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 September 30, 1998
[ ] 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 2-85829
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
(Exact name of small business issuer as specified in its charter)
New York 13-3202289
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. 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 II
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1998
Assets
Cash and cash equivalents $ 584
Receivables and deposits 300
Other assets 130
Investment in joint venture 617
Investment properties:
Land $ 1,578
Buildings and related personal property 10,241
11,819
Less accumulated depreciation (7,827) 3,992
$ 5,623
Liabilities and Partners' Capital
Liabilities:
Accounts payable $ 16
Tenant security deposit liabilities 105
Accrued property taxes 153
Other liabilities 65
Mortgage notes payable 4,468
Partners' Capital:
General partner's $ 7
Limited partners' (37,273 units issued
and outstanding) 809 816
$ 5,623
See Accompanying Notes to Financial Statements
b)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Revenues:
Rental income $ 457 $ 455 $ 1,391 $ 1,356
Other income 27 19 57 56
Gain on disposition of
investment in joint venture -- -- -- 812
Total revenues 484 474 1,448 2,224
Expenses:
Operating 196 199 578 571
General and administrative 23 19 62 78
Depreciation 103 118 308 347
Interest 97 99 293 300
Property taxes 51 51 151 152
Total expenses 470 486 1,392 1,448
Income (loss) before equity in
net income (loss) of
joint venture 14 (12) 56 776
Equity in net income (loss)
of joint venture 26 (9) 83 (10)
Net income (loss) $ 40 $ (21) $ 139 $ 766
Net income allocated to
general partner $ -- $ -- $ 1 $ 107
Net income (loss) allocated
to limited partners 40 (21) 138 659
$ 40 $ (21) $ 139 $ 766
Net income (loss) per limited
partnership unit $ 1.07 $ (.56) $ 3.70 $ 17.68
Net distribution per limited
Partnership unit $ 3.76 $ -- $ 7.57 $ 7.59
See Accompanying Notes to Financial Statements
c)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
(in thousands except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partner Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 37,273 $ 1 $18,637 $18,638
Partners' capital at December 31, 1997 37,273 $ 6 $ 953 $ 959
Distributions to limited partners -- -- (282) (282)
Net income for the nine months
ended September 30, 1998 -- 1 138 139
Partners' capital at September 30, 1998 37,273 $ 7 $ 809 $ 816
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 139 $ 766
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 308 347
Amortization of loan costs and lease commissions 34 33
Equity in net (income) loss of joint venture (83) 10
Gain on disposition of investment in joint venture -- (812)
Changes in accounts:
Receivables and deposits (115) (134)
Other assets (20) (28)
Accounts payable (7) (13)
Tenant security deposit liabilities 2 (3)
Accrued property taxes 153 152
Other liabilities (25) (17)
Net cash provided by operating activities 386 301
Cash flows from investing activities:
Distribution received from joint venture 100 --
Property improvements and replacements (86) (84)
Net cash provided by (used in) investing activities 14 (84)
Cash flows from financing activities:
Payments on mortgage notes payable (112) (104)
Distributions paid to limited partners (282) (283)
Net cash used in financing activities (394) (387)
Net increase (decrease) in cash and cash equivalents 6 (170)
Cash and cash equivalents at beginning of period 578 675
Cash and cash equivalents at end of period $ 584 $ 505
Supplemental disclosure of cash flow information:
Cash paid for interest $ 270 $ 278
See Accompanying Notes to Financial Statements
e)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Drexel Burnham Lambert Real
Estate Associates II (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 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 and
nine month periods ended September 30, 1998, are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 1998.
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, 1997.
Certain reclassifications have been made to the 1997 balances to conform to the
1998 presentation.
NOTE 2 - TRANSACTIONS WITH RELATED 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.
On June 24, 1997, IFGP Corporation acquired all of the issued and outstanding
stock of DBL. Upon the closing, the officers and directors of DBL resigned and
IFGP Corporation caused new officers and directors of this entity to be elected.
