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, 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 November 1, 1997 a total of 4,000 Limited Partnership Units were
outstanding.
<PAGE>
PART 1
------
FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
- --------------------------------------------------------------------------------
Essex Hospitality Associates III L.P.
Balance Sheets
September 30, 1997 and 1996
ASSETS 1997 1996
------ ---- ----
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 1,998,855 1,921,087
----------- -----------
11,233,804 11,306,586
Less:accumulated depreciation (976,220) (517,432)
----------- -----------
Net investments in real estate 10,257,584 10,789,154
Cash and cash equivalents 16,079 216,110
Restricted cash 56,484 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 (814,343) (555,431)
----------- -----------
402,292 661,204
Other assets 168,528 142,275
----------- -----------
Total assets 10,900,967 11,825,858
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable and accrued expenses 230,417 128,308
Accounts payable - construction 13,502 17,500
Due to affiliate 50,000 --
Mortgage notes payable 10,000,000 10,000,000
----------- -----------
Total liabilities 10,293,919 10,145,808
----------- -----------
Commitments (note 5)
Partners' capital 614,378 1,710,582
Less notes receivable from partners (7,300) (30,532)
----------- -----------
Total partners' capital 607,078 1,680,050
----------- -----------
Total liabilities and partners' capital 10,900,997 11,825,858
=========== ===========
See accompanying notes to unaudited financial statements.
<PAGE>
Essex Hospitality Associates III L.P.
Statements of Income
For the Quarters Ended September 30, 1997 and 1996
1997 1996
------ -----
INCOME
Rooms 1,053,000 971,680
Other income 48,049 51,285
---------- ----------
Total income 1,101,049 1,022,965
EXPENSES
Rooms 276,714 278,249
Administrative and general 85,279 99,963
Property taxes 34,476 19,128
Repairs and maintenance 41,671 51,334
Advertising and promotion 57,142 43,739
Management fees 50,790 50,189
Utilities 49,482 48,493
Commissions expenses 41,156 32,355
Franchises fees 36,416 33,917
Partnership management fees 14,108 13,940
Insurance 11,115 8,798
Depreciation & amortization 162,898 146,031
Miscellaneous 16,728 3,203
---------- ----------
Total expenses 877,975 829,339
---------- ----------
Operating income 223,074 193,626
Interest expense 250,000 250,000
---------- ----------
NET INCOME (LOSS) (26,926) (56,374)
========== ==========
Net income (loss) - general partners (269) (564)
Net income (loss) - limited partners (26,657) (55,810)
---------- ----------
(26,926) (56,374)
========== ==========
Net income (loss) per unit - limited partners (7) (14)
========== ==========
See accompanying notes to unaudited financial statements.
<PAGE>
<TABLE>
<CAPTION>
Essex Hospitality Associates III L.P.
Statements of Cash Flows
For the Quarters Ended September 30, 1997 and 1996
1997 1996
----- ------
<S> <C> <C>
Cash flows from operating activities
Cash received from customers 1,089,227 1,036,409
Cash paid to suppliers (693,905) (685,302)
Interest received 873 941
Interest paid (250,000) (250,000)
---------- ----------
Net cash provided by operating activities 146,195 102,048
---------- ----------
Cash flows from investing activities
Increase in restricted cash (809) --
Payments for fixed asset additions (36,295) (4,416)
---------- ----------
Net cash used in investing activities (37,104) (4,416)
---------- ----------
Cash flows from financing activities
Partner capital contributions 1,010 1,010
Advances from affiliate (54,111) --
Partner distributions (101,010) (101,010)
---------- ----------
Net cash used in financing activities (154,111) (100,000)
---------- ----------
Net increase (decrease) in cash and cash equivalents (45,020) (2,368)
Cash and cash equivalents - beginning of period 61,099 235,593
---------- ----------
Cash and cash equivalents - end of period 16,079 233,225
========== ==========
RECONCILIATION OF NET INCOME TO NET CASH FLOWS
----------------------------------------------
FROM OPERATING ACTIVITIES:
--------------------------
Net loss (26,926) (56,374)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 162,898 146,031
Changes in:
Accounts payable 14,470 (252)
Other assets (4,247) 12,643
---------- ----------
146,195 102,048
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
September 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>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 1997 were $976,718.
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>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996
PAGE 3
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 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 Inn hotels are opened for business and 3.5% in the event
100 or more Microtel Inn hotels are opened. During the third quarter,
1997, the 50th Microtel Inn hotel was opened. The monthly royalty fee
increased to 3% in September 1997. 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 Inn 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 $17,800
and $15,743 during the third 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 $47,405 and $45,344 during the third
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
$56,484 and $17,115 at September 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>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 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>
3rd Qtr. 3rd Qtr.
