SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-96716
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(Exact name of registrant as specified in charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
16-1485632
(I.R.S. Employer Identification No.)
100 CORPORATE WOODS
ROCHESTER, NEW YORK 14623
(Address of principal executive office)
Registrant's telephone number, including area code: (716) 272-2300
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
As of August 11, 1997, a total of 2,416 Limited Partnership Units were
outstanding.
<PAGE>
PART 1
------
FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Balance Sheets
June 30, 1997 and 1996
(Unaudited)
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Investments in real estate, at cost:
Land $2,074,526 2,638,672
Construction in progress 4,806,188 4,980,300
---------- ---------
6,880,714 7,618,972
Less accumulated depreciation 0 0
---------- ---------
Net investments in real estate 6,880,714 7,618,972
---------- ---------
Investment in partnership 529,494 0
Cash and cash equivalents 11,013 2,175,220
Deferred costs:
Debt issuance 610,147 652,221
Franchise 85,000 128,000
Other 73,224 121,795
---------- ---------
768,371 902,016
Less accumulated amortization (97,840) (40,366)
---------- ---------
670,531 861,650
---------- ---------
Other assets 8,411 75,850
---------- ---------
Total assets $8,100,163 10,731,692
========== ==========
LIABILIITIES AND PARTNERS' CAPITAL
----------------------------------
Liabilities
Accounts payable - construction $1,566,637 1,347,036
Accounts payable and accrued expenses - 8,143
Due to affiliate 596,156 -
Subordinated notes payable 5,298,000 4,643,000
Construction loan payable - 1,177,149
Notes payable - 1,500,000
---------- ---------
Total liabilities 7,460,793 8,675,328
---------- ---------
Minority interest - Essex Glenmaura L.P. - 996,417
---------- ---------
Commitments and contingencies (note 5 and 6
Partners' capital 677,812 1,230,757
Less notes receivable from partners (38,442) (170,810)
---------- ---------
Total partners' capital 639,370 1,059,947
---------- ---------
Total liabilities and partners' capital $8,100,163 10,731,692
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statement of Income
For the Quarters ended June 30, 1997 and 1996
(Unaudited)
<S> <C> <C>
1997 1996
---- ----
Revenue:
- --------
Rooms 334,336 -
Food and beverage 39,413 -
Telephone and other commissions 22,268 -
---------- --------
396,017 -
---------- --------
Operating expenses:
- -------------------
Rooms 92,171 -
Food & beverage expenses 41,576 -
Commissions expenses 11,096 -
Advertising & promotion 22,119 -
Repairs & maintenance 20,295 -
Utilities 22,346 -
Administrative & general 38,010 749
Property taxes 6,334 -
Royalty fees 11,403 -
Management fees 17,495 -
Partnership management fees 2,916 -
Depreciation and amortization 101,727 10,995
Miscellaneous 13,498 9,911
---------- --------
400,986 21,655
---------- --------
Loss from operations (4,969) (21,655)
Interest expense (140,513) (100,675)
Interest income 10,666 7,026
Loss on termination of franchise agreement (40,000) 0
Equity (loss) of partnership (12,763) 0
---------- --------
(182,610) (93,649)
---------- --------
Loss before minority interest in
loss of partnership (187,579) (115,304)
---------- --------
Minority interest in income/(loss) of partner (22,955) (2,500)
---------- --------
Net loss (164,624) (112,804)
=========== =========
Net loss - general partners (1,646) (1,128)
- limited partners (162,978) (111,676)
---------- --------
(164,624) (112,804)
==========================
Net loss per limited partner unit (68) (133)
==========================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statements of Cash Flows
For the Quarters ended June 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 373,852 100
Cash paid to suppliers (305,672) (148,905)
Interest received 10,666 7,026
Interest paid (140,513) (100,675)
--------- ---------
Net cash from operating activities (61,667) (242,454)
Cash flows from investing activities
Payments for land and construction in
progress (2,792,945) (1,252,586)
Proceeds from sale of partnership
interest 105,000 -
Cash change with change in controlling
interest in partnership 5,131 -
Payments for franchise fees (45,000) -
Payments for deposits 2,709 (33,986)
---------- ----------
Net cash used in investing activities (2,725,105) (1,286,572)
Cash flows from financing activities
Partners' capital contributions 170,234 580,631
Payments for syndication costs (4,788) (62,181)
Proceeds from subordinated notes payable 116,000 797,000
Proceeds from construction loan - 1,177,149
Advance from affiliate 551,156 -
Payments for escrow accounts (34,653) -
Payments for debt acquisition costs (52,822) (117,621)
Payments for organization costs (22,458) -
Payments for distributions (10,500) (24,997)
--------- ---------
Net cash from financing activities 712,169 2,349,981
Net increase in cash and cash equivalents (2,074,603) 820,955
Cash and cash equivalents - beginning of quarter 2,085,616 1,354,265
--------- ---------
Cash and cash equivalents - end of quarter 11,013 2,175,220
========= ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates IV L.P.
