<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
Commission File No. 1-7062
Realty ReFund Trust
------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-6647590
- ----------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
925 Euclid Avenue, Suite 1750, Cleveland, Ohio 44115
- ---------------------------------------------- ----------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, including area code (216) 622-0046
------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- -------------------- ------------------------------------
Shares of Beneficial New York Stock Exchange
Interest
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
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[Cover Continued on Following Page ]
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[Cover Continued From Previous Page]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of April 23, 1998: $7,296,699.
Number of shares of voting stock outstanding as of April 23, 1998: 1,667,817.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the June 16, 1998 Annual
Meeting of Shareholders -- Part III.
2
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PART I
--------
Item 1. BUSINESS.
---------
Introduction
- -------------
The Registrant is an unincorporated Ohio real estate
investment trust (the "Trust") governed by a Declaration of Trust dated April
28, 1971, and has elected to be taxed as a real estate investment trust
("REIT"), as that term is defined and used in Sections 856-860 of the Internal
Revenue Code of 1986, and the Regulations thereunder (all as amended, the
"Code").
The Trust historically specialized in wrap-around mortgage
lending, whereby the Trust offered borrowers a total mortgage loan (the
wrap-around loan), the principal amount of which equaled the balance
outstanding on an existing prior mortgage loan on the borrower's property, plus
an additional amount supplied by the Trust, on existing income-producing
commercial, industrial and multi-unit residential real property. Typically,
wrap-around loans made by the Trust were subordinate to the lien of the existing
prior mortgage loan that remained on the property. The Trust originated no new
mortgage loans during each of the fiscal years ended January 31, 1998, January
31, 1997, or January 31, 1996 and the final two outstanding mortgage loans
receivable matured and were fully paid and cancelled during fiscal year 1997.
Following a lengthy review period during which the Trust
explored various strategies to maximize the value of the Trust to its
shareholders, on December 27, 1996, the Trust entered into an agreement with a
privately-held Arizona corporation to restructure the Trust into an "umbrella
partnership REIT" whereby the Trust became the general partner in a newly-formed
limited partnership which would invest in hotel properties. See "The Formation
Transactions", below.
The Trust currently operates as a self-administered equity
REIT, that on January 31, 1998, owned, through RRF Sub Corp., a wholly-owned
subsidiary, an InnSuites(R) hotel located in Scottsdale, Arizona and a 13.6%
sole general partner interest in RRF Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), which itself on January 31, 1998,
owned or controlled interests, directly or indirectly, in six InnSuites(R)
hotels located in Arizona and California. In order to maintain the REIT tax
status of the Trust, the Trust leases these hotels to Realty Hotel Lessee
Corp., pursuant to lease agreements providing for periodic rental payments
based primarily upon the revenues of the hotels ("Percentage Leases"). Through
its interests in the Operating Partnership and RRF Sub Corp., the Trust
obtains income from cash distributions made by the Operating Partnership and
RRF Sub Corp. Distributions are largely dependent upon those entities' earnings
under the Percentage Leases.
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Equity Investments
- ------------------
In September 1997, the Trust, on behalf of its wholly-owned
subsidiaries, RRF LPI, Inc. and RRF LPII, Inc., sold the Carbide and Carbon
office building located at 230 North Michigan Avenue in downtown Chicago,
Illinois. The Trust conveyed title to the property to LaSalle National Bank, as
trustee, for total consideration of Six Million dollars ($6,000,000). The sale
of the Chicago office building resulted in a loss of approximately $36,000
recognized in the operational results of the Trust as more fully described in
Footnote 5 to the January 31, 1998, 1997 and 1996 Financial Statements. See
"Financial Statements and Supplemental Data". The Trust currently has no other
equity investments in real estate other than its interest in the hotel
properties described above.
The Formation Transactions
- --------------------------
As changes in the prevailing interest rate environment
occurring since the late 1980s have continued, the wrap-around mortgage has
become a less attractive alternative to potential borrowers than conventional
mortgage refinancing. In response to such changes, and to the maturation and
winding-down of the Trust's existing investment portfolio, the Trustees in 1990
authorized the Trust to explore potential real estate equity investments. By
mid-1994, as the Trust's mortgage portfolio continued to mature and wind down,
the Trustees expanded its evaluation of strategic alternatives to include
potential sales, mergers or restructurings of the Trust, and an orderly
liquidation of the Trust. In August 1995, after several months of consultation,
analysis and advice, the Trust formally retained Brown, Gibbons, Lang & Company,
L.P. ("BGL"), an investment banking firm, to act as its financial advisor in
developing and implementing a strategy to maximize the value of the Trust to its
shareholders.
As the Trust's financial advisor, BGL sought proposals from
third parties regarding a potential merger, sale or other restructuring of the
Trust, while also evaluating the relative potential benefits to shareholders of
an orderly liquidation. BGL received in excess of 100 inquiries on the Trust's
behalf, all of which were reviewed and analyzed. The Trust's management, with
the assistance of BGL, pursued approximately ten of such inquiries beyond the
proposal stage and entered into confidentiality agreements with the respective
proponents thereof. After exchanging certain confidential information, the
Trust's management, BGL and the proponents developed and analyzed the structure
and terms of each proposal, and conducted repeated meetings before the Trust's
management, with the advice of BGL, ultimately determined that the pursued
proposals did not present realistic opportunities for the Trust's shareholders
to realize value in excess of that which the Trust's management reasonably
expected would be available upon an orderly liquidation of the Trust. All such
analyses and determinations were presented to and reviewed with the Trustees on
an ongoing basis.
In August 1996, during the course of its review of the various
proposals and alternatives presented and available to it, the Trust was
approached by representatives of Hospitality Corporation International ("HCI"),
an Arizona corporation owned by James F. Wirth and his wife.
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HCI, 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 (the
"Hotels"), five of which were owned by partnerships (the "Hotel Partnerships")
with the remaining two being owned by corporations (the "Hotel Companies"). HCI
proposed a series of transactions resulting in a combination of the Hotels with
the Trust. Following the exchange of additional confidential information, the
Trust, BGL and HCI's advisors commenced discussions to indirectly add the
Hotels to the Trust's investment portfolio by forming a limited partnership, of
which the Trust would be the sole general partner and to which the Hotels would
be contributed. From mid-September 1996 through October 1996, the Trust and HCI
discussed, analyzed and developed the details of the proposed transactions and
exchanged and thereafter negotiated a series of term sheets setting forth the
specific structure of the proposed transactions. This process involved a number
of meetings among the Trust's management, BGL, HCI's legal and financial
advisors, and certain members of HCI's senior management team. The Trustees
were continually advised as to the progress of the analysis and negotiations,
and provided the Trust's management with input throughout the preliminary
negotiation process.
In late October 1996, the Trust and HCI reached a preliminary
agreement as to the framework of the proposed transactions. The parties
exchanged and negotiated numerous successive drafts of a Formation Agreement
over a period of two months culminating in the definitive Formation Agreement
being executed by all parties on December 27, 1996 (the "Formation Agreement").
The execution of the Formation Agreement was ratified and approved by the
Trustees and by HCI's Board of Directors on February 14, 1997, at which time the
Trust announced the proposed transaction to the public. At the 1997 annual
shareholders' meeting held on January 28, 1998, the shareholders of the Trust
approved the terms and execution of the Formation Agreement.
The Formation Agreement provided for the organization of the
Operating Partnership, in which the Trust would be the sole general partner,
holding a 13.6% interest, with the investors of the five Hotel Partnerships and
one of the two Hotel Companies investing as limited partners, receiving a
collective 86.4% interest, and for restructuring the Trust into an "umbrella
partnership REIT", or "UPREIT".
On May 19, 1997, HCI commenced a private placement/consent
solicitation of all of the investors in the Hotel Partnerships by offering to
exchange their equity interests in the Hotel Partnerships for limited
partnership interests in the Operating Partnership. On October 15, 1997, HCI
advised the Trust that the private placement exchange had been accepted by the
requisite number of investors in the Hotel Partnerships.
Following the Hotel Partnerships partners' exercise of the
exchange option under the private placement, the Operating Partnership acquired
substantial interests in the five Hotel Partnerships and one of the two Hotel
Companies. The remaining Hotel Company was acquired directly by RRF Sub Corp.,
a newly-formed Nevada corporation and wholly-owned subsidiary of the Trust.
The Trust contributed $2,081,000 cash
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to the Operating Partnership to obtain its 13.6% sole general partner
interest.
In accordance with the terms of the Formation Agreement,
Messrs. Alan M. Krause, James H. Berick, Alvin M. Kendis, Frank L. Kennard and
Samuel S. Pearlman, as Trustees, and Mr. Alan M. Krause, as Chairman and
Co-Chief Executive Officer, and Mr. James H. Berick, as President, Treasurer,
and Co-Chief Executive Officer, each resigned from the Trust effective January
30, 1998. Messrs. James F. Wirth, Gregory D. Bruhn, Marc E. Berg, Mark J. Nasca,
Lee J. Flory and Edward G. Hill were appointed as the new Trustees, effective
January 30, 1998. Mr. Wirth was also appointed Chairman, President and Chief
Executive Officer and Mr. Bruhn was also appointed Executive Vice President,
Chief Financial Officer, Treasurer and Secretary of the Trust.
The Operating Partnership has two outstanding classes of
limited partnership interests, Class A and Class B, identical in all respects
except that each Class A limited partnership unit is convertible, at the option
of the Class A holder, into one newly-issued Common Share of the Trust. No
particular conversion will be allowed, however, if a determination is made that
such conversion would cause the Trust to no longer qualify as a REIT under the
Code. A total of 2,174,931 Class A limited partnership units were issued to the
former Hotel Partnerships' investors. If all those limited partnership interests
were to be converted into Common Shares of the Trust, those former limited
partners would hold 2,174,931 Common Shares, or approximately 56.6% of the then
outstanding Common Shares. Class B units may be converted at the discretion of
the Board of Trustees, provided that such conversion would not cause the Trust
to fail to qualify as a REIT. A total of 4,017,361 Class B units were issued to
Mr. Wirth and certain of his affiliates in order to satisfy ownership
concentration limitations placed upon REITs by the Code. The Formation Agreement
subjects both general and limited partner units to restrictions on transfer.
In addition to the restructuring, the Trust's investment
advisor, Mid-America ReaFund Advisors, Inc. ("MARA"), which was owned by the
Trust's former Co-Chief Executive Officers, Messrs. Krause and Berick, was
acquired by Mr. and Mrs. Wirth. MARA will continue to provide investment
advisory and consulting services to the Trust and continue to administer the
day-to-day investment operations of the Trust under the supervision of the
Trustees pursuant to an Advisory Agreement executed between the Trust and MARA.
See "Advisory Agreement and MARA" below.
Certain other formation transactions occurred, as contemplated
by the Formation Agreement. The Trust, through its wholly-owned subsidiary, RRF
Sub Corp., executed an Agreement of Merger, dated as of January 30, 1998, under
which RRF Sub Corp. merged into and with Buenaventura Properties, Inc. ("BPI"),
an Arizona corporation owned by Mr. and Mrs. Wirth. By virtue of the merger, the
1,000,000 shares of issued and outstanding BPI common stock were converted into
the right to receive 647,231 Common Shares with an approximate aggregate value
of $3,074,348, representing the independently appraised value of the InnSuites
Hotel Scottsdale/El Dorado Park Resort. RRF Sub Corp. will remain a
wholly-owned subsidiary of the Trust.
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The Trust believes that, while the lodging industry has
benefitted from an improved supply and demand dynamic, the greatest
opportunities for revenue growth and profitability will arise from skillful
management and repositioning of current and future acquired hotel properties.
The Trust's primary business objectives are to maximize current returns to its
shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders. The Trust will seek to achieve
these objectives through (i) participation in increased revenues from the Hotels
pursuant to the Percentage Leases by intensive management and marketing, (ii)
selective acquisitions and expansion of the InnSuites Hotel System in southern
California and in the southwestern United States, and (iii) construction of
additions to existing highly successful InnSuites Hotels locations.
Competition
- -----------
The hotel industry is highly competitive. Each of the Hotels
experiences competition primarily from other mid-market hotels in its immediate
vicinity, but also competes with other hotel properties in broader geographic
markets. Some of the competitors of the Hotels have substantially greater
marketing and financial resources than the Trust and the Operating Partnership.
A number of additional hotel property developments have been announced or have
recently been completed by competitors in a number of Hotel markets, and
additional hotel property developments may be built in the future. Such hotel
developments have had, and could continue to have, an adverse effect on the
revenues of the Hotels in such competitive markets. The Trust and the
Operating Partnership may also compete for investment opportunities with other
entities that have substantially greater financial resources. These entities
also may generally accept more risk than the Trust and the Operating Partnership
can prudently manage. Competition may generally reduce the number of suitable
future investment opportunities available to the Trust and the Operating
Partnership and increase the bargaining power of owners seeking to sell their
properties.
Seasonality of Hotel Business
- -----------------------------
The hotel business is seasonal in nature. The Hotels'
operational results historically have reflected this seasonality through higher
occupancy rates at a majority of the Hotels during the first three quarters of
each calendar year. Accordingly, such seasonality can cause significant
quarterly fluctuations in the Trust's revenues, to the extent the Trust's
revenues are dependent upon lease revenues under the Percentage Leases. Hotels
located in southern Arizona historically experience their most profitable
periods in the winter season, whereas Hotels located in northern Arizona and
California historically experience their most profitable periods during the
summer season, providing some balance to the general seasonality in the hotel
business.
Advisory Agreement and MARA
- ---------------------------
The Trust is a party to an Advisory Agreement with MARA under
which the Trust receives certain investment advisory and administrative
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services regarding the day-to-day investment operations of the Trust and
pursuant to which MARA is responsible for providing the Trust with a continuing
and suitable investment program. Therefore, the Trust employs no persons on a
full-time basis.
The Advisory Agreement is renewable annually and can be
terminated upon 60 days' notice by the Trust and 120 days' notice by MARA. MARA
receives, subject to certain limitations, (a) a monthly fee equal to 1/12th of
1% of the appraised value of the total assets of the Trust during the next
preceding month; (b) 15% of the commitment fees received by the Trust for any
stand-by or gap commitment relating to a mortgage loan which is not closed; and
(c) an incentive fee equal to 10% of the amount, if any, by which the net
profits of the Trust exceed 8% of the monthly average net worth of the Trust for
the year, plus 10% of the net realized capital gains of the Trust for such year
less accumulated net realized capital loss. MARA is required to refund to the
Trust the amount, if any, by which the operating expenses of the Trust in any
fiscal year exceed the lesser of (x) 1 1/2% of the appraised value of the total
assets of the Trust for such fiscal year or (y) 25% of the net income of the
Trust for such fiscal year.
Lines Of Credit
- ---------------
The Trust had an agreement with National City Bank
providing for a secured revolving line of credit (the "Credit Agreement"). The
Credit Agreement, originally scheduled to expire in October 1996, was extended
to November 1996 to correspond with the extended maturity date of the Fort
Worth, Texas loan receivable. The proceeds from the repayment of the Fort
Worth, Texas loan were utilized, in part, to retire all outstanding borrowings
under the Credit Agreement. Upon retirement of all outstanding borrowings
thereunder, the Credit Agreement expired.
The Trust also retired a $5,000,000 secured note held by
Mr. Krause, as more fully described in Footnote 9 to the January 31, 1998,
1997 and 1996 Financial Statements. See "Financial Statements and Supplemental
Data."
On April 16, 1998, the Trust established a $12 million dollar
secured revolving line of credit with Pacific Century Bank. The Trust has drawn
approximately $8,530,000 from its line of credit.
Item 2. PROPERTIES.
-----------
The Trust maintains its headquarters in leased facilities in
Cleveland, Ohio, which it shares with MARA. The Trust directly owns no real
property. In September 1997, the Trust disposed of its interests in
a Chicago office building; see "Business-Equity Investments."
At January 31, 1998, the Operating Partnership owned or
controlled interests in six Hotels. At January 31, 1998, the Trust, through its
wholly-owned subsidiary, RRF Sub Corp., owned one hotel located in Scottsdale,
Arizona. All of the Hotels are operated as InnSuites(R) Hotels, while three are
also marketed as Best Western(R) hotels and one is also marketed as a Holiday
Inn(R) Hotel and Suites. All of the Hotels are managed by InnSuites
Innternational Hotels, Inc. and operate in the following locations:
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<TABLE>
<CAPTION>
Property Number Age of Most recent
of suites property renovation
- --------- --------- -------- -----------
<S> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western 123 1980 1996
InnSuites Hotels Tempe/
Phoenix Airport 170 1982 1996
InnSuites Hotels Tucson/
Catalina Foothills Best Western 159 1981 1996
InnSuites Hotels
Yuma Best Western 166 1982 1996
Holiday Inn Airport Ontario Hotel and Suites 150 1990 1996
(an InnSuites Hotel)
InnSuites Hotels Flagstaff/
Grand Canyon 134 1966 1997
InnSuites Hotels Scottsdale/
El Dorado Park Resort 134 1980 1996
</TABLE>
In the first quarter of fiscal 1999, the Operating Partnership
completed the acquisition of the InnSuites Hotel Tucson/St. Mary's, a 297-suite
property located in Tucson, Arizona, built in 1960, with a significant addition
completed in 1971, and last renovated in 1998, and the acquisition of the
Lafayette Hotel Ramada Inn + Conference Center, a 147-suite property located in
San Diego, California, built in 1946 and which is currently being renovated. The
Trust also has an option to purchase a 185-suite InnSuites Hotel located in
Buena Park, California.
Item 3. LEGAL PROCEEDINGS.
