<PAGE> 1
A SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
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 0-17684
ML/EQ Real Estate Portfolio, L.P.
(Exact name of registrant as specified in its governing instrument)
Delaware 58-1739523
(State of Organization) (I.R.S. Employer Identification No.)
3424 Peachtree Road N.E., Suite 800, Atlanta, Georgia 30326
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (404) 239-5002
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
<PAGE> 2
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Consolidated balance sheets at June 30, 1999 and
December 31, 1998
Consolidated statements of operations for the three and
six months ended June 30, 1999 and 1998
Consolidated statement of partners' capital for the six
months ended June 30, 1999
Consolidated statements of cash flows for the six months
ended June 30, 1999 and 1998
Notes to consolidated financial statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Items 1 through 6
Signatures
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
REAL ESTATE INVESTMENTS:
Rental properties held for sale........................... $62,421,776 $ 41,915,300
Rental properties, net of accumulated depreciation of
$5,586,628 in 1998...................................... -- 39,873,242
Mortgage loan receivable.................................. -- 6,000,000
----------- ------------
Total real estate investments...................... 62,421,776 87,788,542
----------- ------------
OTHER ASSETS:
Cash and cash equivalents................................. 10,798,080 11,939,314
Accounts receivable and accrued investment income, net of
allowance for doubtful accounts of $907,265 in 1999 and
$598,018 in 1998........................................ 3,997,522 2,892,290
Deferred rent concessions................................. 977,953 809,836
Guaranty fee, net of accumulated amortization of
$2,803,838 in 1999 and $2,669,713 in 1998............... 938,877 1,073,002
Deferred leasing costs, net of accumulated amortization of
$137,636 in 1998........................................ -- 302,184
Prepaid expenses and other assets......................... 124,116 875,369
Interest receivable....................................... 87,634 96,112
Due from affiliates....................................... 25,933 649
----------- ------------
Total other assets................................. 16,950,115 17,988,756
----------- ------------
TOTAL ASSETS................................................ $79,371,891 $105,777,298
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued real estate expenses......... $ 2,048,063 $ 1,758,841
Accrued capital expenditures.............................. 565,784 788,395
Security deposits and unearned rent....................... 402,869 343,922
Due to affiliates......................................... 289,654 480,453
Distributions declared.................................... -- 2,440,901
----------- ------------
Total liabilities.................................. 3,306,370 5,812,512
----------- ------------
MINORITY INTEREST IN THE VENTURE............................ 30,292,116 32,023,757
----------- ------------
COMMITMENTS AND CONTINGENT LIABILITIES
PARTNERS' CAPITAL:
General partners.......................................... 2,342,612 2,713,299
Initial limited partner................................... 6,182 6,507
Limited partners (5,424,225 BACs issued and
outstanding)............................................ 43,424,611 65,221,223
----------- ------------
Total partners' capital............................ 45,773,405 67,941,029
----------- ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL..................... $79,371,891 $105,777,298
=========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Rental income............................................. $ 4,425,027 $ 4,883,187 $ 9,012,304 $10,087,457
Lease termination income.................................. -- -- -- 12,501
Interest on loans receivable.............................. -- 153,750 51,250 307,500
----------- ----------- ------------ -----------
Total revenue....................................... 4,425,027 5,036,937 9,063,554 10,407,458
----------- ----------- ------------ -----------
OPERATING EXPENSES:
Real estate operating expenses............................ 1,925,996 1,957,250 4,332,026 4,029,815
Depreciation and amortization............................. 395,237 1,060,250 789,345 2,118,978
Real estate taxes......................................... 743,773 509,110 1,196,217 1,084,285
Property management fees.................................. 83,180 114,880 179,379 222,570
----------- ----------- ------------ -----------
Total operating expenses............................ 3,148,186 3,641,490 6,496,967 7,455,648
----------- ----------- ------------ -----------
INCOME FROM PROPERTY OPERATIONS............................. 1,276,841 1,395,447 2,566,587 2,951,810
OTHER INCOME (EXPENSE):
Loss on sale of real estate............................... -- -- (71,562) --
Loss on write-down of real estate assets.................. (9,257,167) (2,931,890) (11,371,847) (2,931,890)
Interest and other nonoperating income.................... 152,777 99,834 337,655 305,208
Asset management fees..................................... (101,342) (155,306) (207,989) (308,906)
Amortization of guarantee fee............................. (67,063) (67,063) (134,126) (134,126)
General and administrative, including $81,665 and $186,598
for the six months ended June 30, 1999 and 1998,
respectively, to affiliates............................. (165,027) (288,941) (264,091) (457,393)
----------- ----------- ------------ -----------
Total other expense -- net.......................... (9,437,822) (3,343,366) (11,711,960) (3,527,107)
