SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Super 8 Motels III, 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:
-------------------------------------------------------
2) Aggregate number of securities to which transaction
applies:
-------------------------------------------------------
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):
-------------------------------------------------------
<PAGE>
4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------
5) Total fee paid:
-------------------------------------------------------
[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:
$580
2) Form, Schedule or Registration Statement No.:
Schedule 14A
3) Filing Party:
Registrant
4) Dated Filed:
May 15, 1998
<PAGE>
CONSENT SOLICITATION STATEMENT
PROPOSED ACTION BY WRITTEN CONSENT
OF LIMITED PARTNERS
OF
SUPER 8 MOTELS III, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
November 12, 1998
INTRODUCTION
The limited partners (the "Limited Partners") of SUPER 8 MOTELS III, LTD.,
a California limited partnership (the "Partnership"), are being asked by the
Partnership and Grotewohl Management Services, Inc. (the "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
"Properties") for an aggregate purchase price of $2,900,000, and the dissolution
of the Partnership, which proposal is described hereinafter (the "Proposal"). If
the Proposal 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 Proposal" below.)
If the Proposal is approved, the Partnership will be authorized to sell the
Property to Tiburon Capital Corporation, or a nominee thereof (the "Buyer"). It
is expected that Tiburon Capital Corporation will form a limited liability
company for the purpose of buying and owning the Property, and that Tiburon
Capital Corporation, as the managing member thereof, will have the power to
direct such Buyer's affairs and control all its major decisions. 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, or a
limited liability entity to be formed by him, will be a member of the Buyer.
Mark Grotewohl or his wholly-owned entity will enter into a contract to provide
all centralized property management services to the Buyer and pay all
centralized property management expenses in exchange for 4 1/2% of gross
property revenues. The management contract will provide for performance
objectives which, if not met, will entitle the Buyer to terminate the contract.
As an additional management incentive Mr. Grotewohl or his wholly-owned entity
will receive on account of his or its membership in the Buyer up to 50% of the
profits from the Property after return of all capital to all equity investors,
plus a return thereon of at least 14% per annum. Neither Mark Grotewohl nor his
wholly-owned entity has or will have any interest in Tiburon Capital Corporation
or any voting rights in the Buyer with respect to major decisions (e.g., the
sale of refinancing of the Property).
The Limited Partners are urged to consider the following risk factors:
- Inasmuch as the Buyer is engaging in the transaction in order to make a
profit by operating the Properties, the Buyer's interests differ from those of
the Limited Partners. (See "Purchase Agreement" and "Special Factors.")
i
<PAGE>
- The 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 Properties, its conduct of
negotiations leading to the proposed sale of the Properties and its
recommendation with respect thereto. (See "Conflicts of Interest.")
- The General Partner did not list the Properties for sale with a broker to
obtain competitive bids. Instead, the General Partner based the purchase price
for the Properties on a formal appraisal of the Properties as of January 1,
1998. (See "Special Factors" and "Conflicts of Interest.") It is possible, then,
that the Partnership might have received a higher price for the Properties if it
had solicited offers by listing the Properties.
- The appraiser may be subject to conflicts of interest in that it has
prepared other appraisals for the General Partner. (See "Appraisal of the
Properties/Fairness Opinion.")
- The 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 Properties are
sold. (See "Effects of Approval of the Proposal - Federal Income Tax
Consequences.")
Specifically, the Limited Partners are being asked to approve the following
Proposal:
An amendment to the Partnership Agreement to grant to the General Partner
authority to sell the Properties and related personal property to the Buyer,
notwithstanding that Mark Grotewohl will be an Affiliate of the Buyer; 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 "Amendment to Partnership
Agreement."
If the Limited Partners approve the Proposal, 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' 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.
The Proposal is subject to the approval of a majority-in-interest of the
Limited Partners. If the Limited Partners do not approve the Proposal, the
Partnership will not sell the Properties pursuant to the Proposal. Rather, the
General Partner will entertain other offers to sell the Properties and will
submit one or more of such offers to the Limited Partners for approval, in the
discretion of the General Partner. Pending any sale of the Properties, the
Partnership will continue to operate the Properties as usual.
ii
<PAGE>
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 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 Action By
Written Consent of Limited Partners (the "Consent") were first sent to the
Limited Partners on or about November 12, 1998.
Units of limited partnership interest in the Partnership (the "Units")
represented by Consents duly executed and returned to the Partnership on or
before December 31, 1998 (unless extended by the 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 Proposal are
given on an executed and returned Consent, Units so represented will be voted in
favor of the Proposal. The General Partner will take no action with respect to
the Proposal 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 General Partner,
either in person or by telephone or telegram.
iii
<PAGE>
TABLE OF CONTENTS
Page
Special Factors............................................................... 1
Outstanding Voting Securities and Voting Rights............................... 6
Consent Under Partnership Agreement........................................... 8
The Properties and the Partnership' Business.................................. 8
Narrative Description of Business........................................... 8
(a) Franchise Agreements................................................. 8
(b) Operation of the Motels.............................................. 9
(c) Competition.......................................................... 9
Properties.................................................................. 9
(a) San Bernardino....................................................... 9
(b) Bakersfield..........................................................10
Management....................................................................12
Purchase Agreement............................................................12
Conflicts of Interest.........................................................14
Effects of Approval of the Proposal...........................................15
General.....................................................................15
Determination and Use of Net Proceeds.......................................15
Federal Income Tax Consequences.............................................16
(a) General..............................................................16
(b) Characterization of Gain.............................................17
Dissolution of the Partnership..............................................18
Appraisal of the Properties/Fairness Opinion..................................18
Legal Proceedings.............................................................21
Amendment to Partnership Agreement............................................23
Financial Information.........................................................24
Selected Partnership Financial Data.........................................24
Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................24
I. Fiscal Year Financial Statements....................................24
(a) Liquidity and Capital Resources................................24
(b) Results of Operations..........................................25
II. Interim Financial Statements.......................................29
(a) Liquidity and Capital Resources................................29
(b) Results of Operations..........................................29
Other Financial Information.................................................29
Financial Statements.........................................................F-i
iv
<PAGE>
SPECIAL FACTORS
A number of special factors apply to the Proposal. 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 Proposal 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
original objective of the Partnership respecting the sale of the Properties, the
General Partner believes such liquidity is desired by the Limited Partners.
The Partnership was formed in 1980 and its two motel properties located in
San Bernardino and Bakersfield, California opened for business during 1982.
This Consent Solicitation Statement has been prepared to ask the Limited
Partners to approve the sale of the Properties for cash in the amount of the
aggregate appraised fair market values of $2,900,000.
It has always been the intention of the Partnership to liquidate the
Properties when it became apparent that the best interests of the Limited
Partners would be served by doing so. The General Partner has received inquiries
from the Limited Partners over the years as to when the Properties were 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 Properties. During 1997 and the early part of 1998
conditions changed, and the General Partner believes that the Properties should
be sold pursuant to the Proposal, which was executed on April 30, 1998, 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 Properties and
the motel properties of four other California limited partnerships as to which
the 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 Properties was $1,418,595,
a price far below $2,900,000, the appraised value as of January 1, 1998 and the
price offered in the Proposal. The General Partner rejected the offer of the
Everest Group. Subsequent conflicts between the Everest Group and the
Partnership resulted in lawsuits. Inasmuch as the General Partner agreed with
the Everest Group in principle that the Properties should be sold, a settlement
was reached whereby, among other things, the General Partner agreed to take
steps to sell the Properties 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
the Proposal. (See "Outstanding Voting Securities and Voting Rights.")
The General Partner considered seeking third party buyers for the
Properties (and expects to do so if the Proposal is disapproved) but believes
that it is unlikely that a sale materially more favorable to the Limited
Partners could have been arranged last spring, or can be arranged now, because
(i) the proposed purchase price is equal to the appraised value determined as of
1
<PAGE>
January 1, 1998, and (ii) in the opinion of the General Partner, the market is
now less favorable to sellers than it was at the time the contract with the
Buyer was negotiated. It is also possible that a delay in pursuing the Buyer's
offer by listing the Properties would have resulted in the loss of that offer.