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The Trust is not a party nor are its properties subject to
any material litigation or environmental regulatory proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
On January 28, 1998, the shareholders of the Trust held an
Annual Meeting of the Shareholders to consider (a) the approval of the Formation
Transactions, (b) the election of Trustees, (c) the adoption and approval of a
Second Amended and Restated Declaration of Trust, and (d) the adoption and
approval of the Realty ReFund Trust 1997 Stock Incentive and Option Plan. Prior
to such Meeting, the Trust provided notice of the Meeting and solicited proxies
through the Trust's definitive Proxy Statement, filed with the Securities and
Exchange Commission on December
<PAGE> 10
23, 1997, wherein the considered transactions were described to the
shareholders.
Shareholders representing all of the voting shares of the
Trust were present at the Annual Meeting, in person or by proxy, representing a
quorum for such Annual Meeting. The considered transactions were properly placed
before the shareholders for adoption and approval. Following the votes of the
shareholders, such votes were certified by the Inspector of Election of the
Annual Meeting as follows:
<TABLE>
<CAPTION>
Abstentions
and Broker
For Against Non-Votes
------- ------- -----------
<S> <C> <C> <C>
Approval of the Formation Transactions 535,468 42,365 376,140
Election of Trustees:
James H. Berick 888,545 65,428 0
Alan M. Krause 906,485 47,488 0
Alvin M. Kendis 906,485 47,488 0
Frank L. Kennard 906,485 47,488 0
Samuel S. Pearlman 906,485 47,488 0
Adoption and Approval of Second
Amended and Restated Declaration
of Trust 529,577 43,665 380,731
Adoption and Approval of 1997 Stock
Incentive and Option Plan 474,781 99,881 379,311
</TABLE>
All of the proposals were approved and all of the nominees for Trustee
were elected by the requisite majorities, except for the Second Amended and
Restated Declaration of Trust, which failed to receive the approval of
two-thirds of the total outstanding shares as required to amend the Declaration
of Trust.
PART II
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Item 5. MARKET FOR THE TRUST'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS.
------------------------------------
The Trust's shares of beneficial interest are traded on the
New York Stock Exchange under the symbol "RRF". On April 23, 1998, the
Trust had 1,667,817 shares outstanding.
The following table sets forth, for the periods indicated, the
high and low sales prices of the Trust's shares of beneficial interest, as
quoted by the New York Stock Exchange, as well as dividends declared thereon:
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low Dividends
- ---------------- ---- --- ---------
<S> <C> <C> <C>
First Quarter 5 3/8 4 1/2 .10
Second Quarter 4 7/8 4 3/8 .05
Third Quarter 5 4 5/8 -
Fourth Quarter 4 11/16 4 1/4 -
Fiscal Year 1997 High Low Dividends
- ---------------- ---- --- ---------
First Quarter 7 1/4 5 3/4 .10
Second Quarter 6 5 3/8 .10
Third Quarter 6 5 3/8 .10
Fourth Quarter 5 5/8 4 7/8 .10
</TABLE>
The Trust intends to make regular quarterly distributions to
shareholders initially equal to $0.05 per share, which on an annual basis would
equal $0.20 per share. The Trust intends to maintain this dividend rate for the
first 12 months following the completion of the Formation Transactions, unless
actual results of operations, economic conditions or other factors differ from
the assumptions used in its estimate.
Item 6. SELECTED FINANCIAL DATA:
------------------------
The following selected financial data of Realty ReFund Trust
for the five years ended January 31, 1998, have been derived from the audited
financial statements of the Trust, which have been audited by Arthur Andersen
LLP, independent public accountants. All of the data should be read in
conjunction with the respective financial statements and related notes included
herein.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 1,421,979 $3,915,506 $ 5,430,006 $ 6,592,051 $ 7,645,790
=========== ========== =========== =========== ===========
Net income (loss) $ (573,509) $ (888,365) $(7,554,351) $ 670,945 $ 955,121
=========== ========== =========== =========== ===========
Earnings (loss) per share-basic and
diluted $ (.56) $ (.87) $ (7.40) $ .66 $ .94
=========== ========== =========== =========== ===========
Cash dividends paid and declared
per share $ .15 $ .40 $ .50 $ .80 $ .86
=========== ========== =========== =========== ===========
Total assets $43,619,639 $6,416,123 $24,555,330 $45,165,356 $65,264,638
=========== ========== =========== =========== ===========
Bank and other borrowings $22,428,880 $2,300,000 $10,795,000 $16,810,000 $24,575,000
=========== ========== =========== =========== ===========
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL POSITION.
-----------------------------------------
OVERVIEW.
In September 1997, the Trust sold its interests in the Carbon & Carbide
Building in Chicago, Illinois for $6,000,000, before consideration of closing
and other costs related to the sale. A loss of approximately $36,000 was
recorded as a result of the sale. The Carbon & Carbide Building was originally
acquired in July 1992 when the Trust accepted title in lieu of foreclosure. At
the time of title acceptance, the Trust recorded a provision to write down its
investment to estimated net realizable value as it was the Trust's intention to
sell the real estate. Since that time, the carrying value of the investment
increased as a result of considerable investment in building and tenant
improvements. Based on both market conditions for similar commercial property
in Chicago and the current operating performance of the property, the Trust
recorded a $3,000,000 provision in the fourth quarter of fiscal 1996 to reduce
the carrying value of the property to its then estimated net realizable value.
The amount of the writedown was based upon the Trust's best estimate of the
amount of net proceeds which would be realized upon sale of the real estate in
the near future. In the fourth quarter of 1997, the Trust entered into a
contract to sell the building for $6,000,000. Accordingly, the Trust recorded
an additional provision of $1,085,000 to reduce the carrying value of the real
estate held for sale to its estimated net realizable value based upon the
pending contract price and estimated costs associated with the potential sale.
Having liquidated all of its other investments (primarily wrap-around
mortgages) prior to January 31, 1997, the Trust's principal asset after the sale
of the Carbon & Carbide Building consisted of cash and cash equivalents. On
January 31, 1998 the Trust contributed $2,081,000 to the Operating Partnership
in exchange for a 13.6% general partner interest therein. The Trust is the sole
general partner of the Operating Partnership. The Operating Partnership issued
limited partnership interests representing 86.4% of the Operating Partnership
to acquire six hotel properties from various entities. In addition, through RRF
Sub Corp., the Trust issued 647,231 shares of beneficial interest in exchange
for all of the outstanding shares of BPI which owned a hotel located in
Scottsdale, Arizona. The Scottsdale, Arizona hotel together with the six other
hotels are leased to Realty Hotel Lessee Corp. (the "Lessee") pursuant to the
Percentage Leases. Each Percentage Lease obligates the Lessee to pay rent
equal to the greater of the minimum rent or a percentage rent based on the
gross revenues of each hotel. The Lessee holds the franchise agreement for each
hotel. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an
entity owned by James F. Wirth, Chairman, President and Chief Executive Officer
of the Trust ("Wirth"), and his wife.
Since completion of the Formation Transactions, the Trust owns a 13.6%
interest in six of the Hotels through its interest in the Operating Partnership
and 100% of the Scottsdale hotel through RRF Sub Corp. In order for the Trust to
qualify as a REIT, neither the Trust nor the Operating Partnership can operate
hotels. Therefore, the Operating Partnership and RRF Sub Corp. leases the Hotels
to the Lessee. The Trust's principal source of revenue is lease payments from
the Lessee pursuant to the Leases. Lease revenue is based upon the room and
other revenues of the Hotels leased to the Lessee. The Lessee's ability to make
payments to the Operating Partnership or to RRF Sub Corp. pursuant to the Leases
is dependent primarily upon the operations of the Hotels. Therefore, management
believes that a discussion of the pro forma operating results of the Lessee and
the historical operating results of the Hotels is important to an understanding
of the business of the Trust. The following discusses (i) the Trust's pro forma
results of operations for the years ended January 31, 1997 and January 31,
1998; (ii) the Lessee's pro forma results of operations for the years ended
December 31, 1996 and December 31, 1997; and (iii) the historical results of
the Hotels for the years ended December 31, 1997, 1996 and 1995.
GENERAL.
Results of operations are best explained by three key performance
indicators: occupancy, average daily rate (calculated as total room revenue
divided by number of rooms sold) ("ADR"), and revenue per available room
(calculated as total room revenue divided by number of rooms available)
("REVPAR"). Increases in REVPAR attributable to increases in occupancy are
accompanied by increases in most categories of variable operating costs.
Increases in REVPAR attributable to increases in ADR are accompanied by
increases in limited categories of operating costs, such as management fees and
franchise and license fees.
PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY.
The following tables set forth key indicators for (i) all of the Hotels
combined, and (ii) all fully operational hotels (which excludes the Flagstaff,
Arizona hotel which was under renovation during the periods presented), and are
useful in understanding the underlying changes in the percentage rent for the
Trust during the pro forma year ended January 31, 1997 and January 31, 1998.
<TABLE>
<CAPTION>
ALL FULLY-OPERATING HOTELS ALL OPERATING HOTELS
(EXCLUDES FLAGSTAFF) (INCLUDES FLAGSTAFF)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------
KEY FACTORS 1995 1996 1997 1995 1996 1997
----------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Occupancy........................ 72.2% 71.9% 74.3% 67.6% 68.4% 70.6%
ADR.............................. $64.50 $69.17 $71.80 $62.80 $65.71 $68.73
REVPAR........................... $46.57 $49.75 $52.57 $42.45 $45.79 $48.62
</TABLE>
The pro forma financial information set forth below is presented as if the
formation transactions had been consummated as of February 1, 1996. The pro
forma financial information is not necessarily indicative of what actual results
of operations of the Trust would have been assuming the formation transactions
had been consummated as of February 1, 1996 nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
(Unaudited, in thousands)
Year Ended
January 31,
-------------------
1998 1997
------- --------
<S> <C>
PERCENTAGE LEASE REVENUE $7,902 $7,376
INTEREST INCOME 55 1,638
------- --------
TOTAL REVENUES 7,957 9,014
------- --------
PROVISION FOR WRITEDOWNS OF LOAN RECEIVABLE - 111
INTEREST ON LOANS UNDERLYING WRAP MORTGAGES - 239
INTEREST EXPENSE ON MORTGAGE AND OTHER
NOTES PAYABLE $1,668 $1,929
ADVISORY FEE TO RELATED PARTY ADVISOR 576 576
DEPRECIATION AND AMORTIZATION 1,710 1,710
GENERAL AND ADMINISTRATIVE 578 578
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY INSURANCE
AND GROUND RENT 820 942
MINORITY INTEREST 2,314 1,625
--------- --------
TOTAL EXPENSES AND MINORITY INTEREST 7,666 7,360
--------- --------
NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $ 291 $ 1,304
========= ========
NET INCOME PER SHARE - basic and diluted $ .17 $ .85
========= ========
</TABLE>
For the year ended January 31, 1998, the Trust had pro forma revenues of
$7.9 million from the Percentage Leases that would have been in place at the
Hotels. The Trust had only $.55 million in interest income compared to $1.6
million in interest income from mortgage investments in 1997 due to loan
repayments during fiscal 1997. Expenses included interest expense related to the
mortgage investments and Percentage note payable to an affiliated party. Other
rental revenue of $1.4 million and operating expenses of $1.4 million and
amortization of $.02 million related to the Carbon & Carbide Building (the sale
of which closed on September 4, 1997), have been eliminated. Net income to
shareholders (after minority interest) declined to $.29 million from $1.3
million due to the elimination of the positive spread on the mortgage
investments and the presentation of $2.3 million in cash realized from sale of
the Carbon & Carbide Building without reflecting any pro forma income or return
from investment of that cash.
For the year ended January 31, 1997, the Trust had pro forma revenues of
$7.4 million from the Percentage Leases that would have been in place at the
Hotels. The Trust also had $1.6 million in interest income from mortgage
investments which were repaid during the fiscal year. Expenses included interest
expense related to the mortgage investments and a note payable to an affiliated
party. Other rental revenue of $2.3 million and operating expenses of $2.1
million and amortization of $.04 million related to the Carbon & Carbide
Building (the sale of which closed on September 4, 1997) have been eliminated.
PRO FORMA RESULTS OF OPERATIONS OF LESSEE.
For the year ended December 31, 1997, the Lessee had pro forma revenues of
$19.9 million compared to $18.3 million for the year ended December 31, 1996, an
increase of $1.6 million (8.7%). This was due to increases in occupancy from
71.9% in 1996 to 74.3% in 1997 and ADR from $69.17 in 1996 to $71.80 in 1997.
Total expenses increased $2.3 million from $20.2 million in the year ended
December 31, 1996 to $22.5 million in the year ended December 31, 1997.
Increases of $1.0 million in general and administrative expenses, and $.53
million in Percentage Lease payments were consistent with increased occupancy
and revenues and, in the case of general and administrative expenses, due to
increased legal and accounting and advisory expenses. Repairs and maintenance of
$2.5 million in 1997 ($.1 million less than in 1996) remained high due to costs
of the ongoing refurbishing program which was substantially completed by October
15, 1997. The larger increase in expenses ($2.3 million) as compared to the $1.6
million increase in revenues resulted in a $.74 million increased loss to $2.58
million in the year ended December 31, 1997 as compared to the $1.84 million
loss for the year ended December 31, 1996.
The pro forma net loss of Lessee for 1996 was $1.8 million, due to
having incurred $1.73 million of maintenance expense as part of a multi-year
refurbishment program and $286,000 of losses due to the renovation of the the
Flagstaff hotel. The refurbishment programs, including the Flagstaff
renovation, were all substantially completed as of October 15, 1997. Mr. and
Mrs. Wirth's management and trademark corporation have agreed to subordinate
their receipt of management fees and trademark fees from the Lessee to the
extent that Flagstaff has not generated sufficient operating cash flow to meet
its $250,000 minimum annual rent payment, until Flagstaff has generated
sufficient operating cash flow to meet its $250,000 minimum annual rent payment
in two consecutive years. The elimination of the maintenance expense associated
with refurbishment and Mr. Wirth's subsidy of Flagstaff should enable Lessee to
generate a positive cash flow.
LESSEE
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(unaudited, dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1997
PRO FORMA PRO FORMA
LESSEE LESSEE
--------- --------
<S> <C> <C>
REVENUES:
Room revenue....................................... $ 17,614 $18,801
Food and beverage revenue.......................... 197 519
Other revenue...................................... 513 591
-------- -------
Total Revenues................................... 18,324 19,911
-------- -------
EXPENSES:
Departmental expenses of Hotels:
Rooms............................................ 4,439 4,574
Food and beverage................................ 487 922
General and administrative......................... 2,245 3,298
Advertising and promotion.......................... 725 871
Utilities.......................................... 894 934
Management fees.................................... 459 496
Franchisor royalties and other charges............. 835 941
Repairs and maintenance............................ 2,621 2,473
Real estate and personal property taxes, insurance,
and ground rent.................................. 79 76
Percentage Lease payments.......................... 7,376 7,902
-------- -------
Total Expenses................................... 20,160 22,487
-------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS........... ($ 1,836) ($2,576)
======== =======
</TABLE>
RESULTS OF OPERATIONS OF THE HOTELS.
The following table sets forth certain combined historical financial
information for the Hotels, as a percentage of revenues, for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
FINANCIAL DATA
Room revenue...................................... 96.4% 96.1% 94.4%
Food and beverage revenue......................... 0.8 1.1 2.6
Other revenue..................................... 2.8 2.8 3.0
------ ------ ------
Total revenue........................... 100.0 100.0 100.0
------ ------ ------
Departmental and other expenses................... 69.6 70.1 72.3
Real estate and personal property taxes, insurance
and rent........................................ 4.1 4.8 4.6
Depreciation and amortization..................... 6.6 6.3 6.2
Interest expense.................................. 12.5 8.6 9.3
------ ------ ------
Income before extraordinary items................. 7.2 10.2 6.7
Extraordinary item -- gain on early extinguishment
of debt ........................................ 40.6 1.7 --
------ ------ ------
Net income........................................ 47.8% 11.9% 6.7%
====== ====== ======
OTHER DATA
EBITDA (1), as a % of revenue..................... 26.3% 25.0% 22.2%
Cash Flow from Operating Activities, as a % of
revenue......................................... 13.2% 14.3% 19.8%
Cash Flow from Investing Activities, as a % of
revenue......................................... -2.5% -10.9% -13.9%
Cash Flow from Financing Activities, as a % of
revenue......................................... -11.9% -6.3% -8.4%
KEY FACTORS(2)
Occupancy......................................... 67.6% 68.4% 70.6%
ADR............................................... $62.80 $65.71 $68.73
REVPAR............................................ $42.45 $45.79 $48.62
</TABLE>
- ---------------
(1) Represents income (loss) before extraordinary items, excluding interest
expense, depreciation and amortization. The Trust believes that EBITDA,
defined as net income before interest, depreciation, amortization, taxes and
extraordinary items, provides a good indicator of the financial performance
of the Hotels and will be a significant factor in determining the Lessee's
ability to make lease payments to the Hotel Partnerships, and thus to
the Operating Partnership, or RRF Sub Corp. This indicator should not be
considered as an alternative to net income as an indication of Lessee's
performance or to cash flow as a measure of liquidity.
(2) No assurance can be given that the trends reflected in this data will
continue or that occupancy, ADR and REVPAR will not decrease as a result of
changes in national or local economic or hospitality industry conditions.
These figures include the Flagstaff hotel, acquired in June 1996 and under
renovation during the remainder of 1996 and the first half of 1997. The
renovation was substantially completed as of October 15, 1997.
