-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sz+16iyDfklzpJFS2/wgfdNHjvLMbNYS7vxl59jVt+PYjwZmBjkKoeEJCkM6v43r BUjj/QANCaTQtKVppFwoKQ== 0000319723-96-000001.txt : 19960311 0000319723-96-000001.hdr.sgml : 19960311 ACCESSION NUMBER: 0000319723-96-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960308 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES II LTD PARTNERSHIP CENTRAL INDEX KEY: 0000319723 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570709233 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10256 FILM NUMBER: 96532555 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10KSB 1 FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) (As last amended by 34-31905, eff. 4/26/93) FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1995 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period.........to......... Commission file number 0-10256 SHELTER PROPERTIES II LIMITED PARTNERSHIP (Name of small business issuer in its charter) South Carolina 57-0709233 (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) (Zip Code) Issuer's telephone number (864) 239-1000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership Interest (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $5,364,997 State the aggregate market value of the voting partnership interests by non- affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests, as of December 31, 1995. $7,284,279 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Prospectus of Registrant dated February 2, 1981 (included in Registration Statement, No.2-69507, of Registrant) are incorporated by reference into Parts I and III. PART I Item 1. Description of Business Shelter Properties II Limited Partnership (the "Registrant" or the "Partnership") is engaged in the business of acquiring, operating and holding real properties for investment. The Registrant acquired five existing apartment properties during 1981. The Registrant sold one property in 1983, and in 1988, another property was allowed to be foreclosed upon by the lender. Commencing February 2, 1981, the Registrant offered through E. F. Hutton & Company Inc. ("Hutton") up to 27,400 Units of Limited Partnership Interest (the "Units") at $1,000 per Unit with a minimum purchase of 5 Units ($5,000), or 1.5 Units ($1,500) for an Individual Retirement Account. An additional 100 Units were purchased by the Corporate General Partner. Limited partners are not required to make any additional capital contributions. The Units were registered under the Securities Act of 1933 via Registration Statement No. 2-69507 (the "Registration Statement"). Reference is made to the Prospectus of Registrant dated February 2, 1981 (the "Prospectus") contained in said Registration Statement, which is incorporated herein by reference thereto. The offering terminated on April 30, 1981. Upon termination of the offering, the Registrant had accepted subscriptions for 27,500 Units, including 100 Units purchased by the Corporate General Partner, for an aggregate of $27,500,000. By June 30, 1981, the Registrant had invested or committed for investment approximately $21,000,000 of such proceeds in five existing apartment properties and thereby completed its acquisition program at approximately the expenditure level estimated in the Prospectus. During December of 1983, the Partnership sold Cambridge Station Apartments in Columbia, South Carolina. Also, during September of 1988, after unsuccessful negotiations to restructure the mortgage note on The Village Apartments in Winston-Salem, North Carolina, the general partner, on behalf of the Partnership, put the note in default and allowed the lender to foreclose on the property. A further description of the Partnership's business is included in Management's Discussion and Analysis or Plan of Operation included in "Item 6" of this Form 10-KSB. The Registrant has no employees. Management and administrative services are performed by Shelter Realty II Corporation, the Corporate General Partner, and by Insignia Management Group, L.P., an affiliate of Insignia Financial Group, Inc. ("Insignia"), the ultimate parent company of the Corporate General Partner. Pursuant to a management agreement between them, Insignia Management Group, L.P. provides property management services to the Registrant. The real estate business in which the Partnership is engaged is highly competitive, and the Partnership is not a significant factor in this industry. The Registrant's property is subject to competition from similar properties in the vicinity in which the property is located. In addition, various limited partnerships have been formed by the General Partners and/or their affiliates to engage in business which may be competitive with the Registrant. Item 2. Description of Properties: The following table sets forth the Registrant's investments in properties: Date of Property Purchase Type of Ownership Use Parktown Townhouses 03/01/81 Fee ownership, subject Apartment Deer Park, Texas to first and second 309 units mortgages. Raintree Apartments 04/30/81 Fee ownership, subject Apartment Anderson, South Carolina to first and second 176 units mortgages. Signal Pointe Apartments 06/30/81 Fee ownership, subject Apartment Winter Park, Florida to first and second 368 units mortgages. Schedule of Properties:
Gross Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis Parktown Townhouses $ 8,946,315 $ 5,260,204 5-35 S/L $2,676,504 Raintree Apartments 3,934,830 2,318,474 5-38 S/L 620,671 Signal Pointe Apartments 10,995,054 6,377,319 5-37 S/L 2,232,945 Totals $23,876,199 $13,955,997 $5,530,120
See Note A to the financial statements in "Item 7" for a description of the Partnership's depreciation policy. Schedule of Mortgages:
Principal Principal Balance At Stated Balance December 31, Interest Period Maturity Due At Property 1995 Rate Amortized Date Maturity Parktown Townhouses 1st mortgage $ 3,295,559 7.60 (1) 11/15/02 $2,552,322 2nd mortgage 108,986 7.60 (1) 11/15/02 108,986 Raintree Apartments 1st mortgage 1,462,529 7.60 (1) 11/15/02 1,132,696 2nd mortgage 48,366 7.60 (1) 11/15/02 48,366 Signal Pointe Apartments 1st mortgage 4,368,103 7.60 (1) 11/15/02 3,383,063 2nd mortgage 144,454 7.60 (1) 11/15/02 144,454 9,427,997 Less unamortized present value discounts (516,553) Total $ 8,911,444 (1) The principal balance is being amortized over 257 months with a balloon payment due November 15, 2002.
