SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 33-96716 ESSEX HOSPITALITY ASSOCIATES IV L.P. (Exact name of registrant as specified in charter) NEW YORK (State or other jurisdiction of incorporation or organization) 16-1485632 (I.R.S. Employer Identification No.) 100 CORPORATE WOODS ROCHESTER, NEW YORK 14623 (Address of principal executive office) Registrant's telephone number, including area code: (716) 272-2300 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- As of August 11, 1998, a total of 2,945 Limited Partnership Units were outstanding. PART 1 FINANCIAL INFORMATION Item 1. Financial Statements - -------------------------------------------------------------------------------- Essex Hospitality Associates IV L.P. Balance Sheets September 30, 1998 and 1997 (Unaudited) ASSETS 1998 1997 ------- ----- ---- Investments in real estate, at cost: Land and land improvements $ 1,761,744 $ 2,073,173 Furniture & fixtures 1,626,245 512,003 Buildings 9,145,776 4,430,468 Construction in progress -- 334,462 ------------ ------------ 12,533,765 7,350,106 Less accumulated depreciation (434,203) (27,076) ------------ ------------ Net investments in real estate 12,099,562 7,323,030 ------------ ------------ Investment in partnership 224,134 444,210 Cash and cash equivalents 547,529 1,567,039 Land held for sale 646,981 -- Deferred costs: Debt issuance 944,788 842,578 Franchise 85,000 85,000 Other 51,544 73,224 ------------ ------------ 1,081,332 1,000,802 Less accumulated amortization (315,645) (128,676) ------------ ------------ 765,687 872,126 ------------ ------------ Other assets 432,007 253,090 ------------ ------------ Total assets $ 14,715,900 $ 10,459,495 ============ ============ LIABILIITIES AND PARTNERS' CAPITAL Liabilities Accounts payable - construction $ 5,000 $ 54,425 Accounts payable and accrued expenses 147,406 34,210 Due to affiliate 1,933 -- Subordinated notes payable 5,413,000 5,298,000 Construction loan payable 4,239,286 -- Mortgage loan payable 4,492,160 4,500,000 ------------ ------------ Total liabilities 14,298,785 9,886,635 ------------ ------------ Commitments and contingencies Partners' capital 441,858 594,375 Less notes receivable from partners (24,743) (21,515) ------------ ------------ Total partners' capital 417,115 572,860 ------------ ------------ Total liabilities and partners' capital $ 14,715,900 10,459,495 ============ ============ -2- See accompanying notes to unaudited financial statements. Essex Hospitality Associates IV L.P. Statement of Income For the Quarters ended September 30, 1998 and 1997 (Unaudited) 1998 1997 ----- ---- REVENUE: - ---------- Rooms 1,407,239 420,440 Food and beverage -- -- Telephone and other commissions 54,397 17,055 ---------- ---------- 1,461,636 437,495 ---------- ---------- OPERATING EXPENSES: - ---------- Rooms 271,761 103,770 Food & beverage expenses -- -- Commissions expenses 31,131 3,039 Advertising & promotion 65,792 16,521 Repairs & maintenance 37,328 12,240 Utilities 31,417 8,135 Administrative & general 67,833 20,125 Property taxes 29,069 -- Insurance 3,325 2,114 Royalty fees 45,208 9,234 Management fees 56,132 15,417 Partnership management fees 9,355 2,570 Depreciation and amortization 120,419 57,912 Miscellaneous 9,924 20,266 ---------- ---------- 778,694 271,343 ---------- ---------- Income (loss) from operations 682,942 166,152 Interest expense (244,460) (128,881) Interest income 2,601 759 Equity loss in partnership (18,031) (62,384) ---------- ---------- (259,890) (190,506) ---------- ---------- Net income (loss) 423,052 (24,354) ========== ========== Net income (loss) - general partners 4,231 (244) - limited partners 418,822 (24,110) ---------- ---------- 423,052 (24,354) ========== ========== Net loss per limited partner unit 141 (10) ========== ========== -3- See accompanying notes to unaudited financial statements. Essex Hospitality Associates IV L.P. Statements of Cash Flows For the Quarters ended September 30, 1998 and 1997 (Unaudited) 1998 1997 ----- ---- Cash flows from operating activities Cash received from customers 1,435,056 385,863 Cash paid to suppliers (733,307) (284,003) Interest received 2,601 759 Interest paid (244,460) (128,881) ---------- ---------- Net cash from operating activities 459,890 (26,262) ---------- ---------- Cash flows from investing activities Payments for land and construction in progress (1,684,700) (2,023,556) Increase in restricted cash -- (1,221,819) Payments for deposits (56,588) (46,314) ---------- ---------- Net cash used in investing activities (1,741,288) (3,291,689) ---------- ---------- Cash flows from financing activities Partners' capital contributions 600 16,927 Payments for syndication costs -- (12,341) Proceeds from first mortgage loan -- 4,500,000 Proceeds from construction loan 1,644,404 -- Repayment of advance from affiliate (709) (596,156) Payments for escrow accounts -- -- Payments for debt acquisition costs (8,043) (232,431) Payments for organization costs -- -- Distributions received from partnership investment -- 22,900 Payments for distributions (59,940) (46,741) ---------- ---------- Net cash from financing activities 1,576,312 3,652,158 ---------- ---------- Net increase in cash and cash equivalents 294,914 334,207 Cash and cash equivalents - beginning of quarter 252,615 11,013 ---------- ---------- Cash and cash equivalents - end of quarter 547,529 345,220 ========== ========== Reconciliation of net income to net cash flows from operating activities: Net income (loss) 423,052 (24,354) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 120,419 57,912 Changes in: Other assets (79,227) (153,308) Equity loss of partnership 18,031 62,384 Accounts payable and other expenses (22,385) 31,104 ---------- ---------- 459,890 (26,262) ========== ========== -4- See accompanying notes to unaudited financial statements. ESSEX HOSPITALITY ASSOCIATES IV L.P. (A New York Limited Partnership) Notes to Financial Statements September 30, 1998 (1) ORGANIZATION ------------ Essex Hospitality Associates IV L.P. (the Partnership) is a New York limited partnership formed in 1995 for the purpose of acquiring land and constructing, owning and operating a series of hotels. The Partnership may also invest in and lend funds to other partnerships that own hotels. The Partnership financed its activities through a public offering of notes and limited partnership units which was completed in November 1997. The Partnership's general partner is Essex Partners Inc. (Essex Partners), a wholly-owned subsidiary of Essex Investment Group, Inc. (Essex) until September 4, 1998 and thereafter Essex Partners was purchased by JEM Properties Inc. (JEM). The Partnership has acquired land in order to construct and operate hotels. A Hampton Inn hotel was constructed in Solon, Ohio and the hotel commenced operations in August 1997. In June 1997, land was purchased in Erie, Pennsylvania and a Hampton Inn hotel was built which opened July 1, 1998. In December 1995, land was purchased in Warwick, Rhode Island in anticipation of the construction of a Homewood Suites hotel. However, as a result of higher than projected construction costs and a change in market conditions, the Partnership has decided not to proceed with development of the hotel and is now pursuing the sale of the land. In 1997 Solon Hotel LLC, a special purpose entity was created to own the Solon Hampton Inn. The managing member of the Solon Hotel LLC is Essex Hotel LLC, a single purpose entity created to act as the managing member. The membership interests of Solon Hotel LLC are owned 99% by the Partnership and 1% by Essex Hotel LLC, whose sole member is the Partnership. In June 1997, the Partnership transferred the Erie property to a single purpose entity, Erie Hotel LLC. The managing member of Erie Hotel LLC is Essex Hotels II LLC, a single purpose entity created to act as the managing member of Erie Hotel LLC. The membership interests in Erie Hotel LLC are owned 99% by the Partnership and 1% by Essex Hotels II LLC, whose sole member is the Partnership. In January 1996, the Partnership acquired a 54.3% limited partnership interest in Essex Glenmaura L.P. (Glenmaura) through the purchase of 12.5 limited partnership units for $1,250,000. The purchase price was equal to the pro rata portion of the fair value of the net assets acquired. Glenmaura owns and operates a Courtyard by Marriott hotel near Scranton, Pennsylvania. Construction of the hotel was completed and operations began in September 1996. In June 1997, the Partnership sold 1.05 limited partnership units of Glenmaura to Essex Partners for $105,000, reducing the Partnership's ownership interest to 49.8%. A general description of the allocation of Partnership income, loss, and distributions follows. For a more comprehensive description see the Partnership Agreement. Allocations of income from operations will be allocated 99% to the limited partners and 1% to the general partner until the amount allocated to the limited partners equals the cumulative annual return of 8% of their contribution. Any remaining income from operations is allocated 80% to the limited partners and 20% to the general partner. -5- ESSEX HOSPITALITY ASSOCIATES IV L.P. (A New York Limited Partnership) Notes to Financial Statements September 30, 1998 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 commission and 1% to the general partner. Thereafter, income on the sale of any or all the hotels is allocated in the same manner as income from operations. Allocations of losses from operations will be allocated 80% to the limited partners and 20% to the general partner in the amounts sufficient to offset all income which was allocated 80% to the limited partners. Thereafter, operating losses are allocated 99% to the limited partners and 1% to the general partner. Loss on the sale of any or all of the hotels will be first allocated in the same manner as losses from operations, except that the allocation of such loss would be made prior to allocations of income from operations. All other losses are allocated 99% to the limited partners and 1% to the general partner. Cash distributions will initially be made 99% to the limited partners and 1% to the general partner. After the limited partners have received a cumulative annual return of 8% of their contribution, additional distributions may then be made 80% to the limited partners and 20% to the general partner. Distributions of the net proceeds of sale or refinancing of any or all hotels will be made 1% to the general partner and 99% to the limited partners pro rata in accordance with the number of units held by each limited partner until the limited partners have received distributions from sale or refinance of hotels equal to $1,000 per unit. Thereafter, distributions shall next be made 1% to the general partner and 99% to the limited partners until each limited partner has received any unpaid cumulative return accrued through the date of the distribution. Additional distributions will then be made 20% to the general partner and 80% to the limited partners. Essex Partners and its affiliates are receiving substantial fees in connection with the offering of notes and limited partnership units. Additional fees will be paid to them in connection with the acquisition, development and operation of the hotels and management of the Partnership. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF ACCOUNTING ------------------- The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial positions, results or operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments consisting of only normal recurring adjustments or accruals which are necessary for a fair presentation of the financial statements have been made at and for the nine months ended September 30, 1998 and 1997. The results of operations for the nine month periods ended September 30, 1998 are not necessarily indicative of the results which may be expected for an entire fiscal year. -6- Item 2. Management's Discussion and Analysis or Plan of Operation The Partnership was formed on August 30, 1995. The Partnership completed its public offering on November 24, 1997, raising $5,413,000 in subordinated notes and $2,876,000 in limited partnership units for total offering proceeds of $8,289,000. The Partnership owns two hotels, a Hampton Inn in Solon, Ohio which opened August 1, 1997 and a Hampton Inn in Erie, PA which opened July 1, 1998. In addition, the Partnership has a 49.8% interest in Essex Glenmaura L.P. which owns a Courtyard by Marriott hotel in Scranton, PA which opened September 4, 1996. COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 1998 TO THE QUARTER ENDED SEPTEMBER 30, 1997 From July 1, 1997 to September 30, 1998, the total assets of the Partnership increased approximately $4.2 million. The primary reason for the increase is the completion of the Hampton Inn in Solon, Ohio in the third and fourth quarter, 1997 and the construction of the Hampton Inn in Erie, PA. The Partnership's cash balance decreased from $1,567,000 to $548,000 from costs incurred in the construction of properties. Land held for sale increased $647,000, which represents the costs incurred for the Warwick site, which is currently being offered for sale by the Partnership. The Partnership's liabilities increased $4,400,000 from July 1, 1997 to September 30, 1998. The Partnership also obtained a $4,700,000 construction loan from a bank for the Erie Hampton Inn. Limited partners' equity decreased $152,500 primarily as a result of partnership losses and distributions to partners. The primary revenue source for the quarter ended September 30, 1998 was room revenues of $1,407,000 compared to $420,000 for the same period in 1997. Much of this increase relates to revenues from the Solon Hampton Inn which opened August, 1997 as well as the Erie Hampton which opened in July 1998. Telephone and other commission revenue for the third quarter 1998 totaled $54,000, for total revenues of $1,461,000. For the third quarter, 1997 food and beverage revenue and telephone and other commission revenue totaled $17,000. Operating expenses for the quarter ended September 30 1998, before and depreciation totaled $658,000 compared to $329,000 for the same period during 1997. A majority of this increase relates to operating expenses incurred for the Solon and Erie Hampton which were not in operation for the third quarter in 1997. Income from operations was $683,000 for the third quarter 1998 compared to $166,000 for the same period in 1997. Other income and expense for the third quarter 1998 includes interest expense of $244,000, compared to interest expense of $128,000 for the same period in 1997. The Partnership's interest expense in the third quarter 1998 is composed of the interest incurred on the first mortgage loan for Solon, and interest on the subordinated notes as well as the construction loan. For the third quarter 1997, the construction loan was not in place. The net income for the Partnership for the third quarter 1998 was compared to a net loss of $24,000 for the same period in 1997. The third quarter operations generated $460,000 in cash, compared to cash used in operations in the third quarter 1997 of $26,000. This increase is primarily attributable to the room revenue from the Solon and Erie Hamptons. Cash required for investing activities in the third quarter 1998 was $1,741,000 compared to a use of funds of $3,292,000 for the third quarter of 1997. Much of this decrease is due to the finalization of the Erie construction. The Partnership obtained $1,576,000 of cash for financing activities in the third quarter 1998 due to proceeds from the construction loan for the Erie Hampton Inn. Financing activities for the third quarter 1997 provided $3,652,000 in cash due to proceeds from the first mortgage loan for Solon. Cash increased $295,000 in the third quarter 1998, compared to an increase of $11,000 in the third quarter 1997. -7- The Solon Hampton Inn opened on August 1, 1997. The property achieved an average occupancy of 90% in third quarter 1998 with an average daily rate of $101.84. The average occupancy was 81% for the two months it was open with an average daily rate of $82.61. The third quarter of the year is typically stronger than the first or fourth quarters. The Solon, Ohio area also has large tourist demand due to local attractions such as Sea World of Ohio and Geauga Lake, which open Memorial Day week-end for the summer season. Occupancies and rates increase when the tourist demand increases. The