<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 1-8815
EQK REALTY INVESTORS I
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
Massachusetts 23-2320360
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5775 Peachtree Dunwoody Road, Suite 200D, Atlanta, GA 30342
------------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
</TABLE>
(Registrant's telephone number, including area code) (404) 303-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
--------------------------- --------------------------------------------
Shares of Beneficial Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ X ]
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
----- -----
The aggregate market value of Shares of Beneficial Interest held by
non-affiliates of the Registrant, based on the closing price of the Shares on
March 23, 1995 on the New York Stock Exchange of $2.125 per Share, is
$16,092,600. As of March 23, 1995, 9,264,344 Shares of Beneficial Interest
were outstanding. Officers and Trustees of the Trust (and certain of their
family members) and Equitable Realty Portfolio Management, Inc., Advisor to the
Trust, are treated as affiliates for the purposes of this computation, with no
admission being made that such people or entities are actually affiliates.
DOCUMENTS INCORPORATED BY REFERENCE.
The Trust's Proxy Statement relating to its 1995 Annual Meeting of
Shareholders is incorporated in Part III, Items 10, 11, 12 and 13.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 20
</TABLE>
1
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PART I
ITEM 1. BUSINESS.
General Development of Business
EQK Realty Investors I, a Massachusetts business trust (the
"Trust"), was formed pursuant to a Declaration of Trust dated October 8, 1984.
Equitable Realty Portfolio Management, Inc. ("ERPM," successor in interest to
EQK Partners), acts as the advisor (the "Advisor") to the Trust. ERPM is a
wholly owned subsidiary of Equitable Real Estate Investment Management, Inc.
("Equitable Real Estate"), itself an indirect wholly owned subsidiary of The
Equitable Life Assurance Society of the United States ("Equitable"). The
principal executive offices of the Trust and of the Advisor are located at 5775
Peachtree Dunwoody Road, Suite 200D, Atlanta, Georgia, 30342, and their
telephone number is (404) 303-6100.
The Trust has adopted a fiscal and taxable year ending
December 31. The Trust has transacted its affairs so as to qualify as, and has
elected to be treated as, a real estate investment trust under applicable
provisions of the Internal Revenue Code. Under the Internal Revenue Code, a
real estate investment trust that meets applicable requirements is not subject
to Federal income tax on that portion of its taxable income that is distributed
to its shareholders.
The Trust consummated the public offering of its Shares of
Beneficial Interest (the "Shares") on March 12, 1985. The net proceeds to the
Trust from such offering, net of underwriting discount, amounted to
$170,856,000 before deducting offering expenses of $1,062,000. Certain of
those proceeds aggregating $167,032,000 were expended to acquire certain
properties on March 13, 1985 (the "Properties," described below under
"Narrative Description of Business," as well as seven buildings in an office
complex in Atlanta, Georgia, which were subsequently sold during the period
1992-1993).
The Trust initially intended to hold its real estate
investments for a period not to exceed 12 years from the date of acquisition
and, after the twelfth year, to dispose of any remaining investments in an
orderly fashion within a period of two years in order to achieve a complete
liquidation of the Trust by March 1999. As discussed in Note 1 to the
financial statements, the Trust is currently pursuing the orderly liquidation
of its real estate holdings. Actual disposition of the Properties may occur at
any time prior to March 1999, depending on both the prevailing conditions in
the relevant real estate markets and the ability of the Trust to refinance its
debt maturing in December 1995 (see Note 2 to the financial statements). The
precise timing of dispositions will be in the discretion of the Trustees.
On December 18, 1985, the Trust issued to Salomon Brothers
Realty Corp. its seven-year 10.92% Zero Coupon Note (the "1985 Note") in the
principal amount of $45,000,000 and the face amount of $94,719,904. The 1985
Note was secured by mortgages on the Properties. The difference between the
principal amount and the face amount that was due at maturity on December 18,
1992 represents interest compounded
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semi-annually at the rate of 10.92%. The Trust utilized the net proceeds from
the sale of the 1985 Note ($44,296,000) to repurchase an aggregate of 2,466,211
Shares in the open market between February 13, 1986 and May 6, 1986. In 1992
the Trust utilized proceeds from the sale of real estate at Peachtree-Dunwoody
Pavilion to prepay a portion of the 1985 Note. Also, in 1992, the Trust
utilized proceeds from the issuance of previously repurchased shares to its
Advisor to prepay a portion of the 1985 Note.
On February 4, 1988, the Trust issued to Salomon Brothers
Realty Corp. a second Zero Coupon Note (the "1988 Note") in the principal
amount of $5,000,000 and the face amount of $7,771,718 payable at its maturity
on December 18, 1992. The 1988 Note was also secured by mortgages on the
Properties. The difference between the principal amount of and the face amount
represents interest compounded semi-annually at the rate of 9.255%. The Trust
utilized the proceeds from the 1988 Note to repay borrowings under the Trust's
unsecured revolving credit facility. In 1991 the Trust utilized proceeds from
the sale of real estate at Castleton Commercial Park ("Castleton" or the
"Park"), an office park located in Indianapolis, Indiana, to prepay a portion
of the 1988 Note. In 1992 the Trust utilized proceeds from the sale of real
estate at Peachtree-Dunwoody Pavilion to prepay the remaining portion of the
1988 Note.
The 1985 Note and the 1988 Note, together with the mortgages
securing them, were assigned on February 4, 1988 by Salomon Brothers Realty
Corp. to The Prudential Insurance Company of America ("Prudential"). In
December 1992, the Trust completed the refinancing of the 1985 Note, which at
that time had a balance of $75,689,000, for a term of three years. The
interest rates on the refinanced note (the "Mortgage Note") are 9.54% in the
first year, 9.79% in the second year, and 10.04% in the third year. The new
loan agreement requires monthly payments of interest only at the rate of 8.54%
per annum. The additional interest charges are accrued and added to principal
over the term of the loan. The amount of principal due at maturity on December
15, 1995 will be $78,928,000. In addition, the lender received in December
1992, 1993 and 1994 warrants to purchase 165,086, 151,556 and 51,226 Shares of
the Trust, respectively, for $.0001 per share, none of which have yet been
exercised. The new financing is collateralized by first mortgage liens on real
estate at Castleton and Harrisburg East Mall ("Harrisburg" or the "Mall", a
regional shopping center located in Harrisburg, Pennsylvania), assignments of
leases and rents, and certain cash balances.
In December 1992, the Trust also completed the restructuring
of its bank line of credit into a term loan (the "Term Loan"). The balance of
the restructured Term Loan was $2,859,000 and will also mature in December
1995. The interest rate on the Term Loan is 8.33% per annum. Monthly payments
are determined based on the same 8.54% pay rate applicable to the primary
lender's mortgage. The amount of each monthly payment above the required
interest rate is applied to the principal balance of the loan. The amount of
principal due at maturity will be $2,839,000. The Term Loan is secured by
subordinate liens on each of the Properties and an escrow deposit of $300,000.
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In connection with the debt restructuring, the Trust issued
1,675,000 previously repurchased shares of its stock to its Advisor. The Trust
received proceeds of $6,700,000, or $4.00 per share, for the Shares. The Trust
may, at its discretion, reissue the remaining 791,211 Shares previously
repurchased. Any issuance of Shares in excess of the Shares previously
repurchased would require shareholder approval.
In anticipation of the Mortgage Note and Term Loan maturities,
the Trust's management is exploring its external financing alternatives
including the refinancing of its debt with the existing lenders, or the
potential for prepaying part or all of the debt outstanding with the proceeds
from real estate dispositions. Management believes that a new debt facility
would be well collateralized as evidenced by the Properties' aggregate
appraised value of $116,100,000 as of December 31, 1994, and that such new
facility will be in place on or before the maturity date of the existing debt.
Apart from its initial investments in the Properties, and
subject to certain restrictions, the Trust may make additional real estate
investments involving the expansion of existing improvements or the acquisition
and development of additional properties that are in the immediate vicinity of
the Properties. No additional real estate investments are currently
contemplated, other than capital improvements to the existing properties (see
Item 2 - Properties below).
The Trust may make secured or unsecured borrowings to make
distributions to its shareholders, to make permitted additional real estate
investments described above and for normal working capital needs, including
tenant alterations and/or allowances and the repair and maintenance of
properties in which it has invested. The Declaration of Trust prohibits the
Trust's aggregate borrowings from exceeding 75% of its total asset value, as
defined.
The Trust will not engage in any business not related to its
real estate investments and, in that connection, the Declaration of Trust
imposes certain prohibitions and investment restrictions on various investment
practices or activities of the Trust.
Narrative Description of Business
At December 31, 1994, the Trust's portfolio consists of two
real estate investments: Castleton and Harrisburg. During 1993, the Trust
sold its two remaining office buildings within its office complex located in
Atlanta, Georgia, formerly known as Peachtree-Dunwoody Pavilion or "Peachtree".
Castleton Commercial Park
Location and Area Overview. The Park is located in the
northeast portion of Marion County, Indiana, approximately 10 miles from
downtown Indianapolis, within a triangle formed by Interstate 465 (the major
beltway surrounding the Indianapolis metropolitan area), Interstate 69 and East
82nd Street (a major local thoroughfare). The surrounding area is
characterized by varied office, retail, residential and light industrial
development. The site has convenient access from Interstate 465 via the
Allisonville Road
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interchange and from Interstate 69 via the 82nd Street interchange.
