-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SWKuhfre/tLSSE6294gqUfZbXjW3mfG9QzeadR0lizcXybvouT/IAFPlODR50ozw JzIrZJcA4syZOo8Io5kg8g== 0000769129-98-000005.txt : 19980513 0000769129-98-000005.hdr.sgml : 19980513 ACCESSION NUMBER: 0000769129-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980512 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROWTH HOTEL INVESTORS CENTRAL INDEX KEY: 0000769129 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 942964750 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15347 FILM NUMBER: 98616232 BUSINESS ADDRESS: STREET 1: 1 INSIGNIA FINANCIAL PLAZA PO BOX 1089 STREET 2: C/O INSIGNIA FINANCIAL GROUP INC CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: 1 INSIGNIA FINANCIAL PLAZA PO BOX 1089 STREET 2: C/O INSIGNIA FINANCIAL GROUP INC CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: MRI BUSINESS HOTEL INVESTORS 85 DATE OF NAME CHANGE: 19850819 10-K 1 FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1997, or ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from.............to............. Commission file number 0-15347 GROWTH HOTEL INVESTORS (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2964750 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Insignia Financial Plaza, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 239-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] No established trading market for the Limited Partnership Units exists and therefore a current market value for such Units cannot be readily determined. DOCUMENTS INCORPORATED HEREIN BY REFERENCE: (1) Prospectus of the Registrant dated August 14, 1985, and thereafter supplemented, incorporated in Parts I and IV. (2) Items 2-4 and 8 of the Schedule 14D-9 of the Registrant, as filed with the Securities and Exchange Commission on February 29, 1996, as amended by Amendment No. 1 thereto filed with the Securities and Exchange Commission on March 7, 1996 and as further amended by Amendment No. 2 thereto filed with the Securities and Exchange Commission on March 14, 1996 incorporated in Parts I and II. GROWTH HOTEL INVESTORS A CALIFORNIA LIMITED PARTNERSHIP PART I ITEM 1. BUSINESS Growth Hotel Investors, a California Limited Partnership (the "Registrant" or the "Partnership"), was organized in 1984 under the California Uniform Limited Partnership Act. The managing general partner of the Registrant is Montgomery Realty Company-85 ("MRC-85" or the "Managing General Partner"), a California general partnership of which NPI Realty Management Corp. ("NPI Realty"), a Florida corporation, is the managing general partner, and Fox Realty Investors ("FRI"), a California general partnership, is the co-general partner. NPI Equity Investments II, Inc. ("NPI Equity") a Florida corporation, is the managing general partner of FRI. On November 15, 1995, Montgomery Realty Corporation, a California corporation, withdrew as a general partner of MRC-85 and NPI Realty was admitted as a general partner. In February 1996, NPI Realty became the managing general partner of MRC-85. Prior to February 1996, FRI was the managing general partner of MRC-85. Pursuant to a series of transactions which closed during the first half of 1996, affiliates of Insignia Financial Group, Inc. ("Insignia") acquired all of the issued and outstanding shares of stock of NPI Equity and National Property Investors, Inc. ("NPI"), the sole shareholder of NPI Equity until December 31, 1996, at which time the stock of NPI Equity and NPI Realty was acquired by Insignia Properties Trust. In connection with these transactions, affiliates of Insignia appointed new officers and directors of NPI, NPI Equity and NPI Realty. See "Item 9. Directors, Executive officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act." The Registrant's Registration Statement on Form S-11 (No. 2-97836) filed pursuant to the Securities Act of 1933, as amended (the "Act"), was declared effective by the Securities and Exchange Commission (the "Commission") on August 14, 1985. The Registrant marketed its securities pursuant to its Prospectus dated August 14, 1985 and thereafter supplemented (hereinafter the "Prospectus"). The Prospectus was filed with the Commission pursuant to Rule 424(b) of the Act. The principal business of the Registrant was to acquire, primarily through joint ventures, hold for investment, and ultimately sell hotels. The Registrant is a "closed" limited partnership real estate syndicate of the unspecified asset type. Beginning in October 1985 through May 15, 1986, the Registrant offered and sold $36,932,000 in Limited Partnership Assignee Units ("Units" or "Limited Partnership Assignee Units"). The net proceeds of this offering were used to purchase initially, through joint ventures, interests in twenty-three hotels, including eighteen acquired through a joint venture, Growth Hotel Investors Combined Fund No. 1, a California Limited Partnership ("Combined Fund"), with Growth Hotel Investors II, a California limited partnership ("GHI II") affiliated with the Registrant's managing general partner. The Combined Fund had a controlling interest in the eighteen hotels acquired. The acquisition activities of the Registrant were completed on September 15, 1988. The Registrant's original property portfolio was geographically diversified with properties located in twelve states. In 1988, Mariner/GHI Associates No. 1, a 50 percent owned joint venture, which joint venture owned the Hampton Inn- Albuquerque North, was terminated and the Registrant was assigned the joint venture partner's interest in the property. In 1990 the Registrant purchased its joint venture partner's 50 percent interest in the Hampton Inn-Brentwood. In 1991, the Registrant converted its joint venture partner's 48 percent general partnership interest in the Hampton Inn Syracuse joint venture into a limited partnership interest. In 1994, the joint venture which owned the Hampton Inn- Elk Grove lost its property through foreclosure. As required by the settlement of the class action brought in connection with the tender offer made by Devon Associates discussed below, the Registrant and Growth Hotel Investors ("GHI"), the Registrant's joint venture partner in the Combined Fund properties, marketed all of their properties for sale. In this regard, the Registrant and GHI retained Bear, Stearns & Co Inc. to assist in the marketing of such properties. As described in "Item 2. Properties", the Registrant sold all of its assets during 1997. As a result, it is anticipated that a final distribution will be made to the Registrant's partners during 1998 and that the Registrant will be dissolved. On October 2, 1995, the Registrant was granted the option to acquire its joint venture partner's interest in Aurora/GHI Associates No. 1, the joint venture which owns the Hampton Inn-Aurora for $150,000. The Registrant acquired such interest in April 1997. The Registrant was involved in only one industry segment, as described above. The Registrant does not engage in any foreign operations or derive revenues from foreign sources. The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the administration of all partnership activities. The Partnership Agreement provides for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The Registrant's affairs were managed by Metric Management, Inc. ("MMI") or its predecessor from March 1988 to December 1993. On December 16, 1993, the services agreement with MMI was modified and, as a result thereof, the Registrant's general partner assumed responsibility for the cash management of the Registrant as of December 23, 1993, and for investor relations services as of April 1, 1994. On December 6, 1993, NPI Equity Investments II, Inc., a Florida corporation ("NPI Equity II"), became the managing partner of FRI. NPI Equity II is a wholly-owned subsidiary of NPI, Inc. The individuals who had served previously as partners of FRI contributed their general partnership interests in FRI to a newly formed limited partnership, Portfolio Realty Associates, L.P. ("PRA"), in exchange for limited partnership interests in PRA. In the foregoing capacity, such partners continue to hold indirectly certain economic interests in the Registrant and such other investment partnerships, but ceased to be responsible for the operation and management of the Registrant and such other partnerships. On October 12, 1994, NPI, Inc. sold one-third of the stock of NPI, Inc. to an affiliate of Apollo Real Estate Advisors, L.P. ("Apollo"). On August 17, 1995, the stockholders of NPI, Inc. entered into an agreement to sell all of the issued and outstanding common stock of NPI, Inc. to IFGP Corporation, an affiliate of Insignia Financial Group, Inc. ("Insignia"). The transaction was consummated on January 19, 1996. Upon the Closing, the officers and directors of NPI, Inc., NPI Equity II and NPI Realty resigned and Insignia caused new officers and directors of each of those entities to be elected. See "Item 10, Directors and Executive Officers of the Registrant." On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. It is anticipated, however, that the Partnership will be liquidated prior to the consummation of the AIMCO transaction. In any event, it is not anticipated that this transaction will have a material effect on the Partnership. On February 15, 1996, Devon Associates, a New York general partnership, commenced a tender offer (the "Offer") for up to 15,000 of the outstanding Units at a purchase price of $705.00 per Unit. Due to the participation in the tender offer by affiliates of NPI Realty, and the Managing General Partner's related, existing and potential conflicts of interest, the Partnership, in its Schedule 14D-9 filed with the Securities and Exchange Commission and sent to limited partners, expressed no opinion and made no recommendation as to whether limited partners should tender their Units pursuant to the Offer. The expiration of the tender offers described above was midnight, New York time, on March 25, 1996. See Items 2-4 of the Schedule 14D-9 of the Partnership, as filed with the Commission on February 29, 1996, as amended by "Amendment No. 1" thereto, as filed with the Commission on March 7, 1996, and as further amended by "Amendment No. 2" thereto, as filed with the Commission on March 14, 1996 (collectively, the "Schedule 14D-9"), for additional information with respect to the Offer and the current and potential conflicts of interest of MRC-85, which Items 2-4 are incorporated herein by reference. Devon Associates acquired 13,401 units with respect to this offer. As required by the settlement of the class action brought in connection with the tender offer made by Devon Associates discussed above, the Partnership and GHI II, the Partnership's joint venture partner in the Combined Fund properties, marketed all of their properties for sale. In this regard, the Partnership and GHI II retained Bear, Stearns & Co. Inc. to assist in the marketing of such properties. ITEM 2. DESCRIPTION OF