-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HDa0je6kvqnqi+hgLeJPg33aWRbsMPFAMLcLvUwp+piLY6mpW6GiSHwubxIaXl4t B5fCRozlo8XJ3P/uYfvS5Q== 0000032776-00-000012.txt : 20000417 0000032776-00-000012.hdr.sgml : 20000417 ACCESSION NUMBER: 0000032776-00-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPIRE STATE BUILDING ASSOCIATES CENTRAL INDEX KEY: 0000032776 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 136084254 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00827 FILM NUMBER: 602307 BUSINESS ADDRESS: STREET 1: C/O WEIN MALKIN & BETTEX STREET 2: 60 EAST 42ND STREET CITY: NEW YORK STATE: NY ZIP: 10165 BUSINESS PHONE: 2126878700 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-827 EMPIRE STATE BUILDING ASSOCIATES (Exact name of registrant as specified in its charter) New York 13-6084254 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 60 East 42nd Street, New York, New York 10165 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 687-8700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: $33,000,000 of Participations in Partnership Interests Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The aggregate market of the voting stock held by non-affiliates of the Registrant: Not applicable, but see Items 5 and 10 of this report. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ An Exhibit Index is located on pages 36 through 37 of this report. Number of pages (including exhibits) in this filing: 51 PART I Item 1. Business. (a) General Registrant is a partnership which was organized on July 11, 1961. Registrant holds the tenant's interest in a master operating leasehold of the Empire State Building (the "Building") and of the land thereunder, located at 350 Fifth Avenue, New York, New York (collectively, the "Property"). The fee owner of the Property is Trump Empire State Partners. The master lease (the "Master Lease"), which commenced on December 27, 1961, currently expires on January 5, 2013. The Lease contains three 21-year renewal options, which have not been exercised. If all of the options are exercised, the Lease will expire on January 5, 2076. Registrant previously exercised an option to renew the Lease for the term ending January 5, 2013. Registrant does not operate the Property. It subleases the Building to Empire State Building Company (the "Sublessee") pursuant to a net operating sublease (the "Sublease") with a term and renewal options essentially coextensive with those contained in the Master Lease. On January 30, 1989, Sublessee exercised its option to renew the Sublease for the first renewal term from January 4, 1992 to January 4, 2013. Registrant's partners are Peter L. Malkin, Thomas N. Keltner, Jr. and Richard A. Shapiro (individually, a "Partner" and, collectively, the "Partners") each of whom also acts as an agent for holders of participations in their respective partnership interests in Registrant (each holder of a participation, individually, a "Participant" and, collectively, the "Participants"). Sublessee is a partnership in which Peter L. Malkin is a partner. The partners in Registrant are also members of Wien & Malkin LLP, 60 East 42nd Street, New York, New York, which provides supervisory and other services to Registrant and to Sublessee (the "Supervisor"). See Items 10, 11, 12 and 13 hereof for a description of the ongoing services rendered by, and compensation paid to, Supervisor and for a discussion of certain relationships which may pose potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates. As of December 31, 1999, the Building was 96.28% occupied by approximately 800 tenants who engage in various businesses, including the Boy Scouts, the YMCA, the practice of law and accounting, ladies' and men's apparel, and ladies' and men's shoes. Registrant does not maintain a full-time staff. See Item 2 hereof for additional information concerning the Property. (b) The Lease and Sublease The annual rent payable by Registrant under the Lease is $1,970,000 from January 5, 1992 through January 5, 2013 and $1,723,750 annually during the term of each renewal period thereafter. Sublessee is required to pay annual basic rent (the "Basic Rent") equal to $6,018,750 from January 5, 1992 through January 4, 2013, and $5,895,625 from January 5, 2013 through the expiration of all renewal terms. Sublessee is also required to pay overage rent (the "Overage Rent") equal to 50% of its net operating profit in excess of $1,000,000 in any year. Overage Rent income is recognized when earned from the Sublessee, at the close of the year ending December 31; such income is not determinable until the Sublessee, pursuant to the Sublease, renders to Registrant a certified report on the Sublessee's operation of the Property. The Sublease requires that this report be delivered to Registrant annually within 60 days after the end of each such fiscal year. Accordingly, all Overage Rent income and certain supervisory services expense are reflected in the fourth quarter of each year. The Sublease does not provide for the Sublessee to render interim reports to Registrant. See Note 3 of Notes to Financial Statements filed under Item 8 hereof (the "Notes") regarding Overage Rent payments by Sublessee for the fiscal years ended December 31, 1999, 1998, and 1997. There was Overage Rent of $7,582,109 for the year ended December 31, 1999. (c) Competition Pursuant to tenant space leases at the Building, the average annual base rental payable to Sublessee is approximately $37.02 per square foot (exclusive of electricity charges and escalation). The asking rents for the building range from $35 to $47 per square foot. (d) Tenant Leases Sublessee operates the Building free from any federal, state or local government restrictions involving rent control or other similar rent regulations which may be imposed upon residential real estate in Manhattan. Any increase or decrease in the amount of rent payable by a tenant is governed by the provisions of the tenant's lease. -2- Item 2. Property. Registrant owns the tenant's interest in a master operating leasehold on the Building known as the Empire State Building and on the land thereunder located at 350 Fifth Avenue in New York City. See Item 1 hereof. The Building, erected in 1931 and containing 102 stories, a concourse and a lower lobby, occupies the entire blockfront from 33rd Street to 34th Street on Fifth Avenue. The Building has 72 passenger elevators and 4 freight elevators and is equipped with air conditioning and individual air handling units. The Building is subleased to Sublessee under the Sublease which expires on January 4, 2013 and contains three 21-year renewal options. See Item 1 hereof for a description of the terms of the Lease and Sublease. Item 3. Legal Proceedings. The Property of Registrant is the subject of the following pending litigation: Studley v. Empire State Building Associates: On October 21, 1991, in an action entitled Studley v. Empire State Building Associates et al., the holder of a $20,000 original participation in Registrant brought suit in New York Supreme Court, New York County against the Agents for Registrant (Peter L. Malkin, Donald A. Bettex and Alvin Silverman), in their individual capacities and Wien, Malkin & Bettex (currently "Wien & Malkin LLP") Supervisor to Registrant. The suit claimed that the defendants had engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations from the participants in Registrant in September 1991 and in relation to other unrelated acts of the Agents and the sublessee. By order dated July 14, 1997, and entered July 29, 1997, the Court granted defendants' motion for summary judgment and dismissal of the action. The Plaintiff filed an appeal with respect to the foregoing order. By decision and order entered April 2, 1998, the Appellate Court unanimously affirmed the order dismissing the action. The Plaintiff has been denied permission to appeal to the New York Court of Appeals. The Plaintiff has filed a further Complaint alleging similar claims, purportedly as a class action. Defendants' counsel filed a motion to dismiss the new complaint based upon the Court's prior rulings and on other grounds. The Court granted the motion to dismiss the new complaint in its entirety. Plaintiff's appeal of the dismissal is pending. Proceedings Involving Trump Empire State Partners: In December 1994, Registrant received a notice of default from Trump. The Trump default notice to Registrant claimed that Registrant was in violation of its master lease because of extensive work which Sublessee had undertaken as part of an -3- improvement program that commenced before Trump reportedly acquired its interest in the property in 1994. Trump's notice also complained that the Building was in need of repairs. On February 14, 1995, Registrant and Sublessee filed an action ("Action No. 1") in New York State Supreme Court against Trump for a declaratory judgment that none of the matters set forth in the notice of default constitutes a violation of the master lease or sublease, and that the notice of default is entirely without merit. Registrant's and Sublessee's suit also seeks an injunction to prevent Trump from implementing the notice of default. On March 24, 1995, the Court granted Registrant a preliminary injunction against Trump. In 1996 the Court granted two additional preliminary injunctions against Trump with respect to two additional default notices. The preliminary injunctions prohibit Trump from acting on its notices of default to Registrant at any time, pending the prosecution of claims by Registrant and Sublessee for a final declaratory judgment and an injunction and other relief against the Trump defendants. The Appellate Court has upheld and affirmed the granting of such preliminary injunctions against the Trump defendants. On February 15, 1995, Trump filed an action ("Action No. 2") against Registrant, Sublessee, Supervisor, Harry B. Helmsley, a partner in Sublessee, Helmsley-Spear, Inc. (the management company of the Empire State Building), and the Agents for Registrant in New York State Supreme Court, alleging that the notice of default is valid and seeking damages and related relief based thereon. On October 24, 1996 the Court dismissed all of Trump's claims in their entirety against all defendants in Action No. 2. Trump appealed this Order. The Appellate Court has unanimously affirmed the dismissal of Trump's claims. In May, 1995, Registrant and Sublessee filed a separate legal action ("Action No. 3") against Trump and various affiliated persons for breach of the master lease and sublease, and disparagement of the property in violation of Registrant' and Sublessee's leasehold rights. The action was amended to include additional claims by Registrant and Sublessee (the "Ownership Claim") seeking a declaratory judgment that they may act as an owner of the Property for purposes of making applications and related activities pursuant to the New York City Building Code. By decision and order dated October 24, 1996, the Court sustained Registrant's and Sublessee's claims concerning the parties who may act as owner of the Property under the Building Code, but dismissed Registrant's and Sublessee's claims against Trump and co-defendants for money damages. Registrant and Sublessee appealed that portion of the Court's order dismissing their claims for money damages. The Appellate Court has affirmed that part of the Court's order dismissing the claims for money damages. -4- On March 16, 1999, the New York Supreme