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... (8,160,981) (1,947,919) (9,145,373) (575,297)
MINORITY INTEREST IN NET (INCOME) LOSS OF CONSOLIDATED
VENTURE................................................... 1,585,057 316,671 1,731,641 (33,088)
----------- ----------- ------------ -----------
NET INCOME (LOSS)........................................... $(6,575,924) $(1,631,248) $ (7,413,732) $ (608,385)
=========== =========== ============ ===========
ALLOCATION OF NET INCOME (LOSS):
General partners.......................................... $ (328,797) $ (81,562) $ (370,687) $ (30,419)
Initial limited partner................................... (288) (71) (325) (28)
Limited partners.......................................... (6,246,839) (1,549,615) (7,042,720) (577,938)
----------- ----------- ------------ -----------
TOTAL....................................................... $(6,575,924) $(1,631,248) $ (7,413,732) $ (608,385)
=========== =========== ============ ===========
NET INCOME (LOSS) PER LIMITED PARTNER
BAC......................................................... $ (1.15) $ (0.28) $ (1.30) $ (0.11)
=========== =========== ============ ===========
WEIGHTED AVERAGE BACs OUTSTANDING........................... 5,424,225 5,424,225 5,424,225 5,424,225
=========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
INITIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNER PARTNERS TOTAL
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998...................... $2,713,299 $6,507 $ 65,221,223 $ 67,941,029
Net income (loss)............................... (370,687) (325) (7,042,720) (7,413,732)
Distributions................................... -- -- (14,753,892) (14,753,892)
---------- ------ ------------ ------------
Balance, June 30, 1999.......................... $2,342,612 $6,182 $ 43,424,611 $ 45,773,405
========== ====== ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
ML/EQ REAL ESTATE PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Tenant rentals received................................... $ 7,744,684 $ 10,675,879
Interest received......................................... 397,383 643,481
------------ ------------
Cash received from operations............................. 8,142,067 11,319,360
Cash paid for operating activities........................ (5,355,312) (6,157,204)
Cash distributions to minority interest................... -- (331,591)
------------ ------------
Net cash provided by operating activities.......... 2,786,755 4,830,565
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental properties............................ (1,407,559) (2,547,659)
Expenditures for deferred leasing costs................... (43,743) (54,966)
Proceeds from sales of real estate properties............. 8,718,106 --
Repayment of mortgage loan receivable..................... 6,000,000 --
------------ ------------
Net cash provided by (used in) investing
activities....................................... 13,266,804 (2,602,625)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to limited partners.................... (17,194,793) (14,916,619)
------------ ------------
Net cash used in financing activities.............. (17,194,793) (14,916,619)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................ (1,141,234) (12,688,679)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 11,939,314 21,256,903
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 10,798,080 $ 8,568,224
============ ============
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)........................................... $ (7,413,732) $ (608,385)
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 923,471 2,253,104
Minority interest in Venture operations................... (1,731,641) 33,088
Cash distributions to minority interest................... -- (331,591)
Loss on sale of real estate............................... 71,562 --
Loss on write-down of real estate assets.................. 11,371,847 2,931,890
Changes in assets (increase) decrease:
Accounts receivable and accrued investment income......... (1,105,232) 667,428
Deferred rent concessions................................. (221,335) 97,074
Interest receivable....................................... 8,478 30,773
Prepaid expenses and other assets......................... 751,252 388,470
Due from affiliates....................................... (25,284) (26,161)
Changes in liabilities increase (decrease):
Accounts payable and accrued real estate expenses......... 289,221 (282,515)
Security deposits and unearned rent....................... 58,947 (188,581)
Due to affiliates......................................... (190,799) (134,029)
------------ ------------
Total adjustments........................................... 10,200,487 5,438,950
------------ ------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES..... $ 2,786,755 $ 4,830,565
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
The consolidated financial statements of the Partnership included herein
have been prepared by the Partnership pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, to present fairly the
Partnership's financial position, results of operations, and cash flows at the
dates and for the periods presented. These consolidated financial statements
should be read in conjunction with the Partnership's audited financial
statements and notes thereto included in the Partnership's Annual Report on Form
10-K for the year ended December 31, 1998, as certain footnote disclosures which
would substantially duplicate those contained in such audited financial
statements have been omitted from this report. Interim results of operations are
not necessarily indicative of results to be expected for the fiscal year.
