<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, 1997
[ ] 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 August 1, 1997 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
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets
Investments in real estate, at cost
Land 1,546,151 1,700,151
Land improvements 438,234 438,234
Buildings 7,250,564 7,247,114
Furniture, fixtures and equipment 1,966,558 1,916,671
---------- ----------
11,201,507 11,302,170
Less:accumulated depreciation (878,051) (436,133)
---------- ----------
Net investments in real estate 10,323,456 10,866,037
Cash and cash equivalents 61,099 218,478
Restricted cash 55,675 17,115
Deferred costs:
Debt issuance costs 1,060,289 1,060,289
Franchise fees 85,500 85,500
Other deferred costs 70,846 70,846
---------- ----------
Total deferred costs 1,216,635 1,216,635
Less: accumulated amortization (749,613) (490,701)
---------- ----------
467,022 725,934
Other assets 164,312 154,920
---------- ----------
Total assets 11,071,564 11,982,484
---------- ----------
Liabilities and Partners' Capital
Accounts payable and accrued expenses 215,947 183,866
Accounts payable - construction 17,500 17,500
Due to affiliate 104,111 --
Mortgage notes payable 10,000,000 10,000,000
---------- ----------
Total liabilities 10,337,558 10,201,366
---------- ----------
Commitments (note 5)
Partners' capital 742,315 1,812,660
Less notes receivable from partners (8,310) (31,542)
---------- ----------
Total partners' capital 734,005 1,781,118
---------- ----------
Total liabilities and partners' capital 11,071,564 11,982,484
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 3
Essex Hospitality Associates III L.P.
Statements of Income
For the Quarters Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INCOME
Rooms 1,068,151 963,990
Other income 55,619 51,551
--------- ---------
Total income 1,123,770 1,015,541
EXPENSES
Rooms 259,639 228,729
Administrative and general 101,285 98,343
Property taxes 70,870 45,637
Repairs and maintenance 54,388 40,216
Advertising and promotion 50,957 42,598
Management fees 50,731 43,928
Utilities 48,185 52,615
Commissions expenses 38,068 40,808
Franchises fees 32,504 31,208
Partnership management fees 13,461 12,203
Insurance 4,222 2,363
Depreciation & amortization 162,898 146,031
Miscellaneous 12,757 10,484
--------- ---------
Total expenses 899,965 795,163
--------- ---------
Operating income 223,805 220,378
Interest expense 250,000 250,000
--------- ---------
NET INCOME (LOSS) (26,195) (29,622)
========= =========
Net income (loss) - general partners (262) (296)
Net income (loss) - limited partners (25,933) (29,326)
--------- ---------
(26,195) (29,622)
========= =========
Net income (loss) per unit - limited partners (6) (7)
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 4
Essex Hospitality Associates III L.P.
Statements of Cash Flows
For the Quarters Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 1,098,488 1,040,143
Cash paid to suppliers (716,201) (594,195)
Interest received 514 591
Interest paid (250,000) (250,000)
--------- ---------
Net cash provided by operating activities 132,801 196,539
--------- ---------
Cash flows from investing activities
Increase in restricted cash (38,445) (17,115)
Payments for fixed asset additiONS (23,251) (7,278)
--------- ---------
Net cash used in investing activities (61,696) (24,393)
--------- ---------
Cash flows from financing activities
Partner capital contributions 1,010 1,010
Advances from affiliate 59,155 --
Partner distributions (101,010) (101,010)
--------- ---------
Net cash used in financing activities (40,845) (100,000)
--------- ---------
Net increase (decrease) in cash and cash equivalents 30,260 72,146
Cash and cash equivalents - beginning of period 30,839 146,332
--------- ---------
Cash and cash equivalents - end of period 61,099 218,478
========= =========
Reconciliation of net income to net cash flows
from operating activities:
Net loss (26,195) (29,622)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 162,898 146,031
Changes in:
Account payable (1,396) 53,119
Other assets (2,507) 27,011
--------- ---------
132,801 196,539
========= =========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE> 5
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
June 30, 1997 and 1996
(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 activities through
a public offering of notes and limited partnership units. Microtel
Hotels were constructed in Birmingham, Alabama and Chattanooga,
Tennessee and began operations in September 1994 and September 1995,
respectfully. In April 1995, construction of a Hampton Inn hotel in
Rochester, New York was completed and the hotel began operations. The
Partnership does not anticipate raising additional capital and,
therefore, no additional hotels are expected to be developed.
