FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-10260
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
(in thousands, except unit data)
(Unaudited)
June 30, 1999
Assets
Cash and cash equivalents $ 1,508
Receivables and deposits, net of allowance of $8 344
Restricted escrows 615
Other assets 229
Investment properties:
Land $ 1,281
Buildings and related personal property 25,150
26,431
Less accumulated depreciation (15,585) 10,846
$13,542
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 106
Tenant security deposit liabilities 97
Accrued property taxes 182
Other liabilities 391
Mortgage notes payable 8,000
Partners' Capital (Deficit)
General partners $ (85)
Limited partners (55,000 units
issued and outstanding) 4,851 4,766
$13,542
See Accompanying Notes to Consolidated Financial Statements
b)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
Rental income $1,289 $1,264 $2,568 $2,502
Other income 76 112 161 199
Total revenues 1,365 1,376 2,729 2,701
Expenses:
Operating 638 627 1,199 1,198
General and administrative 62 57 117 109
Depreciation 212 226 442 448
Interest 183 187 368 375
Property taxes 99 87 194 179
Total expenses 1,194 1,184 2,320 2,309
Net income $ 171 $ 192 $ 409 $ 392
Net income allocated
to general partners (1%) $ 2 $ 2 $ 4 $ 4
Net income allocated
to limited partners (99%) 169 190 405 388
$ 171 $ 192 $ 409 $ 392
Net income per limited
partnership unit $ 3.07 $ 3.45 $ 7.36 $ 7.05
Distribution per limited
partnership unit $ -- $ -- $ -- $ 9.00
See Accompanying Notes to Consolidated Financial Statements
c)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(in thousands, except unit data)
(Unaudited)
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
Net income for the six months
ended June 30, 1999 -- 4 405 409
Partners' (deficit) capital
at June 30, 1999 55,000 $ (85) $ 4,851 $ 4,766
See Accompanying Notes to Consolidated Financial Statements
d)
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 409 $ 392
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 442 448
Amortization of discounts and loan costs 49 48
Change in accounts:
Receivables and deposits 66 (169)
Other assets (59) 18
Accounts payable 45 (85)
Tenant security deposit liabilities (12) (6)
Accrued property taxes (70) 179
Other liabilities 1 1
Net cash provided by operating activities 871 826
Cash flows from investing activities:
Property improvements and replacements (199) (155)
Net withdrawals from (deposits to) restricted
escrows 331 (20)
Net cash provided by (used in) investing
activities 132 (175)
Cash flows from financing activities:
Payments on mortgage notes payable (125) (116)
Partners' distributions -- (500)
Net cash used in financing activities (125) (616)
Net increase in cash and cash equivalents 878 35
Cash and cash equivalents at beginning of period 630 1,624
Cash and cash equivalents at end of period $1,508 $1,659
Supplemental disclosure of cash flow information:
Cash paid for interest $ 318 $ 327
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 Article 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Shelter Realty 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 six month periods ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1999. For further information, refer to the
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 all 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 balances 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, a publicly traded real
estate investment trust ("AIMCO"), 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 in the accompanying
consolidated statements of cash flows captioned "net cash provided by operating
activities" to "net cash provided by operations," as defined in the Partnership
Agreement. However, "net cash provided by operations" should not be considered
an alternative to net income as an indicator of the Partnership's operating
performance or to cash flows as a measure of liquidity.
Six Months Ended
June 30,
1999 1998
(in thousands)
Net cash provided by operating activities $ 871 $ 826
Payments on mortgage notes payable (125) (116)
Property improvements and replacements (199) (155)
Change in restricted escrows, net 331 (20)
Changes in reserves for net operating
liabilities 29 62
Additional reserves (707) (597)
Net cash provided by operations $ 200 $ --
The Corporate General Partner reserved approximately $707,000 and $597,000 on
June 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 six months
ended June 30, 1999 and 1998.
