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 September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________to _________
Commission file number 0-10260
SHELTER PROPERTIES III
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0718508
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHELTER PROPERTIES III
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 2004
Assets
Cash and cash equivalents $ 133
Receivables and deposits 135
Restricted escrow 84
Other assets 543
Assets held for sale (Note A) 2,515
Investment properties:
Land $ 762
Buildings and related personal property 16,143
16,905
Less accumulated depreciation (11,738) 5,167
$ 8,577
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 124
Tenant security deposit liabilities 59
Accrued property taxes 194
Other liabilities 300
Due to affiliate (Note C) 379
Mortgage notes payable 9,184
Liabilities related to assets held for sale (Note A) 3,301
Partners' Deficit
General partners $ (72)
Limited partners (55,000 units issued and
outstanding) (4,892) (4,964)
$ 8,577
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(Restated) (Restated)
Revenues:
Rental income $ 667 $ 654 $ 1,979 $ 1,895
Other income 82 69 232 180
Total revenues 749 723 2,211 2,075
Expenses:
Operating 398 393 1,163 1,042
General and administrative 46 50 179 212
Depreciation 150 145 459 444
Interest 172 175 517 520
Property taxes 70 57 200 168
Total expenses 836 820 2,518 2,386
Loss from continuing operations (87) (97) (307) (311)
Income from discontinued
operations (Note A) 10 39 185 52
Net loss $ (77) $ (58) $ (122) $ (259)
Net loss allocated
to general partners (1%) $ (1) $ (1) $ (1) $ (3)
Net loss allocated
to limited partners (99%) (76) (57) (121) (256)
$ (77) $ (58) $ (122) $ (259)
Per limited partnership unit:
Loss from continuing operations $ (1.56) $ (1.74) $ (5.53) $ (5.59)
Income from discontinued
operations 0.18 0.71 3.33 0.94
$ (1.38) $ (1.03) $ (2.20) $ (4.65)
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, 2003 55,000 $ (71) $(4,771) $(4,842)
Net loss for the nine months
ended September 30, 2004 -- (1) (121) (122)
Partners' deficit at
September 30, 2004 55,000 $ (72) $(4,892) $(4,964)
See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES III
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2004 2003
Cash flows from operating activities:
Net loss $ (122) $ (259)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 683 657
Amortization of loan costs 14 14
Casualty gain (86) --
Change in accounts:
Receivables and deposits 8 37
Other assets (97) (224)
Accounts payable 34 (165)
Tenant security deposit liabilities 3 9
Accrued property taxes (60) 122
Other liabilities 31 (18)
Due to affiliate 60 --
Net cash provided by operating activities 468 173
Cash flows from investing activities:
Property improvements and replacements (488) (404)
Net insurance proceeds received 91 --
Net withdrawals from restricted escrows 95 --
Net cash used in investing activities (302) (404)
Cash flows from financing activities:
Payments on mortgage notes payable (291) (271)
Advances received from affiliate 135 --
Repayment of advances from affiliate (69) --
Net cash used in financing activities (225) (271)
Net decrease in cash and cash equivalents (59) (502)
Cash and cash equivalents at beginning of period 192 666
Cash and cash equivalents at end of period $ 133 $ 164
Supplemental disclosure of cash flow information:
Cash paid for interest $ 662 $ 737
Supplemental disclosure of non-cash flow information:
Property improvements and replacements in accounts payable $ 45 $ --
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 nine month periods ended September 30, 2004, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2004. 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, 2003.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
the accompanying consolidated statements of operations have been restated as of
January 1, 2003 to reflect the operations of Colony House Apartments as income
from discontinued operations due to its sale to a third party subsequent to
September 30, 2004.
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 Nine Months Ended
September 30,
2004 2003
(in thousands)
Net cash provided by operating activities $ 468 $ 173
Payments on mortgage notes payable (291) (271)
Property improvements and replacements (488) (404)
Change in restricted escrow 95 --
Changes in reserves for net operating assets 21 239
Net cash used in operations $ (195) $ (263)
Distributions made from reserves no longer considered necessary by the Corporate
General Partner are considered to be additional net cash from operations for
allocation purposes.
