UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2002
[] TRANSITION REPORT UNDER 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)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHELTER PROPERTIES III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 2002
Assets
Cash and cash equivalents $ 344
Receivables and deposits 239
Restricted escrows 136
Other assets 479
Investment properties:
Land $ 1,281
Buildings and related personal property 27,877
29,158
Less accumulated depreciation (18,788) 10,370
$ 11,568
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 18
Tenant security deposit liabilities 97
Accrued property taxes 207
Other liabilities 500
Mortgage notes payable 14,794
Partners' Deficit
General partners $ (106)
Limited partners (55,000 units issued and
outstanding) (3,942) (4,048)
$ 11,568
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Rental income $1,211 $1,343 $2,507 $2,657
Other income 103 85 241 214
Total revenues 1,314 1,428 2,748 2,871
Expenses:
Operating 588 643 1,177 1,212
General and administrative 65 91 152 167
Depreciation 283 276 559 548
Interest 279 285 559 571
Property taxes 82 103 193 211
Total expenses 1,297 1,398 2,640 2,709
Net income $ 17 $ 30 $ 108 $ 162
Net income allocated
to general partners (1%) $ -- $ -- $ 1 $ 2
Net income allocated
to limited partners (99%) 17 30 107 160
$ 17 $ 30 $ 108 $ 162
Net income per limited
partnership unit $ .31 $ .55 $ 1.95 $ 2.91
Distributions per limited
partnership unit $ 1.95 $ 8.77 $ 1.95 $26.05
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(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 at
December 31, 2001 55,000 $ (106) $(3,942) $(4,048)
Distributions to partners -- (1) (107) (108)
Net income for the six months
ended June 30, 2002 -- 1 107 108
Partners' deficit at
June 30, 2002 55,000 $ (106) $(3,942) $(4,048)
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income $ 108 $ 162
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 559 548
Amortization of discounts and loan costs 15 14
Change in accounts:
Receivables and deposits (1) 279
Other assets (54) (60)
Accounts payable (59) (28)
Tenant security deposit liabilities -- (1)
Accrued property taxes (78) (63)
Other liabilities 96 130
Net cash provided by operating activities 586 981
Cash flows from investing activities:
Property improvements and replacements (209) (252)
Net withdrawals from restricted escrows -- 598
Net cash (used in) provided by investing
activities (209) 346
Cash flows from financing activities:
Payments on mortgage notes payable (162) (143)
Loan costs paid -- (32)
Partners' distributions (108) (1,447)
Net cash used in financing activities (270) (1,622)
Net increase (decrease) in cash and cash equivalents 107 (295)
Cash and cash equivalents at beginning of period 237 665
Cash and cash equivalents at end of period $ 344 $ 370
Supplemental disclosure of cash flow information:
Cash paid for interest $ 483 $ 474
See Accompanying Notes to Consolidated Financial Statements
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. The general partner responsible for management of the
Partnership's business is Shelter Realty III Corporation, a South Carolina
corporation (the "Corporate General Partner"). The Corporate General Partner is
a subsidiary of Apartment Investment and Management Company ("AIMCO"), a
publicly traded real estate investment trust. In the opinion of the Corporate
General Partner, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 2002, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2002. 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, 2001.
Note B - Reconciliation of Cash Flows
As required by the Partnership Agreement, the following is a reconciliation of
"Net cash provided by operating activities" in the accompanying consolidated
statements of cash flows to "Net cash from operations", as defined in the
Partnership Agreement. However, "Net cash from 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 Six Months Ended
June 30,
2002 2001
(in thousands)
Net cash provided by operating activities $ 586 $ 981
Payments on mortgage notes payable (162) (143)
Property improvements and replacements (209) (252)
Change in restricted escrows, net -- 598
Changes in reserves for net operating
assets 96 (257)
Additional reserves (311) (927)
Net cash from operations $ -- $ --
The Corporate General Partner reserved approximately $311,000 and $927,000 at
June 30, 2002 and 2001, respectively, to fund capital improvements and repairs
at the Partnership's four investment properties.
Note C - 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) payments to
affiliates for services and (ii) reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
During the six months ended June 30, 2002 and 2001, 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
Partnership paid to such affiliates approximately $142,000 and $147,000 for the
six months ended June 30, 2002 and 2001, respectively, which is included in
operating expenses.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $105,000 and
$91,000 for the six months ended June 30, 2002 and 2001, respectively, which is
included in general and administrative expenses and investment properties.
During 1986, a liability of approximately $185,000 was incurred to the general
partners for sales commissions earned. Pursuant to the Partnership Agreement,
this liability cannot be paid until certain levels of returns are received by
the limited partners. As of June 30, 2002, the level of return to the limited
partners has not been met and the balance is included in other liabilities in
the accompanying consolidated balance sheet.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Corporate General Partner. During the six months ended
June 30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $62,000 and $82,000, respectively, for insurance coverage and fees
associated with policy claims administration.