Statements of Cash Flows
For the Quarters ended June 30, 1997 and 1996
(Unaudited)
Reconciliation of net income to net cash flows from operating activities:
<S> <C> <C>
Net loss (164,624) (112,804)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 101,727 10,995
Minority interest in net loss of partnership (22,955) (2,500)
Equity loss of partnership 12,763 0
Loss on termination of franchise agreement 40,000 0
Changes in:
Other assets (20,699) (125,318)
Accounts payable and other expenses (7,879) (12,827)
--------- ----------
(61,667) (242,454)
========== ==========
Supplemental schedule of noncash investing and financing
activities:
Obligations incurred in connection with
construction in progress 716,520 874,478
Notes received from (paid by) general and
limited partners (127,811) (9,899)
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(1) ORGANIZATION
Essex Hospitality Associates IV L.P. (the Partnership) is a New York
limited partnership formed on August 30, 1995 for the purpose of acquiring
land and constructing, owning and operating a series of hotels. The
Partnership may also invest in and lend funds to other partnerships that
own hotels. The Partnership is financing its activities through a public
offering of notes and limited partnership units. The Partnership's general
partner is Essex Partners Inc. (Essex Partners), a subsidiary of Essex
Investment Group, Inc. (Essex).
The Partnership has acquired land in order to construct and operate hotels.
In December 1995, land was purchased in Solon, Ohio. The Solon site is now
under construction for a Hampton Inn hotel which opened August 1, 1997. As
a condition to receiving permanent financing, a special purpose entity was
created to own the Solon Hampton Inn, Solon Hotel LLC. The managing member
of Solon Hotel LLC is Essex Hotel LLC, a single purpose entity created to
act as the managing member of Solon Hotel LLC. The membership interests in
Solon Hotel LLC are owned 99% by the Partnership and 1% by Essex Hotel LLC,
whose sole member is the Partnership.
In December 1995, the Partnership also purchased land in Warwick, Rhode
Island in anticipation of the construction of a Homewood Suites hotel.
Construction was delayed at as a result of higher than projected
construction costs and a change in market conditions. The Partnership has
decided not to proceed with construction of the Homewood Suites and is
currently pursuing a sale of the site. The disposal is not expected to have
a significant impact on the Partnership's financial statements.
In June, 1997, the Partnership purchased land in Erie, Pennsylvania for
construction of a Hampton Inn hotel. In June, 1997, the Partnership
transferred the Erie property to a single purpose entity, Erie Hotel LLC.
The managing member of Erie Hotel LLC is Essex Hotels II LLC, a single
purpose entity created to act as the managing member of Erie Hotel LLC. The
membership interests in Erie Hotel LLC are owned 99% by the Partnership and
1% by Essex Hotels II LLC, whose sole member is the Partnership. The
Partnership is currently negotiating with GMAC for a first mortgage loan in
the principal amount of $4.5 million to finance the construction of the
Erie Hampton Inn hotel.
In January 1996, the Partnership acquired a 54% limited partnership
interest in Essex Glenmaura L.P. (Glenmaura) through the purchase of 12.5
limited partnership units for $1,250,000. The purchase price was equal to
the prorata portion of the fair value of the net assets acquired. Glenmaura
owns and operates a Courtyard by Marriott hotel near Scranton,
Pennsylvania. Construction of the hotel was completed during 1996 and
operations began on September 4, 1996. As a condition to receiving
permanent financing for the Solon Hampton Inn, the Partnership was required
to reduce its investment in Glenmaura to less than 50%. In June 1997, 1.05
units were sold to the general partner for $105,000, reducing the
Partnership's interest to 49.8%.
