Current Form 10-K 1/31/2007
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended January 31, 2007.
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from                           to                          .
   
Commission File No. 1-7062

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

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

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

 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý

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 ý No o

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. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨  Accelerated Filer ¨ Non-Accelerated Filer ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Aggregate market value of Shares of Beneficial Interest held by non-affiliates of the registrant as of July 31, 2006: $4,962,273.

Number of Shares of Beneficial Interest outstanding as of April 27, 2007: 9,183,904.





PART I

Item 1. BUSINESS

INTRODUCTION TO OUR BUSINESS

InnSuites Hospitality Trust (the “Trust”) is headquartered in Phoenix, Arizona and is an unincorporated Ohio real estate investment trust. The Trust, with its affiliates RRF Limited Partnership, a Delaware limited partnership (the “Partnership”), and InnSuites Hotels, Inc., a Nevada corporation (“InnSuites Hotels”), owns and operates five hotels, provides management services for nine hotels, and provides trademark license services for ten hotels. On January 31, 2007, the Trust owned a 69.89% sole general partner interest in the Partnership, which owned four InnSuites® hotels located in Arizona, New Mexico and southern California. The Trust also owned one InnSuites® hotel located in Yuma, Arizona (all five InnSuites® hotels are hereinafter referred to as the (“Hotels”). InnSuites Hotels, a wholly owned subsidiary of the Trust, provides management services for the Hotels and four hotels owned by affiliates of James F. Wirth, the Trust’s Chairman, President and Chief Executive Officer. InnSuites Hotels also provides trademark and licensing services to the Hotels, four hotels owned by affiliates of Mr. Wirth and one unrelated hotel property. The Trust has 422 employees.

The Hotels have an aggregate of 843 hotel suites and operate as moderate and full-service hotels, which apply a value studio and two-room suite operating philosophy formulated in 1980 by Mr. Wirth. The Trust owns and operates hotels as studio and two-room suite hotels that offer services such as free hot breakfast buffets and complimentary afternoon social hours plus amenities, such as microwave ovens, refrigerators, free high-speed hard wired and wireless internet access and coffee makers in each studio or two-room suite.

The Trust believes that a significant opportunity for revenue growth and profitability will arise from the skillful management and repositioning of the Trust’s Hotels or managed hotel properties for both increased occupancy and rates. The Trust’s primary business objectives are to maximize returns to its shareholders through increases in asset value and long-term total returns to shareholders. The Trust seeks to achieve these objectives through participation in increased revenues from the Hotels as a result of intensive management and marketing of the InnSuites® hotels brand in the southwestern region of the United States. At this time, however, the Trust does not plan to acquire any additional hotels. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Future Positioning” for a further discussion of the Trust’s current strategic plans.

The Trust has a single class of Shares of Beneficial Interest, without par value, that are traded on the American Stock Exchange under the symbol “IHT.” The Partnership has two outstanding classes of limited partnership interests, Class A and Class B, which are identical in all respects. Each Class A limited partnership unit is convertible, at the option of the Class A holder, into one newly-issued Share of Beneficial Interest of the Trust and each Class B limited partnership unit is convertible, upon approval of the Board of Trustees of the Trust, into one newly-issued Share of Beneficial Interest of the Trust. The Partnership Agreement of the Partnership subjects both general and limited partner units to certain restrictions on transfer.

Until February 1, 2004, the Trust elected to be taxed as a real estate investment trust (“REIT”), as that term is defined and used in the Internal Revenue Code of 1986, and the regulations thereunder (all as amended, the “Code”). Effective February 1, 2004, the Trust relinquished its REIT tax status enabling greater operating flexibility and is now taxed as a C corporation under the Code.

MANAGEMENT AND LICENSING CONTRACTS

As a REIT, through January 31, 2004, the Trust was prohibited from operating its properties other than through an independent management company or a taxable REIT subsidiary. Following the acquisition of InnSuites Hotels by the Trust effective February 1, 2001, InnSuites Hotels operated and managed the Hotels with the assistance of Suite Hospitality Management, Inc. (the “Management Company”), an entity in which Mr. Wirth, until July 1, 2003, held a 9.8% ownership interest, pursuant to management agreements that provided for an annual management fee of 2.5% of gross revenues. On December 31, 2003, the Trust agreed to extend the current management agreements through January 31, 2008 in exchange for the Management Company forgiving $183,248 of accrued but unpaid fees. The Trust incurred management fee expenses related to these contracts during fiscal year 2005 of $177,742 for the period from February 1, 2004 through June 8, 2004 (the date the Trust acquired the management agreements). The Trust incurred no expense related to these contracts for the twelve months ended January 31, 2007 and 2006. Due to the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), which resulted in the consolidation of the Management Company with the Trust, these expenses have been eliminated in the consolidation for the twelve months ended January 31, 2005.
 
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Prior to June 8, 2004, InnSuites Hotels paid InnSuites Licensing Corp. (the “Licensing Corp.”), an entity owned by Mr. Wirth and his spouse until February 2, 2004, an annual licensing fee of 2.0% of gross room revenues (1.0% for those hotel properties which also carried a third-party franchise, such as Best Western® or Holiday Inn®) for trademark and licensing services relating to the use of the InnSuites® name and marks. On December 31, 2003, the Trust agreed to extend the trademark and licensing services agreements through January 31, 2007 in exchange for the Licensing Corp. forgiving $347,473 of accrued but unpaid fees. The Management Company purchased the Licensing Corp. from Mr. and Mrs. Wirth on February 2, 2004. The Trust incurred licensing fees during fiscal year 2005 of $94,703 for the period from February 1, 2004 through June 8, 2004 (the date the Trust acquired the license agreements). The Trust incurred no expense related to these contracts for the twelve months ended January 31, 2007 and 2006. Due to the adoption of FIN 46R, which resulted in the consolidation of the Licensing Corp. with the Trust, these expenses have been eliminated in the consolidation for the twelve months ended January 31, 2005.

In connection with the Trust’s relinquishment of its REIT status, the Trust no longer required the services of a separate management company. The Trust determined it was in its best interest to buy out the management contracts and licensing agreements and directly manage the Hotels through the Trust’s wholly owned subsidiary, InnSuites Hotels. As a result of this buy out, the Management Company (which was the Trust’s variable interest entity under FIN 46R) was no longer consolidated subsequent to the second quarter of fiscal year 2005.
 
Effective June 8, 2004, InnSuites Hotels acquired the management agreements under which the Management Company provided management services to the Hotels. In consideration of the acquisition, the stockholder of the Management Company received $20,000 and 90,000 Shares of Beneficial Interest of the Trust, reflecting a transaction value of approximately $159,500 in the aggregate. Following the acquisition, InnSuites Hotels now self-manages the Hotels. InnSuites Hotels also manages four hotels owned by affiliates of Mr. Wirth.
 
Under the management agreements, InnSuites Hotels provides the personnel for the hotels, the expenses of which are reimbursed at cost, and manages the hotels’ daily operations. All such expenses and reimbursements between InnSuites Hotels and the Partnership have been eliminated in consolidation. InnSuites Hotels received 2.5% of gross revenue from the Hotels owned by the Partnership and the Trust in exchange for management services during fiscal years 2007 and 2006, and 2.0% of room revenue during fiscal year 2005. During fiscal year 2007 and the second half of fiscal year 2006, InnSuites Hotels also received an accounting fee between $1,000 and $2,000 per month under these agreements. All expenses and reimbursements relating to these agreements have been eliminated in consolidation. These agreements expire on January 31, 2008. InnSuites Hotels received between 1% and 2% of room revenue (depending on results) from the four hotels owned by affiliates of Mr. Wirth in exchange for management services during fiscal years 2006 and 2005, and an additional monthly accounting fee of between $1,000 and $2,000 during fiscal year 2006. These agreements required these four hotels to pay 2% of room revenue, unless these hotels failed to reach 80% of their budgeted profit, at which point the fees were reduced to 1% of room revenue. During fiscal year 2007, the management fees for these four hotels was set at 2% of room revenue and the monthly accounting fee was set at $2,000 per month. Effective February 1, 2007, the management fees for these four hotels is set at 2.5% of room revenue. These agreements have no expiration date and may be cancelled by either party with 90-days written notice, or 30-days written notice in the event the property changes ownership. InnSuites Hotels received 5% of total revenue for managing an unrelated hotel in San Diego, California during fiscal year 2007, 2006 and 2005. This agreement was cancelled by the hotel owners effective September 20, 2006.

Effective June 8, 2004, InnSuites Hotels acquired the license agreements under which Licensing Corp. provided licensing services to the Hotels, and the related registered and unregistered InnSuites trademarks and tradenames. In consideration of the acquisitions, the Management Company (as the sole stockholder of Licensing Corp.) received $60,000 and 10,000 Shares of Beneficial Interest of the Trust and InnSuites Hotels satisfied Licensing Corp.’s line of credit in the amount of $459,000, reflecting a transaction value of approximately $534,500 in the aggregate. The Shares of Beneficial Interest issued by the Trust for both the management contracts and the licensing agreements were valued at $155,000, which amount was recorded as an expense. Following the acquisition, the Trust provides licensing services to the Hotels, one unrelated hotel in Buena Park, California and four hotels owned by affiliates of Mr. Wirth.

 

2

InnSuites Hotels received 1.25% (2.50% for the Hotel which does not carry a third-party franchise) of total revenue from the Hotels owned by the Partnership and the Trust in exchange for use of the “InnSuites” trademark during fiscal years 2007 and 2006 and 1.0% (2.0% for the hotel which does not carry a third-party franchise) of room revenue in fiscal year 2005. The revenue and expenses related to these contracts have been eliminated in consolidation. These agreements have no expiration date. InnSuites Hotels received between 1% and 2% of room revenue (depending on results) from the four hotels owned by affiliates of Mr. Wirth in exchange for use of the “InnSuites” trademark during fiscal years 2006 and 2005. These agreements required that these hotels pay 2% of room revenue, unless these hotels failed to reach 80% of their budgeted profit, at which point the fees were reduced to 1% of room revenue. During fiscal year 2007, these fees were fixed at 1.25% of room revenue. Effective February 1, 2007, the fees are fixed at 1.25% for two hotels owned by affiliates of Mr. Wirth which carry a third party franchise and 2.0% for the two hotels which do not carry a third-party franchise. These agreements have no expiration date and may be cancelled by either party with 12-months written notice, or 90-days written notice in the event the property changes ownership. InnSuites Hotels received 2% of total revenue from the unrelated hotel in San Diego, California in exchange for licensing services during fiscal years 2007, 2006 and 2005. This agreement was cancelled by the hotel owners effective September 20, 2006. InnSuites Hotels received 0.5% of room revenue from the unrelated hotel in Buena Park, California in exchange for licensing services during fiscal years 2007, 2006 and 2005. This agreement has no expiration date and may be cancelled by either party with 30-days written notice.
 
FRANCHISE AGREEMENTS

InnSuites Hotels has entered into franchise arrangements with Best Western International with respect to four of the Hotels. In exchange for use of the Best Western name, trademark and reservation system, the participating Hotels pay fees to Best Western International based on reservations received through the use of the Best Western reservation system and the number of available suites at the participating Hotels. The agreements with Best Western have no specific expiration terms and are cancelable at the option of either party. Best Western requires that the participating Hotels meet certain requirements for room quality, and such Hotels are subject to removal from its reservation system if these requirements are not met. The Hotels with third-party franchise agreements received significant reservations through the Best Western reservation system. Until February 2005, InnSuites Hotels also had a franchise agreement with Holiday Inn relating to its Ontario, California hotel. InnSuites Hotels terminated this agreement and the property now holds a franchise agreement with Best Western. The Trust incurred $310,687, $355,266 and $553,883 in total fees related to these agreements for the twelve months ended January 31, 2007, 2006 and 2005, respectively.

SALE OF HOTEL PROPERTIES

On March 25, 2004, the Trust sold its Tempe, Arizona hotel to Tempe/Phoenix Airport Resort LLC (“Tempe Resort”), an affiliate of Mr. Wirth, for its appraised value of $6.8 million, which was also its carrying value. The purchase price was satisfied by Tempe Resort assuming the Trust’s mortgage note payable on the property of $1.7 million and assuming notes payable to Mr. Wirth and his affiliates of $5.1 million.
 
On April 1, 2004, the Trust sold its San Diego, California hotel to an unrelated third party for $9.7 million, which the Trust received in cash. The Trust used $4.8 million of the proceeds to satisfy its mortgage note payable on the property, $1.4 million to satisfy notes and interest payable to related parties, and retained the remaining proceeds to reduce trade payables and to fund future operations and capital improvements.
 
On July 27, 2005, the Trust sold its Phoenix, Arizona hotel to Phoenix Northern Resort LLC, an affiliate of Mr. Wirth, for its appraised value of $5.1 million. The buyer satisfied the purchase price by assuming the Trust’s $3.2 million mortgage note payable secured by the property, paying $1.7 million in cash prior to the closing, and paying $192,000 in cash at the closing. The sale resulted in a gain of $1.8 million, with $1.3 million of the gain attributable to holders of Shares of Beneficial Interest.
 
COMPETITION IN THE HOTEL INDUSTRY

The hotel industry is highly competitive. Each of the Hotels experiences competition primarily from other mid-market hotels located in its immediate vicinity, but also competes with hotel properties located in other geographic markets. While none of the Hotels’ competitors dominate any of the Trust’s geographic markets, some of those competitors have greater marketing and financial resources than the Trust.

Certain additional hotel property developments have been announced or have recently been completed by competitors in a number of the Hotels’ 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 revenue of the Hotels in their respective markets.

3

 
The Trust has chosen to focus its hotel investments in the southwest region of the United States. The Trust has a concentration of assets in southern Arizona market. In the markets in which the Trust operates, supply and demand rates have generally been balanced.

The Trust may also compete for investment opportunities with other entities that have greater financial resources. These entities also may generally accept more risk than the Trust can prudently manage. Competition may generally reduce the number of suitable future investment opportunities available to the Trust and increase the bargaining power of owners seeking to sell their properties.

SEASONALITY OF THE HOTEL BUSINESS

The Hotels’ operations historically have been seasonal. The three southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those three southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust’s quarterly revenues. The two hotels located in California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business.

FINANCIAL INFORMATION

See “Item 6 - Selected Financial Data” herein for information regarding the Trust’s revenues, net income and losses, dividends, total assets, notes and advances payable to banks and others and notes and advances payable to related parties.

