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 0-14369
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0784852
(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 VII LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except per unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 816
Receivables and deposits 242
Restricted escrows 40
Other assets 152
Investment properties:
Land $ 1,774
Buildings and related personal property 20,572
22,346
Less accumulated depreciation (11,386) 10,960
$ 12,210
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 16
Tenant security deposit liabilities 79
Accrued property taxes 139
Other liabilities 141
Mortgage notes payable 10,780
Partners' Capital (Deficit)
General partners $ (134)
Limited partners (17,343 units issued and
outstanding) 1,189 1,055
$ 12,210
See Accompanying Notes to Consolidated Financial Statements
b)
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
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 $ 968 $ 946 $2,865 $2,809
Other income 42 53 136 153
Total revenues 1,010 999 3,001 2,962
Expenses:
Operating 282 439 920 1,113
General and administrative 58 40 161 118
Depreciation 209 217 624 632
Interest 216 221 659 668
Property taxes 21 59 82 184
Total expenses 786 976 2,446 2,715
Net income $ 224 $ 23 $ 555 $ 247
Net income allocated to
general partners (1%) $ 2 $ -- $ 6 $ 2
Net income allocated to
limited partners (99%) 222 23 549 245
$ 224 $ 23 $ 555 $ 247
Net income per limited
partnership unit $12.80 $ 1.33 $31.66 $14.13
Distributions per limited
partnership unit $22.83 $ -- $57.08 $ --
See Accompanying Notes to Consolidated Financial Statements
c)
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 17,343 $ 2 $17,343 $17,345
Partners' capital (deficit) at
December 31, 1998 17,343 $ (131) $ 1,630 $ 1,499
Distribution to partners -- (9) (990) (999)
Net income for the nine months
ended September 30, 1999 -- 6 549 555
Partners' capital (deficit) at
September 30, 1999 17,343 $ (134) $ 1,189 $ 1,055
See Accompanying Notes to Consolidated Financial Statements
d)
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 555 $ 247
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 624 632
Amortization of discounts and loan costs 34 33
Change in accounts:
Receivables and deposits 19 99
Other assets (44) 28
Accounts payable (11) (62)
Tenant security deposit liabilities 2 (3)
Accrued property taxes (102) --
Other liabilities 26 11
Net cash provided by operating activities 1,103 985
Cash flows from investing activities:
Property improvements and replacements (385) (409)
Net withdrawals from (deposits to) restricted escrows 51 (3)
Net cash used in investing activities (334) (412)
Cash flows from financing activities:
Payments on mortgage notes payable (155) (144)
Distributions to partners (999) --
Net cash used in financing activities (1,154) (144)
Net (decrease) increase in cash and cash equivalents (385) 429
Cash and cash equivalents at beginning of period 1,201 612
Cash and cash equivalents at end of period $ 816 $ 1,041
Supplemental disclosure of cash flow information:
Cash paid for interest $ 625 $ 637
See Accompanying Notes to Consolidated Financial Statements
e)
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Shelter
Properties VII Limited Partnership (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 VII 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 Registrant's financial statements include all the accounts of the Registrant
and its 99.9% owned partnership. The general partner of the consolidated
partnership is Shelter Realty VII Corporation. Shelter Realty VII 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
consolidated statements of cash flows captioned "net cash provided by operating
activities" to "net cash used in operations", as defined in the Partnership
Agreement. However, "net cash used in operations" should not be considered an
alternative to net income as an indicator of the Partnership's operating
performance or to cash flows as a measure of liquidity.
Nine Months Ended
September 30,
1999 1998
(in thousands)
Net cash provided by operating activities $ 1,103 $ 985
Payments on mortgage notes payable (155) (144)
Property improvements and replacements (385) (409)
Change in restricted escrows, net 51 (3)
Changes in reserves for net operating
liabilities 110 (73)
Additional reserves (724) (356)
Net cash used in operations $ -- $ --
The Corporate General Partner reserved an additional $724,000 and $356,000 at
September 30, 1999 and 1998, respectively, to fund capital improvements and
repairs at the Partnership's two 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 certain payments
to affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following payments 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) $151 $146
Reimbursements for services of affiliates
(included in general and administrative
and operating expenses and investment properties) 58 71
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
both of the Registrant's properties for providing property management services.
