FORM 10-KSB-ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(D)
FORM 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 [No Fee Required]
For the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the transition period from_______to_______
Commission file number 2-85829
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number (864) 239-1000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Limited Partnership Units
(Title of class)
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $1,963,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 1998. No market exists for the limited
partnership interests of the Registrant, and, therefore, no aggregate market
value can be determined.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Drexel Burnham Lambert Real Estate Associates II (the "Partnership" or
"Registrant") was organized on November 2, 1983 as a New York limited
partnership pursuant to the Limited Partnership Law of the state of New York.
The general partner of the Partnership is DBL Properties Corporation ("DBL" or
"General Partner"), an affiliate of Apartment Investment and Management Company
("AIMCO") (see "Change in Control" below). The Partnership Agreement provides
that the Partnership is to terminate on December 31, 2032, unless terminated
prior to such date.
The Partnership's primary business is to operate and hold existing properties
for investment. The partnership acquired interests in five properties during
1984 and 1985 and it continues to own and operate two of those, Wendover
Business Park-Phase II and Presidential House, and it continues to hold a 50%
joint venture interest in Table Mesa. On March 19, 1997, SP Associates ("SPA"),
a joint venture in which the Partnership had a two-thirds interest, sold the
Sheraton Poste Inn ("Hotel") to CapStar Management Company, L.P. ("CapStar"),
the Hotel's management company.
Commencing in February 1984 pursuant to the Prospectus, the Partnership offered
$20,000,000 in Limited Partnership Units (the "Units"). A total of 37,273 Units
were sold to the public at $500 per Units aggregating to approximately
$18,637,000. In addition, the general partner contributed $1,000 for its 1% in
the Partnership. The offering closed on October 10, 1984. No Limited Partner
has made any additional capital contribution after that date. The Limited
Partners of the Partnership share in the benefits of ownership of the
Partnership's real property investments according to the number of Units held.
A further description of the Partnership's business is included in "Item 6.
Management's Discussion and Analysis or Plan of Operation".
The General Partner of the Partnership intends to maximize the operating results
and, ultimately, the net realizable value of each of the Partnership's
properties in order to achieve the best possible return for the investors. Such
results may best be achieved by holding and operating the properties or through
property sales or exchanges, refinancings, debt restructurings or relinquishment
of the assets. The Partnership intends to evaluate each of its holdings
periodically to determine the most appropriate strategy for each of the assets.
The Registrant has no employees. Management and administrative services are
provided by the General Partner and by agents retained by the General Partner.
An affiliate of the General Partner, has been providing such property management
services. Effective October 1, 1998, management of the commercial property is
provided by an unrelated party. (See "Transfer of Control" below)
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential and commercial properties within the
market areas of the Registrant's properties. The number and quality of
competitive properties, including those which may be managed by an affiliate of
the General Partner in such market areas, could have a material effect on the
rental market for apartment and commercial properties owned by the Registrant
and the rents that may be charged for such properties. While the General
Partner and its affiliates are a significant factor in the United States in the
apartment industry, competition for the apartments is local. In addition,
various limited partnerships have been formed by the General Partners and/or
their affiliates to engage in business which may be competitive with the
Registrant. The General Partner is not a significant factor in the commercial
real estate industry.
Both the income and expenses of operating the remaining properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
an oversupply of similar properties resulting from overbuilding, increases in
unemployment or population shifts, reduced availability of permanent mortgage
financing, changes in zoning laws, or changes in patterns or needs of users. In
addition, there are risks inherent in owning and operating residential and
commercial properties because such properties are susceptible to the impact of
economic and other conditions outside of the control of the Partnership.
There have been, and it is possible there may be other, Federal, state, and
local legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed, which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
Transfer of Control
On June 24, 1997, Insignia Financial Group, Inc. ("Insignia"), a Delaware
corporation, and IFGP Corporation, a wholly-owned subsidiary of Insignia and a
Delaware corporation (collectively, the "Buyer"), entered into a Stock Purchase
Agreement (the "Agreement") with The Wynnewood Company, Inc., a New York
corporation ("Seller"), DBL, a New York corporation, and William Clements, an
individual and the owner of 100% of the capital stock of Seller. The closing of
the transactions contemplated by the Agreement occurred on June 24, 1997 (the
"Closing"). At the Closing, pursuant to the terms and conditions of the
Agreement, the Buyer acquired all of the issued and outstanding stock of DBL.
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. DESCRIPTION OF PROPERTIES.
The following table sets forth the Partnership's investments in properties:
Date of
Property Purchase Type of Ownership Use
Wendover Business Park 4/1/84 Fee ownership subject Office/Warehouse-
Phase II to first mortgage 80,410 sq.ft.
Greensboro, NC
Presidential House Apartments 10/22/84 Fee ownership subject Apartments-
North Miami Beach, FL to first mortgage 203 units
SCHEDULE OF PROPERTIES:
Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.
<TABLE>
<CAPTION>
Gross
Carrying Accumulated Depreciation Federal
Property Value Depreciation Rate Method Tax Basis
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Wendover II $ 4,292 $ 2,466 3-25 yrs SL $ 585
Presidential House 7,577 5,516 5-31.5 yrs SL 1,976
$11,869 $ 7,982
</TABLE>
See "Note A" to the financial statements included in "Item 7. Financial
Statements" for a description of the Partnership's depreciation policy.
SCHEDULE OF PROPERTY INDEBTEDNESS:
The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.
