF REAL ESTATE............................ 36 (36)(B) --
INTEREST EXPENSE ON MORTGAGE AND OTHER NOTES PAYABLE... 118 44(I) 1,258
(118)(C)
1,214(D)
ADVISORY FEE TO RELATED PARTY ADVISOR.................. -- 432(E) 432
OPERATING EXPENSES OF REAL ESTATE HELD FOR SALE........ 1,404 (1,404)(B) --
DEPRECIATION AND AMORTIZATION.......................... 22 1,001(F) 1,023
GENERAL AND ADMINISTRATIVE............................. 174 260(G) 434
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY
INSURANCE AND GROUND RENT............................ -- 611(H) 611
MINORITY INTEREST...................................... -- 1,844(J) 1,844
------ ------ ------
TOTAL EXPENSES AND MINORITY INTEREST......... 1,754 3,848 5,602
------ ------ ------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL
INTEREST............................................. $ (387) $ 782 $ 395
====== ====== ======
NET INCOME (LOSS) PER SHARE............................ $ (0.38) $ .23
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,020,586 710,941 1,731,427
</TABLE>
See notes to pro forma condensed consolidated statements of income.
<PAGE> 7
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Dollars in Thousands Except for Per Share Data)
(A) Consolidated percentage rent from RRF-LP and BPI as calculated pursuant to
the terms of the Percentage Leases.
(B) Assumes the sale of the Carbon and Carbide Building as of February 1, 1996.
The building was sold on September 4, 1997 for $6,000.
(C) Interest expense on $2,300 loan from related party which was retired with
proceeds from the sale of the Carbon and Carbide Building.
(D) Reflects interest expense on (i) existing mortgage indebtedness of the Hotel
Companies to be assumed by RRF-LP ($1,164 for the year ended January 31,
1997 and $970 for the nine months ended October 31, 1997) and (ii) new
borrowings against the revolving line of credit ($325 for the year ended
January 31, 1997 and $244 for the nine months ended October 31, 1997). The
interest rates on the mortgage debt range from 8.0% to 9.25%.
(E) Reflects increase in advisory fee to MARA (equal to 1% of the Trust's
invested assets) related to increase in assets under management having a
total appraised value of $57,565.
(F) Represents (i) the elimination of historical amortization of the Trust
related to the real estate held for sale, and (ii) depreciation of the
Hotel properties. Depreciation is computed using the straight-line method
and is based upon the estimated useful lives of 40 years for buildings and
improvements and 7 years for furniture and equipment. These estimated
useful lives are based on management's knowledge of the properties and the
hotel industry in general.
The Trust's pro forma investment in hotel properties, at cost, consists of
the following:
<TABLE>
<CAPTION>
HOTEL
COMPANIES
---------
<S> <C>
Land.................................................. $ 3,440
Buildings and improvements............................ 37,195
Furniture, fixtures and equipment..................... 3,100
-------
$43,735
=======
</TABLE>
(G) Reflects increase in consolidated G & A for RRF-LP, Scottsdale, and the
Trust. Pro forma G&A expense is comprised of the following:
<TABLE>
<CAPTION>
FULL YEAR NINE MONTHS
--------- -----------
<S> <C> <C>
Salaries and wages.................................... $ 130 $ 98
Professional fees..................................... 170 127
Directors' and officers' insurance.................... 50 38
Directors' fees and expenses.......................... 58 43
Other operating expenses.............................. 170 128
---- ------
$ 578 $ 434
==== ======
</TABLE>
(H) Represents real estate and personal property taxes, property and casualty
insurance and ground rent expense to be paid by RRF-LP. Such amounts were
derived from historical amounts paid by the Hotels.
(I) Reflects amortization of $175 of deferred loan fees and costs over the
3-year term of the Line of Credit.