Tenants. At December 31, 1994, there were approximately 200
tenants in the Park occupying approximately 1,077,000 square feet of net
rentable area, representing an occupancy percentage of 92.9%. The Park has
five tenants occupying 50,000 square feet or more at December 31, 1994.
Leases covering 194,700 square feet of space are scheduled to
expire during 1995. The Trust anticipates leases covering approximately
175,200 square feet will be renewed during 1995. The Park has five tenants
occupying 50,000 square feet or more at December 31, 1994.
Competition. The following table provides selected
information with respect to Castleton's primary existing competitors. All the
competitive properties listed below are comprised of one or more office
buildings. Each property is located within 10 miles of the Park.
<TABLE>
<CAPTION>
Approximate Approximate
Year(s) Net Rentable
Property Completed Area (Sq. Ft.)
-------- --------- --------------
<S> <C> <C>
Allison Pointe 1990 214,000
Metroplex 1986 90,000
Castleton Business Park 1984-1986 175,000
Shadeland Station 1983-1986 343,000
Castle Creek 1984-1990 317,000
Keystone Crossing Office Park 1975-1989 1,330,000
North Meridian Street Office
Corridor 1975-1982 725,000
Meridian Technology Center 1986 400,000
Hillsdale Tech Centre 1986-1989 300,000
Woodfield Crossing Office Park 1982 800,000
The Precedent 1984-1994 601,000
</TABLE>
The Park will continue to be subject to the very competitive
market conditions as a result of a high level of existing vacancy among
Castleton's competitors. As of December 31, 1994, the office vacancy rate in
the Northeast submarket, of which the Park is a part, was 13%, down from 17% in
1993. Space absorption in the suburban market totalled 308,310 square feet in
1994 as compared to 473,000 square feet in 1993. There is virtually no new
space expected to come on-line in 1995. The Trust believes that, over the long
term, Castleton will be able to sustain a relatively high occupancy level due
to the quality of the Park, the desirability of its location, and its
competitive rent structure, which is somewhat lower than comparable new space.
The president of Castleway Management Corp., the current
manager of Castleton, also serves as marketing manager of a similar park, known
as the Precedent, located approximately two and one-half miles from the Park
and developed by an affiliate of the former owners of the Park. The Trust
believes that the Precedent will not have a material adverse impact on the
Park, based upon the advantage of the Park's more
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developed location, as well as the Trust's assessment of general supply and
demand conditions in the relevant market. Moreover, pursuant to the management
agreement with the Trust, Castleway Management Corp. must disclose to the Trust
the terms of any offers to any major tenant at the Park (20,000 square feet or
more) within 10 days following initial discussions with such tenant and may not
conclude an agreement with such tenant for a period of 30 days thereafter.
Harrisburg East Mall
Location and Area Overview. The Mall is located in Dauphin
County, Pennsylvania, near the intersection of Paxton Street (U.S. Route 322)
and Interstate 83. The Center is adjacent to Pennsylvania Route 441,
approximately five miles from the Pennsylvania Turnpike and three miles from
the central business district of Harrisburg. Access to the site from
Interstate 83, the major north-south traffic corridor serving Harrisburg, is
provided by the Paxton Street interchange. Access from the Pennsylvania
Turnpike, the major east-west traffic corridor serving Harrisburg, is provided
by the Interstate 283 interchange.
Tenants. At December 31, 1994, Harrisburg had 91 mall and
outparcel tenants (excluding anchor store tenants) occupying approximately
334,000 square feet of gross leasable area, representing an occupancy rate of
86.7%. Other than the anchor store tenants, (J.C. Penney, Hecht's and John
Wanamaker), only Toys 'R' Us, which will occupy approximately 45,950 square
feet of space as the sole tenant in Harrisburg's outparcel building, occupies
more than five percent of the gross leasable area of the Mall. See Item 2 -
Properties for a discussion of the replacement of Hess's (which closed November
1994) by Hecht's as an anchor tenant and the relocation of Toys 'R' Us.
In January 1994, Woodward & Lothrop, the parent company of
John Wanamaker, filed for protection under Chapter 11 of the United States
Bankruptcy Code. Under Federal bankruptcy law, Woodward & Lothrop has the
option to assume or reject their lease at Harrisburg. To date, there have been
no substantive developments with respect to the bankruptcy proceedings. The
John Wanamaker location at Harrisburg remains open, and all post-petition
billings have been paid on a timely basis. Further, management has been
informed that the John Wanamaker location at Harrisburg is one of the retail
chain's top performing mall locations. Woodward & Lothrop has demonstrated its
commitment to this location by requesting and receiving the court's approval to
renovate the store's interior. Although no assurances can be given, the
Trust's management believes that Woodward & Lothrop will assume its John
Wanamaker lease at Harrisburg, and that the bankruptcy filing will not have a
material adverse impact on the operations of the Mall.
Competition. The following table provides selected
information with respect to the Mall's primary existing competitors. Each
property is located within five miles of the Mall, except for Park City Mall
which is 35 miles away. The inclusion of Park City is due to the lack of major
retail space along Interstate 283 between Harrisburg and Lancaster, although
its degree of competition with the Mall is limited.
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<TABLE>
<CAPTION>
Gross Leasable Anchor
Shopping Center Type of Center Area (Sq. Ft.) Stores
------------------ --------------- -------------- ------
<S> <C> <C> <C>
Strawberry Square Enclosed multi- 230,000 None
level urban mall
Colonial Park Plaza Enclosed one- 759,000 Sears
level regional mall The Bon Ton
Boscov's
Camp Hill Shopping Enclosed one- 505,000 Boscov's
Center level mall Montgomery Ward
PathMark
Capital City Mall Enclosed one- 671,000 Sears
level regional mall Hecht's (opening 12/95)
J.C. Penney (opening 11/95)
Park City Mall Enclosed two- 1,400,000 The Bon Ton, Sears
level regional mall J.C. Penney
Watt & Shand
</TABLE>
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ITEM 2. PROPERTIES.
Castleton Commercial Park
General. Castleton consists of 44 single and multi-tenanted
office buildings and mixed-use office/warehouse buildings which have a total
building area of 1,219,914 square feet and net rentable area of 1,160,000
square feet. It is located immediately northwest of the intersection of
Interstate 465 and Interstate 69 in the northeast quadrant of the Indianapolis
metropolitan area.
Approximately 66% of the total building area of the Park is
designed solely for use as office space and the balance is a combination of
both office and warehouse space (including related uses, such as operation of
light manufacturing, product assembly, showroom and distribution facilities).
On the basis of net rentable area, approximately 85% of the Park comprises
office space, with the balance consisting of warehouse space. The Park is
located on a site of approximately 18 acres. The site has paved surface
parking for approximately 5,580 cars (4.9 spaces per 1,000 net rentable square
feet).
Harrisburg East Mall
General. Harrisburg is a two-level enclosed regional shopping
mall located approximately three miles from the central business district of
Harrisburg, Pennsylvania, the state capitol. The Mall contains approximately
873,000 gross leasable square feet and is anchored by three major department
stores: J.C. Penney, Hecht's (expected to open December 1995) and John
Wanamaker. The Mall is located on a site of approximately 64 acres with paved
surface parking for approximately 4,763 automobiles (5.5 spaces per 1,000 gross
leasable square feet).
In August 1994, Hess's Department Stores, Inc. (Hess's)
announced its decision to sell certain of its stores, including its location at
Harrisburg, to the May Department Store Company ("May"). During the fourth
quarter of 1994, the Hess's anchor tenant lease at Harrisburg was assigned to
May, and remodeling and expansion of the former Hess' space commenced for the
purpose of accommodating the opening of a Hecht's department store (a division
of May). The anchor space expansion involves the relocation of Toys ' R' Us
(which was situated in the basement area previously occupied by Hess's) to
Harrisburg's outparcel building and the related relocation or lease buyout of
outparcel tenants with lease terms extending beyond 1994.
The Trust anticipates incurring costs of approximately
$3,950,000 to renovate the outparcel building in preparation of the Toys 'R' Us
relocation and to buy out the leases of affected tenants. It is anticipated
that the outparcel building will be renovated such that Toys 'R' Us can
relocate to the outparcel building and May can begin its expansion and
remodeling activities in April 1995, with Hecht's opening by December 1, 1995.
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The total building area of the Mall, giving effect to the
replacement of Hecht's for Hess's and the relocation of Toys 'R' Us, is
allocated as shown in the table below.
<TABLE>
<CAPTION>
Gross % of
Number of Leasable Total
Store Spaces Area Building Occupancy %
2/28/95 (Sq.Ft.) Area at 2/28/95
----------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Gross leasable area
Anchor Stores 3 534,013 52.4 % 100.0 %
Mall Stores 85 292,812 28.7 89.1
Free-standing building 1 45,950 4.5 100.0
------- -------- ------ ----------
Total gross leasable area 89 872,775 85.6 96.3
------ ------- ------ =====
Common area 146,371 14.4
------- ------
Total building area 1,019,146 100.0 %
========= =======
</TABLE>
Physical Improvements. Since acquiring the Mall in 1985, the
Trust has undertaken several physical improvement programs. In 1987, the Trust
converted approximately 51,400 square feet of space in the basement of the
former Hess's department store space into mall tenant space, at which time it
was leased to Toys ' R' Us. During 1988, a new food court with approximately
13,000 square feet of gross leasable area was completed. In 1991, the Trust
completed the conversion of 47,960 square feet of space previously occupied by
J.C. Penney into approximately 31,500 square feet of new leasable area leased
at substantially higher rates.
