1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [ X ] SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [ ] SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to_________ Commission File No. 1-8815 -------------------------- EQK REALTY INVESTORS I ---------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Massachusetts 23-2320360 ---------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5775 Peachtree Dunwoody Road, Suite 200D, Atlanta, GA 30342 ----------------------------------------------------------- (Address of principal executive offices) (Zip code) (404) 303-6100 ----------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ APPLICABLE TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by checkmark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ------ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: 9,264,344 Shares as of November 12, 1997. 2 EQK REALTY INVESTORS I QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 INDEX Page PART I - FINANCIAL INFORMATION Item 1. Balance Sheets as of September 30, 1997 3 and December 31, 1996 Statements of Operations for the three 4 and nine months ended September 30, 1997 and September 30, 1996 Statements of Cash Flows for the nine 5 months ended September 30, 1997 and September 30, 1996 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II - OTHER INFORMATION Items 1 through 6. 15 SIGNATURES 16 2 3 EQK REALTY INVESTORS I BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) September 30, December 31, 1997 1996 ------------- ------------- ASSETS Investment in Harrisburg East Mall, at cost $ 52,733 $ 52,228 Less accumulated depreciation 16,753 15,338 --------- --------- 35,980 36,890 Cash and cash equivalents: Cash Management Agreement 2,363 2,667 Other 642 994 Deferred leasing costs (net of accumulated amortization of 3,827 4,041 $1,865 and $1,629, respectively) Accounts receivable and other assets 2,096 2,011 --------- --------- TOTAL ASSETS $ 44,908 $ 46,603 ========= ========= LIABILITIES AND DEFICIT IN SHAREHOLDERS' EQUITY Liabilities: Mortgage note payable $ 43,794 $ 43,794 Term loan payable to bank 1,585 1,585 Accounts payable and other liabilities (including amounts due affiliates of $3,053 and $2,940, respectively) 3,968 4,245 --------- --------- 49,347 49,624 Deficit in Shareholders' Equity: Shares of beneficial interest, without par value: 10,055,555 shares authorized, 9,264,344 shares issued and outstanding 135,875 135,875 Accumulated deficit (140,314) (138,896) --------- --------- (4,439) (3,021) --------- --------- TOTAL LIABILITIES AND DEFICIT IN SHAREHOLDERS' EQUITY $ 44,908 $ 46,603 ========= ========= SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 3 4 EQK REALTY INVESTORS I STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------ Three months ended September 30, Nine months ended September 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------ Revenues from rental operations $1,545 $1,576 $ 4,515 $4,705 Operating expenses, net of tenant reimbursements (including property management fees earned by an affiliate of $72, $77, $220 and $229, respectively) 283 123 642 654 Other income -- -- -- 264 Depreciation and amortization 637 585 1,893 1,781 - ------------------------------------------------------------------------------------------------------------ Income from rental operations 625 868 1,980 2,534 Interest expense 1,011 971 3,033 2,924 Other expenses, net of interest income (including portfolio management fees earned by an affiliate of $59, $65, $183, and $188, respectively) 179 158 365 539 - ------------------------------------------------------------------------------------------------------------ Net loss $ (565) $ (261) $(1,418) $ (929) ============================================================================================================ Net loss per share $(0.06) $(0.03) $ (0.15) $(0.10) ============================================================================================================ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 4 5 EQK REALTY INVESTORS I STATEMENTS OF CASH FLOWS (IN THOUSANDS) - ----------------------------------------------------------------------------------------------- Nine months ended September 30, 1997 1996 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,418) $ (929) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,893 1,781 Imputed and deferred interest -- 236 Changes in assets and liabilities: Decrease in accounts payable and other liabilities (277) (767) (Increase) decrease in accounts receivable and other assets (349) 249 - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities (151) 570 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate investments (505) (190) - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of mortgage debt -- (246) - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (656) 134 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,661 2,972 - ----------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,005 $3,106 =============================================================================================== Supplemental disclosure of cash flow information: Interest paid $ 3,015 $2,921 =============================================================================================== SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 5 6 EQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS NOTE 1: DESCRIPTION OF BUSINESS EQK Realty Investors I, a Massachusetts business trust (the "Trust"), was formed pursuant to a Declaration of Trust dated October 8, 1984 to acquire certain income-producing real estate investments. Commencing with the period beginning April 1, 1985, the Trust qualified for and elected real estate investment trust ("REIT") status under the provisions of the Internal Revenue Code. At September 30, 1997, the Trust's remaining real estate investment is Harrisburg East Mall ("Harrisburg" or the "Mall"), a regional shopping center located in Harrisburg, Pennsylvania. During 1995, the Trust sold its remaining interest in Castleton Park ("Castleton") an office park located in Indianapolis, Indiana. During 1993, the Trust sold its two remaining office buildings within its office complex located in Atlanta, Georgia, formerly known as Peachtree-Dunwoody Pavilion ("Peachtree"). Prior to 1993, the Trust sold two office buildings at Castleton (1991) and five office buildings at Peachtree (1992). The Declaration of Trust currently provides that actual disposition of the remaining property, Harrisburg, may occur at any time prior to March 1999. The precise timing of this disposition or an alternative strategic transaction will be at the discretion of the Trustees, depending on both the prevailing conditions in the relevant real estate market and the ability of the Trust to extend or refinance its debt maturing in June 1998. NOTE 2: BASIS OF PRESENTATION The financial statements have been prepared by the Trust, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Trust believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the audited financial statements and related notes thereto included in the Annual Report on Form 10-K and Amendment No. 1 to Form 10-K for the year ended December 31, 1996. In the opinion of the Trust, all adjustments, which include only normal recurring adjustments necessary to present fairly its financial position as of September 30, 1997, its results of operations for the three and nine months ended September 30, 1997 and 1996 and its cash flows for the nine months ended September 30, 1997 and 1996, have been included in the accompanying unaudited financial statements. 6 7 EQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS NOTE 2: BASIS OF PRESENTATION (CONTINUED) Net loss per share for the three and nine months ended September 30, 1997 and 1996 have been computed on the basis of the 9,264,344 shares outstanding during the periods. Stock warrants held by the Trust's mortgage lender are considered common stock equivalents for purposes of the calculation of net loss per share. However, the warrants have not been included in the calculation of net loss per share for the periods presented since the effect of such calculation would be antidilutive. NOTE 3: CASH MANAGEMENT AGREEMENT In connection with the Trust's mortgage agreement (as amended and extended), the Trust entered into a Cash Management Agreement with the mortgage lender and assigned all lease and rent receipts to the lender as additional collateral. Pursuant to this agreement, a third-party escrow agent has been appointed to receive all rental payments from tenants and to fund monthly operating expenses in accordance with a budget approved by the lender. As of September 30, 1997, a balance of $498,000 was held by the third-party escrow agent in accordance with the Cash Management Agreement. The agreement also provides for the establishment of a capital reserve account, which is maintained by the escrow agent. Disbursements from this account, which is funded each month with any excess operating cash flow, are limited to capital expenditures approved by the lender. As of September 30, 1997 the balance of the capital reserve account was $1,865,000. NOTE 4: ADVISORY AND MANAGEMENT AGREEMENTS The Trust has entered into an agreement with Equitable Realty Portfolio Management, Inc., a wholly owned subsidiary of Equitable Real Estate Investment Management, Inc. ("Equitable Real Estate"), to act as its "Advisor". Equitable Real Estate was formerly a wholly owned subsidiary of the Equitable Life Assurance Society of the United States ("Equitable"). Effective June 10, 1997, Equitable sold its interest in Equitable Real Estate to Lend Lease Corporation, a real estate and financial services company based in Australia. Going forward, Equitable Real Estate and certain of its business units, including the Advisor, will operate under the name ERE Yarmouth. The Advisor makes recommendations to the Trust concerning investments, administration and day-to-day operations. Under the terms of the advisory agreement, as amended in December 1989, the Advisor