10-K 1 esba10k.txt 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, 2001 [] 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 L.L.C. (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 40 through 41 of this report. Number of pages (including exhibits) in this filing: 41 PART I Item 1. Business. (a) General Registrant was organized on July 11, 1961 as a general partnership. On October 1, 2001, Registrant converted from a general partnership to a limited liability company under New York law and is now known as Empire State Building Associates L.L.C. The conversion does not change any aspect of the assets and operations of Registrant other than to protect its participants from any future liability to a third party. Registrant owns the tenant's interest in a master operating leasehold (the "Master Lease") on the Empire State Building (the "Building") and 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 L.L.C. (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 elected to renew the Sublease for a term commencing January 4, 1992 to January 4, 2013. Registrant's members are Peter L. Malkin, Anthone E. Malkin, and Thomas N. Keltner, Jr. (collectively, the "Agents") each of whom also acts as an agent for holders of participations in his respective member interest in Registrant (the "Participants"). Sublessee is a New York partnership in which Peter L. Malkin is a partner, and Trusts created by Peter L. Malkin for family members are beneficial owners of an interest in the Sublessee. Two of the Agents in Registrant are also members of Wien & Malkin LLP, 60 East 42nd Street, New York, New York, which provides supervisory and other services to Registrant and to Sublessee (the "Supervisor"). See Items 10, 11, 12 and 13 hereof for a description of the ongoing services rendered by, and -1 - compensation paid to, Supervisor and for a discussion of certain relationships which may pose potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates. As of December 31, 2001, the Building was 91% occupied by approximately 905 tenants who engage in various businesses, including the Boy Scouts, the YMCA, the practice of law and accounting, ladies' and men's apparel, and ladies' and men's shoes. Registrant does not maintain a full-time staff. See Item 2 hereof for additional information concerning the Property. (b) The Lease and Sublease The annual rent payable by Registrant under the Lease is $1,970,000 from January 5, 1992 through January 5, 2013 and $1,723,750 annually during the term of each renewal period thereafter. Sublessee is required to pay annual basic rent (the "Basic Rent") equal to $6,018,750 from January 5, 1992 through January 4, 2013, and $5,895,625 from January 5, 2013 through the expiration of all renewal terms. Sublessee is also required to pay Registrant overage rent of 50% of Sublessee's net operating profit in excess of $1,000,000 for each lease year ending December 31("Overage Rent"). 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, 2001, 2000 and 1999. There was Overage Rent of $26,072,502 for the year ended December 31, 2001. (c) Competition Pursuant to tenant space leases at the Building, the average annual base rental payable to Sublessee is approximately $35.21 per square foot (exclusive of electricity charges and escalation). The asking rents for the building range from $38 to $55 per square foot. -2- (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: 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. -3- Helmsley of the claims and counterclaims in the arbitration and litigation between them. Mr. Malkin and Wien & Malkin LLP then continued 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 Lessee. The arbitration hearings were concluded in June 2000, and the arbitrators issued their decision on March 30, 2001, ordering that the termination of Helmsley-Spear, Inc. would require a new vote by the partners in the Lessee, setting forth procedures for such a vote, and denying the other claims of all parties. Following the decision, Helmsley- Spear, Inc. applied to the court for confirmation of the decision, and Mr. Malkin and Wien & Malkin LLP applied to the court for an order setting aside that part of the decision regarding the procedure for partnership voting to terminate Helmsley-Spear, Inc. and various other parts of the decision on legal grounds. The court granted the motion to confirm the arbitrators' decision and denied the application to set aside part of the arbitrators' decision. Mr. Malkin and Wien & Malkin LLP have served notice of appeal of the court's determination. On November 29, 2001, an action entitled Irving Schneider v. Peter L. Malkin et al. was brought in New York State Supreme Court by the holder of a $10,000 original participation in Associates (representing 1/3300th of the interests in Associates) against Associates' Agents, claiming that the Agents had violated contractual and fiduciary duties and that the consent of the Participants to Associates' program for acquisition and financing of the fee title to the Empire State Building pursuant to the September 14, 2001 Solicitation is ineffective. On February 28, 2002, the Court granted an order dismissing all of Mr. Schneider's claims. Mr. Schneider filed on March 8, 2002 a notice of appeal of the order dismissing his claims. Item 4. Submission of Matters to a Vote of Particpants. On September 14, 2001, the Partners mailed to the Participants a STATEMENT ISSUED BY THE AGENTS IN CONNECTION WITH THE SOLICITATION OF CONSENTS OF THE PARTICIPANTS (the ?Statement?) requesting their authorization to acquire the fee title to the Empire State Building. The details of the Agents Proposals are provided in the Definitive Proxy Statement which was filed with the Securities and Exchange Commission as Schedule 14-A on September 14, 2001, and is incorporated by reference. The required consents for the program were obtained prior to December 31, 2001. On March 18, 2002, Associates signed both a purchase contract to acquire the fee title at a price of $57.5 million (with a deposit of $1 million) and a $60.5 million mortgage commitment to finance the acquisition and financing costs. -4- 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 182 transfers. In seven instances, the indicated purchase price was equal to 3.3 times the face amount of the Participation transferred, i.e., $16,500 for a $5,000 Participation. In eighteen instances, the indicated purchase price was equal to three times the face amount of the Participation transferred. In one instance, the indicated purchase price was equal to two times the face amount of the participation transferred. In all other cases, no consideration was indicated. (b) As of December 31, 2001, there were 2,669 holders of Participations of record. (c) Registrant does not pay dividends. During the year ended December 31, 2001, Registrant made regular monthly -5- distributions of $98.21 for each $10,000 Participation. There was Overage Rent payable of $26,072,502 for the year ended December 31, 2001 and Registrant made additional distributions for each $10,000 Participation of $7,000.00 on March 6, 2002. See Item 1 hereof. There are no restrictions on Registrant's present or future ability to make distributions; however, the amount of such distributions, particularly distributions of Overage Rent, depends solely on Sublessee's ability to make payments of Basic Rent and Overage Rent to Registrant. See Item 1 hereof. Registrant expects to make monthly distributions in the future so long as it receives the payments provided for under the Sublease. See Item 7 hereof. -6- [SELECTED FINANCIAL DATA] Item 6. EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) SELECTED FINANCIAL DATA
Year ended December 31, 2001 2000 1999 1998 1997 Basic rent income $ 6,018,750 $ 6,018,750 $ 6,018,750 $ 6,018,750 $6,018,750 Overage rent income 26,072,502 14,583,762 7,582,109 4,109,852 2,401,300 Dividend income 248,948 256,963 144,690 84,615 10,377 Miscellaneous income 1,660,904 - 0 - - 0 - - 0 - - 0 - Total revenues $34,001,104 $20,859,475 $13,745,549 $10,213,217 $8,430,427 Net income $29,512,491 $17,315,601 $10,901,065 $ 7,507,228 $4,752,560 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during the year $ 8,943 $ 5,247 $ 3,303 $ 2,275 $ 1,440 Total assets $32,347,669 $20,842,972 $13,253,481 $ 8,787,638 $5,930,702 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 $ 5,182 $ 3,185 $ 2,033 $ 1,500 $ 1,179 Return of capital - 0 - - 0 - - 0 - - 0 - -0- Total distributions $ 5,182 $ 3,185 $ 2,033 $ 1,500 $ 1,179
-7- Item 7. EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) QUARTERLY RESULTS OF OPERATIONS The following table presents the Company's operating results for each of the eight fiscal quarters in the period ended December 31, 2001. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements included in this Annual Report on Form 10-K. In the opinion of management, all necessary adjustments, which consist only of normal and recurring accruals, have been included to present fairly the unaudited quarterly results. This data should be read together with the financial statements and the notes thereto included in this Annual Report on Form 10-K.