In conjunction with the J.C. Penney conversion, the remaining
area of the J.C. Penney store was remodeled. In addition, the terms of the
amended J.C. Penney lease required the Trust to renovate the common areas and
the exterior facade of the Mall. The renovation was completed in 1993. The
project included a complete refurbishment of the property's interior common
area, with new floors, finishes, and lighting throughout.
As discussed above, in connection with the anchor tenant
replacement of Hess's by Hecht's, Hecht's is expanding into the space
previously occupied by Toys' R' Us and Harrisburg's outparcel building is being
renovated to accommodate the relocation of Toys 'R' Us. In addition to the
expansion of the anchor tenant space, Hecht's is also undertaking a major
remodeling program that will greatly enhance its appearance.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and positions of the
executive officers of the Trust. The term of office of each officer expires at
the annual meeting of the Board of Directors or when the respective successor
is elected and qualifies.
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Phillip E. Stephens President
Gregory R. Greenfield Executive Vice President and Treasurer
William G. Brown, Jr. Vice President and Controller
Scott M. Boggio Vice President
Gary L. Werkheiser Vice President
Linda K. Schear Secretary
</TABLE>
Phillip E. Stephens, age 47, has been President of Compass
Retail, Inc., a subsidiary of Equitable Real Estate, since January 1992 and was
Executive Vice President of the Compass Retail division of Equitable Real
Estate from January 1990 to December 1991. He has also served as President of
ERPM since December 1989. Prior to that date and since October 1987, he was
President of EQK Partners, the predecessor in interest to ERPM. Prior to that
date and since its inception in September 1983, he was Senior Vice President of
EQK Partners. Mr. Stephens is also a managing trustee of Arbor Property Trust,
successor in interest to EQK Green Acres, L.P.
Gregory R. Greenfield, age 38, has been Executive Vice
President and Chief Operating Officer of Compass Retail, Inc. since January
1992 and was Senior Vice President of the Compass Retail division of Equitable
Real Estate from January 1990 to December 1991. He has also served as Vice
President and Treasurer of ERPM since December 1989. Prior to that date and
since November 1988, he was Senior Vice President, General Counsel and
Secretary of EQK Partners. Mr. Greenfield joined EQK Partners in June 1984.
From 1981 to 1984, he was associated with the law firm of Wolf, Block, Schorr
and Solis-Cohen.
William G. Brown, Jr., age 39, has been Senior Vice President
and Chief Financial Officer of Compass Retail, Inc. since January 1992 and was
Vice President of the Compass Retail division of Equitable Real Estate from
March 1990 to December 1991. He has also served as a Vice President of ERPM
since March 1990. Prior to that date and since November 1988, he was Vice
President and Chief Financial Officer of Envirosafe Services, Inc., a hazardous
waste management company. Mr. Brown joined Envirosafe in July 1987. From 1981
to 1987, he held financial management positions with IU International
Corporation, and from 1978 to 1981, he was associated with the accounting firm
of Coopers & Lybrand.
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Scott M. Boggio, age 36, has been Vice President of Compass
Retail, Inc. since February 1992 and was Director of Construction and
Development of the Compass Retail division of Equitable Real Estate from
January 1990 to January 1992. He has also served as Assistant Vice President
of ERPM since December 1989. Prior to that date and since February 1989, he
was Vice President of Construction and Planning of EQK Partners. From 1986
until 1988, he was employed by VMS Realty Management, Inc. as its Northeast
Regional Manager. From 1985 to 1986, he was employed by the Linpro Company in
acquisitions and site selection.
Gary L. Werkheiser, age 35, has been Vice President of Compass
Retail, Inc. since February 1992 and was Director of Asset Management of
Equitable Real Estate from May 1990 to January 1992. Prior to that date and
since August of 1986, he was the Real Estate Analyst for EQK Partners.
Linda K. Schear, age 42, has been Vice President and General
Counsel to Compass Retail, Inc. since February 1992 and was General Counsel to
the Compass Retail division of Equitable Real Estate from April 1990 to
February 1992. She has also served as Counsel to ERPM and Vice President of
Equitable since April 1990. Prior to that date, she was first an associate and
then a partner with the Atlanta law firm of Merritt & Tenney, specializing in
commercial real estate.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Trust's shares of beneficial interest are traded on the New York
Stock Exchange (symbol EKR). The Trust is listed in the stock tables as "EQK
Rt." As of February 28, 1995, the record number of shareholders of the Trust
was 368. Although the Trust does not know the exact number of beneficial
holders of its shares, it believes the number exceeds 2,000.
The following table presents the high and low prices of the Trust's
shares based on the New York Stock Exchange daily composite transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1994:
First Quarter $ 2.750 $ 2.500
Second Quarter 2.500 2.250
Third Quarter 2.500 2.000
Fourth Quarter 2.500 1.750
Year ended December 31, 1993:
First Quarter $ 2.875 $ 2.250
Second Quarter 2.625 2.250
Third Quarter 3.125 2.625
Fourth Quarter 2.875 2.500
</TABLE>
There have been no distributions to shareholders during 1993 and 1994. It is
the Trust's current policy to reinvest all of its cash flow into the Properties
to fund capital expenditures and leasing costs. The Trust does not anticipate
a change in this policy.
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ITEM 6. SELECTED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues from rental operations $ 16,512 $ 18,458 $ 20,900 $ 21,276 $ 20,532
Loss before gain on sales of real
estate and extraordinary loss (3,459) (2,351) (9,993) (15,224) (58,609)
Gain on sales of real estate -- 282 1,143 248 --
Loss before extraordinary loss (3,459) (2,069) (8,850) (14,976) (58,609)
Extraordinary loss from early
retirement of debt -- (1,711) -- -- --
Net loss (3,459) (3,780) (8,850) (14,976) (58,609)
Total assets 90,258 93,163 103,690 124,051 133,867
Long-term obligations:
Mortgage notes payable, net of
imputed interest and discount 80,032 78,727 86,713 9,022 9,433
Zero coupon mortgage notes,
net of unamortized discount -- -- -- 89,410 83,385
Per share data (a):
Loss per share:
Loss before gain on sales of
real estate and extraordinary
loss $ (0.37) $ (0.25) $ (1.31) $ (2.00) $ (7.72)
Loss before extraordinary loss (0.37) (0.22) (1.16) (1.97) (7.72)
Net loss (0.37) (0.41) (1.16) (1.97) (7.72)
Dividends declared -- -- -- -- 0.10
</TABLE>
--------------------------------------------
(a) Calculation is based on 9,264,344 weighted average shares outstanding
during 1994 and 1993, 7,653,415 weighted average shares outstanding
during 1992, and 7,589,344 weighted average shares outstanding during
1991 and 1990.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This discussion should be read in conjunction with the financial
statements and notes that appear immediately following the signatures page.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Trust's portfolio at December 31, 1994 consists of two real estate
investments (the "Properties"): 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 Trust sold its two remaining office buildings
within its office complex in Atlanta, Georgia, formerly known as
Peachtree-Dunwoody Pavilion, or "Peachtree."
13
<PAGE> 15
As discussed in Note 1 to the financial statements, the Trust
continues to pursue the orderly liquidation of its real estate portfolio.
During this process, the Trust will make certain capital expenditures required
to enhance or maintain the value of the Properties, including tenant allowances
associated with leasing activity. The Trust anticipates making calendar year
1995 capital expenditures of approximately $5,925,000, including approximately
$3,950,000 associated with the redevelopment of Harrisburg's outparcel building
as described below. 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 December 31, 1994 was
$2,390,000.
Debt Maturities
As discussed in Note 2 to the financial statements, the
Trust's debt instruments mature in December 1995 in the aggregate principal
amount of $81,767,000 (assuming no 1995 prepayments). In anticipation of the
Mortgage Note and Term Loan maturities, the Trust's management is exploring its
external financing alternatives, including the refinancing of its debt with the
existing lenders or the potential for prepaying part or all of the debt
outstanding with the proceeds from real estate dispositions. Based on its
current assessment of the credit markets, management believes that a new debt
facility would be well collateralized as evidenced by the Properties' aggregate
appraised value of $116,100,000 as of December 31, 1994, and that such new
facility will be in place on or before the maturity date of the existing debt.
However, if the Trust is unable to refinance or replace the existing debt at
commercially reasonable terms or at all, Management's plans with respect to
liquidating the Trust's real estate investments will be accelerated to satisfy
its debt obligations.
Harrisburg Outparcel Building Renovation
On August 1, 1994, Hess's Department Stores, Inc. ("Hess's")
announced its intention to sell certain of its stores, including its location
at Harrisburg, to the May Department Stores Company ("May"). During the fourth
quarter of 1994, the Hess's location at Harrisburg closed, its anchor tenant
lease was assigned to May, and remodeling and expansion of the former Hess's
space commenced for the purpose of accommodating the opening of a Hecht's
department store (a division of May). This expansion will result in the
relocation of Toys 'R' Us, which was situated in the basement area previously
occupied by Hess's, to Harrisburg's outparcel building, and the related
relocation or lease buyout of certain outparcel tenants with lease terms
extending beyond 1994.