receives a management fee that is based upon the average daily per share price of the Trust's shares plus the average daily balance of outstanding mortgage indebtedness. Such fee is calculated using a factor of 42.5 basis points (0.425%) and generally has been payable monthly without subordination. Commencing with the December 1995 debt extension 7 8 EQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS NOTE 4: ADVISORY AND MANAGEMENT AGREEMENTS (CONTINUED) and continuing with the December 1996 debt extension, the Mortgage Note lender has requested, and the Advisor has agreed to, a partial deferral of payment of its fee. Whereas the fee will continue to be computed as described, payments to the Advisor will be limited to $37,500 per quarter. Deferred fees, which amounted to $195,500 as of September 30, 1997, will be eligible for payment upon the repayment of the Mortgage Note. For the nine months ended September 30, 1997 and 1996, portfolio management fees amounted to $183,000 and $188,000, respectively. As part of the 1989 amendment to the advisory agreement, the Advisor forgave one-half, or $2,720,000, of the total amount of fees previously deferred pursuant to subordination provisions of the original advisory agreement. The remaining deferred fees are to be paid upon the disposition of Harrisburg. The Trust has also entered into an agreement with Compass Retail, Inc. ("Compass"), which operates as a business unit of ERE Yarmouth, for the on-site management of Harrisburg. Management fees paid to Compass are generally based upon a percentage of rents and certain other charges. Such fees and commissions are comparable to those charged by unaffiliated third-party management companies providing comparable services. For the nine months ended September 30, 1997 and 1996, management fee expense attributable to services rendered by Compass was $220,000 and $229,000, respectively. NOTE 5: DEBT MATURITIES The Trust's debt instruments mature on June 15, 1998 in the aggregate principal amount of $45,379,000. In the event that the Trust does not sell Harrisburg before the Mortgage Note and Term Loan mature, Management will explore its external financing alternatives, including the refinancing of the debt with its existing lenders. However, if the Trust is unable to refinance or replace the existing debt at commercially reasonable terms or at all, Management's plans with respect to liquidating Harrisburg will be accelerated to satisfy its debt obligations. NOTE 6: OTHER INCOME In March 1996, the Trust was notified by the Fulton County (Georgia) Tax Commissioner's office of a reduction in the assessed value of the real estate underlying Peachtree Dunwoody Pavilion for tax years 1991 and 1992. As previously disclosed in Note 1, the Trust completed the sale of Peachtree Dunwoody Pavilion during the period 1992-1993. Such 8 9 EQK REALTY INVESTORS I NOTES TO FINANCIAL STATEMENTS NOTE 6: OTHER INCOME (CONTINUED) reduction in assessed value resulted in a refund of previously paid real estate taxes in the amount of $192,000 which the Trust recognized as other income during the first quarter of 1996. In June 1996, the Trust was notified by the Fulton County Tax Commissioner's office of an additional tax refund of $72,000, which the Trust received in July 1996 and recognized as other income in the second quarter of 1996. 9 10 EQK REALTY INVESTORS I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the financial statements and notes that appear on pages 3-9. FINANCIAL CONDITION CAPITAL RESOURCES Trust Background As of September 30, 1997, the Trust's remaining real estate investment is Harrisburg East Mall ("Harrisburg"), a regional shopping center located in Harrisburg, Pennsylvania. During the period 1992 to 1995, the Trust completed the disposition of its two other real estate investments. Castleton Park ("Castleton"), an office park in Indianapolis, Indiana was sold in 1995, and Peachtree Dunwoody Pavilion, an office park in Atlanta, Georgia, was sold in three separate transactions during 1992 and 1993. The Declaration of Trust currently provides that the actual disposition of the remaining property, Harrisburg East Mall, may occur at any time prior to March 1999. The precise timing of this disposition or an alternative strategic transaction will be at the discretion of the Trustees, depending on both the prevailing conditions in the relevant real estate market and the ability of the Trust to extend or refinance its debt maturing in June 1998. Harrisburg Overview Over the past several years, the retail industry has experienced a significant number of retail store mergers and bankruptcies. Consolidations within the retail industry and the financial difficulties experienced by individual retailers have, in turn, led to a high level of unanticipated store closings and requests for rent relief within regional shopping malls. At Harrisburg, the current state of the retail industry has impacted both its department stores and its smaller specialty stores. Two of the department stores operating in 