FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-827
EMPIRE STATE BUILDING ASSOCIATES
(Exact name of registrant as specified in its charter)
New York 13-6084254
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
60 East 42nd Street, New York, New York 10165
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 687-8700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
$33,000,000 of Participations in Partnership Interests
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
The aggregate market of the voting stock held by non-affiliates of
the Registrant: Not applicable, but see Items 5 and 10 of this
report.
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not 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-K or any amendment to this
Form 10-K. ___
An Exhibit Index is located on pages through of this report.
Number of pages (including exhibits) in this filing:38 <PAGE>
PART I
Item 1. Business.
(a) General
Registrant is a partnership which was organized on
July 11, 1961. Registrant holds the tenant's interest in a master
operating leasehold of the Empire State Building (the "Building")
and of the land thereunder, located at 350 Fifth Avenue, New York,
New York (collectively, the "Property"). The fee owner of the
Property is Trump Empire State Partners.
The master lease (the "Master Lease"), which commenced
on December 27, 1961, currently expires on January 5, 2013. The
Lease contains three 21-year renewal options, which have not been
exercised. If all of the options are exercised, the Lease will
expire on January 5, 2076. Registrant previously exercised an
option to renew the Lease for the term ending January 5, 2013.
Registrant does not operate the Property. It subleases
the Building to Empire State Building Company (the "Sublessee")
pursuant to a net operating sublease (the "Sublease") with a term
and renewal options essentially coextensive with those contained
in the Master Lease. On January 30, 1989, Sublessee exercised its
option to renew the Sublease for the first renewal term from
January 4, 1992 to January 4, 2013.
Registrant's partners are Stanley Katzman, John L. Loehr
and Peter L. Malkin (individually, a "Partner" and, collectively,
the "Partners") each of whom also acts as an agent for holders of
participations in their respective partnership interests in
Registrant (each holder of a participation, individually, a
"Participant" and, collectively, the "Participants").
Sublessee is a partnership in which Peter L. Malkin is a
partner. Two of the Partners in Registrant are also current
members and one Partner in Registrant is a former, retired member
of the law firm of Wien & Malkin LLP, 60 East 42nd Street, New
York, New York, counsel to Registrant and to Sublessee (the
"Counsel"). See Items 10, 11, 12 and 13 hereof for a description
of the ongoing services rendered by, and compensation paid to,
Counsel and for a discussion of certain relationships which may
pose potential conflicts of interest among Registrant, Sublessee
and certain of their respective affiliates.
As of December 31, 1997, the Building was 88% occupied
by approximately 750 tenants who engage in various businesses,
including the practice of law and accounting, ladies' and men's
apparel, and ladies' and men's shoes. Registrant does not
maintain a full-time staff. See Item 2 hereof for additional
information concerning the Property.<PAGE>
(b) The Lease and Sublease
The annual rent payable by Registrant under the Lease is
$1,970,000 from January 5, 1992 through January 5, 2013 and
$1,723,750 annually during the term of each renewal period
thereafter.
Sublessee is required to pay annual basic rent (the
"Basic Rent") equal to $6,018,750 from January 5, 1992 through
January 4, 2013, and $5,895,625 from January 5, 2013 through the
expiration of all renewal terms. Sublessee is also required to
pay overage rent (the "Overage Rent") equal to 50% of its net
operating profit in excess of $1,000,000 in any year.
Overage Rent income is recognized when earned from the
Sublessee, at the close of the year ending December 31; such
income is not determinable until the Sublessee, pursuant to the
Sublease, renders to Registrant a certified report on the
Sublessee's operation of the Property. The Sublease requires that
this report be delivered to Registrant annually within 60 days
after the end of each such fiscal year. Accordingly, all Overage
Rent income and certain supervisory services expense are reflected
in the fourth quarter of each year. The Sublease does not provide
for the Sublessee to render interim reports to Registrant. See
Note 3 of Notes to Financial Statements filed under Item 8 hereof
(the "Notes") regarding Overage Rent payments by Sublessee for the
fiscal years ended December 31, 1997, 1996 and 1995. There was
Overage Rent of $2,401,300 for the year ended December 31, 1997.
(c) Competition
Pursuant to tenant space leases at the Building, the
average annual base rental payable to Sublessee is approximately
$34 per square foot (exclusive of electricity charges and
escalation) which is at market level as compared to the average
rental rates charged by office buildings offering comparable space
in the immediate vicinity. This is primarily due to a demand for
office space in a building which is considered to have a unique
reputation and a prime location in midtown Manhattan. The
Building is the only major office building in the Fifth Avenue
area between 23rd and 34th Streets. Registrant has been advised
that the average rental rate is approximately $25.50 per square
foot at both 358 Fifth Avenue and 362 Fifth Avenue, which are
neighboring office buildings (containing 12 and 14 stories,
respectively) containing upgraded standard installations, but
lacking comparable views and window space. The average rental
rate at 3 Park Avenue, which contains approximately 35 stories and
is only sixteen years old, is approximately $29 per square foot,
and the average rental rate at 1350 Broadway, which contains 37
stories, is approximately $25 per square foot. Most of these
buildings are about the same age as the Building.
-2-<PAGE>
In the overall rental market for commercial space in
Manhattan, rents range from approximately $60 per square foot for
prime office space to approximately $15 per square foot in less
developed industrial and/or secondary commercial areas.
Accordingly, rents at the Building may be considered competitive
for prime office space in midtown Manhattan, given the relative
condition of surrounding buildings and the nature of services,
amenities and office space offered by them as compared to the
Building.
(d) Tenant Leases
Sublessee operates the Building free from any federal,
state or local government restrictions involving rent control or
other similar rent regulations which may be imposed upon
residential real estate in Manhattan. Any increase or decrease in
the amount of rent payable by a tenant is governed by the
provisions of the tenant's lease.
Item 2. Property.
Registrant owns the tenant's interest in a master
operating leasehold on the Building known as the Empire State
Building and on the land thereunder located at 350 Fifth Avenue in
New York City. See Item 1 hereof. The Building, erected in 1931
and containing 102 stories, a concourse and a lower lobby,
occupies the entire blockfront from 33rd Street to 34th Street on
Fifth Avenue. The Building has 72 passenger elevators and 4
freight elevators and is equipped with air conditioning and
individual air handling units. The Building is subleased to
Sublessee under the Sublease which expires on January 4, 2013 and
contains three 21-year renewal options. See Item 1 hereof for a
description of the terms of the Lease and Sublease.
Item 3. Legal Proceedings.
The Property of Registrant is the subject of the
following pending litigation:
Studley v. Empire State Building Associates: On October
21, 1991, in an action entitled Studley v. Empire State Building
Associates et al., the holder of a $20,000 original participation
in Registrant brought suit in New York Supreme Court, New York
County against the Agents for Registrant (Peter L. Malkin, Donald
A. Bettex and Alvin Silverman), in their individual capacities and
Wien, Malkin & Bettex (currently "Wien & Malkin LLP") counsel to
Registrant. The suit claimed that the defendants had engaged in
breaches of fiduciary duty and acts of self-dealing in relation to
the Agents' solicitation of consents and authorizations from the
participants in Registrant in September 1991 and in relation to
-3-<PAGE>
other unrelated acts of the Agents and the sublessee. By order
dated July 14, 1997, and entered July 29, 1997, the Court granted
defendants' motion for summary judgment and dismissal of the
action. The Plaintiff filed an appeal with respect to the
foregoing order. By decision and order entered April 2, 1998, the
Appellate Court unanimously affirmed the order dismissing the
action.
Proceedings Involving Trump Empire State Partners: In
December 1994, Registrant received a notice of default from Trump.
The Trump default notice to Registrant claimed that Registrant was
in violation of its master lease because of extensive work which
Sublessee had undertaken as part of an improvement program that
commenced before Trump reportedly acquired its interest in the
property in 1994. Trump's notice also complained that the
Building was in need of repairs. On February 14, 1995, Registrant
and Sublessee filed an action in New York State Supreme Court
against Trump for a declaratory judgment that none of the matters
set forth in the notice of default constitutes a violation of the
master lease or sublease, and that the notice of default is
entirely without merit. Registrant's and Sublessee's suit also
seeks an injunction to prevent Trump from implementing the notice
of default. On March 24, 1995, the Court granted Registrant a
preliminary injunction against Trump. In 1996 the Court granted
two additional preliminary injunctions against Trump with respect
to two additional default notices. The preliminary injunctions
prohibit Trump from acting on its notices of default to Registrant
at any time, pending the prosecution of claims by Registrant and
Sublessee for a final declaratory judgment and an injunction and
other relief against the Trump defendants. The Appellate Court
has upheld and affirmed the granting of such preliminary
injunctions against the Trump defendants.
On February 15, 1995, Trump filed an action against
Registrant, Sublessee, Counsel, Harry B. Helmsley, a partner in
Sublessee, Helmsley-Spear, Inc. (the management company of the
Empire State Building), and the Agents for Registrant in New York
State Supreme Court, alleging that the notice of default is valid
and seeking damages and related relief based thereon. On October
24, 1996 the Court dismissed all of Trump's claims in their
entirety against all defendants in the action. Trump appealed
this Order. The Appellate Court has unanimously affirmed the
dismissal of Trump's claims.
In May, 1995, Registrant and Sublessee filed a separate
legal action against Trump and various affiliated persons for
breach of the master lease and sublease, and disparagement of the
property in violation of Registrant' and Sublessee's leasehold
rights. The action was amended to include additional claims by
Registrant and Sublessee seeking a declaratory judgment that they
-4-<PAGE>
may act as an owner of the Property for purposes of making
applications and related activities pursuant to the New York City
Building Code. By decision and order dated October 24, 1996, the
Court sustained Registrant's and Sublessee's claims concerning the
parties who may act as owner of the Property under the Building
Code, but dismissed Registrant's and Sublessee's claims against
Trump and co-defendants for money damages. Registrant and
Sublessee appealed that portion of the Court's order dismissing
their claims for money damages. The Appellate Court has affirmed
that part of the Court's order dismissing the claims for money
damages.
New York Skyline Inc.: Registrant is a defendant in an
action instituted in the Supreme Court of the State of New York,
County of New York, entitled New York Skyline Inc. v. Empire State
Building Company, Empire State Building Associates, Nell H.
Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit,
which was brought by a tenant in the Building and was filed on
December 23, 1997, seeks at least $205,000,000 in damages. In its
complaint, plaintiff-tenant asserts thirteen causes of action
(twelve of which are against Sublessee) in connection with its
leases and license agreements of space in the Building and alleges
that it is entitled to, among other things, specific performance
as to its alleged rights under its leases and licensing agreements
with Sublessee, a declaratory judgment as to the rights of the
parties under the leases and licensing agreements, any monies
allegedly due plaintiff under those agreements, as well as
injunctive relief and additional money damages. While the
complaint includes Registrant as a named defendant, it does not
allege or identify any agreement between plaintiff and Registrant
or any other basis of liability on Registrant's part to plaintiff.