Note D - 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. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Corporate General Partner and
several of their affiliated partnerships and corporate entities. The action
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, among other
things, the acquisition of interests in certain Corporate General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Corporate General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Corporate General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Corporate General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Corporate General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as order by the court, was submitted by the parties. On
July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Corporate General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Corporate General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases 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 six months ended June 30, 2002 and 2001:
Average
Occupancy
Property 2002 2001
Essex Park Apartments
Columbia, South Carolina 82% 91%
Colony House Apartments
Mufreesboro, Tennessee 94% 88%
North River Village Apartments
Atlanta, Georgia 86% 93%
Willowick Apartments
Greenville, South Carolina 91% 94%
The Corporate General Partner attributes the increase in occupancy at Colony
House Apartments to an increase in the student population during the current
year. The decrease in occupancy at North River Village Apartments, Essex Park
Apartments and Willowick Apartments is due to the competitive market of the
apartment industry in the Atlanta, Columbia and Greenville areas.
Results of Operations
The Registrant's net income for the three and six months ended June 30, 2002 was
approximately $17,000 and $108,000 as compared to approximately $30,000 and
$162,000 for the three and six months ended June 30, 2001. The decrease in net
income for the three and six months ended June 30, 2002 is due to a decrease in
total revenues partially offset by a decrease in total expenses. The decrease in
total revenues is due to a decrease in rental income partially offset by an
increase in other income. Rental income decreased due to a decrease in occupancy
at Essex Park Apartments, North River Village Apartments and Willowick
Apartments partially offset by an increase in occupancy at Colony House
Apartments. Other income increased due to an increase in utility reimbursements
at Essex Park Apartments and North River Village Apartments and corporate
housing revenue at Essex Park Apartments partially offset by a decrease in
interest income as a result of lower cash balances maintained in interest
bearing accounts.
The decrease in total expenses for the three and six months ended June 30, 2002
was primarily due to a decrease in operating, property tax and general and
administrative expenses. Operating expenses decreased due to a decrease in
property expense. Property expense decreased due to a decrease in employee
salaries at Colony House Apartments and Willowick Apartments partially offset by
an increase in corporate unit housing expense at Essex Park Apartments. Property
tax expense decreased due to the receipt of a refund during 2002 for overpayment
of prior year property taxes at North River Village Apartments. General and
administrative expense decreased due to a decrease in professional fees and
state operating taxes partially offset by an increase in the cost of services
included in the management reimbursements to the Corporate General Partner
allowed under the Partnership Agreement. Also included in the general and
administrative expenses for the three and six months ended June 30, 2002 and
2001 are costs associated with the quarterly and annual communications with
investors and regulatory agencies and the annual audit 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 June 30, 2002, the Registrant had cash and cash equivalents of approximately
$344,000 as compared to approximately $370,000 at June 30, 2001. Cash and cash
equivalents increased approximately $107,000 for the six months ended June 30,
2002 from the Registrant's year end, primarily due to approximately $586,000 of
cash provided by operating activities which was partially offset by
approximately $209,000 of cash used in investing activities and approximately
$270,000 of cash used in financing activities. Cash used in investing activities
consisted of property improvements and replacements. Cash used in financing
activities consisted of payments of principal made on the mortgages encumbering
the Registrant's properties and distributions to partners. The Registrant
invests its working capital reserves in interest bearing 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 Registrant and to comply with
Federal, state and local legal and regulatory requirements. Capital improvements
completed at each of the Registrant's properties are detailed below.
Essex Park Apartments
During the six months ended June 30, 2002, the Partnership completed
approximately $88,000 of capital improvements at Essex Park Apartments
consisting primarily of structural improvements, plumbing improvements,
appliance and floor covering replacements and cabinet replacements. These
improvements were funded from operating cash flows. The Partnership has
budgeted, but is not limited to,
approximately $174,000 for capital improvements during 2002 at Essex Park
Apartments consisting primarily of floor covering replacements, structural
enhancements and appliance replacements. Additional improvements may be
considered and will depend on the physical condition of the property as well as
anticipated cash flow generated by the property.
Colony House Apartments
During the six months ended June 30, 2002, the Partnership completed
approximately $35,000 of capital improvements at Colony House Apartments
consisting primarily of floor covering, air conditioning and appliance
replacements. These improvements were funded from operating cash flows. The
Partnership has budgeted, but is not limited to, approximately $67,000 for
capital improvements during 2002 at Colony House Apartments consisting primarily
of floor covering replacements, door replacements, and appliance replacements.
Additional improvements may be considered and will depend on the physical
condition of the property as well as anticipated cash flow generated by the
property.
North River Village Apartments
During the six months ended June 30, 2002, the Partnership completed
approximately $55,000 of capital improvements at North River Village Apartments
consisting primarily of floor covering replacements, wall covering and office
computers. These improvements were funded from operating cash flows. The
Partnership has budgeted, but is not limited to, approximately $55,000 for
capital improvements during 2002 at North River Village Apartments consisting
primarily of floor covering replacements. Additional improvements may be
considered and will depend on the physical condition of the property as well as
anticipated cash flow generated by the property and replacement reserves.