The following transactions with The Wynnewood Company (the former owner of DBL)
and its affiliates prior to June 24, 1997, and with affiliates of IFGP
Corporation subsequent to June 24, 1997, during the nine month period ended
September 30, 1997, and with affiliates of IFGP Corporation during the nine
month period ended September 30, 1998, were incurred:
1998 1997
(in thousands)
Property management fees (included in operating
expense) $ 72 $ 59
Reimbursement for services of affiliates (included in
general and administrative expense) 44 10
Prior to June 24, 1997, affiliates of the General Partner provided property
management and partnership administrative services for the Partnership.
For the period from January 1, 1997 to August 31, 1997, the Partnership insured
Presidential House under a master policy through an agency affiliated with the
General Partner but with an insurer unaffiliated with the General Partner. An
affiliate of the General Partner acquired, in the acquisition of a business,
certain financial obligations from an insurance agency which was later acquired
by the agent who placed the master policy. The agent assumed the financial
obligations to the affiliate of the General Partner which received payments on
these obligations from the agent. The amount of the Partnership's insurance
premiums that accrued to the benefit of the affiliate of the General Partner by
virtue of the agent's obligations was not significant.
NOTE 3 - INVESTMENTS IN JOINT VENTURES
SP ASSOCIATES (SPA)
SPA was formed in 1984 as a joint venture to acquire the Sheraton Poste Inn
("Hotel"), a 220-room hotel located in Cherry Hill, New Jersey. The managing
partner of the SPA joint venture was Almanzil, Inc. ("Almanzil"), with a 50%
interest. The remaining interests were owned by the Partnership and Coreal
N.V., Inc. ("Coreal"), owning 33.3% and 16.7%, respectively. Coreal is an
affiliate of Almanzil.
Under the terms of SPA's joint venture agreement, cash from operations and
capital transactions, as defined, were allocated 50% to Almanzil, 33.3% to the
Partnership and 16.7% to Coreal, after Almanzil received an amount equal to an
annual 20% preferred cumulative return on its outstanding capital and a return
of its original investment of approximately $1,954,000. Losses from operations
of SPA were allocated 66.7% to the Partnership and 33.3% to Coreal. At December
31, 1996, the Partnership's accountability to the SPA joint venture,
representing management's estimate of the Partnership's share of recourse
liabilities of SPA, amounted to approximately $812,000. Losses of SPA were
limited to the Partnership's share of recourse liabilities of SPA and for the
period ended September 30, 1997, no additional losses were recorded.
On March 19, 1997, SPA sold the Hotel for $6,300,000 to CapStar Management
Company, L.P. ("CapStar"), the Hotel's management company. In addition, under
the sale agreement CapStar was entitled to collect and retain all accrued
receivables and assumed all outstanding payables, as defined, with respect to
the Hotel. The proceeds from the sale of the Hotel were used first to satisfy
the mortgage payable of approximately $3,964,000 on the Hotel and the balance
was paid to Almanzil in accordance with the terms of the joint venture
agreement. As a result of the sale, the Partnership recognized a gain on
disposition of investment in joint venture of approximately $812,000 in its
statement of operations for the nine months ended September 30, 1997.
Table Mesa
Table Mesa Shopping Center Partnership was formed in 1985 as a joint venture to
own and operate a shopping center in Boulder, Colorado. The Partnership owns a
50% interest in this joint venture. The Partnership's equity in the operations
of Table Mesa, after an adjustment for allocation of depreciation based on its
basis in the property, amounted to net income of approximately $83,000 for the
nine months ended September 30, 1998. For the nine months ended September 30,
1997, the Partnership realized a net loss of approximately $10,000.
The Table Mesa joint venture agreement provides, among other things, that the
Partnership shall be entitled to receive a cash flow preference, as defined, of
$252,000 per year, which is equivalent to a 9% return on the Partnership's
initial cash investment. The annual preference is not cumulative.