On or about February 5, 1998, plaintiff served an
amended complaint which, among other things, added Kessner &
Cyruli, f/k/a Nell H. Kessner & Associates, former landlord-tenant
counsel for the Building, and Eileen Aluska, a former Helmsley-
Spear, Inc. employee, as party defendants. The amended complaint
asserts eleven causes of action, similar to those asserted in the
original complaint.
On March 16, 1998, Registrant filed an answer to the
amended complaint denying all allegations of liability.
Registrant intends to contest the case vigorously.
Because the action is still in the pleading stage and
pre-trial discovery has not yet started, counsel for Registrant
has not formed a professional conclusion that an adverse outcome
is either probable or remote.
-5-<PAGE>
Wien & Malkin LLP, et. al. v. Helmsley-Spear, Inc., et.
al. On June 19, 1997 Wien & Malkin LLP and Peter L. Malkin filed
an action in the Supreme Court of the State of New York, against
Helmsley-Spear, Inc. and Leona Helmsley concerning various
partnerships which own, lease or operate buildings managed by
Helmsley-Spear, Inc., including Registrant's property. In their
complaint, plaintiffs sought the removal of Helmsley-Spear, Inc.
as managing and leasing agent for all of the buildings.
Plaintiffs also sought an order precluding Leona Helmsley from
exercising any partner management powers in the partnerships. In
August, 1997, the Supreme Court directed that the foregoing claims
proceed to arbitration. As a result, Mr. Malkin and Wien & Malkin
LLP filed an arbitration complaint against Helmsley-Spear, Inc.
and Mrs. Helmsley before the American Arbitration Association.
Helmsley-Spear, Inc. and Mrs. Helmsley served answers denying
liability and asserting various affirmative defenses and
counterclaims; and Mr. Malkin and Wien & Malkin LLP filed a reply
denying the counterclaims. By agreement dated December 16, 1997,
Mr. Malkin and Wien & Malkin LLP (each for their own account and
not in any representative capacity) reached a settlement with
Mrs. Helmsley of the claims and counterclaims in the arbitration
and litigation between them. Mr. Malkin and Wien & Malkin LLP are
continuing their prosecution of claims in the arbitration for
relief against Helmsley-Spear, Inc., including its termination as
the leasing and managing agent for various entities and
properties, including the Registrant's Sublessee.
Item 4. Submission of Matters to a Vote of Participants.
During the fourth quarter of the fiscal year ended
December 31, 1997, Registrant did not submit any matter to a vote
by the Participants through the solicitation of proxies or
otherwise.
-6-<PAGE>
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.
Registrant is a partnership organized pursuant to a
partnership agreement dated as of July 11, 1961.
Registrant has not issued any common stock. The securi-
ties registered by it under the Securities Exchange Act of 1934,
as amended, consist of participations in the partnership interests
of the Partners in Registrant (the "Participations") and are not
shares of common stock nor their equivalent. The Participations
represent each Participant's fractional share in a Partner's
undivided interest in Registrant and are divided approximately
equally among the Partners. A full unit of the Participations was
offered originally at a purchase price of $10,000; fractional
units were also offered at proportionate purchase prices.
Registrant has not repurchased Participations in the past and is
not likely to change that policy in the future.
(a) The Participations neither are traded on an
established securities market nor are readily tradable on a
secondary market or the substantial equivalent thereof. Based on
Registrant's transfer records, Participations are sold by the
holders thereof from time to time in privately negotiated
transactions and, in many instances, Registrant is not aware of
the prices at which such transactions occur. During the past year
there were 169 transfers. In 21 instances, the indicated purchase
price was equal to 1.5 times the face amount of the participation
transferred, i.e., $15,000 for a $10,000 participation. In seven
instances, the indicated purchase price was equal to 2.25 times
the face amount of the Participation transferred. In one
instance, the purchase price was equal to 1.7 times the face
amount of the participation transferred. In all other cases, no
consideration was indicated.
(b) As of December 31, 1997, there were 2,622 holders
of Participations of record.
(c) Registrant does not pay dividends. During the year
ended December 31, 1997, Registrant made regular monthly
distributions of $98.21 for each $10,000 Participation. There was
Overage Rent payable of $2,401,300 for the year ended December 31,
1997 and Registrant made additional distributions for each $10,000
Participation of $321.61 on March 5, 1998. See Item 1 hereof.
There are no restrictions on Registrant's present or future
ability to make distributions; however, the amount of such distri-
butions, particularly distributions of Overage Rent, depends
solely on Sublessee's ability to make payments of Basic Rent and
-7-<PAGE>
Overage Rent to Registrant. See Item 1 hereof. Registrant
expects to make monthly distributions in the future so long as it
receives the payments provided for under the Sublease. See Item 7
hereof.
-8-<PAGE>
Item 6.
EMPIRE STATE BUILDING ASSOCIATES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Basic rent income.... $6,018,750 $6,018,750 $6,018,750 $6,018,750 $ 6,018,750
Overage rent income.. 2,401,300 0 0 3,597,887 7,712,818
Dividend income...... 10,377 8,647 35,556 39,667 60,657
Total revenues.... $8,430,427 $6,027,397 6,054,306 $9,656,304 $13,792,225
Net income............ $4,752,560 $3,689,511 $3,716,420 $7,100,005 $10,987,930
Earnings per $10,000
participation unit,
based on 3,300
participation units
outstanding during
the year............. $ 1,440 $ 1,118 $ 1,126 $ 2,152 $ 3,330
Total assets.......... $5,930,702 $3,727,494 $3,927,316 $7,527,783 $11,620,333
Long-term obligations. $ -0- $ -0- $ -0- $ -0- $ -0-
Distributions per $10,000
participation unit, based
on 3,300 participation
units outstanding
during the year:
Income............. $ 1,179 $ 1,118 $ 1,126 $ 2,152 $ 3,330
Return of capital.. -0- 61 1,089 1,241 1,586
Total distributions.$ 1,179 $ 1,179 $ 2,215 $ 3,393 $ 4,916
</TABLE>
-9-<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Registrant was organized solely for the purposes of
owning the Property described in Item 2 hereof subject to the
Sublease. Registrant is required to pay from Basic Rent the
amounts due for supervisory services and to distribute the balance
of such rental payments to Participants. Registrant is required
to pay from Overage Rent additional amounts for supervisory
services and then to distribute the balance of such Overage Rent
to the Participants. Pursuant to the Sublease, Sublessee has
assumed sole responsibility for the condition, operation, repair,
maintenance and management of the Building. Registrant need not
maintain substantial reserves or otherwise maintain liquid assets
to defray any operating expenses of the Property.
The supervisory services provided to Registrant by
Counsel include legal, administrative services and financial
services. The legal and administrative services include acting as
general counsel to Registrant, maintaining all of its partnership
records, performing physical inspections of the Building,
reviewing insurance coverage and conducting annual partnership
meetings. Financial services include monthly receipt of rent from
the Sublessee, payment of monthly rent to the fee owner, payment
of monthly and additional distributions to the Participants,
payment of all other disbursements, confirmation of the payment of
real estate taxes, and active review of financial statements
submitted to Registrant by the Sublessee and financial statements
audited by and tax information prepared by Registrants'
independent certified public accountant, and distribution of such
materials to the Participants. Counsel also prepares quarterly,
annual and other periodic filings with the Securities and Exchange
Commission and applicable state authorities and distributes to the
Participants quarterly source of distribution reports.
Registrant's results of operations are affected
primarily by the amount of rent payable to it under the Sublease.
The amount of Overage Rent payable to Registrant is affected by
(i) the cycles in the New York City economy and real estate rental
market and (ii) the cost of the Property improvement program
described herein under Other Information. It is difficult for
management to forecast the New York City real estate market over
the next few years.
A decrease as compared with a prior year or the absence
of Overage Rent results in a reduction as against such prior year
in the dollar amount of distributions made to the Participants and
a reduction in the expenditure for supervisory services.
Reductions in the amount of Overage Rent paid to Registrant in the
future will not have any other impact on Registrant. See
paragraph 1 of Item 7 hereof and Notes 3, 4, 5, and 7 of the
Notes.
-10-<PAGE>
The following summarizes the material factors affecting
Registrant's results of operations for the three preceding years:
(a) Total income increased for the year ended December 31, 1997
as compared with the year ended December 31, 1996. Such
increase resulted from the receipt of Overage Rent in the
year 1997 and an increase in dividend income earned as
compared with the year ended December 31, 1996. Total income
decreased for the year ended December 31, 1996 as compared
with the year ended December 31, 1995 because of a reduction
in dividend income earned. See Note 3 of the Notes.
(b) Total expenses increased for the year ended December 31, 1997
as compared with the year ended December 31, 1996. Such
increase was the result of an increase in additional payment
for supervisory services because of the receipt of Overage
Rent and the incurrence of legal fees during the year ended
December 31, 1997. Total expenses were the same for the
years ended December 31, 1996 and December 31, 1995. See
Notes 3, 5 and 9 of the Notes.
The State of New York has asserted utility tax
deficiencies through December 31, 1992 in connection with water,
steam and non-metered electricity rent inclusion charges to
tenants, plus estimated accrued interest. The Supreme Court, New
York County, granted summary judgment in favor of the State, which
ruling was affirmed by the Appellate Division, First Department,
holding that the State utility tax applies to such inclusion
charges. Sublessee sought permission to appeal the Appellate
Division's decision and order to the Court of Appeals. The Court
of Appeals denied Sublessee's motion. In May, 1996, Sublessee
entered into a settlement agreement with the State. Pursuant to
the terms of the settlement agreement, Sublessee agreed to pay the
State's assessed tax in the sum of $979,109, plus interest of
approximately $605,000 through July 31, 1996. The State has
agreed to payment of the aforesaid liability over a period of four
years, commencing August, 1996, in equal monthly installments of
$40,000, including interest on the unpaid balance at the statutory
rate. Installment payments to the State of $40,000 per month have
been made by Sublessee commencing on August 1, 1996. It is
anticipated that New York State will seek to impose liability on
Sublessee for State utility tax for periods after December 31,
1992. The amount of such additional tax has yet to be determined.
The City of New York has asserted a utility tax
deficiency in the amount of $277,125 against Sublessee, through
December 31, 1994, in connection with water, steam and non-metered
electricity rent inclusion charges to tenants, plus accrued
interest of approximately $163,012 through December 31, 1997.
Sublessee is contesting the calculation of the City's proposed
utility tax deficiency before the New York City Tax Appeals
Tribunal. The final outcome of Sublessee's appeal cannot
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presently be determined. It is anticipated that New York City
will seek to impose liability on Sublessee for additional New York
City utility tax for periods after December 31, 1994. The amount
of such additional tax has yet to be determined.
Liquidity and Capital Resources
There has been no significant change in Registrant's
liquidity or capital resources for the fiscal year ended
December 31, 1997 as compared with the fiscal year ended
December 31, 1996.