PROPERTIES As of December 31, 1997, the Partnership adopted the liquidation basis of accounting as a result of the sale of all of its investment properties as discussed below. On June 24, 1997, the Partnership sold all of its investment properties, consisting of the Hampton Inn-Brentwood, and Hampton Inn-Albuquerque for a sales price of approximately $13,502,000. The Partnership has a controlling interest in two joint venture partnerships, Aurora/GHI Associates No. 1, and North Coast Syracuse Limited Partnership. The Partnership has a non-controlling interest in the joint venture Growth Hotel Investors Combined Fund No. 1. On June 24, 1997, Aurora/GHI Associates No. 1 sold its investment property, Hampton Inn-Aurora for a purchase price of approximately $4,830,000. Additionally, North Coast Syracuse Limited Partnership sold its investment property, Hampton Inn-Syracuse for a sales price of approximately $2,294,000. Finally, on June 24, 1997, Hampton/GHI Associates No. 1 ("Hampton/GHI"), a joint venture in which Growth Hotel Investors Combined Fund No. 1 owns 80% sold 17 of its 18 investment properties, Hampton Inn-Memphis-I-40, Hampton Inn-Columbia West, Hampton Inn- Spartanburg, Hampton Inn-Little Rock, Hampton Inn-Amarillo, Hampton Inn- Greenville, Hampton Inn-Charleston, Hampton Inn-Memphis-Poplar, Hampton Inn- Greensboro, Hampton Inn-Birmingham, Hampton Inn-Atlanta, Hampton Inn-Chapel Hill, Hampton Inn-Dallas, Hampton Inn-Nashville, Hampton Inn-San Antonio, Hampton Inn-Madison Heights, Hampton Inn-Northlake for a purchase price of approximately $107,576,000. The investment properties were sold to an unrelated third party, Equity Inns Partnership, L.P., a Tennessee limited partnership. The properties were sold in accordance with the settlement of the class action lawsuit brought in connection with the tender offer made by Devon Associates. Hampton/GHI's last hotel property, the Hampton Inn-Mountain Brook, was sold on August 1, 1997 for a sales price of $8,758,000. The aggregate sale price for all 22 properties was approximately $136,960,000. The Partnership received net proceeds, after satisfaction of outstanding indebtedness and closing costs, from the sale of its investment properties of approximately $14,411,000. In addition, the Partnership received approximately $26,207,000 from its unconsolidated joint venture in distributions from operations and the sale of its properties. The Partnership made distributions of $32,720,000 ($885.95 per unit) to its limited partners and approximately $668,000 to the General Partners from these net proceeds in July and December 1997. It is anticipated that the Partnership will be dissolved during 1998 and the remaining cash and any funds from operations will be distributed to the partners at that time. In connection with the sale of the properties owned by Hampton/GHI Associates No. 1 and the liquidation of the joint venture, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Joint Venture Agreement, Hampton was obligated to contribute to the joint venture an amount equal to the deficit of its tax capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. The joint venture received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. The Partnership recognized a gain of approximately $3,908,000 due to the sale of its investment properties and the properties in which the Partnership had a controlling interest. In addition, the Partnership was allocated a gain of approximately $18,422,000 from its unconsolidated joint venture, Growth Hotel Investors Combined Fund No. 1, from the sale of the joint venture's properties. ITEM 3. LEGAL PROCEEDINGS The Partnership is unaware of any pending or outstanding litigation that is not routine in nature. The Managing General Partner of the Partnership believes that all such pending or outstanding litigation will be resolved without a material adverse effect upon the business, financial condition, or operations of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the second quarter of 1997 a proxy statement detailing the particulars of the sales transactions noted in "Item 2. Description of Properties" was submitted to a vote of unit holders and approved. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Limited Partnership Assignee Unit holders are entitled to certain distributions as provided in the Partnership Agreement. No established trading market for Limited Partnership Assignee Units exists, nor is any expected to develop. As a result of the sale of all of its investment properties, the Partnership has adopted the liquidation basis of accounting, and expects to distribute all remaining funds and terminate the Partnership in 1998. During the years ended December 31, 1997 and 1996, the Registrant has made the following cash distributions with respect to the Units to holders thereof as of the dates set forth below in the amounts set forth opposite such dates: Distribution with Amount of Distribution Respect to Quarter Ended Per Unit (*) 1997 1996 March 31 $ 0 $ 0 June 30 $ 20 $ 20 September 30 $947 $ 0 December 31 $ 91 $ 20 (*) The amounts listed represent distributions of cash from operations and cash from sales. (See "Item 7, Management's Discussion and Analysis or Plan of Operation", for information relating to the Partnership's future distributions.) As of December 31, 1997, there were 1,841 holders of record owning an aggregate of 36,932 Units. ITEM 6. SELECTED FINANCIAL DATA The following represents selected financial data for the Registrant for the years ended December 31, 1997, 1996, 1995, 1994, and 1993. The data should be read in conjunction with "Item 8, Consolidated Financial Statements." This data is not covered by the independent auditors' report. For the Year Ended December 31, 1997 1996 1995 1994 1993 (Amounts in thousands except per unit data) Total Revenues $26,192 $ 9,831 $10,341 $10,049 $10,895 Income Before Minority Interest in Joint Ventures' Operations and Extraordinary Item $21,395 $ 2,558 $ 3,556 $ 2,920 $ 2,716 Minority Interest In Joint Ventures' Operations (76) 35 (28) (36) (36) Extraordinary Item - Gain On Extinguishment Of Debt -- -- -- 606 -- Net Income $21,319 $ 2,593 $ 3,528 $ 3,490 $ 2,680 Net Income Per Limited Partnership Assignee Unit (1): Income Before Extraordinary Item $ 537 $ 65 $ 89 $ 73 $ 68 Extraordinary Item - Gain On Extinguishment of Debt -- -- -- 15 -- Net Income $ 537 $ 65 $ 89 $ 88 $ 68 Total Assets $ 4,157 $28,422 $27,510 $27,898 $31,672 Notes Payable $ -- $ 5,412 $ 5,433 $ 7,655 $12,488 Cash Distributions Per Limited Partnership Assignee Unit (actual amount based on admission to partnership) $ 1,059 $ 40 $ 40 $ 40 $ 35 (1) $1,000 original contribution per unit, based on weighted average limited partnership assignee units outstanding during the period after allocation to the general partner. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This item should be read in conjunction with the financial statements and other items contained elsewhere in this report. Liquidity and Capital Resources At December 31, 1997 the Partnership had cash and cash equivalents of approximately $2,562,000 as compared to approximately $4,644,000 at December 31, 1996. For the year ended December 31, 1997, cash and cash equivalents decreased approximately $2,082,000 compared to an increase of approximately $1,044,000 for the year ended December 31, 1996. The decrease in net cash provided by operating activities is due to the decrease in operating income related to the sale of the Partnership's investment properties. Net cash provided by investing activities increased due to the receipt of approximately $19,967,000 in net proceeds from the sale of investment properties sold during 1997. In addition, unconsolidated joint venture distributions increased due to the sale of the joint venture's eighteen properties. Net cash used in financing activities increased due to the distribution of approximately $40,129,000 and the payoff of the mortgages encumbering Hampton Inn-Albuquerque and Hampton Inn- Aurora. Cash distributions were made in the second, third and fourth quarters of 1997. A cash distribution of approximately $794,000 was made in June 1997. Approximately $739,000 was paid to the limited partners and approximately $55,000 was distributed to the general partner. A cash distribution of approximately $35,906,000 was made in July 1997 from cash from operations and sales proceeds. Approximately $34,992,000 was distributed to the limited partners and approximately $914,000 was distributed to the general partner. A cash distribution of approximately $3,429,000 was made in December 1997 from cash from operations and sales proceeds. Approximately $3,362,000 was distributed to the limited partners and approximately $67,000 was distributed to the general partner. In connection with the sale of the properties owned by Hampton/GHI and the liquidation of the joint venture, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Hampton/GHI Joint Venture Agreement, Hampton was obligated to contribute to Hampton/GHI an amount equal to the deficit of its capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. Hampton/GHI received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. The classification of the funds received from Hampton is not clearly defined in the partnership agreement. If the funds are classified as funds from operations, the General Partner would be due a partnership management incentive on the distribution of these funds in the amount of approximately $1,004,000. The General Partner has agreed to take 50% of such allocation or $502,000, which has been accrued at December 31, 1997. The Partnership holds a warranty reserve escrow account in the amount of approximately $1,595,000. This escrow must be held for the period of one year from the closing date of the sale of the investment properties. If the purchaser has not notified the Partnership of any amounts owed to it, the Partnership will distribute such funds to its partners. At March 30, 1998, no notification had been given from the purchaser that any amounts were due the purchaser under the agreement. Cash distributions were made in both 1996 and 1995 totaling approximately $1,587,000, of which approximately $1,477,000 was distributed to the limited partners and approximately $110,000 was distributed to the general partner for each year. Results of Operations 1997 Compared to 1996 On June 24, 1997 and August 1, 1997 the Partnership sold all of its investment properties and all of its joint venture properties as discussed in "Item 8. Financial Statements Note B - Sale of Properties." As a result of the sale of its investment properties and the decision to liquidate the Partnership, the Partnership changed its basis of accounting to the liquidation basis of accounting for its financial statements at December 31, 1997. Consequently, assets have been valued at their estimated net realizable value (including subsequent actual transactions described below) and liabilities are