1994 have since closed, Hess's (November 1994) and John Wanamaker (October 1995). These department store spaces remained "dark" for substantial periods of time pending the opening of their replacements, Hecht's (October 1995) and Lord & Taylor (March 1997), respectively. The temporary closure of these department stores permitted certain tenants to exercise co-tenancy provisions pursuant to their leases, which allowed them to pay a lower amount of rent based on a 10 11 EQK REALTY INVESTORS I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS percentage of sales volumes in lieu of fixed minimum rents. Additionally, certain other tenants experienced financial difficulties which led to requests for rent relief and unanticipated store closings. As a result of these matters, the aggregate decline in rental revenues from amounts otherwise provided for under the related lease agreements amounted to approximately $600,000 for both 1995 and 1996, and $80,000 for the first quarter of 1997. Upon the opening of Lord & Taylor on March 10, 1997, substantially all of the in-line tenants' co-tenancy provisions ceased being operable, and such tenants' rent structures reverted back to fixed minimum rents. However, certain other tenants have experienced financial difficulties and, as a result, have either closed or have been granted rent relief. Tenants on rent relief have led to a decline in rental revenues of approximately $55,000 per quarter in 1997 from amounts otherwise contractually due. Management will continue to seek new tenants to fill existing vacancies and to replace such under-performing tenants. No assurances can be given, however, that Management will succeed with such efforts, or that such adverse effects will not continue beyond 1997 or increase in amount. These factors, as well as competitive pressures within the retail industry, have adversely affected the value and marketability of regional shopping malls in general and of Harrisburg in particular. Debt Maturities The Trust's Mortgage Note and Term Loan mature on June 15, 1998 in the aggregate principal amount of $45,379,000. In the event that the Trust does not sell Harrisburg or complete an alternative strategic transaction before the Mortgage Note and Term Loan mature on June 15, 1998, Management will explore its external financing alternatives, including the refinancing of its debt with the existing lenders. However, if the Trust is unable to refinance or replace the existing debt at commercially reasonable terms or at all, Management's plans with respect to liquidating Harrisburg will be accelerated to satisfy its debt obligations. LIQUIDITY The Trust's cash flows provided by operating activities decreased by $721,000 during the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996. This decrease in operating cash flows is principally the result of decreases in Harrisburg's 1997 revenues ($190,000) as described below coupled with the non-recurrence of accelerated accounts receivable collections in the prior year ($300,000), as well as increases in both real estate taxes ($100,000) and interest ($94,000) paid in 1997. Operating cash flows were also impacted by two 1996 non-recurring events which essentially offset one another, the refund of previously paid real estate 11 12 EQK REALTY INVESTORS I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS taxes at Peachtree Dunwoody Pavilion as discussed in Note 6 to the financial statements ($264,000) and the repayment of a $300,000 obligation to the Advisor in 1996. Cash flows used in investing activities during the nine months ended September 30, 1997 and 1996 amounted to $505,000 and $190,000, respectively. The 1997 results reflect a parking lot repaving project and the payment of certain tenant allowances at Harrisburg. The 1996 results also reflect the payment of certain tenant allowances at Harrisburg. The Trust anticipates capital expenditure requirements of approximately $350,000 for the remainder of 1997, which include projected tenant allowances of $315,000. During the nine months ended September 30, 1996, cash flows used in financing activities were limited to scheduled principal payments on the Trust's debt. Pursuant to the mortgage debt extension effective December 15, 1996, the Mortgage Note and Term Loan generally require monthly payments of interest only. Accordingly, there were no cash flows used in financing activities during the first nine months of 1997. The Trust's liquidity requirements for the remainder of 1997 also will include debt service payments of approximately $1,005,000 pursuant to the existing loan agreements. The Trust's cash management agreement stipulates that all rental payments from tenants are to be made directly to a third party escrow agent who also funds monthly operating expenses in accordance with a budget approved by the lender. The Trust believes that its cash flow for 1997 will be sufficient to fund its various operating requirements, including budgeted capital expenditures and monthly principal and interest payments, although