<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
MASSACHUSETTS 23-2320360
---------------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S.Employer Identification No.)
of incorporation or organization)
2810 Spring Road, Suite 106, Atlanta, GA 30339
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (770) 433-9400
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 OTC Bulletin Board System
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. / /
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
May 19, 2000 on the OTC Bulletin Board System of $.04 per share, is $385,057. As
of May 19, 2000, 9,632,212 Shares of Beneficial Interest were outstanding.
Officers and Trustees of the Trust (and certain of their family members) 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.
<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 is filed solely to (a) amend Item 8 (including
corresponding changes to the financial statements and Note 1 thereto) to
label all the financial statements as unaudited since no accountants' report
is included and (b) amend Item 9 of this report.
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.
In March, 2000, the Trust filed an application in the Bankruptcy
Court with jurisdiction over its pending bankruptcy proceedings for authority
to employ Deloitte & Touche LLP ("Deloitte") as auditors, accountants, and
tax consultants. Certain parties in interest filed objections in the
Bankruptcy Court to such employment and Deloitte subsequently requested that
the Trust withdraw its application to retain Deloitte. On May 18, 2000, the
Trust filed a praecipe to withdraw the Deloitte employment application.
Accordingly, Deloitte ceased acting as the Trust's independent public
accountants as of such date. The Trust has not replaced Deloitte. Deloitte's
reports on the Trust's financial statements for the fiscal years ended
December 31, 1998 and December 31, 1997 do not contain an adverse opinion or
a disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles, except that Deloitte's
report on the Trust's financial statements for the fiscal year ended December
31, 1998 includes an explanatory paragraph indicating that there is
substantial doubt about the Trust's ability to continue as a going concern.
Deloitte did not audit the Trust's financial statements for the fiscal year
ended December 31, 1999.
During the Trust's last two fiscal years ended December 31, 1998 and
the subsequent intervening period to the date hereof, there were no
disagreements between the Trust and Deloitte on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Deloitte, would have caused it to make a reference to the subject matter of
the disagreements in connection with its reports.
The Trust requested and Deloitte furnished a letter addressed to the
Securities and Exchange Commission stating it agrees with the above
statements. A copy of this letter, dated July 7, 2000, is filed as Exhibit 99
to the Trust's Form 8/K filed on July 7, 2000.
None of the "reportable events" described in Item 304 (a)(1)(v) of
Regulation S-K occurred with respect to the Trust within the two fiscal years
ended December 31, 1998 and the subsequent intervening period to the date
hereof.
1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
amendment to a report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 14th day of July, 2000.
EQK Realty Investors I
By: /s/LLOYD T. WHITAKER
--------------------------------
LLOYD T. WHITAKER
PRESIDENT (PRINCIPAL
EXECUTIVE OFFICER)
2
<PAGE>
EQK REALTY INVESTORS I
BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ----------
ASSETS
<S> <C> <C>
Real estate held for sale $ 40,030 $ 39,360
Cash and cash equivalents:
Restricted cash, held in escrow under Cash Management Agreement 3,360 3,390
Operating cash 606 471
Accounts receivable and other assets (net of allowance of $5
and $67, respectively) 1,531 1,881
------------ ----------
TOTAL ASSETS $ 45,527 $ 45,102
============ ==========
LIABILITIES AND DEFICIT IN SHAREHOLDERS' EQUITY
Liabilities:
Mortgage note principal payable $ 43,794 $ 43,794
Term loan principal payable 1,570 1,580
Accrued interest on mortgage note and term loan 3,641 167
Accounts payable and other liabilities (including amounts due to
Lend Lease of $3,143 and $3,069, respectively) 4,333 4,393
------------ ----------
53,338 49,934
============ ==========
Commitments and Contingencies (Note 7)
Deficit in Shareholders' Equity:
Shares of beneficial interest, without par value: 10,055,555 shares
authorized, 9,632,212 shares issued and outstanding
in 1999 and 1998 135,875 135,875
Accumulated deficit (143,686) (140,707)
------------ ----------
(7,811) (4,832)
------------ ----------
TOTAL LIABILITIES AND DEFICIT IN SHAREHOLDERS' EQUITY $ 45,527 $ 45,102
============ ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
EQK REALTY INVESTORS I
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from rental operations $ 6,150 $ 6,191 $ 6,158
Operating expenses, net of tenant
reimbursements 1,063 769 1,083
Depreciation and amortization 0 588 2,181
---------------------------------------------------------------------
Income from rental operations 5,087 4,834 2,894
Interest expense 7,564 4,219 4,397
