FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] 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)
A New York Partnership 13-6084254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 East 42nd Street, New York, New York
(Address of principal executive offices)
10165
(Zip Code)
(212) 687-8700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
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 such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ]. No [ ].
An Exhibit Index is located on Page 14 of this Report.
Number of pages (including exhibits) in this filing: 37 <PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Empire State Building Associates
Condensed Statement of Income
(Unaudited)
For the Three Months
Ended March 31,
1999 1998
Income:
Rent income, from a related
party (Note B) $1,504,687 $1,504,687
Dividend income 47,158 27,179
---------- ----------
Total income 1,551,845 1,531,866
---------- ----------
Expenses:
Leasehold rent 492,500 492,500
Supervisory services, to a
related party (Note C) 39,854 39,854
Amortization of leasehold 52,117 52,117
---------- ----------
Total expenses 584,471 584,471
---------- ----------
Net income $ 967,374 $ 947,395
========== ==========
Earnings per $10,000 participation
unit, based on 3,300
participation units
outstanding during the year $ 293.14 $ 287.09
========== ==========
Distributions per $10,000
participation consisted
of the following:
Income $ 293.14 $ 287.09
Return of capital 856.05 329.17
---------- ----------
Total distributions $ 1,149.19 $ 616.26
========== ==========
At March 31, 1999 and 1998, there were $33,000,000 of participations
outstanding.
<PAGE>
Empire State Building Associates
Condensed Statement of Income
(Unaudited)
Assets March 31, 1999 December 31, 1998
Current assets
Cash $ 328,363 $ 328,636
Prepaid rent 23,831 23,831
Additional rent due from Empire State
Building Company, a related party -0- $ 609,852
Fidelity U.S. Treasury Income Portfolio 2,555,903 4,906,745
---------- -----------
Total current assets 2,908,097 5,869,064
Real Estate
Leasehold on Empire State Building 39,000,000 39,000,000
Less, allowance for amortization 36,133,543 36,081,426
---------- -----------
2,866,457 2,918,574
---------- -----------
Total assets $5,774,554 $ 8,787,638
========== ===========
Current Liabilities:
Accrued legal fees, to a related
Party 1,452,216 1,460,341
Accrued supervisory services,
to a related party -0- 180,000
--------- ----------
Total Current Liabilities $1,452,216 $1,640,341
---------- ----------
Capital
Capital January 1, 7,147,297 4,590,721
Add, Net income:
January 1, 1999 through March 31, 1999 967,374 -0-
January 1, 1998 through December 31, 1998 -0- 7,507,228
---------- ----------
8,114,671 12,097,949
Less, Distributions:
Monthly distributions,
January 1, 1999 through March 31, 1999 972,333 -0-
January 1, 1998 through December 31, 1998 -0- 3,889,334
Additional Distribution on March 5, 1999
of overage rent for the lease year
ended December 31, 1998 2,820,000 -0-
Additional Distribution on March 5, 1998
of overage rent for the lease year
ended December 31, 1997 -0- 1,061,318
---------- ----------
3,792,333 4,950,652
---------- ----------
Capital
March 31, 1999 4,322,338 -0-
December 31, 1998 -0- 7,147,297
---------- ----------
Total liabilities and capital:
March 31, 1999 5,774,554
December 31, 1998 ========== 8,787,638
==========
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Empire State Building Associates
Condensed Statement of Income
(Unaudited)
January 1, 1999 January 1, 1998
through through
March 31, 1999 March 31, 1998
Cash flows from operating activities:
Net income $ 967,374 $ 947,395
Adjustments to reconcile net income
to cash provided by operating
activities:
Amortization of leasehold 52,117 52,117
Change in Investment in Fidelity U.S.
Treasury Income Portfolio 2,350,842 -0-
Change in additional rent due 609,852 2,401,300
Change in accrued supervisory services (180,000) (67,744)
Change in accrued legal fees (8,125) -0-
Change in legal fee reserve account -0- (1,277,110)
---------- ----------
Net cash provided by operating
activities 3,792,060 2,055,958
---------- ----------
Cash flows from financing activities:
Cash distributions (3,792,333) (2,033,651)
---------- ----------
Net cash used in financing
activities (3,792,333) (2,033,651)
---------- ----------
Net increase (decrease)
in cash and cash equivalents (273) 22,307
Cash and cash equivalents
beginning of period 328,636 378,529
---------- ----------
Cash and cash equivalents
end of period $ 328,363 $ 400,836
========== ==========
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Empire State Building Associates
March 31, 1999
Notes to Condensed Financial Statements (unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements
have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary
for a fair presentation of financial position, results of operations
and statement of cash flows in conformity with generally accepted
accounting principles. The accompanying unaudited condensed financial
statements include all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of the partners in
Registrant, necessary for a fair statement of the results for such
interim periods. The partners in Registrant believe that the
accompanying unaudited condensed financial statements and the notes
thereto fairly disclose the financial condition and results of
Registrant's operations for the periods indicated and are adequate to
make the information presented therein not misleading.
