-----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, VU5ZROY3sFRccjhnHDaujSsU86IqB1+s0YFCZCP7Q7n/ySNGu88kr7ZCIKcT/pv6 0xREa3FLMoiHigakAjSJGQ== 0000711642-03-000097.txt : 20030331 0000711642-03-000097.hdr.sgml : 20030331 20030328181410 ACCESSION NUMBER: 0000711642-03-000097 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES IV LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000702174 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570721760 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10884 FILM NUMBER: 03626652 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PL STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 55 BEATTIE PL STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10KSB 1 sp4.txt SP4 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period _________to_________ Commission file number 0-10884 SHELTER PROPERTIES IV (Name of small business issuer in its charter) South Carolina 57-0721760 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 Issuer's telephone number 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. $10,489,000 State the aggregate market value of the voting partnership interests held 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, 2002. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE None The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. The discussions of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, do not take into account the effects of any changes to the Registrant's business and results of operations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission. PART I Item 1. Description of Business Shelter Properties IV (the "Partnership" or "Registrant") was organized as a limited partnership under the laws of the State of South Carolina on August 21, 1981. The general partner responsible for management of the Partnership's business is Shelter Realty IV Corporation, a South Carolina corporation (the "Corporate General Partner"). The Corporate General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The other general partner is AIMCO Properties, L.P., an affiliate of the Corporate General Partner and AIMCO. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2022 unless terminated prior to such date. The Partnership is engaged in the business of operating and holding real estate properties for investment. In 1982 and 1983, during its acquisition phase, the Partnership acquired five existing apartment properties. The Partnership continues to own and operate two of these properties. See "Item 2. Description of Properties". Commencing June 8, 1982, the Partnership offered pursuant to a Registration Statement filed with the Securities and Exchange Commission up to 49,900 Units of Limited Partnership Interest (the "Units") at a purchase price of $1,000 per Unit with a minimum purchase of 5 Units ($5,000) or 2 Units ($2,000) for an Individual Retirement Account. An additional 100 Units were purchased by the Corporate General Partner. The offering terminated on December 15, 1982. Upon termination of the offering, the Partnership had accepted subscriptions for 50,000 Units, including 100 Units purchased by the Corporate General Partner, for an aggregate of $50,000,000. The Partnership invested approximately $38,000,000 of such proceeds in five existing apartment properties. Since its initial offering, the Partnership has not received, nor are limited partners required to make, additional capital contributions. The Partnership has no employees. Management and administrative services are performed by the Corporate General Partner and by agents retained by the Corporate General Partner. An affiliate of the Corporate General Partner has been providing such property management services. Risk Factors The real estate business in which the Partnership is engaged is highly competitive. There are other residential properties within the market area of the Partnership's properties. The number and quality of competitive properties, including those which may be managed by an affiliate of the Corporate General Partner in such market area, could have a material effect on the rental market for the apartments at the Partnership's property and the rents that may be charged for such apartments. While the Corporate General Partner and its affiliates are a significant factor in the United States in the apartment industry, they own an insignificant percentage of total apartment units in the United States and competition for apartments is local. Laws benefiting disabled persons may result in the Partnership's incurrence of unanticipated expenses. Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to the Partnership's properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although the Corporate General Partner believes that the Partnership's properties are substantially in compliance with present requirements, the Partnership may incur unanticipated expenses to comply with the ADA and the FHAA. Both the income and expenses of operating the properties owned by the Partnership are subject to factors outside of the Partnership's control, such as changes in the supply and demand for similar properties resulting from various market conditions, increases/decreases in unemployment or population shifts, changes in the availability of permanent mortgage financing, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Partnership. There have been, and it is possible there may be other, Federal, state and local legislation and regulations enacted relating to the protection of the environment. The Partnership is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the properties owned by the Partnership. The Partnership monitors its property for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed, which resulted in no material adverse conditions or liabilities. In no case has the Partnership received notice that it is a potentially responsible party with respect to an environmental clean up site. Insurance coverage is becoming more expensive and difficult to obtain. The current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Recent developments have resulted in significant increases in insurance premiums and have made it more difficult to obtain certain types of insurance. As an example, many insurance carriers are excluding mold-related risks from their policy coverages, or are adding significant restrictions to such coverage. Continued deterioration in insurance market place conditions may have a negative effect on the Partnership's operating results. 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. Item 2. Description of Properties The following table sets forth the Partnership's investments in properties: Date of Property Purchase Type of Ownership Use Baymeadows Apartments 9/30/82 Fee ownership subject Apartment Jacksonville, Florida to first and second 904 units mortgages Quail Run Apartments 1/03/83 Fee ownership subject Apartment Columbia, South Carolina to first and second 332 units mortgages (1) (1) Property is held by a Limited Partnership in which the Partnership owns a 99.99% interest. Schedule of Properties Set forth below for each of the Partnership's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and Federal tax basis.
Gross Carrying Accumulated Depreciable Federal Property Value Depreciation Life-Years Method Tax Basis (in thousands) (in thousands) Baymeadows Apartments $41,827 $24,766 5-36 S/L $ 9,250 Quail Run Apartments 14,671 8,945 5-34 S/L 1,986 Total $56,498 $33,711 $11,236
See "Note A - Organization and Significant Accounting Policies" to the financial statements included in "Item 7. Financial Statements" for a description of the Partnership's depreciation and capitalization policies. Schedule of Property Indebtedness The following table sets forth certain information relating to the loans encumbering the Partnership's properties.
