REGULATION S-B
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------------------------------
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] 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 16-1442557
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Corporate Woods
Rochester, New York 14623
(Address of principal executive office)
Registrant's telephone number, including area code: (716) 272-2300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $3,950,000
As of March 24, 1998, a total of 3,989 Limited Partnership Units were held by
non-affiliates who purchased the Units from the issuer at an aggregate offering
price of $3,975,320. There is no trading market for the Units and none is
expected to develop.
Documents incorporated by reference: NONE
<PAGE>
PART I
Certain of the information contained in this Form 10-KSB, including the
Management's Discussion and Analysis or Plan of Operation found in Item 6 of
this Report, contains forward-looking statements. A number of important factors
including, but not limited to actions of competitors and franchisors, adverse
changes in general economic conditions and adverse local conditions, increases
in real estate taxes and operating costs and adverse changes in real estate
zoning, health, safety, environmental and other laws and regulations, could
cause actual results to differ materially from the forward-looking statements.
Item 1. Business
Essex Hospitality Associates III L.P., is a Delaware limited partnership,(the
"Partnership") formed on August 17, 1992 whose principal business is to own and
operate three hotel properties, a Microtel Inn hotel in Birmingham, Alabama, a
Hampton Inn hotel in Rochester, New York and a Microtel Inn hotel in
Chattanooga, Tennessee. The properties are operated pursuant to franchises or
licenses obtained from these national lodging chains. The General Partners of
the Partnership are Essex Partners Inc., a New York corporation (the "Managing
General Partner"), and John E. Mooney, an individual and president of Essex and
the Managing General Partner. The principal investment objectives of the
Partnership are to: (i) preserve, protect and return the Partnership's invested
capital and to meet debt service requirements; (ii) provide quarterly
distributions of available cash to the Limited Partners and (iii) provide
appreciation in the market value of the hotels which may be realized through
their sale or refinancing.
Construction of the hotels was financed through a combination of equity and debt
raised through the Partnership's public offering of first mortgage notes and
limited partnership units. The Partnership completed construction of one
property in 1994, and two properties in 1995. The first Partnership property to
open, a 102-room Microtel Inn hotel in Birmingham, Alabama, opened in September,
1994. The Birmingham Microtel Inn cost approximately $3,000,000 to build,
including all furniture, equipment, initial franchise fee and pre-opening costs
as well as the land costs and building construction, but excluding financing
costs. A 118-room Hampton Inn opened in Rochester, New York in April, 1995. The
Hampton Inn cost approximately $4.8 million to build, including all furniture,
equipment, initial franchise fee and pre-opening costs as well as the land costs
and building construction, but excluding financing costs. The third Partnership
property, a 100-room Microtel Inn located in Chattanooga Tennessee opened in
September, 1995. The Chattanooga Microtel Inn cost approximately $3.1 million to
build including all furniture, equipment, initial franchise fee and pre-opening
costs as well as the land costs and building construction, but excluding
financing costs. The Partnership's public offering of first mortgage notes and
class A limited partnership units was completed in 1995. Gross offering proceeds
of $13,986,320 were closed into the Partnership, representing $10,000,000 in
first mortgage notes and $3,986,320 in class A limited partnership units.
MICROTEL INN HOTELS
Microtel Inn hotel is an economy lodging chain. Microtel Inn hotels offer
downsized rooms with higher quality furnishings at rates generally below those
available at competing national lodging chains. The Microtel Inn hotel growth
strategy is to locate in areas where other budget hotels are operating
successfully, typically along major highways or near airports, and to compete
primarily on the basis of price. The lower rates are economically feasible since
the standardized, compact design of Microtel hotels and the elimination of
nonessential amenities (such as swimming pools, restaurants and large lobbies)
results in reduced construction, operating and overhead costs. Microtel Inn
hotels offer the value conscious traveler consistent, affordable and high
quality accommodations.
Each Microtel Inn hotel is of standardized new construction in accordance with
prototype plans developed by the franchisor and furnished to each franchisee.
Typically either two or three stories, Microtel Inn hotels are constructed of
either wood or metal frame. The guest rooms are approximately 30% smaller than
an average economy hotel room. Each guest room contains either one or two queen
size beds, a bay window seat, remote control color television, telephone,
built-in desk and bureau and a standard size hotel bathroom with tub and shower
combination, all packaged in a modern and attractive design. In 1995, the
Microtel Suites and Microtel Inn & Suites brands were added by the franchisor.
On October 6, 1995, Microtel Franchise and Development Corporation announced the
completion of a joint venture transaction with U.S. Franchise Systems Inc., a
new company founded by Michael Leven, former president and chief
<PAGE>
operating officer of Holiday Inn Worldwide. U.S. Franchise Systems Inc. has
assumed worldwide franchising and administration for the Microtel Inn chain of
hotels. The Microtel trademarks have been transferred to U.S. Franchise Systems
for its exclusive use in franchising the hotel chain. Microtel Inns and Suites
Franchising, Inc., a wholly-owned subsidiary of U.S. Franchise Systems, Inc., is
the franchisor and licensor of the Microtel Franchise System and Microtel
trademarks. Microtel Franchise and Development Corporation has changed its name
and operates under Hudson Hotels, and is responsible for building and managing
hotel properties.
Started in 1989 with the opening of its first property, there were 64 Microtel
Inn hotels in operation throughout the United States at the end of 1997. US
Franchise Systems has advised the Partnership that system-wide occupancy rates
for properties open for more than six months averaged 67.3% in 1997 as compared
to 69.4% in 1996, with an average daily rate of approximately $40.49 in 1997
compared to $37.91in 1996. The Microtel Inn hotel franchise competes primarily
in the economy sector of the lodging industry. For 1997 the economy sector
reported an average occupancy rate of 62.3% and an average daily rate of $
46.48.
HAMPTON INN
Hampton Inn hotels are high quality hotels with limited amenities and moderate
prices. Hampton Inn hotels are designed primarily to accommodate business
travelers with limited expense accounts, non-destination business and pleasure
travelers and value-conscious vacationers. Hampton Inn hotels are generally two
to six stories with 50 to 150 rooms and are located in high-visibility, high
traffic areas, typically near full-service restaurants.
Hampton Inn hotels have a strong commitment to guest satisfaction. According to
Promus Corporation ("Promus"), the Hampton Inn hotel was the first national
hotel to offer an unconditional 100% Satisfaction Guarantee. A toll-free number
provides access to a nationwide reservation system. Hampton Inn hotels offer a
national advertising and marketing program and are widely promoted on
television, in magazines and trade publications and through direct mail, which
increases travelers' awareness and trial usage. Major emphasis is also placed on
corporate and travel agent markets.
Hampton Inn hotels offer selected services and amenities, including a free,
self-serve continental breakfast in the lobby, free local telephone calls, a
free in-room movie channel and senior citizens' and frequent travelers' discount
programs. Most hotels offer a lobby/breakfast area and a variety of room types:
rooms with one or two double beds and rooms with king bed configurations. Most
Hampton Inn hotels offer a swimming pool and a hospitality suite, a
multi-purpose room that doubles as a guest room or a small gathering facility.
Started in 1984, there were 728 Hampton Inn hotels in operation throughout the
United States at the end of 1997. Promus has advised the Partnership that
system-wide occupancy rates averaged 70.5% in 1997 as compared to 72.1% in 1996,
with an average daily rate of approximately $64.60 in 1997 compared to $60.84 in
1996. The Hampton Inn hotel franchise started in the upper economy segment, but
over time, as its average daily rate has crossed over into the mid-scale segment
without food and beverage, the franchise has repeatedly exceeded the industry
averages for the mid-scale segment without food and beverage. For 1997 the
mid-scale segment without food and beverage reported an average occupancy rate
of 64.6% and an average daily rate of $68.04.
FRANCHISE AGREEMENT AND LICENSE AGREEMENTS
The following is a summary of the principal terms of the franchise and license
agreements for the Partnership's Hampton Inn and Microtel Inn hotels.
The Partnership entered into franchise agreements with Microtel Franchise and
Development Corporation (MFDC) for the Birmingham, Alabama and Chattanooga,
Tennessee sites which were assigned to U.S. Franchise Systems. The initial
franchise fees paid for the Birmingham and Chattanooga Microtel Inn hotels
totalled $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, and 3.5% of gross revenues in the event more
than 100 Microtel Inn hotels are opened. In the summer of 1997, the 50th
Microtel Inn was opened, and the royalty fee was increased to 3% with the
September, 1997 payment. In 1996, the U.S. Franchise Systems established a
system of advertising, thus requiring the Partnership to contribute an
additional 1% of gross room revenues monthly 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,
<PAGE>
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.
The Partnership has also entered into a license agreement with 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 revenues and a monthly amount
equal to any sales tax or similar tax imposed on Hampton Inn on payments
received under the license agreement. The term of the license agreement is 20
years and is not renewable. Promus requires the Partnership to establish a
capital reserve account based on a percentage of gross room revenues generated
by the Hampton Inn 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 room revenues and stabilizes at 5% for the term
of the agreement.
The franchise agreements 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% per transfer, respectively, without their
consent.
All rights of the Partnership under the franchise and license agreements
automatically terminate upon the happening of certain events, which are
described in the agreements. Upon termination or expiration of such franchise or
license agreements the Partnership is required to immediately cease using the
franchisor's service marks and all confidential methods, procedures and
techniques provided by the franchisor and to remove and discontinue using all
signs, fixtures, advertising materials, stationery, supplies or other articles
which could cause the business to be associated with the franchisor. In
addition, if the termination occurs for reasons other then condemnation, the
Partnership may be required to pay a termination fee in a lump sum equal to the
amount of monthly royalties paid during the preceding 24 months (per the
Microtel Inn Franchise Agreement) or 36 months (per the Hampton Inn License
Agreement).
OPERATION OF THE HOTELS
The Partnership has entered into management agreements with respect to the
Partnership's hotel properties with Essex Partners or its assigns ("Essex
Partners"). The management agreements provide that Essex Partners will
investigate, hire, pay, supervise and discharge the personnel necessary to
properly maintain and operate the hotels. All such personnel will be employees
of the Partnership and compensation of such personnel will be an expense of the
Partnership.
The management agreements require Essex Partners to maintain the building and
grounds, to pay insurance premiums with respect to the hotel, to apply for,
obtain and maintain all required licenses and permits, to pay certain expenses
on behalf of the Partnership, to maintain a comprehensive system of office
records and books and to annually prepare an operating budget. In addition,
Essex Partners has the authority to enter into service contracts and other
contracts reasonably necessary or desirable in connection with the operation of
the hotels, with the approval of the Partnership in some cases. As compensation
for these services, Essex Partners will receive a fee equal to 4.5% of the gross
revenues from the hotels, consisting of room rentals, telephone charges, cable
charges and any other miscellaneous charges collected from guests.
