FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission file number 0-10256
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 Securities Exchange Act of 1934 during the preceding 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)
September 30, 1999
Assets
Cash and cash equivalents $ 1,017
Receivables and deposits 436
Restricted escrows 380
Other assets 203
Investment properties:
Land $ 1,814
Buildings and related personal property 24,608
26,422
Less accumulated depreciation (17,694) 8,728
$ 10,764
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 72
Tenant security deposit liabilities 153
Accrued property taxes 326
Other liabilities 224
Mortgage notes payable 8,168
Partners' (Deficit) Capital
General partners $ (130)
Limited partners (27,500 units issued and
outstanding) 1,951 1,821
$ 10,764
See Accompanying Notes to Financial Statements
b)
SHELTER PROPERTIES II
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $1,465 $1,401 $4,299 $4,138
Other income 64 82 201 250
Total revenues 1,529 1,483 4,500 4,388
Expenses:
Operating 810 704 1,973 2,021
General and administrative 64 47 158 143
Depreciation 201 253 700 752
Interest 187 195 567 585
Property taxes 108 100 324 315
Total expenses 1,370 1,299 3,722 3,816
Net income $ 159 $ 184 $ 778 $ 572
Net income allocated to
general partners (1%) $ 2 $ 2 $ 8 $ 6
Net income allocated to
limited partners (99%) 157 182 770 566
$ 159 $ 184 $ 778 $ 572
Net income per limited
partnership unit $ 5.71 $ 6.62 $28.00 $20.58
Distributions per limited
partnership unit $10.80 $27.00 $10.80 $54.00
See Accompanying Notes to Financial Statements
c)
SHELTER PROPERTIES II
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(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
Distribution to partners -- (3) (297) (300)
Net income for the nine months
ended September 30, 1999 -- 8 770 778
Partners' (deficit) capital at
September 30, 1999 27,500 $ (130) $ 1,951 $ 1,821
See Accompanying Notes to Financial Statements
d)
SHELTER PROPERTIES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 778 $ 572
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 700 752
Amortization of discounts and loan costs 79 82
Loss on disposal of property 11 --
Change in accounts:
Receivables and deposits (102) (122)
Other assets (62) 12
Accounts payable (32) 94
Tenant security deposit liabilities 19 8
Accrued property taxes 90 135
Other liabilities 5 (6)
Net cash provided by operating activities 1,486 1,527
Cash flows from investing activities:
Property improvements and replacements (1,127) (391)
Net withdrawals from (deposits to) restricted escrows 604 (33)
Net cash used in investing activities (523) (424)
Cash flows from financing activities:
Payments on mortgage notes payable (222) (206)
Distributions to partners (300) (1,500)
Net cash used in financing activities (522) (1,706)
Net increase (decrease) in cash and cash equivalents 441 (603)
Cash and cash equivalents at beginning of period 576 1,993
Cash and cash equivalents at end of period $ 1,017 $ 1,390
Supplemental disclosure of cash flow information:
Cash paid for interest $ 488 $ 504
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 Item 310 (b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of 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 nine
month periods ended September 30, 1999, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1999. For
further information, refer to the 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.
Nine Months Ended
September 30,
1999 1998
(in thousands)
Net cash provided by operating activities $ 1,486 $ 1,527
Payments on mortgage notes payable (222) (206)
Property improvements and replacements (1,127) (391)
Change in restricted escrows, net 604 (33)
Changes in reserves for net operating
liabilities 82 (121)
Additional reserves (823) (776)
Net cash used in operations $ -- $ --
For the nine months ended September 30, 1999 and 1998, the Corporate General
Partner believed it to be in the best interest of the Partnership to reserve an
additional $823,000 and $776,000, 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 nine
months ended September 30, 1999 and 1998 are as follows:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $226 $217
Reimbursement for services of affiliates
(included in investment properties,
general and administrative expense and
operating expense) 129 91
Due to general partners 58 58
During the nine months ended September 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 $226,000 and
$217,000 for the nine months ended September 30, 1999 and 1998, respectively.