Principal Principal Balance At Stated Balance December 31, Interest Period Maturity Due At Property 2002 Rate Amortized Date Maturity (1) (in thousands) (in thousands) Baymeadows 1st mortgage $25,705 (2) 60 mo. 9/16/07 $22,714 Quail Run 1st mortgage 8,367 6.94% 240 mo. 07/01/22 -- Total $34,072 $22,714
(1) See "Item 7, Financial Statements - Note B" for information with respect to the Registrant's ability to prepay these loans and other specific details about the loans. (2) The mortgage was refinanced at a variable interest rate of the Fannie Mae discounted mortgage-backed security index plus 85 basis points. On June 14, 2002, the Partnership refinanced the mortgage notes at Quail Run Apartments. Gross proceeds from the refinancing were $8,450,000 of which approximately $4,963,000 was used to repay the existing mortgage notes. The new note requires monthly principal and interest payments of approximately $65,000 at a fixed interest rate of 6.94% and matures July 1, 2022 at which time the loan is scheduled to be fully amortized. The old debt carried a fixed interest rate of 7.6%. The Partnership recognized a loss on the early extinguishment of debt of approximately $27,000, which is included in interest expense in the consolidated statement of operations at December 31, 2002 due to the write off of unamortized loan costs and mortgage discount. Total capitalized loan costs for the new mortgage were approximately $204,000 at December 31, 2002. On November 16, 2002, the Partnership refinanced the mortgages encumbering Baymeadows Apartments. This loan was initially refinanced under an interim credit facility ("Interim Credit Facility") which had a term of three months. The Interim Credit Facility included properties in other partnerships that are affiliated with the Partnership. However, the Interim Credit Facility created separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. During the three month term of the Interim Credit Facility, the properties were required to make interest-only payments. The first month's interest, which was paid at the date of the refinancing, was calculated at LIBOR plus 70 basis points. Interest for the following two months was calculated at LIBOR plus 150 basis points and was due monthly. During December 2002, the loan encumbering Quail Run Apartments was sold to Fannie Mae and the Credit Facility under a permanent credit facility ("Permanent Credit Facility"). The Permanent Credit Facility has a maturity of five years, with one five-year extension option. This Permanent Credit Facility also creates separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility will begin as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans is the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate was 2.16% at December 31, 2002 and will reset monthly. Each loan will automatically renew at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that any property is on the Permanent Credit Facility. The loans are prepayable without penalty. The refinancing of Baymeadows Apartments loans replaced the first mortgage of approximately $11,554,000 and second mortgage of approximately $493,000 with a new mortgage in the amount of $25,705,000. Total capitalized loan costs were approximately $645,000 during the year ended December 31, 2002. Loan costs and the debt discount of the old mortgages were fully amortized in 2002. Rental Rates and Occupancy Average annual rental rate and occupancy for the years ended December 31, 2002 and 2001: Average Annual Average Annual Rental Rates Occupancy (per unit) Property 2002 2001 2002 2001 Baymeadows $8,292 $8,110 96% 96% Quail Run (1) 8,171 8,355 90% 94% (1) The Corporate General Partner attributes the decrease in occupancy at Quail Run Apartments to military transfers and to favorable interest rates on mortgage loans. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. Both properties are subject to competition from other residential apartment complexes in the area. The Corporate General Partner believes that the properties are adequately insured. Each property is an apartment complex which leases units for lease terms of one year or less. No tenant leases 10% or more of the available rental space. Both properties are in good condition subject to normal depreciation and deterioration as is typical for assets of this type and age. Real Estate Taxes and Rates Real estate taxes and rates in 2002 for each property were: 2002 2002 Billing Rate (in thousands) Baymeadows $ 454 1.88% Quail Run 220 34.40% (a) (a) The rates are based on the local authority's assessed value of the investment property. Capital Improvements Baymeadows Apartments The Partnership completed approximately $1,816,000 in capital expenditures at Baymeadows, consisting primarily of building improvements, air conditioning units, cabinets, structural, electrical, plumbing, and roof upgrades, water heaters, computers, and appliance and floor covering replacements. These improvements were funded from operating cash flow, insurance proceeds, and replacement reserves. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and currently expects to budget approximately $625,000. Additional improvements may be considered during 2003 and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Quail Run The Partnership completed approximately $124,000 in capital expenditures at Quail Run, consisting primarily of structural improvements, floor covering replacements, plumbing fixtures, air conditioning units, and appliance replacements. Those improvements were funded from operating cash flow and replacement reserves. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and currently expects to budget approximately $100,000. Additional improvements may be considered during 2003 and will depend on the physical condition of the property as well as anticipated cash flow generated by the property. The additional capital expenditures will be incurred only if cash is available from operations and Partnership reserves. To the extent that such budgeted capital improvements are completed, the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. Item 3. Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Corporate General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Corporate General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Corporate General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Corporate General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Corporate General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Corporate General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the Corporate General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which was heard on December 11, 2001. On February 2, 2002, the Court served its order granting in part the demurrer. The Court has dismissed without leave to amend certain of the plaintiffs' claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a putative class comprised of all non-affiliated persons who own or have owned units in the partnerships. The Corporate General Partner and affiliated defendants oppose the motion. On April 29, 2002, the Court held a hearing on plaintiffs' motion for class certification and took the matter under submission after further briefing, as ordered by the court, was submitted by the parties. On July 10, 2002, the Court entered an order vacating the current trial date of January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and stayed the case in its entirety through November 7, 2002 so that the parties could have an opportunity to discuss settlement. On October 30, 2002, the court entered an order extending the stay in effect through January 10, 2003. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action described below. The Court has scheduled the hearing on preliminary approval for April 4, 2003 and the hearing on final approval for June 2, 2003. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $ 1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the Corporate General Partner has also agreed to make a tender offer to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provides for the limitation of the allowable costs which the Corporate General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. If the Court grants preliminary approval of the proposed settlement in March, a notice will be distributed to partners providing detail on the terms of the proposed settlement. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the Corporate General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. On December 11, 2001, the court heard argument on the motions and took the matters under submission. On February 4, 2002, the Court served notice of its order granting defendants' motion to strike the Heller complaint as a violation of its July 10, 2001 order in the Nuanes action. On March 27, 2002, the plaintiffs filed a notice appealing the order striking the complaint. Before completing briefing on the appeal, the parties stayed further proceedings in the appeal pending the Court's review of the terms of the proposed settlement described above. The Corporate General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2002, 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 The Partnership, a publicly-held limited partnership, offered and sold 49,900 limited partnership units (the "Units") aggregating $49,900,000. An additional 100 units were purchased by the Corporate General Partner. The Partnership currently has 1,817 holders of record owning an aggregate of 49,995 Units. Affiliates of the Corporate General Partner owned 34,253 units or 68.51% at December 31, 2002. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. The following table sets forth the distributions made by the Partnership for the twelve months ended December 31, 2002 and 2001 (in thousands, except per unit data). See "Item 6. Management's Discussion and Analysis or Plan of Operation" for further details.
