-----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, Md7i6E4mS8/1hAxgDLzpfalbNpHATprKypI5w7Kte3Tw80eVEiYIGldTZWMD7KdG PDP7XSvPTTo4SM66KUDLDw== 0000032776-98-000002.txt : 19980417 0000032776-98-000002.hdr.sgml : 19980417 ACCESSION NUMBER: 0000032776-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980416 SROS: NONE 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: 98595253 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, 1997 [] 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 through of this report. Number of pages (including exhibits) in this filing:38 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 Stanley Katzman, John L. Loehr and Peter L. Malkin (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. Two of the Partners in Registrant are also current members and one Partner in Registrant is a former, retired member of the law firm of Wien & Malkin LLP, 60 East 42nd Street, New York, New York, counsel to Registrant and to Sublessee (the "Counsel"). See Items 10, 11, 12 and 13 hereof for a description of the ongoing services rendered by, and compensation paid to, Counsel 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, 1997, the Building was 88% occupied by approximately 750 tenants who engage in various businesses, including 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, 1997, 1996 and 1995. There was Overage Rent of $2,401,300 for the year ended December 31, 1997. (c) Competition Pursuant to tenant space leases at the Building, the average annual base rental payable to Sublessee is approximately $34 per square foot (exclusive of electricity charges and escalation) which is at market level as compared to the average rental rates charged by office buildings offering comparable space in the immediate vicinity. This is primarily due to a demand for office space in a building which is considered to have a unique reputation and a prime location in midtown Manhattan. The Building is the only major office building in the Fifth Avenue area between 23rd and 34th Streets. Registrant has been advised that the average rental rate is approximately $25.50 per square foot at both 358 Fifth Avenue and 362 Fifth Avenue, which are neighboring office buildings (containing 12 and 14 stories, respectively) containing upgraded standard installations, but lacking comparable views and window space. The average rental rate at 3 Park Avenue, which contains approximately 35 stories and is only sixteen years old, is approximately $29 per square foot, and the average rental rate at 1350 Broadway, which contains 37 stories, is approximately $25 per square foot. Most of these buildings are about the same age as the Building. -2- In the overall rental market for commercial space in Manhattan, rents range from approximately $60 per square foot for prime office space to approximately $15 per square foot in less developed industrial and/or secondary commercial areas. Accordingly, rents at the Building may be considered competitive for prime office space in midtown Manhattan, given the relative condition of surrounding buildings and the nature of services, amenities and office space offered by them as compared to the Building. (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. 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") counsel to Registrant. The suit claimed that the defendants had engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations from the participants in Registrant in September 1991 and in relation to -3- 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. Proceedings Involving Trump Empire State Partners: In December 1994, Registrant received a notice of default from Trump. The Trump default notice to Registrant claimed that Registrant was in violation of its master lease because of extensive work which Sublessee had undertaken as part of an improvement program that commenced before Trump reportedly acquired its interest in the property in 1994. Trump's notice also complained that the Building was in need of repairs. On February 14, 1995, Registrant and Sublessee filed an action 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 against Registrant, Sublessee, Counsel, Harry B. Helmsley, a partner in Sublessee, Helmsley-Spear, Inc. (the management company of the Empire State Building), and the Agents for Registrant in New York State Supreme Court, alleging that the notice of default is valid and seeking damages and related relief based thereon. On October 24, 1996 the Court dismissed all of Trump's claims in their entirety against all defendants in the action. 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 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 seeking a declaratory judgment that they -4- 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. 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. Registrant intends to contest the case vigorously. Because the action is still in the pleading stage and pre-trial discovery has not yet started, counsel for Registrant has not formed a professional conclusion that an adverse outcome is either probable or remote. -5- Wien & Malkin LLP, et. al. v. Helmsley-Spear, Inc., et. al. On June 19, 1997 Wien & Malkin LLP and Peter L. Malkin filed an action in the Supreme Court of the State of New York, against Helmsley-Spear, Inc. and Leona Helmsley concerning various partnerships which own, lease or operate buildings managed by Helmsley-Spear, Inc., including Registrant's property. In their complaint, plaintiffs sought the removal of Helmsley-Spear, Inc. as managing and leasing agent for all of the buildings. Plaintiffs also sought an order precluding Leona Helmsley from exercising any partner management powers in the partnerships. In August, 1997, the Supreme Court directed that the foregoing claims proceed to arbitration. As a result, Mr. Malkin and Wien & Malkin LLP filed an arbitration complaint against Helmsley-Spear, Inc. and Mrs. Helmsley before the American Arbitration Association. Helmsley-Spear, Inc. and Mrs. Helmsley served answers denying liability and asserting various affirmative defenses and counterclaims; and Mr. Malkin and Wien & Malkin LLP filed a reply denying the counterclaims. By agreement dated December 16, 1997, Mr. Malkin and Wien & Malkin LLP (each for their own account and not in any representative capacity) reached a settlement with Mrs. Helmsley of the claims and counterclaims in the arbitration and litigation between them. Mr. Malkin and Wien & Malkin LLP are continuing their prosecution of claims in the arbitration for relief against Helmsley-Spear, Inc., including its termination as the leasing and managing agent for various entities and properties, including the Registrant's Sublessee. Item 4. Submission of Matters to a Vote of Participants. During the fourth quarter of the fiscal year ended December 31, 1997, Registrant did not submit any matter to a vote by the Participants through the solicitation of proxies or otherwise. -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 securi- ties 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 169 transfers. In 21 instances, the indicated purchase price was equal to 1.5 times the face amount of the participation transferred, i.e., $15,000 for a $10,000 participation. In seven instances, the indicated purchase price was equal to 2.25 times the face amount of the Participation transferred. In one instance, the purchase price was equal to 1.7 times the face amount of the participation transferred. In all other cases, no consideration was indicated. (b) As of December 31, 1997, there were 2,622 holders of Participations of record. (c) Registrant does not pay dividends. During the year ended December 31, 1997, Registrant made regular monthly distributions of $98.21 for each $10,000 Participation. There was Overage Rent payable of $2,401,300 for the year ended December 31, 1997 and Registrant made additional distributions for each $10,000 Participation of $321.61 on March 5, 1998. See Item 1 hereof. There are no restrictions on Registrant's present or future ability to make distributions; however, the amount of such distri- butions, particularly distributions of Overage Rent, depends solely on Sublessee's ability to make payments of Basic Rent and -7- 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. -8- Item 6. EMPIRE STATE BUILDING ASSOCIATES SELECTED FINANCIAL DATA
