SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 3)
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Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Super 8 Motels II, Ltd., a California limited partnership
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$440
2) Form, Schedule or Registration Statement No.:
Schedule 14A
3) Filing Party:
Registrant
4) Dated Filed:
May 15, 1998
REVISED PRELIMINARY COPY
CONSENT SOLICITATION STATEMENT
PROPOSED ACTIONS BY WRITTEN CONSENT
OF LIMITED PARTNERS
OF
SUPER 8 MOTELS II, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
October ____, 1998
INTRODUCTION
The limited partners (the "Limited Partners") of SUPER 8 MOTELS II,
LTD., a California limited partnership (the "Partnership"), are being asked by
the Partnership and Grotewohl Management Services, Inc. (the "Managing General
Partner") to consider and approve by written consent the proposed sale of all of
the Partnership's interests in real property and related personal property (the
"Property") for an aggregate purchase price of $2,200,000, and the dissolution
of the Partnership, which proposal is described hereinafter ("Proposal #1"). If
Proposal #1 is approved and the proposed sale is consummated, among other
things, all of the Partnership's assets will be liquidated and the Partnership
will be dissolved. (See "Effects of Approval of the Proposals" below.)
If Proposal #1 is approved, the Partnership will be authorized to sell
the Property to Tiburon Capital Corporation, or a nominee thereof (the "Buyer").
As discussed below under "Purchase Agreement," Mark Grotewohl, a former employee
of the Partnership and the son of the two owners of the Managing General
Partner, is an affiliate of the Buyer.
The Limited Partners are urged to consider the following additional
factors:
- The Buyer is engaging in the transaction in order to make a
profit by operating the Property, and the Buyer's interests differ from
those of the Limited Partners. (See "Purchase Agreement" and "Special
Factors.")
- The Managing General Partner is subject to conflicts of interest,
including conflicts arising from the settlement of lawsuits (see "Legal
Proceedings"), which may have impacted its decision to sell the Property, its
conduct of negotiations leading to the proposed sale of the Property and its
recommendation with respect thereto. (See "Conflicts of Interest.")
- The Managing General Partner did not list the Property for sale to
obtain competitive bids. Instead, the Managing General Partner obtained a formal
appraisal of the Property upon which the purchase price therefor is based. (See
"Special Factors" and "Conflicts of Interest.") It is possible, then, that the
Partnership might have received a higher price for the Property if it had
solicited offers by listing the Property.
- The appraiser may be subject to conflicts of interest in that it
has prepared other appraisals for the Managing General Partner. (See
"Appraisal of the Property/Fairness Opinion.")
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- The Managing General Partner did not retain an unaffiliated
representative to act solely on behalf of the Limited Partners in negotiating
the terms of the proposed transaction. (See "Special Factors.")
- The Limited Partners will be allocated taxable gain if the Property
is sold. (See "Effects of Approval of the Proposals - Federal Income Tax
Consequences.")
Specifically, the Limited Partners are being asked to approve the
following Proposals:
Proposal #1. An amendment to the Partnership Agreement to grant to the
Managing General Partner authority to sell the Property and related personal
property to the Buyer, notwithstanding that the Buyer is an Affiliate of Mark
Grotewohl; to dissolve and wind up the affairs of the Partnership; to distribute
the proceeds of the sale and any other cash held by the Partnership in
accordance with the Partnership Agreement; to terminate the Partnership; and to
take any action deemed necessary or appropriate by it to accomplish the
foregoing. The exact wording of such amendment is set forth under "Amendments to
Partnership Agreement."
Proposal #2. An amendment to the Partnership Agreement to grant to the
Managing General Partner authority, without the further approval of the Limited
Partners, to sell the Property, if the purchaser is not an affiliate of the
Managing General Partner, and if such sale is for "all cash," and represents an
amount equal to or greater than the amount reflected in an appraisal which is
not more than 15 months old at the date the purchase agreement is executed; to
dissolve and wind up the affairs of the Partnership; to distribute the proceeds
of the sale and any other cash held by the Partnership in accordance with the
Partnership Agreement; to terminate the Partnership; and to take any action
deemed necessary or appropriate by it to accomplish the foregoing. The exact
wording of such amendment is set forth under "Amendments to Partnership
Agreement."
If the Limited Partners approve Proposal #1, Proposal #2 (whether
approved or not) will be of no force and effect unless the sale to the Buyer
pursuant to Proposal #1 is not consummated. If the Property is not sold pursuant
to Proposal #1 (either because Proposal #1 is not approved or because Proposal
#1 is approved but the Property is not sold to the Buyer) and Proposal #2 is
approved by the Limited Partners, the Managing General Partner will endeavor to
sell the Property pursuant to Proposal #2.
If the Limited Partners approve Proposal #1, closing of the sale will
be subject to certain terms and conditions, including the availability of
sufficient debt financing to the Buyer. (See "Purchase Agreement.") If the sale
is consummated, distributions will be made to the Limited Partners in accordance
with the terms of the Partnership's Certificate and Agreement of Limited
Partnership (the "Partnership Agreement"). In an amendment to the settlement
agreement respecting the lawsuits discussed below (see "Legal Proceedings"), the
Partnership agreed to close the proposed transaction within a 30-day period
after approval thereof by the Limited Partners, so as to provide the Limited
Partners with the proceeds from the sale as quickly as possible.
Proposal #1 and Proposal #2 are subject to the approval of a
majority-in-interest of the Limited Partners. If the Limited Partners do not
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approve Proposal #1 or Proposal #2, the Partnership will continue to conduct its
operations as usual.
The purchase agreement was executed on April 30, 1998 by John F. Dixon
and William R. Dixon, Jr., on behalf of the Buyer, and Philip B. Grotewohl and
David P. Grotewohl, on behalf of the Partnership. The purchase agreement also
covers the proposed sale of the properties of four other California limited
partnerships as to which the Managing General Partner serves as general partner.
The term of all such purchases are identical, except for the amount being
offered for each property. The Buyer has the right to rescind the purchase
agreement if any of the five partnerships fails to approve the sale of its
property or properties to the Buyer.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This Consent Solicitation Statement and the enclosed form of Actions By
Written Consent of Limited Partners (the "Consent") were first sent to the
Limited Partners on or about October __, 1998.
Units of limited partnership interest in the Partnership (the "Units")
represented by Consents duly executed and returned to the Partnership on or
before October __, 1998 (unless extended by the Managing General Partner
pursuant to notice mailed to the Limited Partners) will be voted or not voted in
accordance with the instructions contained therein. If no instructions for the
proposals are given on an executed and returned Consent, Units so represented
will be voted in favor of the proposals. The Managing General Partner will take
no action with respect to the proposals addressed herein except as specified in
the duly executed and returned Consents.
The cost of this solicitation of Consents is being borne by the
Partnership. Such solicitation is being made by mail and, in addition, may be
made by officers and employees of the Partnership and the Managing General
Partner, either in person or by telephone or telegram.
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TABLE OF CONTENTS
Page
Special Factors............................................................ 1
Outstanding Voting Securities and Voting Rights............................ 5
Consent Under Partnership Agreement........................................ 7
The Property and the Partnership's Business................................ 7
Narrative Description of Business........................................ 7
(a) Franchise Agreements........................................ 7
(b) Operation of the Motels..................................... 8
(c) Competition................................................. 8
Property................................................................. 8
Management................................................................. 9
Purchase Agreement.........................................................10
Conflicts of Interest......................................................12
Effects of Approval of the Proposals.......................................13
General..................................................................13
Determination and Use of Net Proceeds....................................13
Federal Income Tax Consequences..........................................14
(a) General...........................................................14
(b) Characterization of Gain..........................................14
Dissolution of the Partnership...........................................16
Appraisal of the Property/Fairness Opinion.................................16
Legal Proceedings..........................................................18
Amendments to Partnership Agreement........................................21
Financial Information......................................................22
Selected Partnership Financial Data......................................22
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................22
I. Fiscal Year Financial Statements.................................22
(a) Liquidity and Capital Resources......................22
(b) Results of Operations................................23
II. Interim Financial Statements....................................25
(a) Liquidity and Capital Resources......................25
(b) Results of Operations................................25
Other Financial Information..............................................25
Financial Statements.......................................................F-i
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SPECIAL FACTORS
A number of special factors apply to the Proposals. Some factors are
described more fully elsewhere in this Consent Solicitation Statement and should
be read in conjunction with the rest of this Consent Solicitation Statement.
Limited Partners are urged to read all of this Consent Solicitation Statement
carefully.
The primary purpose of the Proposals is to provide Limited Partners
with an opportunity to liquidate their investment in the Partnership. Based on
(i) comments and questions from Limited Partners with respect to a liquidation
of their investment, (ii) the lack of a public market for the Units, and (iii)
the duration of the Partnership, the Managing General Partner believes such
liquidity is desired by the Limited Partners.
The Partnership was formed in 1979 and its motel property located in
Santa Rosa, California opened for business during 1980.
This Consent Solicitation Statement has been prepared to ask the
Limited Partners to approve the sale of the Property for cash in the amount of
the appraised fair market value of $2,200,000.
It has always been the intention of the Partnership to liquidate the
Property when it became apparent that the best interests of the Limited Partners
would be served by doing so. The Managing General Partner has received inquiries
from the Limited Partners over the years as to when the Property was to be sold
and the Partnership liquidated. Its response, until recently, has been that
because of overbuilt and depressed motel market conditions, the time was not
right for a sale of the Property. Conditions have changed, and the Managing
General Partner believes that the Property should be sold now and the
Partnership liquidated.
During September and October 1997, Everest Properties II, LLC, a member
of an affiliated group of entities which is the largest investor group in the
Partnership (the "Everest Group"), made an offer to purchase the Property and
the motel properties of four other California limited partnerships as to which
the Managing General Partner serves as general partner (the Partnership and the
four other partnerships are referred to herein as the "GMS Partnerships"). The
purchase price set forth in the October offer for the Property was $1,173,990, a
price far below $2,200,000, the recent appraised value and the price offered in
Proposal #1. The Managing General Partner rejected the prior offer. Subsequent
conflicts between the Everest Group and the Partnership resulted in lawsuits.
Inasmuch as the Managing General Partner agreed with the Everest Group in
principle that the Property should be sold, a settlement was reached whereby,
among other things, the Managing General Partner agreed to take steps to sell
the Property and the properties of the other GMS Partnerships, and the lawsuits
were dismissed. (See "Legal Proceedings.") In an amendment to the settlement
agreement, the Everest Group agreed to vote its Units in favor of Proposal #1.
(See "Outstanding Voting Securities and Voting Rights.")
The Managing General Partner considered seeking third party buyers for
the Property, and would do so if Proposal #2 were approved and Proposal #1 were
disapproved, but believes that the transaction structure of Proposal #1
represents a more favorable option to expedite the liquidation of the Limited
Partners' interests in the Partnership. Although the solicitation of third party
bids might have resulted in a higher price for the Property, the Managing
General Partner believes that inasmuch as the Partnership has obtained an
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independent appraisal of the Property, there is little likelihood of obtaining
bids in the immediate future on more favorable terms than those offered by
Tiburon Capital Corporation. It is also possible that a delay in pursuing the
Buyer's offer by listing the Property would have resulted in the loss of that
offer. In this regard, prior to negotiating the terms represented by Proposal
#1, the Managing General Partner received in writing from two real estate
brokers who are not affiliated with the Partnership or the Managing General
Partner suggested sale strategies for the sale of the Property and the
properties of the other GMS Partnerships. One broker suggested a sealed bid
sales strategy with an emphasis of obtaining a single purchaser or a minimum
number of purchasers. This broker presented a value for the eight properties
which, in the aggregate, was slightly lower than the aggregate of those in the
proposed transactions. However, the values assigned to each property were, in
some instances, lower than those of the proposed transactions and, in other
instances, higher. The other broker suggested that the properties would derive
the highest value if sold as a portfolio. The list price determined by this
broker was substantially the same as that of the proposed transactions. This
broker also suggested that a higher list price might be appropriate for a buyer
trying to break into the California lodging industry. Nonetheless, under each
strategy presented by this broker, the prices assigned to each of the eight
properties were, in some instances, lower than those of the proposed
transactions and, in other instances, higher. (Limited Partners should be aware
that "list" prices and "values" are prices assigned by brokers to position
properties for ultimate sale over a period of time. Such estimated prices are
not intended to be appraised values, are not the result of the rigorous efforts
entailed in producing appraised values, may reflect marketing strategy more than
an honest estimate of the probable value and, therefore, may not accurately
reflect the actual amount of a sale price for any given property.) Thereafter,
Tiburon Capital Corporation (together with its nominees, the "Buyer") was
introduced to the Managing General Partner by Mark Grotewohl and Philip
Grotewohl, on behalf of the Managing General Partner, conducted negotiations
relative to the sale of the Property.
As discussed more fully below under "Appraisal of the Property/Fairness
Opinion," the Property has been appraised by PKF Consulting, a national
hospitality industry specialist. PKF Consulting is an international firm of
management consultants, industry specialists, and appraisers who provide a wide
range of services to the hospitality, real estate, and tourism industries.
