<PAGE> 1
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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-67848
ESSEX HOSPITALITY ASSOCIATES III L.P.
(Exact name of registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
16-1422266
(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 October 31, 1996 a total of 4,000 Limited Partnership Units were
outstanding.
<PAGE> 2
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
Essex Hospitality Associates III L.P.
Balance Sheets
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
----- ---- ----
<S> <C> <C>
Investments in real estate, at cost
Land 1,700,151 1,700,151
Land improvements 438,234 146,738
Buildings 7,247,114 7,903,673
Furniture, fixtures and equipment 1,921,087 1,436,877
--------- ---------
11,306,586 11,187,439
Less:accumulated depreciation (517,432) (152,875)
--------- ---------
Net investments in real estate 10,789,154 11,034,564
Cash and cash equivalents 233,225 492,658
Deferred costs:
Debt issuance costs 1,060,289 1,060,289
Franchise fees 85,500 85,500
Other deferred costs 70,846 178,740
------ -------
Total deferred costs 1,216,635 1,324,529
Less: accumulated amortization (555,431) (293,331)
--------- ---------
661,204 1,031,198
Other assets 142,275 215,200
------- -------
Total assets 11,825,858 12,773,620
---------- ----------
Liabilities and Partners' Capital
---------------------------------
Accounts payable and accrued expenses 128,308 71,205
Accounts payable - construction 17,500 37,972
Mortgage notes payable 10,000,000 10,000,000
---------- ----------
Total liabilities 10,145,808 10,109,177
---------- ----------
Commitments (note 5)
Partners' capital 1,710,582 2,861,554
Less notes receivable from partners (30,532) (197,111)
-------- ---------
Total partners' capital 1,680,050 2,664,443
--------- ---------
Total liabilities and partners' capital 11,825,858 12,773,620
---------- ----------
</TABLE>
<PAGE> 3
Essex Hospitality Associates III L.P.
Statements of Income
Quarters September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INCOME
- ------
Rooms 971,680 884,093
Other income 51,285 56,813
------ -------
Total income 1,022,965 940,906
EXPENSES
- --------
Rooms 278,249 228,536
Commissions expenses 32,355 27,689
Advertising and promotion 16,569 12,499
Repairs and maintenance 51,334 26,417
Utilities 48,493 33,515
Administrative and general 99,963 63,381
Property taxes 19,128 13,679
Insurance 8,798 1,232
Franchises fees 33,917 25,911
Management fees 50,189 39,428
Marketing research fees 27,170 19,861
Miscellaneous 3,203 3,408
----- -----
Total expenses 669,368 495,556
------- -------
Operating income 353,597 445,350
Interest expense 250,000 216,418
Partnership management fees 13,940 10,212
Depreciation & amortization 146,031 151,917
------- -------
Total other expenses 409,971 378,547
------- -------
NET INCOME (56,374) 66,803
-------- ------
</TABLE>
<PAGE> 4
Essex Hospitality Associates III L.P.
Statements of Cash Flows
For the Quarters Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 1,036,409 799,230
Cash paid to suppliers (685,302) (524,162)
Interest received 941 9,420
Interest paid (250,000) (216,418)
--------- ---------
Net cash from operating activities 102,048 68,070
------- ------
Cash flows from investing activities
Payments for fixed asset additions (4,416) (1,912,829)
------- -----------
Net cash used in investing activities (4,416) (1,912,829)
------- -----------
Cash flows from financing activities
Proceeds from issuance of notes payable - 45,000
Debt issuance costs - (4,005)
Partner capital contributions 1,010 383,600
Syndication costs (46,049)
Payments for distributions (101,010) (57,421)
--------- --------
Net cash from financing activities (100,000) 321,125
--------- -------
Net increase (decrease) in cash and cash equivalents (2,368) (1,523,634)
Cash and cash equivalents - beginning of period 235,593 2,016,292
------- ---------
Cash and cash equivalents - end of period 233,225 492,658
======= =======
Reconciliation of net income to net cash flows
- ----------------------------------------------
from operating activities:
- -----------------------------
Net income (56,374) 66,803
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 146,031 151,917
Changes in:
Account payable (252) 17,105
Shortterm assets 12,643 (167,755)
------ ---------
102,048 68,070
------- ------
</TABLE>
<PAGE> 5
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
September 30, 1996 and 1995
(1) ORGANIZATION
Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
limited partnership formed on August 2, 1993 for the purpose of purchasing,
leasing or subleasing undeveloped land and constructing, owning and
operating up to four new Hampton Inn, Homewood Suites or Microtel hotels
under franchises or licenses to be obtained from these national lodging
chains. The Partnership financed its construction and other start up
activities through a public offering of notes and limited partnership
units. The first partnership property, a Microtel hotel in Birmingham,
Alabama was completed and began operations in September 1994. In April
1995, a Hampton Inn hotel opened in Rochester, New York and a third
property in Chattanooga, Tennessee opened in September, 1995.