Affiliates of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $129,000 and
$91,000 for the nine months ended September 30, 1999 and 1998, respectively,
including approximately $46,000 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 return are received by the
limited partners. As of September 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 July 21, 1998, an affiliate of the Corporate General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 9,500 (approximately
34.55% of the total outstanding units) units of limited partnership interest in
the Partnership at $450 per unit, net to the seller in cash. The Purchaser
acquired 1,958.50 units pursuant to this 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 this offer, AIMCO Properties, L.P. acquired 436.33
units. As a result, AIMCO and its affiliates currently own 11,768.50 units of
limited partnership interest in the Partnership representing approximately
42.79% of the total outstanding units. It is possible that AIMCO or its
affiliate 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 (see "Note G - Legal Proceedings").
NOTE E - DISTRIBUTIONS TO PARTNERS
During the nine months ended September 30, 1999, the Partnership paid cash
distributions of $300,000 (approximately $297,000 to the limited partners or
$10.80 per limited partnership unit.) During the nine months ended September
30, 1998, the Partnership paid cash distributions totaling $1,500,000
(approximately $1,485,000 to the limited partners or $54.00 per limited
partnership unit) with $14,000 of this amount being used to satisfy a
withholding liability at December 31, 1997. The remaining amount of $1,486,000
included $248,000 (approximately $245,000 to the limited partners or $8.91 per
limited partnership unit) from refinancing proceeds from prior years, $108,000
(approximately $107,000 to the limited partners or $3.89 per limited partnership
unit) from sales proceeds from prior years, and $1,130,000 (approximately
$1,119,000 to the limited partners or $40.69 per limited partnership unit) from
operations.
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
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 similar types of products and customers.
Segment information for the nine month periods ended September 30, 1999 and 1998
is shown in the tables below (in thousands). The "Other" column includes
Partnership administration related items and income and expense not allocated to
the reportable segment.
1999 Residential Other Totals
Rental income $ 4,299 $ -- $ 4,299
Other income 195 6 201
Interest expense 567 -- 567
Depreciation 700 -- 700
General and administrative expense -- 158 158
Segment profit (loss) 930 (152) 778
Total assets 10,602 162 10,764
Capital expenditures for investment
properties 1,127 -- 1,127
1998 Residential Other Totals
Rental income $ 4,138 $ -- $ 4,138
Other income 189 61 250
Interest expense 585 -- 585
Depreciation 752 -- 752
General and administrative expense -- 143 143
Segment profit (loss) 654 (82) 572
Total assets 10,140 1,340 11,480
Capital expenditures for investment
properties 391 -- 391
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 Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates and the Insignia Merger (see
"Note B - Transfer of Control"). The complaint seeks monetary damages and
equitable relief, including judicial dissolution of the Partnership. On June
25, 1998, the 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 filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Corporate General Partner will make tender offers
for all outstanding limited partnership interests in 49 partnerships, including
the Registrant, subject to the terms and conditions set forth in the
Stipulation, and has agreed to establish a reserve to pay an additional amount
in settlement to qualifying class members (the "Settlement Fund"). At the final
approval hearing, Plaintiffs' counsel will make an application for attorneys'
fees and reimbursement of expenses, to be paid in part by the partnerships and
in part from the Settlement Fund. The Corporate General Partner does not
anticipate that costs associated with this case will be material to the
Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
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 discussion 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 nine months ended September 30, 1999 and 1998:
Average
Occupancy
Property 1999 1998
Parktown Townhouses
Deer Park, Texas 94% 96%
Raintree Apartments
Anderson, South Carolina 95% 93%
Signal Pointe Apartments
Winter Park, Florida 95% 95%
Results of Operations
The Partnership realized net income for the nine months ended September 30,
1999, of approximately $778,000 compared to approximately $572,000 for the
corresponding period in 1998. The Partnership's net income for the three months
ended September 30, 1999, was approximately $159,000 compared to approximately
$184,000 for the three months ended September 30, 1998. The increase in net
income for the nine months ended September 30, 1999, is attributable to an
increase in total revenues and a decrease in total expenses. The decrease in
net income for the three months ended September 30, 1999 is attributable to
increased total expenses partially offset by increased total revenues. Total
revenues increased for the three and nine months ended September 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 Apartments. Partially offsetting
the increases in rental income was decreased occupancy at Parktown Townhouses.