Headquartered in San Francisco, PKF Consulting has offices in New York,
Philadelphia, Atlanta, Boston, Houston, Los Angeles, Washington, D.C., and
abroad. As a member of the Pannell Kerr Forster International Association, PKF
Consulting has access to the resources of one of the world's largest accounting
and consulting firms, with 300 offices in 90 countries. Its conclusion is that
the fair market value of the Property is $2,200,000, which is the purchase price
of the Property set forth in Proposal #1, and, through February 1999, would be
the minimum purchase price of the Property under Proposal #2. The purchase price
is to be paid in cash, and the net proceeds thereof will be distributed in
accordance with the Partnership Agreement upon the close of the sales
transactions and the concomitant dissolution of the Partnership. The amended
settlement agreement with the Everest Group and the contract of sale between the
Partnership and the Buyer provide for a closing of the sale within 30 days after
approval of the sale by the Limited Partners, in order to provide for a rapid
distribution of sale proceeds to the Limited Partners. Termination of the
Partnership will occur as soon as the winding up process can be completed.
The Partnership and the Managing General Partner are recommending the
approval of the Proposals by the Limited Partners for the following reasons:
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The Managing General Partner believes that the subject contract was
entered into at the crest of a seller's market which may not last much
longer. Although there can be no assurance that the Property's value will
not increase over time, the Managing General Partner believes that within
the next five years only modest increases in the Property's value can be
expected to occur. This belief is substantiated by the appraiser's
projection of future revenues. In fact, during the 12-month period ended
August 31, 1998, revenues from the Santa Rosa motel have decreased. The
Managing General Partner believes that now is the time to sell the
Property.
Although the motel is in good condition, it is almost 20 years old and has
never been refurbished. If the Property is to be retained, it would be
necessary for the Partnership to spend large sums for its refurbishment and
modernization. The Managing General Partner believes that the funds for
such expenditures would not be available from cash flow without reducing
future distributions.
The Partnership's intention has always been to sell the Property when the
market conditions warranted sale. It was never an investment objective of
the Partnership to hold the Property permanently.
The Managing General Partner understands that the circumstances of many of
the Limited Partners have changed over the life of the Partnership and
believes that the Limited Partners should be presented with an opportunity
to liquidate their investments. It is important that the Limited Partners
understand that no true market exists for the sale of the Limited Partner's
investment Units, and that the only practical way of obtaining full value
for the Units is to arrange for the sale of the Property itself.
Heretofore, to dispose of their Units, Limited Partners have had to arrange
private sales, or accept tender offers, at prices well below the
correlative value of the underlying assets.
The Property is proposed to be sold to the Buyer for $2,200,000,
approximately $1,026,000 more than was offered for the Property in October
1997 by the Everest Group. The sales price is equal to the appraised value
of the Property as determined by PKF Consulting, an independent real estate
advisory firm specializing in the valuation of lodging properties. The
proposed sale will be for all cash. PKF Consulting has rendered a fairness
opinion, stating its opinion that the sales price is fair to the
Partnership.
As of August 31, 1998, the Limited Partners had already received, over the
life of the Partnership, the sum of $1,458.25 per Unit (more than their
$1,000 per Unit original investment) in the form of quarterly
distributions. Upon the sale of the Property as described herein, the
Limited Partners would receive an additional pre-tax distribution in the
estimated amount of approximately $317 per Unit. For a discussion of other
effects of the sale of the Property, including Federal income tax
consequences, see "Effects of Approval of the Proposals" below.
Notwithstanding the preceding, Limited Partners should note that the
Buyer hopes to benefit from its acquisition of the Property, and that the
Managing General Partner has a conflict of interest (see "Conflicts of
Interest") in proposing the sale at this time. The fair market value and net
cash flow of the Property may increase over time. Therefore, it is possible that
Limited Partners would receive a greater return on their investment if the
Partnership continued to own and operate the Property and sold it at a later
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date, instead of consummating a sale under the Proposals. The Limited Partners
would likely fare worse under a strategy of retaining the Property if its value
were to decline.
The Managing General Partner has faced substantial conflicts of
interest in proposing, negotiating and structuring the Proposals. See "Conflicts
of Interest." Although, as discussed above, the Managing General Partner
believes that the Limited Partners are interested in a means of liquidating
their investment, the Proposals have not been initiated by the Limited Partners.
The steps that are being taken to provide the Limited Partners with procedural
safeguards are the commissioning of an independent appraisal of the Property
upon which Proposal #1 and Proposal #2 are based, the commissioning of a
fairness opinion respecting Proposal #1, and the submission of the Proposals to
Limited Partners for their approval, all of whom are unaffiliated with the
Managing General Partner. The Partnership has not retained an independent
representative for the Limited Partners. The Managing General Partner believes
that the steps taken and to be taken constitute sufficient safeguards for the
Limited Partners' interests.
The Partnership, the Managing General Partner and Mark Grotewohl
reasonably believe that the proposed transaction represented by Proposal #1 is
fair to the Limited Partners. The Partnership, the Managing General Partner and
Mark Grotewohl have considered a number of material factors in connection with
developing such beliefs. Foremost among such factors are the receipt of an
independent appraisal with respect to the Property from PKF Consulting, and the
structuring of the proposed transaction so that the approval of Limited Partners
(all of whom are unaffiliated with the Partnership, the Managing General Partner
and Mark Grotewohl) is required to be obtained. The Managing General Partner
relied on the appraisal to determine the valuation of $2,200,000 for the
Property. As further discussed in the appraisal (see "Appraisal of the
Property/Fairness Opinion"), PKF Consulting relied on a discounted cash flow
analysis based on the projected operating results of the Property over a
ten-year period, and applied a factor for the residual value of the Property at
the end of that ten-year period. Inasmuch as the appraisal, by definition, is an
evaluation of going concern value, in relying on the appraisal the Partnership,
the Managing General Partner and Mark Grotewohl considered the going concern
value of the Property. However, they did not independently evaluate the going
concern value. They did not consider the current liquidation value of the
Property because it is clear that the highest and best use of the Property is as
an operating motel. To sell the building and personal property in a liquidation
dale would be ill advised. Based upon experience in the lodging industry, as
well as general familiarity with industry news as reported by trade journals,
the Partnership, the Managing General Partner and Mark Grotewohl reasonably
believe that the appraised fair market value of the Property as determined by
PKF Consulting is fair and reasonable.
In determining the fairness of the proposed transaction represented by
Proposal #1, the Partnership, the Managing General Partner, and Mark Grotewohl
carefully considered a number of factors. In favor of the proposed transaction
were the valuation of the Property which formed the basis for the Buyer's
purchase offer, the all-cash terms offered by the Buyer, and the opportunity for
the Limited Partners to liquidate their investments over a short period of time.
Against the proposed transaction were the fact of an inside transaction, under
which the Buyer, an entity which will be affiliated with Mark Grotewohl, would
acquire the Property, and the Managing General Partner's decision not to solicit
bids from independent third parties.
No other material factors were considered. For example, in the absence
of an established public market in which Units are being traded, the Managing
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General Partner was not able to determine accurately any market values for the
Units. However, according to Partnership Spectrum, an independent third party
publication, and Schedules 13-D filed by the Everest Group, since August 1996,
there have been sales of Units (including sales made pursuant to tender offers)
at rates ranging from $40 per Unit to $235 per Unit. The proposed sale would
result in distributions of approximately $317 per Unit. During the past two
years, neither the Partnership, the Managing General Partner nor Mark Grotewohl
has purchased or sold any Units. The net book value of the Partnership as of
June 30, 1998 was $98.79 per Unit. The Managing General Partner has not sought
to solicit bids from independent third parties for a sale of the Property, and,
except as described above in connection with the offer made by the Everest
Group, during the past two years no offers have been made by an unaffiliated
entity for a merger or consolidation of the Partnership, the sale or transfer of
all or a substantial part of the assets of the Partnership, or a sale of
partners' interests in the Partnership allowing the purchaser thereof to
exercise control over the Partnership.
Prior to any discussions, negotiations or communications with the
Buyer, the Partnership obtained an independent appraisal of the Property.
Following completion of the negotiations of the proposed transaction represented
by Proposal #1, the Partnership obtained a fairness opinion respecting the
proposed transaction from PKF Consulting. PKF Consulting was retained because of
its reputation and expertise. The Partnership paid PKF Consulting approximately
$8,100 for its services in the proposed transaction and the other GMS
Partnerships paid PKF Consulting an aggregate of approximately $41,400.
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The only outstanding class of voting securities of the Partnership is
the Units. Each Unit entitles its holder to one vote on each Proposal.
All Limited Partners as of the date action is taken on the Proposals
(the "Record Date") are entitled to notice of and to vote on the Proposals. As
of August 31, 1998 there were 7,000 Units outstanding and a total of 1,010
Limited Partners entitled to vote such Units. With respect to each Proposal to
be voted upon, the favorable vote of Limited Partners holding in excess of 50%
of the Units outstanding as of the Record Date will be required for approval.
There are no rights of appraisal or similar rights of dissenters under
California law or otherwise with regard to the Proposals to be voted upon.
Dissenting Limited Partners are protected under California law by virtue of the
fiduciary duty of the Managing General Partner to act with prudence in the
business affairs of the Partnership on behalf of the Partnership and the Limited
Partners.
As of August 31, 1998 no person or group of related persons was known
by the Partnership to be the beneficial owner of more than 5% of the Units,
except the following group of related Unit holders:
5
Everest Lodging Investors, LLC 261 Units 3.73%
Everest Madison Investors, LLC 343 Units 4.90%
--------------------------------
Total 604 Units 8.63%
None of Grotewohl Management Services, Inc. (the Managing General Partner),
Philip B. Grotewohl, David P. Grotewohl or Mark Grotewohl, or any of their
affiliates, are the beneficial owners of any Units.
As set forth above, the Everest Group owns 604 Units (8.63% of the
total). In a written agreement dated April 21, 1998 (a date prior to the date
Mark Grotewohl terminated his employment with the Partnership) entered into by
the GMS Partnerships, Mark Grotewohl, Everest Properties II, LLC, Everest
Properties, LLC, Everest Madison Investors, LLC, Everest Lodging Investors, LLC,
KM Investments, LLC and Everest Financial, Inc., which amended the settlement
agreement dated February 20, 1998 (discussed below under "Legal Proceedings"),
the Everest Group agreed to vote in favor of Proposal #1 upon satisfaction of
the following conditions: (i) execution by the GMS Partnerships of an exclusive
sales agency contract in favor of the Everest Group; (ii) execution by the GMS
Partnerships with an entity affiliated with Mark Grotewohl not later than April
30, 1998 of purchase agreements for the properties of the GMS Partnerships
providing for sale prices equal to the respective appraised values of the
properties and for full payment in cash at the time of the closing of escrow;
(iii) the grant to the Everest Group of the first opportunity to arrange
financing for the proposed transactions; and (iv) the diligent preparation and
dissemination by the Partnership of this Consent Solicitation Statement.
Condition (i) was satisfied on May 8, 1998 by the execution of an exclusive
sales agency contract granting the Everest Group an exclusive listing for the
sale of the Property and the properties owned by the other GMS Partnerships for
a six-month period. For a discussion of the commissions payable pursuant to such
contract, see "Purchase Agreement" below.
No meeting will be held with regard to this solicitation of the Limited
Partners. Voting may be accomplished by completing and returning to the offices
of the Partnership, at 2030 J Street, Sacramento, California 95814, telephone:
(916) 442-9183, the form of Consent included herewith. Only Consents received
prior to the close of business on the date (the "Action Date") which is the
earlier of (i) the date on which the Partnership receives approval and/or
disapproval of each Proposal by a majority-in-interest of the Limited Partners,
or (ii) November __, 1998 (unless extended by the Managing General Partner
pursuant to notice mailed to the Limited Partners), will be counted toward the
vote on the Proposals. However, Limited Partners are urged to return their
Consents at the earliest practicable date.
The Limited Partners are not required to vote in the same fashion for
each of the two Proposals. If Proposal #1 is approved, Proposal #2 will be of no
force and effect (regardless of whether or not it is approved) unless the sale
with the Buyer set forth in Proposal #1 is not consummated.
If a Limited Partner has delivered an executed Consent to the
Partnership, the Limited Partner may revoke such Consent not later than the
close of business on the date immediately prior to the Action Date. As of the
Action Date, the actions which are the subject of this solicitation will either
be effective (if the requisite number of executed Consents have been received by
the Partnership) or the solicitation period will have expired without approval
of the Proposals. The only method for revoking a Consent once it has been
delivered to the Partnership is by the delivery to the Partnership prior to the
Action Date of a written instrument executed by the Limited Partner who executed
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the Consent which states that the Consent previously executed and delivered is
thereby revoked. Other than the substance of the revocation described above, no
specific form is required for such revocation. An instrument of revocation will
be effective only upon its actual receipt prior to the Action Date by the
Partnership or its authorized agent at the Partnership's place of business as
set forth in the foregoing paragraph.