<TABLE>
<CAPTION>
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due At
Property 1998 Rate Amortized Date Maturity (1)
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Wendover II $ 1,185 7.75% 20 years 2/1/01 $ 1,091
Presidential House 3,244 8.00% 20 years 8/1/00 3,047
Total $ 4,429
</TABLE>
(1) See "Item 7. Financial Statement - Note E" for Partnership's ability to
prepay these loans and other specific details about the loans.
RENTAL RATES AND OCCUPANCY:
Average annual rental rate and occupancy for 1998 and 1997 for each property.
Average Annual Average
Rental Rates Occupancy
Property 1998 1997 1998 1997
Wendover II $6.45/sq.ft. $6.19/sq.ft. 98% 98%
Presidential House $7,210/unit $6,920/unit 93% 95%
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other properties in the area. The General Partner believes
that all of the properties are adequately insured. The multi-family residential
property's lease terms are for one year or less. No residential tenant leases
10% or more of the available rental space. All of the properties are in good
physical condition, subject to normal depreciation and deterioration as is
typical for assets of this type and age.
The following is a schedule of the commercial lease expirations for the years
1999-2008:
Number of % of Gross
Wendover II Expirations Square Feet Annual Rent Annual Rent
(in thousands)
1999 4 17,910 $ 94 18.3%
2000 4 15,913 122 23.7%
2001 3 18,900 130 25.3%
2002 3 13,140 78 15.2%
2003 2 4,320 30 5.8%
2004 1 2,610 31 6.0%
2005-2008 -- -- -- --
The following schedule reflects information on tenants occupying 10% or more of
the leasable square feet for the commercial property:
Square Footage Annual Rent Lease
Property Nature of Business Leased Per Square Ft Expiration
Wendover II Computer services 9,630 $ 5.52 08/31/01
REAL ESTATE TAXES AND RATES:
Real estate taxes and rates in 1998 for each property were:
1998 1998
Billing Rate
(in thousands)
Wendover II $ 48 1.22%
Presidential House 142 2.35%
CAPITAL IMPROVEMENTS
Wendover II
During the year ended December 31, 1998, the Partnership completed approximately
$24,000 of capital improvements consisting primarily of tenant improvements and
HVAC replacements. These improvements were funded by cash flow from operations.
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the General Partner on
interior improvements, it is estimated that the property requires approximately
$53,000 of capital improvements over the near term. The Partnership has
budgeted capital improvements of approximately $53,000 for 1999 which includes,
but are not limited to, tenant improvements and HVAC replacements.
Presidential House
During the year ended December 31, 1998, the Partnership completed approximately
$112,000 of capital improvements consisting primarily of carpet and vinyl
replacement, hot water heater replacements, swimming pool repairs and clubhouse
renovations. These improvements were funded by cash flow from operations. Based
on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the General Partner on
interior improvements, it is estimated that the property requires approximately
$420,000 of capital improvements over the near term. The Partnership has
budgeted capital improvements of approximately $413,000 for 1999 which includes,
but is not limited to, HVAC replacements, carpet and vinyl replacement,
landscaping, exterior painting, parking lot repairs, structural improvements,
fencing, roof replacements, electrical and plumbing upgrades.
The capital improvements planned for 1999 at the Partnership's properties will
be made only to the extent of cash available from operations and Partnership
reserves.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, no matter was submitted to a vote of
unit holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED SECURITY
PARTNER MATTERS
As of December 31, 1998, the Partnership included 1,628 limited partners,
holding a total of 37,273 Units. Affiliates of the General Partner owned 2,022
Units, or 5.43%, at December 31, 1998. No public trading market has developed
for the Units and it is not anticipated that such a market will develop in the
future.
During 1998, the Partnership declared and paid cash distributions in the amount
of approximately $282,000 ($7.57 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 in the amount of
approximately $280,000 ($7.50 per limited partnership unit). The distribution
was accrued at December 1996. In April 1997, approximately $4,000 for
withholding taxes was paid on behalf of the limited partners. Future cash
distributions will depend on the levels of net cash generated from operations,
refinancings, property sales 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 after required capital expenditures to permit any
distributions to its partners in 1999 or subsequent periods.
As of December 31, 1998, the remaining unpaid preferred return arrearage totaled
approximately $15,688,000 or approximately $421 per Unit.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB and the other filings with the Securities and
Exchange Commission made by the Registrant from time to time. The discussion of
the Registrant'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 Registrant'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.
This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.
Results of Operations
The Partnership realized net income of approximately $122,000 and $724,000 for
the year ended December 31, 1998 and 1997, respectively. The decrease in net
income is primarily attributable to a decrease in total revenues which was
offset by a decrease in total expenses. The decrease in total revenues is
primarily attributable to the fact that no gain was recognized in 1998 as there
was 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. Excluding the gain on disposition of
joint venture, the Partnership realized net income from operations of $122,000
for the year ended December 31, 1998, compared to a net loss of approximately
$88,000 for the comparable period in 1997. The increase in net income from
operations is the result of increased rental income, decreased operating
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, which more than offset a decline in occupancy at
Presidential House. The decline in operating expenses is the result of reduced
audit expense. Included in general and administrative expenses at both December
31, 1998 and 1997 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. The
increase in equity in net income from the Table Mesa joint venture results from
the decreased interest expense resulting from refinancing of the mortgage
encumbering the property at a lower interest rate in 1998.
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.
