February 28, 2000
United States
Securities and Exchange Commission
Washington, D.C. 20549
RE: Shelter Properties II
Form 10-KSB
File No. 0-10256
To Whom it May Concern:
The accompanying Form 10-KSB for the year ended December 31, 1999 describes a
change in the method of accounting to capitalize exterior painting and major
landscaping, which would have been expensed under the old policy. The
Partnership believes that this accounting principle change is preferable because
it provides a better matching of expenses with the related benefit of the
expenditures and it is consistent with industry practice and the policies of the
Corporate General Partner.
Please do not hesitate to contact the undersigned with any questions or comments
that you might have.
Very truly yours,
Stephen Waters
Real Estate Controller
<PAGE>
FORM 10-KSB--Annual or Transitional Report Under
SECTION 13 OR 15(d)
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period _________to _________
Commission file number 0-10256
SHELTER PROPERTIES II
(Name of small business issuer 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
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units of Limited Partnership Interest
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 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___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $6,044,000
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 1999. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
Item 1. Description of Business:
Shelter Properties II (the "Registrant" or the "Partnership") was organized as a
limited partnership under the laws of the State of South Carolina on October 10,
1980. The general partner responsible for management of the Partnership's
business is Shelter Realty II Corporation, a South Carolina corporation (the
"Corporate General Partner"). The only other general partner of the Partnership
was N. Barton Tuck, Jr. Mr. Tuck was not an affiliate of the Corporate General
Partner and was effectively prohibited by the Partnership's partnership
agreement (the "Partnership Agreement") from participating in the management of
the Partnership. In June 1999, Mr. Tuck's general partnership interest in the
Registrant was purchased by AIMCO Properties, LP, an affiliate of the Corporate
General Partner. The Corporate General Partner is a subsidiary of Apartment
Investment and Management Company ("AIMCO"). The Partnership Agreement provides
that the Partnership is to terminate on December 31, 2020 unless terminated
prior to such date.
The Registrant is engaged in the business of operating and holding real estate
properties for investment. In 1981, during its acquisition phase, the Registrant
acquired five existing apartment properties. The Registrant continues to own and
operate three of these properties. See "Item 2. Description of Properties".
Commencing February 2, 1981, the Registrant offered, pursuant to a Registration
Statement filed with the Securities and Exchange Commission, up to 27,400 Units
of Limited Partnership Interest (the "Units") at a purchase price of $1,000 per
Unit with a minimum purchase of 5 Units ($5,000), or 1.5 Units ($1,500) for an
Individual Retirement Account. An additional 100 Units were purchased by the
Corporate General Partner. Since its offering, the Registrant has not received,
nor are limited partners required to make additional capital contributions.
The offering terminated on April 30, 1981. Upon termination of the offering, the
Registrant had accepted subscriptions for 27,500 Units, including 100 Units
purchased by the Corporate General Partner, for an aggregate of $27,500,000. The
Registrant invested approximately $21,000,000 of such proceeds in five existing
apartment properties. Prior to December 31, 1999, the Partnership sold one
property and lost one property to the lender through foreclosure.
The Registrant has no employees. Management and administrative services are
provided by the Corporate General Partner and by agents retained by the
Corporate General Partner.
The real estate business in which the Partnership is engaged is highly
competitive. There are other residential properties within the market area of
the Partnership's properties. The number and quality of competitive properties,
including those which may be managed by an affiliate of the Corporate General
Partner, in such market area could have a material effect on the rental market
for the apartments at the Partnership's properties and the rents that may be
charged for such apartments. While the Corporate General Partner and its
affiliates own and/or control a significant number of apartment units in the
United States, such units represent an insignificant percentage of total
apartment units in the United States and competition for the apartments is
local.
There have been, and it is possible there may be other, Federal, state and local
legislation and regulations enacted relating to the protection of the
environment. The Partnership is unable to predict the extent, if any, to which
such new legislation or regulations might occur and the degree to which such
existing or new legislation or regulations might adversely affect the properties
owned by the Partnership.
The Partnership monitors its properties for evidence of pollutants, toxins and
other dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed which resulted in no material adverse
conditions or liabilities. In no case has the Partnership received notice that
it is a potentially responsible party with respect to an environmental clean up
site.
Both the income and expenses of operating the properties owned by the
Partnership are subject to factors outside of the Partnership's control, such as
changes in the supply and demand for similar properties resulting from various
market conditions, increases/decreases in unemployment or population shifts,
changes in the availability of permanent mortgage financing, changes in zoning
laws, or changes in patterns or needs of users. In addition, there are risks
inherent in owning and operating residential properties because such properties
are susceptible to the impact of economic and other conditions outside of the
control of the Partnership.
A further description of the Partnership's business is included in "Management's
Discussion and Analysis or Plan of Operation" included in "Item 6" of this Form
10-KSB.
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 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 has had or
will have a material effect on the affairs and operations of the Partnership.
Item 2. Description of Properties:
The following table sets forth the Registrant's investments in properties:
Date of
Properties Purchase Type of Ownership Use
Parktown Townhouses 03/01/81 Fee ownership, subject to Apartment
Deer Park, Texas first and second mortgages 309 units
Raintree Apartments 04/30/81 Fee ownership, subject to Apartment
Anderson, South Carolina first and second mortgages 176 units
Signal Pointe Apartments 06/30/81 Fee ownership, subject to Apartment
Winter Park, Florida first and second mortgages 368 units
<PAGE>
Schedule of Properties:
Set forth below for each of the Registrant's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation, and
Federal tax basis.
Gross
Carrying Accumulated Federal
Properties Value Depreciation Rate Method Tax Basis
(in thousands) (in thousands)
Parktown Townhouses $10,350 $ 6,823 5-35 S/L $ 3,395
Raintree Apartments 4,434 2,981 5-38 S/L 705
Signal Pointe Apartments 12,162 8,080 5-37 S/L 2,320
Totals $26,946 $17,884 $ 6,420
See "Note A" to the financial statements included in "Item 7. Financial
Statements" for a description of the Partnership's depreciation policy and "Note
I - Change in Accounting Principle".
Schedule of Property Indebtedness:
The following table sets forth certain information relating to the loans
encumbering the Registrant's properties.
<TABLE>
<CAPTION>
Principal Principal
Balance At Stated Balance
December 31, Interest Period Maturity Due At
Property 1999 Rate Amortized Date Maturity (3)
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Parktown Townhouses
1st mortgage $ 2,908 7.60% (1) 11/15/02 $ 2,552
2nd mortgage 109 7.60% (2) 11/15/02 109
Raintree Apartments
1st mortgage 1,290 7.60% (1) 11/15/02 1,133
2nd mortgage 48 7.60% (2) 11/15/02 48
Signal Pointe Apartments
1st mortgage 3,854 7.60% (1) 11/15/02 3,383
2nd mortgage 145 7.60% (2) 11/15/02 145
8,354 $ 7,370
Less unamortized
mortgage discounts (252)
Total $ 8,102
</TABLE>
(1) The principal balance is being amortized over 257 months with a balloon
payment due November 15, 2002.
