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
Famous Host Lodging V, L.P.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$820
2) Form, Schedule or Registration Statement No.:
Schedule 14A
3) Filing Party:
Registrant
4) Dated Filed:
May 15, 1998
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CONSENT SOLICITATION STATEMENT
PROPOSED ACTION BY WRITTEN CONSENT
OF LIMITED PARTNERS
OF
FAMOUS HOST LODGING V, L.P.
November 12, 1998
INTRODUCTION
The limited partners (the "Limited Partners") of FAMOUS HOST LODGING V,
L.P., a California limited partnership (the "Partnership"), are being asked by
the Partnership and Grotewohl Management Services, Inc. (the "Managing General
Partner") to consider and approve by written consent the proposed sale of all of
the Partnership's interests in real property and related personal property (the
"Property") for an aggregate purchase price of $4,100,000, 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 Property, the Buyer's interests differ from those of the
Limited Partners. (See "Purchase Agreement" and "Special Factors.")
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- The Managing General Partner is subject to conflicts of interest,
including conflicts arising from the settlement of lawsuits (see "Legal
Proceedings"), which may have impacted its decision to sell the Property, its
conduct of negotiations leading to the proposed sale of the Property and its
recommendation with respect thereto. (See "Conflicts of Interest.")
- The Managing General Partner did not list the Property for sale with a
broker to obtain competitive bids. Instead, the Managing General Partner based
the purchase price for the Property on a formal appraisal of the Property 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
Property if it had solicited offers by listing the Property.
- The appraiser may be subject to conflicts of interest in that it has
prepared other appraisals for the Managing General Partner. (See "Appraisal of
the Property/Fairness Opinion.")
- The Managing General Partner did not retain an unaffiliated
representative to act solely on behalf of the Limited Partners in negotiating
the terms of the proposed transaction. (See "Special Factors.")
- The Limited Partners will be allocated taxable gain if the Property is
sold. (See "Effects of Approval of the 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 Managing General
Partner authority to sell the Property 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's Certificate and Agreement of Limited
Partnership (the "Partnership Agreement"). In an amendment to the settlement
agreement respecting the lawsuits discussed below (see "Legal Proceedings"), the
Partnership agreed to close the proposed transaction within a 30-day period
after approval thereof by the Limited Partners, so as to provide the Limited
Partners with the proceeds from the sale as quickly as possible.
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 Property pursuant to the Proposal. Rather, the
Managing General Partner will entertain other offers to sell the Property and
will submit one or more of such offers to the Limited Partners for approval, in
the discretion of the Managing General Partner. Pending any sale of the
Property, the Partnership will continue to operate the Property as usual.
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The purchase agreement was executed on April 30, 1998 by John F. Dixon and
William R. Dixon, Jr., on behalf of the Buyer, and Philip B. Grotewohl and David
P. Grotewohl, on behalf of the Partnership. The purchase agreement also covers
the proposed sale of the properties of four other California limited
partnerships as to which the Managing General Partner serves as general partner.
The term of all such purchases are identical, except for the amount being
offered for each property. The Buyer has the right to rescind the purchase
agreement if any of the five partnerships fails to approve the sale of its
property or properties to the Buyer.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This Consent Solicitation Statement and the enclosed form of 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 Managing General Partner
pursuant to notice mailed to the Limited Partners) will be voted or not voted in
accordance with the instructions contained therein. If no instructions for the
Proposal are given on an executed and returned Consent, Units so represented
will be voted in favor of the Proposal. The Managing 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 Managing General
Partner, either in person or by telephone or telegram.
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TABLE OF CONTENTS
Page
Special Factors.............................................................. 1
Outstanding Voting Securities and Voting Rights.............................. 6
Consent Under Partnership Agreement.......................................... 8
The Property and the Partnership's Business.................................. 8
Narrative Description of Business.......................................... 8
(a) Franchise Agreements................................................ 8
(b) Operation of the Hotel and Restaurant............................... 8
(c) Competition......................................................... 9
Property................................................................... 9
Management...................................................................10
Purchase Agreement...........................................................11
Conflicts of Interest........................................................13
Effects of Approval of the Proposal..........................................13
General....................................................................13
Determination and Use of Net Proceeds......................................14
Federal Income Tax Consequences............................................15
(a) General.............................................................15
(b) Characterization of Gain............................................16
Dissolution of the Partnership.............................................17
Appraisal of the Property/Fairness Opinion...................................17
Legal Proceedings............................................................20
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.......................................28
(a) Liquidity and Capital Resources...............................28
(b) Results of Operations.........................................28
Other Financial Information................................................28
Financial Statements........................................................F-i
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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 Property, the
Managing General Partner believes such liquidity is desired by the Limited
Partners.
The Partnership was formed in 1984 and its motel property located in
Barstow, California opened for business during 1985.
This Consent Solicitation Statement has been prepared to ask the Limited
Partners to approve the sale of the Property for cash in the amount of the
appraised fair market value of $4,100,000.
It has always been the intention of the Partnership to liquidate the
Property when it became apparent that the best interests of the Limited Partners
would be served by doing so. The Managing General Partner has received inquiries
from the Limited Partners over the years as to when the Property was to be sold
and the Partnership liquidated. Its response, until recently, has been that
because of overbuilt and depressed motel market conditions, the time was not
right for a sale of the Property. During 1997 and the early part of 1998
conditions changed, and the Managing General Partner believes that the Property
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 Property and
the motel properties of four other California limited partnerships as to which
the Managing General Partner serves as general partner (the Partnership and the
four other partnerships are referred to herein as the "GMS Partnerships"). The
purchase price set forth in the October offer for the Property was $2,614,730, a
price far below $4,100,000, the appraised value as of January 1, 1998 and the
price offered in the Proposal. The Managing General Partner rejected the offer
of the Everest Group. Subsequent conflicts between the Everest Group and the
Partnership resulted in lawsuits. Inasmuch as the Managing General Partner
agreed with the Everest Group in principle that the Property should be sold, a
settlement was reached whereby, among other things, the Managing General Partner
agreed to take steps to sell the Property and the properties of the other GMS
Partnerships, and the lawsuits were dismissed. (See "Legal Proceedings.") In an
amendment to the settlement agreement, the Everest Group agreed to vote its
Units in favor of the Proposal. (See "Outstanding Voting Securities and Voting
Rights.")
The Managing General Partner considered seeking third party buyers for the
Property (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 January
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1, 1998, and (ii) in the opinion of the Managing 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 Property would have resulted in the loss of that offer.
In this regard, prior to negotiating the terms represented by the Proposal,
the Managing General Partner received in writing from two real estate brokers
who are not affiliated with the Partnership or the Managing General Partner
suggested sale strategies for the sale of the Property and the properties of the
other GMS Partnerships. One broker suggested a sealed bid sales strategy with an
emphasis of obtaining a single purchaser or a minimum number of purchasers. This
broker presented a 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 Managing 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 Managing 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 Managing 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 Managing General Partner at the time it
negotiated the terms of the Proposal.
It was not until after the Managing 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 Managing General Partner by Mark Grotewohl.
Philip Grotewohl, on behalf of the Managing General Partner, conducted
negotiations relative to the sale of the Property.
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As discussed more fully below under "Appraisal of the Property/Fairness
Opinion," the Property has been appraised by PKF Consulting, a national
hospitality industry specialist. PKF Consulting is an international firm of
management consultants, industry specialists, and appraisers who provide a wide
range of services to the hospitality, real estate, and tourism industries.
Headquartered in San Francisco, PKF Consulting has offices in New York,
Philadelphia, Atlanta, Boston, Houston, Los Angeles, Washington, D.C., and
abroad. As a member of the Pannell Kerr Forster International Association, PKF
Consulting has access to the resources of one of the world's largest accounting
and consulting firms, with 300 offices in 90 countries. Its conclusion was that
the fair market value of the Property as of January 1, 1998 is $4,100,000, which
is the purchase price of the Property 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 Managing General Partner are recommending the
approval of the Proposal by the Limited Partners for the following reasons:
oThe Managing General Partner believes that the subject contract was
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 Property. The Managing General Partner believes that now is the time to
sell the Property.
o The Partnership's intention has always been to sell the Property when the
market conditions warranted sale. It was never an investment objective of the
Partnership to hold the Property permanently.
o The Managing General Partner understands that the circumstances of many
of the Limited Partners have changed over the life of the Partnership and
believes that the Limited Partners should be presented with an opportunity to
liquidate their investments. In this regard the Managing General Partner
believes that it is important that the Limited Partners understand that no true
market exists for the sale of the Limited Partner's 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 Property is proposed to be sold to the Buyer for $4,100,000,
approximately $1,485,000 more than was offered for the Property in October 1997
by the Everest Group. The sales price is equal to the appraised value of the
Property as of January 1, 1998 as determined by PKF Consulting, an independent
real estate advisory firm specializing in the valuation of lodging properties.
The proposed sale will be for all cash. PKF Consulting has rendered a fairness
opinion, stating its opinion that the sales price is fair to the Partnership.
o As of August 31, 1998, the Limited Partners had already received, over
the life of the Partnership, the sum of $693.19 per Unit in the form of
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quarterly distributions. Upon the sale of the Property as described herein, the
Limited Partners would receive an additional pre-tax distribution in the
estimated amount of approximately $433 per Unit (less any amounts withheld by
the Managing General Partner pending the outcome of the arbitration proceeding
discussed under "Legal Proceedings"). For a discussion of other effects of the
sale of the Property, 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 Property, and that the Managing
General Partner has a conflict of interest (see "Conflicts of Interest") in
proposing the sale at this time. The fair market value and net cash flow of the
Property may increase over time. Therefore, it is possible that Limited Partners
would receive a greater return on their investment if the Partnership continued
to own and operate the Property and sold it at a later date, instead of
consummating a sale under the Proposal. The Limited Partners would likely fare
worse under a strategy of retaining the Property if its value were to decline.
