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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 number 0-768
GARMENT CAPITOL ASSOCIATES
(Exact name of registrant as specified in its charter)
New York 13-6083208
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:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to section 12(g) of the Act:
$10,470,000 of Participations in Partnership Interests
(Title of class)
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
An Exhibit Index is located on pages 36 through 38 of this Report.
Number of Pages (including exhibits) in this filing:
PART I
Item 1. Business.
(a) General
Registrant, a partnership, was organized on January 10,
1957. On May 1, 1957, Registrant acquired fee title to the
Garment Capitol Building (the "Building") and the land thereunder,
located at 498 Seventh Avenue, New York, New York (the
"Property"). Registrant's partners are Stanley Katzman, John L.
Loehr and Peter L. Malkin (individually, a "Partner" and,
collectively, the "Partners"), each of whom also acts as agent for
holders of participations in their respective partnership
interests in Registrant (each holder of a participation,
individually, a "Participant" and, collectively, the
"Participants"). As described below, the Property has been sold
and distributions from sale proceeds has been made to the
Participants.
Registrant did not operate the Property. Registrant
leased the Property to 498 Seventh Avenue Associates (the
"Original Lessee") under a net operating lease (the "Operating
Lease") which commenced as of May 1, 1957 and was scheduled to
expire on April 30, 2007.
In 1994 and 1995 the Original Lessee made capital calls
on its partners in the aggregate amount of $1,300,000 to defray
certain operating expenses and improvement costs at the Property.
Despite these new capital infusions, however, the Original Lessee
concluded that to return the Property to profitability would
require a very large additional capital investment, estimated by
the Original Lessee to be as high as $16,000,000. Therefore, on
December 29, 1995, in accordance with the terms of the Operating
Lease, the Original Lessee assigned the Operating Lease to 4987
Corporation (the "New Lessee"), thereby effectively terminating
the liability of the Original Lessee and its partners under the
Operating Lease. The shares in the New Lessee are owned by the
partners in the Original Lessee except that a substantial portion
of the shares originally owned by Peter L. Malkin is held for the
benefit of members of his family but he retains voting control.
The New Lessee had paid basic rent under the Operating
Lease through March 27, 1997, the date of the sale of the
Property, as hereinafter described. Registrant applied these
rents to cover (1) its monthly mortgage payments to the Apple Bank
for Savings ("Apple Bank") on Registrants' fee mortgage on the
Property (the "Mortgage Loan"), (2) its monthly fee for
supervisory services and (3) its distributions to the Participants
in Registrant. The New Lessee did not pay the New York City real
estate taxes and Business Improvement District ("BID") assessments
in the amounts of $936,180.00 and $29,695.14, respectively, and
certain other minor assessments and charges aggregating less than
$1,500, all of which were due on January 1, 1996 or shortly
thereafter. The New Lessee also failed to pay the New York City
real estate taxes and BID assessments in the amounts of
$1,053,254.50 and $28,529.26, respectively, which were due on July
1, 1996 and $740,845.50 and $28,529.26, respectively, which were
due on January 1, 1997. As a result, although payment of the
January 1, 1996 and July 1, 1996 and January 1, 1997 real estate
taxes and BID assessments has been made as described below, the
New Lessee was in default of the Operating Lease as of January 1,
1996.
The New Lessee requested that Registrant forbear from
exercising its rights and remedies under the Operating Lease,
including termination of the Operating Lease, by reason of the
failure to pay the January 1, 1996 and July 1, 1996 real estate
taxes and BID assessments, while management of Registrant
solicited the consent of the Participants to a sale of the
Property (the "Solicitation"). On July 26, 1996, 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 for a sale of the
Property and forbearance in favor of the New Lessee. The details
of the Partners' proposal are provided in the Definitive Proxy
Statement which was filed with the Securities and Exchange
Commission as Schedule 14-A on July 25, 1996, and is incorporated
herein by reference. If Registrant did forbear, the New Lessee
agreed to cooperate fully with Registrant in connection with the
sale of the Property and to continue to perform its other
obligations under the Operating Lease, including payment of Basic
Rent, to enable Registrant to continue its monthly distributions
to the Participants, pay its supervisory fee and pay its monthly
mortgage obligation. The continuation of the Operating Lease was
also to serve to insulate Registrant from third party liabilities
attendant on property operations. Because the consent
solicitation program included the continuation of the Operating
Lease with the New Lessee, Registrant did not send a notice of
default under the Operating Lease based on the failure of the New
Lessee to pay the January 1, 1996 and July 1, 1996 real estate
taxes and BID assessments.
Although the failure to pay the January 1, 1996, July 1,
1996 and January 1, 1997 real estate taxes and BID assessments
also constituted a breach of Registrant's obligations under the
Mortgage Loan, Apple Bank had agreed to forbear from exercising
its rights and remedies during the period of the solicitation of
consents through a sale of the Property based on arrangements
consummated in March 1996 between the shareholders of the New
Lessee (or designees on their behalf) and Apple Bank to fund the
January 1, 1996 real estate taxes and BID assessments and certain
future real estate taxes and BID assessments on the Property
-2-
(together with the January 1, 1996 real estate taxes, the "Real
Estate Taxes") through protective advances under the Mortgage
Loan. The shareholders of the New Lessee (or designees on their
behalf) had personally borrowed from Apple Bank (a) on April 2,
1996, the sum of $1,012,274.18, equal to the January 1, 1996 real
estate taxes and BID assessments and interest thereon to the date
of the borrowing, and certain other minor city charges and
interest aggregating less than $1,500 and (b) on June 28, 1996,
the sum of $1,081,783.76 equal to the July 1, 1996 real estate
taxes and BID assessment and (c) on December 31, 1996, the sum of
$769,374.76 equal to the January 1, 1997 real estate taxes and BID
assessment. The April 2, 1996 borrowing was used to fund a
protective advance by Apple Bank to pay the January 1, 1996 real
estate taxes and BID assessments, interest thereon and such minor
charges, through the purchase of a subordinate participating
interest in the Mortgage Loan in such amount. The June 28, 1996
and December 31, 1996 borrowings were used to fund protective
advances by Apple Bank to pay, respectively, the July 1, 1996 and
January 1, 1997 Real Estate Taxes and BID assessments through the
purchase of additional subordinate participating interests in the
Mortgage Loan in such amounts. Interest and principal required to
be paid on the protective advances and on any future protective
advances have been paid by the New Lessee.
On January 29, 1997, Registrant received the consent of
the Participants for the sale and forbearance program and for the
liquidation of Registrant, as described in the Statement. See
Items 10, 11 12 and 13 hereof for a description of the services
rendered by, and compensation paid to, Counsel and for a
discussion of certain relationships which may pose actual or
potential conflicts of interest among Registrant, Original Lessee,
New Lessee and certain of their respective affiliates.
Registrant, together with the New Lessee, entered into a
contract with George Comfort & Sons, Inc., as Agent, and Tirrem
Management Company, Inc., collectively as Purchasers, to sell the
Property to the Purchasers for $42,000,000, subject to adjustments
(the "Contract of Sale"). The sale closed as of March 27, 1997.