The following is a general description of the allocation of income, loss,
and distributions. For a more comprehensive description see the Partnership
Agreement:
1
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(1) ORGANIZATION (continued)
Allocation of income from operations will be allocated 99% to the
limited partners and 1% to the general partner until the amount
allocated to the limited partners equals the cumulative annual return
of 8% of their contribution. Any remaining income from operations is
allocated 80% to the limited partners and 20% to the general partner.
Income on the sale of any or all of the hotels is allocated 99% to the
limited partners until each limited partner has been allocated income
in an amount equal to his or her pro rata share of the nondeductible
syndication expenses and sales commission and 1% to the general
partner. Thereafter, income on the sale of any or all the hotels is
allocated in the same manner as income from operations.
Allocations of losses from operations will be allocated 80% to the
limited partners and 20% to the general partner in the amounts
sufficient to offset all income which was allocated 80% to the limited
partners. Thereafter, operating losses are allocated 99% to the
limited partners and 1% to the general partner. Loss on the sale of
any or all of the hotels will be first allocated in the same manner as
losses from operations, except that the allocation of such loss would
be made prior to allocations of income from operations. All other
losses are allocated 99% to the limited partners and 1% to the general
partner.
Cash distributions will initially be made 99% to the limited partners
and 1% to the general partner. After the limited partners have
received a cumulative annual return of 8% of their contribution,
additional distributions may then be made 80% to the limited partners
and 20% to the general partner. Distributions of the net proceeds of
sale or refinancing of any or all hotels will be made 1% to the
general partner and 99% to the limited partners prorata in accordance
with the number of units held by each limited partner until the
limited partners have received distributions from sale or refinance of
hotels equal to $1,000 per unit. Thereafter, distributions shall next
be made 1% to the general partner and 99% to the limited partners
until each limited partner has received any unpaid cumulative return
accrued through the date of the distribution. Additional distributions
will then be made 20% to the general partner and 80% to the limited
partners.
Essex Partners and its affiliates are receiving substantial fees in
connection with the offering of notes and limited partnership units.
Additional fees will be paid to them in connection with the acquisition,
development and operation of the hotels and management of the Partnership
(see note 5).
In accordance with the Partnership agreement, the ratio of gross proceeds
from the offering of limited partnership units to total gross proceeds from
the public offering of notes and limited partnership units prior to the
termination of the offering may not be less than .15 to 1. At June 30,
1997, that ratio was .31 to 1.
2
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements of the Partnership were prepared on the accrual
basis of accounting in conformity with generally accepted accounting
principles.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial data included in these financial statements is
unaudited; however, in the opinion of management, such financial data
includes all adjustments of a normal recurring nature necessary for a fair
presentation of the Partnership's financial condition and results of
operation.
INVESTMENT IN PARTNERSHIP
Investment in partnership with a 50% or less ownership interest will be
accounted for by the equity method. Ownership interests exceeding 50% will
be accounted for under the consolidated method.
The statement of operations and cash flows include the accounts of the
Partnership and Glenmaura through June 9, 1997, date upon which the
Partnership's ownership interest of Glenmaura decreased to less than 50% as
discussed in note 1. For the period from June 10, 1997 through June 30,
1997, the Partnership's investment in Glenmaura is accounted for under the
equity method.
INVESTMENT IN REAL ESTATE
Investment in real estate is stated at cost. Investment in real estate is
reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset. Depreciation is calculated using
the straight-line method for buildings and accelerated methods for land
improvements, furniture, fixtures and equipment over the following
estimated useful lives of the assets as each hotel commences operations:
Buildings 39 years
Land improvements 15 years
Furniture, fixtures and equipment 5 - 7 years
CASH AND CASH EQUIVALENTS
Cash investments with maturities of three months or less at the time of
purchase are considered to be cash equivalents.
3
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS
Costs of issuing the debt will be amortized on a straight-line basis over
the term of the debt.
Franchise fees paid for the right to own and operate the hotels will be
amortized on a straight-line basis over the term of each franchise
agreement, as each hotel commences operations.