1. TRANSACTIONS WITH AFFILIATES
The general partners (or affiliates) are entitled to receive various
recurring fees for the supervision and administration of Partnership assets and
for providing the guaranty of minimum return to BAC holders and to be reimbursed
for certain expenses incurred on behalf of the Partnership. At June 30, 1999 and
December 31, 1998, the accrued balance of these fees and reimbursements totaled
$289,654 and $480,453, respectively. For each of the six months ended June 30,
1999 and 1998, the expense for these recurring fees totaled $289,654 and
$495,504, respectively, and this expense is included in the statements of
operations as asset management fees and as components of general and
administrative expense. Asset management fees are paid by the Partnership to
EREIM Managers Corp. (the "Managing General Partner"), which then pays the fees
to Lend Lease Real Estate Investments, Inc., ("Lend Lease"), its investment
advisor. Asset management fees paid by the Partnership to the Managing General
Partner were $207,989 and $308,906 for the six months ended June 30, 1999 and
1998, respectively.
Properties are managed and leased by third-party managing and leasing
agents. During 1998 these agents included Compass Management and Leasing, Inc.
("Compass") and ERE Yarmouth Retail, Inc. ("Retail"), formerly affiliates of
Lend Lease. On October 1, 1998, Lend Lease sold Compass and Retail to LaSalle
Partners Incorporated. Property management fees are generally established at
specified percentages of 1% to 5% of the gross receipts of the properties as
defined in the management agreements. Property management fees paid by EML
Associates (the "Venture"), a joint venture in which the Partnership holds an
80% interest and which invests in income-producing real properties, to Compass
and Retail for properties managed were $194,881 for the six months ended June
30, 1998. The Venture reimbursed Compass and Retail for payroll incurred of
$870,762 for the six months ended June 30, 1998. Payroll reimbursements are
included in real estate operating expenses on the statements of operations.
2. GUARANTY AGREEMENT
EREIM LP Associates, a general partnership between The Equitable Life
Assurance Society of the United States ("Equitable") and EREIM LP Corp., a
wholly owned subsidiary of Equitable, entered into a guaranty agreement with the
Venture to provide a minimum return to the Partnership's limited partners on
their contributions. The Venture has assigned its rights under the guaranty
agreement to the Partnership. Payments on the guaranty are due 90 days following
the earlier of the sale or other disposition of all the
7
<PAGE> 8
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
properties and mortgage loans and notes or the liquidation of the Partnership.
The minimum return will be an amount which, when added to the cumulative
distributions to the limited partners, will enable the Partnership to provide
the limited partners with a minimum return equal to their capital contributions
plus a simple annual return of 9.75% on their adjusted capital contributions
calculated from the dates of the investor closings. Adjusted capital
contributions are the limited partners' original cash contributions reduced by
distributions of sale or financing proceeds and by distributions of certain
funds in reserves, as more particularly described in the Partnership Agreement.
The limited partners' original cash contributions have been adjusted by that
portion of distributions paid through June 30, 1999 resulting from cash
available to the Partnership as a result of sale or financing proceeds paid to
the Venture. The minimum return is subject to reduction in the event that
certain taxes, other than local property taxes, are imposed on the Partnership
or the Venture, and is also subject to certain other limitations set forth in
the prospectus. If there were no distributions until December 31, 2002, the
expiration of the term of the Partnership, the maximum liability of EREIM LP
Associates to the Venture under the guaranty agreement as of June 30, 1999 is
limited to $119,290,832, plus the value of EREIM LP Associates' interest in the
Venture less any amounts contributed by EREIM LP Associates to the Venture to
fund cash deficits.
