<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 33-11064
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EREIM LP Associates
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(Exact name of registrant as specified in its governing instrument)
New York 58-1739527
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(State of Organization) (I.R.S. Employer Identification No.)
787 Seventh Avenue, New York, New York 10019
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(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
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<PAGE> 2
EREIM LP ASSOCIATES
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Balance sheets at March 31, 1996 and December 31, 1995
Statements of income for the three months ended
March 31, 1996 and 1995
Statement of partners' capital for the three months ended
March 31, 1996
Statements of cash flows for the three months ended March 31,
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
MARCH 31, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
ASSETS
- ------
<S> <C> <C>
Cash $ 10,000 $ 10,000
Guaranty fee receivable from affiliate (Note 1) 91,637 186,074
Investment in joint venture, at equity (Note 2) 32,710,804 32,547,073
----------- -----------
TOTAL ASSETS $32,812,441 $32,743,147
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------
LIABILITIES:
Deferred guaranty fee (Note 1) $ 1,684,222 $ 1,746,601
Accrued liabilities 20,912 24,584
Due to affiliates 12,564 9,033
----------- -----------
TOTAL LIABILITIES 1,717,698 1,780,218
----------- -----------
PARTNERS' CAPITAL:
General partners:
Equitable 32,360,453 32,198,220
EREIM LP Corp. (1,265,710) (1,235,291)
----------- -----------
TOTAL PARTNERS' CAPITAL 31,094,743 30,962,929
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $32,812,441 $32,743,147
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 4
EREIM LP ASSOCIATES
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
For the Three Months ended
March 31,
---------------------------------
1996 1995
--------- ---------
<S> <C> <C>
REVENUE:
Equity in net income of joint venture (Note 2) $463,731 $799,482
Guaranty fee from affiliate (Note 1) 153,498 152,976
-------- --------
TOTAL REVENUE 617,229 952,458
-------- --------
EXPENSES:
Advisory fees 31,154 2,815
General and administrative 8,892 24,135
-------- --------
TOTAL EXPENSES 40,046 26,950
-------- --------
NET INCOME $577,183 $925,508
======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 5
EREIM LP ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(unaudited)
EREIM
Equitable LP Corp. Total
--------- -------- ------
Balance, December 31, 1995 $ 32,198,220 $ (1,235,291) $ 30,962,929
Capital contributions 39,785 402 40,187
Distributions to partners (297,000) (188,556) (485,556)
Net income 419,448 157,735 577,183
------------ ------------- ------------
Balance, March 31, 1996 $ 32,360,453 $ (1,265,710) $ 31,094,743
============ ============= ============
See notes to financial statements.
-4-
<PAGE> 6
EREIM LP ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
<S> <C> <C>
Net income $ 577,183 $ 925,508
----------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint venture (463,731) (799,482)
Distributions from joint venture 300,000 400,000
Decrease in guaranty fee receivable from
affiliate 94,437 97,665
Decrease in deferred guaranty fee (62,379) (62,379)
(Decrease) Increase in accrued liabilities (3,672) 9,595
Increase in due to affiliates 3,531 14,540
----------- ----------
Total adjustments (131,814) (340,061)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 445,369 585,447
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Contributions from general partners 40,187 2,815
Distributions to general partners (485,556) (588,262)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES (445,369) (585,447)
----------- ----------
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 THREE MONTHS ENDED MARCH 31, 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. Payments on the
guaranty are due 90 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 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 reduced by distributions of sale or financing proceeds and by
distributions of certain funds in reserves, as more particularly described in
ML/EQ's Partnership Agreement. The limited partners' original cash
contributions have been adjusted by that portion of distributions paid through
March 31, 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. Based upon the assumption that
the last property is sold on December 31, 2002, upon expiration of the term of
ML/EQ, the maximum liability of the Partnership to the Venture under the
guaranty agreement as of March 31, 1996 is limited to $245,769,758, 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.