Three Months Ended March 31, June 30, September 30, December 31, 2000 2000 2000 2000 Statement of Income Data: Minimum net, basic rent income $1,504,687 $1,504,688 $1,504,688 $ 1,504,687 Additional rent income - - - 14,583,762 Dividend income 95,211 48,471 52,024 61,257 Total revenues 1,599,898 1,553,159 1,556,712 16,149,706 Leasehold rent 492,500 492,500 492,500 492,500 Supervisory services 39,854 39,854 39,854 883,165 Amortization of leasehold 52,117 52,117 52,117 52,117 Professional fees - - - 362,679 Total expenses 584,471 584,471 584,471 1,790,461 Net income $1,015,427 $ 968,688 $ 972,241 $14,359,245 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each period $ 307 $ 294 $ 295 $ 4,351
-8- Item 7. EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) QUARTERLY RESULTS OF OPERATIONS (Continued) Three Months Ended
March 31, June 30, September 30, December 31, 2001 2001 2001 2001 Statement of Income Data: Minimum net, basic rent income $1,504,687 $1,504,688 $1,504,688 $ 1,504,687 Additional rent income - - - 26,072,502 Dividend income 157,165 38,193 23,094 30,496 Miscellaneous income - - 1,660,904 - Total revenues 1,661,852 1,542,881 3,188,686 27,607,685 Leasehold rent 492,500 492,500 492,500 492,500 Supervisory services 39,854 39,854 39,855 1,514,322 Amortization of leasehold 52,117 52,117 52,117 52,117 Professional fees 972 53,305 77,206 544,777 Total expenses 585,443 637,776 661,678 2,603,716 Net income $1,076,409 $ 905,105 $2,527,008 $25,003,969 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each period $ 326 $ 274 $ 766 $ 7,577
-9- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Registrant was organized for the purposes of owning the Property described in Item 2 hereof subject to the Sublease. Registrant is required to pay from Basic Rent the amounts due for supervisory services and to distribute the balance of such rental payments to Participants. Registrant is required to pay from Overage Rent additional amounts for supervisory services and then to distribute the balance of such Overage Rent to the Participants. Pursuant to the Sublease, Sublessee has assumed sole responsibility for the condition, operation, repair, maintenance and management of the Building. Registrant need not maintain substantial reserves or otherwise maintain liquid assets to defray any operating expenses of the Property. The supervisory services provided to Registrant by Supervisor include, but are not limited to, providing or coordinating with counsel to Registrant, maintaining all of its entity and Participant records, performing physical inspections of the Building, reviewing insurance coverage and conducting annual supervisory review meetings, receipt of monthly rent from Net Lessee, 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 Net Lessee and financial statements audited by and tax information prepared by Registrants' independent certified public accountant, and distribution of such materials to the Participants. Supervisor also prepares quarterly, annual and other periodic filings with the Securities and Exchange Commission and applicable state authorities. 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 the New York City economy and real estate rental market. It is difficult for management to forecast the New York City economy and real estate market. As compared with the prior year, a decrease in Overage Rent in any year reduces the distributions made to the Participants and the expenditure for supervisory services. Reductions in the amount of Overage Rent paid to Registrant in the future will not have any other impact on Registrant. See paragraph 1 of Item 7 hereof and Notes 3, 4, 5, and 7 of the Notes. The following summarizes the material factors affecting Registrant's results of operations for the three preceding years: -10- (a) Total income increased for the year ended December 31, 2001 as compared with the year ended December 31, 2000. Such increase resulted from an increase in Overage Rent in the year 2001 and an increase in dividend income earned as compared with the year ended December 31, 2000. Total income increased for the year ended December 31, 2000 as compared with the year ended December 31, 1999. Such increase resulted from an increase in Overage Rent in the year 2000 and an increase in dividend income earned as compared with the year ended December 31, 1999. See Note 3 of the Notes. (b) Total expenses increased for the year ended December 31, 2001 as compared with the year ended December 31, 2000. Such increase is the result of an increase in additional payment for supervisory services and an increase in professional fees. Total expenses increased for the year ended December 31, 2000 as compared with the year ended December 31, 1999. Such increase was the result of an increase in additional payment for supervisory services and an increase in professional fees. See Notes 3, 5 and 11 of the Notes. Sublessee was liable for New York State Utility Tax for periods after December 31, 1992 through 1997. The State settled all utility taxes for the years 1993 through 1997 with a payment of $243,270 plus accrued interest of $185,613 through December 31, 2001. Payment of $428,883 in connection with the foregoing was made by Sublessee on February 1, 2002. Note D -Professional Fees and Miscellaneous Income During the twelve months ended December 31, 2001, fees, previously accrued, of $1,854,565 were paid to the firm of Wien & Malkin LLP, a related party. Service fees of $676,260 for the twelve months ended December 31, 2001, included $512,818 to Wien & Malkin LLP for fees and disbursements relating to the consent solicitation for the purchase of the fee title, the LLC conversion and litigation; $292,069 was paid during 2001 and the balance of $220,749 is accrued at December 31, 2001. In September 2001 Registrant received from the lessee and reflected in its financial statements as miscellaneous income, $1,660,904 as a reimbursement for fees and disbursements previously incurred. -11- Liquidity and Capital Resources There has been no significant change in Registrant's liquidity or capital resources for the fiscal year ended December 31, 2001 as compared with the fiscal year ended December 31, 2000, and Registrant may from time to time establish a reserve for contingent or unforeseen liabilities. Inflation Inflationary trends in the economy do not directly impact Registrant's operations. As noted above, Registrant does not actively engage in the operation of the Property. Inflation may impact the operations of the Sublessee. The Sublessee is required to pay the Basic Rent regardless of the results of its operations. Inflation and other operating factors affect the amount of Overage Rent payable by the Sublessee, which is based on the Sublessee's net operating profit. Other Information The Sublessee maintains the Building as a high-class office building as required by the terms of the Sublease. In 1990, the Sublessee commenced its latest improvement program which is estimated to be completed 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 year 2002 but should have no effect on the payment of Basic Rent. -12- Item 8. Financial Statements and Supplementary Data. The financial statements, together with the accompanying