(2) Payments are interest only.
(3) See "Item 7. Financial Statements - Note C" for information with respect to
the Registrant's ability to prepay these loans and other specific details
about the loans.
The Partnership exercised interest rate buy-down options for the three
properties when the debt was refinanced in 1992, reducing the stated rate from
8.76% to 7.60%. The fee for the interest rate reduction amounted to
approximately $700,000 and is being amortized as a loan discount using the
effective interest method over the life of the loans. The discount is reflected
as a reduction of the mortgage notes payable and increases the effective rate of
the debt to 8.76%.
Rental Rates and Occupancy:
Average annual rental rates per unit and occupancy for 1999 and 1998 for each
property:
Average Annual Average
Rental Rate Occupancy
(per unit)
Properties 1999 1998 1999 1998
Parktown Townhouses $8,487 $8,163 94% 95%
Raintree Apartments 5,828 5,751 96% 94%
Signal Pointe Apartments 6,926 6,518 95% 96%
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties of the Partnership are subject to
competition from other residential apartment complexes in the area. The
Corporate General Partner believes that all of the properties are adequately
insured. Each property is an apartment complex which leases units for lease
terms of one year or less. No residential tenant leases 10% or more of the
available rental space. All of the properties are in good physical condition,
subject to normal depreciation and deterioration as is typical for assets of
this type and age.
Real Estate Taxes and Rates:
Real estate taxes and rates in 1999 for each property were:
1999 1999
Billing Rate
(in thousands)
Parktown Townhouses $192 3.13%
Raintree Apartments 75 2.35%
Signal Pointe Apartments 165 1.79%
<PAGE>
Capital Improvements:
Parktown Townhouses
As of December 31, 1999, the Partnership has completed approximately $797,000 in
capital improvements consisting primarily of structural and parking lot
improvements, electrical upgrades, roof replacement, landscaping, air
conditioning unit replacement, and carpet and vinyl replacement. These
improvements were funded from the Partnership's reserves, operating cash flow
and insurance proceeds. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year. The minimum amount to
be budgeted is expected to be $300 per unit or $92,700. Additional improvements
may be considered and will depend on the physical condition of the property as
well as replacement reserves and anticipated cash flow generated by the
property.
Raintree Apartments
As of December 31, 1999, the Partnership has completed approximately $305,000 in
capital improvements consisting primarily of carpet and vinyl replacement, roof
replacement, and exterior painting. These improvements were funded from the
Partnership's reserves. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year. The minimum amount to
be budgeted is expected to be $300 per unit or $52,800. Additional improvements
may be considered and will depend on the physical condition of the property as
well as replacement reserves and anticipated cash flow generated by the
property.
Signal Pointe Apartments
As of December 31, 1999, the Partnership has completed approximately $656,000 in
capital improvements consisting primarily of structural upgrades, exterior
building enhancements, electrical upgrades, air conditioning unit replacement,
major landscaping, fencing, recreation facility improvements, appliances, and
carpet and vinyl replacements. These improvements were funded from the
Partnership's reserves and operating cash flow. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year.
The minimum amount to be budgeted is expected to be $300 per unit or $110,400.
Additional improvements may be considered and will depend on the physical
condition of the property as well as replacement reserves and anticipated cash
flow generated by the property.
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.
Item 3. 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 action 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
"Item 7. Financial Statements, Note B - Transfer of Control"). The plaintiffs
seek 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, settling
claims, subject to final court approval, on behalf of the Partnership and all
limited partners who own units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Superior Court of the
State of California, County of San Mateo, at which time the Court set a final
approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing
the Court received various objections to the settlement, including a challenge
to the Court's preliminary approval based upon the alleged lack of authority of
class plaintiffs' counsel to enter the settlement. On December 14, 1999, the
Corporate General Partner and its affiliates terminated the proposed settlement.
Certain plaintiffs have filed a motion to disqualify some of the plaintiffs'
counsel in the action. 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 4. Submission of Matters to a Vote of Security Holders:
During the quarter ended December 31, 1999, no matter was submitted to a vote of
Unit holders through the solicitation of proxies or otherwise.
<PAGE>
PART II
Item 5. Market for the Partnership Equity and Related Partner Matters:
The Partnership, a publicly-held limited partnership, offered and sold 27,400
limited partnership units aggregating $27,400,000. An additional 100 units were
purchased by the Corporate General Partner. The Partnership currently has 1,027
holders of record owning an aggregate of 27,500 Units. Affiliates of the
Corporate General Partner owned 16,429 units or 59.742% at December 31, 1999. No
public trading market has developed for the Units, and it is not anticipated
that such a market will develop in the future.
The following table sets forth the distributions made by the Partnership for the
years ended December 31, 1998 and 1999. See "Item 6. Management's Discussion and
Analysis or Plan of Operations" for information on split of distributions
between general and limited partners.
Distributions
Per Limited
Aggregate Partnership Unit
(in thousands)
01/01/98 - 12/31/98 $2,686 (1) $96.69
01/01/99 - 12/31/99 $ 300 (2) $10.80
(1) Consists of $2,330,000 of cash from operations and $356,000 of cash from
previously undistributed surplus funds from previous sales and
refinancings.
(2) Distribution was made from cash 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 Partnership'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 distributions to its partners in the year 2000 or
subsequent periods. See "Item 2. Description of Properties - Capital
Improvements" for information relating to anticipated capital expenditures at
the properties. Distributions may be restricted by the requirement to deposit
net operating income (as defined in the mortgage note) into the reserve account
until the reserve account is funded in an amount equal to a minimum of $400 and
a maximum of $1,000 per apartment unit for each respective property for a total
of approximately $341,000 to $853,000. The reserve accounts are currently fully
funded.
Several tender offers were made by various parties, including affiliates of the
general partners, during the calendar years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 16,429
limited partnership units in the Partnership representing 59.742% of the
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. Consequently, AIMCO is in a position to influence all voting decisions
with respect to the Registrant. Under the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters. When voting on matters, AIMCO would in all likelihood vote
the Units it acquired in a manner favorable to the interest of the Corporate
General Partner because of their affiliation with the Corporate General Partner.