After priority allocation for certain payments, as more
particularly described in the Statement, net sale proceeds of
$34,885,810 were allocated between Registrant and the New Lessee
pursuant to the formula described in the Statement, as approved by
the Participants. From its share of the proceeds, Registrant had
made an initial distribution on March 31, 1997 of $27,000,000 to
the Participants, and each holder of an original $10,000
Participation, as reduced to $5,000, received an initial
distribution of sale proceeds of $25,714, which included the
return of the Participant's remaining original capital investment.
On July 23, 1997, an additional distribution of $800,000 ($761.90
per $5,000 participation unit) was made to the Participants out of
the proceeds of sale.
-3-
Based on advice from legal counsel, the partnership was
terminated on November 30, 1997. At the time of termination,
Registrant was still involved in litigation. In order to provide
for the anticipated costs of the litigation, an escrow account, in
the amount of $206,894 is being held by counsel. See Item 3
hereto.
(b) The Operating Lease
Under the Operating Lease, the New Lessee paid (i)
annual basic rent of $1,090,000 (the "Basic Rent") to Registrant
and (ii) additional rent equal to 50% of New Lessee's net
operating profit in excess of $200,000 for each Operating Lease
year (the "Additional Rent").
Additional Rent income was recognized when earned from
the New Lessee, at the close of the lease year ending April 30.
Such income, if any, was not determined until the New Lessee,
pursuant to the Operating Lease, rendered to Registrant a
certified report on the operation of the Property. The Operating
Lease required that this report be delivered to Registrant
annually within 60 days after the end of each such lease year.
All Additional Rent income and certain supervisory service expense
could only be determined after the receipt of such report. The
Operating Lease did not provide for the New Lessee to render
interim reports to Registrant, so no Additional Rent income was
reflected for the period between the end of the Operating Lease
year and the end of Registrant's fiscal year. There was no
additional rent for the eleven months ended November 30, 1997 and
for the fiscal years ended December 31, 1996 and December 31,
1995. See Note 4 of Notes.
(c) The First Mortgage Loan
On March 23, 1995, Registrant entered into a
Modification and Extension Agreement (the "Modification"), as of
December 1, 1992, with Apple Bank concerning the Mortgage Loan,
which was originally made on November 30, 1987 in the principal
amount of $3,485,000. The Mortgage Loan was secured by a first
mortgage on the Property.
The principal terms of the Modification were as follows:
Date: As of December 1, 1992.
Amount as of the
effective date of
the Modification: $3,376,340.61.
Term: Five years, maturing on December 1, 1997.
-4-
Interest Rates: 10.0% per annum from December 1, 1992
through October 31, 1993;
10.50% per annum from November 1, 1993
through November 30, 1994; and
10.60% per annum from December 1, 1994
through December 1, 1997.
Monthly
Payments: $36,282.33 from January 1, 1993 through
November 1, 1993;
$37,276.35 from December 1, 1993 through
December 1, 1994; and
$37,465.52 from January 1, 1995 through
December 1, 1997.
Prepayment
Privilege: The Mortgage Loan was prepayable at any time
in whole only, without penalty, on 60 days'
prior written notice.
The following provisions from the Mortgage Loan before
the Modification continued to be applicable during the extended
term:
Liability: No Partner had personal liability for the
obligation under the Mortgage Loan to pay
principal and interest;
Due on Sale: Upon a sale or further encumbrance of the
Property without Apple Bank's consent, the
Mortgage Loan would have become immediately
due and payable; and
Operating Lease: No modification or cancellation of the
Operating Lease was permitted without Apple
Bank's consent.
The Mortgage Loan was repaid in full in connection with
the sale of the Property.
The total amount paid to Apple Bank in respect of the
Mortgage Loan was $5,809,686. This amount consisted of the
following elements: (a) principal - $2,886,125 (b) accrued
interest on the principal balance to the date of sale - $22,945;
(c) prepayment charges to expiration of 60 day notice period (as
reduced based on discussions between Apple Bank and Counsel
- $14,419; (d) real estate tax advances - $2,863,433 (of which
amount $333,181 was paid by the New Lessee from its share of sale
proceeds, as contemplated by the statement; and (e) accrued
interest on the real estate tax advances - $22,764 (paid by the
New Lessee).
-5-
(d) Competition
Tenant space leases at the Property were offered at an
average annual base rental of approximately $18 per square foot
(exclusive of electricity charges and escalation). Space tenants
provide their own cleaning. The average asking rental rate and
other financial terms for space leases at the Property appeared to
be competitive with the average rental rates charged by similar
buildings offering comparable space in the immediate vicinity.
In the overall rental market for commercial space in
Manhattan, rents range from approximately $50 per square foot for
prime office space to approximately $12 per square foot in less
developed industrial and/or secondary commercial areas. Accord-
ingly, rents at the Building were considered competitive in the
area, given the relative condition of surrounding buildings and
the nature of services, amenities and office space offered by them
as compared to the Building.
(e) Tenant Operating Leases
The New Lessee operated 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 was governed by
the provisions of the tenant's lease.
Item 2. Property.
Registrant owned the Building located at 498 Seventh
Avenue, New York, New York, known as the "Garment Capitol
Building," and the land thereunder. See Item 1 hereof. The
Building, erected in 1921 and containing 24 floors, stands on the
southwest corner of Seventh Avenue and 37th Street in New York
City's Garment District. The Building contains office, showroom
and loft space. The Building is equipped with individual air-
conditioning units and has 11 passenger elevators and 10 freight
elevators. The Building was leased to the New Lessee under the
Operating Lease, the initial term of which expired on April 30,
1982 and which contained two 25-year renewal options, the first of
which was exercised on January 7, 1981. See Item 1 hereof for
additional information concerning the Operating Lease. The
Property was sold on March 27, 1997 pursuant to the Contract of
Sale. See Item 1.
-6-
Item 3. Legal Proceedings.
The Property of Registrant is the subject of the
following pending litigation:
On October 4, 1996, the alleged holder of three
participation interests in Registrant brought suit in the U.S.
District Court for the Southern District of New York against the
New Lessee, the Original Lessee, the partners in Registrant, and
Counsel. Registrant is a nominal defendant. The suit claims that
defendants violated the anti-fraud provisions of the federal
securities laws and committed breaches of fiduciary duty and fraud
in relation to the Solicitation. The suit is styled as a class
action, but the plaintiff has not applied for class certification
to date. The suit seeks to enjoin the allocation of sale proceeds
to the New Lessee approved by the Participants, money damages and
related relief. Defendants responded to the complaint with a
motion seeking dismissal of the action in its entirety. The Court
granted that motion and dismissed the action by order and decision
dated December 8, 1998. Plaintiff's appeal of that order is
pending. The complaint does not seek any relief against
Registrant, and, accordingly, Registrant's litigation counsel is
of the opinion that no loss or other unfavorable outcome of the
action against Registrant is anticipated. In accordance with the
Solicitation, sale proceeds were allocated to repay the Fee
Mortgagee the protective advances as well as all other sums then
outstanding on the Fee Mortgage. Pursuant to an agreement between
counsel for the plaintiff in the 1996 proceeding and counsel for
the defendants, net sale proceeds allocated to the New Lessee in
accordance with the formula set forth in the Solicitation will not
be distributed to the New Lessee, except upon 30 days' notice to
counsel for the plaintiff. Such allocated proceeds are currently
being held by Counsel.