<PAGE> 8
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF INCOME -- CONTINUED
(Unaudited) (Dollars in Thousands Except for Per Share Data)
(J) Represents 86.9% of Net Income of RRF-LP attributable to Minority Interest
holders, who will hold 6,785,564 limited partnership units. The Trust will
hold 1,020,586 units or 13.1% of the total.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED OCTOBER 31,
JANUARY 31, -----------------
1997 1996 1997
----------- ------ ------
<S> <C> <C> <C>
Pro Forma Income before Minority Interest:
Trust....................................................... $ 907 $ 953 $ --
Scottsdale.................................................. 295 123 117
RRF-LP...................................................... 2,060 1,735 2,112
------ ------ ------
3,262 2,811 2,239
Minority Interest in Pro Forma Income of RRF-LP at 86.9%...... 1,790 1,508 1,844
------ ------ ------
Pro Forma Consolidated Net Income............................. $ 1,472 $1,303 $ 395
====== ====== ======
</TABLE>
<PAGE> 9
MICHAEL MAASTRICHT, C.P.A.
---------------
CERTIFIED PUBLIC ACCOUNTANT
10640 North 28th. Drive, Suite C-209 (602) 375-2926 -- ofc
Phoenix, Arizona 85029 (602) 375-2926 -- fax
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InnSuites International Hotels, Inc.:
We have audited the accompanying combined balance sheets of the InnSuites
Hotels as defined in Note 1 to the combined financial statements, as of December
31, 1995 and 1996, and the related combined statements of operations, cash flows
and equity for each of the three years in the period ended December 31, 1996.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the InnSuites
Hotels as of December 31, 1995 and 1996, and the combined results of their
operations, cash flows and equity for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Michael Maastricht
MICHAEL MAASTRICHT, CPA
Phoenix, Arizona
April 28, 1997
MEMBER
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
ARIZONA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 10
INNSUITES HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
--------------------------- 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land $ 3,339,738 $ 3,439,738 $ 3,439,738
Buildings and improvements 23,649,746 24,831,670 24,842,546
Furniture and equipment 8,181,756 9,175,834 9,370,072
Purchases of partners' interests 0 0 1,018,872
- ----------------------------------------------------------------------------------------------------------
35,171,240 37,447,242 38,671,228
Less-Accumulated depreciation 9,861,945 10,958,581 11,786,398
- ----------------------------------------------------------------------------------------------------------
Net investment in hotel properties 25,309,295 26,488,661 26,884,830
CASH AND CASH EQUIVALENTS 1,165,145 628,797 826,625
ACCOUNTS RECEIVABLE 401,313 344,882 490,396
INVENTORIES 329,660 347,252 400,852
OTHER ASSETS 460,817 638,265 1,001,137
CASH HELD IN ESCROW 232,801 253,056 347,337
DEFERRED EXPENSES, net 499,050 513,610 527,071
=========== =========== ===========
$28,398,081 $29,214,523 $30,478,248
=========== =========== ===========
LIABILITIES AND COMBINED EQUITY
MORTGAGE NOTES PAYABLE $17,028,836 $16,405,945 $17,963,129
ACCOUNTS PAYABLE:
Trade 404,213 357,089 549,808
Affiliates 179,392 582,145 946,000
Bank overdraft 57,725 149,372 96,987
Participation investors contingent liability 2,695,035 2,646,627 2,646,626
LINE OF CREDIT 48,728 100,000 90,000
CAPITAL LEASE OBLIGATIONS 103,742 71,707 51,525
LAND LEASE PAYABLE 70,689 75,842 41,362
ACCRUED EXPENSES AND OTHER LIABILITIES 982,319 418,596 511,253
- ----------------------------------------------------------------------------------------------------------
21,570,679 20,807,323 22,896,690
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY: 6,827,402 8,407,200 7,581,558
- ----------------------------------------------------------------------------------------------------------
$28,398,081 $29,214,523 $30,478,248
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 11
INNSUITES HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996 1997
- --------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES FROM HOTEL OPERATIONS:
Room revenue $13,572,350 $15,366,788 $17,613,618 $13,313,370 $14,165,017
Food and beverage revenue 91,400 130,708 197,064 261,817 319,603