Court granted summary judgment in Action Nos. 1 and 3 in favor of Registrant and the Sublessee and against the Trump defendants as to most of the alleged lease defaults set forth in the Trump default notice of December 1994, and as to the two additional Trump default notices in their entirety and the Ownership Claim. The Appellate Division has affirmed the summary judgment order. New York Skyline Inc.: Registrant is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled New York Skyline Inc. v. Empire State Building Company, Empire State Building Associates, Nell H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit, which was brought by a tenant in the Building and was filed on December 23, 1997, seeks at least $205,000,000 in damages. In its complaint, plaintiff-tenant asserts thirteen causes of action (twelve of which are against Sublessee) in connection with its leases and license agreements of space in the Building and alleges that it is entitled to, among other things, specific performance as to its alleged rights under its leases and licensing agreements with Sublessee, a declaratory judgment as to the rights of the parties under the leases and licensing agreements, any monies allegedly due plaintiff under those agreements, as well as injunctive relief and additional money damages. While the complaint includes Registrant as a named defendant, it does not allege or identify any agreement between plaintiff and Registrant or any other basis of liability on Registrant's part to plaintiff. On or about February 5, 1998, plaintiff served an amended complaint which, among other things, added Kessner & Cyruli, f/k/a Nell H. Kessner & Associates, former landlord-tenant counsel for the Building, and Eileen Aluska, a former Helmsley- Spear, Inc. employee, as party defendants. The amended complaint asserts eleven causes of action, similar to those asserted in the original complaint. On March 16, 1998, Registrant filed an answer to the amended complaint denying all allegations of liability. On December 30, 1999 the action was settled and discontinued without any payment or other contribution by Registrant to the settlement. Wien & Malkin LLP, et. al. v. Helmsley-Spear, Inc., et. al. On June 19, 1997 Wien & Malkin LLP and Peter L. Malkin filed an action in the Supreme Court of the State of New York, against Helmsley-Spear, Inc. and Leona Helmsley concerning various partnerships which own, lease or operate buildings managed by Helmsley-Spear, Inc., including Registrant's property. In their complaint, plaintiffs sought the removal of Helmsley-Spear, Inc. as managing and leasing agent for all of the buildings. Plaintiffs also sought an order precluding Leona Helmsley from exercising any partner management powers in the -5- partnerships. In August, 1997, the Supreme Court directed that the foregoing claims proceed to arbitration. As a result, Mr. Malkin and Wien & Malkin LLP filed an arbitration complaint against Helmsley-Spear, Inc. and Mrs. Helmsley before the American Arbitration Association. Helmsley-Spear, Inc. and Mrs. Helmsley served answers denying liability and asserting various affirmative defenses and counterclaims; and Mr. Malkin and Wien & Malkin LLP filed a reply denying the counterclaims. By agreement dated December 16, 1997, Mr. Malkin and Wien & Malkin LLP (each for their own account and not in any representative capacity) reached a settlement with Mrs. Helmsley of the claims and counterclaims in the arbitration and litigation between them. Mr. Malkin and Wien &Malkin LLP are continuing their prosecution of claims in the arbitration for reliefagainst Helmsley-Spear, Inc., including its termination as the leasing and managing agent for various entities and properties, including the Registrant's Sublessee. -6- PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters. Registrant is a partnership organized pursuant to a partnership agreement dated as of July 11, 1961. Registrant has not issued any common stock. The securities registered by it under the Securities Exchange Act of 1934, as amended, consist of participations in the partnership interests of the Partners in Registrant (the "Participations") and are not shares of common stock nor their equivalent. The Participations represent each Participant's fractional share in a Partner's undivided interest in Registrant and are divided approximately equally among the Partners. A full unit of the Participations was offered originally at a purchase price of $10,000; fractional units were also offered at proportionate purchase prices. Registrant has not repurchased Participations in the past and is not likely to change that policy in the future. (a) The Participations neither are traded on an established securities market nor are readily tradable on a secondary market or the substantial equivalent thereof. Based on Registrant's transfer records, Participations are sold by the holders thereof from time to time in privately negotiated transactions and, in many instances, Registrant is not aware of the prices at which such transactions occur. During the past year there were 188 transfers. In ten instances, the indicated purchase price was equal to 2.25 times the face amount of the Participation transferred. In two instances, the indicated purchase price was equal two times the face amount of the participation transferred. In all other cases, no consideration was indicated. (b) As of December 31, 1999, there were 2,634 holders of Participations of record. (c) Registrant does not pay dividends. During the year ended December 31, 1999, Registrant made regular monthly distributions of $98.21 for each $10,000 Participation. There was Overage Rent payable of $7,582,109 for the year ended December 31, 1999 and Registrant made additional distributions for each $10,000 Participation of $2,006.12 on February 29, 2000. See Item 1 hereof. There are no restrictions on Registrant's present or future ability to make distributions; however, the amount of such distributions, particularly distributions of Overage Rent, depends solely on Sublessee's ability to make payments of Basic Rent and Overage Rent to Registrant. See Item 1 hereof. Registrant expects to make monthly distributions in the future so long as it receives the payments provided for under the Sublease. See Item 7 hereof. -7- [SELECTED FINANCIAL DATA] Item 6. EMPIRE STATE BUILDING ASSOCIATES SELECTED FINANCIAL DATA
Year ended December 31, 1999 1998 1997 1996 1995 Basic rent income...... $ 6,018,750 $ 6,018,750 $6,018,750 $6,018,750 $6,018,750 Overage rent income.... 7,582,109 4,109,852 2,401,300 0 0 Dividend income........ 144,690 84,615 10,377 8,647 35,556 Total revenues...... 13,745,549 7,507,228 4,752,560 3,689,511 3,716,420 Net income............. $10,901,065 $ 7,507,228 $4,752,560 $3,689,511 $3,716,420 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during the year...... ........$ 3,303 $ 2,275 $ 1,440 $ 1,118 $ 1,126 Total assets............$13,253,481 $ 8,787,638 $5,930,702 $3,727,494 $3,927,316 Long-term obligations...$ - 0- $ - 0 - $ -0- $ -0- $ -0- Distributions per $10,000 participation unit, based on 3,300 participation units outstanding during the year: Income...............$ 2,033 $ 1,500 $ 1,179 $ 1,118 $ 1,126 Return of capital.... - 0 - - 0 - -0- 61 1,089 Total distributions..$ 2,033 $ 1,500 $ 1,179 $ 1,179 $ 2,215
-8- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Registrant was organized solely for the purposes of owning the Property described in Item 2 hereof subject to the Sublease. Registrant is required to pay from Basic Rent the amounts due for supervisory services and to distribute the balance of such rental payments to Participants. Registrant is required to pay from Overage Rent additional amounts for supervisory services and then to distribute the balance of such Overage Rent to the Participants. Pursuant to the Sublease, Sublessee has assumed sole responsibility for the condition, operation, repair, maintenance and management of the Building. Registrant need not maintain substantial reserves or otherwise maintain liquid assets to defray any operating expenses of the Property. The supervisory services provided to Registrant by Supervisor include real estate supervisory, legal, administrative and financial services. The services include, but are not limited to, providing or coordinating with counsel to Registrant, maintaining all of its partnership records, performing physical inspections of the Building, reviewing insurance coverage and conducting annual partnership meetings. Financial services include monthly receipt of rent from the Sublessee, payment of monthly rent to the fee owner, payment of monthly and additional distributions to the Participants, payment of all other disbursements, confirmation of the payment of real estate taxes, and active review of financial statements submitted to Registrant by the Sublessee and financial statements audited by and tax information prepared by Registrants' independent certified public accountant, and distribution of such materials to the Participants. Supervisor also prepares quarterly, annual and other periodic filings with the Securities and Exchange Commission and applicable state authorities and distributes to the Participants quarterly source of distribution reports. Registrant's results of operations are affected primarily by the amount of rent payable to it under the Sublease. The amount of Overage Rent payable to Registrant is affected by (i) the New York City economy and real estate rental market and (ii) the cost of the Property improvement program described herein under Other Information. It is difficult for management to forecast the New York City economy and real estate market over the next few years. As compared with the prior year, a decrease in Overage Rent in any year reduces the distributions made to the Participants and the expenditure for supervisory services. Reductions in the amount of Overage Rent paid to Registrant in the future will not have any other impact on Registrant. See paragraph 1 of Item 7 hereof and Notes 3, 4, 5, and 7 of the Notes. -9- The following summarizes the material factors affecting Registrant's results of operations for the three preceding years: (a) Total income increased for the year ended December 31, 1999 as compared with the year ended December 31, 1998. Such increase resulted from an increase in Overage Rent in the year 1999 and an increase in dividend income earned as compared with the year ended December 31, 1998. Total income increased for the year ended December 31, 1998 as compared with the year ended December 31, 1997. Such increase resulted from an increase in Overage Rent in the year 1998 and an increase in dividend income earned as compared with the year ended December 31, 1997. See Note 3 of the Notes. (b) Total expenses increased for the year ended December 31, 1999 as compared with the year ended December 31, 1998. Such increase is the result of an increase in additional payment for supervisory services. Total expenses decreased for the year ended December 31, 1998 as compared with the year ended December 31, 1997. Such decrease was the net result of an increase in additional payment for supervisory services and a decrease in legal fees. See Notes 3, 5 and 9 of the Notes. The State of New York has asserted utility tax deficiencies through December 31, 1992 in connection with water, steam and non-metered electricity rent inclusion charges to tenants, plus estimated accrued interest. The