presented at their estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than the amounts indicated and is based upon the General Partner's estimates as of the date of the financial statements. The Partnership's net income as reported in the financial statements for the year ended December 31, 1997, was approximately $21,319,000 compared to approximately $2,593,000 for the corresponding period of 1996 (see "Item 8. Financial Statements Note H" for a reconciliation of these amounts to the Partnership's federal taxable income). The increase in net income is primarily attributable to the increase in revenue from the Partnership's unconsolidated joint venture due to the sale of the eighteen properties owned by the joint venture. The Partnership was allocated approximately $18,422,000 of the gain from the sale of these properties. Also contributing to the increase in net income is the gain on the sale of investment properties due to the sale of the Partnership's investment properties. As a result of the sale of the Partnership's investment properties, hotel operations revenues, hotel operations expenses, depreciation and interest expense decreased. The litigation settlement in 1997 relates to amounts paid in connection with the legal settlement as discussed in "Item 8. Financial Statements Note B - Sale of Properties". The change in minority interest in joint ventures' operations is due to the sale of the Hampton Inn-Aurora. The statement of net assets in liquidation as of December 31 1997, includes approximately $130,000 of accrued costs, net of income, that the General partner estimates will be incurred during the period of liquidation, based on the assumption that the liquidation process will be completed during the third quarter of 1998. These costs principally include legal and administrative expenses. Because the success in realization of assets and the settlement of liabilities is based on the General Partner's best estimates, the liquidation period may be shorter than projected or it may be extended beyond the projected period. 1996 Compared to 1995 The Partnership's net income as reported in the financial statements for the year ended December 31, 1996, was approximately $2,593,000 compared to net income of approximately $3,528,000 for the corresponding period of 1995 (see " Item 8. Financial Statements Note H" for a reconciliation of these amounts to the Partnership's federal taxable income). The decrease in net income is attributable to a decrease in hotel operating revenue, equity from unconsolidated joint ventures and interest income and an increase in hotel operations expenses, general and administrative expenses and depreciation expense. The decrease in hotel operations revenue is due to decreases in occupancy at the Partnership's Aurora and Albuquerque properties. The decrease in occupancy at the properties was partially offset by increases in average daily room rates. The decrease in occupancy at Aurora was due to rooms being out of service for renovations. The decrease in occupancy at the Albuquerque property is related to the construction of new hotels in the area. The decrease in interest income is due to a decrease in the average working capital available for investment. The increase in general and administrative expenses is due to an increase in professional fees, cost reimbursements and additional administrative costs associated with the potential sale of the properties and the liquidation of the Partnership. The increase in expense reimbursements during the year ended December 31, 1996, is directly attributable to the combined transition efforts of the Greenville, South Carolina, and Atlanta, Georgia administrative offices during the year-end close, preparation of the 1995 10-K and tax return (including the limited partners K-1's), filing of the first two quarterly reports and transition of asset management responsibilities to the new administration. The increase in depreciation expense in 1996 is due to additions to property and improvements during the third and fourth quarters of 1995, as well as the purchase of assets in 1996 related to renovations at the Partnership's properties. Offsetting the items noted above is a decrease in interest expense due to the repayment of the mortgage encumbering the Hampton Inn-Brentwood property on December 1, 1995. Unconsolidated Joint Venture Operations (Growth Hotel Investors Combined Fund No. 1) 1997 Compared to 1996 Operating results, prior to minority in joint venture operations and gain on sale of investment properties, was $1,666,000 for the year ended December 31, 1997 as compared to $5,469,000 for 1996. This is a result of the sale of 17 of its 18 investment properties in June 1997 and the remaining property in August 1997. The gain recognized as a result of these sales was $58,044,000. 1996 Compared to 1995 Operating results, prior to minority interest in joint venture operations, declined by approximately $977,000 for the year ended December 31, 1996, as compared to 1995, due to an increase in expenses of approximately $2,148,000 which was partially offset by an increase in revenues of approximately $1,171,000. Expenses increased at all of the joint venture properties except for the Hampton Inn-Atlanta Roswell property, primarily due to higher maintenance expense at all of the properties. The maintenance expense increase is largely due to exterior painting projects at the Hampton Inn-Sycamore, Chapel Hill, Charleston, Birmingham, Nashville and Memphis properties. The increase in revenues is due to higher average daily room rates at all of the joint venture properties which was partially offset by a decline in occupancy. Other Certain items discussed in this annual report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("the Reform Act") and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements of the Partnership expressed or implied by such forward-looking statements. Such forward-looking statements speak only as of the date of this annual report. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS GROWTH HOTEL INVESTORS LIST OF FINANCIAL STATEMENTS Independent Auditors' Report Statement of Net Assets in Liquidation - December 31, 1997 Consolidated Balance Sheet - December 31, 1996 Consolidated Statements of Operations-Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Partners' Capital (Deficit)/Net Assets in Liquidation-Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows-Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements To the Partners Growth Hotel Investors, a California Limited Partnership Greenville, South Carolina Independent Auditors' Report We have audited the accompanying statement of net assets in liquidation, and the consolidated balance sheet of Growth Hotel Investors, a California Limited Partnership, (the "Partnership") as of December 31, 1997 and 1996, respectively, and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Growth Hotel Investors, a California Limited Partnership, as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Imowitz Koenig & Co., LLP Certified Public Accountants New York, N.Y. March 30, 1998 GROWTH HOTEL INVESTORS STATEMENT OF NET ASSETS IN LIQUIDATION (in thousands) December 31, 1997 Assets Cash and cash equivalents $2,562 Escrow receivable 1,595 4,157 Liabilities Accounts payable and state withholding taxes payable 522 Distribution payable to general partner 502 Estimated costs during the period of liquidation 130 1,154 Net Assets in liquidation $3,003 See Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS CONSOLIDATED BALANCE SHEET (in thousands, except unit data) December 31, 1996 Assets Cash and cash equivalents $ 4,644 Restricted cash 268 Deferred costs 652 Accounts receivables and other assets 189 Investment in unconsolidated joint venture 7,767 Investment properties: Land 3,098 Buildings and related personal property 21,479 24,577 Less accumulated depreciation (9,675) 14,902 Total assets $ 28,422 Liabilities and Partners' Capital Liabilities Accounts payable and other liabilities $ 523 Notes payable 5,412 Minority interest in joint ventures 42 Partners' Capital (Deficit): General partner (965) Limited partners' (36,932 units outstanding at December 31, 1996) 23,410 Total partners' capital 22,445 Total liabilities and partners' capital $ 28,422 See Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except unit data) Years Ended December 31, 1997 1996 1995 Revenues: Hotel operations $ 3,658 $7,830 $ 8,091 Equity in unconsolidated joint venture operations 18,440 1,851 2,021 Interest income 186 150 229 Gain on sale of investment properties 3,908 -- -- Total revenues 26,192 9,831 10,341 Expenses (including $150, $201, and $140 paid to the general partner and affiliates in 1997, 1996 and 1995): Hotel operations 2,606 5,107 4,839 Interest 280 594 798 Depreciation 561 941 750 Litigation settlement 583 -- -- General and administrative 767 631 398 Total expenses 4,797 7,273 6,785 Net income before minority interest in joint ventures' operations 21,395 2,558 3,556 Minority interest in joint ventures' operations (76) 35 (28) Net Income $ 21,319 $2,593 $ 3,528 Net income allocated to general partners $ 2,503 $ 179 $ 247 Net income allocated to limited partners 18,816 2,414 3,281 $ 21,319 $2,593 $ 3,528 Net income per limited partnership unit $ 509.48 $65.36 $ 88.84 Cash distributions per limited partnership unit $1,058.51 $39.99 $ 39.99 See Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)/NET ASSETS IN LIQUIDATION (in thousands, except unit data) Limited Partnership General Limited Total Units Partners' Partners' Capital Original capital contributions 36,932 $ -- $36,932 $ 36,932 Partners' (deficit) capital at December 31, 1994 36,932 $(1,171) $20,669 $19,498 Net income for the year ended December 31, 1995 -- 247 3,281 3,528 Distributions -- (110) (1,477) (1,587) Partners' (deficit) capital December 31, 1995 36,932 (1,034) 22,473 21,439 Net income for the year ended December 31, 1996 -- 179 2,414 2,593 Distributions -- (110) (1,477) (1,587) Partners' (deficit) capital at December 31, 1996 36,932 (965) 23,410 22,445 Net income for the year ended December 31, 1997 -- 2,503 18,816 21,319 Distributions -- (1,538) (39,093) (40,631) Partners' capital at December 31, 1997 36,932 $ -- $ 3,133 3,133 Adjustment to liquidation basis (130) Net assets in liquidation at December 31, 1997 $ 3,003 See Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 1997 1996 1995 Cash Flows From Operating Activities: Net income $ 21,319 $ 2,593 $ 3,528 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 604 1,028 838 Equity in unconsolidated joint venture operations (18,440) (1,851) (2,021) Minority interest in joint ventures' operations 76 (35) 28 Deferred income -- -- (40) Deferred costs paid -- -- (775) Gain on sale of investment properties (3,908) -- -- Change in accounts: Accounts receivable and other assets 163 43 (26) Accounts payable, state withholding taxes payable and other liabilities (1) (39) (95) Net cash (used in) provided by operating activities (187) 1,739 1,437 Cash Flows From Investing Activities: Warranty escrow (1,595) -- -- Property improvements and replacements (1,201) (1,245) (1,428) Unconsolidated joint venture distributions 26,207 2,237 2,355 Restricted cash decrease (increase) 268 (79) 146 Net proceeds from sale of investment properties 19,967 -- -- Net cash provided by investing activities 43,646 913 1,073 Cash Flows From Financing Activities: Cash distributions to partners (40,129) (1,587) (1,587) Notes payable principal payments (13) (21) (36) Repayment of notes payable (5,399) -- (2,186) Net cash used in financing activities (45,541) (1,608) (3,809) (Decrease) Increase in Cash and Cash Equivalents (2,082) 1,044 (1,299) Cash and Cash Equivalents at Beginning of Year 4,644 3,600 4,899 Cash and Cash Equivalents at End of Year $ 2,562 $ 4,644 $ 3,600 Supplemental disclosure of cash flow information: Interest paid in cash during the year $ 325 $ 556 $ 813 Supplemental disclosure of non-cash financing activity: Distributions payable $ 502 $ -- $ -- See Notes to Consolidated Financial Statements