Capital contributions by the BAC holders of the Partnership totaled
$108,484,500. As of June 30, 1999, the cumulative 9.75% simple annual return was
$110,665,454. As of June 30, 1999, cumulative distributions by the Partnership
to the BAC holders totaled $109,091,999, of which $27,663,548 is attributable to
income from operations and $81,428,451 is attributable to sales of Venture
assets, principal payments on mortgage loans, and other capital events. To the
extent that future cash distributions to the limited partners are insufficient
to provide the specified minimum return, any shortfall will be funded by the
guarantor, up to the above described maximum.
Effective as of January 1, 1997, the Partnership entered into an amendment
to the Joint Venture Agreement of the Venture between the Partnership and EREIM
LP Associates pursuant to which EREIM LP Associates agreed to defer, without
interest, its rights to receive 20% of the Venture's distributions of sale or
financing proceeds until the Partnership has received aggregate distributions
from the Venture in an amount equal to the capital contributions made to the
Partnership by the BAC holders plus a noncompounded cumulative return computed
at the rate of 9.75% per annum on contributions outstanding from time to time.
Prior to the amendment, EREIM LP Associates had a right to receive 20% of all
the Venture's distributions of sale or financing proceeds on a pari passu basis
with the Partnership. The amendment has the effect of accelerating the return of
original contributions to BAC holders to the extent that sale or financing
proceeds are realized prior to the dissolution of the Partnership.
3. RENTAL PROPERTIES HELD FOR SALE
At June 30, 1999 the 300 Delaware, 16/18 Sentry Park West, and Northland
Mall properties are all classified as held for sale, and accordingly the
application of depreciation has been suspended. Northland Mall was reclassified
to held for sale on June 30, 1999, therefore depreciation was recorded through
that date. The carrying values of 300 Delaware and Northland Mall were adjusted
to the lower of cost or estimated net realizable value, resulting in losses of
$2,114,680 and $9,257,167, respectively, recorded during 1999. The 300 Delaware
property was sold on July 23, 1999 (see footnote 5). For 16/18 Sentry Park West,
management believes that the carrying value does not exceed estimated net
realizable value less selling costs.
8
<PAGE> 9
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LEGAL PROCEEDINGS
As discussed in the Notes to Consolidated Financial Statements of the
Partnership's December 31, 1998 audited financial statements, the Partnership is
a defendant in a consolidated action brought in the Court of Chancery of the
State of Delaware entitled IN RE: ML/EQ Real Estate Partnership Litigation.
There have been no new developments associated with this action for the six
months ended June 30, 1999.
The Venture is currently in litigation with a current Northland Mall tenant
who is seeking damages for breach of lease. The Plaintiff, My Inc., filed a
claim with the State Court of Michigan in 1997. The parties have agreed to the
principal terms of a settlement, which has not yet been finalized. Management
does not expect any material adverse impact as a result of this litigation.
5. SUBSEQUENT EVENT
On July 23, 1999, the Venture consummated the sale of the 300 Delaware
property at a sales price of $8,750,000. The net sales proceeds received were
$8,427,727, which resulted in a loss of $201,975. On August 16, 1999, the
Partnership will make a distribution of the net proceeds from the sale of $1.55
per unit to BAC holders of record as of July 23, 1999.
