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 June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to_________
Commission file number 2-85829
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 (IRS Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
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)
June 30, 1999
Assets
Cash and cash equivalents $ 949
Receivables and deposits 286
Other assets 95
Investment in joint venture 400
Investment properties:
Land $ 1,578
Buildings and related personal property 10,414
11,992
Less accumulated depreciation (8,204) 3,788
$ 5,518
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 20
Tenant security deposit liabilities 95
Accrued property taxes 100
Other liabilities 73
Mortgage notes payable 4,349
Partners' Capital
General partner's $ 8
Limited partners' (37,273 units issued
and outstanding) 873 881
$ 5,518
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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Revenues:
Rental income $ 504 $ 455 $ 960 $ 938
Other income 20 14 40 30
Total revenues 524 469 1,000 968
Expenses:
Operating 178 202 325 382
General and administrative 35 29 77 39
Depreciation 108 102 222 205
Interest 94 98 190 196
Property taxes 50 51 100 100
Bad debt expense, net 47 2 101 4
Total expenses 512 484 1,015 926
Income (loss) before equity in
net income (loss) of
joint venture 12 (15) (15) 42
Equity in net income (loss)
of joint venture 41 (28) 97 57
Net income (loss) $ 53 $ (43) $ 82 $ 99
Net income allocated to
general partner $ 1 $ -- $ 1 $ 1
Net income (loss) allocated
to limited partners 52 (43) 81 98
$ 53 $ (43) $ 82 $ 99
Net income (loss) per limited
partnership unit $ 1.40 $ (1.15) $ 2.17 $ 2.63
Distribution per limited
partnership unit $ -- $ -- $ -- $ 3.81
See Accompanying Notes to Financial Statements
c)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 37,273 $ 1 $18,637 $18,638
Partners' capital at December 31, 1998 37,273 $ 7 $ 792 $ 799
Net income for the six months
ended June 30, 1999 -- 1 81 82
Partners' capital at June 30, 1999 37,273 $ 8 $ 873 $ 881
See Accompanying Notes to Financial Statements
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 82 $ 99
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 222 205
Amortization of loan costs and lease
commissions 23 22
Equity in net income of joint venture (97) (57)
Bad debt expense, net 101 4
Change in accounts:
Receivables and deposits (26) (107)
Other assets 3 8
Accounts payable 6 (7)
Tenant security deposit liabilities (4) (6)
Accrued property taxes (42) 102
Other liabilities 4 (26)
Net cash provided by operating activities 272 237
Cash flows from investing activities:
Lease commissions paid (8) (5)
Distribution received from joint venture 275 100
Property improvements and replacements (123) (62)
Net cash provided by investing activities 144 33
Cash flows from financing activities:
Payments on mortgage notes payable (80) (74)
Distributions paid to limited partners -- (142)
Net cash used in financing activities (80) (216)
Net increase in cash and cash equivalents 336 54
Cash and cash equivalents at beginning of period 613 578
Cash and cash equivalents at end of period $ 949 $ 632
Supplemental disclosure of cash flow information:
Cash paid for interest $ 175 $ 181
See Accompanying Notes to Financial Statements
e)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Drexel Burnham Lambert Real
Estate Associates II (the "Partnership" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the DBL Properties Corporation ("DBL"
or the "General Partner"), all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Partnership's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1998.
Certain reclassifications have been made to the 1998 balances to conform to the
1999 presentation.
NOTE B - TRANSFER OF CONTROL
On October 1, 1998, Insignia Financial Group, Inc., the sole shareholder of IFGP
Corporation, completed its merger with and into Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust,
with AIMCO being the surviving corporation (the "Insignia Merger"). As a result
of the Insignia Merger, AIMCO acquired control of IFGP Corporation and, as a
result thereof, the General Partner. The General Partner does not believe that
this transaction will have a material effect on the affairs and operations of
the Partnership.
NOTE C - TRANSACTIONS WITH 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. The following payments were made to the General
Partner and affiliates during the six months ended June 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating
expense) $ 35 $ 48
Reimbursement for services of affiliates (included in
general and administrative expense) 22 31
During the six months ended June 30, 1999 and 1998, affiliates of the General
Partner were entitled to receive 5% of gross receipts from the Partnership's
residential property for providing property management services. The
Partnership paid to such affiliates approximately $35,000 and $34,000 for the
six month periods ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1998, affiliates of the General Partner were entitled to
receive varying percentages of gross receipts from the Partnership's commercial
property for providing property management services. The Partnership paid to
such affiliates approximately $14,000 for the six months ended June 30, 1998.
