<PAGE> 1
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, 1996
-------------
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 33-11064
--------
EREIM LP Associates
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its governing instrument)
New York 58-1739527
- -------------------------------------------------------------------------------
(State of Organization) (I.R.S. Employer Identification No.)
787 Seventh Avenue, New York, New York 10019
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (212) 554-1926
---------------------------
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
EREIM LP ASSOCIATES
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Balance sheets at June 30, 1996 and December 31, 1995
Statements of income for the three and six months ended
June 30, 1996 and 1995
Statement of partners' capital for the six months ended
June 30, 1996
Statements of cash flows for the six months ended
June 30, 1996 and 1995
Notes to 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
<PAGE> 3
EREIM LP ASSOCIATES
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash $ 10,000 $ 10,000
Guaranty fee receivable from affiliate
(Note 1) 182,446 186,074
Investment in joint venture, at equity (Note 2) 33,187,775 32,547,073
----------- -----------
TOTAL ASSETS $33,380,221 $32,743,147
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Deferred guaranty fee (Note 1) $ 1,621,843 $ 1,746,601
Due to affiliates 26,792 9,033
Accrued liabilities 13,947 24,584
----------- -----------
TOTAL LIABILITIES 1,662,582 1,780,218
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 1)
PARTNERS' CAPITAL:
General partners:
Equitable 32,825,465 32,198,220
EREIM LP Corp. (1,107,826) (1,235,291)
----------- -----------
TOTAL PARTNERS' CAPITAL 31,717,639 30,962,929
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $33,380,221 $32,743,147
=========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 4
EREIM LP ASSOCIATES
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
Ended June 30, Ended June 30,
------------------------ ----------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Equity in net income of joint venture (Note 2) $476,971 $534,114 $940,702 $1,333,597
Guaranty fee from affiliate (Note 1) 153,187 154,619 306,685 307,595
-------- -------- --------- ----------
TOTAL REVENUE 630,158 688,733 1,247,387 1,641,192
-------- -------- --------- ----------
EXPENSES:
Advisory fees 31,416 2,815 62,570 5,630
General and administrative 7,262 13,511 16,154 38,338
-------- -------- ---------- ----------
TOTAL EXPENSES 38,678 16,326 78,724 43,968
-------- -------- ---------- ----------
NET INCOME $591,480 $672,407 $1,168,663 $1,597,224
======== ======== ========== ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
EREIM LP ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
<TABLE>
<CAPTION>
EREIM
Equitable LP Corp. Total
----------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1995 $32,198,220 $(1,235,291) $30,962,929
Capital contributions 70,887 716 71,603
Distributions to partners (297,000) (188,556) (485,556)
Net income 853,358 315,305 1,168,663
----------- ----------- -----------
Balance, June 30, 1996 $32,825,465 $(1,107,826) $31,717,639
=========== =========== ===========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 6
EREIM LP ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,168,663 $1,597,224
---------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint venture (940,702) (1,333,597)
Distributions from joint venture 300,000 400,000
Decrease in guaranty fee receivable from
affiliate 3,628 5,424
Decrease in deferred guaranty fee (124,758) (124,757)
Increase in due to affiliates 17,759 22,134
(Decrease) Increase in accrued liabilities (10,637) 15,513
---------- ----------
Total adjustments (754,710) (1,015,283)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 413,953 581,941
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from general partners 71,603 6,321
Distributions to general partners (485,556) (588,262)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (413,953) (581,941)
---------- ----------
NET CHANGE IN CASH - -
CASH AT BEGINNING OF PERIOD 10,000 10,000
---------- ----------
CASH AT END OF PERIOD $ 10,000 $ 10,000
========== ==========
</TABLE>
See notes to financial statements.