SYNDICATION COSTS
Selling commissions and legal, accounting, printing and other filing costs
totaling $327,138 related to the offering of the limited partnership units
were charged against the proceeds of the public offering.
INCOME TAXES
No provision for income taxes has been provided since any liability is the
individual responsibility of the partners.
RECOGNITION OF REVENUE
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
LIMITED PARTNERSHIP PER UNIT DATA
Net loss per limited partner unit is calculated by dividing net loss by the
weighted average number of units outstanding during the period. The
weighted average number of units outstanding was 2,402 for the three months
ended June 30, 1997.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the general partner to make
estimates and assumptions that affect the reported amounts of asset and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
4
<PAGE>
(3) DEBT
FIRST MORTGAGE LOAN
On July 7, 1997, Solon Hotel LLC obtained permanent financing from GMAC
Commercial Mortgage Corporation for $4,500,000. The term of the loan will
be for four years with a one year extension available upon the payment of
an extension fee and if certain debt service coverage is attained. Interest
will accrue at 3.25% over the 30-day LIBOR index. Monthly payments of
interest only will be due for the first year. Principal and interest
payments are due thereafter based on a 25-year amortization. Starting in
the second year of the loan, Solon Hotel LLC will be required to maintain a
replacement reserve of 2% of monthly room revenues. The replacement reserve
payment will increase to 4% of monthly room revenues in the third year of
the loan. The loan is collateralized by the real and personal property and
certain other assets.
SUBORDINATED NOTES PAYABLE
Subordinated notes payable of the Partnership of $5,298,000 bear interest
at a rate of 10.5% per annum, payable monthly, and mature December 31,
2001, unless extended by the Partnership to December 31, 2002 upon payment
to holders of an extension fee equal to .5% of the principal amount of the
subordinated notes outstanding. The notes are issued as unsecured
obligations of the Partnership.
The aggregate annual principal payments of the debt obligations due for the
six months ended December 31, 1997 and the years subsequent to 1997 are as
follows:
1997 -0-
1998 24,039
1999 51,484
2000 56,383
2001 9,666,094
-----------
9,798,000
For the three months ended June 30, 1997 and 1996, interest of $91,121 and
$45,188, respectively, was capitalized in investments in real estate as the
debt was used to finance construction of hotels.
5
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Unaudited Financial Statements
June 30, 1997
(4) FRANCHISE FEES
In 1996, Promus Corporation (Promus) approved a license agreement for the
Partnership to operate a Hampton Inn hotel in Solon, Ohio. An initial
franchise fee of $40,000 was paid. In 1997, the Partnership entered into a
license agreement with Promus to operate a Hampton Inn in Erie,
Pennsylvania which required an initial franchise fee of $45,000. The term
and amortization period of the license agreements is twenty years. In
addition, for each hotel, the Partnership will be required to pay Promus a
monthly royalty fee of 4% of gross rooms revenues, a monthly
marketing/reservation fee of 4% of gross rooms revenue, an initial software
license fee of $3,000 plus $85 per guest room with a monthly maintenance
charge of $200 to $400 per month, and a monthly amount equal to any sales
tax or similar tax imposed on Promus on payments received under the license
agreement.
Promus requires the Partnership to establish a capital reserve escrow
account based on a percentage of gross revenues generated by each hotel
which will be used for product quality requirements of the hotel.
Cumulative funding of the reserve for the first five years increases from
1% to 5% of gross revenues and stabilizes at 5% for the term of the
agreement. The Promus franchise agreements impose certain restrictions on
the transfer of limited partnership units. Promus restricts the sale,
pledge or transfer of units in excess of 25% without their consent.
In 1995, the Partnership entered into a license agreement with Promus to
operate a Homewood Suites hotel in Warwick, Rhode Island. An initial
franchise fee of $40,000 was paid. The franchise agreement for the Homewood
Suites in Warwick has expired. The franchise fee has been written off since
the franchise agreement has expired.
