Item 1. BUSINESS
General Development of Business
Super 8 Motels III, Ltd. (the "Partnership") is a limited partnership which was organized under the Uniform Limited Partnership Act of the State of California on June 2, 1980.
The General Partner of the Partnership is Grotewohl Management Services, Inc., a California corporation which is 50% owned by Philip B. Grotewohl.
Through two public offerings of units of limited partnership interest in the Partnership (the "Units"), the Partnership sold 5,941 Units at a price of $1,000 per Unit.
The net proceeds of the offerings have been expended for the acquisition in fee and development of properties located in San Bernardino, California and Bakersfield, California. Motel operations commenced on March 6, 1982 at the San Bernardino property, and on September 20, 1982 at the Bakersfield property. Narrative Description of Business
(a) Franchise Agreements
The Partnership operates each of its motel properties as a franchisee of Super 8 Motels, Inc. through sub-franchises obtained from Super 8 Management Corporation. In March 1988, Brown & Grotewohl, a California general partnership which is an affiliate of the General Partner (the "Manager"), became sub-franchisor in the stead of Super 8 Management Corporation. As of December 31, 1995, Super 8 Motels, Inc. had franchised a total of 1,480 motels having an aggregate of 89,678 guest rooms in operation.
The objective of the Super 8 Motel chain is to maintain a competitive position in the motel industry by offering to the public comfortable, no-frills accommodations at a budget price. Each Super 8 Motel provides its guests with attractively decorated rooms, free color television, direct dial telephone and other basic amenities, but eliminates or modifies other items to provide substantial cost reduction without seriously affecting comfort or convenience. Some of these savings are accomplished by reductions in room size, elimination of expensive lobbies, and by substantial economies in building construction.
By the terms of each franchise agreement with Super 8 Motels, Inc., the Partnership pays monthly franchise fees equal to 4% of its gross room revenues (half of which is paid to the sub-franchisor) and contributes an additional 1% of its gross room revenues to a fund administered by Super 8 Motels, Inc. to finance the national reservation and promotions program.
(b) Operation of the Motels
The Manager manages and operates the Partnership's motels. The Manager's responsibilities include, but are not limited to, supervision and direction of the Partnership's employees having direct responsibility for the operation of each motel, establishment of room rates and direction of the promotional activities of the Partnership's employees. In addition, the Manager directs the purchase of replacement equipment and supplies, maintenance activity and the engagement or selection of all vendors, suppliers and independent contractors. The Partnership's financial activities are performed by the individual motel staffs and a centralized accounting staff, all of which work under the direction of the Manager. Together, these staffs perform all bookkeeping duties in connection with each motel, including all collections and all disbursements to be paid out of funds generated by motel operations or otherwise supplied by the Partnership.
As of December 31, 1996, the Partnership employed a total of 31 persons, either full or part-time at its two motel properties, including nine desk clerks, 17 housekeeping and laundry personnel, three maintenance personnel and two motel managers.
In addition, and as of the same date, the Partnership employed 11 persons in administrative positions at its central office in Sacramento, California, all of whom worked for the Partnership on a part-time basis. They included accounting, investor service, sales and marketing personnel, motel supervisory personnel, secretarial personnel, and purchasing personnel. Employed by the Partnership on a part-time basis are David and Mark Grotewohl, relatives of Philip Grotewohl, chairman of the General Partner. David Grotewohl, an attorney, is the Partnership's general counsel and is the Director of Operations. Mark Grotewohl is the Director of Marketing and Sales.
(c) Property Acquisition and Development
The net proceeds of the offering of the Units, and financing in the amount of $870,000 (which has since been repaid), was expended in connection with the acquisition and development of two properties located in San Bernardino and Bakersfield, California, respectively.
It is the present intention of the General Partner that the proceeds of any sale or refinancing be distributed to the Limited Partners rather than reinvested.
(d) Competition
As discussed in greater detail below, in each area in which its motel properties are located the Partnership faces intense competition from motels of varying quality and size, including other budget motels which are part of nationwide chains and which have access to nationwide reservation systems.
Super 8 Motels offer accommodations at the upper end, in terms of facilities and prices, of the budget segment of the lodging industry. Generally, Super 8 Motels offer larger rooms and higher quality furnishings at higher rates than motels franchised under the trade-names Motel 6, Western 6, Econolodge, Red Roof Inns and E-Z 8.
Item 2.
Item 2. Properties
(a) San Bernardino, California
The San Bernardino motel, which consists of 81 guest rooms on approximately 1.87 acres of land, commenced operations on March 6, 1982. The average monthly occupancy rates and average monthly room rates during the three most recent years are as follows:
Average Occupancy Rate 1996 1995 1994 --------- --------- --------- Annual Average 49.9% 55.3% 59.1%
Average Room Rate 1996 1995 1994 --------- --------- --------- Annual Average $40.23 $40.29 $41.07
The Partnership's San Bernardino motel provides accommodations to no one customer, the loss of which could materially affect the Partnership's operations.
