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, 1995
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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
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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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2
EREIM LP ASSOCIATES
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements:
Balance sheets at September 30, 1995 and December 31, 1994
Statements of income for the three and nine months ended
September 30, 1995 and 1994
Statement of partners' capital for the nine months ended
September 30, 1995
Statements of cash flows for the nine months ended
September 30, 1995 and 1994
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
3
EREIM LP ASSOCIATES
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(unaudited)
September 30, December 31,
1995 1994
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ASSETS
Cash $ 10,000 $ 10,000
Guaranty fee receivable from affiliate
(Notes 3 and 4) 93,538 188,262
Investment in joint venture, at equity (Note 5) 32,046,890 31,742,094
-------------- --------------
TOTAL ASSETS $ 32,150,428 $ 31,940,356
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Deferred guaranty fee (Notes 3 and 4) $ 1,808,979 $ 1,996,115
Due to affiliates 23,050 -
Accrued liabilities 20,819 -
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TOTAL LIABILITIES 1,852,848 1,996,115
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COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)
PARTNERS' CAPITAL:
General partners:
Equitable 31,692,891 31,434,573
EREIM LP Corp. (1,395,311) (1,490,332)
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TOTAL PARTNERS' CAPITAL 30,297,580 29,944,241
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 32,150,428 $ 31,940,356
============== ==============
See notes to financial statements.
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4
EREIM LP ASSOCIATES
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
For the three months ended For the nine months ended
September 30 September 30
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1995 1994 1995 1994
--------- ---------- ---------- --------
REVENUE:
Equity in net income (loss) of joint venture (Note 5) $ (253,801) $ 321,856 $1,079,796 $1,466,746
Guaranty fee from affiliate (Notes 3 and 4) 157,011 157,308 464,606 468,827
Miscellaneous income - 7,304 - 12,792
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TOTAL REVENUE (96,790) 486,468 1,544,402 1,948,365
---------- ---------- ---------- ----------
EXPENSES:
Advisory fees 82,779 3,433 88,409 12,701
General and administrative 5,531 - 43,869 -
---------- ---------- ---------- ----------
TOTAL EXPENSES 88,310 3,433 132,278 12,701
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (185,100) $ 483,035 $1,412,124 $1,935,664
========== ========== ========== ==========
See notes to financial statements.
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5
EREIM LP ASSOCIATES
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(unaudited)
EREIM
Equitable LP Corp. Total
----------- ------------ -----------
Balance, December 31, 1994 $31,434,573 $(1,490,332) $29,944,241
Capital contributions 87,525 884 88,409
Distributions to partners (767,250) (379,944) (1,147,194)
Net income 938,043 474,081 1,412,124
----------- ----------- -----------
Balance, September 30, 1995 $31,692,891 $(1,395,311) $30,297,580
=========== =========== ===========
See notes to financial statements.
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6
EREIM LP ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
September 30, September 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,412,124 $ 1,935,664
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Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint venture (1,079,796) (1,466,746)
Distributions from joint venture 775,000 271,249
Decrease in guaranty fee receivable from
affiliate 94,724 95,408
Decrease in deferred guaranty fee (187,136) (188,250)
Increase in due to affiliates 23,050 -
Increase in accrued liabilities 20,819 -
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Total adjustments (353,339) (1,288,339)
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NET CASH PROVIDED BY OPERATING ACTIVITIES: 1,058,785 647,325
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Contributions from general partners 88,409 12,701
Distributions to general partners (1,147,194) (660,026)
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NET CASH USED IN FINANCING ACTIVITIES (1,058,785) (647,325)
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NET CHANGE IN CASH - -
CASH AT BEGINNING OF PERIOD 10,000 10,000
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CASH AT END OF PERIOD $ 10,000 $ 10,000
=========== ===========
See notes to financial statements.
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7
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(unaudited)
1. ORGANIZATION
EREIM LP Associates (the "Partnership") was formed on December
18, 1986 for the primary purpose of serving as a partner of EML
Associates (the "Venture"), a joint venture with ML/EQ Real Estate
Portfolio, L.P. ("ML/EQ"). The Venture was formed to invest in existing
income-producing real properties, zero coupon or similar mortgage notes
and fixed rate mortgage loans. The Partnership owns a 20% interest in
the Venture.