Note C - Transactions with Affiliated Parties
The Partnership has no employees and depends 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 nine months ended September 30, 2004 and 2003, 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 $159,000 and $149,000 for the
nine months ended September 30, 2004 and 2003, respectively, which is included
in operating expenses and income from discontinued operations.
An affiliate of the Corporate General Partner charged for reimbursement of
accountable administrative expenses amounting to approximately $176,000 and
$119,000 for the nine months ended September 30, 2004 and 2003, respectively,
which is 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 $43,000 and $3,000 for the nine months ended September 30, 2004
and 2003, respectively. The construction management service fees are calculated
based on a percentage of additions to the investment properties. At September
30, 2004, the Partnership owed approximately $58,000 for accountable
administrative expenses which is included in due to affiliate.
During 1986, a liability of approximately $185,000 was incurred to the general
partners for sales commissions earned. In connection with the sale of North
River Village Apartments in 2002, the Corporate General Partner earned a
commission of $68,000 for its assistance in the sale. Payment of such
commissions is subordinate to the limited partners receiving a cumulative 7%
return on their investment. As of September 30, 2004, the level of return to the
limited partners has not been met and the balance of approximately $253,000 is
included in due to affiliate.
Pursuant to the Partnership Agreement, an affiliate of the Corporate General
Partner advanced the Partnership approximately $135,000 during the nine months
ended September 30, 2004 to assist with the payment of property taxes at Essex
Park Apartments. During the nine months ended September 30, 2004, the
Partnership made a payment on this advance of approximately $69,000. Interest on
advances is charged at the prime rate plus 2%, or 6.75% at September 30, 2004.
Interest expense for this loan was approximately $3,000 for the nine months
ended September 30, 2004. At September 30, 2004, the Partnership owed an
affiliate of the Corporate General Partner approximately $68,000 in advances and
accrued interest, which is included in due to affiliate. Subsequent to September
30, 2004, an affiliate of the Corporate General Partner advanced the Partnership
approximately $34,000 to fund capital improvements at Willowick Apartments. No
such advances or payments were made during the nine months ended September 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 nine months ended September 30, 2004 and
2003, the Partnership paid AIMCO and its affiliates approximately $66,000 and
$59,000, respectively, for insurance coverage and fees associated with policy
claims administration.
Note D - Casualty
In May 2003, one of the Partnership's investment properties, Colony House
Apartments, incurred damages as a result of a hail storm. During the year ended
December 31, 2003, approximately $151,000 of fixed assets and approximately
$86,000 of accumulated depreciation were written off resulting in a net write
off of approximately $65,000. During 2003, the property received approximately
$244,000 in proceeds from the insurance company to repair the damage and
recognized a casualty gain of approximately $179,000 as a result of the
difference between the proceeds received and the net book value of the buildings
which were damaged. During the nine months ended September 30, 2004, the
Partnership received additional proceeds of approximately $91,000 and wrote off
approximately $5,000 of additional net assets which resulted in an additional
gain of approximately $86,000. This amount is included in income from
discontinued operations.
Note E - Subsequent Event
Subsequent to September 30, 2004, the Partnership sold Colony House Apartments
to a third party, for net proceeds of approximately $7,161,000 after payment of
closing costs. The Partnership used approximately $3,199,000 of the net proceeds
to repay the mortgage encumbering the property. The Partnership anticipates that
it will recognize a gain on the sale of approximately $4,427,000. In addition,
the Partnership recorded a loss on early extinguishment of debt of approximately
$89,000 as a result of unamortized loan costs being written off. As a result of
this sale, the accompanying consolidated statement of operations have been
restated as of January 1, 2003 to reflect the operations of Colony House
Apartments as income from discontinued operations. Included in income from
discontinued operations are revenues generated by the property of approximately
$1,135,000 and $1,021,000 for the nine months ended September 30, 2004 and 2003,
respectively.