OTHER AVAILABLE INFORMATION

We also make available, free of charge, on our Internet website at www.innsuitestrust.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (the “Commission”). The public may read and copy any materials that we file with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 and may obtain information on the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission (http://www.sec.gov).
 
Item 1A. RISK FACTORS
 
The material risks and uncertainties that management believes affect us are described below. You should consider carefully the risks and uncertainties described below together with all of the other information included or incorporated by reference in this annual report on Form 10-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This annual report on Form 10-K is qualified in its entirety by these risk factors.
 
If any of the following risks actually occur to any significant extent, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our Shares of Beneficial Interest could decline, perhaps significantly, and you could lose part or all of your investment.
 
We are subject to operating risks common in the hospitality industry.
 
Our business is subject, directly or through our franchisors, to the following risks common in the hospitality industry, among others:
 
 
·
changes in occupancy and room rates achieved by our hotels and by competitive area hotels;
 
·
desirability of a hotel’s geographic location and changes in traffic patterns;

4


 
·
changes in general and local economic and market conditions, which can adversely affect the level of business and leisure travel, and therefore the demand for lodging and related services;
 
·
changes in the number of hotels operating under specific franchised brands;
 
·
increases in costs due to inflation may not be able to be totally offset by increases in room rates;
 
·
over-building in one or more sectors of the hotel industry and/or in one or more geographic regions, could lead to excess supply compared to demand, and to decreases in hotel occupancy and/or room rates;
 
·
changes in travel patterns and travel costs affected by fuel prices;
 
·
changes in governmental regulations that influence or determine wages, prices or construction costs;
 
·
other unpredictable external factors, such as natural disasters, war, terrorist attacks, epidemics, airline strikes, transportation and fuel price increases and severe weather, may reduce business and leisure travel;
 
·
the need to periodically repair and renovate our hotels at a cost in excess of our standard 4% reserve;
 
·
increases in the cost of labor, energy, healthcare, insurance and other operating expenses resulting in lower operating margins;
 
·
the financial condition of franchisors and travel related companies;
 
·
our ability to develop and maintain positive relations with current and potential franchisors; and
 
·
our ability to develop our own regional “InnSuites” brand.

Changes in any of these conditions could adversely impact hotel room demand and pricing and result in reduced occupancy and revenue which could adversely affect our results of operations and financial condition. We have a limited ability to pass through increased operating costs in the form of higher room rates, so that such increased costs could result in lower operating margins.
 
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 its geographic market. Some of the competitors of the Hotels have substantially greater marketing and financial resources than us. A number of additional hotel rooms have been added, are under development or have been announced in a number of our markets, and additional hotel rooms may be developed in the future. Such additional hotel rooms have had, and may continue to have, an adverse effect on the revenues of the Hotels in such markets.
 
We may be competing for investment opportunities with entities that have substantially greater financial resources than us. These entities may generally be able to accept more risk than we prudently can manage. Competition may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell hotel properties.
 
We have concentrated our marketing resources on the InnSuites Hotels® brand.

All of the Hotels are marketed as InnSuites Hotels®, a southwestern U.S. regional brand owned by the Trust. Accordingly, we are subject to risks inherent in concentrating our investments in the InnSuites Hotels brand, such as a reduction in business following adverse publicity related to the brand, which could have an adverse effect on our results of operations. In addition, many of our Hotels are co-branded as Best Western® hotels. This brand is owned by its members and faces the same risks on an international scale.
 
We have engaged in, and may continue to engage in, transactions involving Mr. Wirth. These transactions pose conflict of interest issues for us.

A number of our prior transactions have involved dealings with Mr. Wirth, our founder, largest shareholder and Chief Executive Officer. We may also engage in similar transactions with Mr. Wirth in the future. Because of the direct and indirect ownership interests of Mr. Wirth in, and his positions with, the Trust and its affiliates, there were, and will continue to be, inherent conflicts of interest in connection with our acquisition or disposition of hotels from or to Mr. Wirth or other transactions, such as loans from Rare Earth Financial L.L.C., an affiliate of Mr. Wirth, or the condo-hotel conversions, in which Mr. Wirth has a significant interest. Accordingly, our management may have considered, and may in the future consider, their own interests above the interests of our other shareholders while negotiating these transactions.
 
Except as specifically provided in our governing documents or in certain provisions of Ohio law, nothing prohibits our officers and trustees from engaging in business activities for their own account. As a general principle of law, however, officers and trustees owe fiduciary duties to the shareholders of each company they represent. Those duties require them to deal with each company fairly. Additionally, all decisions involving the potential for conflict must be approved by a majority of trustees who do not have an interest in the transaction. We cannot guarantee, however, that the independent trustees will resolve all decisions involving conflict in favor of the Trust.
 

5

 
Certain affiliates of the Trust, including Mr. Wirth, may have unrealized gain in their investments in certain hotels acquired by us on January 31, 1998. A subsequent sale of these hotels by us may cause adverse tax consequences to such persons. Therefore, the interests of the Trust and certain of its affiliates, including Mr. Wirth, could be in opposition in connection with the disposition of any of these hotels. However, decisions with respect to the disposition of any of these hotels must be approved by a majority of the independent trustees.
 
We have significant debt obligations.

At January 31, 2007, our outstanding debt and capital lease obligations consisted of approximately $20.9 million in principal amount outstanding. There can be no assurance that we will be able to meet our present or future debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure. Adverse economic conditions could cause the terms on which borrowings are available to become unfavorable to us. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to liquidate one or more investments in the Hotels at times that may not permit realization of the maximum return on our investments.
 
We rely on key personnel.
 
Our future success is substantially dependent on the active participation of our executive officers, Mr. Wirth, Mr. Waters and Mr. Berg. In addition, Mr. Bauer, Controller, and Mr. Green, Director of Operations, hold key positions with the Trust. The loss of the services of any of these individuals could have a material adverse effect on us.
 
Under certain circumstances, our franchisors may terminate our franchise contracts.

The continuation of our franchise contracts for the Hotels is subject to the maintenance of specified operating standards and other terms and conditions, and our Best Western franchise agreements are renewable annually. Our failure to maintain those operating standards or adhere to the other terms and conditions of the franchise contracts could result in the loss or cancellation of such franchise contracts. It is possible that a franchisor could condition the continuation of a franchise contract upon the completion of substantial capital improvements, which the Board of Trustees may determine to be too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected Hotel. Failure to complete improvements, when required, in a manner satisfactory to the franchisor could result in the cancellation of one or more franchise contracts. In any case, if a franchise contract is terminated, we may seek to obtain a suitable replacement franchise, or to operate the affected Hotel independent of a franchise contract. In addition, we may desire to operate additional hotels under franchise contracts, and such franchisors may require that significant capital expenditures be made at such hotels as a condition of granting a franchise contract. The loss or lack of a franchise contract could have a material adverse effect upon the operations or the underlying value of the Hotel covered by such contract because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The loss of a number of the franchise contracts for the Hotels could have a material adverse effect on our results of operations.
 
Due to the geographic concentration of the hotels in our system, our results of operations and financial condition are subject to fluctuations in regional economic conditions.
 
All of our Hotels are located in the southwestern United States. Therefore, our results of operations and financial condition may be significantly affected by the economy of this region. Other adverse events affecting the southwestern United States, such as economic recessions or natural disasters, could cause a loss of revenues for our hotels in this region, which may be greater as a result of our concentration of assets in these areas.
 

6

Our expenses may remain constant even if revenues decline.
 
The expenses of owning property have some flexibility but are not necessarily materially reduced when circumstances such as market factors and competition cause a reduction in income from a hotel. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately or as rapidly. In such instances, our financial condition and results of operations could be adversely affected, not only by changes in occupancy rates, but also by:
 
 
·
fixed labor costs;
 
·
interest rate levels;
 
·
the availability of financing;
 
·
increases in real property tax rates;
 
·
the cost of compliance with government regulations, including zoning and tax laws; and
 
·
changes in government regulations, including those governing usage, zoning and taxes.

Our inability to sell real estate if and when desired may adversely affect our financial condition. 

Real estate assets generally cannot be sold quickly. In general, we may not be able to vary our portfolio of hotels or other real estate promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our assets could adversely affect our financial condition. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our Hotels.
 
We are exploring strategic alternatives for the Trust, including the possible sale of some or all of the Hotels; however we cannot provide assurance that any transactions will be successfully completed, that our financial results will not be adversely effected by the potential loss of management and/or trademark licensing revenue or that the pursuit of these strategic alternatives will have a positive effect on our share price.
 
The Board of Trustees is evaluating potential strategic alternatives, including the sale of some or all of the Hotels. This process may or may not result in an agreement to sell some or all of the Hotels. In addition, the Trust’s ability to complete a sale of any of the Hotels, if the Board of Trustees decides to pursue such a strategy, will depend on numerous factors, some of which are outside the Trust’s control. If any or all of the Hotels were sold, our future management and/or licensing fees could be reduced if the purchaser did not continue to retain us to provide those services. Such a reduction could have an adverse effect on our financial results.
 
There are various uncertainties and risks relating to the exploration of strategic alternatives, including:
 
 
·
diversion of management resources;
 
 
·
the process may be time consuming and expensive and may result in the loss of business opportunities;
 
 
·
the Trust may not be able to successfully achieve the benefits of any strategic alternatives; and
 
 
·
perceived uncertainties as to the Trust’s future direction may result in increased difficulties in recruiting and retaining employees, particularly senior management.
 
Even if a transaction is completed, there can be no assurance that it will have a positive effect on the price of the Trust’s Shares of Beneficial Interest. The market price of the Trust’s Shares of Beneficial Interest could be highly volatile during the period while the Board of Trustees explores strategic alternatives and may continue to be more volatile if the Trust announces the sale of one of its Hotels.
 
We may not have sufficient resources to pursue our current strategies.

We may pursue a growth strategy, which includes acquiring, repositioning and improving hotel properties, and may also pursue a strategy of converting some of our Hotels into condo-hotel units. We also plan to pursue a strategy of increased licensing of the InnSuites Hotels® brand. There is a risk that, due to market and other conditions beyond our control, we will not have access to sufficient equity or debt capital to pursue these strategies. Since the term and amount of our credit arrangements are limited, our ability to continue to pursue these strategies may depend on our ability to obtain additional private or public equity or debt financing. There can be no assurance that such financing is or will be available on acceptable terms when necessary.
 

7


We are subject to governmental regulations affecting the hospitality industry; the costs of complying with governmental regulations, or our failure to comply with such regulations, could affect our financial condition and results of operations.
 
We are subject to numerous federal, state and local government laws and regulations affecting the hospitality industry, including usage, building and zoning requirements. A violation of any of those laws and regulations or increased government regulation could require us to make unplanned expenditures and result in higher operating costs. In addition, our success in expanding our hotel operations or engaging in condo-hotel conversions depends upon our ability to obtain necessary building permits and zoning variances from local authorities. Compliance with these laws is time intensive and costly and may reduce our revenues and operating income.
 
Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. In addition to ADA work to date, we may be required to remove access barriers or make unplanned, substantial modifications to our hotels to comply with the ADA or to comply with other changes in governmental rules and regulations, which could reduce the number of total available rooms, increase operating costs and have a negative impact on our results of operations. Any failure to comply with ADA requirements or other governmental regulations could result in the U.S. government imposing fines or in private litigants winning damage awards against us.
 
Our Hotels, like all real property, are subject to governmental regulations designed to protect the environment.  However, if we fail to comply with such laws and regulations, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations.
 
We are also subject to laws governing our relationship with employees, including minimum or living wage requirements, overtime, working conditions and work permit requirements. An increase in the state or federal minimum wage rate, employee benefit costs or other costs associated with employees could increase expenses and result in lower operating margins. Although none of our employees are currently represented by labor unions, labor union organizing activities may take place at our existing hotels or at any new hotel property we open. A lengthy strike or other work stoppage at one of our hotels, or the threat of such activity, could have an adverse effect on our business and results of operations.
 
If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business.  
 
We collect and maintain information relating to our guests for various business purposes, including maintaining guest preferences to enhance our customer service and for marketing and promotion purposes. The collection and use of personal data are governed by privacy laws and regulations. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services to our guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) could result in fines or restrictions on our use or transfer of data.
 
Increasing use of internet reservation channels may decrease loyalty to our brands or otherwise adversely affect us.
 
As is the case with many other hotel operators, a growing percentage of our hotel rooms are booked through internet travel intermediaries. If such bookings continue to increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our franchisors or us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality at the expense of brand identification. These intermediaries hope that consumers will eventually develop brand loyalties to their reservations systems rather than to our lodging brands. If this happens our business and profitability may be significantly harmed.
 
Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.
 
Our business is seasonal in nature, with the first and fourth fiscal quarters generally accounting for a greater portion of annual revenues than the second and third fiscal quarters. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the first or fourth fiscal quarters, the adverse impact to our revenues could likely be greater as a result of our southern Arizona seasonal business.
 

8


Our properties are subject to risks relating to natural disasters, terrorist activity and war and any such event could materially adversely affect our operating results.  
 
Our financial and operating performance may be adversely affected by natural disasters particularly in locations where we own significant properties. Some types of losses, such as those from earthquake, wild fires, terrorism or environmental hazards, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to rely on insurance proceeds to replace property after that property has been damaged or destroyed. Under those circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to such property.
 
Similarly, war (including the potential for war) and terrorist activity (including threats of terrorist activity), epidemics (such as SARs and bird flu), travel-related accidents, as well as geopolitical uncertainty and international conflict, which impact domestic and international travel, may cause our results to differ materially from anticipated results. Terrorism incidents such as the events of September 11, 2001 and wars such as the ongoing Iraq war significantly impact travel and tourism and consequently the demand for hotel rooms.
 
Hospitality companies have been the target of class actions and other lawsuits alleging violations of federal and state law.
 
Our operating income and profits may be reduced by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. We cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business.
 
Item 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2. PROPERTIES

The Trust maintains its administrative offices at the InnSuites Hotels Centre in Phoenix, Arizona. On January 31, 2007, the Partnership owned four Hotels and the Trust owned one Hotel. All of the Hotels are operated as InnSuites® Hotels, while four are also marketed as Best Western® Hotels. All of the Hotels operate in the following locations:

PROPERTY
 
NUMBER
OF
SUITES
 
YEAR OF
CONSTRUCTION/
ADDITION
 
MOST RECENT
RENOVATION (1)
 
     
 
 
 
 
 
InnSuites Hotel and Suites Airport Albuquerque Best Western
 
101
 
1975/1985
 
2004
 
     
 
 
 
 
 
InnSuites Hotel and Suites Tucson, Catalina Foothills Best Western
 
159
 
1981/1983
 
2005
 
     
 
 
 
 
 
InnSuites Hotels and Suites Yuma Best Western
 
166
 
1982/1984
 
2006
 
     
 
 
 
 
 
InnSuites Hotel and Suites Ontario Airport Best Western
 
150
 
1990
 
2005
 
     
 
 
 
 
 
InnSuites Hotels and Suites Tucson St. Mary’s
 
267
 
1960/1971
 
2006
 
     
 
 
 
 
 
Total suites
 
843
 
 
 
 
 

(1) The Trust defines a renovation as the remodeling of more than 10% of a property’s available suites.