its discretion with respect to cash flow will be limited by the terms of the cash management agreement. Management believes that the Trust's current cash reserves, coupled with additional cash flows projected to be generated from operations, will permit the Trust to meet its operating, capital and debt service requirements. As discussed above and in Note 1 to the financial statements, the Trust records its investments in real estate in accordance with the historical cost accounting convention. Accordingly, the Trust has not written up the cost basis of its investment in Harrisburg to its substantially higher net realizable value. Therefore, Management does not believe that its deficit in shareholders' equity of $4,439,000 at September 30, 1997 is indicative of its current liquidity or the net distribution that its shareholders would receive upon liquidation. 12 13 EQK REALTY INVESTORS I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the nine months ended September 30, 1997, the Trust reported a net loss of $1,418,000 ($.15 per share) compared to a net loss of $929,000 ($.10 per share) for the nine months ended September 30, 1996. For the third quarter of 1997, a net loss of $565,000 ($.06 per share) was reported compared to a net loss of $261,000 ($.03 per share) for the third quarter of 1996. The Trust's revenues for the three and nine months ended September 30, 1997 were $1,545,000 and $4,515,000, respectively, representing decreases of $31,000 and $190,000 over the comparable 1996 periods. The decrease for the nine month period was primarily due to non-recurring lease cancellation fees received in 1996 which are partially offset by the cessation of co-tenancy provisions and a corresponding increase in tenant rent obligations as discussed above. The Trust's expenses (net of tenant reimbursements) for the three and nine months ended September 30, 1997 were $283,000 and $642,000, respectively, representing an increase of $160,000 for the third quarter and a decline of $12,000 for the nine month period. The increase in net expenses for the third quarter was primarily attributable to a $78,000 decrease in Harrisburg's common area maintenance expense recoveries due to a 4% decline in average occupancy levels in 1997, and to other miscellaneous variances, none of which are individually significant. In March 1996, the Trust was notified by the Fulton County (Georgia) Tax Commissioner's office of a reduction in the assessed value of the real estate underlying Peachtree Dunwoody Pavilion for tax years 1991 and 1992. As previously disclosed in Note 1, the Trust completed the sale of Peachtree Dunwoody Pavilion during the period 1992-1993. Such reduction in assessed value resulted in a refund of previously paid real estate taxes in the amount of $192,000 which the Trust recognized as other income during the first quarter of 1996. In June 1996, the Trust was notified by the Fulton County Tax Commissioner's office of an additional tax refund of $72,000, which the Trust received in July 1996 and recognized as other income in the second quarter of 1996. There were no such similar events during the nine months ended September 30, 1997. Interest expense for the three and nine months ended September 30, 1997 increased by $40,000 and $109,000, respectively, over the comparable 1996 periods. The increase is primarily the result of an increase in the mortgage note interest rate to 8.88% from 8.54% effective with the December 15, 1996 mortgage note extension agreement. Other expenses consist of portfolio management fees, other costs related to the operation of the Trust, and interest income earned on cash balances. The decrease in other expenses of $174,000 13 14 EQK REALTY INVESTORS I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the nine months ended September 30, 1997 is primarily attributable to the recognition of imputed interest on deferred advisory fees in 1996. The imputed interest, which was fully amortized as of December 31, 1996, relates to the 1989 amendment to the advisory agreement (see note 4 to the Financial Statements). Partially offsetting this decline is the recognition of certain administrative costs related to management's efforts to wind down the Trust's business affairs as described above. 14 15 EQK REALTY INVESTORS I PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None ITEM 2. Changes in Securities None Items 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 2. None 4. None 10. None 11. See Note 2 to the Financial Statements. 15. Not Applicable 18. Not Applicable 19. None 22. None 23. Not Applicable 24. None 27. Included in EDGAR transmission only. (b) Reports on Form 8-K. None 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 1997 EQK REALTY INVESTORS I By:/s/Gregory R. Greenfield -------------------------------- Gregory R. Greenfield Executive Vice President and Treasurer (Principal Financial Officer) By:/s/William G. Brown, Jr. -------------------------------- William G. Brown, Jr. Vice President and Controller (Principal Accounting Officer) 16