Inflation
Inflationary trends in the economy do not directly
impact Registrant's operations. As noted above, Registrant does
not actively engage in the operation of the Property. Inflation
may impact the operations of the Sublessee. The Sublessee is
required to pay the Basic Rent regardless of the results of its
operations. Inflation and other operating factors affect only the
amount of Overage Rent payable by the Sublessee, which is based on
the Sublessee's net operating profit.
Other Information
The Sublessee maintains the Building as a high-class
office building as required by the terms of the Sublease.
In 1990, the Sublessee commenced its latest improvement
program which is estimated to be completed in 1999 at a total cost
of approximately $68,000,000. Under this program, approximately
6,400 windows are being replaced and this portion of the program
is completed. In addition, the elevators have been upgraded
through installation of a computerized control system and the
replacement of all electrical and mechanical equipment. The
elevator modernization program has increased elevator speed from
800 to 950 feet per minute to 1200 feet per minute. Also included
is waterproofing the Building's exterior, resetting and repairing
the limestone facade, upgrading the Building's security system,
upgrading and replacing the Building's fire safety system and
making substantial further improvement to the air-conditioning,
domestic pump and water systems, waterproofing the mooring mast
and installing a new observation deck ticket office.
The Sublessee anticipates that the costs of improvements
to be incurred will reduce Overage Rent during the years 1998 and
1999, but should have no effect on the payment of Basic Rent in
those years.
Under Sublessee's management, the Building recently won
three awards from the Building Owners and Management Association
("BOMA") (BOMA/NY Award 1989; BOMA Middle Atlantic Region Award
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1990/91 and the BOMA International Award for excellence 1992/93).
The New York Landmarks Conservancy recently awarded a Merit
Citation to the Building. In 1994, Metaloptics recognized the
Building for excellence in lighting efficiency. In December 1994,
Energy User News, a national publication, awarded a Certificate of
Merit in the lighting category for excellence and innovation in
energy efficiency and management of the Building.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the accompanying
report by, and the consent to the use thereof by Jacobs Evall &
Blumenfeld LLP, immediately following, are being filed in response
to this item.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
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PART III
Item 10. Directors and Executive Officers of Registrant.
Registrant has no directors or officers or any other
centralization of management. There is no specific term of office
for any Partner. The table below sets forth as to each Partner as
of December 31, 1997 the following: name, age, nature of any
family relationship with any other Partner, business experience
during the past five years and principal occupation and employment
during such period, including the name and principal business of
any corporation or any organization in which such occupation and
employment was carried on and the date such individual became a
Partner:
Principal Date
Nature of Occupation Individual
Family Business and became
Name Age Relationship Experience Employment Partner
Stanley Katzman 65 None Attorney-at-Law Senior Partner 1996
Wien & Malkin
LLP,
Counsellors-
at-Law
John L. Loehr 61 None Attorney-at-Law Retired former 1996
Senior Partner
Wien & Malkin
LLP,
Counsellors-
at-Law
Peter L. Malkin 64 None Attorney-at-Law Senior Partner 1961
Wien & Malkin
LLP,
Counsellors-
at-Law
As stated above, two of the Partners are current members
of Counsel and one Partner is now a retired former member of
Counsel. See Items 1, 11, 12 and 13 hereof for a description of
the services rendered by, and the compensation paid to, Counsel
and for a discussion of certain relationships which may pose
actual or potential conflicts of interest among Registrant,
Sublessee and certain of their respective affiliates.
The names of entities which have a class of securities
registered pursuant to Section 12 of the Securities Exchange Act
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of 1934 or are subject to the requirements of Section 15(d) of
that Act, and in which the Partners are either a director, joint
venturer or general partner are as follows:
Stanley Katzman is a joint venturer in 250 West 57th St.
Associates and Navarre-500 Building Associates; and a
general partner in Garment Capitol Associates and 60
East 42nd St. Associates.
John L. Loehr is a general partner in Garment Capitol
Associates and 60 East 42nd St. Associates.
Peter L. Malkin is a joint venturer in 250 West 57th St.
Associates and Navarre-500 Building Associates and a
general partner in Garment Capitol Associates and 60
East 42nd St. Associates.
Item 11. Executive Compensation.
As stated in Item 10 hereof, Registrant has no directors
or officers or any other centralization of management.
No remuneration was paid during the current fiscal year
ended December 31, 1997 by Registrant to any of the Partners as
such. Registrant pays Counsel, for supervisory services and
disbursements, fees of $100,000 per annum plus 6% of all sums
distributed to the Participants in excess of 9% per annum on their
original cash investment. Pursuant to such arrangements described
herein, Registrant paid Counsel a total of $227,161 (consisting of
$100,000 as an annual basic payment for supervisory services and
$127,161 as an additional payment for supervisory services) for
supervisory services rendered during the fiscal year ended
December 31, 1997. The supervisory services include, among other
items, the preparation of reports and related documentation
required by the Securities and Exchange Commission, the monitoring
of all areas of federal and local securities law compliance, the
preparation of certain financial reports, as well as the
supervision of accounting and other documentation related to the
administration of Registrant's business. See Item 7 hereof. Out
of its fees, Counsel paid all disbursements and costs of regular
accounting services. As noted in Items 1 and 10 of this report,
the Partners are also members of Counsel.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
(a) Registrant has no voting securities. See
Item 5 hereof. At December 31, 1997, no person owned of record or
was known by Registrant to own beneficially more than 5% of the
outstanding Participations.
-15-<PAGE>
(b) At December 31, 1997, the Partners (see
Item 10 hereof) beneficially owned, directly or indirectly, the
following Participations:
Name & Address Amount of
of Beneficial Beneficial Percent
Title of Class Owners Ownership of Class
Participations John L. Loehr $ 40,000 .1212%
in Partnership 286 Alpine Circle
Interests Rivervale, NJ 07675
Peter L. Malkin $138,750 .4205%
21 Bobolink Lane
Greenwich, CT 06830
At such date, certain of the Partners (or their
respective spouses) held additional Participations as follows:
Stanley Katzman owned of record as trustee but not
beneficially $27,500 of Participations. Mr. Katzman
disclaims any beneficial ownership of such
Participations.
Peter L. Malkin owned of record as trustee or
co-trustee but not beneficially, $175,000 of
Participations. Mr. Malkin disclaims any beneficial
ownership of such Participations.
Isabel W. Malkin, the wife of Peter L. Malkin,
owned of record and beneficially, $153,333.34 of
Participations. Mr. Malkin disclaims any beneficial
ownership of such Participations.
(c) Not applicable.
Item 13. Certain Relationships and Related Transactions.
(a) As stated in Item 1 hereof, Mr. Stanley
Katzman, Mr. John L. Loehr and Mr. Peter L. Malkin are the three
Partners of Registrant and also act as agents for the Participants
in their respective partnership interests. Mr. Malkin is also a
partner in Sublessee. As a consequence of one of the three
Partners being a partner in Sublessee, two of the Partners being
current members of Counsel and one Partner being a retired, former
member of Counsel (which represents Registrant and Sublessee),
certain actual and potential conflicts of interest may arise with
respect to the management and administration of the business of
Registrant. However, under the respective participating
agreements pursuant to which the Partners act as agents for the
Participants, certain transactions require the prior consent from
-16-<PAGE>
Participants owning a specified interest under the agreement in
order for the agents to act on their behalf. Such transactions
include modifications and extensions of the Sublease, or a sale or
other disposition of the Property or substantially all of
Registrant's other assets.
Reference is made to Items 1 and 2 hereof for a
description of the terms of the Sublease between Registrant and
Sublessee. The respective interests of the Partners in Registrant
and in the Sublease arise solely from ownership of their
respective participations in Registrant and, in the case of
Mr. Malkin, his ownership of a partnership interest in Sublessee.
The Partners receive no extra or special benefit not shared on a
pro rata basis with all other security holders of Registrant or
partners in Sublessee. However, two of the Partners, by reason of
their respective interest in Counsel, are entitled to receive
their pro rata share of any legal fees or other remuneration paid
to Counsel for professional services rendered to Registrant and
Sublessee. See Item 11 hereof for a description of the
remuneration arrangements between Registrant and Counsel relating
to supervisory services provided by Counsel.
Reference is also made to Items 1 and 10 hereof for
a description of the relationship between Registrant and Counsel,
of which two of the Partners are among its current members. The
interest of each Partner in any remuneration paid or given by
Registrant to Counsel arise solely from the ownership of such
Partner's interest in Counsel. See Item 11 hereof for a
description of the remuneration arrangements between Registrant
and Counsel relating to supervisory services provided by Counsel.
(b) Reference is made to Paragraph (a) above.
(c) Not applicable.
(d) Not applicable.
-17-<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.
(a)(1) Financial Statements:
Consent of Jacobs Evall & Blumenfeld LLP, Certified
Public Accountants, dated March 12, 1998.
Accountant's Report of Jacobs Evall & Blumenfeld LLP,
Certified Public Accountants, dated March 4, 1998.
Balance Sheets at December 31, 1997 and at December 31,
1996 (Exhibit A).
Statements of Income for the fiscal years ended
December 31, 1997, 1996 and 1995 (Exhibit B).
Statement of Partners' Capital for the fiscal year ended
December 31, 1997 (Exhibit C-1).
Statement of Partners' Capital for the fiscal year ended
December 31, 1996 (Exhibit C-2).
Statement of Partners' Capital for the fiscal year ended
December 31, 1995 (Exhibit C-3).
Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995 (Exhibit D).
Notes to Financial Statements for the fiscal years ended
December 31, 1997, 1996 and 1995.
(2) Financial Statement Schedules:
List of Omitted Schedules.
Real Estate and Accumulated Depreciation - December 31,
1997 (Schedule III).
(3) Exhibits: See Exhibit Index.
(b) No Form 8-K was filed by Registrant for the final
quarter of 1997.
-18-<PAGE>
[LETTERHEARD OF
JACOBS EVALL & BLUMENFELD LLP
CERTIFIED PUBLIC ACCOUNTANTS]
March 12, 1998
Empire State Building Associates
New York, N. Y.
We consent to the use of our independent accountants' report dated
March 4, 1998 covering our audits of the accompanying financial
statements of Empire State Building Associates in connection with and as
part of your December 31, 1997 annual report (Form 10-K) to the
Securities and Exchange Commission.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
-19-<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in Empire State Building Associates
(a Partnership)
New York, N. Y.
We have audited the accompanying balance sheets of Empire State Building
Associates ("Associates") as of December 31, 1997 and 1996, and the related
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1997, and the supporting financial
statement schedule as contained in Item 14(a)(2) of this Form 10-K. These
financial statements and schedule are the responsibility of Associates'
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 Empire State Building
Associates as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles, and the
related financial statement schedule, when considered in relation to the basic
financial statements, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 9 to the financial statements, Associates has been
included as a defendant in actions with other related parties, including the
Agents for Associates and Empire State Building Company, the sublessee.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
New York, N. Y.