Year ended December 31, 997 1996 1995 1994 1993 Basic rent income.... $6,018,750 $6,018,750 $6,018,750 $6,018,750 $ 6,018,750 Overage rent income.. 2,401,300 0 0 3,597,887 7,712,818 Dividend income...... 10,377 8,647 35,556 39,667 60,657 Total revenues.... $8,430,427 $6,027,397 6,054,306 $9,656,304 $13,792,225 Net income............ $4,752,560 $3,689,511 $3,716,420 $7,100,005 $10,987,930 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during the year............. $ 1,440 $ 1,118 $ 1,126 $ 2,152 $ 3,330 Total assets.......... $5,930,702 $3,727,494 $3,927,316 $7,527,783 $11,620,333 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............. $ 1,179 $ 1,118 $ 1,126 $ 2,152 $ 3,330 Return of capital.. -0- 61 1,089 1,241 1,586 Total distributions.$ 1,179 $ 1,179 $ 2,215 $ 3,393 $ 4,916
-9- 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 Counsel include legal, administrative services and financial services. The legal and administrative services include acting as general 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. Counsel also prepares quarterly, annual and other periodic filings with the Securities and Exchange Commission and applicable state authorities and distributes to the Participants quarterly source of distribution reports. Registrant's results of operations are affected primarily by the amount of rent payable to it under the Sublease. The amount of Overage Rent payable to Registrant is affected by (i) the cycles in the New York City economy and real estate rental market and (ii) the cost of the Property improvement program described herein under Other Information. It is difficult for management to forecast the New York City real estate market over the next few years. A decrease as compared with a prior year or the absence of Overage Rent results in a reduction as against such prior year in the dollar amount of distributions made to the Participants and a reduction in 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. -10- 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, 1997 as compared with the year ended December 31, 1996. Such increase resulted from the receipt of Overage Rent in the year 1997 and an increase in dividend income earned as compared with the year ended December 31, 1996. Total income decreased for the year ended December 31, 1996 as compared with the year ended December 31, 1995 because of a reduction in dividend income earned. See Note 3 of the Notes. (b) Total expenses increased for the year ended December 31, 1997 as compared with the year ended December 31, 1996. Such increase was the result of an increase in additional payment for supervisory services because of the receipt of Overage Rent and the incurrence of legal fees during the year ended December 31, 1997. Total expenses were the same for the years ended December 31, 1996 and December 31, 1995. 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. Sublessee sought permission to appeal the Appellate Division's decision and order to the Court of Appeals. The Court of Appeals denied Sublessee's motion. In May, 1996, Sublessee entered into a settlement agreement with the State. 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. Installment payments to the State of $40,000 per month have been made by Sublessee commencing on August 1, 1996. It is anticipated that New York State will seek to impose liability on Sublessee for State utility tax for periods after December 31, 1992. The amount of such additional tax has yet to be determined. The City of New York has asserted a utility tax deficiency in the amount of $277,125 against Sublessee, through December 31, 1994, in connection with water, steam and non-metered electricity rent inclusion charges to tenants, plus accrued interest of approximately $163,012 through December 31, 1997. 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 -11- presently be determined. It is anticipated that New York City will seek to impose liability on Sublessee for additional New York City utility tax for periods after December 31, 1994. The amount of such additional tax has yet to be determined. Liquidity and Capital Resources There has been no significant change in Registrant's liquidity or capital resources for the fiscal year ended December 31, 1997 as compared with the fiscal year ended December 31, 1996. 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 only 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 1999 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. The Sublessee anticipates that the costs of improvements to be incurred will reduce Overage Rent during the years 1998 and 1999, but should have no effect on the payment of Basic Rent in those years. Under Sublessee's management, the Building recently won three awards from the Building Owners and Management Association ("BOMA") (BOMA/NY Award 1989; BOMA Middle Atlantic Region Award -12- 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 Jacobs Evall & Blumenfeld LLP, immediately following, are being filed in response to this item. Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable. -13- 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, 1997 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 Stanley Katzman 65 None Attorney-at-Law Senior Partner 1996 Wien & Malkin LLP, Counsellors- at-Law John L. Loehr 61 None Attorney-at-Law Retired former 1996 Senior Partner Wien & Malkin LLP, Counsellors- at-Law Peter L. Malkin 64 None Attorney-at-Law Senior Partner 1961 Wien & Malkin LLP, Counsellors- at-Law As stated above, two of the Partners are current members of Counsel and one Partner is now a retired former member of Counsel. See Items 1, 11, 12 and 13 hereof for a description of the services rendered by, and the compensation paid to, Counsel 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 -14- 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: Stanley Katzman 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. John L. Loehr is a general partner in Garment Capitol Associates and 60 East 42nd St. Associates. 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. 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, 1997 by Registrant to any of the Partners as such. Registrant pays Counsel, 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 Counsel a total of $227,161 (consisting of $100,000 as an annual basic payment for supervisory services and $127,161 as an additional payment for supervisory services) for supervisory services rendered during the fiscal year ended December 31, 1997. The supervisory services include, among other items, the preparation of reports and related documentation required by the Securities and Exchange Commission, the monitoring of all areas of federal and local securities law 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, Counsel 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 Counsel. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) Registrant has no voting securities. See Item 5 hereof. At December 31, 1997, no person owned of record or was known by Registrant to own beneficially more than 5% of the outstanding Participations. -15- (b) At December 31, 1997, 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 John L. Loehr $ 40,000 .1212% in Partnership 286 Alpine Circle Interests Rivervale, NJ 07675 Peter L. Malkin $138,750 .4205% 21 Bobolink Lane Greenwich, CT 06830 At such date, certain of the Partners (or their respective spouses) held additional Participations as follows: Stanley Katzman owned of record as trustee but not beneficially $27,500 of Participations. Mr. Katzman disclaims any beneficial ownership of such Participations. Peter L. Malkin owned of record as trustee or co-trustee but not beneficially, $175,000 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations. Isabel W. Malkin, the wife of Peter L. Malkin, owned of record and beneficially, $153,333.34 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations. (c) Not applicable. Item 13. Certain Relationships and Related Transactions. (a) As stated in Item 1 hereof, Mr. Stanley Katzman, Mr. John L. Loehr and Mr. Peter L. Malkin 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, two of the Partners being current members of Counsel and one Partner being a retired, former member of Counsel (which represents 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 -16- 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. 