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 March 31, 1999
or
[ ] 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 0-10260
SHELTER PROPERTIES III
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0718508
(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)
SHELTER PROPERTIES III
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
(Unaudited)
March 31, 1999
Assets
Cash and cash equivalents $ 1,065
Receivables and deposits 244
Restricted escrows 860
Other assets 227
Investment properties:
Land $ 1,281
Buildings and related personal property 25,018
26,299
Less accumulated depreciation (15,373) 10,926
$13,322
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 73
Tenant security deposit liabilities 102
Accrued property taxes 93
Other liabilities 410
Mortgage notes payable 8,049
Partners' Capital (Deficit)
General partners $ (87)
Limited partners (55,000 units
issued and outstanding) 4,682 4,595
$13,322
See Accompanying Notes to Consolidated Financial Statements
b)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $1,279 $1,238
Other income 85 87
Total revenues 1,364 1,325
Expenses:
Operating 561 571
General & administrative 55 52
Depreciation 230 222
Interest 185 188
Property taxes 95 92
Total expenses 1,126 1,125
Net income $ 238 $ 200
Net income allocated
to general partners (1%) $ 2 $ 2
Net income allocated
to limited partners (99%) 236 198
$ 238 $ 200
Net income per limited
partnership unit $ 4.29 $ 3.60
Distributions per limited
partnership unit $ -- $ 9.00
See Accompanying Notes to Consolidated Financial Statements
c)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(in thousands, except unit data)
(Unaudited)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 55,000 $ 2 $27,500 $27,502
Partners' (deficit) capital
at December 31, 1998 55,000 $ (89) $ 4,446 $ 4,357
Net income for the three months
ended March 31, 1999 -- 2 236 238
Partners' (deficit) capital
at March 31, 1999 55,000 $ (87) $ 4,682 $ 4,595
See Accompanying Notes to Consolidated Financial Statements
d)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 238 $ 200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 230 222
Amortization of discounts and loan costs 25 24
Change in accounts:
Receivables and deposits 166 (82)
Other Assets (47) 18
Accounts payable 12 (63)
Tenant security deposit liabilities (7) 1
Accrued property taxes (159) 92
Other liabilities 20 (15)
Net cash provided by operating activities 478 397
Cash flows from investing activities:
Property improvements and replacements (67) (67)
Net withdrawal from (deposits to) restricted escrows 86 (4)
Net cash provided by (used in) investing
activities 19 (71)
Cash flows from financing activities:
Payments on mortgage notes payable (62) (58)
Partners' distributions -- (500)
Net cash used in financing activities (62) (558)
Net increase (decrease) in cash and cash equivalents 435 (232)
Cash and cash equivalents at beginning of period 630 1,624
Cash and cash equivalents at end of period $ 1,065 $1,392
Supplemental disclosure of cash flow information:
Cash paid for interest $ 160 $ 164
See Accompanying Notes to Consolidated Financial Statements
e)
SHELTER PROPERTIES III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Shelter
Properties 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 Article 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 Shelter Realty III Corporation (the
"Corporate General Partner"), all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 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 year ended December 31, 1998.
PRINCIPLES OF CONSOLIDATION
The financial statements include all the accounts of the Partnership and its
99.99% owned partnership. The general partner of the consolidated partnership
is Shelter Realty III Corporation. Shelter Realty III Corporation may be
removed by the Registrant; therefore, the consolidated partnership is controlled
and consolidated by the Registrant. All significant interpartnership balances
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, a publicly traded real
estate investment trust ("AIMCO"), with AIMCO being the surviving corporation
(the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in
the Corporate General Partner. The Corporate General Partner does not believe
that this transaction will have a material effect on the affairs and operations
of the Partnership.
NOTE C - RECONCILIATION OF CASH FLOWS
The following is a reconciliation of the subtotal in the accompanying
consolidated statements of cash flows captioned "net cash provided by operating
activities" to "net cash from operations," as defined in the Partnership
Agreement. However, "net cash from operations" should not be considered an
alternative to net income as an indicator of the Partnership's operating
performance or to cash flows as a measure of liquidity.
Three Months Ended
March 31,
1999 1998
(in thousands)
Net cash provided by operating activities $ 478 $ 397
Payments on mortgage notes payable (62) (58)
Property improvements and replacements (67) (67)
Change in restricted escrows, net 86 (4)
Changes in reserves for net operating
liabilities 15 49
Additional reserves (450) (317)
Net cash used in operations $ -- $ --
The Corporate General Partner reserved approximately $450,000 and $317,000 on
March 31, 1999 and 1998, respectively, to fund capital improvements and repairs
at its properties.