Comparison of the year ended December 31, 1997 with 1996
Room revenues increased $1.19 million, or 6.7% from 1996 to 1997. This was
driven by increases in ADR at almost all of the Hotels, along with an increase
in occupancy of 3.0%. This was attributable to the general improvement in the
business travel and tourism industries, lack of any new competition in the
markets where the Hotels operate and the refurbishment program. Food and
beverage revenue grew $.32 million or 163.5% from 1996 to 1997, relating to the
increase in occupancy and expansion of food service including room service at
two hotels. The composition of revenue stayed consistent between the periods,
with only a slight increase in food revenues, from 1.1% of the total to 2.6%,
which reflects that most of the gains in revenue occurred in occupancy and room
rates during this period.
Departmental and other expenses grew by $1.73 million, or 13.4%, between
the years because of expansion of food service, increased payroll costs, general
inflationary pressures and increased occupancy. These costs increased as a
percentage of revenues from 70.1% in 1996 to 72.3% in 1997, as expenses grew
faster than revenues, primarily through increased payroll. Depreciation and
amortization increased slightly between 1996 and 1997.
Interest expense increased by $.28 million in 1997 compared to 1996 due to
refinancing costs of capital improvements.
Income before extraordinary items decreased $.54 million primarily due to
increased expenses discussed above.
A gain on early extinguishment of debt of $.3 million recorded in May 1996
related to the extinguishment of debt at the Flagstaff property. No gains or
losses related to the extinguishment of debt were realized in 1997.
Net income declined $.85 million due to the extinguishment of debt income
realized in 1996 and increased expenses in 1997.
EBITDA declined $.17 million, or 3.8% from 1996 to 1997. This decline is
attributable to the increase in expenses during the periods.
Comparison of the year ended December 31, 1996 with 1995
Total revenues increased $2.38 million, or 14.9%, from 1995 to 1996. Room
revenues increased $2.2 million, or 14.6% from 1995 to 1996. As can be seen by
the growth of REVPAR, revenues as reported were driven by increases in the ADR
which occurred at five of the Hotels, while occupancy increased 1.4% overall.
This was attributable in part to the general improvement in the business travel
and tourism industries as well as to InnSuites' refurbishing program which was
substantially completed at all the Hotels as of October 15, 1997. The
continuation of InnSuites' focus on maximizing REVPAR by focusing on increasing
ADR while maintaining stable occupancy during this period had significant
effect. Food and beverage revenue grew $.066 million or 50.8% from 1995 to 1996.
The composition of revenue stayed consistent between the periods, with only a
slight increase in food and beverage revenues, from .8% of the total to 1.1%.
Departmental and other expenses increased by $1.77 million or 16.0% between
the years, substantially because of a $.68 million increase in maintenance
associated with the refurbishment program, the inclusion of the operating
results of the Flagstaff hotel from January 1, 1996, increases in management and
franchise fees due to increased revenues, and general inflationary pressures.
These costs increased slightly as a percentage of revenues from 69.6% in 1995 to
70.1% in 1996, due to the effect of expenses growing at a faster pace than
revenues, in particular maintenance expenses, and the less-profitable operating
results of the Flagstaff hotel acquired in 1996. In addition, management fees
increased from 3.8% of revenues in 1995 to 4.6% of revenues in 1996 because of
higher revenues and increases in the management fee rate implemented in the
second quarter of 1996 at four of the Hotels. Real estate and personal property
taxes, insurance and rent increased 33.6% from 1995 to 1996. This is primarily
attributable to real estate taxes which increased 40.3% due to increased
property valuations based on improved revenues.
<PAGE> 12
Depreciation and amortization expense increased by $.088 million or 8.3%
primarily due to the additional depreciation associated with the increased rate
of refurbishment at the Hotels.
Interest expense decreased $0.42 million or 21.1% in 1996 due to (i)
principal payments on mortgage notes payable of $2.2 million in 1995 and $0.62
million in 1996, net of new mortgage debt of $0.99 million in 1996; and (ii)
substantial debt forgiveness in 1995 and 1996 as discussed below.
Income before extraordinary items increased $0.72 million primarily due to
increases in ADR at the Hotels and decreased interest expense.
The gain on early extinguishment of debt of $0.3 million recorded in May
1996 related to the extinguishment of debt in Hulsey Hotels (the Flagstaff
property) in the form of forgiveness of advances from affiliates and was
substantially less than the $6.5 million gain recorded in May 1995 related to
the extinguishment of debt at the Ontario property in the form of forgiveness
of mortgage debt.
Net income declined $5.44 million due to substantially larger forgiveness
of debt income in 1995, which was offset partially by the improvement in ADR and
reduced interest expense in 1996.
EBITDA grew $.39 million or 9.3% from 1995 to 1996. This improvement was
attributable to the increase in revenues due to growth in ADR during the periods
which was partially offset by increases in franchise and management fees.
LIQUIDITY AND CAPITAL RESOURCES.
Giving effect to the Formation Transactions, the Trust, through its
ownership interest in the Operating Partnership, will have its proportionate
share of the benefits and obligations of the Operating Partnership's ownership
interest in the Hotels. Giving effect to the Formation Transactions, the Trust's
principal sources of cash to meet its cash requirements, including distributions
to shareholders, will be its share of the Operating Partnership's cash flow and
cash flow from RRF Sub Corp. and RRF Sub Corp's principal source of revenue will
be rent payments under the Percentage Leases. Lessee's obligation under the
Percentage Leases are unsecured and Lessee's ability to make rent payments to
the Operating Partnership under the Percentage Leases, and the Trust's
liquidity, including its ability to make distributions to shareholders, will be
dependent on the Lessee's ability to generate sufficient cash flow from the
operation of the Hotels, particularly the Scottsdale Hotel, which represents, on
a pro forma basis, 58.9% of the Trust's cash flow in 1996 and 35.0% in 1997,
respectively.
For a discussion of the abatement of management and trademark fees at the
Flagstaff property, see "Pro Forma Results of Operations of Lessee". Beyond the
4% reserve for refurbishment and replacements set aside annually, the Trust has
no present commitments for extraordinary capital expenditures.
Outstanding mortgage debt was reduced from $18.0 million to $13.2 million
through line of credit borrowings and available cash. The Trust intends to
acquire and develop additional hotels and will incur indebtedness to fund that
acquisition and development. The Trust may also incur indebtedness to meet
distribution requirements imposed on a REIT under the Code to the extent that
working capital and cash flow from the Trust's investments are insufficient to
make the required distributions. The terms of the line of credit discussed
below permit borrowings for that purpose, but impose certain limitations on the
Trust's ability to engage in other borrowings.
On April 16, 1998, the Trust has obtained a $12,000,000 line of credit to
assist it in its funding of acquisition and development of additional hotels
and for certain other business purposes. Borrowings under the line of credit are
secured by first mortgages on three of the Hotels. The Trust may seek to
increase the amount of its credit facility, negotiate additional credit
facilities, or issue debt instruments. Any debt incurred or issued by the Trust
may be secured or unsecured, long-term, medium-term or short-term, bear interest
at a fixed or variable rate, and be subject to such other terms as the Trustees
consider prudent.
The Trust will acquire or develop additional hotels only as suitable
opportunities arise, and the Trust will not undertake acquisition or
redevelopment of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings under the line of credit or other
borrowings or from the proceeds of additional issuances of Shares or
other securities. The Trust has an option to acquire an additional hotel
property in Buena Park, California. See "Subsequent Acquisitions Property Under
Option". There is no agreement or understanding to invest in any properties
other than the option property, and there can be no assurance that the Trust
will successfully acquire or develop additional hotels.
The Trust will also contribute to the Capital Expenditures Fund on a
continuing basis, from the rent paid under the Percentage Leases, an amount
equal to 4% of the Lessee's revenues from operation of the Hotels. The Trust
intends to use the Capital Expenditures Fund for capital improvements to the
Hotels and refurbishment and replacement of furniture, fixtures and equipment,
but may make other uses of amounts in the fund that it considers appropriate
from time to time. The Trust anticipates making similar arrangements with
respect to future hotels that it may acquire or develop. During the period from
January 1, 1995 through December 31, 1997, the Hotels spent approximately $2.0
million for capital expenditures, excluding hotel acquisitions. The Trust
considers the majority of these improvements to be revenue producing and
therefore these amounts have been capitalized and are being depreciated over
their estimated useful lives. The Hotels also spent $7.0 million during the
period from January 1, 1995 through December 31, 1997 on repairs and
maintenance and these amounts have been charged to expense as incurred.
INFLATION.
The Trust's revenues initially will be based on the Percentage Leases,
which will result in changes in the Trust's revenues based on changes in the
underlying Hotel revenues. Therefore, the Trust initially will be relying
entirely on the performance of the Hotels and the Lessee's ability to increase
revenues to keep pace with inflation. Operators of hotels in general, and the
Lessee, can change room rates quickly, but competitive pressures may limit the
Lessee's ability to raise rates faster than inflation.
The Trust's largest fixed expense is the depreciation of the investment in
Hotel properties. The Trust's variable expenses, which are subject to inflation,
represent approximately 17.5% of pro forma revenues in fiscal 1998. These
variable expenses (general and administrative costs, as well as real estate and
personal taxes, property and casualty insurance and ground rent) are expected
to grow with the general rate of inflation.
SEASONALITY.
The Hotels' operations historically have been seasonal. Six of the Hotels
maintain higher occupancy rates during the first and fourth quarters. The five
Arizona hotels (excluding Flagstaff) experience their highest occupancy in the
first quarter. This seasonality pattern can be expected to cause fluctuations in
the Trust's quarterly lease revenue under the Percentage Leases. The Trust
anticipates that its cash flow from the Lessee's operation of the Hotels will
be sufficient to enable the Trust to make quarterly distributions at the
estimated initial rate for at least the next twelve months. To the extent that
cash flow from operations is insufficient during any quarter, because of
temporary or seasonal fluctuations in lease revenue, the Trust expects to
utilize other cash on hand or borrowings to make those distributions. No
assurance can be given that the Trust will make distributions in the future at
the initially estimated rate, or at all.
FORWARD-LOOKING STATEMENTS.
Certain statements in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Trust intends that such forward-looking statements be subject to the safe
harbors created by such Acts. Those forward-looking statements include
statements regarding the intent, belief or current expectations of the Trust,
its Trustees or officers in respect of (i) the declaration or payment of
dividends; (ii) the leasing, management or operation of the Hotels; (iii) the
adequacy of reserves for renovation and refurbishment; (iv) the Trust's
financing plans; (v) the Trust's position regarding investments, acquisitions,
financings, conflicts of interest and other matters; (vi) the Trust's continued
qualification as a REIT; and (vii) trends affecting the Trust's or any Hotel's
financial condition or results of operations. The words and phrases "looking
ahead", "we are confident", "should be", "will be", "predicted", "believe",
"expect", "anticipate" and similar expressions identify forward-looking
statements.
These forward-looking statements reflect the Trust's current views in
respect of future events and financial performance, but are subject to many
uncertainties and factors relating to the operations and business environment
of the Hotels which may cause the actual results of the Trust to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not limited to,
fluctuations in hotel occupancy rates; changes in room rental rates which may
be charged by the Lessee in response to market rental rate changes or
otherwise; interest rate fluctuations, changes in Federal income tax laws and
regulations; competition; any changes in the Trust's financial condition or
operating results due to acquisitions or dispositions of hotel properties; real
estate and hospitality market conditions; hospitality industry factors; and
local or national economic and business conditions, including, without
limitation, conditions which may affect public securities markets generally,
the hospitality industry, or the markets in which the Trust operates or will
operate upon the closing of the Formation Transactions. The Trust undertakes no
obligation to update publicly or revise any forward-looking statements whether
as a result of new information, future events or otherwise. Pursuant to Section
21E(b)(2)(E) of the Exchange Act, the qualifications set forth hereinabove are
inapplicable to any forward-looking statements in this Annual Report relating
to the operations of the Operating Partnership.
SUBSEQUENT ACQUISITIONS
PROPERTY UNDER OPTION
In the first quarter of fiscal 1999, the Operating Partnership
completed the acquisition of the InnSuites Hotel Tucson/St. Mary's, a 297-suite
property located in Tucson, Arizona, built in 1960, with a significant addition
completed in 1971, and last renovated in 1998, and the acquisition of the
Lafayette Hotel Ramada Inn + Conference Center, a 147-suite property located in
San Diego, California, built in 1946 and which is currently being renovated. The
Trust also has an option to purchase a 185-suite InnSuites Hotel located in
Buena Park, California.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
<PAGE> 13
MICHAEL MAASTRICHT, C.P.A.
----------
CERTIFIED PUBLIC ACCOUNTANT
10640 NORTH 28TH. DRIVE, SUITE C-209 (602) 375-2926 - OFC
PHOENIX, ARIZONA 85029 (602) 375-2761 - FAX
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InnSuites Innternational Hotels, Inc.:
We have audited the accompanying combined balance sheets of the InnSuites Hotels
System as defined in Note 1 to the combined financial statements, as of December
31, 1996 and 1997 and January 30, 1998, and the related combined statements of
operations, equity and cash flows for each of the three years in the period
ended December 31, 1997 and the thirty days ended January 30, 1998. 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
System as of December 31,1996 and 1997 and January 30, 1998, and the combined
results of their operations, equity, and cash flows for each of the three years
in the period ended December 31, 1997 and the thirty days ended January 30,
1998, in conformity with generally accepted accounting principles.
MICHAEL MAASTRICHT, CPA
February 19, 1998
Phoenix, Arizona
MEMBER
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
ARIZONA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 14
INNSUITES HOTELS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, January 30,
1996 1997 1998
------------ ------------ ------------
ASSETS
<S> <C> <C> <C>
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land $ 3,439,738 $ 3,439,738 $ 3,439,738
Buildings and improvements 24,831,670 24,831,670 24,831,670
Furniture and equipment 9,175,834 10,845,586 10,958,829
------------ ------------ ------------
37,447,242 39,116,994 39,230,237
Less- Accumulated depreciation 10,958,581 12,184,479 12,322,787
------------ ------------ ------------
Net investment in hotel properties 26,488,661 26,932,515 26,907,450
CASH AND CASH EQUIVALENTS 628,797 129,871 322,095
ACCOUNTS RECEIVABLE 344,882 571,301 591,869
INVENTORIES 347,252 415,575 397,807
OTHER ASSETS 638,265 295,440 121,691
CASH HELD IN ESCROW 253,056 296,099 297,811
DEFERRED EXPENSES, net 513,610 252,430 248,227
------------ ------------ ------------
$ 29,214,523 $ 28,893,231 $ 28,886,950
============ ============ ============
<CAPTION>
LIABILITIES AND COMBINED EQUITY
<S> <C> <C> <C>
MORTGAGE NOTES PAYABLE $ 16,405,945 $ 17,776,627 $ 17,709,589
ACCOUNTS PAYABLE:
Trade 357,089 678,637 621,073
Affiliates 582,145 1,260,601 1,699,601
Bank overdrafts 149,372 121,052 409,196
PARTNERS' CAPITAL PURCHASES PAYABLE - 275,366 218,063
LINES OF CREDIT 100,000 131,000 155,000
CAPITAL LEASE OBLIGATION 71,707 22,437 20,226
LAND LEASE PAYABLE 75,842 80,441 88,286
ACCRUED EXPENSES AND OTHER LIABILITIES 418,596 867,267 1,622,317
PARTICIPATION INVESTORS CONTINGENT LIABILITY 2,646,627 2,646,627 2,646,627
------------ ------------ ------------
20,807,323 23,860,055 25,189,978
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY:
General Partners' 56,032 (43,823) (113,338)
Limited Partners' 8,049,434 7,337,403 6,276,374
Corporate 301,734 (2,260,404) (2,466,064)
------------ ------------ ------------
8,407,200 5,033,176 3,696,972
------------ ------------ ------------
$ 29,214,523 $ 28,893,231 $ 28,886,950
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
<PAGE> 15
INNSUITES HOTELS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31, January 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
REVENUES FROM HOTEL OPERATIONS:
<S> <C> <C> <C> <C>
Room revenue $15,366,788 $17,613,618 $18,800,566 $ 1,833,441
Food and beverage revenue 130,708 197,064 519,440 61,623
Other revenue 445,761 513,143 591,135 60,999
----------- ----------- ----------- -----------
Total revenues 15,943,257 18,323,825 19,911,141 1,956,063
EXPENSES:
Departmental expenses:
Rooms 4,193,048 4,629,652 4,915,019 667,892
Food and beverage 349,981 487,367 921,514 84,590
General and administrative 3,134,257 3,500,161 4,470,820 1,393,290
Advertising and promotion 706,372 724,887 870,732 76,619
Utilities 765,721 894,121 933,994 90,416
Repairs and maintenance 1,938,523 2,621,472 2,473,074 233,804
Real estate, personal property taxes,
and insurance 656,544 876,816 911,870 79,518
Interest expense 1,990,762 1,569,850 1,853,800 137,580
Depreciation 1,058,931 1,147,326 1,225,898 110,155
Other - land lease 13,678
----------- ----------- ----------- -----------
Total expenses 14,794,139 16,451,652 18,576,721 2,887,542
Income before extraordinary items 1,149,118 1,872,173 1,334,420 (931,479)
EXTRAORDINARY ITEMS
Gain on early extinguishment of debt 6,465,305 307,000 - -
----------- ----------- ----------- -----------
NET INCOME $ 7,614,423 $ 2,179,173 $ 1,334,420 $ (931,479)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
<PAGE> 16
INNSUITES HOTELS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, January 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,614,424 $ 2,179,173 $ 1,334,420 $ (931,479)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,084,325 1,175,804 1,264,424 114,361
Gain on early extinguishment of debt (6,465,305) (307,000) - -
(Increase) decrease in:
Accounts receivable (113) 56,431 (226,419) (20,568)
Inventories (53,014) (17,610) (68,323) 17,768
Cash held in escrow - - (30,039) (1,712)
Other assets (376,921) (231,090) 581,474 173,749
Increase (decrease) in:
Accounts payable (191,596) 38,764 321,975 (57,564)
Bank overdraft - - - 288,144
Accrued expenses 496,240 (251,944) 737,618 791,045
----------- ----------- ----------- -----------
Net cash provided by operating activities 2,108,040 2,642,528 3,915,130 373,744
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures, and equipment (406,289) (753,741) (281,998) (113,243)
Acquisition of land, building and equipment - (1,250,000) (79,707) -
Guest room remodeling - - (565,471) -
Capitalization of partners' capital - - (742,576) -
----------- ----------- ----------- -----------
Net cash used by investing activities (406,289) (2,003,741) (1,669,752) (113,243)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of mortgage notes payable (2,185,926) (1,612,687) (636,524) (60,147)
Refinancing of mortgage notes payable - - (5,017,226) -
Increase in loans from affiliates (91,500) 587,853 (115,000) 439,000
Increase in loans to affiliates - (87,500) 793,456 -
Increase of mortgage notes payable - 990,000 7,000,000 -
Increase in bank overdrafts - - - -
Partners' contributions 266,000 - - -
Purchases of partners' capital - - 157,907 (57,303)
Distributions (120,000) (969,375) (4,866,351) -
Distribution of REIT shares - - - (404,725)
Lines of credit - (6,728) 24,000
Loan fees (139,279) (251,711) (29,000) -
Other 275,584 (31,715) - -
Capital lease obligations 103,742 (24,838) (9,102)
Capitalization of common stock - 200,000 - -
----------- ----------- ----------- -----------
Net cash (used) by financing activities (1,891,379) (1,175,135) (2,744,304) (68,277)
NET CHANGE IN CASH AND CASH EQUIVALENTS (189,628) (536,348) (498,926) 192,224
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,354,773 1,165,145 628,797 129,871
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,165,145 $ 628,797 $ 129,871 $ 322,095
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE> 17
INNSUITES HOTELS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS' PARTNERS' COMMON RETAINED COMBINED
CAPITAL CAPITAL STOCK(1) EARNINGS EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
CONTRIBUTIONS - 170,000 - - 170,000
ISSUANCE OF COMMON STOCK - - 200,000 - 200,000
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 117,283 1,829,275 - (612,138) 1,334,420
DISTRIBUTIONS (217,138) (2,699,213) - (1,950,000) (4,866,351)
PARTNERS' CAPITAL PURCHASES - 157,907 - - 157,907
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 (43,823) 7,337,403 205,000 (2,465,404) 5,033,176
NET INCOME (46,304) (722,215) - (162,960) (931,479)
DISTRIBUTIONS (23,211) (338,814) - (42,700) (404,725)
----------- ----------- ----------- ----------- -----------
BALANCE, January 30, 1998 $ (113,338) $ 6,276,374 $ 205,000 $(2,671,064) $ 3,696,972
=========== =========== =========== =========== ===========
<FN>
(1) Hulsey Hotels Corporation - Common stock, no par value, 1,000,000 shares authorized, 1,000,000 issued and outstanding
(1) Buenaventura Properties, Inc. - Common stock, no par value, 10,000,000 shares authorized, 1,000,000 issued and outstanding
</FN>
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE> 18
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The InnSuites Hotels System consists of the following full-service
hotels:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NUMBER OF
- ------------- -------- ---------
SUITES
------
<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 have 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 System Entities.