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, two of the Partners, by reason of their respective interest in Counsel, are entitled to receive their pro rata share of any legal fees or other remuneration paid to Counsel for professional services rendered to Registrant and Sublessee. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Counsel relating to supervisory services provided by Counsel. Reference is also made to Items 1 and 10 hereof for a description of the relationship between Registrant and Counsel, 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 Counsel arise solely from the ownership of such Partner's interest in Counsel. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Counsel relating to supervisory services provided by Counsel. (b) Reference is made to Paragraph (a) above. (c) Not applicable. (d) Not applicable. -17- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial Statements: Consent of Jacobs Evall & Blumenfeld LLP, Certified Public Accountants, dated March 12, 1998. Accountant's Report of Jacobs Evall & Blumenfeld LLP, Certified Public Accountants, dated March 4, 1998. Balance Sheets at December 31, 1997 and at December 31, 1996 (Exhibit A). Statements of Income for the fiscal years ended December 31, 1997, 1996 and 1995 (Exhibit B). Statement of Partners' Capital for the fiscal year ended December 31, 1997 (Exhibit C-1). Statement of Partners' Capital for the fiscal year ended December 31, 1996 (Exhibit C-2). Statement of Partners' Capital for the fiscal year ended December 31, 1995 (Exhibit C-3). Statements of Cash Flows for the fiscal years ended December 31, 1997, 1996 and 1995 (Exhibit D). Notes to Financial Statements for the fiscal years ended December 31, 1997, 1996 and 1995. (2) Financial Statement Schedules: List of Omitted Schedules. Real Estate and Accumulated Depreciation - December 31, 1997 (Schedule III). (3) Exhibits: See Exhibit Index. (b) No Form 8-K was filed by Registrant for the final quarter of 1997. -18- [LETTERHEARD OF JACOBS EVALL & BLUMENFELD LLP CERTIFIED PUBLIC ACCOUNTANTS] March 12, 1998 Empire State Building Associates New York, N. Y. We consent to the use of our independent accountants' report dated March 4, 1998 covering our audits of the accompanying financial statements of Empire State Building Associates in connection with and as part of your December 31, 1997 annual report (Form 10-K) to the Securities and Exchange Commission. Jacobs Evall & Blumenfeld LLP Certified Public Accountants -19- 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, 1997 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1997, 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 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. Jacobs Evall & Blumenfeld LLP Certified Public Accountants New York, N. Y. March 4, 1998 -20- EXHIBIT A EMPIRE STATE BUILDING ASSOCIATES BALANCE SHEETS A S S E T S
December 31, 1997 1996 Current Assets: Cash and cash equivalents (Note 10): The Chase Manhattan Bank........................... $ 2,988 $ 2,888 Distribution account held by Wien & Malkin LLP................................... 324,111 324,111 Fidelity U.S. Treasury Income Portfolio............. 51,430 41,153 Additional rent advance account held by Wien & Malkin LLP.......................... 2,400,000 - 2,778,529 368,152 Additional rent due from Empire State Building Company, a related party.................... 1,300 - Prepaid rent.......................................... 23,831 23,831 TOTAL CURRENT ASSETS............................ 2,803,660 391,983 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..................... 35,872,958 35,664,489 3,127,042 3,335,511 TOTAL ASSETS....................................$ 5,930,702 $ 3,727,494 LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accrued legal fees, to a related party (Note 9).......$ 1,272,237 $ - Accrued supervisory services, to a related party (Note 5) 67,744 - TOTAL LIABILITIES......................... 1,339,981 - Contingencies (Note 9)............................ Partners' Capital (Exhibit C)...................... 4,590,721 3,727,494 TOTAL LIABILITIES AND PARTNERS' CAPITAL.... $ 5,930,702 $ 3,727,494
See accompanying notes to financial statements. -21- EXHIBIT B EMPIRE STATE BUILDING ASSOCIATES STATEMENTS OF INCOME
Year ended December 31, 1997 1996 1995 Revenues: Rent income, from a related party (Note 3). $8,420,050 $6,018,750 $6,018,750 Dividend income............................ 10,377 8,647 35,556 8,430,427 6,027,397 6,054,306 Expenses: Leasehold rent (Note 4).................... 1,970,000 1,970,000 1,970,000 Supervisory services, to a related party (Note 5)............................ 227,161 159,417 159,417 Legal fees, to a related party (Note 9).... 1,272,237 - - Amortization of leasehold (Note 2)......... 208,469 208,469 208,469 3,677,867 2,337,886 2,337,886 NET INCOME, CARRIED TO PARTNERS' CAPITAL, (NOTE 8)............... $4,752,560 $3,689,511 $3,716,420 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each year............................ $ 1,440 $ 1,118 $ 1,126
See accompanying notes to financial statements. -22- EXHIBIT C-3 EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1995
Capital Capital January 1, Share of December 31, 1995 net income Distributions 1995 Donald A. Bettex Group.... $2,506,510 $1,238,806 $2,436,211 $1,309,105 C. Michael Spero Group (formerly Alvin Silverman Group)........ 2,506,510 1,238,807 2,436,211 1,309,106 Peter L. Malkin Group..... 2,506,510 1,238,807 2,436,212 1,309,105 $7,519,530 $3,716,420 $7,308,634 $3,927,316
See accompanying notes to financial statements. -23- EXHIBIT C-1 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 C-2 EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1996
Capital Capital January 1, Share of December 31, 1996 net income Distributions 1996 John L. Loehr Group (formerly Donald A. Bettex Group)............$1,309,105 $1,229,837 $1,296,444 $ 1,242,498 Stanley Katzman Group (formerly C. Michael Spero Group)............. 1,309,106 1,229,837 1,296,445 1,242,498 Peter L. Malkin Group...... 1,309,105 1,229,837 1,296,444 1,242,498 $3,927,316 $3,689,511 $3,889,333 $3,727,494
See accompanying notes to financial statements. -25- EXHIBIT D EMPIRE STATE BUILDING ASSOCIATES STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 1996 1995 Cash flows from operating activities: Net income............................. $ 4,752,560 $3,689,511 $ 3,716,420 Adjustments to reconcile net income to cash provided by operating activities: Amortization of leasehold........... 208,469 208,469 208,469 Changes in operating assets and liabilities: Additional rent due from Empire State Building Company, a related party. (1,300) - 97,887 Accrued supervisory services, to a related party................. 67,744 - (8,253) Accrued legal fees, to a related party 1,272,237 - - Net cash provided by operating activities............ 6,299,710 3,897,980 4,014,523 Cash flows from financing activities: Cash distributions................ .... (3,889,333) (3,889,333) (7,308,634) Net cash used in financing activities..................... (3,889,333) (3,889,333) (7,308,634) Net increase (decrease) in cash and cash equivalents........... 2,410,377 8,647 (3,294,111) Cash and cash equivalents, beginning of year. 368,152 359,505 3,653,616 CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 2,778,529 $ 368,152 $ 359,505
See accompanying notes to financial statements. -26- 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, 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. In 1988, Associates determined that it would exercise its first renewal option under the lease, and did so in January 1989. Amortization of the leasehold is being computed by the straight-line method over the 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 often makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Related Party Transactions - Rent Income Rent income for the years ended December 31, 1997, 1996 and 1995, totalling $8,420,050, $6,018,750 and $6,018,750, 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, 1997 1996 1995 Minimum net basic rent...... $6,018,750 $6,018,750 $ 6,018,750 Additional rent earned...... 2,401,300 - - $8,420,050 $6,018,750 $ 6,018,750 -27- 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 the remaining three 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"), over the first renewal term of the lease, 21 years, from January 5, 1992 to 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, reportedly 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, 1997, 1996 and 1995, totalling $227,161, $159,417 and $159,417, respectively, represent fees paid to 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. -28- 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, 1997, 1996 and 1995. 7. Determination of Distributions to Participants Distributions to participants in 1997, 1996 and 1995 of $3,889,333, $3,889,333 and $7,308,634, respectively, represented the following:
1997 1996 1995 Minimum annual rent.. $ 6,018,750 $ 6,018,750 $ 6,018,750 Additional rent, earned in previous year, distributed in current year........ - - 3,597,887 Dividend income earned in previous year, distributed in current year..... - - 39,667 6,018,750 6,018,750 9,656,304 Less: Leasehold rent expense......... $1,970,000 $1,970,000 $1,970,000 Supervisory services paid... 159,417 159,417 377,670 2,129,417 2,129,417 2,347,670 Distributions to participants.. $ 3,889,333 $ 3,889,333 $ 7,308,634
-29- 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 1997, 1996 and 1995 based on 3,300 participation units outstanding during each year, consisted of the following: Year ended December 31, 1997 1996 1995 Income........................ $1,179 $1,118 $1,126 Return of capital............. - 61 1,089 TOTAL DISTRIBUTIONS....... $1,179 $1,179 $2,215 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, Legal Fees and Related Party Transactions and Subsequent Event a. On October 21, 1991, in an action entitled Studley v. Empire State Building Associates et al., the holder of a $20,000 original participation in Associates brought suit in New York Supreme Court, New York County against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and Alvin Silverman), in their individual capacities and Wien, Malkin & Bettex (currently "Wien & Malkin LLP"), counsel to Associates. The suit claims that the defendants had engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations from the participants in Associates in September 1991 and in relation to other unrelated acts of the Agents and the sublessee. By order dated July 14, 1997, the Court granted defendants' application for summary judgment and dismissal of the action. Plaintiff's appeal of the dismissal is pending. Associates is a nominal defendant and the complaint does not seek any direct relief from it; accordingly, no loss or other unfavorable outcome of the action against Associates is anticipated. b. In December 1994, Associates received a notice of default from Trump Empire State Partners (Note 4) ("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 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. -30- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 9. Litigation, Legal Fees and Related Party Transactions and Subsequent Event (continued) Associates' and Company's suit also seeks an injunction to prevent Trump from implementing the notice of default. 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. 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 February 15, 1995, Trump filed an action against Associates, Company, Wien & Malkin LLP, Harry B. Helmsley, a partner in Company, Hel msley-Spear, Inc. (the management company of the Empire State Building (the "Building")), and the Agents for Associates 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 the action. Trump appealed this Order. The Appellate Court has unanimously affirmed the 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 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. By decision and order dated October 24, 1996, the Court sustained Associates' and Company's claims concerning the parties who may act as owner of the Property under the Building Code, but dismissed Associates' and Company's claims against Trump and co-defendants for money damages. Associates and Company 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. c. Associates is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled New York Skyline Inc. v. Empire State Building Company, Empire State Building Associates, Neil H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit, which was brought by a tenant in the Building and was filed on December 23, 1997, seeks at least $205,000,000 in damages. -31- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 9. Litigation, Legal Fees and Related Party Transactions and Subsequent Event (continued) In its complaint, plaintiff-tenant asserts thirteen causes of action (twelve of which are against Company) in connection with its leases and license agreements of space in the Building and alleges that it is entitled to, among other things, specific performance as to its alleged rights under its leases and licensing agreements with Company, a declaratory judgment as to the rights of the parties under the leases and licensing agreements, any monies allegedly due plaintiff under those agreements, as well as injunctive relief and additional money damages. While the complaint includes Associates as a named defendant, it does not allege or identify any agreement between plaintiff and Associates or any other basis of liability on Associates' part to plaintiff. On or about February 5, 1998, plaintiff served an amended complaint which, among other things, added Kessner & Cyruli, f/n/a Nell H. Kessner & Associates, former landlord-tenant counsel for the Building, and Eileen Aluska, a former Helmsley-Spear, Inc. employee, as party defendants. The amended complaint asserts eleven causes of action, similar to those asserted in the original complaint. Associates has until March 16, 1998 to answer or make a motion with respect to the amended complaint. Associates intends to contest the case vigorously. Because the action is still in the pleading stage and pre-trial discovery has not yet started, counsel for Associates has not formed a professional conclusion that an adverse outcome is either probable or remote. The accompanying statement of income reflects an expense of $1,272,237 and the accompanying balance sheet reflects a corresponding accrued liability of $1,272,237 for reimbursement to the Agents from Associates of their legal and accounting expenses relating to the Studley and Trump suits. Through December 31, 1997, legal and accounting expenses in connection with the Studley suit amounted to $960,065 of which $647,761 has been advanced by Wien & Malkin LLP, counsel (a related party), to third party professional firms and $312,304 represents accumulated professional time of Wien & Malkin LLP. Counsel has advised that its records at December 31, 1997 also indicate $312,172 in accumulated professional time and disbursements related to the Trump suits. Substantial additional legal and accounting costs may be incurred in both 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. -32- EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 10. Concentration of Credit Risk Associates maintains cash balances in a bank, money market fund (Fidelity U.S. Treasury Income Portfolio), additional rent advance account held by Wien & Malkin LLP (Note 5), which was transferred to the money market fund in January 1998, 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, 1997 was completely insured. The cash in the money market fund and in the two accounts held by Wien & Malkin LLP are not insured. The funds held in the distribution account were paid to the participants on January 1, 1998. -33- 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. -34- SCHEDULE III EMPIRE STATE BUILDING ASSOCIATES Real Estate and Accumulated Depreciation December 31, 1997 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............................. $35,872,958(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, 1997, December 31, 1996 and December 31, 1995. The costs for federal income tax purposes are the same as for financial statement purposes. (b) Accumulated amortization Balance at January 1, 1995 $35,247,551 Amortization: F/Y/E 12/31/95 $208,469 12/31/96 208,469 12/31/97 208,469 625,407 Balance at December 31, 1997 $35,872,958 -35- 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 a Power of Attorney, dated August 6, 1996 (the "Power"). EMPIRE STATE BUILDING REGISTRANT (Registrant) By /s/Stanley Katzman Stanley Katzman, Attorney-in-Fact* Date: April 15, 1998 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 15, 1998 ______________________ * Mr. Katzman supervises accounting functions for Registrant. -36- EXHIBIT INDEX Number Document Page* 3(a) Registrant's Partnership Agreement dated July 11, 1961, filed as Exhibit No. 1 to Registrant's Registration Statement on Form S-1 as amended (the "Registration Statement") by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 3(b) Amended Business Certificate of Registrant filed with the Clerk of New York County on August 19, 1996 reflecting a change in the Partners of Registrant which was filed as Exhibit 3(b) to Registrant's Annual Report on 10-K for the fiscal year ended December 31, 1996 and is incorporated by reference as an exhibit hereto. 