reports by, and the consents to the use thereof by J.H. Cohn LLP and McGrath, Doyle & Phair, immediately following, are being filed in response to this item. Item 9. Disagreements on Accounting and Financial Disclosure. Not applicable. -11- 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 Agent. The table below sets forth as to each Partner as of December 31, 2001 the following: name, age, nature of any family relationship with any other Agent, 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 an Agent: Principal Date Nature of Occupation Individual Family Business and became an Name Age Relationship Experience Employment Agent Peter L. Malkin 67 None Real Estate Senior Partner 1961 Supervision and Chairman Wien & Malkin LLP Thomas N. Keltner, Jr. 55 None Real Estate Partner 1998 Supervision Wien & Malkin LLP Anthony E. Malkin 39 Son of President Senior Director 2001 Peter L. of real estate of Supervisory Malkin management Services of Wien & Malkin LLP and President of W&M Properties L.L.C. As stated above, two of the members are partners in Supervisor. See Items 1, 11, 12 and 13 hereof for a description of the services rendered by, and the compensation paid to, Supervisor and for a discussion of certain relationships which may pose actual or potential conflicts of interest among Registrant, Sublessee and certain of their respective affiliates. The names of entities which have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or are subject to the requirements of Section 15(d) of that Act, and in which the Partners are either a director, joint venturer or general partner are as follows: -12- Peter L. Malkin is a member in 250 West 57th St. Associates L.L.C. and 60 East 42nd St. Associates L.L.C. and a general partner in Navarre-500 Building Associates and Garment Capitol Associates. Thomas N. Keltner, Jr. is a member in 60 East 42nd St. Associates L.L.C. and a general partner in Navarre-500 Building Associates and Garment Capitol Associates. Anthony E. Malkin is a member in 250 West 57th St. Associates L.L.C. and 60 East 42nd St. Associates L.L.C. 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, 2001 by Registrant to any of the Agents as such. Registrant pays Supervisor, for supervisory services and disbursements, fees of $100,000 per annum plus 6% of all sums distributed to the Participants in excess of 9% per annum on their original cash investment. Pursuant to such arrangements described herein, Registrant paid Supervisor a total of $1,574,468 (consisting of $100,000 as an annual basic payment for supervisory services and $1,474,468 as an additional payment for supervisory services) for supervisory services rendered during the fiscal year ended December 31, 2001. The supervisory services provided to Registrant by Supervisor include, but are not limited to, providing or coordinating with counsel to Registrant, maintaining all of its entity and Participant records, performing physical inspections of the Building, reviewing insurance coverage, conducting annual supervisory review meetings, receipt of monthly rent from Net Lessee, 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 Net Lessee and financial statements audited by and tax information prepared by Registrant's independent certified public accountant, and distribution of such materials to the Participants. Supervisor also prepares quarterly, annual and other periodic filings with the Securities and Exchange Commission and applicable state authorities. See Item 7 hereof. As noted in Items 1 and 10 of this report, two of the Agents are also members of Supervisor. -13- Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) Registrant has no voting securities. See Item 5 hereof. At December 31, 2001, no person owned of record or was known by Registrant to own beneficially more than 5% of the outstanding Participations. (b) At December 31, 2001, the Agents (see Item 10 hereof) beneficially owned, directly or indirectly, the following Participations: Name & Address Amount of of Beneficial Beneficial Percent Title of Class Owners Ownership of Class Participations Thomas N. Keltner, Jr. $ 5,000 .0152% in Partnership 60 East 42nd Street Interests New York, NY 10165 Anthony E. Malkin $ 23,333 .07071% 60 East 42nd Street New York, NY 10165 At such date, certain of the Agents (or their respective spouses) held additional Participations as follows: Peter L. Malkin owned of record as trustee or co-trustee but not beneficially, $232,500 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations. Entities for the benefit of members of Peter L. Malkin's family owned of record and beneficially $546,250 of Participations. Mr. Malkin disclaims any beneficial ownership of such Participations, except that related Trusts are required to complete scheduled payments to Mr. Malkin. Anthony E. Malkin owned of record as trustee or co- trustee but not beneficially, $35,833 of Participations. Anthony E. Malkin disclaims any beneficial ownership of such Participations. (c) Not applicable. -14- Item 13. Certain Relationships and Related Transactions. (a) As stated in Item 1 hereof, Mr. Peter L. Malkin, Mr. Keltner and Mr. Anthony E. Malkin are the three members in Registrant and also act as agents for the Participants in their respective partnership interests. Mr. Peter L. Malkin is also a partner in Sublessee. As a consequence of one of the three members being a partner in Sublessee, and two of the members being current members of Supervisor (which supervises Registrant and Sublessee), certain actual and potential conflicts of interest may arise with respect to the management and administration of the business of Registrant. However, under the respective participating agreements pursuant to which the members act for the Participants, certain transactions require the prior consent from Participants owning a specified interest under the agreement in order for the agents to act on their behalf. Such transactions include modifications and extensions of the Sublease, or a sale or other disposition of the Property or substantially all of Registrant's other assets. 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 members 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 members as such 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 members, by reason of their respective interest in Supervisor, are entitled to receive their pro rata share of any supervisory, service, legal or other remuneration paid to Supervisor for services rendered to Registrant and Sublessee. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor. Reference is also made to Items 1 and 10 hereof for a description of the relationship between Registrant and Supervisor, of which two of the members are among the members. The interest of each Agent in any remuneration paid or given by Registrant to Supervisor arise solely from the ownership of such member's interest in Supervisor. See Item 11 hereof for a description of the remuneration arrangements between Registrant and Supervisor relating to supervisory services provided by Supervisor. (b) Reference is made to Paragraph (a) above. (c) Not applicable. (d) Not applicable. -15- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K. (a)(1) Financial Statements: Consent of J.H. Cohn LLP, Certified Public Accountants, dated March 27, 2002. Accountant's Report of J.H. Cohn LLP, Certified Public Accountants, dated March 27, 2002. Balance Sheets at December 31, 2001 and at December 31, 2000 (Exhibit A). Statements of Income for the fiscal years ended December 31, 2001, 2000, and 1999 (Exhibit B). Statement of Members' Equity for the fiscal year ended December 31, 2001 (Exhibit C-1). Statement of Members' Equity for the fiscal year ended December 31, 2000 (Exhibit C-2). Statement of Members' Equity for the fiscal year ended December 31, 1999 (Exhibit C-3). Statements of Cash Flows for the fiscal years ended December 31, 2001, 2000 and 1999 (Exhibit D). Notes to Financial Statements for the fiscal years ended December 31, 2001, 2000 and 1999. Consent of McGrath, Doyle & Phair, Certified Public Accountants, dated March 19, 2002. Accountant's Comparative Combined Statement of Income (Sublessee) of McGrath, Doyle & Phair, Certified Public Accountants, dated March 19, 2002. (2) Financial Statement Schedules: List of Omitted Schedules. Real Estate and Accumulated Depreciation - December 31, 2001 (Schedule III). (3) Exhibits: See Exhibit Index. (b) No Form 8-K was filed by Registrant for the final quarter of 2001. -16- [J.H. COHN LLP ACCOUNTANTS & CONSULTANTS] March 27,2002 Empire State Building Associates L.L.C. New York, N. Y. We consent to the use of our independent accountants' report dated March 27, 2002 covering our audits of the accompanying financial statements of Empire State Building Associates L.L.C. in connection with and as part of your December 31, 2001 annual report (Form 10-K) to the Securities and Exchange Commission. J.H. Cohn LLP New York, N.Y. -17 - [J.H. COHN LLP ACCOUNTANTS & CONSULTANTS] INDEPENDENT ACCOUNTANTS' REPORT To the participants in Empire State Building Associates L.L.C. (a Limited Liability Company) New York, N. Y. We have audited the accompanying balance sheets of Empire State Building Associates L.L.C. ("Associates") as of December 31, 2001 and 2000, and the related statements of income, members' equity and cash flows for each of the three years in the period ended December 31, 2001, 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 auditing standards generally accepted in the United States of America. 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 L.L.C. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America, 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. J.H. Cohn LLP New York, N. Y. March 27, 2002 -18- EXHIBIT A EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) BALANCE SHEETS A S S E T S December 31, 2001 2000 Current assets: Cash and cash equivalents (Note 14): JPMorgan Chase Bank $ 3,739 $ 1,418 Distribution account held by Wien & Malkin LLP 324,111 324,111 Fidelity U.S. Treasury Income Portfolio 29,520,266 15,408,212 29,848,116 15,733,741 Additional rent due from Empire State Building Company L.L.C., a related party 72,502 2,583,762 Prepaid rent 23,831 23,831 TOTAL CURRENT ASSETS 29,944,449 18,341,334 Deferred charges 110,050 - Real estate (Note 2): Leasehold on Empire State Building, 350 Fifth Avenue, New York, N. Y 39,000,000 39,000,000 Less: Accumulated amortization 36,706,830 36,498,362 2,293,170 2,501,638 TOTAL ASSETS $32,347,669 $20,842,972 LIABILITIES AND MEMBERS' EQUITY Current liabilities: Accrued professional fees, including amounts due to a related party (Note 11) $ 316,804 $ 1,854,565 Accrued supervisory services, to a related party (Note 5) 1,474,468 843,310 TOTAL LIABILITIES 1,791,272 2,697,875 Contingencies (Notes 10 and 12) Members' equity (Exhibit C) 30,556,397 18,145,097 TOTAL LIABILITIES AND MEMBERS' EQUITY $32,347,669 $20,842,972 See accompanying notes to financial statements. -19- EXHIBIT B EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) STATEMENTS OF INCOME
Year ended December 31, 2001 2000 1999 Revenues: Rent income, from a related party (Note 3) $32,091,252 $20,602,512 $13,600,859 Miscellaneous income (Note 11) 1,660,904 - - Dividend income 248,948 256,963 144,690 34,001,104 20,859,475 13,745,549 Expenses: Leasehold rent (Note 4) 1,970,000 1,970,000 1,970,000 Supervisory services, to a related party (Note 5) 1,633,885 1,002,727 581,983 Professional fees, including amounts due to a related party (Note 11) 676,260 362,679 84,033 Amortization of leasehold (Note 2) 208,468 208,468 208,468 4,488,613 3,543,874 2,844,484 NET INCOME, CARRIED TO MEMBERS' EQUITY (NOTE 8) $29,512,491 $17,315,601 $10,901,065 Earnings per $10,000 participation unit, based on 3,300 participation units outstanding during each year $ 8,943 $ 5,247 $ 3,303
See accompanying notes to financial statements. -20- EXHIBIT C-3 EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) STATEMENT OF MEMBERS' EQUITY YEAR ENDED DECEMBER 31, 1999
Members' Members' Equity Equity January 1, Share of December 31, 1999 net income Distributions 1999 Richard A. Shapiro Group $2,382,433 $ 3,633,688 $2,236,444 $ 3,779,677 Thomas N. Keltner, Jr. Group 2,382,432 3,633,689 2,236,445 3,779,676 Peter L. Malkin Group 2,382,432 3,633,688 2,236,444 3,779,676 $7,147,297 $10,901,065 $6,709,333 $11,339,029
See accompanying notes to financial statements. -21- EXHIBIT C-1 EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) STATEMENT OF MEMBERS' EQUITY YEAR ENDED DECEMBER 31, 2001
Members' Members' Equity Equity January 1, Share of December 31, 2001 net income Distributions 2001 Anthony E. Malkin Group (formerly Richard A. Shapiro Group) $ 6,048,366 $ 9,837,497 $ 5,700,397 $10,185,466 Thomas N. Keltner, Jr. Group 6,048,365 9,837,497 5,700,397 10,185,465 Peter L. Malkin Group 6,048,366 9,837,497 5,700,397 10,185,466 $18,145,097 $29,512,491 $17,101,191 $30,556,397
See accompanying notes to financial statements. -22- EXHIBIT C-2 EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2000 Members' Members' Equity Equity January 1, Share of December 31, 2000 net income Distributions 2000 Richard A. Shapiro Group $ 3,779,677 $ 5,771,867 $3,503,178 $ 6,048,366 Thomas N. Keltner, Jr. Group 3,779,676 5,771,867 3,503,178 6,048,365 Peter L. Malkin Group 3,779,676 5,771,867 3,503,177 6,048,366 $11,339,029 $17,315,601 $10,509,533 $18,145,097
See accompanying notes to financial statements. -23- EXHIBIT D EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) STATEMENTS OF CASH FLOWS
Year ended December 31, 2001 2000 1999 Cash flows from operating activities: Net income $ 29,512,491 $ 17,315,601 $10,901,065 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of leasehold 208,468 208,468 208,468 Changes in operating assets and liabilities: Additional rent due from Empire State Building Company L.L.C., a related party 2,511,260 (1,601,653) (372,257) Deferred charges (110,050) - - Accrued supervisory services, to a related party 631,158 420,744 242,566 Accrued professional fees, to a related party (1,537,761) 362,679 31,545 Net cash provided by operating activities 31,215,566 16,705,839 11,011,387 Cash flows from financing activities: Cash distributions (17,101,191) (10,509,533) (6,709,333) Net cash used in financing activities (17,101,191) (10,509,533) (6,709,333) Net increase in cash and cash equivalents 14,114,375 6,196,306 4,302,054 Cash and cash equivalents, beginning of year 15,733,741 9,537,435 5,235,381 CASH AND CASH EQUIVALENTS, END OF YEAR $ 29,848,116 $ 15,733,741 $ 9,537,435
