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, 1998
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 0-10256
SHELTER PROPERTIES II LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0709233
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, 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 II LIMITED PARTNERSHIP
BALANCE SHEET
(Unaudited)
June 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 1,804
Receivables and deposits 397
Restricted escrows 962
Other assets 199
Investment properties:
Land $ 1,814
Buildings and related personal property 23,232
25,046
Less accumulated depreciation (16,495) 8,551
$ 11,913
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 70
Tenant security deposit liabilities 134
Accrued property taxes 215
Other liabilities 218
Mortgage notes payable 8,447
Partners' Capital (Deficit)
General partners' $ (119)
Limited partners' (27,500 units
issued and outstanding) 2,948 2,829
$ 11,913
See Accompanying Notes to Financial Statements
b)
SHELTER PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Rental income $1,372 $1,332 $2,737 $2,614
Other income 92 78 168 158
Total revenues 1,464 1,410 2,905 2,772
Expenses:
Operating 686 663 1,317 1,342
General and administrative 44 49 96 93
Depreciation 255 254 499 504
Interest 194 200 390 401
Property taxes 110 104 215 210
Total expenses 1,289 1,270 2,517 2,550
Net income $ 175 $ 140 $ 388 $ 222
Net income allocated
to general partners (1%) $ 2 $ 1 $ 4 $ 2
Net income allocated
to limited partners (99%) 173 139 384 220
$ 175 $ 140 $ 388 $ 222
Net income per limited
partnership unit $ 6.29 $ 5.05 $13.96 $ 8.00
Distributions per limited
partnership unit $ -- $ .18 $27.02 $ .18
See Accompanying Notes to Financial Statements
c)
SHELTER PROPERTIES II LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners' Partners' Total
Original capital contributions 27,500 $ 2 $27,500 $27,502
Partners' (deficit) capital
at December 31, 1997 27,500 $ (116) $ 3,307 $ 3,191
Distribution to partners -- (7) (743) (750)
Net income for the six
months ended June 30, 1998 -- 4 384 388
Partners' (deficit) capital
at June 30, 1998 27,500 $ (119) $ 2,948 $ 2,829
See Accompanying Notes to Financial Statements
d)
SHELTER PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 388 $ 222
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 499 504
Amortization of discounts and loan costs 54 54
Change in accounts:
Receivables and deposits (39) (12)
Other assets 10 (43)
Accounts payable 20 (113)
Tenant security deposit liabilities 4 (7)
Accrued property taxes 36 (16)
Other liabilities (14) 1
Net cash provided by operating activities 958 590
Cash flows from investing activities:
Property improvements and replacements (240) (299)
Net deposits to restricted escrows (21) (19)
Net cash used in investing activities (261) (318)
Cash flows from financing activities:
Payments on mortgage notes payable (136) (126)
Distribution to partners (750) (5)
Net cash used in financing activities (886) (131)
Net (decrease) increase in cash and cash equivalents (189) 141
Cash and cash equivalents at beginning of period 1,993 2,222
Cash and cash equivalents at end of period $1,804 $2,363
Supplemental disclosure of cash flow information:
Cash paid for interest $ 337 $ 347
See Accompanying Notes to Financial Statements
e)
SHELTER PROPERTIES II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Shelter Properties II Limited
Partnership (the "Partnership") 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 II 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 and six
month periods ended June 30, 1998, are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Partnership's annual report on Form 10-KSB for the year ended December 31,
1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation.
NOTE B - RECONCILIATION OF CASH FLOWS
The following is a reconciliation of the subtotal on the accompanying statements
of cash flows captioned "net cash provided by operating activities" to "net cash
used in operations," as defined in the partnership agreement. However, "net
cash used in 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.