The following lodging facilities provide direct and indirect competition to the Partnership's San Bernardino motel:
APPROXIMATE NUMBER DISTANCE FACILITY OF ROOMS FROM MOTEL --------------- -------- --------------- Comfort Inn 50 Adjacent Hilton Inn 200 Across street La Quinta Motel 154 200 yards Travelodge 90 200 yards EZ-8 Motel 117 0.13 miles
(b) Bakersfield, California
The Bakersfield motel, which consists of 90 guest rooms on approximately 2.32 acres of land, commenced operations on September 20, 1982. The average monthly occupancy rate and average monthly room rate for the three most recent years are as follows:
Average Occupancy Rate 1996 1995 1994 --------- --------- --------- Annual Average 87.2% 85.6% 89.9%
Average Room Rate 1996 1995 1994 --------- --------- --------- Annual Average $30.28 $30.87 $30.73
From October 1, 1982 to January 31, 1993, an agreement was in effect granting the Partnership the first opportunity to provide rooms to employees of Santa Fe Railroad at a room rate of $20.00. Though expired according to its terms, the contract continues to be observed by both parties, except that the agreed rate is now $23.00 per room night. Revenue attributable to this agreement constituted approximately 31%, 32%, and 20% of the motel's total guest revenues during 1996, 1995 and 1994, respectively.
On December 31, 1992, the Partnership entered into a written agreement with the National Railroad Passenger Corporation (Amtrak) for the provision of lodging services to its employees at a room rate of $25.75, which included a transportation credit of $1.75 per room night payable to the Partnership for providing transportation from the train terminal. Due to competitive bids, the rate was lowered to $24.00 per room night effective October 1, 1994. Amtrak provided approximately 22%, 26% and 19% of the motel's guest room revenue in 1996, 1995 and 1994, respectively.
Except as set forth above, the Bakersfield motel provides accommodations to no one customer, the loss of which could materially affect the Partnership's operations.
The following lodging facilities provide direct or indirect competition to the Partnership's Bakersfield motel: APPROXIMATE NUMBER DISTANCE FACILITY OF ROOMS FROM MOTEL --------------------------------- -------- ----------- California Inn 74 Adjacent Motel 6 160 0.50 miles EZ-8 Motel 100 0.50 miles Travelodge Plaza 61 0.75 miles Comfort Inn South 80 0.75 miles Four Points Inn 199 1.00 mile Best Western Kern River Motor Inn 200 1.00 mile La Quinta Inn 150 1.00 mile Days Inn 120 1.00 mile Roderunner 49 1.50 miles Economy Motels of America 140 1.50 miles Rio Mirada 209 2.00 miles Comfort Inn 60 2.00 miles Econo Lodge 100 2.00 miles Holiday Inn Express 100 6.00 miles
Item 3.
Item 3. LEGAL PROCEEDINGS
Inapplicable.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Units are not freely transferable and no public market for the Units has developed or is expected to develop.
Holders
As of December 31, 1996 a total of 988 individuals (the "Limited Partners") held Units in the Partnership.
Distributions
Cash distributions are made on a quarterly basis from Cash Available for Distribution, defined in the Partnership's Certificate and Agreement of Limited Partnership (the "Partnership Agreement") as Cash Flow, less adequate cash reserves for obligations of the Partnership for which there is no provision. Cash Flow means cash funds provided from operations of the Partnership, without deduction for depreciation, but after deducting cash funds used to pay or provide for the payment of debt service, capital improvements and replacements and the operating expenses of the Partnership's property. Of the Cash Available for Distribution in any year, the General Partner will receive 10% thereof, of which 9% will constitute a subordinated fee for managing the Partnership and 1% will be attributable to its interest in the profits of the Partnership. The balance will be distributed to the Limited Partners. Notwithstanding the preceding, the General Partner will not receive distributions of Cash Available for Distribution in any year in which the Limited Partners do not receive distributions of Cash Available for Distribution in an amount at least equal to 10% per annum cumulative on their adjusted capital contributions.
In addition, the Partnership will promptly distribute net proceeds of the sale and refinancing of its motel properties to the General Partner and the Limited Partners, to the extent such proceeds are not reinvested in the acquisition of additional properties. Of the sale or refinancing proceeds available for distribution in any year, the General Partner will receive 15% thereof, and the balance will be distributed to the Limited Partners. Notwithstanding the preceding, the General Partner will not receive distributions of Sale or Refinancing Proceeds until each Limited Partner has received from all sources distributions equal to 100% of his capital contributions plus 10% per annum cumulative on his adjusted capital contribution.
The Partnership has made no distributions during the two most recent fiscal years.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Following are selected financial data of the Partnership for its last five fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992.
SUPER 8 MOTELS III, LTD.
Item 6. Selected Financial Data
Years Ended December 31: ----------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ----------
Guest Room Income $1,464,850 $1,526,742 $1,625,581 $1,734,535 $1,622,825 $1,687,071 Net Income (Loss) $1,116 $68,750 $33,851 $49,083 $(31,203) $97,596
Per Partnership Unit: Cash distributions $ - $ - $ - $ - $25.00 $25.00 Net income (loss) $.19 $11.46 $5.64 $8.18 $(5.20) $16.26
Years Ended December 31: ----------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $3,237,869 $3,411,456 $3,632,719 $3,793,456 $3,852,557 $4,045,669 Long-Term Debt $ - $75,493 $390,484 $595,214 $724,636 $741,069
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
The General Partner believes that the Partnership's liquidity, defined as its ability to generate cash to satisfy its cash needs, is adequate. The Partnership's primary source of liquidity is its cash flow from operations. As of December 31, 1996 the Partnership had current assets of $334,237 and current liabilities of $63,785, providing an operating reserve of $270,452. This reserve is below the $297,050 reserve target required by the Partnership Agreement inasmuch as the Partnership made supplemental principal payments on its mortgage debt in each of the last four years to retire the debt. The General Partner authorized the pay-down as cash flow from operations has been increasing in each of the three preceding 1996. The decrease in total cash during 1996 was also due to the $150,000 in extraordinary loan repayments.