Note F - Contingencies
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.
In addition, during the third quarter of 2001, a complaint captioned Heller v.
Insignia Financial Group (the "Heller action") was filed against the same
defendants that are named in the Nuanes action. 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.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
at least one round of tender offers 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. On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering judgment thereto. On November 24,
2003, the Objector filed an application requesting the court order AIMCO to
withdraw settlement tender offers it had commenced, refrain from making further
offers pending the appeal and auction any units tendered to third parties,
contending that the offers did not conform with the terms of the settlement.
Counsel for the Objector (on behalf of another investor) had alternatively
requested the court take certain action purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions and denied them both in their entirety. The Objector filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.
On January 28, 2004, the Objector filed his opening brief in the Appeal. On
April 23, 2004, the Corporate General Partner and its affiliates filed a
response brief in support of the settlement and the judgment thereto. The
plaintiffs have also filed a brief in support of the settlement. On June 4,
2004, Objector filed a reply to the briefs submitted by the Corporate General
Partner and Plaintiffs. In addition both the Objector and plaintiffs filed
briefs in connection with the second appeal. The Court of Appeals heard oral
argument on both appeals on September 22, 2004 and took the matters under
submission.
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.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Corporate General
Partner, was served with a complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. On March 5, 2004 the
plaintiffs filed an amended complaint also naming NHP Management Company, which
is also an affiliate of the Corporate General Partner. The complaint is styled
as a Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The defendants have filed an answer to the amended complaint denying
the substantive allegations. Some discovery has taken place and settlement
negotiations continue. Although the outcome of any litigation is uncertain,
AIMCO Properties, L.P. does not believe that the ultimate outcome will have a
material adverse effect on its financial condition or results of operations.
Similarly, the Corporate General Partner does not believe that the ultimate
outcome will have a material adverse effect on the Partnership's financial
condition or results of operations.
The Partnership is unaware of any other pending or outstanding litigation
matters involving it or its investment properties that are not of a routine
nature arising in the ordinary course of business.
As previously disclosed, the Central Regional Office of the United States
Securities and Exchange Commission (the "SEC") is conducting a formal
investigation relating to certain matters. Although the staff of the SEC is not
limited in the areas that it may investigate, AIMCO believes the areas of
investigation include AIMCO's miscalculated monthly net rental income figures in
third quarter 2003, forecasted guidance, accounts payable, rent concessions,
vendor rebates, capitalization of payroll and certain other costs, and tax
credit transactions. AIMCO is cooperating fully. AIMCO is not able to predict
when the matter will be resolved. AIMCO does not believe that the ultimate
outcome will have a material adverse effect on its consolidated financial
condition or results of operations. Similarly, the Corporate General Partner
does not believe that the ultimate outcome will have a material adverse effect
on the Partnership's consolidated financial condition or results of operations.
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 two apartment complexes,
excluding one property that sold subsequent to September 30, 2004. The following
table sets forth the average occupancy of the properties for each of the nine
months ended September 30, 2004 and 2003:
Average
Occupancy
Property 2004 2003
Essex Park Apartments
Columbia, South Carolina (1) 88% 85%
Willowick Apartments
Greenville, South Carolina 91% 90%
(1) The Corporate General Partner attributes the increase in occupancy at
Essex Park Apartments to increased retention efforts from property
management and a more stable customer base.
The Partnership's financial results depend upon a number of factors including
the ability to attract and maintain tenants at the investment properties,
interest rates on mortgage loans, costs incurred to operate the investment
properties, general economic conditions and weather. 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, the Corporate General Partner may use
rental concessions and rental rate reductions to offset softening market
conditions, accordingly, there is no guarantee that the Corporate General
Partner will be able to sustain such a plan. Further, a number of factors that
are outside the control of the Partnership such as the local economic climate
and weather can adversely or positively affect the Partnership's financial
results.