GROWTH HOTEL INVESTORS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Growth Hotel Investors, (the "Partnership" or the "Registrant"), is a limited partnership organized in 1984 under the laws of the State of California to acquire, primarily through joint ventures, hold for investment, and ultimately sell limited service hotels which are franchised by Hampton Inns, Inc. ("Hampton"), a wholly owned subsidiary of the Promus Companies, Inc. ("Promus"). The Partnership owned properties in Albuquerque, New Mexico, and Nashville, Tennessee, and has 50 percent joint venture interests in two partnerships which owned properties in Syracuse, New York, and Aurora, Colorado, respectively. The Partnership also has an investment in another joint venture in which the Partnership does not have a controlling interest. The properties owned by this joint venture are located in Alabama, Arkansas, Georgia, Michigan, North Carolina, South Carolina, Tennessee and Texas. The general partner is Montgomery Realty Company-85 ("MRC-85"), a California general partnership. The general partners of MRC-85 are Fox Realty Investors ("FRI"), a California general partnership, and NPI Realty Management Corp. ("NPI Realty"), a Florida corporation. On February 13, 1996, NPI Realty, which acquired its interest in MRC-85 from Montgomery Realty Corporation on November 15, 1995 became the managing general partner of MRC-85. Capital contributions of $36,932,000 ($1,000 per unit) were made by the limited partners. On February 15, 1996, Devon Associates, a New York general partnership, commenced a tender offer (the "Offer") for up to 15,000 of the outstanding Limited Partnership Units ("the Units") at a purchase price of $705.00 per Unit. An affiliate of the Managing General Partner has an interest in Devon Associates. Devon Associates acquired 13,401 Units with respect to this offer. The Partnership sold its investment properties on June 24, 1997 to an unrelated third party, Equity Inns Partnership, L.P., a Tennessee limited partnership. The properties were sold in accordance with the settlement of the class action lawsuit brought in connection with the tender offer made by Devon Associates. As a result of the decision to liquidate the Partnership, the Partnership changed its basis of accounting for its financial statements at December 31, 1997 to the liquidation basis of accounting. Consequently, assets have been valued at their estimated net realizable value and liabilities are presented at their estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon the Managing General Partner's estimates as of the date of the financial statements. The statement of net assets in liquidation as of December 31, 1997, includes approximately $130,000 of accrued costs, net of income, that the Managing General Partner estimates will be incurred during the period of liquidation, based on the assumption that the liquidation process will be completed during 1998. These costs principally include legal and administrative expenses. Because the success in realization of assets and the settlement of liabilities is based on the General Partner's best estimates, the liquidation period may be shorter than projected or it may be extended beyond the projected period. On March 17, 1998, Insignia Financial Group, Inc. ("Insignia") entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. It is anticipated, however, that the Partnership will be liquidated prior to the consummation of the AIMCO transaction. In any event, it is not anticipated that this transaction will have a material effect on the Partnership. Principles of Consolidation The consolidated financial statements include the Partnership and the two joint ventures in which the Partnership has a controlling interest. All significant intercompany transactions and balances have been eliminated. The investment in another joint venture in which the Partnership does not have a controlling interest is accounted for under the equity method of accounting. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Advertising The Partnership expenses the costs of advertising as incurred. Advertising expense, included in operating expenses, was approximately $210,000, $400,000 and $530,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Investment Properties Investment properties are stated at cost. Acquisition fees are capitalized as a cost of real estate. The Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Cash and Cash Equivalents The Partnership considers all highly liquid investments with a maturity, when purchased, of three months or less to be cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Depreciation Depreciation is computed using the straight-line method based on estimated useful lives ranging from 5 to 39 years. Deferred Costs Deferred costs represent the buyout of a services agreement, deferred financing costs and deferred franchise fees. The buyout of the services agreement was being amortized over the remaining term of the services agreement which was 7 years. Financing costs were deferred and amortized, as interest expense, over the lives of the related loans, or expensed, if financing was not obtained. Franchise fees paid in connection with the acquisition of the hotels were deferred and were amortized over the lives of the franchise agreements, which ranged from ten to twenty years. Land lease costs paid in connection with acquisition of certain hotels were deferred and amortized over the lives of the lease agreements. In connection with the sale of properties during 1997 all remaining deferred cost balances were written off. Net Income (Loss) Per Limited Partnership Assignee Unit Net income (loss) per limited partnership assignee unit is computed by dividing net income (loss) allocated to the limited partners by 36,932 assignee units outstanding. Income Taxes Taxable income or loss of the Partnership is reported in the income tax returns of its partners. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Reclassification Certain reclassifications have been made to the 1996 and 1995 balances to conform to the 1997 presentation. NOTE B - SALE OF PROPERTIES On June 24, 1997, the Partnership sold all of its investment properties, consisting of the Hampton Inn-Brentwood, and Hampton Inn-Albuquerque for a sales price of approximately $13,502,000. The Partnership has a controlling interest in two joint venture partnerships, Aurora/GHI Associates No. 1, and North Coast Syracuse Limited Partnership. The Partnership has a non-controlling interest in the joint venture Growth Hotel Investors Combined Fund No. 1. On June 24, 1997, Aurora/GHI Associates No. 1 sold its investment property, Hampton Inn-Aurora for a purchase price of approximately $4,830,000. Additionally, North Coast Syracuse Limited Partnership sold its investment property, Hampton Inn-Syracuse for a sales price of approximately $2,294,000. Finally, on June 24, 1997, Hampton/GHI Associates No. 1 ("Hampton/GHI"), a joint venture in which Growth Hotel Investors Combined Fund No. 1 owns 80% sold 17 of its 18 investment properties, Hampton Inn-Memphis-I-40, Hampton Inn-Columbia West, Hampton Inn-Spartanburg, Hampton Inn-Little Rock, Hampton Inn-Amarillo, Hampton Inn-Greenville, Hampton Inn-Charleston, Hampton Inn-Memphis-Poplar, Hampton Inn-Greensboro, Hampton Inn- Birmingham, Hampton Inn-Atlanta, Hampton Inn-Chapel Hill, Hampton Inn-Dallas, Hampton Inn-Nashville, Hampton Inn-San Antonio, Hampton Inn-Madison Heights, Hampton Inn-Northlake for a purchase price of approximately $107,576,000. The investment properties were sold to an unrelated third party, Equity Inns Partnership, L.P., a Tennessee limited partnership. The properties were sold in accordance with the settlement of the class action lawsuit brought in connection with the tender offer made by Devon Associates. Hampton/GHI's last hotel property, the Hampton Inn-Mountain Brook, was sold on August 1, 1997 for a sales price of $8,758,000. The aggregate sale price for all 22 properties was approximately $136,960,000. The Partnership received net proceeds, after satisfaction of outstanding indebtedness and closing costs, from the sale of its investment properties of approximately $14,411,000. In addition, the Partnership received approximately $26,207,000 from its unconsolidated joint venture in distributions from operations and the sale of its properties. The Partnership made aggregate distributions of $32,720,000 ($885.95 per unit) to its limited partners and approximately $668,000 to the General Partners from these net proceeds in 1997. It is anticipated that the Partnership will be dissolved during 1998 and the remaining proceeds and any funds from operations will be distributed to the partners at that time. In connection with the sale of Hampton/GHI Associates No. 1's properties, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Joint Venture Agreement, Hampton was obligated to contribute to the joint venture an amount equal to the deficit of its tax capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. The joint venture received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. The Partnership recognized a gain of approximately $3,908,000 due to the sale of its investment properties and the properties in which the Partnership had a controlling interest. In addition, the Partnership was allocated a gain of approximately $18,422,000 from its unconsolidated joint venture, Growth Hotel Investors Combined Fund No. 1, from the sale of the joint venture's properties. Pursuant to the terms of the settlement agreement with respect to the class actions brought by limited partners of the Partnership and Growth Hotel Investors II ("GHI II"), an affiliated partnership, against among others, the Partnership, GHI II and their general partners, the Partnership and GHI II were required to pay the plaintiffs' attorneys' fees associated with such