6
<PAGE>
(5) RELATED PARTY TRANSACTIONS
A summary of fees earned by Essex Partners or its affiliates for the three
months ended June 30, 1997 and 1996 under the terms of the Partnership
agreement follows:
<TABLE>
<CAPTION>
TYPE OF FEE AMOUNT OF FEE 1997 1996
- ----------- ------------- ---- ----
<S> <C> <C> <C>
Selling Commission Up to $80 per limited partnership $ 9,740 $86,805
unit and $55 per $1,000 sold
Organization and 3.4% of the gross proceeds 5,374 46,307
Offering Fee of the offering
Acquisition Fee $110,000 per hotel site 110,000 -
Development Fee $160,000 per hotel, plus 5% of - -
the total cost of the hotel in
excess of $2.7 million (not to
exceed $325,000 per hotel)
Property Management 4.5% of gross operating revenues
Fee from the hotels 17,495 -
Partnership Management .75% to 1.25% of gross operating 2,916 -
Fee revenues from the hotels
Accounting Fee $800 per month 1,600 -
-------- ------
$147,125 $133,112
======== ========
</TABLE>
7
<PAGE>
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
The above fees are reflected in the accompanying financial statements as
follows:
<TABLE>
<S> <C>
1997
----
Balance Sheet:
Investment in real estate $110,000
Deferred debt issuance costs 10,324
Syndication costs, charged to partner's capital 4,790
$125,114
========
Statements of Operations:
Management fees to affiliates $17,495
Administrative expense 1,600
Partnership management fees 2,916
$22,011
=======
</TABLE>
Organization and offering fees are allocated to syndication costs and debt
issuance costs based on the pro-rata share of limited partner's units and
notes payable to the total offering.
In 1995, the Partnership paid a $110,000 acquisition fee in connection with
the Warwick, Rhode Island site. The acquisition fee was refunded to the
Partnership in the second quarter 1997.
8
<PAGE>
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
Under the terms of the Partnership agreement, Essex Partners or its
affiliates will also earn other fees as follows:
<TABLE>
<S> <C>
TYPE OF FEE AMOUNT OF FEE
----------- -------------
Investor Relations Fee .25% of the gross proceeds of the offering
payable annually in 1998 through 2001
Refinancing Fee 1% of the gross proceeds of re-financing
any or all of the hotels
Sales Fee 3% of the gross sale price of any or all
of the hotels
</TABLE>
The Partnership will also be subject to a number of conflicts of interest
arising from its relationships with the general partner, its owners and
affiliates and due to other activities and entities in which the general
partner and its affiliates have or may have a direct or indirect financial
interest.
(6) INVESTMENT IN PARTNERSHIP
The Partnership owns a 49.8% interest in Essex Glenmaura L.P. (see note 1).
Summarized financial information for Essex Glenmaura as of and for the
three months ended June 30, 1997 follows:
<TABLE>
<S> <C>
Assets $7,765,000
Liabilities 6,623,000
Partners' capital 1,142,000
Revenues 608,000
Net loss (113,000)
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership was formed on August 30, 1995. Since its formation, the
Partnership has been involved in raising capital pursuant to the Original
Prospectus, and the acquisition and construction of properties. The Partnership
has received Gross Offering Proceeds of $7.6 million, including approximately
$6.3 million from the sale of subordinated notes and approximately $2.3 million
from the sale of limited partnership units. The two sites specified in the
Prospectus were acquired on December 29, 1995, a 2.535 acre site in Warwick,
Rhode Island and a 2.28 acre site in Solon, Ohio. Limited partnership units in
another partnership were purchased in the first quarter, 1996.
