1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] 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 November 1, 1996, a total of 2,151 Limited Partnership Units were outstanding. 2 PART 1 FINANCIAL INFORMATION Item 1. Financial Statements Essex Hospitality Associates IV L.P. Balance Sheets September 30, 1996 and 1995 Assets 1996 1995 ------ --------- ---------- Investments in real estate, at cost: Land 2,640,300 Construction in progress 6,507,304 Less accumulated depreciation - ----------- Net investments in real estate 9,147,604 ----------- Cash and cash equivalents 2,454,055 100 Deferred costs: Debt issuance 690,253 Franchise 128,000 Other 60,766 ----------- 879,019 Less accumulated amortization (51,361) ----------- 827,658 ----------- Other assets 494,340 ----------- ---------- Total assets 12,923,657 100 ----------- ---------- Liabiliities and Partners' Capital ---------------------------------- Liabilities Construction payable 47,696 Accounts payable and accrued expenses 46,241 Notes payable 6,420,000 Construction loan payable 4,213,008 Minority interest - Essex Glenmaura L.P. 973,087 ----------- ---------- Total liabilities 11,700,032 - ----------- ---------- Commitments and contingencies (notes 5 and 6) Partners' capital 1,396,824 100 Less notes receivable from partners (173,199) ----------- ---------- Total partners' capital 1,223,625 100 ----------- ---------- Total liabilities and partners' capital 12,923,657 100 ----------- ---------- 3 Essex Hospitality Associates IV L.P. Statement of Income For the Quarter ended September 30, 1996 1996 ---- INCOME - ------ Rooms 56,629 Food and beverage 11,265 Other income 4,313 -------- Total income 72,207 -------- EXPENSES: - --------- Rooms 27,924 Food & beverage expenses 21,148 Commissions expenses 402 Advertising & promotion 12,684 Repairs & maintenance 8,885 Utilities - Administrative & general 9,438 Property taxes - Insurance 1,095 Franchise fees 2,265 Management fees 3,254 Marketing research fees 1,133 Miscellaneous 2,762 -------- Total expenses 90,990 -------- Operating income (18,783) Interest expense 111,187 Interest income (17,541) Partnership management fees 542 Amortization 10,995 -------- Total other expenses 105,183 -------- Net income (123,966) ========= 4 Essex Hospitality Associates IV L.P. Statements of Cash Flows For the Quarters ended September 30, 1996 and 1995 1996 1995 ---- ---- Cash flows from operating activities Cash received from customers 53,310 Cash paid to suppliers (52,775) Interest received 17,551 Interest paid (111,187) ----------- ------------ Net cash from operating activities (93,101) - ----------- ------------ Cash flows from investing activities Payments for land and construction in progress (3,236,046) Payments for deposits 126,756 ----------- ------------ Net cash used in investing activities (3,109,290) - ----------- ------------ Cash flows from financing activities Partners' capital contributions 270,972 100 Payments for syndication costs (30,085) Proceeds from notes payable 277,000 Proceeds from construction loan 3,035,859 Payments for debt acquisition costs (38,032) Payments for organization costs - Payments for distributions (34,488) ----------- ------------ Net cash from financing activities 3,481,226 100 ----------- ------------ Net increase in cash and cash equivalents 278,835 100 Cash and cash equivalents - beginning of quarter 1,354,265 - ----------- ------------ Cash and cash equivalents - end of quarter 1,633,100 100 =========== ============ Reconciliation of net income to net cash flows from operating activities: Net income (123,966) - Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 10,995 - Changes in: Shortterm assets (18,228) - Accounts payable and other expenses 38,098 - ----------- ------------ (93,101) - =========== ============ 5 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 1) Organization Essex Hospitality Associates IV L.P. (the Partnership) is a New York limited partnership formed on August 30, 1995 for the purpose of acquiring land and constructing, owning and operating a series of hotels. The Partnership will also acquire a limited partnership interest in an affiliated partnership, Essex Glenmaura L.P. (Glenmaura), which will construct, own and operate a Courtyard by Marriott hotel near Scranton, Pennsylvania (see note 6). The Partnership may also lend funds to other partnerships that own hotels. The Partnership is financing its activities through a public offering of notes and limited partnership units. The Partnership is in the development stage and is acquiring land in order to construct and operate the hotels. In December 1995, land was purchased in Solon, Ohio and Warwick, Rhode Island in anticipation of the construction of a Hampton Inn and Suites hotel and a Homewood Suites hotel, respectively. In January and March, 1996, a 12.5 unit limited partnership interest was acquired in Essex Glenmaura L.P. The Partnership's general partner is Essex Partners Inc. (Essex Partners), a subsidiary of Essex Investment Group, Inc. (Essex). The following is a general description of the allocation of income, loss, and distributions. For a more comprehensive description see the Partnership Agreement: Allocation 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 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 commission 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. 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 6 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (1) Organization (continued) partners and 1% to the general partner. Loss on the sale of any or all of the hotels will be first allocated in the same manner as losses from operations, except that the allocation of such loss would be made prior to allocations of income from operations. All other losses are allocated 99% to the limited partners and 1% to the general partners. Cash distributions will initially be made 99% to the limited partners and 1% to the general partners. 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 partners. 