1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1997
Commission File Number 2-76543
SUPER 8 MOTELS NORTHWEST II,
A Washington limited partnership (Exact name of
registrant as specified in its charter)
WASHINGTON 91-1172558
- ---------------------------------------- ---------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification Number
7515 Terminal St. S.W., Tumwater, WA 98501
- ---------------------------------------- ---------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (360) 943-8000
Securities registered pursuant to section 12 (g) of the Act:
TITLE OF CLASS
Limited Partnership Units
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 registrant's knowledge, in
2
definitive proxy or information statements incorporated by reference in Part III
of this Form I0-K or any amendment to this Form 10-K. (X)
There has been no market for limited partnership units since the initial
offering of limited partnership units was completed in 1984, therefore the
market value of limited partnership units is unknown.
DOCUMENTS INCORPORATED BY REFERENCE
Partnership's Audited Financial Statements.
Partnership's January, 1998 newsletter to limited partners.
Also incorporated by reference are the partnership agreement, franchise
agreement and property management agreements to which the Partnership is a party
and which were included with and/or described in the original offering materials
for the Partnership, as well as all appropriate exhibits delineated in Part III
hereof.
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PART I
ITEM 1.
Business
(a) General Development of Business
Super 8 Motels Northwest II, a Washington limited partnership (the
"Partnership"), was formed to invest in and operate three "economy" motels to be
located in the states of Washington and Oregon, as a franchise of Super 8
Motels, Inc. The Partnership does not own any interest in Super 8 Motels, Inc.,
the national franchiser, or in The Peninsula Group Incorporated, the regional
sub-franchiser and one of the General Partners of the Partnership. The other
General Partner is Gerald L. Whitcomb.
The Partnership was formed in March, 1982. The Limited Partnership Units of the
Partnership (the "Units") were offered and sold by selected broker-dealers on a
best efforts basis in the states of Washington, Oregon, Montana, Idaho, Alaska,
Wisconsin, Illinois and Georgia.
Sale of the Units began on May 8, 1982. Funds were released from impound on
January 12, 1983, when gross sales of the Units reached $950,000. The
Partnership Agreement was amended in May 1983 to provide for a gross offering of
$6,602,000. At December 31, 1983, the Partnership had raised a total of
$2,710,000. On May 8, 1984, the offering was closed. In the period January 1,
1984, through May 8, 1984, the Partnership raised $1,342,000 in additional
limited partnership subscriptions. The final results of the offering were 4,052
Units sold yielding gross offering proceeds of $4,052,000. This was $2,550,000
under the initially intended subscription amount.
To achieve the Partnership's objective of developing three Super 8 Motel
properties, long-term mortgage financing in the amount of $2,200,000 was
arranged through Sterling Savings and Association of Chehalis, Washington
(formerly Central Evergreen Savings and Loan). This debt is secured by the
Portland property and assignment of the Union Gap (Yakima) land lease (see Item
2a).
(b) Financial Information About Industry Segments.
Not applicable as the registrant operates in a single industry (motels) and
within that industry only in the economy category. For financial information
generally, see "Financial Statements."
(c) Narrative Description of Business.
The motel properties were developed and are being operated as economy motels in
the locations indicated below. The motel properties are franchisees of the
national "Super 8" motel chain. The economy motel concept provides for a clean,
comfortable average-size motel room that has all the basic amenities required by
the traveling public at a price lower than that of most surrounding motel
properties of equal quality.
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All guest rooms are equipped with direct-dial telephone, color television and
tub/shower combination, and are fully carpeted, sound proofed and insulated.
Guests are allowed to use major national credit cards and cash checks with
V.I.P. Club membership. Vending machines are also available.
Each property has interior hallways, a lobby with a manager's office, an
employee lounge, an in-house laundry, a guest laundry facility and conference
room and a manager's apartment. No restaurants are located on any of the
properties,
The 77 room Bremerton property services the military-based City of Bremerton,
Washington.
The 80 room Portland property's proximity to the Portland International Airport
allows it to provide free transportation to and from the airport, courtesy
telephone and long term parking privileges. The property has one mini-suite and
a small conference room available.
The 95 room Union Gap property features a year-round indoor swimming pool, one
mini-suite, a medium-size conference room, guest laundry facilities and special
parking for commercial trucks.
Each of the properties historically experiences seasonal fluctuations in
occupancy, the low point occurring in the winter months and peaking in the late
summer.
The motels provide full or part-time employment for approximately 54 people
(Bremerton 15, Portland 19, Union Gap 20).
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
The Partnership operates only in one geographic area, the Pacific Northwest
(Washington and Oregon states). For financial information generally, see
"Financial Statements."
ITEM 2.
Properties
(a) Location and General Characteristics
In 1983, the Partnership leased the Bremerton, Washington 1.75 acre site located
on State Road 3 and Kitsap Way. The lease has a 37 year term. Adjacent to the
site is a 24 hour family restaurant.