As of December 31, 1997, the InnSuites System 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 46% 54%
InnSuites Tucson Best Western 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>
<PAGE> 19
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
Realty ReFund Trust is an unincorporated Ohio real estate investment trust
("REIT") which agreed to acquire equity interests in existing hotel properties
on January 31, 1998 and to consider selectively the purchase or development of
additional hotels. The REIT acquired the general partnership interest,
representing a 13.6% equity interest in RRF Limited Partnership, a Delaware
limited partnership (the Partnership), as of January 31, 1998. The partners and
shareholders of the entities owning the InnSuites Hotels contributed their
respective partnership and corporate interests to the Partnership, or a
subsidiary of the REIT in exchange for cash, partnership interests or REIT stock
on January 31, 1998. 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
Lessee is an affiliate of InnSuites.
Management believes that these combined financial statements result in a more
meaningful presentation of the InnSuites Hotel System businesses acquired by the
Partnership or REIT and thus appropriately reflect the historical financial
position and results of operations of the predecessor of the Lessee. All
significant intercompany balances and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Periods
For annual reporting purposes, all of the InnSuites System 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 estimated useful lives, 40 years for
buildings and improvements, 7 years for furniture and equipment.
The partners and management of the InnSuites System 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 from operations and disposition of the hotel properties 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 have been
recognized.
<PAGE> 20
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
Deferred Expenses
Deferred expenses consist principally of deferred loan costs. Deferred loan
costs are amortized over the terms of the related loan agreements. The
amortization of deferred loan costs of $51,377, $42,187, and $37,925, and $4,203
for the years ended December 31, 1995, 1996, and 1997, and the month ended
January 30, 1998 is included in interest expense in the accompanying combined
statements of operations. Accumulated amortization of deferred expenses was
$385,651 and $258,673 at December 31, 1996 and 1997, respectively, and $262,876
at January 30, 1998.
Concentration of Credit Risk
Financial instruments which potentially subject the InnSuites System 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, Scottsdale and Flagstaff (S-Corporations in 1997)
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-Corporations into
consideration when filing their respective tax returns. Flagstaff, was a C-
Corporation in 1996, and had no income tax liability for that year.
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.
<PAGE> 21
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
Maintenance and Repairs
Maintenance and repairs are charged to operations as incurred; major renewals
and betterments are capitalized. The hotel properties have scheduled guest room
refurbishing programs, the cost of which is expensed as incurred. 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 System 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 believes
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
properties and amounts deposited for the replacement of hotel real and personal
property pursuant to the terms of certain mortgage and franchise agreements.
<PAGE> 22
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
3. MORTGAGE NOTES PAYABLE:
Mortgage notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31 , January 30,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Mortgage note payable to a bank in aggregate
monthly installments of principal
and interest of $38,436 at rate of 8.5%;
the unpaid principal matures with a balloon
payment due in March 2007; collateralized
by real and personal property having a net
book value of $2,766,938 at December 31,1997. $3,152,590 2,947,434 2,929,875
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 $3,816,504 at December 31, 1997. 2,711,786 2,607,412 2,598,308
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 $3,094,443 at December 31, 1997. 3,958,182 3,824,738 3,812,963
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 $6,834,154
at December 31, 1997; requires an escrow reserve
of 4% of revenues for the replacement or
refurbishing of furniture, fixtures and equipment. 3,739,308 3,653,520 3,646,629
</TABLE>
<PAGE> 23
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
<TABLE>
<S> <C> <C> <C>
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 $2,122,233 at December 31, 1997. 956,612 891,983 886,524
Mortgage note payable to a finance company in
aggregate monthly installments of principal of
$45,701 plus interest at a rate of 9%; the unpaid
principal due February 1998; collateralized
by real and personal property having a net book
value of $1,920,889 at December 31, 1997. 1,887,467 3 ,851,540 3,835,290
----------- ---------- ----------
$16,405,945 17,776,627 17,709,589
=========== ========== ==========
</TABLE>
Aggregate scheduled annual principal payments for the above mortgage notes
payable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
1998 $4,504,838
1999 723,492
2000 779,853
2001 1,321,003
2002 799,639
Thereafter 9,647,802
-----------
$17,776,627
===========
</TABLE>
Debt Extinguishment
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.
<PAGE> 24
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
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% for a portion of 1995. Certain
properties paid different rates or no fees during certain periods. 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.
The InnSuites System Entities paid fees to InnSuites affiliates for various
services as follows:
<TABLE>
<CAPTION>
December 31. January 30,
----------------------------
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Management fees
(4.5% of total revenues) $ 611,421 840,518 902,938 90,051
Trademark license fees
(0.5% of total revenues) 66,246 80,596 81,935 9,785
Advertising trust fees
(1% of total revenues) 232,023 189,231 201,296 16,594
</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.
<PAGE> 25
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
The purchase accounting adjustment recorded was an aggregate increase in the
carrying value of the investments in hotel property was as follows:
<TABLE>
<S> <C>
Land, buildings and improvements $ 1,050,000
Furniture and equipment 200,000
------------
$ 1,250,000
============
</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.
Trademark License Agreements
Under the terms of hotel trademark license agreements, annual payments for
trademark royalties and reservation and advertising services are due from the
hotels. Fees are computed based upon a percentage of total revenues. At December
31, 1997, the trademark license royalty fees are payable by the hotels at .5%
of revenues to InnSuites affiliates 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 for Best
Western and 9% for Holiday Inn.
<PAGE> 26
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
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
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>
Year Ended December 31,
---------------------- ---------- January 30,
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Minimum rent $ 60,000 70,000 70,000 5,833
Percentage rent 70,689 74,632 80,437 7,845
-------- -------- ------- ------
$130,689 144,632 150,437 13,678
======== ======== ======= ======
</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, 1997 and January 30, 1998. 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.
<PAGE> 27
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
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 participants 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, Scottsdale, Ontario and Tucson each carried an unsecured line of
credit of $50,000 at December 31, 1997. Interest rates are 10% to 10.25%; and
due dates are March 1 to April 30, 1998. The lines of credit are guaranteed by a
principal of InnSuites.
10. CAPITAL LEASE OBLIGATION
Ontario owns equipment under a capital lease arrangement for $39,752. The lease
liability carries interest at a rate of 10.5% and is payable through October
1999 with monthly payments of $1,433. Future payments required by the lease as
of December 31, 1997 follow:
1998 14,438
1999 7,999
-------
$22,437
=======
11. PARTNERS' CAPITAL PURCHASES PAYABLE
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 interests effective
January 1, 1997 aggregating $584,669. The purchases are payable monthly through
December 1998.
<PAGE> 28
INNSUITES HOTELS SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued
12. PREACQUISITION COSTS
On January 31, 1998 the InnSuites System Entities were acquired by RRF Limited
Partnership, the general partner of which is Realty ReFund Trust, an
unincorporated Ohio real estate investment trust ("REIT"). In accordance with
the acquisition agreements the InnSuites System Entities are bearing certain
preacquisition costs, primarily professional fees, which will not be reimbursed
by the REIT and will not be a part of the purchase price. These costs of
$445,414 in 1997 and $651,198 in January 1998 are expensed and included in
professional services. As part of the acquisition, the InnSuites System Entities
purchased for $950,000 certain shares from the REIT's prior owners. It then
distributed $404,725 in shares to the partners of RRF Limited Partnership and
$545,275 in shares to certain employees which is included in wages and salaries.
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees,
Realty ReFund Trust:
We have audited the accompanying consolidated balance sheets of Realty ReFund
Trust (an Ohio unincorporated business trust) and subsidiaries as of January 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial position of Realty ReFund Trust as of
January 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 1998 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)1. of
this Form 10-K is the responsibility of the Trust's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
May 13, 1998.
<PAGE> 30
<TABLE>
<CAPTION>
REALTY ReFUND TRUST
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
JANUARY 31, 1998 AND 1997
-------------------------
ASSETS
1998 1997
<S> <C> <C>
INVESTMENTS IN HOTEL PROPERTIES, net $41,241,241 $ -
CASH AND CASH EQUIVALENTS 2,378,398 531,997
INTEREST RECEIVABLE AND OTHER ASSETS - 285,004
REAL ESTATE HELD FOR SALE, net of $4,085,000 valuation
allowance - 5,599,122
------------ ------------
TOTAL ASSETS $43,619,639 $6,416,123
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
MORTGAGE NOTES PAYABLE $17,709,589 $ -
NOTES PAYABLE TO BANKS 155,000 -
OTHER NOTES PAYABLE 2,864,690 -
ADVANCES PAYABLE TO RELATED PARTIES 1,699,601 2,300,000
DUE TO LESSEE 944,234 -
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 572,031 864,903
MINORITY INTEREST IN PARTNERSHIP 14,075,523 -
SHAREHOLDERS' EQUITY:
Shares of beneficial interest without par value;
unlimited authorization; 1,667,817 and 1,020,586
shares issued and outstanding in 1998 and 1997,
respectively
5,598,971 3,251,220
------------ ------------
$43,619,639 $6,416,123
============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
<PAGE> 31
<TABLE>
<CAPTION>
REALTY ReFUND TRUST
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
---------------------------------------------------
1998 1997 1996
------------- ------------- --------------
REVENUES:
<S> <C> <C> <C>
Interest income from loans receivable $ - $1,077,757 $2,199,600
Interest income from loan receivable
from related party - 560,139 932,605
Rental revenue from real estate held for
sale 1,367,366 2,277,610 2,297,801
Interest income 54,613 - -
------------- ------------- --------------
1,421,979 3,915,506 5,430,006
------------- ------------- --------------
EXPENSES:
Provision for writedown of loan
receivable from related party - 111,498 5,000,000
Provision for writedown of real estate
held for sale - 1,085,000 3,000,000
Loss on sale of real estate 35,620 - -
Interest on loans underlying wrap-around
mortgages - 150,184 617,123
Interest on loan underlying wrap-around
mortgage to related party - 89,223 209,872
Interest on note payable to bank - 381,368 717,550
Interest on note payable to related party 118,082 332,308 427,445
Fee to related party investment advisor - 169,961 223,278
Legal expense to related party 84,000 56,000 20,000
Operating expenses of real estate held
for sale 1,379,389 2,085,807 2,144,150
Depreciation of building held for sale - - 264,873
Amortization of tenant improvements and
deferred leasing commissions 21,724 43,080 192,719
Other operating expenses 356,673 299,442 167,347
------------- ------------- --------------
1,995,488 4,803,871 12,984,357
------------- ------------- --------------
NET LOSS $ (573,509) $ (888,365) $(7,554,351)
============= ============= ==============
LOSS PER SHARE - Basic and diluted $ (.56) $ (.87) $ (7.40)
============= ============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 1,022,359 1,020,586 1,020,586
CASH DIVIDENDS PER SHARE:
Paid $ .15 $ .30 $ .40
Declared .00 .10 .10
============= ============= ==============
$ .15 $ .40 $ .50
============= ============= ==============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE> 32
<TABLE>
<CAPTION>
REALTY ReFUND TRUST
-------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
---------------------------------------------------
Total
Shareholders'
Equity
----------------
<S> <C>
BALANCE, JANUARY 31, 1995 $ 12,714,542
Net loss (7,554,351)
Cash dividends paid (612,372)
------------
BALANCE, JANUARY 31, 1996 4,547,819
Net loss (888,365)
Cash dividends paid (408,234)
------------
BALANCE, JANUARY 31, 1997 3,251,220
Issuance of shares 3,074,348
Net loss (573,509)
Cash dividends paid (153,088)
------------
BALANCE, JANUARY 31, 1998 $ 5,598,971
============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE> 33
REALTY ReFUND TRUST
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
---------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (573,509) $ (888,365) $ (7,554,351)
Adjustments to reconcile net loss to net
cash (used for) provided by operating
activities-
Provision for writedown of loan
receivable from related party - 111,498 5,000,000
Provision for writedown of real estate
held for sale - 1,085,000 3,000,000
Depreciation of building held for sale - - 264,873
Amortization of tenant improvements and
deferred leasing commissions 21,724 43,080 192,719
Amortization of deferred loan fees - (15,000) (18,000)
Decrease in interest receivable and
other assets 263,280 392,587 220,781
Decrease in accounts payable and accrued
expenses (676,274) (600,158) (45,767)
--------------- -------------- ---------------
Net cash (used for) provided by
operating activities (964,779) 128,642 1,060,255
=============== ============== ===============
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on mortgage loans
receivable $ - $14,569,483 $13,087,769
Principal payments on mortgage loans payable - (4,991,421) (6,364,536)
Payments for tenant and building
improvements - - (1,178,904)
Payment of transaction costs (334,854) - -
Proceeds from sale of real estate, net 5,599,122 - -
Purchase of fee interest in land - (287,758) -
--------------- -------------- ---------------
Net cash provided by investing
activities 5,264,268 9,290,304 5,544,329
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings - 625,000 2,550,000
Bank repayments - (6,920,000) (8,065,000)
Payment of cash dividends (153,088) (408,234) (612,372)
Principal payments on note payable to
related party (2,300,000) (2,200,000) (500,000)
--------------- -------------- ---------------
Net cash used for financing
activities (2,453,088) (8,903,234) (6,627,372)
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH 1,846,401 515,712 (22,788)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
531,997 16,285 39,073
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 2,378,398 $ 531,997 $ 16,285
=============== ============== ===============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE> 34
-2-
<PAGE> 35
REALTY ReFUND TRUST
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JANUARY 31, 1998, 1997 AND 1996
-------------------------------
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
-----------------------------------------------
Prior to fiscal 1998, Realty ReFund Trust (the Trust) specialized in mortgage
financing as its investment vehicle, refinancing existing income-producing
commercial, industrial and multi-unit residential real property by supplementing
or replacing existing financing. The primary refinancing technique which the
Trust employed was wrap-around mortgage lending, which is discussed in Note 2.
As of January 31, 1997, the Trust's remaining real estate asset was a wholly
owned commercial office building in Chicago, which was sold in September 1997.
On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership
(the Partnership), a Delaware limited partnership, in exchange for a 13.6%
general partnership interest therein. The Trust is the sole general partner of
the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership to acquire six hotel properties from
various entities. In addition, through a wholly-owned subsidiary, the Trust
issued 647,231 shares of beneficial interest in exchange for all of the
outstanding shares of Buenaventura Properties, Inc. (BPI), which owned a hotel
located in Scottsdale, Arizona. The Scottsdale, Arizona hotel together with the
six hotel properties acquired by the Partnership, are the Initial Hotels. The
Initial Hotels are leased to Realty Hotel Lessee Corp. (the Lessee) pursuant to
leases which contain provisions for rent based on revenues of the Initial Hotels
(the Percentage Leases). Each Percentage Lease obligates the Lessee to pay rent
equal to the greater of the minimum rent or a percentage rent based on the gross
revenues of each hotel. The Lessee holds the franchise agreement for each hotel.
