<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
FILED PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 18, 1997
CAPSTAR HOTEL COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-12017 52-1979383
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification
Number)
</TABLE>
1010 WISCONSIN AVENUE, N.W.
SUITE 650
WASHINGTON, D.C. 20007
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 965-4455
<PAGE>
FORM 8-K
ITEM 5. Other Events
In connection with the probable acquisition by CapStar Hotel
Company of the Governor Morris Hotel & Conference Center in
Morristown, New Jersey, and in accordance with Rule 3-05 of
Regulation S-X under the Securities Act of 1933, as amended,
attached hereto as Exhibit 99.1 and 99.2 are the financial
statements of Governor Morris Hotel Partners, L.P. as of
and for the periods ended June 30, 1997, and December 31, 1996
and 1995.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
Exhibit
Number
99.1 Balance Sheet as of June 30, 1997 (unaudited), Statements
of Operations, Changes in Partners' Deficit and Cash
Flows for the six months ended June 30, 1997 (unaudited)
for Governor Morris Hotel Partners, L.P. with
accompanying notes and Accountants' Compilation Report.
99.2 Balance Sheets as of December 31, 1996 and 1995,
Statements of Operations, Changes in Partners' Deficit
and Cash Flows for the years ended December 31, 1996 and
1995 for Governor Morris Hotel Partners, L.P. with
accompanying notes and Independent Auditors' Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 18, 1997
CAPSTAR HOTEL COMPANY
By: /s/ John Emery
------------------------------------
John Emery
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number
99.1 Balance Sheet as of June 30, 1997 (unaudited), Statements of
Operations, Changes in Partners' Deficit and Cash Flows for the six
months ended June 30, 1997 (unaudited) for Governor Morris Hotel
Partners, L.P. with accompanying notes and Accountants' Compilation
Report.
99.2 Balance Sheets as of December 31, 1996 and 1995, Statements of
Operations, Changes in Partners' Deficit and Cash Flows for the years
ended December 31, 1996 and 1995 for Governor Morris Hotel Partners,
L.P. with accompanying notes and Independent Auditors' Report.
<PAGE>
Exhibit 99.1
ACCOUNTANTS' COMPILATION REPORT
-------------------------------
To the Partners
Governor Morris Hotel Partners, L.P.
We have compiled the accompanying balance sheet of Governor Morris Hotel
Partners, L.P. (the "Partnership") as of June 30, 1997 and the related
statements of operations, changes in partners' deficit and cash flows for the
six months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of the Partnership's management. We
have not audited or reviewed the accompanying financial statements and,
accordingly, do not express an opinion or any other form of assurance on them.
Pinsker, Goldberg & Company
Lakewood, New Jersey
September 3, 1997
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
BALANCE SHEET
JUNE 30, 1997
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 1,428,828
Accounts receivable, net...................................... 404,699
Inventory..................................................... 226,817
Prepaid expenses.............................................. 31,870
-----------
Total current assets........................................ 2,092,214
Property and equipment, net..................................... 7,173,126
Other assets
Restricted cash-capital reserve............................... 37,961
Other assets.................................................. 47,000
-----------
Total assets................................................ $ 9,350,301
-----------
-----------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities
Current maturities of long-term notes........................ $ 140,698
Accounts payable, trade...................................... 322,696
Accrued expenses............................................. 384,695
Accrued management fees - related party...................... 34,745
Advance deposits............................................. 82,392
Due to general partner....................................... 49,857
-----------
Total current liabilities.................................. 1,015,083
Noncurrent liabilities
Long-term notes, less current maturities..................... 9,474,863
-----------
Total liabilities before subordinated obligation........... 10,489,946
Subordinated obligation - related party........................ 4,885,750
-----------
Total liabilities.......................................... 15,375,696
Partners' deficit.............................................. (6,025,395)
-----------
Total liabilities and partners' deficit.................... $ 9,350,301
-----------
-----------
See Accountants' Compilation Report and Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Revenue
Room revenue........................ $ 2,921,405