In 1983, the Partnership purchased the Portland, Oregon site for a purchase
price of $720,000. This site is at the interchange of Interstate 205 and Airport
Way, approximately one mile east of the Portland International Airport.
In 1983, the Partnership leased the Union Gap, Washington site located at the
intersection of I-82 and Rudkin Road just south of Yakima, Washington. The lease
is for a term of 30 years.
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The Bremerton motel opened on October 23, 1983, the Portland motel on May 25,
1984 and the Union Gap motel on September 14, 1984.
The motels are of frame construction with stucco exteriors and tile roofs and
have full fire alarm systems. In addition, the Portland motel is fully equipped
with a fire protection sprinkler system. Heating and cooling is by individual
room through the wall heat pumps.
The approximate size of the buildings is as follows:
Bremerton 29,740 square feet
Portland 31,900 square feet
Union Gap 39,190 square feet
Additionally, significant environmental contamination including ground water
contamination, has been discovered within the Airport Way Urban Renewal Area at
the former ICN site, a medical manufacturing firm. ICN, which is no longer in
existence, potentially discharged hazardous substances into wells which have
contaminated the ground water. Such contamination may or may not have affected
the Partnership's property. POC has orally advised the Partnership that it
believes it is unlikely that the Partnership's property is contaminated.
A 33 room addition to the Union Gap property opened for occupancy on January 15,
1991. Total cost of the addition (including furniture and fixtures) was
$875,000. For utilization of these properties see Item 7.
See Item 1 (c) for further information on each property.
ITEM 3.
Legal Proceedings
The Partnership is not party to any material legal proceedings.
ITEM 4
Submission of matters for a Vote of Security Holders
None.
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PART II
ITEM 5.
Market for the Registrant's Common Stock
Related Security Holder Matters
The units are owned by approximately 850 investors.
There is no established public trading market for the units and no significant
transactions in units between a willing buyer and a willing seller have occurred
since the original offering of limited partnership units. Because of this, the
Partnership is unable to ascertain a fair market value for the units.
Distributions of cash to the Limited Partners made during 1997 totaled $405,200.
ITEM 6.
Selected Financial Data*
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total Room Sales $3,132,920 $3,500,148 $3,277,174 $3,236,567 $2,938,505
Net Income (Loss)* $692,709 $1,006,899 $705,904 $771,673 $368,234
Net Income (Loss)* per Unit $145.31 $211.22 $172.47 $188.54 $89.99
Total Assets** $3,641,686 $3,986,972 $4,391,793 $4,657,736 $4,492,431
Long-Term Debt* $2,725,565 $3,181,870 $3,988,018 $3,825,986 $3,719,527
Cash Distribution Per Unit $100.00 $152.09 $289.74 $187.50 $137.50
*In filings prior to the year ended December 31, 1994 with the United States
Securities and Exchange Commission (the "SEC"), and in the Partnership's prior
years' financial statements, the Partnership did not accrue unpaid property
management fees due to the uncertainty of payment. During the year ended
December 31, 1994, the partnership changed its method of accounting for such
fees and the above information was restated for 1993 to account for such fees so
that Net Income, Long Term Debt and Net Income Per Unit was revised to accrue
the expense when incurred and reflect the associated liability on the balance
sheet.
**Net of amortization and depreciation
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Detailed financial data is provided in the form of audited financial statements
as of December 31, 1997 and 1996 and for each of the three years ended December
31, 1997, 1996, and 1995. These statements show the results of operations,
changes in partners' equity, cash flows and additional financial disclosures.
ITEM 7.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity of the Partnership continued to be strong for the year ended December
31, 1997. The current ratio at December 31, 1997, was 1.53:1 and working capital
totaled $161,512.
The interest rate on the Partnership's long term debt is tied to a treasury bill
index plus 3.5%. The effective rate at December 31, 1997 is 9.00%. The long term
interest rate on debt encumbering the Portland property is variable at 1% plus
the Lenders Prime Rate. The effective interest rate on this debt at December 31,
1997 is 9.06%.
Interest rate on the long term loan funding the Yakima addition is variable
based on the treasury bill index plus 2.5% per annum, but was fixed through
December 31, 1997 at 10.25% per annum.
The lack of Navy contract business in Bremerton resulted in an overall reduction
in total occupancy this year.
Balance Sheet data 1997 1996 1995
---- ---- ----
Current Assets $468,690 $641,740 $885,576
Current Liabilities $307,178 $412,162 $344,668
Current Ratio 1.53:1 1.56:1 2.57:1
At December 31, 1997, the Bremerton motel had completed its fourteenth full year
of operation, Portland and Yakima their thirteenth full year of operations.
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Comparative operational statistics:
1997 1996 1995
---- ---- ----
Bremerton
Occupancy 54% 84% 64%
Rented rooms 15,277 23,671 18,028
Gross room rate* $46.25 $42.00 $44.22
Portland
Occupancy 82% 86% 82%
Rented rooms 24,282 25,055 23,649
Gross room rate* $59.34 $56.80 $55.66
Yakima
Occupancy 58% 64% 72%
Rented rooms 20,264 22,115 24,860
Gross room rate* $48.41 $48.15 $46.81
Total
Occupancy 65% 77% 73%
Rented rooms 59,823 70,841 66,537
Gross room rate* $52.37 $49.41 $49.25
*"Gross Room Rate" is defined as total room revenue divided by total rooms sold.