CONSENT UNDER PARTNERSHIP AGREEMENT
Pursuant to Section 14.1(e) of the Partnership Agreement, a
majority-in-interest of the Limited Partners must approve or disapprove the sale
at one time of all or substantially all of the Partnership's properties. Also,
under Section 11.2 of the Partnership Agreement, the Partnership is not
permitted to sell its property to "Affiliates" of the General Partners. (The
Partnership Agreement defines "Affiliate" as (i) any person directly or
indirectly controlling, controlled by, or under common control with another
person, (ii) any person owning or controlling 10% or more of the outstanding
voting securities of such other person, (iii) any officer, director or partner
of such person, and (iv) if such other person is an officer, director or
partner, any company for which such person acts in any such capacity.) Although
it might be contended that the Buyer is an Affiliate of the Managing General
Partner, in the opinion of the Managing General Partner the Buyer does not come
within such definition, because the Managing General Partner does not believe
that Mark Grotewohl is an Affiliate of the Managing General Partner. (See
"Purchase Agreement" below.) However, recognizing the possibility that
reasonable minds might differ in resolving that issue, and because the Property
constitutes substantially all of the Partnership's properties (as discussed
below under "The Property and the Partnership's Business"), the Managing General
Partner is seeking the approval of the proposed sale of the Property to the
Buyer on the terms described herein by a majority-in-interest of the Limited
Partners.
THE PROPERTY AND THE PARTNERSHIP'S BUSINESS
The Property consists of a leasehold interest in land located in Santa
Rosa, California, the motel property constructed thereon by the Partnership, and
the related personal property.
Narrative Description of Business
(a) Franchise Agreements
The Partnership operates its motel property as a franchisee of Super 8
Motels, Inc. through a sub-franchise obtained from Super 8 Management
Corporation. In March 1988, Brown & Grotewohl, a California general partnership
that is an Affiliate of the Managing General Partner (the "Manager"), became
sub-franchisor in the stead of Super 8 Management Corporation, another Affiliate
of the Managing General Partner. As of November 10, 1997, Super 8 Motels, Inc.
had franchised a total of 1,619 motels having an aggregate of 98,000 guestrooms
in operation. Super 8 Motels, Inc. is a wholly-owned subsidiary of Hospitality
Franchise Systems, Inc. Neither the Partnership nor the Managing General Partner
has any interest in Hospitality Franchise Systems, Inc.
The objective of the Super 8 Motel chain is to maintain a competitive
position in the motel industry by offering to the public comfortable, no-frills
accommodations at a budget price. Each Super 8 Motel provides its guests with
attractively decorated rooms, free color television, direct dial telephone and
other basic amenities, but eliminates or modifies other items to provide
7
substantial cost reduction without seriously affecting comfort or convenience.
Some of these savings are accomplished by reductions in room size, elimination
of expensive lobbies, and by substantial economies in building construction.
By the terms of each franchise agreement with Super 8 Motels, Inc., the
Partnership pays monthly franchise fees equal to 4% of its gross room revenues
(half of which is paid to the sub-franchisor) and contributes an additional 1%
of its gross room revenues to a fund administered by Super 8 Motels, Inc. to
finance the national reservation and promotions program.
(b) Operation of the Motel
Brown & Grotewohl, a California general partnership which is an
affiliate of the Managing General Partner (the "Manager"), manages and operates
the Partnership's motel. The Manager's management responsibilities include, but
are not limited to, the supervision and direction of the Partnership's employees
who operate the motel, the establishment of room rates and the direction of the
promotional activities of the Partnership's employees. In addition, the Manager
directs the purchase of replacement equipment and supplies, maintenance activity
and the engagement or selection of all vendors, suppliers and independent
contractors. The Partnership's financial accounting activities are performed by
the motel staff and a centralized accounting staff, all of which work under the
direction of the Managing General Partner or the Manager. Together, these staffs
perform all bookkeeping duties in connection with the motel, including all
collections and all disbursements to be paid out of funds generated by motel
operations or otherwise supplied by the Partnership.
As of December 31, 1997, the Partnership employed a total of 18
persons, either full or part-time, at its motel, including five desk clerks, ten
housekeeping and laundry personnel, two maintenance personnel, and one general
manager. In addition, and as of the same date, the Partnership employed 11
persons in administrative positions at its central office in Sacramento,
California, all of whom worked for the Partnership on a part-time basis. They
included accounting, investor service, sales and marketing and motel supervisory
personnel, secretarial personnel, and purchasing personnel.
(c) Competition
As discussed in greater detail below, the Partnership faces intense
competition from motels of varying quality and size, including other budget
motels which are part of nationwide chains and which have access to nationwide
reservation systems.
Property
On January 8, 1980, the Partnership acquired by long-term lease a
parcel of approximately three acres of unimproved land located at 2632 N.
Cleveland Avenue, Santa Rosa, California, adjacent to U.S. Highway 101.
Effective May 1, 1981, the lease was amended to delete an area comprising
approximately 32,600 square feet from the lease. A restaurant facility was
subsequently built on this deleted portion.
The term of the lease extends until August 31, 2015, with a possible
extension of the term for up to an additional 15 years through exercise by the
Partnership of three five-year renewal options. Base rental payments are subject
to adjustment at three-year intervals to reflect changes in the Consumer Price
Index. The base rent is $8,398 per month from September 1, 1997 through August
8
31, 2000. Such rent is net to the lessor of property taxes and assessments,
utilities and other expenses relating to the land.
In April 1980, construction of the Partnership's 100-room motel was
commenced on the site. The motel opened for operations immediately after
construction was completed on November 12, 1980.
The lease provides that the improvements constructed by the Partnership
on the leased premises will remain the property of the Partnership during the
lease term but that upon expiration of the lease, title to any such improvements
will pass to the lessor.
The Partnership's motel achieved the following average occupancy rates
and average room rates during the fiscal years ended September 30, 1997, 1996
and 1995:
1994 - 1995 1995 - 1996 1996 - 1997
---------------------------------------------------
Average Occupancy Rate 54% 53% 60%
Average Room Rate $42.33 $44.49 $45.65
The following existing lodging facilities provide direct or indirect
competition to the Partnership's Santa Rosa motel:
Approximate
Distance From
Number Of Partnership's
Facility Rooms Motel
- -------------------------------------------------------------------------------
Motel 6 100 Adjacent
Motel 6 119 0.5 Mile
Los Robles Inn 90 0.5 Mile
Sandman Motel 112 0.5 Mile
Ramada Inn 50 0.5 Mile
Holiday Inn Express 95 1.0 Mile
Days Inn 160 1.5 Miles
TraveLodge 60 2.0 Miles
Best Western Garden Inn 100 3.0 Miles
The Santa Rosa motel draws its business from a variety of
sources, including corporate travelers, vacationers and tourists, convention
attendees and sports teams. The Santa Rosa motel has no single customer the loss
of which would have a materially adverse effect on the motel's operations.
MANAGEMENT
The Partnership is a California limited partnership which has no
executive officers or directors. The principal business address of the
Partnership is 2030 J Street, Sacramento, CA 95814. The Partnership's general
partners are Grotewohl Management Services, Inc., as managing general partner,
and Robert J. Dana, as associate general partner.
Grotewohl Management Services, Inc. is a California corporation owned
one-half by Philip B. Grotewohl and one-half by his former wife, who is not
involved in the day-to-day operations of Grotewohl Management Services, Inc.,
and who does not serve as a director or executive officer thereof. The sole
director of Grotewohl Management Services, Inc. is Philip Grotewohl, and the
executive officer of Grotewohl Management Services, Inc. is Philip Grotewohl.
David Grotewohl has authority to sign documents on behalf of the General Partner
as its nominal President and Chief Financial Officer, but has no executive
9
duties. He does act as "inside" legal counsel to the Managing General Partner,
and his principal occupation has been to head the operation and maintenance of
the Property and the properties of the other GMS Partnerships. The principal
business address of Grotewohl Management Services, Inc. is 2030 J Street,
Sacramento, CA 95814. During the past five years Grotewohl Management Services,
Inc. and its affiliate, Brown & Grotewohl, a California general partnership
one-half owned by Philip Grotewohl and one-half owned by the Estate of Dennis A.
Brown, principally have been engaged in the business of managing various limited
partnerships which own and operate lodging facilities, and in the business of
managing such lodging facilities. During the past five years Philip Grotewohl's
business activities have been conducted solely through Grotewohl Management
Services, Inc. and Brown & Grotewohl. The principal business address of Philip
Grotewohl is 2030 J Street, Sacramento, CA 95814. In addition to the services
described above, during the past two and three-quarters years David Grotewohl
has been engaged part-time as a sole proprietor in the marketing of consumer
products and services under the business name "The Biscayne Group." The
principal business address of David P. Grotewohl is 2030 J Street, Sacramento,
CA 95814.
Robert J. Dana is the associate general partner of the Partnership and,
as such, has no control over the management of the Partnership. During the past
five years Robert J. Dana has been self-employed through D/S Telecom and Telecom
Options as a seller of long-distance telephone services. The principal business
address of Robert J. Dana is 6439 Timber Springs Drive, Santa Rosa, CA 95409.
PURCHASE AGREEMENT
On April 30, 1998, the Partnership entered into an agreement to sell
the Property to Tiburon Capital Corporation, San Francisco, California, or a
nominee of Tiburon Capital Corporation (the "Buyer"), for the sum of $2,200,000,
payable in cash at the close of escrow. Escrow was opened at Chicago Title
Company, San Francisco, California on June 10, 1998.
Except as otherwise indicated, the following paragraph is based on
information provided by the Buyer. Tiburon Capital Corporation is a California
corporation formed in 1992. All of its stock has been owned since its inception
equally by William R. Dixon, Jr., Herbert J. Jaffe, John L. Wright and John F.
Dixon. Management and control persons of Tiburon Capital Corporation consist of
its stockholders. Tiburon Capital Corporation and its related entities,
including Pacific Management Group, Inc., NCM Management Ltd. and Capital
Concepts Investment Corp., are and have been involved in many business
transactions, including the ownership and asset or property management of real
estate assets. (The owners, management and the control persons of such related
entities are two or more of the owners of Tiburon Capital Corporation.) In many
instances, the real estate assets were or are owned by limited partnerships or
limited liability companies formed and syndicated by Tiburon Capital Corporation
or its related entities for the specific purpose of owning such assets. The form
of an entity owning real estate assets is typically dictated by investors and/or
lenders. If the proposed sale is consummated, a nominee of Tiburon Capital
Corporation, which would be a limited liability company, would actually purchase
the Property instead of Tiburon Capital Corporation. The members of such limited
liability company would be another limited liability company (formed and
syndicated by Tiburon Capital Corporation), Mark Grotewohl and, perhaps, others.
Mark Grotewohl's interest in the Buyer would be limited to 50% of the profits
remaining after return of all capital (whether debt or equity) to all investors
10
and creditors, plus a return thereon. Mark Grotewohl would also form a limited
liability company to provide property management services to the Buyer. The fee
for this service would be 4 1/2% of gross property revenues, from which Mark
Grotewohl would be required to fund all property management expenses. The
foregoing would be reflected in written agreement if Proposal #1 were approved.
It is possible that some terms of the relationships would vary from those as
described, but in no event would Mark Grotewohl's interest in the Buyer or the
eight properties be greater than as indicated.
Mark Grotewohl is the son of Philip B. Grotewohl. During the last five
years, until April 30, 1998, Mark Grotewohl was employed as the marketing and
sales director for the five GMS Partnerships. Since that time, Mark Grotewohl
has been engaged in facilitating the proposed transaction, and is operating from
the offices of the Managing General Partner. It might be contended that Mark
Grotewohl is, by virtue of his past relationship with the Partnership and the
other GMS Partnerships, an Affiliate of the Partnership as defined in its
Partnership Agreement. Under Section 11.2 of the Partnership Agreement, the
Partnership is not permitted to sell its real property to "Affiliates" of the
General Partners. (The Partnership Agreement defines "Affiliate" as (i) any
person directly or indirectly controlling, controlled by, or under common
control with another person, (ii) any person owning or controlling 10% or more
of the outstanding voting securities of such other person, (iii) any officer,
director or partner of such other person, and (iv) if such other person is an
officer, director or partner, any company for which such person acts in any such
capacity.) The Managing General Partner believes that, based on the facts and
circumstances, Mark Grotewohl is not an Affiliate of the Partnership, because
Mark Grotewohl (i) does not control the Partnership or the Managing General
Partner, (ii) owns no voting securities in the Partnership or the Managing
General Partner, and (iii) is not an officer, director or partner of the
Managing General Partner or the Partnership. However, the Managing General
Partner recognizes that reasonable minds could differ as to the resolution of
this issue and has decided to treat this transaction as an inside transaction.
The Buyer has made a contemporaneous offer to purchase the motel
properties of the four other GMS Partnerships. The offers made by the Buyer for
the properties of each of the GMS Partnerships have been evaluated independently
by the Managing General Partner. Other than with respect to the purchase price
of each motel, the offers are on identical terms. If the limited partners of the
other Partnerships do not approve the sale of their respective properties to the
Buyer, however, the Buyer has the right and option not to proceed with the
proposed purchase of the Property from the Partnership, even if the Limited
Partners approve this sale. In this regard, the Partnership has not solicited
any offers to purchase the Property or the motel properties of the other GMS
Partnerships, has not listed the Property or the motel properties of the other
GMS Partnerships for sale with independent brokers, and has not otherwise
actively sought competing offers for the Property or the motel properties of the
other GMS Partnerships. Consequently, the offer presented by the Buyer is the
only offer that the Managing General Partner has received for the Property or
the motel properties of the other GMS Partnerships other than those presented by
the Everest Group.
