FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 312905, eff. 4/26/93.) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period.........to......... (Amended by Exchange Act Rel. No. 312905, eff. 4/26/93) Commission file number 0-16491 GROWTH HOTEL INVESTORS II (Exact name of registrant as specified in its charter) California 94-2997382 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Insignia Financial Plaza Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's phone number) Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports ), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) GROWTH HOTEL INVESTORS II CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except unit data) March 31, December 31, 1996 1995 Assets Cash and cash equivalents $ 6,486 $ 7,105 Restricted cash 1,191 902 Deferred costs 1,921 2,008 Accounts receivable and other assets 1,751 1,376 Investment properties: Land 15,720 15,640 Buildings and related personal property 108,174 106,243 123,894 121,883 Less accumulated depreciation (39,360) (38,136) 84,534 83,747 $ 95,883 $ 95,138 Liabilities and Partners' Deficit Accounts payable and other liabilities $ 2,816 $ 2,303 Due to affiliate of the joint venture partner 1,179 819 Notes payable 49,935 50,139 Minority interest in joint ventures 3,357 3,902 Partners' Equity (Deficit): General partners' $ (255) $ (268) Limited partners' (58,982 units outstanding) 38,851 38,243 38,596 37,975 Total liabilities and partners' deficit $ 95,883 $ 95,138 <FN> See Notes to Consolidated Financial Statements b) GROWTH HOTEL INVESTORS II CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended March 31, 1996 1995 Revenues: Hotel operations $ 11,716 $ 11,131 Interest income 72 124 Total revenues 11,788 11,255 Expenses: Hotel operations 7,297 7,011 Mortgage interest 1,196 1,378 Depreciation 1,224 1,131 General and administrative 305 246 Total expenses 10,022 9,766 Income before minority interest in joint venture's operation 1,766 1,489 Minority interest in joint ventures' operations (280) (686) Net income $ 1,486 $ 803 Net income allocated to general partners (2%) $ 30 $ 16 Net income allocated to limited partners (98%) 1,456 787 Net income $ 1,486 $ 803 Net income per limited partnership unit $ 24.69 $ 13.34 <FN> See Notes to Consolidated Financial Statements c) GROWTH HOTEL INVESTORS II CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT) (Unaudited) (in thousands, except unit data) Limited General Limited Partnership Partners' Partners' Total Units Deficit Equity Equity Partners' (deficit) equity at December 31, 1995 58,982 $ (268) $ 38,243 $ 37,975 Net income for the three months ended March 31, 1996 -- 30 1,456 1,486 Distributions -- (17) (848) (865) Partners' (deficit) equity at March 31, 1996 58,982 $ (255) $ 38,851 $ 38,596 <FN> See Notes to Consolidated Financial Statements d) GROWTH HOTEL INVESTORS II CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 1996 1995 Cash flows from operating activities: Net income $ 1,486 $ 803 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,311 1,231 Minority interest in joint ventures' operations 280 686 Deferred costs paid -- (1,425) Change in accounts: Accounts receivable and other assets (750) (183) Accounts payable, and other liabilities 513 663 Net cash provided by operating activities 2,840 1,775 Cash flows from investing activities: Property and improvement additions (1,544) (1,701) Restricted cash (increase) decrease (289) 78 Net cash used in investing activities (1,833) (1,623) Cash flows from financing activities: Notes payable principal payments (204) (288) Joint venture partner distributions (662) (781) Cash distribution to partners (865) (865) Due to (from) affiliate 105 (692) Net cash used in financing activities (1,626) (2,626) Net decrease in cash and cash equivalents (619) (2,474) Cash and cash equivalents at beginning of period 7,105 11,776 Cash and cash equivalents at end of period $ 6,486 $ 9,302 Supplemental information: Interest paid $ 1,457 $ 1,337 Non-cash investing activity: Purchase of joint venture partners interest-Note F <FN> See Notes to Consolidated Financial Statements e) GROWTH HOTEL INVESTORS II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the General Partner, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1996. For further information, refer to the financial statements and footnotes thereto included in the Partnership's annual report on Form 10-K for the year ended December 31, 1995. The