Item 6. Management's Discussion and Analysis or Plan of Operation:
The matters discussed in this Form 10-KSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the disclosure
contained in this Form 10-KSB 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 matter, does not take into account the effects of
any changes to the Registrant's business and results of operation. Accordingly,
actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
This item should be read in conjunction with the financial statements and other
items contained elsewhere in this report.
Results of Operations
The Partnership realized net income for the year ended December 31, 1999, of
approximately $1,140,000 compared to approximately $838,000 for the year ended
December 31, 1998. (See "Note D" of the financial statements for a
reconciliation of these amounts to the Registrant's federal taxable income.) The
increase in net income was due to an increase in total revenues and a decrease
in total expenses. Total revenues increased due to increased rental income
partially offset by a decrease in other income. Rental income increased
primarily due to increased average annual rental rates at all the Partnership's
properties and increased occupancy at Raintree Apartments. Partially offsetting
the increases in rental income was a slight decrease in occupancy at Parktown
Townhouses and Signal Pointe Apartments. Other income decreased primarily due to
reduced interest income due to lower cash balances held in interest bearing
accounts.
Total expenses decreased for the year ended December 31, 1999 primarily due to
decreased operating expenses and depreciation expense, partially offset by
increased general and administrative expense. Operating expenses decreased
primarily due to decreased courtesy patrol during 1999 at Parktown Townhouses
and decreased contract services during 1999 at Signal Pointe Apartments. 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 casualty gain during the year ended December 31, 1999. The
gain resulted from foundation and sewer impairments that involved one building
with four units and a fire that damaged four units at Parktown Townhouses.
Depreciation expense decreased due to certain assets becoming fully depreciated
at Parktown Townhouses during 1998. General and administrative expense increased
primarily due to 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 December 31, 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.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Corporate General Partner. The effect of the change in 1999 was
to increase income by approximately $331,000 ($11.92 per limited partnership
unit). The cumulative effect, had this change been applied to prior periods, is
not material. The accounting principle change will not have an effect on cash
flow, funds available for distribution or fees payable to the Corporate General
Partner and affiliates.
As part of the ongoing business plan of the Registrant, the Corporate General
Partner monitors the rental market environment of 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 December 31, 1999, the Partnership had cash and cash equivalents of
approximately $1,327,000 compared to approximately $576,000 at December 31,
1998. Cash and cash equivalents increased approximately $751,000 from the
Partnership's previous year ended December 31, 1998. The increase is due to
approximately $2,342,000 of cash provided by operating activities which was
partially offset by approximately $991,000 of cash used in investing activities
and approximately $600,000 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 and insurance proceeds received. Cash used in financing
activities consisted of payments of principal made on the mortgages encumbering
the Registrant's properties and distributions paid to the partners.
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. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year.
The minimum amount to be budgeted is expected to be $300 per unit or $255,900.
Additional improvements may be considered and will depend on the physical
condition of the property as well as replacement reserves and anticipated cash
flow generated by the property. 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 $8,102,000, net of discount, is amortized over 257
months with required balloon payments 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 the
properties cannot be refinanced or sold for a sufficient amount, the Registrant
may risk losing such properties through foreclosure.
During the year ended December 31, 1999, the Partnership paid cash distributions
from operations of approximately $300,000 (approximately $297,000 to the limited
partners or $10.80 per limited partnership unit.) During the year ended December
31, 1998, the Partnership paid cash distributions totaling approximately
$2,686,000 (approximately $2,659,000 to the limited partners or $96.69 per
limited partnership unit). These distributions consisted of cash from operations
of approximately $2,330,000 (approximately $2,307,000 to the limited partners or
$83.89 per limited partnership unit) and previously undistributed proceeds from
sales and refinancings in previous years of approximately $356,000
(approximately $352,000 to the limited partners or $12.80 per limited
partnership unit). 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. Distributions may be
restricted by the requirement to deposit net operating income (as defined in the
mortgage note) into the reserve account until the reserve account is funded in
an amount equal to a minimum of $400 and a maximum of $1,000 per apartment unit
for each respective property for a total of approximately $341,000 to $853,000.
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 the year 2000 or subsequent periods.
Several tender offers were made by various parties, including affiliates of the
general partners, during the calendar years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 16,429
units of limited partnership units in the Partnership representing 59.742% of
the 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. Consequently, AIMCO is in a position to influence all voting decisions
with respect to the Registrant. Under the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters. When voting on matters, AIMCO would in all likelihood vote
the Units it acquired in a manner favorable to the interest of the Corporate
General Partner because of their affiliation with the Corporate General Partner.
Year 2000 Compliance
General Description
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 Managing Agent's
computer programs or hardware that had date-sensitive software or embedded chips
might have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted 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.
Computer Hardware, Software and Operating Equipment
In 1999, the Managing Agent completed all phases of its Year 2000 program by
completing the replacement and repair of any hardware or software system or
operating equipment that was not yet Year 2000 compliant. The Managing Agent's
hardware and software systems and its operating equipment are now Year 2000
compliant. No material failure or erroneous results have occurred in the
Managing Agent's computer applications related to the failure to reference the
Year 2000 to date.
Third Parties
To date, the Managing Agent is not aware of any significant supplier or
subcontractor (external agent) or financial institution of the Partnership that
has a Year 2000 issue that would have a material impact on the Partnership's
results of operations, liquidity or capital resources. However, the Managing
Agent has no means of ensuring or determining the Year 2000 compliance of
external agents. At this time, the Managing Agent does not believe that a Year
2000 issue of any non-compliant external agent will have a material impact on
the Partnership's financial position or results of operations.
Costs
The total cost of the Managing Agent's Year 2000 project was approximately $3.2
million and was funded from operating cash flows.
Risks Associated with the Year 2000
The Managing Agent completed all necessary phases of its Year 2000 program in
1999, and did not experience system or equipment malfunctions related to a
failure to reference the Year 2000. The Managing Agent or Partnership has not
been materially adversely affected by disruptions in the economy generally
resulting from the Year 2000 issue.
At this time, the Managing Agent does not believe that the Partnership's
businesses, results of operations or financial condition will be materially
adversely affected by the Year 2000 issue.
Contingency Plans Associated with the Year 2000
The Managing Agent has not had to implement contingency plans such as manual
workarounds or selecting new relationships for its banking or elevator operation
activities in order to avoid the Year 2000 issue.
