-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Au5pFOQwm6l+6QkOqeO1Pnr+S+lB3lnVJxe5T6a3XhjBStWiqke0sTJLdr/Ia7UL pJEWdC105vJ5Pl+ffzH6UQ== 0000711642-99-000270.txt : 19991115 0000711642-99-000270.hdr.sgml : 19991115 ACCESSION NUMBER: 0000711642-99-000270 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES III LTD PARTNERSHIP CENTRAL INDEX KEY: 0000353282 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570718508 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-10260 FILM NUMBER: 99746955 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10QSB 1 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 EX-27 2
5 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. 0000353282 SHELTER PROPERTIES III 1,000 9-MOS DEC-31-1999 SEP-30-1999 1,515 0 388 0 0 0 26,786 15,805 13,655 0 7,949 0 0 0 4,782 13,655 0 4,133 0 0 3,508 0 548 0 0 0 0 0 0 625 11.25 0 Registrant has an unclassified balance sheet.
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