This loan, in the original principal amount of $855,000 at a 10% per annum fixed interest rate, had a maturity date of September 1997 when, according to the loan's original terms, $648,230 would have been due. As a result of the additional principal payments in 1993 through 1996, the loan has been paid in full. When the reserve has been completely restored, the General Partner plans to resume distributions.
The liquidity of the Partnership is enhanced by the fact that both the San Bernardino and Bakersfield motels are presently unencumbered. Although the General Partner knows of no trend likely to create a material deficiency in the Partnership's liquidity, if the need arises, cash could be generated through leveraging the properties.
During 1997, the General Partner anticipates making certain capital expenditures, as noted below under the caption "Capital Resources," although the amount of such expenditures will not be such as to compromise the Partnership's liquidity. Other than as described below and above the General Partner foresees no significant trends, demands, commitments, events or uncertainties which are likely to affect the Partnership's liquidity, on either a long-term or short-term basis.
Capital Resources
The Partnership has no material commitments for capital expenditures. However, the General Partner anticipates that during 1997 the Partnership will spend an as yet undetermined amount for the refurbishment of its motels and their furnishings. In particular, the Bakersfield motel needs painting.
During the fiscal year covered by this report, the Partnership expended $70,718 of which $24,711 was capitalized. This amount included $21,900 for parking lot resurfacing at the Bakersfield motel, $15,348 for computer systems, $7,345 for guest room carpets, $6,218 for re-keying, $5,365 for tub refurbishing, $5,006 for replacement bedspreads and $3,702 for replacement televisions.
During the fiscal year ended December 31, 1995, the Partnership expended $81,620 for renovations and replacements, of which $45,880 was capitalized. The capitalized items included $20,759 for guest room carpet, $4,314 for replacement of televisions, $15,191 for Amtrak shuttle vehicles and $3,789 for a replacement ice machine. The uncapitalized items include $8,351 for bedspreads, $7,325 for guest room chairs, $5,827 for mattress sets, $5,081 for replacement lamps and lamp shades, and $4,000 for major boiler repairs.
Other than as described above under "Liquidity," the General Partner knows of no material trends likely to affect or to require a change in the mix of its capital resources.
Results of Operations
Combined Financial Results
The following tables summarize the operating results of the Partnership for the fiscal years ended December 31, 1996, 1995 and 1994 on a combined basis. The results of the individual properties follow in separate subsections. The income and expense numbers in the following table are shown on an accrual basis and other payments on a cash basis.
Average Average Occupancy Room Fiscal Year Ended: Rate Rate ------------------ --------- ------- December 31, 1994 75.3% $34.57
December 31, 1995 71.3% $34.33
December 31, 1996 69.5% $33.66
Total Expenditures Partnership Total and Cash Flow Fiscal Year Ended: Revenues Debt Service (1) ------------------ ---------- ------------ ----------- December 31, 1994 $1,671,022 $1,715,903 $(44,881)
December 31, 1995 $1,571,111 $1,671,151 $(100,040)
December 31, 1996 $1,510,262 $1,515,375 $(5,113)
(1) While Partnership Cash Flow as it is used here is not an amount found in the financial statements, this amount is the best indicator of the annual change in the amount, if any, available for distribution to the Limited Partners. This calculation is reconciled to the financial statement in the following table.
Reconciliation of Partnership Cash Flow (included in the chart above) to Net Income as shown on the Statements of Operations (in the financial statements) is as follows:
1996 1995 1994 ---------- ---------- --------- Partnership Cash Flow $(5,113) $(100,040) $(44,881) Principal Payments on Financial Obligations 153,456 285,133 185,326 Additions to Fixed Assets 24,711 45,880 64,261 Depreciation and Amortization (162,569) (164,599) (172,398) Other Items (9,369) 2,376 1,543 ---------- ---------- --------- Net Income $1,116 $68,750 $33,851 ========== ========== =========
Following is a reconciliation of the Partnership Cash Flow (shown above) to the aggregate total of Cash Flow from Property Operations for the Partnership's two motels which are segregated in the tables below under the captions "San Bernardino Motel" and "Bakersfield Motel".
1996 1995 1994 --------- --------- --------- San Bernardino Motel $20,090 $41,110 $24,211 Bakersfield Motel (34,512) (159,959) (78,601) --------- --------- --------- Aggregate Cash Flow from Property Operations (14,422) (118,849) (54,390)
Interest on Cash Reserves 8,288 10,071 8,727 Other Partnership Income (net of Other Expenses) not allocated to the properties 1,020 8,738 782 --------- --------- --------- Partnership Cash Flow $(5,114) $(100,040) $(44,881) ========= ========= =========
The Partnership experienced a $60,849 or 3.9% decrease in total revenues during the fiscal year covered by this report as compared to the previous fiscal year. The decrease in revenue is due to slightly reduced room rates at both motels and to significantly reduced occupancy at the San Bernardino motel. These conditions are related to the high level of competition in the Bakersfield market and to poor economic conditions in the San Bernardino market.
The Partnership experienced a $99,911 or 6.0% decrease in total revenues during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. The decline in revenue is due to reduced average occupancy at both motels and a reduced average room rate at the San Bernardino motel. Amplified discussion can be found in the individual property subsections that follow.