There are a number of significant conditions to the consummation of the
proposed sale of the Property to the Buyer; therefore, there can be no assurance
as to whether, or when, such transaction will be consummated. Among these
conditions are the Partnership's receipt of the approval of the Limited
Partners; the Buyer's receipt (at the Partnership's expense) and approval of an
ALTA Survey and preliminary title report for the Property; the absence of any
damage or loss to the Property prior to the closing date in excess of $50,000;
the decision by the Buyer, in its unfettered discretion, to terminate the
proposed purchase prior to June 30, 1998; the Buyer's receipt prior to June 30,
11
1998 of a loan commitment for financing in an amount of not less than 90% of the
purchase price of the Property (as of the date hereof the Buyer had not yet
received such a commitment); and receipt by the Partnership of any necessary
approvals of the sale by, among others, the franchisor, the landlords, and the
subtenants. The Managing General Partner expects that such conditions will be
satisfied; however, there can be no assurances in this regard. No federal or
state regulatory requirements must be complied with, or approvals obtained, in
connection with the transaction.
The Buyer will deposit the sum of $11,000 into escrow on the date the
Partnership notifies the Buyer that the Limited Partners have approved the
proposed sale of the Property to the Buyer. Should the Buyer default in the
performance of its obligations under the purchase agreement, the Partnership
will be entitled to retain said deposit as its only damages.
The Partnership and the Buyer will share closing costs. The Managing
General Partner anticipates that the Partnership's share of aggregate closing
costs, including real estate brokerage commissions, will be approximately
$82,500. Included therein is a real estate brokerage commission payable to
Everest Financial, Inc., a member of the Everest Group, in an amount equal to
2.75% of the purchase price. Everest Financial, Inc. has agreed to reallow 1.25%
of the purchase price to the Buyer's broker or, at the Buyer's option, the Buyer
will be entitled to a credit against the purchase price in the amount of 1.25%
of the purchase price.
CONFLICTS OF INTEREST
The Managing General Partner is subject to substantial conflicts of
interest in connection with the Proposals arising out of its relationship with
the Partnership, including the conflicts discussed below.
Philip B. Grotewohl, the co-owner and chief executive officer of the
Managing General Partner, is the father of Mark Grotewohl, an affiliate of the
Buyer. Accordingly, the Managing General Partner faced a significant conflict of
interest in determining the terms of the proposed transaction with the Buyer, in
determining not to solicit bids from independent third parties, and in rendering
its recommendation as to the fairness of the proposed transaction with the
Buyer. The Managing General Partner also faced significant conflicts of interest
in determining to sell the Property at this time in that it agreed to sell the
Property in the agreement settling the lawsuits brought against and by the
Everest Group. (See "Legal Proceedings.") The state court action by the Everest
Group brought partly in response to the Managing General Partner's federal court
action brought against the Everest Group alleged violations by the Managing
General Partner of the Partnership Agreement and of its fiduciary duty to the
Partnership. Accordingly, the Managing General Partner may have been motivated
to agree to sell the Property as a result of the lawsuits rather than in pursuit
of the best interests of the Limited Partners. However, based upon its
experience in the lodging industry, as well as general familiarity with industry
news as reported by trade journals, the Managing General Partner believes that
the appraised market value of the Property as determined by PKF Consulting is
fair and reasonable. The Managing General Partner also believes that the sale of
the Property in accordance with the terms and conditions outlined in this
Consent Solicitation Statement will assist the Partnership in meeting its
investment objectives. Nonetheless, there can be no assurance that (i) the
Limited Partners would not receive a greater amount of sale proceeds if the
Managing General Partner were to solicit bids for the Property from third
12
parties, or (ii) the continued retention and operation of the Property by the
Partnership coupled with a sale of the Property at a later date would not result
in greater after-tax distributions to the Limited Partners.
EFFECTS OF APPROVAL OF THE PROPOSAL
Set forth below is a discussion of the effects of the sale of the
Property pursuant to Proposal #1. The effects of a sale of the Property pursuant
to Proposal #2 would be substantially similar.
General
The consummation of the sale of the Property pursuant to Proposal #1
and the concomitant dissolution of the Partnership should result in the
following consequences for the Partnership, the Limited Partners and the General
Partners:
(i) The Limited Partners are expected to receive the distributions of net cash
proceeds from the sale of the Property as described below.
(ii) The Limited Partners and the General Partners are expected to realize the
Federal income tax consequences as described below.
(iii) All of the Partnership's assets and liabilities will be liquidated, the
Partnership will be dissolved and terminated, and the registration of the Units
under the Securities Exchange Act of 1934 will be terminated.
The consequences stated above are discussed in more detail in the
subsections which follow. Those subsections, in part, include computations as to
the cash proceeds to be received and distributed by the Partnership, and the
taxable gain and allocations thereof to be made by the Partnership, in the event
the proposed sale is consummated. HOWEVER, THIS INFORMATION IS PRESENTED SOLELY
FOR THE PURPOSES OF EVALUATING THE PROPOSALS. ALL AMOUNTS ARE ESTIMATES ONLY.
ALL COMPUTATIONS ARE BASED ON ASSUMPTIONS (SUCH AS THE DATE OF SALE, THE
EXPENSES OF THE SALE, AND THE RESULTS OF PARTNERSHIP OPERATIONS THROUGH THE DATE
OF SALE) WHICH MAY OR MAY NOT PROVE TO BE ACCURATE AND SHOULD NOT BE RELIED UPON
TO INDICATE THE ACTUAL RESULTS WHICH MAY BE ATTAINED.
Determination and Use of Net Proceeds
The following is a summary of the projected amount of cash to be
received by the Partnership and the projected amount of cash to be distributed
to the Limited Partners, assuming the Property is sold for a gross sales price
of $2,200,000. This summary has been prepared by the Managing General Partner.
If the proposed transaction with the Buyer is consummated on November
30, 1998, it is estimated that the Partnership would receive the following net
proceeds:
Gross sales price $2,200,000
Less: Real estate commission (60,500)
Estimated escrow and closing costs (76,000)
-----------
Net proceeds of sale $2,063,500
Included in closing costs set forth above are, among other items, estimated
legal fees of $37,000, estimated fees in connection with the appraisal and
13
fairness opinion of $10,000, estimated accounting fees of $16,000 and estimated
fees in connection with solicitation activities of $4,000.
The Partnership's real property taxes are payable twice yearly on April
10 and December 10, partially in arrears, in the current amount of $7,935.43
each. The Partnership's minimum lease payment for its leasehold interest is
$8,398 per month. Accordingly, if the proposed transaction with the Buyer is
consummated, the actual date of consummation will determine whether there is a
credit to the Partnership for prorated lease payments and/or a credit to the
Buyer for prorated real property taxes. Similarly, the amount indicated below as
the estimate of reserves available for distribution on dissolution of the
Partnership will vary depending on the actual date of consummation of the
proposed transaction.
The net proceeds of $2,063,500 estimated to be received by the
Partnership from the proposed transaction, in the estimated amount of $294.71
per Unit based on a closing date of November 30, 1998, would be distributed
entirely to the Limited Partners. The Partnership's cash reserves would be
retained for the payment of accounts payable and other liabilities and expenses
incurred to that date or expected to be incurred in connection with the
operation of the Property through the date of sale and the operation and
winding-up of the Partnership through its termination, including severance pay
to certain employees of the Partnership and the other GMS Partnerships, and the
balance, estimated to be $159,000 or $22.71 per Unit, also would be distributed
entirely to the Limited Partners. Alternatively, if the Property is not sold
pursuant to Proposal #1 or Proposal #2, the Partnership would continue to
operate the Property for an indeterminate period. The Managing General Partner
estimates that if the Property is not sold the Partnership will make average
annual distributions to the Limited Partners of from zero to $210,000 ($30.00
per Unit) for the foreseeable future. However, there can be no assurance that
the Managing General Partner's estimate in this regard will be borne out.
Federal Income Tax Consequences
(a) General. The following is a summary of the Federal income tax
consequences expected to result from a sale of the Property based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing laws, judicial
decisions and administrative regulations, rulings and practices. This summary is
general in content and does not include considerations which might affect
certain Limited Partners, such as Limited Partners which are trusts,
corporations or tax-exempt entities, or Limited Partners who must pay an
alternative minimum tax. Except as otherwise specifically indicated, this
summary does not address any state or local tax consequences.
Tax counsel to the Partnership, Derenthal & Dannhauser, has delivered
an opinion to the Partnership which states that the following summary has been
reviewed by it and, to the extent the summary involves matters of law,
represents its opinion, subject to the assumptions, qualifications, limitations
and uncertainties set forth therein.
(b) Characterization of Gain. Upon the sale of property, the owner
thereof measures his gain or loss by the difference between the amount of
consideration received in connection with the sale and the owner's adjusted
basis in the property. A gain will be recognized for Federal income tax
purposes. This is so because the depreciation used for Federal income tax
purposes, which decreases adjusted basis, was greater than that used for book
purposes.
14
The Property should constitute "Section 1231 property" (i.e., real
property and depreciable assets used in a trade or business which are held for
more than one year) rather than "dealer" property (i.e., property which is held
primarily for sale to customers in the ordinary course of business). While it is
possible that the Internal Revenue Service will argue that the Property is
"dealer" property, gain upon the sale of which would be taxed entirely as
ordinary income, tax counsel to the Partnership is of the opinion that it is
more likely than not that such an assertion would not be sustained by a court.
A Limited Partner's allocable share of Section 1231 gain from the sale
of the Property would be combined with any other Section 1231 gains or losses
incurred by him in the year of sale, and his net Section 1231 gains or losses
would be taxed as long-term capital gains or constitute ordinary losses, as the
case may be, except that a Limited Partner's net Section 1231 gains will be
treated as ordinary income to the extent of net Section 1231 losses for the five
most recent years which have not previously been offset against net Section 1231
gains.
Long-term gain on sale of Section 1231 property is taxed as follows:
(i) the excess of accelerated depreciation over straight-line depreciation is
taxed at ordinary income rates, (ii) to the extent that any other gain would be
treated as ordinary income if the property were depreciable personal property
rather than depreciable real property, at a maximum rate of 25%, and (iii) the
balance at a maximum rate of 20%.
Set forth below are the Managing General Partner's estimates of the
total taxable gain for Federal income tax purposes, and the allocations thereof,
which will result if the proposed sale of the Property to the Buyer is
consummated, based on an assumed closing date of November 30, 1998. These
estimates do not include any amounts relating to Partnership operations prior to
the sale of the Property or relating to dissolution of the Partnership. These
estimates are not the subject of an opinion of counsel.
Portion
Total Taxed As Portion Portion
Estimated Ordinary Taxed At Taxed At
Gain Income 25% Rate 20% Rate
---------------------------------------------------
Limited Partners $1,600,000 $25,000 $1,251,000 $324,000
General Partners 16,000 1,000 12,000 3,000
------ ----- ------ -----
Total $1,616,000 $26,000 $1,263,000 $327,000
========= ====== ========= =======
Per Unit $228.57 $3.57 $178.71 $46.28
====== ==== ====== =====
Because of different methods of depreciation used for California income
tax purposes than for Federal income tax purposes, the Managing General Partner
anticipates that consummation of the proposed transaction would produce a gain
for California income tax purposes in the amount of approximately $1,614,000, of
which approximately $16,000 and $1,598,000 would be allocated to the General
Partners and to the Limited Partners, respectively.
15
Dissolution of the Partnership
Section 18.1(e) of the Partnership Agreement provides that the
Partnership shall be dissolved upon the sale of all of the Partnership property
and the conversion into cash of any proceeds of sale originally received in a
form other than cash.
If the proposed sale of the Property is consummated, the Partnership
will be dissolved, the Managing General Partner will commence to wind up the
business of the Partnership, and after payment of all expenses of the
Partnership (including the expense of a final accounting for the Partnership)
the remaining cash reserves of the Partnership will be distributed in accordance
with the provisions of the Partnership Agreement. The Managing General Partner
will then take all necessary steps toward termination of the Partnership's
Certificate of Limited Partnership.