9



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

See Note 7 to the Trust’s Consolidated Financial Statements - “Mortgage Notes Payable” herein for a discussion of mortgages encumbering the Hotels.

Item 3. LEGAL PROCEEDINGS

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

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

Item 5.
MARKET FOR THE TRUST’S SHARES, RELATED SHAREHOLDER MATTERS AND TRUST PURCHASES OF SHARES

The Trust’s Shares of Beneficial Interest are traded on the American Stock Exchange under the symbol “IHT.” On April 27, 2007, the Trust had 9,183,904 shares outstanding and 503 holders of record.

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 American Stock Exchange, as well as dividends declared thereon:

Fiscal Year 2007
 
High
 
Low
 
Dividends
 
First Quarter
 
1.75
 
1.30
 
 
Second Quarter
 
1.75
 
1.45
 
 
Third Quarter
 
1.54
 
1.10
 
 
Fourth Quarter
 
1.75
 
1.00
 
.01
 

Fiscal Year 2006
 
High
 
Low
 
Dividends
 
First Quarter
 
1.52
 
1.11
 
 
Second Quarter
 
1.75
 
1.23
 
 
Third Quarter
 
1.50
 
1.24
 
 
Fourth Quarter
 
1.50
 
1.20
 
.01
 
 

The Trust intends to maintain a conservative dividend policy to facilitate the reduction of debt and internal growth. In fiscal years 2007 and 2006, the Trust paid dividends of $0.01 per share in the fourth quarter of each year.
 
On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on September 10, 2002, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. On August 18, 2005, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan. During the three months ended January 31, 2007, the Trust acquired 80,300 Shares of Beneficial Interest in open market transactions at an average price of $1.30 per share. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and American Stock Exchange requirements. The Trust remains authorized to repurchase an additional 66,153 limited partnership units and/or Shares of Beneficial Interest pursuant to the share repurchase program, which has no expiration date.

10



   
Issuer Purchases of Equity Securities
 
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans
 
Maximum Number of
Shares that May Be Yet
Purchased Under the
Plans
 
November 1 - November 30, 2006
 
21,700
 
$
1.20
 
21,700
 
124,753
 
December 1 - December 31, 2006
 
25,900
 
$
1.20
 
25,900
 
98,853
 
January 1 - January 31, 2007
 
32,700
 
$
1.44
 
32,700
 
66,153
 

See Part III, Item 12 for a description of our equity compensation plans.

Item 6. SELECTED FINANCIAL DATA

The following selected financial data of the Trust as of and for the five fiscal years ended January 31, 2007, has been derived from the audited consolidated financial statements of the Trust. The consolidated financial statements of the Trust as of and for the fiscal year ended January 31, 2007 was audited by Moss Adams, LLP, independent public accountants (successor to Epstein, Weber & Conover, P.L.C.) The consolidated financial statements of the Trust as of and for the fiscal years ended January 31, 2006 and 2005 were audited by Epstein, Weber & Conover, P.L.C., independent public accountants. The consolidated financial statements of the Trust as of and for the two fiscal years ended January 31, 2004 and 2003 were audited by McGladrey & Pullen, LLP, independent public accountants.
 
   
Year Ended January 31,
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
     
 
 
 
 
 
 
 
 
 
Total revenue
 
$
21,790,634
 
$
21,248,839
 
$
22,875,187
 
$
24,211,328
 
$
26,940,473
 
     
 
 
 
 
 
   
 
 
Net income (loss) from continuing operations
 
$
(46,430
)
$
541,578
 
$
240,442
 
$
(2,594,317
)
$
(3,445,948
)
     
 
 
 
 
 
   
 
 
Income (loss) per share - basic
 
$
(0.01
)
$
0.06
 
$
0.10
 
$
(1.27
)
$
(1.67
)
                       
Income (loss) per share - diluted
 
$
(0.01
$
0.02
 
$
0.10
 
$
(1.27
)
$
(1.67
)
                       
Cash dividends paid and declared per share
 
$
0.01
 
$
0.01
 
$
0.01
 
$
0.02
 
$
0.01
 
     
 
 
 
 
 
   
 
 
Total assets
 
$
31,379,017
 
$
31,952,358
 
$
36,455,521
 
$
47,961,594
 
$
61,494,579
 
     
 
 
 
 
 
   
 
 
Notes and advances payable to banks and others
 
$
19,851,327
 
$
20,736,859
 
$
24,755,858
 
$
31,974,992
 
$
38,922,408
 
     
 
 
 
 
 
   
 
 
Notes and advances payable to related parties
 
$
1,085,717
 
$
514,706
 
$
93,512
 
$
6,852,241
 
$
9,901,153
 

See “Item 1 - Business” herein for a discussion of the change in the nature of the business of the Trust over the course of the years presented above. As a result, the information presented above is not comparative from year to year.

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

OVERVIEW

The Trust is engaged in the ownership and operation of hotel properties. At January 31, 2007, the InnSuites system included five moderate and full-service hotels with 843 hotel suites. Four of our Hotels are branded through franchise agreements with Best Western. All five Hotels are trademarked as InnSuites Hotels. We are also involved in various operations incidental to the operation of hotels, such as the operation of restaurants and meeting/banquet room rentals.

Our operations consist of one reportable segment, hotel ownership, which derives its revenue from the operation of the Hotels. In addition, we receive management fees, trademark license fees and reservation fees.

Our results are significantly affected by occupancy and room rates at the Hotels, our ability to manage costs, and changes in the number of available suites caused by acquisition and disposition activities. Results are also significantly impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors could negatively impact hotel room demand and pricing which would reduce our profit margins on rented suites. Additionally, our ability to manage costs could be adversely impacted by significant increases in operating expenses, resulting in lower operating margins.

11


 
Improved economic conditions, both generally and specifically in the travel industry, had a positive impact on the operations of the Trust in fiscal year 2007. We anticipate the positive trend in the travel industry to continue in 2008. Better overall economic conditions are expected to result in increased business and leisure travel and support higher room rates, and therefore higher operating margins. We expect the major challenge for fiscal year 2008 to be strong competition for group business in the markets in which we operate that may affect the Trust’s ability to increase room rates while maintaining market share. We believe that we have positioned the hotels to remain competitive through selective refurbishment and carrying a relatively large number of two-room suites at each location.

Effective February 1, 2004, the Trust relinquished its REIT status. As of that date, any distributions to its shareholders are not deductible for purposes of computing the Trust’s taxable income and the Trust will be subject to income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates, without offset for distributions of such income to its shareholders. As of January 31, 2007, the Trust has $11.4 million in federal net loss carryforwards available to offset future federal tax liability and $1.5 million in state net loss carryforwards.
 
GENERAL

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

The accounting policies that we believe are most critical and involve the most subjective judgments include our estimates and assumptions of future revenue and expenditures used to project hotel cash flows. Future cash flows are used in the valuation calculation of our hotel properties to determine the recoverability (or impairment) of the carrying amounts in the event management is required to test the asset for recoverability of its carrying value under Statement of Financial Accounting Standards (“SFAS”) No. 144. If the carrying amount of an asset exceeds the estimated future cash flows over its estimated remaining life, the Trust recognizes an impairment expense to reduce the asset’s carrying value to its fair value. Fair value is determined by either the most current third-party property appraisal, if available, or the present value of future undiscounted cash flows over the remaining life of the asset. Our evaluation of future cash flows is based on our historical experience and other factors, including certain economic conditions and committed future bookings. See “- Critical Accounting Policies and Estimates” below.

At January 31, 2007 and 2006, the Trust owned a 69.89% and 69.14%, respectively, interest in four of the Hotels through its sole general partner’s interest in the Partnership and owned a 99.9% interest in one Hotel. The Trust purchased 6,667, 51,300 and 532,077 Partnership units during the years ended January 31, 2007, 2006 and 2005, respectively.

Prior to May 1, 2004, the Partnership leased its hotel properties to InnSuites Hotels. The corresponding rent expense for InnSuites Hotels and rent revenue for the Partnership, as well as the resulting rent receivable and payable, eliminate in consolidation. On May 1, 2004, the percentage lease agreements between the Partnership and InnSuites Hotels were terminated.

The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees, depreciation of the Hotels and hotel operating expenses. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. Accordingly, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, which is calculated as rooms sold divided by total rooms available, average daily rate (“ADR”), calculated as total room revenue divided by number of rooms sold, and revenue per available room (“REVPAR”), calculated as total room revenue divided by number of rooms available, is appropriate for understanding revenue from the Hotels. Occupancy increased 1.82% to 71.54% from 69.72% in the prior year. ADR increased by $2.40 to $72.95 in fiscal year 2007 from $70.55 in fiscal year 2006. These increases resulted in an increase in REVPAR of $3.00 to $52.19 in fiscal year 2007 from $49.19 in fiscal year 2006.


12


The following table shows certain historical financial and other information for the periods indicated:

   
For the Year Ended January 31,
 
   
2007
 
2006
 
2005
 
     
 
 
 
 
 
Occupancy
 
71.54
%
69.72
%
68.55
%
     
 
 
 
 
 
Average Daily Rate (ADR)
 
$
72.95
 
$
70.55
 
$
70.83
 
     
 
 
 
 
 
Revenue Per Available Room (REVPAR)
 
$
52.19
 
$
49.19
 
$
48.55
 

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.

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

 For a discussion of management and licensing agreements with certain related parties, see “Item 1 - Business - Management and Licensing Contracts.”

 For a discussion of the sales of the Trust’s Phoenix and Tempe, Arizona hotels to a related party during fiscal years 2005 and 2006, see “Item 1 - Business - Sale of Hotel Properties” and Note 21 to the Trust’s Consolidated Financial Statements - “Sale of Hotel Properties.”

 For a discussion of guarantees of the Trust’s mortgage notes payable by certain related parties, see Note 7 to the Trust’s Consolidated Financial Statements - “Mortgage Notes Payable.”

 For a discussion of notes and advances payable by the Trust to certain related parties, see Note 9 to the Trust’s Consolidated Financial Statements - “Notes and Advances Payable to Related Parties.”

 For a discussion of the Trust’s employment agreement with Mr. Wirth, see Note 14 to the Trust’s Consolidated Financial Statements - “Advisory Agreement/Employment Agreements.”

Results of operations of the Trust for the year ended January 31, 2007 compared to the year ended January 31, 2006.

Overview

A summary of operating results for the fiscal years ended January 31, 2007 and 2006 is:

   
2007
 
2006
 
Change
 
% Change
 
Revenue
 
$
21,790,634
 
$
21,248,839
 
$
541,795
 
2.6
%
Operating Income
 
$
1,515,068
 
$
349,349
 
$
1,165,719
 
>100.0
%
Net Income (Loss)
 
$
(46,430
)
$
541,578
 
$
(588,008
>(100.0
)%
Income Per Share - Basic
 
$
(0.01
)
$
0.06
 
$
(0.07
>(100.0
)%
Income Per Share - Diluted
 
$
(0.01
$
0.02
 
$
(0.03
>(100.0
)%

The Trust’s overall results in 2007 were positively affected by the disposition of certain of its underperforming properties and the improved operating results of the remaining hotel properties due to the continued strengthening of the travel industry.


13

For the twelve months ended January 31, 2007, the Trust had total revenue of $21.8 million compared to $21.2 million for the twelve months ended January 31, 2006, an increase of approximately $542,000. This increase in total revenue is primarily due to increased occupancy and room rates. Total expenses of $22.1 million for the twelve months ended January 31, 2007 reflect a decrease of approximately $717,000 compared to total expenses of $22.8 million for the twelve months ended January 31, 2006. The decrease is primarily due to reduced general and administrative expense attributable to reduced bad debt expense on the Hotels as a result of improved receivable collections in fiscal year 2007 and reduced professional fees as a result of costs incurred during fiscal year 2006 relating to the filing of amendments of certain of the Trust’s filings with the Securities and Exchange Commission.

For the twelve months ended January 31, 2007, the Trust disposed of the furniture, fixtures and equipment previously used in the operation of the San Diego, California property for a gain of $139,000. During fiscal year 2006, the Trust had a net gain on disposition of hotels of $1.8 million resulting primarily from the sale of the Phoenix, Arizona property during the second quarter of that year.

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve months ended January 31, 2007 and 2006, these expenses decreased $653,000, or 16.5%, to $3.3 million in fiscal year 2007, from $3.9 million in fiscal year 2006. This decrease was primarily due to reduced bad debt expense on the Hotels as a result of improved receivable collections in fiscal year 2007 and reduced professional fees as a result of costs incurred during fiscal year 2006 relating to the filing of amendments of certain of the Trust’s filings with the Securities and Exchange Commission.

Total operating expenses for the twelve months ended January 31, 2007 were $20.3 million, a decrease of approximately $624,000, or 3.0%, from $20.9 million in the twelve months ended January 31, 2006. The decrease was primarily due to reduced general and administrative expenses as discussed above.

Total interest expense for the twelve months ended January 31, 2007 was $1.8 million, a decrease of $93,000, or 4.9%, from $1.9 million in the twelve months ended January 31, 2006. Interest on mortgage notes payable for the twelve months ended January 31, 2007 was $1.7 million, a decrease of $143,000, or 7.7%, from $1.8 million in the twelve months ended January 31, 2006. The decrease is primarily due to interest incurred on the mortgage note payable secured by the Phoenix, Arizona property during the period of fiscal year 2006 before its disposition. Interest on notes payable to related parties increased $33,000, or over 100%, to $50,000 from $17,000 during the years ended January 31, 2007 and 2006, respectively. The increase is primarily due to increased borrowings on the Trust’s line of credit with Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth.

Real estate and personal property taxes, insurance and ground rent decreased $119,000, or 9.4%, to $1.1 million in the twelve months ended January 31, 2007. Real estate and personal property taxes and property insurance decreased due to expenses relating to the Phoenix, Arizona property during the period of fiscal year 2006 before its disposition and decreased insurance expense on the Tucson St. Mary’s property.