Other revenue 384,764 445,761 513,143 446,290 509,552
- --------------------------------------------------------------------------------------------------------------
Total revenues 14,048,514 15,943,257 18,323,825 14,021,477 14,994,172
EXPENSES:
Departmental expenses:
Rooms 3,601,000 3,934,009 4,439,142 3,650,204 3,720,441
Food and beverage 202,545 349,981 487,367 378,352 395,503
General and administrative 2,482,659 3,134,257 3,500,161 2,147,021 2,476,370
Advertising and promotion 666,359 706,372 724,887 538,701 604,120
Utilities 789,196 765,721 894,121 672,625 685,497
Repairs and maintenance 2,207,888 1,938,523 2,621,472 1,744,810 2,071,050
Real estate, personal property
taxes, and insurance 592,788 656,544 876,816 569,000 593,164
Interest expense 1,460,552 1,990,762 1,569,850 1,300,833 1,291,519
Depreciation 1,163,865 1,058,931 1,147,326 802,772 823,279
Other 148,797 259,038 190,510 -- --
- --------------------------------------------------------------------------------------------------------------
Total expenses 13,315,649 14,794,138 16,451,652 11,804,318 12,660,943
- --------------------------------------------------------------------------------------------------------------
Income before extraordinary items 732,865 1,149,119 1,872,173 2,217,159 2,333,229
EXTRAORDINARY ITEMS
Gain on early extinguishment of
debt 133,075 6,465,305 307,000 307,000 --
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 865,940 $ 7,614,424 $ 2,179,173 $ 2,524,159 $ 2,333,229
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE> 12
INNSUITES HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 865,940 $ 7,614,424 $ 2,179,173 $ 2,524,159 $ 2,333,229
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,163,865 1,084,325 1,175,804 837,720 858,227
Gain on early extinguishment of debt (133,075) (6,465,305) (307,000) (307,000) --
(Increase) decrease in:
Accounts receivable (107,053) (113) 56,431 (186,360) (145,514)
Inventories (4,449) (53,014) (17,610) (7,562) (53,600)
Other assets (42,134) (376,921) (231,090) 93,642 (457,153)
Receivable from affiliate (106,665) -- -- -- --
Increase (decrease) in:
Accounts payable 60,601 (191,596) 38,764 214,922 192,719
Land lease payable (4,738) (6,166) (5,153) (12,663) (34,480)
Accrued expenses (256,950) 502,406 (264,756) 60,710 (9,728)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 1,435,342 2,108,040 2,624,563 3,217,598 2,683,700
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (112,856) (406,289) (753,741) (579,584) (205,114)
Acquisition of land, building and
equipment -- -- (1,250,000) (1,250,000) --
Purchases of partners' interests -- -- -- -- (1,018,872)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (112,856) (406,289) (2,003,741) (1,829,584) (1,223,986)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in loans from
affiliates -- (91,500) (87,500) (1,331,776) 363,855
Payment of mortgage notes payable (929,462) (2,185,926) (1,612,687) -- (2,342,817)
Increase in loans to affiliates 100,845 -- 587,853 -- --
Increase of mortgage notes payable -- -- 990,000 -- 3,900,000
Partner contributions -- 266,000 -- -- --
Partner distributions -- (120,000) (969,375) (650,578) (3,158,871)
Line of Credit -- -- 50,000 50,000 40,000
Loan fees -- (139,279) (251,711) -- (43,871)
Other -- 275,584 (31,715) -- --
Capital lease obligations -- 103,742 (32,035) (7,311) (20,182)
Capitalization of common stock -- -- 200,000 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (828,617) (1,891,379) (1,157,170) (1,939,665) (1,261,886)
- --------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 493,869 (189,628) (536,348) (551,651) 197,828
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 860,904 1,354,773 1,165,145 1,165,145 628,797
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,354,773 $ 1,165,145 $ 628,797 $ 613,494 $ 826,625
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE> 13
INNSUITES HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS' PARTNERS' COMMON RETAINED COMBINED
CAPITAL CAPITAL STOCK EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 $(620,076) $ (902,623) $ 500 $ (281,263) $(1,803,462)
NET INCOME 53,657 1,019,476 -- (207,193) 865,940
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 (566,419) 116,853 500 (488,456) (937,522)
NET INCOME 353,394 6,714,479 -- 546,551 7,614,424