Summarized financial information for Table Mesa at September 30, 1998, is as
follows (in thousands):
Assets:
Real and personal property net
of accumulated depreciation $5,743
Other assets 1,231
Total assets $6,974
Liabilities:
Mortgage payable $6,797
Other liabilities 271
Total liabilities 7,068
Partners' deficit (94)
Total liabilities and partners' deficit $6,974
Summarized results of operations for Table Mesa for each of the nine month
periods ended September 30, 1998 and 1997, are as follows (in thousands):
1998 1997
Total revenues $1,744 $1,662
Total expenses 1,427 1,530
Net income $ 317 $ 132
NOTE 4 - DISTRIBUTIONS TO LIMITED PARTNERS
In August 1998, the Partnership declared and paid a cash distribution to the
limited partners in the amount of approximately $140,000 ($3.76 per limited
partnership unit).
In February 1998, the Partnership declared and paid a cash distribution to the
limited partners in the amount of approximately $142,000 ($3.81 per limited
partnership unit), including approximately $2,000 for withholding taxes on
behalf of the limited partners.
In March 1997, the Partnership paid a cash distribution to the limited partners
in the amount of approximately $280,000 ($7.52 per limited partnership unit).
The distribution was accrued at December 1996. In April 1997, approximately
$3,000 for withholding taxes was paid on behalf of the limited partners.
NOTE 5 - TRANSFER OF CONTROL; SUBSEQUENT EVENT
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership owns and operates two investment properties: Wendover Business
Park - Phase II ("Wendover"), a 80,410 square foot office and warehouse complex
located in Greensboro, North Carolina, and Presidential House at Sky Lake
("Presidential"), a residential apartment complex located in North Miami Beach,
Florida. The Partnership also owns a joint venture interest in Table Mesa
Shopping Center ("Table Mesa") located in Boulder, Colorado. The following
table sets forth the average occupancy of the investment properties for the nine
months ended September 30, 1998 and 1997:
Average
Occupancy
Property 1998 1997
Wendover Business Park Phase II 98% 98%
Presidential House 93% 95%
The Partnership realized net income of approximately $139,000 and $766,000 for
the nine month periods ended September 30, 1998 and 1997, respectively. The
decrease in net income is primarily attributable to the gain recognized in 1997
on the sale of the Sheraton Poste Inn Hotel in Cherry Hill, New Jersey, in which
the Partnership had a subordinated interest. The Partnership did not receive
any proceeds due to the senior position of one of the partners. Because of the
sale, the Partnership recognized a gain on disposition of investment in joint
venture during the first quarter of 1997. The gain of approximately $812,000 was
due to the satisfaction of the Partnership's share of recourse liabilities of
the joint venture. The Partnership realized net income from operations,
excluding the gain on disposition of joint venture, of $139,000 for the nine
months ended September 30, 1998, compared to a net loss of approximately $46,000
for the comparable period in 1997. The increase in net income from operations
is the result of increased rental income, decreased general and administrative
expenses, and an increase in equity in net income of the Table Mesa joint
venture. The increase in rental income is the result of increased rental rates
at both investment properties. The decline in general and administrative
expenses is the result of a decrease in estimated audit fees. For the three
month periods ended September 30, 1998, the Partnership realized net income of
approximately $40,000. For the three month period ended September 30, 1997, the
Partnership realized a net loss of approximately $21,000. The increase in the
net income for the three and nine month periods is the result of an increase in
the net income of the Table Mesa joint venture.
Major repairs and maintenance included in operating expense for the nine months
ended September 30, 1998 and 1997, amounted to approximately $34,000 and
$21,000, respectively. The 1998 expense is the result of exterior painting. The
1997 expenses were comprised of parking lot repairs.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of the investment properties 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.
At September 30, 1998, the Partnership held cash and cash equivalents of
approximately $584,000 compared to approximately $505,000 at September 30, 1997.
The net increase in cash and cash equivalents for the nine month period ended
September 30, 1998, was approximately $6,000, compared to a net decrease of
approximately $170,000, for the comparable period in 1997. Net cash provided by
operations increased due to the increase in property operations, as discussed
above. Net cash provided by investing activities increased due to a
distribution received from the Table Mesa joint venture during the first quarter
of 1998. Net cash used in financing activities increased due to an increase in
payments on mortgage notes payable.