4 Registrant's form of Participating Agreement, filed as Exhibit No. 6 to the Registration Statement by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 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. -37- 10(c) Sublease dated December 27, 1961 between Registrant and Sublessee, filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(d) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. 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 Letter to Participants dated April 1, 1998. 24 Power of Attorney dated August 6,1996, between Peter L. Malkin, John L. Loehr and Stanley Katzman, the partners of Registrant and Richard A. Shapiro and Stanley Katzman, filed as Exhibit 25 to Registrant's 10-Q for the quarter ended September 30, 1996 and incorporated by reference as an exhibit hereto. 27 Financial Data Schedule of Registrant for the fiscal year ended December 31, 1997. -38- EX-13 2 [LETTERHEARD OF WIEN & MALKIN LLP] April 1, 1998 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, 1997 and the comparative statement of operations under the sublease for the years 1997 and 1996. 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 1997 was $5,802,601, so that the sublessee paid additional rent of $2,401,300. No additional rent was paid for the years 1996 or 1995. For the year 1997, professional fees of $1,883,141 incurred by the sublessee include $1,481,778 for outside counsel and other independent professional firms. Of this amount, $671,394 was incurred for the fees and disbursements of Paul, Weiss, Rifkind, Wharton & Garrison in connection with the litigation commenced by Donald Trump and foreign investors who purportedly acquired fee title to the Empire State Building in 1994, subject to the master lease of Empire State Building Associates through January 5, 2076. The distribution from the additional rent is $1,129,063. In accordance with the partnership agreement, 6% of the distribution, $67,744, has been paid to Wien & Malkin LLP. $1,061,319 was distributed to participants on March 5, 1998 and represented 3.2% of the original cash investment of $33,000,000. Together with regular monthly distributions during the year 1997, total distributions to participants for 1997 were at the rate of 15%. $1,272,237 will be applied towards the expenses incurred in defending the Trump and Studley litigations, about which you have been previously advised. To permit monthly distributions without reduction during the improvement program, from 1991 through 1997, Wien & Malkin LLP from its own funds has advanced payment for such expenses to third party professional firms totalling $647,761 relating to the Studley litigation and provided services and advanced disbursements totalling $624,476 relative to the Trump and the Studley litigations on behalf of Associates. Re: Empire State Building Associates 2. Without the litigation expenses, total distributions to participants would have been about 18.62% for the year 1997. We expect both litigations to conclude successfully during 1998. We also expect that the last major component of the improvement program, the restoration of the building facade, should be substantially complete by the end of 1998. Without this substantial expense, which has been paid entirely from building cash flow, the year-end extra distribution to participants for 1998 will be greater. For financial statement purposes, while the income of Empire State Building Associates for the year 1997 was $4,752,560, distributions of $4,950,652, including the additional distribution of $1,061,319, were made to participants. The difference is treated as a return of capital investment. It arises mainly because of amortization of the leasehold. Taking into account that a portion of prior distributions constituted a return of capital, the average capital investment for the year 1997 was $4,159,108. Distributions of $4,950,652 were about 119.0% on the average capital. The book value on December 31, 1997 of an original cash investment of $10,000 was $1,391. 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 1, 1997 to be reported on your 1997 income tax returns. The payment for 1997 was mailed to you on March 5, 1998 and will be reportable on your 1998 income tax returns. Schedule K-1 forms (Form 1065), containing 1997 tax informa- tion, were mailed to the participants on March 13, 1998. If you have any question about the enclosed material, please communicate with our office. Cordially yours, WIEN & MALKIN LLP By: Stanley Katzman SK:mg Encs. [LETTERHERAD OF JACOBS EVALL & BLUMENFELD LLP CERTIFIED PUBLIC ACCOUNTANTS] INDEPENDENT ACCOUNTANTS' REPORT To the participants in Empire State Building Associates (a Partnership): We have audited the accompanying balance sheet of Empire State Building Associates ("Associates") as of December 31, 1997, and the related statements of income, partners' capital and cash flows for the year then ended. These financial statements are the responsibility of Associates' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Empire State Building Associates as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 7 to the financial statements, Associates has been included as a defendant in actions with other related parties, including the Agents for Associates and Empire State Building Company, as sublessee. Jacobs Evall & Blumenfeld LLP Certified Public Accountants 420 Lexington Avenue New York, N. Y. 10170 March 4, 1998 EMPIRE STATE BUILDING ASSOCIATES BALANCE SHEET DECEMBER 31, 1997 Assets Cash and cash equivalents: The Chase Manhattan Bank $ 2,988 Distribution account held by Wien & Malkin LLP 324,111 Fidelity U.S. Treasury Income Portfolio 51,430 Additional rent advance account held by Wien & Malkin LLP 2,400,000 2,778,529 Additional rent due from Empire State Building Company 1,300 Prepaid rent 23,831 Leasehold on Empire State Building, 350 Fifth Avenue, New York, N.Y. $39,000,000 Less: Accumulated amortization of leasehold 35,872,958 3,127,042 Total assets $5,930,702 Liabilities and partners' capital Liabilities: Accrued supervisory services $ 67,744 Accrued legal fees 1,272,237 Total liabilities $1,339,981 Contingency Partners' capital 4,590,721 Total liabilities and partners' capital $5,930,702 See accompanying notes to financial statements. EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1997 Income: Basic rent $6,018,750 Additional rent 2,401,300 Dividend income 10,377 Total income 8,430,427 Expenses: Leasehold rent $1,970,000 Legal fees 1,272,237 Supervisory services 227,161 Total expenses 3,469,398 Income before amortization of leasehold 4,961,029 Amortization of leasehold 208,469 Net income $4,752,560 See accompanying notes to financial statements. EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1997 Partners' capital, January 1, 1997 $ 3,727,494 Add, Net income for the year ended December 31, 1997 4,752,560 8,480,054 8,480,054 Less, Distributions: Monthly distributions, January 1, 1997 through December 31, 1997 3,889,333 Partners' capital, December 31, 1997 $ 4,590,721 See accompanying notes to financial statements. EMPIRE STATE BUILDING ASSOCIATES STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 Cash flows from operating activities Net income $ 4,752,560 Adjustments to reconcile net income to cash provided by operating activities: Amortization of leasehold 208,469 Changes in operating assets and liabilities: Additional rent due from Empire State Building Company (1,300) Accrued supervisory services 67,744 Accrued legal fees 1,272,237 Net cash provided by operating activities 6,299,710 Cash flows from financing activities Monthly distributions to participants (3,889,333) Net cash used in financing activities (3,889,333) Net increase in cash and cash equivalents 2,410,377 Cash and cash equivalents, beginning of year 368,152 Cash and cash equivalents, end of year $ 2,778,529 See accompanying notes to financial statements. EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. Business Activity Empire State Building Associates ("Associates") is a general partnership which owns the master leasehold on the Empire State Building, located at 350 Fifth Avenue, New York City. Associates subleases the property to Empire State Building Company. 