Essex Partners will also receive an accounting fee equal to $675 per month, per
hotel.
Each management agreement has an initial term of five years with a series of one
(1) year renewal terms. The management agreements may be earlier terminated (i)
by either the Partnership or Essex Partners in the event of a default under the
management agreements which is not cured within 60 days after written notice
thereof, (ii) by Essex Partners, upon the failure of the Partnership to pay
compensation due to Essex Partners, (iii) by either party upon the bankruptcy or
insolvency of the other party, (iv) by either party upon the Partnership's
failure to repair or restore the subject hotel within 120 days after all or any
portion of such hotel is damaged or destroyed by fire or other casualty, or (v)
by either party if all or any portion of the subject hotel is condemned and the
remaining facilities are insufficient for the efficient and profitable operation
of such hotel. During any renewal term the management agreements may be
terminated at any time on 120 days written notice.
Each management agreement requires Essex Partners to devote such of its time as
it deems necessary to manage the subject hotel; however, it does not impose any
limitations on Essex Partners's other business activities, including other
commercial and residential real estate ventures which may compete with such
hotel. Pursuant to the management
<PAGE>
agreements, all expenses incurred thereunder shall be obligations of the
Partnership and Essex Partners will receive its management fee notwithstanding
that the Partnership may not have earned a profit or may be operating at a loss
and that the Limited Partners may not have received any distributions.
The Partnership has agreed to a broad indemnity of Essex Partners from
liabilities it may incur in connection with its services under the management
agreements.
COMPETITION
The operation of hotels is a highly competitive business. Competition in the
lodging industry is primarily based on price, location, quality of facilities
and overall range of services. The Partnership's hotels compete primarily in the
segment of the lodging industry often referred to as economy and mid-scale
segment of the limited service lodging. The Partnership's hotels are located in
areas that contain other competitive limited service lodging facilities. The
Microtel Inn hotels generally seek to compete by providing conveniently located,
limited service lodging at below market prices. There were 64 Microtel Inn
hotels open and operating through the end of 1997. The Hampton Inn hotels
generally seek to compete by providing conveniently located, limited service
lodging with superior service. Started in 1984, there were 728 Hampton Inn
hotels open and operating throughout the country at the end of 1997. Competitors
in the overall limited service lodging area include Days Inn, Comfort Inns,
Motel 6, Travelodge, Super 8, Red Roof Inns, Econo Lodge, Courtyard, Holiday
Inns, LaQuinta Inns and Fairfield Inns. These national chains have greater name
recognition than the Microtel Inn, may have operating advantages that the
Microtel Inn franchisor does not have, and may have greater financial resources
and more experienced personnel than either the Microtel or Hampton Inn
franchisors or the Partnership. Some of these hotels could have service and
architectural features similar to the Partnership's hotel properties and may
offer rates and services comparable to or lower than those at the Partnership's
hotel properties. Furthermore, there can be no assurance that competitors will
not offer lower room rates or that additional hotels which offer features
similar to that of the Partnership's hotels in competition with the
Partnership's hotel properties will not be developed near those properties and
that such development will not have an adverse effect on occupancy rates and
profitability.
The hotel industry was negatively impacted by the recession of the early 1990's.
Occupancies and rates dropped significantly. According to published reports,
occupancies began to improve in 1993. Occupancies and rates continued to
increase in 1995, producing the strongest year in five years, but room supply
increased at the greatest level since 1991. According to published reports,
since 1996, the increase in the supply of hotel rooms has exceeded the increase
in demand. This produced a decrease in average occupancy in both 1996 and 1997.
For 1997, the increase in demand was strongest in the luxury, upscale and
midprice rate segments, with the economy and budget segments experiencing weak
or reduced demand. According to published reports, the average daily rate
continued to increase in both 1996 and 1997, which has compensated for the
decreased demand such that the hotel industry has continued to experience
increasing revenues. The reports anticipate that supply growth will continue to
exceed growth in demand for the next few years. The reports predict the hotel
industry will continue to experience increases in annual revenues, but at a
reduced growth rate. According to the reports, industry profits have grown along
with revenues, and are expected to continue to grow, but at a reduced rate.
Advertising for the Partnership's Microtel Inn hotels is conducted through print
advertising (such as advertising in local business journals and distributing
brochures), signage, direct mail campaigns, listings in the American Automobile
Association brochures and by contacting local businesses. Advertising in local
business journals is done throughout the year. Brochures describing the property
are distributed throughout the area at visitor information booths, shopping
malls and rest areas. The Microtel Inn hotels also advertise in state travel
guides. Each of the Microtel Inn hotels has a visible exterior sign which
prominently displays the rate charged for single occupancy. Signage is also used
near highway exits where available. Billboards may be obtained along major
highways. Local businesses are visited by both the hotel manager and personnel
of the property manager. The focus is two fold, establishing new relationships
and maintaining current accounts. Special rates are available for corporate
customers with high usage. There is also a frequent stay program which provides
one free night after ten nights stay. Each hotel manager is required to become
an active member of the local chamber of commerce and convention and visitor's
bureau and other business organizations, providing access to local
businesspeople.
Marketing activities for the Hampton Inn in Rochester are more extensive than
those for the Microtel Inns. Hampton Inn hotels have a full-time sales manager,
responsible for keeping in touch with current customers and promoting the hotel
throughout the community. Radio and print advertising are used year-round, some
in conjunction with
<PAGE>
advertising being placed by Promus and some specifically for a Partnership
property. Special rates are available for corporate customers with high usage.
Direct mail campaigns are used to target selected travelers. Brochures
describing the property are distributed locally. Local businesses are visited by
both the hotel manager and the sales manager, as well as marketing personnel
from the property manager.
ENVIRONMENTAL COMPLIANCE
The Partnership is not aware that it will have to undertake any unusual efforts
in order to comply with federal, state or local laws or regulations which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment.
Accordingly, the Partnership does not believe that any efforts undertaken by it
will have any material effect upon capital expenditures, earnings or the
competitive position of the Partnership.
EMPLOYEES
As of March 15, 1998, the Partnership had approximately 35 fulltime employees
and 30 part-time employees. The Partnership's Microtel Inn hotels have between
20 and 30 employees. The Hampton Inn has approximately 22 employees.
Item 2. Properties
PARTNERSHIP PROPERTY -- BIRMINGHAM, ALABAMA
The first Partnership hotel to be constructed is located in Birmingham, Alabama.
Birmingham is centrally located in the Southeast and is the largest city in
Alabama, with approximately 23% of the state's total population residing in the
five- county metropolitan area. Birmingham is accessible by highway, air and
rail transportation systems. The Birmingham area is a leading retail and
wholesale trade center, as well as one of the Southeast's major centers for
finance, education, health care, medical and high technology research,
telecommunications, transportation and distribution. Major employers include the
University of Alabama, Bell South, Alabama Power Company, Baptist Medical
Centers and various local, state and federal government agencies. The area also
offers a wide variety of cultural, entertainment and outdoor activities.
The 102-room Microtel Inn hotel is located in the City of Homewood, a southern
suburb of Birmingham with over 23,000 residents. The site is situated in a major
commercial area of Homewood, located on Summit Parkway off of Oxmoor Road,
within 0.5 miles west of Interstate 65. Interstate 65 is a major north-south
route that runs through Alabama. Oxmoor Road is a four-lane east-west
thoroughfare.
The immediate area in which the Birmingham Microtel Inn is located is
characterized by a mix of hotels, restaurants, professional office buildings and
light industrial facilities. A large shopping mall is located on Oxmoor Road,
just east of I-65, one mile from the site. A light industrial park is located
0.5 miles west of the site on Oxmoor Road and is undergoing expanded
infrastructure development. A number of national chain restaurants are located
near the site, including Shoney's, Bennigan's, Hardee's and Dunkin' Donuts, in
addition to several local restaurants. There are five other lodging properties
containing a total of approximately 595 rooms within a 0.25-mile radius of the
site. These include a 96-room Red Roof Inn, a 132-room Fairfield Inn, a 152-room
Comfort Inn, a 115-room Shoney's Inn and a 100-room Super 8 Motel. The Shoney's
Inn had the lowest estimated occupancy rates of the Microtel Inn competitors for
1997 at 40%, and both the Fairfield Inn and Red Roof Inn had the highest at
approximately 70%. The Comfort Inn and Super 8 Motel had estimated occupancy
rates in the low 60% range in 1997. The average daily rates ranged from the
Super 8 Motel at around $38.00, the Fairfield Inn and Red Roof Inn in the
mid-$40 and the Comfort Inn in the mid-$50. The average daily rate for the
Shoney's Inn is not available. There is also a 197-room full service Holiday
Inn, which is only indirectly competitive with the Partnership's hotel. An
80-room extended stay Studio Plus, a 129-room extended stay La Quinta Inn and a
Residence Inn are located about a mile from the hotel. These properties are also
only indirectly competitive with the Partnership's hotel.
The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.
The Birmingham property is situated on approximately 2.37 acres and is owned in
fee by the Partnership. A bank, acting as trustee on behalf of the holders of
the Partnership's first mortgage notes, holds a first mortgage on the
<PAGE>
property, including fixtures, equipment and improvements, in the principal
amount of $2,800,000. The first mortgage notes are described below under
"Description of Real Estate and Operating Data."
PARTNERSHIP PROPERTY -- ROCHESTER, NEW YORK
The second Partnership hotel to be constructed is located in Rochester, New York
and opened in April 1995. Rochester, the third largest city in New York, is
located in western New York, approximately mid-way between Buffalo and Syracuse.
Rochester is accessible by highway, air and rail transportation systems. The
Rochester economy has benefited from a diversified employment base, bolstered by
Fortune 500 corporations and a large number of academic institutions. These
factors have buffered the Rochester area from cyclical national recessions.
Rochester is home to over 1,000 manufacturers. Much of this manufacturing
activity is concentrated in high technology-related industries, such as
photographic equipment, optics, graphics technology, communications, electronics
and pharmaceuticals. Major employers include Eastman Kodak Company, Xerox
Corporation, General Motors, Bausch & Lomb, Frontier Corporation, Mobil Chemical
Company, 3M and Paychex. Tourism is generated by regional attractions such as
the Finger Lakes, Lake Ontario, Niagara Falls, and the Erie Canal.
