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 2-95502
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 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 III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1999
Assets
Cash and cash equivalents $ 3,846
Receivables and deposits 566
Other assets 151
Investment properties held for sale:
Land $ 325
Buildings and related personal property 9,280
Less accumulated depreciation 9,605
(5,583) 4,022
Investment properties:
Land $ 8,778
Buildings and related personal property 15,410
24,188
Less accumulated depreciation (11,483) 12,705
$21,290
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable $ 191
Tenant security deposit liabilities 45
Accrued property taxes 297
Due to affiliate 466
Other liabilities 1,312
Mortgage notes payable 14,934
Partners' Capital (Deficit):
General partner's $ (134)
Limited partners' (59,905 units issued
and outstanding) 4,179 4,045
$21,290
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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Revenues:
Hotel operations $ 1,715 $ 1,600 $ 4,011 $ 4,014
Rental operations 444 429 940 846
Other income 20 39 38 79
Total revenues 2,179 2,068 4,989 4,939
Expenses:
Hotel operations 1,520 1,412 3,042 2,901
Rental operations 99 121 202 215
General and administrative 54 57 144 77
Interest 390 394 787 811
Property taxes 141 99 276 199
Depreciation 294 298 590 597
Total expenses 2,498 2,381 5,041 4,800
Net (loss) income $ (319) $ (313) $ (52) $ 139
Net (loss) income allocated to
general partner (1%) $ (3) $ (3) $ (1) $ 1
Net (loss) income allocated to
limited partners (99%) (316) (310) (51) 138
$ (319) $ (313) $ (52) $ 139
Net (loss) income per limited
partnership unit $ (5.28) $ (5.17) $ (.85) $ 2.30
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' CAPITAL (DEFICIT)
(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 loss for the six months
ended June 30, 1999 -- (1) (51) (52)
Partners' (deficit) capital at
June 30, 1999 59,905 $ (134) $ 4,179 $ 4,045
See Accompanying Notes to Consolidated Financial Statements
d)
DREXEL BURNHAM LAMBERT REAL ESTATE ASSOCIATES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net (loss) income $ (52) $ 139
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 590 597
Amortization of loan costs, lease commissions
and debt discount 52 45
Change in accounts:
Receivables and deposits (57) (38)
Other assets 125 --
Accounts payable (123) (73)
Tenant security deposit liabilities (2) 4
Accrued property taxes 88 62
Due to affiliate 200 (545)
Other liabilities 353 (9)
Net cash provided by operating activities 1,174 182
Cash flows used in investing activities:
Property improvements and replacements (75) (59)
Cash flows from financing activities:
Payments on mortgage notes payable (157) (143)
Distribution paid to limited partners -- (599)
Net cash used in financing activities (157) (742)
Net increase (decrease) in cash and cash
equivalents 942 (619)
Cash and cash equivalents at beginning of period 2,904 4,109
Cash and cash equivalents at end of period $ 3,846 $ 3,490
Supplemental disclosure of cash flow information:
Cash paid for interest $ 757 $ 789
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 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
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, merged 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 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
expenses) $ -- $ 234
Reimbursement for services of affiliates (included
in general and administrative expenses) 31 45
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 and hotel properties for providing property management services. The
Partnership paid to such affiliates approximately $234,000 for the six months
ended June 30, 1998. Effective October 1, 1998 (the effective date of the
Insignia Merger) these services for the commercial and hotel properties were
provided by an unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $31,000 and $45,000 for the
six months ended June 30, 1999 and 1998, respectively.
At June 30, 1999, the Partnership owed an affiliate of the General Partner
approximately $466,000 for payroll expenses paid by such affiliate on behalf of
the hotel properties.
Included in other liabilities at June 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 $1,000 in both 1999 and 1998. Total accrued
interest payable of approximately $20,000 is included in other liabilities at
June 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 six months ended June 30, 1999.
NOTE E - 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
two hotels located in Arizona. The commercial property segment consists of two
retail shopping centers located in Georgia and Oklahoma. These properties lease
space to tenants, including a grocery store, a business school and a book
supplies store, 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 segment.
1999
Hotel Commercial Other Totals
Rental income $ -- $ 940 $ -- $ 940
Hotel income 4,011 -- -- 4,011
Other income -- 4 34 38
Interest expense (income) 315 490 (18) 787
Depreciation 382 208 -- 590
General and administrative expense -- -- 144 144
Segment profit (loss) 63 (23) (92) (52)
Total assets 8,939 10,566 1,785 21,290
Capital expenditures for investment
properties 72 3 -- 75
1998
Hotel Commercial Other Totals
Rental income $ -- $ 846 $ -- $ 846
Hotel income 4,014 -- -- 4,014
Other income -- 18 61 79
Interest expense (income) 318 511 (18) 811
Depreciation 380 217 -- 597
General and administrative expense -- -- 77 77
Segment profit (loss) 276 (139) 2 139
Total assets 8,610 10,656 2,504 21,770
Capital expenditures for investment
properties 58 1 -- 59
NOTE F - INVESTMENT PROPERTIES HELD FOR SALE
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
$691,000 after payoff of the mortgages and payment of closing costs. The
Partnership anticipates realizing a gain of approximately $54,000 on the sale
during the third quarter of 1999. The Partnership anticipates realizing a loss
on the early extinguishment of debt encumbering Perimeter Square of
approximately $2,000 during the third quarter of 1999.
The sales transaction is summarized as follows (amounts in thousands):
Net sale price, net of selling costs $ 2,026
Net real estate (1) (1,956)
Net other assets (16)
Gain on sale of real estate $ 54
(1) Net of accumulated depreciation of approximately $2,543,000.