The Managing General Partner has faced substantial conflicts of interest in
proposing, negotiating and structuring the Proposal. See "Conflicts of
Interest." Although, as discussed above, the Managing General Partner believes
that the Limited Partners are interested in a means of liquidating their
investment, the 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
Partners and Mark Grotewohl) for their approval; (ii) the commissioning of an
independent appraisal of the Property 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 Managing 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 Managing 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 Managing General Partner's determination
was made by Philip Grotewohl, as the sole director thereof.
Further, the Partnership, the Managing General Partner and Mark Grotewohl
believe that the proposed transaction represented by the Proposal is
substantively fair to the Limited Partners. The Partnership, the Managing
General Partner and Mark Grotewohl have considered a number of material factors
in connection with developing such beliefs. 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
Managing General Partner and Mark Grotewohl were not able to weigh the relative
importance of each factor precisely:
(i) The purchase price of the Property is equal to the appraised value of
the Property as of January 1, 1998;
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(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 Managing General Partner and Mark Grotewohl
believe that a current appraisal of the might reflect a lower value than that
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 Property is substantially greater than that
proposed by the Everest Group, the only other firm offer made for the Property
during the preceding 18 months; and
(vii) A sale of the Property 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 Managing
General Partner prior to the time that negotiations with the Buyer were
commenced. The Managing General Partner relied on the appraisal to determine the
valuation of $4,100,000 for the Property. As further discussed in the appraisal
(see "Appraisal of the Property/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 Property consists of an actively
operated business, 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 Managing 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 Property because it is clear that the highest
and best use of the Property is as an operating motel. To sell the buildings and
personal property in a liquidation sale would be ill advised. Further, the
Managing General Partner deemed the net book value of the Property to be
irrelevant, given the holding period for the Property. Based upon experience in
the lodging industry, as well as general familiarity with industry news as
reported by trade journals, the Partnership, the Managing General Partner and
Mark Grotewohl reasonably believe that the appraised fair market value of the
Property as determined by PKF Consulting as of January 1, 1998 was fair. PKF
Consulting was retained because of its reputation and expertise. The Partnership
paid PKF Consulting approximately $8,100 for its services in the proposed
transaction and the other GMS Partnerships paid PKF Consulting an aggregate of
approximately $41,400.
With respect to item (ii) above, in the absence of an established public
market in which Units are being traded, the Managing 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 $150 per Unit to $365 per Unit. The proposed sale would result in
distributions of approximately $433 per Unit (less any amounts withheld by the
Managing General Partner pending the outcome of the arbitration proceeding
discussed under "Legal Proceedings"). During the past two years, neither the
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Partnership, the Managing General Partner nor Mark Grotewohl has purchased or
sold any Units. The net book value of the Partnership as of June 30, 1998 was
$249.43 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
Managing General Partner's decision not to solicit bids from independent third
parties, and the possibility that the continued ownership of the Property could
be more economically beneficial than a sale at this time. The Partnership, the
Managing 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 9,022 Units outstanding and a total of 1,764 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 Managing General Partner to act with prudence in the
business affairs of the Partnership on behalf of the Partnership and the Limited
Partners.
As of August 31, 1998 no person or group of related persons was known by
the Partnership to be the beneficial owner of more than 5% of the Units, except
the following group of related Unit holders:
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Everest Lodging Investors, LLC 261 Units 2.89%
Everest Madison Investors, LLC 298 Units 3.30%
Total 559 Units 6.19%
None of Grotewohl Management Services, Inc. (the Managing General
Partner),Robert J. Dana (the associate 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 559 Units (6.19% 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 Property and the properties owned by the other GMS Partnerships for
a six-month period. For a discussion of the commissions payable pursuant to such
contract, see "Purchase Agreement" below.
No meeting will be held with regard to this solicitation of the Limited
Partners. Voting may be accomplished by completing and returning to the offices
of the Partnership, at 2030 J Street, Sacramento, California 95814, telephone:
(916) 442-9183, the form of Consent included herewith. Only Consents received
prior to the close of business on the date (the "Action Date") which is the
earlier of (i) the date on which the Partnership receives approval and/or
disapproval of the Proposal by a majority-in-interest of the Limited Partners,
or (ii) December 31, 1998 (unless extended by the Managing 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
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Partnership or its authorized agent at the Partnership's place of business as
set forth in the foregoing paragraph.
CONSENT UNDER PARTNERSHIP AGREEMENT
Pursuant to Section 14.1(e) of the Partnership Agreement, a
majority-in-interest of the Limited Partners must approve or disapprove the sale
at one time of all or substantially all of the Partnership's properties. Also,
under Section 11.2 of the Partnership Agreement, the Partnership is not
permitted to sell its property to "Affiliates" of the General Partners. (The
Partnership Agreement defines "Affiliate" of a person as (i) any person directly
or indirectly controlling, controlled by, or under common control with such
other person, (ii) any person owning or controlling 10% or more of the
outstanding voting securities of such person, (iii) any officer, director or
general partner of such person, and (iv) any person who is an officer, director
or general partner of any of the foregoing. Although it might be contended that
the Buyer is an Affiliate of the Managing General Partner, in the opinion of the
Managing General Partner the Buyer does not come within such definition, because
the Managing General Partner does not believe that Mark Grotewohl is an
Affiliate of the Managing General Partner. (See "Purchase Agreement' below.)
However, recognizing the possibility that reasonable minds might differ in
resolving that issue, and because the Property constitutes substantially all of
the Partnership's properties (as discussed below under "The Property and the
Partnership's Business"), the Managing General Partner is seeking the approval
of the proposed sale of the Property to the Buyer on the terms described herein
by a majority-in-interest of the Limited Partners.
THE PROPERTY AND THE PARTNERSHIP'S BUSINESS
The Property consists of a leasehold interest in land located in Barstow,
California, the hotel property constructed thereon by the Partnership, another
leasehold interest in a restaurant, and the related personal property.
Narrative Description of Business
(a) Franchise Agreements
The Partnership operates its hotel property as a franchisee of Holiday
Inns, Inc. Holiday Inns offer accommodations in the mid-range of the lodging
industry in terms of facilities and prices.
(b) Operation of the Hotel and Restaurant
Brown & Grotewohl, a California general partnership which is an affiliate
of the Managing General Partner (the "Manager"), manages and operates the
Partnership's hotel and restaurant. The Manager's management responsibilities
include, but are not limited to, the supervision and direction of the
Partnership's employees who operate the hotel and restaurant, 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 hotel and
restaurant staff and a centralized accounting staff, all of which work under the
direction of the Managing General Partner or the Manager. Together, these staffs
perform all bookkeeping duties in connection with the hotel and restaurant,
including all collections and all disbursements to be paid out of funds
generated by hotel and restaurant operations or otherwise supplied by the
Partnership.
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As of December 31, 1997, the Partnership employed a total of 49 persons,
either full or part-time, at its hotel and restaurant, including eight desk
clerks, 16 housekeeping and laundry personnel, four maintenance personnel, one
general manager, four cooks and dishwashers, 11 servers and bus persons, four
bartenders and one restaurant manager. In addition, and as of the same date, the
Partnership employed 11 persons in administrative positions at its central
office in Sacramento, California, all of whom worked for the Partnership on a
part-time basis. They included accounting, investor service, sales and marketing
and hotel supervisory personnel, secretarial personnel, and purchasing
personnel.
(c) Competition
As discussed in greater detail below, the Partnership faces intense
competition from hotels and motels of varying quality and size, including other
mid-range hotels and motels which are part of nationwide chains and which have
access to nationwide reservation systems.
Property
On May 10, 1984, the Partnership entered into a long-term lease of 3.05
acres of unimproved land located on East Main Street in Barstow, California. The
leasehold is located within a 15-acre parcel which was developed as a lodging,
restaurant, retail and theater complex known as "Barstow Station Too!". The
Partnership's hotel is the only hotel or motel to be included in the complex.
The original term of the lease was for 50 years with the lessee's option to
renew for three additional 10-year periods.
The Barstow hotel, which consists of 148 guestrooms, was placed in service
on December 31, 1985, at which date 96 guestrooms were available for occupancy.
The remaining 52 guestrooms became available for occupancy on March 15, 1986.
On June 15, 1987 the Partnership commenced operation of a family restaurant
and cocktail lounge immediately adjacent to the Barstow hotel. The Partnership
leases the restaurant facility from Fred Rosenberg, the lessor of the hotel
site.
On May 30, 1990, the Partnership entered into a written agreement with the
lessor for the amendment of the hotel and restaurant facility leases. The
restaurant facility lease term was extended from January 1, 1991 to December 31,
2010; however, the Partnership has the option of terminating the lease after
January 1, 2001 if the Partnership should terminate its license to operate the
hotel as a franchise of Holiday Inns, Inc. Additional rent for the hotel site
and restaurant facility was changed so as to be the amount by which 9% of the
combined annual gross sales from the hotel and restaurant facility exceeds the
combined annual minimum rent ($275,556 as of December 31, 1997; $280,116 as of
December 31, 1998) under the hotel site and restaurant facility leases.
The leases provide that the improvements constructed by the Partnership on
the leased premises will remain the property of the Partnership during the lease
term but that upon expiration of the leases, title to any such improvements will
pass to the lessor.
In 1997, the Partnership incurred a total of $285,302 in rent expense for
its Barstow hotel site and restaurant facility. In addition, the Partnership
pays all property taxes and assessments for each leasehold site.
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The Partnership's hotel achieved the following average occupancy rates and
average room rates during 1997, 1996 and 1995:
1997 1996 1995
-------------------------------------------
Average Occupancy Rate 68.6% 71.1% 74.9%
Average Room Rate $66.30 $64.63 $60.95
The following lodging facilities provide direct and indirect competition to
the Partnership's Barstow hotel:
Approximate
Number Distance
Facility Of Rooms From The Hotel
- --------------------------------------------------------------------------------
Quality Inn 100 Adjacent
Days Inn 113 0.25 Mile
Comfort Inn 0.50 Mile
Vagabond Inn 67 0.50 Mile
Best Western 79 0.50 Mile
Holiday Inn Express 65 3.00 Miles
The Barstow hotel's major sources of patronage are generated by local
military bases, with civilian Federal employees, military personnel and Federal
government contractors generating approximately 26% of the hotel's room revenue.