Hotel property depreciation for the twelve months ended January 31, 2006 compared to 2005 decreased approximately $86,000, or 4.0%, to $2.0 million from $2.1 million, respectively. The decrease was primarily due to the disposition of the furniture, fixtures and equipment previously used at the San Diego, California location, which were not sold as part of the sale of the San Diego property in fiscal year 2005 but were sold for $160,000 in fiscal year 2007, and the furniture, fixtures and equipment purchased with the Albuquerque, New Mexico hotel reaching the end of its useful life during the last half of fiscal year 2006.

The Trust had other income of $60,000 for the twelve months ended January 31, 2006 relating to insurance proceeds received by the Ontario, California hotel.  There was no such income during the twelve months ended January 31, 2007.

The Trust had a loss before minority interest and income taxes of $159,000 for the twelve months ended January 31, 2007, compared to income of $349,000 in the prior year. After deducting the loss allocated to the minority interest of $429,000 and taxes of $316,000, the Trust had net loss attributable to Shares of Beneficial Interest of approximately ($46,000) for fiscal year 2007. This represented a decrease of approximately $588,000 in net income (loss) attributable to Shares of Beneficial Interest comparing the twelve months ended January 31, 2007 and 2006. Basic net loss per share was ($0.01) for the twelve months ended January 31, 2007, compared to basic net income per share of $0.06 for 2006.


14


Results of operations of the Trust for the year ended January 31, 2006 compared to the year ended January 31, 2005.

Overview

A summary of operating results for the fiscal years ended January 31, 2006 and 2005 is:

   
2006
 
2005
 
Change
 
% Change
 
Revenue
 
$
21,248,839
 
$
22,875,187
 
$
(1,626,348
)
(7.1
)%
Operating Income (Loss)
 
$
349,349
 
$
(221,647
)
$
570,996
 
>100.0
%
Net Income
 
$
541,578
 
$
240,442
 
$
301,136
 
>100.0
%
Income Per Share - Basic
 
$
0.06
 
$
0.10
 
$
(0.04
(40.0
)%
Income Per Share - Diluted
 
$
0.02
 
$
0.10
 
$
(0.08
(80.0
)%

The Trust’s overall results in 2006 were positively affected by the disposition of certain of its underperforming properties in the two prior fiscal years and the improved operating results of the remaining hotel properties due to the continued strengthening of the travel industry.

For the twelve months ended January 31, 2006, the Trust had total revenue of $21.2 million compared to $22.9 million for the twelve months ended January 31, 2005, a decrease of approximately $1.6 million. This decrease in total revenue is primarily due to the sale of the Tempe and Phoenix, Arizona and San Diego, California properties during the last two fiscal years and decreased occupancy at the Ontario, California location due to a conversion of the property to a new brand affiliation. Total expenses of $22.8 million for the twelve months ended January 31, 2006 reflect a decrease of approximately $2.5 million compared to total expenses of $25.3 million for the twelve months ended January 31, 2005. The decrease is primarily due to the sales of the Tempe and Phoenix, Arizona and San Diego, California properties during the last two fiscal years, reduced depreciation due to a large portion of Trust assets reaching the end of their estimated lives, and expenses in the prior year related to the purchase of the management and licensing contracts.

For the twelve months ended January 31, 2006, the Trust had a net gain on disposition of hotels of $1.8 million, a decrease of $3.3 million, or 63.9%, from $5.1 million in fiscal year 2005. The fiscal year 2006 gain is primarily a result of the sale of the Phoenix, Arizona property during the second quarter. The fiscal year 2005 gain is primarily a result of the sale of the San Diego, California property during the first quarter.

General and administrative expenses include overhead charges for management, accounting, shareholder and legal services for the Trust. In comparing general and administrative expenses for the twelve months ended January 31, 2006 and 2005, these expenses decreased $497,000, or 11.2%, to $3.9 million in fiscal year 2006, from $4.4 million in fiscal year 2005. This decrease was primarily due to expenses of approximately $274,000 in fiscal year 2005 related to the purchase of the management and licensing contracts and the disposition of certain Trust properties, which resulted in a $340,000 decrease in expenses.

Total operating expenses for the twelve months ended January 31, 2006 were $20.9 million, a decrease of approximately $2.2 million, or 9.5%, from $23.1 million in the twelve months ended January 31, 2005. The decrease was primarily due to the sales of the Tempe and Phoenix, Arizona and San Diego, California properties during the last two fiscal years, reduced depreciation due to a large portion of Trust assets reaching the end of their estimated lives, and expenses in the prior year related to the purchase of the management and licensing contracts.

Total interest expense for the twelve months ended January 31, 2006 was $1.9 million, a decrease of $350,000, or 15.5%, from $2.3 million in the twelve months ended January 31, 2005. Interest on mortgage notes payable for the twelve months ended January 31, 2006 was $1.8 million, a decrease of $243,000, or 11.6%, from $2.1 million in the twelve months ended January 31, 2005. The decrease is primarily due to the satisfaction of the mortgage note payable secured by the Phoenix, Arizona property in connection with the disposition of that property. Interest on notes payable to related parties decreased 86.6%, or $109,000, to $17,000 from $125,000 during the years ended January 31, 2006 and 2005, respectively. The decrease is primarily due to interest incurred on notes totaling $6.2 million due to affiliates of Mr. Wirth which were outstanding during the first quarter of fiscal year 2005. These notes were paid off at the end of the first quarter of fiscal year 2005 in connection with the sales of the Tempe, Arizona and San Diego, California properties.

Real estate and personal property taxes, insurance and ground rent decreased $71,000, or 5.3%, to $1.3 million in the twelve months ended January 31, 2006. Real estate and personal property taxes and property insurance decreased due to the sale of the Phoenix, Arizona property during the second quarter of fiscal year 2006, which resulted in a decrease of $64,000.

15

 

Hotel property depreciation for the twelve months ended January 31, 2006 compared to 2005 decreased approximately $637,000, or 23.1%, to $2.1 million from $2.8 million, respectively. The decrease was primarily due to the sale of the Phoenix, Arizona property, which accounted for a $239,000 decrease, and a large portion of the Trust’s furniture and equipment reaching the end of its useful life at the beginning of fiscal year 2006.

The Trust had other income of $60,000 for the twelve months ended January 31, 2006 relating to insurance proceeds received by the Ontario, California hotel.  There was no such income during the twelve months ended January 31, 2005.

The Trust had income before minority interest, income taxes and cumulative effect of adoption of accounting principle of $349,000 for the twelve months ended January 31, 2006, compared to $2.6 million in the prior year. After deducting the loss allocated to the minority interest of $267,000 and taxes of $75,000, the Trust had net income attributable to Shares of Beneficial Interest of approximately $541,000 for fiscal year 2006. This represented an increase of approximately $301,000 in net income attributable to Shares of Beneficial Interest comparing the twelve months ended January 31, 2006 and 2005. Basic net income per share was $0.06 for the twelve months ended January 31, 2006, compared to $0.10 for 2005.

LIQUIDITY AND CAPITAL RESOURCES

Overview

The Trust’s principal source of cash to meet its cash requirements, including distributions to its shareholders, is its share of the Partnership’s cash flow and its direct ownership of the Yuma, Arizona property. The Partnership’s principal source of revenue is hotel operations for the four hotel properties it owns. The Trust’s liquidity, including its ability to make distributions to its shareholders, will depend upon the ability of itself and the Partnership to generate sufficient cash flow from hotel operations.

Hotel operations are significantly affected by occupancy and room rates at the Hotels, which have improved over the prior three fiscal years, our ability to manage costs, and changes in the number of available suites caused by acquisition and disposition activities. Results are also significantly impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors could negatively impact hotel room demand and pricing which would reduce our profit margins on rented suites.

We anticipate that better overall economic conditions will result in increased business and leisure travel and support higher room rates, and therefore higher operating margins. Challenges in fiscal year 2008 are expected to include continued competition for group business in the markets in which we operate and the Trust’s ability to increase room rates while maintaining market share.

Net cash provided by operating activities totaled $2.0 million, $878,000, and $660,000 for the years ended January 31, 2007, 2006 and 2005, respectively. The increases during the three-year period were primarily due to increased operating income due to better hotel performance.

Net cash (used in) provided by investing activities totaled $(1.2) million, $(65,000), and $8.0 million for the years ended January 31, 2007, 2006 and 2005, respectively. The decrease in 2007 as compared to 2006 was a result of the proceeds from the disposition of the Phoenix, AZ hotel in fiscal year 2006. The decrease in 2006 as compared to 2005 was due to fewer dispositions during fiscal year 2006.

Net cash used in financing activities totaled $(607,000), $(780,000), and $(8.6) million for the years ended January 31, 2007, 2006 and 2005, respectively. The decrease in 2006 as compared to 2005 was primarily due to the San Diego mortgage payoff in fiscal year 2005.

The Trust received $160,000 in proceeds from the sale of the furniture, fixtures and equipment at the San Diego, California property. The Trust did not sell these items as part of the sale of the hotel during fiscal year 2005.

16


The Trust received $1.2 million in proceeds from the sales of hotel properties in fiscal year 2006. The Trust used these proceeds to fund operations and capital improvements.

The Trust received $9.4 million in proceeds for the sales of hotel properties in fiscal year 2005. The Trust used $4.8 million of these proceeds to satisfy a mortgage note payable, $1.4 million to satisfy related party notes and interest payable, and retained the remaining proceeds to reduce trade payables and to fund future operations and capital improvements.

As of January 31, 2007, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements that is set aside annually, as described below.

The Trust is obligated under loan agreements relating to four of its hotels to deposit 4% of the individual hotel’s room revenue into an escrow account to be used for capital expenditures. These accounts are restricted by the mortgage lenders. As of January 31, 2007, $128,284 was held in these accounts and is reported on the Trust’s Consolidated Balance Sheet as “Restricted Cash.” The accounts are required to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment. During the twelve months ended January 31, 2007 and 2006, the Hotels spent approximately $1.5 million and $1.2 million, respectively, for capital expenditures. The Trust considers the majority of these improvements to be revenue producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Trust plans to spend approximately $730,000 for capital expenditures in fiscal year 2008. The Hotels also spent approximately $1.5 and $1.4 million during fiscal years 2007 and 2006, respectively, on repairs and maintenance and these amounts have been charged to expense as incurred.

The Trust has minimum debt payments of $1.1 million and $2.8 million due during fiscal years 2008 and 2009, respectively. On February 23, 2007, Tucson St. Mary’s Suite Hospitality, an entity owned by the Partnership, established a $2 million non-revolving line of credit. The unpaid principal balance bears interest at the prime rate, as published in the Wall Street Journal, plus 0.75% (currently 9.00%) and is secured by a second mortgage on the Tucson St. Mary’s Hotel. The line of credit matures on February 23, 2008. As of April 30, 2007, $1.5 million was drawn on the line of credit and used to pay down debt and to pay for renovations to that Hotel. The Trust believes it can satisfy its remaining obligations during fiscal years 2008 and 2009 using revenue generated by the Hotels’ operations.

Management believes that cash on hand, future cash receipts from operations, and borrowings from affiliates in fiscal year 2008 will be sufficient to meet the Trust’s obligations as they become due for the next twelve months.

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

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

FUTURE POSITIONING

The Board of Trustees is exploring potential strategic alternatives, including the possibility of selling some or all of the Hotels. In addition, the Trust has been informed by Mr. Wirth that one of the four hotels owned by his affiliates for which the Trust provides management and trademark licensing services has been listed for sale with a real estate broker and that the three remaining hotels owned by his affiliates may also be listed for sale. If any or all of these properties were sold, the Trust’s future management and/or licensing fees could be reduced if the purchaser did not continue to retain InnSuites Hotels to provide those services. In the past, when the Trust has sold hotel properties to unrelated third parties, the Trust has continued to provide management and/or trademark licensing services after a sale, although there can be no assurance that the Trust will be able to successfully do so in the future.
 
Management believes that the market value of each of the Trust’s Hotels exceeds that Hotel’s net book value and outstanding debt, and the Trust intends to sell a Hotel only if the sale price were to exceed the Hotel’s net book value and outstanding debt. Such a sale would result in a profit to the extent the sale price exceeded the net book value and cash flow to the extent the sale price exceeded the outstanding debt. The cash generated from any Hotel sales will be used initially to reduce the Trust’s outstanding debt.
 

17

 
The Trust will list its Yuma, Arizona Hotel for sale with a real estate broker in May 2007. The Trust can provide no assurances that it will be able to sell the Yuma, Arizona Hotel or any of its other Hotels or that, if the Trust did sell a Hotel, that it would be able to sell the Hotel at the advertised listing price. In addition, in connection with any real estate sales the Trust will incur real estate commissions and other closing costs.
 
Management continues to explore the condo-hotel concept as an opportunity for the Trust.
 
SHARE REPURCHASE PROGRAM

On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on September 10, 2002, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. On August 18, 2005, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan. During fiscal year 2007, the Trust acquired 134,865 Shares of Beneficial Interest in open market transactions at an average price of $1.35 per share and 6,427 Shares of Beneficial Interest in privately-negotiated transactions at an average price of $1.38. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and American Stock Exchange requirements.
 
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

Other than lease commitments, legal contingencies incurred in the normal course of business and employment contracts for key employees, the Trust does not have any off-balance sheet financing arrangements or liabilities. The Trust does not have any majority-owned subsidiaries that are not included in the consolidated financial statements. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Accounting Matters” below for a discussion of accounting interpretations with respect to variable interest entities and the impact of such interpretations on the Trust.

CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at January 31, 2007, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

   
PAYMENTS DUE BY PERIOD
 
CONTRACTUAL OBLIGATIONS
 
TOTAL
 
LESS
THAN
1 YEAR
 
1-3
YEARS
 
3-5
YEARS
 
THEREAFTER
 
     
 
 
 
 
 
 
 
 
 
Mortgage notes payable, notes payable to banks, other notes payable and notes and advances payable to related parties
 
$
20,937,044
 
$
1,067,036
 
$
7,741,722
 
$
1,842,886
 
$
10,285,400
 
     
 
 
 
 
 
 
 
 
 
Operating leases
 
6,795,212
 
198,133
 
396,266
 
396,266
 
5,984,547
 
     
 
 
 
 
 
 
 
 
 
TOTAL
 
$
27,912,256
 
$
1,265,169
 
$
8,137,988
 
$
2,239,152
 
$
16,269,947
 


18


The Trust expects to incur interest expense in relation to the notes included in the above table as summarized below:
 
   
TOTAL
 
LESS
THAN
1 YEAR
 
1-3
YEARS
 
3-5
YEARS
 
THEREAFTER
 
                       
   
$
6,482,183
 
$
1,754,436
 
$
2,789,863
 
$
1,227,532
 
$
710,352
 

InnSuites Hotels has entered into franchise arrangements with Best Western International, a third party, for four of the Hotels. These agreements provide for fees to be paid by InnSuites Hotels based on revenues and reservations received, and contain no minimum payment provisions.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Trust believes that the policies it follows for the valuation of its hotel properties, which constitute the majority of Trust assets, are its most critical policies. The Trust applies SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” to determine when it is necessary to test an asset for recoverability. On an events and circumstances basis, the Trust reviews the carrying value of its hotel properties both held for use and held for sale. The Trust will record an impairment loss and reduce the carrying value of a property when anticipated undiscounted future cash flows and/or a current appraisal of the property do not support its carrying value. In cases where the Trust does not expect to recover the carrying cost of hotel properties held for use, it will reduce the carrying value to the fair value of the hotel, as determined by a current appraisal. In cases where the Trust does not expect to recover the carrying cost of hotel properties held for sale, it will reduce the carrying value to the sales price less costs to sell. The Trust did not recognize impairment expense in fiscal years 2007, 2006 or 2005. As of January 31, 2007, the Trust management does not believe that the carrying values of any of its hotel properties are impaired.
 
ACCOUNTING MATTERS

In December 2004, SFAS No. 123 (revised 2004), “Share Based Payment,” was issued. This Statement is a revision of SFAS 123, Accounting for Stock Based Compensation, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This Statement establishes standards for accounting for transactions in which an entity exchanges its equity securities for goods and services. The Trust adopted this Statement during fiscal year 2006. The Trust adopted SFAS 123R using the modified prospective method. The adoption of this Statement had no effect on the Trust’s results of operations in fiscal year 2006.
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29,” which is effective for fiscal years beginning after June 15, 2005. SFAS No. 153 replaces APB Opinion No. 29’s exceptions to recording these transfers at fair value. SFAS No. 153 is not expected to have a material impact on the Trust’s financial statements or results of operations.
 
In February 2004, the Trust adopted FIN 46R, which amended FIN 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46R requires an existing unconsolidated variable interest entity to be consolidated by its primary beneficiary if the entity does not effectively disperse risk among all parties involved or if other parties do not have significant capital to finance activities without subordinated financial support from the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual or other pecuniary interests in an entity.
 
As of February 1, 2004, the Trust recorded a charge for the cumulative effect of a change in accounting principle resulting from its recognition of the $854,000 net stockholder’s deficit of the Management Company, which was the Trust’s variable interest entity under FIN 46R. The $854,000 charge represented the net effect of the Trust reporting $160,000 in net assets (consisting primarily of receivables) and $1,014,000 in net liabilities (consisting primarily of debt) upon consolidating the financial results of the Management Company.
 
All revenue and expense items for the Management Company and Licensing Corp. relating to services provided to the Hotels were eliminated when their financial results were consolidated with the Trust’s results. Revenues and expenses relating to services provided by the Management Company and Licensing Corp. to hotels not owned by the Trust, however, were not eliminated. Payroll reimbursements shown in the current period represent amounts received from hotels not owned by the Trust.
 

19

 
The effect of consolidating the financial results of the Management Company and Licensing Corp. was accounted for as a cumulative effect of a change in accounting principle. As a result of consolidating the financial results of the Management Company with its results, as of February 1, 2004, the Trust’s financial results include a $854,402 charge for the cumulative effect of a change in accounting principle on the Statements of Operations resulting in a reduction in its Stockholders’ Equity which represents the aggregate stockholders’ deficit reported by the Management Company as of February 1, 2004.
 
After June 8, 2004, consolidation of the financial results of the Management Company and Licensing Corp. is no longer required by FIN 46R since InnSuites Hotels acquired the management contracts and licensing agreements from the Management Company on that date. See Note 22 to the Trust’s Consolidated Financial Statements - “Purchase of Management and Licensing Contracts.”
 
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle (unless a different method is prescribed by the new standard) and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Trust’s financial position or results of operations.
 
In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold in determining if a tax position should be reflected in the financial statements. Only tax positions that meet the “more likely than not” recognition threshold may be recognized. The interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements for uncertain tax positions. FIN No. 48 will be effective for the Trust’s fiscal year ending January 31, 2008. The Trust is currently evaluating the impact FIN No. 48 will have on the Trust’s financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 will be effective for the Trust’s fiscal year ending January 31, 2009. The Trust is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on its financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132 (R).” This pronouncement requires an employer to make certain recognitions, measurements, and disclosures regarding defined benefit postretirement plans. The Trust does not have any defined benefit postretirement plans, and SFAS No. 158 will not have any impact on its financial condition and results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have an impact on the Trust’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 will be effective for the Trust on February 1, 2008. The Trust is currently evaluating the impact of adopting SFAS No. 159 on its financial position, cash flows and results of operations.

 

20


In June 2006, the FASB issued EITF Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross Versus Net Presentation)” which permits entities to present certain taxes assessed by a governmental authority on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). An entity is not required to reevaluate its existing policies related to taxes assessed by a governmental authority but may choose to do so. EITF issue No. 06-03 is effective for interim and annual reporting periods beginning after December 15, 2006. The Trust reports it revenue net of sales taxes. Management plans to continue to report revenue net of sales tax.

INFLATION

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

FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K, including statements containing the phrases “believes,” “intends,” “expects,” “anticipates,” “predicts,” “will be,” “should be,” “looking ahead” or similar words, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. These forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the 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, developments, financings, conflicts of interest and other matters; (vi) the Trust’s plans and expectations regarding future sales of hotel properties or condo-hotel conversions; and (vii) trends affecting the Trust’s or any Hotel’s financial condition or results of operations.

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

 
·
fluctuations in hotel occupancy rates;
 
·
changes in room rental rates which may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;
 
·
seasonality of our business;
 
·
interest rate fluctuations;
 
·
changes in governmental regulations, including 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;
 
·
insufficient resources to pursue our current strategies;
 
·
concentration of our investments in the InnSuites Hotels® brand;
 
·
loss of franchise contracts;
 
·
real estate and hospitality market conditions;
 
·
hospitality industry factors;
 
·
our ability to meet present and future debt service obligations;
 
·
terrorist attacks or other acts of war;
 
·
outbreaks of communicable diseases;
 
·
natural disasters;
 
·
loss of key personnel;
 
·
local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry or the markets in which the Trust operates or will operate; and
 
·
uncertainties the Trust might encounter in changing from a REIT to a tax-paying entity.

21



The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-K relating to the operations of the Partnership.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Trust is exposed to interest rate risk primarily as a result of its mortgage notes payable, notes payable to banks, other notes payable and notes and advances payable to related parties. The proceeds from these loans were used to maintain liquidity, fund capital expenditures and expand the Trust’s real estate investment portfolio and operations. The Trust’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flow and to lower its overall borrowing costs. To achieve its objectives, the Trust borrows using fixed rate debt, when possible. The Trust could enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. To date, the Trust has not entered into any such derivative transactions.

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

   
Fiscal
 
Debt Type
 
2008
 
2009
 
2010
 
2011
 
2012
 
Thereafter
 
Total
 
Fair Value
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt (1)
 
$
958,139
 
1,979,181
 
1,029,124
 
1,086,687
 
756,199
 
10,285,400
 
16,094,730
 
16,589,474
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest rate
 
8.23
%
8.23
%
8.31
%
8.30
%
8.27
%
8.26
%
8.27
%
8.25
%
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt (1)
 
$
108,897
 
868,491
 
3,864,926
 
 
 
 
4,842,314
 
4,880,271
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate available on January 31, 2007
 
9.50
%
9.50
%
9.50
%
 
 
 
9.50
%
9.50
%

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

The table incorporates only those exposures that exist as of January 31, 2007 and does not consider those exposures or positions that could arise after that date. Moreover, because firm commitments are not represented in the table above, the information presented therein has limited predictive value. As a result, the Trust’s interest rate fluctuations will depend on the exposures that arise during any particular period and future interest rates.


22


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INNSUITES HOSPITALITY TRUST
LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

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

 
Independent Auditors’ Report -January 31, 2007;
24
     
 
Independent Auditors’ Report -January 31, 2006;
25
     
 
Consolidated Balance Sheets - January 31, 2007 and 2006;
26
     
 
Consolidated Statements of Operations - Years Ended January 31, 2007, 2006 and 2005;
27
     
 
Consolidated Statements of Shareholders’ (Deficit) Equity - Years Ended January 31, 2007, 2006 and 2005;
28
     
 
Consolidated Statements of Cash Flow - Years Ended January 31, 2007, 2006 and 2005; and
29
     
 
Notes to the Consolidated Financial Statements - January 31, 2007, 2006 and 2005.
30

The following financial statement schedules of InnSuites Hospitality Trust are included in Item 8:

 
Schedule III - Real Estate and Accumulated Depreciation.
50
     
 
Schedule IV - Mortgage Loans on Real Estate.
53

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


23



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Trustees of
   
InnSuites Hospitality Trust
   
Phoenix, Arizona:
   

We have audited the accompanying consolidated balance sheet of InnSuites Hospitality Trust and subsidiaries (the “Trust”) as of January 31, 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of InnSuites Hospitality Trust and subsidiaries at January 31, 2007, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedules III and IV are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.


/s/ Moss Adams LLP
Scottsdale, Arizona

May 1, 2007

24



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Trustees of
InnSuites Hospitality Trust
Phoenix, Arizona:

We have audited the accompanying consolidated balance sheets of InnSuites Hospitality Trust and subsidiaries as of January 31, 2006, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial position of InnSuites Hospitality Trust and subsidiaries as of January 31, 2006, and the results of their operations and their cash flows for the each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
 
   
/s/EPSTEIN, WEBER & CONOVER, PLC
 
 
  Scottsdale, Arizona
  April 24, 2006


25



INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
JANUARY 31
 
   
2007
 
2006
 
ASSETS
         
Current Assets:
         
Cash and Cash Equivalents
 
$
202,691
 
$
34,251
 
Restricted Cash
   
128,284
   
226,294
 
Accounts Receivable, including $0 and $14,828 from related parties, net of Allowance for Doubtful Accounts of $115,000 and $112,000, respectively
   
752,232
   
531,961
 
Prepaid Expenses and Other Current Assets
   
485,636
   
494,829
 
Total Current Assets
   
1,568,843
   
1,287,335
 
Hotel Properties, net
   
29,654,942
   
30,215,391
 
Deferred Finance Costs, Long-Term Portion
   
140,245
   
175,645
 
Deposits, Long-Term
   
14,987
   
14,987
 
Deferred Income Tax Benefit
   
   
259,000
 
TOTAL ASSETS
 
$
31,379,017
 
$
31,952,358
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
               
LIABILITIES
             
Current Liabilities :
             
Accounts Payable and Accrued Expenses, including $518,206 and $95,418 accrued interest and payables to related parties as of January 31, 2007 and 2006, respectively
 
$
2,970,080
 
$
2,594,733
 
Notes Payable to Banks
   
749,777
   
500,000
 
Current Portion of Mortgage Notes Payable
   
926,464
   
879,265
 
Current Portion of Other Notes Payable
   
109,486
   
121,558
 
Current Portion of Notes Payable to Related Parties
   
31,086
   
428,989
 
Total Current Liabilities
   
4,786,893
   
4,524,545
 
Mortgage Notes Payable
   
17,939,187
   
19,029,612
 
Notes Payable to Related Parties
   
1,054,631
   
85,717
 
Other Notes Payable
   
126,413
   
206,424
 
               
TOTAL LIABILITIES
   
23,907,124
   
23,846,298
 
               
MINORITY INTEREST IN PARTNERSHIP
   
930,192
   
1,388,132
 
               
SHAREHOLDERS’ EQUITY
             
Shares of Beneficial Interest, without par value; unlimited authorization; 9,195,856 and 9,145,365 shares issued and outstanding at January 31, 2007 and 2006, respectively
   
17,030,891
   
17,155,106
 
Treasury Stock, 7,536,970 and 7,494,578 shares held at January 31, 2007 and 2006, respectively
   
(10,489,190
)
 
(10,437,178
)
TOTAL SHAREHOLDERS’ EQUITY
   
6,541,701
   
6,717,928
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
31,379,017
 
$
31,952,358
 

See accompanying notes to
consolidated financial statements

26

INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
YEARS ENDED JANUARY 31,
 
   
2007
 
2006
 
2005
 
REVENUE
   
 
 
 
 
 
Room
 
$
16,057,900
 
$
16,029,694
 
$
17,729,550
 
Food and Beverage
 
1,273,608
 
1,122,191
 
1,238,808
 
Telecommunications
 
38,163
 
56,804
 
99,894
 
Other
 
396,535
 
462,462
 
736,873
 
Management and Trademark Fees, including $350,233, $209,862 and $115,105 from related parties for 2007, 2006 and 2005, respectively
 
461,579
 
382,260
 
278,888
 
Payroll Reimbursements, including $3,057,136, $2,471,324 and $2,191,474 from related parties for 2007, 2006 and 2005, respectively
 
3,562,849
 
3,195,428
 
2,791,174
 
     
 
 
 
 
 
TOTAL REVENUE
 
21,790,634
 
21,248,839
 
22,875,187
 
     
 
 
 
 
 
OPERATING EXPENSES
   
 
 
 
 
 
Room
 
4,110,342
 
4,222,369
 
5,010,738
 
Food and Beverage
 
1,123,206
 
1,168,246
 
1,226,074
 
Telecommunications
 
106,438
 
153,313
 
226,559
 
General and Administrative
 
3,295,554
 
3,948,539
 
4,445,613
 
Sales and Marketing
 
1,299,082
 
1,362,805
 
1,642,232
 
Repairs and Maintenance
 
1,471,239
 
1,427,470
 
1,387,407
 
Hospitality
 
771,701
 
697,625
 
827,166
 
Utilities
 
1,224,063
 
1,166,233
 
1,232,940
 
Hotel Property Depreciation
 
2,032,955
 
2,118,492
 
2,755,499
 
Real Estate and Personal Property Taxes, Insurance and Ground Rent
 
1,139,869
 
1,258,380
 
1,329,463
 
Other
 
138,268
 
180,590
 
221,969
 
Payroll Costs Related to Management Contracts
 
3,562,849
 
3,195,428
 
2,791,174
 
             
 