The Partnership achieved a $155,776 or 9.3% reduction in the total expenditures during the fiscal year covered by this report as compared to the previous fiscal year. This reduction is due primarily to the comparatively smaller payments necessary to liquidate the Bakersfield motel's loan and to lower payments for renovations and replacements.
The Partnership achieved a $44,752 or 2.6% reduction in combined expenditures and debt service during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. Debt service increased by $75,000. The increase in debt service was offset by a $100,095 reduction in motel operating expenses, due primarily to the reduced average occupancy.
San Bernardino Motel Average Average Occupancy Room Fiscal Year Ended: Rate Rate ------------------ --------- ------- December 31, 1994 59.1% $41.07
December 31, 1995 55.3% $40.29
December 31, 1996 49.9% $40.23
Total Cash Flow Expenditures from Total and Property Fiscal Year Ended: Revenues Debt Service Operations ------------------ -------- ------------ ---------- December 31, 1994 $741,564 $717,353 $24,211
December 31, 1995 $678,561 $637,451 $41,110
December 31, 1996 $615,471 $595,381 $20,090
The Partnership's San Bernardino motel experienced a $63,090 or 9.3% decrease in total revenues during the fiscal year covered by this report as compared to the previous fiscal year. Guest room revenue from the leisure market segment decreased approximately $68,000 while the revenue from the other market segments remained substantially unchanged.
The San Bernardino motel experienced a $63,003 or 8.5% decrease in total revenues during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. Guest room revenue from the corporate and leisure market segments decreased approximately $10,000. The number of guest room nights generated from these two market segments remained substantially unchanged while the average room rate received for the corporate market segment increased slightly and the average room rate received from the leisure market declined more substantially. Average occupancy from the discounted room and group traveler market segments declined sharply resulting in a decrease of approximately $50,000 in guest room revenue.
The San Bernardino motel achieved a $42,070 or 6.6% reduction in total expenditures during the fiscal year covered by this report as compared to the previous fiscal year. Theses expenditure reductions included $13,573 in reduced property taxes from a property tax appeal, $14,602 in reduced resident manager costs, $6,054 in lower housekeeping wages and $9,861 in reduced renovation expenses. This reductions were partially offset by $7,250 in appraisal costs and by $7,609 of increased workers' compensation insurance.
The San Bernardino motel achieved a $79,902 or 11.1% reduction in total expenses and debt service during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. The motel achieved an $8,663 reduction in bad debts, an $8,102 reduction in housekeeping wages, an $18,229 reduction in maintenance wages and a $41,727 reduction in renovation and replacements. The previous year was subject to an unusually high level of replacement and renovation expense.
Bakersfield Motel Average Average Occupancy Room Fiscal Year Ended: Rate Rate ------------------ --------- ------- December 31, 1994 89.9% $30.73
December 31, 1995 85.6% $30.87
December 31, 1996 87.2% $30.28
Total Cash Flow Expenditures from Total and Property Fiscal Year Ended: Revenues Debt Service Operations ------------------ -------- ------------ ---------- December 31, 1994 $919,367 $997,968 $(78,601)
December 31, 1995 $882,261 $1,042,220 $(159,959)
December 31, 1996 $885,403 $919,915 $(34,512)
The Bakersfield motel achieved a $3,142 (0.4%) increase in total revenues during the fiscal year covered by this report as compared to the previous fiscal year. Guest room revenue was substantially unchanged as the increase in occupancy was mostly offset by the decrease in average room rate. Decreased corporate and leisure market segment business was offset by increased contract rooms to the Santa Fe Railroad and to Amtrak.
The Bakersfield motel experienced a $37,106 (4.0%) decrease in total revenues during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. Decreased revenue generated from the corporate, group, discount and trucker market segments was substantially, but not completely, offset by increased revenue from the leisure market segment and the railroad accounts.
The Partnership's Bakersfield motel experienced a $122,305 (11.7%) decrease in total expenses and debt service during the fiscal year covered by this report as compared to the previous fiscal year. The $152,300 reduction in mortgage payments was partially offset by increased expenditures of $7,250 for appraisal fees, of $5,460 for workers' compensation insurance and $5,329 for increased supplies.
The Partnership's Bakersfield motel experienced a $44,252 (4.4%) increase in total expenses and debt service during the fiscal year ended December 31, 1995 as compared to the previous fiscal year. Excluding the $75,000 comparative increase in debt service, the motel achieved a $30,748 reduction in other expenditures. Included in this reduction were savings of $10,242 in front desk wages, $10,120 in maintenance wages, $8,780 in housekeeping wages, $6,635 in resident manager expense and $5,653 in workers' compensation insurance. These reduced expenditures were partially offset by increased costs associated with transporting railroad employees from the train station to the motel. The cost savings was due to adjustments to staffing levels and to a lessor extent to reduced average occupancy.
Future Trends
The General Partner believes that competitive conditions in the San Bernardino and Bakersfield markets are such as to prevent the Partnership from reflecting inflation in increased room rates at its motels. Accordingly, an increase in the inflation rate could have a deleterious effect on Partnership operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Notes to Financial Statements attached hereto at pages through.
ANNUAL REPORT ON FORM 10-K
ITEM 8
FINANCIAL STATEMENTS
SUPER 8 MOTELS III, LTD.
SACRAMENTO, CALIFORNIA
DECEMBER 31, 1996
Item 8: Financial Statements
SUPER 8 MOTELS III, LTD.
INDEX OF FINANCIAL STATEMENTS
Pages -----
Report of Independent Certified Public Accountants
Balance Sheets, December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Partners' Equity for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 to
Notes to Financial Statements to
Note: All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners Super 8 Motels III, Ltd.