The Partnership's general partners are Essex Partners Inc. (Essex
Partners), a subsidiary of Essex Investment Group, Inc. (Essex), and John
E. Mooney, President of Essex Partners and Essex. Management of the
Partnership and the hotels is the sole responsibility of Essex Partners.
The following is a general description of the allocation of income and
loss. For a more comprehensive description see the Partnership Agreement.
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 partners. 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 $1,000
per Unit owned by the limited partners and 1% to the general partners.
Thereafter, income on the sale of any or all the hotels is allocated in
the same manner as income from operations.
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 partners.
<PAGE> 6
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 2
(1) ORGANIZATION (CONTINUED)
Under the Partnership agreement, cash distributions will initially be made
99% to the limited partners and 1% to the general partners. After the
limited partners have received a minimum cumulative annual return of 8% of
their contribution, additional distributions may then be made 80% to the
limited partners and 20% to the general partners.
Essex Partners and its affiliates received substantial fees in connection
with the offering of notes and limited partnership units. Additional fees
were paid to them in connection with the acquisition, development and
operation of the hotels and management of the Partnership (see note 5).
(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.
Cash and Cash Equivalents
Cash investments with original maturities of three months or less are
considered to be cash equivalents.
Deferred Costs
Costs of issuing notes payable are amortized on a straight-line basis over
the term of the notes.
Franchise fees paid for the right to own and operate the hotels will be
amortized on a straight-line basis over the term of the franchise
agreement, beginning when a hotel is placed in service.
Syndication Costs
Selling commissions and legal, accounting, printing, and other filing costs
totaling $492,184 related to the offering of the limited partnership units
were charged against the proceeds of the public offering.
<PAGE> 7
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 3
Income Taxes
The results of the Partnership's operations are reportable as income or
loss in the individual federal and state income tax returns of the
partners.
Reclassification
Certain amounts in the prior year's financial statements were reclassified
to conform with the current year's presentation.
(3) MORTGAGE NOTES PAYABLE
Mortgage Notes payable bear interest at 10% per annum and mature December
31, 1998, unless extended by the Partnership to December 31, 1999 upon
payment of an extension fee equal to .5% of the principal amount
outstanding, or December 31, 2000 upon payment of an extension fee equal to
1% of the principal amount outstanding. The notes are issued as unsecured
obligations of the Partnership until a hotel site is purchased, at which
time the notes are secured by a first mortgage against the site and the
hotel to be constructed thereon.
(4) FRANCHISE, ROYALTY AND MARKETING FEES
In 1993 and 1995, the Partnership entered into franchise agreements with
Microtel Franchise and Development Corporation (MFDC) for each of the two
Microtel hotels. The agreements require the Partnership to pay an initial
franchise fee of the greater of $25,000 or $250 per room (which totaled
$50,500) and a continuing monthly royalty fee of 2.5% of gross room
revenues. The monthly royalty fee increases to 3% of gross room revenues
in the event between 50 and 100 Microtels are opened for business and to
3.5% in the event over 100 Microtels are opened. In the event a system of
advertising for Microtel franchisees, the Partnership is required to
contribute an additional 1% of gross room revenues to pay for the cost of
such a system. In 1996, a system of advertising was established for the
Microtel franchisees and payments of the 1% marketing fee started in March,
1996. The franchise agreements also require the Partnership to maintain
certain insurance coverage, to meet certain standards with respect to
furniture, fixtures, maintenance and repair, and to refurbish and upgrade
the Microtel not more than once every 5 years to conform to the Microtel
hotel's then-current public image. The term of the agreement is 10 years,
with an option to renew for an additional 10 years, subject to compliance
with certain conditions.