The 118-room Hampton Inn is located in the Town of Greece, a northwestern suburb
of Rochester and the second most populous municipality in Monroe County with
over 100,000 residents. The site is situated in the northeast quadrant of the
intersection between Route 390 and Ridge Road (Route 104). Route 390 becomes an
interstate highway approximately three miles south of Ridge Road. Ridge
Road/Route 104 is a four-lane arterial road in the Town of Greece, and is a
major east-west route across western New York. The site is a component of a
mixed-use project, Center Place Subdivision, encompassing 28 acres, which has
been approved for restaurant and hotel use. Within walking distance of the hotel
are several restaurants, a Bob Evans, an Applebees and an Olive Garden. In
addition, the Greece Towne Center Mall is about a mile from the hotel with over
100 stores and restaurants.
The Hampton Inn customer mix is primarily business. The largest customer is
Eastman Kodak, which contributed between 25-30% of the room nights sold in 1997.
The Hampton Inn expects the amount of Eastman Kodak business to decrease in
1998, due to corporate travel reductions. Marketing efforts have been increased
in order to replace the lost business. Although occupancy was lower in January,
1998 than the previous year, occupancy in March, 1998 has improved compared to
the prior two years.
There are four other lodging properties containing a total of approximately 517
rooms within a four-mile radius of the site. A 125-room Extended Stay of America
opened next to the Hampton Inn at the end of 1996. A 210-room full-service
Marriott hotel is located on the northwest corner of the same exit as the
Hampton Inn. Along Ridge Road is a 83-room Comfort Inn and a 99-room Wellesley
Inn. The Partnership's hotel is considered competitive with these lodging
properties. Of the Rochester Hampton Inn's competitors, the Wellesley Inn had
the lowest estimated 1997 occupancy rate with. The Extended Stay was next with
an estimated occupancy rate o 62.3% in 1997. The Marriott. Fairfield Inn and
Comfort Inn all had estimated 1997 occupancy rates in the 70% range, with the
Marriott at the low end with 71.7%, the Fairfield Inn in the mid-70% with 75.7%
and the Comfort Inn with the highest occupancy rate of 77.9%. The average daily
rates for 1997 of the Rochester Hampton Inn's competitors ranged from $36.39 for
the Extended Stay to $87.83 for the Marriott. The Comfort Inn and Wellesley Inn
had average daily rates in 1997 in the low $50.00 range, and the Fairfield Inn
had an average daily rate of just over $60.00. A 73-room Courtyard by Marriott
and 78-room Residence Inn are under construction within one mile of the Hampton
Inn. These properties are expected to open in May, 1998 and are expected to be
competitive with the Hampton Inn. In addition, there is a 63-room Fairfield Inn
located about 6 miles from the hotel at the Rochester International Airport
which is also considered competitive with the Hampton Inn.
The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.
The Rochester property is situated on approximately 2.96 acres and is owned in
fee by the Partnership. A bank, acting as trustee on behalf of the holders of
the Partnership's first mortgage notes, holds a first mortgage on the property,
including fixtures, equipment and improvements, in the principal amount of
$4,100,000. The first mortgage notes are described below under "Description of
Real Estate and Operating Data".
<PAGE>
PARTNERSHIP PROPERTY -- CHATTANOOGA, TENNESSEE
The third Partnership hotel to be constructed is a 100-room Microtel Inn hotel,
opened in September, 1995 in Chattanooga, Tennessee. The hotel has rooms with
two double beds as well as with 1 queen size bed. Chattanooga is located in the
southeastern region of Tennessee, centrally located within the
Tennessee-Alabama-Georgia tri-state area. The region is accessible by highway,
water, air and rail transportation systems.
Chattanooga is located in Hamilton County, Tennessee at the crossroads of
several major U.S. highways, including Interstates 75, 24 and 59. Atlanta,
Birmingham, Nashville and Knoxville are all within 140 miles. The city is within
one day's drive of nearly one-third of the major U.S. markets and population.
Chattanooga is one of the nation's oldest manufacturing cities, producing a
variety of goods, including food, textile and apparel, chemical, fabricated
metal, and paper products. Other major industries are represented by the
printing and publishing sector, insurance and medical service sectors. Major
employers include the Tennessee Valley Authority, the nation's largest utility,
Red Food Stores, Provident Life & Accident, McKee Foods, Roper Corporation,
Dixie Yarns and Blue Cross/Blue Shield of Tennessee. Tourists to the tri-state
region enjoy the area's recreation and attraction resources which include
museums and parks, in addition to a number of craft and music festivals,
orchestral performances and theatrical productions.
The Microtel Inn hotel is located in the eastern section of the City of
Chattanooga. It is located on McCutcheon Road just north of Interstate 75,
approximately one-quarter mile from the Shallowford Road exit. Route 11, which
parallels I-75, intersects Shallowford Road and is a five lane thoroughfare with
heavy commercial development on both sides.
The immediate area in which the Chattanooga Microtel Inn is characterized by a
mix of hotels, restaurants, retail, professional office buildings and light
industrial facilities. Hamilton Place, Tennessee's largest shopping mall, is
within 1 mile of the hotel. There are seventeen hotels located within a
one-quarter mile radius of the hotel, with a total of 1,451 rooms. There are
eight other lodging properties containing a total of approximately 695 rooms
within a one-quarter mile radius of the hotel that were open for the entire 1997
year which the Managing General Partner believes are directly competitive with
the Partnership's hotel. These include a 126-room Hampton Inn, a 105-room
Fairfield Inn, a 112-room Red Roof Inn, a 75-room Days Inn, a 44-room Ramada
Limited, a 132-room La Quinta Inn, a 51-room Holiday Inn Express and a 50-room
Sleep Inn. The occupancy and average daily rates for the Red Roof Inn and Sleep
Inn are not available. The other five properties generally had average daily
rates in the mid to upper $50 range in 1997. The occupancies range from the La
Quinta Inn and Days Inn with an occupancy of approximately 55% in 1997, to the
Fairfield Inn with with an occupancy of approximately 70% in 1997. During the
last quarter of 1997, four new properties opened within about a mile of the
hotel. One of the new hotels is a Wingate Inn, which is a full-service suites
product that is not considered competitive with the Microtel Inn. Two of the new
hotels are budget extended-stay properties, a Hamilton Inn and a Suburban Lodge,
which are only somewhat competitive with the Microtel Inn. The fourth new hotel
is a Knights Inn, which is considered directly competitive. The Knights Inn
opened in December, 1997. In addition, a Holiday Inn, a Courtyard by Marriott
and a Country Suites are located near theMicrotel Inn, however the Managing
General Partner believes these properties are only indirectly competitive with
the Partnership's hotel. There are five budget properties at the next exit north
on I-75, a Comfort Inn, Motel 6, Best Western, Quality Inn and Econo Lodge,
totaling approximately 400 rooms. While these properties are in a less desirable
location, the Managing General Partner believes are considered competitive with
the Partnership's hotel.
The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.
The Chattanooga property is situated on approximately 2.4 acres and is owned in
fee by the Partnership. The Partnership sold an approximately one acre parcel of
land adjacent to the hotel in 1996. A bank, acting as trustee on behalf of the
holders of the Partnership's first mortgage notes, holds a first mortgage on the
property, including fixtures, equipment and improvements, in the principal
amount of $3,100,000. The first mortgage notes are described below under
"Description of Real Estate and Operating Data".
DESCRIPTION OF REAL ESTATE AND OPERATING DATA
Operations of the Birmingham Microtel Inn
<PAGE>
LOCATION: City of Homewood Alabama, south of the City of Birmingham,
Alabama
NUMBER OF
GUEST ROOMS: 102-rooms
CONSTRUCTED: Construction completed in September 1994.
SCHEDULED RENOVATION
EXPENDITURES: Under the franchise agreement, the hotel may be required by
the franchisor to upgrade the property as the franchisor
deems necessary but not more than once every five years (at
the expense of the Birmingham Microtel Inn) .
AVERAGE OCCUPANCY AVERAGE RENTAL
RATE FOR THE FISCAL RATE FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997: 68.4% DECEMBER 31, 1997: $34.86
- ----------------- ------------------
Total Room Revenues
Per Available Rooms
for the Fiscal Year Ended
DECEMBER 31, 1997: $23.85
OPERATIONS OF THE ROCHESTER HAMPTON INN
LOCATION: Town of Greece, New York, northwest of the City of
Rochester
NUMBER OF
GUEST ROOMS: 118-rooms.
CONSTRUCTED: Construction completed in April 1995.
Scheduled Renovation
EXPENDITURES: Under the License Agreement with Promus Hotel,
the hotel may be required to make such
renovations at any time during the term of the
License Agreement (at the expense of the
Rochester Hampton Inn) as Promus Hotel deems
necessary to upgrade the hotel.
AVERAGE OCCUPANCY AVERAGE RENTAL
RATE FOR THE FISCAL RATE FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997: 72.0% DECEMBER 31, 1997: $63.89
- ----------------- -----------------
TOTAL ROOM REVENUES
PER AVAILABLE ROOMS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997: $46.00
OPERATIONS OF THE CHATTANOOGA MICROTEL INN
LOCATION: City of Chattanooga, Tennessee
<PAGE>
NUMBER OF
GUEST ROOMS: 100-rooms
CONSTUCTED Construction completed in September, 1995.
SCHEDULED: Under the franchise agreement, the
RENOVATION hotel may be required by the franchisor to upgrade the
EXPENDITURES property as the franchisor deems necessary but not more
than once every five years (at the expense of the
Chattanooga Microtel Inn) .
AVERAGE OCCUPANCY AVERAGE RENTAL
RATE FOR THE FISCAL RATE FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997: 67.1% DECEMBER 31, 1997:$36.10
- ----------------- -----------------
TOTAL ROOM REVENUES
PER AVAILABLE ROOMS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997: $24.22
Included above is the description of each of the Partnership's hotel properties,
except for the description of the first mortgage debt issued by the Partnership
to finance the acquisition and development of the hotel properties. The
Partnership issued $10,000,000 of 10% first mortgage notes (the "Mortgage
Notes"), which are secured by first mortgage liens on each of the hotel
properties owned by the Partnership. The Mortgage Notes require monthly payments
of interest only at the rate of 10%. All outstanding Mortgage Notes are due and
payable upon maturity on December 31, 1998 unless the notes are extended by the
Partnership until December 31, 1999 upon the payment of an extension fee equal
to .5% of the principal amount outstanding, or December 31, 2000 upon the
payment of an additional extension fee equal to 1% of the principal amount
outstanding. The Mortgage Notes may be redeemed in whole or in part at the
option of the Partnership at any time upon payment of a redemption premium of 1%
of the amount of the principal prepayment if the redemption occurs before
December 31, 1997, and thereafter without payment of any premium, together with
accrued interest to the redemption date. A first mortgage lien is recorded on
the Birmingham property in the amount of $2,800,000. A first mortgage lien is
recorded on the Rochester property in the amount of $4,100,000. A first mortgage
lien is recorded on the Chattanooga property in the amount of $3,100,000. The
Partnership may not incur additional mortgage indebtedness if the effect thereof
would be to cause the total amount of such indebtedness at any time to exceed
the sum of (i) 85 percent of the acquisition and construction cost of all hotels
which have not been refinanced and (ii) 85 percent of the aggregate fair market
value of all refinanced hotels as determined by the Managing General Partner.
