FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT
UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(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, 1999
[ ] 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 2-76434
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
(Exact name of small business issuer as specified in its charter)
New York 13-3153572
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1999
Assets
Cash and cash equivalents $ 78
Receivables and deposits 55
Other assets 77
Investment properties:
Land $ 227
Buildings and related personal property 3,004
3,231
Less accumulated depreciation (1,634) 1,597
$ 1,807
Liabilities and Partners' Capital (Deficit)
Liabilities
Tenant security deposit liabilities $ 7
Other liabilities 27
Mortgage notes payable 1,179
Partners' Capital (Deficit)
General partner's $ (49)
Limited partners' (11,455 units issued
and outstanding) 643 594
$ 1,807
See Accompanying Notes to Consolidated Financial Statements
b)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 99 $ 101
Other income -- 1
Total revenues 99 102
Expenses:
Operating 16 50
General and administrative 18 13
Depreciation 36 35
Interest 26 27
Property taxes 9 9
Total expenses 105 134
Net loss $ (6) $ (32)
Net loss allocated to general partner (1%) $ -- $ --
Net loss allocated to limited partners (99%) (6) (32)
$ (6) $ (32)
Net loss per limited partnership unit $ (.52) $(2.77)
See Accompanying Notes to Consolidated Financial Statements
c)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 11,500 $ 1 $11,500 $11,501
Partners' (deficit) capital
at December 31, 1998 11,455 $ (49) $ 649 $ 600
Net loss for the three months
ended March 31, 1999 -- -- (6) (6)
Partners' (deficit) capital at
March 31, 1999 11,455 $ (49) $ 643 $ 594
See Accompanying Notes to Consolidated Financial Statements
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net loss $ (6) $ (32)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 36 35
Amortization of loan costs and lease
commissions 6 6
Change in accounts:
Receivables and deposits (23) (2)
Other assets 2 (9)
Accounts payable -- (2)
Tenant security deposit liabilities -- (1)
Accrued property taxes -- 9
Other liabilities (3) (1)
Net cash provided by operating activities 12 3
Cash flows used in investing activities:
Property improvements and replacements (3) (20)
Cash flows used in financing activities:
Payments on mortgage notes payable (10) (9)
Net decrease in cash and cash equivalents (1) (26)
Cash and cash equivalents at beginning of period 79 129
Cash and cash equivalents at end of period $ 78 $ 103
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24 $ 25
See Accompanying Notes to Consolidated Financial Statements
e)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Drexel Burnham Lambert Real
Estate Associates (the "Partnership") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the DBL Properties Corporation ("DBL" or the "General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1999, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1999. For
further information, refer to the financial statements and footnotes thereto
included in the Partnership's annual report on Form 10-KSB for the fiscal year
ended December 31, 1998.
NOTE B - TRANSFER OF CONTROL
On October 1, 1998, Insignia Financial Group, Inc., the sole shareholder of IFGP
Corporation, completed its merger with and into Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust,
with AIMCO being the surviving corporation (the "Insignia Merger"). As a result
of the Insignia Merger, AIMCO acquired control of IFGP Corporation and, as a
result thereof, the General Partner. The General Partner does not believe that
this transaction will have a material effect on the affairs and operations of
the Partnership.
NOTE C - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
The Partnership Agreement provides for certain payments to affiliates for
services and as reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership.
The following transactions with affiliates of the General Partner were incurred
during the three months ended March 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating
expenses) $ -- $ 5
Reimbursement for services of affiliates (included in
general and administrative expense) 8 6
During the three months ended March 31, 1998, affiliates of the General Partner
were entitled to varying percentages of gross receipts from the Partnership's
commercial property as compensation for providing property management services.
These services were performed by affiliates of the General Partner for the three
months ended March 31, 1998 which totaled approximately $5,000. Effective
October 1, 1998 (the effective date of the Insignia Merger), these services for
the commercial property were performed by an unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $8,000 and $6,000 for the
three months ended March 31, 1999 and 1998, respectively.
NOTE D - SEGMENT REPORTING
Description of the types of products and services from which each reportable
segment derives its revenues:
The Partnership has one reportable segment: commercial properties. The
Partnership's commercial property segment consists of one office/warehouse
complex in the Southwest. The Partnership leases space to tenants for terms
that are typically twelve months or longer.
Measurement of segment profit or loss:
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segment are the same as those of the Partnership as
described in the Partnership's annual report on Form 10-KSB for the fiscal year
ended December 31, 1998.
Segment information for the three months ended March 31, 1999 and 1998 is shown
in the tables below (in thousands). The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Commercial Other Totals
Rental income $ 99 $ -- $ 99
Interest expense 26 -- 26
Depreciation 36 -- 36
General and administrative expense -- 18 18
Segment profit (loss) 12 (18) (6)
Total assets 1,775 32 1,807
Capital expenditures for investment
Properties 3 -- 3
1998
Commercial Other Totals
Rental income $ 101 $ -- $ 101
Other income -- 1 1
Interest expense 27 -- 27
Depreciation 35 -- 35
General and administrative expense -- 13 13
Segment loss (20) (12) (32)
Total assets 1,826 76 1,902
Capital expenditures for investment
Properties 20 -- 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Partnership from time to time.