In this regard, prior to negotiating the terms represented by the Proposal,
the General Partner received in writing from two real estate brokers who are not
affiliated with the Partnership or the General Partner suggested sale strategies
for the sale of the Properties 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
broker's value for the eight individual properties which, in the aggregate
($28,250,000), was slightly lower than the aggregate appraised value
($28,900,000) of the eight properties. However, the values assigned by this
broker to the properties were, in some instances, lower than the appraised
values and, in other instances, higher. (For example, the broker assigned values
to the South San Francisco, Sacramento, Modesto, Santa Rosa, San Bernardino,
Bakersfield, Pleasanton and Barstow properties of $7,500,000, $2,600,000,
$1,250,000, $1,700,000, $1,700,000, $1,800,000, $7,800,000, and $3,900,000,
respectively, as compared to the appraised values determined by PKF Consulting
of $7,600,000, $2,700,000, $1,800,000, $2,200,000, $1,600,000, $1,300,000,
$7,600,000 and $4,100,000, respectively.) The other broker suggested that the
eight properties would derive the highest value if sold as a portfolio,
particularly if the buyer were trying to break into the California lodging
industry. The aggregate list price determined by this broker ($29,000,000) was
substantially the same as the aggregate appraised values. As was the case with
the first broker, this broker assigned list prices to the eight properties which
were, in some instances, lower than those of the appraised values and, in other
instances, higher. (This broker assigned list prices, assuming the properties
were sold individually, to the South San Francisco, Sacramento, Modesto, Santa
Rosa, San Bernardino, Bakersfield, Pleasanton and Barstow properties of
$7,663,176, $2,562,833, $1,177,217, $1,600,182, $1,417,824, $1,634,820,
$7,947,436 and $3,558,296, respectively.) Limited Partners should be aware that
"list" prices and "values" assigned by brokers are prices to be used to position
properties for ultimate sale over a period of time. Such estimated prices are
not intended to be appraised values, are not the work product of recognized
experts, 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. Indeed, the General Partner is aware
that the competition between these two brokers to obtain the listings may have,
in some instances, resulted in an upward bias in the brokers' reports.
Accordingly, the General Partner does not believe that the prices and values
submitted by the brokers should be relied upon in connection with a Limited
Partner's determination of the manner in which the Limited Partner will vote on
the Proposal. The General Partner has included the information set forth in this
paragraph so that Limited Partners will have before them all third-party
information possessed by the General Partner at the time it negotiated the terms
of the Proposal.
It was not until after the General Partner's receipt of the PKF Consulting
appraisal, and the broker's reports discussed in the preceding paragraph that
Tiburon Capital Corporation (together with its nominees, the "Buyer") was
introduced to the General Partner by Mark Grotewohl. Philip Grotewohl, on behalf
of the General Partner, conducted negotiations relative to the sale of the
Properties.
2
<PAGE>
As discussed more fully below under "Appraisal of the Properties/Fairness
Opinion," the Properties have 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 was that
the aggregate fair market value of the Properties as of January 1, 1998 was
$2,900,000, which is the purchase price of the Properties set forth in the
Proposal. 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 General Partner are recommending the approval of
the Proposal by the Limited Partners for the following reasons:
oThe General Partner believes that the subject contracts were entered into
at the crest of a seller's market, which has now subsided. In this regard,
Limited Partners should note that economic journalists have reported adverse
changes in credit availability and consumer confidence since the terms of the
Proposal were negotiated, factors which could adversely affect the value of the
Properties. The General Partner believes that now is the time to sell the
Properties.
o Although the motels are in good condition, they are 16 years old and have
never been refurbished. If the Properties are to be retained, it would be
necessary for the Partnership to spend large sums for their refurbishment and
modernization. The General Partner believes that the funds for such expenditures
would not be available from cash flow without reducing future distributions.
o The Partnership's intention has always been to sell the Properties when
the market conditions warranted sale. It was never an investment objective of
the Partnership to hold the Properties permanently.
o The 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. In this regard, the General Partner believes that it is important
that the Limited Partners understand that no true market exists for the sale of
the Limited Partners' investment Units. Heretofore, to dispose of their Units,
Limited Partners have had to arrange private sales, or accept tender offers, at
prices well below the real value of the underlying assets.
o The Properties are proposed to be sold to the Buyer for $2,900,000,
approximately $1,481,000 more than was offered for the Properties in October
1997 by the Everest Group. The sales price is equal to the appraised value of
the Properties as of January 1, 1998 as determined by PKF Consulting, an
3
<PAGE>
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.
o As of August 31, 1998, the Limited Partners had already received, over
the life of the Partnership, the sum of $741.25 per Unit in the form of
quarterly distributions. Upon the sale of the Properties as described herein,
the Limited Partners would receive an additional pre-tax distribution in the
estimated amount of approximately $479 per Unit. For a discussion of other
effects of the sale of the Properties, including Federal income tax
consequences, see "Effects of Approval of the Proposal" below.
Notwithstanding the preceding, Limited Partners should note that the Buyer
hopes to benefit from its acquisition of the Properties, and that the 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 Properties
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 Properties and sold them at a later date, instead of
consummating a sale under the Proposal. The Limited Partners would likely fare
worse under a strategy of retaining the Properties if their value were to
decline.
The General Partner has faced substantial conflicts of interest in
proposing, negotiating and structuring the Proposal. See "Conflicts of
Interest." Although, as discussed above, the General Partner believes that the
Limited Partners are interested in a means of liquidating their investment, the
Proposal has not been initiated by the Limited Partners. The steps that have
been and are being taken to provide the Limited Partners with procedural
safeguards are: (i) the submission of the Proposal to the Limited Partners (all
of whom are unaffiliated with the Partnership, the General Partner and Mark
Grotewohl) for their approval; (ii) the commissioning of an independent
appraisal of the Properties upon which the Proposal is based; and (iii) the
commissioning of a fairness opinion respecting the Proposal. The factors are
listed in descending order of importance, i.e., the first factor listed was
given the most weight in the determination that the proposed transaction is
procedurally fair, although, as a practical matter, this process is an
approximation of the weight given to each factor because each factor is relevant
and the Partnership, the General Partner and Mark Grotewohl were not able to
weigh the relative importance of each factor precisely. Although the Partnership
has not retained an independent representative for the Limited Partners, the
Partnership, the General Partner and Mark Grotewohl believe that the steps taken
and to be taken constitute sufficient procedural safeguards for the Limited
Partners' interests and that the proposed transaction is procedurally fair. The
General Partner's determination was made by Philip Grotewohl, as the sole
director thereof.
Further, the Partnership, the General Partner and Mark Grotewohl believe
that the proposed transaction represented by the Proposal is substantively fair
to the Limited Partners. The Partnership, the General Partner and Mark Grotewohl
have considered a number of material factors in connection with developing such
beliefs. The factors are listed below in descending order of importance, i.e.,
the first factor listed was given the most weight in the determination that the
proposed transaction is substantively fair, although, as a practical matter,
this process is an approximation of the weight given to each factor because each
factor is relevant and the Partnership, the General Partner and Mark Grotewohl
were not able to weigh the relative importance of each factor precisely:
4
<PAGE>
(i) The purchase price of the Properties is equal to the appraised value of
the Properties as of January 1, 1998;
(ii) The Units are at present illiquid and the cash to be distributed to
the Limited Partners as a result of the proposed sale will provide Limited
Partners with liquidity and cash in an amount greater than the recent sales
prices for the Units and the net book value of the Units(as discussed below);
(iii) The purchase price will be paid entirely in cash;
(iv) The Partnership, the General Partner and Mark Grotewohl believe that
current appraisals of the Properties might reflect lower values than those
reflected in the January 1, 1998 appraisal;
(v) The Partnership has received an opinion from PKF Consulting that the
terms of the proposed sale are fair to the Limited Partners;
(vi) The purchase price for the Properties is substantially greater than
that proposed by the Everest Group, the only other firm offer made for the
Properties during the preceding 18 months; and
(vii) A sale of the Properties rather than the continued ownership thereof
will be consistent with the Partnership's investment objectives.
The appraisal prepared by PKF Consulting was received by the General
Partner prior to the time that negotiations with the Buyer were commenced. The
General Partner relied on the appraisal to determine the valuation of $2,900,000
for the Properties. As further discussed in the appraisal (see "Appraisal of the
Properties/Fairness Opinion"), PKF Consulting relied on a sales comparison
analysis, a direct capitalization of income analysis, and a discounted cash flow
analysis. Inasmuch as the Properties consist of actively operated businesses,
the appraisal sets forth a single value for the "as is" market value and the
"going concern" value. Accordingly, in relying on the appraisal, the
Partnership, the General Partner and Mark Grotewohl considered the "as is"
market value and the "going concern" value, as well as current and historical
prices for other motels. They did not consider the current liquidation value of
the Properties because it is clear that the highest and best use of the
Properties is as operating motels. To sell the buildings and personal property
in a liquidation sale would be ill advised. Further, the General Partner deemed
the net book value of the Properties to be irrelevant, given the holding period
for the Properties. Based upon experience in the lodging industry, as well as
general familiarity with industry news as reported by trade journals, the
Partnership, the General Partner and Mark Grotewohl reasonably believe that the
appraised fair market value of the Properties as determined by PKF Consulting as
of January 1, 1998 was fair. PKF Consulting was retained because of its
reputation and expertise. The Partnership paid PKF Consulting approximately
$11,100 for its services in the proposed transaction and the other GMS
Partnerships paid PKF Consulting an aggregate of approximately $38,400.