Note B - Interim Period Reporting
The results for the interim periods are not necessarily
indicative of the results to be expected for a full year.
Registrant is a partnership which was organized on July 11,
1961. Registrant owns the tenant's interest in a master operating
leasehold (the "Master Lease") on the Empire State Building (the
"Building") and the land thereunder, located at 350 Fifth Avenue, New
York, New York (the "Property"). On November 27, 1991, Prudential
Insurance Company of America sold the fee ownership of the property to
EGHolding Co. Inc. which, through merger and conveyance, reportedly
transferred its interest as lessor to Trump Empire State Partners
("Trump"). Associates' rights under the master leasehold remain
unchanged.
Registrant's partners are Peter L. Malkin, Thomas N.
Keltner, Jr. and Richard A. Shapiro (collectively, the "Partners"),
each of whom also acts as an agent for holders of participations in
his respective partnership interest in Registrant (the
"Participants").
The initial term of the Master Lease expired on January 5,
1992. On January 30, 1989, Registrant exercised its first of four 21-
year renewal options contained in the Master Lease and extended the
Master Lease through January 5, 2013. The annual rent payable under
the Master Lease is $1,970,000 through January 5, 2013 and $1,723,750
annually during the term of each renewal period thereafter.
The value of the Master Lease is stated at cost. To reflect
Registrant's exercise of the first renewal option under the Master
Lease, the estimated useful life of the Master Lease has been revised
to 25 years, effective January 1, 1988, through January 5, 2013.
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Empire State Building Associates
March 31, 1999
Registrant does not operate the Property. It subleases the
Property to Empire State Building Company ("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 elected to renew the Sublease
for a term commencing January 4, 1992 to January 4, 2013.
Sublessee is required to pay annual basic rent ("Basic
Rent") of $6,018,750 from January 1, 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 Registrant overage rent of
50% of Sublessee's net operating profit in excess of $1,000,000 for
each lease year ending December 31 ("Overage Rent").
Overage Rent and other accumulated interest and dividend
income are distributed annually after payment of any additional
payments for supervisory services to Counsel (as described in Note C
below). For 1998, Sublessee reported net operating profit of
$9,219,704; therefore, there was Overage Rent of $4,109,852 for the
year ended December 31, 1998. Registrant paid Counsel $180,000 as an
additional payment for supervisory services.
Sublessee is a New York partnership in which Peter L. Malkin
is a partner. The Partners in Registrant are also members of the law
firm of Wien & Malkin LLP, 60 East 42nd Street, New York, New York,
which acts as counsel to Registrant and Sublessee ("Counsel"). See
Note C below.
Note C - Supervisory Services
Registrant pays Counsel for supervisory services and
disbursements (i) the basic payment of $100,000 per annum (the "Basic
Payment") and (ii) an additional payment of 6% of all distributions to
Participants in any year in excess of the amount representing a return
of 9% per annum on their remaining original cash investment in any
year ("Additional Payment"). At March 31, 1999, such remaining cash
investment was $33,000,000, representing the original cash investment
of the Participants in Registrant.
No remuneration was paid during the three month period ended
March 31, 1999 by Registrant to any of the Partners as such. Pursuant
to the Fee arrangements described herein, Registrant paid Counsel
$25,000 of the Basic Payment for supervisory services for the three
month period ended March 31, 1999, and $4,951 a month as the
Additional Payment for supervisory services. The supervisory services
provided to Registrant by Counsel include legal, administrative and
financial services. The legal and administrative services include
acting as general counsel to Registrant, maintaining all of its part-
nership 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
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Empire State Building Associates
March 31, 1999
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.
Reference is made to Note B of this Item 1 ("Note B") for a
description of the terms of the Sublease between Registrant and
Sublessee. The respective interests of the Partners in Registrant and
in Sublessee 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 Participants in Registrant or partners in Sublessee.
However, each of the Partners, by reason of his respective interest in
Counsel, is entitled to receive his share of any legal fees or other
remuneration paid to Counsel for legal and supervisory services
rendered to Registrant and Sublessee.
As of March 31, 1999, the Partners owned of record and
beneficially an aggregate of $65,000 of participations in Registrant,
representing less than 1% of the currently outstanding participations
therein totaling $33,000,000.