On March 13, 1997, the alleged holder of a fractional
participation interest in Registrant brought suit in the U.S.
District Court for the Southern District of New York against New
Lessee, Original Lessee, Registrant's Partners and Counsel.
Registrant is a nominal defendant. The suit is essentially
similar to the legal action described in the preceding paragraph,
alleging that defendants violated the Federal proxy rules,
committed breaches of fiduciary duty and fraud in relation to the
Solicitation for the sale and forbearance program and for
liquidation of Registrant. The suit seeks to enjoin the
allocation of sale proceeds to New Lessee approved by the
Participants, money damages and related relief. Defendants
responded to the complaint with a motion seeking dismissal of the
action in its entirety. The Court granted the motion and
dismissed the action by the same order and decision dated December
8, 1997 and referred to in the preceding paragraph. Plaintiff's
-7-
appeal of the order is pending. The complaint does not seek any
relief against Registrant, and, accordingly, Registrant's
litigation counsel is of the opinion that no loss or other
unfavorable outcome of the action against Registrant is
anticipated.
On July 24, 1997, a former holder of a 1.66% partnership
interest in the Original Lessee filed a complaint in New York
Supreme Court against Registrant, Original Lessee, New Lessee and
Peter L. Malkin, individually and as a partner or shareholder in
those entities. As against Registrant, the complaint alleges a
claim for damages or other relief based on the sale of the
Property and the allocation of sale proceeds to Registrant. An
answer for Registrant denying all allegations of liability and
damages asserted by plaintiff has been filed. The action is now
in the pretrial discovery stage.
Item 4. Submission of Matters to a Vote of Participants.
On July 26, 1996, the consent of Participants was sought
to the sale and forbearance program, and, following a sale, to the
liquidation of Registrant, as described in the Statement. The
consent of Participants was received by the Partners, and the
Property was sold on March 27, 1997. Registrant was terminated on
November 30, 1997. See Item 1(a).
-8-
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.
Registrant was a partnership organized pursuant to a
partnership agreement dated January 10, 1957.
Registrant did not issue any common stock. The
securities registered by it under the Securities Exchange Act of
1934, as amended, consisted of participations in the partnership
interests of the Partners in Registrant (the "Participations") and
are not shares of common stock or their equivalent. The
Participations represented 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 originally offered at a purchase price of
$10,000; fractional units were also offered at proportionate
purchase prices. In November 1957, one-half of the original
purchase price was returned to the Participants from the proceeds
of a first mortgage on the Property leaving a remaining unreturned
cash investment of $5,000 (a "$5,000 Participation"). On
March 31, 1997 and July 23, 1997 distributions of sale proceeds
from the sale of the Property were made to the Participants. Each
holder of a $5,000 Participation received a total of $26,475.90,
which included a return of remaining original capital. Registrant
has not repurchased Participations in the past.
(a) The Participations were not traded on an
established securities market, nor were they readily tradable on a
secondary market or the substantial equivalent thereof. Based on
Registrant's transfer records, Participations were sold by the
holders thereof from time to time in privately negotiated
transactions and, in many instances, Registrant was not aware of
the prices at which such transactions occurred.
(b) Registrant did not pay dividends. No Additional
Rent was paid by the Original Lessee for the lease year ended
April 30, 1997. For each $5,000 Participation during the year
ended December 31, 1996, Registrant made monthly distributions of
$47.45. There was no Additional Rent earned for the Operating
Lease year ended April 30, 1996. See Item 1 hereof. There were
no restrictions on Registrant's present or future ability to make
distributions; however, the amount of such distributions,
particularly distributions of Additional Rent, depended solely on
the New Lessee's payments of Basic Rent and Additional Rent to
Registrant. See Item 1 hereof and Note 9 of the Notes.
-9-
By reason of the sale of the Property, the Operating
Lease has expired and the Registrant was liquidated. There was no
additional regular monthly distributions following the
distribution on April 1, 1997 in respect of March, 1997 rent under
the Operating Lease.
-10-
Item 6.
GARMENT CAPITOL ASSOCIATES
SELECTED FINANCIAL DATA
Eleven months
ended November Year ended December 31,
1997 1996 1995 1994 1993
Basic rent income................ $ 257,850 $1,090,000 $1,090,000 $1,090,000 $1,090,000
Additional rent income........... - - - - 1,010,196
Interest income.................. 87,951 140,266 - - -
Dividend income.................. 17,533 43 3,027 7,994 1,683
Total revenue................. $ 363,334 $1,230,309 $1,093,027 $1,097,994 $2,101,879
Gain on sale of real estate...... $28,164,634 $ - $ - $ - $ -
Z
Net income....................... $28,334,587 $ 693,299 $ 693,538 $ 691,708 $1,634,085
Earnings per $5,000 participation
unit, based on 1,050 participa-
tion units outstanding during
the year:
Income from operations....... $ 162 $ 660 $ 661 $ 659 $ 1,556
Gain on sale of real estate.. 26,823 - - - -
Net income................. $ 26,985 $ 660 $ 661 $ 659 $ 1,556
Total assets..................... $ 206,894 $5,496,454 $2,642,224 $2,865,967 $2,786,398
Long-term obligations............ $ - $ - $2,912,936 $ - $ -
Distributions per $5,000 par-
ticipation unit, based on 1,050
participation units outstanding
during the year:
Income........................ $ 26,666 $ 569 $ 583 $ 583 $ 1,342
Return of capital............. - - - - -
Total distributions........... $ 26,666 $ 569 $ 583 $ 583 $ 1,342
-11-
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Registrant was organized solely for the purposes of
acquiring the Property subject to the Operating Lease. Registrant
was required to pay from Basic Rent the mortgage charges and
supervisory services and to distribute the balance of such Basic
Rent to the Participants. Pursuant to the Operating Lease, the
holder of the leasehold interest thereunder had sole responsibil-
ity for the condition, operation, repair, maintenance and
management of the Property. Registrant did not maintain
substantial reserves or otherwise maintain liquid assets to defray
any operating expenses of the Property. Registrant's results of
operations were affected primarily by the amount of rent payable
to it under the Operating Lease.
Registrant is aware of the following events. The
Original Lessee operated the Property at a substantial loss during
the years ended December 31, 1995 and December 31, 1994. In 1994
and 1995, the Original Lessee made capital calls on its partners
in the aggregate amount of $1,300,000 to defray certain operating
expenses and improvement costs at the Property.
The downturn and changes in methods of operations in the
garment industry had a major impact on the Property and its
operations and profitability. Registrant had been advised that
the loss of tenants at the Property and the related reduction in
rent received were primarily due to insolvencies affecting tenants
in the garment business and reduced demand for space.
The New Lessee had the right to abandon or assign its
interest in the Operating Lease (see Item 1 above).
As a result of the Sale, on July 23, 1997, Registrant
made a final distribution to the Participants of the remaining
sales proceeds. At the closing of the sale pursuant to the
Contract of Sale, the interests of Registrant, as lessor, and the
New Lessee, as lessee, under the Operating Lease were assigned to
the purchaser and the Operating Lease was terminated. There were
no additional regular monthly distributions following the
distribution on April 1, 1997 in respect of March 1997 rent under
the Operating Lease. See Item 1.