The Barstow area also attracts traveling salespeople and other commercial
travelers, as well as leisure travelers.
For a discussion of the revenue received by the Partnership from the
restaurant see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANAGEMENT
The Partnership is a California limited partnership which has no executive
officers or directors. The principal business address of the Partnership is 2030
J Street, Sacramento, CA 95814. The Partnership's general partners are Grotewohl
Management Services, Inc., as managing general partner, and Robert J. Dana, as
associate general partner.
Grotewohl Management Services, Inc. is a California corporation owned
one-half by Philip B. Grotewohl and one-half by his former wife, who is not
involved in the day-to-day operations of Grotewohl Management Services, Inc.,
and who does not serve as a director or executive officer thereof. The sole
director of Grotewohl Management Services, Inc. is Philip Grotewohl, and the
executive officer of Grotewohl Management Services, Inc. is Philip Grotewohl.
David Grotewohl has authority to sign documents on behalf of the Managing
General Partner as its nominal President and Chief Financial Officer, but has no
executive duties. He does act as "inside" legal counsel to the Managing General
Partner, and his principal occupation has been to head the operation and
maintenance of the Property and the properties of the other GMS Partnerships.
The principal business address of Grotewohl Management Services, Inc. is 2030 J
Street, Sacramento, CA 95814. During the past five years Grotewohl Management
Services, Inc. and its affiliate, Brown & Grotewohl, a California general
partnership one-half owned by Philip Grotewohl and one-half owned by the Estate
of Dennis A. Brown, principally have been engaged in the business of managing
various limited partnerships which own and operate lodging facilities, and in
the business of managing such lodging facilities. During the past five years
Philip Grotewohl's business activities have been conducted solely through
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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 Grotewohl is 2030 J
Street, Sacramento, CA 95814.
Robert J. Dana is the associate general partner of the Partnership and, as
such, has no control over the management of the Partnership. During the past
five years Robert J. Dana has been self-employed through D/S Telecom and Telecom
Options as a seller of long-distance telephone services. The principal business
address of Robert J. Dana is 6439 Timber Springs Drive, Santa Rosa, CA 95409.
PURCHASE AGREEMENT
On April 30, 1998, the Partnership entered into an agreement to sell the
Property to Tiburon Capital Corporation, San Francisco, California, or a nominee
of Tiburon Capital Corporation (the "Buyer"), for the sum of $4,100,000, 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
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 Managing General Partner. It might be contended that Mark
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Grotewohl is, by virtue of his past relationship with the Partnership and the
other GMS Partnerships, an Affiliate of the Partnership as defined in its
Partnership Agreement. Under Section 11.2 of the Partnership Agreement, the
Partnership is not permitted to sell its real property to "Affiliates" of the
General Partners. (The Partnership Agreement defines an "Affiliate" of a person
as (i) any person directly or indirectly controlling, controlled by, or under
common control with such person, (ii) any person owning or controlling 10% or
more of the outstanding voting securities of such person, (iii) any officer,
director, or general partner of such person, and (iv) any person who is an
officer, director or general partner of any of the foregoing. The Managing
General Partner believes that, based on the facts and circumstances, Mark
Grotewohl is not an Affiliate of the Partnership, because Mark Grotewohl (i)
does not control the Partnership or the Managing General Partner, (ii) owns no
voting securities in the Partnership or the Managing General Partner, and (iii)
is not an officer, director or partner of the Managing General Partner or the
Partnership. However, the Managing General Partner recognizes that reasonable
minds could differ as to the resolution of this issue and has decided to treat
this transaction as an inside transaction.
The Buyer has made a contemporaneous offer to purchase the motel properties
of the four other GMS Partnerships. The offers made by the Buyer for the
properties of each of the GMS Partnerships have been evaluated independently by
the Managing General Partner. Other than with respect to the purchase price of
each motel, the offers are on identical terms. If the limited partners of the
other Partnerships do not approve the sale of their respective properties to the
Buyer, however, the Buyer has the right and option not to proceed with the
proposed purchase of the Property from the Partnership, even if the Limited
Partners approve this sale. In this regard, the Partnership has not solicited
any offers to purchase the Property or the motel properties of the other GMS
Partnerships, has not listed the Property or the motel properties of the other
GMS Partnerships for sale with independent brokers, and has not otherwise
actively sought competing offers for the Property or the motel properties of the
other GMS Partnerships. Consequently, the offer presented by the Buyer is the
only offer that the Managing General Partner has received for the Property or
the motel properties of the other GMS Partnerships other than those presented by
the Everest Group.
There are a number of significant conditions to the consummation of the
proposed sale of the Property to the Buyer; therefore, there can be no assurance
as to whether, or when, such transaction will be consummated. Among these
conditions are the Partnership's receipt of the approval of the Limited
Partners; the Buyer's receipt (at the Partnership's expense) and approval of an
ALTA Survey and preliminary title report for the Property; the absence of any
damage or loss to the Property prior to the closing date in excess of $50,000;
the decision by the Buyer, in its unfettered discretion, to terminate the
proposed purchase prior to June 30, 1998; the Buyer's receipt prior to June 30,
1998 of a loan commitment for financing in an amount of not less than 90% of the
purchase price of the Property (the Buyer has since waived but 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 Managing General Partner expects that such conditions will be satisfied;
however, there can be no assurances in this regard. No federal or state
regulatory requirements must be complied with, or approvals obtained, in
connection with the transaction.
The Buyer will deposit the sum of $21,000 into escrow on the date the
Partnership notifies the Buyer that the Limited Partners have approved the
proposed sale of the Property to the Buyer. Should the Buyer default in the
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performance of its obligations under the purchase agreement, the Partnership
will be entitled to retain said deposit as its only damages.
The Partnership and the Buyer will share closing costs. The Managing
General Partner anticipates that the Partnership's share of aggregate closing
costs, including real estate brokerage commissions, will be approximately
$153,750. 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 Managing 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
Managing General Partner, is the father of Mark Grotewohl, an affiliate of the
Buyer. Accordingly, the Managing General Partner faced a significant conflict of
interest in determining the terms of the proposed transaction with the Buyer, in
determining not to solicit bids from independent third parties, and in rendering
its recommendation as to the fairness of the proposed transaction with the
Buyer. The Managing General Partner also faced significant conflicts of interest
in determining to sell the Property at this time in that it agreed to sell the
Property in the agreement settling the lawsuits brought against and by the
Everest Group. (See "Legal Proceedings.") The state court action by the Everest
Group brought partly in response to the Managing General Partner's federal court
action brought against the Everest Group alleged violations by the Managing
General Partner of the Partnership Agreement and of its fiduciary duty to the
Partnership. Accordingly, the Managing General Partner may have been motivated
to agree to sell the Property as a result of the lawsuits rather than in pursuit
of the best interests of the Limited Partners. However, based upon its
experience in the lodging industry, as well as general familiarity with industry
news as reported by trade journals, the Managing General Partner believes that
the appraised market value of the Property as determined by PKF Consulting is
fair and reasonable. The Managing General Partner also believes that the sale of
the Property in accordance with the terms and conditions outlined in this
Consent Solicitation Statement will assist the Partnership in meeting its
investment objectives. Nonetheless, there can be no assurance that (i) the
Limited Partners would not receive a greater amount of sale proceeds if the
Managing General Partner were to solicit bids for the Property from third
parties, or (ii) the continued retention and operation of the Property by the
Partnership coupled with a sale of the Property at a later date would not result
in greater after-tax distributions to the Limited Partners.
EFFECTS OF APPROVAL OF THE PROPOSAL
Set forth below is a discussion of the effects of the sale of the Property
pursuant to the Proposal.
General
The consummation of the sale of the Property pursuant to the Proposal and
the concomitant dissolution of the Partnership should result in the following
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consequences for the Partnership, the Limited Partners and the General Partners:
(i) The Limited Partners are expected to receive the distributions of net
cash proceeds from the sale of the Property as described below.
(ii) The Limited Partners and the General Partners are expected to realize
the Federal income tax consequences as described below.
(iii) All of the Partnership's assets and liabilities will be liquidated,
the Partnership will be dissolved and terminated, and the registration of the
Units under the Securities Exchange Act of 1934 will be terminated.
The consequences stated above are discussed in more detail in the
subsections which follow. Those subsections, in part, include computations as to
the cash proceeds to be received and distributed by the Partnership, and the
taxable gain and allocations thereof to be made by the Partnership, in the event
the proposed sale is consummated. HOWEVER, THIS INFORMATION IS PRESENTED SOLELY
FOR THE PURPOSES OF EVALUATING THE 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 Property is sold for a gross sales price of
$4,100,000. This summary has been prepared by the Managing General Partner.
If the proposed transaction with the Buyer is consummated on November 30,
1998, it is estimated that the Partnership would
receive the following net proceeds:
Gross sales price $4,100,000
Less: Real estate commission (112,750)
Estimated escrow and closing costs (76,000)
Termination payment to franchisor (89,000)
Net proceeds of sale $3,822,250
Included in closing costs set forth above are, among other items, estimated
legal fees of $37,000, estimated fees in connection with the appraisal and
fairness opinion of $10,000, estimated accounting fees of $16,000 and estimated
fees in connection with solicitation activities of $4,000. Because of
unanticipated expenses of acquiring a Holiday Inn franchise, the Buyer has
decided that it will not operate the motel as a Holiday Inn. Therefore the
present franchise will be terminated. The early termination will require the
payment of a termination fee of approximately $178,000, of which the Seller has
agreed to pay one-half ($89,000).
The Partnership's real property taxes are payable twice yearly on April 10
and December 10, partially in arrears, in the current amount of $31,560 each.
The Partnership's minimum lease payment for its leasehold interests is $23,343
monthly. Accordingly, if the proposed transaction with the Buyer is consummated,
the actual date of consummation will determine whether there is a credit to the
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Partnership for prorated lease payments and/or a credit to the Buyer for
prorated real property taxes. Similarly, the amount indicated below as the
estimate of reserves available for distribution on dissolution of the
Partnership will vary depending on the actual date of consummation of the
proposed transaction.