The discussion of the Partnership's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Partnership's business and
results of operation. Accordingly, actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those identified herein.
The Partnership's investment property, Wendover Business Park - Phase I
("Wendover"), is a commercial business park of approximately 68,000 square feet
located in Greensboro, North Carolina. The average occupancy for the three
months ended March 31, 1999 and 1998, was 89% and 90%, respectively.
Results of Operations
The Partnership's net loss for the three months ended March 31, 1999, was
approximately $6,000 as compared to a net loss of approximately $32,000 for the
three months ended March 31, 1998. The decrease in net loss is primarily
attributable to a decrease in total expenses which was offset by a slight
decrease in total revenues. The decrease in total revenues is primarily
attributable to a slight decrease in average rental and occupancy rates at the
Partnership's investment property. Total expenses decreased primarily as a
result of a decrease in operating expenses partially offset by an increase in
general and administrative expenses. Operating expenses decreased for the three
month period ended March 31, 1999, as compared to the corresponding period in
1998 as a result of the completion in 1998 of a parking project. The increase in
general and administrative expense is due to an increase in professional fees
and reimbursements to the General Partner.
Included in general and administrative expenses at both March 31, 1999 and 1998
are management reimbursements to the General Partner allowed under the
Partnership Agreement. In addition, costs associated with the quarterly and
annual communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement are included.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of the investment property to assess the
feasibility of increasing rents, maintaining or increasing occupancy levels and
protecting the Partnership from increases in expense. As part of this plan, the
General Partner attempts to protect the Partnership from the burden of
inflation-related increases in expenses by increasing rents and maintaining a
high overall occupancy level. However, due to changing market conditions, which
can result in the use of rental concessions and rental reductions to offset
softening market conditions, there is no guarantee that the General Partner will
be able to sustain such a plan.
Capital Resources and Liquidity
At March 31, 1999, the Partnership had cash and cash equivalents of
approximately $78,000 as compared to approximately $103,000 at March 31, 1998.
For the three months ended March 31, 1999, cash and cash equivalents decreased
approximately $1,000 from the Partnership's year ended December 31, 1998. The
decrease in cash and cash equivalents is due to approximately $3,000 of cash
used in investing activities and approximately $10,000 of cash used in financing
activities which was offset by approximately $12,000 of cash provided by
operating activities. Cash used in investing activities consists of property
improvements and replacements. Cash used in financing activities consists of
payments of principal made on the mortgages encumbering the Partnership's
investment property. The Partnership invests its working capital reserves in a
money market account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property to adequately maintain the physical assets
and other operating needs of the Partnership and to comply with Federal, state,
and local legal and regulatory requirements. Capital improvements planned for
the Partnership's property is detailed below.
Wendover I
During the three months ended March 31, 1999, the Partnership completed
approximately $3,000 of capital improvement projects at Wendover I, consisting
of air conditioning repairs. These improvements were funded from cash flow from
operations. Capital improvements scheduled for 1999 include, but are not
limited to, tenant improvements and HVAC upgrades. These improvements are
expected to cost approximately $74,000. The capital improvements planned for
1999 at the Partnership's property will be made only to the extent of cash
available from operations and Partnership reserves.
To the extent that such budgeted capital improvements are completed, the
Partnership's distributable cash flow, if any, may be adversely affected at
least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $1,179,000 is being amortized over twenty years
with a balloon payment of approximately $1,097,000 due February 1, 2001. The
General Partner will attempt to refinance such remaining indebtedness and/or
sell the property prior to such maturity dates. If the property cannot be
refinanced or sold for a sufficient amount, the Partnership will risk losing
such property through foreclosure.
No distributions were made during the three months ended March 31, 1999 or 1998.
The Partnership's distribution policy is reviewed on a quarterly basis. Future
cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves and the timing of debt maturity,
refinancing and/or property sale. There can be no assurance, however, that the
Partnership will generate sufficient funds from operations after required
capital improvements to permit distributions to its partners in 1999 or
subsequent periods.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers, routers and
desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
March 31, 1999, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and the testing process is
expected to be completed by July 31, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report.
b) Reports on Form 8-K:
None filed during the quarter ended March 31, 1999.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
By: DBL Properties Corporation
Its General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President Finance and
Administration
Date: May 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drexel
Burnham Lambert Real Estate Associates 1999 First Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
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<NAME> DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<PP&E> 3,231
<DEPRECIATION> 1,634
<TOTAL-ASSETS> 1,807
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 1,179
0
0
<COMMON> 0
<OTHER-SE> 594
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