Supreme Court, New York County, granted summary judgment in favor of the State, which ruling was affirmed by the Appellate Division, First Department, holding that the State utility tax applies to such inclusion charges. Pursuant to the terms of the settlement agreement, Sublessee agreed to pay the State's assessed tax in the sum of $979,109, plus interest of approximately $605,000 through July 31, 1996. The State has agreed to payment of the aforesaid liability over a period of four years, commencing August, 1996, in equal monthly installments of $40,000, including interest on the unpaid balance at the statutory rate. The State has asserted additional tax for the years 1993 through 1995 of $243,270 plus accrued interest of $114,918 through December 31, 1999. It is anticipated that New York State will seek to impose liability on Sublessee for State utility tax for periods after December 31, 1995 through December 31, 1997. The amount of such additional tax has yet to be determined. The imposition of both New York state and New York City utility taxes on non-metered electricity rent inclusion charges was repealed effective January 1, 1998. The City of New York has asserted a utility tax deficiency in the amount of $277,125 against -10- Sublessee, through December 31, 1994 in connection with water, steam and non- metered electricity rent inclusion charges to tenants, plus accrued interest of approximately $315,610 through December 31, 1999. Sublessee is contesting the calculation of the City's proposed utility tax deficiency before the New York City Tax Appeals Tribunal. The final outcome of Sublessee's appeal cannot presently be determined. Under a settlement proposed by New York City for all taxpayers, Sublessee will settle utility taxes for all open years by paying the tax only for the year 1997. The imposition of New York State and New York City utility taxes on Sublessee impacts Registrant only to the extent it reduces Overage Rent payable to Registrant under the Sublease. Liquidity and Capital Resources There has been no significant change in Registrant's liquidity or capital resources for the fiscal year ended December 31, 1999 as compared with the fiscal year ended December 31, 1998. Inflation Inflationary trends in the economy do not directly impact Registrant's operations. As noted above, Registrant does not actively engage in the operation of the Property. Inflation may impact the operations of the Sublessee. The Sublessee is required to pay the Basic Rent regardless of the results of its operations. Inflation and other operating factors affect the amount of Overage Rent payable by the Sublessee, which is based on the Sublessee's net operating profit. Other Information The Sublessee maintains the Building as a high-class office building as required by the terms of the Sublease. In 1990, the Sublessee commenced its latest improvement program which is estimated to be completed in 2000 at a total cost of approximately $68,000,000. Under this program, approximately 6,400 windows are being replaced and this portion of the program is completed. In addition, the elevators have been upgraded through installation of a computerized control system and the replacement of all electrical and mechanical equipment. The elevator modernization program has increased elevator speed from 800 to 950 feet per minute to 1200 feet per minute. Also included is waterproofing the Building's exterior, resetting and repairing the limestone facade, upgrading the Building's security system, upgrading and replacing the Building's fire safety system and making substantial further improvement to the air- conditioning, domestic pump and water systems, waterproofing the mooring mast and installing a new observation deck ticket office. -11- The Sublessee anticipates that the costs of improvements to be incurred will reduce Overage Rent during the year 2000 but should have no effect on the payment of Basic Rent. Under Sublessee's management, the Building recently won three awards from the Building Owners and Management Association ("BOMA") (BOMA/NY Award 1989; BOMA Middle Atlantic Region Award 1990/91 and the BOMA International Award for excellence 1992/93). The New York Landmarks Conservancy recently awarded a Merit Citation to the Building. In 1994, Metaloptics recognized the Building for excellence in lighting efficiency. In December 1994, Energy User News, a national publication, awarded a Certificate of Merit in the lighting category for excellence and innovation in energy efficiency and management of the Building. Item 8. Financial Statements and Supplementary Data. The financial statements, together with the accompanying report by, and the consent to the use thereof by J.H. Cohn LLP, immediately following, are being filed in response to this item. Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable. -12- PART III Item 10.Directors and Executive Officers of Registrant. Registrant has no directors or officers or any other centralization of management. There is no specific term of office for any Partner. The table below sets forth as to each Partner as of December 31, 1999 the following: name, age, nature of any family relationship with any other Partner, business experience during the past five years and principal occupation and employment during such period, including the name and principal business of any corporation or any organization in which such occupation and employment was carried on and the date such individual became a Partner: Principal Date Nature of Occupation Individual Family Business and became Name Age Relationship Experience Employment Partner Peter L. Malkin 66 None Real Estate Senior Partner 1961 Supervision and Chairman and Law Wien & Malkin LLP Thomas N. Keltner, Jr. 53 None Real Estate Partner 1998 Supervision Wien & Malkin and Law LLP Richard A. Shapiro 54 None Real Estate Partner 1998 Supervision Wien & Malkin and Law LLP As stated above, all three of the Partners are members of Supervisor. See Items 1, 11, 12 and 13 hereof for a description of the services rendered by, and the compensation paid to, Supervisor and for a discussion of certain relationships which may pose actual or potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates. The names of entities which have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or are subject to the requirements of Section 15(d) of that Act, and in which the Partners are either a director, joint venturer or general partner are as follows: -13- Peter L. Malkin is a joint venturer in 250 West 57th St. Associates and Navarre-500 Building Associates and a general partner in Garment Capitol Associates and 60 East 42nd St. Associates. Thomas N. Keltner, Jr. is a joint venturer in Navarre-500 Building Associates; and a general partner in Garment Capitol Associates and 60 East 42nd St. Associates. Richard A. Shapiro is a general partner in Garment Capitol Associates and 60 East 42nd St. Associates. Item 11.Executive Compensation. As stated in Item 10 hereof, Registrant has no directors or officers or any other centralization of management. No remuneration was paid during the current fiscal year ended December 31, 1999 by Registrant to any of the Partners as such. Registrant pays Supervisor, for supervisory services and disbursements, fees of $100,000 per annum plus 6% of all sums distributed to the Participants in excess of 9% per annum on their original cash investment. Pursuant to such arrangements described herein, Registrant paid Supervisor a total of $581,983 (consisting of $100,000 as an annual basic payment for supervisory services and $481,983 as an additional payment for supervisory services) for supervisory services rendered during the fiscal year ended December 31, 1999. The supervisory services include, among other items, the preparation of certain reports required by the Securities and Exchange Commission, the monitoring or coordination of certain other areas of legal compliance, the preparation of certain financial reports, as well as the supervision of accounting and other documentation related to the administration of Registrant's business. See Item 7 hereof. Out of its fees, Supervisor paid all disbursements and costs of regular accounting services. As noted in Items 1 and 10 of this report, the Partners are also members of Supervisor. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) Registrant has no voting securities. See Item 5 hereof. At December 31, 1999, no person owned of record or was known by Registrant to own beneficially more than 5% of the outstanding Participations. -14- (b) At December 31, 1999, the Partners (see Item 10 hereof) beneficially owned, directly or indirectly, the following Participations: Name & Address Amount of of Beneficial Beneficial Percent Title of Class Owners Ownership of Class Participations Thomas N. Keltner, Jr. $ 5,000 .0152% in Partnership 60 East 42nd Street Interests New York, NY 10165 Richard A. Shapiro $ 5,000 .0152% 60 East 42nd Street New York, NY 10165 At such date, certain of the Partners (or their respective spouses) held additional Participations as follows: Richard A. Shapiro owned of record as custodian but not beneficially $12,500 of Participations. Mr. Shapiro disclaims any beneficial ownership of such Participations. Peter L. Malkin owned of record as trustee or co-trustee but not beneficially, $255,000 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations. Entities for the benefit of members of Peter L. Malkin's family owned of record and beneficially $546,250 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations, except that related Trusts are required to complete scheduled payments to Mr. Malkin. (c) Not applicable. Item 13. Certain Relationships and Related Transactions. (a) As stated in Item 1 hereof, Mr. Peter L. Malkin, Mr. Keltner and Mr. Shapiro are the three Partners of Registrant and also act as agents for the Participants in their respective partnership interests. Mr. Malkin is also a partner in Sublessee. As a consequence of one of the three Partners being a partner in Sublessee, and all of the Partners being current members of Supervisor (which supervises Registrant and Sublessee), certain actual and potential conflicts of interest may arise with respect to the management and administration of the business of Registrant. However, under the respective participating agreements pursuant to which the Partners act as agents for the Participants, certain transactions require the prior consent from Participants owning a specified interest under the agreement in order for the agents to act on their behalf. Such transactions include modifications and extensions of the Sublease, or a sale or other disposition of the Property or substantially all of Registrant's other assets. -15- Reference is made to Items 1 and 2 hereof for a description of the terms of the Sublease between Registrant and Sublessee. The respective interests of the Partners in Registrant and in the Sublease arise solely from ownership of their respective participations in Registrant and, in the case of Mr. Malkin, his ownership of a partnership interest in Sublessee. The Partners receive no extra or special benefit not shared on a pro rata basis with all other security holders of Registrant or partners in Sublessee. However, the Partners, by reason of their respective interest in Supervisor, are entitled to receive their pro rata share of any supervisory, service, legal or other remuneration paid to Supervisor for services rendered to Registrant and Sublessee. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor. Reference is also made to Items 1 and 10 hereof for a description of the relationship between Registrant and Supervisor, of which two of the Partners are among its current members. The interest of each Partner in any remuneration paid or given by Registrant to Supervisor arise solely from the ownership of such Partner's interest in Supervisor. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor. (b) Reference is made to Paragraph (a) above. (c) Not applicable. (d) Not applicable. -16- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial Statements: Consent of J.H. Cohn LLP, Certified Public Accountants, dated February 23, 2000. Accountant's Report of J.H. Cohn LLP, Certified Public Accountants, dated February 23, 2000. Balance Sheets at December 31, 1999 and at December 31, 1998 (Exhibit A). Statements of Income for the fiscal years ended December 31, 1999, 1998, and 1997 (Exhibit B). Statement of Partners' Capital for the fiscal year ended December 31, 1999 (Exhibit C-1). Statement of Partners' Capital for the fiscal year ended December 31, 1998 (Exhibit C-2). Statement of Partners' Capital for the fiscal year ended December 31, 1997 (Exhibit C-3). Statements of Cash Flows for the fiscal years ended December 31, 1999, 1998, and 1997 (Exhibit D). Notes to Financial Statements for the fiscal years ended December 31, 1999, 1998, and 1997. (2) Financial Statement Schedules: List of Omitted Schedules. Real Estate and Accumulated Depreciation - December 31, 1999 (Schedule III). (3) Exhibits: See Exhibit Index. (b) No Form 8-K was filed by Registrant for the final quarter of 1999. -17- [LETTERHEARD OF J.H. COHN LLP ACCOUNTANTS & CONSULTANTS] February 23, 2000 Empire State Building Associates New York, N. Y. We consent to the use of our independent accountants' report dated February 23, 2000 covering our audits of the accompanying financial statements of Empire State Building Associates in connection with and as part of your December 31, 1999 annual report (Form 10-K) to the Securities and Exchange Commission. J.H. Cohn LLP New York, N.Y. -18- INDEPENDENT ACCOUNTANTS' REPORT To the participants in Empire State Building Associates (a Partnership) New York, N. Y. We have audited the accompanying balance sheets of Empire State Building Associates ("Associates") as of December 31, 1999 and 1998, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1999, and the supporting financial statement schedule as contained in Item 14(a)(2) of this Form 10-K. These financial statements and schedule are the responsibility of Associates' management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Empire State Building Associates as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles, and the related financial statement schedule, when considered in relation to the basic financial statements, presents fairly, in all material respects, the information set forth therein. As discussed in Note 9 to the financial statements, Associates has been included as a defendant in actions with other related parties, including the Agents for Associates and Empire State Building Company, the sublessee. J.H. Cohn LLP New York, N. Y. February 23, 2000 -19- EXHIBIT A EMPIRE STATE BUILDING ASSOCIATES BALANCE SHEETS A S S E T S
December 31, 1999 1998 Current assets: Cash and cash equivalents (Note 12): The Chase Manhattan Bank....................... $ 4,249 $ 4,525 Distribution account held by Wien & Malkin LLP............................. 324,111 324,111 Fidelity U.S. Treasury Income Portfolio........ 9,209,075 4,906,745 9,537,435 5,235,381 Additional rent due from Empire State Building Company, a related party............... 982,109 609,852 Prepaid rent..................................... 23,831 23,831 TOTAL CURRENT ASSETS....................... 10,543,375 5,869,064 Real estate (Note 2): Leasehold on Empire State Building, 350 Fifth Avenue, New York, N. Y................ 39,000,000 39,000,000 Less: Accumulated amortization................ 36,289,894 36,081,426 2,710,106 2,918,574 TOTAL ASSETS............................... $13,253,481 $ 8,787,638 LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accrued legal fees, to a related party (Note 10). $ 1,491,886 $ 1,460,341 Accrued supervisory services, to a related party (Note 5) ...................................... 422,566 180,000 TOTAL LIABILITIES.......................... 1,914,452 1,640,341 Contingencies (Notes 9 and 11)..................... Partners' capital (Exhibit C)..................... 11,339,029 7,147,297 TOTAL LIABILITIES AND PARTNERS' CAPITAL... $13,253,481 $ 8,787,638
See accompanying notes to financial statements. -20- EXHIBIT B EMPIRE STATE BUILDING ASSOCIATES STATEMENTS OF INCOME
Year ended December 31, 1999 1998 1997 Revenues: Rent income, from a related party (Note 3)............................ $13,600,859 $10,128,602 $8,420,050 Dividend income........................ 144,690 84,615 10,377 13,745,549 10,213,217 8,430,427 Expenses: Leasehold rent (Note 4)............... 1,970,000 1,970,000 1,970,000 Supervisory services, to a related party (Note 5)......................... 581,983 339,417 227,161 Legal fees, to a related party (Note 10). 84,033 188,104 1,272,237 Amortization of leasehold (Note 2)...... 208,468 208,468 208,469 2,844,484 2,705,989 3,677,867 NET INCOME, CARRIED TO PARTNERS' CAPITAL (NOTE 8)................ $10,901,065 $ 7,507,228 $4,752,560 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each year.................... $ 3,303 $ 2,275 $ 1,440
See accompanying notes to financial statements. -21- EXHIBIT C-1 EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1999
Capital Capital January 1, Share of December 31, 1999 net income Distributions 1999 Richard A. Shapiro Group.. $2,382,433 $ 3,633,688 $2,236,444 $ 3,779,677 Thomas N. Keltner Group... 2,382,432 3,633,689 2,236,445 3,779,676 Peter L. Malkin Group.... 2,382,432 3,633,688 2,236,444 3,779,676 $7,147,297 $10,901,065 $6,709,333 $11,339,029
See accompanying notes to financial statements. -22- EXHIBIT C-2 EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1998
Capital Capital January 1, Share of December 31, 1998 net income Distributions 1998 Richard A. Shapiro Group (formerly John L. Loehr Group).... $1,530,241 $2,502,409 $1,650,217 $2,382,433 Thomas N. Keltner Group (formerly Stanley Katzman Group).......... 1,530,240 2,502,410 1,650,218 2,382,432 Peter L. Malkin Group..... 1,530,240 2,502,409 1,650,217 2,382,432 $4,590,721 $7,507,228 $4,950,652 $7,147,297
See accompanying notes to financial statements. -23- EXHIBIT C-3 EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1997
Capital Capital January 1, Share of December 31, 1997 net income Distributions 1997 John L. Loehr Group...$1,242,498 $1,584,187 $1,296,444 $1,530,241 Stanley Katzman Group..1,242,498 1,584,187 1,296,445 1,530,240 Peter L. Malkin Group..1,242,498 1,584,186 1,296,444 1,530,240 $3,727,494 $4,752,560 $3,889,333 $4,590,721
See accompanying notes to financial statements. -24- EXHIBIT D EMPIRE STATE BUILDING ASSOCIATES STATEMENTS OF CASH FLOWS Year ended December 31, 1999 1998 1997
Cash flows from operating activities: Net income.......................... $10,901,065 $ 7,507,228 $ 4,752,560 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of leasehold............ 208,468 208,468 208,469 Changes in operating assets and liabilities: Additional rent due from Empire State Building Company, a related party.. (372,257) (608,552) (1,300) Accrued supervisory services, to a related party.................. 242,566 112,256 67,744 Accrued legal fees, to a related party............................. 31,545 188,104 1,272,237 Net cash provided by operating activities........... 11,011,387 7,407,504 6,299,710 Cash flows from financing activities: Cash distributions.................... (6,709,333) (4,950,652) (3,889,333) Net cash used in financing activities..................... (6,709,333) (4,950,652) (3,889,333) Net increase in cash and cash equivalents........... 4,302,054 2,456,852 2,410,377 Cash and cash equivalents, beginning of year................................ 5,235,381 2,778,529 368,152 CASH AND CASH EQUIVALENTS, END OF YEAR. $ 9,537,435 $ 5,235,381 $ 2,778,529
See accompanying notes to financial statements. -25- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS 1. Business Activity Empire State Building Associates ("Associates") is a general partnership which holds the tenant's position in the master leasehold of the Empire State Building (the "Building"), located at 350 Fifth Avenue, New York City. Associates subleases the property to Empire State Building Company ("Company"). 2. Summary of Significant Accounting Policies a. Cash and Cash Equivalents: Cash and cash equivalents include investments in money market funds and all highly liquid debt instruments purchased with a maturity of three months or less. b. Real Estate and Amortization of Leasehold: Real estate, consisting of a leasehold, is stated at cost. Amortization of the leasehold is being computed through its first renewal term by the straight-line method over its estimated useful life of 25 years, from January 1, 1988 to January 5, 2013 (see Note 4). c. Use of Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Related Party Transactions - Rent Income Rent income for the years ended December 31, 1999, 1998 and 1997 totalling $13,600,859, $10,128,602 and $8,420,050, respectively, consists of the minimum annual rent plus additional rent under an operating sublease dated December 27, 1961, as modified February 15, 1965, with Company (the "Sublessee"), as follows: Year ended December 31, 1999 1998 1997 Minimum net basic rent...... $ 6,018,750 $6,018,750 $ 6,018,750 Additional rent earned...... 7,582,109 4,109,852 2,401,300 $13,600,859 $10,128,602 $ 8,420,050 -26- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 3. Related Party Transactions - Rent Income (continued) The sublease provides for the same initial term and renewal options as the leasehold (see Note 4), less one day. In January 1989, the Sublessee exercised its option to renew the sublease for the first renewal period from January 4, 1992 to January 4, 2013. The annual minimum net basic rent during the first renewal term was reduced to $6,018,750, and is to be further reduced to $5,895,625 during each of three remaining renewal terms. Additional rent earned is equal to fifty percent of the Sublessee's annual net income (as defined in the sublease) in excess of $1,000,000. A partner in Associates is also a partner in the Sublessee. 4. Leasehold Rent Leasehold rent represents the net basic rent of $1,970,000 per annum under an operating lease dated December 27, 1961, as modified February 15, 1965, with The Prudential Insurance Company of America ("Prudential"). Associates exercised its first renewal option in 1988, and the current leasehold rent remains unchanged throughout the first renewal term of the lease, which ends on January 5, 2013. The lease contains options for Associates to renew the leasehold for an additional 3 successive periods of 21 years each. The basic rent is to be further reduced to $1,723,750 per annum during each of the remaining three renewal terms. On November 27, 1991, Prudential sold the property to E.G. Holding Co., Inc. which, through merger and conveyance, transferred its interest as lessor to Trump Empire State Partners (see Note 9b). Associates' rights under the master leasehold remain unchanged. 5. Related Party Transactions - Supervisory Services Supervisory services (including disbursements and cost of regular accounting services) during the years ended December 31, 1999, 1998 and 1997, totalling $581,983, $339,417 and $227,161, respectively, represent fees incurred by the firm of Wien & Malkin LLP. Some members of that firm are partners in Associates. Fees for supervisory services are paid pursuant to an agreement, which amount is based on a rate of return of investment achieved by the participants in Associates each year. -27- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 6. Number of Participants There were approximately 2,620 participants in the participating groups at December 31, 1999, 1998 and 1997. 7. Determination of Distributions to Participants Distributions to participants in 1999, 1998 and 1997 of $6,709,333, $4,950,652 and $3,889,333, respectively, represented the following:
1999 1998 1997 Minimum annual rent.. $6,018,750 $6,018,750 $6,018,750 Additional rent, earned in previous year, distributed in current year........ 4,109,852 2,401,300 - Dividend income earned in previous year, distributed in current year...... 84,615 10,377 - 10,213,217 8,430,427 6,018,750 Less: Leasehold rent expense.......... $1,970,000 $1,970,000 $1,970,000 Supervisory services incurred in previous year. 339,417 227,161 159,417 Legal fees incurred in previous year. 188,104 1,272,237 - Amount held in reserve to fund payment of accrued legal fees....... 1,006,363 10,377 - 3,503,884 3,479,775 2,129,417 Distributions to participants..... $6,709,333 $4,950,652 $3,889,333
-28- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 8. Distributions and Amount of Income per $10,000 Participation Unit Distributions per $10,000 participation unit during the years 1999, 1998 and 1997 based on 3,300 participation units outstanding during each year, consisted of the following: Year ended December 31, 1999 1998 1997 Income........................ $2,033 $1,500 $1,179 Return of capital............. - - - TOTAL DISTRIBUTIONS....... $2,033 $1,500 $1,179 Net income is computed without regard to income tax expense since Associates does not itself pay a tax on its income; instead, any such taxes are paid by the participants in their individual capacities. 9. Litigation and Subsequent Events a. On October 21, 1991, in an action entitled Studley v. Empire State Building Associates et al., the holder of a $20,000 original participation in Associates brought suit in New York Supreme Court, New York County against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and Alvin Silverman), in their individual capacities and Wien, Malkin & Bettex (currently "Wien & Malkin LLP"), supervisor to Associates. The suit claims that the defendants had engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations from the participants in Associates in September 1991 and in relation to other unrelated acts of the Agents and the Sublessee. By order dated July 14, 1997, the Court granted defendants' application for summary judgment and dismissal of the action. The Plaintiff applied for permission to appeal the Appellate Divisions determination to the New York Court of Appeals, and that application was denied by both the Appellate Division and the Court of Appeals. Thereafter, the Plaintiff filed a second complaint, which alleges claims similar to those asserted in the previously dismissed complaint. The defendants applied for dismissal of the second complaint based on the prior dismissal orders and on other grounds. The Court dismissed the second complaint, and Plaintiff has appealed that dismissal to the Appellate Division. It is not possible at this time to predict the outcome or range of potential loss, if any, which might result from this action. No provision for any liability that may result upon adjudication has been made in the accompanying financial statements. -29- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 9. Litigation and Subsequent Events (continued) b. In December 1994, Associates received a notice of default from Trump Empire State Partners ("Trump"). The Trump default notice to Associates claims that Associates was in violation of its master lease because of extensive work which Company, the Sublessee, had undertaken as part of an improvement program that commenced before Trump reportedly acquired its interest in the property in 1994. Trump's notice also complains that the Building is in need of repairs. On February 14, 1995, Associates and Company filed an action (the "Action") in New York State Supreme Court against Trump for a declaratory judgment that none of the matters set forth in the notice of default constitutes a violation of the master lease or sublease, and that the notice of default is entirely without merit. Associates' and Company's suit also seeks an injunction to prevent Trump from implementing the notice of default ("Notice I"). On March 24, 1995, the Court granted Associates a preliminary injunction against Trump. In 1996 the Court granted two additional injunctions against Trump with respect to two additional default notices ("Notices II and III"). The preliminary injunctions prohibit Trump from acting on its notices of default to Associates at any time, pending the prosecution of claims by Associates and Company for a final declaratory judgment and an injunction and other relief against the Trump defendants. The Appellate Court has upheld and affirmed the granting of such preliminary injunctions against the Trump defendants. On June 5, 1998 Company and Associates filed a motion for summary judgment in the Action in a companion action (the "Companion Action") entitled Empire State Building Associates and Empire State Building Company v. Donald Trump et. al., in which plaintiffs seek related declaratory and injunctive relief against Trump and its affiliates with respect to plaintiffs' rights to act as owner of the Building in dealings with the New York City Department of Buildings. In a decision and order dated March 10, 1999, the Court awarded partial summary judgment to Associates and Company in the Action, declaring that Notices II and III were invalid and of no force and effect, and further declaring that there was no legal or factual basis for many of the defaults alleged in Notice I. The Court also awarded summary judgment to Associates in the Companion Action, declaring that Associates is entitled to act as "owner" of the Building for purposes of dealing with the New York City Department of Buildings and enjoining Trump from interfering with such right. In May 1999, plaintiffs renewed their motion for summary judgment in the Action. At that time, the Trump defendants also filed notices of appeal from the Court's March 10, 1999 decision and order in the Action and Companion Action. In a further decision dated December 16, 1999 and entered as final judgment on January 12, 2000, the Court granted plaintiffs' renewed motion for summary judgment in the Action, declaring that the remaining claims of default asserted by Trump were without merit and that plaintiffs were not in default under the master lease. -30- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 9. Litigation and Subsequent Events (continued) On January 31, 2000, the Trump defendants filed a notice of appeal from the January 12, 2000 final judgment entered in the Action. No briefing or other proceedings have yet taken place at the appellate level. Plaintiffs intend to challenge any future claims of default by Trump and, if appropriate, to renew their motion for summary judgment. No provision for any liability that may result upon adjudication has been made in the accompanying financial statements. 10. Related Party Transactions - Legal Fees The accompanying statements of income reflect legal fees paid or owed to Wien & Malkin LLP, a related party (Note 5), as follows: 1999 1998 1997 Reimbursement owing to Agents of their legal and accounting expenses relating to Studley and Trump Suits (Note 9) $39,670 $179,979 $1,272,237 Other payments made or accrued 44,363 8,125 - $84,033 $188,104 $1,272,237 The reimbursement owing to Agents of their legal and accounting expenses relating to the Studley and Trump Suits consisted of the following: 1999 1998 1997 Studley Suit: Advances by Wien & Malkin LLP, to third party professional firms $39,670 $179,979 $647,761 Accumulated professional time of Wien & Malkin LLP - - 312,304 Trump Suits: Accumulated professional time of Wien & Malkin LLP - - 312,172 $39,670 $179,979 $1,272,237 -31- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 10. Related Party Transactions - Legal Fees (continued) Counsel advises that substantial additional legal and accounting costs may be incurred in both suits. The determination of the allocable share of the net legal and accounting costs and disbursements accrued by Associates that are chargeable to Company involve complex issues of fact and law. Therefore, although Associates may be entitled to indemnification from Company, because of uncertainties concerning these issues, amounts for professional fees to be reimbursed to Associates cannot be estimated, and consequently, have not been provided for in the accompanying financial statements. 11. Contingencies Wien & Malkin LLP and Peter L. Malkin are engaged in a dispute with Helmsley-Spear, Inc., the building manager of the Empire State Building, concerning the management, leasing and supervision of the property being net leased to the Sublessee. In this connection, certain legal and professional fees and other expenses have been paid and incurred and additional costs are expected to be incurred. Associates' allocable share of such costs cannot as yet be determined. Accordingly, Associates has not provided for the expense and related liability with respect to such costs in the accompanying financial statements. 12. Concentration of Credit Risk Associates maintains cash balances in a bank, money market funds (Fidelity U.S. Treasury Income Portfolio) and a distribution account held by Wien & Malkin LLP. The bank balance is insured by the Federal Deposit Insurance Corporation up to $100,000, and at December 31, 1999 was completely insured. The cash in the money market funds and the account held by Wien & Malkin LLP are not insured. The funds held in the distribution account were paid to the participants on January 1, 2000. -32- EMPIRE STATE BUILDING ASSOCIATES OMITTED SCHEDULES The following schedules have been omitted as not applicable in the present instance: SCHEDULE I - Condensed financial information of registrant. SCHEDULE II - Valuation and qualifying accounts. SCHEDULE IV - Mortgage loans on real estate. -33- SCHEDULE III EMPIRE STATE BUILDING ASSOCIATES Real Estate and Accumulated Depreciation December 31, 1999
Column A Description Leasehold on Empire State Building located at 350 Fifth Avenue, New York, New York. B Encumbrances............................................. None C Initial cost to company Leasehold.............................................. $39,000,000 D Cost capitalized subsequent to acquisition............... None E Gross amount at which carried at close of period Leasehold............................................. $39,000,000(a) F Accumulated amortization................................ $36,289,894(b) G Date of construction 1931 H Date acquired December 27, 1961 I Life on which leasehold amortization in latest income statements is computed 25 years from January 1, 1988 (see Note 2 of Notes to Financial Statements).
