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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 June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17660
METRIC PARTNERS
GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3050708
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One California Street
San Francisco, California 94111-5415
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 678-2000
(800) 347-6707 in all states
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Page 1
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
BALANCE SHEETS (UNAUDITED)
June 30, December 31,
1999 1998
------------- ------------
ASSETS
Cash and Cash Equivalents $ 7,724,000 $ 7,485,000
Restricted Cash 5,000,000 5,353,000
Accounts Receivable 466,000 672,000
Prepaid Expenses and Other Assets 3,000 126,000
Asset to be Disposed of -- 8,185,000
Deferred Franchise Fees -- 24,000
------------ ------------
TOTAL ASSETS $ 13,193,000 $ 21,845,000
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts Payable $ 156,000 $ 655,000
Accrued Property Taxes -- 114,000
Accrued Interest 229,000 333,000
Other Liabilities 2,096,000 751,000
Note Payable -- 8,292,000
------------ ------------
TOTAL LIABILITIES 2,481,000 10,145,000
------------ ------------
PARTNERS' EQUITY
General Partners (810,000) --
Limited Partners (59,932 Units Outstanding) 11,522,000 11,700,000
------------ ------------
TOTAL PARTNERS' EQUITY 10,712,000 11,700,000
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 13,193,000 $ 21,845,000
============ ============
See notes to financial statements (unaudited).
Page 2
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended
June 30,
-----------------------------
1999 1998
------------ -------------
REVENUES:
Hotel Operations $ 2,016,000 $ 2,202,000
Interest and Other 293,000 370,000
----------- -----------
Total Revenues 2,309,000 2,572,000
----------- -----------
EXPENSES:
Hotel Operations
Rooms 463,000 443,000
Administrative 315,000 289,000
Marketing 200,000 233,000
Energy 101,000 103,000
Repair and Maintenance 99,000 110,000
Management Fees 63,000 80,000
Property Taxes 60,000 50,000
Other 107,000 131,000
----------- -----------
Total Hotel Operations 1,408,000 1,439,000
Depreciation and Other Amortization -- 263,000
Interest 223,000 434,000
General and Administrative 206,000 496,000
----------- -----------
Total Expenses 1,837,000 2,632,000
----------- -----------
INCOME (LOSS) BEFORE LOSS ON FORECLOSURE OF
PROPERTY 472,000 (60,000)
Loss on Foreclosure of Property (1,460,000) --
----------- -----------
NET LOSS $ (988,000) $ (60,000)
=========== ===========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP
ASSIGNEE UNIT:
Income (loss) before loss on foreclosure of
property $ 8 $ (1)
Loss on foreclosure of property (11) --
----------- -----------
NET LOSS $ (3) $ (1)
=========== ===========
CASH DISTRIBUTIONS PER LIMITED PARTNERSHIP
ASSIGNEE UNIT $ -- $ 288
=========== ===========
See notes to financial statements (unaudited).
Page 3
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended
June 30,
--------------------------
1999 1998
----------- -----------
REVENUES:
Hotel Operations $ 1,018,000 $ 1,194,000
Interest and Other 148,000 168,000
----------- -----------
Total Revenues 1,166,000 1,362,000
----------- -----------
EXPENSES:
Hotel Operations
Rooms 250,000 238,000
Administrative 199,000 161,000
Marketing 99,000 123,000
Energy 37,000 45,000
Repair and Maintenance 45,000 67,000
Management Fees 33,000 47,000
Property Taxes 23,000 23,000
Other 50,000 61,000
----------- -----------
Total Hotel Operations 736,000 765,000
Depreciation and Other Amortization -- 132,000
Interest 13,000 215,000
General and Administrative 92,000 176,000
----------- -----------
Total Expenses 841,000 1,288,000
----------- -----------
INCOME BEFORE LOSS ON FORECLOSURE OF PROPERTY 325,000 74,000
Loss on Foreclosure of Property (1,460,000) --
----------- -----------
NET INCOME (LOSS) $(1,135,000) $ 74,000
=========== ===========
NET LOSS PER LIMITED PARTNERSHIP ASSIGNEE UNIT:
Income (loss) before loss on foreclosure of property $ 6 $ 1
Loss on foreclosure of property (11) --
----------- -----------
NET INCOME (LOSS) $ (5) $ 1
=========== ===========
CASH DISTRIBUTIONS PER LIMITED PARTNERSHIP ASSIGNEE
UNIT $ -- $ 3
=========== ===========
See notes to financial statements (unaudited).