The net proceeds of $3,822,250 estimated to be received by the Partnership
from the proposed transaction, in the estimated amount of approximately $433 per
Unit based on a closing date of November 30, 1998, less amounts withheld by the
Managing General Partner in consideration of the pending arbitration discussed
under "Legal Proceedings," would be distributed entirely to the Limited
Partners. The Managing General Partner, in its discretion, will determine the
amount, if any, which would be so withheld. Accordingly, the amount to be
withheld could be an amount ranging from zero to the maximum amount prayed for
or awarded in the arbitration, plus attorneys' fees. (See "Legal Proceedings.")
To the extent that the amount withheld is not used to pay damages or attorneys'
fees, it would be distributed to the Limited Partners. In the unlikely event
that the amount withheld were insufficient to satisfy such obligations of the
Partnership, the Limited Partners could be required to return a portion of their
distributions to the Partnership.
At the date of sale the Partnership would have regular cash reserves on
hand. These regular cash reserves would be retained for the payment of accounts
payable and other liabilities and expenses incurred to that date or expected to
be incurred in connection with the operation of the Property through the date of
sale and the operation and winding-up of the Partnership through its
termination, including severance pay to certain employees of the Partnership and
the other GMS Partnerships, and the balance, estimated to be $85,000 or $9.42
per Unit, also would be distributed entirely to the Limited Partners.
Alternatively, if the Property is not sold pursuant to the Proposal, the
Partnership would continue to operate the Property for an indeterminate period.
The Managing General Partner estimates that if the Property is not sold the
Partnership will make average annual distributions to the Limited Partners of
from zero to $324,792 ($36.00 per Unit) for the foreseeable future. However,
there can be no assurance that the Managing General Partner's estimate in this
regard will be borne out.
Federal Income Tax Consequences
(a) General. The following is a summary of the Federal income tax
consequences expected to result from a sale of the Property based on the
Internal Revenue Code of 1986, as amended (the "Code'), existing laws, judicial
decisions and administrative regulations, rulings and practices. This summary is
general in content and does not include considerations which might affect
certain Limited Partners, such as Limited Partners which are trusts,
corporations or tax-exempt entities, or Limited Partners who must pay an
alternative minimum tax. Except as otherwise specifically indicated, this
summary does not address any state or local tax consequences.
Tax counsel to the Partnership, Derenthal & Dannhauser, has delivered an
opinion to the Partnership which states that the following summary has been
reviewed by it and, to the extent the summary involves matters of law,
represents its opinion, subject to the assumptions, qualifications, limitations
and uncertainties set forth therein.
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(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 Property should constitute "Section 1231 property" (i.e., real property
and depreciable assets used in a trade or business which are held for more than
one year) rather than "dealer" property (i.e., property which is held primarily
for sale to customers in the ordinary course of business). While it is possible
that the Internal Revenue Service will argue that the Property is "dealer"
property, gain upon the sale of which would be taxed entirely as ordinary
income, tax counsel to the Partnership is of the opinion that it is more likely
than not that such an assertion would not be sustained by a court.
A Limited Partner's allocable share of Section 1231 gain from the sale of
the Property would be combined with any other Section 1231 gains or losses
incurred by him in the year of sale, and his net Section 1231 gains or losses
would be taxed as long-term capital gains or constitute ordinary losses, as the
case may be, except that a Limited Partner's net Section 1231 gains will be
treated as ordinary income to the extent of net Section 1231 losses for the five
most recent years which have not previously been offset against net Section 1231
gains.
Long-term gain on sale of Section 1231 property is taxed as follows: (i)
the excess of accelerated depreciation over straight-line depreciation is taxed
at ordinary income rates, (ii) to the extent that any other gain would be
treated as ordinary income if the property were depreciable personal property
rather than depreciable real property, at a maximum rate of 25%, and (iii) the
balance at a maximum rate of 20%.
Set forth below are the Managing General Partner's estimates of the total
taxable gain for Federal income tax purposes, and the allocations thereof, which
will result if the proposed sale of the Property to the Buyer is consummated,
based on an assumed closing date of November 30, 1998. These estimates do not
include any amounts relating to Partnership operations prior to the sale of the
Property or relating to dissolution of the Partnership. These estimates are not
the subject of an opinion of counsel.
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Portion
Total Taxed As Portion Portion
Estimated Ordinary Taxed At Taxed At
Gain Income 25% Rate 20% Rate
Limited Partners $2,677,000 $ 0 $2,677,000 $ 0
General Partners 27,000 0 27,000 0
Total $2,704,000 $ 0 $2,704,000 $ 0
Per Unit $296.72 $ 0 $296.72 $ 0
Because of different methods of depreciation used for California income tax
purposes than for Federal income tax purposes, the Managing General Partner
anticipates that consummation of the proposed transaction would produce a gain
for California income tax purposes in the amount of approximately $1,971,000, of
which approximately $20,000 and $1,951,000 would be allocated to the General
Partners 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 lodging properties or interests therein
and the conversion into cash of any proceeds of sale originally received in a
form other than cash.
If the proposal is approved by a majority-in-interest of the Limited
Partners, and if the proposed sale of the Property is consummated, the
Partnership will be dissolved, the Managing General Partner will commence to
wind up the business of the Partnership, and after payment of all expenses of
the Partnership (including the expense of a final accounting for the
Partnership) the remaining cash reserves of the Partnership will be distributed
in accordance with the provisions of the Partnership Agreement. The Managing
General Partner will then take all necessary steps toward termination of the
Partnership's Certificate of Limited Partnership.
APPRAISAL OF THE PROPERTY/FAIRNESS OPINION
The appraisal of the Property and the fairness opinion respecting the
proposed transaction with the Buyer were prepared by PKF Consulting, San
Francisco, California. PKF Consulting was selected by the Managing General
Partner based on the Managing General Partner's belief as to the expertise of
PKF Consulting in appraising motel properties in the State of California and in
rendering fairness opinions with respect to the sale thereof. The Managing
General Partner's belief is based on past experience with PKF Consulting, which
rendered appraisals of the Property and the properties of the other GMS
Partnerships in 1988, on its knowledge of the lodging industry, and on
recommendations from others in the lodging industry, including attorneys and
accountants. PKF Consulting also prepared appraisals of the motel properties of
the other GMS Partnerships. PKF Consulting was instructed to prepare its
appraisals based on the assumption that the Property was to be sold on the open
market to knowledgeable buyers and that there would be no pressure to make a
quick sale. PKF Consulting was not advised that an affiliate of Mark Grotewohl
would be a potential buyer of the Property. No limitations were imposed by the
17
<PAGE>
Partnership on the appraiser's investigation. PKF Consulting delivered a written
report, dated February 20, 1998, which stated that the "as is" market value of
the Property as of January 1, 1998 was $4,100,000. PKF Consulting also delivered
its written fairness opinion, dated May 19, 1998, to the effect that the
proposed transaction with the Buyer is fair and equitable from a financial
standpoint to the Limited Partners. The amount offered by the Buyer for the
Property is based upon, and is equal to, the market value set forth in the
appraisals.
Other than with respect to the rendering of the appraisal reports and
fairness opinions referred to above, during the past two years there has been no
material relationship between PKF Consulting and the Partnership or its
affiliates. PKF Consulting received a total of approximately $49,000 from the
Partnership and the other GMS Partnerships in connection with the rendering of
such appraisal reports and fairness opinions.
PKF Consulting is an international firm of management consultants, industry
specialists, and appraisers who provide a wide range of services to the
hospitality, real estate, and tourism industries. Headquartered in San
Francisco, PKF Consulting has offices in New York, Philadelphia, Atlanta,
Boston, Houston, Los Angeles, Washington, D.C., and abroad. As a member of the
Pannell Kerr Forster International Association, PKF Consulting has access to the
resources of one of the world's largest accounting and consulting firms, with
300 offices in 90 countries.
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
18
<PAGE>
competitive supply, and the share of the market that each hotel could reasonably
be able to capture over the next five to ten years.
Based on the foregoing scope of work, it was concluded that the Highest and
Best Use of each property is as currently improved.
In developing a value conclusion for each hotel, two of the three
traditional approaches to valuation have been used: the Sales Comparison and
Income Capitalization Approaches. In the Sales Comparison Approach, the value of
the subject properties were estimated based on an analysis of the sales of other
similar facilities using a unit indicator of price per room or multiple of rooms
revenue. In the Income Capitalization Approach, the value of each property is
estimated based on an analysis of the historical and projected income and
expenses generated by each facility during a typical holding period. Both direct
capitalization and yield capitalization (discounted cash flow analysis) methods
were employed.
The earnings stream most commonly used as the basis for the Income
Capitalization method of valuation is the projected net operating income (NOI)
from operations after the deduction of real estate taxes and insurance, but
before the deduction of interest, depreciation, amortization and taxes on
income. Also deducted from the profit from operations is a reserve for capital
improvements for each 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).
19
<PAGE>
The Cost Approach has not been included in the estimate of the value of the
subject properties. The Cost Approach is most applicable in the valuation of
special use properties, properties which are proposed or under construction, and
aged properties, in which the value of the improvements may be nominal and the
value of the property as a whole approaches land value. The subject properties
are all going concerns and the existing improvements contribute significant
value to the property. The costs to replace these facilities are of little more
than historical significance and are not used by the typical investor interested
in the purchase of an existing property."
Upon request the Partnership will furnish to a Limited Partner, without
charge, a copy of the appraisal report. In this regard Limited Partners are
cautioned to refer to the entire appraisal report, inasmuch as the opinions of
value stated therein are subject to the assumptions and limiting conditions
stated therein. Furthermore, Limited Partners should be aware that appraised
values are opinions and, as such, may not represent the realizable value of the
Property. Upon request, the Partnership will also furnish to a Limited Partner,
without charge, a copy of the fairness opinion.
LEGAL PROCEEDINGS
On October 27, 1997 a complaint was filed in the United States District
Court, Eastern District of California by the Partnership, the other GMS
Partnerships, and the Managing General Partner, as plaintiffs (the "GMS
Plaintiffs"). The complaint named as defendants Everest/Madison Investors, LLC,
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
20
<PAGE>
Everest/Madison Investors, LLC, as plaintiffs (the "State Plaintiffs"), against
Philip B. Grotewohl, the Managing General Partner, Kenneth M. Sanders, Robert J.