Effective October 1, 1998 (the effective date of the Insignia Merger) these
services for the commercial property were provided by an unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $22,000 and $31,000 for the
six months ended June 30, 1999 and 1998, respectively.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 15,872.15 (42.58% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $155 per unit. The offer expired on June
29, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 4,772.00
units. As a result, AIMCO and its affiliates currently own 6,794 units of
limited partnership interest in the Partnership representing 18.23% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO.
NOTE D - INVESTMENT IN JOINT VENTURE
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 $97,000 and
$57,000 for the six months ended June 30, 1999 and 1998, 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. The annual preference is not cumulative. During the
six months ended June 30, 1999 and 1998, the Partnership received distributions
from the Table Mesa joint venture of approximately $275,000 and $100,000,
respectively.
Summarized financial information for Table Mesa at June 30, 1999, is as follows
(in thousands):
Assets:
Real and personal property net
of accumulated depreciation $5,381
Other assets 967
Total assets $6,348
Liabilities:
Mortgage payable $6,415
Other liabilities 369
Total liabilities 6,784
Partners' deficit (436)
Total liabilities and partners' deficit $6,348
Summarized results of operations for Table Mesa for each of the six month
periods ended June 30, 1999 and 1998, are as follows (in thousands):
1999 1998
Total revenues $1,203 $1,175
Total expenses 976 959
Net income $ 227 $ 216
NOTE E - DISTRIBUTIONS TO LIMITED PARTNERS
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.
NOTE F - SEGMENT REPORTING
Description of the types of products and services from which each reportable
segment derives its revenues: 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 tenants 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 of the Partnership as described in the Partnership's annual report
on Form 10-KSB for the year ended December 31, 1998.
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 six months ended June 30, 1999 and 1998, is shown in
the tables below (in thousands). The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segments.
1999
Residential Commercial Other Totals
Rental income $ 693 $ 267 $ -- $ 960
Other income 30 2 8 40
Interest expense 139 51 -- 190
Depreciation 137 85 -- 222
General and administrative expense -- -- 77 77
Equity in net income of joint
venture -- -- 97 97
Segment profit 48 6 28 82
Total assets 2,381 1,927 1,204 5,512
Capital expenditures for investment
properties 117 6 -- 123
1998
Residential Commercial Other Totals
Rental income $ 667 $ 271 $ -- $ 938
Other income 16 4 10 30
Interest expense 144 52 -- 196
Depreciation 136 69 -- 205
General and administrative expense -- -- 39 39
Equity in net income of joint
venture -- -- 57 57
Segment profit 10 61 28 99
Total assets 2,470 2,225 1,006 5,701
Capital expenditures for investment
properties 51 11 -- 62
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the 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.
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 six
months ended June 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Wendover Business Park Phase II 99% 98%
Presidential House 93% 93%
Results of Operations
The Partnership realized net income of approximately $82,000 and $99,000 for the
six months ended June 30, 1999 and 1998, respectively. The Partnership realized
net income of approximately $53,000 and a net loss of approximately $43,000 for
the three months ended June 30, 1999 and 1998, respectively. The decrease in
net income for the six months ended June 30, 1999, is due to an increase in
total expenses partially offset an increase in the equity in net income of the
joint venture and by an increase in total revenues. The increase in net income
for the three months ended June 30, 1999, is due to an increase in total
revenues and equity in net income of joint venture partially offset by an
increase in total expenses. The increase in total expenses for the three and
six months ended June 30, 1999, is primarily due to an increase in net bad debt
expense and general and administrative expense, partially offset by a decrease
in operating expenses. The increase in net bad debt expense is attributable to
the delinquencies of three tenants at Wendover II, of which the General Partner
is currently pursuing collection. The increase in general and administrative
expenses is due to the overaccrual of audit expenses in 1997 that were adjusted
in 1998. The decrease in operating expenses is primarily due to a decrease in
insurance and property expenses. Insurance expense decreased due to lower
policy premiums and a refund received due to the cancellation of the precious
policies before the end of their period. The decrease in property expense is
primarily due to a decrease in salary and salary related expenses due to
personnel turnover at Presidential House. The increase in total revenue for the
three and six months ended June 30, 1999, is primarily due to and increase in
rental income resulting from the timing of billings for common area expenses at
Wendover II.