Other expenses, net of interest income 502 465 458
---------------------------------------------------------------------
Net income (loss) ($2,979) $ 150 ($1,961)
=====================================================================
Net income (loss) per share ($ 0.31) $ 0.02 ($ 0.21)
=====================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
EQK REALTY INVESTORS I
STATEMENTS OF SHAREHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Number of Shares of
Shares Issued Beneficial Accumulated
and Outstanding Interest Deficit Total
--------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 9,264,344 $ 135,875 ($138,896) ($3,021)
--------------------------------------------------------------------------------
Net loss -- -- (1,961) (1,961)
Balance, December 31, 1997 9,264,344 135,875 (140,857) ($4,982)
--------------------------------------------------------------------------------
Shares Issued 367,868 -- -- --
Net income -- -- 150 150
Balance, December 31, 1998 9,632,212 135,875 (140,707) ($4,832)
--------------------------------------------------------------------------------
Net loss -- -- (2,979) (2,979)
Balance, December 31, 1999 9,632,212 $ 135,875 ($143,686) ($7,811)
================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
EQK REALTY INVESTORS I
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,979) $ 150 ($1,961)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and property write-off (48) 588 2,181
Amortization of deferred financing costs 71 186 351
Changes in assets and liabilities:
Increase (decrease) in accounts payable, other
liabilities and accrued interest 3,414 252 198
(Increase) decrease in accounts receivable
and other assets 279 421 (537)
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 737 1,597 232
---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to real estate investments (622) (652) (546)
---------------------------------------------------------------------------------------------
Net cash used in investing activities (622) (652) (546)
---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Scheduled repayments of debt (10) (5) --
Payment of deferred financing costs -- (402) (24)
---------------------------------------------------------------------------------------------
Net cash used in financing activities (10) (407) (24)
---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 105 538 (338)
Cash and cash equivalents
beginning of year 3,861 3,323 3,661
---------------------------------------------------------------------------------------------
Cash and cash equivalents
end of year $ 3,966 $ 3,861 $ 3,323
=============================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 4,019 $ 4,058 $ 4,022
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: DESCRIPTION OF BUSINESS
EQK Realty Investors I, a Massachusetts business trust (the "Trust"), was
formed pursuant to an Amended and Restated Declaration of Trust dated
February 27, 1985, as amended on March 5, 1986, 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 applicable provisions of the
Internal Revenue Code. On December 14, 1999, the Trust filed a voluntary
petition in the United States Bankruptcy Court for the Middle District of
Pennsylvania (the "Bankruptcy Court") because the Trust was unable to repay
certain mortgage indebtedness upon the December 15, 1999 expiration date of
forbearance and extension agreements with its lenders. The Trust is now
operating as a "debtor-in-possession" pursuant to Chapter 11 of the U.S.
Bankruptcy Code. On April 10, 2000, the Trust and the Mortgage Note Lender
(as hereinafter defined) filed a Joint Plan of Reorganization in the
Bankruptcy Court.
At December 31, 1999 and 1998, the Trust's remaining real estate investment
is Harrisburg East Mall (the "Mall"), a regional shopping center in
Harrisburg, Pennsylvania, which is currently being actively marketed and
held for sale.
The Declaration of Trust provides for the Trust's existence and a maximum
holding period for its real estate investments of 14 years. The Declaration
of Trust further provides that this 14-year term may be extended by up to
two years upon the recommendation of the Trustees and the affirmative vote
of a majority of its shareholders. At a Special Meeting of Shareholders on
February 23, 1999, the shareholders approved a two-year extension of the
Trust's life from its initial maturity date of March 5, 1999 to March 5,
2001.
Effective December 23, 1997, the Trust entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which an affiliate of
American Realty Trust, Inc. ("ART") agreed to merge with and into the Trust
(the "Merger"), with the Trust being the surviving entity. The Merger
contemplated, among other things, a 20-year extension of the life of the
Trust.
The Merger Agreement was amended on August 25, 1998 and further amended on
April 22, 1999 and June 4, 1999, (the "Revised Merger Agreement") to
provide for, among other matters, the right of the Trust to sell the Mall
and distribute proceeds of such sale to the Trust's shareholders prior to
completing the Merger and a corresponding reduction in the Merger
consideration to be paid to the Trust's shareholders.
