FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 3,145
Receivables and deposits 242
Other assets 57
Investment in joint venture 338
Investment in discontinued operations 144
Investment property:
Land $ 1,287
Buildings and related personal property 6,553
7,840
Less accumulated depreciation (5,724) 2,116
$ 6,042
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 57
Tenant security deposit liabilities 65
Accrued property taxes 112
Other liabilities 86
Mortgage notes payable 3,154
Partners' Capital
General partner $ 6
Limited partners' (37,273 units issued and
outstanding) 2,562 2,568
$ 6,042
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 Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 361 $ 331 $1,055 $1,000
Other income 18 23 57 49
Total revenues 379 354 1,112 1,049
Expenses:
Operating 169 177 455 492
General and administrative 28 23 105 62
Depreciation 71 68 208 204
Interest 68 71 208 215
Property taxes 38 38 112 112
Bad debt expense, net 13 3 53 9
Total expenses 387 380 1,141 1,094
Loss before equity in net
income of joint venture and
discontinued operations (8) (26) (29) (45)
Equity in net (loss) income of
joint venture (62) 26 35 83
(Loss) income before discontinued (70) -- 6 38
operations
(Loss) income from discontinued
operations (35) 40 (29) 101
Gain on sale of discontinued
operations 1,837 -- 1,837 --
Extraordinary loss on early
extinguishment of debt of
discontinued operations (45) -- (45) --
Net income $1,687 $ 40 $1,769 $ 139
Net (loss) income allocated to
general partner $ (2) $ -- $ (1) $ 1
Net income allocated to limited
partners 1,689 40 1,770 138
$1,687 $ 40 $1,769 $ 139
Per limited partnership unit:
(Loss) income before discontinued
operations $(1.83) $ -- $ .19 $ 1.02
(Loss) income from discontinued
operations (.94) 1.07 (.78) 2.68
Gain on sale of discontinued
operations 49.29 -- 49.29 --
Extraordinary loss (1.21) -- (1.21) --
Net income $45.31 $ 1.07 $47.49 $ 3.70
Distribution per limited
partnership unit $ -- $ 3.76 $ -- $ 7.57
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 (loss) income for the nine
months ended September 30, 1999 -- (1) 1,770 1,769
Partners' capital at
September 30, 1999 37,273 $ 6 $ 2,562 $ 2,568
See Accompanying Notes to Financial Statements
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 1,769 $ 139
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 208 308
Amortization of lease commissions and loan costs 16 34
Equity in net income of joint venture (35) (83)
Bad debt expense, net 53 7
Gain on sale of discontinued operations (1,837) --
Extraordinary loss on early extinguishment of
debt of discontinued operations 45 --
Change in accounts:
Receivables and deposits (16) (122)
Other assets (25) (9)
Investment in discontinued operations (1,129) --
Accounts payable 43 (7)
Tenant security deposit liabilities (8) 2
Accrued property taxes (30) 153
Other liabilities 30 (25)
Net cash (used in) provided by operating
activities (916) 397
Cash flows from investing activities:
Distribution received from joint venture 275 100
Lease commission paid -- (11)
Property improvements and replacements (263) (86)
Proceeds from sale of investment property 3,575 --
Net cash provided by investing activities 3,587 3
Cash flows from financing activities:
Payments on mortgage notes payable (90) (112)
Distributions paid to limited partners -- (282)
Net cash used in financing activities (90) (394)
Net increase in cash and cash equivalents 2,581 6
Cash and cash equivalents at beginning of period 564 578
Cash and cash equivalents at end of period $ 3,145 $ 584
Supplemental disclosure of cash flow information:
Cash paid for interest $ 264 $ 270
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 nine month periods ended September 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 reimbursements of certain expenses incurred by affiliates on
behalf of the Partnership. The following transactions with affiliates of the
General Partner were incurred during the nine months ended September 30, 1999
and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expense and discontinued
operations) $ 54 $ 72
Reimbursement for services of affiliates
(included in general and administrative
expense) 35 44
During the nine 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 $54,000 and $51,000 for the
nine month periods ended September 30, 1999 and 1998, respectively. For the
nine months ended September 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 $21,000 for the nine months ended
September 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 $35,000 and $44,000 for the
nine months ended September 30, 1999 and 1998, respectively.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase up to 15,872.15 (approximately 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 6,824.00 units of
limited partnership interest in the Partnership representing approximately
18.31% of the total outstanding units. It is possible that AIMCO or its
affiliates 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 $35,000 and
$83,000 for the nine months ended September 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
nine months ended September 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 September 30, 1999, is as
follows (in thousands):
Assets:
Real and personal property net of accumulated
depreciation $ 5,237
Other assets 1,099
Total assets $ 6,336
Liabilities:
Mortgage payable $ 6,284
Other liabilities 464
Total liabilities $ 6,748
Partners' deficit (412)
Total liabilities and partners' deficit $ 6,336
Summarized results of operations for Table Mesa for each of the nine month
periods ended September 30, 1999 and 1998, are as follows (in thousands):
1999 1998
Total revenues $ 1,800 $ 1,744
Total expenses (1,549) (1,427)
Net income $ 251 $ 317
NOTE E - SALE OF INVESTMENT PROPERTY
On September 9, 1999, the Partnership sold Wendover Business Park II ("Wendover
II") to an unaffiliated third party for net proceeds of approximately $2,417,000
after payoff of the first mortgage and closing costs. The Partnership realized
a gain of approximately $1,837,000 on the sale during the third quarter of 1999.