TOTAL OPERATING EXPENSES
 
20,275,566
 
20,899,490
 
23,096,834
 
OPERATING INCOME (LOSS)
 
1,515,068
 
349,349
 
(221,647
)
Interest Income
 
3,431
 
2,134
 
7,517
 
Other Income
 
 
59,677
 
 
Gain on Disposition of Hotels and Property
 
138,751
 
1,847,425
 
5,113,540
 
TOTAL OTHER INCOME
 
142,182
 
1,909,236
 
5,121,057
 
Interest on Mortgage Notes Payable
 
1,704,169
 
1,846,801
 
2,089,708
 
Interest on Notes Payable to Banks
 
41,531
 
28,322
 
23,659
 
Interest on Notes Payable and Advances Payable to Related Parties
 
49,891
 
16,769
 
125,336
 
Interest on Other Notes Payable
 
20,780
 
17,205
 
20,878
 
TOTAL INTEREST EXPENSE
 
1,816,371
 
1,909,097
 
2,259,581
 
INCOME (LOSS) BEFORE MINORITY INTEREST, INCOME TAXES AND CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE
 
(159,121
349,488
 
2,639,829
 
LESS MINORITY INTEREST
 
(428,855
(267,265
)
1,384,985
 
Income Tax Provision
 
(316,164
)
(75,175
(160,000
)
INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST BEFORE CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE
 
(46,430
)
541,578
 
1,094,844
 
CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE
 
 
 
(854,402
)
INCOME (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST
 
$
(46,430
)
$
541,578
 
$
240,442
 
INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE- Basic
 
$
(0.01
)
$
0.06
 
$
0.45
 
NET LOSS FROM CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE - Basic
 
 
 
(0.35
)
NET INCOME (LOSS) PER SHARE - Basic
 
$
(0.01
)
$
0.06
 
$
0.10
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic
 
9,251,420
 
9,096,338
 
2,424,837
 
INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE- Diluted
 
$
(0.01
$
0.02
 
$
0.45
 
NET LOSS FROM CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE - Diluted
 
 
 
(0.35
)
NET INCOME (LOSS) PER SHARE - Diluted
 
$
(0.01
$
0.02
 
$
0.10
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Diluted
   
9,251,420
   
13,341,783
   
2,424,837
 
CASH DIVIDENDS PER SHARE
 
$
.01
 
$
.01
 
$
.01
 
See accompanying notes to
consolidated financial statements


27



INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 2007, 2006 AND 2005

BALANCE, JANUARY 31, 2004
 
$
(1,573,599
)
Net Income Attributable to Shares of Beneficial Interest
 
240,442
 
Dividends
 
(23,220
)
Purchase of Treasury Stock
 
(225,917
)
Shares of Beneficial Interest issued for Services Received
 
49,280
 
Shares of Beneficial Interest issued to Satisfy Notes Payable to Related Parties
 
690,820
 
Shares of Beneficial Interest issued to Purchase Management and Licensing Contracts
 
155,000
 
Shares of Beneficial Interest issued to Satisfy Advances Payable to the Partnership
 
3,661,659
 
Shares of Beneficial Interest issued to Purchase Yuma Hospitality Minority Interest
 
2,766,515
 
Purchase of Yuma Hospitality Minority Interest Above Carrying Value
 
1,177,425
 
Purchase of Partnership Units Above Carrying Value
 
98,684
 
Reallocation of Minority Interest
 
(752,455
)
     
 
BALANCE, JANUARY 31, 2005
 
6,264,634
 
Net Income Attributable to Shares of Beneficial Interest
 
541,578
 
Dividends
 
(91,450
)
Purchase of Treasury Stock
 
(175,442
)
Shares of Beneficial Interest issued for Services Received
 
37,888
 
Partnership Interest Acquired with Shares of Beneficial Interest
 
213,202
 
Reallocation of Minority Interest
 
(72,482
)
     
 
BALANCE, JANUARY 31, 2006
 
$
6,717,928
 
Net Loss Attributable to Shares of Beneficial Interest
 
(46,430
)
Dividends
 
(93,302
)
Purchase of Treasury Stock
 
(190,301
)
Shares of Beneficial Interest issued for Services Received
 
134,055
 
Partnership Interest Acquired with Shares of Beneficial Interest
 
24,560
 
Reallocation of Minority Interest
 
(4,809
)
         
BALANCE, JANUARY 31, 2007
 
$
6,541,701
 

See accompanying notes to
consolidated financial statements

28


INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

   
YEARS ENDED JANUARY 31,
 
   
2007
 
2006
 
2005
 
CASH FLOW FROM OPERATING ACTIVITIES
   
 
 
 
 
 
Net Income (Loss) Attributable to Shares of Beneficial Interest
 
$
(46,430
)
$
541,578
 
$
240,442
 
Adjustments to Reconcile Net Income (Loss) Attributable to Shares of Beneficial Interest to Net Cash Provided by Operating Activities:
   
 
 
 
 
 
Cumulative Effect of Adoption of Accounting Principle
 
 
 
854,402
 
Net Income from Variable Interest Entities
 
 
 
352,882
 
Issuance of Shares for Management and Licensing Contracts
 
 
 
155,000
 
Stock Compensation Expense
 
96,390
 
36,436
 
40,580
 
Provision for Uncollectible Receivables
 
146,340
 
354,165
 
377,465
 
Minority Interest
 
(428,855
(267,265
)
1,032,103
 
Hotel Property Depreciation
 
2,032,955
 
2,118,492
 
2,755,499
 
Deferred Income Taxes
 
259,000
 
(89,000
)
(170,000)
 
(Gain) Loss on Disposal of Hotel Property
 
(135,791
)
(1,834,080
(4,999,797
)
Amortization of Deferred Loan Fees
 
35,400
 
36,373
 
38,312
 
Changes in Assets and Liabilities:
   
 
 
 
 
 
Decrease (Increase) in Prepaid Expenses and Other Assets
 
9,193
 
(57,734
311,781
 
(Increase) Decrease in Accounts Receivable
 
(358,106
)
134,808
 
(439,814
)
Increase in Purchase Deposit from Related Party
 
 
 
700,000
 
Increase (Decrease) in Accounts Payable and Accrued Expenses
 
404,507
 
(95,887
)
(588,430
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
2,014,603
 
877,886
 
660,425
 
     
 
 
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES
   
 
 
 
 
 
Proceeds From Sale of Hotel Properties
 
160,000
 
1,190,192
 
9,377,138
 
Improvements and Additions to Hotel Properties
 
(1,496,715
)
(1,272,259
)
(1,308,008
)
Change in Restricted Cash
 
98,010
 
17,311
 
(113,852
)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
 
(1,238,705
(64,756
7,955,278
 
               
CASH FLOW FROM FINANCING ACTIVITIES
   
 
 
 
 
 
Principal Payments on Mortgage Notes Payable
 
(1,043,226
)
(931,386
)
(6,087,771
)
Payments on Notes Payable to Banks
 
(2,755,839
)
(2,217,000
)
(720,000
)
Borrowings on Notes Payable to Banks
 
3,005,616
 
2,217,000
 
500,000
 
Repurchase of Partnership Units
 
(246
)
(774
)
(453,223
)
Repurchase of Treasury Stock
 
(182,389
)
(30,191
)
(113,517
)
Payment of Dividends
 
(93,302
)
(91,450
)
(23,220
)
Distributions to Minority Interest Holders
 
 
 
(85,683
)
Payments on Notes and Advances Payable to Related Parties
 
(28,989
)
(35,806
)
(1,740,299
)
Borrowings on Notes and Advances Payable to Related Parties
 
600,000
 
400,000
 
198,000
 
Payments on Other Notes Payable
 
(109,083
)
(90,615
)
(88,647
)
               
NET CASH USED IN FINANCING ACTIVITIES
 
(607,458
)
(780,222
)
(8,614,360
)
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
168,440
 
32,908
 
1,343
 
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
 
34,251
 
1,343
 
 
               
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
202,691
 
$
34,251
 
$
1,343
 

See accompanying notes to
consolidated financial statements

29



INNSUITES HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JANUARY 31, 2007, 2006 AND 2005

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

InnSuites Hospitality Trust (the “Trust”) owns, as of January 31, 2007, directly and through a partnership interest, five hotels with an aggregate of 843 suites in Arizona, southern California and New Mexico (the “Hotels”). The Hotels operate as InnSuites Hotels.

Prior to February 1, 2004, the Trust operated as a self-managed and self-administered “umbrella partnership real estate investment trust (“REIT”),” with operations through an operating partnership, RRF Limited Partnership, a Delaware limited partnership (the “Partnership”). Effective February 1, 2004, the Trust terminated its election to be taxed as a REIT. The Trust is the sole general partner of the Partnership and owned 69.89% and 69.14% of the Partnership as of January 31, 2007 and 2006, respectively. The Trust’s weighted average ownership for the years ended January 31, 2007, 2006, and 2005 was 69.56%, 67.87% and 57.00%, respectively. The Partnership owns four of the hotel properties and incurs the related expenses. The Trust owns and operates the Yuma, Arizona hotel property directly, which it acquired from the Partnership on January 31, 2005. Prior to May 1, 2004, the Hotels were leased to InnSuites Hotels, Inc. (“InnSuites Hotels”), a wholly-owned subsidiary of the Trust. Subsequent to May 1, 2004, the Trust and the Partnership operate the Hotels owned by each of them. Prior to June 8, 2004, InnSuites Hotels held the franchise agreement for each Hotel and contracted with Suite Hospitality Management, Inc. (the “Management Company”) for certain property management services and employment services. Until July 2, 2003, the Management Company was owned 9.8% by the James F. Wirth (“Mr. Wirth”), Chairman, President and Chief Executive Officer of the Trust. On June 8, 2004, the Trust purchased the “InnSuites” trademarks and tradenames and related licensing agreements and acquired the management agreements with the Management Company. See Note 22 - “Purchase of Management and Licensing Contracts.”

As of January 31, 2007, InnSuites Hotels provides hotel management services to the Hotels, as well as four hotels featuring 544 suites owned by affiliates of Mr. Wirth. Under the management agreements, InnSuites Hotels provides the personnel at the hotels, the expenses of which are reimbursed at cost, and manages the hotels’ daily operations. All such expenses and reimbursements between InnSuites Hotels and the Partnership have been eliminated in consolidation. InnSuites Hotels received 2.5% of gross revenue from the hotels owned by the Partnership and the Trust in exchange for management services during fiscal years 2007 and 2006, and 2.0% of room revenue during fiscal year 2005. During fiscal year 2007 and the second half of fiscal year 2006, InnSuites Hotels also received an accounting fee between $1,000 and $2,000 per month under these agreements. These agreements expire on January 31, 2008. InnSuites Hotels received between 1% and 2% of room revenue from the hotels owned by affiliates of Mr. Wirth in exchange for management services during fiscal years 2006 and 2005 and between $1,000 and $2,000 per month for accounting services during fiscal year 2006. These agreements required that these hotels pay 2% of room revenue, unless these hotels failed to reach 80% of their budgeted profit, at which point the fees were reduced to 1% of room revenue. During fiscal year 2007, these management fees were fixed at 2.0% of room revenue plus $2,000 per month for accounting services. Effective February 1, 2007, the management fees are fixed at 2.5% of room revenue. These agreements have no expiration date and may be cancelled by either party with 90-days notice or 30-days notice in the event the property changes ownership. InnSuites Hotels received 5% of total revenue from an unrelated hotel in San Diego, California in exchange for management services during fiscal years 2007, 2006and 2005. This agreement was cancelled by the hotel owners effective September 20, 2006.

As of January 31, 2007, InnSuites Hotels owns the “InnSuites” trademark and holds trademark agreements with the Hotels, as well as four hotels featuring 544 suites owned by affiliates of Mr. Wirth and one unrelated hotel property featuring 175 suites. InnSuites Hotels received 1.25% (2.5% for the hotel which does not carry a third-party franchise) of total revenue from the Hotels owned by the Partnership and the Trust in exchange for use of the “InnSuites” trademark during fiscal year 2006 and 1.0% (2.0% for the hotel without a third-party franchise) during fiscal year 2005. The revenue and expenses related to these contracts have been eliminated in consolidation. These agreements have no expiration date. InnSuites Hotels received between 1% and 2% of room revenue from the Hotels owned by affiliates of Mr. Wirth in exchange for use of the “InnSuites” trademark during fiscal years 2006 and 2005. These agreements required that these hotels pay 2% of room revenue, unless these hotels failed to reach 80% of their budgeted profit, at which point the fees were reduced to 1% of room revenue. During fiscal year 2007, these fees were fixed at 1.25% of room revenue. Effective February 1, 2007, the fees are fixed at 1.25% for the two hotels owned by affiliates of Mr. Wirth which carry a third party franchise and 2.0% for the two hotels which do not carry a third-party franchise. These agreements have no expiration date and may be cancelled by either party with 12-months notice or 90-days notice in the event the property changes ownership. InnSuites Hotels received 2% of total revenue from the unrelated hotel in San Diego, California in exchange for trademark licensing services during fiscal years 2007, 2006 and 2005. This agreement was cancelled by the hotel owners effective September 20, 2006. InnSuites Hotels received 0.5% of room revenue from the unrelated hotel in Buena Park, California in exchange for trademark licensing services during fiscal years 2007, 2006 and 2005. This agreement has no expiration date and may be cancelled by either party with 30-days notice.

30


As a REIT, through January 31, 2004, the Trust was prohibited from operating its properties other than through an independent management company or a taxable REIT subsidiary. On June 8, 2004, the management agreements of the Management Company were purchased by the Trust and the Trust began managing the Hotels, certain hotels owned by Mr. Wirth and an unrelated hotel. See Note 22 - “Purchase of Management and Licensing Contracts.”

