<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 No. 1-8815
EQK REALTY INVESTORS I
(Exact name of Registrant as specified in its Charter)
Massachusetts 23-2320360
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5775 Peachtree Dunwoody Road, Suite 200D, Atlanta, GA 30342
(Address of principal executive offices) (Zip code)
(404) 303-6100
(Registrant's telephone number, including area code)
Indicate by checkmark 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
----- -----
APPLICABLE TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
FIVE YEARS:
Indicate by checkmark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 9,264,344 Shares as of August 5,
1994.
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EQK REALTY INVESTORS I
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1994
INDEX
Page
------
PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets as of June 30, 1994 3
and December 31, 1993
Statements of Operations for the three 4
and six months ended June 30, 1994 and
June 30, 1993
Statements of Cash Flows for the six 5
months ended June 30, 1994 and
June 30, 1993
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
PART II - OTHER INFORMATION
Items 1 through 6. 12
SIGNATURES 13
2
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EQK REALTY INVESTORS I
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments in real estate, at cost:
Castleton Commercial Park, net of
valuation allowance of $19,565 $ 60,881 $ 60,313
Harrisburg East Mall 47,203 46,769
--------- ---------
108,084 107,082
Less accumulated depreciation 29,940 28,118
--------- ---------
78,144 78,964
Restricted cash 3,872 4,308
Cash and short-term investments 982 1,408
Other assets 8,147 8,483
--------- ---------
TOTAL ASSETS $ 91,145 $ 93,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage note payable, net of debt
discounts of $486 and $651,
respectively $ 76,555 $ 75,874
Term loan payable to bank 2,850 2,853
Accounts payable and other liabilities 5,113 6,260
--------- ---------
84,518 84,987
--------- ---------
Shareholders' equity:
Shares of beneficial interest, without
par value: 10,055,555 shares
authorized, 9,264,344 shares
issued and outstanding 135,779 135,779
Accumulated deficit (129,152) (127,603)
--------- ---------
6,627 8,176
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 91,145 $ 93,163
========= =========
</TABLE>
- - -----------------
See accompanying Notes to Financial Statements.
3
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EQK REALTY INVESTORS I
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from rental operations $ 4,169 $ 4,623 $ 8,187 $ 9,109
Operating expenses, net of tenant
reimbursements 1,421 1,331 2,908 2,899
Depreciation and amortization 1,150 1,207 2,335 2,386
------- ------- ------- -------
Income from rental operations 1,598 2,085 2,944 3,824
Interest expense 2,028 2,202 4,042 4,407
Other expenses, net of
interest income 191 223 451 455
------- ------- ------- -------
Net loss $ (621) $ (340) $(1,549) $(1,038)
======= ======= ======= =======
Net loss per share $ (0.07) $ (0.03) $ (0.17) $ (0.11)
======= ======= ======= =======
</TABLE>
- - ----------------
See accompanying Notes to Financial Statements.
4
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EQK REALTY INVESTORS I
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,549) $(1,038)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,335 2,386
Amortization of discount on
mortgage note payable 165 65
Imputed and deferred interest 639 645
Changes in assets and liabilities:
Increase (decrease) in accounts payable
and other liabilities (565) 188
(Increase) decrease in other assets (120) 197
------- -------
Net cash provided by operating activities 905 2,443
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate investments (1,548) (1,747)
Payment of real estate disposition fee (216) --
------- -------
Net cash used in investing activities (1,764) (1,747)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Mortgage principal payments (3) (412)
------- -------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (862) 284
CASH AND SHORT-TERM INVESTMENTS,
BEGINNING OF PERIOD 5,716 6,565
------- -------
CASH AND SHORT-TERM INVESTMENTS,
END OF PERIOD $ 4,854 $ 6,849
======= =======
Supplemental disclosure of cash
flow information:
Interest paid $ 3,350 $ 3,824
======= =======
</TABLE>
- - ----------------
See accompanying Notes to Financial Statements.
5
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EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
EQK Realty Investors I, (the "Company"), a Massachusetts business
trust, was formed pursuant to a Declaration of Trust dated October 8,
1984 to acquire certain income-producing real estate investments.
Commencing with the period beginning April 1, 1985, the Company
qualified and elected real estate investment trust status under the
provisions of the Internal Revenue Code, and adopted December 31 as
its year end, as required for real estate investment trusts.
The Company's portfolio consists of two real estate investments:
Castleton Commercial Park ("Castleton"), an office park located in
Indianapolis, Indiana; and Harrisburg East Mall ("Harrisburg" or the
"Mall"), a regional shopping center located in Harrisburg,
Pennsylvania. In December 1993, the Company sold its two remaining
office buildings within its office complex in Atlanta, Georgia,
formerly known as Peachtree-Dunwoody Pavilion ("Peachtree").