Food and beverage revenue........... 1,678,808
Telephone sales..................... 76,475
Other revenue....................... 106,460
-----------
Total revenue..................... 4,783,148
-----------
Operating expenses
Salaries and related costs.......... 1,591,411
Food and beverage cost of sales..... 424,974
Utilities........................... 275,033
Property taxes and insurance........ 166,973
Supplies............................ 144,768
Advertising and promotion........... 88,565
Commissions and reservation expenses 176,897
Repairs and maintenance............. 104,165
Other operating expenses............ 78,812
General and administrative.......... 131,074
Other cost of sales................. 39,355
Telephone........................... 34,901
-----------
Total operating expenses.......... 3,256,928
-----------
Income from operations................ 1,526,220
Other expenses
Interest expense.................... 413,873
Management fees - related party..... 141,963
Subordinated interest - related
party.............................. 164,000
Depreciation........................ 225,000
-----------
Net income............................ $ 581,384
-----------
-----------
See Accountants' Compilation Report and Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Partners' deficit, beginning of period......... $ (6,200,779)
Net income..................................... 581,384
Partners' distributions........................ (406,000)
------------
Partners' deficit, end of period............... $ (6,025,395)
-------------
-------------
See Accountants' Compilation Report and Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
Cash Flows From Operating Activities
Net income......................................................$ 581,384
Reconciliation to net operating cash flows:
Noncash expenses -
Depreciation................................................ 225,000
Changes in assets and liabilities -
(Increase) decrease in -
Trade receivables......................................... 103,425
Inventory................................................. (28,179)
Other assets.............................................. (31,870)
Cash replacement reserve.................................. (34,071)
(Decrease) increase in -
Accounts payable and accrued expenses..................... (53,391)
Accrued management fees................................... (18,114)
Advance deposits.......................................... 12,807
Accrued interest - advances............................... 1,854
Accrued subordinated interest............................. 164,000
----------
Net operating cash flows................................ 922,845
----------
Cash Flows From Investing Activities
Cash paid for improvements and furnishings...................... (70,238)
----------
Cash Flows From Financing Activities
Mortgage and note principal payments............................ (102,391)
Cash distributions to partners.................................. (406,000)
----------
Net financing cash flows................................ (508,391)
----------
Increase in cash and cash equivalents............................. 344,216
Cash and cash equivalents, beginning of period.................... 1,084,612
----------
Cash and cash equivalents, end of period..........................$1,428,828
----------
----------
Supplemental disclosures:
The Partnership paid $411,998 in interest expense for the six months ended
June 30, 1997.
See Accountants' Compilation Report and Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 -- NATURE OF BUSINESS AND ORGANIZATION
Nature of Business
Governor Morris Hotel Partners, L.P. (the "Partnership"), a New Jersey
Limited Partnership, was organized in December 1987 for the purpose of
acquiring and operating a 198 room hotel known as The Governor Morris (the
"Hotel"), located in Morristown, New Jersey. The Hotel includes banquet and
conference room facilities, two restaurants, and a night club. The revenue of
the Hotel is primarily generated from area businesses and residents.
General Partner
Harmon American Equities, Inc. (the "General Partner") is the general partner
of the Partnership. The principals of the General Partner also own 98 percent
of the limited partner units.
Chapter 11 Reorganization
On December 13, 1990, the Partnership filed a voluntary petition for
Reorganization under Chapter 11 of the United States Bankruptcy Code. The
purpose of the restructuring was to reduce the Company's debt service
requirements to an amount sustainable by the Hotel's operations. The
Company's plan of reorganization filed with the Bankruptcy Court was approved
in April 1994.
The key elements of the restructuring were as follows:
(a) Reduced the outstanding mortgages and advances from approximately
$23,500,000 to $10,000,000. The debt reduction included a $7,126,000
reduction in the purchase price of the Hotel.