-6-
<PAGE> 7
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
The 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
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
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, 1995, 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. GUARANTY AGREEMENT
The Partnership has entered into a guaranty agreement with EML Associates (the
"Venture") to provide a minimum return to ML/EQ Real Estate Portfolio, L.P.'s
("ML/EQ") limited partners on their capital contributions. The guaranty,
if necessary, will be due ninety days following the earlier of the sale or
other disposition of all the properties and mortgage loans and notes or the
liquidation of ML/EQ. The minimum return will be an amount which, when added
to the cumulative distributions from ML/EQ to its limited partners, will enable
ML/EQ to provide its limited partners with a minimum return equal to their
capital contributions plus a simple annual return of 9.75% on their adjusted
capital contributions, as defined in ML/EQ's Amended and Restated Agreement of
Limited Partnership, calculated from the dates of ML/EQ's investor closings at
which investors acquired their Beneficial Assignee Certificates ("BACs").
Adjusted capital contributions are the limited partners' original cash
contributions less distributions of sale or financing proceeds, and funds in
reserves as defined in ML/EQ's Partnership Agreement. The limited partners'
original cash contributions have been adjusted by that portion of distributions
paid through June 30, 1996, resulting from cash available to ML/EQ 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 ML/EQ or the Venture, and is
also subject to certain other limitations set forth in ML/EQ's prospectus.
Based upon the assumption that the last property is sold on December 31, 2002,
upon expiration of the term of the Venture, the maximum liability of the
Partnership to the Venture under the guaranty agreement as of June 30, 1996 is
limited to $245,755,859, plus the value of the Partnership's interest in the
Venture less any amounts contributed by the Partnership to fund cash deficits.
The Venture has assigned its rights under the guaranty agreement to ML/EQ.
ML/EQ will have recourse under the guaranty agreement only to the Partnership
and EREIM LP Corp. as a general partner of the Partnership but not to
Equitable. Equitable has entered into a Keep Well Agreement with EREIM LP
Corp. to permit EREIM LP Corp. to pay its obligations with respect to the
guaranty agreement as they become due; provided, however, that the maximum
liability of Equitable under the Keep Well Agreement is an amount equal to the
lesser of (i) two percent of the total admitted assets of Equitable (as
determined in accordance with New York Insurance Law) or (ii) $271,211,250.
The Keep Well Agreement provides that only EREIM LP Corp. and its successors
will have the right to enforce Equitable's obligations to make capital
contributions to EREIM LP Corp. to pay its obligation with respect to the
guaranty agreement.
Capital contributions by the BAC Holders totaled $108,484,500. As of June 30,
1996, the cumulative 9.75% simple annual return was $86,934,078. As of June
30, 1996, cumulative distributions by ML/EQ to the BAC Holders totaled
$15,795,328, of which $11,662,084 is attributable to income from operations
and $4,133,244 is attributable to sales of Venture assets, principal payments
on Mortgage Loans and other capital events. A distribution of capital
proceeds in the amount of $542,423 was declared on June 30, 1996. To the
extent that future cash distributions to the limited partners of ML/EQ are
insufficient to meet the specified minimum return, any shortfall will be funded
by the guaranty.
-7-
<PAGE> 8
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE
In March, 1988, ML/EQ had its initial investor closing. ML/EQ contributed
$90,807,268 to the Venture. The Partnership contributed zero coupon mortgage
notes to the Venture in the amount of $22,701,817. The Venture purchased an
additional $5,675,453 of zero coupon mortgage notes from Equitable.
In May, 1988, ML/EQ had its second and final investor closing. ML/EQ
contributed $14,965,119 to the Venture. The Partnership contributed zero
coupon mortgage notes to the Venture in the amount of $3,741,280, including
accrued interest. The Venture purchased an additional $935,320 of zero coupon
mortgage notes from Equitable to bring the total amount of zero coupon mortgage
notes owned by the Venture to $33,053,870, including accrued interest as of the
dates of acquisition. One of the zero notes was accounted for as a deed in lieu
of foreclosure by the Venture on July 22, 1994. The remaining note was due on
June 30, 1995. The property which secures the remaining first mortgage note is
Brookdale Center which is located outside of Minneapolis, Minnesota. The
borrower is Midwest Real Estate Shopping Center L.P. ("Midwest"), a publicly
traded limited partnership, (formerly Equitable Real Estate Shopping Centers,
L.P.). The note had an implicit interest rate of 10.2% compounded semiannually
with the Venture's portion of the entire amount of principal and accrued
interest totaling $25,345,353 due on June 30, 1995.