6. SEGMENT REPORTING
The Partnership owns or has owned real estate investments in the retail,
office and industrial sectors, and mortgage loan investments. Revenues,
depreciation and amortization, loss on write-down of assets, income (loss)
before minority interest, identifiable assets and capital expenditures for the
three and six month periods ending June 30, are as follows:
<TABLE>
<CAPTION>
MORTGAGE CORPORATE/
RETAIL OFFICE INDUSTRIAL LOANS OTHER TOTAL
---------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
3 months
1999............................ 2,869,600 1,555,427 4,425,027
1998............................ 2,998,493 1,250,667 634,027 153,750 5,036,937
6 months
1999............................ 6,034,520 2,987,784 (10,000) 51,250 9,063,554
1998............................ 6,319,215 2,576,500 1,204,243 307,500 10,407,458
Depreciation and amortization
3 months
1999............................ 395,237 67,063 462,300
1998............................ 494,063 434,980 131,207 67,063 1,127,313
6 months
1999............................ 789,345 134,126 923,471
1998............................ 984,498 872,065 262,415 134,126 2,253,104
Loss on write-down of assets
3 months
1999............................ 9,257,167 9,257,167
1998............................ 2,931,890 2,931,890
</TABLE>
9
<PAGE> 10
ML/EQ REAL ESTATE PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE CORPORATE/
RETAIL OFFICE INDUSTRIAL LOANS OTHER TOTAL
---------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
6 months
1999............................ 9,257,167 2,114,680 11,371,847
1998............................ 2,931,890 2,931,890
Income (loss) before minority
interest
3 months
1999............................ (8,845,320) 909,976 (430) (225,207) (8,160,981)
1998............................ (2,259,147) 186,534 367,780 153,750 (396,836) (1,947,919)
6 months
1999............................ (8,356,433) (468,792) (3,498) 51,250 (367,900) (9,145,373)
1998............................ (1,265,061) 316,235 685,278 307,500 (619,249) (575,297)
Identifiable assets
At June 30
1999............................ 36,241,996 32,404,890 67,983 10,657,022 79,371,891
1998............................ 54,890,992 36,575,493 20,915,039 6,051,250 9,558,013 127,990,787
Capital expenditures
3 months
1999............................ 119,073 372,529 491,602
1998............................ 267,152 475,432 742,584
6 months
1999............................ 666,628 562,063 1,228,691
1998............................ 403,889 879,972 1,283,861
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Partnership should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included elsewhere herein.
Certain Forward-Looking Information
Certain of the statements contained in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements include, without limitation,
statements regarding future capital expenditures relating to renovation and
development activities. These forward-looking statements are included in this
Quarterly Report on Form 10-Q based on the intent, belief or current
expectations of the Partnership. However, such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Although the Partnership believes
that the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, it can give no assurance that its expectations will
be achieved. Factors that could cause actual results to differ materially from
the Partnership's current expectations include general local market conditions,
the investment climate for particular property types, individual property
issues, construction delays due to unavailability of materials, weather
conditions or other causes, leasing activities, risks associated with the Year
2000 issue, and the other risks detailed from time to time in the Partnership's
SEC reports, including the Annual Report on Form 10-K for the year ended
December 31, 1998.
Liquidity and Capital Resources
As of June 30, 1999, cash and cash equivalents on the balance sheet were
approximately $10.8 million. The Partnership had directly held cash and cash
equivalents of approximately $.7 million, and the Venture, in which the
Partnership owns an 80% interest, had approximately $10.1 million in cash and
cash equivalents. Such cash and cash equivalents are available for distribution
to the extent not required for working capital.
No sales or distributions of cash occurred in the second quarter of 1999.
The cash balances that remain have been retained primarily to fund potential
costs that may be required to improve tenancy at Northland Mall. In addition,
these funds may be required to cover other general working capital requirements.
The Partnership continues to evaluate the appropriate strategies for the
ownership of each of the assets in the portfolio in order to achieve maximum
value. In this regard, the Partnership considers capital market and investment
market conditions for real estate, local market conditions; future capital
needs, including potential lease exposure for specific properties; and other
issues that impact property performance. This ongoing analysis provides the
basis for hold/sell recommendations for the properties. As a result of the
evaluation, the Partnership decided to market for sale the Northland Mall
property. To that end, a brokerage firm has been engaged and marketing efforts
will commence in August 1999. If offers to purchase the property are within the
targeted price range, the Partnership expects the property to be sold. Northland
Mall was reclassified to held for sale on June 30, 1999. Management, through
discussions with real estate brokers, determined that the
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
carrying value for Northland Mall was in excess of the estimated net realizable
value less selling costs, and a loss of $9,257,167 was recorded as a result of
the reclassification.
In accordance with the Partnership's strategy to achieve the maximum value
for each property prior to the termination of the Partnership on December 31,
2002, management is continuing its efforts to sell the remaining properties. On
July 23, 1999, the Venture sold 300 Delaware for $8.75 million. Remarketing
efforts for 16/18 Sentry Park West commenced in April 1999, with the intent of
selling the property prior to the end of 1999. However, there is no certainty as
to when the property will be sold.
FINANCIAL CONDITION
Cash and cash equivalents decreased approximately $1.1 million, or 9.6%,
from $11.9 million at December 31, 1998 to $10.8 million at June 30, 1999 due
primarily to the Partnership making cash distributions of $17.2 million and
expending $1.4 million in additions to real estate during 1999, partially offset
by approximately $8.7 million in net proceeds received from the sale of the
Richland Mall property, $6.0 million received from the payoff of the Jericho
mortgage loan receivable, and $2.8 million of cash provided by operating
activities during 1999.