balance sheet at December 31, 1995, was derived from audited financial statements at such date. Certain reclassifications have been made to the 1995 information to conform to the 1996 presentation. Note B - Transactions with Affiliated Parties Growth Hotel Investors II (the "Partnership") has no employees and is dependent on NPI Realty Management Corp. ("NPI Realty" or the "Managing General Partner") and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for certain expenses incurred by affiliates on behalf of the Partnership. The following transactions with affiliates of Insignia Financial Group, Inc., National Property Investors, Inc. ("NPI"), and affiliates of NPI were charged to expense in 1996 and 1995: For the Three Months Ended March 31, 1996 1995 Reimbursement for services of affiliates (included in general and administrative expenses) $94,000 $91,000 Partnership Management Fees (included in general and administrative expenses) 96,000 96,000 The general partner of the partnership is Montgomery Realty Company-85 ("MRC- 85"), a California general partnership. The general partners of MRC-85 are Fox Realty Investors ("FRI"), a California general partnership, and NPI Realty. On February 13, 1996 NPI Realty, which acquired its interest in MRC-85 from Montgomery Realty Corporation on November 15, 1995, became the managing general partner of MRC-85. The associate general partner is GHI Associates of which FRI is the general partner and Prudential-Bache Properties, Inc. is the limited partner. Note B - Transactions with Affiliated Parties (continued) On December 6, 1993, NPI Equity Investments II, Inc. ("NPI Equity") became the managing general partner of FRI and assumed operational control over Fox Capital Management Corporation ("FCMC"), an affiliate of FRI. As a result, NPI Equity became responsible for the operation and management of the business and affairs of the Partnership and the other investment partnerships sponsored by FRI and/or FCMC. The individuals who had served previously as partners of FRI and as officers and directors of FCMC contributed their general partnership interests in FRI to a newly formed limited partnership, Portfolio Realty Associates, L.P. ("PRA"), in exchange for limited partnership interests in PRA. In the foregoing capacity, such partners continue to hold, indirectly, certain economic interests in the Partnership and such other investment partnerships, but ceased to be responsible for the operation and management of the Partnership and such other partnerships. NPI Equity and NPI Realty are wholly-owned subsidiaries of NPI. On August 17, 1995, the stockholders of NPI entered into an agreement to sell all of the issued and outstanding common stock of NPI to IFGP Corporation, an affiliate of Insignia Financial Group, Inc. ("Insignia"). The transaction was consummated on January 19, 1996. Upon the closing, the officers and directors of NPI, NPI Equity II and NPI Realty resigned and IFG Corporation caused new officers and directors of each of those entities to be elected. Note C - Restricted Cash Restricted cash at March 31, 1996, represents funds provided for and maintained by certain properties pursuant to the related notes payable agreements, primarily related to the Growth Hotel Investors Combined Fund No. 1 ("Combined Fund"), to meet future capital requirements and debt service payments. Note D - Distributions The Partnership distributed approximately $14 per unit (approximately $848,000 in total) to the holders of limited partnership units and approximately $17,000 to the general partners for each of the three month periods ended March 31, 1996 and 1995. Note E - Amendment to Service Agreement The Partnership paid $1,425,000 in January 1995 to Metric Management, Inc. ("MMI") amending their services agreement to provide for a reduction in the monthly asset management fee from $54,700 to $7,000, the elimination of fees payable to MMI for its assistance in refinancing and sales of properties owned by the Partnership and provides the Partnership with the ability to terminate MMI's services at will. The buyout of the service contract is being amortized over the remaining term of the services agreement of 10 years. For the three months ended March 31, 1996 and 1995, $36,000 has been amortized and is included in general and administrative expenses. Note F - Joint Venture Purchase On December 7, 1995, the Partnership acquired, effective January 1, 1996, all of the economic