<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 September 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 September 30, 1996 and December 31, 1995
Statements of income for the three and nine months ended
September 30, 1996 and 1995
Statement of partners' capital for the nine months ended
September 30, 1996
Statements of cash flows for the nine months ended
September 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
Cash $ 10,000 $ 10,000
Guaranty fee receivable from affiliate
(Notes 1) 91,650 186,074
Investment in joint venture, at equity (Note 2) 33,458,040 32,547,073
----------- -----------
TOTAL ASSETS $33,559,690 $32,743,147
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Deferred guaranty fee (Notes 1) $ 1,559,465 $ 1,746,601
Due to affiliates 3,103 9,033
Accrued liabilities 17,856 24,584
----------- -----------
TOTAL LIABILITIES 1,580,424 1,780,218
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 1)
PARTNERS' CAPITAL:
General partners:
Equitable 33,112,609 32,198,220
EREIM LP Corp. (1,133,343) (1,235,291)
----------- -----------
TOTAL PARTNERS' CAPITAL 31,979,266 30,962,929
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $33,559,690 $32,743,147
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 4
EREIM LP ASSOCIATES
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
Ended September 30, Ended September 30,
-------------------- -------------------
1996 1995 1996 1995
REVENUE: ---- ---- ---- ----
<S> <C> <C> <C> <C>
Equity in net income (loss) of
joint venture (Note 2) $570,265 $(253,801) $1,510,967 $1,079,796
Guaranty fee from affiliate (Notes 1) 154,029 157,011 460,714 464,606
-------- --------- ---------- ----------
TOTAL REVENUE 724,294 (96,790) 1,971,681 1,544,402
-------- --------- ---------- ----------
EXPENSES:
Advisory fees 31,924 82,779 94,494 88,409
General and administrative 7,012 5,531 23,166 43,869
-------- --------- ---------- ----------
TOTAL EXPENSES 38,936 88,310 117,660 132,278
-------- --------- ---------- ----------
NET INCOME $685,358 $(185,100) $1,854,021 $1,412,124
======== ========= ========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 5
EREIM LP ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 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 129,015 1,303 130,318
Distributions to partners (594,000) (374,002) (968,002)
Net income 1,379,374 474,647 1,854,021
----------- ----------- -----------
Balance, September 30, 1996 $33,112,609 $(1,133,343) $31,979,266
=========== =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
EREIM LP ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,854,021 $ 1,412,124
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint venture (1,510,967) (1,079,796)
Distributions from joint venture 600,000 775,000
Decrease in guaranty fee receivable from
affiliate 94,424 94,724
(Decrease) in deferred guaranty fee (187,136) (187,136)
(Decrease) increase in due to affiliates (5,930) 23,050
(Decrease) increase in accrued liabilities (6,728) 20,819
----------- -----------
Total adjustments (1,016,337) (353,339)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 837,684 1,058,785
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from general partners 130,318 88,409
Distributions to general partners (968,002) (1,147,194)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (837,684) (1,058,785)
----------- -----------
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.
-5-
<PAGE> 7
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
The financial statements of EREIM LP Associates (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 September 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 September 30,
1996 is limited to $244,892,172, 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 September
30, 1996, the cumulative 9.75% simple annual return was $89,486,915. As of
September 30, 1996, cumulative distributions by the Partnership to the BAC
Holders totaled $16,337,751, of which $11,662,084 is attributable to income
from operations and $4,675,667 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 of ML/EQ are
insufficient to meet the specified minimum return, any shortfall will be funded
by the guaranty.
-6-
<PAGE> 8
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 The Equitable Life Assurance Society of the United States
("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
September 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 September 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 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 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.
-7-
<PAGE> 9
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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. The Venture records cash received
from the operation of Brookdale Center as interest income. During the third
quarter of 1996 approximately $1,224,000 was remitted under the terms of the
cash collateral order. The Venture's portion of these payments was
approximately $877,000.
Consistent with the Letter Agreement, Midwest filed a plan of
reorganization with the Bankruptcy Court on August 23, 1996. The material
provisions of the plan, which is subject to approval of the Bankruptcy Court,
are 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.