The Trust's lender has approved the anchor tenant replacement
and the outparcel building redevelopment budget, subject to the finalization of
certain legal documents. The Trust anticipates incurring costs of
approximately $3,950,000 to renovate the outparcel building in preparation of
the Toys 'R' Us relocation and to buy out the leases of affected tenants. Such
costs will be funded by existing cash reserves, including amounts restricted in
accordance with the Cash Management Agreement (see Note 2 to the financial
statements), and 1995 operating cash flows. May is responsible for the costs
associated with the remodeling and expansion of the Hecht's space.
14
<PAGE> 16
It is anticipated that the outparcel building will be
renovated such that Toys 'R' Us can relocate to the outparcel building and May
can began its expansion and remodeling activities in April 1995, with Hecht's
opening by December 1, 1995. If the current Toys 'R' Us space is not turned
over to May by May 1, 1995, the Trust would incur per diem penalties of $3,000
to $6,000 for the period May 2, 1995 to June 15, 1995. Further delays in
turning this space over to May could result in current rent abatements, a delay
in the opening of Hecht's, and ultimately a termination of the Hecht's lease.
LIQUIDITY
The comparability of the Statements of Cash Flows during the
1992 to 1994 annual periods is affected by the property dispositions and debt
refinancings and repayments that occurred during this time period.
During 1994, the Trust generated cash flows from operating
activity of $2,184,000, a decline of $1,903,000 from the prior year's operating
cash flows of $4,087,000. The 1994 results, and the related decline from 1993,
were primarily attributable to the loss of Peachtree's contribution to
operating cash flows in 1994 upon its December 1993 sale (1993 Peachtree income
before depreciation was $822,000); a $457,000 increase in Castleton's operating
costs as described below; an unusually high level of collections in 1993 of
Harrisburg tenant receivables attributable to prior year operations; and the
timing of payment of certain recurring operational expenses. This decline in
operating cash flows was partially offset by a $693,000 decrease in interest
paid resulting from the retirement of the Harrisburg mortgage notes (see Note 7
to the financial statements).
Cash flows from operating activities in 1993 were $3,981,000
less than 1992 operating cash flows of $8,068,000. This decrease was
attributable to the payment of mortgage interest on a current basis in 1993.
The decline was partially offset by increased cash flows resulting from
improved operating results, net of the effects of results from the buildings at
Peachtree which were sold in 1992, and the nonrecurrence of 1992 payments of
approximately $1,500,000 for refinancing costs.
In connection with the anchor tenant substitution of Hecht's
for Hess's at Harrisburg, the Trust expects an approximate $800,000 decrease in
minimum rents in 1995, including an approximate $100,000 decrease in base rent
to be received from Hecht's as compared to Hess's base rent. Subsequent to the
opening of the Hecht's store, anticipated to occur in December 1995, the
minimum rent reduction is expected to amount to $400,000 per year. Such
reduction may be offset in whole or in part by increases in percentage rental
and other revenues as a result of the expected increase in Mall customer
traffic associated with the inclusion of Hecht's as an anchor tenant.
During 1993 and 1992, the Trust generated cash flow from
investing activities of $5,542,000 and $19,384,000, respectively, and consumed
cash in financing activities in the amounts of $10,478,000 and $21,466,000,
respectively. The cash flows from investing activities during these two years
were generated from dispositions of real estate. The related net proceeds were
used to prepay and retire debt instruments then outstanding. There were no
such property dispositions or debt prepayments or retirements
15
<PAGE> 17
during 1994. Cash flows used in investing activities during 1994 primarily
were for routine capital additions at the Properties.
In addition to the capital expenditure requirements described
above, liquidity requirements for 1995 will also include principal and interest
payments of $6,700,000 pursuant to existing loan agreements prior to such debt
maturities in December 1995.
The Trust'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 Trust believes that its cash flow for 1995 will be
sufficient to fund its various operating requirements, including budgeted
capital expenditures and monthly principal and interest payments, although its
discretion with respect to cash flow management will be limited by the terms of
the cash management agreement.
RESULTS OF OPERATIONS
For the year ended December 31, 1994, the Trust reported a net
loss of $3,459,000 ($.37 per share), compared to net losses of $3,780,000 ($.41
per share) and $8,850,000 ($1.16 per share) for the years ended December 31,
1993 and 1992, respectively. For the quarter ended December 31, 1994, the
Trust reported a net loss of $1,290,000 ($.14 per share), compared to net
losses of $2,029,000 ($.22 per share) and $4,431,000 ($.56 per share) for the
quarters ended December 31, 1993 and 1992, respectively. During the fourth
quarter of 1994, the Trust wrote-off $429,000 of capitalized predevelopment
costs. The 1993 annual period was impacted by the fourth quarter recognition
of a $282,000 gain on the sale of real estate and a $1,711,000 extraordinary
charge for early retirement of debt, while the 1992 annual period was impacted
by the fourth quarter gain on sale of real estate of $1,143,000 and a
$4,001,000 write-down in the Trust's real estate investment at Castleton.
The Trust's revenues for the fourth quarter and year ended
December 31, 1994 were $4,193,000 and $16,512,000, respectively, which
represented a decline from 1993 amounts of $4,750,000 and $18,458,000,
respectively. Such declines were primarily attributable to the December 1993
sale of the remaining buildings at Peachtree, which had accounted for 1993
revenues of $384,000 and $2,164,000 for the fourth quarter and the year,
respectively. The decline in annual revenues for 1994 was partially offset by
the receipt of certain insurance recoveries and higher income from temporary
tenant leasing at Harrisburg. Revenues at Castleton were comparable for both
the quarter and year ended periods in 1994 as compared to 1993.
Revenues from rental operations of $18,458,000 during 1993
declined from $20,900,000 during 1992, primarily due to the sale of five
buildings at Peachtree during the latter part of 1992 which had generated
annual revenues of $3,400,000. This decline in Peachtree revenues was
partially offset by an increase in Harrisburg revenues of $500,000 related to
the addition of four large tenants at the end of 1992 and the receipt of a
$225,000 lease termination fee at Castleton.
16
<PAGE> 18
Operating expenses for the fourth quarter and year ended
December 31, 1994 were $1,527,000 and $5,836,000, respectively, which also
declined from the related 1993 amounts of $1,686,000 and $6,384,000,
respectively. The declines were primarily attributable to the sale of certain
buildings at Peachtree in 1993, which had accounted for 1993 operating expenses
of $256,000 and $1,342,000 for the quarter and annual periods, respectively.
The annual decline was partially offset by increases in net operating expenses
at both Harrisburg and Castleton. At Harrisburg, 1994 operating expenses
exceeded 1993 amounts due to higher snow removal costs during the first quarter
of 1994 and to increases in costs associated with temporary tenant leasing and
in bad debt expense attributable to the absence of certain recoveries that were
realized in 1993. Castleton's annual net operating costs were higher due to
common area expenses such as utilities and maintenance coupled with a decline
in tenant reimbursements for such operating cost escalations, and to one-time
repairs to neighborhood street lighting. The fourth quarter decline in net
operating costs attributable to the Peachtree sale was partially offset by cost
increases in Harrisburg related to legal and consulting fees and the
nonrecurrence in 1994 of an increase in the real estate tax reimbursement ratio
that was calculated and recognized in the fourth quarter of 1993.
Net operating expenses of $6,384,000 in 1993 declined from
$9,239,000 in 1992. This decline was due to reductions in Peachtree operating
costs of $2,500,000 related to the sale of five buildings in the latter part of
1992 and in Harrisburg operating costs due to lower bad debt expense and net
common area expenses. Such decline was partially offset by higher net common
area expenses at Castleton.
Interest expense for the years ended December 31, 1994, 1993,
and 1992 was $8,132,000, $8,706,000, and $11,217,000, respectively. The
decrease in interest expense in 1994 as compared to 1993 was due primarily to
the retirement of the Harrisburg mortgage notes, which accounted for $1,150,000
of interest expense in 1993. The decrease attributable to the retirement of
the Harrisburg notes was partially offset by an increase in interest expense
due 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 to
the lender. Interest expense in 1993 decreased from amounts recognized in 1992
due to lower borrowing levels and interest costs associated with the
refinanced mortgage note. The trends impacting annual interest expense for
1992 to 1994 also impacted the amount of interest expense recognized in the
related fourth quarter periods.
Other expenses consist of portfolio management fees, other
costs related to the operation of the Trust, and interest income earned on cash
balances. In the aggregate, there was no significant fluctuation in other
expenses between 1994 and 1993. However, in 1994 there was a decrease in
interest income and an increase in administrative costs related to efforts to
sell Harrisburg that were largely offset by decreases in portfolio management
and other professional fees associated with reductions in the Trust's real
estate holdings over the past two years. Other expenses decreased $150,000 in
1993 from 1992 due to interest earned on excess cash
17
<PAGE> 19
balances.
In connection with the Harrisburg outparcel building
renovation, the Trust's mortgage lender requires a deferral of payment of the
portfolio management fee (described in Note 8 to the financial statements)
commencing in December 1994 until such time as May has received and accepted
the space previously occupied by Toys 'R' Us and the lender has been provided
with satisfactory evidence that the entire project has been completed within
budget. Upon satisfaction of these conditions, the Trust will pay the Advisor
all such deferred advisory fees and will commence paying all advisory fees
subsequently earned on a current basis. Deferred portfolio management fees
remain an obligation of the Trust, and if the lender's consent to payment on a
current basis is not obtained, such fees will be payable upon liquidation of
the Trust's property portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Registrant's financial statements and supplementary data
listed in Item 14(a) appear immediately following the signatures page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
18
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Trust's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Trust's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference to the Trust's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Trust's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders.
