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 September 30, 1998
[ ] 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, 1998, a total of 2,945 Limited Partnership Units were
outstanding.
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
Essex Hospitality Associates IV L.P.
Balance Sheets
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------- ----- ----
<S> <C> <C>
Investments in real estate, at cost:
Land and land improvements $ 1,761,744 $ 2,073,173
Furniture & fixtures 1,626,245 512,003
Buildings 9,145,776 4,430,468
Construction in progress -- 334,462
------------ ------------
12,533,765 7,350,106
Less accumulated depreciation (434,203) (27,076)
------------ ------------
Net investments in real estate 12,099,562 7,323,030
------------ ------------
Investment in partnership 224,134 444,210
Cash and cash equivalents 547,529 1,567,039
Land held for sale 646,981 --
Deferred costs:
Debt issuance 944,788 842,578
Franchise 85,000 85,000
Other 51,544 73,224
------------ ------------
1,081,332 1,000,802
Less accumulated amortization (315,645) (128,676)
------------ ------------
765,687 872,126
------------ ------------
Other assets 432,007 253,090
------------ ------------
Total assets $ 14,715,900 $ 10,459,495
============ ============
LIABILIITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable - construction $ 5,000 $ 54,425
Accounts payable and accrued expenses 147,406 34,210
Due to affiliate 1,933 --
Subordinated notes payable 5,413,000 5,298,000
Construction loan payable 4,239,286 --
Mortgage loan payable 4,492,160 4,500,000
------------ ------------
Total liabilities 14,298,785 9,886,635
------------ ------------
Commitments and contingencies
Partners' capital 441,858 594,375
Less notes receivable from partners (24,743) (21,515)
------------ ------------
Total partners' capital 417,115 572,860
------------ ------------
Total liabilities and partners' capital $ 14,715,900 10,459,495
============ ============
</TABLE>
-2-
See accompanying notes to unaudited financial statements.
<PAGE>
Essex Hospitality Associates IV L.P.
Statement of Income
For the Quarters ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
REVENUE:
- ----------
<S> <C> <C>
Rooms 1,407,239 420,440
Food and beverage -- --
Telephone and other commissions 54,397 17,055
---------- ----------
1,461,636 437,495
---------- ----------
OPERATING EXPENSES:
- ----------
Rooms 271,761 103,770
Food & beverage expenses -- --
Commissions expenses 31,131 3,039
Advertising & promotion 65,792 16,521
Repairs & maintenance 37,328 12,240
Utilities 31,417 8,135
Administrative & general 67,833 20,125
Property taxes 29,069 --
Insurance 3,325 2,114
Royalty fees 45,208 9,234
Management fees 56,132 15,417
Partnership management fees 9,355 2,570
Depreciation and amortization 120,419 57,912
Miscellaneous 9,924 20,266
---------- ----------
778,694 271,343
---------- ----------
Income (loss) from operations 682,942 166,152
Interest expense (244,460) (128,881)
Interest income 2,601 759
Equity loss in partnership (18,031) (62,384)
---------- ----------
(259,890) (190,506)
---------- ----------
Net income (loss) 423,052 (24,354)
========== ==========
Net income (loss) - general partners 4,231 (244)
- limited partners 418,822 (24,110)
---------- ----------
423,052 (24,354)
========== ==========
Net loss per limited partner unit 141 (10)
========== ==========
</TABLE>
-3-
See accompanying notes to unaudited financial statements.
<PAGE>
Essex Hospitality Associates IV L.P.