The Partnership incurred a royalty fee expense of $11,245 and $6,050 during
the third quarter, 1996 and 1995, respectively, under the Microtel
franchise agreements. Marketing fee expense for the third quarter 1996 was
$4,500. There was no marketing fee expense for the third quarter 1995.
<PAGE> 8
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 4
(4) FRANCHISE, ROYALTY AND MARKETING FEES (CONTINUED)
The Partnership has entered into a license agreement with Promus
Corporation (Promus) to operate a Hampton Inn hotel in Rochester, New York.
An initial franchise fee of $35,000 was paid. In addition to the initial
fee, the Partnership is required to pay Promus a monthly royalty fee of 4%
of gross room revenues, a monthly marketing/reservation contribution of 4%
of gross room revenue and a monthly amount equal to any sales or similar
tax imposed on the payments received under the license agreement.
The Partnership incurred royalty fee expense and marketing reservation
expense each of $22,672 and $19,861 during the third quarter, 1996 and 1995
respectively under the Hampton Inn license agreement.
The Microtel franchise agreements and Hampton Inn license agreement impose
certain restrictions on the transfer of limited partnership units. MFDC
and Promus restrict the sale, pledge or transfer of units in excess of 10%
and 25%, respectively, without their consent.
(5) RELATED PARTY TRANSACTIONS
A summary of the compensation, fees and reimbursements to be received by
Essex Partners or their affiliates under the terms of the Partnership
agreement follows:
<TABLE>
<CAPTION>
3rd Qtr. 3rd Qtr.
Type of Fee Amount of Fee 1996 1995
----------- ------------- ---- ----
<S> <C> <C> <C>
Selling Up to $80 per limited 0 $34,675
Commission partnership unit and 5.5%
per $1,000 note sold
Organization and Up to 3.4% of the gross 0 15,919
Offering Fee proceeds of the offering
Development Fee Up to $140,000 per hotel, 0 0
plus 5% of the total cost
of the hotel in excess of
$2 million
Property 4.5% of gross operating 50,189 39,428
Management Fee revenues from the hotels
Partnership 1.25% of gross operating 13,940 10,212
Management Fee revenues from the hotels
Accounting Fee $675 per month 6,075 4,725
Acquisition Fee Up to $110,000 per hotel 0 0
suite
</TABLE>
<PAGE> 9
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995
PAGE 5
<TABLE>
<CAPTION>
3rd Qtr. 3rd Qtr.
Type of Fee Amount of Fee 1996 1995
----------- ------------- ---- ----
<S> <C> <C> <C>
Refinancing Fee 1% of the gross proceeds 0 0
of any refinancing of any
or all of the hotels
Sales Fee 3% of the gross sale price 0 0
of any or all of hotels
$70,204 $104,959
======= ========
</TABLE>
<PAGE> 10
Item 2. Management's Discussion and Analysis or Plan of Operation
The Partnership was formed on August 2, 1993. In 1995, it completed its public
offering of first mortgage notes and limited partnership units, raising
$13,986,320. The Partnership's properties opened in September, 1994; April,
1995 and September, 1995.
The first property, a 102-room Microtel Inn hotel, is located in Homewood,
Alabama, outside Birmingham. The property is in its second year of operations.
At the end of 1995, the Managing General Partner replaced the manager at the
property. A new manager started in February, 1996. The new manager is
addressing several problems, including improving the physical appearance of the
property, upgrading the clientele and initiating cost controls. Revenues for
the third quarter 1996 decreased 12% ($30,000) over third quarter 1995 revenues
to $228,000 which the General Partner believes is due primarily to three
factors. New hotel room supply has been added in the area of the Partnership's
property, without a significant increase in demand. The second is the effort
made by the hotel to upgrade its client base. More stringent standards are now
in place to reduce the number of undesirable clients. The hotel also reduced
its room rates to attract more customers to the hotel. Reducing rates reduces
revenues in the shortterm, but should increase occupancy and revenue in the
longterm. Occupancy, after dropping sharply during the spring and early
summer, started to move back up in August and September. Operating income for
the third quarter 1996 decreased $20,000 to $59,000 due to the reduced
revenues. The decrease in operating income is less than the decrease in
revenues because cost controls initiated by the new manager are reducing
expenses compared to 1995.