In addition, as of March 31, 1999 certain of the Partners
(or their respective spouses) held additional Participations as
follows:
Trusts for the benefit of members of Peter L. Malkin's
family owned of record and beneficially $379,583 of
Participations. Mr. Malkin disclaims any beneficial
ownership of such Participations, except that such Trusts
are required to complete scheduled payments to Mr. Malkin.
Peter L. Malkin owned of record as trustee or co-trustee,
but not beneficially, $195,000 of Participations. Mr.
Malkin disclaims any beneficial ownership of such
Participations.
Richard A. Shapiro owned of record as custodian, but not
beneficially $12,500 of Participations. Mr. Shapiro
disclaims any beneficial ownership of such Participations.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
As stated in Note B, Registrant was organized for the
purpose of acquiring the Master Lease of the Property subject to the
Sublease. Basic Rent received by Registrant is used to pay annual
rent due under the Master Lease, the Basic Payment and the Additional
Payment for supervisory services; the balance of such Rent is
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Empire State Building Associates
March 31, 1999
distributed to the Participants. Overage Rent and any interest and
dividends accumulated thereon are distributed to the Participants
after the Additional Payment is made to Counsel. See Note C of Item 1
above. Pursuant to the Sublease, Sublessee has assumed responsibility
for the condition, operation, repair, maintenance and management of
the Property. Registrant is not required to maintain substantial
reserves or otherwise maintain liquid assets to defray any operating
expenses of the Property.
Registrant does not pay dividends. During the three month
period ended March 31, 1999, Registrant made regular monthly
distributions of $98.21 for each $10,000 participation ($1,178.52 per
annum for each $10,000 participation). There are no restrictions on
Registrant's present or future ability to make distributions; however,
the amount of such distributions depends solely on the ability of
Sublessee to make payments of Basic Rent and Overage Rent to
Registrant in accordance with the terms of the Sublease. Registrant
expects to make distributions in the future so long as it receives the
payments provided for under the Sublease. See Note B.
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.
Total income increased for the three month period ended
March 31, 1999 as compared with the three month period ended March 31,
1998. Such increase resulted from an increase in dividend income
earned on funds temporarily invested in Fidelity U.S. Treasury Income
Portfolio. Total expenses remained the same for the three month
period ended March 31, 1999 as compared with the three month period
ended March 31, 1998.
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 interest
thereon. The Supreme Court, New York County, granted summary judgment
in favor of the State, which was affirmed by the Appellate Division,
holding that the State utility tax applies to such inclusion charges.
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. The
State has accepted a bond as security for the unpaid liability.
Company also is liable for New York State Utility tax for periods
after December 31, 1992. The state assessed tax for the years 1993
through 1995, in the sum of $636,404 plus interest of $249,521 through
December 31, 1998. Company is currently negotiating a payment
schedule for the aforesaid liability.
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Empire State Building Associates
March 31, 1999
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 accured interest of approximately
$252,479 through March 31, 1999. Company is contesting the
calculation of the city's proposed Utility Tax deficiency. The final
outcome of its appeal cannot presently be determined. Accordingly, no
provision for any liability that may result upon final adjudication
has been made in the accompanying financial statements.
Company also is liable for additional New York City Utility
Tax 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 for the three month period ended March 31, 1999, as compared
with the three month period ended March 31, 1998.
Assuming that the Building continues to generate an annual
net profit in future years comparable to that in the current year,
Registrant anticipates that the value of the Building and the Property
will exceed the indicated balance sheet value at March 31, 1999.
Registrant anticipates that funds for working capital will
be generated by operations of the Building by Sublessee, which entity
in turn is required to make payments of Basic Rent and Overage Rent
under the Sublease and, to the extent necessary, from additional
capital investment by the partners in Sublessee and/or external
financing. Registrant foresees no need to make material commitments
for capital expenditures while the Sublease is in effect.
Inflation
Registrant believes that there has been no material change
in the impact of inflation on its operations since the filing of its
report on Form 10-K for the year ended December 31, 1998, which report
and all exhibits thereto are incorporated herein by reference and made
a part hereof.
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Empire State Building Associates
March 31, 1999
PART II. OTHER INFORMATION
Item 1. 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 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. The Plaintiff has been denied permission to appeal to the New
York Court of Appeals. The Plaintiff has filed a further Complaint
alleging similar claims, purportedly as a class action. Defendant's
counsel filed a motion to dismiss the new complaint based upon the
Court's prior rulings and on other grounds. In March, 1999, the Court
granted the motion for dismissal of the new complaint.
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 ("Action No. 1") 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.
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Empire State Building Associates
March 31, 1999
On February 15, 1995, Trump filed an action ("Action No. 2")
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 Action No. 2. 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 ("Action No. 3") 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 (the "Ownership Claim") 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 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.