The Partnership also realized a loss on the early extinguishment of debt
encumbering the property of approximately $45,000 during the third quarter of
1999 due to the write off of unamortized loan costs and a prepayement penalty.
The sales transactions are summarized as follows (amounts in thousands):
Sale price, net of selling costs $ 3,575
Real estate (1) (1,713)
Net other assets (25)
Gain on sale of real estate $ 1,837
(1) Net of accumulated depreciation of approximately $2,585,000
The following unaudited pro forma information reflects the operations of the
Partnership for the nine months ended September 30, 1999 and 1998, as if
Wendover II had been sold on January 1, 1998 (in thousands).
1999 1998
Revenues, including equity in joint venture $ 1,156 $ 1,132
Expenses (1,140) (1,094)
Net income $ 16 $ 38
Net income per limited partnership unit $ .43 $ 1.02
This pro forma information is not necessarily reflective of the results that
actually would have occurred if the sale had been in effect as of and for the
periods presented or what may be achieved in the future.
Wendover II was the only property in the commercial segment of the Partnership.
Due to the sale of this property, the net assets of Wendover II were classified
as "Investment in discontinued operations" as of September 30, 1999. The
results of operations of the property have been classified as "Income from
discontinued operations" for the three and nine months ended September 30, 1999
and 1998, and the gain on sale of the property is reported as "Gain on sale of
discontinued operations". Included in "Investment in discontinued operations"
on the balance sheet is the remaining cash and deposits partially offset by
accrued liabilities of Wendover II.
NOTE F - DISTRIBUTIONS TO LIMITED PARTNERS
During the nine months ended September 30, 1998, the Partnership declared and
paid cash distributions to the limited partners 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.
Subsequent to September 30, 1999, the Partnership declared a cash distribution
of approximately $2,594,000 to the limited partners, approximately $69.59 per
limited partnership unit, representing proceeds from the sale of Wendover II.
NOTE G - 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 located in
Greensboro, North Carolina which was sold on September 9, 1999 (see "Note E"
above). Therefore, the commercial segment is reflected as discontinued
operations.
Measurement of segment profit or loss:
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segment are the same as those of the Partnership as
described in the Partnership's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998.
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 nine months ended September 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 segment.
1999 Residential Commercial Other Totals
(discontinued)
Rental income $ 1,055 $ -- $ -- $ 1,055
Other income 45 -- 12 57
Gain on sale of discontinued
operations -- 1,837 -- 1,837
Interest expense 208 -- -- 208
Depreciation 208 -- -- 208
General and administrative expense -- -- 105 105
Equity in income of joint venture -- -- 35 35
Extraordinary loss on early
extinguishment of debt of
discontinued operations -- (45) -- (45)
Loss from discontinued operations -- (29) -- (29)
Segment profit (loss) 64 1,763 (58) 1,769
Total assets 2,389 144 3,509 6,042
Capital expenditures for investment
properties 263 -- -- 263
1998 Residential Commercial Other Totals
(discontinued)
Rental income $ 1,000 $ -- $ -- $ 1,000
Other income 36 -- 13 49
Interest expense 215 -- -- 215
Depreciation 204 -- -- 204
General and administrative expense -- -- 62 62
Equity in income of joint venture -- -- 83 83
Income from discontinued operations -- 101 -- 101
Segment profit 4 101 34 139
Total assets 2,473 1,993 1,017 5,483
Capital expenditures for investment
properties 75 11 -- 86
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 other filings with the Securites
and Exchange Commission made by the Partnership from time to time. The
discussion of the Partnership's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Partnership's business and results of
operations. 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 one investment property: Presidential House at
Sky Lake ("Presidential"), a residential apartment complex located in North
Miami Beach, Florida. The average occupancy for Presidential was 93% for both
the nine months ended September 30, 1999 and 1998. The Partnership also owns a
joint venture interest in Table Mesa Shopping Center ("Table Mesa") located in
Boulder, Colorado.
