<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 June 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 1623
(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 July 31, 1996 a total of 4,000 Limited Partnership Units were outstanding.
<PAGE> 2
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Essex Hospitality Associates III L.P.
Balance Sheets
June 30, 1996 and 1995
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Investments in real estate, at cost
Land 1,700,151 1,700,151
Land improvements 438,234 100,598
Buildings 7,247,114 5,666,798
Furniture, fixtures and equipment 1,916,671 1,153,131
Construction in progress - 1,014,356
---------- ---------
11,302,170 9,635,034
Less: accumulated depreciation (436,133) (76,565)
--------- --------
Net investments in real estate 10,866,037 9,558,469
Cash and cash equivalents 235,593 2,016,292
Deferred costs:
Debt issuance costs 1,060,289 1,056,284
Franchise fees 85,500 85,500
Other deferred costs 70,846 149,737
------- -------
Total deferred costs 1,216,635 1,291,521
Less: accumulated amortization (490,701) (216,011)
--------- ---------
725,934 1,075,510
Other assets 154,920 160,446
-------- -------
Total assets 11,982,484 12,810,717
=========== ==========
Liabilities and Partners' Capital
---------------------------------
Accounts payable and accrued expenses 128,560 146,072
Accounts payable - construction 17,500 390,421
Mortgage notes payable 10,000,000 9,955,000
----------- ---------
Total liabilities 10,146,060 10,491,493
----------- ----------
Commitments (note 5)
Partners' capital 1,867,966 2,473,036
Less notes receivable from partners (31,542) (153,812)
-------- ---------
Total partners' capital 1,836,424 2,319,224
---------- ---------
Total liabilities and partners' capital 11,982,484 12,810,717
=========== ==========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Essex Hospitality Associates III L.P.
Statements of Income
Quarters Ended June 30, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
INCOME
Rooms 963,990 492,013
Other income 51,551 38,461
------- ------
Total income 1,015,541 530,474
EXPENSES
Rooms 228,729 139,847
Commissions expenses 40,808 12,197
Advertising and promotion 17,630 30,903
Repairs and maintenance 40,216 16,667
Utilities 52,615 16,435
Administrative and general 98,343 45,393
Property taxes (9,669) 0
Insurance 2,363 5,709
Franchises fees 31,208 10,488
Management fees 43,928 20,641
Marketing research fees 24,968 3,180
Miscellaneous 10,484 5,932
------- -----
Total expenses 581,623 307,392
-------- -------
Operating income 433,918 223,082
Interest expense 250,000 169,281
Partnership management fees 12,203 5,770
Depreciation & amortization 146,031 70,623
-------- ------
Total other expenses 408,234 245,674
-------- -------
NET INCOME 25,684 (22,592)
======= ========
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Essex Hospitality Associates III L.P.
Statements of Cash Flows
For the Quarters Ended June 30, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 1,040,143 470,622
Cash paid to suppliers (594,890) (320,659)
Interest received 591 13,733
Interest paid (250,000) (169,281)
--------- ---------
Net cash from operating activities 195,844 (5,585)
-------- -------
Cash flows from investing activities
Payments for fixed asset additions (7,278) (2,488,202)
------- -----------
Net cash used in investing activities (7,278) (2,488,202)
------- -----------
Cash flows from financing activities
Proceeds from issuance of notes payable - 1,038,000
Debt issuance costs - (97,526)
Partner capital contributions 1,010 827,648
Syndication costs - (104,467)
Payments for distributions (101,010) (35,097)
--------- --------
Net cash from financing activities (100,000) 1,628,558
--------- ---------
Net increase in cash and cash equivalents 88,566 (865,229)
Cash and cash equivalents - beginning of period 123,766 2,881,521
-------- ---------
Cash and cash equivalents - end of period 235,593 2,016,292
======== =========
Reconciliation of net income to net cash flows
from operating activities:
Net income 25,684 (22,592)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 146,031 70,623
Changes in:
Account payable (2,187) (108,326)
Shortterm assets 26,316 54,710
------- ------
195,844 (5,585)
======== =======
</TABLE>
<PAGE> 5
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
June 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 JUNE 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 JUNE 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 $10,404 and $4,979
during the second quarter, 1996 and 1995, respectively, under the
Microtel franchise agreements. Marketing fee expense for the second
quarter 1996 was $4,160. There was no marketing fee expense for the
second quarter 1995.
<PAGE> 8
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 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 $20,807 and $5,509 during the second 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>
Type of Fee Amount of Fee 2nd Qtr. 2nd Qtr.