APPRAISAL OF THE PROPERTY/FAIRNESS OPINION
The appraisal of the motel property and the fairness opinion respecting
the proposed transaction with the Buyer were prepared by PKF Consulting, San
Francisco, California. PKF Consulting was selected by the Managing General
Partner based on the Managing General Partner's belief as to the expertise of
PKF Consulting in appraising motel properties in the State of California and in
rendering fairness opinions with respect to the sale thereof. The Managing
General Partner's belief is based on past experience with PKF Consulting, which
rendered appraisals of the Property and the properties of the other GMS
Partnerships in 1988, on its knowledge of the lodging industry, and on
recommendations from others in the lodging industry, including attorneys and
accountants. PKF Consulting also prepared appraisals of the motel properties of
the other GMS Partnerships. PKF Consulting was instructed to prepare its
appraisals based on the assumption that the Property was to be sold on the open
market to knowledgeable buyers and that there would be no pressure to make a
quick sale. PKF Consulting was not advised that an affiliate of Mark Grotewohl
would be a potential buyer of the Property. No limitations were imposed by the
Partnership on the appraiser's investigation. PKF Consulting delivered a written
report, dated February 20, 1998, which stated that the "as is" market value of
the Property as of January 1, 1998 was $2,200,000. PKF Consulting also delivered
its written fairness opinion, dated May 19, 1998, to the effect that the
proposed transaction with the Buyer is fair and equitable from a financial
standpoint to the Limited Partners. The amount offered by the Buyer for the
Property is based upon, and is equal to, the market value set forth in the
appraisals.
Other than with respect to the rendering of the appraisal reports and
fairness opinions referred to above, during the past two years there has been no
material relationship between PKF Consulting and the Partnership or its
affiliates. PKF Consulting received a total of approximately $49,000 from the
Partnership and the other GMS Partnerships in connection with the rendering of
such appraisal reports and fairness opinions.
PKF Consulting is an international firm of management consultants,
industry specialists, and appraisers who provide a wide range of services to the
hospitality, real estate, and tourism industries. Headquartered in San
Francisco, PKF Consulting has offices in New York, Philadelphia, Atlanta,
Boston, Houston, Los Angeles, Washington, D.C., and abroad. As a member of the
Pannell Kerr Forster International Association, PKF Consulting has access to the
resources of one of the world's largest accounting and consulting firms, with
300 offices in 90 countries.
16
The services offered by PKF Consulting include: market and feasibility
studies; real estate appraisals and business valuations; tourism and
recreational studies; strategic planning; operational reviews; asset management;
chain and management company selection; real estate consulting services;
financial consulting; and litigation support, expert witness and arbitration
services.
The following is excerpted from the appraisal reports:
"The scope of this appraisal included a detailed analysis of
the competitive market position of each of the eight properties. More
specifically, the market analysis for each property included the
following work program.
1) In-depth analysis of the historical operating performance of
each property.
2) Detailed inspection of each property, focused on identifying
areas of deferred maintenance and/or functional obsolescence.
3) Evaluation of the economic environment of each property's
local market, focusing on economic factors which impact the
demand for hotel rooms such as changes in employment, office
space absorption, airport utilization, attendance at tourist
attractions and convention facilities, etc.
4) Primary market research in each market area, including
interviews with key demand generators, inspection and
evaluation of competitive hotels and discussions with persons
familiar with the development patterns of each local market.
5) Analysis of each property's future market position. This
analysis included a projection of the current and future
demand for hotel accommodations in each market, including an
assessment of existing and potential future competitive
supply, and the share of the market that each hotel could
reasonably be able to capture over the next five to ten years.
Based on the foregoing scope of work, it was concluded that
the Highest and Best Use of each property is as currently improved.
In developing a value conclusion for each hotel, two of the
three traditional approaches to valuation have been used: the Sales
Comparison and Income Capitalization Approaches. In the Sales
Comparison Approach, the value of the subject properties were estimated
based on an analysis of the sales of other similar facilities using a
unit indicator of price per room or multiple of rooms revenue. In the
Income Capitalization Approach, the value of each property is estimated
based on an analysis of the historical and projected income and
expenses generated by each facility during a typical holding period.
Both direct capitalization and yield capitalization (discounted cash
flow analysis) methods were employed.
The earnings stream most commonly used as the basis for the
Income Capitalization method of valuation is the projected net
operating income (NOI) from operations after the deduction of real
estate taxes and insurance, but before the deduction of interest,
depreciation, amortization and taxes on income. Also deducted from the
profit from operations is a reserve for capital improvements for each
17
property. The projected operating income for each property was based on
a review of local market conditions and the historical operating
results of each hotel, coupled with an analysis of the historical
operating results of comparable hotels as compiled in PKF Consulting's
1997 issue of `Trends in the Hotel Industry.'
Under the direct capitalization method, the NOI for a typical
or stabilized year of operation is converted into a value estimate by
dividing it by an appropriate income capitalization rate. The
capitalization rate represents the relationship between income and
value observed in the market and is derived through an analysis of
comparable sales as well as other analyses.
In yield capitalization, the value of a property is the
present value of the net operating income of each property in each year
of a holding period (typically ten years) plus the present value of the
property as if sold at the end of the holding period (the "reversion").
The present value of these elements is obtained by applying a
market-derived discount rate. The value of the reversion is obtained
through the capitalization of the adjusted income at the end of the
holding period, which should be a normalized or typical year, with a
deduction for the costs of sale.
In our analysis, the discount rates used to value the subject
hotels ranged from 13.0 to 14.5 percent; going-in capitalization rates
ranged from 10.0 to 11.5 percent; and reversionary capitalization rates
ranged from 10.5 to 12.0 percent. Differences in the discount and
capitalization rates applied to individual properties were based on a
combination of factors, including the age and condition of the hotels,
local market conditions, durability of the projected income stream, and
the ownership rights appraised (fee simple interest or leasehold
interest).
The Cost Approach has not been included in the estimate of the
value of the subject properties. The Cost Approach is most applicable
in the valuation of special use properties, properties which are
proposed or under construction, and aged properties, in which the value
of the improvements may be nominal and the value of the property as a
whole approaches land value. The subject properties are all going
concerns and the existing improvements contribute significant value to
the property. The costs to replace these facilities are of little more
than historical significance and are not used by the typical investor
interested in the purchase of an existing property."
Upon request the Partnership will furnish to a Limited Partner, without
charge, a copy of the appraisal report. In this regard Limited Partners are
cautioned to refer to the entire appraisal report, inasmuch as the opinions of
value stated therein are subject to the assumptions and limiting conditions
stated therein. Furthermore, Limited Partners should be aware that appraised
values are opinions and, as such, may not represent the realizable value of the
Property. Upon request, the Partnership will also furnish to a Limited Partner,
without charge, a copy of the fairness opinion.
LEGAL PROCEEDINGS
On October 27, 1997 a complaint was filed in the United States District
Court, Eastern District of California by the Partnership, the other GMS
Partnerships, and the Managing General Partner, as plaintiffs (the "GMS
Plaintiffs"). The complaint named as defendants Everest/Madison Investors, LLC,
18
Everest Lodging Investors, LLC, Everest Properties, LLC, Everest Partners, LLC,
Everest Properties II, LLC, Everest Properties, Inc., W. Robert Kohorst, David
I. Lesser, The Blackacre Capital Group, L.P., Blackacre Capital Management
Corp., Jeffrey B. Citrin, Ronald J. Kravit, and Stephen P. Enquist (the "Federal
Defendants"). The factual basis underlying the GMS Plaintiffs' causes of action
pertained to tender offers directed by the Federal Defendants to limited
partners of the GMS Partnerships, and to indications of interest made by certain
of the Federal Defendants in purchasing the properties of the GMS Partnerships.
The complaint requested the following relief: (i) a declaration that each of the
Federal Defendants had violated Sections 13(d), 14(d) and 14(e) of the
Securities and Exchange Act of 1934 (the "Exchange Act"), and the rules and
regulations promulgated by the Securities and Exchange Commission thereunder;
(ii) a declaration that certain of the Federal Defendants had violated Section
15(a) of the Exchange Act and the rules and regulations thereunder; (iii) an
order permanently enjoining the Federal Defendants from (a) soliciting tenders
of or accepting for purchase securities of the GMS Partnerships, (b) exercising
any voting rights attendant to the securities already acquired, (c) soliciting
proxies from the limited partners of the GMS Partnerships, and (d) violating
Sections 13 or 14 of the Exchange Act or the rules and regulations promulgated
thereunder; (iv) an order enjoining certain of the Federal Defendants from
violating Section 15(a) of the Exchange Act and the rules and regulations
promulgated thereunder; (v) an order directing certain of the Federal Defendants
to offer to each person who sold securities in the GMS Partnerships to such
defendants the right to rescind such sale; (vi) a declaration that the GMS
Partnerships need not provide to the Federal Defendants a list of limited
partners in the GMS Plaintiffs or any other information respecting the GMS
Partnerships which is not publicly available; and (vii) awarding the GMS
Plaintiffs reasonable attorneys' fees, costs of suit incurred, and such other
and further relief as the Court may deem just and proper.
On October 28, 1997 a complaint was filed in the Superior Court of the
State of California, Sacramento County by Everest Lodging Investors, LLC and
Everest/Madison Investors, LLC, as plaintiffs (the "State Plaintiffs"), against
Philip B. Grotewohl, the Managing General Partner, Kenneth M. Sanders, Robert J.
Dana, Borel Associates, and BWC Incorporated, as defendants (the "State
Defendants"), and the GMS Partnerships, as nominal defendants. On November 11,
1998 the complaint was amended and Mark and David Grotewohl were added as
defendants. The State Plaintiffs alleged that the State Defendants received
unauthorized rebates of franchise fees paid to Super 8 Motels, Inc., that the
Managing General Partner caused the GMS Partnerships to make unauthorized
payments of salaries and expenses, and reimbursements of expenses to the
Managing General Partner, that the Managing General Partner refused to cooperate
with the State Plaintiffs' efforts to buy the properties of the GMS
Partnerships, and that the Managing General Partner refused to provide
information required by the GMS Partnerships' governing documents and California
law. The Managing General Partner believes that these allegations were
unjustified. As amended, the complaint requested the following relief: (i) a
declaration that the action was a proper derivative action; (ii) an order
requiring the State Defendants to discharge their fiduciary duties to the GMS
Partnerships by accepting no kickbacks, charging no unauthorized expenses,
responding in good faith to the offer made by an affiliate of the State
Plaintiffs to purchase the properties of the GMS Partnerships and disclosing
such offers to the limited partners of the GMS Partnerships, and delivering all
information respecting the GMS Partnerships requested by the State Plaintiffs;
(iii) an order enjoining the State Defendants from breaching their fiduciary
duties; (iv) disgorgement of profits in excess of the reasonable value of the
19
services actually rendered; (v) appointment of a receiver; and (vi) an award for
compensatory and punitive damages and, under RICO, treble damages, and costs,
all in an amount to be determined.
On February 20, 1998, the parties entered into a settlement agreement
pursuant to which both of the above complaints were dismissed. Pursuant to the
terms of the settlement agreement, the Federal Defendants (excluding The
Blackacre Capital Group, L.P., Blackacre Capital Management Corp., Jeffrey B.
Citrin, Ronald J. Kravit and Stephen P. Enquist) agreed not to generally solicit
the acquisition of any additional units of the GMS Partnerships without first
filing necessary documents with the Securities and Exchange Commission, and also
agreed to conduct any such solicitation in compliance with the provisions of
Section 14 of the Exchange Act and Regulation 14D, notwithstanding that any such
solicitation might otherwise be exempt from such requirements. It was also
agreed, among other things, that the Managing General Partner would retain, on
behalf of the GMS Partnerships, a real estate broker to market for sale all of
the properties of the GMS Partnerships. The Managing General Partner agreed to
evaluate and consider in good faith a designee of Everest Properties, Inc. to
serve as the real estate broker. Further, the Managing General Partner agreed to
include in any listing agreement between the GMS Partnerships and their real
estate broker a provision requiring the broker to share one-half of the real
estate commission payable with Everest Properties, Inc. or its designee in the
event that Everest Properties, Inc. or its designee were the procuring broker
for the property generating the real estate commission. The Managing General
Partner also agreed to proceed in a commercially reasonable manner with the
marketing of all properties of the GMS Partnerships, and agreed to entertain all
bona fide offers, whether made for all of the properties of the GMS Partnerships
as a group, for all of the properties of a particular GMS Partnership as a
group, or for an individual property. The Managing General Partner agreed, by no
later than June 30, 1998, to accept for submission to the limited partners of
any GMS Partnership either (i) any bona fide offer (an "Acceptable Offer") to
purchase one or more of the properties of a GMS Partnership if the offer were a
cash offer at a price equal to 75% or more of the appraised value of the
property or properties, or (ii) any offer for a property or properties of a GMS
Partnership on terms deemed by the Managing General Partner to be more favorable
to that GMS Partnership than the Acceptable Offer. In addition, the Managing
General Partner agreed to submit the offer for approval to the limited partners
of the GMS Partnership and other procedures as required by the GMS Partnership's
Agreement of Limited Partnership and applicable law. In this connection, the
Managing General Partner agreed, under certain circumstances, to include in the
solicitation materials a proposal seeking the approval of the limited partners
to a sale of the property or properties to another buyer upon substantially the
same or better terms as those offered by the buyer. The Managing General Partner
retained the right to recommend to the limited partners of a GMS Partnership
rejection of any proposal if the proposed sales price were less than the
appraised value of the Property or were not payable entirely in cash. The
Managing General Partner also agreed that, upon the sale of a property of one of
the GMS Partnerships, the Managing General Partner would distribute promptly the
proceeds of the sale after payment of payables and retention of reserves to pay
anticipated expenses. Under the terms of the settlement agreement, the GMS
Partnerships agreed to reimburse the Everest Defendants for certain costs, not
to exceed $60,000, to be allocated among the GMS Partnerships. Of this amount,
the Partnership paid $12,000.