NOTE D - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Corporate 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 amounts were paid or
accrued to the Corporate General Partner and affiliates during the three months
ended March 31, 1999 and 1998.
Three Months Ended
March 31,
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 70 $ 68
Reimbursement for services of affiliates (included in
operating, general and administrative expenses and
investment properties) (1) 27 34
Due to general partner 185 185
Due from general partner 11 11
(1) Included in "Reimbursement for services of affiliates" for the three months
ended March 31, 1998, is approximately $3,000, in reimbursements for
construction oversight costs. There were no such costs incurred for the
three months ended March 31, 1999.
During the three months ended March 31, 1999 and 1998, affiliates of the
Corporate General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's properties for providing property management services. The
Registrant paid to such affiliates approximately $70,000 and $68,000 for the
three months ended March 31, 1999 and 1998, respectively.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $27,000 and
$34,000 for the three months ended March 31, 1999 and 1998, respectively.
During 1986 a liability of approximately $185,000 was incurred to the general
partners for sales commissions earned. Pursuant to the Partnership Agreement,
this liability cannot be paid until certain levels of returns are received by
the limited partners. As of March 31, 1999, the level of return to the limited
partners has not been met.
On September 26, 1997, an affiliate of the General Partner purchased Lehman
Brothers Class "D" subordinated bonds of SASCO, 1992-M1. These bonds are
secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Essex Park Apartments, Colony House Apartments, and Willowick
Apartments owned by the Partnership.
NOTE E - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenue
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of four apartment complexes
located in Georgia, South Carolina and Tennessee. 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 operating income. The
accounting policies of the reportable segment are the same as those described in
the summary of significant accounting policies 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
are managed separately, they have been aggregated into one segment as they
provide services with similar types of products and customers.
Segment information for the three months ended March 31, 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 $ 1,279 $ -- $ 1,279
Other income 81 4 85
Interest expense 185 -- 185
Depreciation 230 -- 230
General and administrative expense -- 55 55
Segment profit (loss) 289 (51) 238
Total assets 12,785 537 13,322
Capital expenditures for
investment properties 67 -- 67
1998 RESIDENTIAL OTHER TOTALS
Rental income $ 1,238 $ -- $ 1,238
Other income 80 7 87
Interest expense 188 -- 188
Depreciation 222 -- 222
General and administrative expense -- 52 52
Segment profit (loss) 245 (45) 200
Total assets 14,008 317 14,325
Capital expenditures for
investment properties 67 -- 67
NOTE F - 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 Corporate 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 as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the Corporate 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 Corporate
General Partner has filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
Corporate General Partner does not anticipate that costs associated with this
case, if any, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussions of the Registrant's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Registrant's business and results
of 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 four apartment complexes.
The following table sets forth the average occupancy of the properties for the
three months ended March 31, 1999 and 1998:
Average Occupancy
Property 1999 1998
Essex Park Apartments
Columbia, South Carolina 93% 91%
Colony House Apartments
Murfreesboro, Tennessee 85% 90%
North River Village Apartments
Atlanta, Georgia 94% 92%
Willowick Apartments
Greenville, South Carolina 94% 93%
The Corporate General Partner attributes the decrease in occupancy at Colony
House Apartments to the construction of new apartment complexes and the
competitive market of the apartment industry in the Murfreesboro area.
Results of Operations
The Registrant's net income for the three months ended March 31, 1999 was
approximately $238,000 as compared to approximately $200,000 for the three
months ended March 31, 1998. The increase in net income was due primarily to an
increase in total revenues. Total revenues increased due to an increase in
rental income. The increase in rental income is primarily attributable to an
increase in average rental rates at all four of the Registrant's investment
properties, an increase in average occupancy at three of the properties which
was partially offset by a decrease in average occupancy at Colony House
Apartments, as noted above.
Total expenses remained relatively constant for the comparable periods. In
fact, all expenses, including general and administrative expenses, remained
relatively constant for the comparable periods. Included in general and
administrative expenses for the three months ended March 31, 1999 and 1998 are
management reimbursements to the Corporate General Partner allowed under the
Partnership Agreement. In addition, costs associated with the quarterly
communications with investors and regulatory agencies required by the
Partnership Agreement are also included.
