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 0-9567
NATIONAL PROPERTY INVESTORS III
(Exact name of small business issuer as specified in its charter)
California 13-2974428
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO 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)
NATIONAL PROPERTY INVESTORS III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 3,727
Receivables and deposits 492
Restricted escrows 738
Other assets 590
Investment properties:
Land $ 3,023
Buildings and related personal property 33,001
36,024
Less accumulated depreciation (25,339) 10,685
$ 16,232
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 156
Tenant security deposit liabilities 171
Accrued property taxes 616
Other liabilities 457
Mortgage notes payable 24,270
Partners' Deficit
General partner $ (263)
Limited partners (48,049 units
issued and outstanding) (9,175) (9,438)
$ 16,232
See Accompanying Notes to Consolidated Financial Statements
b)
NATIONAL PROPERTY INVESTORS 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:
Rental income $2,114 $1,957 $6,321 $5,997
Other income 112 124 303 399
Casualty gain 1,330 -- 1,330 --
Total revenues 3,556 2,081 7,954 6,396
Expenses:
Operating 737 777 2,218 2,285
General and administrative 108 50 230 180
Depreciation 271 368 980 1,034
Interest 498 482 1,460 1,431
Property taxes 189 187 566 563
Total expenses 1,803 1,864 5,454 5,493
Income before extraordinary item 1,753 217 2,500 903
Extraordinary loss on early
extinguishment of debt (160) -- (160) --
Net income $1,593 $ 217 $2,340 $ 903
Net income allocated
to general partner (1%) $ 16 $ 2 $ 23 $ 9
Net income allocated
to limited partners (99%) 1,577 215 2,317 894
$1,593 $ 217 $2,340 $ 903
Per limited partnership unit:
Income before extraordinary item $36.11 $ 4.47 $51.51 $18.61
Extraordinary loss (3.29) -- (3.29) --
Net income $32.82 $ 4.47 $48.22 $18.61
Distributions per limited
partnership unit $13.82 $ -- $13.82 $ --
See Accompanying Notes to Consolidated Financial Statements
c)
NATIONAL PROPERTY INVESTORS III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 48,049 $ 1 $ 24,025 $ 24,026
Partners' deficit at
December 31, 1998 48,049 $ (280) $(10,828) $(11,108)
Net income for the nine months
ended September 30, 1999 -- 23 2,317 2,340
Distributions to partners -- (6) (664) (670)
Partners' deficit
at September 30, 1999 48,049 $ (263) $ (9,175) $ (9,438)
See Accompanying Notes to Consolidated Financial Statements
d)
NATIONAL PROPERTY INVESTORS III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 2,340 $ 903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 980 1,034
Amortization of loan costs 72 63
Casualty gain (1,330) --
Loss on early extinguishment of debt 160 --
Change in accounts:
Receivables and deposits (354) 139
Other assets 72 23
Accounts payable 38 42
Tenant security deposit liabilities 37 (19)
Accrued property taxes (31) (43)
Other liabilities 145 17
Net cash provided by operating activities 2,129 2,159
Cash flows from investing activities:
Property improvements and replacements (545) (649)
Net withdrawals from (deposits to) restricted escrows 19 (218)
Net insurance proceeds received 1,763 --
Net cash provided by (used in) investing
activities 1,237 (867)
Cash flows from financing activities:
Payments on mortgage notes payable (68) (56)
Prepayment penalty (144) --
Distributions to partners (670) --
Net cash used in financing activities (882) (56)
Net increase in cash and cash equivalents 2,484 1,236
Cash and cash equivalents at beginning of period 1,243 1,508
Cash and cash equivalents at end of period $ 3,727 $ 2,744
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,388 $ 1,337
See Accompanying Notes to Consolidated Financial Statements
e)
NATIONAL PROPERTY INVESTORS III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of National
Property Investors 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 NPI Equity Investments, Inc. ("NPI
Equity" or the "Managing 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 Partnership's financial statements include the accounts of National
Pinetree, LP, a limited partnership in which the Partnership owns a 99% limited
partnership interest, and of Summerwalk NPI III, LP, a limited partnership in
which the Partnership owns a 99.9% limited partnership interest. The
Partnership has the ability to control the major operating and financial
policies of these partnerships. All interpartnership transactions have been
eliminated.
NOTE B - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
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, AIMCO acquired 100% ownership interest in
the Managing General Partner. The Managing 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 Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
The following transactions with the Managing General Partner and its affiliates
were incurred during the nine months ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $331 $323
Reimbursement for services of affiliates (included in
investment properties and operating and general and
administrative expenses) 117 150
Partnership management fee (included in general and
administrative expenses) 60 --
During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from the
Partnership's properties for providing property management services. The
Partnership paid to such affiliates approximately $331,000 and $323,000 for the
nine months ended September 30, 1999 and 1998, respectively.