<PAGE>
Item 7. Financial Statements:
SHELTER PROPERTIES II
LIST OF FINANCIAL STATEMENTS
Report of Ernst & Young, LLP Independent Auditors
Balance Sheet - December 31, 1999
Statements of Operations - Years ended December 31, 1999 and 1998
Statements of Changes in Partners' (Deficit) Capital - Years ended
December 31, 1999 and 1998
Statements of Cash Flows - Years ended December 31, 1999 and 1998
Notes to Financial Statements
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Partners
Shelter Properties II
We have audited the accompanying balance sheet of Shelter Properties II as of
December 31, 1999, and the related statements of operations, changes in
partners' (deficit) capital and cash flows for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Partnership's management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shelter Properties II at
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note I to the financial statements, the Partnership changed its
method of accounting to capitalize the cost of exterior painting and major
landscaping effective January 1, 1999.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 24, 2000
<PAGE>
SHELTER PROPERTIES II
BALANCE SHEET
(in thousands, except unit data)
December 31, 1999
Assets
Cash and cash equivalents $ 1,327
Receivables and deposits 369
Restricted escrows 385
Other assets 172
Investment properties (Notes C & F):
Land $ 1,814
Buildings and related personal property 25,132
26,946
Less accumulated depreciation (17,884) 9,062
$11,315
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 243
Tenant security deposit liabilities 150
Accrued property taxes 195
Other liabilities 442
Mortgage notes payable (Note C) 8,102
Partners' (Deficit) Capital
General partners $ (127)
Limited partners (27,500 units issued and
outstanding) 2,310 2,183
$11,315
See Accompanying Notes to Financial Statements
<PAGE>
SHELTER PROPERTIES II
STATEMENTS OF OPERATIONS
(in thousands, except unit data)
Years Ended December 31,
1999 1998
Revenues:
Rental income $ 5,785 $ 5,545
Other income 259 313
Total revenues 6,044 5,858
Expenses:
Operating 2,515 2,618
General and administrative 233 196
Depreciation 954 1,010
Interest 772 778
Property taxes 430 418
Total expenses 4,904 5,020
Net income (Note D) $ 1,140 $ 838
Net income allocated to general partners (1%) $ 11 $ 8
Net income allocated to limited partners (99%) 1,129 830
$ 1,140 $ 838
Net income per limited partnership unit $ 41.05 $ 30.18
Distributions per limited partnership unit $ 10.80 $ 96.69
See Accompanying Notes to Financial Statements
<PAGE>
SHELTER PROPERTIES II
STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
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 -- (27) (2,659) (2,686)
Net income for the year ended
December 31, 1998 -- 8 830 838
Partners' (deficit) capital at
December 31, 1998 27,500 (135) 1,478 1,343
Distribution to partners -- (3) (297) (300)
Net income for the year ended
December 31, 1999 -- 11 1,129 1,140
Partners' (deficit) capital at
December 31, 1999 27,500 $ (127) $ 2,310 $ 2,183
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
SHELTER PROPERTIES II
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,140 $ 838
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 954 1,010
Amortization of discounts and loan costs 100 109
Casualty gain (59) --
Change in accounts:
Receivables and deposits (35) 24
Other assets (40) 19
Accounts payable 84 54
Tenant security deposit liabilities 16 4
Accrued property taxes (41) 57
Other liabilities 223 (13)
Net cash provided by operating activities 2,342 2,102
Cash flows from investing activities:
Property improvements and replacements (1,703) (512)
Net withdrawals from (deposits to) restricted escrows 599 (43)
Insurance proceeds received 113 --
Net cash used in investing activities (991) (555)
Cash flows from financing activities:
Payments on mortgage notes payable (300) (278)
Distributions to partners (300) (2,686)
Net cash used in financing activities (600) (2,964)
Net increase (decrease) in cash and cash equivalents 751 (1,417)
Cash and cash equivalents at beginning of period 576 1,993
Cash and cash equivalents at end of period $ 1,327 $ 576
Supplemental disclosure of cash flow information:
Cash paid for interest $ 647 $ 669
Supplemental disclosure of non-cash activity:
Property improvements and replacements in accounts
payable $ 55 $ --
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
SHELTER PROPERTIES II
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
Note A - Organization and Significant Accounting Policies
Organization: Shelter Properties II (the "Partnership" or "Registrant") was
organized as a limited partnership under the laws of the State of South Carolina
on October 10, 1980. The general partner responsible for management of the
Partnership's business is Shelter Realty II Corporation, a South Carolina
corporation (the "Corporate General Partner"). The only other general partner of
the Partnership was N. Barton Tuck, Jr. Mr. Tuck was not an affiliate of the
Corporate General Partner and was effectively prohibited by the Partnership's
partnership agreement (the "Partnership Agreement") from participating in the
management of the Partnership. In June 1999, Mr. Tuck's general partnership
interest in the Registrant was purchased by AIMCO Properties, L.P., an affiliate
of the Corporate General Partner. The Corporate General Partner is a subsidiary
of Apartment Investment and Management Company ("AIMCO") (see "Note B - Transfer
of Control"). The directors and officers of the Corporate General Partner also
serve as executive officers of AIMCO. The Partnership Agreement provides that
the Partnership is to terminate on December 31, 2020 unless terminated prior to
such date. The Partnership commenced operations on March 1, 1981, and completed
its acquisition of apartment properties on June 30, 1981. The Partnership
operates three apartment properties located in the South and Southeast.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Allocation of Cash Distributions: Cash distributions by the Partnership are
allocated between general and limited partners in accordance with the provisions
of the Partnership Agreement. The Partnership Agreement provides that net cash
from operations means revenue received less operating expenses paid, adjusted
for certain specified items which primarily include mortgage payments on debt,
property improvements and replacements not previously reserved, and the effects
of other adjustments to reserves including reserve amounts deemed necessary by
the Corporate General Partner. In the following notes to the financial
statements, whenever "net cash provided by operations" is used, it has the
aforementioned meaning. 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 from operations", as defined in the Partnership
Agreement. However, "net cash from operations" should not be considered an
alternative to net income as an indicator of the Partnership's operating
performance or to cash flows as a measure of liquidity.
Years Ended December 31,
1999 1998
(in thousands)
Net cash provided by operating activities $ 2,342 $ 2,102
Property improvements and replacements (1,758) (512)
Payments on mortgage notes payable (300) (278)
Changes in reserves for net operating liabilities (207) (145)
Changes in restricted escrows, net 599 (43)
Additional operating reserves (676) (1,124)
Net cash from operations $ -- $ --
In 1999 and 1998, the Corporate General Partner believed it to be in the best
interest of the Partnership to reserve an additional $676,000 and $1,124,000,
respectively, to fund continuing capital improvement needs in order for the
properties to remain competitive.
During the year ended December 31, 1999, the Partnership paid cash distributions
of approximately $300,000 (approximately $297,000 to the limited partners or
$10.80 per limited partnership unit.) During the year ended December 31, 1998,
the Partnership paid cash distributions totaling approximately $2,686,000
(approximately $2,659,000 to the limited partners or $96.69 per limited
partnership unit). The 1998 distributions consisted of cash from operations of
approximately $2,330,000 (approximately $2,307,000 to the limited partners or
$83.89 per limited partnership unit) and previously undistributed proceeds from
sales and refinancings in previous years of approximately $356,000
(approximately $352,000 to the limited partners or $12.80 per limited
partnership unit).