Page 4
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY (UNAUDITED)
For the Six Months Ended June 30, 1999 and 1998
General Limited
Partners Partners Total
------------ ------------ -------------
Balance, January 1, 1999 $ -- $ 11,700,000 $ 11,700,000
Income before Loss on Foreclosure
of Property -- 472,000 472,000
Loss on Foreclosure of Property (810,000) (650,000) (1,460,000)
------------ ------------ ------------
Balance, June 30, 1999 $ (810,000) $ 11,522,000 $ 10,712,000
============ ============ ============
Balance, January 1, 1998 $ 348,000 $ 29,115,000 $ 29,463,000
Net Income (Loss) 5,000 (65,000) (60,000)
Cash Distributions (353,000) (17,287,000) (17,640,000)
------------ ------------ ------------
Balance, June 30, 1998 $ -- $ 11,763,000 $ 11,763,000
============ ============ ============
See notes to financial statements (unaudited).
Page 5
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
June 30,
----------------------------
1999 1998
------------ -------------
OPERATING ACTIVITIES
Net Loss $ (988,000) $ (60,000)
Adjustments to Reconcile Net Loss to Net Cash Used
by Operating Activities:
Loss on Foreclosure of Property 1,460,000
Depreciation and Amortization -- 263,000
Changes in Operating Assets and Liabilities:
Accounts Receivable 216,000 122,000
Prepaid Expenses and Other Assets 106,000 69,000
Accounts Payable, Accrued Expenses, and
Other Liabilities (812,000) (1,021,000)
------------ ------------
Net Cash Used by Operating Activities (18,000) (627,000)
------------ ------------
INVESTING ACTIVITIES
Cash in Escrow -- 19,214,000
Proceeds from Sale of Cash Investment -- 3,888,000
Capital Improvements (26,000) (40,000)
Restricted Cash - Increase 353,000 (9,000)
Costs Paid on Foreclosure of Property (2,000) --
------------ ------------
Net Cash Provided by Investing Activities 325,000 23,053,000
------------ ------------
FINANCING ACTIVITIES
Notes Payable Principal Payments (68,000) (18,540,000)
Cash Distribution to Partners -- (17,640,000)
Prepayment Penalties Paid -- (438,000)
------------ ------------
Cash Used by Financing Activities (68,000) (36,618,000)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 239,000 (14,192,000)
Cash and Cash Equivalents at Beginning of Period 7,485,000 27,051,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,724,000 $ 12,859,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid in Cash During the Period $ 327,000 $ 567,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosure of property - see Note 6.
See notes to financial statements (unaudited).
Page 6
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Reference to the 1998 Audited Financial Statements
These unaudited financial statements should be read in conjunction with the
Notes to Financial Statements included in the 1998 audited financial
statements.
The financial information contained herein reflects all normal and
recurring adjustments that are, in the opinion of management, necessary for
a fair presentation.
2. Transactions with the Managing General Partner and Affiliates
In accordance with the Partnership Agreement, the Partnership is charged by
the Managing General Partner and Affiliates for services provided to the
Partnership. The amounts are as follows
For the Six Months Ended
June 30,
-------------------------
1999 1998
-------- --------
Partnership management fees $ -- $ 72,000
Reimbursement of administrative expense 67,000 105,000
-------- --------
Total $ 67,000 $177,000
======== ========
As discussed in Note 2 to the 1998 audited financial statements, pursuant
to the Partnership Agreement, immediately prior to liquidation and if
certain distribution levels to the limited partners are not met, the
general partners may be obligated to return all or a portion of the
cumulative amounts received in distributions. At June 30, 1999 such amount
is approximately $810,000 and the Partnership believes circumstances will
be such that the general partners will be required to re-contribute this
amount. Therefore, an $810,000 loss was allocated to the general partners
in the second quarter of 1999.
3. Net Income (Loss) Per Limited Partnership Assignee Unit
The net income (loss) per limited partnership assignee Unit is computed by
dividing the net income (loss) allocated to the limited partners by 59,932
assignee Units outstanding.
4. Restricted Cash
The balance includes $5,000,000, which (as discussed in Part II, Item 1)
the Court enjoined the Partnership from conveying, transferring, or
otherwise disposing of. The remaining $353,000 balance at December 31, 1998
represents an amount related to the sale of the Residence Inn - Atlanta
(Perimeter West) which had been deposited in an escrow account. (See Note 7
to the 1998 audited financial statements). In March 1999, the escrow
account was closed and the total amount in the account was transferred to
the Partnership.
5. Legal Proceedings
The Partnership is a plaintiff and counterclaim defendant in legal
proceedings relating to the management agreement at the Residence Inn -
Ontario, a defendant in legal proceedings seeking damages for alleged
failure to consummate a settlement of the Residence Inn - Ontario case, and
a plaintiff and defendant in other legal proceedings; see Part II, Item 1,
Legal Proceedings, for a detailed description of these matters.