For a discussion of the amendment to such settlement agreement, see
"Outstanding Voting Securities and Voting Rights."
20
AMENDMENTS TO PARTNERSHIP AGREEMENT
Set forth below are the proposed amendments to the Partnership
Agreement which are the subject of this Consent Solicitation Statement:
Section 21. SALE OF PROPERTIES
"21.1 Sale and Disposition of Partnership Assets
A. Notwithstanding anything contained in this Agreement to the
contrary, including Section 11.2 hereof, the General Partners,
for and on behalf of the Partnership, are hereby authorized
(i) to sell the Partnership's real property interests,
including its motel, and related personal property, to Tiburon
Capital Corporation or a nominee thereof, including a nominee
which is an Affiliate of Mark Grotewohl, on the terms and
conditions outlined in the Consent Solicitation Statement of
the Partnership dated _____________, 1998; (ii) to dissolve
and wind up the affairs of the Partnership; (iii) to
distribute the proceeds of the sale and any other cash held by
the Partnership in accordance with this Agreement; (iv) to
terminate the Partnership; and (v) to take any action deemed
necessary or appropriate to accomplish the foregoing.
B. Notwithstanding anything contained in this Agreement to the
contrary, the General Partners, for and on behalf of the
Partnership, are hereby authorized (i) to sell the
Partnership's real property interests, including its motel,
and related personal property, if the purchaser is not an
Affiliate of the General Partner, and if such sale is for "all
cash," and is for an amount equal to or greater than the
amount reflected in an appraisal which is not more than 15
months old at the date the purchase agreement is executed;
(ii) to dissolve and wind up the affairs of the Partnership;
(iii) to distribute the proceeds of the sale and any other
cash held by the Partnership in accordance with this
Agreement; (iv) to terminate the Partnership; and (v) to take
any action deemed necessary or appropriate to accomplish the
foregoing; provided, however, that the provisions of this
Section 21.1B shall not be operative and shall be of no force
and effect if the Partnership's motel is sold pursuant to
Section 21.1A hereof."
21
FINANCIAL INFORMATION
Selected Partnership Financial Data
The Partnership's book values per Unit as of December 31, 1997 and June
30, 1998 were $129.93 and $98.79, respectively.
Following are selected financial data of the Partnership for the period
from October 1, 1992 to September 31, 1997.
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, September 30,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ---------
Guest room income $995,707 $856,246 $829,326 $808,505 $828,804
Net income (loss) $213,399 $101,430 $31,089 $(31,564) $(88,213)
Per Partnership Unit:
Cash distributions(1) $60.50 $3.00 ---- ---- ----
Net income (loss) $30.18 $14.35 $4.40 $(4.46) $(12.48)
September 30, September 30, September 30, September 30, September 30,
1997 1996 1995 1994 1993
Total assets $1,067,776 $1,268,224 $1,172,917 $31,122,106 $1,158,408
Long-term debt ---- ---- ---- ---- ----
- ---------
<FN>
(1) On an annual basis, to the extent cash distributions exceed net income,
Limited Partners receive a return of capital rather than a return on
capital. However, an annual analysis will be misleading if the Limited
Partners do not receive their investment back upon liquidation of the
Partnership. For investors who purchased their Units directly from the
Partnership, the original investment was $1,000 per Unit, cumulative
allocations of income through September 30, 1997 were approximately $700
per Unit, and cumulative distributions through September 30, 1997 were
approximately $1,425 per Unit. Investors who did not purchase Units
directly from the Partnership must consult with their own advisers in
this regard.
</FN>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
I. Fiscal Year Financial Statements
(a) Liquidity and Capital Resources
The Managing General Partner believes that the Partnership's liquidity,
defined as its ability to generate sufficient cash to satisfy its cash needs, is
adequate. The Partnership's primary source of liquidity is its cash flow from
operations. The Partnership had, as of September 30, 1997, current assets of
$486,052, current liabilities of $108,806 and, therefore, an operating reserve
of $377,246. The Managing General Partner's reserves target is 5% of the
adjusted capital contributions, which are approximately $3,494,317. Current
reserves are above this $174,716 required reserve.
The Partnership's motel property is unencumbered. Although no assurance
can be had in this regard, the Managing General Partner believes that the
Partnership's equity in its property provides a potential source of external
liquidity (through financing) in the event the Partnership's internal liquidity
is impaired.
During fiscal year 1997, the Partnership expended $61,087 on
renovations and replacements, $43,159 of which was capitalized. Included in
these amounts was $28,669 for guest room and corridor carpeting, $8,024 for a
replacement washing machine, $4,459 for six replacement room air-conditioning
22
units and $3,660 for furniture refurbishment.
During fiscal year 1996, the Partnership expended $57,971 on
renovations and replacements, $36,984 of which was capitalized. Included in the
capitalized items were $11,148 for a replacement central office computer, $8,149
for a replacement washing machine, $6,817 for new backflow devices required by
the City of Santa Rosa under the EPA's administration of the Clean Water Act,
$6,088 for replacement room carpets, $2,577 for a replacement clothes dryer and
$2,205 for replacement television sets. The non-capitalized renovations of
$20,988 included expenditures for lamps and light fixtures, drapes,
air-conditioning units, mattresses, chairs, outside building trim repairs and
landscaping.
The Partnership currently has no material commitments for capital
expenditures, other than parking lot repairs. The Property is in full operation
and no further property acquisitions or extraordinary capital expenditures are
planned. If the Property is not sold the Managing General Partner is aware of no
material trends or changes with respect to the mix or relative cost of the
Partnership's capital resources. If the Property is retained adequate working
capital is expected to be generated by motel operations.
(b) Results of Operations
(i) Overall Financial Results
During fiscal year 1997 as compared to fiscal year 1996, the
Partnership achieved a $143,084 or 16.1% increase in total income. This increase
was due primarily to a $139,461 or 16.3% increase in guest room revenue. The
increased room revenue is discussed under the Santa Rosa Motel caption below.
During fiscal year 1996 as compared to fiscal year 1995, the
Partnership achieved a $38,502 or 4.5% increase in total income, due primarily
to a $26,920 or 3.2% increase in guest room revenue. The increased room revenue
is discussed under the Santa Rosa Motel caption below.
During fiscal year 1997 as compared to fiscal year 1996, the
Partnership experienced a $31,115 or 3.9% increase in total expenses. This
increase is related to increased property occupancy and is discussed below.
During fiscal year 1996 as compared to fiscal year 1995, the
Partnership achieved a $31,839 or 3.9% reduction in total expenses, due
primarily to the $25,548 or 3.7% reduction in motel operating expenses. This
decrease in motel operating expenses is discussed below.
(ii) Santa Rosa Motel
The following is a comparison of operating results of the Partnership's
Santa Rosa motel for the fiscal years ended 1995, 1996 and 1997. The income and
expense numbers in the following table are shown on an accrual basis and other
payments on a cash basis. Total expenditures and debt service include the
operating expenses of the motel, together with the cost of capital improvements.
23
Average Average
Occupancy Room
Twelve months ended: Rate Rate
- -----------------------------------------------------------------------
September 30, 1995 53.7% $42.33
September 30, 1996 52.6% $44.49
September 30, 1997 59.8% $45.65
Total
Expenditures Partnership
Total And Debt Cash
Twelve months ended: Revenues Service Flow (1)
- ------------------------------------------------------------------------------
September 30, 1995 $850,781 $752,705 $98,076
September 30, 1996 $889,283 $733,042 $156,241
September 30, 1997 $1,032,367 $771,215 $261,152
(1) While Partnership Cash Flow as it is used here is not an amount
found in the financial statements, the Managing General Partner believes that it
is the best indicator of the annual change in the amount, if any, available for
distribution to the Limited Partners because it tracks the definition of the
term "Cash Flow" as it is used in the Partnership Agreement. This calculation is
reconciled to the financial statements in the following table. Limited Partners
should not interpret Partnership Cash Flow as an alternative to net income or as
a measure of performance.
Following is a reconciliation of Total Expenditures and Debt Service as
used above to Total Expenses as shown on the Statement of Operations (in the
audited financial statements):
1997 1996 1995
-----------------------------------------------------
Total Expenditures and Debt Service $771,215 $733,042 $752,705
Additions to Fixed Assets (43,159) (36,964) (28,974)
Depreciation and Amortization 90,581 91,815 97,047
Other Items 331 (40) (1,086)
=====================================================
Total Expenses $818,968 $787,853 $819,692
=====================================================
A reconciliation of Partnership Cash Flow (included in the chart above)
to Net Income as shown on the Statements of Operations (in the audited financial
statements) is as follows:
1995 1996 1997
-----------------------------------------------------
Partnership Cash Flow $98,076 $156,241 $261,152
Additions to Fixed Assets 28,974 36,964 43,159
Depreciation and Amortization (97,047) (91,815) (90,581)
Other Items 1,086 40 (331)
=====================================================
Net Income $31,089 $101,430 $213,399
=====================================================
During fiscal year 1997 as compared to fiscal year 1996, the
Partnership's motel achieved an increase in its guest room revenue through
increases in both its average room rate and its occupancy rate. The occupancy
rate increased from 52.6% to 59.8%. The average room rate increased from $44.49
to $45.65. These two increases resulted in the $143,084 or 16% increase in total
revenue. The Santa Rosa motel achieved its largest increased revenue from the
leisure-market segment with the next largest increase from the corporate
segment.
24
During fiscal year 1996 as compared to fiscal year 1995, the
Partnership's motel achieved an increase in total revenue of $38,502 or 4.5%
from an increase in its average daily room rate. This increase in revenue was
partially offset by a decrease in overall room demand. This result was achieved
by selling more rooms to the higher-priced leisure market segment and fewer
rooms to the corporate, government, group and discount-market segments.
During fiscal year 1997 as compared to fiscal year 1996, the
Partnership's motel experienced a $38,173 or 5.2% increase in total expenditures
which is due primarily to the increase in occupancy. The increased expenditures
included $14,411 in room attendant wages, $6,973 in increased franchise fees and
advertising costs and $7,250 in appraisal costs.
During fiscal year 1996 as compared to fiscal year 1995, the
Partnership's Santa Rosa motel achieved a reduction of $19,663 or 2.6% in total
expenditures and debt service. The Partnership's motel achieved reductions of
$20,880 in expenditures for renovations and additions to fixed assets, and
$5,241 in front desk wages and salaries, which were partially offset by a $7,264
increase in utility costs.
II. Interim Financial Statements
(a) Liquidity and Capital Resources
As of June 30, 1998 the Partnership's current assets of $294,240
exceeded its current liabilities of $94,588, providing an operating reserve of
$199,652. The Managing General Partner's reserves target is 5% of adjusted
capital contributions, or $174,716.
The Partnership expended $28,825 on renovations and replacements during
the nine months ended June 30, 1998, of which $13,033 was capitalized. The
expenditures included $7,995 for exterior painting, $8,368 for guestroom carpet
and vinyl, $4,665 for replacement lamps and $3,015 for replacement televisions.
(b) Results of Operations
Total income decreased $62,892 or 9.1% for the first three quarters of
fiscal year 1998 as compared to the first three quarters of fiscal year 1997.
Guest room revenue decreased $54,236 or 8.2% due to a decrease in the average
occupancy rate from 54.4% to 47.0%. Such decrease was partially offset by an
increase in the average room rate from $43.82 to $47.49. The motel experienced
decreased occupancy in the leisure and corporate market segments and increased
occupancy in the discount segment.
Total expenses increased $96,645 or 16.3% primarily due to increases in
the minimum wage and increases in legal, appraisal and other costs associated
with the proposed sale of the Property and the liquidation of the Partnership.
Other Financial Information
In 1996 the computers used by the Partnership at the Managing General
Partner's offices in Sacramento were updated. In the process of updating its
hardware and software, the Managing General Partner eliminated any potential
Year 2000 problem with respect to such computers. Similarly, the Managing
General Partner does not anticipate any material Year 2000 problem with the
computers in use at the individual motels. The Managing General Partner has not
investigated and does not know whether any Year 2000 problems may arise from its
third party vendors. Because the motels are "budget" motels, the Partnership's
25
most significant vendors are its utility providers and banks. To the extent
banking services, utility services and other goods and services are unavailable
as a result of Year 2000 problems with the computer systems of such vendors or
otherwise, the ability of the Partnership to conduct business at its motels
would be comprised. No contingency plans have been developed in this regard.
Items 304 and 305 of Regulation S-K promulgated by the Securities and
Exchange Commission are not applicable to the Partnership.
26
FINANCIAL STATEMENTS
for
CONSENT SOLICITATION STATEMENT
of
SUPER 8 MOTELS II, LTD.
