-----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, DhcxQhCEWxDoJKL9uHO3B4lEHiFCe/3tnumch/zA7hIJJl+OZnptfKuwJlej6MFp UaeFS3HGaAnjUTJY/YLByQ== 0000711642-99-000240.txt : 19990915 0000711642-99-000240.hdr.sgml : 19990915 ACCESSION NUMBER: 0000711642-99-000240 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES IV LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000702174 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570721760 STATE OF INCORPORATION: SC FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-10884 FILM NUMBER: 99711087 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 July 31, 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 0-10884 SHELTER PROPERTIES IV (Exact name of small business issuer as specified in its charter) South Carolina 57-0721760 (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 Securities Exchange Act of 1934 during the preceding 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 IV CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except per unit data) July 31, 1999 Assets Cash and cash equivalents $ 2,975 Receivables and deposits (net of allowance for doubtful accounts of $19) 888 Restricted escrows 886 Other assets 619 Investment properties: Land $ 3,442 Buildings and related personal property 58,418 61,860 Less accumulated depreciation (35,687) 26,173 $ 31,541 Liabilities and Partners' (Deficit) Capital Liabilities Accounts payable $ 157 Tenant security deposit liabilities 245 Accrued property taxes 486 Other liabilities 245 Mortgage notes payable 23,028 Partners' (Deficit) Capital General partners $ (11) Limited partners (49,995 units issued and outstanding) 7,391 7,380 $ 31,541 See Accompanying Notes to Consolidated Financial Statements b) SHELTER PROPERTIES IV CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Nine Months Ended July 31, July 31, 1999 1998 1999 1998 Revenues: Rental income $2,756 $2,809 $8,362 $8,276 Other income 131 137 378 378 Total revenues 2,887 2,946 8,740 8,654 Expenses: Operating 1,245 1,219 3,525 3,571 General and administrative 101 66 261 224 Depreciation 525 488 1,486 1,441 Interest 533 540 1,593 1,630 Property taxes 213 198 593 594 Total expenses 2,617 2,511 7,458 7,460 Net income $ 270 $ 435 $1,282 $1,194 Net income allocated to general partners (1%) $ 3 $ 4 $ 13 $ 12 Net income allocated to limited partners (99%) 267 431 1,269 1,182 $ 270 $ 435 $1,282 $1,194 Net income per limited partnership unit $ 5.34 $ 8.62 $25.38 $23.64 Distributions per limited partnership unit $ -- $ -- $47.52 $16.08 See Accompanying Notes to Consolidated Financial Statements c) SHELTER PROPERTIES IV 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 50,000 $ 2 $50,000 $50,002 Partners' (deficit) capital at October 31, 1998 49,995 $ -- $ 8,498 $ 8,498 Net income for the nine months ended July 31, 1999 -- 13 1,269 1,282 Partners' distributions -- (24) (2,376) (2,400) Partners' (deficit) capital at July 31, 1999 49,995 $ (11) $ 7,391 $ 7,380 See Accompanying Notes to Consolidated Financial Statements d) SHELTER PROPERTIES IV CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended July 31, 1999 1998 Cash flows from operating activities: Net income $ 1,282 $ 1,194 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,486 1,441 Amortization of discounts and loan costs 214 211 Change in accounts: Receivables and deposits 348 148 Other assets (284) 46 Accounts payable (6) 9 Tenant security deposit liabilities (3) (22) Accrued property taxes (174) (170) Other liabilities (29) 25 Net cash provided by operating activities 2,834 2,882 Cash flows from investing activities: Property improvements and replacements (970) (668) Net withdrawals from (deposits to) restricted escrows 944 (57) Net cash used in investing activities (26) (725) Cash flows from financing activities: Partners' distributions (2,400) (812) Payments on mortgage notes payable (614) (572) Net cash used in financing activities (3,014) (1,384) Net (decrease) increase in cash and cash equivalents (206) 773 Cash and cash equivalents at beginning of period 3,181 1,847 Cash and cash equivalents at end of period $ 2,975 $ 2,620 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,378 $ 1,422 See Accompanying Notes to Consolidated Financial Statements e) SHELTER PROPERTIES IV NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 31, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Shelter Properties IV (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 IV 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 July 31, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending October 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 October 31, 1998. Principles of Consolidation: The financial statements include all the accounts of the Partnership and its 99.99% owned partnership. The general partner of the consolidated partnership is the Corporate General Partner. The Corporate General Partner 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 ("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 of the Partnership (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 July 31, 1999 1998 (in thousands) Net cash provided by operating activities $ 2,834 $ 2,882 Payments on mortgage notes payable (614) (572) Property improvements and replacements (970) (668) Change in restricted escrows, net 944 (57) Changes in reserves for net operating liabilities 148 (36) Additional reserves (2,342) (1,549) Net cash from operations $ -- $ -- The Corporate General Partner believed it to be in the best interest of the Partnership to reserve net cash from operations of approximately $2,342,000 and $1,549,000 at July 31, 1999 and 1998, respectively, to fund continuing capital improvements and repairs at the Partnership's three 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 (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were made to the Corporate General Partner and its affiliates during the nine months ended July 31, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $439 $430 Reimbursement for services of affiliates (included in operating, general and administrative expenses, and investment properties) 150 158 During the nine months ended July 31, 1999 and 1998, affiliates of the Corporate General Partner were entitled to receive 5% of gross receipts for all of the Registrant's properties