We have audited the accompanying balance sheets of Super 8 Motels III, Ltd., a California limited partnership, as of December 31, 1996 and 1995, and the related statements of operations, partners' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Super 8 Motels III, Ltd. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
VOCKER KRISTOFFERSON AND CO.
February 20, 1997 San Mateo, California
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 ---------- ---------- Current Assets: Cash and temporary investments (Notes 1, 3 and 7) $ 254,782 $ 285,554 Accounts receivable 68,114 72,824 Prepaid expenses 11,341 11,588 ---------- ---------- Total Current Assets 334,237 369,966 ---------- ----------
Property and Equipment (Note 2): Land 1,670,129 1,670,129 Capital improvements 26,175 26,175 Buildings 3,276,870 3,276,870 Furniture and equipment 756,837 742,531 ---------- ---------- 5,730,011 5,715,705 Accumulated depreciation and amortization (2,826,379) (2,674,215) ---------- ---------- Property and Equipment, Net 2,903,632 3,041,490 ---------- ----------
Total Assets $3,237,869 $3,411,456 ========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities: Current portion of note payable (Note 5) $ - $ 77,963 Accounts payable and accrued liabilities 62,020 85,032 Due to related parties 1,765 - ---------- ---------- Total Current Liabilities 63,785 162,995
Long-term Liabilities, Net of Current Portion: Note payable (Note 5) - 75,493 ---------- ----------
Total Liabilities 63,785 238,488 ---------- ----------
Partners' Equity: General Partner 19,205 19,194 Limited Partners 3,154,879 3,153,774 ---------- ---------- Total Partners' Equity 3,174,084 3,172,968 ---------- ----------
Total Liabilities and Partners' Equity $3,237,869 $3,411,456 ========== ==========
See accompanying notes to financial statements.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) STATEMENTS OF OPERATIONS
Years Ended December 31: ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Income: Guest room $1,464,850 $1,526,742 $1,625,581 Telephone and vending 34,128 32,654 33,352 Interest 8,288 10,071 8,727 Other 2,996 1,644 3,363 ---------- ---------- ---------- Total Income 1,510,262 1,571,111 1,671,023 ---------- ---------- ----------
Expenses: Motel operations (Notes 4 and 6) 1,189,294 1,174,475 1,274,570 General and administrative (Note 4) 74,474 57,956 54,428 Depreciation and amortization (Note 2) 162,569 164,599 172,398 Interest 7,765 27,290 52,932 Property management fees (Note 4) 75,044 78,041 82,844 ---------- ---------- ---------- Total Expenses 1,509,146 1,502,361 1,637,172 ---------- ---------- ----------
Net Income $ 1,116 $ 68,750 $ 33,851 ========== ========== ==========
Net Income Allocable to General Partner $11 $688 $339 ======= ======= =======
Net Income Allocable to Limited Partners $1,105 $68,062 $33,512 ======= ======= =======
Net Income Per Partnership Unit (Note 1) $.19 $11.46 $5.64 ======= ======= =======
Distributions to Limited Partners Per Partnership Unit (Note 1) $ - $ - $ - ======= ======= =======
See accompanying notes to financial statements.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31: ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- General Partner: Balance, beginning of year $ 19,194 $ 18,506 $ 18,167 Net income 11 688 339 ---------- ---------- ---------- Balance, End of Year 19,205 19,194 18,506 ---------- ---------- ----------
Limited Partners: Balance, beginning of year 3,153,774 3,085,712 3,052,200 Net income 1,105 68,062 33,512 ---------- ---------- ---------- Balance, End of Year 3,154,879 3,153,774 3,085,712 ---------- ---------- ----------
Total Partners' Equity $3,174,084 $3,172,968 $3,104,218 ========== ========== ==========
See accompanying notes to financial statements.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) STATEMENTS OF CASH FLOWS
Years Ended December 31: ---------------------------------- 1996 1995 1994 ---------- ---------- ----------
Cash Flows From Operating Activities: Received from motel operations $1,505,571 $1,575,015 $1,678,452 Expended for motel operations and general and administrative expenses (1,359,033) (1,313,408) (1,419,657) Interest received 9,401 9,154 8,649 Interest paid (9,044) (29,666) (54,476) ---------- ---------- ---------- Net Cash Provided by Operating Activities 146,895 241,095 212,968 ---------- ---------- ----------
Cash Flows From Investing Activities: Proceeds from sale of equipment 500 5,366 3,550 Purchases of property and equipment (24,711) (45,880) (64,261) ---------- ---------- ---------- Net Cash Used by Investing Activities (24,211) (40,514) (60,711) ---------- ---------- ----------
Cash Flows From Financing Activities: Payments on notes payable (153,456) (285,134) (185,326) ---------- ---------- ---------- Net Cash Used by Financing Activities (153,456) (285,134) (185,326) ---------- ---------- ----------
Net Increase (Decrease) in Cash and Temporary Investments (30,772) (84,553) (33,069)
Cash and Temporary Investments: Beginning of year 285,554 370,107 403,176 ---------- ---------- ----------
End of Year $ 254,782 $ 285,554 $ 370,107 ========== ========== ==========
See accompanying notes to financial statements.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31: --------------------------------- 1996 1995 1994 ---------- ---------- ---------
Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income $ 1,116 $ 68,750 $ 33,851 ---------- ---------- ---------
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 162,569 164,599 172,398 (Gain) loss on disposition of property and equipment (500) 433 1,860 Decrease in accounts receivable 4,710 13,058 16,078 (Increase) decrease in prepaid expenses 247 (866) (1,957) Increase (decrease) in accounts payable and accrued liabilities (23,012) 3,033 (8,246) Increase (decrease) in due to related parties 1,765 (7,912) (1,016) ---------- ---------- --------- Total Adjustments 145,779 172,345 179,117 ---------- ---------- ---------
Net Cash Provided by Operating Activities $ 146,895 $ 241,095 $ 212,968 ========== ========== =========
See accompanying notes to financial statements.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP
Super 8 Motels III, Ltd. is a limited partnership organized under California law on June 2, 1980 to acquire and operate motel properties in San Bernardino and Bakersfield, California. The term of the Partnership expires December 31, 2030 and may be dissolved earlier under certain circumstances. The San Bernardino motel was opened in March, 1982, and the Bakersfield motel was opened in September, 1982. The Partnership grants credit to customers, substantially all of which are local businesses in San Bernardino or Bakersfield.