See accompanying notes to financial statements. -24- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS 1. Business Activity and Reorganization Empire State Building Associates L.L.C. ("Associates") holds the tenant's position in the master leasehold of the Empire State Building (the "Building"), located at 350 Fifth Avenue, New York City. Associates subleases the property to Empire State Building Company L.L.C.("Company"). Associates operated as a general partnership, Empire State Building Associates, until October 1, 2001, when it converted to a limited liability company and changed to its current name. Ownership percentages in Associates were unchanged by the conversion. Associates continues to be treated as a partnership for tax purposes, and the partnership's income tax basis of its assets and liabilities carried over to the limited liability company. 2. Summary of Significant Accounting Policies a. Cash and Cash Equivalents: Cash and cash equivalents include investments in money market funds and all highly liquid debt instruments purchased with a maturity of three months or less. b. Real Estate and Amortization of Leasehold: Real estate, consisting of a leasehold, is stated at cost. Amortization of the leasehold is being computed through its first renewal term by the straight-line method over its estimated useful life of 25 years, from January 1, 1988 to January 5, 2013. c. Use of Estimates: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Related Party Transactions - Rent Income Rent income for the years ended December 31, 2001, 2000 and 1999 totaling $32,091,252, $20,602,512 and $13,600,859, 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, 2001 2000 1999 Minimum net basic rent $ 6,018,750 $ 6,018,750 $ 6,018,750 Additional rent earned 26,072,502 14,583,762 7,582,109 $32,091,252 $20,602,512 $13,600,859 -25- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS (Continued) 3. Related Party Transactions - Rent Income (continued) The sublease provides for the same initial term and renewal options as the leasehold (see Note 4), less one day. In January 1989, the Sublessee exercised its option to renew the sublease for the first renewal period from January 4, 1992 to January 4, 2013. The annual minimum net basic rent during the first renewal term was reduced to $6,018,750, and is to be further reduced to $5,895,625 during each of three remaining renewal terms. Additional rent earned is equal to fifty percent of the Sublessee's annual net income (as defined in the sublease) in excess of $1,000,000. A member in Associates is also a member in the Sublessee. 4. Leasehold Rent Leasehold rent represents the net basic rent of $1,970,000 per annum under an operating lease dated December 27, 1961, as modified February 15, 1965, with The Prudential Insurance Company of America ("Prudential"). Associates exercised its first renewal option in 1988, and the current leasehold rent remains unchanged throughout the first renewal term of the lease, which ends on January 5, 2013. The lease contains options for Associates to renew the leasehold for an additional 3 successive periods of 21 years each. The basic rent is to be further reduced to $1,723,750 per annum during each of the remaining three renewal terms. On November 27, 1991, Prudential sold the property to E.G. Holding Co., Inc. which, through merger and conveyance, transferred its interest as lessor to Trump Empire State Partners. Associates' rights under the master leasehold remain unchanged. See Note 9. 5. Related Party Transactions - Supervisory Services Supervisory services (including disbursements and cost of regular accounting services) during the years ended December 31, 2001, 2000 and 1999, totaling $1,633,885, $1,002,727 and $581,983, respectively, represent fees incurred by the firm of Wien & Malkin LLP. Some members of that firm are members 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. 6. Number of Participants There were approximately 2,640 participants in the participating groups at December 31, 2001, 2000 and 1999. -26- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS (Continued) 7. Determination of Distributions to Participants Distributions to participants in 2001, 2000 and 1999 of $17,101,191, $10,509,533 and $6,709,333, respectively, represented the following:
2001 2000 1999 Minimum annual rent $ 6,018,750 $ 6,018,750 $ 6,018,750 Additional rent, earned in previous year, distributed in current year 14,583,762 7,582,109 4,109,852 Dividend income earned in previous year, distributed in current year 256,963 144,690 84,615 20,859,475 13,745,549 10,213,217 Less: Leasehold rent expense $1,970,000 $1,970,000 $1,970,000 Supervisory services incurred in previous year 1,002,727 581,983 339,417 Professional fees incurred in previous year 362,679 84,033 188,104 Amount held in reserve to fund payment of accrued legal fees 422,878 600,000 1,006,363 3,758,284 3,236,016 3,503,884 Distributions to participants $17,101,191 $10,509,533 $ 6,709,333
8. Distributions and Amount of Income per $10,000 Participation Unit Distributions per $10,000 participation unit during the years 2001, 2000 and 1999 based on 3,300 participation units outstanding during each year, consisted of the following: Year ended December 31, 2001 2000 1999 Income $5,182 $3,185 $2,033 Return of capital - - - TOTAL DISTRIBUTIONS $5,182 $3,185 $2,033 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. -27- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS (Continued) 9. Proposal to Acquire Fee Title to Empire State Building and Subsequent Event On September 14, 2001, Associates' Agents filed a proxy statment with the Securities and Exchange Commission in connection with the Solicitation of Consents of Associates' Participants for a program (a) to acquire the fee title to the Empire State Building for a price not to exceed $57.5 million, and for total acquisition and financing costs not to exceed $60.5 million; (b) to mortgage the fee title and leasehold to finance such total costs; and (c) to effect such acquisition and financing alone or with the operating sublessee or any third party on terms the Agents believe beneficial for Associates. The required consents for the program were obtained prior to December 31, 2001. On March 18, 2002, Associates signed both a purchase contract to acquire the fee title at a price of $57.5 million (with a deposit of $1 million) and a $60.5 million mortgage commitment to finance the acquisition and financing costs. 