Total 1997 Room sales revenue decreased $367,228 to $3,132,920 down from
$3,500,148 in 1996. Total rented rooms mirrored the drop in revenue and
decreased to 59,823 in 1997, a decrease of 11,018 rented rooms from the previous
year figure of 70,841. The majority of the decrease is due to the lack of Navy
contract business in Bremerton this year. Total room revenues decreased by 10%,
of which, the lack of Navy contract in Bremerton accounted for 80% of the
decrease. Gross room rates increased 6% to $52.37 per room in 1997 compared to
$49.41 in 1996.
Net income in 1997 decreased $314,190 to $692,709 down from $1,006,899 in 1996.
The decrease is consistent with the drop in revenues.
Direct operating expenses in 1997 decreased $21,609 to $1,094,059 down from
$1,115,668 in 1996. The majority of the drop is due to decreased supplies and
maintenance expenditures. Significant renovations are planned for the Portland
and Yakima motels which will result in higher supplies and maintenance expenses
in 1998.
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As discussed in Item 1, the partnership operates the motels as a franchise of
Super 8 Motels, Inc. Nationwide the Super 8 motel chain continues to grow,
increasing the name familiarity of the chain.
Number of Super 8 Motels Increase
------------------------ --------
As of December 31, 1997 1,614 122
1996 1,492 92
1995 1,400 180
1994 1,220 159
1993 1,060 119
1992 941 78
The Super 8 "Superline" national reservation system and "VIP Club"
(approximately 5,000,000 members) continue to be improved.
Distributions paid to the partners in 1995 aggregated $1,174,026, which equaled
a per-unit amount necessary to pay to the limited partners a 10% cumulative
return on their investment from the final closing of the offering of units on
May 5, 1984. Subsequently, on January 31, 1996, the limited partners were paid
amounts, which varied by partner, necessary to pay that partner a 10% return on
their investment from the date of their investment (or, if later, the initial
breaking of the escrow established in connection with the offering on January
12, 1983) until the closing of the offering on May 5, 1984.
Prior to 1985, the Partnership had been accruing, the Motels' property
management fees. Even though the obligation to pay those fees exists, the terms
of the partnership agreement of the Partnership did not allow them to be paid
until such time as the limited partners have received a cumulative annual 10%
return on their adjusted capital investment. In previous filings with the United
States Securities and Exchange Commission (the "SEC"), and in the Partnership's
prior years' financial statements, the Partnership's accounting policy regarding
these fees was to expense them when paid (instead of when earned) and to not
accrue unpaid property management fees as a liability on the face of the balance
sheet.
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In 1994, the Partnership changed its accounting policy for property management
fees to reflect, on the Partnership's income statement, the expense when the
obligation to pay the fee was incurred and to accrue the corresponding liability
on the face of the Partnership's balance sheet. Thus, the financial information
contained in this report conforms with that reporting position. Previously,
incurred but unpaid management fees totaled $1,367,000 on December 31, 1995.
Subsequent to that date, the partnership paid $1,017,000 in accrued but
previously unpaid management fees. The unpaid fees as of December 31, 1997 total
$350,000. Attention is directed to Note 6 in the "Financial Statements," for a
discussion of property management fees. Additionally, see the discussion in Part
II, Item 6, "Selected Financial Data" of this report.
Year 2000 Compliance Issue
Currently, motel reservations, and credit card approvals are handled by
equipment and software provided respectively by Super 8 Motels, Inc. and the
individual banking institutions with which the properties do business.
Currently, internal accounting (with the exception of call accounting) is
completed manually. Pursuant to the POWER-UP program being designed, instituted
and paid for by Super 8 Motels, Inc., all motels will be provided a PC-based
Property Management System which integrates all reservations, credit card
approvals, call accounting, security and motel accounting into a single system.
This fully integrated system is to be in place at every motel within the Super 8
System by the third quarter of 1999. The equipment and software is new and has
been designed and developed by the Franchiser and the franchisee will be
required to utilize it. The Partnership has been assured by Super 8 Motels, Inc.
that the total system will be year 2000 compliant. The total cost of this
conversion which may be borne by the motels owned by the partnership should not
exceed $5,000 per motel.
Internally, the general partner of Super 8 Motels Northwest II and the
affiliated management company have undertaken the task of totally replacing the
current corporate accounting system to ensure that it will fully integrate with
the new Property Management System being installed by Super 8 Motels, Inc. It is
anticipated that this conversion will be completed by the year end 1998. Part of
the hardware and software will be provided by the POWER-UP initiative at no cost
to the company. For those systems purchased by the general partner or
affiliates, all software, hardware and systems vendors will be required to
certify that their products are year 2000 compliant. The cost attributed to each
motel in the partnership for this conversion should not exceed $5,000 per motel.