To date, Midwest has not received a third-party offer to purchase the
property which would produce net sales proceeds of at least $30,750,000 or any
third-party offer at a lesser price acceptable to Equitable and the Venture.
Consequently, Management believes that upon approval of the plan, it is likely
that the property will be conveyed to Equitable and the Venture for a purchase
price of $500,000.
-8-
<PAGE> 10
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
On October 30, 1996, the plaintiffs in one of the class action suits
previously filed against Midwest, Equitable and others (see "Legal
Proceedings") filed a claim for equitable subordination against Equitable in
the Midwest bankruptcy proceeding. The claim alleges, among other things, that
Equitable breached a fiduciary duty to Midwest's investors and violated federal
securities laws in connection with the initial sale of interests in Midwest
and, as such, that Equitable should not be entitled to preferential treatment
in bankruptcy court. If the claim were to be successful as asserted, Equitable
and the Venture would not be entitled to the benefits of the plan. Management
believes, however, that the bankruptcy court is unlikely to find in favor of
the claimants and that the claim can be disposed of without adversely impacting
the Venture's interests.
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> 11
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31
-------------- -----------
Assets:
<S> <C> <C>
Rental properties $128,346,351 $126,336,402
Less accumulated depreciation (15,120,129) (12,421,010)
------------ ------------
Net rental properties 113,226,222 113,915,392
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 23,295,273 19,734,941
Accounts receivable and accrued investment income 2,060,442 3,446,102
Deferred rent concessions 2,184,192 2,030,727
Deferred leasing costs 861,887 713,979
Prepaid expenses and other assets 1,020,245 495,509
Interest income receivable 94,309 140,921
------------ ------------
Total assets $170,240,769 $167,975,770
============ ============
Liabilities and equity:
Accounts payable and accrued real estate expenses $ 2,383,259 $ 2,115,576
Security deposits and unearned rent 458,337 477,737
Accrued capital expenditures 108,975 2,647,092
Joint venturers' equity 167,290,198 162,735,365
------------ ------------
Total liabilities and equity $170,240,769 $167,975,770
============ ============
Partnership's share of joint venture equity $ 33,458,040 $ 32,547,073
============ ============
</TABLE>
-10-
<PAGE> 12
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
SUMMARY STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- --------
Revenue:
<S> <C> <C>
Rental income $14,814,521 $15,620,214
Lease termination income 62,171 1,487,433
Interest on loans receivable 2,753,488 1,076,194
----------- -----------
Total revenue 17,630,180 18,183,841
----------- -----------
Operating expenses:
Real estate operating expenses 5,938,809 5,955,116
Real estate taxes 1,690,027 1,824,074
Property management fees 347,502 373,642
Depreciation and amortization 2,891,678 2,189,811
Provision for impairment on zero coupon mortgage - 3,232,210
----------- -----------
Total operating expenses 10,868,016 13,574,853
----------- -----------
Income from property operations 6,762,164 4,608,988
----------- -----------
Other income:
Interest and other nonoperating income 792,670 789,993
----------- -----------
Total other income 792,670 789,993
----------- -----------
Net income $ 7,554,834 $ 5,398,981
=========== ===========
Partnership's share of equity in net income of joint venture $ 1,510,967 $ 1,079,796
=========== ===========
</TABLE>
-11-
<PAGE> 13
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 September 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 September 30, 1996, the Venture, in which the
Partnership owns a 20% interest, had approximately $23.3 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
September 30, 1996 approximately $2.6 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 nine months ended September 30, 1996.
The Venture anticipates expenditures to be incurred to increase tenancy
at Richland Mall of approximately $3.4 million, including approximately $2.1
million for tenant improvements in connection with leasing approximately 55,000
square feet of space to Redner's Market. Clemens Market will vacate
approximately 26,000 square feet of space upon the expiration of its lease on
December 31, 1996. Management is negotiating a lease with Redner's Market that
would involve expanding the Clemens Market space, upon the expiration of its
lease, into approximately 55,000 square feet of leasable space for Redner's
Market. The Redner's Market lease, expected to commence in March of 1998, has
an anticipated term of twenty years with renewal options thereafter. Also
included in the estimated $3.4 million of expenditures is approximately $1.3
million in connection with the relocation of existing tenants to accommodate the
Redner's Store, lease termination costs, and additional work necessary to
reconfigure Richland Mall for the Redner's Market expansion and additional, as
yet unnamed, mall stores.