Average annual rental rate per unit and occupancy for 1995 and 1994 for each property: Average Annual Average Rental Rates Occupancy Property 1995 1994 1995 1994 Parktown Townhouses $7,063 $6,901 95% 95% Raintree Apartments 5,329 5,118 96% 93% Signal Pointe Apartments 5,826 5,730 95% 92% The Corporate General Partner attributes the increase in occupancy at Signal Pointe Apartments to an increase in population in the area. The increase in population is due to the trend of people moving to Florida from other areas of the country due to the climate and economic factors. This trend may change due to the closure of the naval training center in the area. The increase in occupancy at Raintree is due to increased advertising and concessions being offered during October and November. As noted under "Item 1. Description of Business," the real estate industry is highly competitive. All of the properties of the Partnership are subject to competition from other residential apartment complexes in the area. The Corporate General Partner believes that all of the properties are adequately insured. The multi-family residential properties' lease terms are for one year or less. No residential tenant leases 10% or more of the available rental space. Real estate taxes and rates in 1995 for each property were: 1995 1995 Billing Rate Parktown Townhouses $161,329 2.95% Raintree Apartments 66,976 3.46% Signal Pointe Apartments 139,121 1.89% Item 3. Legal Proceedings The general partner responsible for management of the Partnership's business is Shelter Realty II Corporation, a South Carolina corporation (the "Corporate General Partner"). The only other general partner of the Partnership, N. Barton Tuck, Jr. is effectively prohibited by the Partnership's partnership agreement (the "Partnership Agreement") from participating in the management of the Partnership. The Corporate General Partner is an indirect subsidiary of Insignia Financial Group, Inc. ("Insignia"). The directors and officers of the Corporate General Partner also serve as executive officers of Insignia. The Corporate General Partner owns 100 Limited Partnership Units ("Units"). On May 27, 1995, an affiliate of the Corporate General Partner (the "Affiliated Purchaser") acquired 6,026 Units at a price of $235.00 per Unit pursuant to a tender offer (the "Affiliate Offer") described below. The Corporate General Partner and the Affiliated Purchaser are, therefore, entitled to participate in cash distributions made by the Partnership to its Unit holders. The Partnership made a cash distribution of $21.60 per Unit in February, 1995, but had not made cash distributions to Unit holders during the previous four years. The Corporate General Partner presently expects that the Partnership will seek to make further cash distributions beginning in 1996. In addition, the Corporate General Partner is entitled to certain cash distributions in respect of its general partner interest, and in February 1995 the Corporate General Partner received a cash distribution in respect of such interest of $6,000. Prior to the February 1995 distribution, the Corporate General Partner had not received a cash distribution in respect of its general partner interest since 1985. As a result of the Affiliated Purchaser's acquisition of 21.9% of the outstanding Units, the Affiliated Purchaser, an affiliate of the Corporate General Partner and Insignia, may be in a position to significantly influence any vote of the Unit holders. The Partnership has paid Insignia Management Group, L.P. ("IMG"), an affiliate of the Corporate General Partner, property management fees equal to 5% of the Partnership's apartment revenues for property management services in each of the two years in the period ended December 31, 1995, pursuant to property management agreements. Property management fees paid to IMG amounted to $246,904 and $262,979, respectively, for the years ended December 31, 1994 and 1995. Insignia and its affiliates do not receive any fees from the Partnership for the asset management or partnership administration services they provide, although Insignia and its affiliates are reimbursed by the Partnership for the expenses they incur in connection with providing those services. The Partnership Agreement also provides for reimbursement to the Corporate General Partner and its affiliates for costs incurred in connection with administration of the Partnership's activities. Pursuant to these provisions, and in addition to the property management fees referred to above, the Partnership paid the Corporate General Partner and its affiliates (including the reimbursements to Insignia and its affiliates in connection with asset management and partnership administration services) an aggregate of $83,911 and $97,698, respectively, for the years ended December 31, 1994 and 1995. In addition, at various times during the past two fiscal years an affiliate of Insignia has held preferred stock issued by an unaffiliated company that provides insurance brokerage services to the Partnership. The terms of the Affiliated Purchaser's financing of the Affiliate Offer may result in future potential conflicts of interest. The Affiliated Purchaser paid for the Units it purchased pursuant to the Affiliate Offer with funds provided by Insignia, and Insignia, in turn, obtained these funds from its working capital. It is possible, however, that in connection with its future financing activities, Insignia may cause or request the Affiliated Purchaser to pledge its Units as collateral for loans, or otherwise agree to terms which provide Insignia and the Affiliated Purchaser with incentives to generate substantial near-term cash flow from the Affiliated Purchaser's investment in the Units. In such a situation, the Corporate General Partner may experience a conflict of interest in seeking to reconcile the best interests of the Partnership with the need of its affiliates for cash flow from the Partnership's activities. On April 27, 1995, the Affiliated Purchaser commenced the Affiliate Offer for up to 30% of the Units at a price of $235.00 per Unit. The Affiliate Offer expired on May 26, 1995. On May 27, 1995, an affiliate of the Corporate General Partner, the Affiliated Purchaser, acquired 6,026 Units at a price of $235.00 per Unit pursuant to the Affiliate Offer. During the Affiliate Offer, Carl C. Icahn and certain of his associates contacted Insignia about pursuing a variety of possible transactions on a joint venture basis. During those discussions, representatives of Insignia advised Mr. Icahn and his representatives that Insignia did not wish to discourage or prevent any transaction which would produce additional value for Unit holders. During those conversations, Mr. Icahn and his representatives expressed a desire to make an equity investment in the Affiliated Purchaser with a view to sharing in the economic benefits, if any, to be derived by the Affiliated Purchaser from the Affiliate Offer. The representatives of Insignia declined to agree to such an arrangement. Following those discussions, at approximately 6:45 p.m. on Monday, May 22, 1995, the Corporate General Partner received a letter from High River Limited Partnership ("High River") which stated that High River was commencing, by public announcement, a cash tender offer for up to approximately 30% of the outstanding Units at a price of $270.25 per Unit (the "High River Offer"). High River sent similar letters to the Insignia affiliated corporate general partners of five other limited partnerships. On May 23, 1995, Insignia issued a press release which announced receipt of the letters. From 12:00 noon on Tuesday, May 23 through late in the evening of Wednesday, May 24, the Affiliated Purchaser, Insignia, and High River and their respective counsel had a series of meetings and telephone conversations to explore a possible joint venture relationship with respect to various real estate related investment opportunities, including the Affiliate Offer. Representatives of High River terminated the discussions. No agreement was reached with respect to the Affiliated Offer or any other matter. On the afternoon of Thursday, May 25, 1995, the Corporate General Partner received a second letter from High River stating that High River had initiated a tender offer for up to 40% of the outstanding Units at a price of $341.20 per Unit. High River also issued a press release announcing the High River Offer and that High River was commencing similar tender offers for units of limited partnership interest in five other partnerships in which other Insignia affiliates are the corporate general partners. Upon receiving the letter from High River, Insignia issued its own press release announcing the terms of the six High River offers. Also on May 25, 1995, the Corporate General Partner received a copy of a Complaint (the "High River Complaint") seeking, among other things, an order from the United States District Court for the District of Delaware enjoining the closing of the Affiliate Offer. The High River Complaint related to the Affiliate Offer and to five other tender offers made by affiliates of Insignia for units of limited partnership interests in other limited partnerships in which other affiliates of Insignia are general partners. The High River Complaint named as defendants the Affiliated Purchaser and each of the Insignia affiliates making the five other tender offers; the Corporate General Partner and the five other Insignia-affiliated general partners; and Insignia. The High River