10-Q 1 g65274e10-q.txt EREIM LP ASSOCIATES 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, 2000 ------------------ 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 [ ] 2 EREIM LP ASSOCIATES CONTENTS PART I - FINANCIAL INFORMATION Item 1 - Financial statements: Balance sheets at September 30, 2000 and December 31, 1999 Statements of operations for the three and nine months ended September 30, 2000 and 1999 Statement of partners' capital for the nine months ended September 30, 2000 Statements of cash flows for the nine months ended September 30, 2000 and 1999 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 2 3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements EREIM LP ASSOCIATES BALANCE SHEETS SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (unaudited)

See notes to financial statements. 3 4 EREIM LP ASSOCIATES STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)

See notes to financial statements 4 5 EREIM LP ASSOCIATES STATEMENT OF PARTNERS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (unaudited)

See notes to financial statements. 5 6 EREIM LP ASSOCIATES STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)

See notes to financial statements. 6 7 EREIM LP ASSOCIATES NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (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, 1999, 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"), a joint venture in which the Partnership holds a 20% interest and invests in income-producing real properties, to provide a minimum return to ML/EQ Real Estate Portfolio, L.P.'s ("ML/EQ") limited partners on their 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 September 30, 2000 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. The maximum liability of the Partnership to the Venture under the guaranty agreement as of September 30, 2000 is limited to $66,056,814 plus the value of the Partnership's interest in the Venture less any amounts contributed by the Partnership to the Venture to fund cash deficits. This liability was reduced by $13,940,258 after the distribution made to ML/EQ's BAC holders in October 2000. 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 The Equitable Life Assurance Society of the United States ("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 obligation with respect to the guaranty agreement. Capital contributions by the BAC holders to ML/EQ totaled $108,484,500. As of September 30, 2000, the cumulative 9.75% simple annual return was $111,468,412. As of September 30, 2000 cumulative distributions by ML/EQ to the BAC holders totaled $153,896,098, of which $35,420,190 is attributable to income from operations and $118,475,908 is attributable to sales of Venture assets, principal payments on mortgage loans, and other capital events. Additionally, $12,421,475 of sale proceeds and $1,518,783 of income from operations was distributed to BAC holders in October 2000. To the extent that future cash distributions to the limited partners are insufficient to provide the specified minimum return, any shortfall will be funded by the guarantor, up to the above described maximum. Management does not currently believe that future cash distributions to the limited partners from liquidation of Venture assets will be sufficient to provide the specified minimum return. Accordingly, the shortfall will be funded by the guarantor, up to the above described maximum. All amounts owed due to the specified minimum return will be paid to BAC holders prior to December 27, 2000. 7 8 EREIM LP ASSOCIATES NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (unaudited) 1. GUARANTY AGREEMENT (Continued) Effective as of January 1, 1997, the Partnership entered into an amendment to the Joint Venture Agreement of the Venture between the Partnership and ML/EQ pursuant to which the Partnership agreed to defer, without interest, its rights to receive 20% of the Venture's distributions of sale or financing proceeds until ML/EQ has received aggregate distributions from the Venture in an amount equal to the capital contributions made to ML/EQ by the BAC holders plus a noncompounded cumulative return computed at the rate of 9.75% per annum on contributions outstanding from time to time. Prior to the amendment, the Partnership had a right to receive 20% of all the Venture's distributions of sale or financing proceeds on a pari passu basis with ML/EQ. The amendment has the effect of accelerating the return of original contributions to BAC holders to the extent that sale or financing proceeds are realized prior to the dissolution of ML/EQ. 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 borrower defaulted on its obligation to repay the loan, and the collateral, Brookdale Center, was transferred to Equitable and the Venture on December 16, 1996 as tenants in common, pursuant to a Chapter 11 bankruptcy plan for reorganization filed with the Bankruptcy Court by the borrower. The Partnership has classified its investment in the Venture within partners' capital because the agreement entered into by the Partnership to defer the Partnership's rights to receive its proportionate share of the Venture's distribution of sale or financing proceeds is expected to result in substantially all of the net proceeds from the Venture's sale of its assets and satisfaction of its liabilities being distributed to ML/EQ. Effective as of January 1, 1997, the Partnership deferred its rights to receive its proportionate share of the Venture's distributions of sale or financing proceeds until ML/EQ has received aggregate distributions from the Venture in an amount equal to the capital contributions made to ML/EQ by the BAC holders plus a non-compounded cumulative return computed at a rate of 9.75% per annum. As a result, ML/EQ is not recording losses of the Venture in excess of its investment as all losses in excess of its investment are borne by the Partnership in accordance with the amended Joint Venture Agreement. As such, the Partnership has recorded losses in excess of its 20% ownership percentage for the three and nine months ended September 30, 2000. 8 9 EREIM LP ASSOCIATES NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (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, 2000 AND DECEMBER 31, 1999 (unaudited)