(b) Reduction of the outstanding prepetition trade payables from
$500,000 to $50,000.
(c) Established a $3,740,000 third mortgage to the principals of the general
partner in consideration for loans made to the Partnership during the
plan of reorganization, as more fully described in note 5.
(d) Terminated existing management contracts.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include investments in highly liquid securities with
maturities of three months or less when acquired. Restricted deposits are not
considered as cash or cash equivalents due to their restricted nature.
Allowance for Uncollectible Accounts
Receivables are reflected net of an allowance for doubtful accounts which is
estimated based on collectibility and collection experience of the
Partnership. The allowance for uncollectible accounts at June 30, 1997 was
$35,000.
Property and Equipment
Property and equipment are stated at cost. The original purchase price of
$18,400,000 was reduced by $7,126,000 in 1992 which represented the reduction
of purchase price negotiated by the Partnership and the seller of the Hotel.
Depreciation has been provided on the straight-line method over the estimated
useful lives of the assets. The estimated useful lives of depreciable assets
are:
Years
-----
Building................................. 31
Improvements............................. 10-15
Furniture and equipment.................. 7
Expenditures for repairs and maintenance are charged to income as incurred;
improvements and additions are capitalized and depreciated as discussed above.
Income Taxes
The partners include their share of Partnership income or loss in their
respective tax returns and, accordingly, no Federal and State income taxes
have been provided in the accompanying financial statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Concentration of Credit Risk - Financial Instruments
Financial instruments that potentially subject the Partnership to credit risk
are principally cash and trade receivables. The Partnership places its cash
with high quality financial institutions. At times such amounts may be in
excess of the FDIC insurance limits. At June 30, 1997, the Partnership had
approximately $1,344,000 in cash deposited in excess of FDIC insurance
limits. Trade receivables are primarily from large corporate customers which
are located in the Morris County, New Jersey area. The Partnership does not
require collateral or other support to secure trade receivables.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997:
Land.......................................... $ 1,070,899
Building and improvements..................... 8,828,346
Furnishings and equipment..................... 1,473,766
Transportation equipment...................... 106,676
Capital leased equipment...................... 57,000
-----------
11,536,687
Less, accumulated depreciation................ (4,363,561)
-----------
$ 7,173,126
-----------
-----------
Property and equipment includes approximately $548,000 in fully depreciated
equipment at June 30, 1997.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 4 -- LONG-TERM NOTES PAYABLE
Long-term notes payable consisted of the following at June 30, 1997:
Mortgage note - 1st
mortgage on Hotel, interest
at 8.5%, payable through 9/1999.............. $ 8,618,756
Mortgage note - 2nd
mortgage on Hotel, interest
at 8.5%, payable through 9/1999.............. 957,640
Improvement note - interest at 7%,
payable through 4/1998....................... 20,876
Capital equipment leases -
payable through 10/1999...................... 18,289
-----------
$ 9,615,561
-----------
-----------
The mortgage notes are secured by substantially all of the assets of the
Partnership. The notes also contain restrictions on the general operations of
the Partnership.
The mortgage notes also require the Partnership to establish a capital
replacement reserve with the mortgagee. The annual required reserve
contribution is based on three percent of gross revenue of the Hotel, less
actual capital expenditures.