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 partners. 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, 1997 AND 1996
PAGE 2
(1) ORGANIZATION (CONTINUED)
In 1995 and 1996, losses from operations were allocated 99% to the
limited partners and 1% to the general partners.
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. The limited
partners have received the minimum cumulative return of 8% due as of
December 31, 1996.
Under the Partnership's initial offering from 1993 to 1995, limited
partnership capital of $3,986,320 was raised, less syndication fees
including selling commissions and legal, accounting, printing and other
filing costs of $491,473. Cumulative distributions to limited partners
through June 30, 1997 were $876,718.
Essex Partners and its affiliates received substantial fees in
connection with the offering of notes and limited partnership units and
development of hotels. Management and other fees related to the
operation of the hotels and the Partnership are due annually to Essex
Partners (see note 6).
(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.
Investment in Real Estate
Investments in real estate are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives of the assets.
Deferred Costs
Costs of issuing mortgage 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.
<PAGE> 7
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996
PAGE 3
Income Taxes
No provision for income taxes has been provided since any liability is
the individual responsible of the partners.
Recognition of Revenue
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the managing general partner to
make estimates and assumptions that affect the reported amounts of
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.
Reclassification
Certain amounts in the prior year's financial statements were
reclassified to conform with the current year's presentation.
(3) SALE OF LAND
In 1996, the Partnership sold land adjacent to the hotel with final
settlement in January 1997 of $86,782. A loss of $67,218 was recognized
on the transaction.
(4) 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
secured by a first mortgage on the hotels and underlying land.
<PAGE> 8
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996
PAGE 4
(5) FRANCHISE, ROYALTY AND MARKETING FEES
The Partnership entered into franchise agreements with Microtel
Franchise and Development Corporation (MFDC) for the Birmingham, Alabama
and Chattanooga, Tennessee sites. Total initial franchise fees paid were
$50,500. In addition to the initial fee, the Partnership is required to
pay a 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 Microtel hotels are opened for business and 3.5% in the event
100 or more Microtel hotels are opened. In 1996, the Franchisor
established a system of advertising, thus requiring the Partnership to
contribute an additional 1% of gross room revenues to pay for the cost
of such a system. The franchise agreement also requires 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 hotel 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. Microtel royalty and advertising
fees totaled $17,006 and $14,564 during the second quarter, 1997 and
1996, respectfully.
The Partnership has also entered into a license agreement with Promus
Corporation (Promus) to operate a Hampton Inn hotel for the Rochester,
New York site. 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 fee of 4% of gross room revenue and a monthly
amount equal to any sales tax or similar tax imposed on Hampton Inn on
payments received under the license agreement. The Partnership incurred
royalty and marketing/reservations fees of $20,357 and $20,807 during
the second quarter 1997 and 1996, respectfully.
Promus requires the Partnership to establish a capital reserve escrow
account based on a percentage of gross revenues generated by the Hampton
Inn hotel which will be used for product quality requirements of the
hotel. Cumulative funding of the reserve for the first five years of
operation increases from 1% to 5% of gross revenues and stabilizes at 5%
for the term of the agreement. The capital reserve cash escrow account
was $55,675 and $17,115 at June 30, 1997 and 1996, respectively.
The franchise agreement impose certain restrictions on the transfer of
limited partnership units. MFCD and Promus restrict the sale, pledge or
transfer of units in excess of 10% and 25%, respectively, without their
consent.