On March 16, 1999, the New York Supreme Court granted
summary judgment in Action Nos. 1 and 3 in favor of Registrant and the
Sublessee and against the Trump defendants as to most of the alleged
lease defaults set forth in the Trump default notice of December 1994,
and as to the two additional Trump default notices in their entirety
and the Ownership Claim.
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 April 7, 1999, Registrant's
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Empire State Building Associates
March 31, 1999
counsel filed an application to the Court for summary judgment and
dismissal of the action as to Registrant. The motion is scheduled for
submission to the Court on May 26, 1999.
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.
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.
On November 2, 1998, the Partners mailed to the Participants
a STATEMENT ISSUED BY THE AGENTS IN CONNECTION WITH THE SOLICITATION
OF CONSENTS OF THE PARTICIPANTS (the "Statement") requesting their
authorization for the designation of new Successor Agents. The
details of the Partners' proposal are provided in the Definitive Proxy
Statement which was filed with the Securities and Exchange Commission
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Empire State Building Associates
March 31, 1999
as Schedule 14-A on October 28, 1998, and is incorporated herein by
reference. On April 12, 1999, the Partners mailed to the Participants
notice that they received the necessary consents for the appointment
of new successor agents.
Item 5. Other Information
The Sublessee is to maintain the Building as a high-class
office building as required by the terms of the Sublease.
In 1990, Sublessee commenced its latest improvement program
which is estimated to be completed in 1999 at a total cost in excess
of $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 the installation of
a computerized control system and 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 year 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
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 6. Exhibits and Reports on Form 8-K
(a) See exhibit index.
(b) Registrant did not file any report on Form 8-K for the
period for which this report is being filed.
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Empire State Building Associates
March 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The individual signing this report on behalf of Registrant
is Attorney-in-Fact for Registrant and each of the Partners in
Registrant, pursuant to Powers of Attorney, dated August 6, 1996 and
May 14, 1998 (collectively, the "Power").
EMPIRE STATE BUILDING ASSOCIATES
(Registrant)
By: /s/ Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Dated: May 18, 1999
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the undersigned as Attorney-
in-Fact for each of the Partners in Registrant, pursuant to the Power,
on behalf of Registrant on the date indicated.
By: /s/ Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Dated: May 18, 1999
__________________________
* Mr. Katzman supervises accounting functions for Registrant.
-13- <PAGE>
Empire State Building Associates
March 31, 1999
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.
13(a) Letter to Participants dated April 23,
1999 and supplementary financial reports
for the fiscal year ended December 31,
1998. The foregoing material shall not be
deemed filed with the commission or
otherwise subject to the liabilities of
Section 18 of the Securities Exchange Act
of 1934.
24 Powers of Attorney dated August 6, 1996
and May 14, 1998 between the Partners of
Registrant and Stanley Katzman and Richard
A. Shapiro which was filed as Exhibit 24
to Registrant's 10-Q for the quarter ended
March 31, 1998 and is incorporated herein
by reference.
__________________________
* Page references are based on sequential numbering system.
-14- <PAGE>
[LETTERHEARD OF
WIEN & MALKIN LLP]
April 23, 1999
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, 1998 and the comparative statement of operations
under the sublease for the years 1998 and 1997.
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 1998 was
$9,219,704, so that the sublessee paid additional rent of $4,109,852.
The profit for 1997 was $5,802,601, so that the sublessee paid
additional rent of $2,401,300.
For the year 1998, professional fees of $2,474,890 incurred by the
sublessee include $2,111,720 for outside counsel and other independent
professional firms. Of this amount, approximately $332,000 was incurred
in connection with leasing matters and $731,394 was incurred for fees
and disbursements of Battle Fowler LLP and 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.
There was $3,000,000 available for distribution. In accordance with the
partnership agreement, 6% of the distribution, $180,000, has been paid
to Wien & Malkin LLP. $2,820,000 was distributed to the participants on
March 5, 1999 and represented about 8.5% on the original cash investment
of $33,000,000. Together with regular monthly distributions during the
year 1998, total distribution to participants for 1998 were at the rate
of about 20.3%. Details are as follows:
-15-
<PAGE>
Additional rent for the year 1998 $4,109,852
Dividend income 84,615
4,194,467
Less:
To Wien & Malkin LLP in connection
with agent succession program
that was approved by participants $ 8,125
Accrual for advance by Wien & Malkin LLP
during 1998 in connection with the
Studley litigation about which participants
have previously been advised 179,979
Reserve for future expenses in defending
Trump an Studley litigations 1,006,363 (1,194,467)
Balance $3,000,000
Distribution to participants on March 5, 1999 $2,820,000
6% of $3,000,000 paid to Wien & Malkin LLP 180,000
Total $3,000,000
Total distributions to the participants on the original cash investment
for the years 1998, 1997 and 1996 were at the rate of approximately 20.3%, 15%
and 11.8%, respectively, and we expect this positive upward trend to continue
in 1999.
