UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] 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 Registrant 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, 2003
Assets
Cash and cash equivalents $ 247
Receivables and deposits 140
Restricted escrow 83
Other assets 628
Investment properties:
Land $ 945
Buildings and related personal property 22,307
23,252
Less accumulated depreciation (15,492) 7,760
$ 8,858
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 20
Tenant security deposit liabilities 75
Accrued property taxes 172
Other liabilities 377
Due to general partner 253
Mortgage notes payable 12,868
Partners' Deficit
General partners $ (72)
Limited partners (55,000 units issued and
outstanding) (4,835) (4,907)
$ 8,858
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,
2003 2002 2003 2002
(Restated) (Restated)
Revenues:
Rental income $ 939 $ 963 $ 1,858 $ 1,995
Other income 82 77 151 191
Total revenues 1,021 1,040 2,009 2,186
Expenses:
Operating 413 447 964 900
General and administrative 61 65 162 152
Depreciation 224 219 443 434
Interest 237 244 469 490
Property taxes 87 77 172 166
Total expenses 1,022 1,052 2,210 2,142
(Loss) income from continuing
operations (1) (12) (201) 44
Income from discontinued
operations -- 29 -- 64
Net (loss) income $ (1) $ 17 $ (201) $ 108
Net (loss) income allocated
to general partners (1%) $ -- $ -- $ (2) $ 1
Net (loss) income allocated
to limited partners (99%) (1) 17 (199) 107
$ (1) $ 17 $ (201) $ 108
Per limited partnership unit:
(Loss) income from
continuing operations $ (0.02) $ (0.21) $ (3.62) $ 0.80
Income from discontinued
operations -- 0.52 -- 1.15
Net (loss) income $ (0.02) $ 0.31 $ (3.62) $ 1.95
Distribution per limited
partnership unit $ -- $ 1.95 $ -- $ 1.95
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, 2002 55,000 $ (70) $(4,636) $(4,706)
Net loss for the six months
ended June 30, 2003 -- (2) (199) (201)
Partners' deficit at
June 30, 2003 55,000 $ (72) $(4,835) $(4,907)
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2003 2002
Cash flows from operating activities:
Net (loss) income $ (201) $ 108
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation 443 559
Amortization of discounts and loan costs 9 15
Change in accounts:
Receivables and deposits 42 (1)
Other assets (264) (54)
Accounts payable (164) (59)
Tenant security deposit liabilities 9 --
Accrued property taxes 36 (78)
Other liabilities 66 96
Net cash (used in) provided by operating activities (24) 586
Cash flows used in investing activities:
Property improvements and replacements (216) (209)
Cash flows from financing activities:
Payments on mortgage notes payable (179) (162)
Distributions to partners -- (108)
Net cash used in financing activities (179) (270)
Net (decrease) increase in cash and cash equivalents (419) 107
Cash and cash equivalents at beginning of period 666 237
Cash and cash equivalents at end of period $ 247 $ 344
Supplemental disclosure of cash flow information:
Cash paid for interest $ 468 $ 483
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, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2003. 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 fiscal year ended December 31, 2002.
Effective January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which established standards for the way that public business
enterprises report information about long-lived assets that are either being
held for sale or have already been disposed of by sale or other means. The
standard requires that results of operations for a long-lived asset that is
being held for sale or has already been disposed of be reported as a
discontinued operation on the statement of operations. As a result, the
accompanying consolidated statements of operations have been restated as of
January 1, 2002 to reflect the operations of North River Village Apartments as
income from discontinued operations due to its sale in December 2002.
Note B - Reconciliation of Cash Flows
As required by the Partnership Agreement, the following is a reconciliation of
"Net cash (used in) 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,
2003 2002
(in thousands)
Net cash (used in) provided by operating activities $ (24) $ 586
Payments on mortgage notes payable (179) (162)
Property improvements and replacements (216) (209)
Changes in reserves for net operating assets 275 96
Additional reserves -- (311)
Net cash used in operations $ (144) $ --
For the six months ended June 30, 2003, the Corporate General Partner believed
it to be in the best interest of the Partnership to use cash from operations of
approximately $144,000 to fund continuing capital improvements and repairs in
order for the properties to remain competitive. For the six months ended June
30, 2002, the Corporate General Partner reserved approximately $311,000 to fund
capital improvements and repairs at the Partnership's three 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, 2003 and 2002, affiliates of the Corporate
General Partner were entitled to receive 5% of gross receipts from all of the
Partnership's properties for providing property management services. The
Partnership paid to such affiliates approximately $96,000 and $142,000 for the
six months ended June 30, 2003 and 2002, respectively, which are included in
operating expenses and income from discontinued operations.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $80,000 and
$105,000 for the six months ended June 30, 2003 and 2002, respectively, which
are included in general and administrative expenses and investment properties.