The Revised Merger Agreement provided for Merger consideration to be
comprised entirely of ART Series F Cumulative Convertible Preferred Stock
with a par value of $2.00 per share and a liquidation value of $10.00 per
share (the "ART Preferred Shares"). The Revised Merger Agreement provided
for the Merger to be effected by (i) ART's acquisition of 4,376,056 Shares
held by four EQK shareholders (the "Selling Shareholders") and (ii) ART's
receipt of 673,976 shares newly issued by the Trust (which, together with
Shares currently outstanding, constitutes
7
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
"EQK Shares"), the combined effect of which would give ART an approximate
49% interest in EQK. The Selling Shareholders would receive for each EQK
Share sold 0.030 of an ART Preferred Share with a corresponding liquidation
value of $0.30 per EQK Share sold. The remaining shareholders would be
entitled to retain their Shares at the time of the Merger, but would be
compensated for the dilution in their percentage ownership interest through
the receipt of 0.014 of an ART Preferred Share with a corresponding
liquidation value of $0.14 per EQK Share held. In addition, ART intended
(but was not legally obligated) to acquire the remaining EQK Shares from
such other shareholders at some time after the third anniversary of the
consummation of the Merger for not less than 0.0486 of an ART Preferred
Share with a liquidation value of $0.486 for each EQK Share tendered.
According to the terms of the Revised Merger Agreement, upon completion of
the sale of the Mall and receipt of shareholder approval, the Merger would
be completed. Because the Merger was not completed by December 15, 1998,
the Revised Merger Agreement became terminable by either ART or the Trust.
In view of the Trust's bankruptcy filing, the Trust will not be able to
consummate the Merger in accordance with the terms of the Revised Merger
Agreement nor to make any distributions to its shareholders without
Bankruptcy Court approval. Although management has had continuing
discussions with representatives of ART on terms and conditions of a
transaction with ART and/or its affiliates, no assurances can be provided
that a new agreement will be reached, or if reached, would be approved by
the Bankruptcy Court. See "Note 7-Commitments and Contingencies."
Trading in the Trust's Shares on the New York Stock Exchange ("NYSE")
terminated on May 4, 1998, as the Trust did not meet the NYSE's continued
listing criteria. The Trust's Shares are currently traded on the OTC
Bulletin Board System.
In March 2000, the Trust filed an application in the Bankruptcy Court
for authority to employ Deloitte & Touche LLP ("Deloitte") as its
independent accountants, including serving as auditors of its 1999
financial statements. Certain parties in interest filed objections in the
Bankruptcy Court to such employment, and Deloitte subsequently requested
that the Trust withdraw its application to retain Deloitte.
On May 18, 2000, the Trust filed a praecipe to withdraw the Deloitte
employment application. Accordingly, as of such date, Deloitte ceased
acting as the Trust's independent public accountants, and the 1999
financial statements are unaudited. Furthermore, because the Trust has
not received a currently dated auditors' report with respect to the
financial statements for 1998 and 1997, such statements have also
been labled unaudited.
8
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Costs incurred in connection with the execution of a new lease
including leasing commissions and costs associated with the acquisition or
buyout of existing leases and related legal fees are deferred and amortized
over the term of the new lease.
Until April 1, 1998, depreciation of real estate investments was provided
on a straight-line basis over the estimated useful lives of the related
assets, ranging generally from 5 to 40 years. Tenant improvements were
amortized over their estimated useful lives, which did not exceed the terms
of the respective tenant leases. Intangible assets were amortized on a
straight-line basis over their estimated useful lives. The Trust
discontinued recording depreciation and amortization expense on its
investment in real estate when the investment was classified as "real
estate held for sale" on April 1, 1998.
Deferred financing costs are included in accounts receivable and other
assets on the Balance Sheets. Deferred financing costs are amortized over
the life of the related debt and such amortization is included in interest
expense on the Statements of Operations.
VALUATION OF REAL ESTATE
At December 31, 1999 and 1998, the investment in real estate was recorded
at cost less accumulated depreciation through April 1, 1998. In accordance
with Statement of Financial Accounting Standards No.121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF," the Trust considers, on a quarterly basis, whether events or
changes in circumstances indicate that the carrying amount of its real
estate investment may not be recoverable based on estimates of future
undiscounted cash flows without interest expense. In the event such
projected undiscounted future cash flows should be less than the
depreciated cost of the property, the investment in real estate would be
written down to its estimated fair market value.