PARTNERSHIP AGREEMENT

The Partnership Agreement of the Partnership provides for the issuance of two classes of limited partnership units, Class A and Class B. Class A and Class B limited partnership units are identical in all respects, except that each Class A limited partnership unit shall be convertible into one newly-issued Share of Beneficial Interest of the Trust, at any time at the option of the particular limited partner. The Class B limited partnership units may only become convertible with the approval of the Board of Trustees, in its sole discretion. As of January 31, 2007 and 2006, 570,067 and 669,617 Class A limited partnership units were issued and outstanding representing 4.3% and 5.1%, respectively, of the total partnership units. Additionally, as of January 31, 2007 and 2006, 3,407,938 and 3,407,938, respectively, Class B limited partnership units were outstanding to Mr. Wirth and his affiliates, in lieu of the issuance of Class A limited partnership units representing 25.8% as of January 31, 2007 and 2006, of the total partnership units. If all of the Class A and B limited partnership units were converted as of January 31, 2007, the limited partners in the Partnership would receive 3,978,005 Shares of Beneficial Interest of the Trust. As of January 31, 2007 and 2006, the Trust owns 9,233,512 and 9,133,962 general partner units in the Partnership, representing 69.89% and 69.14%, respectively, of the total partnership units. The Trust purchased 6,667, 51,300 and 532,077 Partnership units during the years ended January 31, 2007, 2006 and 2005 at an average price of  $1.40, $1.61 and $2.17 per unit, respectively.
 
BASIS OF PRESENTATION

As sole general partner of the Partnership, the Trust exercises unilateral control over the Partnership, and the Trust owns all of the issued and outstanding classes of shares of InnSuites Hotels. Therefore, the financial statements of the Partnership and InnSuites Hotels are consolidated with the Trust, and all significant intercompany transactions and balances have been eliminated.

RECLASSIFICATIONS
Certain reclassifications have been made to the cash flow statement to conform to current year presentation. This change has no affect on operations.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Trust’s operations are affected by numerous factors, including the economy, competition in the hotel industry and the effect of the economy on the travel and hospitality industries. The Trust cannot predict if any of the above items will have a significant impact in the future, nor can it predict what impact, if any, the occurrence of these or other events might have on the Trust’s operations and cash flows. Significant estimates and assumptions made by management are used for, but not limited to, the estimated useful lives of long-lived assets and estimates of future cash flows used to test a long-lived asset for recoverability, the fair values of the long-lived assets and the realization of net operating losses.

31


HOTEL PROPERTIES

Hotel properties are stated at cost and are depreciated using the straight-line method over estimated lives ranging from 5 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment.

The Trust adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in accounting for its hotel properties effective the beginning of fiscal year 2003 and previously applied SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” in accounting for its hotel properties in fiscal year 2002. The adoption of SFAS No. 144 had no significant effect on the financial statements.

Management applies SFAS No. 144 to determine when it is required to test an asset for recoverability of its carrying value. If the carrying amount of an asset exceeds the estimated undiscounted future cash flows over its estimated remaining life, the Trust recognizes an impairment expense to reduce the asset’s carrying value to its fair value. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. Long-lived assets evaluated for impairment are analyzed on a property-specific basis independent of the cash flows of other groups of assets. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Trust determines the estimated useful lives of its assets based on the expected future economic benefit of the asset and its ability to hold such assets. Fair value is determined by the most current third-party property appraisal, which was performed in fiscal year 2005. Evaluation of future cash flows is based on historical experience and other factors, including certain economic conditions and committed future bookings. Management has determined that no additional impairment of long-lived assets exists during fiscal years 2005, 2006 and 2007.

During fiscal years 2006 and 2005, events and circumstances indicated that one of the Trust’s properties held in use should be evaluated for impairment. However, the Trust’s estimated future undiscounted cash flows and the third-party appraisal of the property obtained in fiscal year 2005 both indicated that the value of the property exceeded its carrying value. However, it is possible that future changes in the economic climate or real estate markets may adversely impact the fair values of the hotel properties, resulting in the need for the Trust to recognize an impairment expense to adjust the carrying value of those properties to their fair values.

Gains and losses on sales of properties are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles.

The Trust will classify a hotel property as “held for sale” in the period (generally not to exceed one year) in which (1) it has made the decision to actively seek a buyer of the property and/or (2) a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of refundable cash and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, the Trust will record an impairment loss if the fair value less the costs to sell is lower than the carrying amount of the hotel and will cease recording depreciation.

CASH AND CASH EQUIVALENTS

The Trust considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents.

RESTRICTED CASH

Restricted cash consists of amounts held in reserve by lenders to pay property taxes and fund capital improvements to the properties.

32



REVENUE RECOGNITION

Room, food and beverage, telecommunications, management and licensing fees, and other revenue are recognized as earned as services are provided and items are sold. Payroll reimbursements are recorded as personnel services are provided and are not netted with the corresponding payroll expense. Sales taxes collected are excluded from gross revenues.

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are carried at original amounts less an estimate made for doubtful accounts based on a review of outstanding amounts on a quarterly basis. Management records an allowance for doubtful accounts for 50% of the balances over 90 days and 100% of the balances over 120 days. Accounts receivables are written off when deemed uncollectible. Recoveries, if any, of receivables previously written off are recorded when received. The Trust does not charge interest on accounts receivable balances.

The amounts charged to the allowance for doubtful accounts are as follows for the years ended January 31:
                 
   
Balance at the
           
   
Beginning of
 
Charged to
     
Balance at the
Year
 
Year
 
Expense
 
Deductions
 
End of Year
2005
 
$106,773
 
$377,465
 
$(206,145)
 
$278,093
2006
 
278,093
 
354,165
 
(519,835)
 
112,423
2007
 
112,423
 
146,340
 
(143,793)
 
114,970

STOCK-BASED COMPENSATION

Prior to February 1, 2006, the Trust applied the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and provides pro forma net income (loss) disclosures for employee stock-based compensation grants as if the fair-value-based method defined in SFAS No. 123R, “Share Based Payment,” had been applied. In accordance with APB Opinion No. 25, stock-based compensation expense is recorded in the statement of operations over the vesting period only if the current estimated market price on the underlying stock on the date an option is granted exceeds the exercise price. The Trust adopted SFAS 123R during fiscal year 2006. The Trust adopted SFAS 123R using the modified prospective method. The adoption of this Statement had no effect on the Trust’s results of operations in 2006.

No compensation cost has been recognized for options granted to employees for the years ended January 31, 2007, 2006 and 2005. The following pro forma information presents pro forma net loss information as if compensation expense had been recognized for stock-based compensation as determined under the fair-value-based method prescribed by SFAS No. 123R using the Black-Scholes options pricing model:

   
2005 
 
 Net income:
$
240,442
 
 
 
 
 
 Plus:
 
 
 
 Stock compensation recorded in the statements of operations
 
49,280
 
 Minus:
 
 
 
Total stock-based compensation expense as defined under the fair value method
 
(49,280
)
 
 
 
 
 Pro forma stock compensation expense 
 
— 
 
 
 
 
 
 Pro forma
$
240,442
 
 
 
 
 
 Net income per share - basic
 
 
 
 As reported
$
0.10
 
 
 
 
 
 Pro forma
$
0.10
 

No stock options were issued during the fiscal years ended January 31, 2007, 2006 and 2005. During the second quarter of fiscal year 2006, the Trust accepted the voluntary surrender of all outstanding stock options. The options were surrendered in order to reduce costs and simplify the Trust’s reporting and compliance obligations to the Securities and Exchange Commission and the American Stock Exchange. The Trust made no payments to the holders of the options for their surrender. The Trust has no obligation, explicit or implied, for the surrender of the options, including but not limited to the reissuance of options at some time in the future. As of January 31, 2007, the Trust has no stock options outstanding.

33


During the year ended January 31, 2007, the Trust granted restricted stock awards.  All were fully vested in  fiscal year 2007 resulting in stock based compensation expense of $96,390 net of amounts reimbursed through the payroll reimbursement under the management contracts of $8,505 and amounts accrued as bonuses at January 31, 2006 of $29,160.


 
Restricted Shares
 
 
Shares
Weighted-Average Grant Date Fair Value
Balance at January 31, 2006
Granted
99,300
$1.35
Vested
(99,300)
$1.35
Forfeited
Balance of unvested awards at January 31, 2007
 
INCOME TAXES

Prior to February 1, 2004, the Trust elected to be taxed as a REIT under Sections 856 through 860 of the U.S. Internal Revenue Code (the “Code”). To qualify as a REIT, the Trust was required to meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. As a REIT, the Trust was not subject to federal corporate income tax on that portion of its net income that was distributed to shareholders.

Effective February 1, 2004, the Trust relinquished its REIT status. As of that date, any distributions to its shareholders are not deductible for purposes of computing the Trust’s taxable income and the Trust will be subject to income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates, without offset for distributions of such income to its shareholders. 

Subsequent to February 1, 2004, the Trust became subject to federal and state corporate income tax and accounts for deferred taxes utilizing a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it was determined to be more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities were adjusted for the effects of changes in tax laws and rates on the date of enactment.

DIVIDENDS AND DISTRIBUTIONS

In fiscal years 2007, 2006 and 2005, the Trust paid dividends of $0.01 per share in the fourth quarter of each year. The Trust’s ability to pay dividends is largely dependent upon the operations of the Hotels.

MINORITY INTEREST

The Trust accounts for minority interest in accordance with Emerging Issues Task Force (“EITF”) Issue No. 94-2 “Treatment of Minority Interests in Certain Real Estate Investments” and EITF Issue No. 95-7 “Implementation Issues Related to the Treatment of Minority Interest in Certain Real Estate Investment Trusts.”

Minority interest in the Partnership represents the limited partners’ proportionate share of the capital and earnings of the Partnership. Income or loss is allocated to the minority interest based on its weighted average ownership percentage in the Partnership throughout the period, and capital is allocated based on its ownership percentage at year-end. Any difference is recorded as a reallocation of minority interest as a component of shareholders’ equity.

INCOME (LOSS) PER SHARE

Basic and diluted income (loss) per Share of Beneficial Interest have been computed based on the weighted-average number of Shares of Beneficial Interest and potentially dilutive securities outstanding during the periods.

34



For the twelve months ended January 31, 2007, 2006 and 2005, there were Class A and Class B limited partnership units outstanding, which are convertible into Shares of Beneficial Interest of the Trust. Assuming conversion at the beginning of each period, the aggregate weighted-average of these Shares of Beneficial Interest would have been 4,021,840, 4,245,445 and 5,680,962 in addition to the basic shares outstanding for fiscal year 2007, 2006 and 2005, respectively. These Shares of Beneficial Interest issuable upon conversion of the Class A and Class B limited partnership units were anti-dilutive during fiscal years 2007 and 2005 due to the fact that the conversion of these units would result in decreased loss per share and increased earnings per share for the two years respectively. Therefore, they have not been included in the number of issued and outstanding Shares of Beneficial Interest used in the calculation of diluted earnings per share for that year.

For the twelve months ended January 31, 2005, 232,600 stock options were not included in the computation of diluted earnings per share as their inclusion would have had an antidilutive effect because of the fact that the option exercise prices are greater than the average market price of the Trust’s Shares of Beneficial Interest. As of January 31, 2007, there are no stock options outstanding.


The following is a reconciliation of basic earnings per share to diluted earnings per share:

 
For the Twelve Months Ended January 31,
 
2007
2006
2005
Income (Loss) attributable to Shares of Beneficial Interest
 
$
 
(46,430)
 
$ 541,578
 
$ 240,442
Plus: Income (Loss) attributable to minority interest unit holders
 
 
(267,265)
 
1,384,985
Income attributable to Shares of Beneficial Interest after unit conversion
 
$
 
(46,430)
 
$ 274,313
 
$ 1,625,427
       
Weighted average common shares outstanding, basic
 
9,251,420
 
9,096,338
 
2,424,837
Plus: Weighted average incremental shares resulting from unit
conversion
 
 
 
 
4,245,445
 
 
Weighted average common shares outstanding after unit conversion
 
9,251,420
 
13,341,783
 
2,424,837
       
Diluted Earnings Per Share
$
(0.01)
$ 0.02
$ 0.10

35

FAIR VALUE OF FINANCIAL INSTRUMENTS

For disclosure purposes, fair value is determined by using available market information and appropriate valuation methodologies. Due to their short maturities, cash and cash equivalents are carried at cost, which reasonably approximates fair value.

The fair value of mortgage notes payable, notes payable to banks and notes and advances payable to related parties is estimated by using the current rates which would be available for similar loans having the same remaining maturities. The carrying value of accounts payable and accrued expenses and other notes payable approximates fair value, due to their short-term nature. See Note 16 - “Fair Value of Financial Instruments.”

NEW ACCOUNTING PRONOUNCEMENTS

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle (unless a different method is prescribed by the new standard) and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Trust’s financial position or results of operations.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation applies to all tax positions related to income taxes subject to SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold in determining if a tax position should be reflected in the financial statements. Only tax positions that meet the “more likely than not” recognition threshold may be recognized. The interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements for uncertain tax positions. FIN No. 48 will be effective for the Trust’s fiscal year ending January 31, 2008. The Trust is currently evaluating the impact FIN No. 48 will have on the Trust’s financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 will be effective for the Trust’s fiscal year ending January 31, 2009. The Trust is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on its financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132 (R).” This pronouncement requires an employer to make certain recognitions, measurements, and disclosures regarding defined benefit postretirement plans. The Trust does not have any defined benefit postretirement plans, and SFAS No. 158 will not have any impact on its financial condition and results of operations.

36

 
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have an impact on the Trust’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 will be effective for the Trust on February 1, 2008. The Trust is currently evaluating the impact of adopting SFAS No. 159 on its financial position, cash flows and results of operations.

In June 2006, the FASB issued EITF Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross Versus Net Presentation)” which permits entities to present certain taxes assessed by a governmental authority on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). An entity is not required to reevaluate its existing policies related to taxes assessed by a governmental authority but may choose to do so. EITF issue No. 06-03 is effective for interim and annual reporting periods beginning after December 15, 2006. The Trust reports it revenue net of sales taxes. Management plans to continue to report revenue net of sales tax.

SEGMENT REPORTING

The Trust views its operations as one operating business segment, a hospitality company that owns five hotel properties with an aggregate of 843 suites in Arizona, southern California and New Mexico.

ADVERTISING COSTS

Amounts incurred for advertising costs with third parties are expensed as incurred. Advertising expense totaled approximately $823,000, $755,000 and $785,000 for the years ended January 31, 2007, 2006, and 2005, respectively.

3. HOTEL PROPERTIES

As of January 31 of the respective years, hotel properties, and hotel properties held for sale, consisted of the following:

   
2007
 
2006
 
Land
 
$
2,824,520
 
$
2,824,520
 
Building and improvements
 
34,101,584
 
33,520,145
 
Furniture, fixtures and equipment
 
7,413,834
 
7,213,866
 
     
 
 
 
Total hotel properties
 
44,339,938
 
43,558,531
 
Less accumulated depreciation
 
(14,684,996
(13,343,140
)
     
 
 
 
Hotel properties, net
 
$
29,654,942
 
$
30,215,391
 

4. ACQUISITIONS

During the second quarter of fiscal year 2005, the Trust acquired the management and licensing agreements. See Note 22 - “Purchase of Management and Licensing Contracts.”