Six Months Ended
June 30,
1998 1997
(in thousands)
Net cash provided by operating activities $ 958 $ 590
Payments on mortgage notes payable (136) (126)
Property improvements and replacements (240) (299)
Change in restricted escrows, net (21) (19)
Changes in reserves for net operating
liabilities (17) 190
Additional reserves (544) (336)
Net cash used in operations $ -- $ --
For the six months ended June 30, 1998 and 1997, the Corporate General Partner
believed it to be in the best interest of the Partnership to reserve an
additional $544,000 and $336,000, respectively, to fund continuing capital
improvement needs in order for the properties to remain competitive.
NOTE C - 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 Corporate General Partner is wholly-owned by
Insignia Properties Trust ("IPT"), an affiliate of Insignia Financial Group,
Inc. ("Insignia"). The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. Balances and other transactions with
affiliates of the Corporate General Partner in 1998 and 1997 are as follows (in
thousands):
Six Months Ended
June 30,
1998 1997
Property management fees (included in operating expenses) $ 144 $ 136
Reimbursement for services of affiliates, including
approximately $2,000 and $6,000 of construction
services reimbursements for the six months ended
June 30, 1998 and June 30, 1997, respectively (included
in investment properties, general and administrative,
and operating expenses) 62 70
Due to general partners (included in other liabilities) 58 58
From January 1, 1997, through August 31, 1997, the Partnership insured its
properties under a master policy through an agency affiliated with the Corporate
General Partner, with an insurer unaffiliated with the Corporate General
Partner. An affiliate of the Corporate General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy. The
agent assumed the financial obligations to the affiliate of the Corporate
General Partner which received payments on these obligations from the agent. The
amount of the Partnership's insurance premiums that accrued to the benefit of
the affiliate of the Corporate General Partner by virtue of the agent's
obligations was not significant.
On September 26, 1997, an affiliate of the Corporate 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 Parktown Townhouses, Raintree Apartments, and Signal Pointe Apartments
owed by the Partnership.
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
the third quarter of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the Corporate General Partner of the
Partnership.
During July 1998, an Insignia affiliate (the "Purchaser") commenced tender
offers for limited partnership interests in six real estate limited partnerships
(including the Partnership) in which various Insignia affiliates act as general
partner. The Purchaser offered to purchase up to 9,500 of the outstanding units
of limited partnership interest in the Partnership at $450 per Unit, net to the
seller in cash, upon the terms and subject to the conditions set forth in the
Offer to Purchase dated July 21, 1998, (the "Offer to Purchase") and the related
Assignment of Partnership Interest attached as Exhibits (a)(1) and (a)(2),
respectively, to the Tender Offer Statement on Schedule 14D-1 originally filed
with the Securities and Exchange Commission on July 21, 1998. Because of the
existing and potential future conflicts of interest (described in the
Partnership's Statements on Schedule 14D-9 filed with the Securities and
Exchange Commission), neither the Partnership nor the Corporate General Partner
expressed any opinion as to the Offer to Purchase and made no recommendation as
to whether unit holders should tender their units in response to the offer to
Purchase. In addition, because of these conflicts of interest, including as a
result of the Purchaser's affiliation with various Insignia Affiliates that
provide property management services to the Partnership's properties, the manner
in which the Purchaser votes its limited partner interests in the Partnership
may not always be consistent with the best interests of the other limited
partners.
NOTE D - DISTRIBUTIONS TO PARTNERS
During the six months ended June 30, 1998, the Partnership paid a $750,000 cash
distribution. Of this amount, $248,000 was refinance proceeds from prior years,
$108,000 was sales proceeds from prior years, and $394,000 was from operations.
During the six months ended June 30, 1997, the Partnership distributed
approximately $5,000 to the South Carolina tax department on behalf of the
limited partners.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership's investment properties consist of three apartment complexes.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 1998 and 1997:
Average
Occupancy
Property 1998 1997
Parktown Townhouses
Deer Park, Texas 96% 95%
Raintree Apartments
Anderson, South Carolina 92% 91%
Signal Pointe Apartments
Winter Park, Florida 95% 96%
The Partnership realized net income for the six months ended June 30, 1998, of
approximately $388,000 compared to approximately $222,000 for the corresponding
period of 1997. Net income for three months ended June 30, 1998, was
approximately $175,000 compared to approximately $140,000 for the three month
period ended June 30, 1997.