Liquidity and Capital Resources
At December 31, 1998, the Partnership had cash and cash equivalents of
approximately $613,000 compared to approximately $578,000 at December 31, 1997.
The increase in cash and cash equivalents is due to approximately $504,000 of
cash provided by operating activities, which was partially offset by
approximately $36,000 of cash used in investing activities and approximately
$433,000 of cash used in financing activities. Cash used by investing
activities consisted of property improvements and replacements which were
partially offset by distributions from the Table Mesa joint venture. Cash used
in financing activities consisted of payments on the mortgages encumbering the
Partnership's properties and distributions to limited partners. The Registrant
invests its working capital reserves in money market accounts.
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 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. The Partnership has
budgeted approximately $521,000 in capital improvements at both of the
Partnership properties in 1999. Budgeted capital improvements include, but are
not limited to, tenant improvements, HVAC, electrical upgrades, exterior
painting, parking lot improvements, plumbing improvements, roof replacements,
structural improvements, and perimeter fencing. The capital expenditures will
be incurred if cash is available from operations or from 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 Registrant's current assets are currently thought to be sufficient for any
near-term needs (exclusive of capital improvements) of the Partnership. At
December 31, 1998, the mortgage indebtedness of approximately $4,429,000
requires monthly principal and interest payments and balloon payments on August
1, 2000 and February 1, 2001, at which time the properties will either be
refinanced or sold. Future cash distributions will depend on the levels of net
cash generated from operations, refinancings, property sales 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 after required
capital expenditures to permit any 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 and 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
December 31, 1998, 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 March
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 March 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
March 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 March 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 December 31, 1998 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
December 31, 1998 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 April 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 our 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.
ITEM 7. FINANCIAL STATEMENTS.
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
LIST OF FINANCIAL STATEMENTS
Report of KPMG Peat Marwick LLP, Independent Auditors
Report of Pannell Kerr Forster, PC, Independent Auditors
Balance Sheet - December 31, 1998
Statements of Operations - Years ended December 31, 1998 and 1997
Statements of Changes in Partners' Capital (Deficit) - Years ended December 31,
1998 and 1997
Statements of Cash Flows - Years ended December 31, 1998 and 1997
Notes to Financial Statements
Independent Auditors' Report
The Partners
Drexel Burnham Lambert Real Estate Associates II
We have audited the accompanying balance sheet of the Drexel Burnham Lambert
Real Estate Associates II (a New York Limited Partnership) as of December 31,
1998, and the related statements of operations, changes in partners' capital
(deficit) and cash flows for the year then ended. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, financial statements referred to above present fairly, in all
material respects, the financial position of the Partnership as of December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Greenville, South Carolina
February 9, 1999
Independent Auditors Report
To the Partners
Drexel Burnham Lambert Real Estate Associates II
We have audited the accompanying statements of operations, changes in partners'
capital (deficit) and cash flows of Drexel Burnham Lambert Real Estate
Associates II (a limited partnership)for the year ended December 31, 1997.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Drexel
Burnham Lambert Real Estate Associates II (a limited partnership) for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/PANNELL KERR FORSTER P C
New York, NY
February 6, 1998
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
BALANCE SHEET
(in thousands, except unit data)
December 31, 1998
Assets
Cash and cash equivalents $ 613
Receivables and deposits 219
Other assets 113
Investment in joint venture (Note D) 578
Investment properties (Note I):
Land $ 1,578
Buildings and related personal property 10,291
11,869
Less accumulated depreciation (7,982) 3,887
$ 5,410
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 14
Tenant security deposit liabilities 99
Other liabilities 69
Mortgage notes payable (Note E) 4,429
Partners' Capital
General partner's $ 7
Limited partners' (37,273 units issued
and outstanding) 792 799
$ 5,410
See Accompanying Notes to Financial Statements
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF OPERATIONS
(in thousands, except unit data)
<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997
<S> <C> <C>
Revenues:
Rental income $ 1,884 $ 1,835
Other income 79 72
Gain on disposition of investment in joint venture (Note D) -- 812
Total revenues 1,963 2,719
Expenses:
Operating (Note C) 760 794
General and administrative (Note C) 85 97
Depreciation 463 456
Interest 388 399
Property taxes 189 197
Total expenses 1,885 1,943
Equity in net income (loss) of joint venture 44 (52)
Net income $ 122 $ 724
Net income allocated to general partner $ 1 $ 107
Net income allocated to limited partners 121 617
$ 122 $ 724
Net income per limited partnership unit $ 3.25 $ 16.55
Distributions per limited partnership unit $ 7.57 $ .11
</TABLE>
See Accompanying Notes to Financial Statements
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner's Partners' Total
Original capital contributions 37,273 $ 1 $ 18,637 $18,638
Partners' (deficit) capital at
December 31, 1996 37,273 $ (101) $ 340 $ 239
Distribution to partners -- -- (4) (4)
Net income for the year
ended December 31,1997 -- 107 617 724
Partners' capital at
December 31, 1997 37,273 6 953 959
Distributions to partners -- -- (282) (282)
Net income for the year
ended December 31, 1998 -- 1 121 122
Partners' capital at
December 31, 1998 37,273 $ 7 $ 792 $ 799
See Accompanying Notes to Financial Statements
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
December 31,
1998 1997
Cash flows from operating activities:
Net income $ 122 $ 724
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 463 456
Amortization of loan costs and lease
commissions 46 44
Equity in net (income) loss of joint venture (44) 52
Gain on disposition of investment in joint venture -- (812)
Change in accounts:
Receivables and deposits (34) (17)
Other assets (15) (23)
Accounts payable (9) 7
Tenant security deposit liabilities (4) 1
Other liabilities (21) (6)
Net cash provided by operating activities 504 426
Cash flows from investing activities:
Property improvements and replacements (136) (100)
Distributions received from joint venture 100 --
Net cash used in investing activities (36) (100)
Cash flows from financing activities:
Payments on mortgage notes payable (151) (140)
Distributions paid to partners (282) (283)
Net cash used in financing activities (433) (423)
Net increase (decrease) in cash and cash equivalents 35 (97)
Cash and cash equivalents at beginning of year 578 675
Cash and cash equivalents at end of year $ 613 $ 578
Supplemental disclosure of cash flow information:
Cash paid for interest $ 358 $ 369
See Accompanying Notes to Financial Statements
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
Notes to Financial Statements
December 31, 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
Drexel Burnham Lambert Real Estate Associates II (the "Partnership" or
"Registrant") was organized as a limited partnership under the laws of the State
of New York pursuant to a Certificate of Limited Partnership dated November 2,
1983. The Partnership Agreement provides that the Partnership is to terminate on
December 31, 2032, unless terminated prior to such date. The general partner of
the Partnership is DBL Properties Corporation ("DBL" or the "General Partner").