Other income decreased primarily due to reduced interest income due to lower
cash balances held in interest bearing accounts.
Total expenses decreased for the nine months ended September 30, 1999 primarily
due to decreased operating expenses and depreciation expense, partially offset
by increased general and administrative expense. Operating expenses decreased
for the nine month period ended September 30, 1999, primarily due to the
decrease in maintenance salaries and related expense at Parktown Townhouses. In
addition, insurance expense at all of the Partnership's properties decreased due
to a change in insurance carriers late in 1998. Offsetting these decreases, was
the recognition of a loss on disposal of property during the nine months ended
September 30, 1999. The loss resulted from the write-off of the undepreciated
value of roofs that were replaced at Parktown Townhouses.
Total expenses increased for the three months ended September 30, 1999 primarily
due to increased operating expenses and to a lessor extent, general and
administrative expense, partially offset by reduced depreciation expense.
Operating expense increased for the three month period ended September 30, 1999
due primarily to the loss on disposal of property discussed above.
Depreciation expense decreased for the three and nine month periods due to
assets becoming fully depreciated at Parktown Townhouses during 1998. General
and administrative expense increased for both periods primarily because of
increased legal expense due to the settlement of a lawsuit as disclosed in the
Partnership's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1998 and an increase in professional fees. These increases were partially
offset by reduced management reimbursements and appraisal fees. Included in
general and administrative expenses at both September 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
expenses. 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 such
a plan.
Liquidity and Capital Resources
At September 30, 1999, the Registrant had cash and cash equivalents of
approximately $1,017,000 as compared to approximately $1,390,000 at September
30, 1998. The increase in cash and cash equivalents of approximately $441,000
from the Registrant's year ended December 31, 1998, is primarily due to
approximately $1,486,000 of cash provided by operating activities, partially
offset by approximately $523,000 of cash used in investing activities and
approximately $522,000 of cash used in financing activities. Cash used in
investing activities consisted of property improvements and replacements,
partially offset by net withdrawals from escrow accounts maintained by the
mortgage lender. Cash used in financing activities consisted of distributions
paid to the partners and 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, local, legal, and regulatory requirements. Capital improvements planned
for each of the Registrant's properties are detailed below.
Parktown Townhouses
As of September 30, 1999, the Partnership has completed approximately $597,000
in capital improvements consisting primarily of structural and parking lot
improvements, exterior building enhancements, roofing, landscaping, air
conditioning unit replacement, and carpet and vinyl replacement. The structural
improvements, parking lot improvements and landscaping were substantially
complete as of September 30, 1999. These improvements were funded from the
Partnership's reserves, operating cash flow and insurance proceeds. 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. The Partnership has
budgeted, but is not limited to, capital improvements of approximately $674,000
for 1999 at this property which include certain of the required improvements and
consist of carpet and vinyl replacement, landscaping, parking lot improvements,
plumbing and electrical upgrades, pool enhancements, roofing, and other
structural improvements.
Raintree Apartments
As of September 30, 1999, the Partnership has completed approximately $90,000 in
capital improvements consisting primarily of carpet and vinyl replacement,
roofing, and appliance replacements. As of September 30, 1999, the roofing was
substantially complete. These improvements were funded from the Partnership's
reserves. 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.
The Partnership has budgeted, but is not limited to, capital improvements of
approximately $262,000 for 1999 at this property which include certain of the
required improvements and consist of carpet and vinyl replacement, landscaping,
painting, pool enhancements, roofing, and other structural improvements.