(a) There have been no changes in the carrying values of real estate for the years ended December 31, 1999, December 31, 1998 and December 31, 1997. The costs for federal income tax purposes are the same as for financial statement purposes. (b) Accumulated amortization Balance at January 1, 1997 $35,664,489 Amortization: F/Y/E 12/31/97 $208,469 12/31/98 208,468 12/31/99 208,468 625,405 Balance at December 31, 1999 $36,289,894 -34- SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The individual signing this report on behalf of Registrant is Attorney- in-Fact for Registrant and each of the Partners in Registrant, pursuant to Powers of Attorney, dated August 6, 1996 and May 14, 1998 (collectively, the "Power"). EMPIRE STATE BUILDING REGISTRANT (Registrant) By /s/Stanley Katzman Stanley Katzman, Attorney-in-Fact Date: April 14, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person as Attorney-in-Fact for each of the Partners in Registrant, pursuant to the Power, on behalf of Registrant and as a Partner in Registrant on the date indicated. By /s/ Stanley Katzman Stanley Katzman, Attorney-in-Fact* Date: April 14, 2000 _________________________________ * Mr. Katzman supervises accounting functions for Registrant. -35- EXHIBIT INDEX Number Document Page* 3(a) Registrant's Partnership Agreement dated July 11, 1961, filed as Exhibit No. 1 to Registrant's Registration Statement on Form S-1 as amended (the "Registration Statement") by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 3(b) Amended Business Certificate of Registrant filed with the Clerk of New York County on August 7, 1998 reflecting a change in the Partners of Registrant which was filed as Exhibit 3(b) to Registrant's 10-Q-A for the quarter ended September 30, 1998 and is incorporated by reference as an exhibit hereto. 4 Registrant's form of Participating Agreement, filed as Exhibit No. 6 to the Registration Statement by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 10(a) Mortgage dated December 21, 1951 from Imperium Corporation to Prudential Insurance Company of America ("Prudential"), filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(a) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. 10(b) Modification of Indenture of Lease dated December 27, 1961 between Prudential and Registrant filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(b) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. ____________________________________________ * Page references are based on sequential numbering system. -36- 10(e) Modification and Extension Agreement, dated October 26, 1964 between The Bowery Savings Bank and Celeritas Realty Corp., filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(e) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. 13(a) Letter to Participants dated April 10, 2000 and supplementary financial reports for the fiscal year ended December 31, 1999. The foregoing material shall not be deemed "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. 24 Powers of Attorney dated August 6,1996 and May 14, 1998, between the Partners of Registrant and Richard A. Shapiro and Stanley Katzman, filed as Exhibit 24 to Registrant's 10-Q for the quarter ended March 31, 1998 and is incorporated by reference as an exhibit hereto. 27 Financial Data Schedule of Registrant for the fiscal year ended December 31, 1999. ____________________________________________ * Page references are based on sequential numbering system. -37- EX-13 2 EXHIBIT 13A Exhibit 13 a [LETTERHEAD OF WIEN & MALKIN LLP] April 10, 2000 TO PARTICIPANTS IN EMPIRE STATE BUILDING ASSOCIATES Federal Identification Number 13-6084254 We enclose the annual report of Empire State Building Associates for the year ended December 31, 1999 and the comparative statement of operations under the sublease for the years 1999 and 1998. The sublease provides for the payment of additional rent equal to 50% of the sublessee's profit in excess of $1,000,000. The profit for 1999 was $16,164,218, so that the sublessee paid additional rent of $7,582,109. The profit for 1998 was $9,219,704, so that the sublessee paid additional rent of $4,109,852. There was $7,042,766 available for distribution. In accordance with the partnership agreement, 6% of the distribution, $422,566, has been paid to Wien & Malkin LLP. $6,620,200 was distributed to the participants on February 29, 2000 and represented about 20.1% on the original cash investment of $33,000,000. Together with regular monthly distributions during the year 1999, total distributions to participants for 1999 were at the rate of about 31.9%. Details are as follows: Additional rent for the year 1999 $7,582,109 Dividend income 144,690 7,726,799 Less: Legal fees (Proskauer Rose LLP and Thelen, Reid & Priest LLP) in connection with Empire State Liquidity Fund tender offer $ 44,363 Accrual for advance by Wien & Malkin LLP during 1999 in connection with the Studley litigation, about which participants have previously been advised 39,670 Reserve for future expenses in defending Trump and Studley litigations 600,000 ( 684,033) Balance $7,042,766 Distribution to participants on February 29, 2000 $6,620,200 Additional fee paid to Wien & Malkin LLP (6% of $7,042,766) 422,566 Total $7,042,766 -38- Total distributions to the participants on the original cash investment for the years 1999, 1998, 1997 and 1996 were at the rate of approximately 31.9%, 20.3%, 15% and 11.8%, respectively. For financial statement purposes, while the income of Empire State Building Associates for the year 1999 was $10,901,065, distributions of $10,509,533, including the additional distribution of $6,620,200, were made to participants. The difference arises mainly because of an addition to the reserve for future expenses in defending litigations as described above. Such reserves are not deducted for tax purposes on Schedule K-1 until payments are made. Taking into account that a portion of prior distributions constituted a return of capital, the average capital investment for the year 1999 was $9,243,163. Distributions of $10,509,533 were about 113.7% on the average capital. The book value on December 31, 1999 of an original cash investment of $10,000 was $3,436. Those participants who have voluntarily authorized additional compensation to Wien & Malkin LLP pursuant to the consent solicitation letter of September 13, 1991 will receive from Wien & Malkin LLP each year through January 5, 2076, their pro rata shares of the originally scheduled increases in additional payments to Wien & Malkin LLP from the reductions in master lease rent effective in 1992 and 2013. This amounts to $45,017 per annum commencing in 1992 and $52,405 per annum commencing in 2013. Each such participant holding a $10,000 participation will receive each year $13.64 for 1992 through 2012 and $15.88 commencing 2013. The first payment to consenting participants on account of the year 1992 was included in the check distributed on February 28, 1993. The Schedule K-1 previously submitted to you noted the amount you received on March 5, 1999 to be reported on your 1999 income tax returns. The payment for 1999 was mailed to you on February 29, 2000 and will be reportable on your 2000 income tax returns. Schedule K-1 forms (Form 1065), containing 1999 tax information, were mailed to the participants on March 8, 2000. If you have any question about the enclosed material, please communicate with our office. Cordially yours, WIEN & MALKIN LLP By: Stanley Katzman SK:fm Enc. -39- [LETTERHEAD OF MCGRATH, DOYLE & PHAIR CERTIFIED PUBLIC ACCOUNTANTS] Empire State Building Company 60 East 42nd Street New York, NY 10165 We have audited the accompanying Comparative Combined Statement of Income of Empire State Building and Observatory for the years ended December 31, 1999 and 1998 for the purpose of determining "Net Operating Profit" and "Overage Rent" as those terms are defined in Section 2.05 of Agreement of Sublease dated December 27, 1961. During the years ended December 31, 1999 and 1998, the entire building, with the exception of the Observatory, was operated by Empire State Building Company and the Observatory was operated by Empire State Building, Inc. The Combined Statement of Income is the responsibility of the management of Empire State Building Company and Empire State Building, Inc. Our responsibility is to express an opinion on the Combined Statement of Income based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Combined Statement of Income is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Combined Statement of Income. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the accompanying Comparative Combined Statement of Income of Empire State Building and Observatory presents fairly, in all material respects, the Net Operating Profit and Overage Rent for the years ended December 31, 1999 and 1998, in conformity with Section 2.05 of the aforementioned Agreement dated December 27, 1961. As discussed in Note 2 to the Combined Statement of Income, the Empire State Building Company and other related parties have been named as defendants in legal actions. All defendants have denied all material allegations. It is not possible at this time to predict the outcome or range of potential loss, if any, which might result from those actions. No provision for any loss has been made in the accompanying Combined Statement of Income. New York, NY March 16, 2000 -40- Empire State Building and Observatory COMPARATIVE COMBINED STATEMENT OF INCOME Increase 1999 1998 (Decrease) INCOME Rent, including electricity $59,755,165 55,110,840 $4,644,325 Observatory admissions 18,420,734 17,803,746 616,988 Other observatory income 1,149,970 1,228,170 (78,200) Antenna rent 5,334,395 5,348,547 (14,152) Lease cancellation 0 19,184 (19,184) Percentage rent 691,441 676,098 15,343 Net credit on water charges (Note 4) 0 366,094 (366,094) Other 840,707 739,511 101,196 Total income 86,192,412 81,292,190 4,900,222 OPERATING EXPENSES Rent 6,018,750 6,018,750 0 Real estate taxes 19,542,337 19,367,733 174,604 Wages, contract cleaning and protection ser 12,625,802 12,386,259 239,543 Electricity 5,101,519 4,857,861 243,658 Tenants' and building alterations, repairs 10,555,096 11,157,243 (602,147) Management fees and leasing commissions 2,872,316 3,252,369 (380,053) Observatory: Wages 1,863,183 1,786,158 77,025 Contracted labor 2,179,869 2,212,386 (32,517) Advertising and public relations 187,103 379,065 (191,962) Payroll taxes and other labor cost 656,856 656,879 (23) Other taxes and expenses 188,767 247,833 (59,066) Steam 1,172,078 1,205,017 (32,939) Professional fees (Note 1) 1,423,216 2,474,890 (1,051,674) Payroll taxes and other labor costs 3,560,811 2,980,013 580,798 Insurance 334,288 540,241 (205,953) Water (Note 4) 453,032 0 453,032 Rubbish removal 189,003 399,546 (210,543) Advertising 430,427 339,632 90,795 Telephone 56,730 84,702 (27,972) Sprinkler alarm service 102,558 63,618 38,940 Directory service 17,235 9,219 8,016 Interest on NYS utility tax (Note 3) 50,192 340,453 (290,261) Utility taxes (Note 3) 0 968,729 (968,729) Paging and other intercommunication 110,028 86,578 23,450 Dues 44,478 35,403 9,075 Licenses and permits 0 4,372 (4,372) Other expenses 292,520 217,537 74,983 Total expenses before overage rent 70,028,194 72,072,486 (2,044,292) NET OPERATING PROFIT $16,164,218 $9,219,704 $6,944,514 OVERAGE RENT, 50% OF NET OPERATING PROFIT IN EXCESS OF $1,000,000 $7,582,109 $4,109,852 $3,472,257 -41- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 1. Professional fees include payments to Wien & Malkin LLP. A partner in Wien & Malkin LLP is a partner in Company. 