REVENUE RECOGNITION
Minimum rents are recognized on a straight-line basis over the term of the
related leases. Percentage rents, which are earned based on specified
percentages of tenants' sales, are recognized on an accrual basis.
NET INCOME (LOSS) PER SHARE
The net income (loss) per Share calculation is based on the weighted
average number of Shares outstanding during the year, which was 9,632,212
for 1999, 9,505,222 for 1998 and 9,264,344
9
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
for 1997.
On March 19, 1998, The Prudential Insurance Company of America (the
"Mortgage Note Lender") exercised warrants issued in 1992 for 367,868
Shares of the Trust at $.0001 per Share. (See Note 3.) Such Shares were
issued to the Mortgage Note Lender on May 7, 1998, increasing the total
number of issued and outstanding Shares of the Trust to 9,632,212. As such,
these Shares were included in the net income per share calculation for 1999
and 1998. In 1997, the warrants, which were considered common share
equivalents, were not included in the net loss per Share calculation since
the effect on such calculation was anti-dilutive.
INCOME TAXES
The Trust has complied with all applicable provisions established by the
Internal Revenue Code for maintaining its REIT status. Accordingly, no
income tax provision or benefit has been recognized in the accompanying
financial statements.
CASH EQUIVALENTS
Cash equivalents include short-term investments with a maturity of three
months or less.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Trust values its financial instruments as required by Statement of
Financial Accounting Standards No. 107, "DISCLOSURE ABOUT FAIR VALUES OF
FINANCIAL INSTRUMENTS". Based on rates currently available to the Trust for
comparable financial instruments, the Trust believes the carrying amounts
of cash and cash equivalents, the Mortgage Note and the Term Loan
approximate fair value.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE 3: MORTGAGE DEBT AND RESTRUCTURING ACTIVITIES
The Trust has a "Mortgage Note" obligation with the Mortgage Note Lender,
which had an original maturity date of December 15, 1995. The principal
balance of the Mortgage Note as of December 31, 1999 and 1998 was
$43,794,000. The stated terms of the Mortgage Note provide
10
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
for monthly payments of interest only accruing at the rate of 8.88% per
annum ($324,000 per month).
As part of a 1992 debt restructuring, the Trust entered into a Cash
Management Agreement with the Mortgage Note Lender and assigned all lease
and rental receipts to the Mortgage Note Lender as additional collateral.
Pursuant to this agreement, a third-party escrow agent was appointed to
receive all rental payments from tenants, to deposit such funds in a cash
collateral account, and to fund monthly operating expenses in accordance
with a budget approved by the Mortgage Note Lender. The Cash Management
Agreement also provides for the establishment of a capital reserve account,
which is maintained by the escrow agent. Disbursements from this account,
which is funded each month from any excess operating cash flow, are limited
to capital expenditures approved by the Mortgage Note Lender. As of
December 31, 1999, the third-party escrow agent held, in trust, cash
balances of $2,322,000 in the cash collateral account and $1,037,000 in the
capital reserve account.
Under the terms of the 1992 debt restructuring transactions, the Mortgage
Note Lender received warrants to purchase 367,868 Shares of the Trust at
$.0001 per share. The Mortgage Note Lender exercised the warrants in 1998
and owns 367,868 of the Trust's Shares at December 31, 1999 and 1998. (See
Note 2.)
The Trust also has a "Term Loan" obligation with PNC Bank N.A. ("Term Loan
Lender") in place since December 15, 1992, which had an original principal
balance of $2,859,000. The Term Loan is collateralized by a subordinate
lien on the Mall. The principal balance of the Term Loan was $1,570,000 and
$1,580,000, respectively, as of December 31, 1999 and 1998. The stated
terms of the Term Loan provide for an annual pay rate of 8.88%, but an
annual accrual interest at a rate that re-sets periodically. The accrual
interest rate is computed at the Trust's discretion at either 2 5/8% above
the Euro-Rate (as defined) or 1 1/8% above the Prime Rate (as defined). The
accrual rate in effect as of March 15, 2000 was 8.90%. The excess of the
interest accrued over the interest paid is included in the principal
balance of the Term Loan in the accompanying Balance Sheets.