Accounts receivable and accrued investment income increased approximately
$1.1 million, or 38%, from $2.9 million at December 31, 1998 to $4.0 million at
June 30, 1999 due primarily to the timing of the remittance of rental income.
Prepaid expenses and other assets decreased approximately $751,000, or 86%,
from $875,000 at December 31, 1998 to $124,000 at June 30, 1999 due to the
timing of payments for real estate taxes and insurance.
Total liabilities decreased approximately $2.5 million, or 43%, from $5.8
million at December 31, 1998 to $3.3 million at June 30, 1999. The decrease is
primarily due to the payment during the first quarter of 1999 of accrued
distributions to BAC holders of $2.4 million.
The percentage of leased space at the Venture's properties at June 30, 1999
was 65% compared to the percentage of leased space at December 31, 1998 of 68%.
RESULTS OF OPERATIONS
Rental income decreased approximately $458,000, or 9%, and $1.1 million, or
11%, for the three and six months ended June 30, 1999, respectively, from $4.9
million for the three months and $10.1 million for the six months ended June 30,
1998 to $4.4 million for the three months and $9.0 million for the six months
ended June 30, 1999. The decrease is due primarily to the sales of the 1200
Whipple Road and 1345 Doolittle Drive properties in late 1998 and the sale of
Richland Mall in January 1999. Rental income for these properties for the six
months ended June 30, 1998 was approximately $2.0 million. This decrease was
partially offset by increases in rental income at Northland Mall, 300 Delaware
and 16/18 Sentry Park West of $420,000, $237,000 and $174,000, respectively, due
to additional tenants in 1999.
Interest on loans receivable decreased approximately $154,000, or 100%, and
$256,000, or 83% for the three and six months ended June 30, 1999, respectively,
from $154,000 for the three months and $308,000 for
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
the six months ended June 30, 1998 to $0 for the three months and $51,000 for
the six months ended June 30, 1999. The decrease is due to the payoff of the
Jericho mortgage note on February 1, 1999.
Real estate operating expenses increased approximately $302,000, or 7.5%
for the six months ended June 30, 1999, from $4.0 million for the six months
ended June 30, 1998 to $4.3 million for the six months ended June 30, 1999. The
increase is due primarily to a $502,000 legal reserve recorded in 1999 for
Northland Mall for pending litigation by one of Northland Mall's tenants. The
increase is partially offset by a decrease in operating expenses of
approximately $265,000 due to the sales of 1200 Whipple Road, 1345 Doolittle
Drive and Richland Mall.
Depreciation and amortization decreased approximately $665,000, or 63%, and
$1.3 million, or 63%, for the three and six months ended June 30, 1999,
respectively, from $1.1 million for the three months and $2.1 million for the
six months ended June 30, 1998 to $395,000 for the three months and $789,000 for
the six months ended June 30, 1999. The decrease is due to the Richland Mall,
300 Delaware and 16/18 Sentry Park West properties being reclassified to held
for sale during mid 1998, resulting in no further depreciation being recorded.
Depreciation and amortization for these three properties for the six months
ended June 30, 1998 totaled $1.1 million. The decrease is also due to the sales
of 1200 Whipple Road and 1345 Doolittle Drive during late 1998. Depreciation and
amortization for these two properties for the six months ended June 30, 1998 was
approximately $223,000.
Loss on write-down of real estate assets was approximately $9.3 and $11.4
million for the three and six months ended June 30, 1999, respectively, compared
to $2.9 million for the three and six months ended June 30, 1998, due to the
write-down of Northland Mall in the second quarter 1999 and 300 Delaware in
first quarter 1999, and the write-down of Richland Mall in second quarter 1998.
General and administrative expenses decreased approximately $124,000, or
43%, and $193,000, or 42%, for the three and six months ended June 30, 1999,
respectively, from $289,000 for the three months and $457,000 for the six months
ended June 30, 1998 to $165,000 for the three months and $265,000 for the six
months ended June 30, 1999, due to higher income taxes paid by the Partnership
during the second quarter 1998 as a result of the sale of Brookdale Center and
the Chicago Industrial properties in 1997.