The general partner is Grotewohl Management Services, Inc., fifty percent stockholder and officer of which is Philip B. Grotewohl.
The net income or net loss of the Partnership is allocated 1% to the General Partner and 99% to the Limited Partners. Net income and distributions per Partnership unit are based on 5,941 units outstanding. All Partnership units are owned by the Limited Partners.
The Partnership agreement requires that the Partnership maintain working capital reserves for normal repairs, replacements, working capital and contingencies in an amount of at least 5% of adjusted capital contributions ($297,050 at December 31, 1996). As of December 31, 1996 the Partnership had working capital of $270,452. During the year ended December 31, 1996, $26,598 ($297,050 less $270,452) of the reserves, plus additional amounts, were used to make loan repayments on the mortgage payable.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Items of Partnership income are passed through to the individual partners for income tax purposes, along with any income tax credits. Therefore, no federal or California income taxes are provided for in the financial statements of the Partnership.
Property and equipment are recorded at cost. Depreciation and amortization are computed using the following estimated useful lives and methods:
Description Methods Useful Lives ----------------------- -------------------------- ------------ Capital improvements 150-200% declining balance 10-20 years
Buildings Straight-line and 10-25 years 150% declining balance
Furniture and equipment 200% declining balance 4-7 years
Costs incurred in connection with maintenance and repair are charged to expense. Major renewals and betterments that materially prolong the lives of assets are capitalized.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 - CASH AND TEMPORARY INVESTMENTS
Cash and temporary investments as of December 31, 1996 and 1995 consists of the following: 1996 1995 Cash in bank $ 43,305 $ 45,031 Money market accounts 211,477 140,523 Certificates of deposit and commercial paper - 100,000 -------- -------- Total Cash and Temporary Investments $254,782 $285,554 ======== ======== Temporary investments are recorded at cost, which approximates market value. The Partnership considers temporary investments and all highly liquid marketable securities with original maturities of three months or less to be cash equivalents for purposes of the statement of cash flows.
NOTE 4 - RELATED PARTY TRANSACTIONS
Franchise Fees Super 8 Motels, Inc., now a wholly-owned subsidiary of Hospitality Franchise Systems, Inc., is franchisor of all Super 8 Motels. The Partnership pays to the franchisor monthly fees equal to 4% of the gross room revenues of each motel and contributes an additional 1% of its gross room revenues to an advertising fund administered by the franchisor. In return, the franchisor provides the right to use the name "Super 8," a national institutional advertising program, an advance room reservation system, and inspection services. These costs ($73,242, $76,337 and $81,077 for the years ended December 31, 1996, 1995 and 1994, respectively) are included in motel operations expense in the accompanying statements of operations. The Partnership operates its motel properties as a franchisee of Super 8 Motels, Inc., through a sub-franchise agreement with Brown & Grotewohl, a California general partnership, of which Grotewohl Management Services, Inc. (see Note 1) is a 50% owner. Under the sub-franchise agreement, Brown & Grotewohl earned 40% of the above franchise fees, which amounted to $29,297, $30,535 and $32,431 for the years ended December 31, 1996, 1995 and 1994, respectively.
Property Management Fees The General Partner, or its affiliates, handles the management of the motel properties of the Partnership. The fee for this service is 5% of the gross revenues from Partnership operations, as defined in the Partnership agreement, and amounted to $75,044, $78,041 and $82,844 for the years ended December 31, 1996, 1995 and 1994, respectively.
Subordinated Partnership Management Fees During the Partnership's operational stage, the General Partner is to receive 9% of cash available for distributions for Partnership management services, along with an additional 1% of cash available for distributions on account of its interest in the profit and losses subordinated in each case, however, to receipt by the Limited Partners of a 10% per annum cumulative pre-tax return on their adjusted capital contributions. At December 31, 1996, the Limited Partners had not received the 10% cumulative return, and accordingly, no Partnership management fees are presently payable and therefore are not reflected in these financial statements. Management believes it is not likely that these fees will become payable in the future. This fee is payable only from cash funds provided from operations of the Partnership, and may not be paid from the proceeds of sale or a refinancing. As of December 31, 1996, the cumulative amount of these fees was $421,787.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
Subordinated Incentive Distributions Under the terms of the Partnership agreement, the General Partner is to receive 15% of distributions of net proceeds from the sale or refinancing of Partnership properties remaining after distribution to the Limited Partners of any portion thereof required to cause distributions to the Limited Partners from all sources to be equal to their capital contributions plus a cumulative 10% per annum pre-tax return on their adjusted capital contributions. Through December 31, 1996, there had been no such sales or refinancings.