The scheduled maturities for long-term notes existing at June 30, 1997 are as
follows:
June 30 -
1998.................. $ 140,698
1999.................. 131,358
2000.................. 9,343,505
----------
$9,615,561
-----------
-----------
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 5 -- SUBORDINATED OBLIGATION
The General Partner paid Prime Hospitality Corp., the former holder of the
first and second mortgages, $2,750,000 in 1992 pursuant to a mortgage
modification agreement negotiated in the Chapter 11 Reorganization. The
General Partner also advanced the Partnership $400,000 in 1992 for
improvements to the Hotel. In consideration for these advances and other
amounts paid by the General Partner, the Partnership executed a $3,740,000
subordinated note which is secured by a third mortgage on the Hotel. The note
provides for interest only payments based on an 8.75% rate and payable only
to the extent of available cash flow. Accrued and unpaid interest does not
bear additional interest and is payable when the Partnership has available
cash flow. The Partnership accrued $164,000 in interest on the note for the
six months ended June 30, 1997. The Partnership made no interest payments on
the note in 1996. The outstanding principal is payable only out of the
available proceeds of a sale or refinancing of the Hotel. The note also
provides for an equity premium of an additional $3,740,000 which is also
payable out of the proceeds of a sale or refinancing of the Hotel.
The subordinated note consisted of the following at June 30, 1997:
Subordinated note........... $ 3,740,000
Accrued interest............ 1,145,750
-----------
$ 4,885,750
-----------
-----------
NOTE 6 -- LEASE COMMITMENT
The Partnership leases approximately four acres of land under a long-term
noncancellable operating lease which is payable to 2015. The land is adjacent
to the Partnership's property and includes a portion of the Hotel's parking
area. The lease provides for current annual rentals of $17,500 which is
payable through 1999. Thereafter the annual rentals are periodically adjusted
based on the consumer price index.
NOTE 7 -- RELATED PARTY TRANSACTIONS
Management Fees -- The Partnership has engaged the General Partner to manage
the operations of the Hotel. Under the terms of the agreement, the General
Partner receives a fee equal to 3% of gross revenue and these fees totaled
$141,963 for the six months ended June 30, 1997. Accrued and unpaid
management fees totaled $34,745 at June 30, 1997.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
Note 7 -- RELATED PARTY TRANSACTIONS (concluded)
General Partner Advances -- The amounts due the General Partner for advances
bear interest at 10% per annum and are payable out of available cash flow.
General Partner advances consisted of the following at June 30, 1997:
Advances............ $37,650
Accrued interest.... 12,207
-------
$49,857
-------
-------
* * *
<PAGE>
Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
To the Partners
Governor Morris Hotel Partners, L.P.
We have audited the accompanying balance sheets of Governor Morris Hotel
Partners, L.P. (the "Partnership") as of December 31, 1996 and 1995 and the
related statements of operations, changes in partners' deficit and cash flows
for the years then ended. 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 the Partnership at December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Pinsker, Goldberg & Company
Lakewood, New Jersey
February 1, 1997
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
Current assets
Cash and cash equivalents..................... $ 1,084,612 $ 584,539
Accounts receivable, net...................... 508,124 470,325
Inventory..................................... 198,638 137,351
----------- -----------
Total current assets........................ 1,791,374 1,192,215
Property and equipment, net..................... 7,327,888 7,344,404
Other assets
Restricted cash-capital reserve............... 3,890 100,460
Other assets.................................. 47,000 48,106
----------- -----------
Total assets................................ $ 9,170,152 $ 8,685,185
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities
Current maturities of long-term notes......... $ 148,940 $ 141,296
Accounts payable, trade....................... 424,036 364,711
Accrued expenses.............................. 336,746 229,806
Accrued management fees - related party....... 52,859 587,775
Advance deposits.............................. 69,585 83,766
Due to general partner........................ 48,003 44,238
----------- -----------