This policy can only be changed with an affirmative vote of at least a majority
in interest of Limited Partners.
The Managing General Partner obtains property, liability, crime, umbrella,
excess umbrella, unowned auto and boiler insurance for each hotel property, as
well as workers' compensation insurance. The amount of property insurance
obtained is based on the replacement cost of the building and its contents, plus
lost income. The liability and umbrella insurance provide coverage up to
$15,000,000. In the opinion of the Managing General Partner, the hotel
properties are adequately covered by insurance.
The tax basis and depreciation of the Partnership's assets are presented on the
following table. The table presents the total amount of each type of asset owned
by the Partnership, classified by asset life.
LIFE TAX BASIS TAX RATE METHOD
---- --------- -------- ------
7-year FF&E 55,606 14.29% 200DB
10-year FF&E 1,849,493 10% S/L
20-year land improvements 438,234 5% S/L
39-year building 2,176 1.177% S/L
40-year building 7,328,937 2.5% S/L
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
A complaint was filed on December 13, 1996 in the Circuit Court of Jefferson
County in the state of Alabama against Microtel Inns and Suites Franchising,
Inc. (an affiliate of U.S. Franchise Systems, Inc.) by Larry Owens arising from
a gunshot wound Mr. Owens received during a robbery at the Partnership's hotel
in Birmingham, Alabama. The Partnership was notified by U.S. Franchise Systems,
Inc. that per the franchise agreement, the Partnership has an obligation to
indemnify and hold U.S. Franchise Systems, Inc. harmless in connection with the
above lawsuit because the claim arises directly from the franchisee's operation
of the franchised business. Mr. Owens is seeking relief in the amount of
$2,500,000. The Partnership has insurance coverage substantially in excess of
the relief being sought. The Partnership is working with its insurance company
to vigorously defend the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for the limited partnership units and it
is not anticipated that any public market will exist for the units. The
Partnership Agreement imposes a number of restrictions on the transferability of
limited partnership units, including among others, the following: (1) an
assignment may only be made on the first day of a fiscal quarter of the
Partnership; (ii) limited partners desiring to assign less than all of their
units must assign a sufficient number of units such that, after the assignment,
both the assignor and the assignee would hold at least five units (except in
cases of inheritanceand family dissolution); (iii) no limited partner units may
be assigned if the unit sought to be assigned, when added to the total of all
other units assigned within a period of 12 consecutive months prior to the
proposed date of assignment, would, in the opinion of counsel for the
Partnership, result in the termination of the Partnership under Section 708 of
the Internal Revenue Code (dealing with transfers of 50% or more of the
outstanding interests of the Partnership); and (iv) no units may be assigned
unless, in the opinion of counsel for the Partnership, such proposed assignment
could not result in the characterization of the Partnership as "publicly traded"
under Section 7704 of the Internal Revenue Code.
Further restrictions on the assignment of limited partnership units are imposed
under state securities laws upon the residents of such states, including the
requirement of certain states that the suitability standards applied to initial
purchasers of the limited partnership units be applied to assignees where the
assignment involves residents of such states. In addition, the current Microtel
Inn franchise agreement provides that no more than 10% of the total outstanding
units of the Partnership may be sold, pledged or otherwise transferred by a
limited partner in any single transaction without the franchisor's prior written
consent, which may not be unreasonably withheld. The current Hampton Inn license
agreement provides that for "publicly-traded equity interest," no consent of the
franchisor is required with respect to any transfers of less than a 25% interest
in the Partnership unless the transferee owns, or would own after the transfer
is completed, an interest in the Partnership of 25% or more. This franchisor has
advised the Partnership that, solely for purposes of the license areement, the
limited partnership units would be considered "publicly-traded equity interests"
since they were sold in a large real estate syndication transaction.
As of the date of this filing, there are approximately 320 limited partners
owning 4,000 limited partnership units. The limited partners received
distributions of $62,303 in 1994, $314,415 in 1995, $400,000 in 1996 and
$300,000 in 1997. The Partnership's Mortgage Notes prohibit the Partnership from
making distributions (i) at any time when an event of default under the
mortgages or the indenture relating to the Mortgage Notes has occurred and is
continuing or (ii) unless it has established an adequate reserve to pay any
amounts payable under the Mortgage Notes during the month in which the proposed
distribution is to occur.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The first Partnership hotel to be constructed, a 102-room Microtel Inn hotel in
Birmingham, Alabama, opened in September 1994. The two remaining Partnership
hotels opened in 1995, a 118-room Hampton Inn in Rochester, New York in April
and a 100-room Microtel in Chattanooga in September.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The major revenue source for the Partnership's hotel properties is room
revenues, which generated 95% of the operating revenues for the Partnership in
1997. Room revenues generated are dependent on a hotel property's average
occupancy and average daily rate. Room revenues increased 6% in 1997, from
$3,532,000 in 1996 to $3,754,000 in 1997.
The Birmingham Microtel Inn achieved an average occupancy rate of 68% in 1997
with an average daily rate of $34.86, as compared with an average occupancy rate
of 65% in 1996, and an average daily rate of $34.07. With the increase in both
occupancy rate and average daily rate, room revenues increased $61,000. A new
manager was hired in the spring of 1996, who made several improvements, which
started to have an impact on revenues by the end of the summer of 1996. The
property had a very strong winter and spring, with occupancy of 75% through June
1997, compared to 65% during the same period in 1996. Revenues for the first six
months of 1997 exceeded the first six months of 1996 by $61,000. Unfortunately,
that manager left the property in the spring of 1997. The manager returned to
the property in March 1998. During the manager's absence, the performance of the
hotel began to deteriote. The revenues for the last six months were the same as
the last six months of 1996. Although revenues were the same in the last six of
1997 as the same period in 1996, operating income declined in the last six
months of 1997 compared to the same period in 1996 due to ineffective cost
controls. With the return of the hotel manager in 1998, the Managing General
Partner expects that costs will be better controlled. The revenue for the first
two months of 1998 is 8% less than the first two months of 1997. The Managing
General Partner expects the property's performance to improve by the summer of
1998. The Birmingham Microtel generated approximately 24% of the Partnership's
1997 room revenues.
The Hampton Inn achieved an average occupancy rate of 72% in 1997 with an
average daily rate of $63.89, as compared to an average occupancy rate of 71% in
1996 with an average daily rate of $63.80. With the slight increase in both
occupancy and average daily rate, room revenues for 1997 were $18,000 higher
than 1996. Although other hotels in the Hampton Inn market segment increased
rates in 1997, the Rochester Hampton Inn rates were flat due to the opening of
an Extended Stay of America hotel next to the Hampton Inn at the end of 1996.
The Extended Stay of America offers long-term customers rates similar to the
Hampton Inn. Fortunately, the Hampton Inn lost very few customers to the
Extended Stay of America. The major issues facing the Hampton Inn for 1998 are
increasing supply in its market and travel reductions by its largest customer.
In 1998, a Courtyard by Marriott and Residence Inn will be opening within a mile
of the Hampton Inn. The Courtyard is expected to be directly competitive with
the Hampton Inn. The Hampton Inn expects it may lose some customers to the
Courtyard, but is planning to replace the lost revenue by more aggressively
marketing the property and raising rates from 2%-3%. Although the rates for the
Courtyard and Residence Inn have not yet been announced, the typical Courtyard
and Residence Inn offer rooms at rates higher than those charged at the Hampton
Inn. Therefore, the Hampton Inn believes a slight increase in rates will not be
detrimental. In addition, the Hampton Inn is planning to add additional signage
to better direct customers to the hotel. The Hampton Inn's largest customer is
the Eastman Kodak Company. In the fourth quarter 1997, Eastman Kodak announced a
goal to reduce corporate travel by 20%. The Hampton Inn felt some of the effects
of this through reduced occupancy in December 1997 and January 1998 compared to
the same period in the prior year. However, the staff at the Hampton Inn have
increased their marketing efforts, with the result that in March 1998, new
business has been secured and the occupancy and revenues through March 15, 1998
are higher than either of the last two years. The Hampton Inn generated around
53% of the Partnership's room revenues in 1997.
The average occupancy for the Chattanooga Microtel Inn for 1997, at 67%, was 27%
better than the 1996 occupancy rate of 53%. The average daily rate was 5% less,
$36.10 as compared to the 1996 average daily rate of $38.10. Revenues increased
19%, from $741,000 in 1996 to $884,000 in 1997. The Managing General Partner
believes the improvement was due to extensive marketing efforts by the general
manager hired in October 1996. The manager is from the Chattanooga area and has
several years of experience in the hotel industry. The manager's efforts were
successful on two fronts, both increasing awareness of the property in the
Chattanooga community and capitalizing on the rooms with two beds by marketing
the property to a broader range of customers. As a result of the manager's
<PAGE>
affiliations within the Chattanooga community, additional occupancy was obtained
by offering packages to guests which included tickets to local tourist
attractions. The increased supply entering the market in late 1997 started to
impact the hotel by January 1998. The occupancy for January and February 1998
was 37%, compared to occupancy of 52% for the same period in 1997. In response
to the increased supply, the Chattanooga Microtel Inn is planning to obtain
additional signage to increase awareness of and to direct customers to the
hotel, and will be leasing a van. There are several local companies that have
expressed an interest in using the Microtel Inn if a means of transportation is
provided. Extensive marketing efforts will also be continued in 1998. The
Chattanooga Microtel Inn generated around 23% of the Partnership's room revenues
in 1997.
The Partnership's operating income increased from a $1,073,000 in 1996 (before
depreciation and amortization of $429,000) to $1,254,000 in 1997 (before
depreciation and amortization of $434,000) due to the increase in room revenues.
Net interest expense in 1997 was the same as in 1996, since the Partnership debt
requires payments of interest only at a fixed 10% rate. In 1996, the Partnership
sold land adjacent to the Chattanooga Microtel Inn with a cost basis of $154,000
for $87,000 (net of sales commission), resulting in a loss of $67,000. The
amortization of debt acquisition costs of $238,000 was also the same as 1996.