PARTNERSHIP CONTRIBUTIONS 210,500 55,500 -- -- 266,000
ISSUANCE OF COMMON STOCK -- -- 4,500 -- 4,500
PARTNERSHIP DISTRIBUTIONS -- (120,000) -- -- (120,000)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 (2,525) 6,766,832 5,000 58,095 6,827,402
NET INCOME 107,025 2,033,509 -- 38,639 2,179,173
PARTNERSHIP CONTRIBUTIONS -- 170,000 -- -- 170,000
ISSUANCE OF COMMON STOCK -- -- 200,000 -- 200,000
PARTNERSHIP DISTRIBUTIONS (48,468) (920,907) -- -- (969,375)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 56,032 8,049,434 205,000 96,734 8,407,200
NET INCOME, (Unaudited) 140,555 2,562,418 -- (369,744) 2,333,229
PARTNERSHIP DISTRIBUTIONS, (Unaudited) (62,861) (1,146,010) -- (1,950,000) (3,158,871)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 (Unaudited) $ 133,726 $ 9,465,842 $205,000 $ (273,010) $ 7,581,558
========= =========== ======== =========== ===========
<FN>
Hulsey Hotels Corporation -- Common stock, no par value, 1,000,000 shares
authorized, 1,000,000 issued and outstanding
Buenaventura Properties, Inc. -- Common stock, no par value, 10,000,000 shares
authorized, 1,000,000 issued and outstanding
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
<PAGE> 14
INNSUITES HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
The InnSuites Hotels consist of the following full-service hotels:
<TABLE>
<CAPTION>
NUMBER OF
PROPERTY NAME LOCATION ROOMS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
InnSuites Phoenix Best Western ("Phoenix") Phoenix, Arizona 123
InnSuites Tempe/Airport ("Tempe") Tempe, Arizona 170
InnSuites Tucson Best Western ("Tucson") Tucson, Arizona 159
InnSuites Yuma Best Western ("Yuma") Yuma, Arizona 166
Holiday Inn Airport InnSuites Ontario ("Ontario") Ontario, California 150
InnSuites Flagstaff Grand Canyon ("Flagstaff") Flagstaff, Arizona 134
InnSuites Scottsdale ("Scottsdale") Scottsdale, Arizona 134
</TABLE>
InnSuites International Hotels, Inc., ("InnSuites") and its affiliates,
officers and employees were involved in the development of each of the above
hotels, except Flagstaff which was purchased January 1, 1996, and has managed
all of the InnSuites Hotels since their respective inceptions. The hotels with
two exceptions, are owned by partnerships ("InnSuites Partnerships") in which
the shareholders of InnSuites and certain officers of InnSuites (collectively,
InnSuites Affiliates) have significant direct and indirect ownership interests.
Flagstaff and Scottsdale are owned by corporations controlled by principals of
InnSuites. The partnerships and corporations are referred to collectively as the
InnSuites Entities.
As of December 31, 1996, the InnSuites Entities are owned as follows:
<TABLE>
<CAPTION>
ENTITY INTEREST
-----------------------
INNSUITES THIRD
AFFILIATES PARTY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
InnSuites Phoenix Best Western 96% 4%
InnSuites Tempe/Airport/South Mountain 46% 54%
InnSuites Tucson Catalina Foothills 28% 72%
InnSuites Yuma Best Western 33% 67%
Holiday Inn Airport InnSuites Ontario 100% 0%
InnSuites Flagstaff Grand Canyon 100% 0%
InnSuites Scottsdale 100% 0%
</TABLE>
Realty ReFund Trust is an unincorporated Ohio real estate investment trust
("REIT") which seeks to acquire equity interests in existing hotel properties
and to consider selectively the purchase or development of additional hotels.
The REIT will acquire the general partnership interest, representing a 13.1%
equity interest, in RRF Limited Partnership, a Delaware limited partnership (the
Partnership). It is proposed that the partners and shareholders of the entities
owning the InnSuites Hotels will contribute their respective partnership and
corporate interests to the Partnership, or a subsidiary of the REIT in exchange
for cash, partnership interests or REIT stock. All of the InnSuites Hotels will
be leased to Realty Hotel Lessee Corporation (the InnSuites Lessee) pursuant to
operating leases which contain provisions for rent based on the revenues of the
InnSuites Hotels. The InnSuites Lessee is an affiliate of InnSuites.
Management believes that these combined financial statements result in a more
meaningful presentation of the InnSuites Hotel businesses to be acquired by the
Partnership or REIT and thus appropriately reflect the historical financial
position and results of operations of the predecessor of the InnSuites Lessee.