Affiliates of the Managing General Partner received reimbursements of
accountable administrative expenses amounting to approximately $117,000 and
$150,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these amounts are approximately $3,000 and $24,000 of construction
services reimbursements during the nine months ended September 30, 1999 and
1998, respectively.
For services relating to the administration of the Partnership and operation of
the Partnership property, the Managing General Partner is entitled to receive
payment for the non-accountable expenses up to a maximum of $100,000 per year
based upon the number of Partnership units sold, subject to certain limitations.
The Managing General Partner received approximately $60,000 during the nine
months ended September 30, 1999 in connection with the distribution paid to the
partners. No such fee was paid during the nine months ended September 30, 1998.
On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 11,978.83 (24.93% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $448 per unit. The offer expired on July
30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 3,472.00
units. As a result, AIMCO and its affiliates currently own 27,790.00 units of
limited partnership interest in the Partnership representing 57.84% of the total
outstanding units. It is possible that AIMCO or its affiliates will make one or
more offers to acquire additional limited partnership interests in the
Partnership for cash or in exchange for units in the operating partnership of
AIMCO (see "Note G - Legal Proceedings").
NOTE D - DISTRIBUTIONS
During the nine months ended September 30, 1999, the Partnership distributed
approximately $670,000 (approximately $664,000 to limited partners or $13.82 per
limited partnership unit) from operations.
There were no distributions during the nine months ended September 30, 1998.
NOTE E - CASUALTY EVENTS
In July 1998, a fire occurred at Lakeside Apartments that destroyed one building
at the complex, consisting of 22 units. The repair costs are covered by
insurance. In 1998, estimated insurance proceeds were recognized only to the
extent of the write-off of destroyed assets of approximately $225,000. During
the nine months ended September 30, 1999, net insurance proceeds of
approximately $1,554,000 were received to cover replacement costs and the
construction is complete. During the nine months ended September 30, 1999, the
Partnership recognized a casualty gain of approximately $1,330,000.
In July 1999, a fire occurred at Summerwalk Apartments that destroyed one
building consisting of eight units. Demolition has been completed and
reconstruction should be completed by the end of the first quarter 2000. At
September 30, 1999, net insurance proceeds of approximately $209,000 have been
received. The Managing General Partner is still evaluating the income statement
impact and therefore all activity is reflected on the consolidated balance
sheet.
NOTE F - SEGMENT INFORMATION
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of three apartment
complexes, one each in Illinois, North Carolina, and Florida. The Partnership
rents apartment units to tenants for terms that are typically twelve months or
less.
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 year ended
December 31, 1998.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of investment properties that
offer similar products and services. Although each of the investment properties
is managed separately, they have been aggregated into one segment as they
provide services with similar types of products and customers.
Segment information for the nine month periods 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 Other Totals
Rental income $ 6,321 $ -- $ 6,321
Other income 300 3 303
Casualty gain 1,330 -- 1,330
Interest expense 1,460 -- 1,460
Depreciation 980 -- 980
General and administrative expense -- 230 230
Extraordinary loss on early
extinguishment of debt (160) -- (160)
Segment profit (loss) 2,567 (227) 2,340
Total assets 16,073 159 16,232
Capital expenditures for investment
properties 545 -- 545
1998 Residential Other Totals
Rental income $ 5,997 $ -- $ 5,997
Other income 339 60 399
Interest expense 1,431 -- 1,431
Depreciation 1,034 -- 1,034
General and administrative expense -- 180 180
Segment profit (loss) 1,023 (120) 903
Total assets 15,435 2,282 17,717
Capital expenditures for investment
properties 649 -- 649
NOTE G - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA
FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control"). The complaint seeks monetary damages and
equitable relief, including judicial dissolution of the Partnership. On June
25, 1998, the Managing General Partner filed a motion seeking dismissal of the
action. In lieu of responding to the motion, the plaintiffs have filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
NOTE H - SUBSEQUENT EVENT - REFINANCING
On October 15, 1999, the Partnership refinanced the mortgage encumbering
Pinetree Apartments. Interest on the old mortgage was 9.87%. The refinancing
replaced indebtedness of $2,152,000 with a new mortgage in the amount of
$5,000,000. Payments of approximately $41,000 are due on the first day of each
month until the loan matures on November 1, 2019. The prior note was scheduled
to mature in July 1, 2001. The lender also required a repair escrow of
approximately $67,000 to be established. As of September 30, 1999, the
Partnership recognized a loss on the early extinguishment of debt of
approximately $160,000 consisting of the write-off of unamortized loan costs and
a prepayment penalty.