As of December 31, 1998, the Partnership owns and operates Wendover Business
Park - Phase II ("Wendover") an 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 50% joint venture interest in Table Mesa Shopping Center
("Table Mesa") located in Boulder, Colorado.
Investment in Joint Venture:
The Partnership accounts for its 50% investment in Table Mesa on the equity
method. In accordance with the equity method of accounting, the Partnership's
original investment in Table Mesa is increased by advances to Table Mesa and by
the Partnership's share of the earnings of Table Mesa. The investment is
decreased by distributions from Table Mesa and by the Partnership's share of
losses of Table Mesa.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership believes
that the carrying amount of its financialinstruments (except for long term debt)
approximates their fair value due to the short term maturity of these
instruments. The fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity, approximates its carrying
balance.
Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand and in banks, money market
accounts, and certificates of deposit with original maturities of less than 90
days. At certain times, the amount of cash deposited at a bank may exceed the
limit on insured deposits.
Tenant Security Deposits:
The Partnership requires security deposits from lessees for the duration of the
lease, and such deposits are included in receivables and deposits. Deposits are
refunded when the tenant vacates, provided the tenant has not damaged the space
and is current on rental payments.
Investment Properties:
Investment properties consist of one apartment complex and one office warehouse
complex and are stated at cost. Acquisition fees are capitalized as a cost of
real estate. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Partnership
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Costs of apartment properties that have
been permanently impaired have been written down to appraised value. No
adjustments for impairment of value were recorded in the years ended December
31, 1998 or 1997.
Depreciation:
Depreciation is computed by the straight-line method over estimated useful lives
ranging from 15 to 31.5 years for buildings and improvements and three to seven
years for furnishings. Tenant improvements are depreciated using the straight-
line method over the tenant's lease term.
Loan Costs:
Loan costs of approximately $215,000, less accumulated amortization of
approximately $160,000 at December 31, 1998, are included in other assets and
are being amortized on a straight-line basis over the lives of the respective
loans.
Leases:
The Partnership generally leases apartment units for twelve-month terms or less.
The Partnership recognizes income as earned on these leases.
The Partnership leases commercial space to tenants under various lease terms.
For leases containing fixed rental increases during their term, rents are
recognized on a straight-line basis over the terms of the leases. For all other
commercial leases, rents are recognized over the terms of the leases as earned.
In addition, the General Partner's policy is to offer rental concessions during
particularly slow months or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.
Lease Commissions:
Lease commissions of approximately $83,000 are included in other assets and are
being amortized using the straight-line method over the terms of the respective
leases. Current accumulated amortization is approximately $55,000.
Advertising Costs:
Advertising costs of approximately $18,000 in 1998 and $14,000 in 1997 were
charged to expense as incurred and are included in operating expenses.
Income Taxes:
Taxable income or loss of the Partnership is reported in the income tax returns
of its partners. Accordingly, no provision for income taxes is made in the
financial statements of the Partnership.
Segment Reporting:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information ("Statement
131"), which is effective for years beginning after December 15, 1997. Statement
131 established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services geographic areas and major customers
(See "Note K" for required disclosure).
Reclassifications:
Certain reclassifications have been made to the 1997 balances to conform to the
1998 presentation. Such reclassification had no impact on net income or
partner's capital as previously reported.
NOTE B - TRANSFERS OF CONTROL
On June 24, 1997, Insignia Financial Group, Inc. ("Insignia"), a Delaware
corporation, and IFGP Corporation, a wholly-owned subsidiary of Insignia and a
Delaware corporation (collectively, the "Buyer"), entered into a Stock Purchase
Agreement (the "Agreement") with The Wynnewood Company, Inc., a New York
corporation ("Seller"), DBL, a New York corporation, and William Clements, an
individual and the owner of 100% of the capital stock of Seller. The closing of
the transactions contemplated by the Agreement occurred on June 24, 1997 (the
"Closing"). At the Closing, pursuant to the terms and conditions of the
Agreement, the Buyer acquired all of the issued and outstanding stock of DBL.