<PAGE> 9
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996
PAGE 5
(6) 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>
2nd Qtr. 2nd Qtr.
Type of Fee Amount of Fee 1997 1996
- ----------- ------------- ---- ----
<S> <C> <C> <C>
Property Management 4.5% of gross operating revenues from 50,731 43,928
Fee the hotels
Partnership 1.25% of gross operating revenues 13,461 12,203
Management Fee from the hotels
Accounting Fee $675 per month 6,075 6,075
Refinancing Fee 1% of the gross proceeds of any 0 0
refinancing of any or all of the hotels
Sales Fee 3% of the gross sale price of any of all 0 0
of hotels
$70,267 $62,206
======= =======
</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 first Partnership property, a 102-room Microtel hotel in
Birmingham, Alabama, opened in September, 1994. The two remaining Partnership
properties opened in 1995, a 118-room Hampton Inn in Rochester, New York in
April and a 100-room Microtel in Chattanooga in September.
The major revenue source for the Partnership's properties is room revenues,
which generated 95% of the operating revenues for the Partnership in the second
quarter, 1997. Room revenues generated are dependent on a property's average
occupancy and average daily rate. Room revenues for the second quarter 1997 were
11% higher than the second quarter, 1996. Room revenues at each of the
Partnership's properties increased compared to 1996.
The Birmingham Microtel Inn achieved an average occupancy of 71% for the quarter
with an average daily rate of $35.45, as compared with an average occupancy of
59% in the second quarter, 1996, and an average daily rate of $35.55. The
increase in occupancy produced a $41,000 increase in room revenues. The
property's occupancy started to weaken at the end of 1995. A new manager was
hired in the spring, 1996, and made several changes. Room rates were reduced and
the monthly average occupancy started improve. The housekeeping staff was
retrained and property maintenance was improved. The Birmingham Microtel
generated approximately 22% of the Partnership's room revenues for the quarter,
compared to 20% in the second quarter, 1996.
The Hampton Inn achieved an average occupancy of 81% for the quarter, with an
average daily rate of $66.34, compared with an average occupancy of 77% for the
second quarter 1996 and an average daily rate of $65.09. The increase in
occupancy and average daily rate caused room revenues to increase by $34,000.
The Managing General Partner believes that the increased occupancy is partly due
to the timing of the Easter holiday. Around the holiday, occupancy tends to
decrease as business people reduce their travel. Easter was in April in 1996,
and in March in 1997. March 1997 occupancy was less than March 1996, but the
decrease was made up with increases in April 1997. The Hampton Inn generated
around 55% of the Partnership's room revenues for the quarter, compared to 56%
for the second quarter, 1996.
The average occupancy for the Chattanooga Microtel Inn for the quarter was 78%
with an average daily rate of $36.30, compared to the second quarter 1996 when
occupancy was 64% with an average daily rate of $39.33. The improvement in
occupancy caused room revenues for the quarter to exceed the second quarter 1996
by $30,000. The manager at the Chattanooga Microtel Inn was also replaced in
1996. The new manager hired is from the Chattanooga area and has several years
of experience in the hotel industry. The new manager instituted extensive
marketing programs to build the awareness of the hotel within the Chattanooga
market. Occupancies began to improve in January, 1997. The Chattanooga Microtel
Inn generated around 24% of the Partnership's room revenues for the quarter,
compared to 24% for the second quarter, 1996.
<PAGE> 11
Operating income for the second quarter increased $3,000 over the second quarter
1996, to $224,000. Interest expense remained at $250,000, since the
partnership's mortgages require payments of interest only at a fixed rate of
10%. The Partnership's net loss for the quarter was $26,000 compared to a net
loss of $30,000 in the second quarter, 1996. The Partnership generated $133,000
from operations, compared to$197,000 in the second quarter, 1996. Investing
activities required cash of $62,000 in the second quarter 1997, which was
composed of asset replacements of $23,000 and an increase in the Hampton Inn
restricted cash account of $39,000. In 1996, investing activities required cash
of $24,000 in the second quarter, which was composed of asset replacements of
$7,000 and an increase in the Hampton Inn restricted cash account of $17,000.