Willowick Apartments
During the six months ended June 30, 2002, the Partnership completed
approximately $31,000 of capital improvements at Willowick Apartments consisting
primarily of floor covering replacements, appliance replacements and major
landscaping. These improvements were funded from operating cash flows. The
Partnership has budgeted, but it is not limited to, approximately $69,000 for
capital improvements during 2002 at Willowick Apartments consisting primarily of
floor covering replacements, structural upgrades, air conditioning unit
replacements and appliance replacements. Additional improvements may be
considered and will depend on the physical condition of the property as well as
anticipated cash flow generated by the property.
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 $14,794,000, net of discount, is amortized over
varying periods. A balloon payment of $1,543,000 is due in October 2003 at North
River Village. All remaining debt is scheduled to be fully amortized in January
2021. The Corporate General Partner will attempt to refinance such indebtedness
and/or sell the properties prior to such maturity dates. If the properties
cannot be refinanced or sold for a sufficient amount, the Registrant will risk
losing such properties through foreclosure.
The Partnership distributed the following amounts during the six months ended
June 30, 2002 and 2001 (in thousands, except per unit data):
Six Months Per Limited Six Months Per Limited
Ended Partnership Ended Partnership
June 30, 2002 Unit June 30, 2001 Unit
Operations $ 108 $ 1.95 $1,447 $26.05
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 cash
available for distribution is reviewed on a monthly basis. There can be no
assurance, however, that the Partnership will generate sufficient funds from
operations, after planned capital improvement expenditures, to permit any
additional distributions to its partners during the remainder of 2002 or
subsequent periods. In addition, the Partnership may be restricted from making
distributions if the amount in the reserve account for North River Village
Apartments maintained by the mortgage lender is less than $200 per apartment
unit. As of June 30, 2002 the reserve account was fully funded with
approximately $54,000 on deposit with the mortgage lender.
Other
In addition to its indirect ownership of the combined general partner interests
in the Partnership, AIMCO and its affiliates owned 35,639 limited partnership
units in the Partnership representing 64.80% of the outstanding units at June
30, 2002. A number of these units were acquired pursuant to tender offers made
by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will
acquire additional units of limited partnership interest in the Partnership in
exchange for cash or a combination of cash and units in the operating
partnership of AIMCO either through private purchases or tender offers. In this
regard, on June 25, 2002, a tender offer by AIMCO Properties, L.P., to acquire
any and all of the Units not owned by affiliates of AIMCO for a purchase price
of $79.00 per Unit expired. Pursuant to this offer, AIMCO acquired 939 Units
during the quarter ended June 30, 2002. Under the Partnership Agreement,
unitholders holding a majority of the Units are entitled to take action with
respect to a variety of matters, which would include voting on certain
amendments to the Partnership Agreement and voting to remove the general
partners. As a result of its ownership of 64.80% of the outstanding units, AIMCO
is in a position to control all such voting decisions with respect to the
Registrant. Although the Corporate General Partner owes fiduciary duties to the
limited partners of the Partnership, the Corporate General Partner also owed
fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of
the Corporate General Partner, as corporate general partner, to the Partnerships
and its limited partners may come into conflict with the duties of the Corporate
General Partner to AIMCO, as its sole stockholder.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Partnership
to make estimates and assumptions. The Partnership believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Partnership will make an
assessment of its recoverability by estimating the undiscounted future cash
flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Partnership would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment properties. These factors include changes in the
national, regional and local economic climate; local conditions, such as an
oversupply of multifamily properties; competition from other available
multifamily property owners and changes in market rental rates. Any adverse
changes in these factors could cause an impairment in the Partnership's assets.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
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. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Corporate General Partner and
several of their affiliated partnerships and corporate entities. The action
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, among other
things, the acquisition of interests in certain Corporate General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Corporate General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Corporate General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Corporate General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Corporate General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as order by the court, was submitted by the parties. On
July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Corporate General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Corporate General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
3 Amended and Restated Certificate and Agreement of Limited
Partnership (Exhibit A to the Prospectus included in
Registrant's Amendment No. 1 to Registration Statement,
filed September 2, 1981 (File No. 2-72567), is incorporated
herein by reference).
99 Certification of Chief Executive Officer and Chief Financial
Officer.
b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
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/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: August 14, 2002
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Shelter Properties III
Limited Partnership (the "Partnership"), for the quarterly period ended June
30, 2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Patrick J. Foye, as the equivalent of the Chief Executive
Officer of the Partnership, and Paul J. McAuliffe, as the equivalent of the
Chief Financial Officer of the Partnership, each hereby certifies, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/Patrick J. Foye
Name: Patrick J. Foye
Date: August 14, 2002
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for
purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.