With respect to item (ii) above, in the absence of an established public
market in which Units are being traded, the 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, from August 1996 to August 1998 there were sales of
Units (including sales made pursuant to tender offers) at rates ranging from
$110 per Unit to $400 per Unit. The proposed sale would result in distributions
5
<PAGE>
of approximately $479 per Unit. During the past two years, neither the
Partnership, the General Partner nor Mark Grotewohl has purchased or sold any
Units. The net book value of the Partnership as of June 30, 1998 was $524.15 per
Unit. During the past two years no offers have been made by any unaffiliated
entity for a sale of Limited Partners' interests in the Partnership allowing the
purchaser thereof to exercise control over the Partnership.
Against the proposed transaction are the fact of an inside transaction, the
General Partner's decision not to solicit bids from independent third parties,
and the possibility that the continued ownership of the Properties could be more
economically beneficial than a sale at this time. The Partnership, the General
Partner and Mark Grotewohl believe the factors listed above in favor of the
transaction outweigh these negative considerations.
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 the Proposal.
All Limited Partners as of the date action is taken on the Proposal (the
"Record Date") are entitled to notice of and to vote on the Proposal. As of
August 31, 1998 there were 5,941 Units outstanding and a total of 926 Limited
Partners entitled to vote such Units. With respect to the 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 Proposal to be voted upon.
Dissenting Limited Partners are protected under California law by virtue of the
fiduciary duty of the 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:
6
<PAGE>
Everest Lodging Investors, LLC 216 Units 3.64%
Everest Madison Investors, LLC 280 Units 4.71%
KM Investments 50 Units 0.84%
Total 546 Units 9.19%
None of Grotewohl Management Services, Inc. (the 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 546 Units (9.19% 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 the Proposal 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 Properties 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 the Proposal by a majority-in-interest of the Limited Partners,
or (ii) December 31, 1998 (unless extended by the General Partner pursuant to
notice mailed to the Limited Partners), will be counted toward the vote on the
Proposal. However, Limited Partners are urged to return their Consents at the
earliest practicable date.
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
action which is 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 Proposal.
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 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
7
<PAGE>
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 Partner. (The
Partnership Agreement defines "Affiliate" as (i) any person directly or
indirectly controlling, controlled by, or under common control with another
person, (ii) a 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 General Partner, in
the opinion of the General Partner the Buyer does not come within such
definition, because the General Partner does not believe that Mark Grotewohl is
an Affiliate of the General Partner. (See "Purchase Agreement" below.) However,
recognizing the possibility that reasonable minds might differ in resolving that
issue, and because the Properties constitute substantially all of the
Partnership's properties (as discussed below under "The Properties and the
Partnership's Business"), the General Partner is seeking the approval of the
proposed sale of the Properties to the Buyer on the terms described herein by a
majority-in-interest of the Limited Partners.
THE PROPERTIES AND THE PARTNERSHIP'S BUSINESS
The Properties consist of fee interests in land located in San Bernardino
and Bakersfield, California, the motel properties constructed thereon, and the
related personal property. The two motels are managed and operated by the
Partnership under the name "Super 8 Motel."
Narrative Description of Business
(a) Franchise Agreements
The Partnership operates each of its motel properties as a franchisee of
Super 8 Motels, Inc. through sub-franchises obtained from Super 8 Management
Corporation. In March 1988, Brown & Grotewohl, a California general partnership
that is an Affiliate of the General Partner (the "Manager"), became
sub-franchisor in the stead of Super 8 Management Corporation, another Affiliate
of the 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 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
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.
8
<PAGE>
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 Motels
The Manager manages and operates the Partnership's motels. 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 individual
motel staffs and a centralized accounting staff, all of which work under the
direction of the General Partner or the Manager. Together, these staffs perform
all bookkeeping duties in connection with each 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 39 persons,
either full or part-time, at its two motel properties, including ten desk
clerks, 24 housekeeping and laundry personnel, three maintenance personnel, and
two motel managers. 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, in the areas in which its motel
properties are located 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.
Super 8 Motels offer accommodations at the upper end, in terms of
facilities and prices, of the budget segment of the lodging industry.
Properties
The net proceeds of the Partnership's offering of Units (and financing in
the amount of $870,000 which has since been repaid) were expended for the
acquisition in fee and development of two properties located in San Bernardino
and Bakersfield, California.
(a) San Bernardino, California
The San Bernardino motel, which consists of 81 guest rooms on approximately
1.87 acres of land, commenced operations on March 6, 1982. The average monthly
occupancy rates and average monthly room rates during the three most recent
years are as follows:
1997 1996 1995
-------------------------------------------
Average Occupancy Rate 53.8% 49.9% 55.3%
Average Room Rate $43.57 $40.23 $40.29
9
<PAGE>
The Partnership's San Bernardino motel provides accommodations to no one
customer, the loss of which could materially affect the Partnership's
operations.
The following lodging facilities provide direct and indirect competition to
the Partnership's San Bernardino motel:
Approximate
Number Distance
Facility Of Rooms From Motel
- -------------------------------------------------------------------------------
Comfort Inn 50 Adjacent
Hilton Inn 200 Across street
La Quinta Motel 154 200 Yards
TraveLodge 90 200 Yards
EZ-8 Motel 117 0.13 Mile
(b) Bakersfield, California
The Bakersfield motel, which consists of 90 guestrooms on approximately
2.32 acres of land, commenced operations on September 20, 1982. The average
monthly occupancy rate and average monthly room rate for the three most recent
years are as follows:
1997 1996 1995
-------------------------------------------
Average Occupancy Rate 84.6% 87.2% 85.6%
Average Room Rate $32.35 $30.28 $30.87
From October 1, 1982 to January 31, 1993, an agreement was in effect
granting the Partnership the first opportunity to provide rooms to employees of
Santa Fe Railroad at a room rate of $20.00 per night. Though expired according
to its terms, the contract continues to be observed by both parties, except that
the agreed rate is now $23.00 per room night. Revenue attributable to this
agreement constituted approximately 32%, 31%, and 32% of the motel's guest room
revenues during 1997, 1996 and 1995, respectively.
On December 31, 1992, the Partnership entered into a written agreement with
the National Railroad Passenger Corporation (Amtrak) for the provision of
lodging services to its employees at a room rate of $25.75 per night, which
included a transportation credit of $1.75 per room night payable to the
Partnership for providing transportation from the train terminal. Due to
competitive bids, the rate was lowered to $24.00 per room night effective
October 1, 1994. Amtrak provided approximately 24%, 22% and 26% of the motel's
guest room revenue in 1997, 1996 and 1995, respectively.
Except as set forth above, the Bakersfield motel provides accommodations to
no one customer, the loss of which could materially affect the Partnership's
operations.
The following lodging facilities provide direct or indirect competition to
the Partnership's Bakersfield motel:
10
<PAGE>
Approximate
Number Distance
Facility Of Rooms From Motel
- -------------------------------------------------------------------------------
California Inn 74 Adjacent
Motel 6 160 0.50 Mile
EZ-8 Motel 100 0.50 Mile
TraveLodge Plaza 61 0.75 Mile
Comfort Inn South 80 0.75 Mile
Four Points Inn 199 1.00 Mile
Best Western Kern River Motor Inn 200 1.00 Mile
La Quinta Inn 150 1.00 Mile
Days Inn 120 1.00 Mile
Roderunner 49 1.50 Miles
Economy Motels of America 140 1.50 Miles
Rio Mirada 209 2.00 Miles
Comfort Inn 60 2.00 Miles
Econo Lodge 100 2.00 Miles
Holiday Inn Express 100 6.00 Miles
11
<PAGE>
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 partner is Grotewohl
Management Services, Inc.