Liquidity and Capital Resources
N/A
-12-
Inflation
Inflationary trends in the economy did not directly
affect Registrant's operations, since as noted above, Registrant
did not actively engage in the operation of the Property.
Inflation may have affected the operations of the New Lessee. The
New Lessee was required to pay Basic Rent, regardless of the
results of its operations. Inflation and other operating factors
affected only the amount of Additional Rent payable by the New
Lessee, which was based on the New Lessee's net operating profit.
Item 8. Financial Statements and Supplementary Data.
The financial statements, together with the accompanying
report by, and the consent to the use thereof, prepared by Jacobs
Evall & Blumenfeld LLP immediately following, are being filed in
response to this item.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not applicable.
-13-
PART III
Item 10. Directors and Executive Officers of the Registrant.
Registrant had no directors or officers or any other
centralization of management. There is no specific term of office
for any Partner. The table below sets forth as to each individual
who was serving as a Partner the following: name, age, nature of
any family relationship with any other Partner, business
experience during the past five years and principal occupation and
employment during such period, including the name and principal
business of any corporation or any organization in which such
occupation and employment was carried on and the date such
individual became a Partner:
Principal Date
Nature of Occupation Individual
Family Business and became
Name Age Relationship Experience Employment Partner
Stanley Katzman 65 None Attorney-at-Law Senior Partner 1996
Wien & Malkin
LLP,
Counsellors-
at-Law
John L. Loehr 61 None Attorney-at-Law Senior Partner 1996
Wien & Malkin
LLP,
Counsellors-
at-Law
Peter L. Malkin 64 None Attorney-at-Law Senior Partner 1983
Wien & Malkin
LLP,
Counsellors-
at-Law
As stated above, the Partners are also members of
Counsel. See Items 11, 12 and 13 hereof for a description of the
services rendered by, and the compensation paid to, Counsel and
for a discussion of certain relationships which may have posed
actual or potential conflicts of interest among Registrant,
Original Lessee, New Lessee 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
-14-
that Act, and in which the Partners are either a director, joint
venturer or general partner are as follows:
Stanley Katzman is a joint venturer in 250 West 57th St.
Associates and Navarre-500 Building Associates; and a
general partner in Empire State Building Associates and
60 East 42nd St. Associates; and
John L. Loehr is a general partner in Empire State
Building Associates and 60 East 42nd St. Associates; and
Peter L. Malkin is a joint venturer in 250 West 57th St.
Associates and Navarre-500 Building Associates; and a
general partner in Empire State Building Associates and
60 East 42nd St. Associates.
Counsel was responsible for overseeing the liquidation
of Registrant.
Item 11. Executive Compensation
As stated in Item 10 hereof, Registrant had no directors
or officers or any other centralization of management.
No remuneration was paid during the current fiscal year
by Registrant to any of the Partners as such. Registrant's
supervisory fee arrangement with Counsel provided for (i) the
basic payment of $42,500 per annum; (ii) an additional payment of
the first $37,500 of Additional Rent paid by the lessee under the
Operating Lease in any lease year; and (iii) the payment of 10% of
all distributions to Participants in any year from Basic Rent and
Additional Rent in excess of the amount representing a return at
the rate of 18% per annum on their remaining cash investment in
any year. Pursuant to such fee arrangements described herein,
Registrant paid Counsel $21,360 during the eleven month period
ended November 30, 1997. The supervisory services provided to
Registrant by Counsel included legal, administrative and financial
services. The legal and administrative services included acting
as general counsel to Registrant, maintaining all of its
partnership records, performing physical inspections of the
Building, reviewing insurance coverage and conducting annual
partnership meetings. Financial services included monthly receipt
of rent from the New Lessee, payment of monthly and additional
distributions to the Participants, payment of all other
disbursements, confirmation of the payment of real estate taxes,
active review of financial statements submitted to Registrant by
the New 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. Counsel also prepared quarterly, annual and other
-15-
periodic filings with the Securities and Exchange Commission and
applicable state authorities. As noted in Items 1 and 10 of this
report, the Partners are also members of Counsel.
Counsel did not receive a Supervisory Fee based on sale
proceeds allocated to Registrant but has been paid for its legal
services in connection with the Statement and in connection with
the sale. Counsel has also been paid legal fees by the New Lessee
for various work in 1996 and 1997.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
(a) Registrant has no voting securities (see Item 5
hereof).
(b) The Partners (see Item 10 hereof) beneficially
owned, directly or indirectly, the following Participations:
Name & Address Amount of
of Beneficial Beneficial Percent
Title of Class Owners Ownership of Class
Participations Stanley Katzman $ 2,500 .0476%
in Partnership 30 East 62nd Street
Interests New York, NY 10021
John L. Loehr $ 5,000 .0952%
286 Alpine Circle
River Vale, NJ 07675
Peter L. Malkin $42,500 .8095%
21 Bobolink Lane
Greenwich, CT 06830
At the date of sale, March 27, 1997, certain of the
Partners (or their respective spouses) held additional
Participations as follows:
Peter L. Malkin owned of record as trustee, but not
beneficially, a $5,000 Participation. Mr. Malkin
disclaims any beneficial ownership in such
Participation.
Isabel Malkin, the wife of Peter Malkin, owned of record
and beneficially, $21,250 of Participations. Mr. Malkin
disclaims any beneficial ownership of such
Participations.
-16-
Agency Holdings Associates, an affiliate of Counsel,
owned a $5,000 Participation which was distributed in
liquidation to its members.
(c) Not applicable.
Item 13. Certain Relationships and Related Transactions.
(a) As stated in Item 1 hereof, Peter L. Malkin,
Stanley Katzman and John L. Loehr were the three Partners in
Registrant and also acted as agents for the Participants in their
respective partnership interests. Mr. and Mrs. Malkin were also
among the partners in the Original Lessee and shareholders in the
New Lessee. Because one of the three Partners and his wife were
partners in the Original Lessee and shareholders in the New Lessee
and all three Partners are members of Counsel (which represents
Registrant and Original Lessee), certain actual or potential
conflicts of interest may have arose with respect to the
management and administration of the business of Registrant.
Conflicts may have also existed in connection with the sale of the
Property. Under the respective Participating Agreements pursuant
to which the Partners acted as agents for the Participants,
certain transactions required the prior consent from Participants
owning a specified interest under the agreements in order for the
Agents to act on their behalf. Such transactions included
modifications and extensions of the Operating Lease or the
Mortgage Loan, or a sale or other disposition of the Property or
substantially all of Registrant's other assets. As noted in Item
1(a) above, the sale of the Property, as part of the Sale and
Forbearance Program described in the Statement, had been approved
by the Participants and the closing of the sale was on March 27,
1997.
Reference is made to Items 1 and 2 hereof for a
description of the terms of the Operating Lease between Registrant
and the New Lessee. The respective interests of Messrs. Katzman,
Loehr and Malkin, if any, in Registrant arose solely from the
ownership of their respective participations in Registrant. The
respective interests of Mr. and Mrs. Malkin in Original Lessee and
New Lessee arose solely from the ownership of their respective
partnership interests in Original Lessee and shares in New Lessee.