The Midwest defaulted on its obligation to repay the Brookdale zero note in
full on the maturity date. Notice of default was given to Midwest. For book
purposes, beginning with the second quarter of 1995, Management discontinued
the accrual of interest on the Brookdale zero note as the accreted value of the
mortgage approximated the estimated fair market value of Brookdale Center.
Under the terms of the mortgage agreement, however, the Venture continued to
accrue interest off the books at the effective implicit rate of 10.2% until
June 30, 1995. On July 1, 1995, the Venture began to accrue interest off the
books on the Brookdale zero note at the default rate of 19.0%. Equitable and
the Venture commenced foreclosure proceedings and a court appointed receiver
was named. The receiver was responsible for collecting rent proceeds from the
tenants at Brookdale Center and applying the proceeds to payments of operating
costs at Brookdale Center. Any remaining funds were paid to Equitable and the
Venture on account of the Brookdale zero note. The Venture recorded cash
received from the operation of Brookdale Center during this period on a cash
basis as interest income. During the first six months of 1996, approximately
$1,975,000 was remitted under the terms of the receivership. The Venture's
portion of these payments was approximately $1,415,000.
As of September 30, 1995, an internal review of the Brookdale Center was
performed for the Venture. Based on this review, the estimated fair market
value of Brookdale Center was $30,000,000. The Venture recorded a valuation
allowance of $3,232,210 to value the note at an amount equal to the Venture's
participation interest in the note multiplied by the estimated fair market
value of Brookdale Center, or $21,498,199.
In April, 1996 the Venture and Equitable (collectively referred to as "Lender")
agreed in principle to a workout arrangement with Midwest on the Brookdale zero
note under which Midwest would file for Chapter 11 bankruptcy protection and,
with the support of Lender, submit a plan of reorganization to the Bankruptcy
Court for approval. The workout arrangement was memorialized in a nonbinding
letter agreement dated April 11, 1996 (the "Letter Agreement") between Midwest
and Equitable and approved by the Board of Directors of EREIM Managers Corp.,
the general partner of ML/EQ, on behalf of the Venture.
-8-
<PAGE> 9
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11 bankruptcy
protection, staying the Brookdale foreclosure proceeding and terminating the
receivership arrangement. However, as contemplated by the Letter Agreement,
Midwest subsequently obtained Bankruptcy Court approval to retain the
management company that had served as receiver prior to the bankruptcy filing
as Brookdale's property manager. In addition, the Bankruptcy Court, with the
agreement of Midwest and Lender, entered a cash collateral order, as
contemplated by the Letter Agreement, pursuant to which all positive cash
flow generated by the property in excess of property-related expenses and
certain administrative costs of the bankruptcy, not to exceed $25,000, will
be paid to the Lender during the bankruptcy.
Under the Bankruptcy Code, Midwest has the exclusive right for one hundred
twenty days after filing for bankruptcy to propose a plan of reorganization to
the Bankruptcy Court for approval. Midwest has not yet filed a plan but is
expected to do so soon. Although no assurances can be given, the Venture
expects that the plan, when filed, will be consistent with the Letter
Agreement. If so, the material provisions of the plan would be as follows:
- - The Brookdale zero note will remain in default.
- - Midwest will market the property for sale to potential third-party
purchasers through November 15,1996.
- - Lender will fund any necessary capital and leasing costs approved by Midwest
and Lender through a super-priority, non-recourse, debtor-in-possession loan
by Lender.
- - The net proceeds generated through a sale of the property to a third-party
purchaser, after payment of the costs of sale and repayment of the amounts
owed to Lender under the debtor-in-possession financing, first shall be paid
on a pari passu basis $750,000 to Midwest and $30,000,000 to Lender, second
shall be split 50-50 between Midwest and Lender up to a total of
$6,000,000, and third shall thereafter be remitted to Midwest.