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
duties. He does act as "inside" legal counsel to the General Partner, and his
principal occupation has been to head the operation and maintenance of the
Properties 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.
PURCHASE AGREEMENT
On April 30, 1998, the Partnership entered into an agreement to sell the
Properties to Tiburon Capital Corporation, San Francisco, California, or a
nominee of Tiburon Capital Corporation (the "Buyer"), for the sum of $2,900,000,
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 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 Properties instead of
12
<PAGE>
Tiburon Capital Corporation. The members of such limited liability company would
be Tiburon Capital Corporation, Mark Grotewohl or his wholly-owned entity, and,
perhaps, others. Mark Grotewohl's interest in the Buyer would be limited to 50%
of the profits remaining after return of all capital to all equity investors,
plus a return thereon of at least 14% per annum. Mark Grotewohl or his
wholly-owned entity also would provide centralized 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 centralized
property management expenses. The foregoing would be reflected in a written
agreement if the Proposal 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 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 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 Partner.
(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
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 General Partner, (ii) owns no voting
securities in the Partnership or the General Partner, and (iii) is not an
officer, director or partner of the General Partner or the Partnership. However,
the 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 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 Properties from the Partnership, even if the Limited
Partners approve this sale. In this regard, the Partnership has not solicited
any offers to purchase the Properties or the motel properties of the other GMS
Partnerships, has not listed the Properties or the motel properties of the other
GMS Partnerships for sale with independent brokers, and has not otherwise
actively sought competing offers for the Properties or the motel properties of
the other GMS Partnerships. Consequently, the offer presented by the Buyer is
the only offer that the General Partner has received for the Properties or the
motel properties of the other GMS Partnerships other than those presented by the
Everest Group.
13
<PAGE>
There are a number of significant conditions to the consummation of the
proposed sale of the Properties 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 Properties; the absence of any
damage or loss to the Properties 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,
1998 of a loan commitment for financing in an amount of not less than 90% of the
purchase price of the Properties (the Buyer has since waived but has not
satisfied this contingency); and receipt by the Partnership of any necessary
approvals of the sale by, among others, the franchisor, the landlords, and the
subtenants. The 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 $15,000 into escrow on the date the
Partnership notifies the Buyer that the Limited Partners have approved the
proposed sale of the Properties 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 General Partner
anticipates that the Partnership's share of aggregate closing costs, including
real estate brokerage commissions, will be approximately $108,750. 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 General Partner is subject to substantial conflicts of interest in
connection with the Proposal 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
General Partner, is the father of Mark Grotewohl, an affiliate of the Buyer.
Accordingly, the 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 General Partner also faced significant conflicts of interest in determining
to sell the Properties at this time in that it agreed to sell the Properties 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 General Partner's federal court action brought against
the Everest Group alleged violations by the General Partner of the Partnership
Agreement and of its fiduciary duty to the Partnership. Accordingly, the General
Partner may have been motivated to agree to sell the Properties 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
General Partner believes that the appraised market value of the Properties as
determined by PKF Consulting is fair and reasonable. The General Partner also
14
<PAGE>
believes that the sale of the Properties 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 General Partner were to solicit bids for the Properties
from third parties, or (ii) the continued retention and operation of the
Properties by the Partnership coupled with a sale of the Properties 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
Properties pursuant to the Proposal.
General
The consummation of the sale of the Properties pursuant to the Proposal and
the concomitant dissolution of the Partnership should result in the following
consequences for the Partnership, the Limited Partners and the General Partner:
(i) The Limited Partners are expected to receive the distributions of net
cash proceeds from the sale of the Properties as described below.
(ii) The Limited Partners and General Partner 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 PROPOSAL. 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 Properties are sold for a gross sales price of
$2,900,000. This summary has been prepared by the General Partner.
If the proposed transaction is consummated on November 30, 1998, it is
estimated that the Partnership would receive the following net proceeds:
15
<PAGE>
Gross sales price $2,900,000
Less: Real estate commission (79,750)
Estimated escrow and closing costs (79,000)
Net proceeds of sale $2,741,250
Included in closing costs set forth above are, among other items, estimated
legal fees of $37,000, estimated fees in connection with the appraisals and
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 $27,746.54 each.
Accordingly, if the proposed transaction with the Buyer is consummated, the
actual date of consummation will determine whether there is 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 $2,741,250 estimated to be received by the Partnership
from the proposed transaction, in the estimated amount of $461.41 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
Properties 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 $102,000 or $17.17 per Unit, also would be distributed entirely
to the Limited Partners. Alternatively, if the Properties are not sold pursuant
to the Proposal, the Partnership would continue to operate the Properties for an
indeterminate period. The General Partner estimates that if the Properties are
not sold the Partnership will make average annual distributions to the Limited
Partners of from zero to $297,000 ($50.00 per Unit) for the foreseeable future.
However, there can be no assurance that the 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 Properties, 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.
16
<PAGE>
(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.
The Properties 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 Properties are
"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 Properties 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 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 Properties 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
Properties 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 $2,620,000 $ 0 $2,620,000 $ 0
General Partner 27,000 0 27,000 0
Total $2,647,000 $ 0 $2,647,000 $ 0
Per Unit $441.00 $ 0 $441.00 $ 0
Because of different methods of depreciation used for California income tax
purposes than for Federal income tax purposes, the General Partner anticipates
that consummation of the proposed transaction would produce a gain for
California income tax purposes in the amount of approximately $1,784,000, of
17
<PAGE>
which approximately $18,000 and $1,766,000 would be allocated to the General
Partner and to the Limited Partners, respectively.
Dissolution of the Partnership
Section 18.1(e) of the Partnership Agreement provides that the Partnership
shall be dissolved upon the sale of all motel properties or any interest therein
and the conversion into cash of any proceeds of sale originally received in a
form other than cash.
If the proposed sale of the Properties is consummated, the net cash
proceeds received by the Partnership upon close of escrow for the proposed
transaction will be distributed in accordance with the provisions of the
Partnership Agreement. Thereupon the Partnership will be dissolved, the 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 General Partner will then take all necessary steps toward
termination of the Partnership's Certificate of Limited Partnership.
APPRAISAL OF THE PROPERTIES/FAIRNESS OPINION
The appraisals of the two motel properties 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
General Partner based on the 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 General
Partner's belief is based on past experience with PKF Consulting, which rendered
appraisals of the Properties 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 Properties were 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 Properties. 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 Properties as of January 1, 1998 was an aggregate of $2,900,000, or
$1,600,000 for the San Bernardino motel and $1,300,000 for the Bakersfield
motel. 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 Properties 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
18
<PAGE>
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.
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.
19
<PAGE>
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 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
Properties. Upon request, the Partnership will also furnish to a Limited
Partner, without charge, a copy of the fairness opinion.
20
<PAGE>
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 General Partner, as plaintiffs (the "GMS Plaintiffs'). The
complaint named as defendants Everest/Madison Investors, LLC, 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 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 General Partner caused
the GMS Partnerships to make unauthorized payments of salaries and expenses, and
reimbursements of expenses to the General Partner, that the General Partner
refused to cooperate with the State Plaintiffs' efforts to buy the properties of
the GMS Partnerships, and that the General Partner refused to provide
information required by the GMS Partnerships' governing documents and California
law. The 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
21
<PAGE>
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 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 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 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 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 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 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
General Partner to be more favorable to that GMS Partnership than the Acceptable
Offer. In addition, the 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.
The 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 General Partner also agreed that, upon the sale of a property of one of the
GMS Partnerships, the 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."
22
<PAGE>
AMENDMENT TO PARTNERSHIP AGREEMENT
Set forth below is the proposed amendment to the Partnership Agreement
which is the subject of this Consent Solicitation
Statement:
Section 21. SALE OF PROPERTIES
21.1 Sale and Disposition of Partnership Assets
Notwithstanding anything contained in this Agreement to the contrary,
including Section 11.2 hereof, the General Partner, for and on behalf of the
Partnership, is hereby authorized (i) to sell the Partnership's real property
interests, including its motels, and related personal property, to Tiburon
Capital Corporation or a nominee thereof, including a nominee as to which Mark
Grotewohl is an Affiliate, on the terms and conditions outlined in the Consent
Solicitation Statement of the Partnership dated November 12, 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.
23
<PAGE>
FINANCIAL INFORMATION
Selected Partnership Financial Data
The Partnership's book values per Unit as of December 31, 1997 and June 30,
1998 were $525.55 and $524.15, respectively.
Following are selected financial data of the Partnership for the period
from January 1, 1993 to December 31, 1997.