10. Litigation and Subsequent Events On November 29, 2001, an action entitled Irving Schneider v. Peter L. Malkin et al. was brought in New York State Supreme Court by the holder of a $10,000 original participation in Associates (representing 1/3300th of the interests in Associates) against Associates' Agents, claiming that the Agents had violated contractual and fiduciary duties and that the consent of the Participants to Associates' program for acquisition and financing of the fee title to the Empire State Building pursuant to the September 14, 2001 Solicitation (Note 9) is ineffective. On February 28, 2002, the Court granted an order dismissing all of Mr. Schneider's claims. Mr. Schneider filed on March 8, 2002 a notice of appeal of the order dismissing his claims. Associates has paid the defense costs in this action for professional fees and disbursements, of which $122,442 has been incurred through December 31, 2001. Counsel for Associates' Agents has advised that Mr. Schneider's claims are without merit. It is not possible at this time to determine the potential loss, if any, which might result from this action. No provision for liability has been made in the accompanying financial statements. Associates established a reserve of $500,000 as of March 11, 2002 for future defense costs in any appeal or other proceedings related to this matter. 11. Related Party Transactions - Professional Fees and Miscellaneous Income The accompanying statements of income reflect legal fees paid or owed to Wien & Malkin LLP, a related party (Note 5), as follows: 2001 2000 1999 Reimbursement owing to Agents of their legal and accounting expenses relating to suit by Julien Studley $120,009 $219,386 $39,670 Other payments made or accrued 392,809 143,293 44,363 $512,818 $362,679 $84,033 -28- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) NOTES TO FINANCIAL STATEMENTS (Continued) 11. Related Party Transactions - Professional Fees and Miscellaneous Income (continued) Accrued professional fees, at December 31, 2002 and 2001 include $220,749 and $1,854,565, respectively, owed to Wien & Malkin LLP. Miscellaneous income of $1,660,904 in 2001 consists of a reimbursement by Company of litigation costs and disbursements expensed by Associates in 2001 and prior years. The litigation costs and disbursements had been incurred in Associates' successful defense of dismissed claims by Julien Studley, a holder of a $20,000 original participation in Associates, against Agents for Associates. 12. Contingencies Wien & Malkin LLP and Peter L. Malkin are engaged in a dispute with Company's managing agent, Helmsley-Spear, Inc., concerning the management, leasing, and supervision of the property that is subject to the net sublease to the operating sublessee. In this connection, certain legal and professional fees and other expenses have been paid and incurred by Wien & Malkin LLP and Mr. Malkin, and additional costs are expected to be incurred. Wien & Malkin LLP and Mr. Malkin have represented that such costs will be recovered only to the extent that (a) competent tribunal authorizes payment by Associates or (b) a participant voluntarily agrees that his or her proportionate share be paid. Accordingly, Associates' allocable share of such costs is as yet undetermined, and Associates has not provided for the expense and related liability with respect to such costs in these financial statements. The original action commenced in June 1997 and was referred to arbitration. The March 30, 2001 decision of the arbitrators, which was confirmed by the court, (i) reaffirms the right of the partners in the lessee to vote to terminate Helmsley-Spear, Inc. without cause, (ii) dismisses Helmsley-Spear, Inc.'s claims against Wien & Malkin LLP, and (iii) rejects the termination of Helmsley-Spear, Inc. for cause. Parts of the decision of the court are under appeal. 13. Receipt of Warrants and Stock in Telecommunications Companies In 2000, Associates received shares of common stock and warrants from certain unrelated companies in exchange for permission for those companies to provide high-speed internet access and other telecommunication services to the Building. The Sublessee received an equal number of shares and warrants. There are restrictions as to the transfer of the stock, and neither the warrants nor the stock has an ascertainable value since their issuance. Accordingly, the accompanying financial statements do not reflect any value for these securities. 14. Concentration of Credit Risk Associates maintains cash balances in a bank, money market funds (Fidelity U.S. Treasury Income Portfolio) and a distribution account held by Wien & Malkin LLP. The bank balance is insured by the Federal Deposit Insurance Corporation up to $100,000, and at December 31, 2001 was completely insured. The cash in the money market funds and the account held by Wien & Malkin LLP are not insured. The funds held in the distribution account were paid to the participants on January 1, 2002. 15. Reclassifications As a result of the reorganization in 2001 (Note 1), certain accounts in prior year financial statements have been reclassified to conform with the presentation in the financial statements for 2001. -29- EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) 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. -30- SCHEDULE III EMPIRE STATE BUILDING ASSOCIATES L.L.C. (A Limited Liability Company) Real Estate and Accumulated Depreciation December 31, 2001 Column A Description Leasehold on Empire State Building located at 350 Fifth Avenue, New York, New York. B Encumbrances............................................. None C Initial cost to company Leasehold.............................................. $39,000,000 D Cost capitalized subsequent to acquisition............... None E Gross amount at which carried at close of period Leasehold............................................. $39,000,000(a) F Accumulated amortization................................. $36,706,830(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, 2001, December 31, 2000 and December 31, 1999. The costs for federal income tax purposes are the same as for financial statement purposes. (b) Accumulated amortization Balance at January 1, 1999 $36,081,426 Amortization: F/Y/E 12/31/99 $208,468 12/31/00 208,468 12/31/01 208,468 625,404 Balance at December 31, 2001 $36,706,830 -31- EMPIRE STATE BUILDING AND OBSERVATORY COMPARATIVE COMBINED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 Dated: New York, NY -32- [LETTERHEAD OF MCGRATH, DOYLE & PHAIR CERTIFIED PUBLIC ACCOUNTANTS] March 19, 2002 Empire State Building Company L.L.C. 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, 2001 and 2000 for the purpose of determining "Net Operating Profit" and "Overage Rent" as those terms are defined in Section 2.05 of Agreement of Sublease dated December 27, 1961. During the years ended December 31, 2001 and 2000, the entire building, with the exception of the Observatory, was operated by Empire State Building Company L.L.C. 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 L.L.C. 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, 2001 and 2000, 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, Empire State Building Company L.L.C. and other related parties have been named as defendants in legal actions. All defendants have denied all material allegations. It is not possible at this time to predict the outcome or range of potential loss, if any, which might result from those actions. No provision for any loss has been made in the accompanying Combined Statement of Income. New York, NY March 19, 2002 -33- Empire State Building and Observatory COMPARATIVE COMBINED STATEMENT OF INCOME
