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 2-95502
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
(Exact name of small business issuer as specified in its charter)
New York 13-3251176
(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 preceding 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 III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 4,032
Receivables and deposits 563
Other assets 75
Investment properties:
Land $ 7,311
Buildings and related personal property 16,349
23,660
Less accumulated depreciation (11,400) 12,260
$ 16,930
Liabilities and Partners' (Deficit) Capital
Liabilities:
Accounts payable $ 117
Tenant security deposit liabilities 28
Accrued property taxes 371
Due to affiliate 26
Other liabilities 1,156
Mortgage notes payable 10,955
Partners' (Deficit) Capital:
General partner $ (8)
Limited partners (59,905 units issued and
outstanding) 4,285 4,277
$ 16,930
See Accompanying Notes to Consolidated Financial Statements
b)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Hotel operations $ 924 $ 1,328 $ 4,935 $ 5,342
Rental operations 431 451 1,371 1,297
Other income 20 33 58 112
Gain on sale of properties 986 -- 986 --
Total revenues 2,361 1,812 7,350 6,751
Expenses:
Hotel operations 1,118 1,445 4,160 4,346
Rental operations 147 108 349 323
General and administrative 43 69 187 146
Interest 372 393 1,159 1,204
Property taxes 140 100 416 299
Depreciation 264 299 854 896
Total expenses 2,084 2,414 7,125 7,214
Income (loss) before extraordinary
item 277 (602) 225 (463)
Extraordinary (loss) on early
extinguishment of debt (45) -- (45) --
Net income (loss) $ 232 $ (602) $ 180 $ (463)
Net income (loss) allocated to
general partner $ 126 $ (6) $ 125 $ (5)
Net income (loss) allocated to
limited partners 106 (596) 55 (458)
$ 232 $ (602) $ 180 $ (463)
Per limited partnership unit:
Income (loss) before extraordinary
item $ 2.52 $ (9.95) $ 1.67 $ (7.65)
Extraordinary loss on early
extinguishment of debt (.75) -- (.75) --
Net income (loss) $ 1.77 $ (9.95) $ .92 $ (7.65)
Distribution per limited
partnership unit $ -- $ -- $ -- $ 10.00
See Accompanying Notes to Consolidated Financial Statements
c)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 60,095 $ 1 $30,048 $30,049
Partners' (deficit) capital at
December 31, 1998 59,905 $ (133) $ 4,230 $ 4,097
Net income for the nine months
ended September 30, 1999 -- 125 55 180
Partners' (deficit) capital at
September 30, 1999 59,905 $ (8) $ 4,285 $ 4,277
See Accompanying Notes to Consolidated Financial Statements
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income (loss) $ 180 $ (463)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt 45 --
Gain on sale of property (986) --
Depreciation 854 896
Amortization of loan costs, lease commissions and
debt discount 82 66
Change in accounts:
Receivables and deposits (54) (193)
Other assets 137 2
Accounts payable (196) (50)
Tenant security deposit liabilities (20) 4
Accrued property taxes 162 158
Due to affiliate (240) 62
Other liabilities 198 160
Net cash provided by operating activities 162 642
Cash flows from investing activities:
Property improvements and replacements (75) (254)
Proceeds from sale of investment property 5,215 --
Lease commission paid (4) --
Net cash provided by (used in) investing
activities 5,136 (254)
Cash flows from financing activities:
Payments on mortgage notes payable (216) (218)
Repayment of notes payable (3,928) --
Prepayment penalty paid (26) --
Loan costs paid -- (25)
Distributions paid to limited partners -- (599)
Net cash used in financing activities (4,170) (842)
Net increase (decrease) in cash and cash equivalents 1,128 (454)
Cash and cash equivalents at beginning of period 2,904 4,109
Cash and cash equivalents at end of period $ 4,032 $ 3,655
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,144 $ 1,172
See Accompanying Notes to Consolidated Financial Statements
e)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Drexel Burnham
Lambert Real Estate Associates III (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 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
consolidated financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership
and its 90% general partnership interest in DBL Airport Valley Limited
Partnership ("DBLAV"), which owns and operates two hotels in Tucson and Green
Valley, Arizona, and its 90% general partnership interest in Shallowford
Associates, Ltd. ("Shallowford"), which owns and operates a shopping center in
Roswell, Georgia. All material inter-entity transactions and balances have been
eliminated in consolidation. In addition, the consolidated financial statements
include the accounts and operations of its wholly-owned property, Perimeter
Square Shopping Center ("Perimeter Square"), which is a shopping center in
Tulsa, Oklahoma.