Results of Operations
The Partnership's net loss for the three and nine months ended September 30,
2004 was approximately $77,000 and $122,000, respectively, compared to net loss
of approximately $58,000 and $259,000 for the corresponding periods in 2003. The
increase in net loss for the three month period is due to a decrease in income
from discontinued operations and an increase in total expenses partially offset
by an increase in total revenues. The decrease in net loss for the nine month
period is due to an increase in total revenues and an increase in income from
discontinued operations partially offset by an increase in total expenses.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
the accompanying consolidated statements of operations have been restated as of
January 1, 2003 to reflect the operations of Colony House Apartments as income
from discontinued operations due to its sale to a third party subsequent to
September 30, 2004. The income from discontinued operations includes revenues of
approximately $1,135,000 and $1,021,000 for the nine months ended September 30,
2004 and 2003, respectively.
In May 2003, one of the Partnership's investment properties, Colony House
Apartments, incurred damages as a result of a hail storm. During the year ended
December 31, 2003, approximately $151,000 of fixed assets and approximately
$86,000 of accumulated depreciation were written off resulting in a net write
off of approximately $65,000. During 2003, the property received approximately
$244,000 in proceeds from the insurance company to repair the damage and
recognized a casualty gain of approximately $179,000 as a result of the
difference between the proceeds received and the net book value of the buildings
which were damaged. During the nine months ended September 30, 2004, the
Partnership received additional proceeds of approximately $91,000 and wrote off
approximately $5,000 of additional net assets which resulted in an additional
gain of approximately $86,000. This amount is included in income from
discontinued operations.
Excluding the income from discontinued operations, the Partnership's loss from
continuing operations was approximately $87,000 and $307,000 for the three and
nine months ended September 30, 2004, respectively, compared to loss from
continuing operations of approximately $97,000 and $311,000 for the
corresponding periods in 2003. The decrease in loss from continuing operations
for both periods is due to an increase in total revenues partially offset by an
increase in total expenses. Total revenues for the three and nine months ended
September 30, 2004 increased due to increases in rental and other income. Rental
income increased due to increases in the average rental rates at Essex Park
Apartments and in occupancy at Essex Park Apartments partially offset by an
increase in bad debt expense at Essex Park Apartments. Other income increased
due to an increase in lease cancellation fees at both of the Partnership's
investment properties and an increase in late charges at Essex Park Apartments.
Total expenses for both periods increased due to increases in operating,
depreciation and property tax expenses partially offset by a decrease in general
and administrative expense. Operating expenses for both periods increased due to
increases in property expenses and management fees. Property expenses increased
due to an increase in payroll and related benefits at both of the Partnership's
investment properties. Management fees increased due to an increase in rental
income primarily at Essex Park Apartments. Depreciation expense for both periods
increased due to capital improvements and replacements placed into service
during the past twelve months, primarily at Essex Park Apartments. Property tax
expense increased due to an increase in the tax rate at Essex Park Apartments.
General and administrative expense decreased due to decreases in taxes and
licenses and in the expected cost of the annual audit. Included in general and
administrative expense for the nine months ended September 30, 2004 and 2003 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.
Liquidity and Capital Resources
At September 30, 2004, the Partnership had cash and cash equivalents of
approximately $133,000 compared to approximately $164,000 at September 30, 2003.
Cash and cash equivalents decreased approximately $59,000 from December 31, 2003
due to approximately $302,000 and $225,000 of cash used in investing and
financing activities, respectively, partially offset by approximately $468,000
of cash provided by operating activities. Cash used in investing activities
consisted of property improvements and replacements partially offset by net
withdrawals from restricted escrows and insurance proceeds received. Cash used
in financing activities consisted of payments of principal on the mortgages
encumbering the Partnership's properties and repayment of advances to an
affiliate partially offset by advances received from an affiliate. 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 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.
For example, 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. Capital improvements planned for each of
the Partnership's properties are detailed below.