For financial statement purposes, while the income of Empire State
Building Associates for the year 1998 was $7,507,228, distributions of
$6,709,333, including the additional distribution of $2,820,000, were made
to participants. The difference arises mainly because of a reserve for
future expenses in defending litigations as described above.
Taking into account that a portion of prior distributions constituted
a return of capital, the average capital investment for the year 1998 was
$5,869,010. Distributions of $6,709,333 were about 114.3% on the average
capital. The book value on December 31, 1998 of an original cash investment
of $10,000 was $2,166.
-16-<PAGE>
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 5, 1998 to be reported on your
1998 income tax returns. The payment for 1998 was mailed to you on March 5,
1999 and will be reportable on your 1999 income tax returns.
Schedule K-1 forms (Form 1065), containing 1998 tax information, were
mailed to the participants on March 12, 1999.
If you have any question about the enclosed material, please
communicate with our office.
Cordially yours,
WIEN & MALKIN LLP
By: Stanley Katzman
SK:gc
Enc.
-17-<PAGE>
[LETTERHEARD OF
JACOBS EVALL & BLUMENFELD LLP]
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,
1998, 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, 1998, 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 31, 1999
-18- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1998
Assets
Cash and cash equivalents:
The Chase Manhattan Bank $ 4,525
Distribution account held by Wien & Malkin LLP 324,111
Fidelity U.S. Treasury Income Portfolio 4,906,745
5,235,381
Additional rent due from Empire
State Building Company 609,852
Prepaid rent 23,831
Leasehold on Empire State Building,
350 Fifth Avenue, New York, N.Y. $39,000,000
Less: Accumulated amortization
of leasehold 36,081,426 2,918,574
Total assets $8,787,638
Liabilities and partners' capital
Liabilities:
Accrued supervisory services $ 180,000
Accrued legal fees 1,460,341
Total liabilities $1,640,341
Contingencies
Partners' capital 7,147,297
Total liabilities and partners' capital $8,787,638
See accompanying notes to financial statements.
-19- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
Income:
Basic rent $ 6,018,750
Additional rent 4,109,852
Dividend income 84,615
Total income 10,213,217
Expenses:
Leasehold rent $1,970,000
Legal fees 188,104
Supervisory services 339,417
Total expenses 2,497,521
Income before amortization of leasehold 7,715,696
Amortization of leasehold 208,468
Net income $ 7,507,228
See accompanying notes to financial statements.
-20- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1998
Partners' capital, January 1, 1998 $ 4,590,721
Add, Net income for the year ended
December 31, 1998 7,507,228
12,097,949
12,097,949
Less, Distributions:
Monthly distributions,
January 1, 1998 through December 31, 1998 $3,889,333
Additional distribution on March 5, 1998 1,061,319 4,950,652
Partners' capital, December 31, 1998 $ 7,147,297
See accompanying notes to financial statements.
-21- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Cash flows from operating activities
Net income $ 7,507,228
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of leasehold 208,468
Changes in operating assets and liabilities:
Additional rent due from
Empire State Building Company (608,552)
Accrued supervisory services 112,256
Accrued legal fees 188,104
Net cash provided by operating activities 7,407,504
Cash flows from financing activities
Distributions to participants (4,950,652)
Net cash used in financing activities (4,950,652)
Net increase in cash and cash equivalents 2,456,852
Cash and cash equivalents, beginning of year 2,778,529
Cash and cash equivalents, end of year $ 5,235,381
See accompanying notes to financial statements.
-22- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Amortization of the leasehold
is being computed through its first renewal term by the straight-
line method over its 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.
-23- <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 1998 was $4,109,852.
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 remainder of the first renewal term of
the lease 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, 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.
-24- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Litigation and Subsequent Events
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. The Plaintiff applied for
permission to appeal the Appellate Division's determination to the
New York Court of Appeals, and that application was denied by both
the Appellate Division and the Court of Appeals. The Plaintiff has
filed a new complaint, which alleges claims similar to those asserted
in the previously dismissed complaint. The defendants have applied
for dismissal of the new complaint based on the prior dismissal
orders and on other grounds. That application is pending and awaiting
decision by the Court. It is not possible at this time to predict the
outcome or range of potential loss, if any, which might result 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, 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 T
rump from implementing the notice of default ("Notice I"). 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 ("Notices
II and III"). 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 June 5, 1998 the Company and Associates filed a motion for summary
judgment in the Action in a companion action (the "Companion Action")
entitled Empire State Building Associates and Empire State Building
Company v. Donald Trump et. al., in which plaintiffs seek related
declaratory and injunctive relief against Trump and its affiliates
with respect to plaintiffs' rights to act as owner of the Building
in dealings with the New York City Department of Buildings.