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 140 $137
Reimbursement for services of affiliates (included in
operating and general and administrative expenses) 58 64
Due to general partner 185 185
During the six months ended June 30, 1999 and 1998, affiliates of the Corporate
General Partner were entitled to receive 5% of gross receipts from all of the
Registrant's properties for providing property management services. The
Registrant paid to such affiliates approximately $140,000 and $137,000 for the
six months ended June 30, 1999 and 1998, respectively.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $58,000 and
$64,000 for the six months ended June 30, 1999 and 1998, respectively. Included
in these expenses for the six months ended June 30, 1999 and 1998, is
approximately $4,000 and $5,000, respectively, in reimbursements for
construction oversight costs.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing 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 2,385.00
units. As a result, AIMCO and its affiliates currently own 20,977.00 units of
limited partnership interest in the Partnership representing 38.14% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO.
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 June 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 of the Partnership as
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 services with similar types of products and customers.
Segment information for the six months ended June 30, 1999 and 1998 is shown in
the tables below. The "Other" column includes partnership administration
related items and income and expense not allocated to the reportable segment.
1999 RESIDENTIAL OTHER TOTALS
Rental income $2,568 $ -- $ 2,568
Other income 151 10 161
Interest expense 368 -- 368
Depreciation 442 -- 442
General and administrative expense -- 117 117
Segment profit (loss) 516 (107) 409
Total assets 13,069 473 13,542
Capital expenditures for
investment properties 199 -- 199
1998 RESIDENTIAL OTHER TOTALS
Rental income $2,502 $ -- $ 2,502
Other income 185 14 199
Interest expense 375 -- 375
Depreciation 448 -- 448
General and administrative expense -- 109 109
Segment profit (loss) 487 (95) 392
Total assets 13,766 781 14,547
Capital expenditures for
investment properties 155 -- 155
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 as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the Corporate General
Partner filed a motion seeking dismissal of the action. In lieu of responding to
the motion, the plaintiffs have filed an amended complaint. The Corporate
General Partner has filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
Corporate General Partner does not anticipate that costs associated with this
case, if any, will be material to the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussions of the Registrant's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Registrant's business and results
of operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
The Partnership's investment properties consist of four apartment complexes.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Essex Park Apartments
Columbia, South Carolina 92% 92%
Colony House Apartments
Murfreesboro, Tennessee 88% 90%
North River Village Apartments
Atlanta, Georgia 96% 92%
Willowick Apartments
Greenville, South Carolina 95% 93%
The Corporate General Partner attributes the increase in occupancy at North
River Village Apartments to management's intensified marketing efforts.
Results of Operations
The Registrant's net income for the three and six months ended June 30, 1999 was
approximately $171,000 and $409,000, respectively, as compared to approximately
$192,000 and $392,000 for the three and six months ended June 30, 1998. The
decrease in net income for the three months ended June 30, 1999 was due to a
decrease in total revenue and an increase in total expenses. The decrease in
total revenue is the result of a decrease in other income which was partially
offset by an increase in rental income. Other income decreased primarily due to
an overall decrease in the cash balance held in interest bearing accounts by the
Partnership as a whole. Total expenses increased for the three months ended
June 30, 1999 as a result of increases in operating, property taxes and general
and administrative expenses which were slightly offset by decreases in
depreciation and interest expense. Operating expense increased due to an
increase in advertising and maintenance expense, which were offset by a decrease
in insurance expense. Advertising expense increased as a result of management's
intensified marketing at Colony House Apartments, North River Village Apartments
and Willowick Apartments. Maintenance expense increased as a result of interior
and exterior improvements at all four of the Registrant's investment properties.
Insurance expense decreased at all the investment properties due to a change in
insurance carriers during the current year.
The increase in net income for the six months ended June 30, 1999 was due to an
increase in total revenue which was partially offset by a decrease in other
income. Total revenue increased due to an increase in rental income. Rental
income increased primarily due to an increase in average rental rates at all
four of the Registrant's investment properties and to the increase in occupancy
at North River Village Apartments and Willowick Apartments as noted above which
more than offset the decrease in occupancy at Colony House Apartments. Expenses
for the six months ended June 30, 1999 increased due to an increase in property
tax expense and general and administrative expense which was offset by a
decrease in depreciation and interest expense. Property tax expense increased
primarily due to an increase in the accrual for the anticipated property tax
expense at all of the Partnership's investment properties.