6. Foreclosure of Property
On June 18, 1999, the improvements of the Residence Inn - Nashville (the
"Hotel") owned by the Partnership and the land on which it is located,
which was under lease to the Partnership, were sold through foreclosure for
$9,050,000, with net proceeds of approximately $450,000 after deduction of
the outstanding principal and other costs. The purchaser was the holder of
the mortgage note payable encumbering the Hotel (the "Lender"). As
Page 7
previously disclosed, the Partnership had been in default under the
mortgage note payable since April 1998 when it did not pay the balloon
mortgage payment then due. In the foreclosure sale, the lessor on the
ground lease also bid for the property. The lessor has since filed suit
against the foreclosure trustee, asserting that the trustee denied him his
alleged right to redeem the property by paying debt through the
foreclosure.
Subsequent to the foreclosure, Marriott has issued a notice requiring the
Partnership to pay a $1,415,000 termination fee, computed as per the
management agreement, plus certain employee costs not yet specified in
amounts. The Partnership has accrued the $1,415,000 fee as a cost of sale
as of June 30, 1999. However, the Partnership believes that payment of such
termination fee and employee costs is dependent on the outcome of
negotiations currently underway between the Lender and Marriott regarding a
management agreement for Marriott's continued management of the property.
Marriott is managing the property for the Lender on an interim basis. The
ultimate outcome of payment of the termination fee plus other employee
costs cannot be determined at this time.
In the foreclosure sale the allocation of the $9,050,000 price was not
specified. The Partnership claims its right to a portion of the net
proceeds from the sale because of its ownership of the personal property
sold, which portion it has estimated to be no more than $50,000 based upon
the information available to it. The estimated net cost of foreclosure to
the Partnership (including the $1,415,000 accrued termination fee and other
accrued costs) is $1,432,000. The carrying value of the Hotel at the time
of sale was $8,235,000 (net of the $195,000 impairment of value provision
recognized in 1998) and the estimated note payable balance, adjusted for
amounts in the impound account, was $8,207,000, resulting in a $1,460,000
loss on foreclosure of property recognized in the second quarter of 1999.
With respect to the ground lease, on May 20, 1999, the lessor issued a
letter notifying the Partnership that it had terminated the ground lease as
the Partnership had defaulted under the terms of the mortgage note for the
Hotel, thereby violating a term of the ground lease agreement. However, the
Lender has taken the position that the ground lease was not terminated
until June 18, 1999, when it was terminated as a result of the foreclosure.
Therefore, the date on which the ground lease was terminated has not been
determined. The accompanying financial statements reflect ground lease
expenses accrued to the date of the foreclosure. Current ground lease
expenses (exclusive of deferred amounts) have been paid through April 1999.
The Partnership believes that it was relieved of future payments as of the
date of foreclosure, if not as of May 20, 1999, the date the lessor claims
to be the lease termination date. The Partnership is, however, still liable
for approximately $655,000 in deferred ground rents and interest accrued
thereon. This liability is reflected in the financial statements. At this
time it is unclear which party is entitled to this amount or when payment
will be made.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Item should be read in conjunction with Financial Statements and other
Items contained elsewhere in this Report.
Year 2000 Readiness Disclosure
With the change to the year 2000, computer programs or hardware utilizing two
digits rather than four to define the applicable year may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to conduct normal business activities.
In anticipation of the year 2000, in late 1996 the Managing General Partner
conducted a thorough inventory of all software programs it had in use and
identified programs that would require modification to correct date handling
methodology. Furthermore, the Managing General Partner initiated a policy
requiring that all future software purchases be year-2000 compliant. With the
exception of the Managing General Partner's financial accounting system, the
majority of the hardware and software in use was determined to be year-2000
compliant or it was determined that compliance could be achieved with minor
modifications. These modifications were 100% completed by year-end 1998. With
respect to the financial accounting system, the Managing General Partner has
implemented and tested a year 2000-compliant software product replacing its
prior system. All necessary changes have been and will continue to be undertaken
at no cost to the Partnership.
In addition to internal systems, the Managing General Partner surveyed third
parties that provide essential business services to determine their state of
year-2000 readiness. The Partnership's Servicing and Transfer Agent, Gemisys,
utilizes a platform programmed to correctly interpret the change to the new
century.
Page 8
The Managing General Partner anticipates there to be no material exposure to
year-2000 issues. However, should the Managing General Partner's new financial
accounting system not be fully operational subsequent to December 31, 1999 or as
a result of any other date change, the Managing General Partner's contingency
plan would be to process necessary transactions utilizing non-date sensitive
software.