Total current liabilities................... 1,080,169 1,451,592
Noncurrent liabilities
Long-term notes, less current maturities...... 9,569,012 9,731,008
----------- -----------
Total liabilities before
subordinated obligation.................... 10,649,181 11,182,600
Subordinated obligation - related party......... 4,721,750 4,394,500
----------- -----------
Total liabilities........................... 15,370,931 15,577,100
Partners' deficit............................... (6,200,779) (6,891,915)
----------- -----------
Total liabilities and partners' deficit..... $ 9,170,152 $ 8,685,185
----------- -----------
----------- -----------
See Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Room revenue $ 5,003,629 $ 3,799,915
Food and beverage revenue 3,627,571 3,277,189
Telephone sales 133,165 113,518
Other revenue 214,065 178,682
------------ ------------
Total revenue 8,978,430 7,369,304
------------ ------------
Operating expenses
Salaries and related costs 2,853,638 2,422,470
Food and beverage cost of sales 929,702 795,105
Utilities 690,719 653,417
Property taxes and insurance 339,067 331,507
Supplies 274,353 249,449
Advertising and promotion 191,010 192,014
Commissions and reservation expenses 237,863 181,876
Repairs and maintenance 173,436 180,425
Other operating expenses 166,531 175,912
General and administrative 242,158 179,787
Other cost of sales 90,233 99,756
Telephone 75,471 65,210
------------ ------------
Total operating expenses 6,264,181 5,526,928
------------ ------------
Income from operations 2,714,249 1,842,376
Other expenses
Interest expense 839,643 858,769
Management fees - related party 269,353 220,684
Subordinated interest - related party 327,250 327,250
Restructure and refinance costs 78,550 228,650
Depreciation 438,317 427,180
Nonrecurring charges 70,000 --
------------ ------------
Net income (loss) $ 691,136 $ (220,157)
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Partners' deficit, beginning of year $ (6,891,915) $ (6,671,758)
Net income (loss) 691,136 (220,157)
------------ ------------
Partners' deficit, end of year $ (6,200,779) $ (6,891,915)
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Cash Flows From Operating Activities
Net income (loss) $ 691,136 $ (220,157)
Reconciliation to net operating cash flows:
Noncash expenses -
Depreciation 438,317 427,180
Changes in assets and liabilities -
(Increase) decrease in -
Cash-attorney escrow -- 111,909
Trade receivables (37,799) (143,356)
Inventory (61,287) (5,479)
Other assets 1,106 12,123
Cash replacement reserve 96,570 (100,460)
(Decrease) increase in -
Accounts payable and accrued expenses 166,064 (160,790)
Accrued management fees (534,916) 220,684
Advance deposits (14,181) 21,054
Accrued interest - advances 3,765 3,765
Accrued subordinated interest 327,250 327,250
----------- -----------
Net cash provided by operating
activities 1,076,025 493,723
----------- -----------
Cash Flows From Investing Activities
Cash paid for improvements and furnishings (421,600) (66,642)
----------- -----------
Cash Flows From Financing Activities
Mortgage and note principal payments (154,352) (145,444)
----------- -----------
Increase in cash and cash equivalents 500,073 281,637
Cash and cash equivalents, beginning of year 584,539 302,902
----------- -----------
Cash and cash equivalents, end of year $ 1,084,612 $ 584,539
----------- -----------
----------- -----------
Supplemental disclosures:
The Partnership paid $836,476 and $858,769 in interest expense in 1996 and
1995, respectively.
See Notes to Financial Statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Nature of Business
Governor Morris Hotel Partners, L.P. (the "Partnership"), a New Jersey
Limited Partnership, was organized in December 1987 for the purpose of
acquiring and operating a 198 room hotel known as The Governor Morris (the
"Hotel"), located in Morristown, New Jersey. The Hotel includes banquet and
conference room facilities, two restaurants, and a night club. The revenue of
the Hotel is primarily generated from area businesses and residents.
General Partner
Harmon American Equities, Inc. (the "General Partner") is the general
partner of the Partnership. The principals of the General Partner also own 98
percent of the limited partner units.
Chapter 11 Reorganization
On December 13, 1990, the Partnership filed a voluntary petition for
Reorganization under Chapter 11 of the United States Bankruptcy Code. The
purpose of the restructuring was to reduce the Company's debt service
requirements to an amount sustainable by the Hotel's operations. The
Company's plan of reorganization filed with the Bankruptcy Court was approved
in April 1994.
