FORM 10-QSB--QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] 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 LIMITED PARTNERSHIP
(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.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X . No .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
SHELTER PROPERTIES III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
(Unaudited)
June 30, 1998
Assets
Cash and cash equivalents $ 1,659
Receivables and deposits 398
Restricted escrows 926
Other assets 206
Investment properties:
Land $ 1,281
Buildings and related personal property 24,754
26,035
Less accumulated depreciation (14,677) 11,358
$14,547
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 32
Tenant security deposit liabilities 114
Accrued property taxes 179
Other liabilities 379
Mortgage notes payable 8,188
Partners' Capital (Deficit)
General partners $ (76)
Limited partners (55,000 units
issued and outstanding) 5,731 5,655
$14,547
See Accompanying Notes to Consolidated Financial Statements
b)
SHELTER PROPERTIES III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Rental income $1,264 $1,262 $2,502 $2,515
Other income 112 144 199 221
Total revenues 1,376 1,406 2,701 2,736
Expenses:
Operating 627 645 1,198 1,266
General & administrative 57 58 109 102
Depreciation 226 232 448 460
Interest 187 191 375 384
Property taxes 87 89 179 179
Total expenses 1,184 1,215 2,309 2,391
Net income $ 192 $ 191 $ 392 $ 345
Net income allocated
to general partners (1%) $ 2 $ 1 $ 4 $ 3
Net income allocated
to limited partners (99%) 190 190 388 342
$ 192 $ 191 $ 392 $ 345
Net income per limited
partnership unit $ 3.45 $ 3.45 $ 7.05 $ 6.21
See Accompanying Notes to Consolidated Financial Statements
c)
SHELTER PROPERTIES III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(in thousands, except unit data)
(Unaudited)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 55,000 $ 2 $27,500 $27,502
Partners' (deficit) capital
at December 31, 1997 55,000 $ (75) $ 5,838 $ 5,763
Distribution to partners -- (5) (495) (500)
Net income for the six months
ended June 30, 1998 -- 4 388 392
Partners' (deficit) capital
at June 30, 1998 55,000 $ (76) $ 5,731 $ 5,655
See Accompanying Notes to Consolidated Financial Statements
d)
SHELTER PROPERTIES III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 392 $ 345
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 448 460
Amortization of discounts and loan costs 48 49
Change in accounts:
Receivables and deposits (169) 7
Other Assets 18 (40)
Accounts payable (85) 24
Tenant security deposit liabilities (6) 1
Accrued property taxes 179 (29)
Other liabilities 1 (24)
Net cash provided by operating activities 826 793
Cash flows from investing activities:
Property improvements and replacements (155) (161)
Deposits to restricted escrows (20) (18)
Net cash used in investing activities (175) (179)
Cash flows from financing activities:
Payments on mortgage notes payable (116) (108)
Partners' distributions (500) --
Net cash used in financing activities (616) (108)
Net increase in cash and cash equivalents 35 506
Cash and cash equivalents at beginning of period 1,624 1,509
Cash and cash equivalents at end of period $1,659 $2,015
Supplemental disclosure of cash flow information:
Cash paid for interest $ 327 $ 335
See Accompanying Notes to Consolidated Financial Statements
e)
SHELTER PROPERTIES III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Shelter Properties III
Limited Partnership (the "Partnership") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Article 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Shelter Realty III Corporation (the "Corporate General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 1998, are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
1998. For further information, refer to the financial statements and footnotes
thereto included in the Partnership's annual report on Form 10-KSB for the year
ended December 31, 1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation.
NOTE B - RECONCILIATION OF CASH FLOWS
The following is a reconciliation of the subtotal on the accompanying statements
of cash flows captioned "net cash provided by operating activities" to "net cash
used in operations," as defined in the Partnership Agreement. However, "net
cash used in operations" should not be considered an alternative to net income
as an indicator of the Partnership's operating performance or to cash flows as a
measure of liquidity.
1998 1997
(amounts in thousands)
Net cash provided by operating activities $ 826 $ 793
Payments on mortgage notes payable (116) (108)
Property improvements and replacements (155) (161)
Change in restricted escrows, net (20) (18)
Changes in reserves for net operating
liabilities 62 61
Additional reserves (597) (567)
Net cash used in operations $ -- $ --
In 1998 and 1997, the Corporate General Partner believed it to be in the best
interest of the Partnership to reserve an additional $597,000 and $567,000,
respectively, to fund continuing capital improvements and maintenance items at
the four 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 Corporate General Partner is wholly-owned by
Insignia Properties Trust ("IPT"), an affiliate of Insignia Financial Group,
Inc. ("Insignia"). The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following amounts were paid or
accrued to the Corporate General Partner and affiliates in 1998 and 1997:
1998 1997
(in thousands)
Property management fees (included in operating expenses) $137 $135
Reimbursement for services of affiliates (included in
operating, general and administrative expenses and
investment properties) (1) 64 69
Due to general partner 185 185
Due from general partner 11 11
(1)Included in "reimbursements for services of affiliates" for the six months
ended June 30, 1998 and 1997, is approximately $5,000 and $9,000,
respectively, in reimbursements for construction oversight costs.