On August 10, 1999, the Partnership sold the Best Western Green Valley Hotel to
an unaffiliated third party for net sales proceeds of approximately $637,000
after payoff of the first mortgage and payment of closing costs. The
Partnership anticipates realizing a gain of approximately $907,000 on the sale
during the third quarter of 1999.
The sales transaction is summarized as follows (amounts in thousands):
Net sale price, net of selling costs $ 3,171
Net real estate (2) (2,264)
Gain on sale of real estate $ 907
(2) Net of accumulated depreciation of approximately $3,372,000.
The following pro-forma information reflects the operations of the Partnership
for the six months ended June 30, 1999 and 1998, as if Perimeter Square and Best
Western Green Valley had been sold January 1, 1998.
1999 1998
(in thousands, except per unit data)
Revenues $ 3,365 $ 3,394
Net (loss) income (208) 10
Net (loss) income per limited
partnership unit (3.47) .17
NOTE G - LEGAL PROCEEDINGS
The Partnership is unaware of any pending or outstanding litigation that is not
of a routine nature arising in the ordinary course of business.
ITEM 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 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 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's investment properties consist of two shopping centers and two
hotels. Subsequent to June 30, 1999, the Partnership sold one of the shopping
centers and one of the hotels. The following table sets forth the average
occupancy of the properties for the six month periods ended June 30, 1999 and
1998:
Average
Occupancy
Property 1999 1998
Perimeter Square (sold July 1999) 91% 91%
Tulsa, Oklahoma
Shallowford Corners 91% 91%
Roswell, Georgia
Green Valley Hotel (sold August 1999) 70% 71%
Green Valley, Arizona
Tucson Airport Hotel 69% 77%
Tucson, Arizona
The General Partner attributes the decline in occupancy at the Tucson Airport
Hotel to the addition of new competing hotels in the vicinity of the property.
Results of Operation
The Partnership realized a net loss of approximately $52,000 compared to net
income of approximately $139,000 for the six months ended June 30, 1999 and
1998, respectively. For the three month periods ended June 30, 1999 and 1998,
the partnership realized net losses of approximately $319,000 and $313,000,
respectively. The increase in net loss for the three and six months ended June
30, 1999, is due to an increase in total expenses offset by a slight increase in
total revenues. Exclusive of the operations of Perimeter Square and Green
Valley Hotel the net loss for the six months ended June 30, 1999 would have been
$210,000 and net income for the six months ended June 30, 1998 would have been
approximately $10,000. The increase in total expenses is attributable to
increases in hotel operations, general and administrative, and property tax
expenses. The increase in hotel operations is due to increases in both travel
agency commissions and salaries. The increase general and administrative
expenses is primarily due to the overaccrual of audit expense in 1997 that was
adjusted during the first quarter of 1998. The increase in property taxes is
due to increases in the assessed values of both the Tucson Airport and the Green
Valley hotels. For the three months ended June 30, 1999, the above mentioned
increase in hotel operating expenses was largely offset by an increase in hotel
operating revenue. The increase in hotel revenue is due to increased room
rates.
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 or hospitality market environment of each of its investment
properties to assess the feasibility of increasing rates, 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 rates and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental or room rate 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
$3,846,000 as compared to approximately $3,490,000 at June 30, 1998. For the
six months ended June 30, 1999, cash and cash equivalents increased by
approximately $942,000 from the Partnership's year ended December 31, 1998. The
increase in cash and cash equivalents is due to approximately $1,174,000 of cash
provided by operating activities and was partially offset by approximately
$75,000 of cash used in investing activities and approximately $157,000 of cash
used in financing activities. Cash used in investing activities consisted of
property improvements and replacements. Cash used in financing activities
consisted of principal payments made on the mortgage encumbering the
Partnership's properties. 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
$691,000 after payoff of the mortgages and payment of closing costs. The
Partnership anticipates realizing a gain of approximately $54,000 on the sale
during the third quarter of 1999. The Partnership anticipates realizing a loss
on the early extinguishment of debt encumbering Perimeter Square of
approximately $2,000 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 $637,000
after payoff of the first mortgage and payment of closing costs. The
Partnership anticipates realizing a gain of approximately $907,000 on the sale
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 third 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 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.
Perimeter Square Shopping Center
During the six months ended June 30, 1999, the Partnership completed no capital
improvements at Perimeter Square Shopping Center. Capital improvements planned
for 1999 consist of, but are not limited to, tenant improvements. These capital
improvements are expected to cost approximately $21,000.
Shallowford Corners Shopping Center
During the six months ended June 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 six months ended June 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 six months ended June 30, 1999, the Partnership completed
approximately $69,000 of capital improvements at the Clarion Hotel Tucson
Airport consisting of televisions, refrigerators, and signage. The General
Partner has not yet determined the 1999 capital improvement program for the
property.
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 $14,934,000 net of discount, matures at
various times with balloon payments due at maturity at which time the properties
will either be refinanced and/or sold. If the properties cannot be refinanced or
sold for a sufficient amount, the Partnership will risk losing such properties
to 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 six months ended June 30, 1998. No
distribution was paid to the limited partners during the six months ended June
30, 1999. 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.
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 III
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 16, 1999
<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> 3,846
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 24,188
<DEPRECIATION> 11,483
<TOTAL-ASSETS> 21,290
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 14,934
0
0
<COMMON> 0
<OTHER-SE> 4,045
<TOTAL-LIABILITY-AND-EQUITY> 21,290
<SALES> 0
<TOTAL-REVENUES> 4,989
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52)
<EPS-BASIC> (.85)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