The Partners (and Mrs. Malkin) received no extra or special
benefit not shared on a pro rata basis with all other Participants
in Registrant or partners in Original Lessee and shareholders in
New Lessee. However, each of the Partners, by reason of his
respective interest in Counsel, was entitled to receive his share
of any legal fees or other remuneration paid to Counsel for
professional services rendered to Registrant and Original Lessee.
See Item 11 hereof for a description of the renumeration
arrangements between Registrant and Counsel relating to
-17-
supervisory services provided by Counsel. Counsel has also been
paid fees for legal services rendered to the New Lessee in
connection with certain of its operations during 1996 and 1997.
Reference is also made to Items 1 and 10 hereof for a
description of the relationship between Registrant and Counsel, of
which the Partners are among the members. The respective
interests of the Partners in any remuneration paid or given by
Registrant or New Lessee to Counsel arose solely from the
ownership of their respective partnership interests in Counsel.
See Item 11 hereof for a description of the remuneration
arrangements between Registrant and Counsel.
(b) Reference is made to Paragraph (a) above.
(c) Not applicable.
(d) Not applicable.
-18-
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.
(a)(1) Financial Statements:
Consent of Jacobs Evall & Blumenfeld LLP, Certified
Public Accountants, dated January 31, 1998.
Accountant's Report of Jacobs Evall & Blumenfeld LLP,
Certified Public Accountants, dated January 31, 1998.
Balance Sheets at November 30, 1997 and at December 31,
1996 (Exhibit A).
Statements of Income for the eleven months ended
November 30, 1997 and for the fiscal years ended
December 31, 1996 and 1995 (Exhibit B).
Statement of Partners' Capital Deficit for the eleven
months ended November 30, 1997 (Exhibit C-1).
Statement of Partners' Capital Deficit for the fiscal
year ended December 31, 1996 (Exhibit C-2).
Statement of Partners' Capital Deficit for the fiscal
year ended December 31, 1995 (Exhibit C-3).
Statements of Cash Flows for the eleven months ended
November 30, 1997 and for the fiscal years ended
December 31, 1996 and 1995 (Exhibit D).
Notes to Financial Statements for the eleven months
ended November 30, 1997 and for the fiscal years ended
December 31, 1996 and 1995.
(2) Financial Statement Schedules:
List of Omitted Schedules.
(3) Exhibits: See Exhibit Index.
-19-
[LETTERHEARD OF
JACOBS EVALL & BLUMENFELD LLP
CERTIFIED PUBLIC ACCOUNTANT]
January 31, 1998
Garment Capitol Associates
New York, N.Y.
We consent to the use of our independent accountants' report dated January 31,
1998, covering our audits of the accompanying financial statements of Garment
Capitol Associates in connection with and as part of your November 30, 1997
annual report (Form 10-K) to the Securities and Exchange Commission.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
-20-
INDEPENDENT ACCOUNTANTS' REPORT
To the participants in Garment Capitol Associates
(a Partnership)
New York, N. Y.
We have audited the accompanying balance sheets of Garment Capitol Associates
(the "Company") as of November 30, 1997 (cessation of business) and December
31, 1996, and the related statements of income, partners' capital (deficit)
and cash flows for the eleven months ended November 30, 1997 and each of the
two years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Garment Capitol Associates as
of November 30, 1997 and December 31, 1996, and the results of its operations
and its cash flows for the eleven months ended November 30, 1997 and each of
the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Jacobs Evall & Blumenfeld LLP
Certified Public Accountants
New York, N. Y.
January 31, 1998
-21-
EXHIBIT A
GARMENT CAPITOL ASSOCIATES
BALANCE SHEETS
A S S E T S
November 30, December 31,
1997 1996
Current Assets:
Cash and cash equivalents:
Morgan Guaranty Trust Company of New York $ - $ 65,298
Distribution account held by
Wien & Malkin LLP....................... - 49,826
Fidelity U.S. Treasury Income
Portfolio............................... - 868
Escrow account held by Wien
& Malkin LLP (Note 10).................. 206,894 -
206,894 115,992
Due from lessee (Note 9)................... - 2,854,624
TOTAL CURRENT ASSETS............... - 2,970,616
Real Estate (Notes 2b, 3 and 9):
Land....................................... - 2,500,000
Building................................... $ - $8,000,000
Less: Accumulated depreciation.......... - - 8,000,000 -
Other Assets:
Mortgage refinancing costs, less
accumulated amortization of $81,212
in 1996 (Note 2c)......................... - 25,838
TOTAL ASSETS....................... $ 206,894 $5,496,454
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current Liabilities:
Principal payments of first
mortgage payable within one
year (Notes 3 and 9)...................... $ - $5,785,947
Accrued interest payable................... - 45,790
Accrued legal costs reserved re: pending
litigation concerning sale of real
estate (Notes 9 and 10)................... 206,894 -
TOTAL LIABILITIES.................. 206,894 5,831,737
Partners' capital (deficit) (Exhibit C)...... - (335,283)
TOTAL LIABILITIES AND PARTNERS'
CAPITAL (DEFICIT)................. $ 206,894 $5,496,454
See accompanying notes to financial statements.
-22-
EXHIBIT B
GARMENT CAPITOL ASSOCIATES
STATEMENTS OF INCOME
Eleven months
ended November 30, Year ended December 31,
1997 1996 1995
Revenues:
Rent income, from a related
party (Note 4)........................... $ 257,850 $1,090,000 $1,090,000
Interest income........................... 87,951 140,266 -
Dividend income........................... 17,533 43 3,027
363,334 1,230,309 1,093,027
Expenses:
Interest on mortgage (Note 3)............. 146,183 466,323 328,802
Supervisory services, to a
related party (Note 5)................... 21,360 42,500 42,500
Amortization of mortgage
refinancing costs (Note 2c).............. 25,838 28,187 28,187
193,381 537,010 399,489
Income from operations............ 169,953 693,299 693,538
Gain on sale of real estate (Note 9)........ 28,164,634 - -
NET INCOME, CARRIED TO PARTNERS'
CAPITAL DEFICIT (NOTE 8)......... $28,334,587 $ 693,299 $ 693,538
Earnings per $5,000 participation
unit, based on 1,050 participation
units outstanding during each year:
Income from operations................... $ 162 $ 660 $ 661
Gain on sale of real estate.............. 26,823 - -
NET INCOME........................ $ 26,985 $ 660 $ 661
See accompanying notes to financial statements.
-23-
EXHIBIT C-1
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
ELEVEN MONTHS ENDED NOVEMBER 30, 1997
Partners'
capital (deficit) Share of Partners' capital
January 1, 1997 net income Distributions November 30, 1997
John L. Loehr Group........... $(111,761) $ 9,444,862 $ 9,333,101 $ -
Peter L. Malkin Group......... (111,761) 9,444,862 9,333,101 -
Stanley Katzman Group......... (111,761) 9,444,863 9,333,102 -
$(335,283) $28,334,587 $27,999,304 $ -
See accompanying notes to financial statements.