ITEM 8.
Financial Statements and Supplementary Data
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See Independent Auditor's Report and Financial Statements, pages 2 through 13,
for financial statements incorporated by reference; and Item 14 for a list of
the Financial Statement Schedules filed as a part of this report.
ITEM 9.
Disagreements on Accounting and Financial Disclosure
None.
PAGE 11
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PART III
ITEM 10.
Directors and Executive Officers of the Registrant
The General Partners of the Partnership are The Peninsula Group Incorporated and
Gerald L. Whitcomb.
Gerald L. Whitcomb, age 54, was educated at the University of Nebraska with
majors in economics and business finance and obtained a JD. in Law. He practiced
law from 1969 to 1979. Since 1979, he has been involved in the management of The
Peninsula Group, Inc., (formerly known as Super 8 Motels Northwest, Inc.) and
its affiliates.
Mr. Whitcomb is the principal organizer and stockholder of The Peninsula Group
Incorporated and its subsidiaries. Mr. Whitcomb is the general partner of Super
8 Motels Northwest I, a limited partnership whose limited partnership units were
registered under the Securities Act of 1933. He is also a partner in Super 8
Motel Developers, which is General Partner of Super 8 Motel of Lacey Associates,
a General Partner of Super 8 Motels Northwest II, Juneau Motel Associates,
Anchorage Motel Associates and Peninsula Motel Associates, all Washington
limited partnerships. Mr. Whitcomb is the Managing Partner of Tongass Motel
Associates, an Alaska general partnership, Mr. Whitcomb is partner in Peninsula
Properties Partnership, a Washington general partnership.
The Peninsula Group Incorporated is a privately owned Washington corporation. It
owns franchise rights for Super 8 Motels in Washington, Oregon and selected
sites in Alaska.
The officers and directors of The Peninsula Group Incorporated are as follows:
Age Office Term of Office
--- ------ --------------
Gerald L. Whitcomb 54 Director, Treasurer and President One
Maryanne Whitcomb 50 Chairman, Secretary,
and Executive Vice President One
Lawrence Knudsen 56 Director and Executive Vice President One
H. Samual Polack 56 Executive Vice President One
Cortnae del Valle 26 Director One
Kelly M. Ervin 23 Director One
Due to a change in management of the Partnership's General Partner's offices
where the individual responsible for ensuring that appropriate filings are made
with the SEC, some recently required filings on Forms 3, 4 or 5 appear not to
have been timely made. The Partnership is working closely with its counsel to
promptly rectify any such delinquent filings.
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ITEM 11.
Executive Compensation
The General Partners received no salary or bonus compensation from the
Partnership during fiscal year ended December 31, 1997. See Item 13.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management
Title Name Percent
----- ---- -------
General Partner Gerald L. Whitcomb .1
The Peninsula Group, Inc. .9
Limited Partners Various 99.0
100.0
Gerald L. Whitcomb and Maryanne Whitcomb are the beneficial owners of all of the
stock of The Peninsula Group Incorporated and also own four Units individually
and four units in trust for their children in addition to his General Partner
interest. Kelly Ervin owns two Units individually.
See Note 3 of Notes to the "Financial Statements" for a discussion of
distributions and allocations of profits and losses.
ITEM 13.
Certain Relationships and Related Transactions
See the Notes to the Partnership's "Financial Statements."
PAGE 13
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PART IV
ITEM 14.
Exhibits Financial Statement Schedules, and Report on form 8-K
Exhibits incorporated by reference
1.1 Wholesaler's Agreement
1.2 Selected Dealer's Agreement
4.1 Subscription Agreement (filed as Exhibit "B" to the prospectus).
4.2 Limited Partnership Agreement (filed as Exhibit "A" to the
Prospectus).
5.1 Opinion of counsel to the Partnership on the legality of Units being
issued.
8.1 Tax Opinion - set forth in full in the Amended Prospectus.
10.1 Territorial Agreement
10.2(a) State of Washington Franchise Agreement
10.2(b) State of Oregon Franchise Agreement
10.3 Management Agreement
10.4 Ground Sublease and amendment thereto for Bremerton site.
10.5 Option to Purchase Portland site.
10.6 Option to Lease Union Gap (Yakima) site.
16.1 Consent to use of Accountant's name in Registration Statement.
16.2 Letter re change in certifying accountant.
Exhibits filed herewith.
Financial Statements of the Registrant for the year ended December 31, 1997.
Financial Statements and supplemental schedules include:
Report of Independent Public Accountants
Balance Sheet
Statement of Income
Statement of Changes in Partners' Equity
Statement of Changes in Financial Position
Notes to Financial Statements
January, 1998 Partnership newsletter mailed to limited partners.
There were no reports on form 8-K during 1997.