October __, 1998
F-i
INDEX TO FINANCIAL STATEMENTS
SUPER 8 MOTELS II, LTD. Page
INDEPENDENT AUDITORS' REPORT ........................................... F-1
FINANCIAL STATEMENTS:
Balance Sheets, September 30, 1997 and 1996............................. F-2
Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995.................................. F-3
Statements of Partners' Equity for the Years
Ended September 30, 1997, 1996 and 1995............................ F-4
Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995.................................. F-5
Notes to Financial Statements........................................... F-7
Balance Sheets, June 30, 1998 and September 30, 1997 (Unaudited)........ F-12
Statements of Operations for the Three Months and
Nine Months Ended June 30, 1998 and 1997 (Unaudited)............... F-13
Statement of Partners' Equity for the Nine Months
Ended June 30, 1998 and 1997 (Unaudited)........................... F-14
Statements of Cash Flows for the Nine Months
Ended June 30, 1998 and 1997 (Unaudited)........................... F-15
Notes to Financial Statements........................................... F-16
F-ii
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Super 8 Motels II, Ltd.
We have audited the accompanying balance sheets of Super 8 Motels II, Ltd., a
California limited partnership, as of September 30, 1997 and 1996 and the
related statements of operations, partners' equity and cash flows for each of
the three years in the period ended September 30, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Super 8 Motels II, Ltd. as of
September 30, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
December 4, 1997
San Mateo, California
e-super6/s8297fs.wp8.wpd
F-1
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
BALANCE SHEETS
September 30, 1997 and 1996
ASSETS
1997 1996
------------ ---------
Current Assets:
Cash and temporary investments (Notes 1 and 3) $459,098 $614,405
Accounts receivable 17,937 9,323
Prepaid expenses 9,017 21,662
--------- -----------
Total Current Assets 486,052 645,390
-------- -----------
Property and Equipment (Notes 2 and 7):
Capital improvements 34,947 34,947
Building 1,845,878 1,845,878
Furniture and equipment 524,159 497,661
---------- -----------
2,404,984 2,378,486
Accumulated depreciation and amortization (1,834,078) (1,759,327)
--------- ----------
Property and Equipment, Net 570,906 619,159
---------- -----------
Other Assets (Note 2):
Deposit of federal income tax 10,818 3,675
----------- ------------
Total Assets $1,067,776 $1,268,224
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 105,071 $ 97,413
Due to related parties (Note 4) 3,735 1,740
------------ ------------
Total Liabilities 108,806 99,153
----------- -----------
Contingent Liabilities and Lease Commitment (Notes 4 and 5) - -
Partners' Equity:
General Partners 49,493 47,359
Limited Partners: 7,000 units authorized,
issued and outstanding 909,477 1,121,712
-------- ----------
Total Partners' Equity 958,970 1,169,071
-------- ----------
Total Liabilities and Partners' Equity $1,067,776 $1,268,224
========== ==========
The accompanying notes are an integral part of these financial statements
F-2
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended September 30:
1997 1996 1995
------------ ------------ --------
Income:
Motel room $995,707 $856,246 $829,326
Telephone and vending 14,913 14,721 10,260
Interest 16,818 17,236 10,068
Other 4,929 1,080 1,127
---------- --------- ---------
Total Income 1,032,367 889,283 850,781
--------- -------- --------
Expenses:
Motel operations (exclusive of depreciation
shown separately below) (Notes 4 and 6) 684,677 662,519 688,067
General and administrative (exclusive of
depreciation shown separately below) (Note 4) 43,710 33,519 34,578
Depreciation and amortization (Note 2) 90,581 91,815 97,047
-------- -------- --------
Total Expenses 818,968 787,853 819,692
-------- -------- --------
Net Income $213,399 $101,430 $31,089
======== ======== =======
Net Income Allocable to General Partners $2,134 $1,014 $311
====== ====== ====
Net Income Allocable to Limited Partners $211,265 $100,416 $30,778
======== ======== =======
Net Income Per Partnership Unit (Note 1) $30.18 $14.35 $4.40
====== ====== =====
Distributions to Limited Partners
Per Partnership Unit (Note 1) $60.50 $3.00 $ -
====== ===== ======
The accompanying notes are an integral part of these financial statements
F-3
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended September 30:
1997 1996 1995
---------- ---------- -------
General Partners:
Balance, beginning of year $ 47,359 $ 46,345 $ 46,034
Net income 2,134 1,014 311
------------ --------- ------------
Balance, End of Year 49,493 47,359 46,345
------------ -------- -----------
Limited Partners:
Balance, beginning of year 1,121,712 1,042,296 1,011,518
Net income 211,265 100,416 30,778
Distributions to limited partners (423,500) (21,000) -
------------ ----------- -----------
Balance, End of Year 909,477 1,121,712 1,042,296
------------ ---------- ----------
Total Partners' Equity $958,970 $1,169,071 $1,088,641
======== ========== ==========
The accompanying notes are an integral part of these financial statements
F-4
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended September 30:
1997 1996 1995
------------ ------------- ---------
Cash Flows From Operating Activities:
Received from motel operations $1,007,202 $880,407 $840,465
Expended for motel operations and
general and administrative expenses (712,901) (679,215) (704,198)
Interest received 16,551 17,338 8,172
--------- --------- ---------
Net Cash Provided by
Operating Activities 310,852 218,530 144,439
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (43,159) (36,984) (28,974)
Proceeds from sale of equipment 500 20 -
---------- ---------- --------
Net Cash Used by
Investing Activities (42,659) (36,964) (28,974)
--------- --------- ---------
Cash Flows From Financing Activities:
Distributions paid to limited partners (423,500) (21,000) -
---------- --------- --------
Net Cash Used by Financing Activities (423,500) (21,000) -
---------- --------- --------
Net Increase (Decrease) in Cash and
Temporary Investments (155,307) 160,566 115,465
Cash and Temporary Investments:
Beginning of year 614,405 453,839 338,374
-------- -------- --------
End of Year $459,098 $614,405 $453,839
======== ======== ========
The accompanying notes are an integral part of these financial statements
F-5
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30:
1997 1996 1995
---------- ----------- -------
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities:
Net income (loss) $213,399 $101,430 $ 31,089
-------- -------- ---------
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 90,581 91,815 97,047
Loss (gain) on sale of property 331 (20) -
(Increase) decrease in accounts receivable (8,614) 8,462 (2,144)
(Increase) decrease in prepaid expenses 12,645 5,641 (1,276)
Increase in other assets (7,143) (3,675) -
Increase in accounts payable and accrued
liabilities 7,658 14,936 19,599
Increase (decrease) in due to related parties 1,995 (59) 124
--------- ---------- ----------
Total Adjustments 97,453 117,100 113,350
-------- -------- --------
Net Cash Provided by
Operating Activities: $310,852 $218,530 $144,439
======== ======== ========
The accompanying notes are an integral part of these financial statements
F-6
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Super 8 Motels II, Ltd., is a limited partnership organized under California law
on May 7, 1979, to acquire and operate motel properties in Santa Rosa and
Ontario, California. The Santa Rosa Motel was opened in November, 1980, and the
Ontario Motel was opened in May, 1981. The Ontario Motel property was sold in
February, 1990. The Partnership grants credit to customers, substantially all of
which are local businesses in Santa Rosa.
The Managing General Partner of the Partnership is Grotewohl Management
Services, Inc., the sole shareholder and officer of which is Philip B.
Grotewohl. The Associate General Partner of the Partnership is Robert J. Dana.
The net income or net loss of the Partnership is allocated 1% to the General
Partners and 99% to the Limited Partners. Net income and distributions per
partnership unit are based upon 7,000 units outstanding. All partnership units
are owned by the Limited Partners.
The Partnership agreement requires that the Partnership maintain reserves for
normal repairs, replacements, working capital and contingencies in an amount of
at least 5% of adjusted capital contributions ($174,716 at September 30, 1997).
As of September 30, 1997, the Partnership had a combined balance in cash and
temporary investments of $459,098.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Items of Partnership income are passed through to the individual partners for
income tax purposes, along with any income tax credits. Therefore, no federal or
California income taxes are provided for in the financial statements of the
Partnership. Since the Partnership has a fiscal year-end other than the majority
of the partners, the Partnership is required annually to make a payment to the
Internal Revenue Service based on the prior year's income.
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the following estimated useful lives and methods:
Description Methods Useful Lives
-------------------------- -------------------------- ------------
Capital improvements 200% declining balance 7-20 years
and straight-line
Buildings 150% declining balance 10-25 years
and straight-line
Furniture and equipment 200% declining balance 5-7 years
and straight-line
Costs incurred in connection with maintenance and repair are charged to expense.
Major renewals and betterments that materially prolong the life of assets are
capitalized.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and the carrying value of the asset.
F-7
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
NOTE 3 - CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments as of September 30, 1997 and 1996 consist of the
following:
1997 1996
-------- --------
Cash in bank, non-interest bearing $ 22,173 $ 35,070
Money market accounts 336,925 479,335
Certificates of deposit 100,000 100,000
--------- --------
Total Cash and Temporary Investments $459,098 $614,405
======== ========
Temporary investments are recorded at cost, which approximates market value. The
Partnership considers temporary investments with original maturities of six
months or less to be cash equivalents for purposes of the statement of cash
flows.
NOTE 4 - RELATED PARTY TRANSACTIONS
Franchise Fees
Super 8 Motels, Inc., now a wholly-owned subsidiary of Hospitality Franchise
Systems, Inc., is franchisor of all Super 8 Motels. The Partnership pays to the
franchisor monthly fees equal to 4% of the gross room revenues of the motel and
contributes an additional 1% of its gross room revenues to an advertising fund
administered by the franchisor. In return the franchisor provides the right to
use the name "Super 8," a national institutional advertising program, an advance
room reservation system, and inspection services. These costs ($49,785 in 1997,
$42,812 in 1996 and $41,466 in 1995) are included in motel operations expense in
the accompanying statements of operations. The Partnership operates its motel
property as a franchisee of Super 8 Motels, Inc. through a sub-franchise
agreement with Brown & Grotewohl, a California general partnership, of which
Grotewohl Management Services, Inc., (see Note 1) is a 50% owner. Under the
sub-franchise agreement, Brown & Grotewohl earned 40% of the above franchise
fees, which amounted to $19,914, $17,125 and $16,587 in 1997, 1996 and 1995,
respectively.
Property Management Fees
The General Partners or their affiliates handle the management of the motel
property of the Partnership. The fee for this service is 5% of the gross
revenues from Partnership operations, as defined in the Partnership agreement,
not including income from the sale, exchange or refinancing of such properties.
This fee is payable only out of the cash available for distribution of the
Partnership, defined as the total cash receipts from Partnership operations
during a given period of time less cash used during the same period to pay debt
service, capital improvements and replacements, operating expenses and reserves.
It is subordinated to prior receipt by the Limited Partners of a cumulative 10%
per annum pre-tax return on their adjusted capital contributions for each year
of the Partnership's existence. At September 30, 1997 the Limited Partners had
not received the 10% cumulative return, and as no property management fees are
payable, they are not reflected in these financial statements. Management
believes it is not likely that these fees will become payable in the future.
F-8
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
Subordinated Partnership Management Fees
During the Partnership's operational stage, the General Partners are to receive
9% of cash available for distribution for Partnership management services, along
with an additional 1% of cash available for distribution on account of their
interest in the income and losses, subordinated, however, to receipt by the
Limited Partners of a cumulative 10% per annum pre-tax return on their adjusted
capital contributions and to payment of the property management fees referred to
above. Since the Limited Partners had not received the 10% cumulative return and
the property management fees had not been paid, no partnership management fees
are presently payable and therefore are not reflected in these financial
statements. Management expects these fees will never be paid. This fee is
payable only from cash funds provided from operations of the Partnership, and
may not be paid from the proceeds of sale or refinancing.
Subordinated Incentive Distributions
Under the terms of the Partnership agreement, the net proceeds of the sale of
any of the Partnership's motel properties and of any financing or refinancing of
any of the Partnership's motel properties, to the extent that such proceeds are
not to be reinvested in the acquisition of additional properties, shall promptly
be distributed to the General Partners and Limited Partners. Until the Limited
Partners have received distributions from all sources equal to their capital
contributions plus a cumulative 10% per annum pre-tax return on their adjusted
capital contributions, all of such proceeds shall be distributed to the Limited
Partners. Thereafter, 15% of the remainder of such proceeds shall be distributed
to the General Partners as cash incentive distributions and the balance shall be
distributed to the Limited Partners.
Administrative Expenses Shared by the Partnership and its Affiliates There
are certain administrative expenses allocated between the Partnership and
affiliated Super 8 partnerships. These expenses, which are allocated based on
usage, are telephone, data processing, rent of the administrative office, and
administrative salaries. Management believes that the methods used to allocate
shared administrative expenses are reasonable. The administrative expenses
allocated to the Partnership were approximately $112,000 in 1997, $113,000 in
1996 and $110,000 in 1995 and are included in motel operations expenses and
general and administrative expenses in the accompanying statements of
operations. Included in administrative salaries are allocated amounts paid to
two employees who are related to Philip B. Grotewohl, the sole shareholder of
Grotewohl Management Services, Inc., a General Partner of the Partnership.
NOTE 5 - LEASE COMMITMENT
The Partnership has a long-term operating lease commitment on approximately
three acres of land in Santa Rosa, California, the site of the Santa Rosa motel.