Included in these amounts are fees related to construction management services
provided by an affiliate of the Corporate General Partner of approximately
$3,000 for the six months ended June 30, 2003. Fees for the same period in 2002
were less than $1,000. The construction management service fees are calculated
based on a percentage of current year additions to the 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, 2003, the level of return to the limited
partners has not been met and the balance is included in due to general partner
in the accompanying consolidated balance sheet.
Pursuant to the Partnership Agreement and in connection with the sale of North
River Village Apartments in 2002, the Corporate General Partner is entitled to a
commission of up to 1% for its assistance in the sale. Payment of such
commission is subordinate to the limited partners receiving a cumulative 7%
return on their investment. This return has not yet been met, and accordingly,
$68,000 was accrued and is included in due to general partner in the
accompanying consolidated balance sheet at June 30, 2003.
The Partnership insures 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, 2003 and 2002,
the Partnership was charged by AIMCO and its affiliates approximately $59,000
and $92,000, respectively, for insurance coverage and fees associated with
policy claims administration.
Note D - Disposition of Investment Property
On December 13, 2002, the Partnership sold North River Village Apartments to an
unrelated third party for a gross sale price of $6,800,000. The net proceeds
realized by the Partnership were approximately $6,613,000 after payment of
closing costs of approximately $187,000. The Partnership used approximately
$1,568,000 of the net proceeds to repay the mortgages encumbering the property.
The Partnership realized a gain of approximately $4,348,000 for the year ended
December 31, 2002, as a result of this sale. The property's operations, income
of approximately $29,000 and $64,000 and revenues of approximately $274,000 and
$562,000 for the three and six months ended June 30, 2002, respectively, are
included in income from discontinued operations.
Note E - 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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought 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 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 opposed
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 ordered by the court, was submitted by the parties. On July 10,
2002, the Court entered an order vacating the 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 could have an opportunity
to discuss settlement. On October 30, 2002, the court entered an order extending
the stay in effect through January 10, 2003.
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 Heller action was brought as a purported
derivative action, and asserted 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. Before
completing briefing on the appeal, the parties stayed further proceedings in the
appeal in light of a settlement.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Corporate General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provided for the limitation of the allowable costs which the
Corporate General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.
The Corporate General Partner does not anticipate that any costs to the
Partnership, 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 report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. Actual results may differ materially
from those described in the forward-looking statements and will be affected by a
variety of risks and factors including, without limitation: national and local
economic conditions; the terms of governmental regulations that affect the
Registrant and interpretations of those regulations; the competitive environment
in which the Registrant operates; financing risks, including the risk that cash
flows from operations may be insufficient to meet required payments of principal
and interest; real estate risks, including variations of real estate values and
the general economic climate in local markets and competition for tenants in
such markets; litigation, including costs associated with prosecuting and
defending claims and any adverse outcomes, and possible environmental
liabilities. Readers should carefully review the Registrant's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Registrant files from time to time with the Securities and
Exchange Commission.
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 six months ended June 30, 2003 and 2002:
Average
Occupancy
Property 2003 2002
Essex Park Apartments
Columbia, South Carolina 84% 82%
Colony House Apartments
Murfeesboro, Tennessee 94% 94%
Willowick Apartments
Greenville, South Carolina 89% 91%
Results of Operations
The Partnership's net loss was approximately $1,000 and $201,000 for the three
and six months ended June 30, 2003, respectively, compared to net income of
approximately $17,000 and $108,000, respectively, for the corresponding periods
in 2002. The decrease in net income for the three months ended June 30, 2003 is
due to a decrease in income from discontinued operations and a decrease in total
revenues, partially offset by a decrease in total expenses. The decrease in net
income for the six months ended June 30, 2003 is due to a decrease in income
from discontinued operations, a decrease in total revenues, and an increase in
total expenses.
Effective January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which established standards for the way that public business
enterprises report information about long-lived assets that are either being
held for sale or have already been disposed of by sale or other means. The
standard requires that results of operations for a long-lived asset that is
being held for sale or has already been disposed of be reported as a
discontinued operation on the statement of operations. As a result, the
accompanying consolidated statements of operations have been restated as of
January 1, 2002 to reflect the operations of North River Village Apartments as
income from discontinued operations.
On December 13, 2002, the Partnership sold North River Village Apartments to an
unrelated third party for a gross sale price of $6,800,000. The net proceeds
realized by the Partnership were approximately $6,613,000 after payment of
closing costs of approximately $187,000. The Partnership used approximately
$1,568,000 of the net proceeds to repay the mortgages encumbering the property.