The Registrant paid to such affiliates approximately $151,000 and $146,000 for
the nine months ended September 30, 1999 and 1998, respectively.
An affiliate of the Corporate General Partner received reimbursements of
accountable administrative expenses amounting to approximately $58,000 and
$71,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these expenses for the nine months ended September 30, 1999 and
1998, respectively, is approximately $1,000 and $5,000 in construction oversight
costs.
During December 1997, an affiliate of the Corporate General Partner (the
"Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 7,000 of the outstanding
units of limited partnership interest in the Partnership at $350 per Unit, net
to the seller in cash. During February 1998, the tender offer was completed and
the Purchaser acquired 2,180 units of limited partnership interest at $350 per
Unit in the Partnership or approximately 12.57% of the total outstanding units.
On July 21, 1998, the Purchaser commenced an additional tender offer for limited
partnership interest in the Partnership. The Purchaser offered to purchase up
to 6,000 of the outstanding units of limited partnership interest in the
Partnership, at $450 per Unit, net to the seller in cash. During August 1998,
the tender offer was completed and the Purchaser acquired 1,450 units of limited
partnership interest at $450 per Unit in the Partnership or approximately 8.37%
of the total outstanding units.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 5,968.89 (34.42% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $469 per unit. The offer expired on July 30, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 630.00 units. As a
result, AIMCO and its affiliates currently own 4,750 units of limited
partnership interest in the Partnership representing 27.39% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. (See "Note F - Legal Proceedings").
NOTE E - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of two apartment complexes,
located in Tennessee and Colorado. 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 nine month periods 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 $ 2,865 $ -- $ 2,865
Other income 129 7 136
Interest expense 659 -- 659
Depreciation 624 -- 624
General and administrative expense -- 161 161
Segment profit (loss) 709 (154) 555
Total assets 12,135 75 12,210
Capital expenditures for investment
properties 385 -- 385
1998 Residential Other Totals
(in thousands)
Rental income $ 2,809 $ -- $ 2,809
Other income 136 17 153
Interest expense 668 -- 668
Depreciation 632 -- 632
General and administrative expense -- 118 118
Segment profit (loss) 348 (101) 247
Total assets 12,309 489 12,798
Capital expenditures for investment
properties 409 -- 409
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 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 General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
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.
The Partnership's investment properties consist of two apartment complexes. The
following table sets forth the average occupancy of the properties for the nine
months ended September 30, 1999 and 1998:
Average
Occupancy
Property 1999 1998
Hickory Ridge Apartments 95% 95%
Memphis, Tennessee
Governor's Park Apartments 96% 96%
Ft. Collins, Colorado
Results of Operations
The Registrant's net income for the three and nine months ended September 30,
1999 was approximately $224,000 and $555,000, respectively, as compared to
approximately $23,000 and $247,000 for the three and nine months ended September
30, 1998. The increase in net income is due to an increase in total revenue and
a decrease in total expenses. Total revenue increased for both the three and
nine month periods due to an increase in rental income. Rental income increased
primarily due to an increase in the average annual rental rates at both of the
Partnership's investment properties. The increase in rental income was
partially offset by a slight decrease in other income, which is due primarily to
lower interest income as a result of a decrease in interest bearing cash
balances as a result of distributions paid during 1999.
Total expenses decreased for both the three and nine month periods primarily due
to reductions in property tax and operating expenses. The decrease in property
tax was primarily due to an adjustment in 1999 for an overaccrual of 1998
property taxes at Hickory Ridge Apartments. The decrease in operating expense
is primarily due to decreases in maintenance, property and insurance expenses.
Maintenance expense decreased due to interior and exterior building
improvements which were completed during 1998. Property expense decreased as a
result of a decrease in salaries and related employee benefits. The Registrant
changed insurance carriers at the investment properties during the third quarter
of 1998 which contributed to the decrease in insurance expense.