Courtyard by Marriott hotel opened in September 1996. The property achieved an average occupancy of 73% for the third quarter 1998 compared to 69% average occupancy for the third quarter 1997. The average daily rate for the third quarter 1998 was $68.31 compared to the average daily rate of $65.77 for the third quarter 1997. A new hotel opened in the Scranton area in June, 1997, a Comfort Inn & Suites which is directly competitive with the Courtyard by Marriott. The Erie Hampton opened on July 1, 1998. Average occupancy for the three months of operation was 71% with an average daily rate of $80.63. LIQUIDITY AND FINANCIAL CONDITION The Solon Hampton Inn is generating sufficient funds from operations to fund all operating expenses and debt service payments on the first mortgage loan. As of September 30, 1998 the Partnership has $14,144,000 in outstanding long term indebtedness comprised of subordinated notes of $5,413,000, construction loan of $4,239,000 and first mortgage financing of $4,492,000. The notes are due in December 2001, unless extended by their terms for one year to December 2002. The Solon first mortgage loan is due July, 2001, unless extended by its terms for one year to July, 2002. The Erie first mortgage loan is expected to be due before December, 2002, unless extended by its terms for one year to December, 2003. Once the Solon Hampton Inn and Erie Hampton Inn reach more stabilized operations, the Partnership expects to be able to place larger new first mortgages on the properties, such that when it needs to refinance the total outstanding indebtedness, (which is expected to total approximately $14.3 million in July, 2001), it can do so through a combination of retained excess working capital, new first mortgage financing and, if necessary, new subordinated note financing. The Partnership included a working capital reserve in its total costs for the Solon Hampton Inn and has included a working capital reserve in its costs for the Erie Hampton Inn. The Partnership expects that the working capital reserves will be sufficient to fund any operating deficits. The General Partner believes good investment opportunities exist in the limited service segments of the lodging industry. The limited service segment of the lodging industry has experienced significant growth in recent years as a greater number of leisure travelers seek to maximize value. The General Partner believes that the continued success of the lodging industry will depend upon, among other things, the continued demand for lodging facilities by both business and leisure travelers, which such demand is affected by general economic conditions, including, costs of labor and materials, unemployment, inflation and interest rates. In addition to, but directly affected by, economic trends, is the availability of financing on favorable terms for the construction and operation of hotels. In recent years a limited number of institutional lenders have been more willing to provide financing for hotel construction and operations, and hotel franchisors or their affiliates have established financing programs for construction and operation of the hotel franchisors' particular hotels. In addition to these industry considerations, the success of the Partnership's hotels will depend upon the hotel franchises developed and operated by the Partnership, as well as the location of the hotels. -8- OTHER MATTERS The Partnership has been in the process of resolving all significant year 2000 issues since 1997. Since almost all the Partnership's information systems software is licensed software from established software vendors, resolution is being accomplished by means of upgrading existing software to versions which are year 2000 compliant. At present, the Partnership expects to fully year 2000 compliant with its own internal systems by the spring of 1999. Since the cost of resolving the year 2000 issue is included in most cases, through existing software maintenance contracts, the incremental cost to the Partnership is minimal and not material. While the Partnership expects to be fully compliant with the year 2000, with its own systems well in advance of the year 2000 if the Partnership's vendors are unable to resolve such processing issues in a timely manner it could result in a material financial risk, with the risk minimized by the fact that initial year 2000 issues will occur at the beginning of a calendar year which is a slow period in the Partnership's operations. The Partnership is in the process of accessing the readiness of its vendors, and determining the risks associated with year 2000 non-compliance upon its operations. At this point the Partnership is not certain as to whether such non-compliance will have a material effect of the Partnership's results of operations, liquidity and financial condition. In anticipation of such an event the Partnership will be gathering and analyzing the necessary information to make the proper assessment and determine a plan of action to handle any foreseen potential problems which may result. -9- PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3 DEFAULT UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS None b. REPORTS ON FORM 8-K None -10- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX HOSPITALITY ASSOCIATES IV L.P. Registrant Dated: November 11, 1998 /S/ TRISH H. ALBANESE ------------------------------ Essex Hospitality Associates IV L.P. Essex Partners Inc. Trish Albanese Vice President and Chief Financial Officer -11-