Complaint contained allegations that, among other things, the Affiliated Purchaser sought to acquire Units at highly inadequate prices, and that the Affiliate Offer contained numerous false and misleading statements and omissions of material facts. The alleged misstatements and omissions concerned, among other things, the true value of the units; the true financial conditions of the Partnership; the factors affecting the likelihood that properties owned by the Partnership will be sold or liquidated in the near future; the liquidity and value of the Units; the limited secondary market for Units; and the true nature of the market for underlying assets. The High River Complaint also alleged that the Affiliated Purchaser failed to comply with the requirements of Rule 13e-4 under the Securities Exchange Act of 1934. On Friday, May 26, 1995, the United States District Court for the District of Delaware denied High River's motion for a temporary restraining order to postpone the closing of the Affiliate Offer. On May 26, 1995, Insignia issued a press release announcing the Court's decision. High River subsequently voluntarily withdrew the High River Complaint without prejudice. On May 26, 1995, High River filed a Schedule 14D-1 relating to the High River Offer and containing an Offer to Purchase and a related Assignment of Partnership Interest. The Affiliate Offer expired as scheduled at midnight on May 26, 1995. As filed on May 26, 1995, the High River Offer was conditioned upon the Affiliate Offer being extended by at least 10 business days. High River issued a press release, dated May 26, 1995, announcing that the extension of the Affiliate Offer for 10 business days would be eliminated as a condition to the High River Offer. Also on May 26, the Chairman and Chief Executive Officer of Insignia received a letter from Mr. Icahn. In the letter, Mr. Icahn accused Insignia of disregarding its "fiduciary responsibilities." On Friday June 2, the High River Offer to Purchase and the related Assignment of Partnership Interests were mailed to Unit holders. On Monday, June 5, the Corporate General Partner delivered a letter to High River which requested that High River cure certain alleged critical omissions, misstatements, and deficiencies in the High River Offer by June 7, 1995. On June 7, the Corporate General Partner received a letter from Mr. Icahn stating that High River does not agree with the positions taken in the Corporate General Partner's June 5 letter. On June 8, 1995, the Corporate General Partner commenced an action against High River and Carl C. Icahn in the United States District Court for the District of South Carolina. The complaint alleged that the High River Offer misled Unit holders and violated federal securities laws. The Partnership sought relief from High River's and Mr. Icahn's actions in the form of an injunction against the High River Offer, a judgment declaring that the untrue statements in and omissions from the High River Offer constitute violations of the federal securities laws, and an order requiring High River to make appropriate disclosures to correct all of the false and misleading statements in and omissions from the High River Offer. The Partnership and the Corporate General Partner recommended that the Unit holders reject the High River Offer and not tender their Units pursuant to the High River Offer. The Partnership and the Corporate General Partner stated that they may reconsider their recommendation if High River makes additional disclosures to the Unit holders as the Corporate General Partner requested. For further information, see the Partnership's Solicitation/Recommendation Statement on Schedule 14D-9 which was filed with the Securities and Exchange Commission on June 9, 1995. On June 12, 1995, High River filed an amendment to its Schedule 14D-1 containing a Supplement to its Offer to Purchase. The Supplement amended the High River Offer to increase the number of Units being sought to all of the outstanding Units and amended certain disclosures in the Offer to Purchase. Persons claiming to own Units filed a purported class action and derivative suit in the United States District Court for the District of South Carolina seeking, among other things, an order enjoining the Affiliate Offer. On Thursday, May 18, 1995, the Court denied plaintiffs' motion for a temporary restraining order postponing the closing of the Affiliate Offer, which expired as scheduled on May 26, 1995. Counsel for the parties are engaged in settlement discussions and may continue such discussions. The Complaint applies to the Affiliate Offer and to five other tender offers being made by affiliates of Insignia for units of limited partnership interests in other limited partnerships in which other affiliates of Insignia serve as general partners. The Complaint names as defendants the Affiliated Purchaser and each of the Insignia affiliates, including the five other tender offerors; the Corporate General Partner and five other Insignia-affiliated general partners; and four individuals who are officers and/or directors of Insignia, the Corporate General Partner and/or the Affiliated Purchaser. The Complaint contains allegations that, among other things, the defendants have intentionally mismanaged the Partnership and the five other Partnerships (collectively the "Partnerships") and acted contrary to the limited partners' best interests in order to prolong the lives of the Partnerships and thus continue the revenues derived by Insignia from the Partnerships while at the same time reducing the demand for the Partnerships' units in the limited resale market for the units by artificially depressing the trading prices for the units, in order to create a favorable environment for the Affiliate Offer and the five other tender offers. In the Complaint the plaintiffs also allege that in the Affiliate Offer and the five other tender offers, the Affiliated Purchaser will acquire effective voting control over the Partnerships at highly inadequate prices, and that the offers to purchase and related tender offer documents contain numerous false and misleading statements and omissions of material facts. The alleged misstatements and omissions concern, among other things, the advantages to Unit holders of tendering Units pursuant to the Affiliate Offer; the true value of the Units; the true financial condition of the Partnerships; the factors affecting the likelihood that properties owned by the Partnerships will be sold or liquidated in the near future; the liquidity and value of the Units; the limited secondary market for Units; and the true nature of the market for underlying assets. On Friday, June 16, plaintiffs filed an amended complaint which contained allegations that, among other things, the defendants engaged in a plan by which they misappropriated the Partnerships' assets and fraudulently induced limited partners to sell units to the defendants at highly inadequate prices by causing the Partnerships to take actions that artificially depressed the prices available for units and by knowingly disseminating false and misleading statements and omissions of material facts. The plaintiffs alleged that the defendants breached fiduciary duties and violated federal securities law by closing the Affiliate Offer and the five other tender offers made by affiliates of Insignia for units in the other Partnerships with the knowledge that the limited partners were not aware of the High River Offer. The plaintiffs further alleged that the defendants, since the close of the Affiliate Offer, had caused the Partnerships to enter into several wasteful transactions that had no business purpose or benefit to the Partnerships solely in order to entrench themselves in their positions of control over the Partnerships, with the effect of impeding and possibly preventing nonaffiliated entities from making tender offers that offer higher value to unit holders than defendants paid. Subsequent to the filing of the lawsuit by the Corporate General Partner against High River and Carl C. Icahn, the Corporate General Partner and High River began discussions in an attempt to settle the lawsuit. On Friday, June 16, 1995, High River issued a press release announcing that the expiration date of the High River Offer was extended until 12:00 midnight, New York City time on Wednesday, June 28, 1995, and that High River and the Corporate General Partner were engaged in settlement discussions. On Saturday, June 17, the Affiliated Purchaser and Insignia entered into an agreement with Carl C. Icahn and High River (the "Agreement") and the Corporate General Partner, among others, entered into a letter agreement with High River (together with the Agreement, the "Agreements"). The Agreements provide generally that Insignia would not, and will not cause or permit its affiliates to, actively oppose the High River Offer, but rather would take a neutral stance with respect to the High River Offer, except in the case of a competing third party bid made prior to the expiration of the High River Offer or the occurrence of any event materially adversely affecting High River Offer. The High River Offer would proceed in accordance with its terms, as amended, and the Corporate General Partner would cooperate to facilitate the admission of High River as a substitute limited partner with respect to any Units High River purchases pursuant to the High River Offer in accordance with the terms of the Partnership Agreement and applicable law. The Agreements limit High