The Partnership began construction of a 103-room Hampton Inn in Solon, Ohio in
late 1996, which opened August 1, 1997. The Solon Hampton Inn is expected to
cost about $7,000,000, including the cost of the land, cost of construction,
cost of furnishings, construction period interest, financing costs (debt and
equity) and all soft costs such as architectural costs, engineering, franchise
fee and working capital. The General Partner secured first mortgage financing
from GMAC Commercial Mortgage Corporation (GMAC) in July, 1997. As a condition
of receiving financing, the Partnership was required to create special purpose
entities to own each of its properties. Solon Hotel LLC was created to own the
Solon Hampton Inn. The membership interests of the Solon Hotel LLC are owned 99%
by the Partnership and 1% by Essex Hotel LLC, whose sole member is the
Partnership. The first mortgage is in the amount of $4.5 million and will be
advanced in three installments. The first installment of $1,000,000 (net of
offering costs) was received upon the closing of the loan. The second and third
installments are expected to be advanced after the hotel is completed. The term
of the first mortgage loan is for a period of four years, with a one year
extension upon the payment of an extension fee and the achievement of a
specified debt service coverage ratio. Monthly payments of interest only are due
for the first year, thereafter, monthly payments of principal and interest are
due based on a 25 year amortization. Interest will accrue at the rate of 3.25%
over the 30- day LIBOR index. Starting in the second year of the loan, Solon
Hotel LLC will be required to maintain a replacement reserve escrow at 2% of
room revenues. The required replacement reserve increases to 4% of room revenues
in the third year of the loan. The balance of the amount required to complete
the Solon Hampton Inn was provided through the Partnership's offering of Notes
and Units. The General Partner has provided interim financing for the Solon
Property until the Solon Hotel LLC received the amount due from GMAC under the
first mortgage financing. As of June 30, 1997, a total of $596,000 is owed to
the General Partner, which is composed of construction advances and unpaid fees.
The Partnership acquired a site in Erie Pennsylvania in June, 1997 as a possible
location for the construction and operation of a Hampton Inn hotel. The site is
approximately 2.5 acres and was acquired for an aggregate purchase price of
$650,000 plus closing costs of $27,000 and demolition costs of approximately
$15,000. The Partnership has obtained a license agreement from Promus Hotel to
construct and operate a 100-room Hampton Inn hotel. The General Partner expects
to start construction of the Erie Hampton Inn in October, 1997. The hotel is
expected to open in the late spring, 1998. The Partnership does not have
sufficient funds to complete construction of the Erie Hampton Inn. So as to
enable the Partnership to pursue favorable external financing opportunities with
respect to the Erie Hampton Inn, in June 1997 the Partnership transferred the
Erie property to Erie Hotel LLC, a single purpose entity. The membership
interests of the Erie Hotel LLC are owned 99% by the Partnership and 1% by Essex
Hotels II LLC, whose sole member is the Partnership. The Partnership is
currently negotiating with GMAC for a first mortgage loan in the principal
amount of $4.5 million to finance construction of the Erie Hampton Inn. As of
the date of this filing, the Partnership has received no commitment for external
financing.
The Partnership acquired 12.5 limited partnership units in Essex Glenmaura for
$1,250,000 with proceeds from the offering, representing a limited partnership
interest of 54.3%. Essex Glenmaura completed construction of a 120- room
Marriott Courtyard in Scranton, Pennsylvania in September, 1996. The total cost
of the project was $8.7 million, including the cost of the land, cost of
construction, cost of furnishings, construction period interest, financing costs
(debt and equity) and all soft costs such as architectural costs, engineering,
franchise fee and working capital. The project was funded with $2,300,000 of
partner equity, $1,500,000 of unsecured notes and a $5,000,000 first mortgage
loan from GMAC. The term of the first mortgage loan is for a period of four
years, with a one year extension upon the payment of an extension fee and the
achievement of a specified debt service coverage ratio. Monthly payments of
interest only are due for the first year, thereafter, monthly payments of
principal and
<PAGE>
interest are due based on a 25 year amortization. Interest will accrue at the
rate of 3% over the 30-day LIBOR index. Starting in the second year of the loan,
Essex Glenmaura will be required to maintain a replacement reserve escrow at 4%
of room revenues. As a condition of receiving the first mortgage loan for the
Solon Hampton Inn, the Partnership was required to reduce its investment in
Essex Glenmaura to less than 50%. In June 1997, the Partnership sold 1.05
limited partnership units to the General Partner at a purchase price of
$105,000, which is equal to the purchase price originally paid by the
Partnership. As a result, the Partnership now owns a 49.8% interest in Essex
Glenmaura.