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 consists of three apartment complexes.
The following table sets forth the average occupancy for each of the properties
for both of the nine months ended September 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Lakeside Apartments 92% 93%
Lisle, Illinois
Pinetree Apartments 95% 92%
Charlotte, North Carolina (1)
Summerwalk Apartments 96% 98%
Winter Park, Florida
(1) The Managing General Partner attributes the increase in occupancy at
Pinetree Apartments to a strong local rental market and increased marketing
efforts.
Results of Operations
The Partnership's net income for the three and nine months ended September 30,
1999 was approximately 1,593,000 and $2,340,000, respectively. During the three
and nine month periods ended September 30, 1998, the Partnership had net income
of approximately $217,000 and $903,000, respectively.
The increase in net income for the three and nine months ended September 30,
1999, is primarily due to an increase in total revenues and a decrease in total
expenses partially offset by the extraordinary loss on the early extinguishment
of the debt encumbering Pinetree Apartments recognized during the three months
ended September 30, 1999. The increase in total revenue is primarily due to an
increase in casualty gain and rental income. The increase in casualty gain is
due to insurance proceeds received related to the July 1998 fire at Lakeside
Apartments (see discussion below). The increase in rental income is primarily
due to the increase in average rental rates at all three of the Partnership's
investment properties. The decrease in total expenses is primarily due to a
decrease in depreciation expense partially offset by an increase in general and
administrative expense. The decrease in depreciation expense is primarily due
to assets becoming fully depreciated during the previous twelve months. The
increase in general and administrative expense is primarily due to the
Partnership management fee paid to the Managing General Partner in connection
with the distribution during the third quarter of 1999. The extraordinary loss
on the early extinguishment of the debt encumbering Pinetree Apartments includes
the write-off of unamortized loan costs and a prepayment penalty (see further
discussion below).
Included in general and administrative expenses for the nine months ended
September 30, 1999 and 1998, are reimbursements to the Managing General Partner
allowed under the Partnership Agreement associated with its management of the
Partnership. 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 Managing 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 expenses. As part of
this plan, the Managing 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
Managing 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 $3,727,000 as compared to approximately $2,744,000 at September
30, 1998. For the nine months ended September 30, 1999, cash and cash
equivalents increased approximately $2,484,000 from the Partnership's year ended
December 31, 1998. The increase in cash and cash equivalents is due to
approximately $2,129,000 of cash provided by operating activities and
approximately $1,237,000 of cash provided by investing activities, which was
partially offset by approximately $882,000 of cash used in financing activities.
Cash provided by investing activities consists of insurance proceeds and net
withdrawals from restricted escrows maintained by the mortgage lenders partially
offset by property improvements and replacements. Cash used in financing
activities consists of distributions to the partners and payments of principal
made on the mortgages encumbering the Pinetree and Summerwalk Apartments. The
Partnership invests its working capital reserves in a money market account.
On October 15, 1999, the Partnership refinanced the mortgage encumbering
Pinetree Apartments. Interest on the old mortgage was 9.87%. The refinancing
replaced indebtedness of $2,152,000 with a new mortgage in the amount of
$5,000,000. Payments of approximately $41,000 are due on the first day of each
month until the loan matures on November 1, 2019. The prior note was scheduled
to mature in July 1, 2001. The lender also required a repair escrow of
approximately $67,000 be established. As of September 30, 1999, the Partnership
recognized a loss on the early extinguishment of debt of approximately $160,000
consisting of the write-off of unamortized loan costs and a prepayment penalty.
The Managing General Partner has extended to the Partnership a $300,000 line of
credit. At the present time, the Partnership has no outstanding amounts due
under this line of credit. Based on present plans, the Managing General Partner
does not anticipate the need to borrow in the near future. Other than cash and
cash equivalents, the line of credit is the Partnership's only unused source of
liquidity.
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.
Lakeside Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $310,000 of capital improvements at Lakeside Apartments consisting
primarily of structural improvements, carpet replacement, parking lot
resurfacing and landscaping. The structural improvements, parking lot
resurfacing, and landscaping are substantially complete as of September 30,
1999. These improvements were funded from operating cash flows and replacement
reserves. Based on a report received from an independent third party consultant
analyzing necessary exterior improvements and estimates made by the Managing
General Partner on interior improvements, it is estimated that the property
requires approximately $362,000 of capital improvements over the next few years.