March 4, 1998
-20-<PAGE>
EXHIBIT A
EMPIRE STATE BUILDING ASSOCIATES
BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 10):
The Chase Manhattan Bank........................... $ 2,988 $ 2,888
Distribution account held by
Wien & Malkin LLP................................... 324,111 324,111
Fidelity U.S. Treasury Income Portfolio............. 51,430 41,153
Additional rent advance account
held by Wien & Malkin LLP.......................... 2,400,000 -
2,778,529 368,152
Additional rent due from Empire State
Building Company, a related party.................... 1,300 -
Prepaid rent.......................................... 23,831 23,831
TOTAL CURRENT ASSETS............................ 2,803,660 391,983
Real Estate (Note 2):
Leasehold on Empire State Building,
350 Fifth Avenue, New York, N. Y..................... 39,000,000 39,000,000
Less: Accumulated amortization..................... 35,872,958 35,664,489
3,127,042 3,335,511
TOTAL ASSETS....................................$ 5,930,702 $ 3,727,494
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accrued legal fees, to a related party (Note 9).......$ 1,272,237 $ -
Accrued supervisory services, to a related party
(Note 5) 67,744 -
TOTAL LIABILITIES......................... 1,339,981 -
Contingencies (Note 9)............................
Partners' Capital (Exhibit C)...................... 4,590,721 3,727,494
TOTAL LIABILITIES AND PARTNERS' CAPITAL.... $ 5,930,702 $ 3,727,494
</TABLE>
See accompanying notes to financial statements.
-21-<PAGE>
EXHIBIT B
EMPIRE STATE BUILDING ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Rent income, from a related party (Note 3). $8,420,050 $6,018,750 $6,018,750
Dividend income............................ 10,377 8,647 35,556
8,430,427 6,027,397 6,054,306
Expenses:
Leasehold rent (Note 4).................... 1,970,000 1,970,000 1,970,000
Supervisory services, to a related
party (Note 5)............................ 227,161 159,417 159,417
Legal fees, to a related party (Note 9).... 1,272,237 - -
Amortization of leasehold (Note 2)......... 208,469 208,469 208,469
3,677,867 2,337,886 2,337,886
NET INCOME, CARRIED TO PARTNERS'
CAPITAL, (NOTE 8)............... $4,752,560 $3,689,511 $3,716,420
Earnings per $10,000 participation unit, based
on 3,300 participation units outstanding
during each year............................ $ 1,440 $ 1,118 $ 1,126
</TABLE>
See accompanying notes to financial statements.
-22-<PAGE>
EXHIBIT C-3
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Capital Capital
January 1, Share of December 31,
1995 net income Distributions 1995
<S> <C> <C> <C> <C>
Donald A. Bettex Group.... $2,506,510 $1,238,806 $2,436,211 $1,309,105
C. Michael Spero Group
(formerly Alvin
Silverman Group)........ 2,506,510 1,238,807 2,436,211 1,309,106
Peter L. Malkin Group..... 2,506,510 1,238,807 2,436,212 1,309,105
$7,519,530 $3,716,420 $7,308,634 $3,927,316
</TABLE>
See accompanying notes to financial statements.
-23-<PAGE>
EXHIBIT C-1
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Capital Capital
January 1, Share of December 31,
1997 net income Distributions 1997
<S> <C> <C> <C> <C>
John L. Loehr Group........ $1,242,498 $1,584,187 $1,296,444 $1,530,241
Stanley Katzman Group...... 1,242,498 1,584,187 1,296,445 1,530,240
Peter L. Malkin Group...... 1,242,498 1,584,186 1,296,444 1,530,240
$3,727,494 $4,752,560 $3,889,333 $4,590,721
</TABLE>
See accompanying notes to financial statements.
-24-<PAGE>
EXHIBIT C-2
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Capital Capital
January 1, Share of December 31,
1996 net income Distributions 1996
<S> <C> <C> <C> <C>
John L. Loehr Group
(formerly Donald A.
Bettex Group)............$1,309,105 $1,229,837 $1,296,444 $ 1,242,498
Stanley Katzman Group
(formerly C. Michael
Spero Group)............. 1,309,106 1,229,837 1,296,445 1,242,498
Peter L. Malkin Group...... 1,309,105 1,229,837 1,296,444 1,242,498
$3,927,316 $3,689,511 $3,889,333 $3,727,494
</TABLE>
See accompanying notes to financial statements.
-25-<PAGE>
EXHIBIT D
EMPIRE STATE BUILDING ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 4,752,560 $3,689,511 $ 3,716,420
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of leasehold........... 208,469 208,469 208,469
Changes in operating assets
and liabilities:
Additional rent due from Empire State
Building Company, a related party. (1,300) - 97,887
Accrued supervisory services,
to a related party................. 67,744 - (8,253)
Accrued legal fees, to a related
party 1,272,237 - -
Net cash provided by
operating activities............ 6,299,710 3,897,980 4,014,523
Cash flows from financing activities:
Cash distributions................ .... (3,889,333) (3,889,333) (7,308,634)
Net cash used in financing
activities..................... (3,889,333) (3,889,333) (7,308,634)
Net increase (decrease) in cash
and cash equivalents........... 2,410,377 8,647 (3,294,111)
Cash and cash equivalents, beginning of year. 368,152 359,505 3,653,616
CASH AND CASH EQUIVALENTS, END
OF YEAR.................... $ 2,778,529 $ 368,152 $ 359,505
</TABLE>
See accompanying notes to financial statements.
-26-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Activity
Empire State Building Associates ("Associates") is a general partnership
which holds the tenant's position in the master leasehold of the Empire
State Building, located at 350 Fifth Avenue, New York City. Associates
subleases the property to Empire State Building Company ("Company").
2. Summary of Significant Accounting Policies
a. Cash and Cash Equivalents:
Cash and cash equivalents include investments in money market funds
and all highly liquid debt instruments purchased with a maturity of
three months or less.
b. Real Estate and Amortization of Leasehold:
Real estate, consisting of a leasehold, is stated at cost. In 1988,
Associates determined that it would exercise its first renewal option
under the lease, and did so in January 1989. Amortization of the
leasehold is being computed by the straight-line method over the
estimated useful life of 25 years, from January 1, 1988 to January 5,
2013 (see Note 4).
c. Use of Estimates:
In preparing financial statements in conformity with generally
accepted accounting principles, management often makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3. Related Party Transactions - Rent Income
Rent income for the years ended December 31, 1997, 1996 and 1995, totalling
$8,420,050, $6,018,750 and $6,018,750, respectively, consists of the
minimum annual rent plus additional rent under an operating sublease dated
December 27, 1961, as modified February 15, 1965, with Company (the
"Sublessee"), as follows:
Year ended December 31,
1997 1996 1995
Minimum net basic rent...... $6,018,750 $6,018,750 $ 6,018,750
Additional rent earned...... 2,401,300 - -
$8,420,050 $6,018,750 $ 6,018,750
-27-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. Related Party Transactions - Rent Income (continued)
The sublease provides for the same initial term and renewal options as the
leasehold (see Note 4), less one day. In January 1989, the Sublessee
exercised its option to renew the sublease for the first renewal period
from January 4, 1992 to January 4, 2013. The annual minimum net basic rent
during the first renewal term was reduced to $6,018,750, and is to be
further reduced to $5,895,625 during each of the remaining three renewal
terms.
Additional rent earned is equal to fifty percent of the sublessee's annual
net income (as defined in the sublease) in excess of $1,000,000.
A partner in Associates is also a partner in the Sublessee.
4. Leasehold Rent
Leasehold rent represents the net basic rent of $1,970,000 per annum under
an operating lease dated December 27, 1961, as modified February 15, 1965,
with The Prudential Insurance Company of America ("Prudential"), over the
first renewal term of the lease, 21 years, from January 5, 1992 to January
5, 2013.
The lease contains options for Associates to renew the leasehold for an
additional 3 successive periods of 21 years each. The basic rent is to
be further reduced to $1,723,750 per annum during each of the remaining
three renewal terms.
On November 27, 1991, Prudential sold the property to E.G. Holding Co.,
Inc. which, through merger and conveyance, reportedly transferred its
interest as lessor to Trump Empire State Partners (see Note 9b).
Associates' rights under the master leasehold remain unchanged.
5. Related Party Transactions - Supervisory Services
Supervisory services (including disbursements and cost of regular
accounting services) during the years ended December 31, 1997, 1996
and 1995, totalling $227,161, $159,417 and $159,417, respectively,
represent fees paid to the firm of Wien & Malkin LLP. Some members
of that firm are partners in Associates.
Fees for supervisory services are paid pursuant to an agreement,
which amount is based on a rate of return of investment achieved
by the participants in Associates each year.
-28-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. Number of Participants
There were approximately 2,620 participants in the participating groups
at December 31, 1997, 1996 and 1995.
7. Determination of Distributions to Participants
Distributions to participants in 1997, 1996 and 1995 of $3,889,333,
$3,889,333 and $7,308,634, respectively, represented the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Minimum annual rent.. $ 6,018,750 $ 6,018,750 $ 6,018,750
Additional rent,
earned in
previous year,
distributed in
current year........ - - 3,597,887
Dividend income
earned in previous
year, distributed
in current year..... - - 39,667
6,018,750 6,018,750 9,656,304
Less:
Leasehold rent
expense......... $1,970,000 $1,970,000 $1,970,000
Supervisory
services paid... 159,417 159,417 377,670
2,129,417 2,129,417 2,347,670
Distributions
to participants.. $ 3,889,333 $ 3,889,333 $ 7,308,634
</TABLE>
-29-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. Distributions and Amount of Income per $10,000 Participation Unit
Distributions per $10,000 participation unit during the years 1997, 1996
and 1995 based on 3,300 participation units outstanding during each year,
consisted of the following:
Year ended December 31,
1997 1996 1995
Income........................ $1,179 $1,118 $1,126
Return of capital............. - 61 1,089
TOTAL DISTRIBUTIONS....... $1,179 $1,179 $2,215
Net income is computed without regard to income tax expense since Associates
does not itself pay a tax on its income; instead, any such taxes are paid
by the participants in their individual capacities.
9. Litigation, Legal Fees and Related Party Transactions and Subsequent Event
a. On October 21, 1991, in an action entitled Studley v. Empire State
Building Associates et al., the holder of a $20,000 original participation
in Associates brought suit in New York Supreme Court, New York County
against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and
Alvin Silverman), in their individual capacities and Wien, Malkin & Bettex
(currently "Wien & Malkin LLP"), counsel to Associates. The suit claims
that the defendants had engaged in breaches of fiduciary duty and acts of
self-dealing in relation to the Agents' solicitation of consents and
authorizations from the participants in Associates in September 1991
and in relation to other unrelated acts of the Agents and the sublessee.