All significant intercompany balances and transactions have been eliminated
Interim Unaudited Financial Information
The combined financial statements as of and for the nine months ended September
30, 1996 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
<PAGE> 15
fair representation of the combined financial statements for these interim
periods have been included. The results of interim periods are not necessarily
indicative of the results to be obtained for a full year.
2. Summary of Significant Accounting Policies:
Accounting Periods
For annual reporting purposes, all of the InnSuites Entities have been included
in the accompanying combined financial statements based on a December 31
year-end.
Hotel Properties
Hotel properties are stated at cost. Depreciation is computed using primarily
the straight-line method based upon the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements 40 years
Furniture and equipment 7 years
</TABLE>
For the year ended December 31, 1995, the InnSuites Partnerships adopted
Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, the partners and management of the InnSuites Entities review
the hotel properties for impairment when events or changes in circumstances
indicate the carrying amounts of the hotel properties may not be recoverable.
When such conditions exist, management estimates the future cash flows from
operations and disposition of the hotel properties. If the estimated
undiscounted future cash flows are less than the carrying amount of the asset,
an adjustment to reduce the carrying amount to the related hotel property's
estimated fair market value would be recorded and an impairment loss would be
recognized. No such impairment losses were recognized in connection with the
adoption of SFAS No. 121.
Maintenance and repairs are charged to operations as incurred; major renewals
and betterments are capitalized. Upon the sale or disposition of a fixed asset,
the asset and related accumulated depreciation are removed from the accounts,
and the gain or loss is included in the determination of net income or loss.
Advertising and Promotion
The InnSuites Entities expense the cost of advertising and promotion as incurred
which approximates the time such advertising takes place. There are no
capitalized advertising costs.
Cash and Cash Equivalents
All highly liquid investments with an original maturity date of three months or
less when purchased are considered to be cash equivalents. Management estimates
that the fair value of cash equivalents approximates carrying value due to the
relatively short maturity of these instruments.
Inventories
Inventories consisting primarily of linen, food, and beverages and gift store
merchandise are stated at the lower of first-in, first-out cost or market.
Cash Held in Escrow
Cash held in escrow consists of amounts for real estate taxes and property
insurance remitted to the lenders which hold the mortgages on the hotel
facilities and amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of certain mortgage and franchise agreements.
Deferred Expenses
Deferred expenses consist principally of deferred loan costs and initial
franchise fees. Amortization of initial franchise fees is computed on a
straightline basis over the terms of the franchise agreements while deferred
loan costs are amortized over the terms of the related loan agreements. The
amortization of deferred loan costs of $67,519, $51,377, and $42,187, and
$32,314
<PAGE> 16
and $33,854 for the years ended December 31, 1994, 1995 and 1996, and the nine
month periods ended September 30, 1996 and 1997 is included in interest expense
in the accompanying combined statements of operations. Accumulated amortization
of deferred expenses was $362,565 and $473,454 at December 31, 1995 and 1996,
respectively, and $507,308 at September 30, 1997.
Concentration of Credit Risk
Financial instruments which potentially subject the InnSuites Entities to credit
risk consist primarily of trade receivables. Credit evaluations of guest's
accounts are performed regularly. The receivables are unsecured.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed and
credit losses are charged off when deemed to be uncollectible. Such losses have
been minimal and within management's expectations.
Income Taxes
The InnSuites Partnerships and Scottsdale, an S-Corporation, are not subject to
federal or state income taxes; however, they must file informational income tax
returns and the partners and stockholders must take income or loss of the
InnSuites Partnerships and S-Corporation into consideration when filing their
respective tax returns. Flagstaff, a C-Corporation, operated only in 1996 and
had no income tax liability for year ended December 31, 1996.
Management's Use of Estimates in the Preparation of Financial Statements
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 and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. It is reasonably possible that the
InnSuites Entities recorded estimate of its obligations may change in the near
term.