The key elements of the restructuring were as follows:
(a) Reduced the outstanding mortgages and advances from approximately
$23,500,000 to $10,000,000. The debt reduction included a $7,126,000
reduction in the purchase price of the Hotel.
(b) Reduction of the outstanding prepetition trade payables from $500,000 to
$50,000.
(c) Established a $3,740,000 third mortgage to the principals of the general
partner in consideration for loans made to the Partnership during the
plan of reorganization, as more fully described in note 5.
(d) Terminated existing management contracts.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include investments in highly liquid securities with
maturities of three months or less when acquired. Restricted deposits are not
considered as cash or cash equivalents due to their restricted nature.
Allowance for Uncollectible Accounts
Receivables are reflected net of an allowance for doubtful accounts
which is estimated based on collectibility and collection experience of the
Partnership. The allowance for uncollectible accounts at December 31, 1996
and 1995 was $28,000 and $35,000, respectively.
Property and Equipment
Property and equipment are stated at cost. The original purchase price of
$18,400,000 was reduced by $7,126,000 in 1992 which represented the reduction
of purchase price negotiated by the Partnership and the seller of the Hotel.
Depreciation has been provided on the straight-line method over the estimated
useful lives of the assets. The estimated useful lives of depreciable assets
are:
Years
-----
Building.......................... 31
Improvements...................... 10-15
Furniture and equipment........... 7
Expenditures for repairs and maintenance are charged to income as
incurred; improvements and additions are capitalized and depreciated as
discussed above.
Income Taxes
The partners include their share of Partnership income or loss in their
respective tax returns and, accordingly, no Federal and State income taxes
have been provided in the accompanying financial statements.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Concentration of Credit Risk - Financial Instruments
Financial instruments that potentially subject the Partnership to credit
risk are principally cash and trade receivables. The Partnership places its
cash with high quality financial institutions. At times such amounts may be
in excess of the FDIC insurance limits. At December 31, 1996, the Partnership
had approximately $966,000 in cash deposited in excess of FDIC insurance
limits. Trade receivables are primarily from large corporate customers which
are located in the Morris County, New Jersey area. The Partnership does not
require collateral or other support to secure trade receivables.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996
and 1995:
1996 1995
---- ----
Land................................ $ 1,070,899 $ 1,070,899
Building and improvements........... 8,828,346 8,449,224
Furnishings and equipment........... 1,403,528 1,361,050
Transportation equipment............ 106,676 106,676
Capital leased equipment............ 57,000 57,000
----------- -----------
11,466,449 11,044,849
Less, accumulated depreciation...... (4,138,561) (3,700,445)
----------- -----------
$ 7,327,888 $ 7,344,404
----------- -----------
----------- -----------
Property and equipment includes approximately $548,000 in fully
depreciated equipment at December 31, 1996.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 4 - LONG-TERM NOTES PAYABLE
Long-term notes payable consisted of the following at December 31, 1996
and 1995:
1996 1995
---- ----
Mortgage note - 1st
mortgage on Hotel, interest
at 8.5%, payable through 9/1999......... $8,666,482 $8,756,079
Mortgage note - 2nd
mortgage on Hotel, interest
at 8.5%, payable through 9/1999......... 962,943 972,898
Transportation notes - secured by
vans and trucks, interest 9.5% -
11%, payable through 11/1999............ 34,047 61,251
Improvement note - interest at 7%,
payable through 4/1998.................. 32,831 55,525
Capital equipment leases -
payable through 10/1999................. 21,649 26,551
----------- -------------
$9,717,952 $9,872,304
----------- -------------
----------- --------------
The mortgage notes are secured by substantially all of the assets of the
Partnership. The notes also contain restrictions on the general operations of
the Partnership.
The mortgage notes also require the Partnership to establish a capital
replacement reserve with the mortgages. The annual required reserve
contribution is based on three percent of gross revenue of the Hotel, less
actual capital expenditures.