EXTENSIONS OF DEBT
The Trust's Mortgage Note Lender and Term Loan Lender agreed to extensions
of the maturity dates of the loans through June 15, 1998. Following the
June 15, 1998 scheduled maturity date, the Mortgage Note Lender granted
three six-month forbearance arrangements (through December 15, 1998, then
through June 15, 1999, and then through December 15, 1999) wherein it
agreed not to exercise remedies for non-payment of the outstanding
principal balance. The Term Loan Lender also granted three six-month
extensions of its maturity dates so as to coincide with such forbearance
periods. The forbearance and extension arrangements were conditioned upon,
among other things, the Trust continuing to make timely debt service
payments in monthly amounts equal to those amounts stipulated in prior debt
extension agreements, as set forth below.
In consideration for the extension of the maturity date of the Mortgage
Note through June 15, 1998, the Trust paid an up-front application fee of
$165,000 and agreed to pay a back-end fee
11
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
of $272,900, plus interest thereon at the contract rate of 8.88% at
maturity. On June 15, 1998, the Trust paid the back-end fee plus interest
in the aggregate amount of $309,200 to the Mortgage Note Lender. In
consideration for the extension of the maturity date of the Term Loan the
Trust agreed to pay an extension fee of $23,800 in 1997 and paid additional
loan fees of $88,100 to the Term Loan Lender on June 15, 1998.
In consideration for the extension of the forbearance agreement relating to
the Mortgage Note through June 15, 1999 and December 15, 1999, the Trust
paid extension fees of $25,000 for each extension. In consideration for the
extension of the maturity date of the Term Loan through June 15, 1999 and
December 15, 1999, the Trust paid extension fees of $8,000 and $15,700,
respectively.
The Trust's expiration date of its final forbearance and extension
arrangements was December 15, 1999. Inasmuch as the Trust was unable to
obtain from its lenders additional forbearance and extension arrangements
on economically acceptable terms, the Trust filed a voluntary bankruptcy
petition on December 14, 1999.
The Mortgage Note Lender has asserted that it is entitled to be paid
interest at the default rate (which is 5.04% in excess of the stated 8.88%
stated rate) for all periods following June 15, 1998, due to the Trust's
failure to pay the Mortgage Note on the December 15, 1999, expiration date
of the forbearance agreement. The Term Loan Lender may assert that it is
likewise entitled to default rate interest at 5.00% in excess of the stated
Term Loan Rate from the December 15, 1999, extended maturity date of the
Term Loan. Accordingly, the Trust has recorded accrued and unpaid interest
in the Balance Sheet as of December 31, 1999, at amounts which include
$3,467,000 for the accrual of default rate interest for such periods. The
Trust has been advised that it may have defenses to the Mortgage Note
Lender's claim for default rate interest for all periods prior to
December 15, 1999. There can, however, be no assurance that any such
defenses would be successful.
NOTE 4: LEASING ARRANGEMENTS
The Trust leases shopping center space in the Mall generally under
non-cancelable operating leases, some of which contain renewal options. The
shopping center leases generally provide for minimum rentals, plus
percentage rentals based upon specified percentages of the tenant retail
store sales. Percentage rentals amounted to $245,000, $272,000, and
$122,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. In addition, the tenants pay certain utility charges to the
Trust. In most leases, tenants reimburse their proportionate share of real
estate taxes and common area expenses. Recoveries of common area and real
estate tax expenses amounted to $2,591,000, $2,418,000, and $2,299,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.
12
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Future minimum rentals under existing, non-cancelable leases at December
31, 1999, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- -------------
<S> <C>
2000 $4,804,000
2001 4,051,000
2002 3,649,000
2003 3,326,000
2004 2,796,000
Thereafter 7,457,000
-------------
$ 26,083,000
=============
</TABLE>
The Limited Inc. operates seven stores at the Mall. Revenues from these
tenants represented approximately 13.7%, 14.2% and 13.0% of the Mall's
total revenues in 1999, 1998 and 1997, respectively. No other individual
tenant, or group of affiliated tenants, contributed more than 10% to the
Mall's total revenues in any of the three years in the period ended
December 31, 1999.