Properties
A description of the remaining property in which the Partnership had an
ownership interest prior to the June 18, 1999 foreclosure date, along with the
occupancy and room rate data, follows:
OCCUPANCY AND ROOM RATE SUMMARY
Average Occupancy Rate (%) Average Daily Room Rate ($)
------------------------------- --------------------------------
Six Months Three Months Six Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Date of --------------- --------------- ---------------- ---------------
Name and Location Rooms Purchase 1999 1998 1999 1998 1999 1998 1999 1998
- -------------------------------- -------- ---------- ------- ------- ------- ------- ------ ------- ------- ------
Residence Inn - Nashville(Airport) 168 05/89 80 84 83 87 85.66 82.42 88.11 85.09
Nashville, Tennessee
Results of Operations
During the six and three months ended June 30, 1999, the Partnership had net
loss of $988,000 and $1,135,000, respectively, compared to net loss of $60,000
for the six months ended June 30, 1998 and net income of $74,000 for the three
months ended June 30, 1998. The changes are primarily due to a $1,460,000 loss
on foreclosure of property recorded in the second quarter of 1999, including
accrued costs of sale of $1,415,000 for a termination fee potentially due in
accordance with the Marriott management contract, which was terminated upon
foreclosure of the Residence Inn - Nashville (see Note 6 to the financial
statements). Contributing to the decrease in income in 1999 was a decrease in
operating income from the Residence Inn - Nashville. Partial offsets to these
negative factors were a decrease in depreciation, reductions in general and
administrative and a decline in interest expense.
Operating revenues decreased in both the three and six months ended June 30,
1999 compared to the same periods in 1998 as a result of a decrease in
occupancy. Operating expenses decreased in the three and six month periods ended
June 30, 1999 compared to the same periods in 1998, but not in amounts
sufficient to offset the decrease in revenues. Hence, the Partnership
experienced decreases in hotel net operating income for both the three and six
month periods ended June 30, 1999. Depreciation and other amortization decreased
during the three and six months ended June 30, 1999 compared to 1998 as a result
of the Residence Inn - Nashville being classified as an asset to be disposed of
at December 31, 1998 and as no depreciation or amortization of deferred
franchise fees was recorded after that date (see Notes 1 and 4 to the 1998
audited financial statements). Interest expense decreased in the three and six
months ended June 30, 1999 as interest was not paid or recorded on the books of
the Partnership after March 31, 1999 in anticipation of foreclosure. The
Partnership's general and administrative costs decreased in the three and six
months ended June 30, 1999 compared to 1998, primarily due to a decrease in
legal costs, Partnership management fees and administrative costs.
Partnership Liquidity and Capital Resources
Second Quarter of 1999
As presented in the Statement of Cash Flows, cash was used by operating
activities. Cash was provided by investing activities from receipt by the
Partnership of the balance of an escrow account (the "Shortfall Guaranty
Account") that had been established at the time of sale of the Residence Inn -
Atlanta in October 1995. The conditions for payment from the Shortfall Guaranty
Account to the buyer of the hotel were not met and, pursuant to the escrow
agreement, the full amount, including any interest earned, was returned to the
Partnership on March 31, 1999. Cash was used by financing activities for
principal payments on notes payable.
Page 9
In January 1998, the Partnership made two distributions to its general and
limited partners, one totaling $16,818,000, representing a portion of the net
sales proceeds, and another one totaling $612,000 representing a distribution
from 1997 operations. Additionally, in April 1998 the Partnership made a
distribution totaling $211,000 in order to comply with certain states' tax
withholding requirements. The Partnership has made no distributions to date in
1999. Future distributions will be dependent primarily upon the level of general
and administrative expenses and interest income as well as the outcome of legal
proceedings related to the Residence Inn - Nashville, as described further in
Part II, Item 1, and the potential payment of a substantial termination fee and
other amounts to Marriott.
On April 1, 1998, the balloon mortgage payment for the Residence Inn -
Nashville, totaling approximately $8.5 million, became due and payable (see Note
6 to the financial statements). In exchange for a six-month forbearance
agreement, during which time the Partnership pursued the potential sale of the
property, the lender accepted a principal reduction payment of $100,000,
reimbursement of $20,000 of its costs, and regular monthly debt service payments
through November 1, 1998. The Partnership subsequently determined that a sale of
the property was not feasible, and the forbearance agreement expired. The
Partnership attempted to negotiate with the lender to accept a deed in lieu of
foreclosure and to assume the Marriott management contract, but was
unsuccessful. A deed in lieu of foreclosure would have relieved the Partnership
of substantial contract termination fees that it may have to pay as a result of
the foreclosure sale. In this regard, the Partnership made regular monthly debt
service payments due on the first day of the month of December 1998, January,
February, March and April 1999. On June 18, 1999 the Residence Inn - Nashville,
its contents and the land on which it is located, which was under lease to the
Partnership, was sold through foreclosure. See Note 6 to the accompanying
financial statements. While the Partnership believes that the ground lease
associated with the property was terminated on or before the foreclosure date,
the Partnership will be obligated to pay deferred rent under the lease.