Statements of Cash Flows
For the Quarters ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 1,435,056 385,863
Cash paid to suppliers (733,307) (284,003)
Interest received 2,601 759
Interest paid (244,460) (128,881)
---------- ----------
Net cash from operating activities 459,890 (26,262)
---------- ----------
Cash flows from investing activities
Payments for land and construction in progress (1,684,700) (2,023,556)
Increase in restricted cash -- (1,221,819)
Payments for deposits (56,588) (46,314)
---------- ----------
Net cash used in investing activities (1,741,288) (3,291,689)
---------- ----------
Cash flows from financing activities
Partners' capital contributions 600 16,927
Payments for syndication costs -- (12,341)
Proceeds from first mortgage loan -- 4,500,000
Proceeds from construction loan 1,644,404 --
Repayment of advance from affiliate (709) (596,156)
Payments for escrow accounts -- --
Payments for debt acquisition costs (8,043) (232,431)
Payments for organization costs -- --
Distributions received from partnership investment -- 22,900
Payments for distributions (59,940) (46,741)
---------- ----------
Net cash from financing activities 1,576,312 3,652,158
---------- ----------
Net increase in cash and cash equivalents 294,914 334,207
Cash and cash equivalents - beginning of quarter 252,615 11,013
---------- ----------
Cash and cash equivalents - end of quarter 547,529 345,220
========== ==========
Reconciliation of net income to net cash flows
from operating activities:
Net income (loss) 423,052 (24,354)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 120,419 57,912
Changes in:
Other assets (79,227) (153,308)
Equity loss of partnership 18,031 62,384
Accounts payable and other expenses (22,385) 31,104
---------- ----------
459,890 (26,262)
========== ==========
</TABLE>
-4-
See accompanying notes to unaudited financial statements.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
September 30, 1998
(1) ORGANIZATION
------------
Essex Hospitality Associates IV L.P. (the Partnership) is a New York
limited partnership formed in 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 financed its activities through a
public offering of notes and limited partnership units which was
completed in November 1997. The Partnership's general partner is Essex
Partners Inc. (Essex Partners), a wholly-owned subsidiary of Essex
Investment Group, Inc. (Essex) until September 4, 1998 and thereafter
Essex Partners was purchased by JEM Properties Inc. (JEM).
The Partnership has acquired land in order to construct and operate
hotels. A Hampton Inn hotel was constructed in Solon, Ohio and the
hotel commenced operations in August 1997. In June 1997, land was
purchased in Erie, Pennsylvania and a Hampton Inn hotel was built which
opened July 1, 1998. In December 1995, land was purchased in Warwick,
Rhode Island in anticipation of the construction of a Homewood Suites
hotel. However, as a result of higher than projected construction costs
and a change in market conditions, the Partnership has decided not to
proceed with development of the hotel and is now pursuing the sale of
the land.
In 1997 Solon Hotel LLC, a special purpose entity was created to own
the Solon Hampton Inn. The managing member of the Solon Hotel LLC is
Essex Hotel LLC, a single purpose entity created to act as the managing
member. The membership interests of Solon Hotel LLC are owned 99% by
the Partnership and 1% by Essex Hotel LLC, whose sole member is the
Partnership.
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.
In January 1996, the Partnership acquired a 54.3% 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 pro rata 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
and operations began in September 1996. In June 1997, the Partnership
sold 1.05 limited partnership units of Glenmaura to Essex Partners for
$105,000, reducing the Partnership's ownership interest to 49.8%.
A general description of the allocation of Partnership income, loss,
and distributions follows. For a more comprehensive description see the
Partnership Agreement.
Allocations 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.
-5-
<PAGE>
ESSEX HOSPITALITY ASSOCIATES IV L.P.
(A New York Limited Partnership)
Notes to Financial Statements
September 30, 1998
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 pro rata 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF ACCOUNTING
-------------------
The accompanying unaudited financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation
of financial positions, results or operations, and cash flows in
conformity with generally accepted accounting principles. However, in
the opinion of management, all adjustments consisting of only normal
recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the
nine months ended September 30, 1998 and 1997. The results of
operations for the nine month periods ended September 30, 1998 are not
necessarily indicative of the results which may be expected for an
entire fiscal year.
-6-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The Partnership was formed on August 30, 1995. The Partnership completed its
public offering on November 24, 1997, raising $5,413,000 in subordinated notes
and $2,876,000 in limited partnership units for total offering proceeds of
$8,289,000. The Partnership owns two hotels, a Hampton Inn in Solon, Ohio which
opened August 1, 1997 and a Hampton Inn in Erie, PA which opened July 1, 1998.
In addition, the Partnership has a 49.8% interest in Essex Glenmaura L.P. which
owns a Courtyard by Marriott hotel in Scranton, PA which opened September 4,
1996.
COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1998 TO THE QUARTER ENDED
SEPTEMBER 30, 1997
From July 1, 1997 to September 30, 1998, the total assets of
the Partnership increased approximately $4.2 million. The primary reason for the
increase is the completion of the Hampton Inn in Solon, Ohio in the third and
fourth quarter, 1997 and the construction of the Hampton Inn in Erie, PA. The
Partnership's cash balance decreased from $1,567,000 to $548,000 from costs
incurred in the construction of properties. Land held for sale increased
$647,000, which represents the costs incurred for the Warwick site, which is
currently being offered for sale by the Partnership.