The Partnership's second property is a 118-room Hampton Inn located in
Rochester, New York. Revenues for the third quarter 1996 were $561,000, with
operating income of $262,000. Revenues for the third quarter 1995 were
$616,000, with operating income of $347,000. Only one month in the third
quarter 1996 had lower revenues and operating income compared to 1995, and that
was September. September 1996 revenues were $87,000 less than 1995 and
operating income was $100,000 less than September, 1995. The Ryder Cup golf
tournament was held in Rochester in September, 1995. Rooms rates were more
than doubled during the Ryder Cup which contributed a significant amount of
revenue to the property, with little increase in expenses.
The Partnership's third property, a 100-room Microtel hotel in Chattanooga,
Tennessee, has been open since September, 1995. The property has not performed
as well as expected during its first year of operations, which the Managing
General Partners believes is primarily due to the manager at the property. The
manager was changed in early 1996, and again in October, 1996. The current
manager, who has worked in the Chattanooga hotel industry for several years, is
expected to make significant improvements over the next several months. The
two prior managers had less hotel experience and were not familiar with the
Chattanooga market. Revenues for the third quarter 1996 were $233,000 and
operating income totaled $59,000. The property opened at the end of the third
quarter in 1995, therefore, 1995 revenue and operating amounts are not
comparable.
<PAGE> 11
Partnership revenues for the third quarter, 1996 were $1,023,000, compared to
$941,000 in the third quarter 1995. The revenues in 1995 were lower because
the Chattanooga hotel was only open for one month in the third quarter, 1995.
Operating expenses totaled $669,000 for operating income of $354,000.
Operating expenses for the third quarter 1995 were $496,000, and operating
income was $445,000. The reduction in operating income for the Partnership in
1996 compared to 1995 is due to issues discussed above for the Birmingham and
Hampton Inn hotels. Other expenses, including interest and depreciation were
$410,000 for a net loss of $56,000 for the third quarter 1996. The net income
for the same period in 1995 was $67,000. The reduction in net income for 1996
compared to 1995 was caused by the reduction in operating income, and the
increase in interest expense with the Chattanooga hotel being open for the
entire quarter in 1996. Cash flow from operations was $89,000 compared to a
cash flow of $68,000 in the third quarter 1995. The properties are expected to
generate sufficient cash from operations to meet their needs for the remainder
of 1996.
Partnership assets decreased $948,000 from October 1, 1995 to September 30,
1996. The change in total assets is a combination of an increase in
accumulated depreciation and amortization of $627,000 and a decrease in cash of
$260,000 due to payments for distributions. Liabilities increased $37,000 due
to increases in accounts payable. Partners' equity decreased $984,000 from net
losses incurred and the payment of distributions.
<PAGE> 12
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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 III L.P.
-------------------------------------
Registrant
Dated: November 7, 1996 /s/ Lorrie L. LoFaso
--------------------------------------------
Essex Hospitality Associates III L.P.
Essex Partners Inc.
Lorrie L. LoFaso
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 233
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,789
<DEPRECIATION> 517
<TOTAL-ASSETS> 11,826
<CURRENT-LIABILITIES> 0
<BONDS> 10,000
0
0
<COMMON> 0
<OTHER-SE> 1,680<F2>
<TOTAL-LIABILITY-AND-EQUITY> 11,826
<SALES> 972
<TOTAL-REVENUES> 1,023
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250
<INCOME-PRETAX> (56)
<INCOME-TAX> 0
<INCOME-CONTINUING> (56)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0<F3>
<FN>
<F1>UNCLASSIFIED BALANCE SHEET USED
<F2>EQUITY IS PARTNERS' CAPITAL
<F3>ENTITY IS A PARTNERSHIP
</FN>
</TABLE>