rights of its joint venture partner in GHI II Big River Associates, a California partnership, the joint venture which owns the Hampton Inn - St. Louis hotel, for $375,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment Properties: A description of the hotel properties in which the Partnership has an ownership interest, together with occupancy and room rate data follows: Average Average Daily Occupancy Rate Room Rate For Quarter Ended For Quarter Ended March 31, March 31, Name and Location 1996 1995 1996 1995 Growth Hotel Investors II: Hampton Inn-Kansas City 75% 79% $ 57.24 $ 52.05 Kansas City, Missouri Hampton Inn-Eden Prairie 68% 64% 57.73 54.74 Eden Prairie, Minnesota Hampton Inn-Dublin 63% 65% 55.73 52.38 Dublin, Ohio Hampton Inn-North Dallas 81% 79% 64.94 61.96 Addison, Texas Hampton Inn-St. Louis 61% 64% 59.44 57.08 St. Louis, Missouri Hampton Inn-Colorado Springs 74% 64% 45.38 41.10 Colorado Springs, Colorado Growth Hotel Investors Combined Fund No. 1: Hampton Inn-Memphis I40 East 65% 71% 53.20 50.36 Memphis, Tennessee Hampton Inn-Columbia-West 73% 82% 58.96 53.03 West Columbia, South Carolina Hampton Inn-Spartanburg 54% 63% 51.61 46.23 Spartanburg, South Carolina Hampton Inn-Little Rock, North 64% 72% 51.37 46.78 North Little Rock, Arkansas Hampton Inn-Amarillo 59% 64% 49.70 46.68 Amarillo, Texas Average Average Daily Occupancy Rate Room Rate For Quarter Ended For Quarter Ended March 31, March 31, Name and Location 1996 1995 1996 1995 Growth Hotel Investors Combined Fund No. 1: (continued) Hampton Inn-Greenville 76% 77% $ 57.79 $ 51.92 Greenville, South Carolina Hampton Inn-Charleston-Airport 74% 70% 53.57 52.76 North Charleston, South Carolina Hampton Inn-Memphis-Poplar 79% 80% 67.95 63.00 Memphis, Tennessee Hampton Inn-Greensboro 77% 85% 63.42 55.79 Greensboro, North Carolina Hampton Inn-Birmingham 71% 80% 60.51 57.17 Birmingham, Alabama Hampton Inn-Atlanta-Roswell 75% 81% 63.36 55.86 Roswell, Georgia Hampton Inn-Chapel Hill 81% 81% 60.29 54.68 Chapel Hill, North Carolina Hampton Inn-Dallas-Richardson 78% 71% 55.60 50.25 Richardson, Texas Hampton Inn-Nashville- 67% 81% 64.66 59.20 Briley Parkway Nashville, Tennessee Hampton Inn-San Antonio-Northwest 54% 59% 55.87 56.28 San Antonio, Texas Hampton Inn-Madison Heights 69% 63% 57.38 53.19 Madison Heights, Michigan Hampton Inn-Mountain Brook 77% 68% 60.78 56.40 Birmingham, Alabama Hampton Inn-Northlake 78% 77% 60.22 53.34 Atlanta, Georgia The Partnership's net income for the three months ended March 31, 1996, was approximately $1,486,000 as compared to $803,000 for the same period of 1995. The increase in net income is attributable to an increase in hotel revenues due to an overall room rate increase at the Partnership's investment properties along with a decrease in mortgage interest due to the repayment of long-term debt on its Hampton Inn - Dublin and Hampton Inn - Kansas City properties during the fourth quarter of 1995. Partially offsetting these increases to income were increases in hotel operating expenses, depreciation expense and general and administrative expenses. Finally affecting the increase in net income was a decrease in loss attributable to the minority interest to joint venture partners. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the hotel market environment of its investment properties to assess the feasibility of increasing rates, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rates and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of concessions and room rate reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. At March 31, 1996, the Partnership had unrestricted cash of $6,486,000 as compared to $9,302,000 at March 31, 1995. Net cash provided by operating activities increased due to the increase in net income discussed above along with the Partnership incurring costs of $1,425,000 during the first quarter of 1995 in relation to a buyout agreement as discussed in "Item 1. Financial Statements Note E". Net cash used in investing activities increased primarily as a result of increases in deposits to restricted cash. Net cash used in financing activities decreased primarily as a result of a difference in the timing of payments of distributions from the Combined Fund to the Partnership. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The mortgage indebtedness of $49,935,000 includes mortgages with maturity dates ranging from 1996 through 2016. A balloon payment on the mortgage encumbering the Partnership's Hampton Inn - North Dallas property is due in December 1996 in the amount of approximately $2,927,000. The Partnership's consolidated joint venture, the Combined Fund, has balloon payments due in August 1996 of approximately $35,323,000. The Partnership's remaining properties have balloon payments due in 1998 and 2016. The Managing General Partner is currently evaluating the feasibility of selling all of the investment properties (as discussed in further detail below) or the refinancing opportunities. Future cash distributions will depend on the levels of cash generated from operations, property sales, and the availability of cash reserves. A cash distribution of approximately $865,000 was paid to the partners in the first quarters of 1996 and 1995. On February 15, 1996, Devon Associates, a New York general partnership, commenced a tender offer (the "Offer") for up to 21,000 of the outstanding Units at a purchase price of $750.00 per Unit. Due to the participation in the tender offer by affiliates of NPI Realty, and the Managing General Partner's related, existing and potential conflicts of interest, the Partnership, in its Schedule 14D-9 filed with Securities and Exchange Commission and sent to limited partners, expressed no opinion and made no recommendation as to whether limited partners should tender their Units pursuant to the Offer. The expiration of the tender offers described above was midnight, New York time, on March 25, 1996. See Items 2-4 of the Schedule 14D-9 of the Partnership, as filed with the Commission on February 29, 1996, as amend by "Amendment No. 1" thereto, as filed with the Commission on March 7, 1996, and as further amended by "Amendment No. 2" thereto, as filed with the Commission on March 14, 1996 and as further amended by "Amendment No. 3" thereto filed with the Commission on March 18, 1996 (collectively, the "Schedule 14D-9"), for additional information with respect to the Offer and the current and potential conflicts of interest of MRC-85, which Items 2-4 are incorporated herein by reference. Devon Associates acquired 17,287 units with respect to this offer. See Part II - Item 1 - Legal Proceedings. On March 12, 1996, the Partnership received a letter advising that the Partnership's and Growth Hotel Investors' ("GHI") joint venture partner in certain of the hotel properties was offering $147,400,000 in cash for all of the 28 hotel properties directly or indirectly owned by the Partnership and GHI. See "Amendment No. 2" to the Partnership's Statement on Schedule 14D-9, as filed with the Commission on March 14, 1996, for a more complete description of this offer, which "Amendment No. 2" is hereby incorporated by reference herein. The Managing General Partner determined that the offer price was insufficient and, by its terms, the offer expired unaccepted on March 31, 1996. PART II - OTHER INFORMATION ITEM 1. Legal Proceeding William Wallace, Mildred Wallace, Edith G. Martin, Paul Allemang and Gwen Allemang, on behalf of themselves and all others similarly situated, and derivatively on behalf of Growth Hotel Investors, a California limited partnership and Growth Hotel Investors II, a California limited partnership, Plaintiff v. Devon Associates, Montgomery Realty-85, GHI Associates, Cayuga Associates, L.P., Cayuga Capital Corp., Insignia Financial Group, Inc., L.P., and Fleetwood Corp., Defendants and Growth Hotel Investors, a California Limited partnership, and Growth Hotel Investors II, a California limited partnership, Nominal Defendant, Supreme Court of the State of New York, County of New York, Case No. 9600866 (The "Wallace Action"). On February 21, 1996, William and Mildred Wallace, holders of Units of GHI, and Edith G. Martin and Paul and Gwen Allemang, holders of Units of the Partnership, commenced an action on behalf of themselves and others similarly situated, and derivatively on behalf of GHI and the Partnership, in the Supreme Court of the State of New York, County of New York, against, among others, MRC-85 and certain of its affiliates pertaining to the tender offer for up to 15,000 partnership Units of GHI and up to 21,000 partnership Units of the Partnership which commenced February 15, 1996. The action alleged, among other things, that the tender offers constituted (a) a breach of fiduciary duty owed to limited partners and the partnerships, and (b) a breach of the provisions of the partnership agreements of such partnerships. The action, which was brought as