The Partnership's liabilities increased $4,400,000 from July 1, 1997 to
September 30, 1998. The Partnership also obtained a $4,700,000 construction loan
from a bank for the Erie Hampton Inn. Limited partners' equity decreased
$152,500 primarily as a result of partnership losses and distributions to
partners.
The primary revenue source for the quarter ended September 30, 1998 was room
revenues of $1,407,000 compared to $420,000 for the same period in 1997. Much of
this increase relates to revenues from the Solon Hampton Inn which opened
August, 1997 as well as the Erie Hampton which opened in July 1998. Telephone
and other commission revenue for the third quarter 1998 totaled $54,000, for
total revenues of $1,461,000. For the third quarter, 1997 food and beverage
revenue and telephone and other commission revenue totaled $17,000. Operating
expenses for the quarter ended September 30 1998, before and depreciation
totaled $658,000 compared to $329,000 for the same period during 1997. A
majority of this increase relates to operating expenses incurred for the Solon
and Erie Hampton which were not in operation for the third quarter in 1997.
Income from operations was $683,000 for the third quarter 1998 compared to
$166,000 for the same period in 1997.
Other income and expense for the third quarter 1998 includes interest expense of
$244,000, compared to interest expense of $128,000 for the same period in 1997.
The Partnership's interest expense in the third quarter 1998 is composed of the
interest incurred on the first mortgage loan for Solon, and interest on the
subordinated notes as well as the construction loan. For the third quarter 1997,
the construction loan was not in place. The net income for the Partnership for
the third quarter 1998 was compared to a net loss of $24,000 for the same period
in 1997.
The third quarter operations generated $460,000 in cash, compared to cash used
in operations in the third quarter 1997 of $26,000. This increase is primarily
attributable to the room revenue from the Solon and Erie Hamptons. Cash required
for investing activities in the third quarter 1998 was $1,741,000 compared to a
use of funds of $3,292,000 for the third quarter of 1997. Much of this decrease
is due to the finalization of the Erie construction. The Partnership obtained
$1,576,000 of cash for financing activities in the third quarter 1998 due to
proceeds from the construction loan for the Erie Hampton Inn. Financing
activities for the third quarter 1997 provided $3,652,000 in cash due to
proceeds from the first mortgage loan for Solon. Cash increased $295,000 in the
third quarter 1998, compared to an increase of $11,000 in the third quarter
1997.
-7-
<PAGE>
The Solon Hampton Inn opened on August 1, 1997. The property achieved an average
occupancy of 90% in third quarter 1998 with an average daily rate of $101.84.
The average occupancy was 81% for the two months it was open with an average
daily rate of $82.61. The third quarter of the year is typically stronger than
the first or fourth quarters. The Solon, Ohio area also has large tourist demand
due to local attractions such as Sea World of Ohio and Geauga Lake, which open
Memorial Day week-end for the summer season. Occupancies and rates increase when
the tourist demand increases.
The Courtyard by Marriott hotel opened in September 1996. The property achieved
an average occupancy of 73% for the third quarter 1998 compared to 69% average
occupancy for the third quarter 1997. The average daily rate for the third
quarter 1998 was $68.31 compared to the average daily rate of $65.77 for the
third quarter 1997. A new hotel opened in the Scranton area in June, 1997, a
Comfort Inn & Suites which is directly competitive with the Courtyard by
Marriott.
The Erie Hampton opened on July 1, 1998. Average occupancy for the three months
of operation was 71% with an average daily rate of $80.63.
LIQUIDITY AND FINANCIAL CONDITION
The Solon Hampton Inn is generating sufficient funds from operations to fund all
operating expenses and debt service payments on the first mortgage loan. As of
September 30, 1998 the Partnership has $14,144,000 in outstanding long term
indebtedness comprised of subordinated notes of $5,413,000, construction loan of
$4,239,000 and first mortgage financing of $4,492,000. The notes are due in
December 2001, unless extended by their terms for one year to December 2002. The
Solon first mortgage loan is due July, 2001, unless extended by its terms for
one year to July, 2002. The Erie first mortgage loan is expected to be due
before December, 2002, unless extended by its terms for one year to December,
2003. Once the Solon Hampton Inn and Erie Hampton Inn reach more stabilized
operations, the Partnership expects to be able to place larger new first
mortgages on the properties, such that when it needs to refinance the total
outstanding indebtedness, (which is expected to total approximately $14.3
million in July, 2001), it can do so through a combination of retained excess
working capital, new first mortgage financing and, if necessary, new
subordinated note financing.