19
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(a) The following documents are filed as part of this
report:
1. Financial Statements
--------------------
Balance Sheets at December 31, 1994 and 1993
Statements of Operations for the years ended
December 31, 1994, 1993 and 1992
Statements of Shareholders' Equity
for the years ended December 31, 1994,
1993 and 1992
Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to financial statements, including
supplementary data
2. Financial Statement Schedule
----------------------------
Schedule III: Real Estate and Accumulated
Depreciation
Independent Auditors' Report
All other schedules are omitted as the required
information is inapplicable or the information
is presented in the financial statements, or the
related notes thereto.
3. Exhibits
--------
(2) None.
(3) (a) Form of Amended and Restated
Declaration of Trust, as amended.(2)
(b) Trustees' Regulations, as amended.(2)
(4) Form of certificate for Shares of
Beneficial Interest.(1)
(9) None.
(10) (a) Form of Advisory Agreement between
the Registrant and EQK Partners.(1)
(e) Property management agreement
between Salomon Brothers Peachtree
Properties Inc. and Equitable Real
Estate Investment Management, Inc.
with respect to Peachtree-Dunwoody
Pavilion.(1)
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(f) Form of property management
agreement between the Registrant
and Castleway Management Corp.
with respect to Castleton
Commercial Park.(1)
(k) Mortgage encumbering Harrisburg
East Mall in favor of Continental
Assurance Company and related
documents.(1)
(m) Mortgage encumbering Harrisburg
East Mall in favor of The
Philadelphia Savings Fund Society
and related documents.(1)
(n) Amended and Restated Zero Coupon
Mortgage Note due December 1992 in
the principal amount of $45,000,000.(1)
(o) Mortgage encumbering Harrisburg East
Mall in favor of Salomon Brothers
Realty Corp.(2)
(p) Mortgages encumbering Peachtree-Dunwoody
Pavilion in favor of Salomon Brothers Realty Corp.(2)
(q) Mortgages encumbering Castleton
Commercial Park in favor of Salomon
Brothers Realty Corp.(2)
(r) Zero Coupon Mortgage Note due
December 1992 in the principal
amount of $5,000,000.(3)
(s) Form of Amendments dated February 4,
1988 to Exhibits 10(o), 10(p) and 10(q).(3)
(t) Form of Mortgages securing 10(r).(3)
(u) First Amendment to Advisory Agreement
dated as of December 31, 1989.(4)
(v) Form of property management
agreement between Registrant and
Compass Retail, a division of
Equitable Real Estate Investment
Management, Inc.(5)
(w) Agreement of sale dated June 25, 1991
between McCready and Keene, Inc.
and the Registrant.(6)
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(x) Agreement for release of collateral between
The Prudential Insurance Company of America
and the Registrant dated August 30, 1991.(6)
(y) Agreement of sale dated September 23, 1991
between the Wesleyan Church Corporation
and the Registrant.(6)
(z) Agreement of sale dated June 24, 1992
between Computer Generation Incorporated
and the Registrant.(7)
(aa) Purchase and Sale Agreement dated
October 21, 1992 between Minneapolis
Investment Associates L.P. and the Registrant(7)
(bb) Second Amended and Restated Note
dated as of December 16, 1992 from the
Registrant to The Prudential Insurance
Company of America(7)
(cc) Cash Management and Security Agreement
dated as of December 15, 1992, among
the Registrant, The Prudential Insurance
Company of America and First Union
National Bank of Georgia(7)
(dd) Amended and Restated Deed to Secure
Debt and Security Agreement (Peachtree)
dated as of December 16, 1992 by Successor
Trustees of the Registrant as Debtor in
favor of The Prudential Insurance Company
of America as Secured Party(7)
(ee) Amended and Restated Open-End Mortgage
and Security Agreement (Harrisburg) dated
as of December 15, 1992 by Successor
Trustees of the Registrant as Debtor in
favor of The Prudential Insurance Company
of America as Secured Party(7)
(ff) Amended and Restated Mortgage and Security
Agreement (Castleton) dated as of December 15,
1992 by the Registrant as Debtor in favor of
The Prudential Insurance Company of
America as Secured Party(7)
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(gg) Absolute Assignment of Leases and Rents
and Rental Collection Agreement
(Peachtree) dated as of December 16,
1992 among Successor Trustees of the
Registrant as Assignor, The Prudential
Insurance Company of America as
Assignee and First Union National Bank
of Georgia as Rental Collection Agent(7)
(hh) Absolute Assignment of Leases and Rents
and Rental Collection Agreement
(Harrisburg) dated as of December 16,
1992 among Successor Trustees of the
Registrant as Assignor, The Prudential
Insurance Company of America as
Assignee and First Union National Bank
of Georgia as Rental Collection Agent(7)
(ii) Absolute Assignment of Leases and Rents
and Rental Collection Agreement (Castleton)
dated as of December 15, 1992 among
the Registrant as Assignor, The Prudential
Insurance Company of America as Assignee
and First Union National Bank of Georgia
as Rental Collection Agent(7)
(jj) Warrant Agreement dated as of December 18,
1992 between the Registrant and
The Prudential Insurance Company of America(7)
(kk) Subordination and Intercreditor Agreement
dated as of December 16, 1992
among Provident National Bank,
The Prudential Insurance Company of America
and the Registrant(7)
(ll) Second Amended and Restated Loan
Agreement dated as of December 16,
1992 from the Registrant to
Provident National Bank(7)
(mm) Amended and Restated Note dated as of
December 16, 1992 from the
Registrant to Provident National Bank(7)
(nn) Mortgage and Security Agreement (Castleton)
dated as of December 16, 1992 between
the Registrant and Provident National Bank(7)
(oo) Deed to Secure Debt and Security
Agreement (Peachtree) dated as of
December 16, 1992 between the
Registrant and Provident National Bank(7)
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(pp) Open-End Mortgage and Security
Agreement (Harrisburg) dated as of
December 16, 1992 between the
Registrant and Provident National Bank(7)
(qq) Assignment of Lessor's Interest in Leases
(Castleton) dated as of December 16,
1992 between the Registrant and
Provident National Bank(7)
(rr) Assignment of Lessor's Interest in Leases
(Peachtree) dated as of December 16,
1992 between the Registrant and
Provident National Bank(7)
(ss) Assignment of Lessor's Interest in Leases
(Harrisburg) dated as of December 16,
1992 between the Registrant and
Provident National Bank(7)
(tt) Assignment of Cash Collateral Account
and Security Agreement dated as of
December 16, 1992 between the
Registrant and Provident National Bank(7)
(uu) Purchase and Sale Agreement dated
July 6, 1993 between Lawrence E.
Cooper and the Registrant(8)
(vv) Amendment dated October 1, 1993
to Exhibit 10(cc)(8)
(ww) Amendment dated December 3, 1993
to Exhibits 10(ll) and 10(mm)(8)
(11) See Note 1 to the Financial Statements.
(12) Inapplicable.
(13) Inapplicable.
(16) None.
(18) None.
(21) None.
(22) None.
(23) None.
(24) None.
(27) Financial Data Schedule Included in EDGAR transmission only.
(28) None.
</TABLE>
24
<PAGE> 26
(b) Reports on Form 8-K
None.
(c) See paragraph (a) 3. above
(d) See paragraph (a) 2. above
_________________________
(1) Incorporated herein by reference to exhibit filed with
Registrant's Registration Statement on Form S-11, File No.
2-93936.
(2) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K dated for fiscal year ended December
31, 1985.
(3) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K dated for fiscal year ended December
31, 1987.
(4) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K for fiscal year ended December 31,
1989.
(5) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K for fiscal year ended December 31,
1990.
(6) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K for fiscal year ended December 31,
1991.
(7) Incorporated herein by reference to exhibit filed with
Registrant's Form 10-K for fiscal year ended December 31,
1992.
(8) Incorporated herein by reference to exhibit file with
Registrant's Form 10-K for fiscal year ended December 31,
1993.
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of
March, 1995.
EQK Realty Investors I
By: /s/Phillip E. Stephens
----------------------------
Phillip E. Stephens
President and Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on March 27, 1995 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
/s/Phillip E. Stephens President (Principal Executive
-------------------------------- Officer) and Trustee
Phillip E. Stephens
/s/Gregory R. Greenfield Executive Vice President and Treasurer
----------------------------- (Principal Financial Officer)
Gregory R. Greenfield
/s/William G. Brown, Jr. Vice President and Controller
-----------------------------
William G. Brown, Jr.
/s/Sylvan M. Cohen Trustee
----------------------------
Sylvan M. Cohen
/s/Alton G. Marshall Trustee
------------------------------
Alton G. Marshall
/s/George R. Peacock Trustee
---------------------------
George R. Peacock
/s/Robert C. Robb, Jr. Trustee
------------------------------
Robert C. Robb, Jr.