NOTE 2. BASIS OF PRESENTATION
The financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. The financial statements should be read in
conjunction with the audited financial statements and related notes
thereto included in the Annual Report on Form 10-K for the year ended
December 31, 1993.
In the opinion of the Company, all adjustments, which include only
normal recurring adjustments necessary to present fairly its financial
position as of June 30, 1994, its results of operations for the three
and six months ended June 30, 1994 and 1993 and its cash flows for the
six months ended June 30, 1994 and 1993, have been included in the
accompanying unaudited financial statements.
Net loss per share for the three and six months ended June 30, 1994
and 1993 have been computed on the basis of the 9,264,344 shares
outstanding during the periods. Stock warrants issued in December
1992 and 1993 to the Company's mortgage lender are considered common
stock equivalents for purposes of the calculation of net loss per
share. However, the warrants have not been included in the
calculation of net loss per share for the periods presented since the
effect of such calculation would be antidilutive.
6
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EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. CASH MANAGEMENT AGREEMENT
In connection with the Company's mortgage agreement, the Company has
entered into a Cash Management Agreement with the mortgage lender and
has assigned all lease and rent receipts to the lender as additional
collateral. Pursuant to this agreement, a third-party escrow agent
has been appointed to receive all rental payments from tenants and to
fund monthly operating expenses in accordance with a budget approved
by the lender. As of June 30, 1994, a balance of $537,000 was held by
the third-party escrow agent in accordance with the Cash Management
Agreement. The agreement also provides for a capital reserve account,
which is maintained by the escrow agent. Disbursements from this
account, which is funded each month with any excess operating cash
flow, are limited to capital expenditures approved by the lender. As
of June 30, 1994, the balance of the capital reserve account was
$3,022,000.
NOTE 4. ADVISORY AND MANAGEMENT AGREEMENTS
The Company has entered into an agreement with Equitable Realty
Portfolio Management, Inc., a wholly owned subsidiary of Equitable
Real Estate Investment Management, Inc. ("Equitable Real Estate"), to
act as its "Advisor". The Advisor makes recommendations to the
Company concerning investments, administration and day-to-day
operations.
Under the terms of the advisory agreement, as amended in December
1989, the Advisor receives a management fee that is based upon the
average daily per share price of the Company's shares plus the average
daily balance of outstanding mortgage indebtedness. Such fee is
calculated using a factor of 42.5 basis points (0.425%) and is payable
monthly without subordination. For the six months ended June 30, 1994
and 1993, portfolio management fees were $ 216,000 and $235,000,
respectively.
As part of the 1989 amendment to the advisory agreement, the Advisor
forgave one-half, or $2,720,000, of the total amount of fees
previously deferred pursuant to subordination provisions of the
original advisory agreement. The remaining deferred fees are to be
paid upon the disposition of the Company's properties. If the
properties are sold before December 1, 1994, the $2,720,000 will be
discounted by 13% per year from December 1, 1994 to the date on which
the last property is sold. For financial reporting purposes, the
deferred balance is discounted from December 1, 1996. As of June 30,
1994, the discounted liability for deferred management fees was
$2,017,000.
7
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EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ADVISORY AND MANAGEMENT AGREEMENTS (CONTINUED)
The Company has also entered into agreements for the on-site
management of each of its properties. Harrisburg East Mall is managed
by Compass Retail, a subsidiary of Equitable Real Estate. Peachtree
was managed under an agreement with a subsidiary of Equitable Real
Estate that specializes in office management and leasing. Castleton
Commercial Park is managed by an unaffiliated third-party management
company.
Management fees paid to each of the Equitable Real Estate management
subsidiaries are generally based upon a percentage of rents and
certain other charges. For Peachtree, the Company also paid leasing
commissions based upon a percentage of total minimum future rents.
Such fees and commissions are comparable to those charged by
unaffiliated third-party management companies providing comparable
services. For the six months ended June 30, 1994 and 1993, management
and leasing fee expense attributable to services rendered by
subsidiaries of Equitable Real Estate were $154,000 and $271,000,
respectively.
NOTE 5. PROPOSED SALE OF HARRISBURG EAST MALL
In July 1994, the Board of Trustees authorized the Company's
management to pursue the sale of Harrisburg as part of a portfolio of
regional shopping malls assembled by Compass Retail. On August
4, 1994, a term sheet was executed with the potential purchaser, a
publicly-traded real estate investment trust, that provides for, among
other things, an all-cash purchase price of $72,400,000. The term
sheet also provides for a 60 day due diligence period and anticipates
a closing by the end of 1994. The net proceeds from the sale, along
with existing cash reserves, will be used to retire substantial
portions of the mortgage note and term loan, and to satisfy certain
yield maintenance requirements related to such debt. Upon
consummation of these transactions, the Company anticipates
recognizing a gain on sale of real estate of approximately $27,500,000
and a loss on retirement of debt of approximately $1,700,000. Upon
the sale of Harrisburg and the concurrent debt retirement, the
portfolio management fee payable to the Advisor is expected to be
restructured to a fixed fee of $375,000 per year. The proposed
transaction also includes the sale of Compass Retail and the Company's
Advisor. Completion of the transaction is subject to approval by the
Company's primary lender, along with board of directors approval by
all parties, the execution of mutually agreeable documents, and normal
due diligence procedures. Accordingly, there can be no assurances
that the transaction will be consummated.