- ----------- ------------- 1996 1995
---- ----
<S> <C> <C> <C>
Selling Up to $80 per limited 0 $123,95
Commission partnership unit and 5.5% 0
per $1,000 note sold
Organization and Up to 3.4% of the gross 0 46,648
Offering Fee proceeds of the offering
Development Fee Up to $140,000 per hotel, 0 96,583
plus 5% of the total cost
of the hotel in excess of
$2 million
Property 4.5% of gross operating 43,928 20,641
Management Fee revenues from the hotels
Partnership 1.25% of gross operating 12,203 5,770
Management Fee revenues from the hotels
Accounting Fee $675 per month 6,075 4,050
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 JUNE 30, 1996 AND 1995
PAGE 5
<TABLE>
<CAPTION>
Type of Fee Amount of Fee 2nd Qtr. 2nd Qtr.
- ----------- ------------- 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
$62,206 $297,642
======= ========
</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 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 decided to replace 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 second
quarter 1996 decreased 7% over second quarter 1995 revenues to $205,000 which
the General Partner believes is due primarily to two factors. The first is a
general softening in the Birmingham limited service hotel market. The second is
the effort made by the hotel to upgrade its client base. It will take time to
find new customers to replace the clients no longer using the hotel. The room
rates have been reduced to encourage new customers to try the hotel. Operating
income decreased $43,000 to $46,000 due primarily to expense overruns. The
Managing General Partner believes that expenses will be brought under control by
the end of the year.
The Partnership's second property is a 118-room Hampton Inn located in
Rochester, New York. Revenues for the second quarter 1996 were $570,000, with
operating income of $314,000. Revenues for the second quarter 1995 were
$298,000, with operating income of $142,000. Since the property opened in April,
1995, most of 1995 was spent building a client base. Rates were also lower in
1995, to attract the maximum number of customers. In 1996, occupancy and rates
have increased, causing the increase in revenues and operating income.
The Partnership's third property, a 100-room a Microtel hotel in Chattanooga,
Tennessee, has been open since September, 1995. The property is still in its
ramp-up phase of operations. Lower occupancy is typical for properties in the
ramp-up stage of operations. Customers to the area are unfamiliar with the
property and time is required to build a reputation. Revenues for the second
quarter 1996 were $239,000 and operating income totaled $101,000.
Partnership revenues for the second quarter, 1996 were $1,016,000, compared to
$530,000 in the second quarter 1995 when only two properties were open.
Operating expenses totaled $582,000 for operating income of $434,000. Operating
expenses for the second quarter 1995 were $307,000, and operating income was
$223,000. Other expenses, including interest and depreciation were $408,000 for
net income of $26,000 for the second quarter 1996. The net loss for the same
period in 1995 was $23,000. Cash flow from operations was $196,000 compared to a
cash deficit in the second quarter 1995 of $6,000. The properties are expected
to generate sufficient cash from operations to meet their needs for the
remainder of 1996.
<PAGE> 11
Partnership assets decreased $828,000 from July 1, 1995 to June 30, 1996. The
change in total assets is a combination of an increase in fixed assets of
$1,700,000 from completing construction of the partnership's third property in
the third quarter, 1995; an increase in accumulated depreciation and
amortization of $634,000 and a decrease in cash of $1,800,000 due to payments
for construction and distributions. Liabilities decreased $345,000 due primarily
to the payment of outstanding construction payables. Partners' equity decreased
$483,000 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: August 6, 1996 /s/ Lorrie L. LoFaso
--------------------
Essex Hospitality Associates III L.P.
Essex Partners Inc.
Lorrie L. LoFaso
Vice President and Chief Accounting Officer
<PAGE> 13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911217
<NAME> ESSEX HOSPITALITY ASSOCIATES III L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 236
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 10,866
<DEPRECIATION> 436
<TOTAL-ASSETS> 11,982
<CURRENT-LIABILITIES> 0
<BONDS> 10,000
0
0
<COMMON> 0
<OTHER-SE> 1,836<F2>
<TOTAL-LIABILITY-AND-EQUITY> 11,982
<SALES> 964
<TOTAL-REVENUES> 1,016
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 740
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250
<INCOME-PRETAX> 26
<INCOME-TAX> 0
<INCOME-CONTINUING> 26
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26
<EPS-PRIMARY> 0
<EPS-DILUTED> 0<F3>
<FN>
<F1>UNCLASSIFIED BALANCE USED
<F2>EQUITY IS PARTNERS' CAPITAL
<F3>ENTITY IS A PARTNERSHIP
</FN>
</TABLE>