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 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. The first distribution was made in March, 1996. 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 (see note 5). (2) Summary of Significant Accounting Policies Basis of Accounting The financial statements of the Partnership were prepared on the accrual basis of accounting in conformity with generally accepted accounting principles. Investments in Partnerships Investments in Partnerships with a 50% or less ownership interest will be accounted for by the equity method. Ownership interests exceeding 50% will be accounted for under the consolidated method. The Partnership owns a 54% interest in Essex 7 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (2) Summary of Significant Accounting Policies (continued) Glenmaura L.P. and is accounting for the investment under the consolidated method Investment in Real Estate Investment in real estate is stated at cost. Depreciation will be calculated using the straight-line method over the estimated useful lives of the assets as each hotel commences operations. Cash and Cash Equivalents Cash investments with maturities of three months or less at the time of purchase are considered to be cash equivalents. Deferred Costs Costs of issuing the subordinated notes payable will be amortized on a straight-line basis over the term of the notes. Franchise fees paid for the right to own and operate the hotels will be amortized on a straight-line basis over the term of each franchise agreement, beginning when a hotel is placed in service. Syndication Costs Selling commissions and legal, accounting, printing and other filing costs totaling $283,415 related to the offering of the limited partnership units were charged against the proceeds of the public offering. Income Taxes No provision for income taxes has been provided since any liability is the individual responsibility of the partners. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires the managing general partner to make estimates and assumptions that affect the reported amounts of asset and liabilities and disclosure 8 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (2) Summary of Significant Accounting Policies (continued) of contingent 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. (3) Subordinated Notes Payable Subordinated notes payable bear interest at a rate of 10.5% per annum, payable monthly, and mature December 31, 2001, unless extended by the Partnership to December 31, 2002 upon payment to holders of an extension fee equal to .5% of the principal amount of the subordinated notes outstanding. The notes are issued as unsecured obligations of the Partnership. In accordance with the Partnership agreement, the ratio of gross proceeds from the offering of limited partnership units to total gross proceeds from the offering prior to the termination of the offering may not be less that .15 to 1. As of September 30, 1996, that ratio was .29 to 1. The carrying value of the subordinated notes payable approximates the fair value based on a discounted cash flow analysis using an interest rate currently being offered for loans with similar terms and credit quality. (4) Franchise Fees In 1995, the Partnership entered into a license agreement with Promus Corporation (Promus) to operate a Homewood Suites hotel in Warwick, Rhode Island. An initial franchise fee of $40,000 has been paid. In addition to the initial fee, the Partnership will be required to pay to Promus a monthly royalty fee of 4% of gross room revenues, a monthly marketing/reservation fee of 4% of gross room revenue, an initial software license fee of $3,000 plus $85 per guest room with a monthly maintenance charge of $200 to $350 per month, and a monthly amount equal to any sales tax or similar tax imposed on Promus on payments received under the license agreement. In November 1995, the Partnership entered into a license agreement with Promus to operate a Hampton Inn and Suites hotel for the Solon, Ohio site. An initial franchise fee of $40,000 was paid. In addition to the initial fee, the Partnership will be required to pay to Promus a monthly royalty fee of 4% of gross room revenues, a monthly marketing/reservation fee of 4% of gross room revenue, an initial software license fee of $3,000 plus $85 per guest room with a monthly maintenance charge of 9 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (4) Franchise Fees (continued) $200 to $350 per month and a monthly amount equal to any sales tax or similar tax imposed on Promus on payments received under the license agreement. Promus requires the Partnership to establish a capital reserve escrow account based on a percentage of gross revenues generated by each 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 franchise agreements impose certain restrictions on the transfer of limited partnership units. Promus restricts the sale, pledge or transfer of units in excess of 25% without their consent. (5) Related Party Transactions A summary of fees earned by Essex Partners or its affiliates since inception through September 30, 1996 under the terms of the Partnership agreement follows: Type of Fee Amount of Fee ----------- ------------- Selling Commission Up to $80 per limited partnership unit and $420,277 $55 per $1,000 not sold Organization and 3.4% of the gross proceeds 233,409 Offering Fee of the offering Acquisition Fee $110,000 per hotel site 220,000 Development Fee $160,000 per hotel, plus 5% of the total cost 180,000 ------- of the hotel in excess of $2.7 million (not to exceed $325,000 per hotel) $1,053,686 ========== Organization and offering fees are allocated to syndication costs and debt issuance costs based on the pro-rata share of limited partner's units and notes payable to the total offering: 10 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (5) Related Party Transactions (continued) The above fees are reflected in the accompanying financial statements as follows: Balance Sheet: Investment in real estate $400,000 Deferred debt issuance costs 437,880 Syndication costs, charged to partner's