Increase 2001 2000 (Decrease) INCOME Rent, including electricity $78,273,477 $69,461,218 $8,812,259 Observatory admissions 21,108,995 23,654,368 (2,545,373) Other observatory income 3,769,522 2,624,108 1,145,414 Antenna rent 5,077,548 5,077,548 - Net real estate tax refund (Note 5) 19,001,383 - 19,001,383 Lease cancellation 104,779 67,760 37,019 Percentage rent - 328,434 (328,434) Utility tax reduction (Note 6) - 602,434 (602,434) Other 1,025,230 1,033,768 (8,538) Total income 128,360,934 02,849,638 25,511,296 OPERATING EXPENSES Rent 6,018,750 6,018,750 - Real estate taxes 18,517,172 19,523,532 (1,006,360) Wages, contract cleaning and protection service 13,603,615 13,165,323 438,292 Electricity 7,193,645 7,029,324 164,321 Tenants' and building alterations, repairs and supplies 10,317,180 6,823,452 3,493,728 Management fees and leasing commissions (Note 1) 2,005,574 4,687,457 (2,681,883) Observatory: Wages 2,587,102 2,278,651 308,451 Contracted labor 2,066,353 2,145,304 (78,951) Advertising and public relations 367,470 402,858 (35,388) Payroll taxes and other labor cost 809,567 810,417 (850) Other taxes and expenses 539,948 348,276 191,672 Steam 1,558,714 1,545,921 12,793 Professional fees (Note 2) 3,130,969 1,502,321 1,628,648 Payroll taxes and other labor costs 3,859,169 3,792,167 67,002 Insurance 733,344 408,345 324,999 Water and sewer 287,154 464,299 (177,145) Rubbish removal 115,638 175,057 (59,419) Advertising 894,885 678,149 216,736 Telephone 97,158 113,263 (16,105) Sprinkler alarm service 127,435 93,662 33,773 Directory service 12,432 25,934 (13,502) Interest on NYS utility tax 60,619 6,953 53,666 Sales and use tax - 158,601 (158,601) Interest on sales and use tax - 72,655 (72,655) Paging and other intercommunication 136,270 137,704 (1,434)" Dues 31,988 48,691 (16,703) Utility tax (refund) (129,319) (55,467) (73,852) Other expenses 273,097 280,516 (7,419) Total expenses before overage rent 75,215,929 72,682,115 2,533,814 NET OPERATING PROFIT $53,145,005 $30,167,523 $22,977,482 OVERAGE RENT, 50% OF NET OPERATING PROFIT IN EXCESS OF $1,000,000 $26,072,502 $14,583,762 $11,488,741
-34- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 1. During 2001, a leasing commission in the amount of $300,000 was paid to Helmsley-Noyes, Inc., a company in which a member in Empire State Building Company L.L.C. ("Company") has a controlling interest. 2. Professional fees include payments to Wien & Malkin LLP. A partner in Wien & Malkin LLP is a member in Company. 3. Litigation (a) Company is a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled Magnifique Parfumes And Cosmetics, Inc. d/b/a Perfumania v. Empire State Building, Inc. This is an action commenced on or about October 15, 1998 against Company (incorrectly named in the action as "Empire State Building, Inc."). This lawsuit which is brought by a tenant in the building seeks at least $700,000 in damages. In its complaint, plaintiff-tenant alleges that the Company breached its lease with plaintiff by, among other things, charging plaintiff for electricity on a submetering basis at a rate which far exceeds the rate permissable under the lease. On or about February 2, 1999, the Company served an answer to the complaint. The answer denied the material allegations of the complaint and asserted eight affirmative defenses. On or about February 22, 1999, the Company served an amended answer and counterclaim. The amended answer denied the material allegations of the complaint and asserted nine affirmative defenses. The counterclaim against plaintiff and Perfumania, Inc. (as guarantor) alleges that plaintiff breached certain obligations under the lease to pay certain rent, electricity and operating expense charges and owes the Company $37,312.11 in arrears under the lease. In or about the Fall of 1999, the parties exchanged discovery demands. Thereafter, the parties began engaging in settlement discussions and it was agreed to hold discovery in abeyance. The settlement discussions were never concluded and nothing further has occurred in the case to date. In the event plaintiff revives this matter, Company intends to contest the case vigorously while continuing settlement negotiations. -35- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 3. Litigation - Continued (b) Company was a defendant in an action instituted in the Supreme Court of the State of New York, County of New York, entitled Duane Reade v. Walgreen Co. and Empire State Building. This was an action which was brought by a tenant in the building and commenced on February 14, 2000. Plaintiff alleged, among other things, that Company misled plaintiff in negotiations for a renewal of its lease that expired on April 30, 2000, and wrongfully entered into a lease with Walgreen for the space occupied by plaintiff. The complaint sought no money damages, but instead sought a judgment declaring that the lease between Walgreen and Company be deemed a renewal of the lease between Company and plaintiff, and that plaintiff be substituted for Walgreen as the tenant under the Walgreen lease. Alternatively, the complaint sought a judgment declaring that the Walgreen lease is a graft upon plaintiff's existing lease for its use and benefit and that plaintiff have all rights of the tenant under the Walgreen lease. On March 20, 2000, Company and Walgreen each moved to dismiss the Supreme Court Action as against them. While that motion was pending, on May 2, 2000, Company commenced a holdover proceeding against plaintiff in the Civil Court of the City of New York, County of New York, seeking, among other things, a judgment of possession of the premises and the issuance of a warrant to remove plaintiff (the "Holdover Proceeding"). By Settlement and Surrender Agreement dated as of November 7, 2001, Company and Duane Reade agreed to settle their claims against one another in the Supreme Court Action and the Holdover Proceeding on the following terms, among others; (1) Duane Reade would pay Company $175,000 for Company's legal fees and expenses; (2) Duane Reade would surrender the premises on January 6, 2002; and (3) the parties' claims against one another in the two actions would be dismissed with prejudice. That settlement is now final and complete. (c) NNT Group, Inc. ("NNT") was a purported sub-tenant occupying certain premises (the "Premises") of the Empire State Building. NNT was evicted from the Premises and the locks on the Premises were changed pursuant to an order of eviction. Following the eviction, NNT filed a suit against Company to recover its property remaining in the Premises. On December 21, 2001, the court entered an order granting NNT a judgment of possession for the limited purpose of accessing the Premises to retrieve its personal belongings. At the time the judge issued the order, NNT threatened to bring an action against the Company for treble damages and attorneys' fees based on an allegedly unlawful eviction. Pursuant to the court's order, Company permitted NNT to retrieve its personal belongings from the Premises. Subsequently, NNT attempted to gain access to the Premises and use the Premises to continue operating its business, without the Company's knowledge or consent. Upon discovering NNT's attempted and continued unlawful occupation of the Premises, the Company demanded that NNT vacate the Premises and remove all remaining property therein, which it did. To date, NNT has not filed any action for damages or