</TABLE>
<PAGE> 28
EQK REALTY INVESTORS I
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31
------------------------
1994 1993
---------- ---------
ASSETS
<S> <C> <C>
Investments in real estate, at cost:
Castleton Commercial Park, net of valuation allowance of $19,565 $ 61,706 $ 60,313
Harrisburg East Mall 47,819 46,769
--------- ---------
109,525 107,082
Less accumulated depreciation 31,793 28,118
--------- ---------
77,732 78,964
Restricted cash 3,734 4,308
Cash and cash equivalents 967 1,408
Accounts receivable and other assets 7,825 8,483
--------- ---------
TOTAL ASSETS $ 90,258 $ 93,163
========= =========
LIABILITES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage note payable, net of debt discount of $413 in 1994 and
$651 in 1993 $ 77,186 $ 75,874
Term loan payable to bank 2,846 2,853
Accounts payable and other liabilities 5,413 2,620
--------- ---------
85,445 84,987
Shareholders' equity:
Shares of beneficial interest, without par value: 10,055,555 shares
authorized, 9,264,344 shares issued and outstanding 135,875 135,779
Accumulated deficit (131,062) (127,603)
--------- ---------
4,813 8,176
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 90,258 $ 93,163
========= =========
</TABLE>
See accompanying Notes to Financial Statements
<PAGE> 29
================================================================================
EQK REALTY INVESTORS I
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from rental operations $16,512 $18,458 $20,900
Operating expenses, net of tenant
reimbursements 5,836 6,384 9,239
Depreciation and amortization 4,612 4,761 5,328
Write-off of capitalized predevelopment costs 429 -- --
Write-down of investment in real estate -- -- 4,001
--------------------------------------------------------------------------------
Income (loss) from rental operations 5,635 7,313 2,332
Interest expense 8,132 8,706 11,217
Other expenses, net of interest income 962 958 1,108
--------------------------------------------------------------------------------
Loss before gain on sales of real estate and
extraordinary loss (3,459) (2,351) (9,993)
Gain on sales of real estate -- 282 1,143
--------------------------------------------------------------------------------
Loss before extraordinary loss (3,459) (2,069) (8,850)
Extraordinary loss from early retirement of debt -- (1,711) --
--------------------------------------------------------------------------------
Net loss ($3,459) ($3,780) ($8,850)
================================================================================
Loss per share:
Loss before gain on sales of real estate and
extraordinary loss ($0.37) ($0.25) ($1.31)
Gain on sales of real estate -- 0.03 0.15
--------------------------------------------------------------------------------
Loss before extraordinary loss (0.37) (0.22) (1.16)
Extraordinary loss from early retirement of debt -- (0.19) --
--------------------------------------------------------------------------------
Net loss ($0.37) ($0.41) ($1.16)
================================================================================
</TABLE>
See accompanying Notes to Financial Statements
<PAGE> 30
EQK REALTY INVESTORS I
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------
Shares of
Beneficial Accumulated
Interest Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1992 $128,290 ($114,973) $13,317
Net loss (8,850) (8,850)
Reissuance of 1,675,000 shares 6,700 6,700
Issuance of 165,086 warrants in
connection with refinancing 392 392
------------------------------------------------------------------
Balance, December 31, 1992 135,382 (123,823) 11,559
Net loss (3,780) (3,780)
Issuance of 151,556 warrants in
connection with financing 397 397
------------------------------------------------------------------
Balance, December 31, 1993 135,779 (127,603) 8,176
------------------------------------------------------------------
Net loss (3,459) (3,459)
Issuance of 51,226 warrants in
connection with financing 96 96
------------------------------------------------------------------
Balance, December 31, 1994 $135,875 ($131,062) $ 4,813
==================================================================
</TABLE>
See accompanying Notes to Financial Statements
<PAGE> 31
EQK REALTY INVESTORS I
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Years ended December 31,
1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($3,459) ($3,780) ($8,850)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary loss from early retirement of debt -- 1,711 --
Write-down of investment in real estate -- -- 4,001
Depreciation and amortization 4,612 4,761 5,328
Amortization of debt discount 334 139 9,344
Imputed and deferred interest 1,320 1,295 488
Gain on sales of real estate -- (282) (1,143)
Changes in assets and liabilities:
Increase (decrease) in accounts
payable and other liabilities (388) (119) 123
(Increase) decrease in other assets (235) 362 (1,223)
-------------------------------------------------------------------------------------
Net cash provided by operating activities 2,184 4,087 8,068
-------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of real estate -- 10,768 21,748
Additions to real estate investments (2,976) (5,226) (2,364)
Payment of real estate disposition fee (216) -- --
-------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (3,192) 5,542 19,384
-------------------------------------------------------------------------------------
Cash flows from financing activities:
Mortgage principal payments -- (846) (787)
Prepayment of zero coupon note -- -- (23,038)
Prepayment of Harrisburg mortgage notes payable -- (9,626) --
Repayments under term loan (7) (6) --
Net borrowing (repayments) under bank line of credit -- -- (4,341)
Reissuance of shares -- -- 6,700
-------------------------------------------------------------------------------------
Net cash used in financing activities (7) (10,478) (21,466)
-------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,015) (849) 5,986
Cash and cash equivalents
beginning of year 5,716 6,565 579
-------------------------------------------------------------------------------------
Cash and cash equivalents
end of year $4,701 $5,716 $6,565
=====================================================================================
</TABLE>
See accompanying Notes to Financial Statements
<PAGE> 32
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
EQK Realty Investors I, a Massachusetts business trust (the "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 Trust qualified for and elected real estate
investment trust ("REIT") 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 Trust's portfolio at December 31, 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 Trust sold its two remaining office buildings within its
office complex in Atlanta, Georgia, formerly known as Peachtree-Dunwoody
Pavilion or "Peachtree" (see Note 4).
The Declaration of Trust established the Trust as a finite life REIT with
an investment holding period of up to 12 years, after which it is required to
dispose of its assets in an orderly fashion within two years. The Trust's
management is currently pursuing the orderly liquidation of its real estate
holdings.
CAPITALIZATION, DEPRECIATION AND AMORTIZATION:
Property additions are recorded at cost. Costs directly associated with
major renovations and improvements, including interest on funds borrowed to
finance construction, are capitalized to the point of substantial completion.
Depreciation of real estate investments is provided on a straight-line
basis over the estimated useful lives of the related assets, ranging generally
from 5 to 40 years. Intangible assets are amortized on a straight-line basis
over their estimated useful lives.
OTHER ASSETS
Other assets primarily consist of deferred leasing costs. Costs incurred
in connection with the execution of a new lease including leasing commissions,
costs associated with the acquisition or buyout of existing leases, and legal
fees are deferred and amortized over the term of the new lease. At December
31, 1994 and 1993, deferred leasing costs, net of accumulated amortization,
amounted to $4,816,000 and $4,898,000, respectively. Included in deferred
leasing costs is a 1990 payment of $5,500,000 made to an anchor tenant at
Harrisburg in exchange for the tenant relinquishing space that was subsequently
converted into leasable area for mall shops.
<PAGE> 33
NET LOSS PER SHARE:
Net loss per share is calculated on the basis of the weighted average
number of shares outstanding during each year. For the years ended December
31, 1994, 1993 and 1992, the number of weighted average shares outstanding was
9,264,344, 9,264,344 and 7,653,415, respectively.
Share warrants issued in connection with the Trust's debt restructuring
(see Note 2) are considered common share 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 since the effect on such
calculation would be antidilutive.
In December 1992, the Trust prepaid $3,000,000 of debt with proceeds from
the issuance of shares to its Advisor (see Notes 2 and 8). Net loss per share
for the year ended December 31, 1992 would have been $1.02 had the related
shares been included in average shares outstanding from the beginning of the
year and had interest expense been lower due to a $3,000,000 reduction of
outstanding indebtedness for the entire year.
INCOME TAXES:
The Trust distributes 100% of its real estate investment trust taxable
income to its shareholders within certain time limits prescribed by the
Internal Revenue Code. Accordingly, no provision has been made for income
taxes.
STATEMENTS OF CASH FLOWS:
Cash equivalents include short-term investments with an original maturity
of three months or less. Included in the statements of cash flows are cash
payments for interest of $6,746,000, $7,439,000 (net of amount capitalized of
$115,000), and $1,361,000, in 1994, 1993 and 1992, respectively.
At December 31, 1993, the Trust accrued additional investments in real
estate and a real estate disposition fee payable to the Advisor in the amounts
of $489,000 and $216,000, respectively. Such amounts were paid in 1994.
As a condition of the Trust's debt restructuring (see Note 2), the Trust
issued 51,226, 151,556 and 165,086 share warrants in 1994, 1993 and 1992,
respectively, to its primary mortgage lender. Based upon the respective market
values of the Trust's shares, the value of the warrants at the time of issuance
was $96,000, $397,000 and $392,000, respectively. These amounts were recorded
as debt discounts and increases in Shareholders' equity.
RESTRICTED CASH:
The terms of the Trust's restructured mortgage loan required the
establishment of a Cash Management Agreement with a third-party escrow agent
(see Note 2). The Trust's access to cash balances maintained on deposit with
the escrow agent are restricted in accordance with the terms of this agreement.
In addition, the Trust has established a $300,000 escrow account in connection
with the restructuring of its bank line of credit.
<PAGE> 34
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2: MORTGAGE DEBT AND RESTRUCTURING ACTIVITIES
On February 4, 1988, the Trust issued a zero coupon mortgage note with an
original maturity date of December 18, 1992. The original maturity value of
the note was $7,772,500; however, in December 1991 the Trust prepaid a portion
of the note with proceeds from the sale of buildings at Castleton reducing the
maturity value to $4,264,000. In September 1992, the Trust prepaid the
remainder of the note with proceeds from the sale of a building at Peachtree
(see Note 4). At issuance, the Trust received $5,000,000 representing an
effective interest rate of 9.255% compounded semi-annually.