The increase in net income for the three and six months ended June 30, 1998,
compared to the corresponding periods in 1997, is primarily due to an increase
in rental revenues. Rental revenues increased as a result of increased
occupancy at Raintree Apartments and Parktown Townhouses and increases in rental
rates at Parktown Townhouses and Signal Point Apartments. Also contributing to
the increase in net income for the six months ended June 30, 1998, was a
decrease in operating expenses. Operating expenses decreased for the six months
ended June 30, 1998, primarily as a result of fewer major repairs and
maintenance items at Parktown Townhouses and Signal Pointe. Included in
operating expense for the six months ended June 30, 1998, is approximately
$18,000 of major repairs and maintenance comprised primarily of landscaping and
parking lot repairs. Included in operating expense for the six months ended
June 30, 1997, is approximately $128,000 of major repairs and maintenance
comprised primarily of exterior painting and other exterior building repairs.
As part of the ongoing business plan of the Partnership, the Corporate General
Partner monitors the rental market environment at each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expense. As part of this plan, the Corporate 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 Corporate General Partner will be able to sustain this
plan.
At June 30, 1998, the Partnership held cash and cash equivalents of
approximately $1,804,000 compared to approximately $2,363,000 at June 30, 1997.
For the six months ended June 30, 1998, cash and cash equivalents decreased
approximately $189,000, compared to an increase of approximately $141,000 for
the six months ended June 30, 1997. Net cash provided by operating activities
increased primarily as a result of an increase in rental income and a decrease
in operating expenses, as previously discussed. Also contributing to the
increase in net cash provided by operating activities was a decrease in cash
used for accounts payables related to the timing of payments. Net cash used in
investing activities decreased primarily due to a reduction in property
improvements and replacements. Net cash used in financing activities increased
primarily due to a distribution being paid to the partners in the first quarter
of 1998.
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. Such assets are currently
thought to be sufficient for any near-term needs of the Partnership. The
mortgage indebtedness of approximately $8,447,000, net of discount, is amortized
over 257 months. In addition, the mortgage notes require balloon payments on
November 15, 2002, at which time the individual properties will either be sold
or refinanced. Cash distributions of $750,000 were paid during the six months
ended June 30, 1998. During the six months ended June 30, 1997, a cash
distribution of $5,000 was paid to the South Carolina tax department on behalf
of the limited partners. The Corporate General Partner is planning to make
another distribution in September 1998; however, future cash distributions will
depend on the levels of net cash generated from operations, refinancings,
property sales and the availability of cash reserves.
Year 2000
The Partnership is dependent upon the Corporate General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed no
later than December 31, 1998, which is prior to any anticipated impact on its
operating systems. The Corporate General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
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 and its affiliates of
interests in certain general partner entities, past tender offers 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.
The Corporate General Partner believes the action to be without merit, and
intends to vigorously defend it. On June 24, 1998, the Corporate General
Partner filed a motion seeking dismissal of the action.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature. The Corporate General Partner believes all such
pending or outstanding litigation will be resolved without a material adverse
effect upon the business, financial condition or operations of the Partnership.
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 June 30, 1998.
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 II LIMITED PARTNERSHIP
By: Shelter Realty II Corporation
Its Corporate General Partner
By: /s/ William H. Jarrard, Jr.
William H. Jarrard, Jr.
President and Director
By: /s/ Ronald Uretta
Ronald Uretta
Vice President and Treasurer
Date: July 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Shelter Properties II Limited Partnership 1998 Second Quarter 10-QSB
and is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000319723
<NAME> SHELTER PROPERTIES II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,804
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 25,046
<DEPRECIATION> 16,495
<TOTAL-ASSETS> 11,913
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,447
0
0
<COMMON> 0
<OTHER-SE> 2,829
<TOTAL-LIABILITY-AND-EQUITY> 11,913
<SALES> 0
<TOTAL-REVENUES> 2,905
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,517
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390
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<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
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