Financial Data Schedule for the year ended December 31, 1997
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SIGNATURES
Pursuant to the requirements of Section 13 of 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:
Gerald L. Whitcomb
- ------------------------------------
GERALD L. WHITCOMB
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the persons below on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Gerald L. Whitcomb
- ------------------------------------
GERALD L. WHITCOMB
Director, Treasurer and President
The Peninsula Group Incorporated
/s/ Maryanne Whitcomb
- ------------------------------------
MARYANNE WHITCOMB, Chairman
Secretary and Executive Vice President
The Peninsula Group Incorporated
/s/ Lawrence P. Knudsen
- ------------------------------------
LAWRENCE P. KNUDSEN,
Executive Vice President
The Peninsula Group Incorporated
/s/ H. Samuel Polack
- ------------------------------------
H. SAMUEL POLACK
Executive Vice President
The Peninsula Group Incorporated
16
SUPER 8 MOTELS NORTHWEST II
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
17
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance sheet 2 - 3
Statement of income 4
Statement of changes in partners' equity 5
Statement of cash flows 6 - 7
Notes to financial statements 8 - 15
18
INDEPENDENT AUDITOR'S REPORT
To the General and Limited Partners
Super 8 Motels Northwest II
We have audited the accompanying balance sheets of Super 8 Motels Northwest II
as of December 31, 1997 and 1996, and the related statements of income, changes
in partners' equity, and cash flows for the three years ended December 31, 1997,
1996 and 1995. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Super 8 Motels Northwest II as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the three years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
Tacoma, Washington
February 2, 1998
19
SUPER 8 MOTELS NORTHWEST II
BALANCE SHEET
===============================================================================
ASSETS
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
CURRENT ASSETS
Cash and cash equivalents....................... $ 387,878 $ 551,202
Accounts receivable, trade...................... 15,042 17,457
Accounts receivable, affiliates................. -- 3,149
Inventory....................................... 58,858 58,319
Prepaid expenses................................ 6,912 11,613
----------- -----------
Total current assets......................... 468,690 641,740
----------- -----------
PROPERTY AND EQUIPMENT, at cost
Land............................................ 714,301 714,301
Buildings....................................... 4,097,107 4,097,107
Equipment, furniture, and fixtures.............. 1,242,261 1,241,326
----------- -----------
6,053,669 6,052,734
Less accumulated depreciation................... (2,906,997) (2,738,663)
----------- -----------
Total property and equipment................. 3,146,672 3,314,071
----------- -----------
OTHER ASSETS
Loan fees....................................... 26,375 26,375
Franchise fees.................................. 45,000 45,000
Lease option costs.............................. 6,000 6,000
----------- -----------
77,375 77,375
Less accumulated amortization................... (51,051) (46,214)
----------- -----------
Total other assets.......................... 26,324 31,161
----------- -----------
$ 3,641,686 $ 3,986,972
=========== ===========
2
===============================================================================
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SUPER 8 MOTELS NORTHWEST II
BALANCE SHEET
- ------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
DECEMBER 31,
----------------------------
1997 1996
---------- ----------
CURRENT LIABILITIES
Accounts payable, trade $ 17,862 $ 47,021
Accounts payable, affiliates 53,939 83,663
Accrued expenses 108,377 126,478
Current portion of long-term debt 127,000 155,000
---------- ----------
Total current liabilities 307,178 412,162
---------- ----------
NONCURRENT LIABILITIES
Long-term debt, net of current portion shown above 2,223,015 2,345,801
Accrued rent under lease agreements 152,550 137,021
---------- ----------
2,375,565 2,482,822
---------- ----------
ACCRUED PROPERTY AND MANAGEMENT FEES 350,000 699,048
---------- ----------
COMMITMENTS (Notes 7 and 9)
PARTNERS' EQUITY
General partners' equity 96,031 63,632
Limited partners' equity (authorized, issued and
outstanding 4,052 units) 512,912 329,308
---------- ----------
608,943 392,940
---------- ----------
$3,641,686 $3,986,972
========== ==========
The accompanying notes are an integral part of these financial statements. 3
- ------------------------------------------------------------------------------
21
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF INCOME
- ------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
SALES
Rooms $3,132,920 $3,500,148 $3,277,174
Other 113,201 99,682 85,069
---------- ---------- ----------
3,246,121 3,599,830 3,362,243
---------- ---------- ----------
DIRECT OPERATING EXPENSES
Payroll and related expenses 659,424 660,323 654,913
Supplies and maintenance 212,780 224,116 292,889
Utilities 191,653 195,160 187,831
Other 30,202 36,069 33,800
---------- ---------- ----------
1,094,059 1,115,668 1,169,433
---------- ---------- ----------
INDIRECT OPERATING EXPENSES
Taxes (principally property taxes) and fees 148,799 147,424 144,931
Advertising and promotion 83,566 82,104 126,888
Bank and credit card charges 45,411 44,493 47,000
Insurance 36,541 37,721 38,604
Other 12,584 14,731 22,660
---------- ---------- ----------
326,901 326,473 380,083
---------- ---------- ----------
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative service fees 205,999 191,324 182,235
Property management fees 162,328 179,999 168,112
Franchise fees 125,294 139,654 131,938
Professional services 37,949 42,279 36,257
Other 36,561 26,682 25,260
---------- ---------- ----------
568,131 579,938 543,802
---------- ---------- ----------
FIXED CHARGES
Interest expense 238,831 244,594 246,505
Depreciation 168,334 170,833 174,683
Lease expense - current 146,580 143,153 137,591
Lease expense - deferred 15,529 15,983 18,251
Amortization 4,838 4,838 4,838
---------- ---------- ----------
574,112 579,401 581,868
---------- ---------- ----------
INCOME FROM OPERATIONS 682,918 998,350 687,057
OTHER INCOME 9,791 8,549 18,847
---------- ---------- ----------
NET INCOME $ 692,709 $1,006,899 $ 705,904
========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 145.31 $ 211.22 $ 172.47