capital 215,806 ------- $1,053,686 ========== Under the terms of the Partnership agreement, Essex Partners or its affiliates will also earn other fees as follows: Type of Fee Amount of Fee ----------- ------------- Investor Relations Fee .25% of the gross proceeds of the offering payable annually in 1998 through 2001 Property Management Fee 4.5% of gross operating revenues from the hotels Partnership Management Fee .75% of gross operating revenues from the hotels Accounting Fee $800 per month Refinancing Fee 1% of the gross proceeds of re-financing any or all of the hotels Sales Fee 3% of the gross sale price of any or all of the hotels The Partnership will also be subject to a number of conflicts of interest arising from its relationships with the general partner, its owners and affiliates and due to other activities and entities in which the general partner and its affiliates have or may have a direct or indirect financial interest. 11 ESSEX HOSPITALITY ASSOCIATES IV L.P (A New York Limited Partnership) Notes to Financial Statements September 30, 1996 (6) Investment in Affiliate - Essex Glenmaura L.P. In January and March, 1996, the Partnership purchased a twelve and one-half unit limited partnership investment in Essex Glenmaura L.P. for $100,000 per unit. The purchase resulted in a 54% equity interest. As of September 30, 1996, Glenmaura completed construction of a Courtyard by Marriott hotel near Scranton, Pennsylvania. The hotel opened on September 4, 1996. Glenmaura has invested $7,998,000 into the land acquisition and construction costs. The financing of the land acquisition, construction costs and all related fees and expenses through September 30 1996 for the hotel project has been funded by $1,500,000 in unsecured notes, construction loan proceeds of $4,213,,000 and $2,300,000 from partner equity. 12 Item 2. Management's Discussion and Analysis or Plan of Operation The Partnership was formed on August 30, 1995. The Partnership's public offering of mortgage notes, subordinated notes and limited partnership units was declared effective on November 24, 1995. Since the effective date, the Partnership has been involved in raising capital, the acquisition and construction of properties and the purchase of limited partnership units in another partnership. The two sites specified in the Prospectus were acquired on December 29, 1995, a 2.535 acre site in Warwick, Rhode Island and a 2.28 acre site in Solon, Ohio. Limited partnership units in another partnership were purchased in the first quarter, 1996. The Partnership expects to begin construction of a 100-room Hampton Inn in Solon, Ohio within the next month with an opening in early summer, 1997. The Partnership had originally intended to build an Hampton Inn & Suites on the site in Solon, Ohio, however, the General Partner concluded that the construction cost of the Hampton Inn & Suites was too high. Based on its knowledge of the Solon market, the General Partner believed a Hampton Inn could be built and operated more successfully. The General Partner secured approval from the Promus Hotel Corporation, the franchisor, to change brand designations. The General Partner expects to secure first mortgage financing from institutional lenders or affiliates of the franchisor, however, no external financing source has issued a commitment to lend funds to the Partnership for construction or permanent financing. The Partnership also invested $1,250,000 in another partnership, Essex Glenmaura L.P. in two purchases in the first quarter of 1996. Essex Glenmaura L.P. just completed construction of a 120-room Marriott Courtyard in Scranton, Pennsylvania, which opened in September, 1996. The total cost of the project is expected to be approximately $8.3 million, which is being funded by $2.3 million of partner equity, $1.5 million of unsecured notes and a $4.5 million construction mortgage loan provided by a bank. The construction loan, which bears interest at prime plus 0.75%, will be replaced by a permanent mortgage loan to be provided by Marriott International Capital Corporation. The permanent loan is expected to close before the end of 1996. The key terms of the permanent loan include a five year term, 20-year amortization period and interest either floating at 325 basis points over the 30-day LIBOR rate or fixed at 325 basis points over the five-year treasury rates. The Partnership owns a 54% equity interest in Essex Glenmaura L.P.. The Partnership's investment in Essex Glenmaura L.P. represented 25% of the Partnership's assets at September 30, 1996. The Partnership had intended to build an 80-room Homewood Suites hotel in Warwick, Rhode Island. However, the Partnership has learned that additional new hotels are planned for the area on the Partnership's site which would be directly competitive with the Partnership's hotel. The Partnership has decided to review the market for the Warwick area again to determine if the market exists to support the additional hotel rooms before proceeding with construction. The Partnership is currently offering subordinated notes and limited partnership units for sale to investors pursuant to the Prospectus. The mortgage notes have not been offered for sale to investors as yet. Through November 6, 1996, $6,808,000 has been raised. Gross offering proceeds of up to $21,000,000 may be raised through the public offering. The Partnership does not have sufficient funds to complete construction of the two specified properties. Although 13 additional funding is not assured, based on the rate funds are being raised, the timing of construction and expected availability of external financing, the Partnership anticipates sufficient funds will be available to pay for construction when required. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX HOSPITALITY ASSOCIATES IV L.P. ------------------------------------ Registrant Dated: November 7, 1996 /s/ Lorrie L. LoFaso --------------------------------------------- Essex Hospitality Associates IV L.P. Essex Partners Inc. Lorrie L. LoFaso Vice President and Chief Accounting Officer