The Partnership realized a gain of approximately $4,348,000 for the year ended
December 31, 2002, as a result of this sale. The property's operations, income
of approximately $29,000 and $64,000 for the three and six months ended June 30,
2002, respectively, and revenues of approximately $274,000 and $562,000,
respectively, are included in income from discontinued operations.
Excluding the discontinued operations, the Partnership realized a loss from
continuing operations of approximately $1,000 and $12,000, respectively, for the
three months ended June 30, 2003 and 2002, and a loss from continuing operations
of approximately $201,000 for the six months ended June 30, 2003 compared to
income from continuing operations of approximately $44,000 for the corresponding
period in 2002. The decrease in loss from continuing operations for the three
months ended June 30, 2003 is due to a decrease in total expenses, partially
offset by a decrease in total revenues. The decrease in income from continuing
operations for the six months ended June 30, 2003 is due to a decrease in total
revenues and an increase in total expenses. The decrease in total revenues for
the three months ended June 30, 2003 is due to a decrease in rental income. The
decrease in total revenues for the six months ended June 30, 2003 is due to
decreases in both rental and other income. Rental income decreased due to a
decrease in average rental rates at all three of the Partnership's investment
properties, a decrease in occupancy at Willowick Apartments, and an increase in
concessions at Colony House Apartments and Willowick Apartments, partially
offset by an increase in occupancy at Essex Park Apartments. Other income
decreased for the six months ended June 30, 2003, primarily due to a decrease in
utility reimbursements and corporate housing revenue at Essex Park Apartments.
Other income remained relatively constant for the three months ended June 30,
2003.
The decrease in total expenses for the three months ended June 30, 2003 is due
to a decrease in operating expense. The increase in total expenses for the six
months ended June 30, 2003 is due to an increase in operating expense, partially
offset by a decrease in interest expense. The decrease in operating expense for
the three months ended June 30, 2003 is primarily due to decreases in utility
and payroll related expenses at all of the properties. The increase in operating
expense for the six months ended June 30, 2003 is primarily due to an increase
in contract maintenance expense at all of the properties and an increase in
advertising expense at Essex Park Apartments, partially offset by a decrease in
property management fees as a result of the decrease in rental income. Interest
expense decreased due to the scheduled payments on the mortgages encumbering the
investment properties.
Included in general and administrative expense during the three and six months
ended June 30, 2003 and 2002 are management reimbursements to the Corporate
General Partner as allowed under the Partnership Agreement. In addition, costs
associated with the quarterly and annual communications with investors and
regulatory agencies and the annual audit required by the Partnership Agreement
are also included in general and administrative expenses.
As part of the ongoing business plan of the Partnership, 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, 2003, the Partnership had cash and cash equivalents of approximately
$247,000 compared to approximately $344,000 at June 30, 2002. Cash and cash
equivalents decreased approximately $419,000 from December 31, 2002 due to
approximately $216,000 of cash used in investing activities, approximately
$179,000 of cash used in financing activities, and approximately $24,000 of cash
used in operating activities. Cash used in investing activities consisted of
property improvements and replacements. Cash used in financing activities
consisted of payments of principal on the mortgages encumbering the
Partnership's properties. The Partnership 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 Partnership and to comply with
Federal, state and local legal and regulatory requirements. The Corporate
General Partner monitors developments in the area of legal and regulatory
compliance and is studying new federal laws, including the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance
measures with regard to governance, disclosure, audit and other areas. In light
of these changes, the Partnership expects that it will incur higher expenses
related to compliance, including increased legal and audit fees. Capital
improvements planned at each of the Partnership's properties are detailed below.
Essex Park Apartments
During the six months ended June 30, 2003, the Partnership completed
approximately $116,000 of capital improvements at Essex Park Apartments,
consisting primarily of building and structural upgrades, and floor covering,
appliance, and water heater replacements. These improvements were funded from
operating cash flow. The Partnership evaluates the capital improvement needs of
the property during the year and currently expects to complete an additional
$121,000 in capital improvements during the remainder of 2003. The additional
capital improvements will consist primarily of parking lot upgrades, pool
improvements, appliances, building improvements, and floor covering
replacements. Additional capital improvements may be considered and will depend
on the physical condition of the property as well as the anticipated cash flow
generated by the property.
Colony House Apartments
During the six months ended June 30, 2003, the Partnership completed
approximately $44,000 of capital improvements at Colony House Apartments,
consisting primarily of water heaters, plumbing upgrades, and floor covering
replacements. These improvements were funded from operating cash flow. The
Partnership evaluates the capital improvement needs of the property during the
year and currently expects to complete an additional $20,000 in capital
improvements during the remainder of 2003. The additional capital improvements
will consist primarily of floor covering replacements, appliances, cabinets,
fencing, and air conditioning units. Additional capital improvements may be
considered and will depend on the physical condition of the property as well as
the anticipated cash flow generated by the property.