Prior to 1998, due to the temporary closure of two of the anchor stores
operating at the Mall, certain tenants exercised the right, as provided for
under co-tenancy provisions set forth in their respective leases, to pay
percentage rent in lieu of fixed minimum rents which amounted to $228,000
for the years ended December 31, 1997. The rental payment obligations of
substantially all of these tenants reverted back to fixed minimum rent upon
the March 10, 1997 opening of a Lord & Taylor department store at the Mall.
NOTE 5: ADVISORY AND MANAGEMENT AGREEMENTS
ADVISORY AGREEMENTS
Lend Lease Portfolio Management, Inc. ("Lend Lease" and formerly ERE
Yarmouth Portfolio Management, Inc.), a wholly owned subsidiary of Lend
Lease Real Estate Investments, (formerly ERE Yarmouth, Inc.) served as
advisor to the Trust from the Trust's inception until the termination of
its advisory agreement on December 13, 1999. The advisor makes
recommendations to the Trust concerning investments, administration and
day-to-day operations.
As of December 31, 1989, the payment of portfolio management fees of
$5,440,000 payable to Lend Lease had been deferred in accordance with
subordination provisions contained in the original advisory agreement.
Pursuant to the amended advisory agreement, Lend Lease forgave one-half, or
$2,720,000, of the deferred balance. The remaining deferred fees of
$2,720,000 were intended to be paid upon the disposition of the Trust's
remaining property, the Mall.
Under the terms of the advisory agreement with Lend Lease, as amended in
December 1989,
13
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Lend Lease was entitled to a management fee based on the average daily per
share price of the Trust's shares plus the average daily balance of
outstanding mortgage indebtedness. Such fee was calculated using an annual
factor of 42.5 basis points (0.425%) and generally was payable monthly.
Inasmuch as the Shares of the Trust ceased to be traded on a market with
readily available market values on May 4, 1998, the Trustees agreed on
stipulated per Share values to be used for purposes of calculating the
portfolio management fee. These stipulated per share values were $0.75 per
share for the period of May 4, 1998 through December 31, 1998, $0.37 per
share for the period January 1, 1999 through June 30, 1999, and $0.15 per
share for the period July 1, 1999 through the December 13, 1999 termination
date of the Lend Lease advisory agreement with the Trust.
Commencing with a December, 1995 extension of mortgage debt, the Mortgage
Note Lender requested, and the Advisor agreed to, a partial deferral of
payment of its fee. Although the fee continued to be accrued and computed
in accordance with the formula described above, cash payments to Lend Lease
were limited to $37,500 per quarter. These additional deferred fees were
intended to be paid to Lend Lease upon the repayment of the Mortgage Note.
In addition to the foregoing, Lend Lease earned a refinancing fee of
$50,000 in connection with a December, 1996 extension of debt, which fee
does not become payable until the retirement of the Trust's mortgage debt.
For the years ended December 31, 1999, 1998 and 1997, accrued portfolio
management fee expense to Lend Lease amounted to $186,195, $232,000, and
$242,000, respectively. The aggregate amount of all refinancing and
advisory fees due to Lend Lease at December 31, 1999, including all
deferred amounts, was $3,142,741. The liability for these fees is included
in "accounts payable and other liabilities" on the Balance Sheets, and the
Trust has treated this amount as a general unsecured claim in the Trust's
bankruptcy proceeding.
On December 13, 1999, the Trust entered into an Advisory Agreement with
Gregory Greenfield & Associates, Ltd. ("Greenfield"). Certain parties in
interest raised objections to Greenfield's appointment as advisor in
connection with the Trust's bankruptcy proceedings due to prior
relationships between the Trust and principals of Greenfield who had
previously been officers of the Trust and Lend Lease. As a consequence,
Greenfield resigned as the Trust's advisor effective January 18, 2000.
Greenfield was paid cash compensation of $25,000 for its advisory services.
Effective January 18, 2000, Newleaf Corporation was appointed as the
Trust's Advisor pursuant to an Advisory Agreement dated January 18, 2000
and an order of the Bankruptcy Court entered January 25, 2000. The Newleaf
Advisory Agreement provides for the Advisor to receive monthly cash
compensation based on the hourly billing rates of its principals, but not
to exceed a cumulative amount calculated at the rate of $35,000 per month
for the first three months of services, $25,000 per month for the next six
months of services, and $20,000 per month for each month thereafter. The
Advisor is also entitled to earn incentive fees of not more than $70,000
14
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
in connection with the sale of the Mall and $25,000 upon the consummation
of a merger or similar transaction involving the Trust and ART or other
entities.