River's ability to amend or extend the High River Offer. Apart from purchases made by High River pursuant to the High River Offer, neither High River nor Insignia nor any of their respective affiliates would purchase any additional Units pursuant to a tender offer and can only purchase additional Units from time to time under certain conditions specified in the Agreements. High River would vote on certain matters concerning the Partnership as directed by Insignia. In addition, High River and its affiliates are prohibited from soliciting proxies with respect to the Partnership or otherwise making proposals concerning the Partnership directly to other Unit holders. High River and Insignia have certain buy-sell rights with respect to the other's Units which may be exercised 18 months after the effective date of the Agreements and annually thereafter and at earlier or later dates under other circumstances specified in the Agreements, including the proposal of certain transactions otherwise protected by the Agreements. The party selling Units pursuant to the buy-sell transaction must sell or cause to be sold to the other party all Units beneficially owned by the first party and its affiliates. Litigation initiated by the Corporate General Partner concerning the High River Offer and litigation initiated by High River concerning the Affiliate Offer was dismissed with prejudice and mutual releases were exchanged. On June 20, High River issued a press release announcing that the expiration date of the High River Offer was extended until 12:00 midnight, New York City time on Monday, July 3, 1995. On July 20, 1995, the Partnership mailed a letter to limited partners of the Partnership who tendered limited partnership units to the Affiliated Purchaser in the recent tender offer. The letter notifies the limited partners that the Affiliated Purchaser has offered to increase the amount paid to such limited partners by an additional 45%. On September 27, 1995, the parties to the purported class action and derivative suit described above, filed a stipulation to settle the matter. The principal terms of the stipulation requires supplemental payments to tendering limited partners aggregating approximately $6 million; waiver by the Corporate General Partner and five other Insignia affiliated general partners of any right to certain proceeds from a sale or refinancing of the Partnership's properties; some restrictions on Insignia's ability to vote the limited partner interest it acquired; payment of $1.25 million for plaintiffs' attorney fees and expenses in the litigation; and general releases of all the defendants. The Partnership has accrued approximately $59,000 related to its allocated share of the $1.25 million. Provisional Court approval of the stipulation is required before it may be distributed to the class members for review. If a certain number of class members opt out, the settlement may be cancelled and no assurance can be given that this matter will be settled on the terms set forth above or otherwise. Item 4. Submission of Matters to a Vote of Security Holders During the fiscal year ended December 31, 1995, no matter was submitted to a vote of Unit holders through the solicitation of proxies or otherwise. PART II Item 5. Market for Partnership Equity and Related Partner Matters As of December 31, 1995, there was minimal trading of the Units in the secondary market establishing a value of $240 per unit as quoted in the January 1996 Stanger Report. There were 1,802 holders of record owning an aggregate of 27,500 Units. As disclosed in "Item 3. Legal Proceedings," an affiliate of the Corporate General Partner purchased 6,026 units at $235 per unit. In addition, High River Limited Partnership purchased 2,857 units at $341.20 per Unit. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. Cash distributions of $600,000 were declared and paid in the year ended December 31, 1995. Future cash distributions will depend on the levels of cash generated from operations, refinancings, property sales and cash reserves. Distributions may also be restricted by the requirement to deposit net operating income (as defined in the mortgage note) into the Reserve Account until the Reserve Account is funded an amount equal to $1,000 per apartment unit for each respective property. Item 6. Management's Discussion and Analysis or Plan of Operation This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report. Results of Operations The Partnership's net loss as shown in the financial statements for the year ended December 31, 1995, was $93,505 versus $55,834 for 1994 (see Note E of the financial statements for a reconciliation of these amounts to the Partnership's federal taxable losses). The increase in the net loss was primarily attributable to an increase in general and administrative expenses. General and administrative expenses increased primarily due to increased legal fees, associated with the lawsuits disclosed in "Item 3. Legal Proceedings," as well as an increase in administrative expenses in connection with the tender offers. Also contributing to the increase in net loss was an increase in maintenance expense due to renovations at Parktown in 1995. Offsetting the increase in net loss was an increase in revenues and other income. Other income increased due to additional interest income due to an increase in the investment balances and increased interest rates. Stricter enforcement of tenant charges also contributed to the increase in other income. In addition, the Partnership reported a gain of $14,012 in 1994 as a result of proceeds received from condemnation of land at Signal Pointe with no such gain in 1995. The Partnership recorded a casualty loss in 1995 resulting from a fire at Parktown Apartments to the roof and interiors of four units. The damage resulted in a loss of $14,994 arising from proceeds from the Partnership's insurance carrier of $37,920 which did not exceed the basis of the property and expenses to replace the roof and interiors damaged. Management relies on the annual appraisals performed by outside appraisers to assess the impairment of investment properties. There are three recognized approaches or techniques available to the appraiser. When applicable, these approaches are used to process the data considered significant to each to arrive at separate value indications. In all instances the experience of the appraiser, coupled with his objective judgement, plays a major role in arriving at the conclusions of the indicated value from which the final estimate of value is made. The three approaches commonly known are the cost approach, the sales comparison approach, and the income approach. The cost approach is often not considered to be reliable due to the lack of land sales and the significant amount of depreciation and, therefore, is often not presented. Upon receipt of the appraisals, any property which is stated on the books of the partnership above the estimated value given in the appraisal, is written down to the estimated value given by the appraiser. The appraiser assumes a stabilized occupancy at the time of the appraisal and, therefore, any impairment of value is considered to be permanent by Management. For the year ended December 31, 1995, no adjustments for the impairment of value were recorded. As part of the ongoing business plan of the Partnership, the Corporate General Partner monitors the rental market environment at each 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 assurance that the Corporate General Partner will be able to sustain this plan. Liquidity and Capital Resources At December 31, 1995, the Partnership had unrestricted cash of $465,611 compared to $631,180 at December 31, 1994, as a result of increased cash used in financing activity during 1995. Net cash used in financing activities increased as a result of the payment of distributions in the first quarter of 1995. Net cash provided by operating activities increased primarily as a result of an increase in accounts payable due to the timing of the payments to vendors. Net cash used in investing activities decreased due to a reduction in property improvements during 1995. The Partnership has no material capital programs scheduled to be performed in 1996, 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 $8,911,444, net of discount, is amortized over 257 months as previously disclosed in "Item 2. Description of Properties." In addition, the mortgage notes require balloon payments on November 15, 2002, at which time the individual properties will either be sold or refinanced. Cash distributions of $600,000 were paid during the year ended December 31, 1995. Future cash distributions will depend on the levels of net cash generated from operations, refinancings, property sales and cash reserves. Item 7. Financial Statements SHELTER PROPERTIES II LIMITED PARTNERSHIP LIST OF FINANCIAL STATEMENTS Report of Independent Auditors Balance Sheet--December 31, 1995 Statements of Operations--Years ended December 31, 1995 and 1994 Statements of Changes in Partners' Capital (Deficit)--Years ended December 31, 1995 and 1994 Statements of Cash Flows--Years ended December 31, 1995 and 1994 Notes to Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Shelter Properties II Limited Partnership We have audited the accompanying balance sheet of Shelter Properties II Limited Partnership as of December 31, 1995, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Partnership's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shelter