<TABLE>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Guest room income $1,592,209 $1,464,850 $1,526,742 $1,625,581 $1,734,535
Net income $117,093 $1,116 $68,750 $33,851 $49,083
Per Partnership Unit:
Cash distributions(1) $25.00 ---- ---- ---- ----
Net income $19.52 $0.19 $11.46 $5.64 $8.18
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
Total assets $3,259,069 $3,237,869 $3,411,456 $3,632,719 $3,793,456
Long-term debt ---- ---- $75,493 $390,484 $595,214
_________
<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 December 31, 1997
were approximately $339.51 per Unit, and cumulative distributions through
December 31, 1997 were approximately $663.96 per Unit. Investors who did not
purchase Units directly from the Partnership must consult with their own
advisers in this regard.
</FN>
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
I. Fiscal Year Financial Statements
(a) Liquidity and Capital Resources
The General Partner believes that the Partnership's liquidity, defined as
its ability to generate sufficient cash to meet its cash needs, is adequate. The
Partnership's primary source of internal liquidity is its revenues from motel
operations. The Partnership had, as of December 31, 1997, current assets of
$471,628, current liabilities of $116,417 and, therefore, an operating reserve
of $355,211. The General Partner's reserves target is 5% of adjusted capital
contributions, or $297,050.
The Partnership's properties are currently unencumbered. Although no
assurance can be had in this regard, the General Partner believes that the
Partnership's equity in its properties provides a potential source of external
liquidity (through financing) in the event the Partnership's internal liquidity
is impaired.
During 1997, the Partnership expended $66,721 for renovations and
replacements, of which $36,441 was capitalized. This amount included $18,629 for
guestroom carpets, $8,021 for two ice machines, $4,255 for tub refurbishing,
$5,099 for replacement bedspreads, $6,323 for replacement air conditioners and
$4,524 for replacement televisions.
24
<PAGE>
During 1996, the Partnership expended $70,718 for renovations and
replacements, of which $24,711 was capitalized. This amount included $21,900 for
parking lot resurfacing at the Bakersfield motel, $15,348 for computer systems,
$7,345 for guest room carpets, $6,218 for re-keying, $5,365 for tub
refurbishing, $5,006 for replacement bedspreads and $3,702 for replacement
televisions.
The Partnership currently has no material commitments for capital
expenditures, except that the Bakersfield motel requires painting and roof
repairs. Its two motel properties are in full operation and no further property
acquisitions or extraordinary capital expenditures are planned. If the
properties are not sold the 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 properties are retained adequate working capital is expected
to be generated by motel operations.
(b) Results of Operations
(i) Combined Financial Results
The following tables summarize the operating results of the Partnership for
1997, 1996 and 1995 on a combined basis. The results of the individual motel
properties follow in separate subsections. 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
motels, together with the cost of capital improvements and those Partnership
expenses properly allocable to such motels.
Average Average
Occupancy Room
Fiscal Year Ended: Rate Rate
- ------------------------------------------------------------------
December 31, 1995 71.3% $34.33
December 31, 1996 69.5% $33.66
December 31, 1997 70.0% $36.43
Total
Expenditures Partnership
Total And Cash Flow
Fiscal Year Ended: Revenues Debt Service (1)
- -----------------------------------------------------------------------------
December 31, 1995 $1,571,111 $1,671,151 $(100,040)
December 31, 1996 $1,510,262 $1,515,375 $(5,113)
December 31, 1997 $1,641,860 $1,408,696 $233,164
(1) While Partnership Cash Flow as it is used here is not an amount found
in the financial statements, the General Partner believes 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. These calculations are 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.
25
<PAGE>
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):
<TABLE>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Total Expenditures and Debt Service $1,408,696 $1,515,375 $1,671,151
Principal Payments on Financial Obligations 0 (153,456) (285,133)
Additions to Fixed Assets (36,441) (24,711) (45,880)
Depreciation and Amortization 151,769 162,569 164,599
Other Items 742 9,369 (2,376)
=========================================================
Total Expenses $1,524,766 $1,509,146 $1,502,361
=========================================================
</TABLE>
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:
<TABLE>
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Partnership Cash Flow $233,164 $(5,113) $(100,040)
Principal Payments on Financial Obligations 0 153,456 285,133
Additions to Fixed Assets 36,441 24,711 45,880
Depreciation and Amortization (151,769) (162,569) (164,599)
Other Items (743) (9,369) 2,376
=====================================================
Net Income $117,093 $1,116 $68,750
=====================================================
</TABLE>
26
<PAGE>
Following is a reconciliation of Partnership Cash Flow (shown above) to the
aggregate total of Cash Flow from Properties Operations for the Partnership's
two motels which are segregated in the tables below:
<TABLE>
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
San Bernardino Motel $82,590 $20,090 $41,110
Bakersfield Motel 134,412 (34,512) (159,959)
-----------------------------------------------------
Aggregate Cash Flow from Properties Operations $217,002 ($14,422) (118,849)
Interest on Cash Reserves 13,116 8,288 10,071
Other Partnership Income (Net of Other
Expenses) Not Allocated to the Properties 3,046 1,019 8,738
-----------------------------------------------------
Partnership Cash Flow $233,164 $(5,113) $(100,040)
-----------------------------------------------------
</TABLE>
The Partnership achieved a $131,598 or 8.7% increase in total revenues
during 1997 as compared to 1996. The increase in revenue primarily is due to
increased room rates at both motels. The San Bernardino market improved in 1997
as compared to 1996.
The Partnership experienced a $60,849 or 3.9% decrease in total revenues
during 1996 as compared to 1995. The decrease in revenue is due to slightly
reduced room rates at both motels and to significantly reduced occupancy at the
San Bernardino motel. These conditions are related to the high level of
competition in the Bakersfield market and to poor economic conditions in the San
Bernardino market.
The Partnership achieved a $106,679 or 7.0% decrease in total expenditures
and debt service during 1997 as compared to 1996. This decrease is due primarily
to the liquidation of the Bakersfield motel's loan during 1996.
The Partnership achieved a $155,776 or 9.3% reduction in total expenditures
and debt service during 1996 as compared to 1995. This reduction is due
primarily to the comparatively smaller payments necessary to liquidate the
Bakersfield motel's loan and to lower payments for renovations and replacements.
(ii) San Bernardino Motel
Average Average
Occupancy Room
Fiscal Year Ended: Rate Rate
- -------------------------------------------------------------------
December 31, 1995 55.3% $40.29
December 31, 1996 49.9% $40.23
December 31, 1997 53.8% $43.57
Total Cash Flow
Expenditures From
Total And Properties
Fiscal Year Ended: Revenues Debt Service Operations
- --------------------------------------------------------------------------------
December 31, 1995 $678,561 $637,451 $41,110
December 31, 1996 $615,471 $595,381 $20,090
December 31, 1997 $717,895 $635,305 $82,590
27
<PAGE>
The Partnership's San Bernardino motel achieved a $102,424 or 16.6%
increase in total revenues during 1997 as compared to 1996. The increased
revenue was primarily in guestroom revenue and was realized by increased
business in the corporate market segment.
The Partnership's San Bernardino motel experienced a $63,090 or 9.3%
decrease in total revenues during 1996 as compared to 1995. Guestroom revenue
from the leisure market segment decreased approximately $68,000 while the
revenue from the other market segments remained substantially unchanged.
The San Bernardino motel experienced a $39,924 or 6.7% increase in total
expenditures during 1997 as compared to 1996. These expenditure increases
included $14,184 in increased resident manager costs reflecting a management
change, $9,987 in increased franchise and management fees costs associated with
the increased guestroom revenue and $6,808 in increased renovation expenses.
The San Bernardino motel achieved a $42,070 or 6.6% reduction in total
expenditures during 1996 as compared to 1995. These expenditure reductions
included $13,573 in reduced property taxes from a property tax appeal, $14,602
in reduced resident manager costs, $6,054 in lower housekeeping wages and $9,861
in reduced renovation expenses. These reductions were partially offset by $7,250
in increased appraisal costs and by $7,609 of increased workers' compensation
insurance.