As part of the ongoing business plan of the Registrant, the Corporate 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 Registrant from increases in expense. As part of this
plan, the Corporate General Partner attempts to protect the Registrant 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
Corporate General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At March 31, 1999, the Registrant had cash and cash equivalents of approximately
$1,065,000 as compared to approximately $1,392,000 at March 31, 1998. Cash and
cash equivalents increased approximately $435,000 for the three months ended
March 31, 1999 from the Registrant's year end, primarily due to approximately
$478,000 of cash provided by operating activities and approximately $19,000 of
cash provided by investing activities, which was partially offset by
approximately $62,000 of cash used in financing activities. Cash provided by
investing activities consist of net withdrawals from the escrow accounts
maintained by the mortgage lender partially offset by property improvements and
replacements. Cash used in financing activities consisted of payments of
principal made on the mortgages encumbering the Registrant's properties. The
Registrant invests its working capital reserves in money market accounts.
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 various 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. Cash improvements
planned for each of the Registrant's properties are detailed below.
Essex Park
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $278,000 of capital improvements over the near term. Capital
improvements budgeted for, but not limited to, approximately $289,000 are
planned for 1999 consisting of floor covering and appliance replacement,
swimming pool repairs and major landscaping. As of March 31, 1999 approximately
$20,000 has been incurred consisting primarily of appliance and floor covering
replacements.
Colony House
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $278,000 of capital improvements over the near term. Capital
improvements budgeted for, but not limited to, approximately $254,000 are
planned for 1999 consisting of roof repairs, air conditioning system repairs,
electrical, parking lot and major landscaping. As of March 31, 1999
approximately $14,000 has been incurred consisting primarily of floor covering
replacements and interior and exterior building improvements.
North River Village
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $76,000 of capital improvements over the near term. Capital
improvements budgeted for, but not limited to, approximately $104,000 are
planned for 1999 consisting of floor covering and air conditioning system
repairs. As of March 31, 1999 approximately $18,000 has been incurred
consisting primarily of floor covering replacements and other interior and
exterior building improvements.
Willowick
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $278,000 of capital improvements over the near term. Capital
improvements budgeted for, but not limited to, approximately $406,000 are
planned for 1999 consisting of parking lot and swimming pool repairs, exterior
painting, and major landscaping. As of March 31, 1999 approximately $15,000 has
been incurred consisting primarily of floor covering and appliance replacements.
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 Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $8,049,000, net of discount, is amortized over
varying periods with required balloon payments ranging from November 15, 2002 to
October 15, 2003. The Corporate General Partner will attempt to refinance such
indebtedness and/or sell the properties prior to such maturity date. If the
properties cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such properties through foreclosure.
No distributions were made during the three months ended March 31, 1999. Cash
distributions of $500,000 from operations were made during the three months
ended March 31, 1998. The general partners received $5,000 and the limited
partners received $495,000 (approximately $9.00 per limited partnership unit).
The Registrant's distribution policy is reviewed on a quarterly 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 Registrant will generate sufficient funds from operations,
after planned capital improvement expenditures, to permit further distributions
to its partners in 1999 or subsequent periods.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into Apartment
Investment and management Company ("AIMCO"), a real estate investment trust,
whose Class A Common Shares are listed on the New York Stock Exchange. As a
result of such merger, AIMCO and AIMCO Properties, L.P., a Delaware limited
partnership and the operating partnership of AIMCO ("AIMCO OP") acquired
indirect control of the Managing General Partner. AIMCO and its affiliates
currently own 33.80% of the limited partnership interests in the Partnership.
AIMCO is presently considering whether it will engage in an exchange offer for
additional limited partnership interests in the Partnership. There is a
substantial likelihood that, within a short period of time, AIMCO OP will offer
to acquire limited partnership interests in the Partnership for cash or
preferred units or common units of limited partnership interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
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 Corporate 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 mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, 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
March 31, 1999, had completed approximately 75% 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 July
31, 1999.
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.
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 the testing process is
expected to be completed by July 31, 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 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
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. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
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 May 1999.
The Managing Agent has updated data transmission standards with two of the three
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 June 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 $2.8 million ($0.6 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 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 Corporate 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 as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the Corporate 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 Corporate
General Partner has filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
Corporate General Partner does not anticipate that costs associated with this
case, if any, 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 part of this
report.
b) Reports on Form 8-K:
None filed during the quarter ended March 31, 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.
SHELTER PROPERTIES III
By: Shelter Realty III Corporation
Corporate General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
Date: May 4, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties III Limited Partnership 1999 First Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000353282
<NAME> SHELTER PROPERTIES III LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,065
<SECURITIES> 0
<RECEIVABLES> 244
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 26,299
<DEPRECIATION> 15,373
<TOTAL-ASSETS> 13,322
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,049
0
0
<COMMON> 0
<OTHER-SE> 4,595
<TOTAL-LIABILITY-AND-EQUITY> 13,322
<SALES> 0
<TOTAL-REVENUES> 1,364
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> 4.29<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