Internal Revenue Service regulations provide that, should 5% or more of the
outstanding assignee limited partnership units of a limited partnership be
traded via non-exempt transactions within a calendar year, the limited
partnership could be classified as a publicly-traded partnership for federal tax
purposes, and could therefore be taxed as a corporation. Transfers that are
exempt from the above restrictions include transfers at death; transfers between
siblings, spouses, ancestors, or lineal descendants; and distributions from
qualified retirement plans.
In 1996, 1997, and again in 1998, the Managing General Partner suspended the
processing of most types of resale transactions, as the level of such resale
transactions reached 4.9% of the total number of outstanding Units for each of
those years. This action was taken to ensure that resale transactions did not
result in the termination of the Partnership for tax purposes, or cause the
Partnership to be classified as a publicly traded partnership or to be taxed as
a corporation.
On June 25, 1999, Gemisys, the Partnership's Servicing and Transfer Agent
notified the Managing General Partner that non-exempt trading representing
approximately 4.9% of the outstanding Units of GSI had been reached, at which
time the Managing General Partner again suspended processing of resale
transactions for the remainder of the calendar year. Unit holders were advised
of that suspension in accordance with Section 12.1 of the Partnership Agreement,
via a special communication dated June 25, 1999. All resale transaction
paperwork submitted subsequent to that date has been returned to the originator.
Gemisys will again begin processing resale transactions on January 3, 2000.
Conclusion
In view of (i) the foreclosure of the Residence Inn - Nashville; (ii) the
Partnership's potential liability of $1,415,000 in contract termination fees
plus other costs arising from the disposal of the hotel; (iii) distributions the
General Partners will be obligated to return to the Partnership prior to its
liquidation; and (iv) uncertainties related to the litigation relating to that
property, the Partnership no longer provides an estimated net asset value per
Unit. However, the Partnership is aware that some resale transactions of Units
have taken place in the informal secondary market. In this informal market,
transactions may or may not take place in any given time period and occur at a
price negotiated between the buyer and seller. The Partnership has no knowledge
concerning how a particular price may be determined. A total of 131 resale
transactions have been recorded on the books of the Partnership's transfer agent
between January 1, 1999 and June 25, 1999 (the date of the suspension of
trading), reflecting prices ranging from $75 to $415 per Unit, with a simple
average price of $109.50. The Partnership's knowledge of these transactions is
based solely on the books and records of its Transfer Agent.
Cash distributions from Partnership operations to investors throughout 1997 were
made at an annualized rate of 4%, including the distribution made on January 29,
1998 from fourth quarter 1997 operations. On January 13, 1998 the Partnership
distributed $275 per Unit from the proceeds of the sale of eight hotels in
Page 10
December 1997. On April 9, 1998 the Partnership made a distribution of $3.45 per
Unit in order to satisfy nonresident state withholding requirements for the
states of California, North Carolina, and Indiana. Future distributions will be
dependent on general and administrative expenses and interest income and fees
and expenses the Partnership may be liable for resulting from the foreclosure,
as well as the outcome of legal proceedings relating to the Residence Inn -
Nashville and potential payment of the $1,415,000 termination fee to Marriott.
As discussed in Part II, Item 1, there is substantial doubt regarding the
Partnership's ability to continue as a going concern.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Metric Partners Growth Suite Investors, L.P. vs. Kenneth E. Nelson, The Nelson
Group, et al., San Francisco County Superior Court, Case No. 928065 (the "SF
Lawsuit"). [The lawsuits described below are related. Terms defined in the
description of one case may be used in the description of the other cases.]
This lawsuit relates to disputes in connection with management of the
Partnership's Residence Inn - Ontario by an entity controlled by Kenneth E.
Nelson ("Nelson") from April 1988 to February 1991. In March 1993, the
Partnership and Nelson verbally agreed to settle the SF Lawsuit at a settlement
conference (the "SF Settlement"), whereby the Partnership would purchase at a
discount the land (the "Land") underlying the Partnership's Residence Inn -
Nashville (the "Hotel") then leased by the Partnership from Nashville Lodging
Company ("NLC"), an entity controlled by Nelson. Various disagreements between
the Partnership and Nelson regarding the SF Settlement arose after March 1993
and documents to effectuate the SF Settlement were never executed.