-25-<PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Litigation and Subsequent Events (continued)
In a decision and order dated March 10, 1999, the Court awarded partial
summary judgment to Associates and Company in the Action, declaring
that Notices II and III were invalid and of no force and effect, and
Further declaring that there was no legal or factual basis for many
of the defaults alleged in Notice I. The Court also awarded summary
judgment to Associates in the Companion Action, declaring that
Associates is entitled to act as "owner" of the Building for purposes
of dealing with the Buildings Department and enjoining Trump from
interfering with such right.
Plaintiffs intend to challenge any future claims of default by Trump
and, if appropriate, to renew their motion for summary judgment.
No provision for any liability that may result upon adjudication has
been made in the accompanying financial statements.
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 those asserted in the original complaint.
Associates served an answer to plaintiff-tenant's complaint, denying
all material allegations of liability and damage. Associates is not
a party to the leases and license agreements between plaintiff-tenant
and Company.
Counsel for Associates has not formed a professional conclusion that
an adverse outcome is either probable or remote, although it notes
that all causes of action asserted against Associates have already
been dismissed as against Company and the Helmsley-Spear defendants.
It is not possible at this time to predict the outcome or range of
potential loss, if any, which might result from this action.
-26- <PAGE>
EMPIRE STATE BUILDING ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Legal Fees and Related Party Transactions
The accompanying statement of income reflects the accrual of legal
expense of $188,104, consisting of $179,979 for advances by Wien &
Malkin LLP for expenses of the Agents relating to the Studley suit
for 1998 and $8,125 to Wien & Malkin LLP relating to an Agent
succession program. The accompanying balance sheet reflects an
accrued liability of $1,460,341 through December 31, 1998, consisting
of an accrued liability for reimbursement owing to Agents of $1,272,237
at December 31, 1997 of their legal and accounting expenses relating
to the Studley and Trump suits, plus the 1998 accrued expenses of
$188,104. Through December 31, 1998 legal and accounting expenses in
connection with the Studley suit amounted to $1,140,044, of which
$827,740 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, 1998 also indicate $312,172
in accumulated professional time 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.
9. Concentration of Credit Risk
Associates maintains cash balances in a bank, money market funds
(Fidelity U.S. Treasury Income Portfolio) 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, 1998
was completely insured. The cash in the money market funds and the
account held by Wien & Malkin LLP are not insured. The funds held in
the distribution account were paid to the participants on January 1,
1999.
-27- <PAGE>
[LETTERHEARD OF
MCGRATH, DOYLE & PHAIR]
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, 1998 and 1997 for the purpose of determining "Net Operating
Profit" and "Overage Rent" as those terms are defined in Section 2.05 of
Agreement of Sublease dated December 27, 1961. During the years ended
December 31, 1998 and 1997, 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, 1998 and 1997, 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
March 17, 1999
-28-<PAGE>
Empire State Building and Observatory
COMPARATIVE COMBINED STATEMENT OF INCOME
Increase
1998 1997 (Decrease)
INCOME
Rent, including electricity $ 55,110,840 $ 53,800,622 $ 1,310,218
Observatory admissions 17,803,746 16,378,777 1,424,969
Other observatory income 1,228,170 1,194,070 34,100
Antenna rent 5,348,547 5,442,661 (94,114)
Lease cancellation 19,184 113,919 (94,735)
Percentage rent 676,098 625,929 50,169
Net credit on water charges (Note 5) 366,094 - 366,094
Other 739,511 879,686 (140,175)
Total income 81,292,190 78,435,664 2,856,526
OPERATING EXPENSES
Rent 6,018,750 6,018,749 1
Real estate taxes 19,367,733 19,766,635 (398,902)
Wages, contract cleaning and protection
service 12,386,259 11,808,525 577,734
Electricity 4,857,861 4,745,390 112,471
Tenants' and building alterations,
repairs and supplies 11,157,243 12,528,746 (1,371,503
Management fees and leasing commissions
(No 1) 3,252,369 2,872,332 380,037
Observatory:
Wages 1,786,158 1,767,377 18,781
Contracted security 2,212,386 2,139,784 72,602
Advertising and public relations 379,065 228,608 150,457
Payroll taxes and other labor cost 656,879 558,923 97,956
Other taxes and expenses 247,833 216,517 31,316
Steam 1,205,017 1,455,313 (250,296)
Professional fees (Note 2) 2,474,890 1,883,141 591,749
Payroll taxes and other labor costs 2,980,013 3,265,122 (285,109)
Insurance 540,241 725,396 (185,155)
Water (Note 5) - 959,828 (959,828)
Rubbish removal 399,546 463,205 (63,659)
Advertising 339,632 331,726 7,906
Telephone 84,702 69,572 15,130
Fire alarm service 63,618 18,955 44,663
Directory service 9,219 5,072 4,417
New York State utility taxes (1987-1992)
(Note 4) - - -
Interest on NYS utility tax (Note 4) 340,453 127,811 212,642
Utility taxes (Note 4) 968,729 261,128 707,601
Paging and other intercommunication 86,578 108,499 (21,921)
Dues 35,403 35,719 (316)
Licenses and permits 4,372 3,366 1,006
Other expenses 217,537 267,624 (50,087)
Total expenses before overage rent 72,072,486 72,633,063 (560,577)
NET OPERATING PROFIT $ 9,219,704 $ 5,802,601 $ 3,417,103
OVERAGE RENT, 50% OF NET OPERATING PROFIT
IN EXCESS OF $1,000,000 $ 4,109,852 $ 2,401,300 $ 1,708,552
(See note to combined statement of income)
-29- <PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
1. Management and leasing services were provided to Empire State Building
Company ("Company") by entities in which the Estate of Harry B.