The Partnership intended to build an 80-room Homewood Suites hotel in Warwick,
Rhode Island. The purchase price for the property was $501,400. However, prior
to commencing construction, the Partnership learned that additional hotels were
planned for construction near the Warwick site which would be competitive with
the Partnership's hotel and result in a 57% potential increase in the number of
hotel rooms in the area. The Partnership elected to postpone construction until
it could better assess the effect of the additional hotel rooms on the expected
performance of the Partnership's hotel. Based on the results of an updated
market survey, the Partnership concluded that the estimated 57% potential
increase in the number of hotel rooms in the area would have a significant
negative impact upon the expected performance of the Partnership's hotel. In
light of these findings, the Partnership has elected not to proceed with
development of the Warwick site and is currently pursuing the sale of the site.
In the second quarter, 1997, the franchise agreement for the Warwick site
expired. Although the Partnership has received some interest in the site from
potential buyers, there is no assurance that the Partnership will sell the
Warwick site or that it will be sold at a price sufficient to enable the
Partnership to recover all the costs and expenses incurred by the Partnership
with respect to the Warwick site. The Partnership has invested approximately
$682,000 in the Warwick site, including the cost of the site, the cost of the
franchise fee and engineering and architectural costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion analyzes the financial statements of the Partnership as
of June 30, 1997 and December 31, 1996, which are attached. The Partnership had
an ownership interest of 54.3% in Essex Glenmaura until June 9, 1997, at which
time the Partnership's ownership interest was reduced to 49.8%. Accordingly, the
statements of operations and cash flows for the quarter ended June 30, 1997
include the accounts of the Partnership and Essex Glenmaura through June 9,
1997. For the period from June 10, 1997 to June 30, 1997, the Partnership's
investment in Essex Glenmaura is accounted for on the equity method. The
financial statements of the Partnership and Essex Glenmaura as of December 31,
1996 are consolidated. The consolidated financial statements include the
accounts of the Partnership and Essex Glenmaura.
From April 1, 1997 to June 30, 1997, the total assets of the Partnership
decreased approximately $5.8 million. The primary reason for the decrease was
the change in accounting method for Essex Glenmaura from the consolidated to the
equity method. The investments in real estate decreased $3.8 million in total.
The investment in the Solon and Erie Properties increased by $3.8 million,
primarily relating to construction costs for the Hampton Inn in Solon. This
increase was offset by a decrease of approximately $7.6 million for Essex
Glenmaura. The Partnership's cash balance decreased from approximately $2.2
million to $11,000 from costs incurred in the construction of the Hampton Inn in
Solon and the purchase of the property in Erie. The assets of the Partnership at
June 30, 1997 include $529,000 of investment in partnership, which represents
the Partnership's investment in Glenmaura, net of reductions for net losses of
$603,000 incurred through June 30, 1997, the sale of 1.05 limited partnership
units for $105,000 and distributions of $12,500. The deferred assets of the
Partnership decreased $201,000 from the change in accounting method for Essex
Glenmaura as discussed above. During the quarter, the Partnership incurred
additional deferred costs of $113,000, representing additional debt acquisition
costs from the offering of subordinated notes, costs incurred to obtain the
first mortgage financing for the Solon Hampton Inn, the $45,000 franchise fee
paid for the Erie Hampton Inn and additional organization costs of $22,000.
The Partnership's liabilities decreased approximately 5.2 million from April 1,
1996 to June 30, 1997, primarily from the change in accounting method as
discussed previously. From April 1, 1996 to June 30, 1997, the outstanding
balance in subordinated notes payable increased $116,000 from the issuance of
subordinated notes payable in the Partnership's offering. Accounts
payable-construction increased $559,000 from outstanding
<PAGE>
construction invoices for the Solon Hampton Inn. The first mortgage loan payable
and notes payable of $6,500,000 as of March 31, 1997 represented liabilities of
Essex Glenmaura, which no longer are presented in the financial statements due
to the change in accounting method. In June, 1997, the general partner of the
Partnership, Essex Partners Inc., advanced $596,000 as a short-term loan to the
Partnership for construction costs incurred for the Hampton Inn in Solon. The
Partnership expects to repay all amounts due the general partner during the
third quarter from the proceeds of the first mortgage loan on the Solon Hampton
Inn. The minority interest in Glenmaura is no longer presented in the balance
sheet due to the change in accounting method for Glenmaura. Partners' capital
was unchanged for the second quarter. During the quarter, the Partnership
received $42,000 in limited partner equity from proceeds of the Partnership's
offering and collected $128,000 in promissory note payments from limited
partners. These increases were offset by $5,000 in syndication costs and the net
loss of 165,000 for the Partnership from April 1, 1997 through June 30, 1997.