37


5. PREPAIDS AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are carried at face value and expect to be consumed within one year. Prepaid expenses and other current assets consisted of the following:

           
   
January 31,
 
   
2007
 
2006
 
Prepaid Insurance
 
$
125,108
   
121,964
 
Deferred Financing Costs, Current Portion
   
35,683
   
35,683
 
Tax and Insurance Escrow
   
310,159
   
320,017
 
Other Prepaid Expenses and Current Assets
   
14,686
   
17,165
 
Total Prepaid Expenses and Current Assets
 
$
485,636
   
494,829
 



6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The carrying value of accounts payable and accrued expenses approximates fair value, due to their short-term nature. The carrying value of accounts payable and accrued liabilities was $2.97 million and $2.60 million at January 31, 2007 and 2006 respectively. Accounts payable and accrued liabilities consisted of the following:

   
January 31,
 
   
2007
 
2006
 
Accounts Payable
 
$
845,413
   
863,723
 
Accrued Salaries and Wages
   
503,447
   
368,288
 
Accrued Vacation
   
208,706
   
188,965
 
Sales Tax Payable
   
240,468
   
169,702
 
Accrued Interest Payable
   
95,550
   
102,363
 
Advanced Customer Deposits
   
46,248
   
33,637
 
Income Tax Liability
   
31,805
   
240,671
 
Accrued Property Taxes
   
266,619
   
282,043
 
Accrued Land Lease
   
106,393
   
97,750
 
Accrued Other
   
113,745
   
189,149
 
Advances From Related Parties, net
   
511,686
   
58,442
 
Total Accounts Payable and Accrued Liabilities
 
$
2,970,080
   
2,594,733
 

38


7. MORTGAGE NOTES PAYABLE

At January 31, 2007, the Trust had mortgage notes payable outstanding with respect to each of the Hotels. The mortgage notes payable have various repayment terms and have scheduled maturity dates ranging from July 29, 2009 to May 1, 2016. Weighted average interest rates on the mortgage notes payable for the years ended January 31, 2007, 2006 and 2005 were 8.56%, 8.21% and 8.03%, respectively.

The following table summarizes the Trust’s mortgage notes payable as of January 31:

   
2007
 
2006
 
Mortgage note payable, due in variable monthly installments ($41,521 as of January 31, 2007), including interest at prime rate plus 1.0% per year (9.5% as of January 31, 2007), through July 29, 2009, secured by the Tucson St. Mary’s property with a carrying value of $9.3 million at January 31, 2007.
 
$
4,092,537
 
$
4,191,981
 
     
 
 
 
Mortgage note payable, due in monthly installments of $48,738, including interest at 8% per year, through May 1, 2016, secured by the Tucson Oracle property with a carrying value of $5.1 million at January 31, 2007.
 
3,837,263
 
4,103,465
 
     
 
 
 
Mortgage note payable, due in monthly installments of $71,141, including interest at 8.28% per year, through May 11, 2011, secured by the Ontario property with a carrying value of $6.8 million at January 31, 2007.
 
8,297,893
 
8,448,212
 
     
 
 
 
Mortgage note payable, due in monthly installments of $15,858, including interest at 8.875% per year, through September 1, 2015, secured by the Albuquerque property with a carrying value of $1.7 million at January 31, 2007.
 
1,147,738
 
1,232,062
 
     
 
 
 
Mortgage note payable, due in monthly installments of $41,168, including interest at 9.25% per year, through August 1, 2011, secured by the Yuma property with a carrying value of $6.4 million at January 31, 2007.
 
1,490,220
 
1,933,157
 
     
 
 
 
Totals
 
$
18,865,651
 
$
19,908,877
 

Mr. Wirth and certain of his affiliates have guaranteed $1,745,110 and $1,966,579 of the mortgage notes payable as of January 31, 2007 and 2006, respectively. The net book value of the properties securing these mortgage notes payable at January 31, 2007 and 2006 was $15,776,000 and $15,862,000, respectively. See Note 11 - “Minimum Debt Payments” for scheduled minimum payments.

8. NOTES PAYABLE TO BANKS

On July 21, 2004, the Trust obtained a bank line of credit secured by a security agreement, business loan agreement and commercial guaranty of the Partnership all dated July 21, 2004. As of January 31, 2006, the Trust had drawn the entire $500,000 available under the line of credit. The Trust satisfied the line with a new bank line of credit on August 18, 2006.

On August 18, 2006, the Trust entered into an agreement for an unsecured bank line of credit. Under the agreement, the Trust can draw $750,000, bearing interest at prime plus 0.5% (8.75% as of January 31, 2007), with interest-only payments due monthly. During specified times over the duration of the line of credit, the Trust must pay the line of credit down to zero and is unable to borrow against the line of credit for a period of 30 days. The line of credit matures on February 18, 2008. As of January 31, 2007 the Trust had drawn $749,777 of the funds available under the line of credit.
 
39

9. NOTES AND ADVANCES PAYABLE TO RELATED PARTIES

Notes and advances payable to related parties consist of funds provided by Mr. Wirth, certain of his affiliates and other related parties to permit the Trust to repurchase additional general partnership units in the Partnership and to fund working capital and capital improvement needs. The aggregate amounts outstanding to related parties were approximately $1.1 million and $515,000 as of January 31, 2007 and 2006, respectively. The notes and advances payable to related parties are as follows as of January 31 of the respective years:

   
2007
 
2006
 
               
Line of credit payable to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, unsecured and bearing interest at 7% per annum. Due in one installment of accrued interest and unpaid principal on March 1, 2008.
 
$
1,000,000
 
$
 
     
 
 
 
Note payable to The Anderson Charitable Remainder Unitrust, an affiliate of Mason Anderson, former Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $1,365 through November 2009.
 
41,985
 
54,929
 
     
 
 
 
Note payable to Wayne Anderson, son of Mason Anderson, former Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $574 through June 2009.
 
15,280
 
20,886
 
     
 
 
 
Note payable to Karen Anderson, daughter of Mason Anderson, former Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $574 through June 2009.
 
15,280
 
20,886
 
     
 
 
 
Note payable to Kathy Anderson, daughter of Mason Anderson, former Trustee of the Trust, bearing interest at 7% per annum, and secured by Shares of Beneficial Interest in the Trust. Due in monthly principal and interest payments of $495 through June 2009.
 
13,172
 
18,005
 
     
 
 
 
Note payable to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, unsecured and bearing interest at 7% per annum. Satisfied in full during fiscal year 2007 with proceeds from the line of credit with Rare Earth Financial.
 
 
400,000
 
     
 
 
 
Totals
 
$
1,085,717
 
$
514,706
 

During the first quarter of fiscal year 2005, the Trust repurchased 433,036 Class B limited partnership units in the Partnership from affiliates of Mr. Wirth, issuing promissory notes in the aggregate amount of $974,331. During the first quarter of fiscal year 2005, the Trust repaid $449,500 of these notes. During the fourth quarter of fiscal year 2005, the Trust repaid the remaining balance of these notes with Shares of Beneficial Interest with an aggregate value of $467,552. Additionally, Mr. Wirth converted 100,000 Class B limited partnership units in the Partnership into 100,000 Shares of Beneficial Interest.
 
As of February 2, 2004, J. R. Chase, the sole stockholder of the Management Company, agreed to transfer 32,363 Shares of Beneficial Interest in the Trust to the Management Company in order to facilitate the Management Company’s acquisition of Licensing Corp. from Mr. Wirth. In consideration of the transfer of those Shares, the Management Company agreed to pay Mr. Chase $72,817. The Management Company fully satisfied this obligation during June 2004. See Note 22, “Purchase of Management and Licensing Contracts.”
 
During the second quarter of fiscal year 2005, the Trust issued promissory notes totaling $83,000 to affiliates of Mason Anderson, who was Trustee of the Trust from January through August 2005, in exchange for 47,084 Shares of Beneficial Interest in the Trust.
 
During the second quarter of fiscal year 2005, the Trust issued 55,423 Shares of Beneficial Interest to satisfy unpaid principal and interest totaling $95,882 to Mr. Robson, a Trustee of the Trust.
 
During the fourth quarter of fiscal year 2005, the Partnership reclassified $700,000 of advances payable to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, to a deposit for the purchase of the Phoenix, Arizona hotel property by another affiliate of Mr. Wirth.
 
During the third quarter of fiscal year 2006, the Partnership issued a promissory note in the amount of $400,000 to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth. The full unpaid principal and accrued interest was due in one installment on April 15, 2006. This note was paid off during fiscal year 2007 using a new line of credit with Rare Earth Financial, L.L.C.

During the first quarter of fiscal year 2007, the Partnership established a $700,000 subordinated line of credit with Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth. The line of credit is secured by 49% of the Partnership’s interest in its Tucson St. Mary’s hotel property, and is subordinated to the Trust’s commercial bank line of credit. Outstanding borrowings under the line of credit will bear interest at 7.0% per year. The Trust borrowed $400,000 under the line of credit during the first quarter of fiscal year 2007 in order to refinance an outstanding promissory note payable to Rare Earth Financial. During the fourth quarter of fiscal year 2007, the line of credit limit was increased to $1.0 million. As of January 31, 2007, $1.0 million was outstanding on the line of credit.

The Trust paid interest on related party notes to Mr. Wirth and his affiliates in the amounts of $45,644, $8,905 and $443,959 for the twelve months ended January 31, 2007, 2006 and 2005, respectively. The Trust incurred interest expense on related party notes to Mr. Wirth and his affiliates in the amounts of $42,782, $10,856 and $122,314 for the twelve months ended January 31, 2007, 2006 and 2005, respectively.

40



10. OTHER NOTES PAYABLE

As of January 31, 2007, the Trust had $235,899 in secured promissory notes outstanding to unrelated third parties arising from the repurchase of 187,008 Class A limited partnership units in the Partnership and the repurchase of 91,222 Shares of Beneficial Interest in privately negotiated transactions. The promissory notes bear interest at 7% per year and are due in varying monthly payments through March 2011. The repurchased Class A limited partnership units and Shares of Beneficial Interest secure the notes. As of January 31, 2006, the Trust had $327,982 in secured promissory notes outstanding to unrelated third parties arising from the repurchase of 207,850 Class A limited partnership units in the Partnership and the repurchase of 84,312 Shares of Beneficial Interest in privately negotiated transactions.

11. MINIMUM DEBT PAYMENTS

Scheduled minimum payments of debt as of January 31, 2007 are as follows in the respective fiscal years indicated:

FISCAL YEAR ENDED
 
RELATED PARTIES
 
MORTGAGES
 
OTHER NOTES PAYABLE
 
TOTAL
 
2008
 
$
31,086
 
$
926,464
 
$
109,486
 
$
1,067,036
 
2009
 
1,033,333
 
1,007,403
 
806,936
 
2,847,672
 
2010
 
21,298
 
4,834,138
 
37,614
 
4,894,050
 
2011
 
 
1,057,051
 
29,636
 
1,086,687
 
2012
 
 
754,195
 
2,004
 
756,199
 
Thereafter
 
 
10,285,400
 
 
10,285,400
 
                 
 
   
$
1,085,717
 
$
18,865,651
 
$
985,676
 
$
20,937,044
 

12. DESCRIPTION OF CAPITAL STOCK

Holders of the Trust’s Shares of Beneficial Interest are entitled to receive dividends when and if declared by the Board of Trustees of the Trust out of funds legally available therefor. The holders of Shares of Beneficial Interest, upon any liquidation, dissolution or winding-down of the Trust, are entitled to share ratably in any assets remaining after payment in full of all liabilities of the Trust. The Shares of Beneficial Interest possess ordinary voting rights, each share entitling the holder thereof to one vote. Holders of Shares of Beneficial Interest do not have cumulative voting rights in the election of Trustees and do not have preemptive rights.

On January 2, 2001, the Board of Trustees approved a share repurchase program under Rule 10b-18 of the Securities Exchange Act of 1934, as amended, for the purchase of up to 250,000 limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Additionally, on September 10, 2002, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. On August 18, 2005, the Board of Trustees approved the purchase of up to 350,000 additional limited partnership units in the Partnership and/or Shares of Beneficial Interest in open market or privately negotiated transactions. Acquired Shares of Beneficial Interest will be held in treasury and will be available for future acquisitions and financings and/or for awards granted under the InnSuites Hospitality Trust 1997 Stock Incentive and Option Plan. During fiscal year 2007, the Trust acquired 134,865 Shares of Beneficial Interest in open market transactions at an average price of $1.35 per share and 6,427 Shares of Beneficial Interest in privately-negotiated transactions at an average price of $1.38. During fiscal year 2006, the Trust acquired 20,100 Shares of Beneficial Interest in open market transactions at an average price of $1.34 per share and 112,253 Shares of Beneficial Interest in privately-negotiated transactions at an average price of $1.32. During fiscal year 2005, the Trust acquired 130,717 Shares of Beneficial Interest in open market and privately negotiated transactions at an average price of $1.73 per share. The Trust intends to continue repurchasing Shares of Beneficial Interest in compliance with applicable legal and American Stock Exchange requirements. The Trust is authorized to repurchase an additional 66,153 limited partnership units and/or Shares of Beneficial Interest pursuant to the share repurchase program.

For the years ended January 31, 2007, 2006 and 2005, the Trust repurchased 141,292, 132,353 and 130,717 Shares of Beneficial Interest at an average price of $1.35, $1.33 and $1.73 per share, respectively. Repurchased Shares of Beneficial Interest are accounted for as treasury stock at its cost in the Trust’s Consolidated Statements of Shareholders’ Equity (Deficit).


41



13. FEDERAL INCOME TAXES

The Trust and subsidiaries have an income tax net operating loss carryforward of approximately $11.4 million at January 31, 2007.  The quarterly allocation of cash dividends paid per Share of Beneficial Interest and the characterization of dividends as either ordinary income or return of capital for an individual shareholder’s income tax purposes were as follows:

   
CALENDAR 2006
 
CALENDAR 2005
 
CALENDAR 2004
 
Month
Paid
 
Ordinary
Income
 
Return of
Capital
 
Total
Paid
 
Ordinary
Income
 
Return of
Capital
 
Total
Paid
 
Ordinary
Income
 
Return of
Capital
 
Total
Paid
 
January
 
 
$
.01
 
$
.01