For the period of January 1, 1997 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency affiliated with the
Corporate General Partner with an insurer unaffiliated with the Corporate
General Partner. An affiliate of the Corporate General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy. The
agent assumed the financial obligations to the affiliate of the Corporate
General Partner, which receives payment on these obligations from the agent.
The amount of the Partnership's insurance premiums accruing to the benefit of
the affiliate of the Corporate General Partner by virtue of the agent's
obligations is not significant.
On September 26, 1997, an affiliate of the General Partner purchased Lehman
Brothers Class "D" subordinated bonds of SASCO, 1992-M1. These bonds are
secured by 55 multi-family apartment mortgage loan pairs held in Trust,
including Essex Park Apartments, Colony House Apartments, and Willowick
Apartments owned by the Partnership.
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
the third quarter of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the Corporate General Partner of the
Partnership.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
The Partnership's investment properties consist of four apartment complexes.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 1998 and 1997:
Average
Occupancy
Property 1998 1997
Essex Park Apartments
Columbia, South Carolina 92% 95%
Colony House Apartments
Murfreesboro, Tennessee 90% 88%
North River Village Apartments
Atlanta, Georgia 92% 92%
Willowick Apartments
Greenville, South Carolina 93% 90%
The Corporate General Partner attributes the decrease in occupancy at Essex Park
to a slower market and the use of higher standards for pre-leasing by management
than by local competitors. The Corporate General Partner attributes the increase
in occupancy at Colony House and Willowick Apartments to the subsiding of a
competitive market.
The Partnership's net income for the three and six month periods ended June 30,
1998, was approximately $192,000 and $392,000, respectively, compared to net
income of approximately $191,000 and $345,000, respectively, for the three and
six month periods ended June 30, 1997. The increase in net income is
attributable to a decrease in operating expenses. Operating expenses decreased
primarily due to a decrease in maintenance expenses. Maintenance expenses
decreased due to expenses incurred in 1997 for interior building improvements at
Colony House and Essex Park Apartments and major landscaping and roof repairs
performed at North River Village.
Included in operating expenses for the six months ended June 30, 1998 is
approximately $22,000 of major repairs and maintenance comprised of window
coverings and construction oversight costs. Included in operating expenses for
the six months ended June 30, 1997 is approximately $34,000 of major repairs and
maintenance comprised of window coverings, construction oversight costs and
major landscaping.
As part of the ongoing business plan of the Partnership, the Corporate General
Partner monitors the rental market environment of its investment properties to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. 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, 1998 the Partnership had cash and cash equivalents of approximately
$1,659,000 compared to approximately $2,015,000 at June 30, 1997. The net
increase in cash and cash equivalents for the six months ended June 30, 1998 was
$35,000. The net increase in cash and cash equivalents for the six months ended
June 30, 1997 was $506,000. Net cash provided by operating activities increased
due to the increase in net income as discussed above and an increase in accrued
property taxes. Partially offsetting the increase in net cash provided by
operating activities was an increase in receivables and deposits and a decrease
in accounts payable due to the timing of payments to vendors. Net cash used in
investing activities decreased slightly due to a decrease in property
improvements in the first and second quarter of 1998. Net cash used in
financing activities increased due to a distribution to partners during the
first quarter of 1998.
The Partnership has no material capital programs scheduled to be performed in
1998, although certain routine capital expenditures and maintenance expenses
have been budgeted. These capital expenditures and maintenance expenses will be
incurred only if cash is available from operations or is received from the
capital reserve account.
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. Such assets are currently
thought to be sufficient for any near-term needs of the Partnership. The
mortgage indebtedness of approximately $8,188,000, net of discount, is amortized
over varying periods. In addition, the mortgage notes require balloon payments
ranging from November 15, 2002, to October 15, 2003, at which time the
properties will either be refinanced or sold. During the six months ended June
30, 1998, the Partnership made a distribution of approximately $495,000 to the
limited partners and $5,000 to the general partners. Included in these amounts
is approximately $14,000 of withholding taxes paid on behalf of the nonresident
partners to the state of South Carolina related to the taxable income generated
from Essex Park and Willowick Apartments in 1997. Future cash distributions
will depend on the levels of net cash generated from operations, property sales,
and the availability of cash reserves. The Corporate General Partner is
evaluating the feasibility of making a cash distribution from operations during
September 1998.
Year 2000
The Partnership is dependent upon the Corporate General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The Corporate General Partner believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled ROSALIE NUANES, ET AL. V. INSIGNIA
FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Corporate General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and its affiliates of
interests in certain general partner entities, past tender offers by Insignia
affiliates as well as a recently announced agreement between Insignia and
Apartment Investment and Management Company. The complaint seeks monetary
damages and equitable relief, including judicial dissolution of the Partnership.
The Corporate General Partner believes the action to be without merit, and
intends to vigorously defend it. On June 24, 1998, the Corporate General
Partner filed a motion seeking dismissal of the action.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature. The Corporate General Partner of the Partnership
believes that all such pending or outstanding litigation will be resolved
without a material adverse effect upon the business, financial condition, or
operations of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as part of this
report.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 1998.
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 LIMITED PARTNERSHIP
By: Shelter Realty III Corporation
Corporate General Partner
By: /s/ William H. Jarrard, Jr.
William H. Jarrard, Jr.
President and Director
By: /s/ Ronald Uretta
Ronald Uretta
Vice President and Treasurer
Date: July 30, 1998