TYPE OF FEE AMOUNT OF FEE 1997 1996
- ----------- ------------- ---- ----
<S> <C> <C> <C>
Property Management 4.5% of gross operating revenues from 50,790 50,189
Fee the hotels
Partnership 1.25% of gross operating revenues 14,108 13,940
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
$70,973 $70,204
======= =======
</TABLE>
<PAGE>
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 96% of the operating revenues for the Partnership in the third
quarter, 1997. Room revenues generated are dependent on a property's average
occupancy and average daily rate. Room revenues for the third quarter 1997 were
8% higher than the third quarter, 1996. Room revenues at the Hampton Inn and
Chattanooga Microtel Inn properties increased compared to 1996.
The Birmingham Microtel Inn achieved an average occupancy of 66% for the quarter
with an average daily rate of $34.87, as compared with an average occupancy of
65% in the third quarter, 1996, and an average daily rate of $35.03. The
increase in occupancy produced a $1,500 increase in room revenues. The
Birmingham Microtel generated approximately 21% of the Partnership's room
revenues for the quarter, compared to 22% in the third quarter, 1996.
The Hampton Inn achieved an average occupancy of 80% for the quarter, with an
average daily rate of $75.91, compared with an average occupancy of 71% for the
third quarter 1996 and an average daily rate of $69.05. The increase in
occupancy and average daily rate caused room revenues to increase by $37,100.
The Hampton Inn generated around 54% of the Partnership's room revenues for the
quarter, compared to 55% for the third quarter, 1996.
The average occupancy for the Chattanooga Microtel Inn for the quarter was 79%
with an average daily rate of $36.46, compared to the third quarter 1996 when
occupancy was 61% with an average daily rate of $33.35. The improvement in
occupancy caused room revenues for the quarter to exceed the third quarter 1996
by $42,900. The manager at the Chattanooga Microtel Inn was 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 25% of the Partnership's room revenues for the quarter,
compared to 23% for the third quarter, 1996.
Operating income for the third quarter increased $29,400 over the third quarter
1996, to $223,000. 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 $27,000 compared to a net
loss of $56,000 in the third quarter, 1996. The Partnership generated $146,000
from operations, compared to$102,000 in the third quarter, 1996. Investing
activities required cash of $37,000 in the third quarter 1997, primarily for
asset replacements. In 1996, investing activities required cash of $4,000 in the
third quarter for asset replacements. Financing activities used $154,000 in cash
in the third quarter, 1997. Significant financing activities for the
<PAGE>
third quarter 1997 included the payment of $100,000 in limited partner
distributions and the repayment of $54,000 in advances from the Managing General
Partner. The third quarter 1996 financing activities were primarily composed of
the payment of $100,000 in limited partner distributions. The Partnership's cash
and cash equivalents decreased $45,000 in the third quarter, 1997, compared to a
decrease of $2,000 in 1996.
Total assets decreased $925,000 in 1997 due primarily to the $718,000 increase
in depreciation and amortization and a $200,000 decrease in unrestricted cash.
Total liabilities increased $148,000 from an increase in accounts payable and
accrued expenses and in due to affiliate. Partners' equity decreased $1,096,000
from two factors, the payment of $400,000 in distributions to limited partners
and the net losses of $696,000 generated between October 1, 1996 and September
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 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 room revenues
generated by the Hampton Inn hotel. The reserve 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 September 30, 1997, the capital reserve escrow
account was $56,484.
<PAGE>
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 13, 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> SEP-30-1997
<CASH> 72
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<FN>
<F1> UNCLASSIFIED BALANCE SHEET USED
</FN>
<PP&E> 11,234
<DEPRECIATION> 976
<TOTAL-ASSETS> 10,901
<CURRENT-LIABILITIES> 0
<BONDS> 10,000
0
0
<COMMON> 0
<OTHER-SE> 607
<FN>
<F2> EQUITY IS PARTNERS' CAPITAL
</FN>
<TOTAL-LIABILITY-AND-EQUITY> 10,901
<SALES> 1,053
<TOTAL-REVENUES> 1,101
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250
<INCOME-PRETAX> (27)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27)
<EPS-PRIMARY> (7)
<EPS-DILUTED> (7)
<FN>
<F3> ENTITY IS A PARTNERSHIP, EPS IS LOSS PER LIMITED PARTNERSHIP UNIT
</FN>
</TABLE>