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 Registrant 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 payments were made to the General Partner and affiliates during
the years ended December 31, 1998 and 1997:
1998 1997
(in thousands)
Property management fees (included in operating
expenses) $97 $71
Reimbursement for services of affiliates (included in
general and administrative expenses) 61 19
During the years ended December 31, 1998 and 1997, affiliates of the General
Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates approximately $69,000 and $26,000 for the
years ended December 31, 1998 and 1997 respectively. For the nine months ended
September 30, 1998 and the year ended December 31, 1997 affiliates of the
General Partner were entitled to receive varying percentages of gross receipts
from all of the Registrant's commercial properties for providing property
management services. The Registrant paid to such affiliates $21,000 and $32,000
for the nine months ended September 30, 1998 and the year ended December 31,
1997. Effective October 1, 1998 (the effective date of the Insignia Merger)
these services for the commercial properties were provided by an unrelated
party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $61,000 and $19,000 for the
year ended December 31, 1998 and the six months ended December 31, 1997,
respectively.
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 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, who received payments on
these obligations from the agent. The amount of the Partnership's insurance
premiums accruing to the benefit of the affiliate of the General Partner by
virtue of the agent's obligations is not significant.
NOTE D - INVESTMENT IN JOINT VENTURE
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 is Almanzil, Inc. ("Almanzil"), with a 50%
interest. The remaining interests are 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, are allocated 50% to Almanzil, 33.3% to the
Partnership and 16.7% to Coreal, after Almanzil receives 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 are 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.
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 the 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 year ended December 31, 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 income of approximately $44,000 and a loss of
$52,000 for the years ended December 31, 1998 and 1997, respectively.
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. This annual preference is not cumulative. In 1998,
the Partnership received a distribution from the Table Mesa joint venture of
$100,000. No distributions were received in 1997.
Summarized financial information for Table Mesa at December 31, 1998, is as
follows (in thousands):
Assets:
Real and personal property, net
of accumulated depreciation $ 5,637
Other assets 932
Total assets $6,569
Liabilities:
Mortgage payable $ 6,672
Other liabilities 559
Total liabilities $7,231
Partners' deficit $ (662)
Total liabilities and partners'
deficit $6,569
Summarized results of operations for Table Mesa for years ended December 31,
1998 and 1997, are as follows (in thousands):
1998 1997
Total revenues $2,257 $2,172
Total expenses 1,958 2,074
Net income $ 299 $ 98
NOTE E - MORTGAGE NOTES PAYABLE
The principal terms of mortgage notes payable are as follows:
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1998 Interest Rate Date Maturity
(in thousands) (in thousands)
Wendover II $ 1,185 $ 11 7.75% 2/1/01 $ 1,091
Presidential 3,244 31 8.00% 8/1/00 3,047
House
$ 4,429 $ 42
The mortgage notes payable are nonrecourse and are secured by pledge of the
Partnership's properties and by pledge of revenues from the respective rental
properties. The mortgage notes include prepayment penalties if repaid prior to
maturity. Further the properties may not be sold subject to existing
indebtedness.
Scheduled principal payments of mortgage notes payable subsequent to December
31, 1998, are as follows (in thousands):
1999 $ 164
2000 3,169
2001 1,096
Total $ 4,429
NOTE F - PARTNERS' CAPITAL
Pursuant to a public offering, 37,273 units were sold at $500 per unit. The
calculation of net income (loss) per limited partner unit is based on 37,273
units outstanding.
For income tax purposes the limited partners share 99% and the General Partner
1% (subordinated as defined in the partnership agreement) in all profits or
losses from operations until the limited partners have received an 8% cumulative
preferred return on their invested capital. Thereafter, the limited partners
share 90% and the General Partner shares 10% in the profits or losses from
operations.
Cash distributions from sales or refinancing, if any, shall be made to the
partners to the extent available and, as more fully described in the partnership
agreement, as follows: first, to each partner in an amount equivalent to the
positive amount of such partner's capital account on the date of distribution
after adjustment; second, to the limited partners, until the limited partners
have received an amount equal to their original invested capital; third, 99% to
the limited partners equal to any unpaid preferred return arrearage; and fourth,
as to any excess, 85% to the limited partners and 15% to the General Partner.
Distributions in liquidation to the partners shall be made pro rata in
accordance with the partners' capital accounts.
In accordance with the Agreement of Limited Partnership, limited partners are
entitled to receive an 8% cumulative preferred return on their unrecovered
invested capital. No distributions have been made or accrued to the General
Partner, since the limited partners must receive their original invested capital
plus any preferred return arrearage before payment to the General Partner. As
of December 31, 1998, the unpaid preferred return arrearage totaled
approximately $15,688,000.
