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 0-10260
SHELTER PROPERTIES III
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0718508
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
SHELTER PROPERTIES III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except per unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 1,515
Receivables and deposits, net of bad debt
allowance of $14 388
Restricted escrows 562
Other assets 209
Investment properties:
Land $ 1,281
Buildings and related personal property 25,505
26,786
Less accumulated depreciation (15,805) 10,981
$ 13,655
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 140
Tenant security deposit liabilities 105
Accrued property taxes 277
Other liabilities 402
Mortgage notes payable 7,949
Partners' Capital (Deficit)
General partners $ (85)
Limited partners (55,000 units issued and
outstanding) 4,867 4,782
$ 13,655
See Accompanying Notes to Consolidated Financial Statements
b)
SHELTER PROPERTIES III
CONSOLIDATED 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 $1,317 $1,297 $3,885 $3,799
Other income 87 106 248 305
Total revenues 1,404 1,403 4,133 4,104
Expenses:
Operating 634 688 1,833 1,886
General and administrative 59 43 176 152
Depreciation 220 228 662 676
Interest 180 186 548 561
Property taxes 95 92 289 271
Total expenses 1,188 1,237 3,508 3,546
Net income $ 216 $ 166 $ 625 $ 558
Net income allocated to
general partners (1%) $ 2 $ 2 $ 6 $ 6
Net income allocated to
limited partners (99%) 214 164 619 552
$ 216 $ 166 $ 625 $ 558
Net income per limited
partnership unit $ 3.89 $ 2.98 $11.25 $10.04
Distributions per limited
partnership unit $ 3.60 $ 9.00 $ 3.60 $18.00
See Accompanying Notes to Consolidated Financial Statements
c)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 55,000 $ 2 $27,500 $27,502
Partners' (deficit) capital at
December 31, 1998 55,000 $ (89) $ 4,446 $ 4,357
Distribution to partners -- (2) (198) (200)
Net income for the nine months
ended September 30, 1999 -- 6 619 625
Partners' (deficit) capital at
September 30, 1999 55,000 $ (85) $ 4,867 $ 4,782
See Accompanying Notes to Consolidated Financial Statements
d)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 625 $ 558
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 662 676
Amortization of discounts and loan costs 74 73
Change in accounts:
Receivables and deposits 22 (256)
Other assets (50) 12
Accounts payable 79 (47)
Tenant security deposit liabilities (4) (6)
Accrued property taxes 25 271
Other liabilities 12 18
Net cash provided by operating activities 1,445 1,299
Cash flows from investing activities:
Property improvements and replacements (554) (242)
Net withdrawals from (deposits to) restricted escrows 384 (31)
Net cash used in investing activities (170) (273)
Cash flows from financing activities:
Payments on mortgage notes payable (190) (176)
Partners' distributions (200) (500)
Net cash used in financing activities (390) (676)
Net increase in cash and cash equivalents 885 350
Cash and cash equivalents at beginning of period 630 1,624
Cash and cash equivalents at end of period $ 1,515 $ 1,974
Supplemental disclosure of cash flow information:
Cash paid for interest $ 475 $ 488
Supplemental disclosure of non-cash flow information:
Distribution payable $ -- $ 500
See Accompanying Notes to Consolidated Financial Statements
e)
SHELTER PROPERTIES III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Shelter
Properties III (the "Partnership" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and 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 III Corporation (the
"Corporate General Partner"), all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three 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
consolidated financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership
and its 99.99% owned partnership. The general partner of the consolidated
partnership is Shelter Realty III Corporation. Shelter Realty III Corporation
may be removed by the Registrant; therefore, the consolidated partnership is
controlled and consolidated by the Registrant. All significant interpartnership
transactions have been eliminated.
NOTE B - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment Investment and Management Company ("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.
For the Nine Months Ended
September 30,
1999 1998
(in thousands)
Net cash provided by operating activities $ 1,445 $ 1,299
Payments on mortgage notes payable (190) (176)
Property improvements and replacements (554) (242)
Change in restricted escrows, net 384 (31)
Changes in reserves for net operating
liabilities (84) 8
Additional reserves (1,001) (858)
Net cash provided by operations $ -- $ --
The Corporate General Partner reserved approximately $1,001,000 and $858,000 at
September 30, 1999 and 1998, respectively to fund capital improvements and
repairs at the Partnership's four investment properties.
NOTE D - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Corporate General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following amounts were paid or
accrued to the Corporate General Partner and affiliates during the nine months
ended September 30, 1999 and 1998.
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $211 $208
Reimbursement for services of affiliates
(included in operating and general and
administrative expenses and investment properties) 92 92
Due to general partners 185 185
Due from general partners 11 11
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 for providing property management services. The
Registrant paid to such affiliates approximately $211,000 and $208,000 for the
nine months ended September 30, 1999 and 1998, respectively.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $92,000 for both
the nine months ended September 30, 1999 and 1998. Included in these expenses
for the nine months ended September 30, 1999 and 1998, respectively, is
approximately $8,000 and $6,000 in construction oversight costs.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 16,306.88 (29.65% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $222 per unit. The offer expired on July
30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 2,682.00
units. As a result, AIMCO and its affiliates currently own 21,274.00 units of
limited partnership interest in the Partnership representing 38.68% of the total
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. (See "Note F - Legal Proceedings").