Orlando Residence Ltd. vs. Metric Partners Growth Suite Investors, L.P. et al.,
Chancery Court for Davidson County, in Nashville, Tennessee, Case No.
92-3086-III.
2300 Elm Hill Pike, Inc. ("2300") (formerly known as Nashville Residence
Corporation until 1986) was the original owner of the Hotel (including the
Land). 2300 conveyed its interest in the Hotel (including the Land) to NLC in
1986 by unrecorded quitclaim deed. In April 1989, NLC sold the Hotel and leased
the Land to the Partnership pursuant to a ground lease ("the Lease").
In October 1992, Orlando filed this lawsuit against NLC and its general partners
and the Partnership, alleging that the sale of the Hotel and the Land by 2300 to
NLC in 1986 and NLC's subsequent sale of the Hotel and lease of the Land to the
Partnership in 1989 were fraudulent conveyances, intended to hinder Plaintiff's
recovery of a judgment against 2300. In August 1993, the Court dismissed this
action against the Partnership. In June 1999, the lender of the mortgage note on
the Hotel and the Land foreclosed, which terminated the Partnership's interest
in the Hotel and the Land.
Nashville Lodging Company vs. Metric Partners Growth Suite Investors, L.P. et
al., Circuit Court, State of Wisconsin, Case No. 94CV001212.
In February 1994, NLC served this lawsuit on the Partnership. NLC alleges fraud,
breach of settlement contract and breach of good faith and fair dealing and
seeks compensatory, punitive and exemplary damages in an unspecified amount for
the Partnership's failure to consummate the SF Settlement. In February 1994, the
Partnership filed an answer and requested that the Court stay the action pending
resolution of the SF Lawsuit including all appeals. The Court refused to stay
the action and discovery commenced. In February 1995, the Court determined that
the Partnership could be sued in Wisconsin but stayed the case until the
settlement of the SF Lawsuit has been finalized.
Orlando Residence Ltd. vs. 2300 Elm Hill Pike, Inc. and Nashville Lodging
Company vs. Metric Partners Growth Suite Investors, L.P., Chancery Court for
Davidson County, in Nashville, Tennessee, Case No. 94-1911-I ("Nashville Case
I").
Orlando filed this action against 2300 and NLC in the Davidson County Chancery
Court to attempt to execute on its judgment against Nelson, NLC and 2300 in
another action in the Chancery Court by subjecting the Land to sale. In May
1995, 2300 and NLC filed a third-party complaint against the Partnership,
alleging it had refused to purchase the Land as required by the SF Settlement.
2300 and NLC demanded payment by the Partnership of 2300 and NLC's costs of
defending Nashville Case I and indemnification for any loss resulting from the
claims of Orlando, among other claims of damage.
Page 11
In February 1996, the Court granted a motion filed by 2300 and NLC for partial
summary judgment, ruling that the Partnership had breached the SF Settlement.
The action will continue to determine damages and other issues. The Partnership
does not believe it breached the SF Settlement and will appeal this ruling at an
appropriate time. However, no assurance can be given that its appeal will be
successful.
In late October 1997, 2300 and NLC filed a motion for an injunction to prohibit
GSI from distributing proceeds from the sale of the Residence Inns owned by GSI,
pending a final judgment in this case. A hearing on this motion was held in
February 1998 and the Court enjoined the Partnership from conveying,
transferring, distributing or otherwise disposing of its cash to any extent
which would leave less than $5 million available for payment of any judgment
obtained by 2300 and NLC.
2300 and NLC filed an amended complaint against the Partnership in April 1998,
asserting, among other things, a bad faith breach of contract by the
Partnership. In May 1998, the Court granted a motion by the Partnership to
dismiss these bad faith allegations and to dismiss certain claims for specific
damages made by 2300 and NLC, including attorneys' fees and the value of
Nelson's time relating to efforts to enforce the SF Settlement.
In late October 1998, 2300 and NLC filed a second amended complaint, asserting
that a certain 1989 three-party agreement among NLC, the Partnership and the
holder of a mortgage on the Hotel and the Land entitles 2300 and NLC to obtain
judgment for, among other things, the cost, including attorney's fees, of this
action and of Nelson's time and efforts on behalf of NLC in this action. In
November 1998, the Court granted a motion filed by the Partnership, dismissing
the claim of NLC and 2300 to recover for the value of Nelson's time and efforts
on behalf of NLC in this and related litigation.