PROPERTY MANAGEMENT AGREEMENTS
The Trust has a property management agreement with Jones Lang LaSalle
Americas, Inc. (the "Manager" and formerly ERE Yarmouth Retail, Inc.,
formerly Compass Retail, Inc. and formerly a wholly-owned subsidiary of
Lend Lease Real Estate Investments, Inc.), for the on-site management of
the Mall. On September 30, 1998, Lend Lease Real Estate Investments, Inc.
sold the Manager to LaSalle Partners, Incorporated ("LaSalle"), which is
not affiliated with the Trust or Lend Lease.
Management fees paid to the Manager are generally based upon a percentage
of rents and certain other charges. The Manager earned management fees of
$302,000, $316,000, and $307,000 for the respective years ended December
31, 1999, 1998 and 1997.
NOTE 6: SHARE OWNERSHIP
In connection with a debt restructuring in December 1992, the Trust issued
1,675,000 previously repurchased Shares to Lend Lease for $6,700,000, or
$4.00 per Share. In total at December 31, 1999 and 1998, Lend Lease owned
1,685,556 Shares, or 17.5% of the total Shares outstanding. The Trust has
available for re-issuance an additional 423,343 shares previously
repurchased. Any issuance of shares in excess of the shares previously
repurchased would require Bankruptcy Court approval and possibly
shareholder approval.
NOTE 7: COMMITMENTS AND CONTINGENCIES
On February 3, 1998, the Trust, its trustees, and its Advisor were named as
defendants in a purported class action complaint filed by a shareholder in
Massachusetts State court. The complaint sought to enjoin the Merger and
also sought other relief including unspecified damages. This complaint was
dismissed without prejudice in 1999.
Counsel for ART has indicated that ART has claims against the Trust arising
from the purported termination of the Revised Merger Agreement, and in
connection therewith, ART has filed a proof of claim in the Trust's
bankruptcy proceedings in the amount of $2,162,000.
NOTE 8: JOINT PLAN OF REORGANIZATION
On April 10, 2000, the Trust and the Mortgage Note Lender filed a Joint
Plan of Reorganization (the "Plan") in the Bankruptcy Court. The Plan
provides for the allowance of a secured claim of the Mortgage Note Lender
in the amount of approximately $47,478,000 plus legal fees, which amount
includes accrued and unpaid interest of approximately $3,360,000 calculated
at the default rate from June 15, 1998 to the December 14, 1999 bankruptcy
petition date. The Plan further provides that the Mortgage Note Lender will
waive its entitlement to default rate interest if, by certain specified
dates in July, 2000: (a) a Plan confirmation order is entered by the
15
<PAGE>
EQK REALTY INVESTORS I
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Bankruptcy Court or the Mall is sold pursuant to order of the Bankruptcy
Court; (b) the general unsecured creditors (including Lend Lease) and the
Term Loan Lender vote to accept the Plan; and (c) the closing of a sale of
the Mall takes place or the Mortgage Note Lender is conveyed title to the
Mall.
Upon the closing of the sale or conveyance of the Mall, the Plan provides
that the Mortgage Note Lender will receive payment of its secured claim
first from the restricted cash accounts held in trust by the escrow agent
pursuant to the Cash Management Agreement and secondly from the sales
proceeds of the Mall. The Trust will deliver to an escrow agent a deed in
lieu of foreclosure in favor of the Mortgage Note Lender which shall be
released only in the event of a default by the Trust under the terms of the
Plan or the Trust's failure to meet certain July, 2000, payment deadlines
(unless extended). If the proceeds from the proposed sale of the Mall are
sufficient to pay all of the Trust's claims in full, the Plan provides that
the Mortgage Note Lender will be entitled to a $200,000 administrative and
forbearance fee.
Under the Plan, the Term Loan Lender will be paid its secured claim from
the proceeds remaining from the sale of the Mall, after payment of the
Mortgage Note. To the extent that the Term Loan is not paid in full from
such proceeds, then the deficiency will be treated as a general unsecured
claim. General unsecured claims will share pro rata in the Trust's
remaining funds after payment of administrative expenses, certain priority
tax claims, and secured claims; provided, however, the Mortgage Note Lender
has agreed to fund up to $750,000 for the payment of general unsecured
claims under certain conditions. The Shareholders of the Trust would retain
their shares in accordance with the Declaration of Trust and in accordance
with any treatment which might be set forth in any plan of merger which
might be negotiated with ART or other entities.