Dana, Borel Associates, and BWC Incorporated, as defendants (the "State
Defendants"), and the GMS Partnerships, as nominal defendants. On November 11,
1998 the complaint was amended and Mark and David Grotewohl were added as
defendants. The State Plaintiffs alleged that the State Defendants received
unauthorized rebates of franchise fees paid to Super 8 Motels, Inc., that the
Managing General Partner caused the GMS Partnerships to make unauthorized
payments of salaries and expenses, and reimbursements of expenses to the
Managing General Partner, that the Managing General Partner refused to cooperate
with the State Plaintiffs' efforts to buy the properties of the GMS
Partnerships, and that the Managing General Partner refused to provide
information required by the GMS Partnerships' governing documents and California
law. The Managing General Partner believes that these allegations were
unjustified. As amended, the complaint requested the following relief: (i) a
declaration that the action was a proper derivative action; (ii) an order
requiring the State Defendants to discharge their fiduciary duties to the GMS
Partnerships by accepting no kickbacks, charging no unauthorized expenses,
responding in good faith to the offer made by an affiliate of the State
Plaintiffs to purchase the properties of the GMS Partnerships and disclosing
such offers to the limited partners of the GMS Partnerships, and delivering all
information respecting the GMS Partnerships requested by the State Plaintiffs;
(iii) an order enjoining the State Defendants from breaching their fiduciary
duties; (iv) disgorgement of profits in excess of the reasonable value of the
services actually rendered; (v) appointment of a receiver; and (vi) an award for
compensatory and punitive damages and, under RICO, treble damages, and costs,
all in an amount to be determined.
On February 20, 1998, the parties entered into a settlement agreement
pursuant to which both of the above complaints were dismissed. Pursuant to the
terms of the settlement agreement, the Federal Defendants (excluding The
Blackacre Capital Group, L.P., Blackacre Capital Management Corp., Jeffrey B.
Citrin, Ronald J. Kravit and Stephen P. Enquist) agreed not to generally solicit
the acquisition of any additional units of the GMS Partnerships without first
filing necessary documents with the Securities and Exchange Commission, and also
agreed to conduct any such solicitation in compliance with the provisions of
Section 14 of the Exchange Act and Regulation 14D, notwithstanding that any such
solicitation might otherwise be exempt from such requirements. It was also
agreed, among other things, that the Managing General Partner would retain, on
behalf of the GMS Partnerships, a real estate broker to market for sale all of
the properties of the GMS Partnerships. The Managing General Partner agreed to
evaluate and consider in good faith a designee of Everest Properties, Inc. to
serve as the real estate broker. Further, the Managing General Partner agreed to
include in any listing agreement between the GMS Partnerships and their real
estate broker a provision requiring the broker to share one-half of the real
estate commission payable with Everest Properties, Inc. or its designee in the
event that Everest Properties, Inc. or its designee were the procuring broker
for the property generating the real estate commission. The Managing General
Partner also agreed to proceed in a commercially reasonable manner with the
marketing of all properties of the GMS Partnerships, and agreed to entertain all
bona fide offers, whether made for all of the properties of the GMS Partnerships
as a group, for all of the properties of a particular GMS Partnership as a
group, or for an individual property. The Managing General Partner agreed, by no
later than June 30, 1998, to accept for submission to the limited partners of
any GMS Partnership either (i) any bona fide offer (an "Acceptable Offer") to
purchase one or more of the properties of a GMS Partnership if the offer were a
cash offer at a price equal to 75% or more of the appraised value of the
property or properties, or (ii) any offer for a property or properties of a GMS
21
<PAGE>
Partnership on terms deemed by the Managing General Partner to be more favorable
to that GMS Partnership than the Acceptable Offer. In addition, the Managing
General Partner agreed to submit the offer for approval to the limited partners
of the GMS Partnership and other procedures as required by the GMS Partnership's
Agreement of Limited Partnership and applicable law. The Managing General
Partner retained the right to recommend to the limited partners of a GMS
Partnership rejection of any proposal if the proposed sales price were less than
the appraised value of the property or were not payable entirely in cash. The
Managing General Partner also agreed that, upon the sale of a property of one of
the GMS Partnerships, the Managing General Partner would distribute promptly the
proceeds of the sale after payment of payables and retention of reserves to pay
anticipated expenses. Under the terms of the settlement agreement, the GMS
Partnerships agreed to reimburse the Everest Defendants for certain costs, not
to exceed $60,000, to be allocated among the GMS Partnerships. Of this amount,
the Partnership paid $12,000.
For a discussion of the amendment to such settlement agreement, see
"Outstanding Voting Securities and Voting Rights."
In addition, Fred Rosenberg, dba Barstow Station, Too, the Partnership's
lessor (the "Lessor") has served upon the Partnership a Demand for Arbitration,
dated September 24, 1998. In the demand, the Lessor has asked for (i) a
declaration that the Partnership is in violation of the lease in that the
Partnership's restaurant is not open for lunch (the Lessor alleging that this
practice is not customary for businesses of like character in Barstow and that
the lease requires the Partnership to operate the restaurant in such alleged
customary fashion) and that the meeting and banquet rooms are not being operated
for lunch; (ii) damages in an amount to be proved but believed to be at least
$250,000. On October 23, 1998 the Partnership transmitted its answer to the
demand and the Partnership and the Managing General Partner transmitted a
counterclaim praying for a dismissal of the Lessor's demand, compensatory
damages for the Lessor's breach of the implied covenant of good faith and fair
dealing contained in the lease, a declaration that no violation of the lease has
occurred, and damages equal to reasonable attorneys' fees and costs. The
counterclaim alleges that the Lessor breached his implied covenant of good faith
and fair dealing by leasing nearby property to the Sizzler Restaurant and Taco
Bell, and that the changes in operating policies were dictated by changed
economic circumstances since the lease was executed more than 14 years' ago and
by the Lessor's actions in leasing nearby property to direct competitors.
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 22. SALE OF PROPERTY
22.1 Sale and Disposition of Partnership Assets
Notwithstanding anything contained in this Agreement to the contrary,
including Section 11.2 hereof, the General Partners, for and on behalf of the
Partnership, are hereby authorized (i) to sell the Partnership's real property
interests, including its motel, and related personal property, to Tiburon
Capital Corporation or a nominee thereof, including a nominee 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 $249.43 and $249.43, 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 $2,458,115 $2,489,982 $2,466,338 $2,526,730 $2,458,535
Restaurant income $690,622 $655,746 $636,141 $701,900 $775,129
Net income (loss) $(45,074) $14,787 $78,676 $188,470 $82,208
Per Partnership Unit:
Cash distributions(1) $36.80 $36.80 $36.80 $34.40 $16.00
Net income (loss) $(4.95) $1.62 $8.63 $20.68 $9.02
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
Total assets $2,430,463 $2,815,123 $3,127,918 $3,411,671 $3,523,707
Long-term debt ---- ---- ---- ---- ----
_________
<FN>
(1) On an annual basis, to the extent cash distributions exceed net income,
Limited Partners receive a return of capital rather than a return on capital.
However, an annual analysis will be misleading if the Limited Partners do not
receive their investment back upon liquidation of the Partnership. For investors
who purchased their Units directly from the Partnership, the original investment
was $1,000 per Unit, cumulative allocations of income through December 31, 1997
were approximately $43.54 per Unit, and cumulative distributions through
December 31, 1997 were approximately $637.70 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 Managing General Partner believes that the Partnership's liquidity,
defined as its ability to generate sufficient cash to satisfy its cash needs, is
adequate. The Partnership's primary source of liquidity is its cash flow from
operations. The Partnership had, as of December 31, 1997, current assets of
$216,599, current liabilities of $176,765 and, therefore, an operating reserve
of $39,834. The Managing General Partner's reserves target is 5% of the adjusted
capital contributions, which are approximately $5,536,000. Current reserves are
below the $276,800 reserves target partially because the Managing General
Partner decided to pay for renovations and replacements from cash on hand rather
than by incurring debt. The reserve will be replenished during the coming fiscal
year to the extent made possible by operations.
The Partnership's Property is currently unencumbered. Although no assurance
can be had in this regard, the Managing General Partner believes that the
Partnership's equity in its Property provides a potential source of external
liquidity (through financing) in the event the Partnership's internal liquidity
is impaired.
During 1997, the Partnership expended $103,300 for renovations and
replacements, of which $50,387 was capitalized. The expenditures included
24
<PAGE>
$25,714 for desk chairs, chairs and sleep sofas, $19,721 for parking lot
repairs, $12,341 for guestroom carpet, $6,200 for security equipment, $7,478 for
lamp and ballast upgrades, $5,700 for roof repairs and $7,132 for restaurant
signage.
During 1996, the Partnership expended $70,569 for renovations and
replacements, of which $29,643 was capitalized. The expenditures included
$11,148 for computer systems, $9,103 for replacement chairs, $5,797 for carpet,
$5,195 for tub refinishing, $4,745 for roof repairs and $4,000 for pool
replastering.
The Partnership currently has no material commitments for capital
expenditures. The Property is in full operation and no further property
acquisitions or extraordinary capital expenditures are planned. If the Property
is not sold the Managing General Partner is aware of no material trends or
changes with respect to the mix or relative cost of the Partnership's capital
resources. If the Property is retained adequate working capital is expected to
be generated by motel operations.
(b) Results of Operations
(i) Combined Financial Results
The following tables summarize the Partnership's operating results for
1995, 1996 and 1997 on a combined basis. Individual hotel and restaurant results
follow in separate subsections. The income and expense numbers in the following
tables are shown on an accrual basis and other payments on a cash basis. Total
expenditures and debt service include the operating expenses of the motel,
together with the cost of capital improvements.