========== ========== ==========
4 The accompanying notes are an integral part of these financial statements.
- ------------------------------------------------------------------------------
22
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF CHANGES IN PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
General Limited
Partners Partners Total
--------- ----------- -----------
BALANCE, December 31, 1994 $ (25,819) $ 564,906 $ 539,087
Distributions paid (11,858) (1,174,026) (1,185,884)
Net income 7,059 698,845 705,904
--------- ----------- -----------
BALANCE, December 31, 1995 (30,618) 89,725 59,107
Distributions paid (56,785) (616,281) (673,066)
Net income 151,035 855,864 1,006,899
--------- ----------- -----------
BALANCE, December 31, 1996 63,632 329,308 392,940
Distributions paid (71,506) (405,200) (476,706)
Net income 103,905 588,804 692,709
--------- ----------- -----------
BALANCE, December 31, 1997 $ 96,031 $ 512,912 $ 608,943
========= =========== ===========
The accompanying notes are an integral part of these financial statements. 5
23
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Revenues and other income received in cash $ 3,261,475 $ 3,666,580 $ 3,349,353
Operating expenses paid in cash (2,553,719) (2,770,299) (2,039,115)
Interest paid (242,652) (244,360) (244,550)
----------- ----------- -----------
Net cash provided by operating activities 465,104 651,921 1,065,688
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (936) (23,550) --
Proceeds from sale of asset -- 3,000 --
----------- ----------- -----------
Net cash used in investing activities (936) (20,550) --
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from loan -- -- 129,580
Principal payments on long-term debt (150,786) (141,019) (95,912)
Payment of loan fees -- -- (2,500)
Distributions to:
Limited partners (405,200) (616,281) (1,174,026)
General partners (71,506) (56,785) (11,858)
----------- ----------- -----------
Net cash used in financing activities (627,492) (814,085) (1,154,716)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (163,324) (182,714) (89,028)
CASH AND CASH EQUIVALENTS, beginning of year 551,202 733,916 822,944
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 387,878 $ 551,202 $ 733,916
=========== =========== ===========
6 The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
24
SUPER 8 MOTELS NORTHWEST II
STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
-----------------------------------------------
1997 1996 1995
--------- ----------- -----------
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net income $ 692,709 $ 1,006,899 $ 705,904
--------- ----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 173,172 175,671 179,521
Lease expense - deferred 15,529 15,983 18,251
Loss on sale of asset -- 5,864 --
Change in assets and liabilities
Accounts receivable 5,564 58,201 (31,737)
Inventory (539) (466) 13,049
Prepaid expenses 4,701 3,387 18,583
Deposits and loan fees -- -- --
Accounts payable (58,883) 43,892 (15,454)
Accrued expenses (18,101) 10,602 9,459
Accrued management fees (349,048) (668,112) 168,112
--------- ----------- -----------
(227,605) (354,978) 359,784
--------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 465,104 $ 651,921 $ 1,065,688
========= =========== ===========
The accompanying notes are an integral part of these financial statements. 7
25
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
NOTE 1 - PARTNERSHIP OPERATIONS
Super 8 Motels Northwest II is a Washington limited partnership. The
partnership owns and operates three motels: one in Bremerton,
Washington; one in Portland, Oregon; and one in Yakima, Washington.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS - Cash equivalents are investments with maturity at
date of purchase of three months or less.
INVENTORY - Inventory consists of various operating supplies which have
been valued at cost.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
are depreciated using straight-line and accelerated methods over
estimated useful lives as follows:
Years
-----
Buildings 7, 15, and 30
Equipment, furniture and fixtures 5 and 7
LOAN FEES - Loan fees incurred in connection with financing for the
Yakima property are amortized over the term of the loan of 10 years.
FRANCHISE FEES AND LEASE OPTION COSTS - The initial franchise fees and
lease option costs are stated at cost; amortization of these amounts is
being provided using the straight-line method over 20 and 30 years,
respectively.
ACCRUED VACATION - It is the partnership's policy to expense vacation
pay as paid rather than as earned as required by generally accepted
accounting principles. The effect upon the financial statements is not
significant.