actions. As a result, an aggregate of $1,800,000 ($583,000 of which is allocable to the Partnership) was paid in 1997. NOTE C - ADJUSTMENT TO LIQUIDATION BASIS OF ACCOUNTING At December 31, 1997, in accordance with the liquidation basis of accounting, assets were adjusted to their estimated net realizable value and liabilities were adjusted to their estimated settlement amount and include all estimated costs associated with carrying out the liquidation. The net adjustment required to convert to the liquidation basis of accounting was an increase in net liabilities of approximately $130,000 which is included in the Statement of Changes of Partners' Capital (Deficit)/Net Assets in Liquidation. NOTE D - TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the administration of all partnership activities. The Partnership Agreement provides for payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following transactions with affiliates of the Managing General Partner were charged to expense in 1997, 1996, and 1995: 1997 1996 1995 (in thousands) Reimbursement for services of affiliates ( primarily included in general and administrative expenses) $ 150 $ 201 $ 140 In accordance with the partnership agreement, the general partner receives cash distributions as follows: (a) a partnership management incentive not to exceed ten percent, determined on a cumulative, noncompounded basis, of cash from operations available for distribution (as defined in the partnership agreement) distributed to partners, and (b) a continuing interest representing a two percent share of cash distributions, after allocation of the partnership management incentive. A portion of the partnership management incentive is subordinated to certain cash distributions to the limited partners. Cash distributions accrued or paid to the general partner for the years ended December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 (in thousands) Partnership management incentive $ 741 $ 79 $ 79 Continuing interest 129 31 31 Sales proceeds 668 -- -- Total $1,538 $110 $110 NOTE E - RELATED PARTY TRANSACTIONS In addition to the fees paid to the general partner and affiliates as set forth above, the Partnership has agreements with affiliates of its joint venture partners, which provide for the management and operations of the joint venture properties and services provided under each property's franchise agreement. Fees paid pursuant to these agreements are generally based on a percentage of gross revenues from operations of the property and for the years ended December 31, 1997, 1996 and 1995 were approximately $0, $40,000 and $76,000, respectively. NOTE F - DEFERRED COSTS The Partnership paid $775,000 in January 1995 to Metric Management, Inc. ("MMI") amending their services agreement to provide for a reduction in the monthly asset management fee from $29,750 to $5,500. This amendment eliminated fees payable to MMI for its assistance in refinancings and sales of properties owned by the Partnership and provides the Partnership with the ability to terminate MMI's services at will. The cost of the amendment is being amortized over the remaining term of the service agreement of 8 years. For the years ended December 31, 1997, 1996 and 1995, approximately $39,000, $78,000 and $77,000, respectively, was amortized and included in general and administrative expenses. At December 31, 1996, accumulated amortization of the service agreement's deferred costs totaled approximately $155,000. At December 31, 1996, accumulated amortization of the franchise fees deferred costs totaled approximately $30,000. The fully amortized costs were written off during 1996. The remaining deferred costs associated with the MMI agreement were written off in 1997 as a result of the sale of investment properties and the Partnerships adoption of the liquidation basis of accounting. NOTE G - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE On December 9, 1986, the Partnership acquired an ownership interest in Growth Hotel Investors Combined Fund No. 1, a California Limited Partnership, ("Combined Fund"), a joint venture with Growth Hotel Investors II, a California Limited Partnership, ("GHI II") affiliated with the Partnership's general partner. The Partnership's ownership interest in the Combined Fund is approximately 32 percent. The Combined Fund acquired an 80% interest in a separate joint venture, Hampton/GHI Associates No. 1, which was formed to acquire and has acquired eighteen Hampton Inn hotels. Hampton Inns owns a 20% subordinated interest. The Partnership's interest in the Combined Fund has been reported under the equity method of accounting. As noted in Note B, the joint venture sold the eighteen Hampton inn Hotels in 1997. As a result of this sale, the joint venture has distributed the majority of its funds as of December 31, 1997. It is anticipated that any remaining funds will be distributed during 1998. At December 31, 1997 the Combined Fund had assets of $153,000 and liabilities and estimated costs of liquidation of $221,000 resulting in net liabilities in liquidation of $68,000. Summary financial information for Growth Hotel Investors Combined Fund No. 1 Joint Venture is as follows (in thousands): December 31, 1996 Total assets $ 62,199 Total liabilities (37,081) Total ventures' equity $ 25,118 December 31, 1997 1996 1995 Total revenues $ 76,664 $ 38,327 $ 37,156 Total expenses (16,954) (32,858) (30,710) Minority interest 455 393 (76) Net income $ 60,165 $ 5,862 $ 6,370 Allocation of income: GHI $ 18,440 $ 1,851 $ 2,021 GHI II 41,725 4,011 4,349 Net income $ 60,165 $ 5,862 $ 6,370 In 1997, 1996 and 1995 the Partnership received distributions of approximately $26,207,000, $2,237,000 and $2,355,000, respectively, from the Joint Venture. NOTE H - RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING The differences between the method of accounting for income tax reporting and the accrual method of accounting used in the consolidated financial statements are as follows:
1997 1996 1995 (in thousands, except unit data) Net income - financial statements $21,319 $ 2,593 $ 3,528 Differences resulted from: Deferred costs -- -- (775) Depreciation and amortization 333 (120) (141) Equity in unconsolidated joint venture operations 955 (180) (200) Minority interest (2,282) 21 8 Gain on sale and other 3,366 15 30 Net income - income tax method $23,691 $ 2,329 $ 2,450 Taxable income per limited partnership Assignee unit after giving effect to the Allocation to the general partner $ 585 $ 59 $ 62 Partner's capital-financial statements $ -- $22,445 $21,439 Net assets in liquidation, as reported 3,003 Differences resulted from: Deferred sales commissions and organization costs 4,946 4,946 4,946 Commission reduction reimbursed to investors 43 43 43 Depreciation and amortization -- (1,744) (1,624) Deferred costs -- (775) (775) Equity in unconsolidated joint venture operations -- (1,019) (839) Minority interest -- 1,455 1,434 Other 620 (295) (310) Partners' capital-income tax method $ 8,612 $25,056 $24,314
NOTE I - COMMITMENT AND CONTINGENCIES In connection with the sale of the properties owned by Hampton/GHI Associates No. 1 and the liquidation of the joint venture, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Joint Venture Agreement, Hampton was obligated to contribute to the joint venture an amount equal to the deficit of its tax capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. The Joint Venture received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. The classification of the funds received from Hampton is not clearly defined in the partnership agreement. If the funds are classified as funds from operations, the General Partner would be due a partnership management incentive on the distribution of these funds in the amount of approximately $1,004,000. The General Partner has agreed to take 50% of such allocation or $502,000, which has been accrued at December 31, 1997. The Partnership holds a warranty reserve escrow account in the amount of approximately $1,595,000. This escrow must be held for the period of one year from the closing date of the sale of the investment properties. If the purchaser has not notified the Partnership of any amounts owed to it, the Partnership will distribute such funds to its partners. At March 30, 1998, no notification had been given from the purchaser that any amounts were due the purchaser under the agreement. NOTE J - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION Reconciliation of Investment Properties and Accumulated Depreciation: Years Ended December 31, 1997 1996 1995 (in thousands) Balance at beginning of year $ 24,577 $23,332 $ 21,904 Property improvements 1,201 1,245 1,428 Retirement of assets (25,778) -- -- Balance at end of year $ -- $24,577 $ 23,332 Accumulated Depreciation Balance at beginning of year $ 9,675 $ 8,734 $ 7,984 Additions charged to expense 561 941 750 Retirement of assets (10,236) -- -- Balance at end of year $ -- $ 9,675 $ 8,734 The aggregate cost of the real estate for Federal income tax purposes at December 31, 1996 and 1995, respectively is approximately $23,742,000 and $22,482,000. The accumulated depreciation taken for Federal income tax purposes at December 31, 1996, and 1995, respectively is approximately $11,316,000 and $10,165,000. NOTE K - OPTION TO ACQUIRE JOINT VENTURE PARTNER'S INTEREST On October 2, 1995, the Registrant was granted the option to acquire its joint venture partner's interest in Aurora/GHI Associates No. 1, the joint venture which owns the Hampton Inn-Aurora for $150,000. The Registrant acquired such interest in April 1997. NOTE L - TENDER OFFERS On February 15, 1996, Devon Associates ("Devon") offered to purchase up to 21,000 and 15,000 limited partnership outstanding units (the "Units") of GHI II, and the Partnership, respectively. Devon Associates acquired 17,302 and 13,401 units, with respect to these offers, respectively. The offer for the Partnerships Units was at a purchase price of $750 and $705, respectively, per unit, net to the seller in cash, without interest, upon the terms and conditions set forth in the offer to purchase. Certain beneficial owners of Devon are affiliated with the general partners of GHI II and the Partnership. In addition, an affiliate of Insignia is both a shareholder in the general partner of Cayuga Associates, LP, the controlling general partner in Devon, and a limited partner in Devon. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Neither the Registrant nor Montgomery Realty Company-85 ("MRC"), the general partner of the Registrant has any officers or directors. NPI Realty Management Corp. ("NPI Realty"), the managing general partner of MRC, manages and controls substantially all of the Registrant's affairs and has general responsibility and ultimate authority in all matters affecting its business. NPI Realty is a wholly owned subsidiary of National Property Investors, Inc. ("NPI, Inc."), which in turn is wholly owned by Insignia. The names and positions held by the officers and directors of NPI Realty are as follows: Name Age Position William H. Jarrard, Jr. 51 President and Director Ronald Uretta 41 Vice President and Treasurer Daniel M. LeBey 32 Vice President and Secretary Robert D. Long, Jr. 30 Vice President Kelley M. Buechler 40 Assistant Secretary Martha L. Long 38 Controller William H. Jarrard, Jr. has been President and Director of NPI Realty since January 1996. He has acted as Senior vice President of Insignia Properties Trust ("IPT"), parent of the General Partner since May 1997. Mr. Jarrard previously acted as Managing Director - Partnership Administration of Insignia from January 1991 through September 1997 and served as Managing Director - Partnership Administration and Asset Management from July 1994 until January 1996. Ronald Uretta has been Vice President and Treasurer of NPI Realty since January 1996 and Insignia's Treasurer since January 1992. Since August 1996, he has also served as Insignia's Chief Operating Officer. He has also served as Insignia's Secretary from January 1992 to June 1996 and as Insignia's Chief Financial Officer from January 1992 to August 1996. Daniel M. LeBey has been Vice President and Secretary of NPI Realty since January 29, 1998 and Insignia's Assistant Secretary since April 30, 1997. Since July 1996 he has also served as Insignia's Associate General Counsel. From September 1992 until June 1996, Mr. LeBey was an attorney with the law firm of Alston & Bird LLP, Atlanta, Georgia. Robert D. Long, Jr. has been Vice President of NPI Realty since January 2, 1998. Mr. Long joined Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of Insignia, in September 1993. Since 1994 he has acted as Vice President and Chief Accounting Officer of the MAE subsidiaries. Mr. Long was an accountant for Insignia until joining MAE in 1993. Prior to joining Insignia, Mr. Long was an auditor for the State of Tennessee and was associated with the accounting firm of Harsman Lewis and Associates. Kelley M. Buechler has been Assistant Secretary of NPI Realty since January 1996, and Assistant Secretary of Insignia since 1991. Martha L. Long has been Controller of NPI Realty since December 1996 and Senior Vice President - Finance and Controller of Insignia since January 1997. In June 1994, Ms. Long joined Insignia as its Controller, and was promoted to Senior Vice President - Finance in January 1997. Prior to that time, she was Senior Vice President and Controller of the First Savings Bank, in Greenville, SC. There are no family relationships between or among any officers and directors. ITEM 11. EXECUTIVE COMPENSATION: The Registrant is not required to and did not pay any compensation to the officers or directors of NPI Realty or NPI Equity Investments II, Inc., the managing general partner of Fox Realty Investors, a general partner of MRC. NPI Realty does not presently pay any compensation to any of its officers or directors. (See Item 13, "Certain Relationships and Related Transactions"). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The following table sets forth certain information regarding limited partnership units of the Registrant owned by each person who is known by the Registrant to own beneficially or exercise voting or dispositive control over more than 5% of the Registrant's limited partnership units, by each of the directors and by all directors and executive officers of the Managing General Partner as a group as of March 1, 1998. Name and address of Amount and nature of Beneficial Owner Beneficial Owner % of Class Devon Associates (1) (2) 13,401 36.29% All directors and executive officers as a group (four persons) ______________________ (1) The business address for Devon Associates is 100 Jericho Quadrangle, Suite 214, Jericho, New York 11753. (2) Based upon information supplied to the Registrant by Devon Associates. The Registrant is a limited partnership and has no officers or directors. The Managing General Partner has discretionary control over most of the decisions made by or for the Registrant in accordance with the terms of the Partnership Agreement. Affiliates of the Managing General Partner own less than one percent of the Registrant's voting securities. However, an affiliate of the Managing General Partner holds an interest in Devon Associates. There are no arrangements known to the Registrant, the operation of which may, at a subsequent date, result in a change in control of the Registrant except as follows. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. It is anticipated, however, that the Partnership will be liquidated prior to the consummation of the AIMCO transaction. In any event, it is not anticipated that this transaction will have a material effect on the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the administration of all partnership activities. The Partnership Agreement provides for payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The general partner of the Partnership is MRC-85. The general partners of MRC- 85 are FRI, and NPI Realty. On February 13, 1996, NPI Realty, which acquired its interest in MRC-85 from Montgomery Realty Corporation on November 15, 1995, became the managing general partner of MRC-85. On January 19, 1996, all of the issued and outstanding shares of stock of National Property Investors, Inc. ("NPI"), the sole shareholder of both NPI Equity Investments II, Inc. ("NPI Equity"), the managing general partner of FRI, and NPI Realty was acquired by an affiliate of Insignia Financial Group, Inc. ("Insignia"). In connection with these transactions, affiliates of Insignia appointed new officers and directors of NPI Equity and NPI Realty. The following transactions with affiliates of the Managing General Partner were charged to expense in 1997, 1996, and 1995: 1997 1996 1995 (in thousands) Reimbursement for services of affiliates $ 150 $ 201 $ 140 In accordance with the partnership agreement, the general partner receives cash distributions as follows: (a) a partnership management incentive not to exceed ten percent, determined on a cumulative, noncompounded basis, of cash from operations available for distribution (as defined in the partnership agreement) distributed to partners, and (b) a continuing interest representing a two percent share of cash distributions, after allocation of the partnership management incentive. A portion of the partnership management incentive is subordinated to certain cash distributions to the limited partners. Cash distributions to the general partner for the years ended December 31, 1997, 1996 and 1995 are as follows: 1997 1996 1995 (in thousands) Partnership management incentive $ 741 $ 79 $ 79 Continuing interest 129 31 31 Sales proceeds 668 -- -- Total $1,538 $110 $110 In addition to the fees paid to the general partner and affiliates as set forth above, the Partnership has agreements with affiliates of its joint venture partners, which provide for the management and operations of the joint venture properties and services provided under each property's franchise agreement. Fees paid pursuant to these agreements are generally based on a percentage of gross revenues from operations of the property and for the years ended December 31, 1997, 1996 and 1995 were $0, $40,000 and $76,000, respectively. As required by the settlement of the class action brought in connection with the tender offer made by Devon Associates discussed above, the Partnership and GHI II, the Partnership's joint venture partner in the Combined Fund properties, marketed all of their properties for sale. In this regard, the Partnership and GHI II retained Bear, Stearns & Co. Inc. to assist in the marketing of such properties. On June 24, 1997, the Partnership sold all of its investment properties, consisting of the Hampton Inn-Brentwood, and Hampton Inn-Albuquerque for a sales price of approximately $13,502,000. The Partnership has a controlling interest in two joint venture partnerships, Aurora/GHI Associates No. 1, and North Coast Syracuse Limited Partnership. The Partnership has a non- controlling interest in the joint venture Growth Hotel Investors Combined Fund No. 1. On June 24, 1997, Aurora/GHI Associates No. 1 sold its investment property, Hampton Inn-Aurora for a purchase price of approximately $4,830,000. Additionally, North Coast Syracuse Limited Partnership sold its investment property, Hampton Inn-Syracuse for a sales price of approximately $2,294,000. Finally, on June 24, 1997, Hampton/GHI Associates No. 1 ("Hampton/GHI"), a joint venture in which Growth Hotel Investors Combined Fund No. 1 owns 80% sold 17 of its 18 investment properties, Hampton Inn-Memphis-I-40, Hampton Inn-Columbia West, Hampton Inn-Spartanburg, Hampton Inn-Little Rock, Hampton Inn-Amarillo, Hampton Inn-Greenville, Hampton Inn-Charleston, Hampton Inn-Memphis-Poplar, Hampton Inn-Greensboro, Hampton Inn-Birmingham, Hampton Inn-Atlanta, Hampton Inn-Chapel Hill, Hampton Inn-Dallas, Hampton Inn-Nashville, Hampton Inn-San Antonio, Hampton Inn-Madison Heights, Hampton Inn-Northlake for a purchase price of approximately $107,576,000. The investment properties were sold to an unrelated third party, Equity Inns Partnership, L.P., a Tennessee limited partnership. The properties were sold in accordance with the settlement of the class action lawsuit brought in connection with the tender offer made by Devon Associates (discussed in Item 3 of the Partnership's Annual Report on Form 10-K for the period ending December 31, 1996). Hampton/GHI's last hotel property, the Hampton Inn-Mountain Brook, was sold on August 1, 1997 for a sales price of $8,758,000. The aggregate sale price for all 22 properties was approximately $136,960,000. The Partnership received net proceeds, after satisfaction of outstanding indebtedness and closing costs, from the sale of its investment properties of approximately $14,411,000. In addition, the Partnership received approximately $26,207,000 from its unconsolidated joint venture in distributions from operations and the sale of its properties. The Partnership made aggregate distributions of $32,720,000 ($885.95 per unit) to its limited partners and approximately $668,000 to the General Partners from these net proceeds in 1997. It is anticipated that the Partnership will be dissolved during 1998 and the remaining proceeds, after establishment of sufficient reserves, will be distributed to the partners. In connection with the sale of Hampton/GHI of its properties, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Hampton/GHI Joint Venture Agreement, Hampton was obligated to contribute to Hampton/GHI an amount equal to the deficit of its capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. Hampton/GHI received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. It is expected that this amount, after establishment of reserves, will be distributed by the Partnership prior to year end, at which time the Partnership will be dissolved. Pursuant to the terms of the settlement agreement with respect to the class actions brought by limited partners of the Partnership and Growth Hotel Investors II ("GHI II"), an affiliated partnership, against among others, the Partnership, GHI II and their general partners, the Partnership and GHI II were required to pay the plaintiffs' attorneys' fees associated with such actions. As a result, an aggregate of $1,800,000 ($583,000 of which is allocable to the Partnership) was paid in 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a) (3) Exhibits (a)(1)(2) Financial Statements and Financial Statement Schedules See Item 8 of this Form 10-K for Consolidated Financial Statements for the Registrant, Notes thereto, and Financial Statement Schedules. (A table of contents to Consolidated Financial Statements and Financial Statement Schedules is included in Item 8 and incorporated herein by reference.) 