Year Per Limited Year Per Limited Ended Partnership Ended Partnership December 31, 2002 Unit December 31, 2001 Unit Operations $ 698 $13.82 $ -- $ -- Sale (1) 424 8.48 929 18.58 Refinancing (2) 15,831 316.65 -- -- $16,953 $338.95 $ 929 $18.58
(1) From undistributed proceeds of the sale of Countrywood Village Apartments in August 2000. (2) Approximately $3,267,000 from the refinancing of Quail Run Apartments in June 2002 and approximately $12,564,000 from the refinancing of Baymeadows Apartments in November 2002. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings and/or property sales. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations, after required capital expenditures, to permit any distributions to its partners in 2003 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to anticipated capital expenditures at the properties. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 34,253 limited partnership units (the "Units") in the Partnership representing 68.51% of the outstanding units at December 31, 2002. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include voting on certain amendments to the Partnership Agreement and voting to remove the Corporate General Partner. As a result of its ownership of 68.51% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Registrant. Although the Corporate General Partner owes fiduciary duties to the limited partners of the Partnership, the Corporate General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Corporate General Partner, as corporate general partner, to the Partnership and its limited partners may come into conflict with the duties of the Corporate General Partner to AIMCO, as its sole stockholder. 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 income for the years ended December 31, 2002 and 2001 was approximately $1,662,000 and $1,052,000, respectively. The increase in net income for the year ended December 31, 2002 was due to an increase in total revenues and a decrease in total expenses. Total revenues increased due to increases in rental income and casualty gains. Rental income increased due to an increase in rental rates at Baymeadows Apartments. The increase was partially offset by lower occupancy and rental rates at Quail Run Apartments. In November 2001, Baymeadows Apartments experienced a fire which resulted in damages of approximately $277,000. Insurance proceeds of approximately $245,000 were received during 2002 to cover the damages. A casualty gain of approximately $184,000 was recognized during 2002 as a result of the insurance proceeds received less the write-off of the net book value of the destroyed assets of approximately $61,000. During the year ended December 31, 2002 an additional casualty gain of approximately $45,000 was recorded at Baymeadows Apartments. The casualty gain related to a tropical storm that occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $51,000 and the write-off of the net book value of the destroyed assets of approximately $6,000. During the year ended December 31, 2001, a net casualty gain of approximately $20,000 was recorded at Quail Run Apartments. The casualty gain related to a fire which occurred on September 30, 1999. The gain was a result of the receipt of insurance proceeds of approximately $28,000 and the write-off of the net book value of the destroyed assets of approximately $8,000. During the year ended December 31, 2001 a net casualty gain of approximately $56,000 was recorded at Baymeadows Apartments. The casualty gain related to a tropical storm which occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $82,000 and the write of the net book value of the destroyed assets of approximately $26,000. The decrease in total expenses for the year ended December 31, 2002 is due to a decrease in operating and general and administrative expenses, partially offset by an increase in depreciation expense. Operating expenses decreased due to decreases in utilities and payroll expenses at both investment properties and due to a decrease in corporate unit expense at Quail Run Apartments. Corporate unit expense decreased at Quail Run Apartments due to the decrease in the number of units rented in 2002. In addition, maintenance expense decreased due to an increase in the capitalization of certain direct and indirect project costs, primarily payroll related costs at the properties (See Item 7. Financial Statements, Note A). Depreciation expense increased as a result of property improvements and replacements being placed into service at both properties during the past twelve months. General and administrative expenses decreased due to a decrease in professional fees associated with the administration of the Partnership. Included in general and administrative expenses for the years ended December 31, 2002 and 2001 are management reimbursements to the Corporate General Partner as allowed under the Partnership Agreement. In addition to these reimbursements, costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included in general and administrative expenses. As part of the ongoing business plan of the Partnership, the Corporate General Partner monitors the rental market environment of 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 guarantee that the Corporate General Partner will be able to sustain such a plan. Liquidity and Capital Resources At December 31, 2002, the Partnership had cash and cash equivalents of approximately $1,986,000 compared to approximately $517,000 at December 31, 2001. Cash and cash equivalents increased approximately $1,469,000 since December 31, 2001 due to approximately $3,503,000 of cash provided by operating activities, partially offset by approximately $684,000 and $1,350,000 of cash used in investing and financing activities, respectively. Cash used in investing activities consisted of property improvements and replacements slightly offset by insurance proceeds received and net withdrawals from restricted escrows maintained by the mortgage lender. Cash used in financing activities consisted primarily of the repayment of the mortgages encumbering Quail Run and Baymeadows Apartments, distributions to partners and, to a lesser extent, principal payments made on the mortgages encumbering the Partnership's properties and loan costs paid for the refinancing of the debt. These uses were partially offset by proceeds from the refinancing of the mortgage notes payable. The Partnership invests its working capital reserves in interest bearing accounts. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the investment properties to adequately maintain the physical assets and other operating needs of the registrant and to comply with Federal, state, and local legal an regulatory requirements. The Corporate General Partner monitors developments in the area of legal and regulatory compliance and is studying new federal laws, including the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance, including increased legal and audit fees. The Partnership is currently evaluating the capital improvement needs of the properties for the upcoming year. The minimum amount to be budget is expected to be $725,000. Additional improvements may be considered and will depend on the physical condition of the properties as well as replacement reserves and anticipated cash flow generated by the properties. The capital expenditures will be incurred only if cash is available from operations and partnership reserves. To the extent that such budgeted capital improvements are completed, the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. On June 14, 2002, the Partnership refinanced the mortgage notes at Quail Run Apartments. Gross proceeds from the refinancing were $8,450,000 of which approximately $4,963,000 was used to repay the existing mortgage notes. The new note requires monthly principal and interest payments of approximately $65,000 at a fixed interest rate of 6.94% and matures July 1, 2022 at which time the loan is scheduled to be fully amortized. The old debt carried a fixed interest rate of 7.6%. The Partnership recognized a loss on the early extinguishment of debt of approximately $27,000, which is included in interest expense in the consolidated statement of operations at December 31, 2002 due to the write off of unamortized loan costs and mortgage discount. Total capitalized loan costs for the new mortgage were approximately $204,000 at December 31, 2002. On November 16, 2002, the Partnership refinanced the mortgages encumbering Baymeadows Apartments. This loan was initially refinanced under an interim credit facility ("Interim Credit Facility") which had a term of three months. The Interim Credit Facility included properties in other partnerships that are affiliated with the Partnership. However, the Interim Credit Facility created separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. During the three month term of the Interim Credit Facility, the properties were required to make interest-only payments. The first month's interest, which was paid at the date of the refinancing, was calculated at LIBOR plus 70 basis points. Interest for the following two months was calculated at LIBOR plus 150 basis points and is due monthly. During December 2002 the loan encumbering Quail Run apartments was sold to Fannie Mae under a permanent credit facility ("Permanent Credit Facility"). The Permanent Credit Facility has a maturity of five years, with one five-year extension option. This Permanent Credit Facility also creates separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility will begin as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans is the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate was 2.16% at December 31, 2002 and will reset monthly. Each loan will automatically renew at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that any property is on the Permanent Credit Facility. The loans are prepayable without penalty. The refinancing of Baymeadows Apartments loans replaced the first mortgage of approximately $11,554,000 and second mortgage of approximately $493,000 with a new mortgage in the amount of $25,705,000. Total capitalized loan costs were approximately $645,000 during the year ended December 31, 2002. Loan costs and the debt discount of the old mortgages were fully amortized in 2002. The Partnership's assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. Approximately $8,367,000 of the mortgage indebtedness is being amortized over 240 months at which time it is scheduled to be fully amortized. The remaining indebtedness of approximately $25,705,000 is being amortized over 60 months with a balloon payment of approximately $22,714,000 due in September 2007. The Corporate General Partner will attempt to refinance such indebtedness and/or sell the property prior to such maturity date. If the property cannot be refinanced or sold for a sufficient amount, the Partnership will risk losing such properties through foreclosure. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," required that all gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should only be classified as extraordinary if they are unusual in nature and occur infrequently. Neither of these criteria apply to the Partnership. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 with early adoption an option. Effective April 1, 2002, the Managing General Partner adopted SFAS No. 145. As a result of its adoption, the Partnership has recognized a loss of approximately $27,000 which is included in interest expense on the accompanying consolidated statement of operations. The following table sets forth the distributions made by the Partnership for the years ended December 30, 2002 and 2001 (in thousands, except per unit data).