Included in general and administrative expenses at both June 30, 1999 and 1998,
are management reimbursements to the General Partner allowed under the
Partnership Agreement. In addition, costs associated with the quarterly and
annual communications with investors and regulatory agencies and the annual
audit required by the Partnership agreement are also included.
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 June 30, 1999, the Partnership had cash and cash equivalents of approximately
$949,000 as compared to approximately $632,000 at June 30, 1998. For the six
months ended June 30, 1999, cash and cash equivalents increased by approximately
$336,000 from the Partnership's year ended December 31, 1998. The increase in
cash and cash equivalents is due to approximately $272,000 of cash provided by
operating activities and approximately $144,000 of cash provided by investing
activities which was partially offset by approximately $80,000 of cash used in
financing activities. Cash provided by investing activities consisted of a
distribution from the Table Mesa joint venture, partially offset by property
improvements and replacements and lease commissions paid. Cash used in
financing activities primarily consisted of principal payments made on the
mortgages encumbering the Partnership's properties. The Partnership invests its
working capital reserves in a money market account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the 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. Capital improvements
planned for each of the Partnership's properties are detailed below.
Wendover Business Park II, located in Greensboro, North Carolina, is under
contract for sale. The sale, which is subject to the purchaser's due diligence
and other customary conditions, is expected to close during the third quarter of
1999. However, there can be no assurance that the sale will be consummated.
Wendover II
During the six months ended June 30, 1999, the Partnership completed
approximately $6,000 of capital improvements consisting primarily of 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 next few years. The Partnership has
budgeted, but is not limited to, capital improvements of approximately $53,000
for 1999 at this property which include certain of the required improvements and
consist of tenant improvements and HVAC replacements.
Presidential House
During the six months ended June 30, 1999, the Partnership completed
approximately $117,000 of capital improvements consisting primarily of roof
replacements, landscaping, carpet and vinyl replacement, appliances, and air
conditioning. 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 next few years. The Partnership has
budgeted, but is not limited to, capital improvements of approximately $413,000
for 1999 at this property which include certain of the required improvements and
consist of HVAC replacements, carpet and vinyl replacement, landscaping,
exterior painting, parking lot repairs, structural improvements, fencing, roof
replacements, electrical and plumbing upgrades.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The remaining
mortgage indebtedness of approximately $4,349,000 requires monthly principal and
interest payments and requires balloon payments in August 2000 and February
2001. If the properties cannot be refinanced and/or sold for a sufficient
amount, the Partnership will risk losing such properties to foreclosure.
A distribution of approximately $142,000 ($3.81 per limited partnership unit)
was made to the limited partners during the six months ended June 30, 1998. The
Partnership's distribution policy will be reviewed on a semi-annual basis.
Future cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves, and the timing of debt
maturities, refinancings and/or property sales. There can be no assurance,
however, that the Partnership will generate sufficient funds from operations,
after planned capital improvement expenditures, to permit any additional
distributions to its limited partners in 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 15,872.15 (42.58% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $155 per unit. The offer expired on June
29, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 4,772.00
units. As a result, AIMCO and its affiliates currently own 6,794 units of
limited partnership interest in the Partnership representing 18.23% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO.
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 main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of June 30, 1999, had completed approximately 90% 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
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
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.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
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 testing process was
completed in June, 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 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
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.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
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 September 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 $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report.
b) Reports on Form 8-K:
None filed during the three months ended June 30, 1999.
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 J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President Finance and
Administration
Date: August 13, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drexel
Burnham Lambert Real Estate Associates III 1999 Second Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000761657
<NAME> DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 949
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 11,992
<DEPRECIATION> 8,204
<TOTAL-ASSETS> 5,512
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,349
0
0
<COMMON> 0
<OTHER-SE> 875
<TOTAL-LIABILITY-AND-EQUITY> 5,512
<SALES> 0
<TOTAL-REVENUES> 1,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82
<EPS-BASIC> .16<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