The Partnership's net loss for 1997 was $415,000, $243,000 less than the net
loss in 1996 of $658,000 due to the increase in room revenues and the loss on
the sale of land in 1996. The Partnership generated cash flow from operations of
$316,000 in 1997, compared to a cash flow of $240,000 in 1996. The net cash used
in financing and investing activities was $317,000 in 1997 causing cash to
decrease only $1,000. Investing activities included an increase in restricted
cash of $35,000, which represented the net increase in the Hampton Inn capital
reserve escrow account. Also, capital improvements totalling $48,000 were
completed in 1997. Financing activities included the payment of limited partner
distributions of $300,000, and a cash overdraft of 66,000 at the end of the
1997. Financing and investing activities in 1996 included capital improvements
of $37,000, the payment of $400,000 in limited partner distributions and the
receipt of $119,000 of limited partnership capital contributions. The
Partnership expects to generate significant cash flow from operations again in
1998.
Total assets decreased $639,000 in 1997 due primarily to the $671,000 in
depreciation and amortization. Total liabilities increased $75,000 from an
increase due to affiliate. Partners' equity decreased $715,000 from the payment
of $300,000 in distributions to limited partners and the 1997 net loss of
$415,000.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total assets decreased $847,000 in 1996 due primarily to the $667,000 in
depreciation and amortization, the sale of land with a cost basis of $154,000 by
the Chattanooga Microtel Inn and a $96,000 decrease in cash. Total liabilities
increased $92,000 from an increase in accounts payable, accrued expenses and due
to affiliate. Partners' equity decreased $939,000 from several factors, the
payment of $400,000 in distributions to limited partners and the 1996 net loss
of $658,000 which caused a decrease of $1,058,000 in partners' equity, and
capital contributions of $119,000 which offset the decrease in partners' equity.
For further information on the properties, please refer to Part I, Item 2.
Properties.
YEAR 2000 DISCLOSURE
The Partnership is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Partnership's
computerized information systems. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Partnership's financial position, results of operations or
cash flows in future periods. However, if the Partnership, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk. Accordingly, the Partnership plans to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
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 ("the Mortgage Notes") in the principal amount of $10,000,000
mature on December 31, 1998. The Managing General Partner intends to replace the
outstanding Mortgage Notes with first mortgage financing from an institutional
lender combined with unsecured subordinated note financing raised through a
private offering. The Managing General Partner has made an application to an
institutional lender for first mortgage financing in the amount of approximately
$7.9 million, and intends to offer unsecured subordinated notes in the amount of
approximately $3,100,000 to private investors. The Managing General Partner
believes the Partnership can obtain first mortgage
<PAGE>
financing from an institutional lender given that the Managing General Partner
obtained $12 million in institutional financing in 1996 and 1997 for other hotel
properties, and a commitment for an additional $4.7 million in institutional
financing in 1997. The Managing General Partner, believes given that affiliates
of the Managing General Partner have raised debt financing in excess of $32
million from private investors, it is also likely that the Partnership would be
able to obtain the necessary note financing. However, if the institutional
financing and/or note financing is not available, the Partnership can extend the
maturity date of the 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 once 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 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 December 31, 1997, the capital reserve escrow
account was $52,219.
ITEM 7. FINANCIAL STATEMENTS
The following Partnership financial statements are filed as part of this Report:
Balance Sheets at December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997 and 1996
Statements of Changes in Partners' Capital for the years ended
December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and 1996
Notes to Financial Statements
Independent Auditors' Report issued by Coopers & Lybrand, LLP as of
and for the year ended December 31, 1997
Independent Auditors' Report issued by KPMG Peat Marwick LLP as of
and for the year ended December 31, 1996
The following Managing General Partner financial statements are filed as part of
this Report:
Balance Sheets at December 31, 1997 and 1996
Statements of Operations and Changes in Retained Earnings for the
years ended December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and 1996
Notes to Financial Statements
Independent Auditors' Report
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
-----
Financial Statements
December 31, 1997 and 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Essex Hospitality Associates III L.P.
We have audited the accompanying balance sheet of Essex Hospitality Associates
III L.P. (A Delaware limited partnership) as of December 31, 1997, and the
related statements of operations, changes in partners' capital and cash flows
for the year then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements for the
year ended December 31, 1996 were audited by other accountants, who expressed an
unqualified opinion on them in their report dated February 13, 1997.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Essex Hospitality Associates
III L.P. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/S/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Rochester, New York
February 20, 1998
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Essex Hospitality Associates III L.P.:
We have audited the accompanying balance sheet of Essex Hospitality
Associates III L.P. (a Delaware limited partnership) as of December 31, 1996
and the related statements of operations, changes in partners' capital and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Essex Hospitality Associates
III L.P. as of December 31, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Rochester, New York
February 13, 1997
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Balance Sheets
December 31, 1997 and 1996
ASSETS 1997 1996
------
---------------- ----------------
Investment in real estate, at cost:
<S> <C> <C>
Land $ 1546151 $ 1546151
Land improvements 438234 438234
Buildings 7239290 7247114
Furniture, fixtures and equipment 1996925 1941321
--------------- ---------------
11220600 11172820
Less accumulated depreciation 1094296 681714
--------------- ---------------
Net investment in real estate 10126304 10491106
Cash 26414 27771
Cash - restricted 52219 17115
Deferred costs:
Debt issuance 1131134 1131134
Franchise fees 85500 85500
--------------- ---------------
1216634 1216634
Less accumulated amortization 879069 620154
--------------- ---------------
337565 596480
Other assets 138885 188366
--------------- ---------------
$ 10681387 $ 11320838
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Liabilities:
Cash overdraft 65533 --
Due to affiliate 150069 66238
Accounts payable and accrued expenses 137108 211122
Mortgage notes payable 10000000 10000000
--------------- ---------------
Total liabilities 10352710 10277360
--------------- ---------------
Commitments and contingencies
Partners' capital, net 328677 1043478
--------------- ---------------
$ 10681387 $ 11320838
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Operations
For the Years Ended December 31, 1997 and 1996
1997 1996
---------------- ----------------
Revenue
<S> <C> <C>
Room revenue $ 3753750 $ 3531946
Telephone and other commissions 201124 205855
--------------- ---------------
Total income 3954874 3737801
--------------- ---------------
Operating expenses:
Room expense 995794 1012113
Depreciation and amortization 433554 429153
Administrative expenses 364096 367514
Utilities expense 209273 205764
Advertising and promotion 200623 173752
Repairs and maintenance 185677 182103
Property management fees 177953 168192
Property taxes 174873 182548
Telephone and other commissions 147104 138680
Royalty fees 126028 117550
Partnership management fees 49431 46720
Professional 29066 27064
Insurance 26452 28344
Miscellaneous 14355 14594
--------------- ---------------
Total operating expenses 3134279 3094091
--------------- ---------------
Income before interest and loss on sale of land 820595 643710
--------------- ---------------
Interest:
Income 2547 3302
Expense (1000000) (1000000)
Loss on sale of land -- (67218)
Amortization 237943 237943
--------------- ---------------
Net loss $ (414801) $ (658149)
================ ===============
Net loss - general partners $ (4148) $ (6581)
================ ===============
Net loss - limited partners $ (410653) $ (651868)
================ ===============
Net loss per limited partner unit $ (103) $ (163)
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1997 and 1996
PARTNERS' CAPITAL (DEFICIT)
-------------------------------------------------------------------------------------
NOTES SYNDICATION NET
PARTNERS'
GENERAL LIMITED TOTAL RECEIVABLE COSTS CAPITAL
---------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 22387 $ 2603265 $ 2625652 $ (151352) $ (491473) $ 1982827
Capital contributions -- -- -- 118800 -- 118800
Distribution to Partners (23232) (400000) (423232) 23232 -- (400000)
Net loss (6581) (651568) (658149) -- -- (658149)
--------- ----------- ----------- ---------- ------------ ------------
Balance at December 31, 1996 (7426) 1551697 1544271 (9320) (491473) 1043478
Distribution to Partners (3030) (300000) (303030) 3030 -- (300000)
Net loss (4148) (4106530) (414801) -- -- (414801)
--------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1997 $ (14604) $ 841044 $ 826440 $ (6290) $ (491473) $ (328677)
========= =========== =========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996
1997 1996
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from customers $ 4007415 $ 3796978
Cash paid to vendors and employees (2694042) (2560672)
Interest received 2547 3302
Interest paid (1000000) (1000000)
---------------- ---------------
Net cash provided by operating activities 315920 239608
---------------- ---------------
Cash flows from investing activities:
Increase in cash - restricted (35104) (17115)
Investments in real estate (47780) (37263)
Decrease (increase) in deposits 74 (25)
---------------- ---------------
Net cash used in investing activities (82810) (54403)
---------------- ---------------
Cash flows from financing activities:
Cash overdraft 65533 --
Partners' capital contributions 3030 142032
Distributions to Partners (303030) (423232
---------------- ---------------
Net cash used in financing activities (234467) (281200)
---------------- ---------------
Net decrease in cash (1357) (95995)
Cash - beginning of year 27771 123766
---------------- ---------------
Cash - end of year $ 26414 $ 27771
================ ===============
Reconciliation of net loss to net cash flows from
operating activities:
Net loss (414801) (658149)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 671497 667096
Loss on sale of land -- 67218
Cash provided (used) by changes in:
Other assets 49407 70945
Due to affiliate 83831 34942
Accounts payable and accrued expenses (74014) 57556
---------------- ---------------
Net cash provided by operating activities $ 315920 $ 239608
================ ===============
Supplemental schedule for noncash investing and
financing activities:
Receivable from sale of land $ -- $ 86782
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION
Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
limited partnership formed in August 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 those 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 which began operations
in September 1994 and September 1995, respectively. 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 partners 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 his or her pro rata
share of the nondeductible syndication expenses and sales
commissions 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 partners in the amounts sufficient
to offset all income, if any, 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.
In 1997 and 1996 losses from operations were allocated 99% to the
limited partners and 1% to the general partners.
6
<PAGE>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997
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. The limited
partners have received the minimum cumulative return of 8% due through
December 31, 1997.
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 December 31, 1997 were $1,076,718.
Essex Partners and its affiliates received substantial fees in connection
with the offering of notes and limited partnership units and the
acquisition and development of the 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.
INVESTMENTS IN REAL ESTATE
Investments in real estate are stated at cost. Depreciation is calculated
using the straight-line method over the following estimated useful lives
of the assets:
Building 39 Years
Land improvements 15 Years
Equipment and furnishings 5-7 Years
The cost of property and equipment retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts.
DEFERRED COSTS
Costs of issuing the 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 are
amortized on a straight-line basis over the term of each 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
December 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SYNDICATION COSTS
The Partnership incurred legal fees and other costs related to the
syndication which were treated as a reduction to Partners' capital. These
costs will be included in the Partners' basis upon termination of the
Partnership.