Properties II Limited Partnership as of December 31, 1995, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP Greenville, South Carolina February 7, 1996 SHELTER PROPERTIES II LIMITED PARTNERSHIP BALANCE SHEET December 31, 1995 Assets Cash: Unrestricted $ 465,611 Restricted--tenant security deposits 152,197 Investments (Note B) 1,814,201 Accounts receivable 16,865 Escrow for taxes 205,698 Restricted escrows 915,904 Other assets 281,107 Investment properties: (Note C & G) Land $ 1,814,055 Buildings and related personal property 22,062,144 23,876,199 Less accumulated depreciation (13,955,997) 9,920,202 $13,771,785 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 265,855 Tenant security deposits 152,741 Accrued taxes 161,329 Other liabilities 270,573 Mortgage notes payable (Note C) 8,911,444 Partners' Capital (Deficit) General partners $ (113,047) Limited partners (27,500 units issued and outstanding) 4,122,890 4,009,843 $13,771,785 See Accompanying Notes to Financial Statements SHELTER PROPERTIES II LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS Years Ended December 31, 1995 1994 Revenues: Rental income $5,000,248 $4,743,535 Other income 364,749 300,273 Total revenues 5,364,997 5,043,808 Expenses: Operating 1,628,600 1,662,805 General and administrative 339,211 140,785 Property management fees 262,979 246,904 Maintenance 932,949 845,532 Depreciation 1,089,912 1,025,571 Interest 826,554 841,017 Property taxes 363,303 351,040 Total expenses 5,443,508 5,113,654 Casualty loss (14,994) -- Gain from condemnation (Note D) -- 14,012 Net loss (Note E) $ (93,505) $ (55,834) Net loss allocated to general partners (1%) $ (935) $ (558) Net loss allocated to limited partners (92,570) (55,276) $ (93,505) $ (55,834) Net loss per limited partnership unit $ (3.37) $ (2.01) See Accompanying Notes to Financial Statements SHELTER PROPERTIES II LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
Limited Partnership General Limited Units Partners Partners Total Original capital contributions 27,500 $ 2,000 $27,500,000 $27,502,000 Partners' (deficit) capital at December 31, 1993 27,500 $(105,554) $ 4,864,736 $ 4,759,182 Net loss for the year ended December 31, 1994 -- (558) (55,276) (55,834) Partners' (deficit) capital at December 31, 1994 27,500 (106,112) 4,809,460 4,703,348 Partners' distributions paid -- (6,000) (594,000) (600,000) Net loss for the year ended December 31, 1995 -- (935) (92,570) (93,505) Partners' (deficit) capital at December 31, 1995 27,500 $(113,047) $ 4,122,890 $ 4,009,843 See Accompanying Notes to Financial Statements
SHELTER PROPERTIES II LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
Years Ended December 31 1995 1994 Cash flows from operating activities: Net loss $ (93,505) $ (55,834) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,089,912 1,025,571 Amortization of discounts and loan costs 101,986 99,990 Casualty loss 14,994 -- Gain from condemnation -- (14,012) Change in accounts: Restricted cash (10,224) (11,494) Accounts receivable (5,597) 1,002 Escrows for taxes (102,271) 113,998 Other assets (6,000) -- Accounts payable 140,787 (69,317) Tenant security deposit liabilities 7,890 14,372 Accrued taxes 76,897 (103,170) Other liabilities (31,460) 15,028 Net cash provided by operating activities 1,183,409 1,016,134 Cash flows from investing activities: Property improvements and replacements (462,997) (545,783) Cash invested in short-term investments (8,175,087) (5,163,055) Cash received from matured investments 8,104,233 4,871,998 Deposits to restricted escrows (56,515) (37,353) Receipts from restricted escrows 54,943 288,500 Condemnation proceeds -- 14,967 Insurance proceeds from property damage 7,874 -- Net cash used in investing activities (527,549) (570,726) Cash flows from financing activities: Payments on mortgage notes payable (221,429) (205,273) Distributions paid (600,000) -- Net cash used in financing activities (821,429) (205,273) Net (decrease) increase in cash (165,569) 240,135 Cash at beginning of year 631,180 391,045 Cash at end of year $ 465,611 $ 631,180 Supplemental disclosure of cash flow information: Cash paid for interest $ 725,749 $ 741,905 See Accompanying Notes to Financial Statements
SHELTER PROPERTIES II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Note A - Organization and Significant Accounting Policies Organization: Shelter Properties II Limited Partnership (the "Partnership ) was organized as a limited partnership under the laws of the State of South Carolina pursuant to a Certificate and Agreement of Limited Partnership filed October 10, 1980. The general partner responsible for management of the Partnership's business is Shelter Realty II Corporation, a South Carolina corporation (the "Corporate General Partner"). The only other general partner of the Partnership, N. Barton Tuck, Jr., is effectively prohibited by the Partnership's partnership agreement (the "Partnership Agreement") from participating in the management of the Partnership. The Corporate General Partner is an indirect subsidiary of Insignia Financial Group, Inc. ("Insignia"). The directors and officers of the Corporate General Partner also serve as executive officers of Insignia. The partnership agreement terminates December 31, 2020. The Partnership commenced operations on March 1, 1981, and completed its acquisition of apartment properties on June 30, 1981. The Partnership operates three apartment properties located in the South and Southwest. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Allocation of Cash Distributions: Cash distributions by the Partnership are allocated between general and limited partners in accordance with the provisions of the partnership agreement. The partnership agreement provides that net cash from operations means revenue received less operating expenses paid, adjusted for certain specified items which primarily include mortgage payments on debt, property improvements and replacements not previously reserved, and the effects of other adjustments to reserves. In the following notes to financial statements, whenever net cash (used by) from operations is used, it has the aforementioned meaning. The following is a reconciliation of the subtotal in the accompanying statements of cash flows captioned net cash provided by operating activities to net cash (used by) from operations, as defined in the partnership agreement. However, "net cash (used by) 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. 1995 1994 Net cash provided by operating activities $1,183,409 $1,016,134 Property improvements and replacements (462,997) (545,783) Payments on mortgage notes payable (221,429) (205,273) Changes in reserves for net operating liabilities (70,022) 39,581 Changes in restricted escrows, net (1,572) 251,147 Insurance proceeds from property damage 7,874 -- Condemnation proceeds -- 14,967 Additional operating reserves (450,000) -- Net cash (used by) from operations $ (14,737) $ 570,773 Note A - Organization and Significant Accounting Policies (continued) The General Partner believed it to be in the best interest of the Partnership to reserve an additional $450,000 at December 31, 1995, to fund continuing capital improvements in 1996. Distributions made from reserves no longer considered necessary by the general partners are considered to be additional net cash from operations for allocation purposes. During the year ended December 31, 1995, the Corporate General Partner made a distribution of $600,000 from cash from operations. The partnership agreement provides that 99% of distributions of net cash from operations are allocated to the limited partners until they receive net cash from operations for such fiscal year equal to 7% of their adjusted capital values (as defined in the partnership agreement), at which point the general partners will be allocated all net cash from operations until they have received distributions equal to 10% of the aggregate net cash from operations distributed to partners for such fiscal year. Thereafter, the general partners will be allocated 10% of any distributions of remaining net cash from operations for such fiscal year. All distributions of distributable net proceeds (as defined in the partnership agreement) from property dispositions and refinancings will be allocated to the limited partners until each limited partner has received an amount equal to a cumulative 7% per annum of the average of the limited partners' adjusted capital value, less any prior distributions of net cash from operations and distributable net proceeds, and has also received an amount equal to the limited partners' adjusted capital value. Thereafter, the general partners receive 1% of the selling prices of properties sold where they acted as a broker, and then the limited partners will be allocated 85% of any remaining distributions of distributable net proceeds and the general partners will receive 15%. Undistributed Net Proceeds from Refinancing: At December 31, 1995, net proceeds from refinancings of approximately $748,000 remained undistributed. Also, at December 31, 1995, undistributed sales proceeds from a prior year sale of an apartment property amounted to approximately $166,000, of which $58,000 is payable to the general partners for related sales commissions when certain levels of return are received by the limited partners. Allocation of Profits, Gains and Losses: Profits, gains and losses of the Partnership are allocated between general and limited partners in accordance with the provisions of the partnership agreement. For