Helmsley, a partner in Company, had a controlling interest through
September 24, 1997. Through May 26, 1997, purchasing services were
provided through an entity in which the Estate of Harry B. Helmsley
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.
The Plaintiff filed an appeal with respect to the foregoing order.
By decision and order entered April 2, 1998, the Appellate Division of
the Supreme Court unanimously affirmed the order dismissing the action.
The Plaintiff has applied for permission to appeal the Appellate
Division's determination to the New York Court of Appeals,
and that application has been denied by both the Appellate Division and
the Court of Appeals. The Plaintiff has filed a new complaint, which
alleges claims similar to those asserted in the previously dismissed
complaint. The defendants have applied for dismissal of the new
complaint based on the prior dismissal orders and on other grounds.
That application is pending and awaiting decision by the Court. 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 ("Notice I") 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 ("Notices II
and III") for which the Court had granted additional injunctions against
Trump.
-30- <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.
On June 5, 1998, Associates and Company filed a motion for summary
judgment against Trump and various affiliates that they may act as owner
of the Property in dealing with the New York City Department of
Buildings.
In a decision and order dated March 10, 1999, the court awarded partial
summary judgment to Associates and Company in the action, declaring
that Notices II and III were invalid and of no force and effect, and
further declaring that there was no legal or factual basis for many of
the defaults alleged in Notice I. The court also stated that Trump
appeared to concede that many of the remaining defaults alleged in
Notice I had been corrected, and that Trump would be permitted to
inspect the Building within 30 days of the date of the order to
determine whether these claimed violations had in fact been corrected.
Finally, the court directed Trump to notify plaintiffs, within 30 days
of the completion of its inspection, as to which defaults it claims
still exist, and the court granted plaintiffs permission to renew their
motion for summary judgment with respect to any such remaining claims
of default within 30 days of the receipt of Trump's notice. Plaintiffs
intend to challenge any such claims of default by Trump and, if
appropriate, to renew their motion for summary judgment.
In its March 10, 1999 decision and order, the Court also awarded
summary judgment to Associates in the Companion Action, declaring
that Associates is entitled to act as "owner" of the Building for
purposes of dealing with the Buildings Department and enjoining Trump
from interfering with such right.
-31-<PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(b) (Continued)
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, 1998, such legal and accounting
expenses in connection with the Studley suit have amounted to
$1,140,044, of which $827,740 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,
1998 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.
(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).
-32- <PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(d) (Continued)
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
indemnification 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.
By a Stipulation and Order of Dismissal filed April 10, 1998, the
Federal Court Action was dismissed, without prejudice, as against
Company. (Because of that dismissal, certain cross-claims and a third-
party complaint asserted by Company were also dismissed without
prejudice.) Accordingly, the Federal Court Action is no longer pending
against Company.
On April 23, 1998, certain of the plaintiffs in the Federal Court Action
(together with other parties) filed a new complaint in New York State
court against Company, which was principally the same as the complaint
originally filed in the Federal Court Action. Plaintiffs never served
that state court complaint on Company and have not prosecuted that
action.
In January 1999, Company was informed by plaintiffs counsel that one or
more of the plaintiffs intend to serve a complaint, presumably similar
to the pleading in the prior actions, against Company.
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.
(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 $200,000 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.
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 and Peter L.
Malkin, as party-defendants. The amended complaint asserted eleven
causes of action against the Company, similar to those asserted in the
original complaint.