Signal Pointe Apartments
As of September 30, 1999, the Partnership has completed approximately $440,000
in capital improvements consisting primarily of structural upgrades, exterior
building enhancements, electrical upgrades, landscaping, fencing, recreation
facility improvements, appliances, and carpet and vinyl replacements. The
structural upgrades, electrical upgrades, fencing, and exterior building
enhancements were substantially complete at September 30, 1999. These
improvements were funded from the Partnership's reserves and operating cash
flow. 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.
The Partnership has budgeted, but is not limited to, capital improvements of
approximately $572,000 for 1999 at this property which include certain of the
required improvements and consist of new air conditioning units, carpet and
vinyl replacement, parking lot and stairwell improvements, electrical upgrades,
fence replacement, landscaping, pool enhancements, roofing, and other structural
improvements.
The additional capital expenditures will be incurred only if cash is available
from operations and 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 $8,168,000, net of discount, is amortized over 257
months with required 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 nine months ended September 30, 1999, the Partnership paid cash
distributions of $300,000 (approximately $297,000 to the limited partners or
$10.80 per limited partnership unit.) During the nine months ended September
30, 1998, the Partnership paid cash distributions totaling $1,500,000
(approximately $1,485,000 to the limited partners or $54.00 per limited
partnership unit) with $14,000 of this amount being used to satisfy a
withholding liability at December 31, 1997. The remaining amount of $1,486,000
included $248,000 (approximately $245,000 to the limited partners or $8.91 per
limited partnership unit) from refinancing proceeds from prior years, $108,000
(approximately $107,000 to the limited partners or $3.89 per limited partnership
unit) from sales proceeds from prior years, and $1,130,000 (approximately
$1,119,000 to the limited partners or $40.69 per limited partnership unit) from
operations. 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 is 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 additional
distributions to its partners in the remainder of 1999 or subsequent periods.
Tender Offers
On July 21, 1998, an affiliate of the Corporate General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 9,500 (approximately
34.55% of the total outstanding units) units of limited partnership interest in
the Partnership at $450 per unit, net to the seller in cash. The Purchaser
acquired 1,958.50 units pursuant to this 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 11,768.50 units of
limited partnership interest in the Partnership representing approximately
42.79% of the total outstanding units. It is possible that AIMCO or its
affiliate 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 (see "Item 1. Financial Statements, Note G -
Legal Proceedings").
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the 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 September 30, 1999, had virtually completed this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October 1999.
During 1998, the Managing agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded virtually all of the server operating systems.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 1999. Any operating
equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
September 30, 1999 to replace or repair the operating equipment was
approximately $75,000. The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date, the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expenses
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
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 and the Insignia Merger (see
"Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer
of Control"). The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
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 filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Corporate General Partner will make tender offers
for all outstanding limited partnership interests in 49 partnerships, including
the Registrant, subject to the terms and conditions set forth in the
Stipulation, and has agreed to establish a reserve to pay an additional amount
in settlement to qualifying class members (the "Settlement Fund"). At the final
approval hearing, Plaintiffs' counsel will make an application for attorneys'
fees and reimbursement of expenses, to be paid in part by the partnerships and
in part from the Settlement Fund. The Corporate General Partner does not
anticipate that costs associated with this case will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K filed during the quarter ended September 30,
1999:
None filed during the quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHELTER PROPERTIES II
By: Shelter Realty II Corporation
Corporate General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President and Director
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties II 1999 Third Quarter 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,017
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 26,422
<DEPRECIATION> 17,694
<TOTAL-ASSETS> 10,764
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,168
0
0
<COMMON> 0
<OTHER-SE> 1,821
<TOTAL-LIABILITY-AND-EQUITY> 10,764
<SALES> 0
<TOTAL-REVENUES> 4,500
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 778
<EPS-BASIC> 28.00<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