The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc. an entity
owned by James F. Wirth, Chairman, President and Chief Executive Officer of the
Trust, (Wirth) and his spouse.
Partnership Agreement
- ---------------------
Pursuant to the Partnership Agreement, the partners in five partnerships (the
Exchanging Partners) exchanged their respective partnership interests for
limited partnership interests in the Partnership. The corporation which owned a
hotel property in Flagstaff, Arizona (one of the Initial Hotels) contributed the
hotel to the Partnership in exchange for limited partnership interests therein.
The Partnership Agreement provides for the issuance of two classes of limited
partnership units, Class A and Class B. Such Classes are identical in all
respects, except that each Class A limited partnership unit in the Partnership
shall be convertible into a like number of shares of beneficial interest of the
Trust, at any time at the option of the particular limited partner, if the Trust
determines that such conversion would not cause the Trust to fail to qualify as
a REIT. A total of 2,174,931 Class A limited partnership units were issued to
the Exchanging Partners. Additionally, 299,622 Class A partnership units were
reserved for issuance to those partners who did not accept the formation
exchange offer. A total of 4,017,361 Class B limited partnership units were
issued to Wirth and his affiliates, in lieu of the issuance of Class A limited
partnership units. If all of the Class A limited partnership units were to be
converted, the limited partners in the Partnership would hold 2,174,931 shares
of beneficial interest of the Trust. The Class B limited partnership units may
be converted at the discretion of the Board of Trustees provided that such
conversion would not cause the Trust to fail to qualify as a REIT.
<PAGE> 36
-2-
Basis of Presentation
- ---------------------
As general partner, the Trust exercises unilateral control over the Partnership.
Therefore, the financial statements of the Trust, its wholly-owned subsidiaries
and the Partnership are consolidated. All significant intercompany transactions
and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Investments in Hotel Properties
- --------------------------------
Hotel properties are stated at cost and are depreciated using the straight-line
method over estimated lives of 40 years for buildings and improvements and 7
years for furniture and equipment.
In accounting for the acquisitions of the Initial Hotels discussed in Note 1,
purchase accounting was applied. The historical carrying values of the assets
and liabilities of BPI were adjusted to their respective fair market values
based upon the aggregate fair market value of shares of beneficial interest
issued to acquire the outstanding shares of BPI. The Trust's purchase of its
13.6% general partnership interest in the Partnership and the Partnership's
acquisition of interests in the Initial Hotels other than BPI held by
Exchanging Partners other than Wirth and his affiliates resulted in adjustments
to the historical net carrying values of such hotel properties in amounts equal
to 34% of the difference between the fair market values and the historical net
carrying values of the respective hotel properties. The Partnership's
acquisition of interests in the Initial Hotels other than BPI held by Wirth and
his affiliates did not result in purchase accounting adjustments to historical
net carrying values as such transaction were between entities under common
control. The purchase price allocation resulting from the formation
transactions remains preliminary as of January 31, 1998 pending final
determination of assumed liabilities and allocation of cost among categories of
investments in hotel properties.
The Trust does not believe that there are any factors or circumstances
indicating impairment of any of its investments in hotel properties at January
31, 1998.
In the first quarter of fiscal 1997, the Trust adopted FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Pursuant to this standard, long-lived assets to be disposed of are to be
reported at the lower of carrying amount or fair value less incremental direct
costs to sell. Long-lived assets to be disposed of shall not be depreciated
while being held for disposal. The Trust's real estate held for sale was within
the scope of FAS No. 121. As the Trust established a $3,000,000 valuation
allowance at January 31, 1997 to reduce the carrying value of the real estate
held for sale to its estimated net realizable value, adoption of FAS No. 121 did
not have a material impact on the Trust's financial position or results of
operations except that no depreciation expense was recorded on the real estate
held for sale during fiscal 1998 and 1997. Accumulated depreciation and
amortization of the real estate held for sale at January 31, 1996 was $793,000.
Interest Receivable and Other Assets
- -------------------------------------
Included in interest receivable and other assets at January 31, 1997 were
deferred leasing commissions related to the Chicago office building of $312,000,
which were being amortized on a straight-line basis over the related lease
terms. Accumulated amortization of such deferred costs at January 31, 1997 was
$74,000.
<PAGE> 37
-3-
Investments in Wrap-Around Mortgages
and Related Underlying Loans
- -------------------------------------
In a wrap-around mortgage structure, the principal amount secured by the
mortgage note held by the Trust was equal to the outstanding balance under the
prior mortgage loan plus the amount of funds advanced by the Trust. The notes
held by the Trust were subordinate to the underlying prior indebtedness. The
Trust agreed with the borrower to make principal and interest payments to the
holder of the existing prior mortgage, but only to the extent scheduled payments
were received from the borrower and no other default existed. Generally, the
Trust had the right to pay off the prior indebtedness and succeed to its
priority.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard allows a creditor to measure the impairment
of a loan based on the fair value of the collateral if a loan is collateral
dependent. FAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," issued in October 1994, amended FAS No. 114
to allow a creditor to use existing methods for recognizing interest income on
impaired loans. The Trust adopted the provisions of FAS Nos. 114 and 118 in
fiscal 1996. See Note 4 for a discussion of the impairment of the Trust's loan
on the Toledo, Ohio property.
Dividends/Distributions
- -----------------------
The Trust expects to pays dividends which will be dependant upon the receipt of
distributions from the Partnership.
Revenue Recognition
- -------------------
The Trust recognizes lease revenue on a accrual basis over the terms of the
respective Percentage Leases. No percentage rent was earned in fiscal 1998 from
the Initial Hotels.
Minority Interest
- -----------------
Minority interest in the Partnership represents the limited partners' actual
proportionate share of the equity in the Partnership. Income will be allocated
to minority interest based on the weighted average limited partnership
percentage ownership throughout the period.
Fair Value of Financial Instruments
- -----------------------------------
For disclosure purposes, fair value is determined by using available market
information and appropriate valuation methodologies. Cash and cash equivalents,
due to their short maturities, are carried at amounts which reasonably
approximate fair value.
For mortgage notes payable, notes payable to banks, other note payables and
advances to related parties, the fair value is estimated by discounting the
future cash flows using the current rates which would be available for similar
loans having the same remaining maturities.
<PAGE> 38
-4-
Earnings Per Share
- ------------------
In February 1997, FAS No. 128, "Earnings per Share" was issued which eliminated
the concept of common stock equivalents and replaces "primary" and "fully
diluted" earnings per share with "basic" and "diluted" earnings per share. For
all periods presented there were no dilutive securities.
Basic earnings per share has been computed based on the weighted average number
of shares outstanding during the periods. The calculation of basic earnings per
share for 1998 was based upon 1,022,359 shares and in 1997 and 1996 was based
upon 1,020,586 shares.
Statements of Cash Flows
- ------------------------
The Trust considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. Interest paid
amounted to $118,000, $995,000 and $2,018,000 for fiscal years 1998, 1997 and
1996, respectively.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In July 1995, the Trust established a valuation allowance of $5,000,000 on its
investment in the Toledo, Ohio wrap-around mortgage loan. The loan was retired
in fiscal 1997 and an additional loss of $111,000 was recorded.
In the fourth quarter of fiscal 1996, the Trust established a valuation
allowance of $3,000,000 to writedown the Chicago real estate held for sale to
its estimated net realizable value. The Trust recorded an additional valuation
allowance of $1,085,000 at January 31, 1997 to further reduce the real estate
held for sale to its estimated net realizable value. The building was sold
during fiscal 1998.
3. INVESTMENT IN HOTEL PROPERTIES:
-------------------------------
Investment in hotel properties as of January 31, 1998 consist of the following:
Land $ 3,439,738
Building and improvements 31,395,305
Furniture and equipment 6,406,198
--------------
41,241,241
Less-Accumulated depreciation -
--------------
$41,241,241
==============
The Initial Hotels are located in Arizona (6) and California (1) and are subject
to Percentage Leases as described in Note 11.
<PAGE> 39
-5-
4. LOAN IMPAIRMENT:
---------------
In July 1995, the Trust recorded a $5,000,000 loss provision on its investment
in the Toledo, Ohio wrap-around mortgage loan. The owner of the property was
pursuing, among other things, the sale of the property. As the Trust's loan was
made on a nonrecourse basis, the Trust had written down its investment to
reflect the estimated sale price of the property and the estimated net proceeds
to be received by the Trust as repayment of its loan as of January 31, 1996.
The commercial building that secured the loan was owned by a partnership of
which a corporation owned by the former Chairman of the Trust was the general
partner. The building was sold by the partnership in fiscal 1997. In connection
with that sale, the Trust was released by the new owner from any claims or
liabilities relating to that property, and the Trust released its rights to any
obligations from the partnership. As a result, in the fourth quarter of fiscal
1997, the Trust recorded a $111,000 loss provision on the Toledo, Ohio loan
based on its final actual net realized value.
5. REAL ESTATE HELD FOR SALE:
--------------------------
In July 1992, the Trust accepted title in lieu of foreclosure on a commercial
building in Chicago, Illinois. At the time of title acceptance, the Trust
recorded a provision to write down its investment to estimated net realizable
value as it was the Trust's intention to sell the real estate. The carrying
value of the investment increased as a result of considerable investment in
building and tenant improvements.
Based on both market conditions for similar commercial property in Chicago and
the operating performance of the property, the Trust recorded a $3,000,000
provision in the fourth quarter of fiscal 1996 to reduce the carrying value of
the property to its then estimated net realizable value. The amount of the
writedown was based upon the Trust's best estimate at January 31, 1996 of the
amount of net proceeds which would be realized upon sale of the real estate in
the near term future.
In the fourth quarter of fiscal 1997, the Trust entered into a contract to sell
the Chicago building for $6,000,000. Accordingly, the Trust recorded an
additional provision of $1,085,000 to reduce the carrying value of the real
estate held for sale to its estimated net realizable value based upon a pending
contract price and estimated costs associated with the potential sale.
In the third quarter of fiscal 1998, the Trust sold the Chicago building and
received approximately $6,000,000 before consideration of closing and other
costs related to the sale. A loss of approximately $36,000 was recorded as a
result of the sale.
6. MORTGAGE NOTES PAYABLE
----------------------
At January 31, 1998, the Trust had mortgage notes payable outstanding with
respect to six of the Initial Hotels. The mortgage notes payable have various
repayment terms and have scheduled maturity dates ranging from fiscal 1999 to
2012. Interest rates on the mortgage notes range from 8.50% to 9.75%. The
mortgage notes payable are guaranteed by Wirth and certain of his affiliates.
The net book value of properties securing the mortgage notes payable at January
31, 1998 was $35,179,000.
Scheduled minimum payments of mortgage notes payable as of January 31, 1998
are as follows:
Year Amount
---------- -----------
1999 $ 4,496,000
2000 729,000
2001 785,000
2002 1,317,000
2003 781,000
Thereafter 9,602,000
-----------
$17,710,000
===========
<PAGE> 40
-6-
7. NOTE PAYABLE TO BANKS:
----------------------
At January 31, 1998, the Trust had various lines of credit totaling $350,000
with outstanding balances totaling $155,000 at interest rates floating with the
banks' respective reference rates plus 1.5% to 3.0%.
Prior to January 31, 1997, the Trust had a separate bank credit facility. During
fiscal 1997, the proceeds from the repayment of the Forth Worth, Texas loan were
utilized, in part, to retire all outstanding borrowings under the Trust's bank
credit agreement. Upon retirement of all outstanding borrowings thereunder, the
Trust's former bank credit agreement expired.
For the years ended January 31, 1997 and 1996, the average daily bank borrowings
were $5,519,000 and $9,431,000, respectively, with a weighted average interest
rate (actual interest expense divided by average daily borrowings) of 6.9% and
7.6%, respectively.
8. OTHER NOTES PAYABLE:
--------------------
For one of the Initial Hotels, participation investors' rights to repayment were
converted into the right to receive forty-five percent of the profits from any
future sale of that hotel property, over a fixed base amount of approximately
$4,100,000 and after payment of all outstanding liabilities. Other notes payable
at January 31, 1998 include a contingent liability of $2,647,000 at January 31,
1998 represents the participants' 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 $745,000 of accrued but
unpaid interest during the construction period, as defined. During 1996 certain
units were purchased from participation investors for $48,000.
Prior to the formation transactions, certain partners of the partnerships that
previously owned the Initial Hotels sold their interests therein in exchange for
notes. These notes are payable over 2 years. At January 31, 1998 $218,000
principal amounts of such notes is outstanding.
9. ADVANCES PAYABLE TO RELATED PARTIES:
------------------------------------
Advances payable to related parties at January 31, 1998 consists of funds
provided to fund working capital and capital improvement needs. The aggregate
amount outstanding was approximately $1,700,000 as of January 31, 1998.
In March 1993, the Trust sold a $5,000,000 secured note to the former Chairman
of the Trust, at par. The note bore interest at the prime lending rate and had a
stated maturity date of August 1994. The Trust exercised its option to extend
the maturity of the note. Pursuant to the terms of the note, the Trust made
scheduled principal payments of $500,000 for each of the years ended January 31,
1997 and 1996. In addition, $1,700,000 of the proceeds from the repayment of the
Fort Worth, Texas loan was utilized to reduce the note. The remaining $2,300,000
of the note was retired with proceeds from the sale of the Chicago property.
<PAGE> 41
-7-
10. DESCRIPTION OF CAPITAL STOCK:
-----------------------------
Holders of the Trust's shares are entitled to receive dividends when, as and if
declared by the Board of Directors of the Trust out of funds legally available
therefor. The holders of shares, upon any liquidation, dissolution or winding-up
of the Trust, are entitled to share ratably in any assets remaining after
payment in full of all liabilities of the Trust. The shares possess ordinary
voting rights, each share entitling the holder thereof to one vote. Holders of
shares do not have cumulative voting rights in the election of directors and do
not have preemptive rights.
11. PERCENTAGE LEASE AGREEMENTS:
----------------------------
The Percentage Leases have noncancellable terms which expire at various dates
through May 31, 2007, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Percentage Lease is
the greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such gross revenues in
excess of specified threshold amounts. Both the minimum rent and the revenue
thresholds used in computing percentage rents are subject to annual adjustments
beginning January 1, 1999, based on increases in the United States Consumer
Price Index. Percentage rent applicable to food and beverage revenues is
calculated as 5% of such revenues over a minimum threshold.
Future minimum rentals (ignoring CPI increases) to be received by the Trust from
the Lessee pursuant to the Percentage Leases for each of the next five years and
in total thereafter are as follows:
1999 $ 5,850
2000 5,850
2001 5,850
2002 5,850
2003 5,850
Thereafter 25,347
----------
$54,597
==========
12. FEDERAL INCOME TAXES:
---------------------
No provision for current or deferred income taxes has been made by the Trust.
The Trust has elected to be a real estate investment trust (REIT) and is
therefore subject to the requirements of Sections 856-860 of the Internal
Revenue Code, all of the requirements of which management believes have been met
for the year ended January 31, 1998. As a REIT, the Trust normally distributes
all of its taxable income to its shareholders. For the year ended January 31,
1998, the Trust had a taxable loss of approximately $4,000,000. The primary
difference between the timing of book provisions for write downs and when such
amounts are allowed as deductions for Federal income tax purposes is
attributable to the foreclosure property described in Note 5. In fiscal 1998,
the net tax deductions related to such property were $3,570,000 that related
primarily to amounts that had been expensed in previous years for book purposes.
The total dividends per share applicable to operating results for the year ended
January 31, 1998, amount to $.15 per share, totaling $153,088.
<PAGE> 42
-8-
An income tax net operating loss of approximately $9,533,000 of which
$4,476,000, originated in fiscal 1993 and $5,057,000 originated in fiscal 1997,
is available for carryforward to fiscal 2008 and fiscal 2012, respectively. In
addition, the taxable loss for fiscal 1998 of $4,000,000 will be available for
carryforward to fiscal 2013. The calendar 1997 dividends were 100% return of
capital due to the fiscal 1998 taxable loss. The quarterly allocation of cash
dividends paid per share for individual shareholders' income tax purposes was as
follows:
<TABLE>
<CAPTION>
Calendar 1997 Calendar 1996 Calendar 1995
---------------------------------- ---------------------------------- ----------------------------------
Return
Ordinary Return Total Ordinary Return Total Ordinary of Total
Month Paid Income of Capital Paid Income of Capital Paid Income Capital Paid
- --------------- ------------ ------------ ------- ------------ ----------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March $ - $.10 $.10 $ - $.10 $.10 $.195 $.005 $.20
June - .05 .05 - .10 .10 .195 .005 .20
September - - - - .10 .10 .097 .003 .10
December - - - - .10 .10 .097 .003 .10
====== ====== ====== ====== ====== ===== ======= ======= =====
$ - $.15 $.15 $ - $.40 $.40 $.584 $.016 $.60
====== ====== ====== ====== ====== ===== ======= ======= =====
</TABLE>
The tax status of distributions to shareholders in calendar 1998 will be
dependent on the level of the Trust's earnings in that year. If taxable income
of the Trust exceeds dividends paid in calendar 1998, such dividends will
represent ordinary income to the recipients irrespective of the net operating
loss carryforward.
13. ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS:
----------------------------------------
On January 31, 1998, Wirth and his spouse purchased the stock of Mid-America
ReaFund Advisors, Inc. (the Advisor) which provides the administration of the
day-to-day investment operations of the Trust and the Partnership. The Advisor
was formerly owned by the former Chairman and President of the Trust. Under the
terms of the advisory agreement, the Advisor is to receive, subject to certain
limitations, a monthly fee equal to 1/12 of 1% of invested assets, as defined in
the advisory agreement, and an annual incentive fee equal to (a) 10% of the
amount by which the net income of the Trust exceeds 8% of the average net worth
for the year and (b) 10% of the difference between net realized capital gains
less accumulated net realized capital losses, as defined. For any fiscal year in
which operating expenses of the Trust exceed certain thresholds specified in the
advisory agreement, the Advisor is required to refund to the Trust the amount of
such excess. For fiscal years 1997 and 1996, operating expenses exceeded the
specified thresholds by approximately $6,000 and $18,000, respectively. There
was no fee to the Advisor during fiscal year 1998 due to the reduction in the
Trust's investment in mortgage loans.
Wirth has an employment agreement with the Trust which expires in December 2007.
The employment agreement provides that Wirth will receive no compensation from
the Trust as long as the advisory agreement is in effect. However, pursuant to
the terms of the employment agreement, should the Advisor no longer provide
services to the Trust, Wirth will then be compensated, upon the same annual
basis as the Advisor would have been compensated under the current terms of the
advisory agreement had it remained in effect.
Certain employment agreements with the former Chairman and President of the
Trust were terminated at January 30, 1998.
<PAGE> 43
-9-
14. INVESTMENTS IN LOANS RECEIVABLE:
--------------------------------
Reconciliation of Mortgage Loans Receivable
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
BALANCE, beginning of period $17,422,010 $35,509,779
-------------- -------------
COLLECTIONS OF PRINCIPAL:
Office buildings 14,569,483 7,255,186
Shopping centers - 2,029,068
Motels - 3,803,515
Apartments - -
-------------- -------------
14,569,483 13,087,769
-------------- -------------
ELIMINATION OF UNDERLYING MORTGAGE (Note 15) 2,741,029 -
WRITEDOWN OF LOAN RECEIVABLE FROM RELATED
PARTY (Note 4) 111,498 5,000,000
-------------- -------------
BALANCE, end of period $ - $17,422,010
============== =============
</TABLE>
15. OTHER RELATED PARTY TRANSACTIONS:
--------------------------------
Wirth is a 9.8% shareholder of the Lessee. At January 31, 1998, the Trust has a
payable to the Lessee of $944,000 primarily for the reimbursement of costs and
expenses incurred on behalf of the Trust.
The Initial Hotels were acquired by the Partnership from entities in which Wirth
and his affiliates had substantial ownership interests. Wirth and his affiliates
received 4,017,361 Class B limited partnership units and 647,231 shares of
beneficial interest in the Trust in exchange for their interests in the Initial
Hotels.
The Trust recorded provisions of approximately $84,000, $56,000 and $20,000 in
fiscal years 1998, 1997 and 1996, respectively, for legal services provided by a
law firm of which the former President of the Trust and another former Trustee
are principals.
The Toledo, Ohio loan investment was secured by a commercial building owned by a
partnership of which the former Chairman of the Trust was the general partner.
In September 1996, the Toledo, Ohio loan investment was converted from a
wrap-around mortgage loan to a junior mortgage loan. Accordingly, the Trust's
loan receivable from related party and loan payable underlying mortgage to
related party were reduced by approximately $2,741,000, representing the balance
of the underlying mortgage loan at the time the status of the Toledo loan was
changed. In addition, a principal prepayment of $600,000 was received and
approximately $401,000 of escrow funds held by the Trust was applied against the
mortgage loan receivable balance. The remaining portion ($111,498) of the loan
was written off in the fourth quarter of fiscal 1997.
<PAGE> 44
-10-
In the years ended January 31, 1997 and 1996, the Trust earned approximately
$560,000 and $933,000 of interest income on this loan, respectively. The Trust
incurred interest expense of approximately $89,000 and $210,000 in connection
with the related underlying loan payable for the years ended January 31, 1997
and 1996, respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The carrying amounts and fair values of the Trust's significant financial
instruments at January 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Mortgage notes payable $17,709,589 $18,103,824 $ -- $ --
Notes payable to banks 155,000 155,000 -- --
Other notes payable 2,864,690 2,864,690 -- --
Advances payable to
related parties 1,699,601 1,699,601 2,300,000 2,300,000
</TABLE>
17. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
-------------------------------------------------
In connection with the formation of the Partnership, approximately $24,899,000
of historical net book value in hotel properties was contributed to the
Partnership in exchange for Partnership units and the Partnership assumed
approximately $16,844,000 of debt.
The Trust acquired all of the outstanding shares of BPI in exchange for 647,231
shares of beneficial interest having an aggregate value of $3,074,000.
18. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
--------------------------------------------
The pro forma financial information set forth below is presented as if the
formation transactions had been consummated as of February 1, 1996. The pro
forma financial information is not necessarily indicative of what actual results
of operations of the Trust would have been assuming the formation transactions
had been consummated as of February 1, 1996 nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
(Unaudited, in thousands)
Year Ended
January 31,
-------------------
1998 1997
------- --------
<S> <C>
PERCENTAGE LEASE REVENUE $7,902 $7,376
INTEREST INCOME 55 1,638
------- --------
TOTAL REVENUES 7,957 9,014
------- --------
PROVISION FOR WRITEDOWNS OF LOAN RECEIVABLE - 111
INTEREST ON LOANS UNDERLYING WRAP MORTGAGES - 239
</TABLE>
<PAGE> 45
-11-
<TABLE>
<CAPTION>
Year Ended
January 31,
-------------------
1998 1997
--------- --------
<S> <C> <C>
INTEREST EXPENSE ON MORTGAGE AND OTHER
NOTES PAYABLE $1,668 $1,929
ADVISORY FEE TO RELATED PARTY ADVISOR 576 576
DEPRECIATION AND AMORTIZATION 1,710 1,710
GENERAL AND ADMINISTRATIVE 578 578
REAL ESTATE AND PERSONAL PROPERTY TAXES AND CASUALTY INSURANCE
AND GROUND RENT 820 942
MINORITY INTEREST 2,314 1,625
--------- --------
TOTAL EXPENSES AND MINORITY INTEREST 7,666 7,360
--------- --------
NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $ 291 $ 1,304
========= ========
NET INCOME PER SHARE - basic and diluted $ .17 $ .78
========= ========
</TABLE>
19. SUBSEQUENT EVENTS:
------------------
In the first quarter of fiscal 1999, the Partnership completed the acquisition
of the InnSuites Hotel Tucson/St. Mary's located in Tucson, Arizona, and the
acquisition of the Lafayette Hotel Ramada Inn + Conference Center located in San
Diego, California. Total consideration for the acquisitions were $10,820,000 and
$5,148,000, respectively.
In the first quarter of fiscal 1999, the Trust established a $12,000,000
secured revolving line of credit with Pacific Century Bank. The credit facility
will require, among other things, the Trust to maintain a minimum net worth, a
specified coverage ratio of EBITDA to debt service, and a specified coverage
ratio of EBITDA to debt service and fixed charges. Further, the Trust will be
required to maintain its franchise agreement at each of the hotel properties and
to maintain its REIT status.
20. NEW ACCOUNTING PRONOUNCEMENTS:
-----------------------------
In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Development or Obtained for Internal Use,"
which is effective for the Trust as of February 1, 1999. This SOP requires
capitalization of the development costs of software to be used internally. The
Trust plans to adopt this SOP as of February 1, 1999. The effect of adopting
this SOP will not be material.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which is effective for the Trust as of February 1, 1999. This SOP
requires start-up and organization costs to be expensed as incurred and also
requires previously deferred start-up costs to be recognized as a cumulative
effect adjustment in the statement of income. The Trust will adopt this SOP when
required, but the effect of adoption will not be material.
<PAGE> 46
-12-
21. QUARTERLY RESULTS (UNAUDITED):
-----------------------------
The following is an unaudited summary of the results of operations, by quarter,
for the fiscal years ended January 31, 1998 and 1997. Management believes that
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of such interim results have been included. The results of
operations for any interim period are not necessarily indicative of those for
the entire fiscal year.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
Fiscal 1998 April 30 July 31 October 31 January 31
----------- ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues $ 558,933 $ 545,926 $ 262,507 $ 54,613
============= ============ ============== ==============
Total revenues less interest
expense on mortgage loans and
operating expenses,
and amortization expense of real
estate held for sale $ 14,423 $ 55,036 $ (127,379) $ (187,447)
============= ============ ============== ==============
Net loss $ (90,973) $ (48,889) $ (246,200) $ (187,447)
============= ============ ============= ==============
Loss per share - basic
and diluted
$(.09) $(.05) $(.24) $ (.18)
======= ======== ======= ==============
Dividends declared per share $ .05 $ .00 $ .00 $ .00
======= ======== ======= ==============
Quarter Ended
----------------------------------------------------------
Fiscal 1997 April 30 July 31 October 31 January 31
------------- ------------ -------------- --------------
Total revenues $1,082,334 $1,107,406 $1,064,527 $ 661,239
============= ============ ============== ==============
Total revenues less interest
expense on mortgage loans and
operating expenses,
depreciation and amortization
expense of real estate held
for sale $ 408,457 $ 445,805 $ 529,278 $ 163,671
============= ============ ============== ==============
Provision for writedown of loan
receivable from related party $ - $ - $ - $ (111,498)
============= ============ ============== ==============
Provision for writedown of real
estate held for sale - $ - $ - $ (1,085,000)
============= ============ ============== ==============
Net income (loss) $ 101,775 $ 98,454 $ 102,258 $ (1,190,862)
============= ============ ============== ==============
Earnings (loss) per share - basic
and diluted $.10 $.10 $.10 $(1.17)
======= ======= ======= =========
Dividends declared per share $.10 $.10 $.10 $.10
======= ======= ======= =========
</TABLE>
<PAGE> 47
SCHEDULE III
REALTY ReFUND TRUST
-------------------
REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------
AS OF JANUARY 31, 1998
----------------------
<TABLE>
<CAPTION>
Cost Capitalized
Initial Cost Subsequent to
to Trust Acquisition
---------------------------------- --------------------------------
Buildings and Building and
Encumbrances Land Improvements Land Improvements
------------ ---------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona $ 2,929,875 $ 418,219 $ 2,922,884 $ - $ -
InnSuites Hotels
Tempe/Phoenix
Airport/South
Mountain
Tempe, Arizona 2,598,308 686,806 6,548,348 - -
InnSuites Hotels Tucson,
Catalina Foothills Best
Western Tucson, Arizona - - 4,220,820 - -
InnSuites Hotels Yuma Best
Western
Yuma, Arizona 3,812,963 251,649 4,983,292 - -
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California 6,293,256 1,633,064 5,450,872 - -
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona 886,524 100,000 1,194,691 - -
InnSuites Hotels Scottsdale/
El Dorado Park Resort
Scottsdale, Arizona 3,835,290 350,000 6,074,398 - -
-------------- ------------- -------------- ----------- --------------
$20,356,216 $3,439,738 $31,395,305 $ - $ -
============== ============= ============== =========== ==============
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
Gross Amounts at
Which Carried at
Close of Period
------------------------------
Net Book Value
Buildings and Total Accumulated Land and Buildings
Land Improvements (A) Depreciation and Improvements
------------- ----------- ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona $ 418,219 $ 2,922,884 $ 3,341,103 $ - $ 3,341,103
InnSuites Hotels
Tempe/Phoenix
Airport/South
Mountain
Tempe, Arizona 686,806 6,548,348 7,235,154 - 7,235,154
InnSuites Hotels Tucson,
Catalina Foothills Best
Western Tucson, Arizona - 4,220,820 4,220,820 - 4,220,820
InnSuites Hotels Yuma Best
Western
Yuma, Arizona 251,649 4,983,292 5,234,941 - 5,234,941
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California 1,633,064 5,450,872 7,083,936 - 7,083,936
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona 100,000 1,194,691 1,294,691 - 1,294,691
InnSuites Hotels Scottsdale/
El Dorado Park Resort
Scottsdale, Arizona 350,000 6,074,398 6,424,398 - 6,424,398
------------- --------------- -------------- -------------- ---------------
$ 3,439,738 $31,395,305 $34,835,043 $ - $34,835,043
============= =============== ============== ============== ===============
</TABLE>
(A) Aggregate cost for federal income tax reporting purposes at January 31,
1998 is as follows:
Land $ 3,439,738
Building and improvements 10,026,664
-----------
$13,466,402
===========
<PAGE> 49
<TABLE>
<CAPTION>
Depreciation in
Date of Date of Income Statement is
Construction Acquisition Computed
-------------- ------------ -----------------
<S> <C> <C> <C>
InnSuites Hotels
Phoenix Best Western
Phoenix, Arizona 6/1/84 1998 40 years
InnSuites Hotels
Tempe/Phoenix
Airport/South
Mountain
Tempe, Arizona 12/1/82 1998 40 years
InnSuites Hotels Tucson,
Catalina Foothills Best
Western Tucson, Arizona 11/1/81 1998 40 years
InnSuites Hotels Yuma Best
Western
Yuma, Arizona 4/1/82 1998 40 years
Holiday Inn Airport
Ontario Hotel and Suites
Ontario, California 12/1/90 1998 40 years
InnSuites Hotels
Flagstaff/Grand Canyon
Flagstaff, Arizona 1966(1) 1998 40 years
InnSuites Hotels Scottsdale/
El Dorado Park Resort
Scottsdale, Arizona 12/1/80 1998 40 years
</TABLE>
(1) Purchased by InnSuites 1/1/96
<PAGE> 50
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
---------------------------------------------
None.
PART III
---------
Item 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST.
---------------------------------------------
Trustees of the Trust
- ---------------------
The Trust incorporates herein by reference the information
appearing under the caption "Election of Trustees" of the Trust's definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
about May 15, 1998.
Executive Officers of the Trust
- --------------------------------
The name, age (as of April 23, 1998), business experience
during the past five years, and offices presently held by each of the Trust's
executive officers are reported below. The Trust's By-Laws provide that officers
shall hold office until their successors are duly elected and qualified and that
any officer may be removed from office at any time by the Trust's Trustees.
JAMES F. WIRTH: Age 52 ; Chairman, President and Chief
Executive Officer of the Trust since January 30, 1998. Chairman and President of
InnSuites Hotels, L.L.C., and affiliated entities, owners and operators of
hotels, since 1980; Chairman and President of Rare Earth Development Company,
a real estate development and investment company, since 1973.
GREGORY D. BRUHN: Age 50; Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Trust since January 30,
11
<PAGE> 51
1998. Executive Vice President and Chief Financial Officer of First Union Real
Estate Mortgage and Equity Investments, a real estate investment trust, from
1994 through 1996; Executive Vice President, Real Estate Industries Division,
Bank of America from 1992 through 1994.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
The Trust incorporates herein by reference the information
appearing under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Trust's definitive Proxy Statement to be filed with the
Securities and Exchange Commission on or about May 15, 1998.
Item 11. EXECUTIVE COMPENSATION.
-----------------------
The Trust incorporates herein by reference the information
appearing under the caption "Compensation of Trustees and Executive Officers" of
the Trust's definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or about May 15, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------
The Trust incorporates herein by reference the information
appearing under the caption "Ownership of Common Shares" of the Trust's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or about May 15, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The Trust incorporates herein by reference the information
appearing under the caption "Certain Transactions" of the Trust's definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
about May 15, 1998.
12
<PAGE> 52
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
---------------------------------------
Exhibits
- --------
3(a) First Amended and Restated Declaration of Trust (incorporated
by reference to Exhibit 3.1 of Registration Statement No.
2-40238 effective June 17, 1971).
10(a) Advisory Agreement dated as of January 31, 1998, between RRF
Limited Partnership and Mid-America ReaFund Advisors, Inc.
("MARA").
10(b) Employment Agreement dated as of January 31, 1998, between the
Trust and James F. Wirth.
10(c) Formation Agreement among the Trust; MARA; Alan M. Krause;
James H. Berick; Hospitality Corporation International;
InnSuites Hotels, L.L.C.; James F. Wirth; Tucson Hospitality
Properties, Ltd.; Yuma Hospitality Properties, Ltd.; Baseline
Hospitality Properties, Ltd.; Northern Phoenix Investment
Limited Partnership; Ontario Hospitality Properties Limited
Partnership; Hulsey Hotels Corporation; and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1 of
the Registrant's Form 8-K dated and filed with the Securities
and Exchange Commission on February 17, 1998).
10(d) Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the Registrant's
Form 8-K dated and filed with the Securities and Exchange
Commission on March 16, 1998).
10(e) Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K dated and filed with the
Securities and Exchange Commission on May 14, 1998).
21 Subsidiaries of the Registrant.
Financial Statement Schedules
- -----------------------------
27 Financial Data Schedule.
Forms 8-K
- ---------
No Current Reports on Form 8-K were filed by the Trust during
the fiscal quarter ended January 31, 1998.
13
<PAGE> 53
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of
Securities Exchange Act of 1934, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
REALTY REFUND TRUST
Dated: May 18, 1998 By: /s/ JAMES F. WIRTH
--------------------------
James F. Wirth, Chairman, President
and Chief Executive Officer
By: /s/ GREGORY D. BRUHN
--------------------------
Gregory D. Bruhn, Executive Vice
President, Chief Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Trust and in the capacities and on the dates indicated.