-33- <PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
3. Litigation (Continued)
(e) (Continued)
By order and decision dated April 3, 1998 (the "April 3, 1998 Order"),
the Court granted plaintiff a Yellowstone injunction on the condition
that plaintiff pay $878,000 in back rent to the Company and ordered
that a hearing be held to determine the amount due on disputed rent and
license fees. Plaintiff made timely payment of the $878,000 to the
Company. The hearing to determine the amount due on disputed rent
and license fees has not yet been held.
On March 16, 1998 the Company moved to dismiss the second, third,
fifth, sixth, eighth, ninth and eleventh causes of action with respect
to the amended complaint. By decision and order dated February 25,
1999, the Court granted the Company's motion to dismiss the second,
fifth, sixth, eighth, ninth and eleventh causes of action, and denied
the Company's motion to dismiss the third cause of action.
By order to show cause dated December 22, 1998, plaintiff moved for a
temporary restraining order and preliminary injunction preventing the
Company from seeking to enforce a Notice of Default that the Company
had served on plaintiff with respect to certain space leased to
plaintiff under the lease dated as of March 1996 covering Rooms
209-214, 233-250 and 340-346 in the Building. The Company has
opposed the motion and oral argument on the motion has not yet taken
place.
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.
(f) Company is a defendant in an action instituted in the Supreme Court
of the State of New York, County of New York, entitled Magnifique
Parfumes And Cosmetics, Inc. d/b/a Perfumania v. Empire State Building
Inc.
This is an action commenced on or about October 15, 1998 against
Company (incorrectly named in the action as "Empire State Building,
Inc.").
This lawsuit which is brought by a tenant in the building seeks at least
$700,000 in damages. In its complaint, plaintiff-tenant alleges that
the Company breached its lease with plaintiff by, among other things,
charging plaintiff for electricity on a submetering basis at a rate
which far exceeds the rate permissable under the lease.
On or about February 2, 1999, the Company served an answer to the
complaint. The answer denied the material allegations of the complaint
and asserted eight affirmative defenses.
On or about February 22, 1999, the Company served an amended
answer and counterclaim. The amended answer denied the material
allegations of the complaint and asserted nine affirmative defenses.
The counterclaim against plaintiff and Perfumania, Inc. (as guarantor)
alleges that plaintiff breached certain obligations under the lease to
pay certain rent, electricity and operating expense charges and owes the
Company $37,312.11 in arrears under the lease.
The Company intends to contest the case vigorously.
-34- <PAGE>
Empire State Building and Observatory
NOTES TO COMBINED STATEMENT OF INCOME
NOTE
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
nonmetered electricity rent inclusion charges to tenants, plus estimated
accrued interest of $797,713.
The Supreme Court, New York County 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. Company also is liable for New
York State Utility Tax for periods after December 31, 1992. The state
has asserted tax for the years 1993 through 1995, in the sum of $636,404
plus interest of $249,521 through December 31, 1998. Company is
currently reviewing the amount of the asserted tax and will negotiate a
payment schedule for the aforesaid liability when finally determined.
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 $233,390 through
December 31, 1998. 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.
Wien & Malkin LLP and Peter Malkin are engaged in a dispute with
Helmsley Spear, Inc. concerning the future management, leasing and
supervision of the Company's property. In this connection, certain
legal and professional fees and other expenses have been paid and
incurred and additional costs are expected to be incurred. The
Company's allocable share of such costs, if any, is as yet undetermined.
Accordingly, the Company has not provided for the expense and related
liability with respect to such cost in these financial statements.
5. Net credit re water charges
Prior to 1998, The City of New York had rendered estimated water charges
for approximately one and one-half years because it had not read the
various water meters. During 1997, Company had received charges which
were in excess of previously rendered charges and Company then retained
a water consultant. The consultant determined that Company had been
overcharged in prior years; accordingly, the City of New York rendered
credits, attributable to prior years, which exceed the 1998 water
expense.
-35- <PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of March 31, 1999 and the Statement Of Income
for the year ended March 31, 1999, and is qualified in its entirety by
refenence to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 328,363
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,908,097<F1>
<PP&E> 39,000,000
<DEPRECIATION> 36,133,543
<TOTAL-ASSETS> 5,774,554
<CURRENT-LIABILITIES> 1,452,216
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 4,322,338
<TOTAL-LIABILITY-AND-EQUITY> 5,774,554
<SALES> 1,504,687<F2>
<TOTAL-REVENUES> 1,551,845<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 584,471<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 967,374
<INCOME-TAX> 0
<INCOME-CONTINUING> 967,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 967,374
<EPS-PRIMARY> 293.14<F5>
<EPS-DILUTED> 293.14<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
-36-<PAGE>
</TABLE>