The Partnership Agreement provides that 99% of distributions of net cash from
operations are allocated to the limited partners until they receive net cash
from operations for such fiscal year equal to 7% of their adjusted capital
values (as defined in the Partnership Agreement), at which point the general
partners will be allocated all net cash from operations until they have received
distributions equal to 10% of the aggregate net cash from operations distributed
to partners for such fiscal year. Thereafter, the general partners will be
allocated 10% of any distributions of remaining net cash from operations for
such fiscal year.
All distributions of distributable net proceeds (as defined in the Partnership
Agreement) from property dispositions and refinancings will be allocated to the
limited partners until each limited partner has received an amount equal to a
cumulative 7% per annum of the average of the limited partners' adjusted capital
value, less any prior distributions of net cash from operations and
distributable net proceeds, and has also received an amount equal to the limited
partners' adjusted capital value. Thereafter, the general partners receive 1% of
the selling prices of properties sold where they acted as a broker, and then the
limited partners will be allocated 85% of any remaining distributions of
distributable net proceeds and the general partners will receive 15%.
Distributions may be restricted by the requirement to deposit net operating
income (as defined in the mortgage note) into the reserve account until the
reserve account is funded in an amount equal to a minimum of $400 and a maximum
of $1,000 per apartment unit for each respective property for a total of
approximately $341,000 to $853,000. As of December 31, 1999, the Partnership has
deposits of approximately $362,000 in its reserve account.
Allocation of Profits, Gains and Losses: Profits, gains, and losses of the
Partnership are allocated between general and limited partners in accordance
with the provisions of the Partnership Agreement.
Profits, not including gain from property dispositions, are allocated as if they
were distributions of net cash from operations.
Any gain from property dispositions attributable to the excess, if any, of the
indebtedness relating to a property immediately prior to the disposition of such
property over the Partnership's adjusted basis in the property shall be
allocated to each partner having a negative capital account balance, to the
extent of such negative balance. The balance of any gain shall be treated on a
cumulative basis as if it constituted an equivalent amount of distributable net
proceeds and shall be allocated to the general partners to the extent that
general partners would have received distributable net proceeds in connection
therewith; the balance shall be allocated to the limited partners. However, the
interest of the general partners will be equal to at least 1% of each gain at
all times during the existence of the Partnership.
All losses, including losses attributable to property dispositions, are
allocated 99% to the limited partners and 1% to the general partners.
Accordingly, net income as shown in the statements of operations and changes in
partners' (deficit) capital for 1999 and 1998 were allocated 99% to the limited
partners and 1% to the general partners. Net income per limited partnership unit
for 1999 and 1998 was computed as 99% of net income divided by 27,500 average
units outstanding.
Fair Value of Financial Instruments: Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments", as
amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate fair value. Fair value is
defined in the SFAS as the amount at which the instruments could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. The Partnership believes that the carrying amount of its
financial instruments (except for long term debt) approximates their fair value
due to the short term maturity of these instruments. The fair value of the
Partnership's long term debt, after discounting the scheduled loan payments to
maturity, approximates its carrying balance.
Other Reserves: The general partners may designate a portion of cash generated
from operations as "other reserves" in determining net cash used in operations.
Per the Partnership Agreement, the general partners designated as other reserves
an amount equal to the net liabilities related to the operations of apartment
properties during the current fiscal year that are expected to require the use
of cash during the next fiscal year. The changes in other reserves during 1999
and 1998 were a decrease of approximately $207,000 and $145,000, respectively,
which amounts were determined by considering changes in the balances of
receivables and deposits, other assets, accounts payable, tenant security
deposits, accrued taxes, and other liabilities. At this time, the Corporate
General Partner expects to continue to adjust other reserves based on the net
change in the aforementioned account balances.
Cash and cash equivalents: Includes cash on hand and in banks and money market
accounts. At certain times, the amount of cash deposited at a bank may exceed
the limit on insured deposits.
Reserve Account: A general reserve account was established in 1992 with the
refinancing proceeds for each mortgaged property. These funds were established
to cover necessary repairs and replacements of existing improvements, debt
service, out of pocket expenses incurred for ordinary and necessary
administrative tasks, and payment of real property taxes and insurance premiums.
The Partnership is required to deposit net operating income (as defined in the
mortgage note) from each refinanced property to the respective reserve account
until it equals a minimum balance of $400 and a maximum balance of $1,000 per
apartment unit for each respective property. The minimum balance of $400 per
apartment unit has currently been attained; however, the maximum balance of
$1,000 per apartment unit has not been attained. The balance at December 31,
1999, is approximately $362,000, which includes interest.
Escrows for Taxes: Escrows maintained for the payment of taxes, totaling
$196,000 at December 31, 1999, are included in receivables and deposits and are
held by the Partnership.
Depreciation: Depreciation is provided by the straight-line method over the
estimated lives of the apartment properties and related personal property. For
Federal income tax purposes, the accelerated cost recovery method is used (1)
for real property over 15 years for additions prior to March 16, 1984, 18 years
for additions after March 15, 1984 and before May 9, 1985, and 19 years for
additions after May 8, 1985, and before January 1, 1987, and (2) for personal
property over 5 years for additions prior to January 1, 1987. As a result of the
Tax Reform Act of 1986, for additions after December 31, 1986, the modified
accelerated cost recovery method is used for depreciation of (1) real property
additions over 27 1/2 years and (2) personal property additions over 5 years.
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the costs of exterior painting and major landscaping (Note I).
Loan Costs: Loan costs of approximately $393,000, less accumulated amortization
of approximately $279,000, are included in other assets and are being amortized
on a straight-line basis over the life of the loans.
Tenant Security Deposits: The Partnership requires security deposits from
lessees for the duration of the lease and such deposits are included in
receivables and deposits. Deposits are refunded when the tenant vacates,
provided the tenant has not damaged the unit and is current on rental payments.
Leases: The Partnership generally leases apartment units for twelve-month terms
or less. The Partnership recognizes income as earned on its leases. In addition,
the Corporate General Partner's policy is to offer rental concessions during
particularly slow months or in response to heavy competition from other similar
complexes in the area. Concessions are charged against rental income as
incurred.
Investment Properties: Investment properties consist of three apartment
complexes and are stated at cost. Acquisition fees are capitalized as a cost of
real estate. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Partnership
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Costs of apartment properties that have
been permanently impaired have been written down to appraised value. No
adjustments for impairment of value were recorded in the years ended December
31, 1999 or 1998.
Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. (See "Note G" for required disclosure).
Advertising: The Partnership expenses the costs of advertising as incurred.
Advertising expense, included in operating expenses, was approximately $63,000
and $66,000 for the years ended December 31, 1999 and 1998, respectively.
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 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 has had or
will have a material effect on the affairs and operations of the Partnership.
Note C - Mortgage Notes Payable
The principle terms of mortgage notes payable are as follows:
<TABLE>
<CAPTION>
Principal Monthly Principal
Balance At Payment Stated Balance
December 31, Including Interest Maturity Due At
1999 Interest Rate Date Maturity
(in thousands) (in thousands)
Properties
Parktown Townhouses
<S> <C> <C> <C> <C> <C>
1st mortgage $ 2,908 $ 28 7.60% 11/15/02 $ 2,552
2nd mortgage 109 1 7.60% 11/15/02 109
Raintree Apartments
1st mortgage 1,290 12 7.60% 11/15/02 1,133
2nd mortgage 48 (a) 7.60% 11/15/02 48
Signal Pointe Apartments
1st mortgage 3,854 37 7.60% 11/15/02 3,383
2nd mortgage 145 1 7.60% 11/15/02 145
8,354 $ 79 $ 7,370
Less unamortized present
value discounts (252)
Total $ 8,102
</TABLE>
(a) Monthly interest only payments are less than $1,000.
The Partnership exercised interest rate buy-down options for the three
properties when the debt was refinanced in 1992, reducing the stated rate from
8.76% to 7.60%. The fee for the interest rate reduction amounted to
approximately $700,000 and is being amortized as a loan discount using the
effective interest method over the life of the loans. The discount is reflected
as a reduction of the mortgage notes payable and increases the effective rate of
the debt to 8.76%.
The mortgage notes payable are nonrecourse and are secured by pledge of the
respective apartment properties and by pledge of revenues from the respective
apartment properties. Prepayment penalties are incurred if the notes are repaid
prior to maturity. Further, the properties may not be sold subject to existing
indebtedness.
Scheduled principal payments of the mortgage notes payable subsequent to
December 31, 1999 are as follows (in thousands):
2000 $ 323
2001 349
2002 7,682
$ 8,354
Note D - Income Taxes
The Partnership has received a ruling from the Internal Revenue Service that it
will be classified as a partnership for Federal income tax purposes.
Accordingly, no provision for income taxes is made in the financial statements
of the Partnership. Taxable income or loss of the Partnership is reported in the
income tax returns of its partners.
The following is a reconciliation of reported net income and Federal taxable
income (dollar amounts in thousands, except per unit data):
1999 1998
Net income as reported $ 1,140 $ 838
Add (deduct):
Depreciation differences 480 622
Change in prepaid rental 61 33
Other (70) 26
Federal taxable income $ 1,611 $ 1,519
Federal taxable income per limited
partnership unit $ 57.98 $ 54.67
The following is a reconciliation between the Partnership's reported amounts and
Federal tax basis of net assets and liabilities (in thousands):
Net assets as reported $ 2,183
Buildings and land 2,727
Accumulated depreciation (5,369)
Syndication fees 3,111
Other 366
Net assets - tax basis $ 3,018
======
Note E - 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) 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 years ended December 31,
1999 and 1998 are as follows:
1999 1998
(in thousands)
Property management fees (included in operating
expenses) $ 303 $ 290
Reimbursement for services of affiliates
(included in operating expense, general and
administrative expense, and investment
properties) 163 120
Due to general partners 58 58
During the years ended December 31, 1999 and 1998, affiliates of the Corporate
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's properties as compensation for providing property management
services. The Partnership paid to such affiliates approximately $303,000 and
$290,000 for the years ended December 31, 1999 and 1998, respectively.
Affiliates of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $163,000 and
$120,000 for the years ended December 31, 1999 and 1998, respectively, including
approximately $54,000 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 December 31, 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.
Several tender offers were made by various parties, including affiliates of the
general partners, during the calendar years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 16,429
units of limited partnership units in the Partnership representing 59.742% of
the 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. Consequently, AIMCO is in a position to influence all voting decisions
with respect to the Registrant. Under the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters. When voting on matters, AIMCO would in all likelihood vote
the Units it acquired in a manner favorable to the interest of the Corporate
General Partner because of their affiliation with the Corporate General Partner.
Note F - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
Initial Cost
To Partnership
(in thousands)
Buildings Net Costs
and Related Capitalized
Personal Subsequent to
Description Encumbrances Land Property Acquisition
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Parktown Townhouses $ 3,017 $ 1,095 $ 5,329 $ 3,926
Raintree Apartments 1,338 184 3,184 1,066
Signal Pointe Apartments 3,999 535 8,062 3,565
Totals $ 8,354 $ 1,814 $16,575 $ 8,557
</TABLE>
<TABLE>
<CAPTION>
Gross Amount At Which
Carried
At December 31, 1999
(in thousands)
Buildings
And
Related
Personal Accumulated Date of Date Depreciable
Description Land Properties Total Depreciation Construction Acquired Life-Years
(in thousands)
Parktown
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Townhouses $ 1,095 $ 9,255 $10,350 $ 6,823 1969 03/01/81 5-35
Raintree
Apartments 184 4,250 4,434 2,981 1972-1974 04/30/81 5-38
Signal Pointe
Apartments 535 11,627 12,162 8,080 1970 06/30/81 5-37
Totals $ 1,814 $25,132 $26,946 $17,884
</TABLE>
Reconciliation of "Real Estate and Accumulated Depreciation":
Years Ended December 31,
1999 1998
(in thousands)
Investment Properties
Balance at beginning of year $25,318 $24,806
Property improvements 1,758 512
Disposals of property (130) --
Balance at end of year $26,946 $25,318
Accumulated Depreciation
Balance at beginning of year $17,006 $15,996
Additions charged to expense 954 1,010
Disposals of property (76) --
Balance at end of year $17,884 $17,006
The aggregate cost of the real estate for Federal income tax purposes at
December 31, 1999 and 1998, is approximately $29,673,000 and $28,166,000,
respectively. The accumulated depreciation taken for Federal income tax purposes
at December 31, 1999 and 1998, is approximately $23,253,000 and $22,779,000,
respectively.
Note G - 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 segment profit (loss) before
depreciation. The accounting policies of the reportable segment are the same as
those described in the summary of significant accounting policies.