any fiscal year, to the extent that profits, not including gains from property dispositions, do not exceed distributions of net cash from operations, such profits are allocated in the same manner as such distributions. In any fiscal year in which profits, not including gains from property disposition, exceed distributions of net cash from operations, such excess is treated on a cumulative basis as if it constituted an equivalent amount of distributable net proceeds and is allocated together with, and in the same manner as, that portion of gain described in the second sentence of the following paragraph. Note A - Organization and Significant Accounting Policies (continued) Any gain from property dispositions attributable to the excess, if any, of the indebtedness relating to a property immediately prior to the disposition of such property over the Partnership's adjusted basis in the property shall be allocated to each partner having a negative capital account balance, to the extent of such negative balance. The balance of any gain shall be treated on a cumulative basis as if it constituted an equivalent amount of distributable net proceeds and shall be allocated to the general partners to the extent that general partners would have received distributable net proceeds in connection therewith; the balance shall be allocated to the limited partners. However, the interest of the general partners will be equal to at least 1% of each gain at all times during the existence of the Partnership. All losses, including losses attributable to property dispositions, are allocated 99% to the limited partners and 1% to the general partners. Accordingly, net losses as shown in the statements of operations and changes in partners' capital for 1995 and 1994 were allocated 99% to the limited partners and 1% to the general partners. Net loss per limited partnership unit for 1995 and 1994 was computed as 99% of net loss divided by 27,500 weighted average units outstanding. Other Reserves: The general partners may designate a portion of cash generated from operations as other reserves in determining net cash from operations. The general partners designated as other reserves an amount equal to the net liabilities related to the operations of apartment properties during the current fiscal year that are expected to require the use of cash during the next fiscal year. The decrease in other reserves during 1995 was $70,022 and the increase in 1994 was $39,581, which amounts were determined by considering changes in the balances of restricted cash, accounts receivable, escrows for taxes, other assets, accounts payable, tenant security deposit liabilities, accrued taxes and other liabilities. At this time, the general partners expect to continue to adjust other reserves based on the net change in the aforementioned account balances. Restricted Escrows: Capital Improvement Account - At the time of the refinancing in 1992, $1,183,180 of the proceeds were designated for a "capital improvement escrow" for certain capital improvements. At December 31, 1995, the balance remaining in the escrow was $33,686. Upon completion of the scheduled property improvements, any excess funds will be returned for property operations. Reserve Account - In addition to the Capital Improvement Account a general Reserve Account was established in 1992 with the refinancing proceeds for each mortgaged property. These funds were established to cover necessary repairs and replacements of existing improvements, debt service, out of pocket expenses incurred for ordinary and necessary administrative tasks, and payment of real property taxes and insurance premiums. The Partnership is required to deposit net operating income (as defined in the mortgage note) from each refinanced property to the respective reserve account until they equal $1,000 per apartment unit or $853,000 in total. The balance at December 31, 1995, is $862,827, which includes interest earned on these funds. Note A - Organization and Significant Accounting Policies (continued) Escrows for Taxes: These escrows are held by the Partnership and are designated for the payment of real estate taxes. Depreciation: Depreciation is provided by the straight-line method over the estimated lives of the apartment properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used (1) for real property over 15 years for additions prior to March 16, 1984, 18 years for additions after March 15, 1984, and before May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1, 1987, and (2) for personal property over 5 years for additions prior to January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property additions over 27 1/2 years and (2) personal property additions over 7 years. Present Value Discounts: Periodically, the Partnership incurs debt at below market rates for similar debt. Present value discounts are recorded on the basis of prevailing market rates and are amortized on an interest method over the life of the related debt. Loan Costs: Loan costs are included in other assets and are being amortized on a straight-line basis over the life of the loans. Cash: The Partnership considers only unrestricted cash to be cash. Certificates of deposit are considered to be investments. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Investments: Securities held-to-maturity and available-for-sale: The Corporate General Partner determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Partnership has the positive intent and ability to hold the securities to maturity. Held- to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Interest on securities classified as held-to- maturity is included in investment income. Marketable equity securities and debt securities not classified as held-to- maturity are classified as available-for-sale. Presently, all of the Partnership's investments are classified as held-to-maturity. Available-for- sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of partner's capital. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. Note A - Organization and Significant Accounting Policies (continued) Leases: The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases. In addition, the Corporate General Partner's policy is to offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged to expense as incurred. Restricted Cash - Tenant Security Deposits: The Partnership requires security deposits from all lessees for the duration of the lease. Deposits are refunded when the tenant vacates the apartment if there has been no damage to the unit. Investment Properties: Investment properties consist of three apartment complexes and are stated at cost. Costs of apartment properties that have been permanently impaired have been written down to appraised value. The Corporate General Partner relies on the annual appraisals performed by the independent appraisers for the estimated value of the Partnership's properties. There are three recognized approaches or techniques available to the appraiser. When applicable, these approaches are used to process the data considered significant to each to arrive at separate value indications. In all instances the experience of the appraiser, coupled with his objective judgement, plays a major role in arriving at the conclusions of the indicated value from which the final estimate of value is made. The three approaches commonly known are the cost approach, the sales comparison approach, and the income approach. The cost approach is often not considered to be reliable due to the lack of land sales and the significant amount of depreciation and, therefore, is often not Note C - Mortgage Notes Payable The principal terms of mortgage notes payables are as follows:
Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 1995 Interest Rate Date Maturity Parktown 1st mortgage $3,295,559 $27,813 7.60% 11/15/02 $2,552,322 2nd mortgage 108,986 690 7.60 11/15/02 108,986 Raintree 1st mortgage 1,462,529 12,343 7.60 11/15/02 1,132,696 2nd mortgage 48,366 306 7.60 11/15/02 48,366 Signal Pointe 1st mortgage 4,368,103 36,864 7.60 11/15/02 3,383,063 2nd mortgage 144,454 915 7.60 11/15/02 144,454 9,427,997 $78,931 Less unamortized present value discounts (516,553) Total $ 8,911,444