-24-
EXHIBIT C-2
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1996
Partners' Partners'
capital (deficit) Share of capital (deficit)
January 1, 1996 net income Distributions December 30, 1996
John L. Loehr Group (formerly
Donald A. Bettex Group)...... $(143,557) $ 231,100 $ 199,304 $(111,761)
Peter L. Malkin Group......... (143,557) 231,100 199,304 (111,761)
Stanley Katzman Group
(formerly Martin D. Newman
Group)...................... (143,556) 231,099 199,304 (111,761)
$(430,670) $ 693,299 $ 597,912 $(335,283)
See accompanying notes to financial statements.
-25-
EXHIBIT C-3
GARMENT CAPITOL ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEAR ENDED DECEMBER 31, 1995
Partners' Partners'
capital (deficit) Share of capital (deficit)
January 1, 1995 net income Distributions December 31, 1995
Donald A. Bettex Group........ $(170,699) $231,179 $ 204,037 $(143,557)
Peter L. Malkin Group......... (170,699) 231,179 204,037 (143,557)
Martin D. Newman Group
(formerly Alvin
Silverman Group)............ (170,698) 231,180 204,038 (143,556)
$(512,096) $693,538 $ 612,112 $(430,670)
See accompanying notes to financial statements.
-26-
EXHIBIT D
GARMENT CAPITOL ASSOCIATES
STATEMENTS OF CASH FLOWS
Eleven months
ended November 30, Year ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net income...................................... $ 28,334,587 $ 693,299 $ 693,538
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization of mortgage refinancing
costs (Note 2c)............................. 25,838 28,187 28,187
Gain on sale of real estate.................. (28,164,634) - -
Changes in operating liabilities:
Accrued interest payable................... (45,790) 18,884 (38,465)
Accrued legal fees reserved
re: pending litigation.................... 206,894 - -
Mortgage refinancing costs paid............ - - (37,568)
Net cash provided by
operating activities................ 356,895 740,370 645,692
Cash flows from investing activities:
Payments from (advances to)
lessee, net (Note 9)........................... 2,854,624 (2,854,624) -
Net proceeds from sale of real estate.......... 30,664,634 - -
Net cash used in investing
activities.......................... 33,519,258 (2,854,624) -
Cash flows from financing activities:
Cash distributions.............................. (27,999,304) (597,912) (612,112)
Principal payments on first mortgage payable.... (5,785,947) (123,473) (266,704)
Proceeds from issuance of long-term
debt re: protective advances (Note 9).......... - 2,863,432 -
Net cash provided by (used in)
financing activities................ (33,785,251) 2,142,047 (878,816)
Net increase (decrease) in cash
and cash equivalents................ 90,902 27,793 (233,124)
Cash and cash equivalents, beginning of period.... 115,992 88,199 321,323
CASH AND CASH EQUIVALENTS,
END OF PERIOD....................... $ 206,894 $ 115,992 $ 88,199
Supplemental disclosures of cash flow information:
1997 1996 1995
Cash paid for:
Interest...................................... $ 191,973 $ 447,439 $ 367,267
See accompanying notes to financial statements.
-27-
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Activity
Garment Capitol Associates ("Associates") is a general partnership
which, until March 27, 1997, owned commercial property situated at 498
Seventh Avenue, New York, New York (the "Property"). Through December
28, 1995 the Property was net leased to 498 Seventh Avenue Associates
(the "Original Lessee"). Effective December 29, 1995 the operating
lease was assigned to 4987 Corporation (the "New Lessee") (see Note 4).
On March 27, 1997 Associates sold the Property and discontinued
operations. See Note 9. Associates formally ceased all business
activity as of November 30, 1997, when the partnership was terminated.
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. Cash equivalents also include amounts held
by Wien & Malkin LLP (see Note 5) in escrow on November 30, 1997 as a
reserve to cover possible legal costs for pending litigation in which
Associates is named as a defendant (see Note 10).
b. Real Estate and Depreciation of Building:
Real estate, consisting of land and building, is stated at cost. The
building Is fully depreciated. Depreciation of the building had been
provided on the straight-line method based on a thirty-year life
(3-1/3% per annum).
c. Mortgage Refinancing Costs and Amortization:
Mortgage refinancing costs totaling $107,050 have been incurred
in connection with the December 1, 1992 refinancing of the first
mortgage payable (see Note 3), and were being charged to income ratably
over the five year term of the first mortgage. Such costs include
payments of $49,564 to the firm of Wien & Malkin LLP, a related party.
See Note 5. The unamortized balance was written off in 1997, when the
Property was sold (Note 1) and the balance of the first mortgage was
paid.
d. Use of Estimates:
In preparing financial statements in conformity with generally
accepted accounting principles, management often makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
Expenses during the reporting period. Actual results could differ from
those estimates.
3. First Mortgage Payable
On November 30, 1987, a first mortgage was placed on the Property with
Apple Bank for Savings in the amount of $3,485,000. Annual mortgage
charges were $348,500, payable in equal monthly installments, applied
first to interest at the rate of 9-1/2% per annum and the balance to
principal. The mortgage was scheduled to mature on December 1, 1992
with a balance of $3,376,341 but was extended until June 16, 1993, when
the bank issued a commitment to extend and modify the mortgage for a
five-year period
-28-
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
3. First Mortgage Payable (continued)
from December 1, 1992 through December 1, 1997. The closing, which had
been delayed, occurred on March 23, 1995. The terms of the extended
mortgage include provision for constanmonthly payments totaling
$447,316 per annum, including interest at the rate of 10 1/2% per annum
from November 1, 1993 through November 30, 1994, and constant payments
totaling $449,586 per annum, including interest at the rate of 10.6%
per annum from December 1, 1994 through maturity. The constant
payments were based on a fifteen year amortization schedule. Payments
of principal and interest made subsequent to the original maturity
date (December 1, 1992) were reapplied according to these new
repayment terms and, at the closing, a retroactive payment of $218,081
was made to bring the payments current with the new mortgage schedule.
The balance of the mortgage at December 31, 1996 was scheduled to be
$2,912,936. However, protective advances by the Fee Mortgagee in 1996
(see Note 9) increased the mortgage payable balance to $5,785,947.
Interest only on the increased mortgage amounts were also payable
monthly at the rate of 10.6% per annum through maturity. In
accordance with the Solicitation, interest on the protective advances
were payable by the New Lessee so long as the lease continued in
effect; the principal of the protective advances was collectible from
the proceeds of the sale of the Property.
The Property was sold on March 27, 1997 and proceeds from the sale
were used to pay the first mortgage and the protective advances in
full.
4. Related Party Transactions - Rent Income
Rent income for the period of ownership of the Property in 1997 (Note
1) and for the years ended December 31, 1996 and 1995 was earned
pursuant to the terms of a net operating lease dated May 1, 1957 (the
"Operating Lease") with the Original Lessee.
For the period January 1, 1997 through March 27, 1997 and for the years
ended December 31, 1996 and 1995, no additional rent was earned from
the Original Lessee or the New Lessee for its lease years ended April
30, 1997, 1996 and 1995.