2. Summary of Significant Accounting Policies Cash and cash equivalents Cash and cash equivalents include investments in money market funds and all highly liquid debt instruments purchased with a maturity of three months or less. Leasehold and amortization The leasehold is stated at cost. In 1988 Associates determined that it would exercise its first renewal option under the lease, and did so in January 1989. Amortization of the leasehold is being computed by the straight-line method over the revised estimated useful life of 25 years, from January 1, 1988 to January 5, 2013 (see Note 4). Use of estimates In preparing financial statements in conformity with generally accepted accounting principles, management often makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Rent Income and Related Party Transactions The sublease provides for the same first renewal term and additional renewal options as the leasehold (see Note 4), less one day. In accordance with the terms of the operating sublease, annual minimum net basic rent is $6,018,750 during the first renewal term, and $5,895,625 during each of the remaining three renewal terms. EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 3. Rent Income and Related Party Transactions (continued) Additional rent under the sublease is payable in an amount equal to 50% of the sublessee's annual net income, as defined, in excess of $1,000,000. Additional rent earned for the year 1997 was $2,401,300. A partner in Associates is also a partner in the sublessee. 4. Leasehold Rent Pursuant to an operating lease dated December 27, 1961, as modified February 15, 1965, with the Prudential Insurance Company of America ("Prudential"), leasehold rent represents the net basic rent of $1,970,000 per annum for the first renewal term from January 5, 1992 to January 5, 2013. The lease contains options for Associates to renew the leasehold for three additional terms of twenty-one years each. The basic rent is to be reduced to $1,723,750 per annum for each of the remaining three renewal terms. On November 27, 1991, Prudential sold the property to E. G. Holding Co., Inc. which, through merger and conveyance, reportedly transferred its interest as lessor to Trump Empire State Partners (see Note 7). Associates' rights under the master leasehold remain unchanged. 5. Supervisory Services and Related Party Transactions Payments for supervisory services, including disbursements and cost of accounting services, are made to the firm of Wien & Malkin LLP. Some members of that firm are partners in Associates. 6. Income Taxes Net income is computed without regard to income tax expense since Associates does not pay a tax on its income; instead, any such taxes are paid by the participants in their individual capacities. EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 7. Litigation, Legal Fees and Related Party Transactions a. On October 21, 1991, in an action entitled Studley v. Empire State Building Associates et al., the holder of a $20,000 original participation in Associates brought suit in New York Supreme Court, New York County against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and Alvin Silverman), in their individual capacities and Wien, Malkin & Bettex (currently "Wien & Malkin LLP"), counsel to Associates. The suit claims that the defendants had engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations from the participants in Associates in September 1991 and in relation to other unrelated acts of the Agents and the sublessee. By order dated July 14, 1997, the Court granted defendants' application for summary judgment and dismissal of the action. Plaintiff's appeal of the dismissal is pending. Associates is a nominal defendant and the complaint does not seek any direct relief from it; accordingly, no loss or other unfavorable outcome of the action against Associates is anticipated. b. In December 1994, Associates received a notice of default from Trump Empire State Partners ("Trump"). The Trump default notice to Associates claims that Associates was in violation of its master lease because of extensive work which the sublessee, Empire State Building Company ("Company"), had undertaken as part of an improvement program that commenced before Trump reportedly acquired its interest In the property in 1994. Trump's notice also complains that the building is in need of repairs. On February 14, 1995, Associates and Company filed an action in New York State Supreme Court against Trump for a declaratory judgment that none of the matters set forth in the notice of default constitutes a violation of the master lease or sublease, and that the notice of default is entirely without merit. Associates' and Company's suit also seeks an injunction to prevent Trump from implementing the notice of default. 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. 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 February 15, 1995, Trump filed an action against Associates, Company, Wien & Malkin LLP, Harry B. Helmsley, a partner in Company, Helmsley-Spear, Inc. (the management company of the Empire State Building), and the Agents for Associates 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 the action. Trump appealed this Order. The Appellate Court has unanimously affirmed the dismissal of Trump's claims. EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 7. Litigation, Legal Fees and Related Party Transactions (continued) 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 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. By decision and order dated October 24, 1996, the Court sustained Associates' and Company's claims concerning the parties who may act as owner of the Property under the Building Code, but dismissed Associates' and Company's claims against Trump and co-defendants for money damages. Associates and Company 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. c. Associates is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled New York Skyline Inc. v. Empire State Building Company, Empire State Building Associates, Neil H. Kessner, Helmsley-Spear, Inc. and Stephen A. Tole. This lawsuit, which was brought by a tenant in the Building and was filed on December 23, 1997, seeks at least $205,000,000 in damages. In its complaint, plaintiff-tenant asserts thirteen causes of action (twelve of which are against Company) in connection with its leases and license agreements of space in the Building and alleges that it is entitled to, among other things, specific performance as to its alleged rights under its leases and licensing agreements with Company, a declaratory judgment as to the rights of the parties under the leases and licensing agreements, any monies allegedly due plaintiff under those agreements, as well as injunctive relief and additional money damages. While the complaint includes Associates as a named defendant, it does not allege or identify any agreement between plaintiff and Associates or any other basis of liability on Associates' part to plaintiff. On or about February 5, 1998, plaintiff served an amended complaint which, among other things, added Kessner & Cyruli, f/n/a Nell H. Kessner & Associates, former landlord-tenant counsel for the Building, and Eileen Aluska, a former Helmsley-Spear, Inc. employee, as party defendants. The amended complaint asserts eleven causes of action, similar to thoseasserted in the original complaint. Associates has until March 16, 1998 to answer or make a motion with respect to the amended complaint. Associates intends to contest the case vigorously. Because the action is still in the pleading stage and pre-trial discovery has not yet started, counsel for Associates has not formed a professional conclusion that an adverse outcome is either probable or remote. EMPIRE STATE BUILDING ASSOCIATES NOTES TO FINANCIAL STATEMENTS (Continued) 7. Litigation, Legal Fees and Related Party Transactions (continued) The accompanying statement of income reflects an expense of $1,272,237 and the accompanying balance sheet reflects a corresponding accrued liability of $1,272,237 for reimbursement to the Agents from Associates of their legal and accounting expenses relating to the Studley and Trump suits. Through December 31, 1997, legal and accounting expenses in connection with the Studley suit amounted to $960,065 of which $647,761 has been advanced by Wien & Malkin LLP, counsel (a related party), to third party professional firms and $312,304 represents accumulated professional time of Wien & Malkin LLP. Counsel has advised that its records at December 31, 1997 also indicate $312,172 in accumulated professional time and disbursements related to the Trump suits. Substantial additional legal and accounting costs may be incurred in both 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. 