Average Average
Hotel Hotel
Occupancy Room
Fiscal Year Ended: Rate Rate
- ------------------------------------------------------------------
December 31, 1995 74.9% $60.95
December 31, 1996 71.1% $64.63
December 31, 1997 68.6% $66.30
Total Partnership
Total Expenditures Cash Flow
Fiscal Year Ended: Revenues and Debt Service (1)
- -------------------------------------------------------------------------------
December 31, 1995 $3,213,820 $3,158,485 $55,335
December 31, 1996 $3,257,416 $2,961,860 $295,556
December 31, 1997 $3,250,726 $3,063,793 $186,933
(1) While Partnership Cash Flow as it is used here is not an amount found
in the financial statements, the Managing General Partner believes that it is
the best indicator of the annual change in the amount, if any, available for
distribution to the Limited Partners because it tracks the definition of the
term "Cash Flow" as it is used in the Partnership Agreement. These calculations
25
<PAGE>
are reconciled to the financial statements in the following table.
Following is a reconciliation of Total Expenditures and Debt Service as
used above to Total Expenses shown on the Statement of Operations (in the
audited financial statements):
1997 1996 1995
-------------------------------------------
Total Expenditures and Debt Service $3,063,793 $2,961,860 $3,158,485
Net Additions to Fixed Assets (50,387) (29,643) (306,084)
Depreciation and Amortization 281,791 299,764 278,574
Other Items 603 10,648 4,170
============================================
Total Expenses $3,295,800 $3,242,629 $3,135,145
============================================
A reconciliation of Partnership Cash Flow (from the chart above) to Net
Income (Loss) as shown on the Statements of Operations (in the audited financial
statements) is as follows:
1997 1996 1995
--------------------------------------------
Partnership Cash Flow $186,933 $295,556 $55,335
Net Additions to Fixed Assets 50,387 29,643 306,084
Depreciation and Amortization (281,791) (299,764) (278,574)
Other Items (603) (10,648) (4,169)
============================================
Net Income ($45,074) $14,787 $78,676
=============================================
Following is a reconciliation of Partnership Cash Flow (shown above) to the
aggregate total of Cash Flow from Hotel Operations (shown in the succeeding
subsection) and the Total Restaurant Net Loss (shown in the second succeeding
subsection):
1997 1996 1995
--------------------------------------------
Cash Flow from Hotel Operations $408,473 $467,476 $251,271
Total Restaurant Net Loss (231,552) (182,081) (207,886)
--------------------------------------------
Aggregate Cash Flow
from Property Operations $176,921 285,395 43,385
Interest on Cash Reserves 6,938 9,131 11,825
Other Income (Net of Other Expenses)
Not Allocated to the Property 3,074 1,030 125
===========================================
Partnership Cash Flow $186,933 $295,556 $55,335
===========================================
(ii) Hotel Operations
The following table summarizes the operating results of the hotel for 1997,
1996, and 1995. Total expenditures include the operating expenses of the hotel,
together with the cost of capital improvements and those Partnership expenses
properly allocable to such hotel.
Cash Flow
from
Total Total Hotel
Fiscal Year Ended: Revenues Expenditures Operations
- -------------------------------------------------------------------------------
December 31, 1995 $2,565,636 $2,314,365 $251,271
December 31, 1996 $2,591,465 $2,123,989 $467,476
December 31, 1997 $2,553,167 $2,144,694 $408,473
The Partnership's hotel experienced a $38,298 or 1.5% decrease in total
revenues during 1997 as compared to 1996. The decrease in average occupancy rate
26
<PAGE>
from 71.1% in 1996 to 68.6% in 1997 was partially offset by an increase in the
average daily rate from $64.63 in 1996 to $66.30 in 1997. The occupancy
generated by the group market segments declined while occupancy by the other
market segments stayed about the same. The average room rate for all market
segments increased due to rate increases.
The Partnership's hotel achieved a $25,829 or 1.0% increase in total
revenues during 1996 as compared to 1995. The 5% decline in the average
occupancy rate was offset by the $3.68 increase in the average room rate. The
occupancy generated by the government and corporate market segments declined
while occupancy by the other market segments increased. The average room rate
for all market segments increased due to rate increases.
The Barstow hotel's total expenditures increased $20,705 or 1.0% during
1997 as compared to 1996. This included increases of $7,855 for additional
billboards, $9,139 for central overhead allocation, $8,776 for travel agent
commissions, $8,145 for legal fees and $43,879 for renovations and replacements.
These increases were partially offset by reductions of $34,243 in security
services.
The Barstow hotel's total expenditures decreased $190,376 or 8.2% during
1996 as compared to 1995. This decrease is primarily attributable to the
reduction in renovations and replacements. This decrease was partially offset by
increased expenditures of $69,170 for security services, of $9,858 for front
desk wages and salaries, of $8,589 in workers' compensation insurance, of $7,311
for print advertising, of $16,780 for commissions and of $7,250 for appraisal
fees.
(iii) Restaurant Operations
The following table summarizes the operating results of the restaurant for
1997, 1996, and 1995:
<TABLE>
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Food Sales $533,750 100.0% $506,255 100.0% $496,097 100.0%
Cost of Food Sales (229,820) -43.1% (203,022) -40.1% (183,583) -37.0%
---------------- -------------------- -----------------
Gross Profit from Food Sales $303,930 56.9% 303,233 59.9% 312,514 63.0%
Beverage Sales 156,871 100.0% 149,490 100.0% 140,044 100.0%
Cost of Beverages Sold (50,488) -32.2% (50,866) -34.0% (47,772) -34.1%
--------------- -------------------- -----------------
Gross Profit from Beverage Sales $106,383 67.8% 98,624 66.0% 92,272 65.9%
---------------- -------------------- -----------------
Combined Gross Profit 410,313 59.4% 401,857 61.3% 404,786 63.6%
Restaurant Operating Expenses (641,865) -92.9% (583,938) -89.0% (612,672) -96.3%
---------------- -------------------- -----------------
Total Restaurant Net Loss ($231,552) -33.5% $(182,081) -27.8% $(207,886) -32.7%
================ ==================== =================
</TABLE>
The Partnership's restaurant experienced a $49,471 or 27.2% increase in its
net loss during 1997 as compared to 1996. There was an effort to increase
restaurant sales, but the costs rose faster than revenue. Holiday Inn has
modified its standards so that the restaurant operations can be reduced from 16
hours per day to six hours per day. Effective February 23, 1998, the restaurant
hours were reduced to seven hours per day. Financial projections of the modified
operation indicate that future restaurant operating losses will be much lower
than those experienced during the last three fiscal years.
27
<PAGE>
The Partnership's restaurant achieved a $25,805 or 12.4% decrease in its
net loss during 1996 as compared to 1995. The improved performance is
attributable to the elimination of $20,000 in professional fees and some
renovations paid in the previous year.
II. Interim Financial Statements
(a) Liquidity and Capital Resources
As of June 30, 1998, the Partnership's current assets of $344,323 exceeded
its current liabilities of $186,967, providing an operating reserve of $157,356.
Cash distributions have been suspended in order to replenish the Partnership
reserves. The Statement of Cash Flows for the six months ended June 30, 1998
shows that the Partnership continues to generate cash sufficient to meet its
cash needs.
The Partnership expended $42,580 on renovations and replacements during the
six months ended June 30, 1998, of which $13,970 was capitalized. The
expenditures included $8,970 for guestroom carpet, $5,000 for the restaurant
signs and $18,915 for roof repairs.
(b) Results of Operations
Total income decreased $55,140 or 3.3% for the first two quarters of 1998
as compared to the first two quarters of 1997. Hotel room revenue increased
$25,987 or 2.0% due to an increase in the average room rate from $66.11 to
$68.77, which was partially offset by a decrease in the occupancy rate from
72.9% to 71.5%. The decrease in occupancy was due primarily to reduced military
activity at Fort Irwin. Restaurant revenue decreased $80,829 or 25.3% due to a
reduction in daily operating hours from 16 to seven.
Total expenses decreased $64,238 or 4.0% primarily due to reduced
restaurant costs and the reversal in the three months ended June 30, 1998 of a
contingent liability previously accrued during the three months ended March 31,
1998 in the amount of $100,250. 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 Managing General
Partner's offices in Sacramento were updated. In the process of updating its
hardware and software, the Managing General Partner eliminated any potential
Year 2000 problem with respect to such computers. Similarly, the Managing
General Partner does not anticipate any material Year 2000 problem with the
computers in use at the motel. The Managing General Partner has not investigated
and does not know whether any Year 2000 problems may arise from its third party
vendors. Because the motel is a "budget" motel, 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 conduct business at its motel would
be compromised. No contingency plans have been developed in this regard.
28
<PAGE>
Items 304 and 305 of Regulation S-K promulgated by the Securities and
Exchange Commission are not applicable to the Partnership.
29
<PAGE>
FINANCIAL STATEMENTS
for
CONSENT SOLICITATION STATEMENT
of
FAMOUS HOST LODGING V, L.P.
November 12, 1998
F-i
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FAMOUS HOST LODGING V, L.P. 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-12
Statements of Operations for the Three Months and Six Months
Ended June 30, 1998 and 1997 (Unaudited)......................... F-13
Statements of Partners' Equity for the Six Months
Ended June 30, 1998 and 1998 (Unaudited)......................... F-14
Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)......................... F-15
Notes to Financial Statements......................................... F-16
F-ii
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Famous Host Lodging V, L.P.