- - If Midwest receives and wishes to accept a third-party offer to purchase
the property for a price that will produce net sales proceeds of less than
$30,750,000, then Lender shall have the option either to consent to such
sale or purchase the property for an amount equal to $500,000 plus 2.5% of
the amount by which the purchase price under the third-party offer exceeds
$20,000,000.
- - If no third-party offer is received by November 15, 1996, or if a
third-party purchaser has failed to close its acquisition of the property by
December 1, 1996, both Midwest and Lender will have the right to cause the
property to be conveyed to Equitable and the Venture as joint tenants. The
purchase price for the property shall be $500,000, and the property shall be
conveyed to Equitable and the Venture subject to, among other things, the
mortgage securing the Brookdale zero note and the mortgage securing Lender's
debtor-in-possession financing.
- - Lender will be granted certain limited rights of first refusal to purchase
the property, and Lender will be granted, during the bankruptcy, various
rights to discuss with third-parties the possible renovation of the property
should Lender acquire ownership of the property.
The Venture and Equitable have entered into an agreement between themselves
to support Midwest's plan of reorganization as outlined in the Letter
Agreement, to make all decisions regarding the plan of reorganization jointly,
and to share all expenses, on a pro rata basis, in connection with the
bankruptcy and all undertakings jointly agreed upon by the Venture and
Equitable in accordance with their participation interests in the Brookdale
zero note.
-9-
<PAGE> 10
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
The financial position and results of operations of the Venture
are summarized as follows:
SUMMARY OF FINANCIAL POSITION
JUNE 30, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
June 30 December 31
------------ -------------
<S> <C> <C>
Assets:
Rental properties $127,976,721 $126,336,402
Less accumulated depreciation (14,195,982) (12,421,010)
------------ ------------
Net rental properties 113,780,739 113,915,392
Zero coupon mortgage note receivable, net of
valuation allowance 21,498,199 21,498,199
Mortgage loan receivable 6,000,000 6,000,000
Cash and short-term investments 21,218,104 19,734,941
Accounts receivable and accrued investment income 2,649,027 3,446,102
Deferred rent concessions 2,049,997 2,030,727
Deferred leasing costs 733,492 713,979
Prepaid expenses and other assets 216,580 495,509
Interest income receivable 139,358 140,921
------------ ------------
Total assets $168,285,496 $167,975,770
============ ============
Liabilities and equity:
Accounts payable and accrued real estate expenses $ 1,627,469 $ 2,115,576
Security deposits and unearned rent 578,160 477,737
Accrued capital expenditures 140,994 2,647,092
Joint venturers' equity 165,938,873 162,735,365
------------ ------------
Total liabilities and equity $168,285,496 $167,975,770
============ ============
Partnership's share of joint venture equity $ 33,187,775 $ 32,547,073
============ ============
</TABLE>
-10-
<PAGE> 11
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
SUMMARY STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Revenue:
Rental income $9,582,681 $10,676,004
Lease termination income 62,171 1,376,228
Interest on loans receivable 1,722,798 922,444
---------- -----------
Total Revenue 11,367,650 12,974,676
---------- -----------
Operating expenses:
Real estate operating expenses 1,907,706 1,444,986
Real estate taxes 1,083,114 1,237,514
Property management fees 231,142 258,734
Depreciation and amortization 3,945,780 3,894,651
---------- -----------
Total operating expenses 7,167,742 6,835,885
---------- -----------
Income from property operations 4,199,908 6,138,791
---------- -----------
Other income:
Interest and other nonoperating income 503,600 529,193
---------- -----------
Total other income 503,600 529,193
---------- -----------
Net income $4,703,508 $ 6,667,984
========== ===========
Partnership's share of equity in net income of joint venture $ 940,702 $ 1,333,597
========== ===========
</TABLE>
-11-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the results of operations and financial
condition of the Partnership should be read in conjunction with the financial
statements and the related notes to financial statements included elsewhere
herein.