The Partnership is a New York general partnership between The
Equitable Life Assurance Society of the United States ("Equitable") and
EREIM LP Corp., a wholly owned subsidiary of Equitable.
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, 1994. Interim
results of operations are not necessarily indicative of results to be
expected for the fiscal year.
2. PARTNERSHIP ALLOCATIONS
In accordance with the provisions of the Amended and Restated
Agreement of General Partnership of EREIM LP Associates, all income,
gains, losses, deductions, credits and distributions are allocated to
each partner in proportion to their respective capital contributions
(99% to Equitable and 1% to EREIM LP Corp.) except for fees received
under the Guaranty Agreement which are to be distributed entirely to the
1% partner, EREIM LP Corp. Accordingly, all guarantee fee income is
allocated to EREIM LP Corp.
3. GUARANTY AGREEMENT
The Partnership has entered into a guaranty agreement with the
Venture to provide a minimum return to ML/EQ's limited partners on their
capital contributions. Payments on the guaranty are 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 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 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 September 30, 1995, resulting from cash
available to ML/EQ as a result of sale or financing proceeds paid to the
Venture.
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8
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(unaudited)
3. GUARANTY AGREEMENT (Continued)
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 the Venture, the maximum liability of the
Partnership to the Venture under the guaranty agreement as of September
30, 1995, is limited to $246,666,599, 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, 1995, the cumulative 9.75% simple annual return was
$79,288,285. As of September 30, 1995, cumulative distributions by the
Partnership to the BAC Holders totaled $15,252,905, of which $11,662,084
is attributable to income from operations and $3,590,821 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 guarantor, up to the
above described maximum.
4. GUARANTY FEE
The guaranty fee is payable by ML/EQ to the Partnership on a
semiannual basis at an annual rate of .35% of the average annual
adjusted capital contributions of ML/EQ's limited partners.
5. 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. As of September 30, 1995, only one of the zero notes
remains. The other zero note was accounted for as a deed in lieu of
foreclosure by the Venture on July 22, 1994.
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9
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(unaudited)
5. 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, 1995 AND DECEMBER 31, 1994
(unaudited)
September 30 December 31
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Assets:
Rental properties $123,746,892 $119,590,903
Less accumulated depreciation (11,875,406) (9,866,248)
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Net rental properties 111,871,486 109,724,655
Zero coupon mortgage note
receivable, net of
valuation allowance of $3,232,210 in 1995 21,498,199 24,115,465
Mortgage loan receivable 6,000,000 6,000,000
Cash and short-term investments 18,146,119 19,725,901
Rental income receivable 2,634,163 1,996,909
Deferred rent concessions 1,962,352 1,752,428
Interest income receivable 134,101 84,521
Other 915,705 599,630
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Total assets $163,162,125 $163,999,509
============ ============
Liabilities and equity:
Accrued expenses $ 1,622,971 $ 1,854,748
Security deposits and unearned rent 806,686 486,284
Accrued capital expenditures 498,016 2,948,006
Joint venturers' equity 160,234,452 158,710,471
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Total liabilities and equity $163,162,125 $163,999,509
============ ============
Partnership's share of joint venture equity $ 32,046,890 $ 31,742,094
============ ============
SUMMARY STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
1995 1994
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Income:
Rental income $15,620,214 $15,746,472
Lease termination rental income 1,487,433 -
Interest income 1,867,855 2,709,769
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Total income 18,975,502 18,456,241
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Expenses:
Depreciation 2,189,811 1,511,132
Real estate operating expenses 5,956,784 6,345,334
Real estate taxes 1,824,074 1,973,476
Administrative 373,642 292,568
Provision for impairment on zero coupon mortgage 3,232,210 -
Loss on write-down of other real estate assets - 1,000,000
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Total expenses 13,576,521 11,122,510
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Net income $ 5,398,981 $ 7,333,731
=========== ===========
Partnership's share of equity in net
income of joint venture $ 1,079,796 $ 1,466,746
=========== ===========
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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, 1995, 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, 1995, the Venture, in which the
Partnership owns a 20% interest, had approximately $18.1 million in cash and
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 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 $1.9 million is expected to be
incurred in 1995, $1.3 million is expected to be incurred in 1996, and $1.1
million is expected to be incurred in 1997. As of September 30, 1995,
approximately $340,000 of these costs had been expended. Approximately $50,000
in capital costs have been accrued but not paid as of September 30, 1995.