(iii) Bakersfield Motel
Average Average
Occupancy Room
Fiscal Year Ended: Rate Rate
- -------------------------------------------------------------------------
December 31, 1995 85.6% $30.87
December 31, 1996 87.2% $30.28
December 31, 1997 84.6% $32.35
Total Cash Flow
Expenditures From
Total And Properties
Fiscal Year Ended Revenues Debt Service Operations
- --------------------------------------------------------------------------------
December 31, 1995 $882,261 $1,042,220 $(159,959)
December 31, 1996 $885,403 $919,915 $(34,512)
December 31, 1997 $910,849 $776,437 $134,412
The Bakersfield motel achieved a $25,446 or 2.9% increase in total revenues
during 1997 as compared to 1996. Guestroom revenue increased $30,045 due to
increased average room rates. The railroad contracts were essentially unchanged,
while rate increases were achieved in other market segments with a slight
decline in rooms sold.
The Bakersfield motel achieved a $3,142 or 0.4% increase in total revenues
during 1996 as compared to 1995. Guestroom revenue was substantially unchanged
as the increase in occupancy was mostly offset by the decrease in average room
rate. Decreased corporate and leisure business segments were offset by increased
contract rooms to the Santa Fe Railroad and to Amtrak.
28
<PAGE>
The Partnership's Bakersfield motel experienced a $143,478 or 15.6%
decrease in total expenditures and debt service during 1997 as compared to 1996.
The loan that was secured by the Bakersfield property was liquidated in 1996.
The Partnership's Bakersfield motel experienced a $122,305 or 11.7%
decrease in total expenditures and debt service during 1996 as compared to 1995.
The $152,300 reduction in mortgage payments was partially offset by increased
expenditures of $7,250 for appraisal fees, $5,460 for workers' compensation
insurance and $5,329 for increased supplies.
II. Interim Financial Statements
(a) Liquidity and Capital Resources
As of June 30, 1998, the Partnership's current assets of $493,331 exceeded
current liabilities of $80,747, providing an operating reserve of $412,584. The
General Partner's reserves target is 5% of adjusted capital contributions, or
$297,050.
The Partnership expended $18,523 on renovations and replacements during the
six months ended June 30, 1998, of which $7,141 was capitalized. The
expenditures included $7,527 for guestroom carpets and $4,341 for replacement
lamps.
(b) Results of Operations
Total income decreased $18,943 or 2.2% for the first six months of 1998 as
compared to the first six months of 1997. There was a decrease in the average
occupancy rate from 73.9% in 1997 to 73.0% in 1998 and a decrease in the average
room rate from $36.29 in 1997 to $36.03 in 1998. The decreased occupancy was due
to a reduction in corporate business at the San Bernardino motel.
Total expenses decreased $26,484 or 3.7% primarily due to the reversal in
the three months ended June 30, 1998 of a contingent liability previously
accrued during the fiscal year ended December 31, 1997 in the amount of $55,400.
The contingent liability arose from a notice issued by the California Franchise
Tax Board (the "FTB") wherein the FTB claimed that the Partnership had failed to
file its required information income tax returns. Upon establishing to the
satisfaction of the FTB that the returns had been filed, the FTB waived its
notice and the Partnership reversed the accrual. This reversal (in an amount
equal to the accrual) also gives rise to the credit in general and
administrative expenses for the three months ended June 30, 1998.
Other Financial Information
In 1996 the computers used by the Partnership at the General Partner's
offices in Sacramento were updated. In the process of updating its hardware and
software, the General Partner eliminated any potential Year 2000 problem with
respect to such computers. Similarly, the General Partner does not anticipate
any material Year 2000 problem with the computers in use at the individual
motels. The 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 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
29
<PAGE>
conduct business at its motels would be compromised. 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.
30
<PAGE>
FINANCIAL STATEMENTS
for
CONSENT SOLICITATION STATEMENT
of
SUPER 8 MOTELS III, LTD.
November 12, 1998
F-i
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SUPER 8 MOTELS III, LTD. Page
INDEPENDENT AUDITORS' REPORT ............................................. F-1
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 1997 and 1996................................ F-2
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-3
Statements of Partners' Equity for the Years
Ended December 31, 1997, 1996 and 1995............................... F-4
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-5
Notes to Financial Statements............................................. F-7
Balance Sheets, June 30, 1998 and December 31, 1997 (Unaudited).......... F-11
Statements of Operations for the Three Months and Six Months
Ended June 30, 1998 and 1997 (Unaudited)........................... F-12
Statements of Partners' Equity for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)........................... F-13
Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)........................... F-14
Notes to Financial Statements............................................ F-15
F-ii
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Super 8 Motels III, Ltd.
We have audited the accompanying balance sheets of Super 8 Motels III, Ltd., a
California limited partnership, as of December 31, 1997 and 1996, and the
related statements of operations, partners' equity, and cash flows for each of
the three years in the period ended December 31, 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Super 8 Motels III, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 26, 1998
San Mateo, California
e-super8/s8397fs.wp8.wpd
F-1
<PAGE>
<TABLE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------ --------
Current Assets:
<S> <C> <C>
Cash and temporary investments (Notes 1, 3 and 6) $ 362,215 $ 254,782
Accounts receivable 100,184 68,114
Prepaid expenses 9,229 11,341
----------- -----------
Total Current Assets 471,628 334,237
---------- -----------
Property and Equipment (Note 2):
Land 1,670,129 1,670,129
Capital improvements 26,175 26,175
Buildings 3,276,870 3,276,870
Furniture and equipment 782,439 756,837
---------- -----------
5,755,613 5,730,011
Accumulated depreciation and amortization (2,968,172) (2,826,379)
--------- ----------
Property and Equipment, Net 2,787,441 2,903,632
--------- ----------
Total Assets $3,259,069 $3,237,869
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 105,668 $ 62,020
Due to related parties 10,749 1,765
---------- --------
Total Current Liabilities 116,417 63,785
---------- -------
Total Liabilities 116,417 63,785
---------- --------
Partners' Equity:
General Partner 20,376 19,205
Limited Partners: 12,900 units authorized,
5,941 units issued and outstanding 3,122,276 3,154,879
--------- ----------
Total Partners' Equity 3,142,652 3,174,084
--------- ----------
Total Liabilities and Partners' Equity $3,259,069 $3,237,869
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31:
1997 1996 1995
---------- ---------- ---------
Income:
<S> <C> <C> <C>
Guest room $1,592,209 $1,464,850 $1,526,742
Telephone and vending 33,356 34,128 32,654
Interest 13,116 8,288 10,071
Other 3,178 2,996 1,644
------------ ------------ -----------
Total Income 1,641,859 1,510,262 1,571,111
---------- ---------- ----------
Expenses:
Motel operations (Notes 4 and 5) 1,164,112 1,189,294 1,174,475
General and administrative (Note 4) 127,448 74,474 57,956
Depreciation and amortization (Note 2) 151,769 162,569 164,599
Interest - 7,765 27,290
Property management fees (Note 4) 81,437 75,044 78,041
---------- ----------- -----------
Total Expenses 1,524,766 1,509,146 1,502,361
---------- ---------- ----------
Net Income $ 117,093 $ 1,116 $ 68,750
========== =========== ===========
Net Income Allocable to General Partner $1,171 $11 $688
====== === ====
Net Income Allocable to Limited Partners $115,922 $1,105 $68,062
======== ====== =======
Net Income Per Partnership Unit (Note 1) $19.52 $.19 $11.46
====== ==== ======
Distributions to Limited Partners Per
Partnership Unit (Note 1) $25.00 $ - $ -
====== ======== =====
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31:
1997 1996 1995
---------- ---------- -------
General Partner:
Balance, beginning of year $ 19,205 $ 19,194 $ 18,506
Net income 1,171 11 688
------------ ------------- -----------
Balance, End of Year 20,376 19,205 19,194
----------- ----------- ----------
Limited Partners:
Balance, beginning of year 3,154,879 3,153,774 3,085,712
Net Income 115,922 1,105 68,062
Cash Distributions (148,525) - -
----------- -------------- ---------
Balance, End of Year 3,122,276 3,154,879 3,153,774
---------- ---------- ----------
Total Partners' Equity $3,142,652 $3,174,084 $3,172,968
========== ========== ==========
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31:
1997 1996 1995
---------- ---------- -------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Received from motel operations $1,596,674 $1,505,571 $1,575,015
Expended for motel operations and
general and administrative expenses (1,317,510) (1,359,033) (1,313,408)
Interest received 13,115 9,401 9,154
Interest paid - (9,044) (29,666)
-------------- ------------ ----------
Net Cash Provided by Operating Activities 292,279 146,895 241,095
----------- ----------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of equipment 120 500 5,366
Purchases of property and equipment (36,441) (24,711) (45,880)
---------- ----------- ----------
Net Cash Used by Investing Activities (36,321) (24,211) (40,514)
---------- ----------- ----------
Cash Flows From Financing Activities:
Distributions paid to limited partners (148,525) - -
Payments on notes payable - (153,456) (285,134)
-------------- ----------- ---------
Net Cash Used by Financing Activities (148,525) (153,456) (285,134)
----------- ----------- ---------
Net Increase (Decrease) in Cash and
Temporary Investments 107,433 (30,772) (84,553)
Cash and Temporary Investments:
Beginning of year 254,782 285,554 370,107
----------- ----------- ---------
End of Year $ 362,215 $ 254,782 $285,554
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31:
1997 1996 1995
---------- ---------- -------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
<S> <C> <C> <C>
Net income $117,093 $ 1,116 $ 68,750
-------- --------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 151,769 162,569 164,599
(Gain) loss on disposition of property and equipment 743 (500) 433
Decrease in accounts receivable (32,070) 4,710 13,058
(Increase) decrease in prepaid expenses 2,112 247 (866)
Increase (decrease) in accounts payable and
accrued liabilities 43,648 (23,012) 3,033
Increase (decrease) in due to related parties 8,984 1,765 (7,912)
--------- --------- ----------
Total Adjustments 175,186 145,779 172,345
-------- -------- --------
Net Cash Provided by Operating Activities $292,279 $146,895 $241,095
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Super 8 Motels III, Ltd. is a limited partnership organized under California law
on June 2, 1980 to acquire and operate motel properties in San Bernardino and
Bakersfield, California. The term of the Partnership expires December 31, 2030,
and may be dissolved earlier under certain circumstances. The San Bernardino
motel was opened in March, 1982, and the Bakersfield motel was opened in
September, 1982. The Partnership grants credit to customers, substantially all
of which are local businesses in San Bernardino or Bakersfield.