Capital improvements budgeted for 1999 include certain of the required
improvements and consist of, but are not limited to, carpet and vinyl
replacements, electrical upgrades, heating systems, landscaping, appliances, and
structural improvements. These improvements are expected to cost approximately
$473,000.
Pinetree Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $55,000 of capital improvements at Pinetree Apartments consisting
of carpet and vinyl replacement, appliances and landscaping. These improvements
were funded from replacement reserves and operating cash flows. Based on a
report received from an independent third party consultant analyzing necessary
exterior improvements and estimates made by the Managing General Partner on
interior improvements, it is estimated that the property requires approximately
$274,000 of capital improvements over the next few years. Capital improvements
budgeted for 1999 include certain of the required improvements and consist of,
but are not limited to, carpet replacements, appliances, roof replacements,
landscaping, and other building improvements. These improvements are expected
to cost approximately $305,000.
Summerwalk Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $180,000 of capital improvements at Summerwalk Apartments
consisting of carpet and vinyl replacement, electrical upgrades, building
improvements, and appliances. These improvements were funded from replacement
reserves. Based on a report received from an independent third party consultant
analyzing necessary exterior improvements and estimates made by the Managing
General Partner on interior improvements, it is estimated that the property
requires approximately $505,000 of capital improvements over the next few years.
Capital improvements budgeted for 1999 include certain of the required
improvements and consist of, but are not limited to, carpet replacements,
appliances, landscaping, structural improvements and electrical upgrades. These
improvements are expected to cost approximately $636,000.
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 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 approximately $22,118,000 encumbering Lakeside Apartments and
Summerwalk Apartments is being amortized over varying periods with balloon
payments due over periods ranging from November 2003 to January 2008. The debt
encumbering Pinetree Apartments was refinanced on October 15, 1999 (see
discussion above). The Managing General Partner will attempt to refinance such
remaining indebtedness and/or sell the properties prior to such maturity dates.
If the properties cannot be refinanced or sold for a sufficient amount, the
Partnership will risk losing such properties through foreclosure.
A distribution was made during the nine months ended September 30, 1999 in the
amount of $670,000 (approximately $664,000 to limited partners or $13.82 per
limited partnership unit). No distributions were made during the nine months
ended September 30, 1998. 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 required capital improvements to permit further distributions
to its partners during the remainder of 1999 or subsequent periods.
Casualty Events
In July 1998, a fire occurred at Lakeside Apartments that destroyed one building
at the complex, consisting of 22 units. The fire was covered by insurance. In
1998, estimated insurance proceeds were recognized only to the extent of the
write-off of destroyed assets of approximately $225,000. During the nine months
ended September 30, 1999, net insurance proceeds of approximately $1,554,000
were received to cover replacement costs and the construction is complete.
During the nine months ended September 30, 1999, the Partnership recognized a
casualty gain of approximately $1,330,000.
In July 1999, a fire occurred at Summerwalk Apartments that destroyed one
building consisting of eight units. Demolition has been completed and
reconstruction should be completed by the end of the first quarter 2000. Net
insurance proceeds of approximately $209,000 have been received. The Managing
General Partner is still evaluating the income statement impact and therefore
all activity is reflected on the consolidated balance sheet.
Tender Offer
On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 11,978.83 (24.93% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $448 per unit. The offer expired on July
30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 3,472.00
units. As a result, AIMCO and its affiliates currently own 27,790.00 units of
limited partnership interest in the Partnership representing 57.84% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more offers to acquire additional limited partnership interests in the
Partnership for cash or in exchange for units in the operating partnership of
AIMCO (see "Item 1. Financial Statements, Note G - Legal Proceedings").
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 Managing 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 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA
FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer
of Control"). The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
Managing General Partner filed a motion seeking dismissal of the action. In
lieu of responding to the motion, the plaintiffs have filed an amended
complaint. The Managing General Partner filed demurrers to the amended complaint
which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
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.
NATIONAL PROPERTY INVESTORS III
By: NPI EQUITY INVESTMENTS, INC.
Its Managing 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 informatin extracted from National
Property Investors III 1999 Third Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000310485
<NAME> NATIONAL PROPERTY INVESTORS III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,727
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 36,024
<DEPRECIATION> 25,339
<TOTAL-ASSETS> 16,232
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 24,270
0
0
<COMMON> 0
<OTHER-SE> (9,438)
<TOTAL-LIABILITY-AND-EQUITY> 16,232
<SALES> 0
<TOTAL-REVENUES> 7,954
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (160)
<CHANGES> 0
<NET-INCOME> 2,340
<EPS-BASIC> 48.22<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