Year Per Limited Year Per Limited Ended Partnership Ended Partnership December 31, 2002 Unit December 31, 2001 Unit Operations $ 698 $13.82 $ -- $ -- Sale (1) 424 8.48 929 18.58 Refinancing (2) 15,831 316.65 -- -- $16,953 $338.95 $ 929 $18.58
(1) From undistributed proceeds of the sale of Countrywood Village Apartments in August 2000. (2) Approximately $3,267,000 from the refinancing of Quail Run Apartments in June 2002 and approximately $12,564,000 from the refinancing of Baymeadows Apartments in November 2002. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings and/or property sales. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations, after required capital expenditures, to permit any distributions to its partners in the year 2003 or subsequent periods. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 34,253 limited partnership units (the "Units") in the Partnership representing 68.51% of the outstanding units at December 31, 2002. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include voting on certain amendments to the Partnership Agreement and voting to remove the Corporate General Partner. As a result of its ownership of 68.51% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Registrant. Although the Corporate General Partner owes fiduciary duties to the limited partners of the Partnership, the Corporate General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Corporate General Partner, as corporate general partner, to the Partnership and its limited partners may come into conflict with the duties of the Corporate General Partner to AIMCO, as its sole stockholder. Critical Accounting Policies and Estimates A summary of the Partnership's significant accounting policies is included in "Note A - Organization and Significant Accounting Policies" which is included in the consolidated financial statements in "Item 7. Financial Statements". The Corporate General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnership's operating results and financial condition. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnership's accounting policies in many areas. The following may involve a higher degree of judgment and complexity. Impairment of Long-Lived Assets Investment properties are recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Partnership will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of the Partnership's investment properties. These factors include changes in the national, regional and local economic climate; local conditions, such as an oversupply of multifamily properties; competition from other available multifamily property owners and changes in market rental rates. Any adverse changes in these factors could cause an impairment in the Partnership's assets. Revenue Recognition The Partnership generally leases apartment units for twelve-month terms or less. Rental income attributable to leases is recognized monthly as it is earned and the Partnership fully reserves all balances outstanding over 30 days. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged to income as incurred. Item 7. Financial Statements SHELTER PROPERTIES IV LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheet - December 31, 2002 Consolidated Statements of Operations - Years ended December 31, 2002 and 2001. Consolidated Statements of Changes in Partners' Capital (Deficit) - Years ended December 31, 2002 and 2001. Consolidated Statements of Cash Flows - Years ended December 31, 2002 and 2001. Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Shelter Properties IV We have audited the accompanying consolidated balance sheet of Shelter Properties IV as of December 31, 2002, and the related consolidated statements of operations, changes in partners' capital (deficit), and cash flows for each of the two years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States. 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 consolidated financial position of Shelter Properties IV at December 31, 2002, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note A to the consolidated financial statements, in 2002 the Partnership adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64." /s/ERNST & YOUNG LLP Greenville, South Carolina February 14, 2003 SHELTER PROPERTIES IV CONSOLIDATED BALANCE SHEET (in thousands, except unit data) December 31, 2002
Assets Cash and cash equivalents $ 1,986 Receivables and deposits 380 Restricted escrows 287 Other assets 969 Investment properties (Notes B and F): Land $ 2,759 Buildings and related personal property 53,739 56,498 Less accumulated depreciation (33,711) 22,787 $ 26,409 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 121 Tenant security deposit liabilities 210 Other liabilities 599 Mortgage notes payable (Note B) 34,072 Partners' Capital (Deficit) General partners $ 119 Limited partners (49,995 units issued and outstanding) (8,712) (8,593) $ 26,409 See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES IV CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit data)
Years Ended December 31, 2002 2001 Revenues: Rental income $ 9,374 $ 9,318 Other income 886 868 Casualty gain (Note E) 229 76 Total revenues 10,489 10,262 Expenses: Operating 4,013 4,431 General and administrative 290 397 Depreciation 2,187 2,071 Interest 1,654 1,663 Property taxes 683 648 Total expenses 8,827 9,210 Net income (Note C) $ 1,662 $ 1,052 Net income allocated to general partners (1%) $ 17 $ 11 Net income allocated to limited partners (99%) 1,645 1,041 $ 1,662 $ 1,052 Per limited partnership unit: Net income $ 32.90 $ 20.82 Distributions per limited partnership unit $ 338.95 $ 18.58 See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES IV CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (in thousands, except unit data)
Limited Partnership General Limited Units Partners Partners Total Original capital contributions 50,000 $ 2 $ 50,000 $ 50,002 Partners' capital at December 31, 2000 49,995 $ 98 $ 6,477 $ 6,575 Net income for the year ended December 31, 2001 -- 11 1,041 1,052 Distribution to partners -- -- (929) (929) Partners' capital at December 31, 2001 49,995 109 6,589 6,698 Net income for the year ended December 31, 2002 -- 17 1,645 1,662 Distribution to partners -- (7) (16,946) (16,953) Partners' capital (deficit) at December 31, 2002 49,995 $ 119 $ (8,712) $ (8,593) See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES IV CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 2002 2001 Cash flows from operating activities: Net income $ 1,662 $ 1,052 Adjustments to reconcile net income to net cash provided by operating activities: Loss on early extinguishment of debt 27 -- Depreciation 2,187 2,071 Casualty gain (229) (76) Amortization of discounts and loan costs 212 324 Change in accounts: Receivables and deposits (201) (65) Other assets (19) (8) Accounts payable (157) 127 Tenant security deposit liabilities (15) 22 Accrued property taxes (194) 1 Other liabilities 230 (335) Net cash provided by operating activities 3,503 3,113 Cash flows from investing activities: Property improvements and replacements (1,940) (2,462) Net withdrawals from (deposits to) restricted escrows 960 (533) Insurance proceeds received 296 110 Net cash used in investing activities (684) (2,885) Cash flows from financing activities: Proceeds from mortgage note payable 34,155 -- Payments on mortgage notes payable (693) (824) Repayment of mortgage notes payable (17,010) -- Loan cost paid (849) -- Partners' distributions (16,953) (929) Net cash used in financing activities (1,350) (1,753) Net increase (decrease) in cash and cash equivalents 1,469 (1,525) Cash and cash equivalents at beginning of period 517 2,042 Cash and cash equivalents at end of period $ 1,986 $ 517 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,360 $ 1,348 See Accompanying Notes to Consolidated Financial Statements
SHELTER PROPERTIES IV NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 Note A - Organization and Significant Accounting Policies Organization: Shelter Properties IV (the "Partnership" or "Registrant") was organized as a limited partnership under the laws of the State of South Carolina on August 21, 1981. The general partner responsible for management of the Partnership's business is Shelter Realty IV Corporation, a South Carolina corporation (the "Corporate General Partner"). The Corporate General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The other general partner is AIMCO Properties, L.P., an affiliate of the Corporate General Partner and AIMCO. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2022 unless terminated prior to such date. The Partnership commenced operations on July 22, 1982, and completed its acquisition of apartment properties on March 31, 1983. The Partnership operates two apartment properties located in the Southeast. Principles of Consolidation: The financial statements include all the accounts of the Partnership and its 99.99% owned partnership. The General Partner of the consolidated partnership is the Corporate General Partner. The Corporate General Partner may be removed by the Partnership; therefore, the consolidated partnership is controlled and consolidated by the Partnership. All significant interpartnership balances have been eliminated. Loan Costs: Loan costs of approximately $849,000 less accumulated amortization of approximately $4,000 are included in other assets on the accompanying balance sheet and are being amortized by the straight-line method over the life of the loan. The total amortization expense for the year ended December 31, 2002 was approximately $61,000 and is included in interest expense. Amortization expenses are expected to be approximately $33,000 for each of the years 2003 through 2007. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 including reserve amounts deemed necessary by the Corporate General Partner. In the following notes to financial statements, whenever net cash from operations is used, it has the aforementioned meaning. As required by the Partnership Agreement, the following is a reconciliation of "net cash provided by operating activities" in the accompanying consolidated statements of cash flows to "net cash from operations", as defined in the Partnership Agreement. However, "net cash from operations" should not be considered an alternative to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Years Ended December 31, 2002 2001 (in thousands) Net cash provided by operating activities $ 3,503 $ 3,113 Property improvements and replacements (1,940) (2,462) Payments on mortgage notes payable (693) (824) Changes in restricted escrows, net 960 (533) Changes in reserves for net operating liabilities 356 258 (Additional)/Release of operating reserves (2,186) 448 Net cash from operations $ -- $ -- The Corporate General Partner reserved net cash from operations of approximately $2,186,000 at December 31, 2002 to fund continuing capital improvements and repairs at the Partnership's two investment properties. During the year ended December 31, 2001, the Corporate General Partner released previously reserved funds of approximately $448,000. Distributions made from reserves no longer considered necessary by the Corporate General Partner are considered to be additional net cash from operations for allocation purposes. 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 price 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%. 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. Profits, not including gains from property dispositions, are allocated as if they were distributions of net cash from operations. 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 income as shown in the consolidated statements of operations and consolidated changes in partners' capital (deficit) for both of the twelve months ended December 31, 2002 and 2001 were allocated 99% to the limited partners and 1% to the general partners. Net income per limited partnership unit for each such year was computed as 99% of net income divided by 49,995 units outstanding. Other Reserves: The Corporate General Partner may designate a portion of cash generated from operations as "other reserves" in determining net cash from operations. The Corporate General Partner 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 changes in other reserves during the years ended December 31, 2002 and 2001 were an increase of approximately $356,000 and $258,000, respectively. These amounts were determined by considering changes in the balances of receivables and deposits, other assets, accounts payable, tenant security deposit liabilities, accrued taxes and other liabilities. At this time, the Corporate General Partner expects to continue to adjust other reserves based on the net change in the aforementioned account balances. Fair Value of Financial Instruments: Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amounts of its financial instruments (except for long term debt) approximate their fair values due to the short term maturity of these instruments. The fair value of the Partnership's long term debt, after discounting the scheduled loan payments to maturity, approximates its carrying balance. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $1,946,000 at December 31, 2002 that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts. Restricted Reserve Account: At December 31, 2002 approximately $287,000 was on deposit with the mortgage holder of Baymeadows, as required by the loan agreement. The reserve is intended for immediate repairs and enhancements at the property. 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 for real property over 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. 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 over 27 1/2 years and (2) personal property additions over 5 years. Tenant Security Deposits: The Partnership requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. Deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on its rental payments. Leases: The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases and fully reserves all balances outstanding over 30 days. 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 against rental income as incurred. Investment Properties: Investment properties consist of two apartment complexes and are stated at cost. Acquisition fees are capitalized as a cost of real estate. Expenditures in excess of $250 that maintain an existing asset which has a useful life of more than one year are capitalized as capital replacement expenditures and depreciated over the estimated useful like of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expressed as incurred. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Costs of apartment properties that have been permanently impaired have been written down to appraised value. No adjustments for impairment of value were recorded in the years ended December 31, 2002 and 2001. During 2001, AIMCO, an affiliate of the Corporate General Partner, commissioned a project to study process improvement ideas to reduce operating costs. The result of the study led to a re-engineering of business processes and eventual redeployment of personnel and related capital spending. The implementation of these plans during 2002, accounted for as a change in accounting estimate, resulted in a refinement of the Partnership's process for capitalizing certain direct and indirect project costs (principally payroll related costs) and increased capitalization of such costs by approximately $164,000 in 2002 compared to 2001. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising costs were approximately $96,000 and $112,000 for the years ended December 31, 2002 and 2001, respectively. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS No. 131, the Partnership has only one reportable segment. Recent Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Partnership adopted SFAS 144 effective January 1, 2002. Its adoption did not have a material effect on the financial position or results of operations of the Partnership. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," required that all gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should only be classified as extraordinary if they are unusual in nature and occur infrequently. Neither of these criteria apply to the Partnership. SFAS 145 is effective for fiscal years beginning after May 15, 2002 with an early adoption option. Effective April 1, 2002, the Partnership adopted SFAS 145. As a result of its adoption, the Partnership has recognized a loss of approximately $27,000 which is included in interest expense on the accompanying consolidated statement of operations. Note B - Mortgage Notes Payable The principal terms of mortgage notes payable are as follows:
Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 2002 Interest Rate Date Maturity (in thousands) (in thousands) Baymeadows 1st mortgage $25,705 $ 97 (1) 9/16/07 $22,714 Quail Run 1st mortgage 8,367 65 6.94% 07/01/22 -- Total $34,072 $ 162 $22,714
(1) The mortgage was refinanced at a variable interest rate of the Fannie Mae prime plus 85 basis points. (2) The mortgage was refinanced at a variable interest rate of the Fannie Mae discounted mortgage-backed security index plus 85 basis points. On June 14, 2002, the Partnership refinanced the mortgage notes at Quail Run Apartments. Gross proceeds from the refinancing were $8,450,000 of which approximately $4,963,000 was used to repay the existing mortgage notes. The new note requires monthly principal and interest payments of approximately $65,000 at a fixed interest rate of 6.94% and matures July 1, 2022 at which time the loan is scheduled to be fully amortized. The old debt carried a fixed interest rate of 7.6%. The Partnership recognized a loss on the early extinguishment of debt of approximately $27,000, which is included in interest expense in the consolidated statement of operations at December 31, 2002 due to the write off of unamortized loan costs and mortgage discount. Total capitalized loan costs for the new mortgage were approximately $204,000 at December 31, 2002. On November 16, 2002, the Partnership refinanced the mortgages encumbering Baymeadows Apartments. This loan was initially refinanced under an interim credit facility ("Interim Credit Facility") which had a term of three months. The Interim Credit Facility included properties in other partnerships that are affiliated with the Partnership. However, the Interim Credit Facility created separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. During the three month term of the Interim Credit Facility, the properties were required to make interest-only payments. The first month's interest, which was paid at the date of the refinancing, was calculated at LIBOR plus 70 basis points. Interest for the following two months was calculated at LIBOR plus 150 basis points and was due monthly. During