We have audited the accompanying balance sheets of Famous Host Lodging V, L.P.,
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 years in the three year 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 Famous Host Lodging V, L.P. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 26, 1998
San Mateo, California
F-1
e-super8/s8597fs.wp8.wpd
<PAGE>
<TABLE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------ --------
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and temporary investments (Notes 1, 3, 8 and 9) $ 146,113 $ 246,283
Accounts receivable 32,624 24,531
Prepaid expenses 37,862 39,762
---------- -----------
Total Current Assets 216,599 310,576
--------- ----------
Property and Equipment (Note 2):
Building 4,077,604 4,077,604
Furniture and equipment 1,294,151 1,253,417
Projects in progress - 58,444
------------- -----------
5,371,755 5,389,465
Accumulated depreciation and amortization (3,190,183) (2,917,212)
---------- ----------
Property and Equipment, Net 2,181,572 2,472,253
---------- ----------
Other Assets 32,294 32,294
----------- -----------
Total Assets $2,430,465 $2,815,123
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 165,909 $ 184,017
Due to related parties 10,856 322
---------- ------------
Total Liabilities 176,765 184,339
--------- -----------
Contingent Liabilities and Lease Commitments (Notes 4 and 5)
Partners' Equity:
General Partners 3,385 3,836
Limited Partners: 10,000 units authorized,
9,022 units issued and outstanding 2,250,315 2,626,948
--------- ----------
Total Partners' Equity 2,253,700 2,630,784
--------- ----------
Total Liabilities and Partners' Equity $2,430,465 $2,815,123
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31:
1997 1996 1995
------------ ------------ ---------
Income:
<S> <C> <C> <C>
Guest room $2,458,115 $2,489,982 $2,466,338
Restaurant 690,622 655,746 636,141
Telephone and vending 55,707 65,512 54,893
Interest 6,938 9,131 11,825
Other 39,344 37,045 44,624
------------ ----------- ----------
Total Income 3,250,726 3,257,416 3,213,821
----------- ---------- ----------
Expenses:
Hotel and restaurant operations (Notes 4, 5 and 6) 1,886,822 1,900,900 1,790,818
Restaurant operations (Note 4,5 and 6) 887,991 800,817 844,027
General and administrative (Note 4) 77,356 78,787 61,637
Depreciation and amortization (Note 2) 281,791 299,764 278,574
Property management fees (Note 4) 161,840 162,361 160,089
----------- ----------- ----------
Total Expenses 3,295,800 3,242,629 3,135,145
---------- ---------- ----------
Net Income (Loss) $ (45,074) $ 14,787 $ 78,676
=========== =========== ===========
Net Income (Loss) Allocable to General Partners $(451) $148 $787
===== ==== ====
Net Income (Loss) Allocable to Limited Partners $(44,623) $14,639 $77,889
======== ======= =======
Net Income (Loss) Per Partnership Unit (Note 1) $4.95 $1.62 $8.63
===== ===== =====
Distributions to Limited Partners Per
Partnership Unit (Note 1) $36.80 $36.80 $36.80
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31:
1997 1996 1995
---------- ---------- --------
General Partners:
<S> <C> <C> <C>
Balance, beginning of year $ 3,836 $ 3,688 $ 2,901
Net income (Loss) (451) 148 787
----------- ------------ ----------
Balance, End of Year 3,385 3,836 3,688
---------- ------------ ----------
Limited Partners:
Balance, beginning of year 2,626,948 2,944,319 3,198,440
Net income (Loss) (44,623) 14,639 77,889
Less: Cash distribution to limited partners (332,010) (332,010) (332,010)
----------- ----------- ----------
Balance, End of Year 2,250,315 2,626,948 2,944,319
---------- ---------- ----------
Total Partners' Equity $2,253,700 $2,630,784 $2,948,007
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
FAMOUS HOST LODGING V, L.P.
(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 hotel and restaurant operations $3,237,065 $3,255,807 $3,224,408
Expended for hotel and restaurant operations
and general and administrative expenses (2,963,719) (2,942,661) (2,878,610)
Interest received 8,651 8,216 11,223
------------ ------------ -----------
Net Cash Provided by Operating Activities 281,997 321,362 357,021
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment 230 500 3,060
Purchases of property and equipment (50,387) (29,643) (306,084)
----------- ----------- ----------
Net Cash Used by Investing Activities (50,157) (29,143) (303,024)
----------- ----------- ----------
Cash Flows From Financing Activities:
Distributions paid to limited partners (332,010) (332,010) (332,010)
---------- ----------- ----------
Net Cash Used by Financing Activities (332,010) (332,010) (332,010)
---------- ----------- ----------
Net Increase (Decrease) in Cash
and Temporary Investments (100,170) (39,791) (278,013)
Cash and Temporary Investments:
Beginning of year 246,283 286,074 564,087
---------- ----------- ----------
End of Year $ 146,113 $ 246,283 $ 286,074
========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
<TABLE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31:
1997 1996 1995
----------- ---------- -------
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities:
<S> <C> <C> <C>
Net income (loss) $ (45,074) $ 14,787 $ 78,676
---------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 281,791 299,764 278,574
(Gain) loss on disposition of property and equipment 59,047 (500) 4,170
(Increase) decrease in accounts receivable (8,093) 6,607 21,810
(Increase) decrease in prepaid expenses 1,900 (3,724) 5,210
(Increase) decrease in other assets - - (1,000)
Increase (decrease) in accounts payable and
accrued liabilities (18,108) 4,106 (18,863)
Increase (decrease) in due to related parties 10,534 322 (11,556)
---------- ---------- ---------
Total Adjustments 327,071 306,575 278,345
--------- -------- ---------
Net Cash Provided By Operating Activities $281,997 $321,362 $357,021
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Famous Host Lodging V, L.P. is a limited partnership organized under California
law on January 17, 1984, to acquire and/or develop and operate hotel properties
in the State of California. The term of the Partnership expires December 31,
2023, and may be dissolved earlier under certain circumstances. On February 13,
1991 the Partnership Agreement was amended to change the name of the Partnership
from "Super 8 Lodging V, Ltd." to "Famous Host Lodging V, L.P." The hotel in
Barstow, California was opened in December 1985. In 1987 the Partnership
commenced operation of a family restaurant and cocktail lounge immediately
adjacent to the hotel. The Partnership grants credit to customers, substantially
all of which are local businesses.
The managing general partner is Grotewohl Management Services, Inc., the fifty
percent stockholder and officer of which is Philip B. Grotewohl. In addition,
there is one individual associate general partner.
The net income or net loss of the Partnership is allocated 1% to the General
Partners and 99% to the Limited Partners. Net income (loss) and distributions
per partnership unit are based upon 9,022 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 gross proceeds of the public offering of units as
adjusted for distributions of sales proceeds ($276,799 at December 31, 1997). As
of December 31, 1997, the Partnership had working capital of only $39,834 due to
capital renovations made during 1996 and distributions to limited partners in
1996 and 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Items of Partnership income or loss 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 $750,000 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
Building and components 150% declining balance 10-25 years
and straight-line
Furniture and equipment 200% declining balance 4-7 years
and straight-line
Costs incurred in connection with maintenance and repair are charged to expense.
Major renewals and betterments that materially prolong the lives of assets are
capitalized.
Long-lived assets are revised 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.
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.
F-7
<PAGE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 - CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments as of December 31, 1997 and 1996 consist of the
following:
1997 1996
-------- ------
Cash in bank $ 71,809 $ 57,133
Money market accounts 74,304 89,150
Certificates of deposit - 100,000
-------- --------
Total Cash and Temporary Investments $146,113 $246,283
======== ========
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 five months or less to be cash
equivalents for purposes of the statement of cash flows.
NOTE 4 - RELATED PARTY TRANSACTIONS
Property Management Fees
The General Partners, or their affiliates, handle the management of the hotel
property 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 $161,840 in 1997, $162,361 in 1996 and $160,089 in 1995.
Subordinated Distributions to General Partners
During the Partnership's operational stage, the General Partners are to receive
an aggregate of 10% of Partnership distributions from cash available for
distribution, of which 9% will constitute a fee for managing the Partnership and
1% will be on account of their interest in the income and losses of the
Partnership. These distributions are subordinated, however, to payment to each
Limited Partner during such year of distributions from cash available for
distribution equal to a 14% per annum non-cumulative return on his adjusted
capital contribution. Through December 31, 1997, the Limited Partners have not
received a 14% non-cumulative return in any year, therefore no distributions
have been made or have accrued to the General Partners.
Subordinated Incentive Distributions
Under the terms of the partnership agreement, the General Partners are to
receive an aggregate of 15% of Partnership distributions of net proceeds from
the sale or refinancing of Partnership properties. The aggregate distribution of
15% is composed of a 14% subordinated incentive fee as additional compensation
for services rendered by the General Partners and the 1% on account of their
interest in the income and losses of the Partnership. These distributions are
subordinated, however, to 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 10% per annum
cumulative return on their adjusted capital contributions. At December 31, 1997,
the Limited Partners had not received the 10% per annum cumulative return, and
accordingly, no such proceeds have been distributed to the General Partners.
F-8
<PAGE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
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 Partners and their 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 in 1997, $225,000 in 1996 and $223,000 in 1995 and are
included in general and administrative expenses and hotel and restaurant
operations 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. (see Note 1), the General Partner.
NOTE 5 - LEASE COMMITMENTS
The Partnership leases 3.05 acres of land in Barstow, California for a term of
50 years beginning in 1984. The Partnership has the right to extend the lease
for three consecutive periods of ten years each. The base rent payments are
subject to annual upward or downward adjustments based on changes in the
Consumer Price Index. The Partnership also leases the site adjacent to its
Barstow hotel that contains a restaurant and lounge. The lease provides for a
20-year term ending December 31, 2010 with an option to terminate this lease
after termination of the Holiday Inn license agreement. The option cannot be
exercised before the tenth year of the renewal term and requires six months
written notice.
Both leases contain provisions requiring the lessee to pay all property taxes
and assessments. The leases provide for payment of the excess of percentage rent
over the base rent. The percentage rent is 9% of the combined gross hotel room
revenues and gross restaurant and lounge sales.
Rental expense under these leases incurred by the Partnership amounted to
$299,375 in 1997, $299,569 in 1996 and $297,167 in 1995. Such amounts are
included in hotel and restaurant operations expense in the accompanying
statements of operations.