By order dated July 14, 1997, the Court granted defendants' application
for summary judgment and dismissal of the action. Plaintiff's appeal of
the dismissal is pending. Associates is a nominal defendant and the
complaint does not seek any direct relief from it; accordingly, no loss
or other unfavorable outcome of the action against Associates is
anticipated.
b. In December 1994, Associates received a notice of default from Trump
Empire State Partners (Note 4) ("Trump"). The Trump default notice to
Associates claims that Associates was in violation of its master lease
because of extensive work which Company, the sublessee, had undertaken
as part of an improvement program that commenced before Trump reportedly
acquired its interest in the property in 1994. Trump's notice also
complains that the building is in need of repairs. On February 14, 1995,
Associates and Company filed an action in New York State Supreme Court
against Trump for a declaratory judgment that none of the matters set
forth in the notice of default constitutes a violation of the master lease
or sublease, and that the notice of default is entirely without merit.
-30-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. Litigation, Legal Fees and Related Party Transactions and Subsequent Event
(continued)
Associates' and Company's suit also seeks an injunction to prevent Trump
from implementing the notice of default. On March 24, 1995, the Court
granted Associates a preliminary injunction against Trump. In 1996 the
Court granted two additional injunctions against Trump with respect to
two additional default notices. The preliminary injunctions prohibit
Trump from acting on its notices of default to Associates at any time,
pending the prosecution of claims by Associates and Company for a final
declaratory judgment and an injunction and other relief against the Trump
defendants. The Appellate Court has upheld and affirmed the granting of
such preliminary injunctions against the Trump defendants.
On February 15, 1995, Trump filed an action against Associates, Company,
Wien & Malkin LLP, Harry B. Helmsley, a partner in Company, Hel
msley-Spear, Inc. (the management company of the Empire State Building
(the "Building")), and the Agents for Associates in New York State Supreme
Court, alleging that the notice of default is valid and seeking damages and
related relief based thereon. On October 24, 1996 the Court dismissed all
of Trump's claims in their entirety against all defendants in the action.
Trump appealed this Order. The Appellate Court has unanimously affirmed
the dismissal of Trump's claims.
In May 1995, Associates and Company filed a separate legal action against
Trump and various affiliated persons for breach of the master lease and
sublease, and disparagement of the property in violation of Associates'
and Company's leasehold rights. The action was amended to include
additional claims by Associates and Company seeking a declaratory judgment
that they may act as an owner of the Property for purposes of making
applications and related activities pursuant to the New York City
Building Code. By decision and order dated October 24, 1996, the
Court sustained Associates' and Company's claims concerning the parties
who may act as owner of the Property under the Building Code, but dismissed
Associates' and Company's claims against Trump and co-defendants for money
damages. Associates and Company appealed that portion of the Court's order
dismissing their claims for money damages. The Appellate Court has
affirmed that part of the Court's order dismissing the claims for money
damages.
c. Associates is a defendant in an action instituted in the Supreme Court
of the State of New York, County of New York, entitled New York Skyline
Inc. v. Empire State Building Company, Empire State Building Associates,
Neil H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit,
which was brought by a tenant in the Building and was filed on December
23, 1997, seeks at least $205,000,000 in damages.
-31-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. Litigation, Legal Fees and Related Party Transactions and Subsequent Event
(continued)
In its complaint, plaintiff-tenant asserts thirteen causes of action
(twelve of which are against Company) in connection with its leases
and license agreements of space in the Building and alleges that it
is entitled to, among other things, specific performance as to its
alleged rights under its leases and licensing agreements with Company,
a declaratory judgment as to the rights of the parties under the leases
and licensing agreements, any monies allegedly due plaintiff under
those agreements, as well as injunctive relief and additional money
damages. While the complaint includes Associates as a named
defendant, it does not allege or identify any agreement between
plaintiff and Associates or any other basis of liability on Associates'
part to plaintiff.
On or about February 5, 1998, plaintiff served an amended complaint
which, among other things, added Kessner & Cyruli, f/n/a Nell H.
Kessner & Associates, former landlord-tenant counsel for the Building,
and Eileen Aluska, a former Helmsley-Spear, Inc. employee, as party
defendants. The amended complaint asserts eleven causes of action,
similar to those asserted in the original complaint.
Associates has until March 16, 1998 to answer or make a motion with
respect to the amended complaint. Associates intends to contest the
case vigorously.
Because the action is still in the pleading stage and pre-trial
discovery has not yet started, counsel for Associates has not formed
a professional conclusion that an adverse outcome is either probable
or remote.
The accompanying statement of income reflects an expense of $1,272,237
and the accompanying balance sheet reflects a corresponding accrued
liability of $1,272,237 for reimbursement to the Agents from Associates
of their legal and accounting expenses relating to the Studley and
Trump suits. Through December 31, 1997, legal and accounting expenses
in connection with the Studley suit amounted to $960,065 of which
$647,761 has been advanced by Wien & Malkin LLP, counsel (a related
party), to third party professional firms and $312,304 represents
accumulated professional time of Wien & Malkin LLP. Counsel has
advised that its records at December 31, 1997 also indicate $312,172
in accumulated professional time and disbursements related to the Trump
suits. Substantial additional legal and accounting costs may be incurred
in both suits.
The determination of the allocable share of the net legal and accounting
costs and disbursements accrued by Associates that are chargeable to
Company involve complex issues of fact and law. Therefore, although
Associates may be entitled to indemnification from Company, because of
uncertainties concerning these issues, amounts for professional fees to
be reimbursed to Associates cannot be estimated, and consequently, have
not been provided for in the accompanying financial statements.
-32-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. Concentration of Credit Risk
Associates maintains cash balances in a bank, money market fund (Fidelity
U.S. Treasury Income Portfolio), additional rent advance account held by
Wien & Malkin LLP (Note 5), which was transferred to the money market fund
in January 1998, and a distribution account held by Wien & Malkin LLP.
The bank balance is insured by the Federal Deposit Insurance Corporation
up to $100,000, and at December 31, 1997 was completely insured. The
cash in the money market fund and in the two accounts held by Wien &
Malkin LLP are not insured. The funds held in the distribution account
were paid to the participants on January 1, 1998.
-33-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
OMITTED SCHEDULES
The following schedules have been omitted as not applicable in the present
instance:
SCHEDULE I - Condensed financial information of registrant.
SCHEDULE II - Valuation and qualifying accounts.
SCHEDULE IV - Mortgage loans on real estate.
-34-<PAGE>
SCHEDULE III
EMPIRE STATE BUILDING ASSOCIATES
Real Estate and Accumulated Depreciation
December 31, 1997
<TABLE>
<S> <C> <C>
Column
A Description Leasehold on Empire State Building
located at 350 Fifth Avenue,
New York, New York.
B Encumbrances......................................... None
C Initial cost to company
Leasehold.......................................... $39,000,000
D Cost capitalized subsequent to acquisition........... None
E Gross amount at which carried at
close of period
Leasehold......................................... $39,000,000(a)
F Accumulated amortization............................. $35,872,958(b)
G Date of construction 1931
H Date acquired December 27, 1961
I Life on which leasehold amortization in
latest income statements is computed 25 years from January 1,
1988 (see Note 2 of Notes
to Financial Statements).
</TABLE>
(a) There have been no changes in the carrying values of real
estate for the years ended December 31, 1997, December 31, 1996 and
December 31, 1995. The costs for federal income tax purposes are the
same as for financial statement purposes.
(b) Accumulated amortization
Balance at January 1, 1995 $35,247,551
Amortization:
F/Y/E 12/31/95 $208,469
12/31/96 208,469
12/31/97 208,469 625,407
Balance at December 31, 1997 $35,872,958
-35-<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The individual signing this report on behalf of
Registrant is Attorney-in-Fact for Registrant and each of the
Partners in Registrant, pursuant to a Power of Attorney, dated
August 6, 1996 (the "Power").
EMPIRE STATE BUILDING REGISTRANT
(Registrant)
By /s/Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Date: April 15, 1998
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
person as Attorney-in-Fact for each of the Partners in Registrant,
pursuant to the Power, on behalf of Registrant and as a Partner in
Registrant on the date indicated.
By /s/ Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Date: April 15, 1998
______________________
* Mr. Katzman supervises accounting functions for Registrant.
-36-<PAGE>
EXHIBIT INDEX
Number Document Page*
3(a) Registrant's Partnership Agreement dated July
11, 1961, filed as Exhibit No. 1 to
Registrant's Registration Statement on Form
S-1 as amended (the "Registration Statement")
by letter dated August 8, 1962 and assigned
File No. 2-18741, is incorporated by reference
as an exhibit hereto.
3(b) Amended Business Certificate of Registrant
filed with the Clerk of New York County on
August 19, 1996 reflecting a change in the
Partners of Registrant which was filed as
Exhibit 3(b) to Registrant's Annual Report on
10-K for the fiscal year ended December 31,
1996 and is incorporated by reference as an
exhibit hereto.
4 Registrant's form of Participating Agreement,
filed as Exhibit No. 6 to the Registration
Statement by letter dated August 8, 1962 and
assigned File No. 2-18741, is incorporated by
reference as an exhibit hereto.
10(a) Mortgage dated December 21, 1951 from Imperium
Corporation to Prudential Insurance Company of
America ("Prudential"), filed by letter dated
March 31, 1981 (Commission File No. 0-827) as
Exhibit 10(a) to Registrant's Form 10-K for
the fiscal year ended December 31, 1980, is
incorporated by reference as an exhibit
hereto.
10(b) Modification of Indenture of Lease dated
December 27, 1961 between Prudential and
Registrant filed by letter dated March 31,
1981 (Commission File No. 0-827) as Exhibit
10(b) to Registrant's Form 10-K for the fiscal
year ended December 31, 1980, is incorporated
by reference as an exhibit hereto.
______________________
* Page references are based on sequential numbering system.
-37-<PAGE>
10(c) Sublease dated December 27, 1961 between
Registrant and Sublessee, filed by letter
dated March 31, 1981 (Commission File No.
0-827) as Exhibit 10(d) to Registrant's Form
10-K for the fiscal year ended December 31,
1980, is incorporated by reference as an
exhibit hereto.
10(e) Modification and Extension Agreement, dated
October 26, 1964 between The Bowery Savings
Bank and Celeritas Realty Corp., filed by
letter dated March 31, 1981 (Commission File
No. 0-827) as Exhibit 10(e) to Registrant's
Form 10-K for the fiscal year ended
December 31, 1980, is incorporated by
reference as an exhibit hereto.
13 Letter to Participants dated April 1, 1998.
24 Power of Attorney dated August 6,1996, between
Peter L. Malkin, John L. Loehr and Stanley
Katzman, the partners of Registrant and
Richard A. Shapiro and Stanley Katzman, filed
as Exhibit 25 to Registrant's 10-Q for the
quarter ended September 30, 1996 and
incorporated by reference as an exhibit
hereto.
27 Financial Data Schedule of Registrant for
the fiscal year ended December 31, 1997.
-38-<PAGE>
[LETTERHEARD OF
WIEN & MALKIN LLP]
April 1, 1998
TO PARTICIPANTS IN EMPIRE STATE BUILDING ASSOCIATES
Federal Identification Number 13-6084254
We enclose the annual report of Empire State Building
Associates for the year ended December 31, 1997 and the
comparative statement of operations under the sublease for the
years 1997 and 1996.