3. Mortgage Notes Payable:
Mortgage notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $33,779 at rate of
8% adjustable by .25% annually; the unpaid principal is due
May 1998; collateralized by real and personal property having
a net book value of $2,870,366 at December 31, 1996. $ 3,299,221 $ 3,152,590 $ 3,036,929
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank in aggregate installments of
principal and interest of $27,572 at a rate of 8.5%; the
unpaid principal is due January 2006; collateralized by real
and personal property having a net book value of $3,240,818
at December 31, 1996. 2,800,000 2,711,786 2,634,340
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank, paid in full in 1996 800,625 -- --
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a finance company in aggregate
monthly installments of principal and interest of $41,168 at
a rate of 9.25%; the unpaid principal is due August 2011;
collateralized by real and personal property having a net
book value of $3,167,675 at December 31, 1996. 4,606,618 3,958,182 3,848,936
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $33,581 at a rate
of 8.75%; the unpaid principal due March 2011, collateralized
by real and personal property having a net book value of
$7,164,133 at December 31, 1996; requires an escrow reserve
of 4% of revenues for the replacement or refurbishing of
furniture, fixtures and equipment. 3,618,000 3,739,308 3,692,759
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a bank in aggregate monthly
installments of principal and interest of $12,919 at a rate
of 9.75%; the unpaid principal due June 2001; collateralized
by real and personal property having a net book value of
$1,707,885 at December 31, 1996. -- 956,612 866,415
- ----------------------------------------------------------------------------------------------------------
Mortgage note payable to a finance company in aggregate
monthly installments of principal and interest of $16,250 at
a rate of 9%; the unpaid principal due February 1998;
collateralized by real and personal property having a net
book value of $1,752,594 at December 31, 1996. 1,904,372 1,887,467 3,883,750
- ----------------------------------------------------------------------------------------------------------
$17,028,836 $16,405,945 $17,963,129
=========== =========== ===========
</TABLE>
Aggregate scheduled annual principal payments for the above mortgage notes
payable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------------------------- -----------
<S> <C>
1997 $ 587,395
1998 3,425,539
1999 501,644
2000 554,405
2001 2,830,753
Thereafter 8,506,209
-----------
$16,405,945
==========
</TABLE>
Debt Extinguishment
In 1994 Tempe realized an extraordinary gain of $133,075 on the extinguishment
of previously accrued interest. In 1995 Tempe and Ontario realized net
extraordinary gains of $5,994,473 on early extinguishment of debt and Scottsdale
realized an extraordinary gain related to the forgiveness of principal on debt
of $470,832 due to a related party. In 1996 Flagstaff refinanced its existing
mortgage indebtedness, realizing a net extraordinary gain of $112,780 and an
extraordinary gain related to the forgiveness of debt of $194,220 due to a
related party.
4. Related Party Transactions:
A substantial portion of the hotels' management functions are performed by two
InnSuites management companies for a fee computed as specified in each hotel's
management agreement. The management fee is based on a percentage of hotel
revenues of 4.5%.
In addition, InnSuites has trademark license agreements with the hotels,
excluding Ontario which operates under licensing with Holiday Inns, for which
the fees are .5% of revenues. InnSuites also operates an advertising trust to
which the hotels contribute 1% of revenues (1.9% at certain properties through a
portion of 1997). All agreements expire in 2000. The payable to affiliates
represents amounts due primarily for working capital advances. There are no
terms or covenants connected with the advances.
<PAGE> 18
The InnSuites Entities paid fees to InnSuites for various services as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
DECEMBER 31, (UNAUDITED)
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Management fees
(4.5% of total revenues) $ 622,937 $ 611,421 $ 840,518 $ 35,467 $ 74,738
- --------------------------------------------------------------------------------------------------------------
Trademark license fees
(0.5% of total revenues) 66,766 66,246 80,596 70,608 74,971
- --------------------------------------------------------------------------------------------------------------
Advertising trust fees
(1% of total revenues) 220,731 232,023 189,231 141,215 149,942
- --------------------------------------------------------------------------------------------------------------
</TABLE>
5. Changes in Ownership:
On January 1, 1996 the principals of InnSuites became sole shareholders of
Hulsey Hotels Corporation (Flagstaff) and purchased the hotel from a
sole-proprietorship for the assumption of $200,000 of outstanding debt, certain
other considerations plus the outstanding mortgage indebtedness. The property
was refinanced on June 19, 1996 in the amount of $1,004,000.