The decrease in total expenses was partially offset by an increase in general
and administrative expense for both comparable periods. General and
administrative expense increased as a result of an increase in legal costs,
which include the Partnership's portion of settlement costs paid in March 1999
as disclosed in the Partnership's annual report on Form 10-KSB for the year
ended December 31, 1998. Included in general and administrative expense at both
September 30, 1999 and 1998 are management 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 and appraisals required by the
Partnership Agreement are also included.
As part of the ongoing business plan of the Partnership, the Corporate General
Partner monitors the rental market environment 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 September 30, 1999, the Registrant had cash and cash equivalents of
approximately $816,000 compared to approximately $1,041,000 at September 30,
1998. The decrease in cash and cash equivalents of approximately $385,000 for
the nine months ended September 30, 1999, from the Partnership's calendar year
end is due to approximately $1,154,000 of cash used in financing activities and
approximately $334,000 of cash used in investing activities which was partially
offset by approximately $1,103,000 of cash provided by operating activities.
Cash used in financing activities consisted primarily of partner distributions
and to a lesser extent principal payments made on the mortgages encumbering the
Registrant's properties. Cash used in investing activities consisted of
property improvements and replacements, which was partially offset by
withdrawals from escrow accounts maintained by the mortgage lender. The
Registrant invests its working capital reserves in a money market account.
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 both of the properties to adequately maintain the
physical assets and other operating needs of the Registrant and to comply with
Federal, state, and local legal and regulatory requirements. Capital
improvements planned for both of the Registrant's properties are detailed below.
Hickory Ridge
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 $328,000 of capital improvements over the next few years. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $392,000 for 1999 at this property which include certain of the
required improvements and consist of roof replacements, landscaping and
irrigation, drainage and pool additions. During the nine months ended September
30, 1999, the Partnership completed approximately $312,000 of capital
improvements at the property, consisting primarily of floor covering
replacements, roof replacement, and landscaping and irrigation enhancements to
the property.
Governor's 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 $84,000 of capital improvements over the next few years. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $116,000 for 1999 at this property which include certain of the
required improvements and consist of stairwells and parking lot improvements.
During the nine months ended September 30, 1999, the Partnership completed
approximately $73,000 of capital improvements at the property, consisting
primarily of appliance and floor covering replacements.
The additional capital improvements planned for 1999 at the Partnership's
properties will be made only to the extent of cash 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 $10,780,000, net of discount, is amortized over
varying periods with balloon payments due at maturity, March 1, 2001 and
October 15, 2003. 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.
In January 1999, the Partnership distributed approximately $594,000
(approximately $34.25 per limited partnership unit) to the limited partners and
$6,000 to the general partners. In July 1999, the Corporate General Partner
distributed (approximately $396,000 to the limited partners (approximately
$22.83 per limited partnership unit) and $4,000 to the general partners. No
distributions were made during the corresponding period 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 required capital expenditures to permit further distributions to its
partners in subsequent periods. Distributions may also 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 by an amount equal
to $400 per apartment unit at Governor's Park. The reserve account is currently
fully funded.
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 5,968.89(34.42% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $469 per unit. The offer expired on July 30, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 630.00 units. As a
result, AIMCO and its affiliates currently own 4,750 units of limited
partnership interest in the Partnership representing 27.39% of the total
outstanding units. It is possible that AIMCO or its affiliate will make one or
more additional offers to acquire additional limited partnership interests in
the Partnership for cash or in exchange for units in the operating partnership
of AIMCO. (See "Item 1. Financial Statements, Note 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 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
"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 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 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:
None filed during the quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHELTER PROPERTIES VII LIMITED PARTNERSHIP
By: Shelter Realty VII Corporation
Corporate General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President and Director
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date: November 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Shelter
Properties VII Limited Partnership Third Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000758009
<NAME> SHELTER PROPERTIES VII LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 816
<SECURITIES> 0
<RECEIVABLES> 242
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 22,346
<DEPRECIATION> (11,386)
<TOTAL-ASSETS> 12,210
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,780
0
0
<COMMON> 0
<OTHER-SE> 1,055
<TOTAL-LIABILITY-AND-EQUITY> 12,210
<SALES> 0
<TOTAL-REVENUES> 3,001
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555
<EPS-BASIC> 31.66<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