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 AFFILIATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all Partnership activities.
The Partnership Agreement provides for certain payments to affiliates for
services and as 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) $ -- $321
Reimbursement for services of affiliates
(included in general and administrative
expense) 50 70
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 and hotel properties for providing management services.
The Partnership paid to such affiliates approximately $321,000 for the nine
months ended September 30, 1998. Effective October 1, 1998 (the effective date
of the Insignia Merger) these services for the commercial and hotel properties
were provided by an unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $50,000 and $70,000 for the
nine months ended September 30, 1999 and 1998, respectively.
At September 30, 1999, the Partnership owed an affiliate of the General Partner
approximately $26,000 for payroll expenses paid by such affiliate on behalf of
the hotel properties.
Included in other liabilities at September 30, 1999, is a $25,000 note payable
to the co-venturer in Shallowford. The note does not have any stipulated terms
for repayment and it accrues interest at 3% above prime. Interest expense on
the note amounted to approximately $2,000 in both 1999 and 1998. Total accrued
interest payable of approximately $20,000 is included in other liabilities at
September 30, 1999.
NOTE D - DISTRIBUTIONS TO LIMITED PARTNERS
In February 1998, the Partnership declared and paid a cash distribution to the
limited partners of approximately $599,000 ($10.00 per limited partnership
unit).
No distributions were paid during the nine months ended September 30, 1999.
NOTE E - SALE OF INVESTMENT PROPERTIES
On July 21, 1999, the Partnership sold Perimeter Square to an unaffiliated third
party, P & H Properties, L.L.C., for net sales proceeds of approximately
$663,000 after payoff of the mortgages and payment of closing costs. The
Partnership realized a gain of approximately $64,000 on the sale during the
third quarter of 1999. The Partnership realized a loss on the early
extinguishment of debt encumbering Perimeter Square of approximately $3,000
during the third quarter of 1999.
The sales transaction is summarized as follows (amounts in thousands):
Net sale price, net of selling costs $ 2,033
Net real estate (1) (1,953)
Net other assets (16)
Gain on sale of real estate $ 64
(1) Net of accumulated depreciation of approximately $2,546,000.
On August 10, 1999, the Partnership sold the Best Western Green Valley Hotel to
an unaffiliated third party for net sales proceeds of approximately $598,000
after payoff of the first mortgage and payment of closing costs. The
Partnership realized a gain of approximately $922,000 on the sale during the
third quarter of 1999. The Partnership realized a loss on the early
extinguishment of the debt encumbering the property of approximately $42,000
consisting of a prepayment penalty and the write-off of unamortized loan costs
during the third quarter of 1999.
The sales transaction is summarized as follows (amounts in thousands):
Net sale price, net of selling costs $ 3,182
Net real estate (2) (2,260)
Gain on sale of real estate $ 922
(2) Net of accumulated depreciation of approximately $3,384,000.
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:
hotel and commercial properties. The Partnership's hotel property segment
consists of a hotel located in Arizona. The commercial property segment consists
of a retail shopping center located in Georgia. These properties lease space to
tenants, including a grocery store, a business school, and a book supplies
store, under various lease terms. During the third quarter of 1999, the
Partnership sold two other properties one of which was a hotel and one of which
was a commercial property.