NOTE G - OPERATING LEASES
The Partnership leases office, warehouse and retail space to tenants of Wendover
Business Park Phase II under operating lease agreements which expire on various
dates through 2004. Future minimum rentals, excluding escalation charges, under
these leases as of December 31, 1998, are as follows (in thousands):
1999 $ 461
2000 361
2001 244
2002 101
2003 50
Thereafter 19
Total $1,236
NOTE H - INCOME TAXES
A reconciliation of the net income per the financial statements to the net
taxable income to partners is as follows (in thousands, except unit data):
Years Ended December 31,
1998 1997
Net income as reported $ 122 $ 724
Preferred returns not recognized as income for
tax purposes
Depreciation and amortization differences 20 (25)
Amount of tax loss under book loss
of equity investees 143 927
Prepaid rent (10) 14
Federal taxable net income $ 275 $1,612
Federal taxable income per limited
partnership unit $ 7.31 $42.82
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets and liabilities(in thousands):
1998
Net assets as reported $ 799
Fixed assets (758)
Accumulated depreciation (567)
Investment in joint venture 248
Syndication costs 2,050
Other assets & liabilities (82)
Net assets - tax basis $ 1,690
NOTE I - REAL ESTATE AND ACCUMULATED DEPRECIATION
Initial Cost
To Partnership
(in thousands) Net Cost
Capitalized
Buildings (Written
and Related Down)
Personal Subsequent to
Description Encumbrances Land Property Acquisition
(in thousands) (in thousands)
Presidential House $ 3,244 $1,510 $ 6,037 $ 30
Wendover II 1,185 359 4,547 (614)
Total $ 4,429 $1,869 $10,584 $ (584)
<TABLE>
<CAPTION>
Gross Amount at Which Carried
At December 31, 1998
(in thousands)
Buildings
And
Related
Personal Accumulated Year of Date of Deprec-
iable
Description Land Property Total Depreciation Constructi Acquisiti Life
on on Years
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Presidential $ 1,287 $ 6,290 $ 7,577 $ 5,516 1967/1974 10/84 5-31.5
House yrs.
Wendover II 291 4,001 4,292 2,466 1982 4/84 3-25 yrs.
Total $ 1,578 $ 10,291 $ 11,869 $ 7,982
</TABLE>
Reconciliation of Real Estate and Accumulated Depreciation:
Years Ended December 31,
1998 1997
(in thousands)
Investment Properties
Balance at beginning of year $11,733 $11,633
Property improvements 136 100
Balance at end of year $11,869 $11,733
Accumulated Depreciation
Balance at beginning of year $ 7,519 $ 7,063
Additions charged to expense 463 456
Balance at end of year $ 7,982 $ 7,519
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1998 and 1997, is approximately $11,111,000 and $11,258,000,
respectively. The accumulated depreciation taken for Federal income tax
purposes at December 31, 1998 and 1997, is approximately $8,549,000 and
$8,272,000, respectively.
NOTE J - DISTRIBUTIONS
During 1998, the Partnership declared and paid cash distributions to the limited
partners in the amount of approximately $282,000 ($7.56 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 ($7.50 per limited
partnership unit). The distribution was accrued at December 1996. In April
1997, approximately $4,000 for withholding taxes was paid on behalf of the
limited partners.
NOTE K - SEGMENT REPORTING
Description of the types of products and services from which each reportable
segment derives its revenues
As defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", the Partnership has two reportable segments: residential
property and commercial property. The Partnership's residential property
segment consists of an apartment complex in North Miami Beach, Florida. The
Partnership rents apartment units to people for terms that are typically twelve
months or less. The commercial property segment consists of one office building
and warehouse located in Greensboro, North Carolina. This property leases space
to tenants under various lease terms.
Measurement of segment profit or loss
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies.
Factors management used to identify the enterprise's reportable segments
The Partnership's reportable segments are investment properties that offer
different products and services. The reportable segments are managed separately
because they provide distinct services with different types of products and
customers.
Segment information for the years 1998 and 1997 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.
1998
Residential Commercial Other Totals
Rental income $ 1,336 $ 548 $ -- $ 1,884
Other income 40 22 17 79
Interest expense 286 102 -- 388
Depreciation 279 184 -- 463
General and administrative expense -- -- 85 85
Equity in net income of joint
venture -- -- 44 44
Segment profit (loss) 32 114 (24) 122
Total assets 2,312 2,022 1,076 5,410
Capital expenditures for investment
Properties 112 24 -- 136
1997
Residential Commercial Other Totals
Rental income $ 1,313 $ 522 $ -- $ 1,835
Other income 43 7 22 72
Interest expense 294 105 -- 399
Depreciation 274 182 -- 456
General and administrative expense -- -- 97 97
Gain on disposal of assets -- -- 812 812
Equity in net loss of joint
venture -- -- (52) (52)
Segment (loss) profit (15) 54 685 724
Total assets 2,453 2,159 1,143 5,755
Capital expenditures for investment
properties 65 35 -- 100
NOTE L - LEGAL PROCEEDINGS
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature arising in the ordinary course of business.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective September 23, 1998, the Registrant dismissed its prior Independent
Auditors, Pannell Kerr Forster PC ("PKF") and retained as its new Independent
Auditors, KPMG Peat Marwick LLP. PKF's Independent Auditor's Report on the
Registrant's financial statements for the calendar year ended December 31, 1997
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to change Independent Auditors was approved by the General
Partner's directors. During the calendar year ended 1997 and through September
23, 1998, there were no disagreements between the Registrant and PKF on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure which disagreements if not resolved to the
satisfaction of PKF, would have caused it to make references to the subject
matter of the disagreements in connection with its reports.
Effective September 23, 1998, the Registrant engaged KPMG Peat Marwick LLP as
its Independent Auditors. During the last two calendar years and through
September 23, 1998, the Registrant did not consult KPMG Peat Marwick LLP
regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-B.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Drexel Burnham Lambert Real Estate Associates II (the "Partnership") does not
have any officers or directors. Management and administrative services are
performed by DBL Properties Corporation ("DBL" or the "General Partner") and its
affiliates. The General Partner has general responsibility and authority in all
matters affecting the business of the Partnership.