Future lease commitments at December 31, 1997, using the current minimum monthly
amounts, are as follows:
Years Ended Hotel Land Restaurant
December 31: Lease Lease Total
1998 $ 163,428 $ 116,688 $ 280,116
1999 163,428 116,688 280,116
2000 163,428 116,688 280,116
2001 163,428 116,688 280,116
2002 163,428 116,688 280,116
2003-2035 5,147,982 933,504 6,081,486
---------- ----------- ----------
Total minimum future lease payments $5,965,122 $1,516,944 $7,482,066
========== ========== ==========
F-9
<PAGE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 - HOTEL AND RESTAURANT OPERATING EXPENSES
The following table summarizes the major components of hotel and restaurant
operating expenses for the following years:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Hotel operating expenses:
Salaries and related expenses $ 473,267 $ 464,624 $ 448,159
Rent 235,753 238,538 235,455
Franchise, advertising and reservation fees 175,932 179,762 177,711
Utilities 151,979 155,573 163,683
Allocated costs, mainly indirect salaries 186,004 184,064 181,607
Renovations and replacements 52,913 40,926 77,384
Maintenance expenses 106,149 125,157 139,443
Property taxes 63,790 65,322 61,697
Property insurance 43,021 41,984 39,776
Other operating expenses 398,014 404,950 265,903
---------- ----------- --------
Total hotel operating expenses $1,886,822 $1,900,900 $1,790,818
========== ========== ==========
Restaurant operating expenses:
Salaries and related expenses $ 393,229 $ 343,962 $ 341,357
Cost of food and beverage 287,070 253,888 231,355
Rent 65,302 63,068 60,818
Utilities 49,693 48,678 52,858
Property taxes 10,504 11,551 10,307
Property insurance 8,595 9,525 9,802
Other operating expenses 73,598 70,145 137,530
--------- ---------- --------
Total restaurant
operating expenses $887,991 $800,817 $844,027
======== ======== ========
</TABLE>
NOTE 7 - COMMITMENTS
Franchise Fees
In February 1991, the Partnership obtained a ten-year franchise agreement with
Holiday Inns, Inc. to operate its Barstow hotel and restaurant under the name
"Holiday Inn." The Partnership pays monthly franchise fees of 4% of gross room
revenues of the hotel and makes monthly contributions of 1 1/2% and 1% of guest
room revenues to a marketing fund and reservation fund, respectively.
NOTE 8 - 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.
F-10
<PAGE>
FAMOUS HOST LODGING V, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 9 - CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash accounts in five 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
uninsured cash balances (not reduced by outstanding checks) as of December 31,
1997 follows:
Total cash in all California banks $177,077
Portion insured by FDIC (131,674)
Uninsured cash balance $ 45,403
========
NOTE 10 - LEGAL PROCEEDINGS AND SUBSEQUENT EVENT
On October 27, 1997, a complaint was filed in the United States District Court
by the Managing 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 the
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-11
<PAGE>
Famous Host Lodging V, L.P.
(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 $ 275,409 $ 146,113
Accounts receivable 37,987 32,624
Prepaid expenses 30,927 37,862
---------- ----------
Total current assets 344,323 216,599
---------- ----------
Property and Equipment:
Buildings 4,077,604 4,077,604
Furniture and equipment 1,308,121 1,294,151
---------- ----------
5,385,725 5,371,755
Accumulated depreciation (3,320,794) (3,190,183)
---------- ----------
Property and equipment, net 2,064,931 2,181,572
---------- ----------
Other Assets: 32,294 32,294
---------- ----------
Total Assets $ 2,441,548 $ 2,430,465
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 186,967 $ 176,765
---------- ----------
Total liabilities 186,967 176,765
---------- ----------
Contingent Liabilities (See Note 1)
Partners' Equity:
General Partners 4,224 3,385
Limited Partners (9,022 units
issued and outstanding) 2,250,357 2,250,315
---------- ----------
Total partners' equity 2,254,581 2,253,700
---------- ----------
Total Liabilities and Partners' Equity $ 2,441,548 $ 2,430,465
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
Famous Host Lodging V, L.P.
(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:
Hotel room $ 664,962 $ 1,317,738 $ 587,612 $ 1,291,751
Restaurant 104,095 239,119 165,713 319,948
Telephone and vending 10,949 23,943 12,429 26,909
Interest 857 1,649 4,118 5,810
Other 16,353 29,645 12,936 22,816
---------- ---------- ----------- ----------
Total Income 797,216 1,612,094 782,808 1,667,234
---------- ---------- ----------- ----------
Expenses:
Motel operating expenses
(Note 2) 467,135 922,132 445,874 895,150
Restaurant operations
(Note 2) 129,137 311,293 230,450 434,189
General and administrative (68,347) 84,130 17,442 40,198
Depreciation and
amortization 65,495 130,611 70,239 139,992
Property management fees 39,527 80,045 38,707 82,920
---------- ---------- ----------- ----------
Total Expenses 632,947 1,528,211 802,712 1,592,449
---------- ---------- ----------- ----------
Net Income (Loss) $ 164,269 $ 83,883 $ (19,904) $ 74,785
========== ========== =========== ==========
Net Income (Loss) Allocable
to General Partners $1,643 $839 ($199) $748
========== ========== =========== ==========
Net Income (Loss) Allocable
to Limited Partners $162,626 $83,044 ($19,705) $74,037
========== ========== =========== ==========
Net Income (Loss)
per Partnership Unit $18.03 $9.20 ($2.18) $8.21
========== ========== =========== ==========
Distribution to Limited Partners
per Partnership Unit $9.20 $18.40 $9.20 $18.40
========== ========== =========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
Famous Host Lodging V, L.P.
(A California Limited Partnership)
Statement of Changes in Partners' Equity
For the Six Months Ending June 30, 1998 and 1997
1998 1997
---------- ----------
General Partners:
Balance at beginning of year $ 3,385 $ 3,836
Net income (loss) 839 748
---------- ----------
Balance at end of period 4,224 4,584
---------- ----------
Limited Partners:
Balance at beginning of year 2,250,315 2,626,948
Net income (loss) 83,044 74,037
Distributions to limited partners (83,002) (166,005)
---------- ----------
Balance at end of period 2,250,357 2,534,980
---------- ----------
Total Partners' Equity $ 2,254,581 $ 2,539,564
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
Famous Host Lodging V, L.P.
(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 hotel and restaurant revenues $ 1,605,082 $ 1,662,323
Expended for hotel and restaurant operation
and general and administrative expenses (1,380,463) (1,421,142)
Interest received 1,649 5,379
---------- ----------
Net cash provided (used) by operating activities 226,268 246,560
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (13,970) (27,818)
Proceeds from sale of equipment - 230
---------- ----------
Net cash provided (used) by investing activities (13,970) (27,588)
---------- ----------
Cash flows from financing activities:
Distributions paid to limited partners (83,002) (166,005)
---------- ----------
Net cash provided (used) by operating activities (83,002) (166,005)
---------- ----------
Net increase (decrease) in cash
and temporary investments 129,296 52,967
Cash and Temporary Investments:
Beginning of year 146,113 246,283
---------- ----------
End of Period $ 275,409 $ 299,250
========== ==========
Reconciliation of net income (loss) to net cash provided (used) by operating
activities:
Net income (loss) $ 83,883 $ 74,785
---------- ----------
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 130,611 139,992
(Gain) loss on disposition of
property and equipment - (230)
(Increase) decrease in accounts receivable (5,363) 468
(Increase) decrease in prepaid expenses 6,935 3,976
Increase (decrease) in accounts payable
and accrued liabilities 10,202 27,569
---------- ----------
Total adjustments 142,385 171,775
---------- ----------
Net cash provided (used) by
operating activities $ 226,268 $ 246,560
========== ==========
UNAUDITED
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
Famous Host Lodging V, L.P.
(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 to the General Partners or affiliates for the
period.
Property Management Fees $80,045
In February, 1991 the Partnership terminated its franchise and its affiliation
with Super 8 Motels, Inc. and began operating as a Holiday Inn. Accordingly, no
franchise or advertising fees have been paid to the General Partners or their
affiliates for the period.
Partnership management fees and subordinated incentive distributions are
contingent in nature and none have been accrued or paid during the current
period.
Note 2:
The following table summarizes the major components of hotel 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
---------- ---------- ----------- ----------
Motel Operating Costs:
Salaries and related
costs $ 124,283 $ 248,928 $ 119,818 $ 244,224
Rent 64,655 126,450 57,623 123,811
Franchise, advertising and
reservation fees 45,045 91,577 42,249 92,095
Utilities 31,657 65,750 35,083 68,291
Allocated costs, mainly
indirect salaries 47,755 97,516 44,313 88,423
Maintenance, repairs &
replacements 48,003 88,434 38,016 69,097
Property taxes 16,024 32,049 15,870 31,741
Property insurance 10,409 21,063 12,299 23,017
Other operating expenses 79,304 150,365 80,603 154,451
----------- ---------- ---------- ----------
467,135 922,132 445,874 895,150
=========== ========== ========== ==========
Restaurant Operating Expenses:
Salaries and related costs 49,987 125,776 98,333 187,657
Cost of Food and Beverage 37,454 85,093 69,111 129,659
Rent 9,369 22,895 14,914 30,543
Utilities 7,704 16,518 12,139 22,631
Property taxes 2,631 5,259 2,622 5,244
Property insurance 2,286 4,523 2,061 4,655
Other operating expenses 19,706 51,229 31,270 53,800
----------- ---------- ---------- ----------
129,137 311,293 230,450 434,189
=========== ========== ========== ==========
The following additional material contingencies are required to be restated in
interim reports under federal securities law: None.
F-16
<PAGE>
APPENDIX 1
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE
ACTION BY WRITTEN CONSENT OF LIMITED PARTNERS
FAMOUS HOST LODGING V, L.P.
2030 J Street
Sacramento, California 95814
(916) 442-9183
THIS CONSENT IS SOLICITED ON BEHALF OF THE PARTNERSHIP AND THE MANAGING
GENERAL PARTNER.
The undersigned hereby acknowledges receipt of the Consent Solicitation
Statement dated November 12, 1998 and hereby votes all the units of limited
partnership interest of Famous Host Lodging V, L.P. (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 Partners authority to sell
the Partnership's motel and related personal property to Tiburon Capital
Corporation, or a nominee thereof, as specifically set forth under "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 shoud 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 Famous Host Lodging V, L.P.
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 Managing General Partner believes that this proposed sale at an
all-cash price equal to the full amount of the recent appraisal of the
Partnership's motel 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 Managing 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,