December 2002, the loan encumbering Quail Run Apartments was sold to Fannie Mae under a permanent credit facility ("Permanent Credit Facility"). The Permanent Credit Facility has a maturity of five years, with one five-year extension option. This Permanent Credit Facility also creates separate loans for each property that are not cross-collateralized or cross-defaulted with the other property loans. Each note under this Permanent Credit Facility will begin as a variable rate loan with the option of converting to a fixed rate loan after three years. The interest rate on the variable rate loans is the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate was 2.16% at December 31, 2002 and will reset monthly. Each loan will automatically renew at the end of each month. In addition, monthly principal payments are required based on a 30-year amortization schedule, using the interest rate in effect during the first month that any property is on the Permanent Credit Facility. The loans are prepayable without penalty. The refinancing of Baymeadows Apartments loans replaced the first mortgage of approximately $11,554,000 and second mortgage of approximately $493,000 with a new mortgage in the amount of $25,705,000. Total capitalized loan costs were approximately $645,000 during the year ended December 31, 2002. Loan costs and the debt discount of the old mortgages were fully amortized in 2002. The mortgage notes payable are non-recourse and are secured by a pledge of the respective apartment properties and revenues generated by the properties. Prepayment penalties are required on the mortgage encumbering Quail run Apartments if repaid prior to maturity. Further, the properties may not be sold subject to existing indebtedness. Scheduled principal payments of mortgage notes payable subsequent to December 31, 2002 are as follows (in thousands): 2003 $ 824 2004 853 2005 882 2006 913 2007 23,435 Thereafter 7,165 Total $34,072 Note C - 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 consolidated 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 income and Federal taxable income (in thousands, except per unit data): Years Ended December 31, 2002 2001 Net income as reported $ 1,662 $ 1,052 Add (deduct): Depreciation differences 1,070 995 Change in prepaid rental 154 (6) Other (207) (33) Federal taxable income $ 2,679 $ 2,008 Federal taxable income per limited partnership unit $ 53.04 $ 39.76 The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets (in thousands): Net assets as reported $ (8,593) Land and buildings 7,010 Accumulated depreciation (18,561) Syndication 6,293 Other 381 Net assets - Federal tax basis $ (13,470) Note D - Transactions with Affiliated Parties The Partnership has no employees and is dependent on the Corporate General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Affiliates of the Corporate General Partner are entitled to receive 5% of gross receipts from all of the Partnership's properties as compensation for providing property management services. The Partnership paid to such affiliates approximately $512,000 and $525,000 during the years ended December 31, 2002 and 2001, respectively, which is included in operating expenses. Affiliates of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $425,000 and $641,000 for the years ended December 31, 2002 and 2001, respectively, which are included in general and administrative expenses and investment properties. Included in these amounts are fees related to construction management services provided by an affiliate of the Corporate General Partner of approximately $206,000 and $351,000 for the years ended December 31, 2002 and 2001, respectively. The construction management service fees are calculated based on a percentage of additions to the investment properties. Pursuant to the Partnership Agreement and in connection with the sale of Countrywood Village in 2000, the Corporate General Partner is entitled to a commission of up to 1% for its assistance in the sale. Payment of such commission is subordinate to the limited partners receiving a cumulative 7% return on their investment. This return has not yet been met, and accordingly, the $178,000 was accrued and is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2002. Beginning in 2001, the Partnership began insuring its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Corporate General Partner. During the years ended December 31, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates approximately $208,000 and $172,000, respectively, for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 34,253 limited partnership units (the "Units") in the Partnership representing 68.51% of the outstanding units at December 31, 2002. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include voting on certain amendments to the Partnership Agreement and voting to remove the Corporate General Partner. As a result of its ownership of 68.51% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Registrant. Although the Corporate General Partner owes fiduciary duties to the limited partners of the Partnership, the Corporate General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Corporate General Partner, as corporate general partner, to the Partnership and its limited partners may come into conflict with the duties of the Corporate General Partner to AIMCO, as its sole stockholder. Note E - Casualty Events In November 2001, Baymeadows Apartments experienced a fire, which resulted in damages of approximately $277,000. Insurance proceeds of $245,000 were received during the year ended December 31, 2002 to cover the damages. A casualty gain of approximately $184,000 was recognized during the year ended December 31, 2002 as a result of the insurance proceeds received less the write-off of the net book value of the destroyed assets of approximately $61,000. During the year ended December 31, 2002 an additional casualty gain of approximately $45,000 was recorded at Baymeadows Apartments. The casualty gain related to a tropical storm that occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $51,000 and the write-off of the net book value of the destroyed assets of approximately $6,000. During the year ended December 31, 2001 a net casualty gain of approximately $20,000 was recorded at Quail Run Apartments. The casualty gain related to a fire which occurred on September 30, 1999. The gain was a result of the receipt of insurance proceeds of approximately $28,000 and write-off of the net book value of the destroyed assets of approximately $8,000. During the year ended December 31, 2001 a net casualty gain of approximately $56,000 was recorded at Baymeadows Apartments. The casualty gain related to a tropical storm that occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $82,000 and the write-off of the net book value of the destroyed assets of approximately $26,000. Note F - Real Estate and Accumulated Depreciation Initial Cost To Partnership (in thousands)
Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition (in thousands) (in thousands) Baymeadows Apartments $25,705 $ 1,884 $26,916 $13,027 Quail Run Apartments 8,367 875 10,642 3,154 Totals $34,072 $ 2,759 $37,558 $16,181
Gross Amount At Which Carried At December 31, 2002 (in thousands)
Buildings And Related Personal Accumulated Date Depreciable Description Land Property Total Depreciation Acquired Life-Years (in thousands) Baymeadows Apartments $ 1,884 $39,943 $41,827 $24,766 09/30/82 5-36 Quail Run Apartments 875 13,796 14,671 8,945 01/03/83 5-34 Totals $ 2,759 $53,739 $56,498 $33,711
Reconciliation of "Real Estate and Accumulated Depreciation": Years Ended December 31, 2002 2001 (in thousands) Real Estate Balance at beginning of period $ 54,711 $ 53,235 Property improvements 1,940 1,535 Disposition of assets (153) (59) Balance at end of period $ 56,498 $ 54,711 Accumulated Depreciation Balance at beginning of period $ 31,610 $ 29,575 Additions charged to expense 2,187 2,071 Disposition of assets (86) (36) Balance at end of period $ 33,711 $ 31,610 The aggregate cost of the real estate for Federal income tax purposes at December 31, 2002 and 2001 is approximately $63,508,000 and $61,945,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 2002 and 2001 is approximately $52,272,000 and $51,155,000, respectively. Note G - Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Corporate General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Corporate General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Corporate General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Corporate General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Corporate General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Corporate General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the Corporate General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which was heard on December 11, 2001. On February 2, 2002, the Court served its order granting in part the demurrer. The Court has dismissed without leave to amend certain of the plaintiffs' claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a putative class comprised of all non-affiliated persons who own or have owned units in the partnerships. The Corporate General Partner and affiliated defendants oppose the motion. On April 29, 2002, the Court held a hearing on plaintiffs' motion for class certification and took the matter under submission after further briefing, as ordered by the court, was submitted by the parties. On July 10, 2002, the Court entered an order vacating the current trial date of January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and stayed the case in its entirety through November 7, 2002 so that the parties could have an opportunity to discuss settlement. On October 30, 2002, the court entered an order extending the stay in effect through January 10, 2003. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action described below. The Court has scheduled the hearing on preliminary approval for April 4, 2003 and the hearing on final approval for June 2, 2003. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $ 1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the Corporate General Partner has also agreed to make a tender offer to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provides for the limitation of the allowable costs which the Corporate General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. If the Court grants preliminary approval of the proposed settlement in March, a notice will be distributed to partners providing detail on the terms of the proposed settlement. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the Corporate General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. On December 11, 2001, the court heard argument on the motions and took the matters under submission. On February 4, 2002, the Court served notice of its order granting defendants' motion to strike the Heller complaint as a violation of its July 10, 2001 order in the Nuanes action. On March 27, 2002, the plaintiffs filed a notice appealing the order striking the complaint. Before completing briefing on the appeal, the parties stayed further proceedings in the appeal pending the Court's review of the terms of the proposed settlement described above. The Corporate General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 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 Corporate General Partner is Shelter Realty IV Corporation. The names and ages of, as well as the position and offices held by, the present executive officers and director of the Corporate General Partner are set forth below. There are no family relationships between or among any officers or directors. Name Age Position Patrick J. Foye 45 Executive Vice President and Director Paul J. McAuliffe 46 Executive Vice President and Chief Financial Officer Thomas C. Novosel 44 Senior Vice President and Chief Accounting Officer Patrick J. Foye has been Executive Vice President and Director of the Corporate General Partner since October 1, 1998. Mr. Foye has served as Executive Vice President of AIMCO since May 1998, where he is responsible for continuous improvement, acquisitions of partnership securities, consolidation of minority interests, and corporate and other acquisitions. Prior to joining AIMCO, Mr. Foye was a Merger and Acquisitions Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998. Paul J. McAuliffe has been Executive Vice President and Chief Financial Officer of the Corporate General Partner since April 1, 2002. Mr. McAuliffe has served as Executive Vice President of AIMCO since February 1999 and Chief Financial Officer of AIMCO since October 1999. From May 1996 until he joined AIMCO, Mr. McAuliffe was Senior Managing Director of Secured Capital Corp. Thomas C. Novosel has been Senior Vice President and Chief Accounting Officer of the Corporate General Partner since April 1, 2002. Mr. Novosel has served as Senior Vice President and Chief Accounting Officer of AIMCO since April 2000. From October 1993 until he joined AIMCO, Mr. Novosel was a partner at Ernst & Young LLP, where he served as the director of real estate advisory services for the southern Ohio Valley area offices but did not work on any assignments related to AIMCO or the Partnership. One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act. Further, one or more of the above persons are also directors and/or officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act. The executive officers and director of the Corporate General Partner fulfill the obligations of the Audit Committee and oversee the Partnership's financial reporting process on behalf of the Corporate General Partner. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the executive officers and director of the Corporate General Partner reviewed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The executive officers and director of the Corporate General Partner reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States, their judgments as to the quality, not just the acceptability, of the Partnership's accounting principles and such other matters as are required to be discussed with the Audit Committee or its equivalent under auditing standards generally accepted in the United States. In addition, the Partnership has discussed with the independent auditors the auditors' independence from management and the Partnership including the matters in the written disclosures required by the Independence Standards Board and considered the compatibility of non-audit services with the auditors' independence. The executive officers and director of the Corporate General Partner discussed with the Partnership's independent auditors the overall scope and plans for their audit. In reliance on the reviews and discussions referred to above, the executive officers and director of the Corporate General Partner have approved the inclusion of the audited financial statements in the Form 10-KSB for the year ended December 31, 2002 for filing with the Securities and Exchange Commission. The Corporate General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for 2003. Fees for 2002 were audit services of approximately $37,000 and non-audit services (principally tax-related) of approximately $18,000. Item 10. Executive Compensation None of the directors and officers of the Corporate General Partner received any remuneration from the Partnership. Item 11. Security Ownership of Certain Beneficial Owners and Management Except as noted below, no person or entity was known by the Partnership to be the beneficial owner of more than 5% of the Limited Partnership Units of the Partnership as of December 31, 2002. Entity Number of Units Percentage Cooper River Properties, LLC (an affiliate of AIMCO) 3,685 7.37% Insignia Properties, LP (an affiliate of AIMCO) 16,052 32.11% AIMCO Properties, L.P. (an affiliate of AIMCO) 14,516 29.03% Cooper River Properties, LLC and Insignia Properties LP are indirectly ultimately owned by AIMCO. Their business addresses are 55 Beattie Place, Greenville, South Carolina 29602. AIMCO Properties, L.P. is indirectly ultimately owned by AIMCO. Its business address is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237. 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 governing the Partnership. Item 12. Certain Relationships and Related Transactions The Partnership has no employees and is dependent on the Corporate General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Affiliates of the Corporate General Partner are entitled to receive 5% of gross receipts from all of the Partnership's properties as compensation for providing property management services. The Partnership paid to such affiliates approximately $512,000 and $525,000 during the years ended December 31, 2002 and 2001, respectively, which is included in operating expenses. Affiliates of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $425,000 and $641,000 for the years ended December 31, 2002 and 2001, respectively, which are included in general and administrative expenses and investment properties. Included in these amounts are fees related to construction management services provided by an affiliate of the Corporate General Partner of approximately $206,000 and $351,000 for the years ended December 31, 2002 and 2001, respectively. The construction management service fees are calculated based on a percentage of additions to the investment properties. Pursuant to the Partnership Agreement and in connection with the sale of Countrywood Village in 2000, the Corporate General Partner is entitled to a commission of up to 1% for its assistance in the sale. Payment of such commission is subordinate to the limited partners receiving a cumulative 7% return on their investment. This return has not yet been met, and accordingly, the $178,000 was accrued and is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2002. Beginning in 2001, the Partnership began insuring its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Corporate General Partner. During the years ended December 31, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates approximately $208,000 and $172,000, respectively, for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interest in the Partnership, AIMCO and its affiliates owned 34,253 limited partnership units (the "Units") in the Partnership representing 68.51% of the outstanding units at December 31, 2002. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters, which would include voting on certain amendments to the Partnership Agreement and voting to remove the Corporate General Partner. As a result of its ownership of 68.51% of the outstanding Units, AIMCO is in a position to control all such voting decisions with respect to the Registrant. Although the Corporate General Partner owes fiduciary duties to the limited partners of the Partnership, the Corporate General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Corporate General Partner, as corporate general partner, to the Partnership and its limited partners may come into conflict with the duties of the Corporate General Partner to AIMCO, as its sole stockholder. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: See Exhibit Index attached. (b) Reports on Form 8-K filed in the fourth quarter of fiscal year 2002: Current Report on Form 8-K dated November 15, 2002, and filed on December 2, 2002 disclosing the refinancing of the mortgage encumbering Baymeadows Apartments, one of the investment properties of the Partnership. Item 14. Controls and Procedures The principal executive officer and principal financial officer of the Corporate General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, have, within 90 days of the filing date of this annual report, evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect the Partnership's internal controls since the date of evaluation. The Partnership does not believe any significant deficiencies or material weaknesses exist in the Partnership's internal controls. Accordingly, no corrective actions have been taken. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHELTER PROPERTIES IV By: Shelter Realty IV Corporation Corporate General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Thomas C. Novosel Thomas C. Novosel Senior Vice President and Chief Accounting Officer Date: March 28, 2003 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/Patrick J. Foye Executive Vice President Date: March 28, 2003 Patrick J. Foye and Director /s/Thomas C. Novosel Senior Vice President Date: March 28, 2003 Thomas C. Novosel and Chief Accounting Officer CERTIFICATION I, Patrick J. Foye, certify that: 1. I have reviewed this annual report on Form 10-KSB of Shelter Properties IV; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/Patrick J. Foye Patrick J. Foye Executive Vice President of Shelter Realty IV Corporation, equivalent of the chief executive officer of the Partnership CERTIFICATION I, Paul J. McAuliffe, certify that: 1. I have reviewed this annual report on Form 10-KSB of Shelter Properties IV; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/Paul J. McAuliffe Paul J. McAuliffe Executive Vice President and Chief Financial Officer of Shelter Realty IV Corporation, equivalent of the chief financial officer of the Partnership EXHIBIT INDEX Exhibit Description of 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 June 8, 1982 contained in Amendment No. 1 to Registration Statement No. 2-77217, of Registrant filed June 8, 1982 (the "Prospectus") and incorporated herein by reference). (b) Subscription Agreement and Signature Page (included as Exhibit 8 to the Prospectus and incorporated herein by reference). 10(i) Contracts related to acquisition of properties: (a) Real Estate Sales Agreement dated May 5, 1982, First Modification to Real Estate Agreement dated June 18, 1982 (filed as Exhibit 12(b) to Amendment No. 1 to Registration Statement No. 2-77217 of Registrant filed June 8, 1982 and incorporated herein by reference) and Second Modification to Real Estate Sales Agreement dated September 30, 1982 between Baymeadows Associates and U.S. Shelter Corporation to purchase Baymeadows Apartments (filed as Exhibit 10(a) to Form 10-K of Registrant dated January 26, 1983 and incorporated herein by reference). (b) Agreement for Purchase and Sale dated May 14, 1982 between Lincoln Spartanburg Corners Associates and U.S. Shelter Corporation to purchase The Corners Apartments. (Filed as Exhibit 12(a) to Amendment No. 1 to Registration Statement, No. 2-77217, of Registrant filed June 8, 1982 and incorporated herein by reference.) (c) Real Estate Purchase Agreement dated October 11, 1982 and Second Addendum to Real Estate Purchase Agreement dated December 10, 1982 between Rushcreek Village Apartments, Ltd. And U.S. Shelter Corporation to purchase Rushcreek Village Apartments. (Filed as Exhibit 10(a) to Form 8-K of Registrant dated December 15, 1982 and incorporated herein by reference.) (d) Real Estate Purchase Agreement dated December 3, 1982 between Quail Run Apartments, a Limited Partnership and Percival Partnership and U.S. Shelter Corporation to purchase Quail Run Apartments. (Filed as Exhibit 10(b) to Form 8-K of Registrant dated December 15, 1982 and incorporated herein by reference.) (e) Real Estate Purchase Agreement dated March 13, 1983 between Europco Management Company of America, Inc. and U.S. Shelter Corporation to purchase Countrywood Village Apartments. (Filed as Exhibit 10 to Form 8-K of Registrant dated March 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 of Registration Statement No. 2-86995 of Registrant filed March 21, 1984 and incorporation herein by reference.) (iii) Contracts related to refinancing of debt: (a) First Deeds of Trust and Security Agreements dated October 28, 1992 between Shelter Properties IV and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Baymeadows and Quail Run.* (b) Second Deeds of Trust and Security Agreements dated October 28, 1992 between Shelter Properties IV and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Baymeadows and Quail Run.* (c) First Assignments of Leases and Rents dated October 28, 1992 between Shelter Properties IV and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Baymeadows and Quail Run.* (d) Second Assignment of Leases and Rents dated October 28, 1992 between Shelter Properties IV and Joseph Philip Forte (Trustee) and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing the following properties: Baymeadows and Quail Run.* (e) First Deeds of Trust Notes dated October 28, 1992 between Shelter Properties IV and First Commonwealth Realty Credit Corporation, relating to the following properties: Baymeadows and Quail Run.* (f) Second Deeds of Trust Notes dated October 28, 1992 between Shelter Properties IV and First Commonwealth Realty Credit Corporation, relating to the following properties: Baymeadows and Quail Run.* (g) Multifamily Note dated June 14, 2002, between Shelter Properties IV and Keycorp Real Estate Capital Markets, Inc. for Quail Run Apartments. (Filed as Exhibit 10 (iii) g to form 10-QSB-Annual or Transitional Report filed November 13, 2002 and incorporated herein by reference.) (j) Consolidated, Amended and Restated Multifamily Note dated November 1, 2002 between Shelter Properties IV and GMAC Commercial Mortgage Corporation.** (k) Guaranty dated November 1, 2002 by AIMCO Properties, L.P., for the benefit of GMAC Commercial Mortgage Corporation.** (l) Consolidated Amended and Restated Payment Guaranty dated November 1, 2002 by Shelter Properties IV for the benefit of GMAC Commercial Mortgage Corporation.** (m) Completion/Repair and Security Agreement dated November 1, 2002 between Shelter Properties IV and GMAC Commercial Mortgage Corporation for the benefit of GMAC Commercial Mortgage Corporation.** *Filed as Exhibits 10 (iii) a through 10 (iii) f, respectively, to Form 10-KSB - Annual or Transitional Report filed January 29, 1993 and incorporated herein by reference. **Filed as Exhibits 10 (iii) j through 10 (iii) m, respectively, to Form 8-K of Registrant dated November 15, 2002 and incorporated herein by reference. 28 (a) Agreement of Limited Partnership for Quail Run IV Limited Partnership between Shelter IV GP Limited Partnership and Shelter Properties IV entered into on February 12, 1992. (Filed as Exhibit 28 to Form 10QSB - Quarterly or Transitional Report filed June 11, 1993 and incorporated herein by reference.) (iv) Contracts related to the sale of Countrywood: (a) Purchase and Sale Contract between Shelter Properties IV and DCF, Sr., LLC effective August 1, 2000. (Filed as Exhibit 10.4(a) to Form 8K of Registrant dated August 1, 2000 and incorporated herein by reference.) (b) First Amendment to Purchase and Sale Agreement between Shelter Properties IV and DCF, Sr., LLC effective August 1, 2000. (Filed as Exhibit 10.4(b) to Form 8K of Registrant dated August 1, 2000 and incorporated herein by reference.) (c) Second Amendment to Purchase and Sale Agreement between Shelter Properties IV and DCF, Sr., LLC effective August 1, 2000. (Filed as Exhibit 10.4(c) to Form 8K of Registrant dated August 1, 2000 and incorporated herein by reference.) (d) Third Amendment to Purchase and Sale Agreement between Shelter Properties IV and DCF, Sr., LLC effective August 1, 2000. (Filed as Exhibit 10.4(d) to Form 8K of Registrant dated August 1, 2000 and incorporated herein by reference.) (e) Fourth Amendment to Purchase and Sale Agreement between Shelter Properties IV and DCF, Sr., LLC effective August 1, 2000. (Filed as Exhibit 10.4(e) to Form 8K of Registrant dated August 1, 2000 and incorporated herein by reference.) 99 Certification of Chief Executive Officer and Chief Financial Officer. Exhibit 99 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-KSB of Shelter Properties IV (the "Partnership"), for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Patrick J. Foye, as the equivalent of the Chief Executive Officer of the Partnership, and Paul J. McAuliffe, as the equivalent of the Chief Financial Officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/Patrick J. Foye Name: Patrick J. Foye Date: March 28, 2003 /s/Paul J. McAuliffe Name: Paul J. McAuliffe Date: March 28, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----