The purchase accounting adjustment recorded was an aggregate increase in the
carrying value of the investments in hotel property as follows:
<TABLE>
<S> <C>
Land, buildings and improvements $1,050,000
Furniture and equipment 200,000
-------------------------------------------------------------------------------
$1,250,000
=========
</TABLE>
Following is unaudited pro forma data assuming that the purchase discussed above
and the related refinancing had occurred at the beginning of 1995. The pro forma
adjustments to historical operating results give effect to an increase in
depreciation expense and an increase in interest expense to reflect the terms of
the new mortgage debt and the amortization of related deferred financing costs.
Had the pro forma assumptions been in effect, 1995 operating results would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(UNAUDITED)
---------------------------------------------------------------------------------
<S> <C>
Total revenues $16,720,299
Net income 7,457,196
</TABLE>
6. Commitments and Contingencies:
Claims and Legal Matters
Certain of the hotels are involved in claims and legal matters incidental to
their business. In the opinion of management, the ultimate resolution of these
matters will not have a material impact on the financial position or the results
of operations of the hotels.
Franchise Agreements
Under the terms of hotel franchise agreements, annual payments for franchise
royalties and reservation and advertising services are due from the hotels. For
six of the hotels, fees are computed based upon a percentage of total revenues.
At December 31, 1996, the franchise royalty fees are payable by the hotels at
.5% of revenues while the fees for advertising services are 1% of revenues. The
franchise agreements expire in 2000. The Best Western and Holiday Inn hotels
have additional franchise agreements in which fees are charged on a per room
basis and generally approximate 3% of revenues.
Other
The land on which the Tucson Hotel is located is leased under an operating lease
agreement expiring in 2010 which can be extended to 2051. The lease requires
minimum annual rentals of $70,000 for 1997-2000, $75,000 through 2002, plus
<PAGE> 19
percentage rentals based on hotel revenues. Tucson is responsible for all taxes,
insurance and maintenance on the property. Rental expense charged to operations
for the land lease were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------- ---------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Minimum rent $ 60,000 $ 60,000 $ 70,000 $ 52,500 $ 52,500
Percentage rent 64,523 70,689 74,632 57,867 59,499
- -----------------------------------------------------------------------------------------------------------------
$124,523 $130,689 $144,632 $110,367 $111,999
------------------------------------------------------------
</TABLE>
7. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value for all financial instruments, whether or not recognized for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
December 31, 1996. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Long-Term Debt
Management estimates that the fair values of mortgage and other long-term debt
approximate carrying values based upon the hotels' effective borrowing rate for
issuance of debt with similar terms and remaining maturities.
8. Participation Investors Contingent Liability
For the Ontario property, participation investors rights to repayment were
converted to the right to receive forty-five percent of the profits, from any
future sale of the hotel property, over a fixed base amount of approximately
$4,100,000, after payment of all outstanding liabilities. The contingent
liability approximates the participant's original investment plus certain
accrued interest and management's estimate of the potential liability upon a
future sale of the hotel property. The balance consists of the original
$1,950,000 of loan participation units subscribed to by investors, plus $745,035
of accrued but unpaid interest during the construction period, as defined.
During 1996 the Partnership purchased units from participation investors for
$48,408.
9. Lines of Credit
Flagstaff and Scottsdale each carried an unsecured line of credit of $50,000 at
December 31, 1996. Interest rates are 10% and 10.25%; and due dates are April
30, and March 1, 1997, respectively. Both lines are guaranteed by a principal of
Innsuites.
10. Capital Leases
Ontario and Scottsdale own equipment under capital lease arrangements
aggregating $148,556. The lease liabilities carry interest at rates ranging from
10.5% to 12.5% and are payable through dates from August 1997 to October 1999
with monthly payments aggregating $5,479. Future payments required by the leases
as of December 31, 1996 follow:
<TABLE>
<S> <C>
------------------------------------------------------------------------------
1997 $49,384
1998 14,438
1999 7,885
------------------------------------------------------------------------------
$71,707
=======
</TABLE>
11. Purchases of Partners' Interests
Certain partners of entities owning the InnSuites Hotels are redeeming their
interests for cash in lieu of exchanging their interests for partnership
interests or REIT stock. Three properties purchased such interest during the
nine months ended September 30, 1997 aggregating $1,018,872.