-6-
<PAGE> 8
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
1. GUARANTY AGREEMENT (Continued)
Capital contributions by the BAC Holders totaled $108,484,500. As of March 31,
1996, the cumulative 9.75% simple annual return was $84,404,415. As of
March 31, 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. 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, up to
the above described maximum.
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.
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 the 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 is 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 are to be
paid to Equitable and the Venture on account of the Brookdale zero note. The
Venture records cash received from the operation of Brookdale Center on a cash
basis as interest income. During the first quarter of 1996, approximately
$825,000 was remitted under the terms of the receivership. The Venture's
portion of these payments was approximately $591,000.
As of September 30, 1995, an internal review of 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.
-7-
<PAGE> 9
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
The Venture and Equitable (collectively referred to as "Lender") have
agreed in principle to a workout arrangement with Midwest on the Brookdale zero
note. Under the proposed plan Midwest would file for Chapter 11 bankruptcy
protection and, with the support of the Venture and Equitable, submit a plan of
reorganization to the Bankruptcy Court for approval providing as follows:
- - The Brookdale zero note will remain in default. Lender will terminate
the foreclosure process, and the current receiver for the property will
remain in place as the property manager.
- - In the bankruptcy case, 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.
- - Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- - Until a third-party sale occurs or a deed in lieu of foreclosure is
delivered, Lender will receive as adequate protection payments in the
bankruptcy case all positive cash flow generated from the property in
excess of property-related expenses and certain administrative costs of the
bankruptcy not to exceed $25,000.
- - 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 of 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 various rights to discuss with
third-parties the possible renovation of the property should Lender acquire
ownership of the property.
The workout arrangement has been memorialized in a letter agreement dated
April 11, 1996, between Midwest and Equitable (the "Letter Agreement").
The Letter Agreement is by its terms nonbinding unless and until a formal
agreement is executed by each of the parties pursuant to appropriate corporate
or other authorization. The Board of Directors of EREIM Managers Corp., the
general partner of ML/EQ, has approved the workout arrangement provided
for in the Letter Agreement on behalf of the Venture. However, the workout
arrangement provided for in the Letter Agreement is subject to certain
conditions precedent, the approval of the Board of Directors of Midwest's
general partner, and confirmation of Midwest's plan of reorganization by a
United States Bankruptcy Court. Management believes that the proposed workout
provides an opportunity for Lender to take title to Brookdale Center sooner
than would otherwise be possible. A decision by Lender to foreclose on
Brookdale Center could result in a non-consenual bankruptcy filing by Midwest
which might substantially delay Lender's efforts to take title to the property.
In addition, Midwest has the right under Minnesota law to redeem Brookdale
Center for one year following the date on which foreclosure occurs. The right
of redemption gives a mortagor the right to reclaim mortgaged property by
paying the loan in full after foreclosure, handicapping the mortgagee for the
duration of the redemption period, thus negatively impacting its ability to
sell or redevelop and remerchandise the property. The transfer of Brookdale
Center to Lender pursuant to the proposed reorganization plan would terminate
Midwest's right of redemption. Furthermore, by giving Midwest an opportunity
to market Brookdale Center and to pay off the Brookdale zero note for the sum
of $30,000,000, the proposed plan also offers Lender the possibility of
realizing on its mortgage without having to take title to the property. There
can be no assurance that any definitive formal agreement will be executed by
the parties, that all conditions precedent will be met, that all required
approvals will be obtained, or that confirmation of the plans will be
forthcoming.