RECOGNITION OF REVENUE
Revenues are recognized as earned in accordance with contractual
arrangements for each transaction.
ADVERTISING COSTS
Advertising costs of the Partnership are expensed as incurred.
Advertising expense for the years ended December 31, 1997 and 1996 was
$200,623 and $173,752, respectively.
INCOME TAXES
No provision for income taxes has been provided since any liability is
the individual responsibility of the Partners.
LIMITED PARTNERSHIP PER UNIT DATA
Net loss per limited partner unit is calculated by dividing net loss by
the weighted average number of units outstanding during the period. The
weighted average number of units outstanding was 4,000 for the years
ended December 31, 1997 and 1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
RECLASSIFICATIONS
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 in Chattanooga
with final settlement in January 1997 of $86,782. A loss of $67,218 was
recognized on the transaction.
8
<PAGE>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997
4. MORTGAGE NOTES PAYABLE
Mortgage notes payable bear interest at a rate of 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
collateralized by first mortgages on the hotels and underlying land.
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 by franchisees and up
to 3.5% in the event 100 or more Microtel hotels are opened. The monthly
royalty fee increased to 3% in 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 repairs, and to refurbish and upgrade the hotel
not more than once every 5 years to conform to 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 fees totaled $46,756 in 1997 and
$39,027 in 1996 and advertising fees were $17,665 in 1997 and $14,600 in
1996.
The Partnership also entered into a license agreement with Promus
Corporation (Promus) to operate a Hampton Inn Hotel for the Rochester,
New York site with a term of twenty years. 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 the
Hampton Inn on payments received under the license agreement. The
Partnership incurred royalty fees of $79,272 in 1997 and $78,523 in 1996.
Marketing/reservation fees included in advertising and promotion expense
totaled $79,272 in 1997 and $78,523 in 1996.
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 at
December 31, 1997 and 1996 was $52,219 and $17,115, respectively.
<PAGE>
ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997
5. FRANCHISE, ROYALTY AND MARKETING FEES - CONTINUED
The franchise agreements 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.
6. RELATED PARTY TRANSACTIONS
A summary of the fees earned by Essex Partners in 1997 and 1996 under the
terms of the Partnership and management agreements is as follows:
<TABLE>
<CAPTION>
TYPE OF FEE AMOUNT OF FEE 1997 1996
------------------------------ ------------------------------------------------ -------------- --------------
<S> <C> <C> <C>
Property Management Fee 4.5% of gross operating revenues from the hotel $ 177953 $ 168192
Partnership Management Fee 1.25% of gross operating revenues from the
hotels 49431 46720
Accounting Fee $2,025 per month 24300 24300
-------- ------------
$ 251684 $ 239212
</TABLE>
The accounting fees for the year ended December 31, 1997 and 1996 has
been included in administrative expenses.
Organization and offering fees are allocated between syndication costs
and debt issuance costs based on the pro-rata share of limited partners'
units and notes payable to the total offering.
In addition, Essex Partners will receive refinancing fees equal to 1% of
the gross proceeds from any refinancing of the hotels and a sales fee of
up to 3% of the gross price if the hotel is sold.
7. CONTINGENCY
The Partnership is involved in a litigation matter arising from the
normal course of business. In management's opinion, resolution of
litigation will not materially affect the Partnership's financial
position or results of operations.
10
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of
Essex Investment Group, Inc.)
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
KPMT PEAT MARWICK LLP
600 Clinton Square
Rochester, NY 14604
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Essex Partners Inc.:
We have audited the accompanying balance sheets of Essex Partners Inc. (a wholly
owned subsidiary of Essex Investment Group, Inc.) as of December 31, 1997 and
1996, and the related statements of operations and changes in retained earnings
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Essex Partners Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
February 26, 1998
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Balance Sheets
December 31, 1997 and 1996
ASSETS 1997 1996
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 418,458 84,643
Receivables from partnerships 452,187 815,825
Due from parent and affiliates, net 318,465 --
Other 2,630 5,682
---------- ---------
Total current assets 1,191,740 906,150
Noncurrent receivables from partnerships 186,146 533,825
Investment in real estate 132,844 --
Investments in partnerships 543,745 506,224
Deferred tax asset 56,300 48,000
Office furniture and equipment less accumulated
depreciation of $104,373 in 1997 and $74,560 in 1996 73,545 87,479
---------- ---------
$2,184,320 2,081,678
========== =========
LIABILITIES AND STOCKHOLDER'S INVESTMENT
Current liabilities:
Accounts payable and accrued expenses 301,426 40,504
Due to parent and affiliates, net -- 216,006
---------- ---------
Total current liabilities 301,426 256,510
Accrued partnership contributions 87,359 91,770
---------- ---------
388,785 348,280
---------- ---------
Contingencies (note 6)
Stockholder's investment:
Common stock, par value $.01, authorized 2,000,000
shares; 100 shares issued and outstanding 1 1
Paid-in capital 999 999
Retained earnings 1,794,535 1,732,398
---------- ---------
Total stockholder's investment 1,795,535 1,733,398
---------- ---------
$2,184,320 2,081,678
========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Statements of Operations and Changes in Retained Earnings
For the years ended December 31, 1997 and 1996
1997 1996
Revenues:
Management and administrative fees $ 1,361,325 1,139,551
Organization, property acquisition, disposition
and development fees 960,947 652,156
----------- ---------
Total revenues 2,322,272 1,791,707
----------- ---------
Operating expenses:
Personnel 1,432,460 1,136,218
Office operations 166,720 170,883
Occupancy 145,692 143,666
Sales and marketing 38,152 51,280
Professional fees 40,086 57,594
Equity in losses of partnerships, net 85,665 11,290
Provision for losses on partnership investments
and receivables 217,246 210,653
----------- ---------
Total operating expenses 2,126,021 1,781,584
----------- ---------
Income from operations 196,251 10,123
----------- ---------
Other income (expense):
Expenses from terminated REIT transaction (200,000) --
Interest income 76,948 75,920
Interest expense (7,062) (80,743)
----------- ---------
Total other expense, net (130,114) (4,823)
----------- ---------
Income before income taxes 66,137 5,300
Income taxes 35,000 2,000
----------- ---------
Net income 31,137 3,300
Retained earnings, beginning of year 1,732,398 1,729,098
Adjustment pursuant to tax sharing arrangement 31,000 --
----------- ---------
Retained earnings, end of year $ 1,794,535 1,732,398
=========== =========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 31,137 3,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of partnerships 85,665 11,290
Depreciation 29,813 25,397
Provision for losses on partnership investments
and receivables 217,246 210,653
Deferred income taxes (8,300) --
Adjustment pursuant to tax sharing arrangement 31,000 --
Cash provided (used) by changes in:
Other current assets 3,052 27,709
Accounts payable and accrued expenses 260,922 (144,876)
Accrued partnership contributions (4,411) (71,772)
------- ------
Net cash provided by operating activities 646,124 61,701
------- ------
Cash flows from investing activities:
Repayments from (advances to) partnerships, net 594,614 (1,002,829)
Purchase of real estate (132,844) --
Investments in partnerships (321,830) (242,500)
Distributions from partnerships 98,101 149,242
Purchase of office furniture and equipment (15,879) (12,410)
------- ------
Net cash provided by (used in)
investing activities 222,162 (1,108,497)
------- ------
Cash flows from financing activities -
advances (to) from and parent and affiliates, net (534,471) 216,006
------- ------
Net increase (decrease) in cash and
cash equivalents 333,815 (830,790)
Cash and cash equivalents, beginning of year 84,643 915,433
------- ------
Cash and cash equivalents, end of year $ 418,458 84,643
========= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 8,651 86,859
========= ======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements
December 31, 1997 and 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Essex Partners Inc. (the Company) is the managing general partner of
partnerships which primarily own and operate hotels, apartment buildings
and manufactured home communities (MHCs). In addition to revenues earned as
an investor, the Company receives management, administrative, development
and other fees for services rendered to the partnerships.
The Company's parent, Essex Investment Group, Inc. (Essex), is an
integrated financial services and real estate company.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts.
INVESTMENTS IN PARTNERSHIPS
Investments in partnerships are accounted for by the equity method. Any
initial partnership capital contribution required by the Company which is
payable out of future distributions to the Company is accrued.
RECOGNITION OF REVENUE
Organization, property acquisition, disposition, development, management
and administrative fees are recognized as earned in accordance with
contractual arrangements for each transaction.
INCOME TAXES
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
The effect of deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period which includes the enactment date.
The Company is included in the consolidated federal and combined New York
State income tax returns of Essex. Essex allocates current federal and
state income taxes on a pro rata basis to only its subsidiaries which have
taxable income. Any difference between current income taxes determined on a
separate company basis in accordance with the asset and liability method
and the amount allocated to the Company by Essex is reflected as an
adjustment of retained earnings.
<PAGE>
2
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(2) PARTNERSHIP INVESTMENTS AND RECEIVABLES
INVESTMENTS
The Company's investments in partnerships as of and for the years ended
December 31, 1997 and 1996 by property type are summarized as follows:
APARTMENTS
HOTELS MHCS AND OTHER TOTAL
------ ---- --------- -----
1997
Investments at December 31 $ 180,722 304,029 58,994(1) 543,745
Equity in losses (44,289) (41,306) (70) (85,665)
Investments during the year 105,000 190,000 26,830 321,830
Distributions received 14,015 49,868 34,218 98,101
1996
Investments at December 31 $ 134,026 205,203 166,995 506,224
Equity in losses (14,211) 11,162 (8,241) (11,290)
Investments during the year -- 217,500 25,000 242,500
Distributions received 89,378 23,764 36,100 149,242
(1) In 1997, the Company wrote off $100,543 of an investment in a residential
real estate partnership.
Losses of the partnerships include amortization and depreciation of the
underlying properties.
<PAGE>
<PAGE>
3
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(2) PARTNERSHIP INVESTMENTS AND RECEIVABLES, CONTINUED
RECEIVABLES
The Company makes advances to investee partnerships to fund operations as
well as in connection with the acquisition and construction of real estate.