Liquidity and Capital Resources
As of June 30, 1996, the Partnership had cash of $10,000. The cash is
expected to be used for general working capital purposes. The Partnership may
establish additional working capital reserves as the General Partners from time
to time determine are appropriate.
In addition, at June 30, 1996, the Venture, in which the Partnership
owns a 20% interest, had approximately $21.2 million in short-term investments.
These funds are intended to be utilized primarily to fund the renovation work
expected on The Bank of Delaware Building, to fund possible costs incurred to
increase tenancy at Richland Mall, and to fund other general working capital
requirements. These funds, in addition to reserves from future operations, may
also be used to pay the Venture's pro rata share of costs incurred in
connection with the Brookdale zero coupon mortgage note, including legal costs
with respect to the Midwest bankruptcy proceeding as well as improvements
deemed to be necessary in the event title is transferred to the Venture and
Equitable.
Management has established an enhancement, stabilization and renovation
program for The Bank of Delaware Building which was transferred to the Venture
by deed in lieu of foreclosure on November 15, 1994. Estimated costs for this
program are expected to be $4.3 million over the next three years, of which
$1.6 million was incurred in 1995, $1.3 million is expected to be incurred
in 1996, and $1.4 million is expected to be incurred in 1997. As of June 30,
1996 approximately $2.5 million of these costs have been expended. Included
in the estimated $4.3 million of expenditures related to The Bank of Delaware
renovation program is approximately $2.3 million for asbestos abatement
expected to be incurred evenly over 1995, 1996, and 1997. Also included in
the $4.3 million is $400,000 for sprinkler installation and $400,000 for
exterior deferred maintenance including recaulking all four sides of the
building. Additional costs not included in the above figures are estimated
tenant improvements of $2.5 million. The tenant improvement costs are
directly associated with actual leasing and will only be expended as leasing
transactions occur in the building. No significant leasing has occurred
during the six months ended June 30, 1996.
Reference is made to Note 1 in the Notes to Financial Statements for
information regarding the Guaranty Agreement issued by the Partnership to the
Venture and assigned to ML/EQ, and the related Keep Well Agreement between
EREIM LP Corp. and Equitable.
Financial Condition
The Partnership's financial statements reflect its proportional
ownership interest in, and its share of the results of operations of, the
Venture, through which the Partnership conducts its business of investment in
real property and first mortgages.
The increase in investment in joint venture at June 30, 1996 as
compared to December 31, 1995, resulted from the excess of equity in net income
of the Venture over actual cash distributions from the Venture.
The increase in EREIM LP Corp.'s and Equitable's capital accounts at
June 30, 1996 as compared to December 31, 1995 is attributable to the
respective shares of net income of the Partnership in excess of cash
distributions by the Partnership to EREIM LP Corp. and Equitable.
-12-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Results of Operations
Equity in net income of joint venture for the six months ended June
30, 1996 decreased approximately $393,000 compared to the six months
ended June 30, 1995. This decrease is primarily due to approximately $1.3
million of lease termination income which was recognized by the Venture during
the first quarter of 1995. Pursuant to an agreement with Kohl's Department
Stores, Inc. ("Kohl's"), a former tenant at Northland Center, Equitable agreed
to accept approximately $1.8 million in connection with the termination of
Kohl's lease on behalf of the tenancy in common arrangement between the
Venture and Equitable. The Venture's portion of the termination payment was
approximately $1.3 million. This agreement released Kohl's from any remaining
obligation under the original lease agreement.
Guaranty fee income from affiliate for the six months ended June 30,
1996 remained approximately the same compared to the six months ended June 30,
1996.
Advisory fees increased approximately $57,000 for the six months ended
June 30, 1996 compared to the six months ended June 30, 1995 due to a change in
the allocation of fees to the Partnership from Equitable.