a class action on behalf of all limited partners, sought to enjoin the tender offers as well as monetary damages in an unspecified amount. R&S Asset Partners, a Florida general partnership, and Jessie B. Small, on their own behalves, on behalf of all others similarly situated, and derivatively on behalf of the Nominal Defendants, Plaintiffs, v. Devon Associates, Cayuga Associates, L.P., Cayuga Capital Corp., Fleetwood Corp., Carl C. Icahn, Michael L. Ashner, Martin Lifton, Arthur N. Queler, Insignia Financial Group, Inc., IFGP, Corp., National Properties Investors, Inc., NPI Equity Investment II, Inc., Fox Fealty Investors, Portfolio Realty Associates, L.P., Emmet J. Cashin, Jr., Jarold A. Evans, W. Patrick McDowell, Apollo Real Estate Advisors, L.P., and Montgomery Realty Company-85, Defendants, and Growth Hotel Investors, a California Limited Partnership, and Growth Hotel Investors II, a California Limited Partnership, Nominal Defendants, Superior Court of the State of California, County of Los Angeles, Case No. BC145220 (The "R&S Asset Partners Action"). On February 28, 1996, R&S Asset Partners, holders of Units of GHI, and Jesse B. Small, holder of Units of the Partnership, commenced an action on behalf of themselves and others similarly situated, and derivatively on behalf of GHI and the Partnership, in the Superior Court of the State of California, County of Los Angeles, against, among others, MRC-85 and certain of its affiliates pertaining to the tender offer for up to 15,000 partnership Units of GHI and up to 21,000 partnership Units of the Partnership which commenced February 15, 1996. The action alleged, among other things, that the tender offers constituted (a) a breach of fiduciary duty owed to the limited partners of the partnerships, (b) negligent misrepresentations pertaining to the disclosure set forth in the offer to purchase, (c) common law fraud, and (d) a breach of the provisions of the partnership agreements of such partnerships. The action, which was brought as a class action on behalf of all limited partners, sought to enjoin the tender offers as well as monetary damages in an unspecified amount. See Item 3 of the Schedule 14D-9, which is incorporated herein by reference, for additional information with respect to the above actions. On March 15, 1996, counsel for the plaintiffs and defendants in the Wallace Action and the R&S Partners Action agreed in principle to settle these actions. In connection with the settlement, MRC-85 agreed to take such actions as are reasonably necessary and consistent with its fiduciary duties to procure offers for the purchase of the Partnership's and GHI's assets which maximize the value of the limited partner assignee units. MRC-85 further agreed to deal fairly and in good faith with persons expressing an interest in making a bona fide offer to purchase such assets and, subject to its fiduciary duty, provide such bona fide offers with access to the Partnership's and GHI's books and records for due diligence purposes. If MRC-85 determines that an offer to purchase its assets is acceptable, MRC-85 will prepare a plan of liquidation and submit such plan to the Partnership's partners for approval. Also in connection with the settlement, the plaintiffs will release all claims they may have arising out of the tender offers. The consummation of the settlement is subject to the satisfaction of numerous conditions including court approval. Accordingly, there can be no assurance that the settlement will be consummated on these terms and conditions or at all. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. 99(a) Schedule 14D-9 of the Registrant, as filed with the Commission on February 29, 1996. 99(b) Amendment No. 1 to Schedule 14D-9 of the Registrant, as filed with the Commission on March 7, 1996. 99(c) Amendment No. 2 to Schedule 14D-9 of the Registrant, as filed with the Commission on March 14, 1996. 99(d) Amendment No. 3 to Schedule 14D-9 of the Registrant as filed with the Commission on March 18, 1996. b) Reports on Form 8-K: Form 8-K dated January 19, 1996, was filed reporting the change in control of the Partnership. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GROWTH HOTEL INVESTORS II By: MONTGOMERY REALTY COMPANY 85, its general partner By: NPI REALTY MANAGEMENT CORP. MANAGING GENERAL PARTNER /s/William H. Jarrard, Jr. President and Director /s/Ronald Uretta Principal Financial Officer and Principal Accounting Officer Date: May 15, 1996