Willowick Apartments
During the six months ended June 30, 2003, the Partnership completed
approximately $56,000 of capital improvements at Willowick Apartments,
consisting primarily of floor covering and appliance replacements. These
improvements were funded from operating cash flow. The Partnership evaluates the
capital improvement needs of the property during the year and currently expects
to complete an additional $17,000 in capital improvements during the remainder
of 2003. The additional capital improvements will consist primarily of parking
lot upgrades, structural enhancements, appliances, building improvements, and
floor covering replacements. Additional capital improvements may be considered
and will depend on the physical condition of the property as well as the
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 Partnership's distributable cash flow, if any,
may be adversely affected at least in the short term.
The Partnership's assets are thought to be sufficient for any near term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $12,868,000 is amortized over 240 months and is
scheduled to be fully amortized in January 2021.
The Partnership distributed the following amounts during the six months ended
June 30, 2003 and 2002 (in thousands, except per unit data):
Six Months Per Limited Six Months Per Limited
Ended Partnership Ended Partnership
June 30, 2003 Unit June 30, 2002 Unit
Operations $ -- $ -- $ 108 $ 1.95
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
distributions to its partners during the remainder of 2003 or subsequent
periods.
Other
In addition to its indirect ownership of the combined general partner interests
in the Partnership, AIMCO and its affiliates owned 35,663 limited partnership
units (the "Units") in the Partnership representing 64.84% of the outstanding
Units at June 30, 2003. 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 in exchange for cash or a combination
of cash and Units in the operating partnership of AIMCO either through private
purchases or tender offers. Pursuant to the Partnership Agreement, unitholders
holding a majority of the Units are entitled to take action with respect to a
variety of matters that include, but are not limited to, voting on certain
amendments to the Partnership Agreement and voting to remove the Corporate
General Partner. As a result of its ownership of 64.84% of the outstanding
Units, AIMCO and its affiliates are in a position to influence all such voting
decisions with respect to the Partnership. Although the Corporate General
Partner owes fiduciary duties to the limited partners of the Partnership, the
Corporate General Partner also owes fiduciary duties to AIMCO as its sole
stockholder. As a result, the duties of the Corporate General Partner, as
corporate general partner, to the Partnership 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 and
the Partnership fully reserves all balances outstanding over thirty days. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area. Any
concessions given at the inception of the lease are amortized over the life of
the lease.
ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Partnership's management, with the
participation of the principal executive officer and principal financial officer
of the Corporate General Partner, who are the equivalent of the Partnership's
principal executive officer and principal financial officer, respectively, has
evaluated the effectiveness of the Partnership's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on such evaluation, the principal
executive officer and principal financial officer of the Corporate General
Partner, who are the equivalent of the Partnership's principal executive officer
and principal financial officer, respectively, have concluded that, as of the
end of such period, the Partnership's disclosure controls and procedures are
effective.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Partnership's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Partnership's internal control
over financial reporting.
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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought 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 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 opposed
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 ordered by the court, was submitted by the parties. On July 10,
2002, the Court entered an order vacating the 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 could have an opportunity
to discuss settlement. On October 30, 2002, the court entered an order extending
the stay in effect through January 10, 2003.
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 Heller action was brought as a purported
derivative action, and asserted 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. Before
completing briefing on the appeal, the parties stayed further proceedings in the
appeal in light of a settlement.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action described below.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Corporate General Partner has also agreed to make
a tender offer to purchase all of the partnership interests in the Partnerships
within one year of final approval, if it is granted, and to provide partners
with the independent appraisals at the time of these tenders. The proposed
settlement also provided for the limitation of the allowable costs which the
Corporate General Partner or its affiliates will charge the Partnerships in
connection with this litigation and imposes limits on the class counsel fees and
costs in this litigation. On April 11, 2003, notice was distributed to limited
partners providing the details of the proposed settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions.
The Corporate General Partner does not anticipate that any costs to the
Partnership, 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).
31.1 Certification of equivalent of Chief Executive Officer
pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of equivalent of Chief Financial Officer
pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K filed during the quarter ended June 30, 2003:
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 13, 2003
Exhibit 31.1
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Shelter Properties
III;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of Shelter Realty
III Corporation, equivalent of the chief
executive officer of the Partnership
Exhibit 31.2
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Shelter Properties
III;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
/s/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of Shelter Realty III Corporation,
equivalent of the chief financial officer of
the Partnership
Exhibit 32.1
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
(the "Partnership"), for the quarterly period ended June 30, 2003 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 13, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 13, 2003
This certification is furnished with this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.