INCOME TAXES - No provision has been made in the accompanying financial
statements for federal or state income taxes as taxable income or loss
of the partnership is allocated to and included in the taxable income
of the partners. See Note 5 for additional discussion.
INCOME PER LIMITED PARTNERSHIP UNIT - Net income per limited
partnership unit is computed by dividing the limited partners' share of
net income by the limited partners' units outstanding for each year.
8
- -------------------------------------------------------------------------------
26
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK - The partnership has bank deposits in
excess of federal deposit insurance limits. The partnership's
management does not anticipate any adverse effect on its financial
position resulting from the credit risk.
USE OF ESTIMATES - The preparation of the 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.
NOTE 3 - DISTRIBUTIONS AND ALLOCATIONS OF PROFITS AND LOSSES
DISTRIBUTIONS - Under the partnership agreement, on a quarterly basis,
the managing general partner determines the amount, if any, of cash
available for distribution and distributes cash as follows:
- 1% to the general partners and 99% to the limited partners
until the limited partners have received a cumulative pretax
return on their adjusted capital investment equal to 10% per
year through the end of the partnership year for which the
distribution is being made, then
- Any remaining cash will be distributed 15% to the general
partners and 85% to the limited partners.
Distributions paid to the limited partners in 1995 aggregated
$1,174,026, which equaled a per-unit amount necessary to pay to the
limited partners a 10% cumulative return on their investment from the
final closing of the offering of units on May 5, 1984. Subsequently,
the limited partners were paid amounts, which varied by partner,
necessary to pay that partner a 10% return on their investment from the
date of their investment (or, if later, the initial breaking of the
escrow established in connection with the offering on January 12, 1983)
until the closing of the offering on May 5, 1985.
PROFIT AND LOSSES - Profits and losses are allocated 1% to the general
partners and 99% to the limited partners until the limited partners
have received a cumulative pretax return of 10% per year on their
adjusted capital investment; and thereafter, 15% to the general
partners and 85% to the limited partners.
9
27
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
---------- ----------
Note payable to bank, collateralized by
assignment of land lease and other property;
interest rate is variable and is adjusted
annually based on a treasury bill index plus
3.5%; payable in variable monthly
installments which is currently $18,826
including interest; due August 2009. The
interest rate at December 31, 1997 is 9% $1,634,802 $1,708,349
Note payable to bank, collateralized by
assignment of land lease and other property;
interest rate is variable and is adjusted
annually based upon a treasury bill index
plus 2.5%; payable in monthly installments
of $8,308, including interest; due February
2001. The interest rate at December 31, 1997
is 10.25% 700,248 725,377
Line of credit, collateralized by real
property; interest rate is variable at 1%
plus lender's prime rate, currently payable
in monthly installments of $4,167 plus
interest, due January 2000. The interest
rate at December 31, 1997 is 9.06% 14,965 67,075
---------- ----------
2,350,015 2,500,801
Less current portion 127,000 155,000
---------- ----------
$2,223,015 $2,345,801
========== ==========
10
- -------------------------------------------------------------------------------
28
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT (CONTINUED)
Based on the December 31, 1997 interest rates, principal payments
required on these notes during each of the next five years and
thereafter are as follows:
1998 $ 127,000
1999 123,000
2000 134,000
2001 153,000
2002 162,000
Thereafter 1,651,015
-----------
$ 2,350,015
===========
NOTE 5 - INCOME TAXES
The cost of certain assets and the amount of certain expenses reported
for federal income tax purposes are different from the amounts reported
under generally accepted accounting principles in the accompanying
financial statements. The differences arise primarily from:
- Depreciating the buildings for financial reporting purposes using
the straight-line method over a 30 year life, and for federal
income tax purposes using the straight-line method over a 15, 18,
or 31.5 year life.
- Depreciating furniture and equipment for financial reporting
purposes using accelerated and straight-line methods over a 5 or 7
year life, and for federal income tax purposes using the
accelerated cost recovery method or the modified accelerated cost
recovery method over a 5 or 7 year life.
- Amortizing capitalized interest for federal income tax purposes
using a 10 year life and for financial reporting purposes
amortizing it over the life of the building.
- Deducting sales tax incurred prior to 1987 on property and
equipment acquisitions as an expense for federal income tax
purposes and capitalizing it for financial reporting purposes.