Such receivables, which are generally due on demand and unsecured, are
summarized as follows at December 31, 1997 and 1996:
Partnership 1997 1996
----------- ---- ----
Essex Geneseo Associates L.P. $ 276,232 173,293
Essex Microtel LeRay L.P. 212,995 313,084
Essex Hospitality Associates III L.P. 149,903 62,784
Essex - Ashford River Oaks L.P.:
Mortgage note -- 270,000
Advances 10,267 472,372
Others 211,936 298,117
------- -------
861,333 1,589,650
Less allowance for losses 223,000 240,000
------- -------
638,333 1,349,650
Less current portion 452,187 815,825
------- -------
$ 186,146 533,825
========== =======
Essex Microtel LeRay L.P. (LeRay) owns and operates a 100-room Microtel
hotel located in LeRay, New York. During 1996, the Company advanced
$313,084 to LeRay, primarily to reduce outstanding mortgage debt. Cash flow
from hotel operations is not anticipated to be sufficient to repay the
advances, and therefore, during 1997, the Company wrote off $100,089 of the
amount due. Summarized financial information for LeRay as of and for the
years ended December 31, 1997 and 1996 follows:
1997 1996
---- ----
Assets $2,064,000 2,170,000
Liabilities 1,581,000 1,780,000
Partners capital 483,000 390,000
Revenue 605,000 577,000
Net income (loss) 93,000 (221,000)
========== =========
<PAGE>
4
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(2) PARTNERSHIP INVESTMENTS AND RECEIVABLES, CONTINUED
The following table summarizes activity in the allowance for losses:
1997 1996
---- ----
Balance beginning of year $ 240,000 240,000
Provisions for losses 116,703 210,653
Charges offs, net of recoveries (133,703) (210,653)
-------- --------
Balance at end of year $ 223,000 240,000
========= =======
OPERATIONS
Fees earned in connection with providing organization, financing,
acquisition, development, management, administration and due diligence
services to the investee partnerships totaled $2,228,216 in 1997 and
$1,726,426 in 1996.
In 1997, the Company initiated development of a real estate investment
trust (REIT) for hotel properties held by certain of the investee
partnerships. The Company incurred legal, accounting and other advisory
costs in connection with that project. However, as of December 31, 1997,
the REIT offering is not expected to be completed and the Company has,
therefore, charged $200,000 of those costs to operating expense in 1997.
(3) INVESTMENT IN REAL ESTATE
In 1997, the Company purchased an 8% mortgage loan receivable with an
outstanding balance of $192,844. The Company purchased the loan at a
$60,000 discount, paying $132,844. On February 26, 1998, the Company
acquired title to the property through foreclosure sale.
(4) RELATED PARTY TRANSACTIONS
The Company provides management and administrative services under contracts
with several other entities owned by officers of Essex, earning fees of
$94,056 in 1997 and $65,281 in 1996.
(5) INCOME TAXES
The components of income tax expense are as follows:
Current Deferred Total
------- -------- -----
1997:
Federal $ 34,000 (7,000) 27,000
State 9,300 (1,300) 8,000
-------- ------ ------
$ 43,300 (8,300) 35,000
======== ====== ======
1996:
Federal 1,500 -- 1,500
State 500 -- 500
-------- ------ ------
$ 2,000 -- 2,000
======== ====== ======
<PAGE>
5
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(5) INCOME TAXES, CONTINUED
Income taxes differ from the amounts computed by applying the U.S. Federal
income tax rate of 34% to income before income taxes as follows:
1997 1996
---- ----
Computed "expected" tax expense $22,500 1,800
Increase (decrease) resulting from:
State taxes, net of Federal income
tax benefit 5,300 330
Meals and entertainment 2,400 --
Officers' life insurance 4,300 --
Other 500 (130)
------- -----
$35,000 2,000
======= =====
In 1997 and 1996, Essex allocated $12,300 and $2,000 of consolidated
current income tax expense to the Company pursuant to the inter-company tax
sharing arrangement. The differences between current income taxes allocated
to the Company under the tax sharing arrangement and the amounts reflected
above in accordance with the asset and liability method are reflected in
the accompanying statement of changes in retained earnings as adjustments
to retained earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets - allowance for uncollectible
receivables $89,200 96,000
------- ------
Deferred tax liabilities:
Investment in partnerships 26,800 42,700
Depreciation of office furniture and
equipment 6,100 5,300
------- ------
Gross deferred tax liabilities 32,900 48,000
------- ------
Net deferred tax asset $56,300 48,000
======= ======
<PAGE>
6
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(5) INCOME TAXES, CONTINUED
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies
in making this assessment. Based on the level of historical taxable income
and estimates of future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences
at December 31, 1997.
(6) CONTINGENCIES
As the general partner in several partnerships, the Company may, subject to
partnership agreement restrictions, be held liable for all recourse debt
and obligations of such partnerships to the extent that the obligations are
not otherwise funded. The amounts of such contingent liabilities include
guarantees of the following partnership obligations at December 31, 1997:
Essex Microtel Lehigh L.P.
Mortgage payable to bank, secured by a first mortgage on
the property $2,543,000
Essex Hospitality Associates IV L.P.
Mortgage payable, secured by a first mortgage on the property 1,350,000
Essex Geneseo Associates L.P.
Mortgage payable to bank, secured by mortgages on
the property 4,275,000
Essex Real Estate Partnership Notes
Mortgage notes payable to private investors, primarily
secured by first and second mortgages on certain
properties 651,000
Essex Glenmaura L.P.
Unsecured subordinated notes payable to private investors 1,500,000
Essex Mobile Home Properties IX L.P.
Unsecured subordinated notes payable to private investors 1,200,000
Greenport L.L.C
Mortgage payable to bank, secured by a first mortgage 135,000
on the property
Essex Manufactured Home Communities X L.P.
Unsecured subordinated notes payable to private investors 1,200,000
<PAGE>
7
ESSEX PARTNERS INC.
(A Wholly Owned Subsidiary of Essex Investment Group, Inc.)
Notes to Financial Statements, Continued
(6) CONTINGENCIES, CONTINUED
Although there is no current plan or intention to do so, the capital of the
Company is available for withdrawal by Essex. Summarized consolidated
financial information for Essex as of and for the years ended December 31,
1997 and 1996 follows:
1997 1996
---- ----
Assets $ 7,000,000 6,400,000
Liabilities 5,200,000 5,200,000
Total stockholders' equity 1,800,000 1,200,000
Revenue 16,700,000 13,900,000
Net income 420,000 400,000
========== ==========
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Partnership's former accountants, KPMG Peat Marwick LLP, were dismissed
effective February 13, 1998. KPMG Peat Marwick LLP's reports on the
Partnership's financial statements for the past two years did not contain an
adverse opinion or disclaimer of opinion, nor was either such opinion modified
as to uncertainty, audit scope or accounting principles. The decision to change
accountants was decided by Essex Partners Inc., the Managing General Partner.
There were no disagreements with KPMG Peat Marwick LLP through February 13, 1998
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
Coopers & Lybrand, LLP was engaged to serve as the Partnership's principal
accountants to audit its financial statements by Essex Partners Inc. on February
13, 1998. Although the Partnership has consulted with Coopers & Lybrand
regarding accounting matters in connection with accounting issues for affiliated
entities, the Partnership did not consult with the new accountants regarding the
application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on the
Partnership's financial statements.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16 OF THE EXCHANGE ACT
The Partnership is managed by the Managing General Partner, Essex Partners Inc.
The Managing General Partner is a wholly-owned subsidiary of Essex Investment
Group, Inc. ("Essex"). Essex was formed in January, 1987. Mr. John E. Mooney,
the President of the Managing General Partner and Essex, is also a General
Partner of the Partnership.
The directors and executive officers of the Managing General Partner, as of
March, 1998, are as follows. Brief summaries of their business experience and
certain other information are set forth following the table.
NAME AGE POSITION
---- --- --------
John E. Mooney 53 President, Chief Executive Officer and Director
Jerald P. Eichelberger 54 Executive Vice President, Secretary and Director
Richard C. Brienzi 40 Senior Vice President, Treasurer, Chief
Operating Officer of the Multi-Family Division
and Director
Barbara J. Purvis 44 Senior Vice President and Director
James A. Young 49 First Vice President Hotel Operations
Mr. Mooney has been the President, Chief Executive Officer and a Director of the
General Partner since its formation in December, 1986. Mr. Mooney is also the
President, Chief Executive Officer and a Director of Essex, and has served in
that capacity since its formation in January, 1987. His investment experience
includes serving as an individual general partner of over 45 real estate limited
partnerships, 10 oil and gas limited partnerships, and 3 venture funds. He is
the Chairman of the Board of Moscom Corporation. In addition, he is a Director
of Performance Technologies, Inc., the Greater Rochester Housing Partnership and
the Monroe County Industrial Development Agency. He is also Chairman of the
Executive Committee of Genesee Capital, Inc., a Small Business Investment
Company in the Rochester, New York area.
Mr. Eichelberger has been the Executive Vice President and Director of the
General Partner since its formation in December, 1986. Mr. Eichelberger has also
been an Officer and Director of Essex since its formation in January, 1987. Mr.
Eichelberger has been an individual general partner in several real estate
limited partnerships, one oil and gas partnership, and one venture capital fund.
He is a Director of Genesee Capital, Inc. and St. Joseph's Villa.
Mr. Brienzi joined Essex in April of 1993, and was appointed Vice President,
Treasurer and Chief Financial Officer in September, 1993. Prior to joining
Essex, from 1988 to 1993, he was the Chief Financial Officer of DiMarco
Constructors Corporation. While at DiMarco he established Baldwin Real Estate
Corp., a subsidiary which manages the properties of the DiMarco Group. He is a
member of the American Institute of Certified Public Accountants, New York State
Society of Certified Public Accountants, and Construction Financial Management
Association.
Ms. Purvis has been a Vice President and Director of the General Partner and
Essex since their formation. She is a Director of Genesee Capital, Inc. and
serves on the boards of a number of not-for-profit agencies.
Mr. Young joined Essex in August of 1993, and is responsible for hotel
management and operations. Mr. Young was appointed Vice President in September,
1993. From 1990 to 1993 he worked for the Georgetown University, first as
General Manager of the Georgetown University Hotel and Conference Center, then
as Executive Director of Auxiliary Services of Georgetown University.
Another significant employee of the General Partner, as of March, 1998, is as
follows. Brief summaries of their business
<PAGE>
experience and certain other information are set forth following the table.
NAME AGE POSITION
---- --- --------
Lorrie L. LoFaso 41 Assistant Secretary and Vice President
Ms. LoFaso joined Essex in June, 1989, was elected a Vice President of Essex and
the Managing General Partner in January, 1991, and appointed to the position of
Assistant Secretary of the Managing General Partner in March, 1990. Ms. LoFaso
is responsible for the financial control of the Hotel Division's properties.
Each officer and director of the Managing General Partner is elected for a one
year term and until his or her successor is elected and has qualified. There are
no arrangements between any officer or director and any other person pursuant to
which he or she was elected as an officer or director of the Managing General
Partner.