8
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EQK REALTY INVESTORS I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Capital Resources
The Company's portfolio at June 30, 1994 consists of two real estate
investments: Castleton Commercial Park ("Castleton"), an office park located
in Indianapolis, Indiana; and Harrisburg East Mall ("Harrisburg" or the "Mall),
a regional shopping center located in Harrisburg, Pennsylvania. During 1993,
the Company sold its two remaining office buildings within its office complex
in Atlanta, Georgia, formerly known as Peachtree-Dunwoody Pavilion or
"Peachtree."
The Company continues to pursue the orderly liquidation of its real estate
portfolio. During this process, the Company will make certain capital
expenditures required to enhance or maintain the value of the properties,
including tenant allowances associated with leasing activity. For 1994, the
Company's capital budget is $2,500,000, of which approximately $1,000,000 was
spent during the first six months. One of the conditions of the mortgage
restructuring completed in 1992 was the establishment of a capital reserve
account, which is maintained by a third-party escrow agent and from which
expenditures must be approved by the lender. The balance of this account at
June 30, 1994 was $3,022,000.
As disclosed in Note 5 to the Financial Statements presented in Item 1, a term
sheet has been executed with respect to the sale of Harrisburg to a publicly
traded real estate investment trust as part of a portfolio of regional shopping
malls. The all cash proceeds from the sale of Harrisburg in the amount of
$72,400,000, along with existing cash reserves, will be used to retire
substantial portions of the mortgage note and the term loan, and to satisfy
certain yield maintenance requirements related to such debt. The reduction in
debt balances outstanding will reduce both the accrual of interest and the
issuance of warrants for additional shares required under the terms of the
mortgage loan agreement. Under the existing terms of the debt, the interest
payment savings will be approximately $5,960,000 in 1995 and if the transaction
is consummated prior to December 15, 1994, the number of shares underlying the
warrants to be issued to the mortgage lender will be reduced from 50,000 shares
to approximately 5,000 shares. Upon consummation of these transactions, the
Company anticipates recognizing a gain on sale of real estate of approximately
$27,500,000 and a loss on retirement of debt of approximately $1,700,000. The
proposed transaction also includes the sale of Compass Retail, Inc. (the
property manager for Harrisburg) and Equitable Realty Portfolio Management,
Inc. (the Company's Advisor.) Completion of the transaction is subject to
approval by the Company's primary lender, along with board of directors
approval by all parties, the execution of mutually agreeable documents, and
normal due diligence procedures. Accordingly, there can be no assurances that
the transaction will be consummated.
9
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Liquidity
The December 1993 sale of the Peachtree buildings and the resulting retirement
of the Harrisburg mortgage notes affects the comparability of the Statements of
Cash Flows for the six months ended June 30, 1994 and 1993. The buildings at
Peachtree generated approximately $500,000 of operating cash flows during the
six months ended June 30, 1993 as measured by net income before depreciation
and amortization expense. However, this decline in operating cash flows was
entirely offset by the positive impact on cash flows from debt retirement, as
the Harrisburg mortgage notes consumed $850,000 of cash flows through principal
and interest payments during the six months ended June 30, 1993.
During the first half of 1994, the Company generated $905,000 of cash flows
from operating activities, compared to cash flows generated from operating
activities of $2,443,000 during the corresponding 1993 period. The 1994
results, and the related decline from 1993, were primarily attributable to the
timing of payment of certain recurring operational expenses, a decline at
Castleton in tenant reimbursements of operating cost escalations, and the
aforementioned sale of the remaining two buildings at Peachtree, partially
offset by a decrease in interest expense resulting from the retirement of the
Harrisburg mortgage notes.
Cash flows used in investing activities were $1,764,000 and $1,747,000 for the
six months ended June 30, 1994 and 1993, respectively. Such investing
activities were comprised of building and tenant improvements, and during the
1994 period, a $216,000 disposition fee paid to the Advisor in connection with
the sale of the buildings at Peachtree.
The decline in cash flows used in financing activities during the first half of
1994 compared to the first half of 1993 is attributable to the repayment of the
Harrisburg mortgage notes in December 1993. In addition to the capital
expenditure requirements described above, liquidity requirements for the
remainder of 1994 will also include principal and interest payments of
approximately $3,350,000 pursuant to existing loan agreements.