Administrative Expenses Shared by the Partnership and Its Affiliates There are certain administrative expenses allocated between the Partnership and other partnerships managed by the General Partner and its affiliates. These expenses, which are allocated based on usage are telephone, data processing, rent of the administrative office, and administrative salaries. The administrative expenses allocated to the Partnership were approximately $225,000, $223,000 and $207,000 during the years ended December 31, 1996, 1995 and 1994, respectively, and are included in general and administrative and motel operating expenses in the accompanying statements of operations. Included in administrative salaries are allocated amounts paid to three employees who are related to Philip B. Grotewohl, a fifty percent stockholder of Grotewohl Management Services, Inc., the General Partner.
NOTE 5 - NOTE PAYABLE
The note payable consisted of a note due to a bank and was collateralized by a first deed of trust on real property in Bakersfield, California. During 1995, the note, which was held in trust by Wells Fargo Bank for Mr. Bruce J. Bailey, was split into two notes, one due to Wells Fargo and the other due to Mr. Bailey. The combined balances of the new notes were equal to the prior balance of the original Wells Fargo note.
During 1996, the Partnership paid off the balances of the two notes payable.
SUPER 8 MOTELS III, LTD. (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 - MOTEL OPERATING EXPENSES
The following table summarizes the major components of motel operating costs for the following years:
1996 1995 1994 ---------- ---------- ----------
Salaries and related costs $ 447,181 $ 441,334 $ 514,133 Franchise and advertising fees 73,242 76,337 78,077 Utilities 111,366 121,969 130,871 Allocated costs, mainly indirect salaries 184,064 181,607 169,656 Renovations and replacements 46,007 35,740 50,906 Other operating expenses 327,434 317,488 330,927 ---------- ---------- ----------
Total motel operating expenses $1,189,294 $1,174,475 $1,274,570 ========== ========== ==========
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash accounts in four commercial banks located in California. Accounts at each bank are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per bank. A summary of the total insured and uninsured cash balances (not reduced by outstanding checks) as of December 31, 1996 follows:
Total cash in all California banks $ 264,771 Portion insured by the FDIC (238,087) --------- Uninsured cash balances $ 26,684 =========
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The original general partners of the Partnership were Dennis A. Brown and Philip B. Grotewohl, as the managing general partners, and Borel Associates (a partnership of which Robert J. Dana was a partner), as the associate general partner. Upon Mr. Brown's death on February 25, 1988, Mr. Grotewohl and Borel Associates elected to continue the Partnership. During March 1988, Mr. Grotewohl appointed Grotewohl Management Services, Inc., a California corporation, his successor as General Partner. Upon the liquidation of Borel Associates in April 1990, Grotewohl Management Services, Inc., as the sole remaining General Partner, elected to continue the Partnership.
The General Partner was organized in 1981 to serve as a general partner of limited partnerships to be formed for the purpose of investing in Super 8 Motels. A 50% shareholder, director and the principal officer of the General Partner is Mr. Grotewohl.
Mr. Grotewohl, age 78, is an attorney-at-law and was engaged in the private practice of law in San Mateo County, California, between 1967 and 1978. Since 1978, Mr. Grotewohl's principal occupation has been as a promoter and general partner of Super 8 Motels limited partnerships.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Although Mr. Brown ceased to be a general partner of the Partnership upon his death, a trust of Mr. Brown shares in certain of the compensation otherwise payable to the General Partner and its affiliates. Similarly, although Borel Associates ceased to have any interest in the Partnership upon its dissolution, Mr. Dana continues to share in such compensation.
The following is a description of the fees paid or payable to the General Partner, the Brown trust and Mr. Dana.
Property Management Fees
The Manager is managing and will manage all motel properties of the Partnership. The fee for this service is 5% of the gross proceeds from the operations of each motel. This compensation is in addition to the cost of compensating the Partnership's employees and the cost of goods and services acquired for the Partnership from independent contractors.
The Partnership accrued and paid such fees to the Manager in the amount of $75,044 during the year ended December 31, 1996.
Franchise Fees and Advertising Fees
The Partnership operates its motels as a franchisee of Super 8 Motels, Inc., pursuant to sub-franchises from the Manager. In connection with the operation of each of its motels, the Partnership, as franchisee, pays 4% of its gross room revenues to the franchisor. One-half of the franchise fee is paid to the Manager. In addition to the franchise fee, the Partnership pays 1% of its gross room revenues to the franchisor as an advertising fee. No part of this fee is paid to the Manager.
The total of franchise fees accrued during the year ended December 31, 1996 to Super 8 Motels, Inc. was $58,594, of which $29,297 accrued to the Manager. The total advertising fees paid to Super 8 Motels, Inc. was $14,648. All the above amounts have been paid.
General Partner's Interest in Cash Available for Distribution
At quarterly intervals, the total amount of the Partnership's Cash Available for Distribution is determined at the discretion of the General Partner. (See Item 5 above.) Distributions therefrom are made as follows: (1) 90% of such distributions are paid to the Limited Partners; (2) 9% thereof is paid to the General Partner as Partnership management fees; and (3) 1% thereof is paid to the General Partner in accordance with its interest in the income and losses of the Partnership.
Notwithstanding the foregoing, however, distributions of Cash Available for Distribution which would otherwise be paid to the General Partner are deferred and paid only after payment to the Limited Partners of distributions of Cash Available for Distribution in an amount equal to 10% per annum cumulative on their adjusted capital contributions.