attorneys' fees against the Company. Should it file any such action, the Company will vigorously defend against it. -36- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 4. Liabilities (a) Company and New York State agreed to a settlement of utility taxes for the years 1993 through 1997 by payment to the State of tax of $243,270 plus interest through December 31, 2001 of $185,613, or a total of $428,883. (b) The City of New York had 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 or approximately $345,603 through April 30, 2000. Company was also liable for an undetermined amount of additional New York City Utility Tax for periods after December 31, 1994. Under a settlement reached with New York City, Company settled all of its utility tax liability for all years by agreeing to pay any additional Tax for only the year 1997. The City reviewed the records of Company for 1997 and determined that no additional utility tax was payable. Accordingly, the prior proposed assessment of $277,125 plus interest thereon has been cancelled. The imposition of both New York State and New York City utility taxes on non-metered electricity rent inclusion charges was repealed effective January 1, 1998. (c) Wien & Malkin LLP and Peter L. Malkin, a member in Company, are engaged in a dispute with Helmsley-Spear, Inc. concerning the management, leasing and supervision of Company's property. In this connection, certain legal and professional fees and other expenses have been paid and incurred by Wien & Malkin LLP and Mr. Malkin and additional costs are expected to be incurred. Wien & Malkin LLP and Mr. Malkin have represented that such costs will be recovered only to the extent that ( a ) a competent tribunal authorizes payment by Company or ( b ) a member voluntarily agrees that his or her proportionate share be paid. Accordingly, Company has not provided for the expense and related liability with respect to such costs in these financial statements. The original action was commenced in June 1997 and was referred to arbitration. The March 30, 2001 decision of the Arbitrators, which was confirmed by the court, (i) reaffirms the right of the members to vote to terminate Helmsley-Spear, Inc. without cause, (ii) dismisses Helmsley -Spear, Inc.'s claims against Wien & Malkin LLP and Peter L. Malkin, and (iii) rejects the termination of Helmsley-Spear, Inc. for cause. Parts of the decision of the court are under appeal. Irving Schneider, who is one of the controlling principals of Helmsley- Spear, Inc. and has no record or beneficial interest in Company, has brought litigation against Company's supervisor, Wien & Malkin LLP, and member, Mr. Malkin, claiming misconduct and seeking damages and disqualification from performing services for Company. Wien & Malkin LLP and Mr. Malkin are defending against these claims. -37- Empire State Building and Observatory NOTES TO COMBINED STATEMENT OF INCOME NOTE 5. Net real estate tax refund Company concluded a real estate tax settlement with New York City covering the period July 1, 1992 through June 30, 2001 resulting in a total savings of $28,344,576, of which $26,004,965 was refunded in May 2001, and the balance, $2,339,611, will reduce assessments to be phased in over the next five years. Expenses attributable to the settlement amounted to $2,393,221, of which $2,327,062 was for legal fees, and the balance, $66,159, was for appraisal, accounting, filing fees and miscellaneous disbursements. Wien & Malkin LLP, received $1,163,531 of the total legal fees paid. A partner in Wien & Malkin LLP is a member in Company. Other required offsets to the refund were for tenant credits, and for overage rent adjustments for 1995 and 1996, resulting in net real estate tax refund of $19,001,383 for overage rent purposes. 6. Utility tax reduction The reduction in utility tax of $602,434 represents the difference between the amount of New York State utility tax that had been accrued as opposed to the actual tax for the years 1993 through 1997 in accordance with a settlement reached with New York State (See footnote 4). 7. Warrants and Stock In 2000, Company received shares of common stock and warrants from certain unrelated companies in exchange for permission for those companies to provide high speed internet access and other telecommunication services to the building. Company's lessor received an equal amount of shares and warrants. Company will receive from 5% to 10% of the revenues generated by such services from advertising and subscriptions with tenants of the building. There are restrictions as to the transfer of the stock, and neither the warrants nor the stock have an ascertainable value as of December 31, 2000 and 2001. Accordingly, these transactions are not reflected in the accompanying comparative statement of income. -38- SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The individual signing this report on behalf of Registrant is Attorney-in-Fact for Registrant and each of the Partners in Registrant, pursuant to Powers of Attorney, dated August 6, 1996 and May 14, 1998 (collectively, the "Power"). EMPIRE STATE BUILDING ASSOCIATES L.L.C. (Registrant) By /s/Stanley Katzman Stanley Katzman, Attorney-in-Fact Date: April 15, 2002 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, 2002 _________________________________ * Mr. Katzman supervises accounting functions for Registrant. -39- EXHIBIT INDEX Number Document Page* 3(a) Registrant's Partnership Agreement dated July 11, 1961, filed as Exhibit No. 1 to Registrant's Registration Statement on Form S-1 as amended (the "Registration Statement") by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 3(b) Amended Business Certificate of Registrant filed with the Clerk of New York County on August 7, 1998 reflecting a change in the Partners of Registrant which was filed as Exhibit 3(b) to Registrant's 10-Q-A for the quarter ended September 30, 1998 and is incorporated by reference as an exhibit hereto. 4 Registrant's form of Participating Agreement, filed as Exhibit No. 6 to the Registration Statement by letter dated August 8, 1962 and assigned File No. 2-18741, is incorporated by reference as an exhibit hereto. 10(a) Mortgage dated December 21, 1951 from Imperium Corporation to Prudential Insurance Company of America ("Prudential"), filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(a) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. 10(b) Modification of Indenture of Lease dated December 27, 1961 between Prudential and Registrant filed by letter dated March 31, 1981 (Commission File No. 0-827) as Exhibit 10(b) to Registrant's Form 10-K for the fiscal year ended December 31, 1980, is incorporated by reference as an exhibit hereto. ____________________________________________ * Page references are based on sequential numbering system. -40- 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. 24 Powers of Attorney dated August 6,1996 and May 14, 1998, between the Partners of Registrant and Richard A. Shapiro and Stanley Katzman, filed as Exhibit 24 to Registrant's 10-Q for the quarter ended March 31, 1998 and is incorporated by reference as an exhibit hereto. ____________________________________________ * Page references are based on sequential numbering system. -41-