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 3 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 guaranty fee receivable during the current period as
compared to December 31, 1994, is due to the receipt of the semiannual payment
in 1995 of $183,932 for the deferred portion of the fee covering the period
January 1, 1995, to June 30, 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 September 30, 1995.
The increase in investment in joint venture at September 30, 1995, as
compared to December 31, 1994, resulted from the excess of equity in net income
of the Venture over actual cash distributions from the Venture.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in EREIM LP Corp.'s and Equitable's capital accounts at
September 30, 1995, as compared to December 31, 1994, 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.
Results of Operations
The decrease in equity in net income of joint venture for the three
months and nine months ended September 30, 1995, as compared to the three months
and nine months ended September 30, 1994, is attributable to a decrease in the
Venture's net income. The Venture's net income decreased 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 note at an amount equal to the
Venture's participation interest in the note multiplied by the estimated fair
market value of the Center.
The Venture recognized approximately $1.5 million of lease termination
income in 1995. The majority of this income was 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 the
Kohl's lease on behalf of the tenancy in common arrangement between the Venture
and Equitable. The Venture's portion of the termination payment received in
1995 was approximately $1.3 million. This agreement released Kohl's from any
remaining obligation under the original lease agreement.
Total expenses of the Venture decreased for the nine months ended
September 30, 1995, as compared to the nine months ended September 30, 1994. A
$1.0 million write-down was recognized by the Venture during the third quarter
of 1994 in order to value the Bank of Delaware Building at its estimated fair
market value. A comparative loss has not been recognized in 1995.
Guaranty fee income from affiliate for the three months and nine months
ended September 30, 1995, remained approximately the same compared to the same
periods in the prior year.
Miscellaneous income for the three months and nine months ended
September 30, 1995, decreased compared to the same periods last year. The
income in 1994 relates to the receipt of tax refunds from the state of Illinois
for the 1990 and 1991 tax years. No tax refunds have been received in 1995.
Advisory fees for the three months and nine months ended September 30,
1995, increased compared to the three months and nine months ended September 30,
1994. This increase is due to a change in the allocation of fees to the
Partnership from Equitable.
General and administrative expenses for the three months and nine months
ended September 30, 1995, increased compared to the same periods in the prior
year due to the timing of the accrual of audit and tax fees in 1995 as compared
to 1994.
The zero coupon mortgage note (the "Note") secured by the Brookdale
Center matured on June 30, 1995 and Midwest Real Estate Shopping Center L.P.
("Midwest"), the owner of Brookdale Center (formerly Equitable Real Estate
Shopping Centers, L.P.), defaulted on its obligation to repay the Note in full.
The Venture's portion of the entire amount of principal and accrued interest due
on the maturity date, June 30, 1995, totaled $25,345,353. Notice of default has
been given to Midwest. Equitable and the Venture have commenced foreclosure by
advertisement proceedings and a court-appointed receiver has been named. As
previously reported, Midwest is currently attempting to sell Brookdale Center.
The date set for foreclosure is December 12, 1995. However, the parties are
continuing to discuss the matter, and that date may be extended. At December 31,
1994, Midwest reduced the carrying value of the Center by $9,068,553 to the
Center's estimated fair market value of $35,072,000, as determined by a third
party appraiser. Beginning with the second quarter of 1995, Management
discontinued the accrual of interest on the Note as the accreted value of the
mortgage approximated the underlying value of the Brookdale Center. The
Venture's share of the Note plus accrued interest at that time was $24,730,409.
The same proportionate share of the estimated fair market value of the
underlying collateral was $25,132,840. A recently completed internal review of
the property, performed for the Venture as of September 30, 1995, estimated the
fair market value of Brookdale Center to be $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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest in the note multiplied by the estimated fair market value of the
Center, or $21,498,199. This valuation allowance is presented on the
consolidated balance sheets as a decrease in assets and partners' capital and
on the consolidated statements of operations as a provision for impairment on
zero coupon mortgage.
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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13
PART II
Item l. 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 BACs, 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
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14
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, 1995
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15
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------
27 Financial Data Schedule (for SEC filing purposes only)
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