The current term of the Operating Lease was due to expire on April 30,
2007, with a renewal option of 25 years. Pursuant to the Operating
Lease, the lessee had the right to surrender its leasehold interest
at any time, upon 60 days' prior written notice, without further
liability after the date of surrender. The lessee also had the right
to assign the Operating Lease. The Original Lessee exercised such
assignment right on December 29, 1995, and the New Lessee assumed all
lessee obligations under the Operating Lease of that date; such
assignment effectively terminated the liability of the Original Lessee
and its remaining partners under the lease. On March 27, 1997, with
the sale of the Property, the Operating Lease was terminated.
The shares in the New Lessee are owned by the partners in the Original
Lessee and a partner in Associates was also a partner in the Original
Lessee.
5. Related Party Transactions - Supervisory Services
Supervisory services (including disbursements and cost of regular
accounting services) for the period January 1, 1997 through March 27,
1997 and for the years ended December 31, 1996 and 1995, totaling
$21,360, $42,500 and $42,500, respectively, were paid to the firm of
Wien & Malkin LLP. Some members of that firm are also partners in
Associates. Fees for supervisory services were paid pursuant to an
agreement, which amount was based on a rate of return of investment
achieved by the participants in Associates each period.
See Note 9 for additional related party transactions in connection with
the sale of the Property.
-29-
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
6. Number of Participants
There were approximately 900 participants in the participating groups
at November 30, 1997 and December 31, 1996 and 1995.
7. Determination of Distributions to Participants
Distributions to participants represent mainly proceeds from the sale of
the Property and the excess of rent income received over the mortgage
requirements, as anticipated, and expenses paid or accrued.
8. Distributions and Amount of Income per $5,000 Participation Unit
Distributions per $5,000 participation unit during the eleven months
ended November 30, 1997 and the years 1996 and 1995, based on 1,050
participation units outstanding during each period, totaled $26,666,
$569 and $583, respectively. All such distributions consisted of
income only. Distributions in 1997 include $26,476 per $5,000 unit
resulting from proceeds on the sale of the Property. See Note 9.
Net income is computed without regard to income tax expense since
Associates does not pay a tax on its income; instead, any such taxes
are paid by the participants in their individual capacities.
For income tax purposes, the reserve for contingent future legal costs
in the amount of $206,894, deducted for financial statement purposes
in 1997 from the gain on sale of real estate, ($197 per $5,000 part-
icipation unit, based on $1,050 participant units outstanding in 1997)
is not currently deductible; the gain on the sale of real estate in
1997 for income tax purposes is $28,371,528.
9. Sale of the Property on March 27, 1997 and Preceding Events Regarding
Default by New Lessee of the Operating Lease and Breach of Associates'
Obligations Under the Fee Mortgage
Default by New Lessee of Operating Lease and Breach of Associates'
Obligations Under Fee Mortgage:
Since January 1, 1996, the New Lessee paid Basic Rent under the
Operating Lease. Associates in turn continued to pay (1) the monthly
mortgage payments to Apple Bank for Savings (the "Fee Mortgagee") on
Associates' fee mortgage on the Property (the "Fee Mortgage"); (2) its
monthly fee for supervisory services; and (3) monthly distributions to
the participants in Associates.
However, from January 1, 1996 through the date of sale of the Property,
the New Lessee failed to pay the New York City real estate and Business
Improvement District ("BID") assessments, which were due on January 1,
1996 (collectively, the "1/1/96 Real Estate Taxes"). As a result, the
New Lessee was in default of the Operating Lease as of that date.
The New Lessee requested that Associates forbear from exercising its
rights and remedies under the Operating Lease, including termination of
the Operating Lease, by reason of the failure to pay the 1/1/96 Real
Estate Taxes, while management of Associates solicited the consent of
its participants to a sale of the Property (the "Solicitation"). In
connection with Associates' forbearance, the New Lessee agreed
-30-
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
9. Sale of the Property on March 27, 1997 and Preceding Events Regarding
Default by New Lessee of the Operating Lease and Breach of Associates'
Obligations Under the Fee Mortgage (continued)
to cooperate fully with Associates in connection with the sale of the
Property and to continue to perform its other obligations under the
Operating Lease, including payment of the Basic Rent, to enable
Associates to continue its monthly distributions to the participants,
pay its supervisory fee and pay its monthly mortgage obligation.
The failure to pay the 1/1/96 Real Estate Taxes also constituted a
breach of Associates' obligations under the Fee Mortgage. The
shareholders of the New Lessee (or designees on their behalf) borrowed
from the Fee Mortgagee a sum equal to the 1/1/96 Real Estate Taxes and
interest thereon to the date of the borrowing and further sums equal to
the subsequent semi-annual installments of the New York City real
estate taxes and BID assessments (together with the 1/1/96 Real Estate
Taxes, the "Real Estate Taxes") which had since become due. These
sums were used to fund protective advances by the Fee Mortgagee to pay
the Real Estate Taxes and interest thereon through the purchase of
subordinate participating interests in the Fee Mortgage in such
amounts. As a result, the Fee Mortgagee agreed to forbear from
exercising rights and remedies under the Fee Mortgage based on
Associates' failure to pay (or cause to be paid by the New Lessee) the
Real Estate Taxes.
On July 26, 1996 management completed its Solicitation, in which it
expressed its belief that the Property could not be operated on a
profitable basis without significant capital improvements; it also
opined that the program to sell the Property would permit Associates
to liquidate its investment in an orderly fashion and avoid the
necessity of raising additional capital from the participants and
others to support and renovate the Property while avoiding litigation
costs and the risk of loss of the Property through a Fee Mortgage
foreclosure.
On January 29, 1997 Associates, having received authorization from its
participants to sell the Property, entered into a contract of sale of
the Property at a selling price of $42,000,000. Such sale was
concluded on March 27, 1997, at which time the first mortgage was paid
in full and Associates discontinued operations. In accordance with the
Solicitation, the proceeds of sale were allocated between Associates
and the New Lessee, with Associates receiving $32,681,200 and the New
Lessee receiving $9,318,800.
The gain on sale of real estate is computed as follows:
Sales proceeds allocated to Associates..................... $32,681,200
Less: costs of sale:
Building, net of depreciation.............. $ -
Land....................................... 2,500,000
Closing costs.............................. 1,809,672 4,309,672
28,371,528
Less: accrued legal costs reserved
re: pending litigation (see Note 10).... 206,894
Gain on sale of real estate...................... $28,164,634
Closing costs on the sale of the Property include $297,544 paid to the
firm of Wien & Malkin LLP, a related party (Note 5).
-31-
GARMENT CAPITOL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(continued)
9. Sale of the Property on March 27, 1997 and Preceding Events Regarding
Default by New Lessee of the Operating Lease and Breach of Associates'
Obligations Under the Fee Mortgage (continued)
On March 31, 1997 a distribution of $27,000,000 ($25,714 per $5,000
participation unit) was made to the participants out of the proceeds of
sale. On July 22, 1997 a final distribution of $800,000 ($762 per
$5,000 participation unit) was made to the participants out of the
proceeds of sale. Associates' receivable from the New Lessee as of the
date of the sale of the Property, in the amount of $2,399,317 was
satisfied on March 27, 1997 by the payment of the protective advances
from proceeds of the sale in accordance with the Solicitation.
