FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-10256
SHELTER PROPERTIES II
(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.)
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 II
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1999
Assets
Cash and cash equivalents $ 1,204
Receivables and deposits 343
Restricted escrows 646
Other assets 235
Investment properties:
Land $ 1,814
Buildings and related personal property 24,115
25,929
Less accumulated depreciation (17,505) 8,424
$10,852
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 77
Tenant security deposit liabilities 143
Accrued property taxes 218
Other liabilities 224
Mortgage notes payable 8,228
Partners' (Deficit) Capital
General partners $ (129)
Limited partners (27,500 units
issued and outstanding) 2,091 1,962
$10,852
See Accompanying Notes to Financial Statements
b)
SHELTER PROPERTIES II
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
Rental income $1,411 $1,372 $2,834 $2,737
Other income 73 92 137 168
Total revenues 1,484 1,464 2,971 2,905
Expenses:
Operating 541 686 1,163 1,317
General and administrative 41 44 94 96
Depreciation 243 255 499 499
Interest 189 194 380 390
Property taxes 107 110 216 215
Total expenses 1,121 1,289 2,352 2,517
Net income $ 363 $ 175 $ 619 $ 388
Net income allocated
to general partners (1%) $ 3 $ 2 $ 6 $ 4
Net income allocated
to limited partners (99%) 360 173 613 384
$ 363 $ 175 $ 619 $ 388
Net income per limited
partnership unit $13.09 $ 6.29 $22.29 $13.96
Distributions per limited
partnership unit $ -- $ -- $ -- $27.02
See Accompanying Notes to Financial Statements
c)
SHELTER PROPERTIES II
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, 1998 27,500 $ (135) $ 1,478 $ 1,343
Net income for the six
months ended June 30, 1999 -- 6 613 619
Partners' (deficit) capital at
June 30, 1999 27,500 $ (129) $ 2,091 $ 1,962
See Accompanying Notes to Financial Statements
d)
SHELTER PROPERTIES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 619 $ 388
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 499 499
Amortization of discounts and loan costs 53 54
Change in accounts:
Receivables and deposits (9) (39)
Other assets (84) 10
Accounts payable (27) 20
Tenant security deposit liabilities 9 4
Accrued property taxes (18) 36
Other liabilities 5 (14)
Net cash provided by operating activities 1,047 958
Cash flows from investing activities:
Property improvements and replacements (611) (240)
Net receipts from (deposits to) restricted escrows 338 (21)
Net cash used in investing activities (273) (261)
Cash flows from financing activities:
Payments on mortgage notes payable (146) (136)
Distribution to partners -- (750)
Net cash used in financing activities (146) (886)
Net increase (decrease) in cash and cash equivalents 628 (189)
Cash and cash equivalents at beginning of period 576 1,993
Cash and cash equivalents at end of period $1,204 $1,804
Supplemental disclosure of cash flow information:
Cash paid for interest $ 327 $ 337
See Accompanying Notes to Financial Statements
e)
SHELTER PROPERTIES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Shelter Properties II (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 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, 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 financial statements and footnotes thereto included in
the Partnership's Annual Report on Form 10-KSB for the year ended December 31,
1998.
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. ("Insignia") 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 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 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,
1999 1998
(in thousands)
Net cash provided by operating activities $1,047 $ 958
Payments on mortgage notes payable (146) (136)
Property improvements and replacements (611) (240)
Change in restricted escrows, net 338 (21)
Changes in reserves for net operating
liabilities 124 (17)
Additional reserves (752) (544)
Net cash used in operations $ -- $ --
For the six months ended June 30, 1999 and 1998, the Corporate General Partner
believed it to be in the best interest of the Partnership to reserve an
additional $752,000 and $544,000, respectively to fund continuing capital
improvement needs in order for the properties to remain competitive.
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 (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. Balances and other
transactions with affiliates of the Corporate General Partner for the six months
ended June 30, 1999 and 1998 are as follows:
1999 1998
(in thousands)
Property management fees (included in
Operating expenses) $ 150 $ 144
Reimbursement for services of affiliates
(included in investment properties, and
General administrative and operating
Expenses) 66 62
Due to general partners 58 58
During the six months ended June 30, 1999 and 1998, affiliates of the Corporate
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's properties as compensation for providing property management
services. The Registrant paid to such affiliates approximately $150,000 and
$144,000 for the six months ended June 30, 1999 and 1998, respectively.
Affiliates of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $66,000 and
$62,000 for the six months ended June 30, 1999 and 1998, respectively, including
approximately $14,000 and $2,000, respectively, of construction oversight
reimbursements.
During 1983, a liability of approximately $58,000 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 June 30, 1999, the level of return to the limited
partners has not been met.