The term of the lease runs through August 31, 2015, with an option to extend the
lease for three consecutive periods of five years each. The base monthly rent is
subject to adjustment at three year intervals to reflect changes in the Consumer
Price Index. The Partnership will pay all property taxes, assessments and
utilities. Rent expenses for the fiscal years ending September 30, 1997, 1996
and 1995 were $102,033, $101,354 and $101,679, respectively.
F-9
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5 - LEASE COMMITMENT (Continued)
The future lease commitment at September 30, 1997, using the minimum monthly
amounts, is as follows:
Years Ending
September 30: Amount
1998 $100,778
1999 100,778
2000 100,778
2001 100,778
2002 100,778
2003-2007 503,888
2008-2012 503,888
2013-2015 293,935
-----------
Total $1,805,601
==========
NOTE 6 - MOTEL OPERATING EXPENSES
The following table summarizes the major components of motel operating expenses
for the years ended September 30, 1997, 1996 and 1995.
1997 1996 1995
---------- ---------- -------
Salaries and related costs $211,215 $189,103 $191,794
Rent 94,025 93,395 94,016
Franchise and advertising fees 49,785 42,812 41,466
Utilities 71,893 74,632 73,824
Allocated costs, mainly indirect salaries 90,713 92,355 89,327
Repairs and minor renovations 17,928 20,987 33,863
Maintenance expenses 38,988 42,313 38,666
Property taxes 21,335 11,413 28,492
Property insurance 18,458 18,028 17,323
Other operating expenses 70,337 77,481 79,296
-------- -------- --------
Total Motel Operating Expenses $684,677 $662,519 $688,067
======== ======== ========
NOTE 7 - PROPERTY AND EQUIPMENT
The following is a summary of the accumulated depreciation and amortization of
property and equipment:
1997 1996
----------- -------
Capital improvements $ 34,947 $ 34,075
Building 1,353,486 1,292,582
Furniture and equipment 445,645 432,670
----------- ----------
Accumulated depreciation and amortization $1,834,078 $1,759,327
---------- ==========
F-10
SUPER 8 MOTELS II, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8 - CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash accounts in six commercial banks located in
California. Accounts at each bank are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000 per bank. A summary of the total
insured and uninsured cash balances (not reduced by outstanding checks) as of
September 30, 1997 follows:
Total cash in all California banks $469,982
Portion insured by FDIC (329,181)
Uninsured cash balances $140,801
NOTE 9 - SUBSEQUENT EVENTS
On October 27, 1997 a complaint was filed in the United States District Court by
Grotewohl Management Services, Inc. (a general partner of the Partnership)
naming as defendants Everest/Madison Investors, LLC, Everest Lodging Investors,
LLC, Everest Properties II, LLC, Everest Properties, Inc., W. Robert Kohorst,
David I. Lesser, The Blackacre Capital Group, L.P., Blackacre Capital Management
Corp., Jeffrey B. Citron, Ronald J. Kravit, and Stephen B. Enquist. The
complaint pertains to tender offers directed by certain of the defendants to
limited partners of the Partnerships, and to indications of interest made by
certain of the defendants in purchasing the property of the Partnership. The
complaint alleges that the defendants violated certain provisions of the
Security and Exchange Act of 1934 and seeks injunctive and declarative relief.
Defendants have yet to respond to the complaint.
On October 28, 1997 a complaint was filed in the Superior Court of the State of
California, Sacramento County by Everest Lodging Investors, LLC and
Everest/Madison Investors, LLC as plaintiffs against Philip B. Grotewohl,
Grotewohl Management Services, Inc., Kenneth M. Sanders, Robert J. Dana, Borel
Associates, and BWC Incorporated, as defendants, and the Partnership, along with
four other partnerships of which have common general partners, as nominal
defendants. The complaint pertains to the receipt by the defendants of franchise
fees and reimbursement of expenses, the indications of interest made by the
plaintiffs in purchasing the properties of the nominal defendants, and the
alleged refusal of the defendants to provide information required by the terms
of the Partnership's partnership agreement and California law. The complaint
requests the follow relief: a declaration that the action is a proper derivative
action; an order requiring the defendants to discharge their fiduciary duties to
the Partnerships and to enjoin them from breaching their fiduciary duties;
return of certain profits; appointment of a receiver; and an award for damages
in an amount to be determined. The defendants and nominal defendants have
recently been served and are formulating their response to the complaint.
F-11
Super 8 Motels II, Ltd.
(A California Limited Partnership)
Balance Sheet
June 30, 1998 and September 30, 1997
6/30/98 9/30/97
----------- -----------
ASSETS
Current Assets:
Cash and temporary investments $ 283,390 $ 459,098
Accounts receivable 4,711 17,937
Prepaid expenses 6,139 9,017
----------- -----------
Total current assets 294,240 486,052
----------- -----------
Property and Equipment:
Capital improvements 34,947 34,947
Buildings 1,845,878 1,845,878
Furniture and equipment 533,444 524,159
----------- -----------
2,414,269 2,404,984
Accumulated depreciation (1,895,924) (1,834,078
----------- -----------
Property and equipment, net 518,345 570,906
----------- -----------
Other Assets: 22,434 10,818
----------- -----------
Total Assets $ 835,019 $ 1,067,776
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 94,588 $ 108,806
----------- -----------
Total current liabilities 94,588 108,806
----------- -----------
Total liabilities 94,588 108,806
----------- -----------
Contingent Liabilities (See Note 1)
Partners' Equity:
General Partners 48,883 49,493
Limited Partners (7,000 units authorized,
issued and outstanding) 691,548 909,477
----------- -----------
Total partners' equity 740,431 958,970
----------- -----------
Total Liabilities and Partners' Equity $ 835,019 $ 1,067,776
=========== ===========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-12
Super 8 Motels II, Ltd.
(A California Limited Partnership)
Statement of Operations
Nine Months Ended June 30, 1998 and 1997
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
6/30/98 6/30/98 6/30/97 6/30/97
---------- ---------- ---------- ----------
Income:
Guest room $ 229,389 $ 608,806 $ 267,559 $ 663,042
Telephone and vending 2,437 8,705 3,379 10,931
Interest 2,293 9,090 2,856 12,907
Other 808 1,998 3,481 4,611
---------- ---------- ---------- ----------
Total Income 234,927 628,599 277,275 691,491
---------- ---------- ---------- ----------
Expenses:
Motel operating expenses
(Note 2) 171,311 539,484 170,488 488,030
General and administrative (43,764) 85,385 2,520 37,394
Depreciation and amortization 21,475 64,769 22,915 67,569
---------- ---------- ---------- ----------
Total Expenses 149,022 689,638 195,923 592,993
---------- ---------- ---------- ----------
Net Income (Loss) $ 85,905 $ (61,039) $ 81,352 $ 98,498
========== ========== ========== ==========
Net Income (Loss) Allocable
to General Partners $859 ($610) $814 $985
========== ========== ========== ==========
Net Income (Loss) Allocable
to Limited Partners $85,046 ($60,429) $80,538 $97,513
========== ========== ========== ==========
Net Income (Loss)
per Partnership Unit $12.15 ($8.63) $11.51 $13.93
========== ========== ========== ==========
Distribution to Limited
Partners per
Partnership Unit $7.50 $15.00 $5.00 $53.00
========== ========== ========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-13
Super 8 Motels II, Ltd.
(A California Limited Partnership)
Statement of Partners' Equity
For the Nine Months Ended June 30, 1998 and 1997
6/30/98 6/30/97
---------- ----------
General Partners:
Balance, beginning of year $ 49,493 $ 47,359
Net income (loss) (610) 985
---------- ----------
Balance, End of period 48,883 48,344
---------- ----------
Limited Partners:
Balance, beginning of year 909,477 1,121,712
Net income (loss) (60,429) 97,513
Distributions to Limited Partners (157,500) (371,000)
---------- ----------
Balance, End of Period 691,548 848,225
---------- ----------
Total Partners' Equity $ 740,431 $ 896,569
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-14
Super 8 Motels II, Ltd.
(A California Limited Partnership)
Statement of Cash Flows
For the Nine Months Ended June 30, 1998 and 1997
6/30/98 6/30/97
---------- ----------
Cash Flows from Operating Activities:
Received from motel revenues $ 631,390 $ 671,817
Expended for motel operations and
general and administrative expenses (647,000) (530,286)
Interest received 10,435 14,011
---------- ----------
Net Cash Provided (Used) by Operating Activities (5,175) 155,542
---------- ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (13,033) (33,591)
Proceeds from sale of land - 500
---------- ----------
Net Cash Provided (Used) by Investing Activities (13,033) (33,091)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners (157,500) (371,000)
---------- ----------
Net Cash Provided (Used) by Financing Activities (157,500) (371,000)
---------- ----------
Net Increase (Decrease) in Cash and
Temporary Investments (175,708) (248,549)
Cash and Temporary Investments:
Beginning of period 459,098 614,405
---------- ----------
End of period $ 283,390 $ 365,856
========== ==========
Reconciliation of Net Income (Loss) to Net Cash Provided (Used) by
Operating Activities:
Net Income (Loss) $ (61,039 $ 98,498
---------- ----------
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 64,769 67,569
(Gain) loss on disposition of property
and equipment 825 331
(Increase) decrease in accounts receivable 13,226 (5,663)
(Increase) decrease in prepaid expenses 2,878 14,742
(Increase) decrease in other assets (11,616) (7,143)
Increase (decrease) in accounts payable (14,218) (12,792)
---------- ----------
Total Adjustments 55,864 57,044
---------- ----------
Net Cash Provided (Used) by Operating Activities$ (5,175) $ 155,542
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-15
Super 8 Motels II, Ltd.
(A California Limited Partnership)
Notes to Financial Statements
Nine Months Ended June 30, 1998 and 1997
Note 1:
The attached interim financial statements include all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
period presented.
Users of these interim financial statements should refer to the audited
financial statements for the year ended September 30, 1997 for a complete
disclosure of significant accounting policies and practices and other detail
necessary for a fair presentation of the financial statements.
In accordance with the partnership agreement, the following information is
presented related to fees paid to the General Partners or affiliates for the
period.
Franchise Fees $12,182
Upon the sale of the Ontario Motel property in February, 1990, management felt
that the payment of the property management fees and partnership management fees
became remote. Therefore, no property management fees or partnership management
fees have been accrued.
Note 2:
The following table summarizes the major components of motel operating expenses
for the periods reported:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
6/30/98 6/30/98 6/30/97 6/30/97
---------- ---------- ---------- ----------
Salaries and related costs $ 59,715 $ 170,128 $ 52,494 $ 149,462
Rent 25,194 75,583 23,349 70,062
Franchise and advertising fees 11,469 30,455 13,375 33,168
Utilities 13,664 48,683 18,909 51,628
Allocated costs,
mainly indirect salaries 23,877 75,595 22,157 68,759
Maintenance, repairs and
replacements 9,662 50,467 10,771 31,809
Property taxes 5,720 20,572 5,297 15,890
Property insurance 4,389 13,405 5,205 14,509
Other operating expenses 17,621 123,248 39,263 108,732
--------- --------- --------- ---------
Total motel operating expenses $ 171,311 $ 539,484 $ 170,488 $ 488,030
========= ========= ========= =========
The following additional material contingencies are required to be restated in
interim reports under federal securities law: None.
F-16
APPENDIX 1
ACTIONS BY WRITTEN CONSENT OF LIMITED PARTNERS
SUPER 8 MOTELS II, LTD.,
a California limited partnership
2030 J Street
Sacramento, California 95814
(916) 442-9183
THIS CONSENT IS SOLICITED ON BEHALF OF THE PARTNERSHIP AND THE MANAGING GENERAL
PARTNER.
The undersigned hereby acknowledges receipt of the Consent Solicitation
Statement dated ______________, 1998 and hereby votes all the units of limited
partnership interest of Super 8 Motels II, Ltd., a California limited
partnership (the "Partnership"), held of record by him, her or it as follows:
Proposal #1. An amendment to the Partnership's Certificate and
Agreement of Limited Partnership to grant to the General Partners
authority to sell the Partnership's motel and related personal
property to Tiburon Capital Corporation, or a nominee thereof, as
specifically set forth under "Amendments to the Partnership
Agreement" in the accompanying Consent Solicitation Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Proposal #2. An amendment to the Partnership's Certificate and
Agreement of Limited Partnership to grant to the General Partners
authority to sell the Partnership's motel and related personal
property to a party or parties yet to be identified, as specifically
set forth under "Amendments to the Partnership Agreement" in the
accompanying Consent Solicitation Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
This Consent, when properly executed and returned to the Partnership, will be
voted in the manner directed herein by the undersigned limited partner. IF NO
DIRECTION IS MADE FOR A PROPOSAL, THIS CONSENT, IF SO EXECUTED AND RETURNED,
WILL BE VOTED FOR THE PROPOSAL.
Please sign exactly as name appears below: When Units are held by joint
tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name by president or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
DATED: , 1998
----------------------------------
Signature
----------------------------------
Additional signature, if held
jointly
PLEASE MARK, SIGN, DATE AND
RETURN THIS
POSTPAID CONSENT CARD.