The sublease provides for the payment of additional rent
equal to 50% of the sublessee's profit in excess of $1,000,000.
The profit for 1997 was $5,802,601, so that the sublessee paid
additional rent of $2,401,300. No additional rent was paid for
the years 1996 or 1995.
For the year 1997, professional fees of $1,883,141 incurred
by the sublessee include $1,481,778 for outside counsel and other
independent professional firms. Of this amount, $671,394 was
incurred for the fees and disbursements of Paul, Weiss, Rifkind,
Wharton & Garrison in connection with the litigation commenced by
Donald Trump and foreign investors who purportedly acquired fee
title to the Empire State Building in 1994, subject to the master
lease of Empire State Building Associates through January 5, 2076.
The distribution from the additional rent is $1,129,063. In
accordance with the partnership agreement, 6% of the distribution,
$67,744, has been paid to Wien & Malkin LLP. $1,061,319 was
distributed to participants on March 5, 1998 and represented 3.2%
of the original cash investment of $33,000,000. Together with
regular monthly distributions during the year 1997, total
distributions to participants for 1997 were at the rate of 15%.
$1,272,237 will be applied towards the expenses incurred in
defending the Trump and Studley litigations, about which you have
been previously advised. To permit monthly distributions without
reduction during the improvement program, from 1991 through 1997,
Wien & Malkin LLP from its own funds has advanced payment for such
expenses to third party professional firms totalling $647,761
relating to the Studley litigation and provided services and
advanced disbursements totalling $624,476 relative to the Trump
and the Studley litigations on behalf of Associates.<PAGE>
Re: Empire State Building Associates 2.
Without the litigation expenses, total distributions to
participants would have been about 18.62% for the year 1997. We
expect both litigations to conclude successfully during 1998. We
also expect that the last major component of the improvement
program, the restoration of the building facade, should be
substantially complete by the end of 1998. Without this
substantial expense, which has been paid entirely from building
cash flow, the year-end extra distribution to participants for
1998 will be greater.
For financial statement purposes, while the income of Empire
State Building Associates for the year 1997 was $4,752,560,
distributions of $4,950,652, including the additional distribution
of $1,061,319, were made to participants. The difference is
treated as a return of capital investment. It arises mainly
because of amortization of the leasehold.
Taking into account that a portion of prior distributions
constituted a return of capital, the average capital investment
for the year 1997 was $4,159,108. Distributions of $4,950,652
were about 119.0% on the average capital. The book value on
December 31, 1997 of an original cash investment of $10,000 was
$1,391.
Those participants who have voluntarily authorized additional
compensation to Wien & Malkin LLP pursuant to the consent
solicitation letter of September 13, 1991 will receive from Wien &
Malkin LLP each year through January 5, 2076, their pro rata
shares of the originally scheduled increases in additional
payments to Wien & Malkin LLP from the reductions in master lease
rent effective in 1992 and 2013. This amounts to $45,017 per
annum commencing in 1992 and $52,405 per annum commencing in 2013.
Each such participant holding a $10,000 participation will receive
each year $13.64 for 1992 through 2012 and $15.88 commencing 2013.
The first payment to consenting participants on account of the
year 1992 was included in the check distributed on February 28,
1993. The Schedule K-1 previously submitted to you noted the
amount you received on March 1, 1997 to be reported on your 1997
income tax returns. The payment for 1997 was mailed to you on
March 5, 1998 and will be reportable on your 1998 income tax
returns.
Schedule K-1 forms (Form 1065), containing 1997 tax informa-
tion, were mailed to the participants on March 13, 1998.
If you have any question about the enclosed material, please
communicate with our office.
Cordially yours,
WIEN & MALKIN LLP
By: Stanley Katzman
SK:mg
Encs. <PAGE>
[LETTERHERAD OF
JACOBS EVALL & BLUMENFELD LLP
CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in Empire State Building Associates (a Partnership):
We have audited the accompanying balance sheet of Empire State Building
Associates ("Associates") as of December 31, 1997, and the related
statements of income, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of Associates'
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 Empire State Building
Associates 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.
As discussed in Note 7 to the financial statements, Associates has been
included as a defendant in actions with other related parties, including
the Agents for Associates and Empire State Building Company, as sublessee.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
420 Lexington Avenue
New York, N. Y. 10170
March 4, 1998
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1997
Assets
Cash and cash equivalents:
The Chase Manhattan Bank $ 2,988
Distribution account held by Wien
& Malkin LLP 324,111
Fidelity U.S. Treasury Income Portfolio 51,430
Additional rent advance account
held by Wien & Malkin LLP 2,400,000
2,778,529
Additional rent due from Empire
State Building Company 1,300
Prepaid rent 23,831
Leasehold on Empire State Building,
350 Fifth Avenue, New York, N.Y. $39,000,000
Less: Accumulated amortization
of leasehold 35,872,958 3,127,042
Total assets $5,930,702
Liabilities and partners' capital
Liabilities:
Accrued supervisory services $ 67,744
Accrued legal fees 1,272,237
Total liabilities $1,339,981
Contingency
Partners' capital 4,590,721
Total liabilities and partners' capital $5,930,702
See accompanying notes to financial statements.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
Income:
Basic rent $6,018,750
Additional rent 2,401,300
Dividend income 10,377
Total income 8,430,427
Expenses:
Leasehold rent $1,970,000
Legal fees 1,272,237
Supervisory services 227,161
Total expenses 3,469,398
Income before amortization of leasehold 4,961,029
Amortization of leasehold 208,469
Net income $4,752,560
See accompanying notes to financial statements.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
Partners' capital, January 1, 1997 $ 3,727,494
Add, Net income for the year ended
December 31, 1997 4,752,560
8,480,054
8,480,054
Less, Distributions:
Monthly distributions,
January 1, 1997 through December 31, 1997 3,889,333
Partners' capital, December 31, 1997 $ 4,590,721
See accompanying notes to financial statements.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities
Net income $ 4,752,560
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of leasehold 208,469
Changes in operating assets and liabilities:
Additional rent due from
Empire State Building Company (1,300)
Accrued supervisory services 67,744
Accrued legal fees 1,272,237
Net cash provided by operating activities 6,299,710
Cash flows from financing activities
Monthly distributions to participants (3,889,333)
Net cash used in financing activities (3,889,333)
Net increase in cash and cash equivalents 2,410,377
Cash and cash equivalents, beginning of year 368,152
Cash and cash equivalents, end of year $ 2,778,529
See accompanying notes to financial statements.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Business Activity
Empire State Building Associates ("Associates") is a general
partnership which owns the master leasehold on the Empire State
Building, located at 350 Fifth Avenue, New York City. Associates
subleases the property to Empire State Building Company.
2. Summary of Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents include investments in money market
funds and all highly liquid debt instruments purchased with a
maturity of three months or less.
Leasehold and amortization
The leasehold is stated at cost. In 1988 Associates
determined that it would exercise its first renewal option
under the lease, and did so in January 1989. Amortization of
the leasehold is being computed by the straight-line method
over the revised estimated useful life of 25 years, from
January 1, 1988 to January 5, 2013 (see Note 4).
Use of estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management often makes
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
3. Rent Income and Related Party Transactions
The sublease provides for the same first renewal term and additional
renewal options as the leasehold (see Note 4), less one day. In
accordance with the terms of the operating sublease, annual minimum
net basic rent is $6,018,750 during the first renewal term, and
$5,895,625 during each of the remaining three renewal terms.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Rent Income and Related Party Transactions (continued)
Additional rent under the sublease is payable in an amount equal to
50% of the sublessee's annual net income, as defined, in excess of
$1,000,000. Additional rent earned for the year 1997 was $2,401,300.
A partner in Associates is also a partner in the sublessee.
4. Leasehold Rent
Pursuant to an operating lease dated December 27, 1961, as modified
February 15, 1965, with the Prudential Insurance Company of America
("Prudential"), leasehold rent represents the net basic rent of
$1,970,000 per annum for the first renewal term from January 5,
1992 to January 5, 2013.
The lease contains options for Associates to renew the leasehold for
three additional terms of twenty-one years each. The basic rent is
to be reduced to $1,723,750 per annum for each of the remaining three
renewal terms.
On November 27, 1991, Prudential sold the property to E. G. Holding
Co., Inc. which, through merger and conveyance, reportedly transferred
its interest as lessor to Trump Empire State Partners (see Note 7).
Associates' rights under the master leasehold remain unchanged.
5. Supervisory Services and Related Party Transactions
Payments for supervisory services, including disbursements and cost of
accounting services, are made to the firm of Wien & Malkin LLP. Some
members of that firm are partners in Associates.
6. Income Taxes
Net income is computed without regard to income tax expense since
Associates does not pay a tax on its income; instead, any such taxes
are paid by the participants in their individual capacities.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Litigation, Legal Fees and Related Party Transactions
a. On October 21, 1991, in an action entitled Studley v. Empire State
Building Associates et al., the holder of a $20,000 original
participation in Associates brought suit in New York Supreme Court,
New York County against the Agents for Associates (Peter L. Malkin,
Donald A. Bettex and Alvin Silverman), in their individual
capacities and Wien, Malkin & Bettex (currently "Wien & Malkin
LLP"), counsel to Associates. The suit claims that the
defendants had engaged in breaches of fiduciary duty and acts of
self-dealing in relation to the Agents' solicitation of consents
and authorizations from the participants in Associates in September
1991 and in relation to other unrelated acts of the Agents and the
sublessee. By order dated July 14, 1997, the Court granted
defendants' application for summary judgment and dismissal of the
action. Plaintiff's appeal of the dismissal is pending. Associates
is a nominal defendant and the complaint does not seek any direct
relief from it; accordingly, no loss or other unfavorable outcome of
the action against Associates is anticipated.
b. In December 1994, Associates received a notice of default from Trump
Empire State Partners ("Trump"). The Trump default notice to
Associates claims that Associates was in violation of its master
lease because of extensive work which the sublessee, Empire State
Building Company ("Company"), had undertaken as part of an
improvement program that commenced before Trump reportedly acquired
its interest In the property in 1994. Trump's notice also complains
that the building is in need of repairs. On February 14, 1995,
Associates and Company filed an action in New York State Supreme
Court against Trump for a declaratory judgment that none of the
matters set forth in the notice of default constitutes a violation
of the master lease or sublease, and that the notice of default is
entirely without merit. Associates' and Company's suit also seeks
an injunction to prevent Trump from implementing the notice of
default. On March 24, 1995, the Court granted Associates a
preliminary injunction against Trump. In 1996 the Court granted
two additional injunctions against Trump with respect to two
additional default notices. The preliminary injunctions
prohibit Trump from acting on its notices of default to Associates
at any time, pending the prosecution of claims by Associates and
Company for a final declaratory judgment and an injunction and other
relief against the Trump defendants. The Appellate Court has upheld
and affirmed the granting of such preliminary injunctions against
the Trump defendants.