During 1986 a liability of approximately $185,000 was incurred to the general
partners for sales commissions earned. Pursuant to the Partnership Agreement,
this liability cannot be paid until certain levels of returns are received by
the limited partners. As of September 30, 1999, the level of return to the
limited partners has not been met.
On September 26, 1997, an affiliate of the General Partner purchased Lehman
Brothers Class "D" subordinated bonds of SASCO, 1992-M1. These bonds are
secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Essex Park Apartments, Colony House Apartments, and Willowick
Apartments owned by the Partnership.
NOTE E - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenue:
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of four apartment complexes
located in Georgia, South Carolina (2), and Tennessee. The Partnership rents
apartment units to tenants for terms that are typically twelve months or less.
Measurement of segment profit or loss:
The Partnership evaluates performance based on net 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.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of investment properties that
offer similar products and services. Although each of the investment properties
is managed separately, they have been aggregated into one segment as they
provide similar types of products and customers.
Segment information for the nine months ended September 30, 1999 and 1998 is
shown in the tables below. The "Other" column includes partnership
administration related items and income and expense not allocated to the
reportable segment.
1999 Residential Other Totals
(in thousands)
Rental income $ 3,885 $ -- $ 3,885
Other income 236 12 248
Interest expense 548 -- 548
Depreciation 662 -- 662
General and administrative expense -- 176 176
Segment profit (loss) 789 (164) 625
Total assets 13,440 215 13,655
Capital expenditures for investment
properties 554 -- 554
1998 Residential Other Totals
(in thousands)
Rental income $ 3,799 $ -- $ 3,799
Other income 281 24 305
Interest expense 561 -- 561
Depreciation 676 -- 676
General and administrative expense -- 152 152
Segment profit (loss) 686 (128) 558
Total assets 13,792 1,022 14,814
Capital expenditures for investment
properties 242 -- 242
NOTE F - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Corporate General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates 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 discussions of the Registrant's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Registrant's business and results
of operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
The Partnership's investment properties consist of four apartment complexes.
The following table sets forth the average occupancy of the properties for each
of the nine months ended September 30, 1999 and 1998:
Average
Occupancy
Property 1999 1998
Essex Park Apartments
Columbia, South Carolina 92% 94%
Colony House Apartments
Mufreesboro, Tennessee 92% 91%
North River Village Apartments
Atlanta, Georgia 95% 93%
Willowick Apartments
Greenville, South Carolina 94% 93%
Results of Operations
The Registrant's net income for the three and nine months ended September 30,
1999 was approximately $216,000 and $625,000, respectively, as compared to
approximately $166,000 and $558,000 for the three and nine months ended
September 30, 1998. The increase in net income for the nine months ended
September 30, 1999 was due to an increase in total revenue and a decrease in
total expenses. The increase in net income for the three month period is due
primarily to a decrease in total expenses. The increase in total revenue is the
result of an increase in rental income which was partially offset by a decrease
in other income. Rental income increased for both the three and nine month
periods ended September 30, 1999 primarily due to an increase in average annual
rental rates at all four of the Registrant's investment properties and an
increase in occupancy at three of the Registrant's investment properties. Other
income for both the three and nine month periods ended September 30, 1999
decreased primarily due to lower interest income as a result of a decrease in
interest bearing cash balances as a result of distributions paid to the
partners.
Total expenses decreased for the three and nine months ended September 30, 1999
as a result of a decrease in operating expense and to a lesser extent a decrease
in depreciation and interest expense which was slightly offset by an increase in
both general and administrative expense and property tax expense. Operating
expense decreased due to a decrease in insurance expense and maintenance expense
which were offset by an increase in advertising expense. Insurance expense
decreased at all the investment properties due to a change in insurance carriers
during the fourth quarter of 1998. Maintenance expense decreased due to the
completion during 1998 of exterior building improvements at Essex Park
Apartments and Colony House Apartments. The decrease in operating expense was
offset by an increase in advertising expense as a result of management's
intensified marketing at all four of the Registrant's investment properties in
an effort to increase occupancy. Property tax expense increased primarily due
to an increase in the accrual for the anticipated increase in property taxes at
all of the Partnership's investment properties.
The increase in general and administrative expense for the three and nine months
ended September 30, 1999 is primarily attributable to an increase in legal fees.
Legal fees increased as a result of the settlement of an outstanding litigation
case in the first quarter of 1999. Included in general and administrative
expenses for the nine months ended September 30, 1999 and 1998 are management
reimbursements to the Corporate General Partner allowed under the Partnership
Agreement. Also included in general and administrative expenses were costs
associated with the quarterly and annual communications with investors and
regulatory agencies and the annual audit and appraisals required by the
Partnership Agreement.