General and administrative expenses decreased approximately $22,184 for
the six months ended June 30, 1996 compared to the six months ended June
30,1995 due to the timing of the accrual of audit and tax fees in 1996 as
compared to 1995.
Under the terms of the Brookdale zero note, which is secured by
Brookdale Center, principal and interest in the aggregate amount of
$35,368,572, of which the Venture's portion is $25,345,353, was due on June 30,
1995. Midwest defaulted on its obligation to repay the Brookdale zero note in
full on the maturity date. Notice of default was given to Midwest. For book
purposes, beginning with the second quarter of 1995, Management discontinued
the accrual of interest on the Brookdale zero note as the accreted value of the
mortgage approximated the estimated fair market value of Brookdale Center.
Under the terms of the mortgage agreement, however, the Venture continued to
accrue interest off the books at the effective implicit rate of 10.2% until
June 30, 1995. On July 1, 1995, the Venture began to accrue interest off the
books on the Brookdale zero note at the default rate of 19.0%. Equitable and
the Venture commenced foreclosure proceedings and a court appointed receiver
was named. The receiver was responsible for collecting rent proceeds from the
tenants at Brookdale Center and applying the proceeds to payments of operating
costs at Brookdale Center. Any remaining funds were paid to Equitable and the
Venture on account of the Brookdale zero note. The Venture recorded cash
received from the operation of Brookdale Center during this period on a cash
basis as interest income. During the first half of 1996, approximately
$1,975,000 was remitted under the terms of the receivership. The Venture's
portion of these payments was approximately $1,415,000.
As of September 30, 1995, an internal review of the Brookdale Center
was performed for the Venture. Based on this review, the estimated fair market
value of Brookdale Center was $30,000,000. The Venture recorded a valuation
allowance of $3,232,210 to value the note at an amount equal to the Venture's
participation interest in the note multiplied by the estimated fair market
value of Brookdale Center, or $21,498,199.
In April, 1996 the Venture and Equitable (collectively referred to as
"Lender") agreed in principle to a workout arrangement with Midwest on the
Brookdale zero note under which Midwest would file for Chapter 11 bankruptcy
protection and, with the support of Lender, submit a plan of reorganization to
-13-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
the Bankruptcy Court for approval. The workout arrangement was memorialized in
a nonbinding letter agreement dated April 11, 1996 (the "Letter Agreement")
between Midwest and Equitable and approved by the Board of Directors of EREIM
Managers Corp., the general partner of ML/EQ, on behalf of the Venture.
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11
bankruptcy protection, staying the Brookdale foreclosure proceeding and
terminating the receivership arrangement. However, as contemplated by the
Letter Agreement, Midwest subsequently obtained Bankruptcy Court approval to
retain the management company that had served as receiver prior to the
bankruptcy filing as Brookdale's property manager. In addition, the Bankruptcy
Court, with the agreement of Midwest and Lender, entered a cash collateral
order, as contemplated by the Letter Agreement, pursuant to which all
positive cash flow generated by the property in excess of property-related
expenses and certain administrative costs of the bankruptcy, not to exceed
$25,000, will be paid to the Lender during the bankruptcy.
Under the Bankruptcy Code, Midwest has the exclusive right for one
hundred twenty days after filing for bankruptcy to propose a plan of
reorganization to the Bankruptcy Court for approval. Midwest has not yet filed
a plan but is expected to do so soon. Although no assurances can be given, the
Venture expects that the plan, when filed, will be consistent with the Letter
Agreement. If so, the material provisions of the plan would be as follows:
- - The Brookdale zero note will remain in default.
- - Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- - Lender will fund any necessary capital and leasing costs approved by
Midwest and Lender through a super-priority, non-recourse,
debtor-in-possession loan by Lender.
- - The net proceeds generated through a sale of the property to a
third-party purchaser, after payment of the costs of sale and repayment of
the amounts owed to Lender under the debtor-in-possession financing, first
shall be paid on a pari passu basis $750,000 to Midwest and $30,000,000 to
Lender, second shall be split 50-50 between Midwest and Lender up to a total
of $6,000,000, and third shall thereafter be remitted to Midwest.