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
owned by the Partnership.
On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 7,340.60 (approximately
26.69% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $480.00 per unit. The offer expired on
July 14, 1999. Pursuant to the offer, AIMCO Properties, L.P., acquired 436.33
units. As a result, AIMCO and its affiliates currently own 11,736.83 units of
limited partnership interest in the Partnership representing approximately
42.68% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional
limited partnership interests in the Partnership for cash or in exchange for
units in the operating partnership of AIMCO.
NOTE E - DISTRIBUTIONS TO PARTNERS
During the six months ended June 30, 1998, the Partnership declared and paid a
cash distribution for approximately $750,000, (approximately $743,000 was paid
to the limited partners or $27.02 per limited partnership unit). Of this amount,
approximately $248,000 was refinancing proceeds from prior years, approximately
$108,000 was sales proceeds from prior years, and approximately $394,000 was
from operations. There were no distributions during the six months ended June
30, 1999.
NOTE F - SEGMENT REPORTING
The Partnership has one reportable segment: residential properties, consisting
of three apartment complexes in Texas, South Carolina and Florida. The
Partnership rents apartment units to tenants for terms that are typically twelve
months or less.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segment are the same as those described in the
summary of significant accounting policies in the Partnership's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
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 six months ended June 30, 1999 and 1998, is shown in
the tables below (in thousands). The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segment.
1999 Residential Other Totals
Rental income $ 2,834 $ -- $ 2,834
Other income 132 5 137
Interest expense 380 -- 380
Depreciation 499 -- 499
General and administrative expense -- 94 94
Segment profit (loss) 708 (89) 619
Total assets 10,642 210 10,852
Capital expenditures for investment
properties 611 -- 611
1998 Residential Other Totals
Rental income $ 2,737 $ -- $ 2,737
Other income 128 40 168
Interest expense 390 -- 390
Depreciation 499 -- 499
General and administrative expense -- 96 96
Segment profit (loss) 444 (56) 388
Total assets 10,127 1,786 11,913
Capital expenditures for investment
properties 240 -- 240
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 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 entities which were, at
the time, affiliates of Insignia ("Insignia 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. 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 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 three apartment complexes.
The following table sets forth the average occupancy of the properties for each
of the six months ended June 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Parktown Townhouses
Deer Park, Texas 93% 96%
Raintree Apartments
Anderson, South Carolina 96% 92%
Signal Pointe Apartments
Winter Park, Florida 94% 95%
The Corporate General Partner attributes the increase in occupancy at Raintree
Apartments to increased marketing efforts. The decrease in occupancy at
Parktown Townhouses is due to a tight rental market in Deer Park, Texas.
Management is increasing marketing efforts in an effort to improve occupancy.
Results of Operations
The Partnership realized net income for the six months ended June 30, 1999, of
approximately $619,000 compared to approximately $388,000 for the corresponding
period in 1998. The Partnership's net income for the three months ended June
30, 1999, was approximately $363,000 compared to approximately $175,000 for the
three months ended June 30, 1998. The increase in net income for the three and
six months ended June 30, 1999, is attributable to an increase in total revenues
and a decrease in total expenses. Total revenues increased for the three and
six months ended June 30, 1999, due to increased rental income partially offset
by decreased other income. Rental income increased primarily due to increased
average annual rental rates at all the Partnership's properties, increased
occupancy at Raintree Apartments and reduced concession costs primarily at
Raintree. Partially offsetting the increases in rental income was decreased
occupancy at Parktown Townhouses and Signal Pointe Apartments. Other income
decreased due to reduced interest income due to lower cash balances held in
interest bearing accounts.
Total expenses decreased primarily due to decreased operating expenses for the
three and six month periods ended June 30, 1999. Operating expenses decreased
primarily due to the elimination of the courtesy patrol at Parktown Townhouses,
decreased insurance expense at all of the Partnership's properties due to a
change in insurance carriers and reduced maintenance expenses at Parktown
Townhouses and Signal Pointe Apartments. Partially offsetting these decreases
was the added cost of the installation of an alarm system at Parktown
Townhouses.
General and administrative expenses remained relatively constant. Included in
general and administrative expenses at both June 30, 1999 and 1998, are
reimbursements to the Corporate General Partner allowed under the Partnership
Agreement. In addition, costs associated with the quarterly and annual
communications with investors and regulatory agencies and the annual audit
required by the Partnership Agreement are also included.
As part of the ongoing business plan of the Partnership, the 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.