The Company's cash management agreement stipulates that all rental payments
from tenants are to be made directly to a third-party escrow agent who also
funds monthly operating expenses in accordance with a budget approved by the
lender. The Company believes that its cash flow for the remainder of 1994 will
be sufficient to fund its various operating requirements, including principal
and interest payments, although its discretion with respect to cash flow
management will be limited by the terms of the cash management agreement.
10
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Results of Operations
For the six month period ended June 30, 1994, the Company reported a net loss
of $1,549,000, or $0.17 per share, compared with a net loss of $1,038,000, or
$0.11 per share, for the comparable period in 1993. For the second quarter of
1993, a net loss of $621,000, or $.07 per share, was reported compared to a net
loss of $340,000, or $0.03 per share, in the second quarter of 1993.
The Company's revenues declined significantly during the three and six month
periods ended June 30, 1994 from the comparable prior year periods, reflecting
the impact of the December 1993 sale of the Company's remaining two buildings
at Peachtree. Revenues at Peachtree for the three and six months periods in
1993 were $512,000 and $1,155,000, respectively.
Revenues at Harrisburg were $1,815,000 and $3,518,000 during the three and six
months ended June 30, 1994, respectively, reflecting increases of $158,000 and
$255,000 over the related 1993 periods, respectively. Such increases were
attributable to higher percentage rental income and utility reimbursement
income. At Castleton, revenues were $4,669,000 for the six months ended June
30, 1994, which was comparable to revenues during the related 1993 period. For
the three months ended June 30, 1994, revenues declined by approximately
$100,000 to $2,354,000 from the corresponding 1993 period, which was due to
higher occupancy in the second quarter of 1993.
Operating expenses declined during the three and six month periods ended June
30, 1994, due to the aforementioned sale of the Peachtree buildings. Operating
expenses at Peachtree for the three and six month periods in 1993 were $296,000
and $638,000, respectively. Operating expenses at Harrisburg were $263,000 and
$517,000 for the three and six months ended June 30, 1994, reflecting increases
over the related 1993 periods of $149,000 and $253,000, respectively. Such
increases were attributable to increases in repair and maintenance expense and
bad debt expense. Operating expenses at Castleton were $1,158,000 and
$2,391,000 for the three and six months ended June 30, 1994, reflecting
increases over the related 1993 periods of $237,000 and $394,000, respectively.
Such increases were attributable to higher common area expenses such as
utilities and maintenance, coupled with a decline in tenant reimbursements for
such operating cost escalations.
Interest expense decreased by $174,000 and $365,000 during the three and six
months ended June 30, 1994, respectively, over the comparable prior year
periods. This decrease was due to the December 1993 retirement of the
Harrisburg mortgage notes, which accounted for approximately $290,000 of
quarterly interest expense, partially offset by an increase in interest expense
attributable to (i) an increase in the balance of the mortgage note resulting
from the addition to principal of accrued but not currently payable interest
and (ii) the amortization of non-cash expense arising from the issuance of
warrants.
Other expenses, net of interest income declined during both the three and six
months ended June 30, 1994, primarily due to lower portfolio management fees
payable to the Company's Advisor.
11
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EQK REALTY INVESTORS I
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on June 15,
1994. The only matter submitted to a vote at the meeting was the
election of five Trustees to serve for the ensuing year. All nominees
were elected without opposition.
ITEM 5. Other Information.
The May Department Stores Company ("May") has announced its agreement
to purchase ten Hess's department stores, including the Hess's store
at Harrisburg East Mall. The Company has had discussions with May
about its plan to operate a Hecht's department store (a division of
May) within this location and its desire to expand and remodel this
store. Such plans anticipate the execution of a new lease between the
Company and May, and discussions regarding such a new lease are
currently ongoing. Although the Company believes the execution of
such a new lease would be beneficial to the Mall, it may result in a
decrease in revenues and an increase in capital expenditures in the
intial years of the lease. A significant change in any anchor
department store lease would require the consent of the Company's
mortgage lender. There can be no assurance that May will complete its
acquisition of the Hess's department stores or that the Company will
ultimately enter into a new lease with May for the Hess's store at
Harrisburg.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2. None
4. None
10. None
11. See Note 2 to the Financial Statements.
15. Not Applicable
18. Not Applicable
19. None
22. None
23. Not Applicable
24. None
(b) Reports on Form 8-K. No reports on Form 8-K have been filed
during the quarter ended June 30, 1994.
12
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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.
Date: August 12, 1994 EQK REALTY INVESTORS I
By: /s/Gregory R. Greenfield
--------------------------------------
Gregory R. Greenfield
Executive Vice President and Treasurer
(Principal Financial Officer)
By: /s/William G. Brown, Jr.
--------------------------------------
William G. Brown, Jr.
Vice President and Controller
(Principal Accounting Officer)
13