The scheduled maturities for long-term notes existing at December 31,
1996 are as follows:
1997................ $ 148,940
1998................ 145,245
1999................ 9,423,767
----------
$9,717,952
----------
----------
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5 - SUBORDINATED OBLIGATION
The General Partner paid Prime Hospitality Corp., the former holder of
the first and second mortgages, $2,750,000 in 1992 pursuant to a mortgage
modification agreement negotiated in the Chapter 11 Reorganization. The
General Partner also advanced the Partnership $400,000 in 1992 for
improvements to the Hotel. In consideration for these advances and other
amounts paid by the General Partner, the Partnership executed a $3,740,000
subordinated note which is secured by a third mortgage on the Hotel. The note
provides for interest only payments based on an 8.75% rate and payable only
to the extent of available cash flow. Accrued and unpaid interest does not
bear additional interest and is payable when the Partnership has available
cash flow. The Partnership accrued $327,250 in interest on the note in 1996
and 1995. The Partnership made no interest payments on the note in 1996 and
1995. The outstanding principal is payable only out of the available proceeds
of a sale or refinancing of the Hotel. The note also provides for an equity
premium of an additional $3,740,000 which is also payable out of the proceeds
of a sale or refinancing of the Hotel.
The subordinated note consisted of the following at December 31, 1996
and 1995:
1996 1995
----------- -----------
Subordinated note............ $ 3,740,000 $ 3,740,000
Accrued interest............. 981,750 654,500
----------- -----------
$ 4,721,750 $ 4,394,500
----------- -----------
----------- -----------
NOTE 6 - LEASE COMMITMENT
The Partnership leases approximately four acres of land under a long-term
noncancellable operating lease which is payable to 2015. The land is adjacent
to the Partnership's property and includes a portion of the Hotel's parking
area. The lease provides for current annual rentals of $17,500 which is
payable through 1999. Thereafter the annual rentals are periodically adjusted
based on the consumer price index.
NOTE 7 - RELATED PARTY TRANSACTIONS
MANAGEMENT FEES - The Partnership has engaged the General Partner to
manage the operations of the Hotel. Under the terms of the agreement, the
General Partner receives a fee equal to 3% of gross revenue and these fees
totaled $269,353 in 1996 and $220,684 in 1995. Accrued and unpaid management
fees totaled $52,859 and $587,775 at December 31, 1996 and 1995, respectively.
<PAGE>
GOVERNOR MORRIS HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 -- RELATED PARTY TRANSACTIONS - (concluded)
General Partner Advances - The amounts due the General Partner for
advances bear interest at 10% per annum and are payable out of available cash
flow. General Partner advances consisted of the following at December 31,
1996 and 1995:
1996 1995
-------- --------
Advances.................... $37,650 $37,650
Accrued interest............ 10,353 6,588
------- -------
$48,003 $44,238
------- -------
------- -------
NOTE 8 -- RECONCILIATION TO FEDERAL TAXABLE INCOME
The following is a reconciliation between net income (loss) for financial
statement purposes to taxable income on the Federal Partnership tax return
for the years ended December 31, 1996 and 1995:
1996 1995
--------- -----------
Net income (loss) per financial statements....... $ 691,136 $(220,157)
Accrued subordinated note interest............... 327,250 327,250
Accrued interest on advances..................... 3,761 3,765
Accrued related party management fees............ (534,916) 220,684
Difference between book and
tax depreciation............................... 41,841 7,400
Refinance costs.................................. (228,650) 228,650
Allowance for uncollectible accounts............. (7,000) --
Adjustment of prior period payables.............. -- (108,393)
Nondeductible expenses........................... 18,547 13,950
Other............................................ (201) --
--------- ---------
Federal taxable income........................... $ 311,768 $ 473,149
--------- ---------
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* * *