The estimated fair values of the Partnership's aggregate debt is approximately $9,428,000. This estimation is not necessarily indicative of the amounts the Partnership may pay in actual market transactions. The Partnership exercised interest rate buy-down options for the three properties when the debt was refinanced, reducing the stated rate from 8.76% to 7.60%. The fee for the interest rate reduction amounted to $700,211 and is being amortized as a loan discount on the interest method over the life of the loans. The discount fee is reflected as a reduction of the mortgage notes payable and increases the effective rate of the debt to 8.76%. The mortgage notes payable are nonrecourse and are secured by pledge of the respective apartment properties and by pledge of revenues from the respective apartment properties. Certain of the notes require prepayment penalties if repaid prior to maturity. Note C - Mortgage Notes Payable (continued) Scheduled principal payments of mortgage notes payable subsequent to December 31 are as follows: 1996 $ 238,856 1997 257,655 1998 277,933 1999 299,808 2000 323,404 Thereafter 8,030,341 $9,427,997 Note D - Gain From Condemnation In 1994, the Partnership reported a gain as a result of proceeds received from condemnation of land for a road widening project at Signal Pointe. Note E - Income Taxes The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net loss and Federal taxable loss. 1995 1994 Net loss as reported $ (93,505) $ (55,834) Add (deduct) Amortization of present value discounts (7,486) (10,361) Depreciation differences (375,708) (390,234) Change in prepaid rental (63,404) 31,187 Other 634 (2,053) Casualty loss 56,952 -- Federal taxable loss $(482,517) $(427,295) Federal taxable loss per limited partnership $ (17.37) $ (15.38) Note E - Income Taxes (continued) The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities: Net assets as reported $4,009,843 Buildings and land 2,672,213 Accumulated depreciation (7,062,295) Syndication fees 3,111,112 Other 167,584 Net assets - tax basis $ 2,898,457 Note F - 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 payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Balances and other transactions with affiliates of Insignia Financial Group, Inc. in 1995 and 1994 are: 1995 1994 Property management fees $262,979 $246,904 Reimbursement for services of affiliates 97,698 85,911 Due to General Partner 58,000 58,000 The Partnership insures its properties under a master policy through an agency and 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 current year's master policy. The current agent assumed the financial obligations to the affiliate of the Corporate General Partner, who receives payments 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. Note G - Real Estate and Accumulated Depreciation Apartment Properties
Initial Cost To Partnership Cost Buildings Capitalized and Related (Removed) Personal Subsequent to Description Encumbrances Land Property Acquisition Parktown Townhouses Deer Park, TX $3,404,545 $1,094,593 $ 5,329,074 $2,522,648 Raintree Apartments Anderson, SC 1,510,895 183,872 3,183,760 567,198 Signal Pointe Apartments Winter Park, FL 4,512,557 536,544 8,061,916 2,396,594 Totals $9,427,997 $1,815,009 $16,574,750 $5,486,440
Gross Amount At Which Carried At December 31, 1995 Buildings And Related Personal Accumulated Date of Date Depreciable Description Land Property Total Depreciation Construction Acquired Life-Years Parktown Deer Park, TX $1,094,593 $ 7,851,722 $ 8,946,315 $ 5,260,204 1969 03/01/81 5-35 Raintree Anderson, SC 183,872 3,750,958 3,934,830 2,318,474 1972-1974 04/30/81 5-38 Signal Pointe Winter Park, FL 535,590 10,459,464 10,995,054 6,377,319 1970 06/30/81 5-37 Totals $1,814,055 $22,062,144 $23,876,199 $13,955,997
Note G - Real Estate and Accumulated Depreciation (continued) Reconciliation of Real Estate and Accumulated Depreciation : Years Ended December 31, 1995 1994 Investment Properties Balance at beginning of year $23,493,896 $22,959,597 Property improvements 462,997 545,783 Disposals of property (80,694) (11,484) Balance at End of Year $23,876,199 $23,493,896 Accumulated Depreciation Balance at beginning of year $12,923,911 $11,907,991 Additions charged to expense 1,089,912 1,025,571 Disposals of property (57,826) (9,651) Balance at End of Year $13,955,997 $12,923,911 The aggregate cost of the real estate for Federal income tax purposes is $26,548,412 and $26,108,259 at December 31, 1995 and 1994, respectively. The accumulated depreciation taken for Federal income tax purposes is $21,018,292 and $19,552,674 at December 31, 1995 and 1994, respectively. Note H - Contingencies Tender Offer Litigation: The Corporate General Partner owns 100 Limited Partnership Units ("Units"). On or about April 26 and 27, 1995, six entities ("Affiliated Purchaser") affiliated with the Partnership commenced tender offers for limited partner interests in six limited partnerships, including the Partnership (collectively, the "Shelter Properties Partnerships"). On May 27, 1995, the Affiliated Purchaser acquired 6,026 units of the Partnership pursuant to the tender offer. On or about May 12, 1995, in the United States District Court for the District of South Carolina, certain limited partners of the Shelter Properties Partnerships commenced a lawsuit, on behalf of themselves, on behalf of a putative class of plaintiffs, and derivatively on behalf of the partnerships, challenging the actions taken by defendants (including Insignia, the acquiring entities and certain officers of Insignia) in the management of the Shelter Properties Partnerships and in connection with the tender offers and certain other matters. Note H - Contingencies (continued) The plaintiffs alleged that, among other things: (i) the defendants intentionally mismanaged the partnerships and acted contrary to the limited partners' best interests by prolonging the existence of the partnerships in order to perpetuate the revenues derived by Insignia and its affiliates from the partnerships, (ii) the defendants' actions reduced the demand for the partnerships' limited partner interests in the limited resale market by artificially depressing the trading prices for limited partners interests in order to create a favorable environment for the tender offers; (iii) through the tender offers, the acquiring entities sought to acquire effective voting control over the partnerships while paying highly inadequate prices; and (iv) the documents disseminated to the class in connection with the tender offers contained false and misleading statements and omissions of material facts concerning such issues as the advantages to limited partners of tendering pursuant to the tender offers, the true value of the interest, the true financial condition of the partnerships, the factors affecting the likelihood that properties owned by the partnerships will be sold or liquidated in the near future, the liquidity and true value of the limited partner interests, the reasons for the limited secondary market for limited partner interests, and the true nature of the market for the underlying real estate assets owned by the partnerships all in violation of the federal securities laws. On September 27, 1995, the parties entered into a stipulation to settle the matter. The principal terms of the stipulation require supplemental payments to tendering limited partners aggregating approximately $6 million to be paid by the Affiliated Purchaser; waiver by the Shelter Properties Partnership's general partners of any right to certain proceeds from a sale or refinancing of the partnerships' properties; some restrictions on Insignia's ability to vote the limited partner interests it acquired; payment of $1.25 million for plaintiffs' attorney fees and expenses in the litigation; and general releases of all the defendants. The Partnership has accrued approximately $59,000 as its allocated share of the $1.25 million. Provisional Court approval of the stipulation is required before it will be distributed to the class members for review. If a certain number of class members opt out, the settlement may be cancelled. No assurance can be given that this matter will be settled on the terms, set forth above or otherwise. Note I - Casualty Loss The Partnership recorded a casualty loss in 1995 resulting from a fire at Parktown Townhouses which damaged the roof and interiors of four units. The damage resulted in a loss of $14,994 arising from proceeds from the Partnership's insurance carrier of $37,920 which did not exceed the basis of the property and expenses to replace the roof and interiors damaged. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act The Registrant has no officers or directors. The Individual and Corporate General Partners are as follows: Individual General Partner - N. Barton Tuck, Jr., age 57, is the Individual General Partner of the Registrant. Mr. Tuck is Chairman of GolfSouth Management, Inc. Until August 1990, he served as Chairman and Chief Executive Officer of U.S. Shelter Corporation ("Shelter"), the former parent of AmReal Corporation (parent of the Corporate General Partner of the Partnership). For six years prior to 1966, Mr. Tuck was employed in Greenville, South Carolina by the certified public accounting firm of S.D. Leidesdorf & Company. From 1966 to 1970, he was a registered representative with the investment banking firm of Harris Upham & Co., Inc. in Greenville, South Carolina. Since 1970, Mr. Tuck has been engaged in arranging equity investments for individuals and partnerships. Mr. Tuck is a graduate of the University of North Carolina. Mr. Tuck has delegated to the Corporate General Partner all of his authority, as a general partner of the Partnership, to manage and control the Partnership and its business and affairs. Corporate General Partner - The names and ages of, as well as the positions and offices held by, the executive officers and directors of Shelter Realty II Corporation are set forth below. There are no family relationships between or among any officers or directors. Name Age Position William H. Jarrard, Jr. 49 President and Director Ronald Uretta 39 Vice President and Treasurer John K. Lines, Esq. 36 Vice President and Secretary Kelley M. Buechler 38 Assistant Secretary Mr. Jarrard, who had previously served as Vice President, became President in August 1994. In August 1994, Mr. Lines became Vice President and Secretary. William H. Jarrard, Jr. has been President of the Corporate General Partner since August 1994 and Managing Director - Asset Management and Partnership Administration of Insignia since January 1991. During the five years prior to joining Insignia in 1991, he served in similar capacities for U.S. Shelter. Ronald Uretta has been Insignia's Chief Financial Officer, Secretary, and Treasurer since January 