The names of the directors and executive officers of DBL as of December 31,
1998, their ages and nature of all positions presently held by them are set
forth below. There are no family relationships between or among any officers
and directors:
Name Age Position
Patrick J. Foye 41 Executive Vice President and Director
Timothy R. Garrick 42 Vice President - Accounting and Director
Patrick J. Foye has been Executive Vice President of the General Partner since
October 1, 1998. Mr. Foye has served as Executive Vice President of AIMCO since
May 1998. Prior to joining AIMCO, Mr. Foye was a partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was Managing
Partner of the firm's Brussels, Budapest and Moscow offices from 1992 through
1994. Mr. Foye is also Deputy Chairman of the Long Island Power Authority and
serves as a member of the New York State Privatization Council. He received a
B.A. from Fordham College and a J.D. from Fordham University Law School.
Timothy R. Garrick has served as Vice President-Accounting of AIMCO and Vice
President-Accounting and Director of the General Partner since October 1, 1998.
Prior to that date, Mr. Garrick served as Vice President-Accounting Services of
Insignia Financial Group since June of 1997. From 1992 until June of 1997, Mr.
Garrick served as Vice President of Partnership Accounting and from 1990 to 1992
as an Asset Manager for Insignia Financial Group. From 1984 to 1990, Mr.
Garrick served in various capacities with U.S. Shelter Corporation. From 1979
to 1984, Mr. Garrick worked on the audit staff of Ernst & Whinney. Mr. Garrick
received his B.S. Degree from the University of South Carolina and is a
Certified Public Accountant.
ITEM 10. EXECUTIVE COMPENSATION
No direct form of compensation or remuneration was paid by the Partnership to
any officer or director of the General Partner. The Partnership has no plan,
nor does the Partnership presently propose a plan, which will result in any
remuneration being paid to any officer or director upon termination of
employment. However, reimbursements and other payments have been made to the
Partnership's General Partner and its affiliates, as described in "Item 12.
Certain Relationships and Related Transactions" below.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as noted below, no person or entity was known by the Registrant to be the
beneficial owner of more than 5% of the Limited Partnership Units of the
Registrant as of December 31, 1998.
Number
Entity of Units Percentage
AIMCO Properties LP 2,022 5.43%
No director or officer of the General Partner owns any Units. AIMCO Properties
L.P. is an affiliate of AIMCO. Their business address is 1873 South Bellaire
Street, 17th Floor, Denver, Colorado 80222.
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the General Partner. AIMCO and its affiliates
currently own 5.43% of the limited partnership units in the Partnership. AIMCO
is presently considering whether it will engage in an exchange offer for
additional limited partnership units in the Partnership. There is a substantial
likelihood that, within a short period of time, AIMCO OP will offer to acquire
limited partnership units in the Partnership for cash or preferred units or
common units of limited partnerships units in AIMCO OP. While such an
exchange offer is possible, no definite plans exist as to when or whether to
commence such an exchange offer, or as to the terms of any such exchange offer,
and it is possible that none will occur. A registration statement relating to
these securities has been filed with the Securities and Exchange Commission but
has not yet become effective. These securities may not be sold nor may offers
to buy be accepted prior to the time the registration statement becomes
effective. This Form 10-KSB shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
state.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant 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 payments were made to the General Partner and affiliates during
the years ended December 31, 1998 and 1997:
1998 1997
(in thousands)
Property management fees $97 $71
Reimbursement for services of affiliates 61 19
During the years ended December 31, 1998 and 1997, affiliates of the General
Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates approximately $69,000 and $26,000 for the
years ended December 31, 1998 and 1997 respectively. For the nine months ended
September 30, 1998 and the year ended December 31, 1997 affiliates of the
General Partner were entitled to receive varying percentages of gross receipts
from all of the Registrant's commercial properties for providing property
management services. The Registrant paid to such affiliates approximately
$21,000 and $32,000 for the nine months ended September 30, 1998 and the year
ended December 31, 1997. Effective October 1, 1998 (the effective date of the
Insignia Merger) these services for the commercial properties were provided by
an unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $61,000 and $19,000 for the
year ended December 31, 1998 and the six months ended December 31, 1997,
respectively.
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 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, who received payments on
these obligations from the agent. The amount of the Partnership's insurance
premiums accruing to the benefit of the affiliate of the General Partner by
virtue of the agent's obligations is not significant.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index contained herein.
(b) Reports on Form 8-K filed during the fourth quarter of 1998:
Current Report Form 8-K dated October 1, 1998 and filed October 16, 1998
disclosing change in control of Registrant from Insignia Financial Group, Inc.
to AIMCO.
Current Report Form 8-K filed September 23, 1998 disclosing change in accountant
from Pannell Kerr Forester PC to KPMG Peak Marwick LLP.
Current Report Form 8-K dated September 23, 1998 and filed October 26, 1998
disclosing change in accountant from Pannell Kerr Forester PC to KPMG Peak
Marwick LLP.
SIGNATURES
In accordance with Section 13 or 15(d) 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 J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
Date: March 31, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
By:/s/Patrick J. Foye Date: March 31, 1999
Patrick J. Foye
Executive Vice President and Director
By:/s/Timothy R. Garrick Date: March 31, 1999
Timothy R. Garrick
Vice President - Accounting
and Director
INDEX TO EXHIBITS
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and
between AIMCO and IPT in Registrant's Current Report on Form 8-K dated
October 1, 1998.
3.1 Prospectus of the Partnership filed pursuant to rule 424(b), dated
December 30, 1983 is hereby incorporated herein by reference.