8. Concentration of Credit Risk Associates maintains cash balances in a bank, money market fund (Fidelity U.S. Treasury Income Portfolio), additional rent advance account held by Wien & Malkin LLP (which was transferred to the money market fund in January 1998) 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, 1997 was completely insured. The cash in the money market fund and the two accounts held by Wien & Malkin LLP are not insured. The funds held in the distribution account were paid to the participants on January 1, 1998. [LETTERHEARD 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, 1997 and 1996 for the purpose of determining "Net Operating Profit" and "Overage Rent" as thoseterms are defined in Section 2.05 of Agreement of Sublease dated December 27, 1961. During the years ended December 31, 1997 and 1996, 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, 1997 and 1996, in conformity with Section 2.05 of the aforementioned Agreement dated December 27, 1961. As discussed in Note 3 to the Combined Statement of Income, the Empire State Building Company and other related parties have been named as defendants in legal actions. All defendants have denied all material allegations. It is not possible at this time to predict the outcome or range of potential loss, if any, which might result from those actions. No provision for any loss has been made in the accompanying Combined Statement of Income. New York, NY February 23, 1998 Empire State Building and Observatory COMPARATIVE COMBINED STATEMENT OF INCOME Increase 1997 1996 (Decrease) INCOME Rent, including electricity $53,800,622 $52,196,949 $1,603,673 Observatory admissions 16,378,777 12,317,087 4,061,690 Other observatory income 1,194,070 1,098,580 95,490 Antenna rent 5,442,661 5,280,773 161,888 Lease cancellation 113,919 6,409 107,510 Percentage rent 625,929 456,780 169,149 Other 879,686 592,370 287,316 Total income 78,435,664 71,948,948 6,486,716 OPERATING EXPENSES Rent 6,018,749 6,018,750 (1) Real estate taxes 19,766,635 20,748,418 (981,783) Wages, contract cleaning and protection ser 11,808,525 11,067,231 741,294 Electricity 4,745,390 4,712,758 32,632 Tenants' and building alterations, repairs 12,528,746 18,953,112 (6,424,366) Management fees and leasing commissions (Note 4) 2,872,332 3,100,637 (228,305) Observatory: Wages 1,767,377 1,521,091 246,286 Contracted security 2,139,784 180,402 1,959,382 Advertising and public relations 228,608 265,777 (37,169) Payroll taxes and other labor cost 558,923 468,322 90,601 Other taxes and expenses 216,517 189,715 26,802 Steam 1,455,313 1,442,483 12,830 Professional fees (Note 2) 1,883,141 3,091,938 (1,208,797) Payroll taxes and other labor costs 3,265,122 3,112,192 152,930 Insurance 725,396 768,538 (43,142) Water (1995 - 1997) 959,828 172,498 787,330 Rubbish removal 463,205 679,281 (216,076) Advertising 331,726 396,172 (64,446) Telephone 69,572 71,624 (2,052) Fire alarm service 18,955 203,510 (184,555) Directory service 5,072 25,732 (20,660) New York State utility taxes (1987-1992) (Note 4) 0 979,109 (979,109) Interest on NYS utility tax (Note 4) 127,811 681,688 (553,877) Utility and vault taxes 261,128 322,648 (61,520) Paging and other intercommunication 108,499 78,739 29,760 Dues 35,719 61,213 (25,494) Licenses and permits 3,366 16,721 (13,355) Other expenses 267,624 532,681 (265,057) Total expenses before overage rent 72,633,063 79,862,980 (7,229,917) NET OPERATING PROFIT (LOSS) $5,802,601 $(7,914,032)$13,716,633 OVERAGE RENT, 50% OF NET OPERATING PROFIT IN EXCESS OF $1,000,000 $2,401,300 $0 $2,401,300 (See notes to combined statements of income) Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 1. Management fees and leasing commissions for the years 1997 and 1996 were paid to companies in which a partner in Empire State Building Company ("Company"), had a controlling interest. 2. Professional fees include payments to Wien & Malkin LLP. A partner in Wien & Malkin LLP is a partner in Company. 3. Litigation (a) On October 21, 1991, Julien J. Studley ("Studley"), the holder of a $20,000 original participation in Empire State Building Associates ("Associates"), the master lessee of the Empire State Building, brought suit against the Agents for Associates (Peter L. Malkin, Donald A. Bettex and Alvin Silverman); Company; Harry B. Helmsley, a partner in Company; and Wien, Malkin & Bettex, counsel to Associates. The suit claimed that the defendants have engaged in breaches of fiduciary duty and acts of self-dealing in relation to the Agents' solicitation of consents and authorizations of the Participants in Associates in September, 1991, and in relation to other unrelated acts of the Agents and the Sublessee. The suit is styled as a class action, but the Court was not asked to grant class certification. The suit seeks relief including an injunction and an accounting. In 1994, the action was dismissed against Company and Mr. Helmsley. In 1995, the plaintiff amended the complaint to allege, amongst other things, the underpayment by Company of overage rent due to Associates. In June 1996, plaintiff applied for partial summary judgment. In September 1996, defendants applied for summary judgment and dismissal of the action in its entirety. By order and decision dated July 14, 1997, the Court denied the plaintiff's motion for partial summary judgment, granted the defendants' motion for summary judgment, and dismissed the action. Plaintiff appealed that determination and the appeal is pending. 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 from Trump Empire State Partners ("Trump"). The Trump default notice to Associates claims that Associates is in violation of its master lease because of extensive work Company has undertaken as part of an improvement program that commenced before Trump reportedly acquired its interest in the property in 1994. Trump's notice also complains that the building is in need of repairs. On February 14, 1995, Associates and Company filed an action in the New York State Supreme Court against Trump for a declaratory judgment that none of the matters set forth in the notice of default constitutes a violation of the master lease or sublease, and that the notice of default is without merit. Associates' and Company's suit also seeks an injunction to prevent Trump from implementing the notice of default. On March 24, 1995, the New York State Supreme Court, in the foregoing action, granted Associates a preliminary injunction against Trump. Trump, thereafter, served two additional default notices for which the Court had granted additional injunctions against Trump. (See discussion below). Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 3. Litigation (Continued) (b) (Continued) The injunctions prohibit Trump from acting on its notices of default to Associates, at any time, pending the prosecution of claims by Associates and Company for a final judgment granting a permanent injunction and other relief against the Trump defendants. On April 8, 1996, the Court granted Associates additional injunctions against Trump, which further prohibit Trump from seeking to terminate Associate's Master Lease. On August 19, 1996, the Court denied a motion by Trump to set aside the injunction granted in favor of Associates and against Trump on March 24, 1995. The Court has directed the parties in the foregoing action to proceed with pretrial discovery. Trump has appealed the Court's injunction orders, and the Appellate Court has unanimously affirmed the appealed orders. On February 15, 1995, Trump filed an action against Associates, Company, Counsel, Harry B. Helmsley, Helmsley Spear, Inc. (the management company of the Building engaged by Company), and the Partners, in New York State Supreme Court, alleging that the notice of default is valid and seeking damages and related relief based thereon. On October 24, 1996, the Court dismissed all of Trump's claims in their entirety as against Associates and all other defendants in the foregoing action. Trump appealed this ruling and the Appellate Court unanimously affirmed dismissal of Trump's claims. In May 1995, Associates and Company filed a separate legal action against Trump and various affiliated persons for breach of the Master Lease and Sublease and for disparagement of the property in violation of Associates' and Company's leasehold rights. The action was amended to include additional claims by Associates and Company seeking a declaratory judgment that they may act as an owner of the Property for purposes of making applications and related activities pursuant to the New York City Building Code. Trump moved to dismiss the claims concerning the Building Code. By decision and order of October 24, 1996, the Court rejected Trump's motion and sustained Associates' and Company's claims concerning the parties who may act as owner of the Property under the Building Code. The Court directed that the claims should proceed to trial. At the same time, the Court dismissed Associates' and Company's claims against Trump and co- defendants for money damages. The Appellate Court has affirmed that portion of the Court's order dismissing the claims for money damages. 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, 1997, such legal and accounting expenses in connection with the Studley suit have amounted to $960,065, of which $647,761 has been advanced by Wien & Malkin LLP, counsel (a related party), to third-party professional firms, and $312,304 represents accumulated professional time of Wien & Malkin LLP. In addition, counsel has advised that its records at December 31, 1997 indicate $312,172 in accumulated professional time and disbursements related to the Trump suits. Substantial additional legal and accounting costs may be incurred in both cases. The determination of the allocable share of the net legal and accounting costs and disbursements chargeable to Company involve complex issues of fact and law. Because of uncertainties concerning these issues, an amount for professional fees payable by Company cannot be estimated, and therefore, have not been provided for. Resolutions unfavorable to Company could result in material liabilities and charges which have not been reflected in the accompanying financial statements. Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 3. 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, but transferred down to the New York City Civil Court, entitled Robert D. Gould P.C. v. Empire State Building Company, et al. This lawsuit, which is brought by a tenant in the building, seeks $5,000,000 in damages for an alleged breach of lease and tortious conduct. The Supreme Court entered an order precluding plaintiff from proving damages by reason of its failure to serve an adequate bill of particulars. Plaintiff's motion to vacate the order of preclusion was denied, and its time to appeal from the order of preclusion expired. Because plaintiff is precluded from proving damages, the action has been transferred to the New York City Civil Court. Plaintiff has taken no step to prosecute the case subsequent to the transfer. The case has been dormant since 1996. (d) Company is a defendant in an action pending in the United States District Court for the Southern District of New York, entitled R. Gene Smith and Turbo Vision Limited Partnership vs. Neil H. Kessner, Richard C. O'Conor, Neil H. Kessner and Associates, Steven M. Durels, The Empire State Building Company and Stephen A. Tole. This lawsuit, which is brought by the principals of a tenant in the Empire State Building, alleges various claims for damages against the six named defendants in connection with plaintiffs' alleged construction and operation of an entertainment facility in the building. As against the Company, plaintiffs allege fraudulent inducement in connection with matters pertaining to the making of a lease agreement in connection with the foregoing entertainment facility, and to the construction and operation of the foregoing entertainment facility; and breach of the covenant of quiet enjoyment contained in the lease, which was entered into in connection with the foregoing entertainment facility. Plaintiffs allege that they expended funds and incurred future liabilities in connection with the construction and operation of the foregoing entertainment facility, and on each of their claims against the Company, plaintiffs allege damages in an amount not less than $5,000,000 and punitive damages in an amount not less that $10,000,000 (together with interest, attorney's fees, and the costs and disbursements of the action). 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 indemni- fication 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. 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. Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 3. Litigation (Continued) (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. The Company served papers opposing the plaintiff's motion. Oral argument on the motion was held on February 6, 1998. The motion is sub judice for a preliminary injuction and related relief. 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, as party-defendants. The amended complaint asserted eleven causes of action against the Company, similar to those asserted in the original complaint. The Company has until March 16, 1998 to answer or make a motion with respect to the amended complaint. The Company intends to contest the case vigorously. Counsel for Company has not formed a professional conclusion that in the action an adverse outcome is either probable or remote. It is not possible at this time to predict the outcome or range of potential loss, if any, which results from this action. No provision for any liability that may result upon adjudication has been made in the accompanying financial statements. 4. Liabilities The State of New York has asserted utility tax deficiencies of $1,528,816 through December 31, 1992 in connection with water, steam and non-metered electricity rent inclusion charges to tenants, plus estimated accrued interest of $797,713. The Supreme Court, New York County has 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. It is anticipated that New York State will seek to impose liability on Company for State utility tax for periods after December 31, 1992. The amount of such additional tax has yet to be determined. Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 4. Liabilities (Continued) 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 $163,012 through December 31, 1997. Company is contesting the calculation of the City's proposed utility tax deficiency before the New York City Tax Appeals Tribunal. The final outcome of Company's appeal cannot presently be determined. It is anticipated that New York City will seek to impose liability on Company for additional New York City utility tax for periods after December 31, 1994. The amount of such additional tax has yet to be determined. EX-27 3
5 This schedule contains summary financial information extracted from the Company's Balance Sheet as of December 31, 1997 and the Statement Of Income for the year ended December 31, 1997, and is qualified in its entirety by refenence to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 2,778,529 0 0 0 0 2,803,660 39,000,000 35,872,958 5,930,702 0 0 0 0 0 4,590,721 5,930,702 8,420,050 8,430,427 0 0 3,677,867 0 0 4,752,560 0 4,752,560 0 0 0 4,752,560 1,440 1,440 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
-----END PRIVACY-ENHANCED MESSAGE-----