However, the New Lessee's share of such proceeds, which according to
the Solicitation amounts to $6,919,483, is being held by Wien & Malkin
LLP, a related party and counsel to Associates ("Counsel"), in
connection with litigation referred to in Note 10.
10. Litigation and Contingency Reserve Held in Escrow
On October 4, 1996, the alleged holder of three participation interests
in Associates brought suit in the U.S. District Court for the Southern
District of New York against the New Lessee, the Original Lessee, the
partners of Associates, and Counsel. Associates is a nominal
defendant. The suit claims that defendants violated the anti-fraud
provisions and federal proxy rules of the federal securities laws and
committed breaches of fiduciary duty and fraud in relation to the
Solicitation (Note 9). The suit is styled as a class action, but the
plaintiff has not applied for class certification to date. The suit
seeks to enjoin the allocation of sale proceeds to the New Lessee
approved by the participants, money damages and related relief.
Defendants responded to the complaint with a motion seeking dismissal
of the action in its entirety. The Court granted that motion and
dismissed the action by order and decision dated December 8, 1997.
Plaintiff's appeal of the order is pending.
A similar suit was filed by another alleged holder of a fractional
interest in Associates on March 13, 1997. The defendants responded to
the complaint with a motion seeking dismissal of the action in its
entirety and the Court granted that motion by the same order and
decision referred to in the preceding paragraph. Plaintiff's appeal of
that order is also pending.
The complaints do not seek any relief against Associates, and,
accordingly, Associates' litigation counsel is of the opinion that no
loss or other unfavorable outcome of the action against Associates is
anticipated. No provision has been made in the accompanying financial
statements for any adjustments that might result from the outcome of
the litigation. In accordance with the Solicitation, sale proceeds
were allocated to repay the Fee Mortgagee the protective advances as
well as all other sums then outstanding on the Fee Mortgage. Pursuant
to an agreement between counsel for the plaintiff in the 1996
proceeding and counsel for the defendants, net sale proceeds allocated
to the New Lessee in accordance with the formula set forth in the
Solicitation will not be distributed to the New Lessee, except upon 30
days' notice to counsel for the plaintiff. Such allocated proceeds are
currently being held byCounsel.
On July 24, 1997, a former holder of a 1.66% partnership interest in
the Original Lessee filed a complaint in New York Supreme Court against
Associates, the Original Lessee, the New Lessee and Peter L. Malkin,
individually and as a partner or shareholder in those entities. As
against Associates, the complaint alleges a claim for damages or other
relief based on the sale of the Property and the allocation of sale
proceeds to associates. An answer for Associates denying all
allegations of liability and damages asserted by plaintiff has been
filed. The action is now in the pretrial discovery stage.
To reserve against possible legal costs associated with the afore-
mentioned pending litigation Associates has set aside $206,894 in an
escrow account held by Wien & Malkin LLP, a related party, and charged
that amount in the accompanying financial statements against the gain
on the sale of real estate (Note 9).
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GARMENT CAPITOL ASSOCIATES
OMITTED SCHEDULES
The following schedules have been omitted as not applicable in the
present instance:
SCHEDULE I - Condensed financial information of registrant.
SCHEDULE II - Valuation and qualifying accounts.
SCHEDULE III - Real estate and accumulated depreciation.
SCHEDULE IV - Mortgage loans on real estate.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The individual signing this report on behalf of
Registrant is Attorney-in-Fact for Registrant and each of the
Partners in Registrant, pursuant to a Power of Attorney, dated
April 10, 1996 (the "Power").
GARMENT CAPITOL ASSOCIATES (Registrant)
By /s/ Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Date: April 15, 1998
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed by the undersigned as
Attorney-in-Fact for each of the Partners in Registrant, pursuant
to the Power, on behalf of Registrant and as a Partner in
Registrant on the date indicated.
By /s/ Stanley Katzman
Stanley Katzman, Attorney-in-Fact*
Date: April 15, 1998
______________________
* Mr. Katzman supervises accounting functions for Registrant.
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Exhibit Index
Number Document Page*
2 (a) Proxy Statement issued by Agents in
connection with the solicitation of
consents of the Participants, which
was filed by Registrant on July 25,
1996 on Schedule 14-A and is
incorporated herein by reference.
2 (b) Contract of Sale, among Registrant
and New Lessee, as Seller, and
George Comfort & Sons, Inc., as
Agent, and Tirrem Management
Company, Inc., as Purchasers, which
was filed as Exhibit 2(b) to
Registrant's Annual Report on Form
10-K for the year ended December 31,
1996 and is incorporated by
reference, but excluding exhibits,
which are available for inspection
at the offices of Counsel.
3 (a) Registrant's Partnership Agreement,
dated January 10, 1957, which was
filed as Exhibit No. 1 to
Registrant's Registration Statement
on Form S-1 as amended (the
"Registration Statement") effective
February 13, 1957 and assigned File
No. 2-13034, is incorporated by
reference as an exhibit hereto.
3 (b) Amended Business Certificate of
Registrant effective as of January
1, 1996, reflecting a change in the
partners of Registrant, which was
filed as Exhibit 3(b) to
Registrant's Annual Report on Form
10-K for the year ended December 31,
1995 and is incorporated by
reference as an exhibit hereto.
______________________
* Page references are based on a sequential numbering system.
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Number Document Page*
4 Registrant's form of Participation
Agreement, which was filed as
Exhibit No. 5 to the Registration
Statement effective February 13,
1957 and assigned File No. 2-13034,
is incorporated by reference as an
exhibit hereto.
10 (a) Contract between Lawrence A. Wien
("Wien") and Garment Center Capitol
Inc. for the purchase of the
property 498 Seventh Avenue and
certain other property, dated
January 7, 1957, which was filed as
Exhibit No. 2 to the Registration
Statement effective February 13,
1957 and assigned File No. 2-1304,
is hereby incorporated by reference
as an exhibit hereto.
10 (b) Assignment by Wien to Registrant of
his rights under the contract
assignment, dated January 11, 1957,
insofar as they pertain to 498
Seventh Avenue and agreement of
assignment, dated January 11, 1957,
which was filed as Exhibit No. 3 to
the Registration Statement effective
February 13, 1957 and assigned File
No. 2-13034, is hereby incorporated
by reference as an exhibit hereto.
10 (c) Modification and Extension
Agreement, dated as of December 1,
1992, between Apple Savings Bank and
Garment Capitol Associates, which
was filed as Exhibit 10(c) to
Registrant's Annual Report on Form
10K for the year ended 1994, is
incorporated herein by reference.
______________________
* Page references are based on a sequential numbering system.
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Number Document Page*
24 Power of Attorney dated April 10,
1996, between Stanley Katzman, Peter
L. Malkin, and John L. Loehr as
Partners of Registrant and Stanley
Katzman and Richard A. Shapiro,
attached as Exhibit 24 to
Registrant's Annual Report on Form
10-K for the year ended December 31,
1995 and is incorporated by
reference as an exhibit hereto.
27 Financial Data Schedule of Registrant
for the eleven months ended November
30, 1997.
______________________
* Page references are based on a sequential numbering system.
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