as compensation for providing property management services. The Registrant paid to such affiliates approximately $439,000 and $430,000 for the nine months ended July 31, 1999 and 1998, respectively. Affiliates of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $150,000 and $158,000 for the nine months ended July 31, 1999 and 1998, respectively. Included in these expenses is approximately $4,000 and $8,000 in reimbursements for construction oversight costs for the nine months ended July 31, 1999 and 1998, respectively. On June 2, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General Partner commenced a tender offer to purchase up to 13,550.39 (27.10% of the total outstanding units) units of limited partnership interest in the Partnership for a purchase price of $536 per unit. The offer expired on July 30, 1999. Pursuant to this offer, AIMCO Properties, L.P. acquired 1,245.33 units. As a result, AIMCO and its affiliates currently own 20,982.33 units of limited partnership interest in the Partnership representing 41.97% 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. 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 consisting of three apartment complexes located in Florida, South Carolina, and North Carolina. 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 summary of significant accounting policies in the Partnership's Annual Report on Form 10-KSB for the year ended October 31, 1998. Factors management used to identify the Partnership's reportable segment: The Partnership's reportable segment consists of investment properties that offer similar products and services. Although each of the investment properties are 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 July 31, 1999 and 1998 is shown in the tables below (in thousands). The "Other" column includes partnership administration related items and income and expense not allocated to the reportable segment. 1999 Residential Other Totals Rental income $ 8,362 $ -- $ 8,362 Other income 340 38 378 Interest expense 1,593 -- 1,593 Depreciation 1,486 -- 1,486 General and administrative expense -- 261 261 Segment profit (loss) 1,505 (223) 1,282 Total assets 30,668 873 31,541 Capital expenditures for investment properties 970 -- 970 1998 Residential Other Totals Rental income $ 8,276 $ -- $ 8,276 Other income 320 58 378 Interest expense 1,630 -- 1,630 Depreciation 1,441 -- 1,441 General and administrative expense -- 224 224 Segment profit (loss) 1,360 (166) 1,194 Total assets 30,903 1,981 32,884 Capital expenditures for investment properties 668 -- 668 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 AIMCO. 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 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 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 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 three apartment complexes. The following table sets forth the average occupancy of the properties for each of the nine months ended July 31, 1999 and 1998: Average Occupancy Property 1999 1998 Baymeadows Apartments Jacksonville, Florida 93% 93% Quail Run Apartments Columbia, South Carolina 92% 95% Countrywood Village Apartments Raleigh, North Carolina 93% 93% The Corporate General Partner attributes the decrease in average occupancy at Quail Run to increased home sales and decreased rental market conditions in the Columbia area. Results of Operations The Partnership's net income for the nine months ended July 31, 1999 was approximately $1,282,000 compared to approximately $1,194,000 for the corresponding period in 1998. The Partnership recorded net income of approximately $270,000 for the three months ended July 31, 1999 compared to net income of approximately $435,000 for the corresponding period in 1998. The increase in net income for the comparable nine months periods is primarily due to an increase in total revenues, while total expenses remained relatively constant. The increase in total revenues was due to an increase in rental income. Rental income increased due to an increase in average annual rental rates at all three of the Registrant's investment properties, which more than offset a decrease in occupancy at Quail Run. The decrease in net income for the three months ended July 31, 1999 compared to the corresponding period in 1998 is attributable to a decrease in total revenues and an increase in total expenses for the three month period. The decrease in total revenues is primarily due to a decrease in rental income, which is the result of the decrease in occupancy at Quail Run from the comparable period in 1998. Also contributing to the decrease in rental income for the three months ended July 31, 1999 was a decrease in occupancy from the previous quarter at Baymeadows. Total expenses remained relatively consistent for the nine months ended July 31, 1999, as decreases in operating and interest expense have offset increases in general and administrative and depreciation expense. Operating expense decreased for the nine months ended July 31, 1999 due to the completion of major landscaping projects and swimming pool repairs at Baymeadows and Countrywood Village, and window covering replacements and interior decorating at Baymeadows during the nine months ended July 31, 1998. In addition, insurance expense, which is included in operating expense, decreased due to a change in insurance carriers late in 1998. Interest expense decreased for both the three and nine month periods ended July 31, 1999 due to the reduction in mortgage balances encumbering the properties as a result of scheduled principal payments. The increase in general and administrative expense for both the three and nine month periods ended July 31, 1999 is primarily the result of an increase in legal fees due to the settlement of a partnership legal case which was disclosed in the prior quarter. Depreciation expense increased due to increased capital improvements and replacements made at the properties over the past year. Included in general and administrative expense for the three and nine month periods ended July 31, 1999 are reimbursements to the Corporate General Partner allowed under the Partnership Agreement. In addition, costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit 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 July 31, 1999, the Partnership had cash and cash equivalents of approximately $2,975,000 as compared to approximately $2,620,000 at July 31, 1998. Cash and cash equivalents decreased approximately $206,000 for the nine months ended July 31, 1999 from the Registrant's fiscal year end. This decrease was primarily due to approximately $3,014,000 of net cash used in financing activities and approximately $26,000 of net cash used in investing activities, which was partially offset by approximately $2,834,000 of net cash provided by operating activities. Cash used in financing activities consisted primarily of partner distributions and, to a lesser extent, payments of principal made on the mortgages encumbering the Registrant's properties. Cash used in investing activities consisted of property improvements and replacements, which was offset by net withdrawals from restricted escrows maintained by the mortgage lender. 