The primary revenue source for the quarter ended June 30, 1997 was room revenues
of $334,000 from Essex Glenmaura, which was the only hotel in operation. Food
and beverage revenue and telephone and other commission revenue totaled $62,000,
for total revenues of $396,000. For the quarter ended June 30, 1996 there were
no operating hotels. The only income for 1996 was interest income of $7,000.
Operating expenses for the quarter ended June 30, 1997, before depreciation,
totaled $299,000. Depreciation of $102,000 was recorded for a loss from
operations of $5,000. Before depreciation, the single largest operating expense
for the Partnership is rooms expense, followed by food and beverage expenses.
Operating expenses for 1996 totaled $22,000 and were composed primarily of
depreciation of $11,000. Since there were no operating revenues for 1996, the
loss from operations was $22,000. The Partnership's interest expense for 1997,
net of interest income was $130,000, representing interest incurred on the notes
payable and the first mortgage loan for Glenmaura through June 9, 1997, and
interest on the subordinated notes for the quarter to the extent the proceeds
were not used for construction. The net interest expense for 1996 was $94,000,
representing interest on the subordinated notes to the extent the proceeds were
not used for construction. Also included in other expenses are the Partnership's
equity in the loss of Glenmaura for the period from June 10, 1997 through June
30, 1997 of $12,000 and the loss on termination of the Warwick franchise
agreement of $40,000. The net loss for the quarter is $187,000 before allocating
$23,000 of the net loss to the minority interest in Glenmaura. The net loss for
the Partnership for the quarter ended June 30, 1997 was $165,000. For the
quarter ended June 30, 1996, the loss before minority interest was $115,000, and
the net loss was $113,000 after allocating $2,500 of loss to the minority
interests in Glenmaura.
The Courtyard by Marriott owned by Glenmaura opened in September, 1996. The
property achieved an average occupancy of 69% for the second quarter of 1997, at
an average daily rate of $68.20. The revenue per available room for the second
quarter of 1997 was $47.06. Glenmaura is in the start-up phase of operations.
New hotels require from several months to a couple years to establish a stable
customer base. During the start-up phase, occupancy is building, and room rates
may be lower to attract new customers. When a strong customer base is
established, room rates can be raised to a more competitive level.
At the current time, the Partnership does not have sufficient funds to complete
the construction of the Erie Property. The Partnership intends to raise
additional funds from the Offering and obtain External Financing from an
institutional lender. No commitments have been received as of the date of this
Prospectus for such External Financing. Since the Partnership can control the
timing of construction, the construction of the Erie Property can be delayed
until the required additional financing can be obtained. The Partnership
included a working capital reserve in its total costs for the Solon Hampton Inn.
The Partnership expects that the working capital reserve will be sufficient to
fund any operating deficits of the Solon Hampton Inn.
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. EXHIBITS
None
b. REPORTS ON FORM 8-K
There was one report 8-K filed in the second quarter, 1997.
The report was dated June 10, 1997 and described the purchase
of land in Erie, Pennsylvania. No financial statements were
required. The report was filed on June 25, 1997.
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 thereunto duly authorized.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
Registrant
Dated: August 13, 1997 /s/ LORRIE L. LOFASO
--------------------
Essex Hospitality Associates IV L.P.
Essex Partners Inc.
Lorrie L. LoFaso
Vice President and Chief Accounting Officer
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> OTHER
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<FN>
<F1> UNCLASSIFIED BALANCE SHEET USED
</FN>
<PP&E> 6,881
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,100
<CURRENT-LIABILITIES> 0
<BONDS> 5,298
<COMMON> 0
0
0
<OTHER-SE> 639
<FN>
<F2> EQUITY IS PARTNERS' CAPITAL
</FN>
<TOTAL-LIABILITY-AND-EQUITY> 8,100
<SALES> 396
<TOTAL-REVENUES> 396
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> (165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165)
<EPS-PRIMARY> (68)
<EPS-DILUTED> (68)
<FN>
<F3> ENTITY IS A PARTNERSHIP, EPS IS LOSS PER
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