Liquidity and Capital Resources
At June 30, 1999, the Registrant had cash and cash equivalents of approximately
$1,204,000 as compared to approximately $1,804,000 at June 30, 1998. The
increase in cash and cash equivalents of approximately $628,000 from the
Registrant's year ended December 31, 1998, is primarily due to approximately
$1,047,000 of cash provided by operating activities, partially offset by
approximately $273,000 of cash used in investing activities and approximately
$146,000 of cash used in financing activities. Cash used in investing activities
consisted of property improvements and replacements, partially offset by net
receipts from escrow accounts maintained by the mortgage lender. Cash used in
financing activities consisted of payments of principal made on the mortgages
encumbering the Registrant's properties.
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 Registrant and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements
planned for the Registrant's properties are detailed below.
Parktown Townhomes
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 $638,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $674,000 are
planned for 1999, include certain of the required improvements and consist of
carpet and vinyl replacement, landscaping, parking lot repairs, plumbing and
electrical upgrades, pool repairs, roof repairs and other structural repairs and
improvements. As of June 30, 1999, the Partnership has completed approximately
$253,000 in capital improvements consisting primarily of structural and parking
lot repairs, roofing, and carpet and vinyl replacement. These improvements were
funded from the Partnership's reserves and operating cash flow.
Raintree Apartments
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 $186,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $262,000 are
planned for 1999, include certain of the required improvements and consist of
carpet and vinyl replacement, landscaping, painting, pool repairs, roof repairs,
and other structural repairs and improvements. As of June 30, 1999, the
Partnership has completed approximately $37,000 in capital improvements
consisting primarily of carpet and vinyl replacement, roofing, and appliance
replacements. These improvements were funded from the Partnership's reserves.
Signal Pointe Apartments
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 $428,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $572,000 are
planned for 1999, include certain of the required improvements and consist of
new air conditioning units, carpet and vinyl replacement, parking lot and
stairwell repairs, electrical upgrades, fence replacement, landscaping,
painting, pool repairs, roof repairs, and other structural repairs and
improvements. As of June 30, 1999, the Partnership has completed approximately
$321,000 in capital improvements consisting primarily of structural upgrades,
exterior painting, and carpet and vinyl replacement. These improvements were
funded from operating cash flow and the Partnership's reserves.
The additional capital improvements will be incurred only if cash is available
from operations or 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 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 $8,228,000, net of discount, is amortized over 257
months with a balloon payment of approximately $7,370,000 due on November 15,
2002. The Corporate General Partner will attempt to refinance such indebtedness
and/or sell the properties prior to such maturity date. If a property cannot be
refinanced or sold for a sufficient amount, the Registrant may risk losing such
property through foreclosure.
During the six months ended June 30, 1998, the Partnership declared and paid a
cash distribution of approximately $750,000, (approximately $743,000 was paid to
the limited partners or $27.02 per limited partnership unit). Of this amount,
approximately $248,000 was refinancing proceeds from prior years, approximately
$108,000 was sales proceeds from prior years, and approximately $394,000 was
from operations. There were no distributions during the six months ended June
30, 1999. 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. The Registrant's
distribution policy will be reviewed on a semi-annual basis. There can be no
assurance, however, that the Partnership will generate sufficient funds from
operations after required capital expenditures to permit any distributions to
its partners in 1999 or subsequent periods.
Tender Offer
On June 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 7,340.60 (approximately
26.69% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $480.00 per unit. The offer expired on
July 14, 1999. Pursuant to the offer, AIMCO Properties, L.P., acquired 436.33
units. As a result, AIMCO and its affiliates currently own 11,736.83 units of
limited partnership interest in the Partnership representing approximately
42.68% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional
limited partnership interests in the Partnership for cash or in exchange for
units in the operating partnership of AIMCO.
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 main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of June 30, 1999, had completed approximately 90% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by September 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 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 entities which were, at
the time, affiliates of Insignia ("Insignia 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. 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 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 an exhibit to this report.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHELTER PROPERTIES II
By: Shelter Realty II Corporation
Corporate General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Carla R. Stoner
Carla R. Stoner
Senior Vice President Finance
and Administration
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Shelter Properties II
first quarter 1999 10-QSB and is qualified in its entirety by reference to such
10-QSB filing.
</LEGEND>
<CIK> 0000319723
<NAME> SHELTER PROPERTIES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,204
<SECURITIES> 0
<RECEIVABLES> 343
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 25,929
<DEPRECIATION> (17,505)
<TOTAL-ASSETS> 10,852
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,228
0
0
<COMMON> 0
<OTHER-SE> 1,962
<TOTAL-LIABILITY-AND-EQUITY> 10,852
<SALES> 0
<TOTAL-REVENUES> 2,971
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 619
<EPS-BASIC> 22.29<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Mulitplier is 1.
</FN>
</TABLE>