No such cash distributions were paid by the Partnership to the General Partner, the Brown Trust, Robert J. Dana, or their affiliates during the fiscal year ended December 31, 1996. A total of $421,787 has been accrued to such persons since commencement of the Partnership, but is not set forth as a liability in the Partnership's financial statements due to the uncertainty of payment. In order for this amount to be payable the Limited Partners must receive $5,190,589 in prior years' preference distributions and $594,100 in each future year before any payments can be made to management.
General Partner's Interest in Net Proceeds of Sales, Financing and Refinancing of Partnership Properties
The proceeds from the sale or refinancing of properties not reinvested are to be distributed first to the Limited Partners until they have received cumulative payments from all distribution sources equal to 100% of their original capital contributions and a cumulative 10% per annum return on their adjusted capital contributions. When the foregoing requirement has been satisfied, any remaining funds from the sale or refinancing of properties is to be distributed 15% to the General Partner and 85% to the Limited Partners.
No such distributions were paid or accrued for the account of the General Partner, the Brown trust, Robert J. Dana or their affiliates during the fiscal year covered by this report.
Allocation of General Partners' Interest
Compensation to the General Partners and their affiliates in the form of franchise fees and property management fees is allocated 1/3 each to the Brown trust, the General Partner and Robert J. Dana.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5% of the Units.
Security Ownership of Management
The General Partner is not the beneficial owner of any Units.
Changes in Control
With the consent of all other General Partners and Limited Partners holding more than 50% of the Units, a General Partner may designate a successor or additional general partner, in each case with such participation in such General Partner's interest as such General Partner and successor or additional general partner may agree upon, provided that the interests of the Limited Partners are not affected thereby.
A General Partner may withdraw from the Partnership at any time upon 60 days' prior written notice to the Limited Partners and any other General Partners, or may transfer his interest to an entity controlled by him; provided, however, that in either such event, if it is determined that the Partnership business is to be continued rather than dissolved and liquidated upon the happening thereof, the withdrawal or transfer will be effective only after receipt by the Partnership of an opinion of counsel to the effect that such withdrawal or transfer will not cause the Partnership to be classified as an association taxable as a corporation rather than as a partnership for federal income tax purposes.
The Limited Partners shall take no part in the management of the Partnership's business; however, a majority in interest of the Limited Partners, without the concurrence of the General Partner, shall have the right to amend the Partnership Agreement, dissolve the Partnership, remove a General Partner or any successor general partner, elect a new general partner or general partners upon the removal, retirement, death, insanity, insolvency or bankruptcy of a General Partner, and approve or disapprove the sale, exchange or pledge in a single transaction of all or substantially all of the properties acquired by the Partnership.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Administrative Expenses Shared by the Partnership and its Affiliates
There are certain administrative expenses allocated between the Partnership and other partnerships managed by the General Partner and its affiliates. These expenses, which are allocated based on usage, are telephone, data processing, rent of administrative offices and administrative salaries. The administrative expenses allocated to the Partnership were approximately $225,000 in 1996 are included in general and administrative expenses and motel operations expenses in the Partnership's financial statements. Included in administrative salaries are allocated amounts paid to three employee who are related to Philip B. Grotewohl, the 50% shareholder of the General Partner. The Partnership purchased motel supplies for approximately $8,000 from one of these employees.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report 1. Financial Statements Included in Part II of this Report Report of Independent Certified Public Accountants Balance Sheets, December 31, 1996 and 1995 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Statements of Partners' Equity for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flow for the Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements
2. Financial Statement Schedules Included in this Report None
3. Exhibits 3.1 and 4.1 The Partnership Agreement filed as Exhibits 3.1 and 4.1 to the annual report on Form 10-K for the fiscal year ended December 31, 1994 is incorporated herein by reference.
3.2 & 4.2 The Amendment to Partnership Agreement, included as Exhibit 3.2 & 4.2 to the annual report on Form 10-K for the fiscal year ended December 31, 1989 is incorporated herein by reference.
Exhibits 10.1 through 10.4, filed as Exhibits 10.1 through 10.4, respectively, to the annual report on Form 10-K for the fiscal year ended December 31, 1989 are hereby incorporated herein by reference.
10.1 Santa Fe Railway Agreement with the Partnership's Bakersfield Motel. 10.2 Amtrak Contract with the Partnership's Bakersfield Motel. 10.3 Franchise Agreement for the Bakersfield Property. 10.4 Franchise Agreement for the San Bernardino Property.
10.5 Amtrak Contract Amendment filed as Exhibit 10.5 to the annual report on Form 10-K for the fiscal year ended December 31, 1994 is incorporated herein by reference.
(b) Reports on Form 8-K Inapplicable.
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.
(Registrant) SUPER 8 MOTELS III, LTD.
By (Signature and Title) /s/ Philip B. Grotewohl --------------------------- Philip B. Grotewohl, Chairman of Grotewohl Management Services, Inc., General Partner
Date March 28, 1997
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 dates indicated.
By (Signature and Title) /s/ Philip B. Grotewohl --------------------------- Philip B. Grotewohl, Chief executive officer, chief financial officer, chief accounting officer and sole director of Grotewohl Management Services, Inc., General Partner
Date March 28, 1997
EXHIBIT INDEX
Exhibit Sequentially Number Exhibit Numbered Page ------- ---------- ------------- 28.1 Prospectus