3.2 Supplement dated October 10, 1984 to Prospectus dated December 30, 1983
is hereby incorporated herein by reference.
3.3 Form of Agreement of Limited Partnership of the Partnership reference
is made to Exhibit A to the Prospectus.
3.4 Certificate of Limited Partnership of the Partnership, which appears as
Exhibit 3.2 to the Registration Statement is hereby incorporated herein
by the reference.
10.1 Agreement related to purchase by the Partnership of Wendover Business
Park Phase II in Greensboro, North Carolina, which appears as Exhibit
2.1 to the Registration Statement of the Partnership is hereby
incorporated herein by reference.
10.2 Agreement related to purchase by the Partnership of an interest in the
Sheraton Poste Inn in Cherry Hill, New Jersey, which appears as Exhibit
2.2 to the Registration Statement of the Partnership is hereby
incorporated herein by reference.
10.3 Agreement relating to purchase by the Partnership of Presidential House
at Sky Lake in North Miami Beach, Florida, for which a Report on Form
8-K was filed with the Commission on November 5, 1984, is hereby
incorporated herein by reference.
10.4 Agreement relating to purchase by the Partnership of an interest in
Table Mesa Shopping Center in Boulder, Colorado, for which a Report on
Form 8-K was filed with the Commission on May 21, 1985, is hereby
incorporated herein by reference.
10.5 Amendment No. 1, dated October 1, 1992, among the Partnership, Coreal
N.V., Inc. and Almanzil, Inc., to the Joint Venture Agreements, dated
April 4, 1984, between the Partnership and Coreal relating to the
Sheraton Poste Inn is incorporated by reference to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1992.
10.6 Contracts related to refinancing of the debt of Wendover Business Park
Phase II were filed as Exhibit 10.6 to the report on Form 10-KSB for
the fiscal year ended December 31, 1993, and are hereby incorporated
herein by reference:
(a) Mortgage note dated January 13, 1994 between Drexel Burnham Lambert
Real Estate Associates II, a New York limited partnership, and
United Family Life Insurance Company, a Georgia corporation.
(b) Deed of Trust and Security Agreement dated January 13, 1994 between
Drexel Burnham Lambert Real Estate Associates II, a New York limited
partnership, and Stewart Title Guaranty Company for the benefit of
United Family Life Insurance Company, a Georgia corporation.
(c) Assignment of Leases, Rents, Contracts, and Agreements dated January
13, 1994 from Drexel Burnham Lambert Real Estate Associates II, a
New York limited partnership, to United Family Life Insurance
Company, a Georgia corporation.
(d) Hazardous Material Indemnification Agreement dated January 13, 1994
between Drexel Burnham Lambert Real Estate Associates II, a New York
limited partnership, and United Family Life Insurance Company, a
Georgia corporation.
(e) Escrow Agreement dated January 13, 1994 by and between United Family
Life Insurance Company, a Georgia corporation, Drexel Burnham
Lambert Real Estate Associates II, a New York limited partnership,
and Dickinson, Logan, Todd and Barber, Inc. (the "Escrow Agent").
16 Letter dated September 23, 1998, from the Registrant's former
independent accountant regarding its concurrence with the statements
made by the Registrant in its Current Report on Form 8-K dated September
23, 1998.
16.1 Letter dated October 21, 1998, from the Registrant's former independent
accountant regarding its concurrence with the statements made by the
Registrant in its Current Report on Form 8-K dated September 23, 1998.
27 Financial Data Schedule.
99.1 Special Report/Acquisition Bulletin dated May 9, 1985 regarding the
Purchase by the Partnership of interests in Table Mesa Shopping Center
in Boulder, Colorado, and the 123 Office Building in Tyson's Corner,
Virginia is hereby incorporated herein by reference.
99.2 Report on Form 8-K filed November 4, 1984 regarding the purchase of
Presidential House at Sky Lake in North Miami Beach, Florida is hereby
incorporated herein by reference.
99.3 Report on Form 8-K filed May 21, 1985 regarding the acquisition of a
50% interest in Table Mesa Shopping Center in Boulder, Colorado is
hereby incorporated herein by reference.
99.4 On May 17, 1988, a report on Form 8-K was filed regarding the
refinancing of the four loans underlying the Presidential wrap mortgage
is hereby incorporated herein by reference.
99.5 On June 12, 1989, a report on Form 8-K was filed regarding the
modification of Table Mesa Promissory Note is hereby incorporated
herein by reference.
99.7 On October 11, 1989, a report on Form 8-K was filed regarding the
change in control of the parent company of the General Partner is
hereby incorporated herein by reference.
99.8 Second Note and Deed of Trust Revision Agreement dated December 3, 1990
regarding Table Mesa Shopping Center in Boulder, Colorado.
99.9 Report on Form 8-K filed February 3, 1993 regarding the sale of the
outstanding stock of the General Partner is hereby incorporated herein
by reference.
99.10 Report on Form 8-K filed July 9, 1997, regarding the change in
control of the Partnership.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drexel
Burnham Lambert Real Estate Associates II 1998 Year-End 10-KSB and is qualified
in its entirety by reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000725646
<NAME> DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 613
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 11,869
<DEPRECIATION> 7,982
<TOTAL-ASSETS> 5,410
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,429
0
0
<COMMON> 0
<OTHER-SE> 799
<TOTAL-LIABILITY-AND-EQUITY> 5,410
<SALES> 0
<TOTAL-REVENUES> 1,963
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122
<EPS-PRIMARY> 3.25<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
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