2. Litigation (a) On October 21, 1991, Julien J. Studley ("Studley"), the holder of a $20,000 original participation in Empire State Building Associates ("Associates"), the master lessee of the Empire State Building, brought suit against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and Alvin Silverman); Company; Harry B. Helmsley, a partner in Company; and Wien, Malkin & Bettex, supervisor to Associates. The suit claimed that the defendants have engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations of the Participants in Associates in September, 1991, and in relation to other unrelated acts of the Agents and the Sublessee. The suit is styled as a class action, but the Court was not asked to grant class certification. The suit seeks relief including an injunction and an accounting. In 1994, the action was dismissed against Company and Mr. Helmsley. In 1995, the plaintiff amended the complaint to allege, amongst other things, the underpayment by Company of overage rent due to Associates. In June 1996, plaintiff applied for partial summary judgment. In September 1996, defendants applied for summary judgment and dismissal of the action in its entirety. By order and decision dated July 14, 1997, the Court denied the plaintiff's motion for partial summary judgment, granted the defendants' motion for summary judgment, and dismissed the action. The plaintiff filed an appeal with respect to the foregoing order. By decision and order entered April 2, 1998, the Appellate Division of the Supreme Court unanimously affirmed the order dismissing the action. The plaintiff has applied for permission to appeal the Appellate Division's determination to the New York Court of Appeals, and that application has been denied by both the Appellate Division and the Court of Appeals. The plaintiff has filed a new complaint, which alleges claims similar to those asserted in the previously dismissed complaint. The defendants have applied for dismissal of the new complaint based on the prior dismissal orders and on other grounds. In April 1999, the Court granted defendants motion to dismiss the complaint. In May 1999, the plaintiff filed a Notice of Appeal. It is not possible at this time to predict the outcome or range of potential loss, if any, which results from this action. No provision for any liability that may result upon adjudication has been made in the accompanying financial statements. (b) In December 1994, Empire State Building Associates ("Associates") received a notice of default ("Notice I") from Trump Empire State Partners ("Trump"). The Trump default notice to Associates claims that Associates is in violation of its master lease because of extensive work Company has undertaken as part of an improvement program that commenced before Trump reportedly acquired its interest in the property in 1994. Trump's notice also complains that the building is in need of repairs. -42- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued On February 14, 1995, Associates and Company filed an action in the New York State Supreme Court against Trump for a declaratory judgment that none of the matters set forth in the notice of default constitutes a violation of the master lease or sublease, and that the notice of default is without merit. Associates' and Company's suit also seeks an injunction to prevent Trump from implementing the notice of default. On March 24, 1995, the New York State Supreme Court, in the foregoing action, granted Associates a preliminary injunction against Trump. Trump, thereafter, served two additional default notices ("Notices II and III") for which the Court had granted additional injunctions against Trump. The injunctions prohibit Trump from acting on its notices of default to Associates, at any time, pending the prosecution of claims by Associates and Company for a final judgment granting a permanent injunction and other relief against the Trump defendants. On April 8, 1996, the Court granted Associates additional injunctions against Trump, which further prohibit Trump from seeking to terminate Associates' Master Lease. On August 19, 1996, the Court denied a motion by Trump to set aside the injunction granted in favor of Associates and against Trump on March 24, 1995. The Court has directed the parties in the foregoing action to proceed with pretrial discovery. Trump has appealed the Court's injunction orders, and the Appellate Court has unanimously affirmed the appealed orders. On February 15, 1995, Trump filed an action against Associates, Company, Wien & Malkin LLP, Harry B. Helmsley, Helmsley Spear, Inc. (the management company of the Building engaged by Company), and the Partners, in New York State Supreme Court, alleging that the notice of default is valid and seeking damages and related relief based thereon. On October 24, 1996, the Court dismissed all of Trump's claims in their entirety as against Associates and all other defendants in the foregoing action. Trump appealed this ruling and the Appellate Court unanimously affirmed dismissal of Trump's claims. In May 1995, Associates and Company filed a separate legal action against Trump and various affiliated persons for breach of the Master Lease and Sublease and for disparagement of the property in violation of Associates' and Company's leasehold rights. The action was amended to include additional claims by Associates and Company seeking a declaratory judgment that they may act as an owner of the Property for purposes of making applications and related activities pursuant to the New York City Building Code. Trump moved to dismiss the claims concerning the Building Code. By decision and order of October 24, 1996, the Court rejected Trump's motion and sustained Associates' and Company's claims concerning the parties who may act as owner of the Property under the Building Code. The Court directed that the claims should proceed to trial. At the same time, the Court dismissed Associates' and Company's claims against Trump and co-defendants for money damages. The Appellate Court has affirmed that portion of the Court's order dismissing the claims for money damages. -43- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued On June 5, 1998, Associates and Company filed a motion for summary judgment against Trump and various affiliates that they may act as owner of the Property in dealing with the New York City Department of Buildings. In a decision and order dated March 10, 1999, the court awarded partial summary judgment to Associates and Company in the action, declaring that Notices II and III were invalid and of no force and effect, and further declaring that there was no legal or factual basis for many of the defaults alleged in Notice I. The court also stated that Trump appeared to concede that many of the remaining defaults alleged in Notice I had been corrected, and that Trump would be permitted to inspect the Building within 30 days of the date of the order to determine whether these claimed violations had in fact been corrected. Finally, the court directed Trump to notify plaintiffs, within 30 days of the completion of its inspection, as to which defaults it claims still exist, and the court granted plaintiffs' permission to renew their motion for summary judgment with respect to any such remaining claims of default within 30 days of the receipt of Trump's notice. Plaintiffs intend to challenge any such claims of default by Trump and, if appropriate, to renew their motion for summary judgment. In its March 10, 1999 decision and order, the Court also awarded summary judgment to Associates in the Companion Action, declaring that Associates is entitled to act as "owner" of the Building for purposes of dealing with the Buildings Department and enjoining Trump from interfering with such right. On December 16, 1999, the New York State Supreme Court dismissed entirely the attempt by Trump to terminate the leasehold. The dismissal order was entered on January 12, 2000. Trump has appealed the Supreme Court's decision. In connection with the Studley and Trump litigations, Associates may be entitled to reimbursement of its legal and accounting expenses from Company. Through December 31, 1999, such legal and accounting expenses in connection with the Studley suit have amounted to $1,179,714, of which $867,410 has been advanced by Wien & Malkin LLP (a related party) to third-party professional firms, and $312,304 represents accumulated professional time of Wien & Malkin LLP. In addition, through December 31, 1999 the accrual for accumulated professional time by Wien & Malkin LLP amounted to $312,172 in connection with the Trump suits. Substantial additional legal and accounting costs may be incurred in both cases. The determination of the allocable share of the net legal and accounting costs and disbursements chargeable to Company involve complex issues of fact and law. Because of uncertainties concerning these issues, an amount for professional fees payable by Company cannot be estimated, and therefore, have not been provided for. Resolutions unfavorable to Company could result in material liabilities and charges which have not been reflected in the accompanying financial statements. -44- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued (c) Company is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled Robert D. Gould P.C. v. Empire State Building Company, et al. This lawsuit, which is brought by a tenant in the building, seeks $5,000,000 in damages for an alleged breach of lease and tortious conduct. The Supreme Court entered an order precluding plaintiff from proving damages by reason of its failure to serve an adequate bill of particulars. Plaintiff's motion to vacate the order of preclusion was denied, and its time to appeal from the order of preclusion expired. The action has been transferred to the New York City Civil Court. Plaintiff has taken no step to prosecute the case subsequent to the transfer. The case has been dormant since 1996. (d) Company is a defendant in an action pending in the United States District Court for the Southern District of New York, entitled R. Gene Smith and Turbo Vision Limited Partnership vs. Neil H. Kessner, Richard C. O'Conor, Neil H. Kessner and Associates, Steven M. Durels, The Empire State Building Company and Stephen A. Tole. This lawsuit, which is brought by the principals of a tenant in the Empire State Building, alleges various claims for damages against the six named defendants in connection with plaintiffs' alleged construction and operation of an entertainment facility in the building. As against the Company, plaintiffs allege fraudulent inducement in connection with matters pertaining to the making of a lease agreement in connection with the foregoing entertainment facility, and to the construction and operation of the foregoing entertainment facility; and breach of the covenant of quiet enjoyment contained in the lease, which was entered into in connection with the foregoing entertainment facility. Plaintiffs allege that they expended funds and incurred future liabilities in connection with the construction and operation of the foregoing entertainment facility, and on each of their claims against the Company, plaintiffs allege damages in an amount not less than $5,000,000 and punitive damages in an amount not less that $10,000,000 (together with interest, attorney's fees, and the costs and disbursements of the action). The Company has denied the material allegations of the complaint against it and has asserted various affirmative defenses. The Company has also asserted a cross-claim against defendant Stephen A. Tole for indemnification and/or contribution for the entire amount of any damages awarded in plaintiffs' favor against the Company, as well as a cross-claim against defendants Tole, Neil H. Kessner, Richard C. O'Conor, Steven M. Durels and Neil H. Kessner and Associates, jointly and severally, for contribution and/or indemnification for part or all of any such damages. The Company has furthermore filed a third- party complaint against Helmsley-Spear, Inc., as an agent of the Company and the employer of defendant Tole, asserting claims for indemnification, contribution and/or respondeat superior for the entire amount, or part thereof, of any damages awarded in plaintiffs' favor against the Company. The co- defendants and the third-party defendant have denied the material allegations of the cross-claims and third-party complaint. By a Stipulation and Order of Dismissal filed April 10, 1998, the Federal Court Action was dismissed, without prejudice, as against Company. (Because of that dismissal, certain cross-claims and a third-party complaint asserted by Company were also dismissed without prejudice.) Accordingly, the Federal Court Action is no longer pending against Company. -45- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued On April 23, 1998, certain of the plaintiffs in the Federal Court Action (together with other parties) filed a new complaint in New York State court against Company, which was principally the same as the complaint originally filed in the Federal Court Action. Plaintiffs never served that state court complaint on Company and have not prosecuted that action. In August 1999, Company moved to dismiss the complaint as against it in its entirety. By order dated November 9, 1999, the Supreme Court granted Company's motion and dismissed the complaint. On December 8, 1999, plaintiffs filed a Notice of Appeal of the dismissal order. The Company intends, and has begun, to defend the action vigorously. The action is presently at a discovery stage, and counsel is not able to express an opinion as to the likely outcome or to estimate amounts or a range of potential losses or gains. (e) Company is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled New York Skyline Inc. v. Empire State Building Company, Empire State Building Associates, Neil H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit which is brought by a tenant in the building and commenced on December 23, 1997 seeks at least $205,000,000 in damages. In its complaint, plaintiff-tenant asserts thirteen causes of action (twelve of which are against the Company) in connection with its leases and license agreements of space in the Building and alleges that it is entitled to, among other things, specific performance as to its alleged rights under its leases and licensing agreements with the Company, a declaratory judgment as to the rights of the parties under the leases and licensing agreements as well as any monies allegedly due plaintiff under those agreements, as well as injunctive relief and additional money damages. On or about February 5, 1998, plaintiff served an amended complaint which, among other things, added Kessner & Cyruli, f/n/a Neil H. Kessner & Associates, former landlord-tenant counsel for the building, and Eileen Aluska, a former Helmsley- Spear, Inc. employee and Peter L. Malkin, as third party-defendants. The amended complaint asserted eleven causes of action against the Company, similar to those asserted in the original complaint. By order and decision dated April 3, 1998 (the "April 3, 1998 Order"), the Court granted plaintiff a Yellowstone injunction on the condition that plaintiff pay $878,000 in back rent to the Company and ordered that a hearing be held to determine the amount due on disputed rent and license fees. Plaintiff made timely payment of the $878,000 to the Company. The hearing to determine the amount due on disputed rent and license fees has not yet been held. On March 16, 1998 the Company moved to dismiss the second, third, fifth, sixth, eighth, ninth and eleventh causes of action with respect to the amended complaint. By decision and order dated February 25, 1999, the Court granted the Company's motion to dismiss the second, fifth, sixth, eighth, ninth and eleventh causes of action, and denied the Company's motion to dismiss the third cause of action. -46- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued By order to show cause dated December 22, 1998, plaintiff moved for a temporary restraining order and preliminary injunction preventing the Company from seeking to enforce a Notice of Default that the Company had served on plaintiff with respect to certain space leased to plaintiff under the lease dated as of March 1996 covering Rooms 209-214, 233-250 and 340-346 in the Building. The Company has opposed the motion and oral argument on the motion has not yet taken place. Company and plaintiff entered into a settlement agreement (the "Settlement Agreement") dated as of December 30, 1999. Pursuant to the Settlement Agreement, the parties entered into a stipulation dismissing with prejudice the plaintiff's action against Company and all of the other defendants. Under the Settlement Agreement, plaintiff and each of the defendants in the Action exchanged mutual general releases. In particular, the release from Company released plaintiff from, among other things, "any and all claims for rent, additional rent and/or license fees due through December 1999 under [Skyline's] leases and license agreements with Company". The amount Company claimed was owed from plaintiff through December 1999 exceeded $1.5 million. The Company release to plaintiff does not cover plaintiff 's rent and license obligations on a going forward basis under plaintiff 's remaining leases and license agreement with Company. Those obligations continue. Simultaneously with entering into the Settlement Agreement, Company and plaintiff entered into a Surrender Agreement (dated as of December 30, 1999) pursuant to which plaintiff surrendered to Company space it had leased on the 2nd and 3rd floor of the Empire State Building under a lease running through July 2016. As a further part of the Settlement Agreement, Company and plaintiff entered into a Second Modification of License Agreement which changed certain of the parties' obligations to each other under the existing license agreement and may, under certain circumstances, lead to additional license fees being paid to Company. Finally, as part of the Settlement Agreement, Company and plaintiff entered into a Third Amendment of Lease which changed an additional rent escalation clause from an operating expense calculation to one using the Consumer Price Index. -47- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME 2. Litigation - Continued (f) Company is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled Magnifique Parfumes And Cosmetics, Inc. d/b/a Perfumania v. Empire State Building Inc. This is an action commenced on or about October 15, 1998 against Company (incorrectly named in the action as "Empire State Building, Inc."). This lawsuit which is brought by a tenant in the building seeks at least $700,000 in damages. In its complaint, plaintiff-tenant alleges that the Company breached its lease with plaintiff by, among other things, charging plaintiff for electricity on a submetering basis at a rate which far exceeds the rate permissable under the lease. On or about February 2, 1999, the Company served an answer to the complaint. The answer denied the material allegations of the complaint and asserted eight affirmative defenses. On or about February 22, 1999, the Company served an amended answer and counterclaim. The amended answer denied the material allegations of the complaint and asserted nine affirmative defenses. The counterclaim against plaintiff and Perfumania, Inc. (as guarantor) alleges that plaintiff breached certain obligations under the lease to pay certain rent, electricity and operating expense charges and owes the Company $37,312.11 in arrears under the lease. The Company intends to contest the case vigorously. (g) Company is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled Duane Reade v. Walgreen Co. and Empire State Building. This is an action which is brought by a tenant in the building and commenced on February 14, 2000. Plaintiff alleges, among other things, that Company misled plaintiff in negotiations for a renewal of its current lease that expires on April 30, 2000, and wrongfully entered into a lease with Walgreen for the space currently occupied by plaintiff. The complaint seeks no money damages, but instead seeks a judgment declaring that the lease between Walgreen and Company be deemed a renewal of the lease between Company and plaintiff, and that plaintiff be substituted for Walgreen as the tenant under the Walgreen lease. Alternatively, the complaint seeks a judgment declaring that the Walgreen lease is a graft upon plaintiff's existing lease for it's use and benefit and that plaintiff have all rights of the tenant under the Walgreen lease. Company's time to move or answer in response to the complaint has been extended by written stipulation to March 20, 2000. Company intends to contest the case vigorously. -48- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 3. Liabilities The State of New York has asserted utility tax deficiencies of $1,528,816 through December 31, 1992 in connection with water, steam and non-metered electricity rent inclusion charges to tenants, plus estimated accrued interest of $797,713. The Supreme Court, New York County granted summary judgment in favor of the State, holding that the State utility tax applies to such rent inclusion charges. The ruling was affirmed by the Appellate Division. Company sought permission to appeal the Appellate Division's decision and order to the Court of Appeals. The Court of Appeals denied Company's motion. In May, 1996, Company entered into a settlement agreement with the State. Pursuant to the terms of the settlement agreement, Company agreed to pay the State $979,109, plus interest of approximately $605,000 through July 31, 1996. The State has agreed to payment of the aforesaid liability over a period of four years, commencing August, 1996, in equal monthly installments of $40,000, including interest on the unpaid balance at the statutory rate. Installment payments to the State of $40,000 per month have been made by Company commencing on August 1, 1996. Company also is liable for New York State Utility Tax for periods after December 31, 1992. The state has asserted tax for the years 1993 through 1995, in the sum of $243,270 plus interest of $114,918 through December 31, 1999. Company is currently negotiating a payment schedule for the aforesaid liability. It is anticipated that New York State will seek to impose liability on Company for state utility tax for periods after December 31, 1995 through December 31, 1997. The amount of such additional tax has yet to be determined. The imposition of both New York State and New York City utility taxes on non- metered electricity rent inclusion charges was repealed effective January 1, 1998. The City of New York has asserted a utility tax deficiency in the amount of $277,125 against Company, through December 31, 1994, in connection with water, steam and non-metered electricity rent inclusion charges to tenants, plus accrued interest of approximately $315,610 through December 31, 1999. Company is contesting the calculation of the City's proposed utility tax deficiency before the New York City Tax Appeals Tribunal. The final outcome of Company's appeal cannot presently be determined. Under a settlement proposed by New York City for all taxpayers, Company will settle utility taxes for all open years by paying the tax for only the year 1997, the determination of which is pending. Wien & Malkin LLP and Peter L. Malkin are engaged in a dispute with Helmsley Spear, Inc. concerning the management, leasing and supervision of the Company's property. In this connection, certain legal and professional fees and other expenses have been paid and incurred and additional costs are expected to be incurred. The Company's allocable share of such costs is as yet undetermined. Accordingly, the Company has not provided for the expense and related liability with respect to such cost in these financial statements. 4. Net credit re water charges Prior to 1998, The City of New York had rendered estimated water charges for approximately one and one-half years because it had not read the various water meters. During 1997, Company had received charges which were in excess of previously rendered charges and Company then retained a water consultant. The consultant determined that Company had been overcharged in prior years; accordingly, the City of New York rendered credits, attributable to prior years, which exceed the 1998 water expense. -49- EX-27 3
5 This schedule contains summary financial information extracted from the Company's Balance Sheet as of December 31, 1999 and the Statement Of Income for the year ended December 31, 1999, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 9,537,435 0 0 0 0 10,543,375 39,000,000 36,289,894 13,253,481 1,914,452 0 0 0 0 11,339,029 13,253,481 13,600,859 13,745,549 0 0 2,844,484 0 0 10,901,065 0 10,901,065 0 0 0 10,901,065 3,303 3,303 Includes prepaid rent Rental income Includes dividend income Leasehold rent, supervisory fees, legal fees and amortization of leasehold Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during the year. -50-
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