Essex Park Apartments
During the nine months ended September 30, 2004, the Partnership completed
approximately $149,000 of capital improvements at Essex Park Apartments,
consisting primarily of structural upgrades, exterior painting and 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
$28,000 in capital improvements during the remainder of 2004. 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 nine months ended September 30, 2004, the Partnership completed
approximately $288,000 of capital improvements at Colony House Apartments
consisting primarily of floor covering and appliance replacements and building
repairs related to damage from a hail storm. These improvements were funded from
operating cash flow, replacement reserves and insurance proceeds. The property
was sold subsequent to September 30, 2004.
Willowick Apartments
During the nine months ended September 30, 2004, the Partnership completed
approximately $96,000 of capital improvements at Willowick Apartments,
consisting primarily of floor covering and appliance replacements and furniture
and fixtures. 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 $125,000 in capital
improvements during the remainder of 2004. 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 encumbering the Partnership's properties of approximately
$9,184,000 is amortized over 240 months and is scheduled to be fully amortized
in January 2021.
No distributions were made during the nine months ended September 30, 2004 and
2003.
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 2004 or subsequent
periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 36,382 limited partnership units
(the "Units") in the Partnership representing 66.15% of the outstanding Units at
September 30, 2004. 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 AIMCO Properties, L.P., 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 66.15% of
the outstanding Units, AIMCO and its affiliates are in a position to control 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, but are not limited
to, 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 impairment of 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 evaluates all accounts receivable from residents and establishes an
allowance, after the application of security deposits, for accounts greater than
30 days past due on current tenants and all receivables due from former tenants.
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.
In addition, during the third quarter of 2001, a complaint captioned Heller v.
Insignia Financial Group (the "Heller action") was filed against the same
defendants that are named in the Nuanes action. 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.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
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
at least one round of tender offers 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. On August 12, 2003, an objector
("Objector") filed an appeal (the "Appeal") seeking to vacate and/or reverse the
order approving the settlement and entering judgment thereto. On November 24,
2003, the Objector filed an application requesting the court order AIMCO to
withdraw settlement tender offers it had commenced, refrain from making further
offers pending the appeal and auction any units tendered to third parties,
contending that the offers did not conform with the terms of the settlement.
Counsel for the Objector (on behalf of another investor) had alternatively
requested the court take certain action purportedly to enforce the terms of the
settlement agreement. On December 18, 2003, the court heard oral argument on the
motions and denied them both in their entirety. The Objector filed a second
appeal challenging the court's use of a referee and its order requiring Objector
to pay those fees.
On January 28, 2004, the Objector filed his opening brief in the Appeal. On
April 23, 2004, the Corporate General Partner and its affiliates filed a
response brief in support of the settlement and the judgment thereto. The
plaintiffs have also filed a brief in support of the settlement. On June 4,
2004, Objector filed a reply to the briefs submitted by the Corporate General
Partner and Plaintiffs. In addition both the Objector and plaintiffs filed
briefs in connection with the second appeal. The Court of Appeals heard oral
argument on both appeals on September 22, 2004 and took the matters under
submission.
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.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Corporate General
Partner, was served with a complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. On March 5, 2004 the
plaintiffs filed an amended complaint also naming NHP Management Company, which
is also an affiliate of the Corporate General Partner. The complaint is styled
as a Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The defendants have filed an answer to the amended complaint denying
the substantive allegations. Some discovery has taken place and settlement
negotiations continue. Although the outcome of any litigation is uncertain,
AIMCO Properties, L.P. does not believe that the ultimate outcome will have a
material adverse effect on its financial condition or results of operations.
Similarly, the Corporate General Partner does not believe that the ultimate
outcome will have a material adverse effect on the Partnership's financial
condition or results of operations.
ITEM 6. EXHIBITS
See Exhibit Index attached.
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/Martha L. Long
Martha L. Long
Senior Vice President
By: /s/Stephen B. Waters
Stephen B. Waters
Vice President
Date: November 12, 2004
Shelter Properties III
EXHIBIT INDEX
Exhibit
3 See Exhibit 4(a)
4 (a) Amended and Restated Certificate and Agreement of Limited
Partnership, [included as Exhibit A to the Prospectus of
Registrant dated September 2, 1981 contained in Amendment
No. 1 to Registration Statement No. 2-72567 of Registrant
filed September 2, 1981 (the "Prospectus") and incorporated
herein by reference].