The general partner is Grotewohl Management Services, Inc., the fifty
percent stockholder and officer of which is Philip B. Grotewohl.
The net income or net loss of the Partnership is allocated 1% to the General
Partner and 99% to the Limited Partners. Net income and distributions per
Partnership unit are based on 5,941 units outstanding. All Partnership units are
owned by the Limited Partners.
The Partnership agreement requires that the Partnership maintain working capital
reserves for normal repairs, replacements, working capital and contingencies in
an amount of at least 5% of adjusted capital contributions ($297,050 at December
31, 1997). As of December 31, 1997 the Partnership had working capital of
$355,211.
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. At December 31, 1997, assets and liabilities on a tax basis were
approximately $1,000,000 lower than on a book basis due to accelerated
depreciation methods used for tax purposes.
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 150-200% declining balance 10-20 years
Buildings Straight-line and 10-25 years
150% declining balance
Furniture and equipment 200% declining balance 4-7 years
Costs incurred in connection with maintenance and repair are charged to expense.
Major renewals and betterments that materially prolong the lives 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
<PAGE>
SUPER 8 MOTELS III, 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 December 31, 1997 and 1996 consists of the
following:
1997 1996
-------- ------
Cash in bank $ 44,675 $ 43,305
Money market accounts 317,540 211,477
--------- ---------
Total Cash and Temporary Investments $362,215 $254,782
======== ========
Temporary investments are recorded at cost, which approximates market value. The
Partnership considers temporary investments and all highly liquid marketable
securities with original maturities of three 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 each 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 ($79,610, $73,242
and $76,337 for the years ended December 31, 1997, 1996 and 1995, respectively)
are included in motel operations expense in the accompanying statements of
operations. The Partnership operates its motel properties 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 $31,844,
$29,297 and $30,535 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Property Management Fees
The General Partner, or its affiliates, handles the management of the motel
properties of the Partnership. The fee for this service is 5% of the gross
revenues from Partnership operations, as defined in the Partnership agreement,
and amounted to $81,437, $75,044 and $78,041 for the years ended December 31,
1997, 1996 and 1995, respectively.
F-8
<PAGE>
SUPER 8 MOTELS III, 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 Partner is to receive 9%
of cash available for distributions for Partnership management services, along
with an additional 1% of cash available for distributions on account of its
interest in the profit and losses subordinated in each case, however, to receipt
by the Limited Partners of a 10% per annum cumulative pre-tax return on their
adjusted capital contributions. At December 31, 1997, the Limited Partners had
not received the 10% cumulative return, and accordingly, no Partnership
management fees are presently payable and therefore are not reflected in these
financial statements. Management believes it is not likely that these fees will
become payable in the future. 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 a refinancing. As of December 31, 1997, the cumulative amount of these
fees was $438,290.
Subordinated Incentive Distributions
Under the terms of the Partnership agreement, the General Partner is to receive
15% of distributions of net proceeds from the sale or refinancing of Partnership
properties remaining after distribution to the Limited Partners of any portion
thereof required to cause distributions to the Limited Partners from all sources
to be equal to their capital contributions plus a cumulative 10% per annum
pre-tax return on their adjusted capital contributions. Through December 31,
1997, there had been no such sales or refinancings.
Administrative Expenses Shared by the Partnership and Its Affiliates There
are certain administrative expenses allocated between the Partnership and other
partnerships managed by the General Partner and its affiliates. 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
$230,000, $225,000 and $223,000 during the years ended December 31, 1997, 1996
and 1995, respectively, and are included in general and administrative and motel
operating 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 fifty percent stockholder of Grotewohl
Management Services, Inc., the General Partner.
NOTE 5 - MOTEL OPERATING EXPENSES
The following table summarizes the major components of motel operating costs for
the following years:
1997 1996 1995
---------- ---------- -------
Salaries and related costs $ 454,635 $ 447,181 $ 441,334
Franchise and advertising fees 79,610 73,242 76,337
Utilities 111,274 111,366 121,969
Allocated costs, mainly
indirect salaries 186,004 184,064 181,607
Renovations and replacements 30,280 46,007 35,740
Maintenance expenses 68,121 73,715 70,106
Property taxes 57,738 53,058 65,878
Property insurance 33,433 37,215 32,355
Other operating expenses 143,017 163,446 149,149
---------- ----------- -----------
Total motel operating expenses $1,164,112 $1,189,294 $1,174,475
========== ========== ==========
F-9
<PAGE>
SUPER 8 MOTELS III, LTD.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 - CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash accounts in four 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
December 31, 1997 follows:
Total cash in all California banks $406,606
Portion insured by the FDIC (359,665)
Uninsured cash balances $ 46,941
========
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and temporary investments approximates fair value
because of the short-term maturity of those investments.
NOTE 8 - LEGAL PROCEEDINGS AND SUBSEQUENT EVENT
On October 27, 1997, a complaint was filed in the United States District Court
by the General Partner 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 P. Enquist. The complaint alleged that the defendants violated certain
provisions of the Security and Exchange Act of 1934 and sought injunctive and
declarative relief.
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 the General Partners of the
Partnership and four other partnerships which have common general partners as
nominal defendants. The complaint pertained 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.
On February 20, 1998, the parties entered into a settlement agreement and both
of the above complaints were dismissed. Pursuant to the terms of the settlement
agreement, the General Partner has agreed to proceed with the marketing for sale
of the properties of the Partnerships, among other things, if by June 30, 1998,
it receives an offer to purchase one or more properties for a cash price equal
to 75% or more of the appraised value. In addition, the General Partner has
agreed to submit the offer for approval to the limited partners as required by
the partnership agreements and applicable law. The General Partner has also
agreed that upon the sale of one or more properties, to distribute promptly the
proceeds of the sale after payment of payables and retention of reserves to pay
anticipated expenses. The Everest Defendants agreed not to generally solicit the
acquisition of any additional units of the Partnerships without first filing
necessary documents with the SEC. Under the terms of the settlement agreement,
the Partnerships have agreed to reimburse the Everest Defendants for certain
costs not to exceed $60,000, to be allocated among the Partnerships. Of this
amount, the Partnership will pay approximately $12,000 during the year ended
December 31, 1998.
F-10
<PAGE>
Super 8 Motels III, Ltd.