As part of the ongoing business plan of the Registrant, the Corporate General
Partner monitors the rental market environments 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 $1,515,000 as compared to approximately $1,974,000 at September
30, 1998. Cash and cash equivalents increased approximately $885,000 for the
nine months ended September 30, 1999 from the Registrant's year end, primarily
due to approximately $1,445,000 of cash provided by operating activities, which
was partially offset by approximately $170,000 of cash used in investing
activities and approximately $390,000 of cash used in financing activities.
Cash used in investing activities consisted of property improvements and
replacements at all four of the Partnership's investment properties, which was
offset by net withdrawals from the restricted escrow accounts maintained by the
mortgage lender. Cash used in financing activities consisted of payments of
principal made on the mortgages encumbering the Registrant's properties and of
payments of partner distributions. The Registrant invests its working capital
reserves in money market accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the 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.
Essex Park
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements it is estimated that the property requires
approximately $278,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $289,000 are
planned for 1999 which include certain of the required improvements and consist
of floor covering and appliance replacement, swimming pool improvements and
major landscaping. For the nine months ended September 30, 1999, the
Partnership completed approximately $103,000 in capital improvements consisting
primarily of appliance and floor covering replacements and air conditioning
system upgrades. These improvements were funded from Partnership reserves.
Colony House
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $278,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $254,000 are
planned for 1999 which include certain of the required improvements and consist
of roof replacements, air conditioning system upgrades, electrical improvements,
parking lot improvements and major landscaping. For the nine months ended
September 30, 1999, the Partnership completed approximately $127,000 in capital
improvements consisting primarily of floor covering and appliance replacements
and interior and exterior building improvements. These improvements were funded
from Partnership reserves and operations.
North River Village
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $76,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $104,000 are
planned for 1999 which include certain of the required improvements and consist
of floor covering and air conditioning system improvements. For the nine months
ended September 30, 1999, the Partnership completed approximately $93,000 in
capital improvements at the property consisting primarily of floor covering and
appliance replacements and other interior and exterior building improvements and
air conditioning system improvements. These improvements were funded from
Partnership reserves and operations.
Willowick Apartments
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $278,000 of capital improvements over the next few years. Capital
improvements budgeted for, but not limited to, approximately $406,000 are
planned for 1999 which include certain of the required improvements and consist
of parking lot and swimming pool improvements, exterior renovations, and major
landscaping. For the nine months ended September 30, 1999, the Partnership
completed approximately $231,000 in capital improvements at the property
consisting primarily of floor covering and appliance replacements and exterior
building improvements. These improvements were funded from Partnership reserves
and operations.
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 $7,949,000, net of discount, is amortized over 257
months with required balloon payments due from November 15, 2002 to October 15,
2003. The Corporate General Partner will attempt to refinance such indebtedness
and/or sell the properties prior to such maturity date. If a property cannot be
refinanced or sold for a sufficient amount, the Registrant will risk losing such
property through foreclosure.
A cash distribution from operations of approximately $200,000 (198,000 to the
limited partners, $3.60 per limited partnership unit), was made to the partners
during the nine months ended September 30, 1999. Cash distributions of $500,000
from operations were made during the nine months ended September 30, 1998. The
general partners received $5,000 and the limited partners received $495,000
(approximately $9.00 per limited partnership unit). The Partnership made a cash
distribution from operations during October 1998 of approximately $500,000
($495,000 of which was paid to the limited partners, $9.00 per limited
partnership unit), which was accrued for in the third quarter of 1998. The
Registrant's distribution policy is reviewed on a semi-annual basis. Future
cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves, and the timing of debt
maturities, refinancings and/or property sales. There can be no assurance,
however, that the Registrant will generate sufficient funds from operations
after planned capital improvement expenditures to permit any additional
distributions to its partners during the remainder of 1999 or subsequent
periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 16,306.88 (29.65% of the
total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $222 per unit. The offer expired on July
30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 2,682.00
units. As a result, AIMCO and its affiliates currently own 21,274.00 units of
limited partnership interest in the Partnership representing 38.68% of the total
outstanding units. It is possible that AIMCO or its affiliates will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. (See "Item 1. Financial Statements, Note F - 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 Managing 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.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHELTER PROPERTIES III
By: Shelter Realty III Corporation
Corporate General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date: November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties III 1999 Third Quarter 10-QSB and is qualified in its entirety by
reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000353282
<NAME> SHELTER PROPERTIES III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,515
<SECURITIES> 0
<RECEIVABLES> 388
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 26,786
<DEPRECIATION> 15,805
<TOTAL-ASSETS> 13,655
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 7,949
0
0
<COMMON> 0
<OTHER-SE> 4,782
<TOTAL-LIABILITY-AND-EQUITY> 13,655
<SALES> 0
<TOTAL-REVENUES> 4,133
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 548
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 625
<EPS-BASIC> 11.25
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
</FN>
</TABLE>