16
<PAGE>
NOTE 9: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues from rental operations $ 1,612 $ 1,519 $ 1,454 $ 1,565
Income from rental operations 1,479 1,164 1,322 1,122
Net income (loss) (1) (2) 347 42 179 (3,547)
Net income (loss) per share (2) .04 .00 .02 (.37)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
1998 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---- --------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues from rental operations $ 1,553 $ 1,337 $ 1,619 $ 1,682
Income from rental operations 760 968 1,429 1,677
Net income (loss) (1) (335) (145) 282 348
Net income (loss) per share (.04) (.02) .03 .05
</TABLE>
(1) The 1999 and 1998 results reflect the cessation of depreciation and
amortization of the Mall's assets as a result of the Trust's real
estate being classified as "held for sale" as of April 1, 1998.
(2) The quarter ended December 31, 1999, reflects the recording of default
rate interest on the Mortgage Note from June 15, 1998, and the Term
Loan from December 15, 1999, in the total amount of $3,467,000.
17
<PAGE>
FINANCIAL STATEMENT SCHEDULE
DECEMBER 31, 1999
(IN THOUSANDS)
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION (5)--(UNAUDITED)
<TABLE>
<CAPTION>
Cost
Capitialized Gross Amount
Subsequent at which Carried
Initial cost to Acquisition at Close of Period (3)
--------------------- ---------------- ---------------------------------------------
Deferred Deferred
Bldg & Leasing Costs & Bldg. & Leasing
Description Encumbrances Land Improve. Improvements Land Improve. Costs Total
----------- ------------ ---- -------- ------------ ---- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harrisburg East Mall $49,005(1) $ 4,700(2) $31,287(2) $23,753 $4,700(2) $49,318(2) $5,722(6) $59,740
Harrisburg, PA
--------------------------------------------------------------------------------------------------------------------------------
Totals $49,005 $ 4,700 $31,287 $23,753 $4,700 $49,318 $5,722 $59,740
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Life on
which
Depreciation
in Latest
Accum. Income Stmt.
Depreciation Date of Date is
& Amort Construction Acquired Computed
------- ------------ -------- --------
Harrisburg East Mall $19,710 1969(4) 3/13/85 N.A.
Harrisburg, PA
-------------------------------
Totals $19,710
-------------------------------
</TABLE>
(1) Encumbrances are composed of the principal amounts of a mortgage note
payable constituting a first lien on the Mall and a term loan payable to a
bank constituting a subordinated lien on the Mall, together with the
related amounts of accrued interest thereon as of December 31, 1999.
(2) Initial cost is net of imputed interest of $5,280 at date of acquisition.
(3) The aggregate tax basis of the Trust's land and building is $54 million as
of December 31, 1998.
(4) Renovation of the Mall was completed in 1993.
(5) As discussed in the Notes to Financial Statements, the Trust intends to
sell the Mall and as such, its investment in real estate is presented on
the balance sheets as held for sale at December 31, 1999 and 1998. This
asset includes deferred leasing costs, and is carried at the lower of cost
or fair value less cost to sell. Depreciation and amortization of the
Mall's assets ceased beginning April 1, 1998.
(6) Included in deferred leasing costs is a 1990 payment of $5,500,000 made to
an anchor tenant at the Mall in exchange for the tenant relinquishing space
that was subsequently converted into leasable are for mall shops.
<TABLE>
<CAPTION>
RECONCILIATION OF GROSS CARRYING RECONCILIATION OF ACCUMULATED DEPRECIATION &
AMOUNT OF REAL ESTATE: AMORTIZATION:
<S> <C> <C> <C>
Balance, December 31, 1996 $ 57,920 Balance, December 31, 1996 $ 16,989
Improvements and Additions 546 Depreciation & amortization expense 2,181
-------- --------
Balance, December 31, 1997 58,466 Balance, December 31, 1997 19,170
Improvements and Additions 652 Depreciation & amortization expense 588
-------- --------
Balance, December 31, 1998 59,118 Balance, December 31, 1998 19,758
Improvements and Additions 622 Retirement (48)
-------- --------
Balance, December 31, 1999 $ 59,740 Balance, December 31, 1999 $ 19,710
-------- --------
-------- --------
</TABLE>
18