(A California Limited Partnership)
Balance Sheet
June 30, 1998 and December 31, 1997
6/30/98 12/31/97
---------- ----------
ASSETS
Current Assets:
Cash and temporary investments $ 413,765 $ 362,215
Accounts receivable 68,587 100,184
Prepaid expenses 10,979 9,229
---------- ----------
Total current assets 493,331 471,628
---------- ----------
Property and Equipment:
Land 1,670,129 1,670,129
Capital improvements 26,175 26,175
Buildings 3,276,870 3,276,870
Furniture and equipment 789,580 782,439
---------- ----------
5,762,754 5,755,613
Accumulated depreciation (3,039,589) (2,968,172)
---------- ----------
Property and equipment, net 2,723,165 2,787,441
---------- ----------
Total Assets $ 3,216,496 $ 3,259,069
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 80,747 $ 116,417
---------- ----------
Total current liabilities 80,747 116,417
---------- ----------
Total liabilities 80,747 116,417
---------- ----------
Contingent Liabilities (See Note 1)
Partners' Equity:
General Partners 21,792 20,376
Limited Partners (12,900 units authorized,
5,941 units issued and outstanding) 3,113,957 3,122,276
---------- ----------
Total partners' equity 3,135,749 3,142,652
---------- ----------
Total Liabilities and Partners' Equity $ 3,216,496 $ 3,259,069
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
Super 8 Motels III, Ltd.
(A California Limited Partnership)
Statement of Operations
For the Six Months Ending June 30, 1998 and 1997
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
6/30/98 6/30/98 6/30/97 6/30/97
--------- --------- --------- ---------
Income:
Guest room $ 405,095 $ 814,289 $ 426,318 $ 829,613
Telephone and vending 6,085 13,326 7,936 16,344
Interest 2,726 5,684 2,427 3,789
Other 1,646 2,466 4,043 4,962
--------- --------- --------- ---------
Total Income 415,552 835,765 440,724 854,708
--------- --------- --------- ---------
Expenses:
Motel operating expenses
(Note 2) 281,886 560,457 288,952 568,366
General and administrative (28,582) 20,801 10,166 32,627
Depreciation and amortization 35,704 71,414 38,666 77,242
Property management fees 20,608 41,471 21,746 42,392
--------- --------- --------- ---------
Total Expenses 309,616 694,143 359,530 720,627
--------- --------- --------- ---------
Net Income (Loss) $ 105,936 $ 141,622 $ 81,194 $ 134,081
========= ========= ========= =========
Net Income (Loss) Allocable
to General Partners $1,059 $1,416 $812 $1,341
========= ========= ========= =========
Net Income (Loss) Allocable
to Limited Partners $104,877 $140,206 $80,382 $132,740
========= ========= ========= =========
Net Income (Loss)
per Partnership Unit $17.65 $23.60 $13.53 $22.34
========= ========= ========= =========
Distribution to Limited Partners
per Partnership Unit $12.50 $25.00 $0.00 $0.00
========= ========= ========= =========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
Super 8 Motels III, Ltd.
(A California Limited Partnership)
Statement of Partners' Equity
For the Six Months Ending June 30, 1998 and 1997
1998 1997
---------- ----------
General Partners:
Balance at beginning of year $ 20,376 $ 19,205
Net income (loss) 1,416 1,341
---------- ----------
Balance at end of period 21,792 20,546
---------- ----------
Limited Partners:
Balance at beginning of year 3,122,276 3,154,879
Net income (loss) 140,206 132,740
Less: Cash distributions (148,525 -
---------- ----------
Balance at end of period 3,113,957 3,287,619
---------- ----------
Total balance at end of period $ 3,135,749 $ 3,308,165
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
Super 8 Motels III, Ltd.
(A California Limited Partnership)
Statement of Cash Flows
For the Six Months Ending June 30, 1998 and 1997
1998 1997
---------- ----------
Cash Flows From Operating Activities:
Received from motel revenues $ 861,678 $ 847,975
Expended for motel operations
and general and administrative expenses (660,146) (620,423)
Interest received 5,684 3,789
---------- ----------
Net cash provided (used) by operating activities 207,216 231,341
---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment (7,141) (24,553)
Proceeds from sale of equipment - 120
---------- ----------
Net cash provided (used) by investing activities (7,141) (24,433)
---------- ----------
Cash Flows From Financing Activities:
Distributions paid to Limited Partners (148,525) -
---------- ----------
Net cash provided (used) by financing activities (148,525) -
---------- ----------
Net increase (decrease) in cash
and temporary investments 51,550 206,908
Cash and temporary investments:
Beginning of year 362,215 254,782
---------- ----------
End of period $ 413,765 $ 461,690
========== ==========
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Net income (loss) $ 141,622 $ 134,081
---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 71,414 77,242
Gain on disposition of property - (120)
(Increase) decrease in accounts receivable 31,597 (2,944)
(Increase) decrease in prepaid expenses (1,750) (1,263)
Increase (decrease) in accounts payable
and accrued liabilities (35,667) 24,345
---------- ----------
Total adjustments 65,594 97,260
---------- ----------
Net cash provided by operating activities $ 207,216 $ 231,341
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
Super 8 Motels III, Ltd.
(A California Limited Partnership)
Notes to Financial Statements
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 December 31, 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 or accrued to the General Partner or affiliates
for the period.
Property Management Fees $41,471
Franchise Fees $16,286
Note 2:
The following table summarizes the major components of motel operating expenses
for the periods reported:
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
6/30/98 6/30/98 6/30/97 6/30/97
--------- --------- --------- ---------
Salaries and related costs $ 117,185 $ 232,469 $ 115,862 $ 225,591
Franchise and advertising 20,255 40,715 21,310 41,481
Utilities 22,764 43,999 27,194 49,859
Allocated costs,
mainly indirect salaries 47,755 97,516 44,313 88,423
Maintenance, repairs &
replacements 18,044 35,401 21,621 50,622
Property taxes 14,396 28,792 14,473 28,946
Property insurance 7,912 16,097 9,440 18,068
Other operating expenses 33,575 65,468 34,739 65,376
--------- --------- --------- ---------
Total motel operating
expenses $ 281,886 $ 560,457 $ 288,952 $ 568,366
========= ========= ========= =========
The following additional material contingencies are required to be restated in
interim reports under federal securities law: None.
F-15
<PAGE>
APPENDIX 1
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE
ACTION BY WRITTEN CONSENT OF LIMITED PARTNERS
SUPER 8 MOTELS III, 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 GENERAL
PARTNER.
The undersigned hereby acknowledges receipt of the Consent Solicitation
Statement dated November 12, 1998 and hereby votes all the units of limited
partnership interest of Super 8 Motels III, Ltd., a California limited
partnership (the "Partnership"), held of record by the undersigned as follows:
The Proposal. The Partnership's Certificate and Agreement of Limited
Partnership will be amended to grant to the General Partner authority to sell
all the Partnership's motels and related personal property to Tiburon Capital
Corporation, or a nominee thereof, as specifically set forth under "Amendment to
the Partnership Agreement" on page 23 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 THE PROPOSAL, THIS CONSENT, IF SO EXECUTED AND RETURNED,
WILL BE VOTED FOR THE PROPOSAL.
Please sign exactly If signing as attorney, executor,
as name appears below: 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. If held by
co-owners, both should sign.
DATED: , 1998
___________________________________
Signature
___________________________________
Additional signature, if held jointly
PLEASE MARK, SIGN, DATE AND
RETURN THIS
POSTPAID CONSENT CARD
<PAGE>
APPENDIX 2
To all Limited Partners of Super 8 Motels III, Ltd.
We are pleased to submit to you the enclosed materials for use in our
solicitation of the Limited Partners' approval of the proposed sale of the
Partnership=s motel assets to Tiburon Capital Corporation.
All of our Limited Partners should carefully read the enclosed materials
and then vote for or against the proposed sale by marking, signing and returning
the enclosed ballot form in the enclosed stamped, addressed envelope.
It must be understood that the proposed sale cannot be considered approved
without the affirmative vote of the owners of more than 50% of the units of
limited partnership interest. Therefore, if a Limited Partner does not return
his signed ballot, that Limited Partner will have effectively voted against the
sale.
The General Partner believes that this proposed sale at an all-cash price
equal to the full amount of the recent appraisal of the Partnership' motels
would be favorable to the Limited Partners and should be approved. It believes
that this is particularly true in light of the national and world-wide economic
uncertainties that have developed since the contract of sale was made on April
30, 1998.
The Limited Partners should be aware that Mark Grotewohl, a son of the
owners of the General Partner, and a former employee of the Partnership, will be
employed by the buyer as the property manager and will have a profits (but not a
capital) interest in the buyer.
We estimate that after we have received the required affirmative vote, the
sale and distribution of proceeds should be completed within 45 days.
Please mark the enclosed ballot and return it to us in the enclosed
envelope. And please call us if you have any questions.
Sincerely yours,