9 10 EREIM LP ASSOCIATES NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (unaudited) 2. INVESTMENT IN JOINT VENTURE (Continued) SUMMARY STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999 (unaudited)

3. RENTAL PROPERTY HELD FOR SALE On September 28, 2000 the Venture completed the sale of Northland Center. The Venture's share of net proceeds from the sale was $12,367,221, resulting in a loss of $7,154,379. 4. LEGAL PROCEEDINGS As discussed in the Notes to Consolidated Financial Statements of the Partnership's December 31, 1999 audited financial statements, the Partnership is a defendant in a consolidated action brought in the Court of Chancery of the State of Delaware entitled IN RE: ML/EQ Real Estate Partnership Litigation. The parties have reached an agreement in principle to settle the case subject to approval of the court and are finalizing the documentation. 10 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the 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. Certain Forward-Looking Information Certain of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are included in this Quarterly Report on Form 10-Q based on the intent, belief or current expectations of the Partnership. However, such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Although the Partnership believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, 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, 2000, the Venture, in which the Partnership owns a 20% interest, had approximately $15.8 million in cash and cash equivalents. On September 28,2000, the Venture completed the sale of the last remaining property, Northland Center. The Venture's share of net proceeds received was $12,367,221, resulting in a net loss of $7,154,379. On October 27, 2000, the Partnership made a distribution of $2.57 per BAC to holders of record as of September 28, 2000. The distribution was comprised of $2.29 per BAC representing a return of capital from the sale proceeds, and $0.28 per BAC representing a distribution of cash on hand from operations. The cash had been retained by the Venture to cover operating and working capital requirements at Northland Center, but became available for distribution due to the sale of the property. FINANCIAL CONDITION The decrease in guaranty fee receivable of $26,317, or 100%, from $26,317 at December 31, 1999 to $0 at September 30, 2000 is attributable to the payment to EREIM LP by ML/EQ of the $26,317 guaranty fee in February 2000. RESULTS OF OPERATIONS Equity in net income of the Venture decreased approximately $8.2 million, or 1,925%, and $9.9 million, or 761%, for the three and nine months ended September 30, 2000, respectively, from $425,000 for the three months and ($1,307,000) for the nine months ended September 30, 1999 to ($7,751,000) for the three months and ($11,248,000) for the nine months ended September 30, 2000. The decrease is due primarily to ML/EQ not recording losses of the Venture in excess of its investment in the Venture for the three and nine months ended September 30, 2000. As a result, the Partnership has recorded losses in excess of its 20% ownership percentage for the three and nine months ended September 30, 2000. In addition, the Venture recorded a $3.7 million write-down of Northland Center and a $7.2 million loss on the sale of Northland Center in 2000. This decrease was partially offset by the $11.4 million write-downs of Northland Center and 300 Delaware recorded in 1999, of which the Partnership's portion was approximately $2.3 million. YEAR 2000 As of September 30, 2000, the Partnership and the Venture have not experienced any material disruption of their internal computer systems or software applications, and have not experienced any problem with the computer systems or software applications of their third party vendors, suppliers or service providers. The Partnership and the Venture will continue to monitor these third parties to determine the impact, if any, on the business of the Partnership and the actions the Partnership must take, if any, in the event of non-compliance by any of these third parties. Based upon the Partnership's assessment of compliance by third parties, there appears to be no material business risk posed by any such noncompliance. 11 12 PART II Item 1. Legal Proceedings As discussed in the Notes to the Consolidated Financial Statements of the Partnership's December 31, 1999 audited financial statements, the Partnership is a defendant in a consolidated action brought in the Court of Chancery of the State of Delaware entitled IN RE: ML/EQ Real Estate Partnership Litigation. The parties have reached an agreement in principle to settle the case subject to approval of the court and are finalizing the documentation. 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 a) Exhibits 27 Financial Data Schedule (for SEC filing purposes only) b) Reports None 12 13 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/Debra L. Keller --------------------------- Debra L. Keller Vice President and Assistant Treasurer (Principal Accounting Officer) Dated: November 14, 2000 13 14 EXHIBIT INDEX

EREIM LP ASSOCIATES 10-Q