1992. Since September 1990, Mr. Uretta has also served as the Chief Financial Officer and Controller of MAG. From May 1988 until September 1990, Mr. Uretta was a self-employed financial consultant. From January 1978 until January 1988, Mr. Uretta was employed by Veltri Raynor & Company, independent certified public accountants. John Lines, Esq. has been Vice President and Secretary of the Corporate General Partner since August 1994, Insignia's General Counsel since June 1994, and General Counsel and Secretary since July 1994. From May 1993 until June 1994, Mr. Lines was the Assistant General Counsel and Vice President of Ocwen Financial Corporation, West Palm Beach, Florida. From October 1991 until May 1993, Mr. Lines was a Senior Attorney with BANC ONE CORPORATION, Columbus, Ohio. From May 1984 until October 1991, Mr. Lines was an attorney with Squire Sanders & Dempsey, Columbus, Ohio. Kelley M. Buechler is Assistant Secretary of the Corporate General Partner and Assistant Secretary of Insignia since 1991. During the five years prior to joining Insignia in 1991, she served in similar capacities with U.S. Shelter. Ms. Buechler is a graduate of the University of North Carolina. Item 10. Executive Compensation Neither the Individual General Partner nor any of the directors and officers of the Corporate General Partner received any remuneration from the Registrant. Item 11. Security Ownership of Certain Beneficial Owners and Management Except as noted below, no person was known by the Registrant to be the beneficial owner of more than 5% of the Limited Partnership Units of the Registrant as of December 31, 1995. Number Entity of Units Percentage Insignia Financial Group, Inc. 6,051 21.93% High River Limited Partnership 2,857 10.39% No director or officer of the Corporate General Partner owns any Units. The Corporate General Partner owns 100 Units as required by the terms of the partnership agreement. Item 12. Certain Relationships and Related Transactions The Individual General Partner and the Corporate General Partner received, collectively, $6,000 as their prorata share of the distribution made during the first quarter of 1995. No cash distributions were made during the remainder of the year ended December 31, 1995. For a description of the share of cash distributions from operations, if any, to which the general partners are entitled, reference is made to the material contained in the Prospectus under the heading PROFITS AND LOSSES AND CASH DISTRIBUTIONS. The Registrant has a property management agreement with Insignia Management Group, L.P. pursuant to which Insignia Management Group, L.P. has assumed direct responsibility for day-to-day management of the Partnership's properties. This service includes the supervision of leasing, rent collection, maintenance, budgeting, employment of personnel, payment of operating expenses, etc. Insignia Management Group, L.P. receives a property management fee equal to 5% of apartment revenues. During the fiscal year ended December 31, 1995, Insignia Management Group, L.P. received $262,979 in fees for property management. For a more detailed description of the management fee that Insignia Management Group, L.P. is entitled to receive, see the material contained in the Prospectus under the heading CONFLICTS OF INTEREST - Property Management Services. For a further description of payments made by the Registrant to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Registrant, see Note F of the financial statements included as part of this report. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. (b) Reports on Form 8-K filed in the fourth quarter of fiscal year 1995: None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHELTER PROPERTIES II LIMITED PARTNERSHIP By: Shelter Realty II Corporation Corporate General Partner By: /s/William H. Jarrard, Jr. William H. Jarrard President and Director Date: March 8, 1996 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/William H. Jarrard, Jr. Date: March 8, 1996 William H. Jarrard, Jr. President and Director /s/Ronald Uretta Date: March 8, 1996 Ronald Uretta Treasurer Principal Financial Officer and Principal Accounting Officer 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 February 2, 1981 contained in Amendment No. 1 to Registration Statement No. 2-69507, of Registrant filed February 2, 1981 (the "Prospectus") and incorporated herein by reference]. (b) Subscription Agreements and Signature Pages [Filed with Amendment No. 1 of Registration Statement No. 2-69507, of Registrant and incorporated herein by reference]. (c) Promissory Note and Deed of Trust between Joe A. McDermott, Inc. and the Mischer Corporation and New York Life Insurance Company. General Warranty Deed between Parktown Realty, N.V and Shelter Properties II to acquire Parktown Apartments.* (d) Mortgage Note and Mortgage Deed between Mutual Benefit Life Insurance Company and Foxcroft Investors, Limited. Purchase Money Note and Purchase Money Mortgage and Security Agreement between Foxcroft Investors, Limited and Shelter Properties II to acquire Squire One Apartments.* *Filed as Exhibit 4(c) and 4(e), respectively, to Form 10-K of Registrant for year ended December 31, 1987 and incorporated herein by reference. (e) Mortgage Note between William C. Dailey and Fidelity Federal Savings and Loan Association and Promissory Note between William C. Dailey and The Prudential Insurance Company (filed as Exhibit 12(E) to Amendment No. 1 to Registration Statement No. 2-69507 of Registrant filed January, 1981 and incorporated herein by reference). Modification and Assumption of Mortgage between American Federal Savings and Loan Association and Shelter Properties II to acquire Raintree Apartments (filed as Exhibit 4(e) to Form 10-K of Registrant for year ended December 31, 1988 and incorporated herein by reference). 10(i) Contracts related to acquisition or disposition of properties. (a) Purchase Agreement dated December 31, 1980, between Hubris, Inc. and U.S. Shelter Corporation to purchase Parktown Townhouse.** (b) Purchase Agreement dated January 5, 1981, between Twin City Apartments, Inc. and U.S. Shelter Corporation to purchase The Village Apartments.** EXHIBIT INDEX Exhibit (c) Purchase Agreement dated January 2, 1981 between Carolina Housing Partners and U.S. Shelter Corporation to purchase Raintree Apartments.** **Filed as Exhibits 12(b), 12(c) and 12(d), respectively, to Amendment No. 1 of Registration Statement, No. 2-69507, of Registrant filed February 2, 1981 and incorporated herein by reference. (d) Purchase Agreement dated May 28, 1981 between Foxcroft Investors, Limited and Shelter Properties II to purchase Squire One Apartments. [Filed with Form 8-K of Registrant dated June 8, 1981 and incorporated herein by reference.] (e) Sales Agreement dated December 30, 1983 between Shelter Properties II and Security Investors, Ltd.-II to sell Cambridge Station Apartments. [Filed with Form 10-K of Registrant for year ended December 31, 1983 and incorporated herein by reference.] (ii) Form of Management Agreement with U.S. Shelter Corporation subsequently assigned to Shelter Management Group, L.P. (now known as Insignia Management Group, L.P.) [filed with Amendment No. 1 to Registration Statement, No. 2-69507, of Registrant] and incorporated herein by reference. (iii) Contracts related to refinancing of debt: (a) First Mortgage and Security Agreements dated October 28, 1992 between Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Raintree, Parktown/Center Court, and Squire One. *** (b) Second Mortgage and Security Agreements dated October 28, 1992 between Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Raintree, Parktown/Center Court, and Squire One. *** (c) First Assignments of Leases and Rents dated October 28, 1992 between Shelter Properties II Limited Partnership and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Raintree, Parktown/Center Court, and Squire One. *** (d) Second Assignments of Leases and Rents dated October 28, 1992 between Shelter Properties ii Limited Partnership and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Raintree, Parktown/Center Court, and Squire One. *** EXHIBIT INDEX Exhibit (e) First Deeds of Trust Notes dated October 28, 1992 between Shelter Properties II Limited Partnership and First Commonwealth Realty Credit Corporation, relating to the following properties: Raintree, Parktown/Center Court, and Squire One. *** (f) Second Deeds of Trust Notes dated October 28, 1992 between Shelter Properties II Limited Partnership and First Commonwealth Realty Credit Corporation, relating to the following properties: Raintree, Parktown/Center Court, and Squire One. *** ***Filed as Exhibits 10(iii) (a) through (f), respectively, of form 10KSB of Registrant for the year ended December 31, 1992 and incorporated herein by reference. 27 Financial Data Schedule 99 Prospectus of Registrant dated February 2, 1981 [included in Registration Statement No. 2-69507, of Registrant] and incorporated herein by reference. EX-27 2
5 This schedule contains summary financial information extracted from Shelter Properties II 1995 Year-End 10-KSB and is qualified in its entirety by reference to such 10-KSB. 0000319723 SHELTER PROPERTIES II 1 12-MOS DEC-31-1995 DEC-31-1995 465,611 0 16,865 0 0 0 23,876,199 13,955,997 13,771,785 0 8,911,444 0 0 0 4,009,843 13,771,785 03,771,785 5,364,997 0 0 5,443,508 0 826,554 0 0 0 0 0 0 (93,505) (3.37) 0 The Partnership has an unclassified balance sheet.
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