In December 1998, the Court granted a motion for partial summary judgment filed
by the Partnership, dismissing most of the remaining damage claims of 2300 and
NLC, including claims for indemnification for any loss resulting from the claims
of Orlando. After these claims were dismissed, 2300 and NLC amended their damage
claim to seek to recover the alleged differential between the price that the
Partnership agreed to pay for the Land and its alleged fair market value. The
amount of this claim is approximately $1.6 million.
In April 1999, the Partnership filed a motion to strike the new damage claim. At
a hearing held on May 7, 1999, the Court denied the motion.
The trial of the case, which had previously been set for February 9, 1998 and
continued to March 15, 1999, has been further continued to February 7, 2000 to
permit limited discovery related to this new claim.
Metric Partners Growth Suite Investors, L.P., vs. Nashville Lodging Co., 2300
Elm Hill Pike, Inc., Orlando Residence Ltd., and LaSalle National Bank, as
trustee under that certain pooling and servicing agreement, dated July 11, 1995
for the holders of the WHP Commercial Mortgage Pass Through Certificates, Series
1995C1 and Robert Holland, Trustee, Chancery Court for Davidson County, in
Nashville, Tennessee, Case No. 96-1405-III ("Nashville Case II").
GSI filed this action on May 3, 1996 to obtain, among other things, a judicial
determination of the rights and obligations of GSI and NLC under the senior
mortgage on the Hotel ("Senior Mortgage"), a note held by NLC "wrapped around"
the Senior Mortgage (the "Wrap Note") and the Lease as a consequence of GSI's
cure of certain defaults by NLC under the Senior Mortgage. GSI believed that as
a result of such a cure, it became the direct obligor to the lender under the
Senior Mortgage and that the Wrap Note had been satisfied and the payments due
under Lease reduced by $50,000 per year.
NLC and 2300 filed an answer in June, together with a counterclaim against the
Partnership. NLC and 2300 claimed damages from the Partnership and asked the
Court to permit acceleration of the Wrap Note and termination of the Lease. In
July 1996, the Partnership filed a motion for summary judgment in this case,
asking that the Court award the relief sought by it and that the Court dismiss
the counterclaim of NLC and 2300. At a hearing on this motion held in August
1996 the Court granted the Partnership's motion. The defendants appealed all
judgments for the Partnership in this case. The Partnership and the defendants
agreed on an attorneys' fee award to the Partnership of $60,000, but no payment
was expected until the defendants' appeal is resolved. Oral arguments regarding
this appeal were held in July 1998, and in September 1998 the appellate court
affirmed the judgments for the Partnership. Defendants moved for rehearing,
which was denied in early October 1998. Defendants then filed an application
with the Tennessee Supreme Court for permission to appeal the appellate court
decision. This application was denied by the Tennessee Supreme Court in early
March 1999. Subsequently, Defendants petitioned the Tennessee Supreme Court to
reconsider its denial. This petition was denied by the Tennessee Supreme Court
on May 10, 1999. The Partnership's $60,000 attorneys' fee award is now due and
owing by the defendants.
Page 12
Kenneth E. Nelson and Nashville Lodging Co. vs. Metric Realty et al., Chancery
Court for Davidson County in Nashville, Tennessee, Case No. 97-2189-III (the
"Inducement Action").
In the second quarter of 1997, Nelson alleged that Metric Realty and GHI
Associates II, L.P., the Managing and Associate General Partners, respectively,
of the Partnership, and certain of Metric Realty's affiliates (the "Affiliates")
and certain former and current employees of Metric Realty or its affiliates (the
"Employees") had improperly induced the Partnership to breach the SF Settlement.
In June 1997, Nelson and NLC filed the Inducement Action in the Chancery Court
for Davidson County in Nashville, Tennessee (the "Chancery Court") against
Metric Realty, GHI Associates II, L.P., the Affiliates and certain of the
Employees (the "Inducement Action Defendants"), seeking unspecified
compensatory, treble and punitive damages for the alleged improper inducement of
breach of contract.
In the Inducement Action, Defendants in June 1998 filed a motion to dismiss the
complaint against the Employees and one of the Affiliates named in the action
based on lack of jurisdiction and against the remaining Affiliates based on
failure to state a claim. The Chancery Court in September 1998 dismissed the
complaint against all Affiliates but one and denied the remaining requests for
dismissal.
A motion for summary judgment to dismiss the action on the basis of the statute
of limitations was filed in January 1999 by the Inducement Action Defendants and
was argued at a hearing held in February 1999. In April 1999, the Court denied
the motion. Discovery is ongoing and the case has not been set for trial.