On December 18, 1985, the Trust issued a zero coupon mortgage note with an
original face amount of $94,720,000. At issuance, the Trust received
$45,000,000 representing an effective interest rate of 10.92% compounded
semi-annually. As described in Note 4, the Trust completed property sales in
1992, and, as described in Note 3, the Trust issued additional shares to its
Advisor. Proceeds received from these transactions were used to prepay a
portion of the mortgage note, reducing the maturity value to $75,689,000.
Upon maturity of this zero coupon mortgage note in December 1992, the
Trust completed a restructuring of its debt. The new financing, which is
collateralized by first mortgage liens on Castleton and Harrisburg, matures on
December 15, 1995 (the "Mortgage Note"). Interest accrues on the mortgage at
9.54%, 9.79% and 10.04% per year in the first, second and third loan years,
respectively, although interest is payable at an annual rate of 8.54% for the
duration of the loan. The interest differential between the accrual rates and
the payment rate is added to principal over the term of the loan, resulting in
a final maturity balance of $78,928,000. The mortgage lender also received in
December 1992, 1993 and 1994 warrants to purchase 165,086, 151,556, and 51,226
Trust shares, respectively, for $.0001 per share, none of which have yet been
exercised.
As part of the restructuring, the Trust also entered into a Cash
Management Agreement with the mortgage lender and 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. The agreement also provides for the establishment of a
capital reserve account, which is maintained by the escrow agent.
Disbursements from this account, which was initially funded with a portion of
the proceeds from the sale of shares to the Trust's Advisor (see Note 3) and is
funded each month with any excess operating cash flow, are limited to capital
expenditures approved by the lender.
In December 1992, the Trust also completed the restructuring of its bank
line of credit into a term loan (the "Term Loan"). The line of credit was an
unsecured facility that bore interest at the bank's prime rate through its
original maturity date, March 23, 1992, and at the prime rate plus 1 1/4% until
restructured. The balance of the restructured term loan was $2,859,000 and
also will mature on December 15, 1995. The interest rate on the Term Loan is
8.33% per annum. Monthly payments are determined based on the same 8.54% pay
rate applicable to the primary lender's mortgage. The amount of each monthly
payment in excess
<PAGE> 35
of the required interest payment is applied to the principal balance of the
loan. The amount of principal due at maturity will be $2,839,000. The Term
Loan is secured by subordinate liens on each of the properties and by an escrow
deposit of $300,000 (see Note 9).
In anticipation of the Mortgage Note and Term Loan maturities, the Trust's
management is exploring its external financing alternatives, including the
refinancing of its debt with the existing lenders or the prepayment of part or
all of the debt outstanding with the proceeds from real estate dispositions.
Based on its current assessment of the credit markets, management believes
that a new debt facility would be well collateralized as evidenced by the
Properties' aggregate appraised value of $116,100,000 as of December 31, 1994,
and that such new facility will be in place on or before the maturity date of
the existing debt. However, if the Trust is unable to refinance or replace
the existing debt at commercially reasonable terms or at all, management's
plans with respect to liquidating the Trust's real estate investments will be
accelerated to satisfy its debt obligations.
NOTE 3: ISSUANCE OF SHARES
In connection with its 1992 debt restructuring, the Trust issued 1,675,000
previously repurchased shares to its Advisor. Upon issuance, the Trust
received proceeds of $6,700,000, or $4.00 per share. In total, the Advisor
owns 1,685,556 shares, or 18.2% of the total shares outstanding.
NOTE 4: VALUATION AND SALES OF REAL ESTATE
The Trust is attempting to sell the properties in conjunction with
management's plans for an orderly liquidation of its real estate portfolio. As
the likelihood of any specific future property sales cannot be predicted, the
Trust considers that all of its properties are held for sale. Therefore, to
the extent that the net investment in any property exceeds its current market
value, an allowance is recorded to adjust such net investment to net realizable
value commencing with the date on which the properties were deemed held for
sale. For the years ended December 31, 1994 and 1993, no such write-down was
deemed necessary. For the year ended December 31, 1992 the Trust recorded a
write-down of $4,001,000 to adjust its investment in Castleton to its net
realizable value. Although the determination of net realizable value involves
subjective judgment, as market prices of real estate can only be determined by
negotiation between a willing buyer and seller, the Trust believes that these
market values are reasonable approximations of market prices.
In December 1993, the Trust completed the sale of its remaining two office
buildings at Peachtree. In the aggregate, the Trust received cash proceeds of
$10,552,000 net of associated costs of $248,000, and recognized a gain on sale
of $282,000.
During 1992, the Trust completed the sale of five office buildings at
Peachtree. In the aggregate, the Trust received cash proceeds of $21,748,000,
net of associated costs of $888,000, and recognized a gain on sale of
$1,143,000.
<PAGE> 36
NOTE 5: LEASING ARRANGEMENTS
The Trust leases office, warehouse and shopping center space, generally
under noncancelable operating leases, some of which contain renewal options.
The office and warehouse space leases generally provide for either base rentals
plus annual increases based on the increase in the Consumer Price Index, or
base rentals plus reimbursement to the Trust for the increase in certain
defined real estate operating expenses.
The shopping center leases generally provide for minimum rentals, plus
percentage rentals based upon the retail stores' sales volume. Percentage
rentals amounted to $295,000, $154,000, and $268,000 for the years ended
December 31, 1994, 1993, and 1992, respectively. In addition, the tenants pay
certain utility charges to the Trust and, in most leases, reimburse their
proportionate share of real estate taxes and common area expenses.
Future minimum rentals under existing, non-cancelable leases at December
31, 1994 were as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
------------------------- -----------
<S> <C>
1995 14,684,000
1996 12,164,000
1997 10,201,000
1998 8,277,000
1999 7,056,000
Thereafter 20,089,000
----------
$ 72,471,000
===========
</TABLE>
NOTE 6: INVESTMENTS IN REAL ESTATE
The Trust's investments in real estate at December 31, 1994 and 1993
consisted of the following:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Land $ 15,411,000 $ 15,411,000
Buildings and improvements 101,957,000 100,960,000
Tenant improvements 11,497,000 9,981,000
Personal property 225,000 198,000
Construction in progress -- 97,000
------------ ------------
129,090,000 126,647,000
Less valuation allowance 19,565,000 19,565,000
------------ ------------
$109,525,000 $107,082,000
============ ============
</TABLE>
<PAGE> 37
NOTE 7: EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT
The Trust used proceeds of $9,626,000 from the 1993 sale of its
remaining two buildings at Peachtree (see Note 4) to retire the Harrisburg
mortgage notes that had been assumed by the Trust in connection with its
purchase of the Mall. The Harrisburg mortgage notes, with stated interest
rates of 8.8% and 8.562% per annum, had been discounted for financial reporting
purposes using a market interest rate of 14%. At retirement, the Harrisburg
mortgage notes had a carrying value of $7,975,000, net of a $1,547,000
discount. The Trust also paid accommodation fees of $60,000 to the holders of
its mortgage note and term loan. In connection with the retirement of the
Harrisburg mortgage notes, the Trust recognized an extraordinary charge to
earnings of $1,711,000.
NOTE 8: ADVISORY AND MANAGEMENT AGREEMENTS
The Trust has entered into an agreement with Equitable Realty Portfolio
Management, Inc. (successor in interest to EQK Partners), 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 Trust 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 Trust'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 generally is payable monthly without subordination (see
Note 10). For the years ended December 31, 1994, 1993 and 1992, portfolio
management fees were $430,000, $484,000, and $494,000, respectively.
In connection with the December 1992 refinancing described in Note 2,
the Advisor earned a $500,000 refinancing fee, which was paid in 1993-1994.
As of December 31, 1989, portfolio management fees of $5,440,000 payable
to the Advisor were deferred in accordance with subordination provisions
contained in the original advisory agreement. Pursuant to the amended advisory
agreement, the Advisor forgave one-half, or $2,720,000, of the deferred
balance. The remaining deferred fees are to be paid upon the disposition of
the Trust's properties. For financial reporting purposes, the deferred balance
is being discounted at the rate of 13% per year from December 1, 1996. As of
December 31, 1994, the discounted liability for deferred management fees was
$2,140,000.
Upon the sale of all or any portion of any real estate investment of the
Trust, the Advisor will receive a disposition fee equal to 2% of the gross sale
price (including outstanding indebtedness taken subject to or assumed by the
buyer and any purchase money indebtedness taken back by the Trust). The
disposition fee will be reduced by the amount of any brokerage commissions and
legal expenses incurred by the Trust in connection with such sales. For the
years ended December 31, 1993 and 1992 disposition fees earned by the Advisor
amounted to $216,000, and $453,000, respectively.
The Trust has also entered into agreements for the on-site management of
each of its properties. Harrisburg East Mall is managed by Compass Retail,
Inc. ("Compass"), an affiliate of Equitable Real Estate. The buildings at
Peachtree were managed by another
<PAGE> 38
affiliate of Equitable Real Estate up until the time of their respective sales.
Castleton Commercial Park is managed by an unaffiliated third-party management
company.
Management fees paid to each of the Equitable Real Estate management
affiliates are generally based upon a percentage of rents and certain other
charges. For Peachtree, the Trust 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 years ended December 31, 1994, 1993 and
1992, management and leasing fees paid to Equitable Real Estate were $314,000,
$403,000, and $707,000, respectively.
Compass also received development and construction management fees of
$185,000 in connection with the 1993 renovation of Harrisburg. In connection
with the redevelopment of Harrisburg's outparcel building as described in Note
10, Compass will receive a $150,000 development fee.