The Partnership does not have a class of equity securities registered pursuant
to Section 12 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The Partnership has approximately 80 employees who work at the three Partnership
hotels. The Partnership and its hotel properties are managed by its Managing
General Partner. The Partnership has not paid (or accrued) any cash or other
compensation to any executive officer of the Managing General Partner for
services rendered to the Partnership during the year ended December 31, 1997.
The Partnership has no pension, option or other benefit plans and no cash or
non-cash compensation was paid or distributed, or is proposed to be paid or
distributed in the future, by the Partnership to any executive officer of the
Managing General Partner pursuant to any benefit plan.
The Managing General Partner is the property manager for each of the
Partnership's properties. The management agreements describe the property
manager's responsibilities and fees. Under the management agreements, the
Managing General Partner receives a monthly management fee of 4.5% of gross
revenues, and a monthly accounting fee of $675 from each property. Total fees
paid under the management agreements in 1997 were $202,300.
The Managing General Partner also receives a partnership management fee of 1.25%
of gross revenues under section 4.07 of the Partnership Agreement. Total
partnership management fees in 1997 were $49,000.
The amount of fees payable by the Partnership to the Managing General Partner
and its affiliates are described in Section 4.07 of the Partnership Agreement.
The rules governing the reimbursement of expenses of the Partnership are set
forth in Section 4.10 of the Partnership Agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no partners which own at least a 5% interest in the Partnership.
The following table sets forth the interests in the Partnership held by
executive officers and directors of the Managing General Partner as of March 20,
1998:
NAME AND ADDRESS OF
TITLE OF CLASS BENEFICIAL OWNER PERCENTAGE
- -------------- ---------------- ----------
6 limited partnership units Jerald P. Eichelberger (1) .2%
22 Autumn Wood
Rochester, New York 14624
General Partner interests Essex Partners and
John E. Mooney 1%
100 Corporate Woods
Rochester, New York 14623
(1) These partnership units are held by family members of Mr. Eichelberger. Mr.
Eichelberger disclaims ownership of these units.
The Managing General Partner is a wholly-owned subsidiary of Essex. Essex
possesses the sole voting and dispositive power with respect to the common stock
of the Managing General Partner beneficially owned by it.
Item 12. Certain Relationships and Related Transactions
The Managing General Partner and Essex Capital Markets Inc., an affiliate of the
Managing General Partner, have received (or accrued) certain fees and
reimbursements from the Partnership for the years ended December 31, 1997 and
1996:
TYPE OF FEE AMOUNT OF FEE 1997 1996
- ----------- ------------- ---- ----
Property 4.5% of gross revenues $177,953 168,192
management of the properties
fees
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Rochester,
State of New York on March 30, 1998.
ESSEX HOSPITALITY ASSOCIATES III L.P.
By: Essex Partners Inc.
Its: Managing General Partner
By: /S/JOHN E. MOONEY
John E. Mooney
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Dated: March 30, 1998 Principal Executive Officer of
Managing General Partner:
/S/JOHN E. MOONEY
John E. Mooney
President and Chief
Executive Officer
Dated: March 30, 1998 Principal Financial and Accounting
Officer of Partnership
/S/LORRIE L. LOFASO
Lorrie L. LoFaso
Principal Accounting Officer
<PAGE>
The Board of Directors of Managing General Partner:
Dated: March 30, 1998 /S/JOHN E. MOONEY
John E. Mooney, Director
Dated: March 30, 1998 /S/JERALD P. EICHELBERGER
Jerald P. Eichelberger, Director
Dated: March 30, 1998 /S/BARBARA J. PURVIS
Barbara J. Purvis, Director
Dated: March 30, 1998 /S/RICHARD C. BRIENZI
Richard C. Brienzi, Director
The Individual General Partner of Essex
Hospitality Associates III L.P.:
Dated: March 30, 1998 /S/JOHN E. MOONEY
John E. Mooney, General Partner
<PAGE>
Part IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits and Index of Exhibits
EXHIBIT NUMBER DESCRIPTION
3-1* Certificate of Incorporation of Essex Partners Inc. (Filed as
Exhibit 3-1 to form 10KSB for fiscal year ended December 31, 1993.)
3-2* By-laws of Essex Partners Inc. (Filed as Exhibit 3-1 to form 10KSB
for fiscal year ended December 31, 1993.)
3-3* Certificate of Limited Partnership of Essex Hospitality Associates
III L.P. (Filed as Exhibit 3(b) to the Registration Statement on
Form S-1 of Essex Hospitality Associates III L.P., SEC File No.
33-67848)
4-1* Form of Amended and Reinstated Limited Partnership Agreement of
Essex Hospitality Associates III L.P. (Filed as Exhibit A to the
Prospectus included in the Registration Statement on Form S-1 of
Essex Hospitality Associates III L.P., SEC File No. 33-67848)
4-2* Escrow Agreement, dated November 17, 1993, between Essex Hospitality
Associates III L.P. and Manufacturers and Traders Trust Company.
(Filed as Exhibit 3-1 to form 10KSB for fiscal year ended December
31, 1993.)
4-3* Form of Subscription Agreement (Filed as Exhibit C to the Prospectus
included in the Registration Statement on Form S-1 of Essex
Hospitality Associates III L.P., SEC File No. 33-67848)
4-4* Indenture, dated as of November 1, 1993, between the Partnership and
Manufacturers and Traders Trust Company, relating to the
Partnership's 10% First Mortgage Notes. (Filed as Exhibit 3-1 to
form 10KSB for fiscal year ended December 31, 1993.)
4-5* Form of 10% First Mortgage Note (Filed as Exhibit B to the
Prospectus included in the Registration Statement on Form S-1 of
Essex Hospitality Associates III L.P., SEC File No. 33-67848)
4-6* Form of Guaranty of Completion (Filed as Exhibit D to the Prospectus
included in the Registration Statement on Form S-1 of Essex
Hospitality Associates III L.P., SEC File No. 33-67848)
10-1* Form of Dealer Manager Agreement between Essex Hospitality
Associates III L.P. and Essex Capital Markets Inc. (Filed as Exhibit
1(a) to the Registration Statement of Essex Hospitality Associates
III L.P., SEC File No. 33-67848)
10-2* Form of Franchise Agreement to be entered into between Essex
Hospitality Associates III L.P. and Microtel Franchise and
Development Corporation (Filed as Exhibit 28(a) to the Registration
Statement of Essex Hospitality Associates III L.P., SEC File No.
33-67848)
10-3* Form of Management Agreement to be entered into between Essex
Hospitality Associates III L.P. and Essex Partners Inc. (Filed as
Exhibit 28(d) to the Registration Statement of Essex Hospitality
Associates III L.P., SEC File No. 33-67848)
<PAGE>
10-4* Real Estate Purchase Contract for the Birmingham, Alabama sites,
dated as of October 1, 1993, between Essex Partners Inc. and Farris,
Harden & Associates, Inc. (Filed as Exhibit 3-1 to form 10KSB for
fiscal year ended December 31, 1993.)
10-5* Fee Mortgage and Security Agreement, dated December 30, 1993,
between the Partnership and Manufacturers and Traders Trust Company,
as Trustee relating to the Birmingham property. (Filed as Exhibit
3-1 to form 10KSB for fiscal year ended December 31, 1993.)
10-6* Real Estate Purchase Contract for one of the Chattanooga sites,
dated as of December 15, 1993, between Essex Partners and Clifford
E. Colbaugh and Linda C. McDaniel. (Filed as Exhibit 3-1 to form
10KSB for fiscal year ended December 31, 1993.)
10-7* Real Estate Purchase Contract for one of the Chattanooga sites,
dated as of December 15, 1993, between Essex Partners and Robert W.
Myers, Executor of the James E. Myers Estate. (Filed as Exhibit 3-1
to form 10KSB for fiscal year ended December 31, 1993.)
10-8* Option Agreement for the Rochester, New York site, dated as of
August 25, 1993, between Essex Partners and Center Place Associates.
(Filed as Exhibit 3-1 to form 10KSB for fiscal year ended December
31, 1993.)
10-9* Form of License Agreement to be entered into between Essex
Hospitality Associates III L.P. and the Hampton Inn Hotel Division
of Embassy Suites, Inc. (Filed as Exhibit 28(C) to the Registration
Statement on Form S-1 of Essex Hospitality Associates III L.P., SEC
File No. 33-67848)
10-10* Fee Mortgage and Security Agreement, dated June 28, 1994, as
modified on March 30, 1995, between the Partnership and
Manufacturers and Traders Trust Company, as Trustee relating to the
Rochester, New York property. (Filed as Exhibit 10-10 to form 10KSB
for fiscal year ended December 31, 1994.)
10-11* Fee Mortgage and Security Agreement, dated December 30, 1994,
between the Partnership and Manufacturers and Traders Trust Company,
as Trustee relating to the Chattanooga, Tennessee property. (Filed
as Exhibit 10-11 to form 10KSB for fiscal year ended December 31,
1994.)
10-12* Construction contract for the Birmingham property, dated April 1,
1994 between the Partnership and Potter Builders, Inc. (Filed as
Exhibit10-12 to form 10KSB for fiscal year ended December 31, 1994.)
10-13* Construction contract for the Rochester property, dated August 15,
1994 between the Partnership and DiMarco Constructors, Inc. (Filed
as Exhibit 10-13 to form 10KSB for fiscal year ended December 31,
1994.)
10-14* Construction contract for the Chattanooga property, dated April 15,
1995 between the Partnership and Bunkoff General Contractors. (Filed
as Exhibit 10-14 to form 10KSB for fiscal year ended December 31,
1995.)
27 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended December 31, 1997.
* Incorporated by reference
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911217
<NAME> ESSEX HOSPITALITY ASSOCIATES III L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 78
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<FN>
<F1> UNCLASSIFIED BALANCE SHEET USED
</FN>
<PP&E> 11,221
<DEPRECIATION> 1,094
<TOTAL-ASSETS> 10,681
<CURRENT-LIABILITIES> 353
<BONDS> 10,000
0
0
<COMMON> 0
<OTHER-SE> 734
<FN>
<F2> EQUITY IS PARTNERS' CAPITAL
</FN>
<TOTAL-LIABILITY-AND-EQUITY> 11,072
<SALES> 3,754
<TOTAL-REVENUES> 3,955
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,235
<INCOME-PRETAX> (415)
<INCOME-TAX> 0
<INCOME-CONTINUING> (415)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (415)
<EPS-PRIMARY> (103)
<EPS-DILUTED> (103)
<FN>
<F3> ENTITY IS A PARTNERSHIP, EPS IS LOSS PER LIMITED
PARTNERSHIP UNIT.
</FN>
</TABLE>