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 years 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 $ 5,785 $ -- $ 5,785
Other income 250 9 259
Interest expense 772 -- 772
Depreciation 954 -- 954
General and administrative expense -- 233 233
Segment profit (loss) 1,364 (224) 1,140
Total assets 11,183 132 11,315
Capital expenditures for investment
properties 1,758 -- 1,758
1998 Residential Other Totals
Rental income $ 5,545 $ -- $ 5,545
Other income 242 71 313
Interest expense 778 -- 778
Depreciation 1,010 -- 1,010
General and administrative expense -- 196 196
Segment profit (loss) 963 (125) 838
Total assets 10,060 317 10,377
Capital expenditures for investment
properties 512 -- 512
Note H - 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 action 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 plaintiffs seek 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, settling claims, subject to final court
approval, on behalf of the Partnership and all limited partners who own units as
of November 3, 1999. Preliminary approval of the settlement was obtained on
November 3, 1999 from the Superior Court of the State of California, County of
San Mateo, at which time the Court set a final approval hearing for December 10,
1999. Prior to the December 10, 1999 hearing the Court received various
objections to the settlement, including a challenge to the Court's preliminary
approval based upon the alleged lack of authority of class plaintiffs' counsel
to enter the settlement. On December 14, 1999, the Corporate General Partner and
its affiliates terminated the proposed settlement. Certain plaintiffs have filed
a motion to disqualify some of the plaintiffs' counsel in the action. 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.
Note I - Change in Accounting Principle
Effective January 1, 1999, the Partnership changed its method of accounting to
capitalize the cost of exterior painting and major landscaping on a prospective
basis. The Partnership believes that this accounting principle change is
preferable because it provides a better matching of expenses with the related
benefit of the expenditures and it is consistent with industry practice and the
policies of the Corporate General Partner. The effect of the change in 1999 was
to increase income by approximately $331,000 ($11.92 per limited partnership
unit). The cumulative effect, had this change been applied to prior periods, is
not material. The accounting principle change will not have an affect on cash
flow, funds available for distribution or fees payable to the Corporate General
Partner and affiliates.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act:
Shelter Properties II (the "Partnership" or "Registrant") has no officers or
directors. The names and ages of, as well as the positions and offices held by,
the executive officers and directors of Shelter Realty II Corporation (the
"Corporate General Partner") are set forth below. There are no family
relationships between or among any officers or directors.
Name Age Position
Patrick J. Foye 42 Executive Vice President and Director
Martha L. Long 40 Senior Vice President and Controller
Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to
1998 and was Corporate Partner of the firm's Brussels, Budapest and Moscow
offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long
Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.
Martha L. Long has been Senior Vice President and Controller of the Corporate
General Partner and AIMCO since October 1998, as a result of the acquisition of
Insignia Financial Group, Inc. From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997, retaining that title until October 1998. From 1988
to June 1994, Ms. Long was Senior Vice President and Controller for The First
Savings Bank, FSB in Greenville, South Carolina.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Registrant under Rule 16a-3(e) during the Registrant's most recent fiscal
year and Forms 5 and amendments thereto furnished to the Registrant with respect
to its most recent fiscal year, the Registrant is not aware of any director,
officer, beneficial owner of more than ten percent of the units of limited
partnership interest in the Registrant that failed to file on a timely basis, as
disclosed in the above Forms, reports required by section 16(a) of the Exchange
Act during the most recent fiscal year or prior fiscal years except as follows:
AIMCO Properties, L.P. and its joint filers failed to timely file a Form 3 with
respect to its acquisition of Units and AIMCO and its joint filers failed to
timely file a Form 4 with respect to its acquisition of Units.
Item 10. Executive Compensation:
No directors and officers of the Corporate General Partner received any
remuneration from the Registrant.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management:
Except as noted below, no person was known to be the beneficial owner of more
than 5% of the Limited Partnership Units of the Registrant as of December 31,
1999.
Entity Number of Units Percentage
Cooper River Properties, LLC 1,958.5 7.122%
(an affiliate of AIMCO)
Insignia Properties, LP 9,128.0 33.193%
(an affiliate of AIMCO)
AIMCO Properties LP 5,342.5 19.427%
(an affiliate of AIMCO)
Cooper River Properties, LLC and Insignia Properties LP are indirectly
ultimately owned by AIMCO. Their business address is 55 Beattie Place,
Greenville, South Carolina 29602.
AIMCO Properties LP is indirectly ultimately controlled by AIMCO. Its business
address is 2000 South Colorado Boulevard, Denver, Colorado 80222.
No director or officer of the Corporate General Partner owns any units. The
Corporate General Partner owns 100 Units as required by the terms of the
Partnership Agreement. AIMCO Properties LP, the other general partner, acquired
5,342.5 units during the current fiscal year.
Item 12. Certain Relationships and Related Transactions:
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) 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 years ended December 31,
1999 and 1998 are as follows:
1999 1998
(in thousands)
Property management fees $ 303 $ 290
Reimbursement for services of affiliates 163 120
Due to general partners 58 58
During the years ended December 31, 1999 and 1998, affiliates of the Corporate
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's properties as compensation for providing property management
services. The Partnership paid to such affiliates approximately $303,000 and
$290,000 for the years ended December 31, 1999 and 1998, respectively.
Affiliates of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $163,000 and
$120,000 for the years ended December 31, 1999 and 1998, respectively, including
approximately $54,000 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 December 31, 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.
Several tender offers were made by various parties, including affiliates of the
general partners, during the calendar years ended December 31, 1999 and 1998. As
a result of these tender offers, AIMCO and its affiliates currently own 16,429
units of limited partnership units in the Partnership representing 59.742% of
the 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. Consequently, AIMCO is in a position to influence all voting decisions
with respect to the Registrant. Under the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters. When voting on matters, AIMCO would in all likelihood vote
the Units it acquired in a manner favorable to the interest of the Corporate
General Partner because of their affiliation with the Corporate General Partner.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 18, Independent Accountants' Preferability Letter for Change
in Accounting Principle, is filed as an exhibit to this report.
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
(b) Reports on Form 8-K filed in the fourth quarter of calendar year 1999:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
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
Corporate General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date:
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/Patrick J. Foye Executive Vice President Date:
Patrick J. Foye and Director
/s/Martha L. Long Senior Vice President Date:
Martha L. Long and Controller
<PAGE>
EXHIBIT INDEX
Exhibit
2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and between
AIMCO and IPT, incorporated by reference to Exhibit 2.1 filed with
Registrant's Current Report on Form 8-K dated October 1, 1998.
3 See Exhibit 4(a)
4 (a) Amended and Restated Certificate and Agreement of Limited Partnership
[included as Exhibit A to the Prospectus of Registrant dated February 2,
1981 contained in Amendment No. 1 to Registration Statement No. 2-69507 of
Registrant filed February 2, 1981 (the "Prospectus") and incorporated
herein by reference].