The funding required for the restricted cash account increased because the
amount required for the capital reserve account for Hampton Inn increased from
1% of previous twelve months' room revenues to 2%. Financing activities used
$41,000 in cash in the second quarter, 1997. Significant financing activities
for the second quarter 1997 included the payment of $100,000 in limited partner
distributions and the receipt of $59,000 in advances from the Managing General
Partner. The advances from the Managing General Partner are expected to be
repaid in the third quarter. The second quarter 1996 financing activities were
primarily composed of the payment of $100,000 in limited partner distributions.
The Partnership generated $30,000 in cash in the second quarter, 1997, which was
$42,000 lower than the second quarter 1996.
Total assets decreased $911,000 in 1997 due primarily to the $701,000 increase
in depreciation and amortization and a $119,000 decrease in cash. Total
liabilities increased $136,000 from an increase in accounts payable and accrued
expenses and in due to affiliate. Partners' equity decreased $1,047,000 from two
factors, the payment of $400,000 in distributions to limited partners and the
net losses of $647,000 generated between July 1, 1996 and June 30, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership expects to obtain sufficient liquidity from operations to fund
all operating costs. In addition to operations, the Partnership will require
liquidity to provide for repayment of outstanding debt. The Partnership's first
mortgage notes in the principal amount of $10,000,000 mature on December 31,
1998. The Managing General Partner would prefer to replace the notes with
conventional financing from a bank or other institutional lender. The Managing
General Partner believes the environment for conventional financing for hotels
has improved such that there is reasonable probability that the Partnership
would be able to obtain sufficient conventional financing to replace its first
mortgage notes. However, if conventional financing is not available, the
Partnership can extend the maturity date of the first mortgage notes for up to
two years upon payment of extension fees.
The Microtel franchise agreements require the Partnership to refurbish and
upgrade its Microtel Inn hotels not more than every five years. The upgrade
would include replacing soft goods such as bedspreads and drapes, new carpeting,
equipment such the front desk system, telephone system and the key system. The
Partnership is replacing soft goods as needed and expects it will satisfy the
Microtel franchisor's requirements without any major additional expenditures.
The front desk system, telephone system and key system at the Partnership's
properties were new at the time the properties were constructed and are expected
to meet Franchisor specifications for the next several years. Equipment such as
televisions and heating and cooling units are expected to have a life of
<PAGE> 12
between five and ten years and can replaced as required. Not all units will need
to be replaced in the same year, so that management expects that the
expenditures can be spread over several years.
The Hampton Inn license agreement requires the Partnership to establish a
capital reserve escrow account based on a percentage of gross revenues generated
by the Hampton Inn 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 Partnership expects to fund the reserve from cash from
operations, and the reserve should be sufficient to fund major capital
improvements as required. At June 30, 1997, the capital reserve escrow account
was $55,675.
<PAGE> 13
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 14, 1997 /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
<CIK> 0000911217
<NAME> ESSEX HOSPITALITY ASSOCIATES III L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 61
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 11,202
<DEPRECIATION> 878
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0
0
<COMMON> 0
<OTHER-SE> 734<F2>
<TOTAL-LIABILITY-AND-EQUITY> 11,072
<SALES> 1,124
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<OTHER-EXPENSES> 900
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<EPS-DILUTED> (6)<F3>
<FN>
<F1>UNCLASSIFIED BALANCE SHEET USED
<F2>EQUITY IS PARTNERS' CAPITAL
<F3>ENTITY IS A PARTNERSHIP, EPS IS LOSS PER LIMITED PARTNERSHIP UNIT
</FN>
</TABLE>