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. The "Other" column includes Partnership
administration related items and income and expense not allocated to the
reportable segment.
1999 Hotel Commercial Other Totals
(in thousands)
Rental income $ -- $ 1,371 $ -- $ 1,371
Hotel income 4,935 -- -- 4,935
Other income -- 11 47 58
Gain on sale of properties 922 64 -- 986
Interest expense (income) 412 778 (31) 1,159
Depreciation 551 303 -- 854
General and administrative expense -- -- 187 187
Extraordinary (loss) on early
extinguishment of debt (42) (3) -- (45)
Segment profit (loss) 374 (85) (109) 180
Total assets 8,455 5,436 3,039 16,930
Capital expenditures for
investment properties 72 3 -- 75
1998 Hotel Commercial Other Totals
(in thousands)
Rental income $ -- $ 1,297 $ -- $ 1,297
Hotel income 5,342 -- -- 5,342
Other income -- 23 89 112
Interest expense (income) 476 755 (27) 1,204
Depreciation 570 326 -- 896
General and administrative expense -- -- 146 146
Segment loss (257) (176) (30) (463)
Total assets 8,861 10,723 2,404 21,988
Capital expenditures for
investment properties 253 1 -- 254
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's investment properties consist of a shopping center and a
hotel. The following table sets forth the average occupancy of the investment
properties for the nine months ended September 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Shallowford Corners
Roswell, Georgia 91% 92%
Tucson Airport Hotel
Tucson, Arizona 69% 74%
The General Partner attributes the decline in occupancy at the Tucson Airport
Hotel to the addition of several new competing hotels in the vicinity of the
property.
Results of Operations
The Partnership realized net income of approximately $180,000 compared to a net
loss of approximately $463,000 for the nine months ended September 30, 1999 and
1998, respectively. The Partnership realized net income of approximately
$232,000 and a net loss of approximately $602,000 for the three months ended
September 30, 1999 and 1998, respectively. The increase in net income for the
nine months ended September 30, 1999, is due to an increase in total revenues
partially offset by a slight decrease in total expenses. Exclusive of the
operations of Perimeter Square and Green Valley Hotel, which were sold during
the current fiscal year the net losses for the nine months ended September 30,
1999 and 1998 would have been $807,000 and $296,000, respectively. The increase
in total revenues is primarily attributable to a gain on the sale of two of the
Partnership's investment properties, Perimeter Square and Green Valley Hotel,
during the third quarter of 1999. Total expenses decreased as the result of
decreases in hotel operations, mortgage interest, and depreciation expense, and
were partially offset by an increase in rental operations expense. Hotel
operations expense decreased as a result of the sale of Best Western Green
Valley Hotel. Mortgage interest and depreciation expenses both decreased as the
result of the sale of two of the Partnership's properties, Perimeter Square and
Green Valley Hotel. Rental operations expense increased as the result of
increased property and maintenance expenses at the Partnership's Shallowford
Shopping Center property.
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.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of its 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.
Capital Resources and Liquidity
At September 30, 1999, the Partnership had cash and cash equivalents of
approximately $4,032,000 as compared to approximately $3,655,000 at September
30, 1998. For the nine months ended September 30, 1999, cash and cash
equivalents increased approximately $1,128,000 from the Partnership's year ended
December 31, 1998. The increase in cash and cash equivalents is due to
approximately $162,000 of cash provided by operating activities and
approximately $5,136,000 of cash provided by investing activities which was
partially offset by approximately $4,170,000 of cash used in financing
activities. Cash provided by investing activities consists of proceeds from the
sale of Green Valley Hotel and Perimeter Square slightly offset by property
improvements and replacements and lease commissions paid. Cash used in
financing activities consists of payments of principal made on the mortgage
encumbering the Partnership's investment property, repayment of mortgages
encumbering the Partnership's sold investment properties and a prepayment
penalty. The Partnership invests its working capital reserves in a money market
account.