NOTE 9: RELATED PARTY TRANSACTIONS
In addition to providing management and advisory services to the Trust
as described in Note 8, Equitable Real Estate and certain of its affiliates,
including the Advisor, leased space at Peachtree. As discussed in Note 4, the
Trust sold its office buildings at Peachtree during 1992 and 1993. The Trust
received rent payments of approximately $1,167,000 and $879,000 for the years
ended December 31, 1993 and 1992, respectively, with respect to such leases.
As a condition of the restructured bank term loan, an escrow deposit of
$300,000 was required as additional security for the loan. The Trust borrowed
this amount from its Advisor, for which it will pay the Advisor interest as a
rate of 7.5% per annum. The balance of this loan is repayable at such time as
the bank term loan is repaid.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Harrisburg Anchor Tenant Replacement and Redevelopment
On August 1, 1994, Hess's Department Stores, Inc. ("Hess's") announced
its intention to sell certain of its stores, including its location at
Harrisburg, to the May Department Stores Company ("May"). During the fourth
quarter of 1994, the Hess's location at Harrisburg closed, its anchor tenant
lease was assigned to May, and remodeling and expansion of the former Hess's
space commenced in order to accommodate the opening of a Hecht's department
store (a division of May). This expansion will result in the relocation of
Toys 'R' Us, which was situated in the basement area previously occupied by
Hess's, to Harrisburg's outparcel building, and the related relocation or lease
buyout of certain outparcel tenants with lease terms extending beyond 1994.
The Trust's lender has approved the anchor tenant replacement and the
outparcel building redevelopment budget, subject to the finalization of certain
legal documents. The Trust anticipates incurring costs of approximately
$3,950,000 to renovate the outparcel
<PAGE> 39
building in preparation of the Toys 'R' Us relocation and to buyout the leases
of affected tenants. Such costs will be funded by existing cash reserves,
including amounts restricted in accordance with the Cash Management Agreement,
and 1995 operating cash flows.
It is anticipated that the outparcel building will be renovated such
that Toys 'R' Us can relocate to the outparcel building and May can begin its
expansion and remodeling activities in April 1995, with Hecht's opening by
December 1, 1995. However, if the current Toys 'R' Us basement space is not
turned over to May by May 1, 1995, the Trust will incur certain per diem
penalties. Further delays in turning this space over to May could result in
current rent abatements, a delay in the opening of Hecht's, and ultimately a
termination of the Hecht's lease.
The Trust's mortgage lender requires the deferral of payment of the
portfolio management fee (described in Note 8) commencing in December 1994
until such time as May has received and accepted the space previously occupied
by Toys 'R' Us and the lender has been provided with satisfactory evidence that
the entire project has been completed within budget. Deferred portfolio
management fees remain an obligation of the Trust and will be paid at the time
of the liquidation of the Trust's real estate portfolio if lender's consent to
payment upon completion of the project is not obtained.
John Wanamaker
In January 1994, Woodward & Lothrop, the parent company of John
Wanamaker (an anchor department store tenant at Harrisburg), filed for
protection under Chapter 11 of the United States Bankruptcy Code. Under
Federal bankruptcy law, Woodward & Lothrop has the option to assume or reject
their lease at Harrisburg. To date, there have been no substantitive
developments with respect to the bankruptcy proceedings. The John Wanamaker
location at Harrisburg remains open, and all post-petition billings have been
paid on a timely basis. Further, management has been informed that the John
Wanamaker location at Harrisburg is one of the retail chain's top performing
mall locations. Woodward & Lothrop has demonstrated its commitment to this
location by requesting and receiving the court's approval to renovate the
store's interior. Although no assurances can be given, the Trust's management
believes that Woodward & Lothrop will assume its John Wanamaker lease at
Harrisburg, and that the bankruptcy filing will not have a material adverse
impact on the operations of the Mall.
NOTE 11: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Quarter Ended
-------------------------------------------------------------
1994 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Revenues from rental operations 4,018 4,169 4,132 4,193
Income (loss) from rental operations 1,346 1,598 1,586 1,105
Net loss (928) (621) (620) (1,290)
Net loss per share (.10) (.07) (.06) (.14)
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
1993 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Revenues from rental operations $4,486 $4,623 $4,599 $4,750
Income from rental operations 1,739 2,085 1,650 1,839
Loss before gain on sales of real
estate and extraordinary loss (698) (340) (713) (600)
Loss before extraordinary loss (698) (340) (713) (318)
Net loss (698) (340) (713) (2,029)
Per share data:
Loss before gain on sales of real
estate and extraordinary loss ($.08) ($.03) ($.08) ($.06)
Loss before extraordinary loss (.08) (.03) (.08) (.03)
Net loss (.08) (.03) (.08) (.22)
</TABLE>
During the period 1992 to 1994, management explored the possibility
of expanding Harrisburg by possibly acquiring an adjacent tract of land and/or
by developing additional leasable space contiguous with the existing mall
structure. In light of the anchor tenant changes and redevelopment activities
discussed in Note 10, coupled with the on-going efforts to sell the Properties,
management concluded during the fourth quarter of 1994 that further development
activity currently was not feasible. Accordingly, the related capitalized
predevelopment costs of $429,000, including payments made under a land purchase
option agreement, were written off in the fourth quarter of 1994.
<PAGE> 41
FINANCIAL STATEMENT SCHEDULE
December 31, 1994
(in thousands)
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Cost Capitalized Gross Amount
Subsequent to At which Carried
Initial Cost Acquisition at Close of Period (4)
--------------------- ---------------- ---------------------------
Description Encumbrance Land Bldg & Improvements Land Bldg & Total Accum.
Improve. Improve. Deprec.
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harrisburg $80,032(1) $ 4,700(2) $31,287(2) $11,876 $ 4,700(2) $43,119(2) $ 47,819 $11,622
East Mall.....
Harrisburg, PA
Castleton 80,032(1) 11,264 40,650(3) 10,345 10,711 50,995(3) 61,706 20,171
Commercial
Park..........
Indianapolis, IN
Totals $80,032 $15,964 $71,937 $22,221 $15,411 $94,114 $109,525 $31,793
</TABLE>
<TABLE>
<CAPTION>
Life on Which
Depreciation in
Description Date of Date Latest Income
Construction Acquired Stmt.
is Computed
---------------------------------------------------------------------
<S> <C> <C> <C>
Harrisburg 1969(5) 3/13/85 30 yrs.
East Mall.....
Harrisburg, PA
Castleton 1968-1985 3/13/85 40 yrs.
Commercial
Park..........
Indianapolis, IN
Totals
(1) Encumbrance is a mortgage note payable constituting first liens on the
Castleton and Harrisburg real estate and a term loan payable to a bank
constituting subordinated liens on such properties.
(2) Initial cost is net of imputed interest of $5,280 at date of
acquisition.
(3) The initial cost is net of unrealized loss recognized through 1994 of
$19,565.
(4) The aggregate tax basis of the Trust's property is $134 million as of
December 31, 1994.
(5) Renovation of Harrisburg was completed in 1993.
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Gross Carrying Amount of Real Estate: Reconcilation of Accumulated Depreciation:
<S> <C> <C> <C>
Balance, December 31, 1991 $142,716 Balance, December 31, 1991 $32,243
Improvements and Additions 2,364 Depreciation expense 4,571
Deductions -- costs of real (26,413) Deductions -- Accumulated depreciation of
Valuation allowance (4,001) real estate sold (8,817)
-------- -------
Balance, December 31, 1992 114,666 Balance, December 31, 1992 27,997
Improvements and Additions 5,715 Depreciation expense 3,812
Deductions -- costs of real (13,299) Deductions -- Accumulated depreciation of
------- real estate sold (3,691)
-------
Balance, December 31, 1993 107,082 Balance, December 31, 1993 28,118
Improvements and Additions 2,487 Depreciation expense 3,719
Deductions -- Reversal of net book value Deductions -- Reversal of net book value of
of fully depreciated assets (44) fully depreciated assets (44)
-------- -------
Balance, December 31, 1994 $109,525 Balance, December 31, 1994 $31,793
======== =======
</TABLE>
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and
Shareholders of EQK Realty Investors I:
We have audited the accompanying balance sheets of EQK Realty Investors I (a
Massachusetts business trust) as of December 31, 1994 and 1993 and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
and the financial statement schedule discussed below are the responsibility of
the Trust's management. Our responsibilitiy is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally auditing standards. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of EQK Realty Investors I as of December 31,
1994 and 1993 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
Our audits also comprehended the financial statement schedule of EQK Realty
Investors I as of December 31, 1994 and 1993 and for each of the three years in
the period ended December 31, 1994. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements,
presents fairly, in all material respects, the information shown therein.
As discussed in Note 2 to the financial statements, the Trust's existing
mortgage note and its term loan mature on December 15, 1995. Management's
plans with regard to the maturity of the mortgage note and term loan are also
described in Note 2.
Deloitte & Touche LLP
Atlanta, Georgia
March 10, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EQK REALTY INVESTORS I FOR THE PERIOD ENDED DECEMBER
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 4,701
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 90,258
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 135,875
0
0
<OTHER-SE> (131,062)
<TOTAL-LIABILITY-AND-EQUITY> 90,258
<SALES> 0
<TOTAL-REVENUES> 16,512
<CGS> 0
<TOTAL-COSTS> 5,836
<OTHER-EXPENSES> 6,003
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,132
<INCOME-PRETAX> (3,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,459)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