11
29
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 - INCOME TAXES (CONTINUED)
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax reporting purposes:
1997 1996 1995
--------- ----------- ---------
Net income as shown in the statement of
income $ 692,709 $ 1,006,899 $ 705,904
Additional depreciation and amortization
for income tax purposes (40,965) (38,785) (41,488)
Accrued (paid) property management fees (349,048) (668,112) 168,112
Lease expense - deferred 15,529 15,983 18,251
Other 4,148 6,652 7,569
--------- ----------- ---------
Net income for federal income tax
reporting purposes $ 322,373 $ 322,637 $ 858,348
========= =========== =========
NOTE 6 - RELATED-PARTY TRANSACTIONS
Transactions between the partnership and the general partners, The
Peninsula Group, Inc. (formerly named Super 8 Motels Northwest, Inc.)
and Gerald L. Whitcomb and between affiliates of the general partners
are as follows:
1997 1996 1995
-------- -------- --------
Purchases of supplies and equipment $182,941 $148,935 $266,673
Administrative service fee $205,999 $191,324 $182,235
Property management fees $162,328 $179,999 $168,112
The partnership has a management agreement with an affiliate of the
general partners to employ the affiliate for a period of 20 years as
manager of the motels owned by the partnership. The agreement provides
for payment of a property management fee to the affiliate equal to 5%
of the partnership's gross revenues from motel operations in addition
to reimbursement of certain out-of-pocket costs incurred by the
affiliate in connection with management of the property. The 5% base
fees are recorded as property management fees. The reimbursements of
out-of-pocket costs are recorded as administrative service fees.
12
30
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 6 - RELATED-PARTY TRANSACTIONS (CONTINUED)
Payment of property management fees is subordinated to receipt by the
limited partners of a cumulative, pretax return on their adjusted
capital investment of 10% per annum. This 10% return was achieved
during 1996. Accordingly, current year management fees of $162,328 and
prior years' management fees totaling $349,048 were paid in 1997. The
balance of unpaid management fees of $350,000 will be paid only as
sufficient operational cash flow is experienced.
NOTE 7 - COMMITMENTS
FRANCHISE AGREEMENTS - The partnership has purchased franchise rights
to provide motel services to the general public using a system commonly
known as Super 8 Motels. An initial franchise fee of $15,000 was paid
for each motel and the partnership is committed to pay additional fees
equal to 4% of gross room revenue for the 20 year term of the
respective agreements. In addition, 1% of gross room revenue is
remitted to Super 8 Motels for advertising and participation in the
national reservation system. This amount is included in advertising and
promotion.
LEASE COMMITMENTS - The partnership leases the land upon which the
Bremerton and Yakima motels are located under three operating leases
with initial lease terms of 36, 30, and 24 years.
The Bremerton and one of the Yakima land leases provide for adjustment
of the minimum rent ranging from one to three years by a factor based
on changes in the consumer price index.
The remaining Yakima land lease provides for adjustment of the minimum
rent annually by a factor of 5%. This lease requires fixed minimum
payment escalations over the lease term. Generally accepted accounting
principles require the partnership to recognize lease expense on a
straight-line basis over the term of each lease. As a result, lease
expense is presently greater than cash lease payments. Cash lease
payments are captioned "lease expense -- current" in the statement of
operations. Noncash lease expense is captioned "lease expense --
deferred" in the statement of income. In the balance sheet under
noncurrent liabilities, "accrued rent under lease agreements" reflects
the accrual of noncash lease expense. This accrued rent will not begin
to be paid until 2004.
13
31
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS (CONTINUED)
Minimum lease payments based on current rents are as follows:
1998 $ 149,928
1999 154,514
2000 158,168
2001 162,081
2002 168,734
Thereafter 2,720,181
----------
$3,513,606
==========
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value
because of the short-term maturity of those instruments.
LONG-TERM DEBT - The carrying amounts of the partnership's borrowings
under its long-term revolving credit agreement and notes payable
approximate fair value.
NOTE 9 - YEAR 2000 COMPLIANCE
Currently, motel reservations and credit card approvals are handled by
equipment and software provided respectively by Super 8 Motels, Inc.
and the individual banking institutions with which the properties do
business. Currently, internal accounting (with the exception of call
accounting) is completed manually. Pursuant to the POWER-UP program
being designed, instituted, and paid for by Super 8 Motels, Inc. all
motels will be provided a PC-based Property Management System which
integrates all reservations, credit card approvals, call accounting,
security, and motel accounting into a single system.
This fully integrated system is to be in place at every motel within
the Super 8 System by the third quarter of 1999. The new equipment and
software have been designed and developed by the franchisor, and the
franchisee will be required to utilize it. The partnership has been
assured by Super 8 Motels, Inc. that the total system will be year 2000
compliant. The total cost of this conversion, which may be borne by the
motels owned by the partnership, should not exceed $5,000 per motel.
14
- --------------------------------------------------------------------------------
32
SUPER 8 MOTELS NORTHWEST II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 9 - YEAR 2000 COMPLIANCE (CONTINUED)
Internally, the general partner and the affiliated management company
have undertaken the task of totally replacing the current corporate
accounting system to ensure that it will fully integrate with the new
Property Management Systems being installed by Super 8 Motels, Inc. It
is anticipated that this conversion will be completed by year end 1998.
Part of the hardware and software will be provided by the POWER-UP
initiative at no cost to the Company. For those systems purchased by
the general partner or affiliates, all software, hardware, and systems
vendors will be required to certify that their products are year 2000
compliant. The cost attributed to each motel in the partnership for
this conversion should not exceed $5,000 per motel.
15