(b) Subscription Agreements and Signature Pages [Filed with
Amendment No. 1 of Registration Statement No. 2-72567 of
Registrant and incorporated herein by reference].
(d) Modification Agreement between Citibank, N.A. and Southern
Associates Limited Partnership and a Title to Real Estate
between Southern Associates Limited Partnership and Shelter
Properties III to acquire Essex Park Apartments. Filed as
Exhibit 4(d) to Form 10-K of Registrant for year ended
December 31, 1987 and incorporated herein by reference.
10(i) Contract related to acquisition of properties.
(a) Purchase Agreement dated July 1, 1981 and First Addendum to
Purchase Agreement dated August 4, 1981 between Colony House
of Murfreesboro and U.S. Shelter Corporation to purchase
Colony House Apartments.**
(b) Purchase Agreement dated July 31, 1981, between Southern
Associated Limited Partnership and U.S. Shelter Corporation
to purchase Essex Park Apartments.**
**Filed as Exhibits 12(a) and 12(b), respectively, to
Amendment No. 1 of Registration Statement No. 2-72567 of
Registrant filed September 2, 1981 and incorporated herein
by reference.
(e) Purchase Agreement dated May 14, 1982 between Lincoln
Willowick Greenville Associates and U.S. Shelter Corporation
to purchase Willowick Apartments. [Filed with Form 8-K of
Registrant dated May 14, 1982 and incorporated herein by
reference.]
10(ii) Form of Management Agreement with U.S. Shelter Corporation
subsequently assigned to Shelter Management Group, L.P. (now
known as Insignia Management, L.P.) [Filed with Amendment No.
1 to Registration Statement, No. 2-72567 of Registrant and
incorporated herein by reference.]
10(iii) Contracts related to refinancing the debt:
(m) Multifamily Note dated December 15, 2000 between Shelter
Properties III and Reilly Mortgage Group, Inc., a District of
Columbia corporation securing Colony House Apartments, Essex
Park Apartments, and Willowick Apartments (filed as Exhibit
10(iii)(m) on Form 8-K February 1, 2001 and incorporated
herein by reference).
(n) Multifamily Deed of Trust, Assignment of Rents, and Security
Agreement dated December 15, 2000 between Shelter Properties
III and Reilly Mortgage Group, Inc., a District of Columbia
corporation, securing Colony House Apartments, Essex Park
Apartments, and Willowick Apartments (filed as Exhibit
10(iii)(n) on Form 8-K February 1, 2001).
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.
99 (a) Prospectus of Registrant dated September 2, 1981 [included
in Registration Statement No. 2-72567, of Registrant] and
incorporated herein by reference.
Exhibit 31.1
CERTIFICATION
I, Martha L. Long, 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 small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business issuer 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
small business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business
issuer's internal control over financial reporting.
Date: November 12, 2004
/s/Martha L. Long
Martha L. Long
Senior Vice President of Shelter Realty III
Corporation, equivalent of the chief
executive officer of the Partnership
Exhibit 31.2
CERTIFICATION
I, Stephen B. Waters, 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 small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer'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 small business issuer 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
small business issuer, 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 small business issuer'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 small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer'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 small business issuer'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 small business
issuer's internal control over financial reporting.
Date: November 12, 2004
/s/Stephen B. Waters
Stephen B. Waters
Vice President 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
Limited Partnership (the "Partnership"), for the quarterly period ended
September 30, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), Martha L. Long, as the equivalent of the chief
executive officer of the Partnership, and Stephen B. Waters, 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/Martha L. Long
Name: Martha L. Long
Date: November 12, 2004
/s/Stephen B. Waters
Name: Stephen B. Waters
Date: November 12, 2004
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.