The increase in general and administrative expense for the three and six months
ended June 30, 1999 was 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 six months ended June 30, 1999 and 1998 are management
reimbursements to the 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 Registrant from increases in expenses. As part of
this plan, the Corporate General Partner attempts to protect the Registrant 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 June 30, 1999, the Registrant had cash and cash equivalents of approximately
$1,508,000 as compared to approximately $1,659,000 at June 30, 1998. Cash and
cash equivalents increased approximately $878,000 for the six months ended June
30, 1999 from the Registrant's year end, primarily due to approximately $871,000
of cash provided by operating activities and approximately $132,000 of cash
provided by investing activities, which was partially offset by approximately
$125,000 of cash used in financing activities. Cash provided by investing
activities consisted of net withdrawals from the escrow accounts maintained by
the mortgage lender which were partially offset by property improvements and
replacements at the Partnership's investment properties. Cash used in financing
activities consisted of payments of principal made on the mortgages encumbering
the Registrant's properties. 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 various properties to adequately maintain the
physical assets and other operating needs of the Partnership and to comply with
Federal, state and local legal and regulatory requirements. Cash 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 days. 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 repairs
and major landscaping. For the six months ended June 30, 1999 the Partnership
completed approximately $70,000 of capital improvements at the property
consisting primarily of appliance and floor covering replacements.
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 repairs, air conditioning system repairs, electrical, parking lot and
major landscaping. For the six months ended June 30, 1999, the Partnership
completed approximately $35,000 of capital improvements at the property
consisting primarily of floor covering replacements and interior and exterior
building improvements.
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 repairs. For the six months ended
June 30, 1999, the Partnership completed approximately $53,000 of capital
improvements at the property consisting primarily of floor covering and
appliance replacements and other interior and exterior building improvements.
Willowick
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 repairs, exterior painting, and major
landscaping. For the six months ended June 30, 1999 the Partnership completed
approximately $41,000 of capital improvements at the property consisting
primarily of floor covering and appliance replacements and exterior building
improvements.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $8,000,000, net of discount, is amortized over
varying periods with required balloon payments ranging 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 dates. If the
properties cannot be refinanced or sold for a sufficient amount, the Registrant
will risk losing such properties through foreclosure.
No distributions were made during the six months ended June 30, 1999. Cash
distributions of $500,000 from operations were made during the six months ended
June 30, 1998. The general partners received $5,000 and the limited partners
received $495,000 (approximately $9.00 per limited partnership unit).
Subsequent to June 30, 1999 the Corporate General Partner approved and paid a
distribution of $200,000 from operations ($198,000 of which was paid to limited
partners, $3.60 per limited partnership unit). 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 in 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing 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 2,385.00
units. As a result, AIMCO and its affiliates currently own 20,977.00 units of
limited partnership interest in the Partnership representing 38.14% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Corporate General Partner and its affiliates for
management and administrative services ("Managing Agent"). Any of the computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of June 30, 1999, had completed approximately 90% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by September 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA
FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Corporate General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia 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 as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the Corporate General
Partner filed a motion seeking dismissal of the action. In lieu of responding to
the motion, the plaintiffs have filed an amended complaint. The Corporate
General Partner has filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
Corporate General Partner does not anticipate that costs associated with this
case, if any, will be material to the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as part of this report.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHELTER PROPERTIES III
By: Shelter Realty III Corporation
Corporate General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President
Finance and Administration
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties III Limited Partnership 1999 Second 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,508
<SECURITIES> 0
<RECEIVABLES> 344
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 26,431
<DEPRECIATION> 15,585
<TOTAL-ASSETS> 10,846
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 8,000
0
0
<COMMON> 0
<OTHER-SE> 4,766
<TOTAL-LIABILITY-AND-EQUITY> 13,542
<SALES> 0
<TOTAL-REVENUES> 2,729
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409
<EPS-BASIC> 7.36<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