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 investment properties to adequately maintain the physical assets and other operating needs of the Partnership and to comply with Federal, state, local, legal, and regulatory requirements. Capital improvements planned for each of the Registrant's properties are detailed below. Baymeadows Apartments: The Partnership completed approximately $586,000 in capital expenditures at Baymeadows Apartments as of July 31, 1999, consisting primarily of flooring, appliance and drapery replacement, swimming pool and air conditioning improvements, landscaping, and plumbing work. These improvements were funded primarily from replacement reserves. 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 $3,821,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $3,821,000 for 1999 which include certain of the required improvements and consist primarily of parking lot repairs, plumbing upgrades, major landscaping, roof replacements, major building repairs, and improvements to its recreational facility. Quail Run Apartments: The Partnership completed approximately $287,000 in capital expenditures at Quail Run Apartments as of July 31, 1999, consisting primarily of appliance and flooring replacement, air conditioning improvements and a roofing project. These improvements were funded primarily from cash flow and replacement reserves. 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 $412,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, approximately $404,000 for 1999 which include certain of the required improvements and consist primarily of roof replacements, landscaping, major carpet replacement, and improvements to its air conditioning system. Countrywood Village Apartments: The Partnership completed approximately $97,000 in capital expenditures at Countrywood Apartments as of July 31, 1999, consisting primarily of landscaping, parking area improvements, flooring replacements and new water heaters and appliances. These improvements were funded primarily from replacement reserves. 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 $200,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $248,000 for 1999 which include certain of the required improvements and consist primarily of interior and exterior building improvements. 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 $23,028,000, net of discount, is amortized over 257 months with a balloon payment of approximately $20,669,000 due on November 15, 2002. The Corporate General Partner will attempt to refinance such indebtedness and/or sell the properties prior to such maturity date. If the properties cannot be refinanced or sold for a sufficient amount, the Registrant will risk losing such properties through foreclosure. A cash distribution from operations of approximately $2,400,000 was paid during the nine months ended July 31, 1999, of which approximately $2,376,000 was paid to limited partners ($47.52 per limited partnership unit). A cash distribution of approximately $812,000 was made from operations during the nine months ended July 31, 1998, of which approximately $804,000 was paid to limited partners ($16.08 per limited partnership unit). Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings, and/or property sales. The Partnership's distribution policy will be reviewed on a quarterly basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations, after required capital expenditures, to permit any additional distributions to its partners in 1999 or subsequent periods. Tender Offer On June 2, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General Partner commenced a tender offer to purchase up to 13,550.39 (27.10% of the total outstanding units) units of limited partnership interest in the Partnership for a purchase price of $536 per unit. The offer expired on July 30, 1999. Pursuant to this offer, AIMCO Properties, L.P. acquired 1,245.33 units. As a result, AIMCO and its affiliates currently own 20,982.33 units of limited partnership interest in the Partnership representing 41.97% 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. 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 July 31, 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 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. 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 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 July 31, 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 was to move accounts from any institution that could not certified Year 2000 compliant by September 1, 1999. 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 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 filed an amended complaint. The Corporate General Partner 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 an exhibit to this report. b) Reports on Form 8-K filed during the quarter ended July 31, 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 IV By: Shelter Realty IV 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: September 14, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Shelter Properties IV 1999 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000702174 SHELTER PROPERTIES IV 1,000 9-MOS OCT-31-1999 JUL-31-1999 2,975 0 0 0 0 0 61,860 35,687 31,541 0 23,028 0 0 0 7,380 31,541 0 8,740 0 0 7,458 0 1,593 0 0 0 0 0 0 1,282 25.38 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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