The legal and other expenses of the Inducement Action Defendants in the
Inducement Action arising as a result of the allegations made by Nelson are
being paid by the Partnership pursuant to the indemnification provisions of the
Partnership's limited partnership agreement and subject to the conditions set
forth in those provisions.
Metric Partners Growth Suite Investors, L.P. vs. James Reuben et al., San
Francisco County Superior Court, Case No. 998214.
On September 30, 1998, the Partnership filed this lawsuit against James Reuben
and several law corporations of which he is or has been a member (the "Reuben
Defendants"), alleging breach of their professional obligations and fiduciary
duty as attorneys for the Partnership to adequately and competently represent
and advise the Partnership in connection with the SF Settlement. The Partnership
seeks unspecified damages from the Reuben Defendants arising from such breach.
The Reuben Defendants answered the complaint in January 1999. Discovery has yet
to commence and no trial date for this action has been set.
Samuel A. Hardage and Samantha Hotels, LLC vs. Robert M. Holland, Jr., Trustee,
and WBL II Real Estate Limited Partnership vs. Metric Partners Growth Suite
Investors, L. P. and Nashville Lodging Company, Chancery Court for Davidson
County, in Nashville, Tennessee, Case No. 99-1749-I..
On June 21, 1999, Samuel A. Hardage and Samantha Hotels, LLC ("Hardage") filed
this action against Robert M. Holland (the "Trustee") and WBL Real Estate
Limited Partnership (the "Lender") claiming in general that the Trustee
improperly conducted the foreclosure sale of the Hotel and its contents and the
Land (the "Collateral") by failing to (i) permit Hardage to redeem the
Collateral for the amount of the outstanding debt that was being foreclosed and
(ii) disqualify the Lender when it did not close its purchase of the Collateral
by noon on June 18, 1999. Among other remedies, Hardage asks that he be allowed
to redeem the Collateral or that he be paid any proceeds from the sale of the
Collateral in excess of the outstanding debt.
On July 19, 1999, the Trustee and the Lender responded to the complaint, made
certain counterclaims and made a third-party complaint against the Partnership
and NLC. In general, the third-party complaint alleges that in the foreclosure
sale the Lender paid $450,000 (the "Surplus Funds") in excess of the debt, costs
and attorney's fees recoverable in connection with the debt and a $50,000
reserve for litigation costs related to the sale. As a result, the Trustee and
Lender ask the Court for an order interpleading the Surplus Funds and joining
all parties, including the Partnership and NLC, who claim an interest in the
Surplus Funds. On July 20, 1999, the Partnership filed an answer, counterclaim
and crossclaim, claiming an interest in the Surplus Funds related to the
personal property sold in the foreclosure sale.
Hardage has filed a motion for a preliminary injunction to permit him to redeem
the debt or to reconvene the sale with the Lender disqualified, which motion is
scheduled to be heard on August 12, 1999. If this motion were to be granted,
there would be no Surplus Funds in which the Partnership could claim an
interest. Moreover, if Hardage were to acquire the Hotel as a result of this
motion and was to discontinue the management of the Hotel by Marriott (which the
Partnership believes would happen), the claim by Marriott to contract
termination fees of $1,415,000 and other employee-related costs related to the
Page 13
foreclosure (see Part I, Item 1, Note 6 to Financial Statements, above) would be
strengthened.
Potential Impact of Foreclosure and Litigation
The foreclosure of the Residence Inn - Nashville and subsequent claims made by
Marriott in connection with the foreclosure (see Part I, Item 2, "Partnership
Liquidity and Capital Resources"), as well as (i) the substantial legal fees and
costs that have been and are expected to be incurred by the Partnership in
connection with the existing lawsuits and (ii) the usual uncertainty of
litigation create substantial doubt about the Partnership's ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments that might result from these uncertainties.
Item 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were required to be filed during the period
covered by this Report other than the Report filed on June 29, 1999
including the letter from the Registrant to its investors dated June
25, 1999. Subsequent to the close of the quarter, on July 2, 1999, a
Report was filed on Form 8-K reporting on the foreclosure of the
Residence Inn - Nashville.
Page 14
SIGNATURE
---------
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.
METRIC PARTNERS GROWTH SUITE INVESTORS, L.P.,
a California Limited Partnership
By: Metric Realty
an Illinois general partnership
its Managing General Partner
By: SSR Realty Advisors, Inc.,
a Delaware corporation
its Managing General Partner
By: /s/ William A. Finelli
----------------------
William A. Finelli
Managing Director,
Principal Financial and Accounting Officer
of SSR Realty Advisors, Inc.
Date: August 10, 1999
----------------------
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