-8-
<PAGE> 10
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
The financial position and results of operations of the Venture are summarized
as follows:
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL POSITION
MARCH 31, 1996 AND DECEMBER 31, 1995
(unaudited)
March 31 December 31
-------- -----------
<S> <C> <C>
Assets:
Rental properties $127,151,622 $126,336,402
Less accumulated depreciation (13,302,716) (12,421,010)
------------ ------------
Net rental properties 113,848,906 113,915,392
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 18,452,895 19,734,941
Accounts receivable and accrued investment income 3,227,541 3,446,102
Deferred rent concessions 2,032,865 2,030,727
Deferred leasing costs 714,669 713,979
Prepaid expenses and other assets 652,829 495,509
Interest receivable 130,080 140,921
------------ ------------
Total assets $166,557,984 $167,975,770
============ ============
Liabilities and equity:
Accounts payable and accrued real estate expenses $ 1,807,922 $ 2,115,576
Accrued capital expenditures 769,379 2,647,092
Security deposits and unearned rent 426,664 477,737
Joint venturers' equity 163,554,019 162,735,365
------------ ------------
Total liabilities and equity $166,557,984 $167,975,770
============ ============
Partnership's share of joint venture equity $ 32,710,804 $ 32,547,073
============ ============
</TABLE>
-9-
<PAGE> 11
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(unaudited)
2. INVESTMENT IN JOINT VENTURE (Continued)
<TABLE>
<CAPTION>
SUMMARY STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
1996 1995
---- ----
<S> <C> <C>
Revenue:
Rental income $ 4,865,805 $ 5,182,394
Lease termination income 26,514 1,254,062
Interest on loans receivable 744,950 768,695
-------------- --------------
Total revenue 5,637,269 7,205,151
-------------- --------------
Operating expenses:
Real estate operating expenses 2,009,222 1,991,127
Depreciation and amortization 932,012 749,724
Real estate taxes 512,607 611,223
Property management fees 112,108 107,945
-------------- --------------
Total operating expenses 3,565,949 3,460,019
-------------- --------------
Income from property operations 2,071,320 3,745,132
-------------- --------------
Other income:
Interest and other nonoperating income 247,335 252,280
-------------- --------------
Total other income 247,335 252,280
-------------- --------------
Net income $ 2,318,655 $ 3,997,412
============== ==============
Partnership's share of equity in net income of joint venture $ 463,731 $ 799,482
============== ==============
</TABLE>
-10-
<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 March 31, 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 March 31, 1996, the Venture, in which the Partnership
owns a 20% interest, had approximately $18.5 million in short-term investments.
These funds are intended to be utilized primarily to fund 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 in connection with actions taken relating to the Brookdale zero
coupon mortgage note, including costs of legal action as well as improvements
deemed to be necessary in the event a foreclosure is effected.
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 three year program total $4.3 million, 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 March 31, 1996,
approximately $1.9 million of these costs had been expended. Approximately
$32,000 in capital costs have been accrued but not paid as of March 31, 1996.
Included in the estimated $4.3 million of renovation expenditures 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. The other
components of the renovation program are minor interior common area and
exterior plaza cosmetic upgrades totaling approximately $600,000 to be incurred
evenly over 1995 and 1996. Management expects these upgrades to give the
building a fresher, more inviting look. 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.
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 decrease in the guaranty fee receivable at March 31, 1996 as
compared to December 31, 1995 is due to the receipt of the semiannual payment
in 1996 of $185,556 for the deferred portion of the fee covering the period
July 1, 1995 to December 31, 1995, for the purpose of providing the minimum
guaranty return. This decrease is offset by the accrual of the deferred
portion of the guaranty fee for the three months ended March 31, 1996.
The increase in investment in joint venture at March 31, 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.
-11-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The increase in Equitable's capital account at March 31, 1996 as
compared to December 31, 1995 is attributable to the share of net income of the
Partnership in excess of cash distributions by the Partnership to Equitable.
Results of Operations
Equity in net income of the Venture for the three months ended March
31, 1996 decreased approximately $336,000 as compared to the three months ended
March 31, 1995 primarily a result of approximately $1.3 million of lease
termination rental 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
$1,750,000 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.
Advisory fees for the three months ended March 31, 1996 increased
approximately $28,000 as compared to the three months ended March 31, 1995 due
to a change in the allocation of fees to the Partnership from Equitable.