Results of Operations
The Partnership realized net income of approximately $1,769,000 and $139,000 for
the nine months ended September 30, 1999 and 1998, respectively. The
Partnership realized net income of approximately $1,687,000 and $40,000 for the
three months ended September 30, 1999 and 1998, respectively. The increase in
net income for both the three and nine month periods ended September 30, 1999,
is primarily attributable to the gain on sale of Wendover Business Park II
("Wendover II") in September 1999 partially offset by the extraordinary loss on
the early entinguishment of debt related to the sale. Excluding the Wendover II
sale and operations, the Partnership realized a loss of approximately
$70,000 and net income of $6,000 for the three and nine month periods ended
September 30, 1999, respectively. The increase in loss for the three months
ended September 30, 1999 and the decrease in income for the nine months ended
September 30, 1999, is due to an increase in total expenses and a decrease in
the equity in net income of the joint venture. The increase in total expenses
for the three and nine months ended September 30, 1999, is primarily due to an
increase in bad debt expense and general and administrative expense. The
increase in bad debt expense is attributable to delinquencies at Presidential
House. The increase in general and administrative expenses is due to increased
professional fees in 1999 and the overaccrual of audit expenses in 1997 that
were adjusted in 1998. This was partially offset by decreases in operating
expenses due to a decrease in insurance and property expense. Insurance expense
decreased due to lower policy premiums and a refund received due to the
cancellation of the previous 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.
Included in general and administrative expenses at both September 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 included.
On September 9, 1999, the Partnership sold Wendover Business Park II ("Wendover
II") to an unaffiliated third party for net proceeds of approximately $2,417,000
after payoff of the first mortgage and closing costs. The Partnership realized
a gain of approximately $1,837,000 on the sale during the third quarter of 1999.
The Partnership also realized a loss on the early extinguishment of debt
encumbering the property of approximately $45,000 during the third quarter of
1999 due to the write off of unamortized loan costs and a prepayement penalty.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of the investment property to assess the
feasibility of increasing rents, maintaining or increasing occupancy levels and
protecting the Partnership from increases in expense. As part of this plan, the
General Partner attempts to protect the Partnership from the burden of
inflation-related increases in expenses by increasing rents and maintaining a
high overall occupancy level. However, due to changing market conditions, which
can result in the use of rental concessions and rental reductions to offset
softening market conditions, there is no guarantee that the General Partner will
be able to sustain such a plan.
Capital Resources and Liquidity
At September 30, 1999, the Partnership had cash and cash equivalents of
approximately $3,145,000 as compared to approximately $584,000 at September 30,
1998. For the nine months ended September 30, 1999, cash and cash equivalents
increased approximately $2,581,000 from the Partnership's year ended December
31, 1998. The increase in cash and cash equivalents is due to approximately
$3,587,000 of cash provided by investing activities which was partially offset
by approximately $916,000 of cash used in operating activities and approximately
$90,000 of cash used in financing activities. Cash provided by investing
activities consists of proceeds from the sale of Wendover II and a distribution
from the Table Mesa joint venture partially offset by property improvements and
replacements. Cash used in financing activities consists of payments on the
mortgage encumbering the Partnership's remaining investment property. The
Partnership invests its working capital reserves in a money market account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property to adequately maintain the physical asset
and other operating needs of the Partnership and to comply with Federal, state,
and local legal and regulatory requirements. Capital improvements planned for
the Partnership's remaining investment property is detailed below.
Presidential House
During the nine months ended September 30, 1999, the Partnership completed
approximately $263,000 of capital improvements consisting primarily of
structural improvements, roof replacements, and carpet and vinyl replacement.
The roof replacements and structural improvements are substantially complete as
of September 30, 1999. 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, parking lot enhancements, 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 $3,154,000 requires monthly principal and
interest payments and requires a balloon payment in August 2000. If the property
cannot be refinanced and/or sold for a sufficient amount, the Partnership will
risk losing such property to foreclosure.
Distributions of approximately $282,000 ($7.57 per limited partnership unit)
were made to the limited partners during the nine months ended September 30,
1998. Subsequent to September 30, 1999, the Partnership declared a cash
distribution of approximately $2,594,000 to the limited partners, approximately
$69.59 per limited partnership unit, representing proceeds from the sale of
Wendover II. This distribution has been recorded as a distribution payable for
the nine month period ended September 30, 1999. The Partnership's distribution
policy is 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 the debt maturity, refinancing, and/or property
sale. There can be no assurance, however, that the Partnership will generate
sufficient finds from operations, after planned capital improvement
expenditures, to permit any additional distributions to its limited partners
during the remainder of 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the 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 6,824.00 units of limited
partnership interest in the Partnership representing 18.31% of the total
outstanding units. It is possible that AIMCO or its affiliates 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 September 30, 1999, had virtually completed 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.
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 virtually all of the server operating systems.
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 virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 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
September 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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 expenses
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:
Current report on Form 8-K dated September 9, 1999, and filed on
September 23, 1999, disclosing the sale of Wendover Business Park
II to SB Orchard, LLC.
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/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drexel
Burnham Lambert Real Estate Associates II 1999 Third Quarter 10-QSB and is
qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000725646
<NAME> DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,145
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 7,840
<DEPRECIATION> 5,724
<TOTAL-ASSETS> 6,042
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 3,145
0
0
<COMMON> 0
<OTHER-SE> 2,568
<TOTAL-LIABILITY-AND-EQUITY> 6,042
<SALES> 0
<TOTAL-REVENUES> 1,112
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,769
<EPS-BASIC> 47.49<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