Dated: May 18, 1998 /s/ JAMES F. WIRTH
--------------------------
James F. Wirth, Trustee, Chairman,
President and Chief Executive Officer
Dated: May 18, 1998 /s/ GREGORY D. BRUHN
--------------------------
Gregory D. Bruhn, Trustee, Executive Vice
President, Chief Financial Officer,
Treasurer and Secretary
Dated: May 18, 1998 /s/ MARC E. BERG
--------------------------
Marc E. Berg, Trustee
Dated: May 18, 1998 /s/ LEE J. FLORY
--------------------------
Lee J. Flory, Trustee
Dated: May 18, 1998 /s/ EDWARD G. HILL
--------------------------
Edward G. Hill, Trustee
Dated: May 18, 1998 /s/ MARK J. NASCA
--------------------------
Mark J. Nasca, Trustee
14
<PAGE> 54
Index of Exhibits
Exhibit
Number
3(a) First Amended and Restated Declaration of Trust (incorporated
by reference to Exhibit 3.1 of Registration Statement No.
2-40238 effective June 17, 1971).
10(a)* Advisory Agreement dated as of January 31, 1998, between
RRF Limited Partnership and MARA.
10(b)* Employment Agreement dated as of January 31, 1998, between the
Trust and James F. Wirth.
10(c) Formation Agreement among the Trust, MARA, Alan M. Krause,
James H. Berick, Hospitality Corporation International,
InnSuites Hotels, L.L.C., James F. Wirth, Tucson Hospitality
Properties, Ltd., Yuma Hospitality Properties, Ltd., Baseline
Hospitality Properties, Ltd., Northern Phoenix Investment
Limited Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1 of
the Registrant's Form 8-K dated and filed with the Securities
and Exchange Commission on February 17, 1998).
10(d) Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the Registrant's
Form 8-K dated and filed with the Securities and Exchange
Commission on March 16, 1998).
10(e) Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K dated and filed with the
Securities and Exchange Commission on May 14, 1998).
21 Subsidiaries of the Registrant.
27** Financial Data Schedule.
*Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
**Filed only in electronic format pursuant to Item 601(b)(27) of
Regulation S-K.
15
<PAGE> 1
Exhibit 10(a)
Advisory Agreement
Between
RRF Limited Partnership
and
Mid-America ReaFund Advisors, Inc.
This Agreement made as of this 31st day of January, 1998, between RRF
LIMITED PARTNERSHIP, a Delaware limited partnership ("RRF-LP"), and MID-AMERICA
REAFUND ADVISORS, INC., an Ohio corporation (the "Adviser");
WITNESSETH:
WHEREAS, RRF-LP was established in Delaware by a Certificate of Limited
Partnership on April 9, 1997;
WHEREAS, RRF-LP desires to avail itself of the experience, sources of
information, advice and assistance of the Adviser and to have the Adviser
undertake the duties and responsibilities hereinafter set forth, on behalf of
and subject to the supervision of the trustees of Realty ReFund Trust, the sole
general partner of RRF-LP (the "Trustees"), as provided herein; and
WHEREAS, the Adviser is willing to undertake to render such services,
subject to the supervision of the Trustees, on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, it is agreed as follows:
1. Duties of Adviser. The Adviser shall consult with the Trustees and
shall, at the request of the Trustees or the officers of RRF-LP, furnish advice
and recommendations in respect of all aspects of the business and affairs of
RRF-LP. In general, the Adviser shall inform the Trustees of any factors which
come to its attention which would influence the policies of RRF-LP. Subject to
the supervision of the Trustees and consistent with the provisions of the
Declaration of Trust, the Adviser shall use its best efforts to:
(a) present to RRF-LP a continuing and suitable investment
program and opportunities to acquire investments of which the Adviser
is aware, which are consistent with any investment program adopted by
the Trustees from time to time and which the management of the Adviser
believes would be reasonably attractive to RRF-LP, and furnish the
Trustees with advice in respect of the acquiring, holding and disposing
of investments including commitments therefor;
(b) administer the day-to-day investment operations of RRF-LP
and perform or supervise the performance of such other administrative
functions in connection with the management of RRF-LP as may be agreed
upon by the Adviser and the Trustees;
-1-
<PAGE> 2
(c) serve as RRF-LP's investment adviser in connection with
policy decisions to be made by the Trustees and, as requested, furnish
reports to the Trustees and provide research and economic and
statistical data in connection with RRF-LP's investments and investment
policies;
(d) on behalf of RRF-LP, investigate, select and conduct
relations with borrowers, lenders, consultants, accountants, mortgage
loan originators, brokers, mortgagors and other mortgage and investment
participants, correspondents and servicers, property managers,
attorneys, underwriters, appraisers, insurers, corporate fiduciaries,
escrow agents, depositories, custodians, agents for collection, banks,
savings and loan associations, investors, builders and developers,
sellers and buyers of investments and persons acting in any other
capacity deemed by the Trustees desirable, and enter into contracts
with, retain and supervise services performed by, such parties in
connection with investments which have been or may be acquired or
disposed of by RRF-LP and substitute any such party or itself for any
such other party or for itself;
(e) upon the request of the Trustees, act as attorney-in-fact
or agent of RRF-LP in acquiring and disposing of investments,
disbursing and collecting the funds, paying the debts and fulfilling
the obligations of RRF-LP, and handling, prosecuting and selling any
claims of RRF-LP, including foreclosing, participating in bankruptcy or
other reorganization proceedings, and otherwise enforcing mortgage and
other liens securing investments, and exercise its own sound discretion
in doing so, or obtain for RRF-LP the services of others to so act;
(f) assist in negotiations on behalf of RRF-LP with investment
banking firms and other institutions or investors for public or private
sales of securities of RRF-LP or for other loans or other financing on
behalf of RRF-LP, but in no event in such a way that the Adviser shall
be acting as a broker, dealer or underwriter of securities of RRF-LP;
(g) upon request of the Trustees, invest or reinvest any
money of RRF-LP;
(h) provide office space and equipment and personnel as
required for the performance of the foregoing services as Adviser:
(i) as requested by the Trustees, make reports to the
Trustees on its performance of the foregoing services; and
(j) obtain for RRF-LP such services as may be required for
property management, mortgage servicing, construction and development
loan disbursements and other activities relating to the investment
portfolio of RRF-LP.
2. No Partnership or Joint Venture. RRF-LP and the Adviser are not, and
shall not be deemed to be, partners or joint venturers with each other.
-2-
<PAGE> 3
3. Records. The Adviser shall keep proper books of account and records
relating to services performed hereunder which shall be accessible for
inspection by RRF-LP at any time during ordinary business hours.
4. REIT Qualification. Anything else in this Agreement to the contrary
notwithstanding, the Adviser shall refrain from any action which, in its
reasonable judgment, or in the judgment of the Trustees of which the Adviser has
written notice, would adversely affect the status of Realty ReFund Trust as a
real estate investment trust as defined and limited in Sections 856, 857 and 858
of the Code or which would violate any law, rule or regulation of any
governmental body or agency having jurisdiction over RRF-LP or its securities or
which would not be permitted by the Declaration of Trust.
5. Bank Accounts. The Adviser may establish one or more bank accounts
in its own name and may deposit into and disburse from such accounts, any money
on behalf of RRF-LP, under such terms and conditions as the Trustees may
approve, provided that no funds in any such account shall be commingled with
funds of the Adviser; and the Adviser shall from time to time render appropriate
accounting of such deposits and payments to the Trustees and to the auditors of
RRF-LP.
6. Bond. The Adviser shall maintain a fidelity bond with a responsible
surety company in such reasonable amount as may be required by the Trustees from
time to time covering its officers, employees and agents handling funds and
records of RRF-LP. Such bond shall inure to the benefit of RRF-LP in respect of
losses of such property from acts of such persons through theft, embezzlement,
fraud, negligence, error or otherwise.
7. Information Furnished Adviser. RRF-LP shall keep the Adviser
informed in writing concerning the investment and financing policies of RRF-LP.
RRF-LP shall notify the Adviser promptly in writing of their intention to make
any new investments or to dispose of any existing investments. RRF-LP shall
furnish the Adviser with a certified copy of all financial statements, a signed
copy of each report prepared by independent public accountants, and such other
information with regard to its affairs as the Adviser may reasonably request.
8. Definitions. As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" as used herein shall have the meaning set
forth in Section 1.1 of RRF-LP's First Amended and Restated Agreement
of Limited Partnership as in effect on the date hereof.
(b) "Average Book Value" for any period shall mean the
arithmetic average of the aggregate Book Value of the assets reflected
in the computation at the opening of the first and at the close of the
last business day of each calendar month during the period to which
such computation relates.
(c) "Average Net Worth" shall mean the arithmetic average of
the amounts in the partners' accounts on the books of RRF-LP, plus the
accumulated non-cash reserves for
-3-
<PAGE> 4
depreciation, depletion and amortization shown on the books of RRF-LP,
at the close of the last business day of each calendar month during the
period to which such computation relates.
(d) "Book Value" of an asset shall mean the value of such
asset on the books of RRF-LP, before provision for amortization,
depreciation or depletion and before deducting any indebtedness or
other liability in respect thereof, except that depreciable assets
shall be valued at the lesser of fair market value, in the judgment of
the Trustees, or cost.
(e) "Fiscal Year" shall mean any period of RRF-LP for which
any income tax return is submitted to the Internal Revenue Service and
which is treated by the Internal Revenue Service as a reporting period.
(f) "Invested Assets" shall mean the appraised value of
RRF-LP's total assets (without deduction of any liabilities) plus the
undisbursed commitments of RRF-LP in respect of closed loans and other
closed investments, but excluding good will and other intangible
assets, cash, cash items, obligations of municipal, state and federal
governments and governmental agencies other than obligations secured
by a lien on real property, or to be acquired by such governments or
governmental agencies and securities of governmental agencies issuing
securities which securities are balanced by a pool of mortgages and,
in respect of Wrap-Around Loans, the principal amount of the prior
indebtedness.
(g) "Net Income" for any period shall mean the net income of
RRF-LP for such period computed on the basis of its results of
operations for such period excluding gains and losses from the
disposition of assets of RRF-LP, and after deduction of all expenses
other than any compensation payable to the Adviser pursuant to Sections
9, 10 and 11 hereof and provision for depreciation, amortization and
depletion.
(h) "Net Profits" for any period shall mean the gross earned
income of RRF-LP for such period (exclusive of gains and losses from
the disposition of capital assets of RRF-LP), minus all expenses
(including reasonable reserves set aside by the Trustees out of
earnings) other than non-cash provision for depreciation, depletion and
amortization, incentive compensation payable to the Adviser pursuant to
Section 10 hereof, and any taxes on RRF-LP's income and, in respect of
any real estate equities owned by RRF-LP, minus all amounts expended
for mortgage amortization.
(i) "Operating Expenses" for any Fiscal Year shall mean the
aggregate annual expenses of every character regarded as operating
expenses in accordance with generally accepted accounting principles,
as determined by the independent accountants who shall have reported on
the financial statements of RRF-LP for such Fiscal Year, including
compensation payable to the Adviser but excluding the expenses set
forth in clauses (b) through (i) inclusive of Section 14 hereof and
reserves for amortization, depreciation, depletion and losses and
provisions for losses.
-4-
<PAGE> 5
All calculations made in accordance with this Section 8 shall be based
on statements (which may be unaudited, except as provided herein) prepared on an
accrual basis consistent with generally accepted accounting principles,
regardless of whether RRF-LP may also prepare statements on a different basis.
9. Regular Compensation. On or before the 15th business day of each
calendar month, the Trustees shall pay to the Adviser as compensation for the
services rendered to RRF-LP hereunder (a) a fee at the rate of 1/12 of 1% of the
Invested Assets of RRF-LP for the next preceding calendar month and (b) 15% of
the amount of any unrefunded commitment fees received by RRF-LP in respect of
mortgage loan commitments which RRF-LP was not required to fund and which
expired within the next preceding calendar month.
10. Incentive Compensation. In order to reward further the Adviser for
performance hereunder, the Trustees shall also pay to the Adviser, on or before
the 15th day after the completion of the annual audit of RRF-LP's financial
statements for each Fiscal Year, an incentive fee equal to the sum of (a) 10% of
the amount, if any, by which the Net Profits for such Fiscal Year exceed 8% of
the monthly Average Net Worth for such Fiscal Year and (b) 10% of (i) the net
realized capital gains of RRF-LP for such year less (ii) accumulated net
realized capital loss. "Net realized capital gain" from the sale or other
disposition of an asset shall be deemed to be the lesser of (i) the amount by
which the net proceeds after taxes received by RRF-LP (including the proceeds of
any financing) exceed the value of such asset on the books of RRF-LP at the time
of sale (after deducting all liabilities relating thereto) or (ii) the amount by
which such net proceeds exceed the sum of the value of the consideration
originally paid for such asset by RRF-LP plus any additional capital
expenditures by RRF-LP on such asset.
11. Compensation for Additional Services. If RRF-LP shall request the
Adviser, or any officer or employee of the Adviser, to render services for
RRF-LP other than those required to be rendered by the Adviser hereunder, such
additional services, if performed, will be compensated separately on terms to be
agreed upon between such party and RRF-LP from time to time. To the extent the
Adviser or any affiliate of the Adviser performs any loan servicing, loan
administration, property management or other similar services, the rate of
compensation for such services shall be approved by the majority of the Trustees
who are not affiliated with the Adviser and shall not exceed the rate at which
qualified unaffiliated persons are then performing such services for similar
investors in the same geographic area. Neither the Adviser nor any of its
Affiliates will receive any brokerage fees in connection with any real property
or other assets purchased by, or sold to, RRF-LP. Any other remuneration
received by any such person in connection with any such purchase or sale shall
be deducted from the compensation payable to the Adviser.
12. Statements. The Adviser shall furnish to RRF-LP not later than the
tenth day of each calendar month, beginning with the second calendar month of
the term of this Agreement, a statement showing the computation of any
compensation payable to it during such month under Section 9 hereof. The Adviser
shall furnish to RRF-LP not later than the 30th day following the end of each
Fiscal Year a statement showing the computation of the fees, if any, payable in
respect of such Fiscal Year under Sections 10 and 11 hereof. The final
settlement of compensation payable
-5-
<PAGE> 6
under Sections 10 and 11 hereof for each Fiscal Year shall be subject to
adjustment in accordance with, and upon completion of, the annual audit of
RRF-LP's financial statements.
13. Expenses of the Adviser. Without regard to the amount of
compensation received hereunder by the Adviser, the Adviser shall bear the
following expenses:
(a) salaries and other employment expenses of the personnel
employed by the Adviser to assist it in performing its obligations
hereunder and of officers and employees of RRF-LP who are affiliates of
the Adviser;
(b) travel and other expenses incurred by directors, officers
and employees of the Adviser and of Trustees, officers and employees of
RRF-LP who are affiliates of the Adviser;
(c) advertising expenses, if any, incurred by the Adviser in
seeking investments for RRF-LP;
(d) rent, telephone, utilities, office furniture and
equipment (including computers, to the extent utilized) and other
office expenses of the Adviser and RRF-LP, except as any of such
expenses relate to an office maintained by RRF-LP separate from the
office of the Adviser; and
(e) miscellaneous administrative expenses relating to
performance by the Adviser of its functions hereunder.
14. Expenses of RRF-LP. Except as expressly otherwise provided in this
Agreement RRF-LP shall pay all its expenses not assumed by the Adviser and
without limiting the generality of the foregoing it is agreed that the following
expenses of RRF-LP shall be paid by RRF-LP:
(a) salaries and other employment expenses of the personnel
employed by RRF-LP who are not affiliates of the Adviser, expenses
incurred in attending Trustees' meetings paid to all Trustees, fees and
travel and other expenses incurred by Trustees, officers and employees
of RRF-LP who are not affiliates of the Adviser and the cost of
Trustees, liability insurance;
(b) the cost of borrowed money;
(c) taxes on income, real property and all other taxes
applicable to RRF-LP;
(d) legal, auditing, underwriting, transfer agent's, warrant
agent's, registrants and indenture trustee's and other fees, and
listing, registration, printing and other expenses and taxes incurred
in connection with the issuance, distribution, transfer, registration
and stock exchange listing of RRF-LP's securities;
-6-
<PAGE> 7
(e) fees and expenses paid to independent contractors
employed by or on behalf of RRF-LP;
(f) costs of insurance;
(g) the expenses of organizing or terminating RRF-LP;
(h) all expenses connected with distributions and
communications to holders of securities of RRF-LP and the other
bookkeeping and clerical work necessary in maintaining relations with
holders of securities, including the cost of printing and mailing
checks, certificates for securities, proxy solicitation materials and
reports to such holders;
(i) expenses directly connected with the acquisition,
disposition and ownership of mortgage loans or other property,
including, to the extent not paid by borrowers from RRF-LP, the costs
of appraisal, legal services, brokerage and sales commissions, as well
as the costs of foreclosure, maintenance, repair and improvement of
property;
(j) to the extent not paid by borrowers from RRF-LP, loan
administration and mortgage servicing fees; and
(k) general legal, accounting and auditing fees and expenses.
15. Refund by Adviser. On or before the 15th day after the completion
of the annual audit of RRF-LP's financial statements for each Fiscal Year, the
Adviser will refund to RRF-LP the amount, if any, by which the Operating
Expenses of RRF-LP for such Fiscal Year exceeded the lesser of (a) 1-1/2% of the
Invested Assets of RRF-LP for such Fiscal Year or (b) 25% of the Net Income of
RRF-LP for such Fiscal Year.
16. Other Activities of The Advisor. The Adviser shall not act as the
investment adviser for any other person or entity ("person"). However, the
Adviser may act as an investment adviser and perform other services for persons
other than RRF-LP in situations in which such persons are participating in
investment with RRF-LP. No Affiliate of the Adviser shall enter into an
investment advisory contract or contract to perform other services with any
other real estate investment trust or other person the investment policy of
which is substantially similar to that of RRF-LP. Furthermore any person who (i)
is an officer, director or employee of the Adviser, (ii) holds beneficially,
directly or indirectly, 1% or more of the outstanding capital stock or other
equity interests of the Adviser, (iii) is an officer, director, employee,
partner, or trustee of a corporation, partnership or trust which either holds
beneficially, directly or indirectly, 1% or more of the outstanding capital
stock or other equity interests of the Adviser or (iv) controls, is controlled
by, or under common control with the Adviser, will offer RRF-LP a right of first
refusal to the full extent of any investment opportunity available to such
person which is consistent with the investment policies of RRF-LP.