(b) Subscription Agreements and Signature Pages [Filed with Amendment No. 1
of Registration Statement No. 2-69507, of Registrant and incorporated
herein by reference].
(c) Promissory Note and Deed of Trust between Joe A. McDermott, Inc. and
the Mischer Corporation and New York Life Insurance Company. General
Warranty Deed between Parktown Realty, N.V. and Shelter Properties II to
acquire Parktown Apartments.*
(d) Mortgage Note and Mortgage Deed between Mutual Benefit Life Insurance
Company and Foxcroft Investors, Limited. Purchase Money Note and Purchase
Money Mortgage and Security Agreement between Foxcroft Investors, Limited
and Shelter Properties II to acquire Squire One Apartments.*
*Filed as Exhibit 4(c) and 4(e), respectively, to Form 10-K of Registrant
for year ended December 31, 1987 and incorporated herein by reference.
(e) Mortgage Note between William C. Dailey and Fidelity Federal Savings
and Loan Association and Promissory Note between William C. Dailey and The
Prudential Insurance Company (filed as Exhibit 12(E) to Amendment No. 1 to
Registration Statement No. 2-69507 of Registrant filed January 1981 and
incorporated herein by reference). Modification and Assumption of Mortgage
between American Federal Savings and Loan Association and Shelter
Properties II to acquire Raintree Apartments (filed as Exhibit 4(e) to Form
10-K of Registrant for year ended December 31, 1988 and incorporated herein
by reference).
<PAGE>
10(i) Contracts related to acquisition or disposition of properties.
(a) Purchase Agreement dated December 31, 1980, between Hubris, Inc. and
U.S. Shelter Corporation to purchase Parktown Townhouse.**
(b) Purchase Agreement dated January 5, 1981, between Twin City Apartments,
Inc. and U.S. Shelter Corporation to purchase The Village Apartments.**
(c) Purchase Agreement dated January 2, 1981 between Carolina Housing
Partners and U.S. Shelter Corporation to purchase Raintree Apartments.**
**Filed as Exhibits 12(b), 12(c), and 12(d), respectively, to Amendment No.
1 of Registration Statement No. 2-69507 of Registrant filed February 2,
1981 and incorporated herein by reference.
(d) Purchase Agreement dated May 28, 1981 between Foxcroft Investors,
Limited and Shelter Properties II to purchase Squire One Apartments. [Filed
with Form 8-K of Registrant dated June 8, 1981 and incorporated herein by
reference.]
(e) Sales Agreement dated December 30, 1983 between Shelter Properties II
and Security Investors, Ltd.-II to sell Cambridge Station Apartments.
[Filed with Form 10-K of Registrant for year ended December 31, 1983 and
incorporated herein by reference.]
(ii) Form of Management Agreement with U.S. Shelter Corporation subsequently
assigned to Shelter Management Group, L.P. (now known as Insignia
Management Group, L.P.) [filed with Amendment No. 1 to Registration
Statement, No. 2-69507, of Registrant and incorporated herein by
reference].
(iii) Contracts related to refinancing of debt:
(a) First Mortgage and Security Agreements dated October 28, 1992 between
Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee)
and First Commonwealth Realty Credit Corporation, a Virginia Corporation,
securing the following properties: Raintree, Parktown/Center Court, and
Squire One.***
(b) Second Mortgage and Security Agreements dated October 28, 1992 between
Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee)
and First Commonwealth Realty Credit Corporation, a Virginia Corporation,
securing the following properties: Raintree, Parktown/Center Court, and
Squire One.***
<PAGE>
(c) First Assignments of Leases and Rents dated October 28, 1992 between
Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee)
and First Commonwealth Realty Credit Corporation, a Virginia Corporation,
securing the following properties: Raintree, Parktown/Center Court, and
Squire One.***
(d) Second Assignments of Leases and Rents dated October 28, 1992 between
Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee)
and First Commonwealth Realty Credit Corporation, a Virginia Corporation,
securing the following properties: Raintree, Parktown/Center Court, and
Squire One.***
(e) First Deeds of Trust Notes dated October 28, 1992 between Shelter
Properties II Limited Partnership and First Commonwealth Realty Credit
Corporation, relating to the following properties: Raintree,
Parktown/Center Court, and Squire One.***
(f) Second Deeds of Trust Notes dated October 28, 1992 between Shelter
Properties II Limited Partnership and First Commonwealth Realty Credit
Corporation, relating to the following properties: Raintree,
Parktown/Center Court, and Squire One.***
***Filed as Exhibit 10(iii) (a) through (f), respectively, to Form 10-KSB
of Registrant for the year ended December 31, 1992 and incorporated herein
by reference.
18 Independent Accountants' Preferability Letter for Change in Accounting
Principle.
27 Financial Data Schedule.
99 Prospectus of Registrant dated February 2, 1981 [included in Registration
Statement No. 2-69507 of Registrant and incorporated herein by reference].
<PAGE>
Exhibit 18
February 24, 2000
Mr. Patrick J. Foye
Executive Vice President
Shelter Realty II Corporation
Corporate General Partner of Shelter Properties II
55 Beattie Place
P.O. Box 1089
Greenville, South Carolina 29602
Dear Mr. Foye:
Note I of Notes to the Financial Statements of Shelter Properties II included in
its Form 10-KSB for the year ended December 31, 1999 describes a change in the
method of accounting to capitalize exterior painting and major landscaping,
which would have been expensed under the old policy. You have advised us that
you believe that the change is to a preferable method in your circumstances
because it provides a better matching of expenses with the related benefit of
the expenditures and is consistent with policies currently being used by your
industry and conforms to the policies of the Corporate General Partner.
There are no authoritative criteria for determining a preferable method based on
the particular circumstances; however, we conclude that the change in the method
of accounting for exterior painting and major landscaping is to an acceptable
alternative method which, based on your business judgment to make this change
for the reasons cited above, is preferable in your circumstances.
Very truly yours,
/s/Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties II 1999 Fourth Quarter 10-KSB and is qualified in its entirety by
reference to such 10-KSB filing.
</LEGEND>
<CIK> 0000319723
<NAME> SHELTER PROPERTIES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,327
<SECURITIES> 0
<RECEIVABLES> 369
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 26,946
<DEPRECIATION> (17,884)
<TOTAL-ASSETS> 11,315
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 8,102
0
0
<COMMON> 0
<OTHER-SE> 2,183
<TOTAL-LIABILITY-AND-EQUITY> 11,315
<SALES> 0
<TOTAL-REVENUES> 6,044
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 772
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140
<EPS-BASIC> 41.05 <F2>
<EPS-DILUTED> 0
<FN>
<F1> Registrant has an unclassified balance sheet. <F2> Multiplier is 1.
</FN>
</TABLE>