On February 15, 1995, Trump filed an action against Associates,
Company, Wien & Malkin LLP, Harry B. Helmsley, a partner in
Company, Helmsley-Spear, Inc. (the management company of the
Empire State Building), and the Agents for Associates in New
York State Supreme Court, alleging that the notice of default is
valid and seeking damages and related relief based thereon. On
October 24, 1996 the Court dismissed all of Trump's claims in their
entirety against all defendants in the action. Trump appealed this
Order. The Appellate Court has unanimously affirmed the dismissal
of Trump's claims.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Litigation, Legal Fees and Related Party Transactions (continued)
In May 1995, Associates and Company filed a separate legal action
against Trump and various affiliated persons for breach of the master
lease and sublease, and disparagement of the property in violation of
Associates' and Company's leasehold rights. The action was amended
to include additional claims by Associates and Company seeking a
declaratory judgment that they may act as an owner of the Property
for purposes of making applications and related activities pursuant
to the New York City Building Code. By decision and order dated
October 24, 1996, the Court sustained Associates' and Company's
claims concerning the parties who may act as owner of the Property
under the Building Code, but dismissed Associates' and Company's
claims against Trump and co-defendants for money damages.
Associates and Company appealed that portion of the Court's order
dismissing their claims for money damages. The Appellate Court
has affirmed that part of the Court's order dismissing the claims
for money damages.
c. Associates is a defendant in an action instituted in the Supreme
Court of the State of New York, County of New York, entitled New
York Skyline Inc. v. Empire State Building Company, Empire State
Building Associates, Neil H. Kessner, Helmsley-Spear, Inc. and
Stephen A. Tole. This lawsuit, which was brought by a tenant in
the Building and was filed on December 23, 1997, seeks at least
$205,000,000 in damages. In its complaint, plaintiff-tenant asserts
thirteen causes of action (twelve of which are against Company) in
connection with its leases and license agreements of space in the
Building and alleges that it is entitled to, among other things,
specific performance as to its alleged rights under its leases and
licensing agreements with Company, a declaratory judgment as to the
rights of the parties under the leases and licensing agreements,
any monies allegedly due plaintiff under those agreements, as well
as injunctive relief and additional money damages. While the complaint
includes Associates as a named defendant, it does not allege or
identify any agreement between plaintiff and Associates or any
other basis of liability on Associates' part to plaintiff.
On or about February 5, 1998, plaintiff served an amended complaint
which, among other things, added Kessner & Cyruli, f/n/a Nell H.
Kessner & Associates, former landlord-tenant counsel for the Building,
and Eileen Aluska, a former Helmsley-Spear, Inc. employee, as party
defendants. The amended complaint asserts eleven causes of action,
similar to thoseasserted in the original complaint.
Associates has until March 16, 1998 to answer or make a motion with
respect to the amended complaint. Associates intends to contest the
case vigorously.
Because the action is still in the pleading stage and pre-trial
discovery has not yet started, counsel for Associates has not formed a
professional conclusion that an adverse outcome is either probable or
remote.
<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Litigation, Legal Fees and Related Party Transactions (continued)
The accompanying statement of income reflects an expense of $1,272,237
and the accompanying balance sheet reflects a corresponding accrued
liability of $1,272,237 for reimbursement to the Agents from Associates
of their legal and accounting expenses relating to the Studley and
Trump suits. Through December 31, 1997, legal and accounting expenses
in connection with the Studley suit amounted to $960,065 of which
$647,761 has been advanced by Wien & Malkin LLP, counsel (a related
party), to third party professional firms and $312,304 represents
accumulated professional time of Wien & Malkin LLP. Counsel has
advised that its records at December 31, 1997 also indicate
$312,172 in accumulated professional time and disbursements related
to the Trump suits. Substantial additional legal and accounting costs
may be incurred in both suits.
The determination of the allocable share of the net legal and
accounting costs and disbursements accrued by Associates that are
chargeable to Company involve complex issues of fact and law.
Therefore, although Associates may be entitled to indemnification
from Company, because of uncertainties concerning these issues, amounts
for professional fees to be reimbursed to Associates cannot be
estimated, and consequently, have not been provided for in the
accompanying financial statements.
8. Concentration of Credit Risk
Associates maintains cash balances in a bank, money market fund
(Fidelity U.S. Treasury Income Portfolio), additional rent advance
account held by Wien & Malkin LLP (which was transferred to the money
market fund in January 1998) and a distribution account held by Wien &
Malkin LLP. The bank balance is insured by the Federal Deposit
Insurance Corporation up to $100,000, and at December 31, 1997 was
completely insured. The cash in the money market fund and the two
accounts held by Wien & Malkin LLP are not insured. The funds held
in the distribution account were paid to the participants on
January 1, 1998.
<PAGE>
[LETTERHEARD OF
MCGRATH, DOYLE & PHAIR
CERTIFIED PUBLIC ACCOUNTANTS]
Empire State Building Company
60 East 42nd Street
New York, NY 10165
We have audited the accompanying Comparative Combined Statement of
Income of Empire State Building and Observatory for the years ended December
31, 1997 and 1996 for the purpose of determining "Net Operating Profit" and
"Overage Rent" as thoseterms are defined in Section 2.05 of Agreement of
Sublease dated December 27, 1961. During the years ended December 31, 1997
and 1996, the entire building, with the exception of the Observatory, was
operated by Empire State Building Company and the Observatory was operated
by Empire State Building, Inc. The Combined Statement of Income is the
responsibility of the management of Empire State Building Company and Empire
State Building, Inc. Our responsibility is to express an opinion on the
Combined Statement of Income 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 Combined Statement of Income is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the Combined Statement of Income. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the accompanying Comparative Combined Statement of
Income of Empire State Building and Observatory presents fairly, in all
material respects, the Net Operating Profit and Overage Rent for the years
ended December 31, 1997 and 1996, in conformity with Section 2.05 of the
aforementioned Agreement dated December 27, 1961.
As discussed in Note 3 to the Combined Statement of Income, the Empire
State Building Company and other related parties have been named as
defendants in legal actions. All defendants have denied all material
allegations. It is not possible at this time to predict the outcome or range
of potential loss, if any, which might result from those actions. No
provision for any loss has been made in the accompanying Combined Statement
of Income.
New York, NY
February 23, 1998<PAGE>
Empire State Building and Observatory
COMPARATIVE COMBINED STATEMENT OF INCOME
Increase
1997 1996 (Decrease)
INCOME
Rent, including electricity $53,800,622 $52,196,949 $1,603,673
Observatory admissions 16,378,777 12,317,087 4,061,690
Other observatory income 1,194,070 1,098,580 95,490
Antenna rent 5,442,661 5,280,773 161,888
Lease cancellation 113,919 6,409 107,510
Percentage rent 625,929 456,780 169,149
Other 879,686 592,370 287,316
Total income 78,435,664 71,948,948 6,486,716
OPERATING EXPENSES
Rent 6,018,749 6,018,750 (1)
Real estate taxes 19,766,635 20,748,418 (981,783)
Wages, contract cleaning and protection ser 11,808,525 11,067,231 741,294
Electricity 4,745,390 4,712,758 32,632
Tenants' and building alterations, repairs 12,528,746 18,953,112 (6,424,366)
Management fees and leasing commissions
(Note 4) 2,872,332 3,100,637 (228,305)
Observatory:
Wages 1,767,377 1,521,091 246,286
Contracted security 2,139,784 180,402 1,959,382
Advertising and public relations 228,608 265,777 (37,169)
Payroll taxes and other labor cost 558,923 468,322 90,601
Other taxes and expenses 216,517 189,715 26,802
Steam 1,455,313 1,442,483 12,830
Professional fees (Note 2) 1,883,141 3,091,938 (1,208,797)
Payroll taxes and other labor costs 3,265,122 3,112,192 152,930
Insurance 725,396 768,538 (43,142)
Water (1995 - 1997) 959,828 172,498 787,330
Rubbish removal 463,205 679,281 (216,076)
Advertising 331,726 396,172 (64,446)
Telephone 69,572 71,624 (2,052)
Fire alarm service 18,955 203,510 (184,555)
Directory service 5,072 25,732 (20,660)
New York State utility taxes (1987-1992)
(Note 4) 0 979,109 (979,109)
Interest on NYS utility tax (Note 4) 127,811 681,688 (553,877)
Utility and vault taxes 261,128 322,648 (61,520)
Paging and other intercommunication 108,499 78,739 29,760
Dues 35,719 61,213 (25,494)
Licenses and permits 3,366 16,721 (13,355)
Other expenses 267,624 532,681 (265,057)
Total expenses before overage rent 72,633,063 79,862,980 (7,229,917)
NET OPERATING PROFIT (LOSS) $5,802,601 $(7,914,032)$13,716,633
OVERAGE RENT, 50% OF NET OPERATING PROFIT
IN EXCESS OF $1,000,000 $2,401,300 $0 $2,401,300
(See notes to combined statements of income)<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
1. Management fees and leasing commissions for the years 1997 and 1996 were
paid to companies in which a partner in Empire State Building Company
("Company"), had a controlling interest.
2. Professional fees include payments to Wien & Malkin LLP. A partner in
Wien & Malkin LLP is a partner in Company.
3. Litigation
(a) On October 21, 1991, Julien J. Studley ("Studley"), the holder of a
$20,000 original participation in Empire State Building Associates
("Associates"), the master lessee of the Empire State Building, brought
suit against the Agents for Associates (Peter L. Malkin, Donald A. Bettex
and Alvin Silverman); Company; Harry B. Helmsley, a partner in Company;
and Wien, Malkin & Bettex, counsel to Associates. The suit claimed that
the defendants have engaged in breaches of fiduciary duty and acts of
self-dealing in relation to the Agents' solicitation of consents and
authorizations of the Participants in Associates in September, 1991, and
in relation to other unrelated acts of the Agents and the Sublessee. The
suit is styled as a class action, but the Court was not asked to grant
class certification. The suit seeks relief including an injunction and an
accounting. In 1994, the action was dismissed against Company and Mr.
Helmsley. In 1995, the plaintiff amended the complaint to allege, amongst
other things, the underpayment by Company of overage rent due to
Associates. In June 1996, plaintiff applied for partial summary judgment.
In September 1996, defendants applied for summary judgment and dismissal
of the action in its entirety. By order and decision dated July 14, 1997,
the Court denied the plaintiff's motion for partial summary judgment,
granted the defendants' motion for summary judgment, and dismissed the
action. Plaintiff appealed that determination and the appeal is pending.
It is not possible at this time to predict the outcome or range of
potential loss, if any, which results from this action. No provision for
any liability that may result upon adjudication has been made in the
accompanying financial statements.
(b) In December 1994, Empire State Building Associates ("Associates")
received a notice of default from Trump Empire State Partners ("Trump").