On July 21, 1999, the Partnership sold Perimeter Square to an unaffiliated third
party, P & H Properties, L.L.C., for net sales proceeds of approximately
$663,000 after payoff of the mortgage and payment of closing costs. The
Partnership realized a gain of approximately $64,000 on the sale during the
third quarter of 1999. The Partnership realized a loss on the early
extinguishment of the debt encumbering Perimeter Square of approximately $3,000
consisting of the write-off of unamortized loan costs during the third quarter
of 1999.
On August 10, 1999, the Partnership sold the Best Western Green Valley Hotel to
an unaffiliated third party for net sales proceeds of approximately $598,000
after payoff of the mortgage and payment of closing costs. The Partnership
realized a gain of approximately $922,000 on the sale during the third quarter
of 1999. The Partnership realized a loss on the early extinguishment of the debt
encumbering the property of approximately $42,000 consisting of a prepayment
penalty and the write-off of unamortized loan costs during the third quarter of
1999.
Tucson Airport Hotel, located in Tucson, Arizona, 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 fourth quarter of 1999. However,
there can be no assurance that the sale will be consummated.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property to adequately maintain the physical assets
and other operating needs of the Partnership and to comply with Federal, state,
and local legal and regulatory requirements. Capital improvements planned for
the Partnership's property are detailed below.
Perimeter Square Shopping Center
During the nine months ended September 30, 1999, the Partnership completed no
capital improvements at Perimeter Square Shopping Center.
Shallowford Corners Shopping Center
During the nine months ended September 30, 1999, the Partnership completed
approximately $3,000 of tenant improvements at Shallowford Corners Shopping
Center. Capital improvements planned for 1999 consist of, but are not limited
to, tenant improvements. These capital improvements are expected to cost
approximately $34,000.
Best Western Green Valley
During the nine months ended September 30, 1999, the Partnership expended
approximately $3,000 consisting of furniture and fixtures at the Best Western
Green Valley.
Clarion Hotel Tucson Airport
During the nine months ended September 30, 1999, the Partnership completed
approximately $69,000 of capital improvements at the Clarion Hotel Tucson
Airport consisting of televisions, refrigerators, and signage.
The additional capital improvements will be incurred only if cash is available
from operations and partnership reserves. To the extent that such budgeted
capital improvements are completed, the Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of Clarion Hotel Tucson Airport of approximately $3,205,000,
matures in November 2001, with a balloon payment due at maturity. The General
Partner will attempt to refinance such remaining indebtedness and/or sell the
property prior to such maturity date. If the property cannot be refinanced or
sold for a sufficient amount, the Partnership will risk losing the property
through foreclosure.
The first mortgage on Shallowford Corners Shopping Center of $7,750,000 matured
April 15, 1997. On October 15, 1997, the General Partner negotiated a
forbearance agreement with the holder of the mortgage which has now been
extended through December 15, 1999. The forbearance agreement requires interest
only payments based on a 10% per annum interest rate. The General Partner is
currently negotiating options with the lender regarding the forbearance
agreement. If an agreement with the lender cannot be reached, the property
could be lost through foreclosure.
A distribution of approximately $599,000 ($10.00 per limited partnership unit)
was made to the limited partners during the nine months ended September 30,
1998. No distributions were made during the nine months 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 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 during the remainder of 1999 or in
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 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:
None filed during the quarter ended September 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 III
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: November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Drexel
Burnham Lambert Real Estate Associates III Third Quarter 10-QSB and is qualified
in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000761657
<NAME> DREXEL BURNHAM REAL ESTATE ASSOCIATES III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,032
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 23,660
<DEPRECIATION> (11,400)
<TOTAL-ASSETS> 16,930
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,955
0
0
<COMMON> 0
<OTHER-SE> 4,277
<TOTAL-LIABILITY-AND-EQUITY> 16,930
<SALES> 0
<TOTAL-REVENUES> 7,350
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,159
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-BASIC> .92<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