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 has been given to Midwest. For
book purposes, beginning with the second quarter of 1995, the Venture
discontinued the accrual of interest on the Brookdale zero note as the accreted
value of the mortgage approximated the estimated fair market value of the
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 at the default rate of 19.0%. Additionally,
Equitable and the Venture commenced foreclosure proceedings and a
court-appointed receiver was named. The receiver is responsible for
collecting rent proceeds from the tenants at Brookdale Center and applying the
proceeds to payments of operating costs at the Center. Any remaining funds are
to be paid to Equitable and the Venture on account of the Brookdale zero note.
The Venture records cash received from operations of Brookdale Center on a cash
basis as interest income. During the first quarter of 1996, approximately
$825,000 was remitted under the terms of the receivership. The Venture's
portion of these payments was approximately $591,000.
As of September 30, 1995, an internal review of 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.
The Venture and Equitable (collectively referred to as "Lender") have
agreed in principle to a workout arrangement with Midwest on the
Brookdale zero note. Under the proposed plan Midwest would file for Chapter 11
bankruptcy protection and, with the support of the Venture and Equitable, submit
a plan of reorganization to the Bankruptcy Court for approval providing as
follows:
-12-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
- - The Brookdale zero note will remain in default. Lender will terminate
the foreclosure process, and the current receiver for the property will
remain in place as the property manager.
- - In the bankruptcy case, 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.
- - Midwest will market the property for sale to potential third-party
purchasers through November 15, 1996.
- - Until a third-party sale occurs or a deed in lieu of foreclosure is
delivered, Lender will receive as adequate protection payments in the
bankruptcy case all positive cash flow generated from the property in
excess of property-related expenses and certain administrative costs of the
bankruptcy not to exceed $25,000.
- - 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 of 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 various rights to discuss
with third-parties the possible renovation of the property should Lender
acquire ownership of the property.
The workout arrangement has been memorialized in a letter agreement dated April
11, 1996, between Midwest and Equitable (the "Letter Agreement"). The Letter
Agreement is by its terms nonbinding unless and until a formal agreement is
executed by each of the parties pursuant to the appropriate corporate or other
authorization. The Board of Directors of EREIM Managers Corp., the general
partner of ML/EQ, has approved the workout arrangement provided for in the
Letter Agreement on behalf of the Venture. However, the workout arrangement
provided for in the Letter Agreement is subject to certain conditions
precedent, the approval of the Board of Directors of Midwest's general partner,
and confirmation of Midwest's plan of reorganization by a United States
Bankruptcy Court. Management believes that the proposed workout provides an
opportunity for Lender to take title to Brookdale Center sooner than would
otherwise be possible. A decision by Lender to foreclose on Brookdale Center
could result in a non-consenual bankruptcy filing by Midwest which might
substantially delay Lender's efforts to take title to the property. In
addition, Midwest has the right under Minnesota law to redeem Brookdale Center
for one year following the date on which foreclosure occurs. The right of
redemption gives a mortagor the right to reclaim mortgaged property by paying
the loan in full after foreclosure, handicapping the mortgagee for the duration
of the redemption period, thus negatively impacting its ability to sell or
redevelop and remerchandise the property. The transfer of Brookdale Center to
Lender pursuant to the proposed reorganization plan would terminate Midwest's
right of redemption. Furthermore, by giving Midwest an opportunity to market
Brookdale Center and to pay off the Brookdale zero note for the sum of
$30,000,000, the proposed plan also offers Lender the possibility of realizing
on its mortgage without having to take title to the property. There can be no
assurance that any definitive formal agreement will be executed by the parties,
that all conditions precedent will be met, that all required approvals will be
obtained, or that confirmation of the plans will be forthcoming.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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
stopped dropping in many of the properties' markets. Real recovery in rental
rates, if achieved at all, will likely occur over an extended period of time.
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<PAGE> 16
PART II
Item l. Legal Proceedings
Response: None
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
None
b) Reports
None
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<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: Harry D. Pierandri
------------------
Harry D. Pierandri
President
Dated: May 15, 1996
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