The Trump default notice to Associates claims that Associates is in
violation of its master lease because of extensive work Company has
undertaken as part of an improvement program that commenced before Trump
reportedly acquired its interest in the property in 1994. Trump's notice
also complains that the building is in need of repairs.
On February 14, 1995, Associates and Company filed an action in the New
York State Supreme Court against Trump for a declaratory judgment that
none of the matters set forth in the notice of default constitutes a
violation of the master lease or sublease, and that the notice of default
is without merit. Associates' and Company's suit also seeks an injunction
to prevent Trump from implementing the notice of default.
On March 24, 1995, the New York State Supreme Court, in the foregoing
action, granted Associates a preliminary injunction against Trump. Trump,
thereafter, served two additional default notices for which the Court had
granted additional injunctions against Trump. (See discussion below).<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(b) (Continued)
The injunctions prohibit Trump from acting on its notices of default to
Associates, at any time, pending the prosecution of claims by Associates
and Company for a final judgment granting a permanent injunction and other
relief against the Trump defendants. On April 8, 1996, the Court granted
Associates additional injunctions against Trump, which further prohibit
Trump from seeking to terminate Associate's Master Lease. On August 19,
1996, the Court denied a motion by Trump to set aside the injunction
granted in favor of Associates and against Trump on March 24, 1995. The
Court has directed the parties in the foregoing action to proceed with
pretrial discovery. Trump has appealed the Court's injunction orders, and
the Appellate Court has unanimously affirmed the appealed orders.
On February 15, 1995, Trump filed an action against Associates, Company,
Counsel, Harry B. Helmsley, Helmsley Spear, Inc. (the management company
of the Building engaged by Company), and the Partners, in New York State
Supreme Court, alleging that the notice of default is valid and seeking
damages and related relief based thereon. On October 24, 1996, the Court
dismissed all of Trump's claims in their entirety as against Associates
and all other defendants in the foregoing action. Trump appealed this
ruling and the Appellate Court unanimously affirmed dismissal of Trump's
claims.
In May 1995, Associates and Company filed a separate legal action against
Trump and various affiliated persons for breach of the Master Lease and
Sublease and for disparagement of the property in violation of Associates'
and Company's leasehold rights. The action was amended to include
additional claims by Associates and Company seeking a declaratory judgment
that they may act as an owner of the Property for purposes of making
applications and related activities pursuant to the New York City Building
Code. Trump moved to dismiss the claims concerning the Building Code. By
decision and order of October 24, 1996, the Court rejected Trump's motion
and sustained Associates' and Company's claims concerning the parties who
may act as owner of the Property under the Building Code. The Court
directed that the claims should proceed to trial. At the same time, the
Court dismissed Associates' and Company's claims against Trump and co-
defendants for money damages. The Appellate Court has affirmed that
portion of the Court's order dismissing the claims for money damages.
In connection with the Studley and Trump litigations, Associates may be
entitled to reimbursement of its legal and accounting expenses from
Company. Through December 31, 1997, such legal and accounting expenses
in connection with the Studley suit have amounted to $960,065, of which
$647,761 has been advanced by Wien & Malkin LLP, counsel (a related
party), to third-party professional firms, and $312,304 represents
accumulated professional time of Wien & Malkin LLP. In addition,
counsel has advised that its records at December 31, 1997 indicate
$312,172 in accumulated professional time and disbursements related
to the Trump suits.
Substantial additional legal and accounting costs may be incurred in both
cases.
The determination of the allocable share of the net legal and accounting
costs and disbursements chargeable to Company involve complex issues of
fact and law. Because of uncertainties concerning these issues, an amount
for professional fees payable by Company cannot be estimated, and
therefore, have not been provided for. Resolutions unfavorable to Company
could result in material liabilities and charges which have not been
reflected in the accompanying financial statements.<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(c) Company is a defendant in an action instituted in the Supreme Court of
the State of New York, County of New York, but transferred down to the New
York City Civil Court, entitled Robert D. Gould P.C. v. Empire State
Building Company, et al. This lawsuit, which is brought by a tenant in the
building, seeks $5,000,000 in damages for an alleged breach of lease and
tortious conduct. The Supreme Court entered an order precluding plaintiff
from proving damages by reason of its failure to serve an adequate bill of
particulars. Plaintiff's motion to vacate the order of preclusion was
denied, and its time to appeal from the order of preclusion expired.
Because plaintiff is precluded from proving damages, the action has been
transferred to the New York City Civil Court. Plaintiff has taken no step
to prosecute the case subsequent to the transfer. The case has been
dormant since 1996.
(d) Company is a defendant in an action pending in the United States
District Court for the Southern District of New York, entitled R. Gene
Smith and Turbo Vision Limited Partnership vs. Neil H. Kessner, Richard
C. O'Conor, Neil H. Kessner and Associates, Steven M. Durels, The Empire
State Building Company and Stephen A. Tole. This lawsuit, which is
brought by the principals of a tenant in the Empire State Building,
alleges various claims for damages against the six named defendants in
connection with plaintiffs' alleged construction and operation of an
entertainment facility in the building. As against the Company,
plaintiffs allege fraudulent inducement in connection with matters
pertaining to the making of a lease agreement in connection with the
foregoing entertainment facility, and to the construction and operation
of the foregoing entertainment facility; and breach of the covenant of
quiet enjoyment contained in the lease, which was entered into in
connection with the foregoing entertainment facility. Plaintiffs allege
that they expended funds and incurred future liabilities in connection
with the construction and operation of the foregoing entertainment
facility, and on each of their claims against the Company, plaintiffs
allege damages in an amount not less than $5,000,000 and punitive
damages in an amount not less that $10,000,000 (together with interest,
attorney's fees, and the costs and disbursements of the action).
The Company has denied the material allegations of the complaint against
it and has asserted various affirmative defenses. The Company has also
asserted a cross-claim against defendant Stephen A. Tole for indemni-
fication and/or contribution for the entire amount of any damages awarded
in plaintiffs' favor against the Company, as well as a cross-claim against
defendants Tole, Neil H. Kessner, Richard C. O'Conor, Steven M. Durels and
Neil H. Kessner and Associates, jointly and severally, for contribution
and/or indemnification for part or all of any such damages. The Company
has furthermore filed a third-party complaint against Helmsley-Spear,
Inc., as an agent of the Company and the employer of defendant Tole,
asserting claims for indemnification, contribution and/or respondeat
superior for the entire amount, or part thereof, of any damages awarded
in plaintiffs' favor against the Company. The co-defendants and the
third-party defendant have denied the material allegations of the cross-
claims and third-party complaint.
The Company intends, and has begun, to defend the action vigorously. The
action is presently at a discovery stage, and counsel is not able to
express an opinion as to the likely outcome or to estimate amounts or a
range of potential losses or gains.<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(e) Company is a defendant in an action instituted in the Supreme Court of
the State of New York, County of New York, entitled New York Skyline Inc.
v. Empire State Building Company, Empire State Building Associates, Neil
H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit which
is brought by a tenant in the building and commenced on December 23, 1997
seeks at least $205,000,000 in damages. In its complaint, plaintiff-
tenant asserts thirteen causes of action (twelve of which are against the
Company) in connection with its leases and license agreements of space in
the Building and alleges that it is entitled to, among other things,
specific performance as to its alleged rights under its leases and
licensing agreements with the Company, a declaratory judgment as to the
rights of the parties under the leases and licensing agreements as well as
any monies allegedly due plaintiff under those agreements, as well as
injunctive relief and additional money damages.
The Company served papers opposing the plaintiff's motion. Oral argument
on the motion was held on February 6, 1998. The motion is sub judice for
a preliminary injuction and related relief.
On or about February 5, 1998, plaintiff served an amended complaint which,
among other things, added Kessner & Cyruli, f/n/a Neil H. Kessner &
Associates, former landlord-tenant counsel for the building, and Eileen
Aluska, a former Helmsley-Spear, Inc. employee, as party-defendants. The
amended complaint asserted eleven causes of action against the Company,
similar to those asserted in the original complaint.
The Company has until March 16, 1998 to answer or make a motion with
respect to the amended complaint. The Company intends to contest the case
vigorously.
Counsel for Company has not formed a professional conclusion that in the
action an adverse outcome is either probable or remote. It is not
possible at this time to predict the outcome or range of potential loss,
if any, which results from this action. No provision for any liability
that may result upon adjudication has been made in the accompanying
financial statements.
4. Liabilities
The State of New York has asserted utility tax deficiencies of $1,528,816
through December 31, 1992 in connection with water, steam and non-metered
electricity rent inclusion charges to tenants, plus estimated accrued
interest of $797,713.
The Supreme Court, New York County has granted summary judgment in favor
of the State, holding that the State utility tax applies to such rent
inclusion charges. The ruling was affirmed by the Appellate Division.
Company sought permission to appeal the Appellate Division's decision and
order to the Court of Appeals. The Court of Appeals denied Company's
motion. In May, 1996, Company entered into a settlement agreement with the
State. Pursuant to the terms of the settlement agreement, Company agreed
to pay the State $979,109, plus interest of approximately $605,000 through
July 31, 1996. The State has agreed to payment of the aforesaid liability
over a period of four years, commencing August, 1996, in equal monthly
installments of $40,000, including interest on the unpaid balance at the
statutory rate. Installment payments to the State of $40,000 per month
have been made by Company commencing on August 1, 1996. It is
anticipated that New York State will seek to impose liability on Company
for State utility tax for periods after December 31, 1992. The amount of
such additional tax has yet to be determined.<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
4. Liabilities (Continued)
The City of New York has asserted a utility tax deficiency in the amount
of $277,125 against Company, through December 31, 1994, in connection with
water, steam and non-metered electricity rent inclusion charges to
tenants, plus accrued interest of approximately $163,012 through December
31, 1997. Company is contesting the calculation of the City's proposed
utility tax deficiency before the New York City Tax Appeals Tribunal.
The final outcome of Company's appeal cannot presently be determined.
It is anticipated that New York City will seek to impose liability on
Company for additional New York City utility tax for periods after
December 31, 1994. The amount of such additional tax has yet to be
determined.<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of December 31, 1997 and the Statement Of Income
for the year ended December 31, 1997, and is qualified in its entirety by
refenence to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,778,529
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,803,660<F1>
<PP&E> 39,000,000
<DEPRECIATION> 35,872,958
<TOTAL-ASSETS> 5,930,702
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 4,590,721
<TOTAL-LIABILITY-AND-EQUITY> 5,930,702
<SALES> 8,420,050<F2>
<TOTAL-REVENUES> 8,430,427<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,677,867<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,752,560
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,752,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,752,560
<EPS-PRIMARY> 1,440<F5>
<EPS-DILUTED> 1,440<F5>
<FN>
<F1>Includes prepaid rent
<F2>Rental income
<F3>Includes dividend income
<F4>Leasehold rent, supervisory fees, legal fees and amortization of
leasehold
<F5>Earnings per $10,000 participation unit, based on 3,300 participation
units outstanding during the year
</FN>
</TABLE>