The Trustees may request the Adviser to engage in certain other
activities which complement RRF-LP's investments and the Adviser may provide
services requested by the borrowers or
-7-
<PAGE> 8
prospective borrowers of RRF-LP. The Adviser may receive compensation or
commissions therefor from RRF-LP and other persons.
Directors, officers, employees and agents of the Adviser or of
affiliates of the Adviser may serve as partners, officers, employees or agents
of RRF-LP. When executing documents or otherwise acting in such capacities for
RRF-LP, such persons shall use their respective titles in RRF-LP.
17. Term; Termination of Agreement. This Agreement shall continue in
force for a period of 24 months from the date hereof and thereafter it may be
extended from year to year by the affirmative vote of a majority of the Trustees
who are not affiliates of the Adviser. Notice of renewal shall be given in
writing by the Trustees to the Adviser not less than three months before the
expiration of this Agreement or of any extension thereof. Notwithstanding any
other provisions to the contrary, this Agreement may be terminated for any
reason upon 60 days' written notice by RRF-LP to the Adviser or 120 days'
written notice by the Adviser to RRF-LP, in the former case (i) by the vote of a
majority of all Trustees; (ii) by the vote of a majority of the Trustees who are
not affiliates of the Adviser; or (iii) by the vote of the holders of not less
than a majority of the partnership Units of RRF-LP then outstanding and entitled
to vote, at a meeting called for such purpose.
18. Amendments. This Agreement shall not be modified or terminated
except by an instrument in writing signed by both parties hereto, or their
respective successors or assigns, or otherwise as provided herein.
19. Assignment. RRF-LP may terminate this Agreement forthwith in the
event of its assignment by the Adviser except an assignment to a successor
organization which takes over substantially all of the property and carries on
the affairs of the Adviser. This Agreement shall not be assignable by RRF-LP
without the consent of the Adviser, except in the case of assignment by RRF-LP
to a corporation, trust or other organization which is a successor to RRF-LP.
Any assignment of this Agreement by either party shall bind the assignee here-
under in the same manner as the assignor is bound hereunder.
20. Default, Bankruptcy, etc. At the option of the Trustees, this
Agreement shall be terminated immediately upon written notice of termination
from the Trustees to the Adviser if any of the following events shall occur:
(a) If the Adviser shall violate any provision of this
Agreement and, after written notice of such violation, shall not cure
such default within thirty days; or
(b) If the Adviser shall be adjudged bankrupt or insolvent by
a court of competent jurisdiction, for any order shall be made by a
court of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Adviser or of all or substantially all of
its property by reason of the foregoing, or approving any petition
filed against the Adviser for its reorganization; or
-8-
<PAGE> 9
(c) If the Adviser shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
Federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver of itself or
of all or substantially all its property, or shall make a general
assignment for the benefit of its creditors, or shall admit in writing
its inability to pay its debts generally, as they become due.
The Adviser agrees that if any of the events specified in subsections
(b) and (c) of this Section 20 shall occur, it will give written notice thereof
to the Trustees within seven days after the occurrence of such event.
21. Action Upon Termination. The Adviser shall not be entitled to
compensation after the date of termination of this Agreement for further
services hereunder but shall be paid all compensation accruing to the date of
termination. The Adviser shall forthwith upon such termination:
(a) pay over to RRF-LP all moneys collected and held for the
account of RRF-LP pursuant to this Agreement, after deducting any
accrued compensation and reimbursement for its expenses to which it is
then entitled;
(b) deliver to the Trustees a full accounting, including a
statement showing all payments collected by it and a statement of all
moneys held by it, covering the period following the date of the last
accounting furnished to the Trustees; and
(c) deliver to the Trustees all property and documents of
RRF-LP then in the custody of the Adviser.
22. Governing Law. The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of Ohio as at the time in effect.
23. Miscellaneous. The Adviser assumes no responsibility under this
Agreement other than to render the services called for hereunder in good faith,
and shall not be responsible for any action of the Trustees in following or
declining to follow any advice or recommendations of the Adviser. None of the
Adviser, its owners, directors, officers or employees shall be liable to RRF-LP,
the Trustees or the holders of securities of RRF-LP except by reason of acts
constituting bad faith, willful misfeasance, gross negligence or reckless
disregard of their duties.
24. Notice. Any communications given hereunder shall be in writing
delivered at the following addresses of the parties hereto:
RRF-LP: 1750 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44114
-9-
<PAGE> 10
The Adviser: 1750 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44114
Attention: President
In each case with a copy to: James B. Aronoff, Esq.
Thompson Hine & Flory LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114
Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 24.
IN WITNESS WHEREOF, RRF Limited Partnership and Mid-America ReaFund
Advisors, Inc., by an authorized officer, in each case thereunto duly
authorized, have signed these presents all as of the day and year first above
written.
Attest: RRF LIMITED PARTNERSHIP
By: /s/ JAMES B. ARONOFF By: REALTY REFUND TRUST, its sole
-------------------- general partner
James B. Aronoff
Assistant Secretary
By: /s/ GREGORY D. BRUHN
--------------------------
Gregory D. Bruhn
Executive Vice President
Attest: MID-AMERICA REAFUND ADVISORS, INC.
By: /s/ JAMES B. ARONOFF By: /s/ JAMES F. WIRTH
-------------------- ------------------
James B. Aronoff James F. Wirth
Assistant Secretary President
-10-
<PAGE> 1
Exhibit 10(b)
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT made and entered into as of the 31st day of
January, 1998, by and between REALTY ReFUND TRUST, an unincorporated association
in the form of a business trust organized under the laws of the State of Ohio
having its principal business address at 1750 Huntington Building, 925 Euclid
Avenue, Cleveland, Ohio 44114 (the "Trust"), and JAMES F. WIRTH, c/o InnSuites
Hotels LLC, 1615 East Northern Avenue, Suite 105, Phoenix, Arizona 85020-3998
("Employee").
RECITALS:
---------
The Trust has been engaged since 1971 in the business of
refinancing existing income-producing commercial, industrial and multi-unit
residential real property by supplementing or replacing existing financing and
is currently redirecting its business to developing and owning lodging
properties. The Trust is party to an Advisory Agreement, dated as of June 15,
1971, as the same has been extended and amended (the "Advisory Agreement"), with
Mid-America ReaFund Advisors, Inc. (the "Adviser"), assignee of ReaFund
Advisors, Inc. Under the terms of the Advisory Agreement, the Adviser has agreed
to furnish advice and recommendations in respect of all aspects of the business
and affairs of the Trust and to furnish day-to-day administration for the Trust.
The Employee is Chairman, President and Director of the
Adviser. He has, effective on the date hereof, also been elected Chairman and
President of the Trust. The Trustees determined that it was desirable to provide
for continuity and to assure the Trust that the services presently being
furnished to it by the Adviser would be furnished by the Employee without any
cost or expense to the Trust in excess of that called for under the terms of the
Advisory Agreement in the event of any termination of the Advisory Agreement.
AGREEMENTS:
-----------
NOW, THEREFORE, in consideration of the foregoing, and their
mutual covenants and agreements herein contained, the parties hereto do hereby
agree as follows:
1. Employment
----------
The Trust hereby employs Employee as the Chairman,
Chief Executive Officer and President of the Trust, and Employee hereby accepts
such employment upon the terms and conditions hereinafter set forth.
- 1 -
<PAGE> 2
2. Term
----
Subject to the provisions for earlier termination as
hereinafter provided, this Agreement shall commence upon the execution hereof
and shall continue through and including the 31st day of December, 2007.
3. Duties
------
(A) Employee shall devote such business time,
attention and energies to the business of the Trust as he shall deem necessary
to perform for the Trust all of the duties and services required of him
hereunder and shall serve both diligently and to the best of his ability.
Employee further shall perform such other duties as he shall deem to be normally
incident to the positions of Chairman, Chief Executive Officer and President of
the Trust. In addition to his duties as Chairman, Chief Executive Officer and
President, Employee shall perform or provide for the performance of all of the
duties and services set forth in Section 1 of the Advisory Agreement; provided,
however, that so long as the Advisory Agreement shall remain in full force and
effect, the Adviser shall perform the Advisory duties thereunder.
(B) If the Trustees of the Trust request the Employee
to engage in other activities which complement the Trust's investments, Employee
may receive compensation or commissions therefor from the Trust or such other
persons.
4. Compensation
------------
During the term of this Agreement, so long as the
Adviser is performing its services and duties under the terms of the Advisory
Agreement and being paid compensation in respect thereof, the Trust shall not
pay to the Employee any monetary consideration. In the event that at any time
during the term hereof the Adviser shall cease to serve the Trust as its Adviser
under the terms of the Advisory Agreement and to receive compensation therefor
(regardless of the reason for such cessation), then and thereafter during the
remaining term of this Agreement the Employee shall receive as compensation in
full for all of his services hereunder an amount equal to one hundred percent
(100%) of the Regular Compensation and the Incentive Compensation that would
have been paid to the Adviser in respect of such period pursuant to Sections 9,
10 and 11(a) of the Advisory Agreement; and bear all expenses and pay all costs
and charges of the kind or nature that would have been paid or borne by the
Adviser prior to the termination of the Advisory Agreement.
In the event of cessation of the Advisory Agreement, the
Employee's compensation shall be subject to adjustment by the Trust in
accordance with, and upon completion of, the annual audit of the Trust's
financial statements, and subject to the same limitations on the compensation of
Adviser as contained in Section 15 of the Advisory Agreement.
- 2 -
<PAGE> 3
Employee shall, in addition to the foregoing, participate in
any employee benefit programs established by the Trust, including, but not
limited to, health and accident insurance, group life insurance, stock option
plans, pension plans and profit sharing plans.
5. Termination
-----------
At the option of the Trust, this Agreement may be
terminated immediately upon written notice of termination from the Trust to
Employee if any of the following events shall occur:
(i) If Employee materially shall violate any provision of this
Agreement and, after written notice of such violation, shall
not cure such default within thirty (30) days (provided,
however, that if Employee shall not be reasonably able to cure
such default within such thirty (30) day period, if Employee
shall not have commenced promptly to cure such default and
diligently pursued the same to completion); or
(ii) If Employee shall die; or
(iii) If Employee shall become disabled for a period of twelve (12)
consecutive months. As used herein, "disabled" shall mean such
physical or mental impairment of Employee as shall result in
his being unable to perform his full duties hereunder; or
(iv) If Employee shall so consent.
6. Covenant Against Competition
----------------------------
(A) During the period commencing with the date hereof
and continuing until the latter of the expiration of the term of this Agreement
or until December 31, 2008 if this Agreement shall be terminated for the reasons
specified in Section 5(A)(i) hereof, Employee agrees that, except as an employee
of the Adviser while the Adviser is serving as adviser to the Trust pursuant to
the terms of the Advisory Agreement, Employee shall not, without the prior
approval of the Trustees, directly or indirectly:
(i) Act as the investment advisor for any other person or entity
("person") or enter into an investment advisory contract
therewith or contract to perform other services with any other
real estate investment trust or other person the investment
policy of which is substantially similar to that of the Trust
at that time. However, Employee may act as an investment
advisor and perform other services for persons other than the
Trust in situations in which such persons are participating in
investments with the Trust or which have investment policies
substantially dissimilar to that of the Trust.
- 3 -
<PAGE> 4
(ii) Either as an individual for Employee's own account or as an
investor, or other participant in, or as an employee, agent or
representative of, any other business enterprise:
(a) solicit, divert, entice, take away or interfere with,
or attempt to solicit, divert, entice or take away or
interfere with, any of the Trust's business,
patronage, borrowers or investment opportunities
except as permitted pursuant to Subparagraph (i)
hereof; or
(b) engage or participate in or finance, aid or be
connected with, any commercial enterprise which
competes with any of the business activities which
the Trust is conducting at such time.
The foregoing, however, shall not be deemed to prohibit the investment without a
role in management by Employee in the equity or debt securities of any company
otherwise within the ambit of this covenant and registered with the Securities
and Exchange Commission pursuant to Section 12 of the Securities and Exchange
Act of 1934.
(B) If it shall be judicially determined that
Employee has violated any of the covenants or agreements to be performed and/or
observed by Employee pursuant to the provisions of this Section 6, then the
period applicable to such of said covenants or agreements as shall have been so
determined to have been violated by Employee shall automatically be extended by
that period of time which shall be co-extensive with the period during which
said violations have occurred.
(C) Subject only to the rules and procedures set
forth in the Second Amended and Restated Declaration of Trust, Employee can
continue to engage in all facets of the real estate business and business
affairs generally. Furthermore, subject to the foregoing, Employee, or any
entity in which he is an officer, director, shareholder, employee, partner
(general or limited) or otherwise interested, may borrow from the Trust or
purchase properties on which the Trust is a lender.
Employee acknowledges that the covenants contained in
this Section 6 are of the essence of this Agreement; said covenants shall be
construed as independent of any other provisions of this Agreement; and the
existence of any claim or cause of action by Employee against the Trust, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Trust of these covenants.
Recognizing the irreparable nature of the injury that
could result from Employee's violation of any of the covenants and agreements to
be performed and/or observed by Employee pursuant to the provisions of this
Section 6, and that damages would be inadequate compensation, it is agreed that
any violation by Employee of the provisions of this Section 6 shall be the
proper subject for immediate injunctive and other equitable relief to the
- 4 -
<PAGE> 5
Trust. Employee further agrees to communicate the contents of this Section 6 to
any prospective employer or associate of Employee which has an investment policy
which is substantially similar to that of the Trust.
7. Governing Law
-------------
The laws of the State of Arizona shall govern the
validity, performance and enforcement of this Agreement. If any of the terms or
provisions of this Agreement or the application thereof to any person or
circumstance shall, to any extent, be invalid or unenforceable, the reminder of
this Agreement or the application of such term or provision to persons or
circumstances other than those to which it is held invalid or unenforceable
shall not be affected thereby, and each term and provision of this Agreement
shall be valid and be enforced to the fullest extent permitted by law. If the
invalidity or unenforceablitiy of any covenant or restriction herein is due to
the unreasonableness of the time or the fact that no geographical area is
specified for the coverage of any said covenant or restriction, the said
covenant or restriction shall nevertheless be effective for such period of time
and for such geographical area as may be determined by a court of competent
jurisdiction.
8. Assignment
----------
This Agreement shall not be assignable by the Trust
without the written consent of Employee.
9. The Entire Agreement
--------------------
The foregoing is the entire agreement of the parties
hereto in respect of the subject matter hereof, and no waiver, amendment or
modification hereof shall be valid unless in writing and signed by both parties.
10. Counterparts
------------
This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
11. Notices
-------
All notices hereunder shall be in writing and
delivered or mailed by registered or certified mail, return receipt requested,
to the parties at the addresses listed below or to such other address as the
Trust or Employee may hereafter designate in writing to the other. A copy of any
such notice shall also be telecopied at the time of its mailing to the number
listed below for the relevant party.
- 5 -
<PAGE> 6
12. The Trust
---------
The name Realty ReFund Trust is the designation of
the Trustees under a Declaration of Trust dated April 28, 1971, as amended, and
all persons dealing with Realty ReFund Trust must look solely to the Trust
property for the enforcement of any claims against Realty ReFund Trust as
neither the Trustees, officers, agents nor security holders assume any personal
liabilities for covenants or obligations entered into on behalf of Realty ReFund
Trust and their respective properties shall not be subject to any claims of any
other person in respect of such liability.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written, the Trust pursuant to the
authorization of its Trustees.
REALTY ReFUND TRUST
By: /s/ Gregory D. Bruhn
-----------------------
Gregory D. Bruhn
Executive Vice President
1750 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44114
Phone: (216) 622-0046
Fax: (216) 622-0436
THE TRUST
/s/ James F. Wirth
---------------------------
James F. Wirth
1615 E. Northern Avenue
Suite 105
Phoenix, Arizona 85020
Phone: (602) 944-1500
Fax: (602) 678-0281
EMPLOYEE
- 6 -
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
------------------------------
RRF Limited Partnership, a Delaware limited partnership.
Yuma Hospitality Properties, Ltd., an Arizona limited partnership.
Northern Phoenix Investment Limited Partnership, an Arizona limited
partnership.
Tucson Hospitality Properties, Ltd., an Arizona limited partnership.
Baseline Hospitality Properties, Ltd., an Arizona limited partnership.
Ontario Hospitality Properties Limited Partnership, an Arizona limited
partnership.
Tucson St. Mary's Suite Hospitality LLC, an Arizona limited liability
company.
RRF Sub Corp., an Arizona corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF THE REGISTRANT AS OF JANUARY 31, 1998 AND 1997 AND THE STATEMENTS OF
OPERATIONS OF THE REGISTRANT FOR THE THREE YEARS ENDED JANUARY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,378,398
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 41,241,241
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,619,637
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 38,020,668
0
0
<COMMON> 0
<OTHER-SE> 5,598,971
<TOTAL-LIABILITY-AND-EQUITY> 43,619,639
<SALES> 0
<TOTAL-REVENUES> 1,421,979
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,995,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (573,509)
<INCOME-TAX> 0
<INCOME-CONTINUING> (573,509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (573,509)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
<FN>
<F1>THE REGISTRANT UTILIZES AN UNCLASSIFIED BALANCE SHEET THEREFORE THE CAPTIONS
"TOTAL CURRENT ASSETS" AND "TOTAL CURRENT LIABILITIES" ARE NOT APPLICABLE.
</FN>
</TABLE>