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 investment properties 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. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The General Partner is currently assessing the need for capital improvements at
each of the Partnership's properties. To the extent that additional capital
improvements are required, the Partnership's distributable cash flow, if any,
may be adversely affected, at least in the short term. The remaining mortgage
indebtedness of approximately $4,506,000 requires monthly principal and interest
payments and requires balloon payments in August 2000 and February 2001. The
General Partner will attempt to refinance such remaining indebtedness or sell
the properties prior to such maturity dates. If the properties cannot be
refinanced or sold for a sufficient amount, the Partnership will risk losing
such properties through foreclosure. In August 1998, the Partnership paid a cash
distribution to the limited partners in the amount of approximately $140,000
($3.76 per limited partnership unit). In February 1998, the Partnership declared
and paid a cash distribution to the limited partners in the amount of
approximately $142,000 ($3.81 per limited partnership unit), including
approximately $2,000 for withholding taxes on behalf of the limited partners. In
March 1997, the Partnership paid a cash distribution to the limited partners in
the amount of approximately $280,000 ($7.52 per limited partnership unit). The
distribution was accrued at December 1996. In April 1997, approximately $3,000
was paid for withholding taxes on behalf of the limited partners. Future cash
distributions will depend on levels of cash generated from operations, property
sales or refinancings, and the availability of cash reserves. The Partnership's
distribution policy will be reviewed on a quarterly basis. There can be no
assurance, however, that the Partnership will generate sufficient funds from
operations to permit additional distributions to its partners in 1998 or
subsequent periods.
Transfer of Control; Subsequent Event
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.
Year 2000
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 to define the applicable year. The Partnership is
dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any 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.
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 are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Managing
Agent and the Partnership.
Status of Progress in Becoming Year 2000 Compliant
The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems. Assessments are continuing in regards to embedded systems in operating
equipment. The Managing Agent anticipates having all phases complete by June 1,
1999.
In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with, the Partnership has certain operating equipment,
primarily at the property sites, which needed to be evaluated for Year 2000
compliance. The focus of the General Partner was to the security systems,
elevators, heating-ventilation-air-conditioning systems, telephone systems and
switches, and sprinkler systems. The General Partner is currently engaged in the
identification of all non-compliant operational systems, and is in the process
of estimating the costs associated with any potential modifications or
replacements needed to such systems in order for them to be Year 2000 compliant.
It is not expected that such costs would have a material adverse affect upon
the operations of the Partnership.
Risk Associated with the Year 2000
The General Partner believes that the Managing Agent has an effective program in
place to resolve the Year 2000 issue in a timely manner and has appropriate
contingency plans in place for critical applications that could affect the
Partnership's operations. To date, the General Partner is not aware of any
external agent with a Year 2000 issue that would materially impact the
Partnership's results of operations, liquidity or capital resources. However,
the General Partner has no means of ensuring that external agents will be Year
2000 compliant. The General Partner does not believe that the inability of
external agents to complete their Year 2000 resolution 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.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date of
this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K: A Form 8-K was filed by the Partnership dated
September 30, 1998, relating to a change in accountants (Item 4).
SIGNATURES
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 II
By: DBL Properties Corporation
Its General Partner
By: /s/Patrick Foye
Patrick Foye
Executive Vice President
By: /s/Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
(Duly Authorized Officer)
Date: November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Drexel Burnham Lambert Real Estate Associates II 1998 Third Quarter
10-QSB and is qualified in its entirety by reference to such 10-QSB
filing.
</LEGEND>
<CIK> 0000725646
<NAME> DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 584
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 11,819
<DEPRECIATION> 7,827
<TOTAL-ASSETS> 5,623
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,468
0
0
<COMMON> 0
<OTHER-SE> 816
<TOTAL-LIABILITY-AND-EQUITY> 5,623
<SALES> 0
<TOTAL-REVENUES> 1,448
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,099
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139
<EPS-PRIMARY> 3.70<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