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 September 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
September 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> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Results of Operations
The increase in equity in net income of joint venture for the three
and nine months ended September 30,1996 compared to the three and nine months
ended September 30, 1995 is attributable to an increase in the
Venture's net income. The Venture's net income increased as a result of the
valuation allowance of $3,232,210 that was recorded during the third quarter of
1995 to value the Brookdale zero coupon mortgage at an amount equal to the
Venture's participation interest in the note multiplied by the estimated fair
market value of the Center. A valuation allowance has not been recognized in
1996.
Guaranty fee income from affiliate for the nine months ended September
30, 1996 remained approximately the same compared to the nine months ended
September 30, 1995.
Advisory fees for the nine months ended September 30, 1996 remained
approximately the same compared to the nine months ended September 30, 1995.
General and administrative expenses decreased approximately $21,000
for the nine months ended September 30, 1996 compared to the nine months ended
September 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 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
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.
-13-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (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. The Venture records cash received
from the operation of Brookdale Center as interest income. During the third
quarter of 1996 approximately $1,224,000 was remitted under the terms of the
cash collateral order. The Venture's portion of these payments was
approximately $877,000.
Consistent with the Letter Agreement, Midwest filed a plan of
reorganization with the Bankruptcy Court on August 23, 1996. The material
provisions of the plan, which is subject to approval of the Bankruptcy Court,
are 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.
To date, Midwest has not received a third-party offer to purchase the
property which would produce net sales proceeds of at least $30,750,000 or any
third-party offer at a lesser price acceptable to Equitable and the Venture.
Consequently, Management believes that upon approval of the plan, it is likely
that the property will be conveyed to Equitable and the Venture for a
purchase price of $500,000.
-14-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
On October 30, 1996, the plaintiffs in one of the class action suits
previously filed against Midwest, Equitable and others (see "Legal
Proceedings") filed a claim for equitable subordination against Equitable in
the Midwest bankruptcy proceeding. The claim alleges, among other things, that
Equitable breached a fiduciary duty to Midwest's investors and violated federal
securities laws in connection with the initial sale of interests in Midwest
and, as such, that Equitable should not be entitled to preferential treatment
in bankruptcy court. If the claim were to be successful as asserted, Equitable
and the Venture would not be entitled to the benefits of the plan. Management
believes, however, that the bankruptcy court is unlikely to find in favor of
the claimants and that the claim can be disposed of without adversely impacting
the Venture's interests.
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> 17
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.
On October 30, 1996, the plantiffs in one of the class action suits
previously filed against Midwest, Equitable and others filed a claim for
equitable subordination against Equitable in the Midwest bankruptcy proceeding.
Equitable alleges, among other things, that Equitable breached a fiduciary duty
to Midwest's investors and violated federal securities laws in connection with
the initial sale of interests in Midwest and, as such, that Equitable should
not be entitled to preferential treatment in bankruptcy court. If the claim
were to be successful as asserted, Equitable and the Venture would not be
entitled to the benefits of the plan. Management believes, however, that the
bankruptcy court is unlikely to find in favor of the claimants and that the
claim can be disposed of without adversely impacting the Venture's interests.
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> 18
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: November 14,1996
-17-
<PAGE> 19
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 SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,000
<SECURITIES> 0
<RECEIVABLES> 91,650
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 101,650
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,559,690
<CURRENT-LIABILITIES> 20,959
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 31,979,266
<TOTAL-LIABILITY-AND-EQUITY> 33,559,690
<SALES> 0
<TOTAL-REVENUES> 1,971,681
<CGS> 0
<TOTAL-COSTS> 94,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,854,021
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,854,021
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854,021
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