2. NPI, Inc. Stock Purchase Agreement, dated as of August 17, 1995, incorporated by reference to the Registrant's Current Report on Form 8-K dated August 17, 1995. 3.4. Agreement of Limited Partnership, incorporated by reference to Exhibit A to the Prospectus of the Registrant dated October 10, 1986, and thereafter supplemented, included in the Registrant's Registration Statement on Form S-11 (Reg. No. 33-4566). 16. Letter dated April 27, 1994, from the Registrant's Former Independent Auditors incorporated by reference to the Registrant's Current Report on Form 8-K dated April 22, 1994. 20 Letter, dated February 29, 1996, from the Registrant to its limited partners, incorporated by reference to the Schedule 14D-9 of Registrant filed with the Commission on February 29, 1996. 27 Financial Data Schedule 99(a) Schedule 14D-9 of the Registrant, as filed with the Commission on February 29, 1996. 99(b) Amendment No. 1 to Schedule 14D-9 of Registrant, as filed with the Commission on March 7, 1996. 99(c) Amendment No. 2 to Schedule 14D-9 of Registrant, as filed with the Commission on March 14, 1996. 99(d) Letter Agreement, dated November 15, 1995, between Montgomery Realty Corporation, Fox Realty Investors, NPI Equity Investments II, Inc., and NPI Realty Management Corp. incorporated by reference to the Schedule 14D-9 of Registrant filed with the Commission on February 29, 1996. 99(e) Second Amended and Restated Partnership Agreement of Montgomery Realty Company 85, made and entered into to be effective as of November 15, 1995, by and between NPI Realty Management Corp. and Fox Realty Investors incorporated by reference to the Schedule 14D-9 of Registrant filed with the Commission on February 29, 1996. 99(f) Third Amended and Restated General Partnership Agreement of Montgomery Realty Company-85, effective as of February 13, 1996, by and between NPI Realty Management Corp. and Fox Realty Investors incorporated by reference to the Schedule 14D-9 of Registrant filed with the Commission on February 29, 1996. 99(g) Growth Hotel Investors Combined Fund No. 1, a California Limited Partnership, audited financial statements for the years ended December 31, 1997 and 1996. (b) No reports on Form 8-K were filed during the last quarter covered by this Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized this 26th of March 1997. GROWTH HOTEL INVESTORS By: MONTGOMERY REALTY COMPANY-85 Its General Partner By: NPI Realty Management Corp., Its Managing General Partner By: /s/ William H. Jarrard, Jr. William H. Jarrard, Jr. President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature/Name Title Date /s/ William H. Jarrard, Jr. President and May 12, 1998 William H. Jarrard, Jr. Director /s/ Ronald Uretta Principal Financial May 12, 1998 Ronald Uretta Officer and Principal Accounting Officer EX-27 2
5 This schedule contains summary financial information extracted from Growth Hotel Investors 1997 Year-End 10-K and is qualified in its entirety by reference to such 10-K filing. 0000769129 GROWTH HOTEL INVESTORS 1,000 12-MOS DEC-31-1997 DEC-31-1997 2,562 0 0 0 0 0 0 0 4,157 0 0 0 0 0 3,003 4,157 0 26,192 0 0 4,797 0 280 0 0 0 0 0 0 21,319 509.48 0 Registrant has an unclassified balance sheet. Multiplier is 1.
EX-99 3 EXHIBIT 99(g) GROWTH HOTEL INVESTORS COMBINED FUND NO 1. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, 1996 and 1995 GROWTH HOTEL INVESTORS COMBINED FUND NO 1. December 31, 1997 LIST OF CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report Statement of Net Liabilities in Liquidation - December 31, 1997 Consolidated Balance Sheet - December 31, 1996 Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Partners' Capital (Deficit)/Net Liabilities in Liquidation - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS COMBINED FUND NO. 1. To the Partners Growth Hotel Investors Combined Fund No. 1, Greenville, South Carolina Independent Auditors' Report We have audited the accompanying consolidated statement of net liabilities in liquidation and the consolidated balance sheet of Growth Hotel Investors Combined Fund No. 1 (the "Partnership"), as of December 31, 1997 and 1996, respectively, and the related consolidated statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Growth Hotel Investors Combined Fund No. 1, as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Imowitz Koenig & Co., LLP Certified Public Accountants New York, N.Y. March 30, 1998 GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 STATEMENT OF NET LIABILITIES IN LIQUIDATION (in thousands) December 31, 1997 Assets Cash and cash equivalents $ 153 Liabilities Accounts payable 195 Estimated costs during the period of liquidation 26 221 Net Liabilities in liquidation $ (68) See Accompanying Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 CONSOLIDATED BALANCE SHEET (in thousands) YEAR ENDED DECEMBER 31, 1996 Assets Cash and cash equivalents $ 2,228 Restricted cash 3 Deferred costs and other assets 1,108 Investment properties Land 10,369 Buildings and related personal property 79,891 90,260 Less accumulated depreciation (31,400) 58,860 Total assets $ 62,199 Liabilities and Partners' Equity Accounts payable and other liabilities $ 1,337 Due to an affiliate of the joint venture partner 827 Notes payable 40,185 Total liabilities 42,349 Minority interest in consolidated joint venture (5,268) Partners' Equity: GHI 7,767 GHI II 17,351 Total partners' equity 25,118 Total liabilities and partners' equity $ 62,199 See Accompanying Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) YEARS ENDED DECEMBER 31, 1997 1996 1995 Revenues: Hotel operations $ 18,222 $ 38,154 $ 36,934 Gain on sale of investment properties 58,044 -- -- Interest income 398 173 222 Total revenues 76,664 38,327 37,156 Expenses (including $2,714, $5,602 and $5,545 paid to an affiliate of the joint venture partner in 1997, 1996, and 1995) Hotel operations 12,515 24,274 22,811 Interest 1,926 4,227 4,139 Depreciation 2,283 4,088 3,751 General and administrative 230 269 9 Total expenses 16,954 32,858 30,710 Income before minority interest in joint venture's operations 59,710 5,469 6,446 Minority interest in joint venture's operations 455 393 (76) Net income $ 60,165 $ 5,862 $ 6,370 See Accompanying Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)/NET LIABILITIES IN LIQUIDATION (in thousands) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Growth Growth Hotel Hotel Investors Investors II Total Balance - December 31, 1994 $ 8,487 $ 18,872 $ 27,359 Net income 2,021 4,349 6,370 Cash distributions (2,355) (5,067) (7,422) Balance - December 31, 1995 8,153 18,154 26,307 Net income 1,851 4,011 5,862 Cash distributions (2,237) (4,814) (7,051) Balance - December 31, 1996 7,767 17,351 25,118 Net income 18,440 41,725 60,165 Cash distributions (26,207) (59,154) (85,361) Balance - December 31, 1997 $ -- $ (78) (78) Adjustment to liquidation basis 10 Net liabilities in liquidation $ (68) See Accompanying Notes to Consolidated Financial Statements GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1997 1996 1995 Cash flows from operating activities: Net income $ 60,165 $ 5,862 $ 6,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,297 4,201 3,916 Minority interest in joint venture's operations (455) (393) 76 Gain on sale of investment properties (58,044) -- -- Change in operating assets and liabilities: Deferred costs and other assets 482 (122) (20) Accounts payable, other liabilities and due to an affiliate of the joint venture partner (736) (144) 412 Net cash provided by operating activities 3,709 9,404 10,754 Cash flows from investing activities: Net proceeds from sale of investment properties 114,230 -- -- Additions to real estate (2,721) (2,860) (3,154) Restricted cash decrease 3 567 1,418 Net cash provided by (used in) investing activities 111,512 (2,293) (1,736) Cash flows from financing activities: Notes payable principal payments (273) (651) (525) Due to affiliate (818) -- -- Repayment of notes payable (39,911) -- -- Joint venture partner contributions (distributions) 9,067 (838) (367) Cash distributions to partners (85,361) (7,051) (7,422) Net cash used in financing activities (117,296) (8,540) (8,314) (Decrease) Increase in Cash and Cash Equivalents (2,075) (1,429) 704 Cash and cash equivalents at beginning of year 2,228 3,657 2,953 Cash and cash equivalents at end of year $ 153 $ 2,228 $ 3,657 Supplemental disclosure of cash flow information: Interest paid in cash during the year $ 1,926 $ 4,218 $ 3,716 See Accompanying Notes to Consolidated Financial Statements