The Partnership included a working capital reserve in its total costs for the
Solon Hampton Inn and has included a working capital reserve in its costs for
the Erie Hampton Inn. The Partnership expects that the working capital reserves
will be sufficient to fund any operating deficits.
The General Partner believes good investment opportunities exist in the limited
service segments of the lodging industry. The limited service segment of the
lodging industry has experienced significant growth in recent years as a greater
number of leisure travelers seek to maximize value. The General Partner believes
that the continued success of the lodging industry will depend upon, among other
things, the continued demand for lodging facilities by both business and leisure
travelers, which such demand is affected by general economic conditions,
including, costs of labor and materials, unemployment, inflation and interest
rates. In addition to, but directly affected by, economic trends, is the
availability of financing on favorable terms for the construction and operation
of hotels. In recent years a limited number of institutional lenders have been
more willing to provide financing for hotel construction and operations, and
hotel franchisors or their affiliates have established financing programs for
construction and operation of the hotel franchisors' particular hotels. In
addition to these industry considerations, the success of the Partnership's
hotels will depend upon the hotel franchises developed and operated by the
Partnership, as well as the location of the hotels.
-8-
<PAGE>
OTHER MATTERS
The Partnership has been in the process of resolving all significant year 2000
issues since 1997. Since almost all the Partnership's information systems
software is licensed software from established software vendors, resolution is
being accomplished by means of upgrading existing software to versions which are
year 2000 compliant. At present, the Partnership expects to fully year 2000
compliant with its own internal systems by the spring of 1999.
Since the cost of resolving the year 2000 issue is included in most cases,
through existing software maintenance contracts, the incremental cost to the
Partnership is minimal and not material.
While the Partnership expects to be fully compliant with the year 2000, with its
own systems well in advance of the year 2000 if the Partnership's vendors are
unable to resolve such processing issues in a timely manner it could result in a
material financial risk, with the risk minimized by the fact that initial year
2000 issues will occur at the beginning of a calendar year which is a slow
period in the Partnership's operations.
The Partnership is in the process of accessing the readiness of its vendors, and
determining the risks associated with year 2000 non-compliance upon its
operations. At this point the Partnership is not certain as to whether such
non-compliance will have a material effect of the Partnership's results of
operations, liquidity and financial condition. In anticipation of such an event
the Partnership will be gathering and analyzing the necessary information to
make the proper assessment and determine a plan of action to handle any foreseen
potential problems which may result.
-9-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
None
b. REPORTS ON FORM 8-K
None
-10-
<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 thereunto duly authorized.
ESSEX HOSPITALITY ASSOCIATES IV L.P.
Registrant
Dated: November 11, 1998 /S/ TRISH H. ALBANESE
------------------------------
Essex Hospitality Associates IV L.P.
Essex Partners Inc.
Trish Albanese
Vice President and Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001000375
<NAME> ESSEX HOSPITALITY ASSOCIATES IV L.P.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 548
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<FN>
<F1> UNCLASSIFIED BALANCE SHEET USED
</FN>
<PP&E> 12,534
<DEPRECIATION> 434
<TOTAL-ASSETS> 14,716
<CURRENT-LIABILITIES> 4,393
<BONDS> 9,905
<COMMON> 0
0
0
<OTHER-SE> 417
<FN>
<F2> EQUITY IS PARTNERS' CAPITAL
</FN>
<TOTAL-LIABILITY-AND-EQUITY> 14,716
<SALES> 1,407
<TOTAL-REVENUES> 1,462
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 423
<INCOME-TAX> 0
<INCOME-CONTINUING> 423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 423
<EPS-PRIMARY> 141
<EPS-DILUTED> 141
<FN>
<F3> ENTITY IS A PARTNERSHIP, EPS IS LOSS PER
LIMITED PARTNERSHIP UNIT
</FN>
</TABLE>