Year 2000
The inability of computers, software and other equipment to recognize and
properly process data fields containing a two-digit year is commonly referred to
as the Year 2000 compliance issue ("Y2K"). As the year 2000 approaches, such
systems may be unable to accurately process certain date-based information.
Y2K exposures of the Partnership and the Venture continue to be assessed.
Potential critical exposures include reliance on third party vendors and
building systems that are not Y2K compliant. The Venture continues to
communicate with its third party vendors and service providers in an effort to
assess Y2K compliance status and the adequacy of Y2K efforts.
Each property owned by the Venture has been individually assessed in an
effort to identify critical Y2K issues. The inventory survey and assessment
process for 16/18 Sentry Park West and Northland Mall have
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
been completed and remediation efforts are expected to be completed by August
31, 1999. Remediation strategies have been developed based on assessment
findings. 300 Delaware Avenue was sold on July 23, 1999.
The Partnership and the Venture have incurred costs to date relating to Y2K
of approximately $62,200. The total property assessment costs to the Venture
were approximately $49,500 and the total cost for quality assurance paid to
third party engineers and consultants was approximately $12,700. Additional
estimated remediation costs of $34,000 are expected to be incurred to remediate
and test non-compliant building systems as necessary, for a total estimated cost
of $96,200.
The failure to adequately address the Year 2000 issue may result in the
delay or temporary cessation or malfunction of certain building services, the
closure of buildings owned by the Venture, or delay in distributions to BAC
Holders. In order to reduce the potential impact on the operations of the
Partnership and the Venture, Partnership contingency plans are anticipated to be
completed by September 30, 1999.
Contingency plans have been developed for each of the buildings owned by
the Venture. Contingency plans may involve the engagement of additional security
services, implementation of temporary systems modifications, and the
identification and engagement of alternate service vendors. Additional
contingency plans may be developed as circumstances warrant.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. As
of June 30, 1999, the Partnership had no material exposure to market risk.
14
<PAGE> 15
PART II
Item 1. Legal Proceedings
As discussed in the Notes to Consolidated Financial Statements
of the Partnership's December 31, 1998 audited financial statements,
the Partnership is a defendant in a consolidated action brought in the
Court of Chancery of the State of Delaware entitled IN RE: ML/EQ Real
Estate Partnership Litigation. There have been no new developments
associated with this action for the six months ended June 30, 1999.
The Venture is currently in litigation with a current Northland Mall
tenant who is seeking damages for breach of lease. The Plaintiff, My
Inc., filed a claim with the State Court of Michigan in 1997. The
parties have agreed to the principal terms of a settlement, which has
not yet been finalized. Management does not expect any material adverse
impact as a result of this litigation.
<TABLE>
<S> <C>
Item 2. Changes in Securities
Response: None
Item 3. Default Upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Response:
a) Exhibits
27 Financial Data Schedule (for SEC filing purposes only)
b) Reports
None
</TABLE>
15
<PAGE> 16
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ML/EQ Real Estate Portfolio, L.P.
By: EREIM Managers Corp.
Managing General Partner
By: /s/Patricia C. Snedeker
-----------------------
Patricia C. Snedeker
Vice President, Controller
and Treasurer
(Principal Accounting Officer)
Dated: August 12, 1999
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- --------------------------------------------------------
<S> <C>
27 Financial Data Schedule (for SEC filing purposes only)
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ML/EQ ESTATE PORTFOLIO LP FOR THE PERIOD ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,798,080
<SECURITIES> 0
<RECEIVABLES> 5,018,354
<ALLOWANCES> 907,265
<INVENTORY> 0
<CURRENT-ASSETS> 15,033,285
<PP&E> 62,421,776
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,371,891
<CURRENT-LIABILITIES> 2,903,501
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,773,405
<TOTAL-LIABILITY-AND-EQUITY> 79,371,891
<SALES> 0
<TOTAL-REVENUES> 9,401,209
<CGS> 0
<TOTAL-COSTS> 5,707,622
<OTHER-EXPENSES> 789,345
<LOSS-PROVISION> 11,443,409
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,145,373)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,413,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,413,732)
<EPS-BASIC> (1.30)
<EPS-DILUTED> 0
</TABLE>