- - If Midwest receives and wishes to accept a third-party offer to
purchase the property for a price that will produce net sales proceeds of
less than $30,750,000, then Lender shall have the option either to consent
to such sale or purchase the property for an amount equal to $500,000 plus
2.5% of the amount by which the purchase price under the third-party offer
exceeds $20,000,000.
- - If no third-party offer is received by November 15, 1996, or if a
third-party purchaser has failed to close its acquisition of the property
by December 1, 1996, both Midwest and Lender will have the right to cause
the property to be conveyed to Equitable and the Venture as joint tenants.
The purchase price for the property shall be $500,000, and the property
shall be conveyed to Equitable and the Venture subject to, among other
things, the mortgage securing the Brookdale zero note and the mortgage
securing Lender's debtor-in-possession financing.
- - Lender will be granted certain limited rights of first refusal to purchase
the property, and Lender will be granted, during the bankruptcy, various
rights to discuss with third-parties the possible renovation of the
property should Lender acquire ownership of the property.
-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
The Venture and Equitable have entered into an agreement between themselves
to support Midwest's plan of reorganization as outlined in the Letter
Agreement, to make all decisions regarding the plan of reorganization jointly,
and to share all expenses, on a pro rata basis, in connection with the
bankruptcy and all undertakings jointly agreed upon by the Venture and
Equitable in accordance with their participation interests in the Brookdale
zero note.
Midwest is subject to the informational requirements under the
Securities Exchange Act, and in accordance therewith files reports and other
information, including financial statements, with the Securities and Exchange
Commission (SEC) under Commission File No. 1-9331. Such reports and other
information filed by Midwest can be inspected and copied at the public
reference facilities maintained by the SEC in Washington, D.C. and at certain
of its Regional Offices, and copies may be obtained from the Public Reference
Section of the SEC, Washington, D.C. 20549, at prescribed rates.
Inflation has been at relatively low levels during the periods
presented in the financial statements and, as a result, has not had a
significant effect on the operations of the Partnership, the Venture or their
investments. Over the past several years, the rate of inflation has exceeded
the rate of rental rate growth in many of the Venture's properties. During the
recent real estate downturn, rental rates dropped, indicating a negative growth
rate. This negative growth appears to have ceased, and rental rates have
stabilized in many of the properties' markets. Real recovery in rental rates,
if achieved at all, will likely occur over an extended period of time.
-15-
<PAGE> 16
PART II
Item 1. Legal Proceedings
There are no pending legal proceedings material to the Partnership to
which the Partnership, the Venture, any of the Properties, or to the knowledge
of the Managing General Partner, the properties that secure the Mortgage loans
are subject.
Several class action suits have been filed against Midwest, the general
partner of Midwest, certain officers of such general partner, Lehman Brothers,
Inc., Equitable, and Equitable Real Estate. The complaints allege, among other
things, that the defendants breached their fiduciary duties and violated
federal securities laws in connection with the initial sale of BAC's, the
operation of Midwest, and the sale of Northland Center to the Venture and
Equitable. Neither the Venture nor the Partnership has been named as a party
to any such suits.
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
-16-
<PAGE> 17
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.
EREIM LP Associates
By: EREIM LP Corp.
General Partner
By: /s/Harry D. Pierandri
------------------------------
Harry D. Pierandri
President
Dated: August 14, 1996
-17-
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule (for SEC filing purposes only)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EREIM LP ASSOCIATES FOR THE PERIOD ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,000
<SECURITIES> 0
<RECEIVABLES> 182,446
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 192,446
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,380,221
<CURRENT-LIABILITIES> 40,739
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 31,717,639
<TOTAL-LIABILITY-AND-EQUITY> 33,380,221
<SALES> 0
<TOTAL-REVENUES> 1,247,387
<CGS> 0
<TOTAL-COSTS> 62,570
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,168,663
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,168,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,168,663
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