GROWTH HOTEL INVESTORS COMBINED FUND NO. 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Growth Hotel Investors, Combined Fund No. 1, (the "Partnership"), is a general partnership organized in 1986 under the laws of the State of California to acquire a majority interest in a joint venture, Hampton/GHI Associates No. 1, which was formed to acquire, manage and ultimately sell eighteen hotels which were franchised by Hampton Inns, Inc. ("Hampton"), a wholly owned subsidiary of Promus Hotels, Inc. ("Promus"). The properties owned by the joint venture were located in Alabama, Arkansas, Georgia, Michigan, North Carolina, South Carolina, Tennessee and Texas. The general partners are Growth Hotel Investors ("GHI") and Growth Hotel Investors II ("GHI II"); both are California limited partnerships which are affiliated through their general partners. On March 17, 1998, Insignia Financial Group, Inc. ("Insignia") entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partners of the Partnership. It is anticipated, however, that the Partnership will be liquidated prior to the consummation of the AIMCO transaction. In any event, it is not anticipated that this transaction will have a material effect on the Partnership. Cash is distributed first to the Partnership as a priority return on its invested capital prior to any distributions to Hampton. Income before depreciation and amortization is allocated between the Partnership and Hampton in the same ratio as their respective cash distributions. Depreciation and amortization are allocated on the basis of residual interests except for the expenses related to acquisition and loan fees paid by the Partnership which are allocated 100 percent to the Partnership. The residual interests in Hampton/GHI Associates No. 1 are 80 percent for the Partnership and 20 percent for Hampton. Except for Mountain Brook, all of the Partnership's properties were sold on June 24, 1997 to an unrelated third party, Equity Inns Partnership LP ("Equity Inns"), a Tennessee Limited Partnership. Mountain Brook was sold on August 1, 1997 to Equity Inns. As a result of the decision to liquidate the Partnership, the Partnership changed its basis of accounting for its financial statements at December 31, 1997 to the liquidation basis of accounting. Consequently, assets have been valued at their estimated net realizable value and liabilities are presented at their estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon the Managing General Partner's estimates as of the date of the financial statements. The statement of net liabilities in liquidation as of December 31, 1997, includes approximately $26,000 of costs, net of income, that the Managing General Partner estimates will be incurred during the period of liquidation, based on the assumption that the liquidation process will be completed in 1998. These costs include anticipated legal fees and administrative expenses, net of estimated interest income from cash balances. Because the realization of assets and the settlement of liabilities is based on the Managing General Partner's best estimates, the liquidation period may be shorter than projected or it may be extended beyond the projected period. Principles of Consolidation The consolidated financial statements include the accounts of the Partnership and its majority owned joint venture. All significant intercompany transactions and balances have been eliminated. Losses in excess of capital contributions were allocated to the minority interest. Pursuant to the terms of the Hampton/GHI Joint Venture Agreement, Hampton was obligated to contribute to Hampton/GHI an amount equal to the deficit of its tax capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. Hampton/GHI received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Advertising The Partnership expenses the costs of advertising as incurred. Advertising expense, included in operating expenses, was approximately $983,111, $1,995,000 and $1,911,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Investment Properties Investment properties are stated at cost. Acquisition fees are capitalized as a cost of real estate. The Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Cash and Cash Equivalents The Partnership considers all highly liquid investments with a maturity, when purchased, of three months or less to be cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Depreciation Depreciation is computed using the straight-line method based on estimated useful lives ranging from 5 to 39 years. Deferred Costs Deferred costs represent financing costs, franchise fees and land lease cost. Financing costs were deferred and amortized, as interest expense, over the life of the related loans, which ranged from eight to ten years, or expensed, if financing was not obtained. Franchise fees paid in connection with the acquisition of the hotels were deferred and amortized over the lives of the franchise agreements, which were twenty years. Land lease costs paid in connection with the acquisition of certain hotels were deferred and amortized over the lives of the lease agreements, which were twenty years. At December 31, 1996, accumulated amortization of deferred costs totaled $350,000. The fully amortized costs were written off during 1996. Net deferred costs of $403,000 for 1996, are included in deferred costs and other assets. In connection with the sale of properties during 1997, all remaining deferred cost balances were written off. Net Income Allocation Net income is allocated between GHI and GHI II based on the ratio of each partner's capital contribution to the Partnership. Income Taxes Taxable income or loss of the Partnership is reported in the income tax returns of its partners. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Reclassifications: Certain reclassifications have been made to the 1996 and 1995 balances to conform to the 1997 presentation. NOTE B - RELATED PARTY TRANSACTIONS The Partnership has agreements with an affiliate of its joint venture partner, which provide for the management and operation of the joint venture properties and services provided under each property's franchise agreement. Fees paid pursuant to these agreements are generally based on a percentage of gross revenues from operations of the property and were $2,714,000, $5,602,000 and $5,545,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE C - RESTRICTED CASH Restricted cash at December 31, 1996, represents funds provided for and maintained by certain properties, pursuant to the related notes payable agreements, to meet future capital requirements and debt service payments. NOTE D - NOTES PAYABLE Properties and improvements were pledged as collateral for the related notes payable. The notes carried interest at rates ranging from 7.63 percent to 10 percent. The mortgages encumbered sixteen of the eighteen hotels that were owned by the joint venture and were cross collateralized. Amortization of deferred financing costs totaled $103,000 for the year ended December 31, 1996, and $124,000 for the year ended December 31, 1995. The notes were payable monthly and matured beginning in July 1997, through August 1997. The mortgages encumbering the Partnership's Hampton Inn-Mountain Brook and Hampton Inn-Northlake properties in the amounts of approximately $2,543,000 and $2,366,000, respectively, matured on August 1, 1996. The Managing General Partner obtained an extension for these loans until August 1, 1997. The mortgage encumbering the remaining properties in the Combined Fund in the amount of approximately $35,276,000 matured on December 1, 1996. The Managing General Partner obtained an extension for these loans until July 1, 1997. Upon the sale of the investment properties, as discussed in Note E, the mortgages were paid off. NOTE E - SALE OF PROPERTIES On June 24, 1997, the Partnership sold 17 of its 18 investment properties, Hampton Inn-Memphis-I-40, Hampton Inn-Columbia West, Hampton Inn-Spartanburg, Hampton Inn-Little Rock, Hampton Inn-Amarillo, Hampton Inn-Greenville, Hampton Inn-Charleston, Hampton Inn-Memphis-Poplar, Hampton Inn-Greensboro, Hampton Inn- Birmingham, Hampton Inn-Atlanta, Hampton Inn-Chapel Hill, Hampton Inn-Dallas, Hampton Inn-Nashville, Hampton Inn-San Antonio, Hampton Inn-Madison Heights, Hampton Inn-Northlake for a purchase price of approximately $107,576,000. The investment properties were sold to an unrelated third party, Equity Inns Partnership, L.P., a Tennessee limited partnership. The properties were sold in accordance with the settlement of the class action lawsuit brought in connection with the tender offer made by Devon Associates (see Note H - Tender Offers). The Partnership's final property, the Hampton Inn-Mountain Brook, was sold on August 1, 1997 for a sales price of $8,758,000. The aggregate sale price for all the properties was approximately $116,334,000. The Partnership received net proceeds, after satisfaction of outstanding indebtedness and closing costs, from the sale of its investment properties of approximately $74,312,000. The Partnership made distributions of approximately $85,361,000 to its partners from proceeds of the sale and operations. It is anticipated that the Partnership will be dissolved during 1998 and the remaining funds will be distributed to the partners. In connection with the sale of the Partnership's properties, the Partnership's joint venture partner, Hampton Inns, Inc. ("Hampton"), was to be distributed a portion of the net sale proceeds. However, pursuant to the terms of the Hampton/GHI Joint Venture Agreement, Hampton was obligated to contribute to Hampton/GHI an amount equal to the deficit of its tax capital account, which amount was in excess of the amount to be distributed to Hampton. As a result, the Partnership set aside as a reserve the amount which otherwise would have been distributed to Hampton. Hampton/GHI received such payment from Hampton for its deficit restoration obligation on November 5, 1997 in the amount of approximately $9,067,000. The Partnership recognized a gain of approximately $58,044,000 due to the sale of the properties in which the Partnership had a controlling interest. NOTE F - ADJUSTMENT TO LIQUIDATION BASIS OF ACCOUNTING At December 31, 1997, in accordance with the liquidation basis of accounting, assets were adjusted to their estimated net realizable value and liabilities were adjusted to their estimated settlement amount and include all estimated costs associated with carrying out the liquidation. The net adjustment required to convert to the liquidation basis of accounting was a decrease in net liabilities of approximately $10,000. The adjustments are summarized as follows: (Increase) Decrease in Net Liabilities (in thousands) Adjustment to record estimated costs associated with the liquidation (Note A) $ (26) Adjustment of other assets and liabilities 36 Net decrease in net liabilities $ 10 Reconciliation of Investment Properties and Accumulated Depreciation: Year Ended December 31, 1997 1996 1995 Investment Properties (in thousands) Balance at beginning of year $ 90,260 $ 87,400 $ 94,793 Property improvements 2,721 2,860 3,154 Sale of investment properties (92,981) -- -- Retirement of assets -- -- (10,547) Balance at end of year $ -- $ 90,260 $ 87,400 Accumulated Depreciation Balance at beginning of year $ 31,400 $ 27,313 $ 34,108 Additions charged to expense 2,283 4,087 3,752 Sale of investment properties (33,683) -- -- Retirement of assets $ -- -- (10,547) Balance at end of year $ -- $ 31,400 $ 27,313 The aggregate cost of the real estate for Federal income tax purposed at December 31, 1996 and 1995, respectively is approximately $100,824,000 and $97,964,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1996 and 1995, is approximately $47,821,000 and $43,650,000, respectively. NOTE H - TENDER OFFERS On February 15, 1996, Devon Associates ("Devon") offered to purchase up to 21,000 and 15,000 limited partnership outstanding units (the "Units") of GHI II, and GHI, respectively. Devon Associates acquired 17,302 and 13,401 units, with respect to these offers, respectively. The offer for the partnerships Units was at a purchase price of $750 and $705, respectively, per unit, net to the seller in cash, without interest, upon the terms and conditions set forth in the offer to purchase. Certain beneficial owners of Devon are affiliated with the general partners of GHI II and GHI. In addition, an affiliate of Insignia is both a shareholder in the general partner of Cayuga Associates, LP, the controlling general partner in Devon, and a limited partner in Devon. -----END PRIVACY-ENHANCED MESSAGE-----