-----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, QJByhwNO8SncrVq8E7NS/IprDNzxbO0wfr+fP12dlnVKy2vyosPsiqKzpXjb8WpC pIxLOFJ0Hc58ZtPeytEz4w== 0000711642-03-000105.txt : 20030331 0000711642-03-000105.hdr.sgml : 20030331 20030331081703 ACCESSION NUMBER: 0000711642-03-000105 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US REALTY PARTNERS LTD PARTNERSHIP CENTRAL INDEX KEY: 0000788955 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 570814502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-15656 FILM NUMBER: 03627135 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10KSB 1 usrp.txt USRP SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [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 from.........to......... Commission file number 0-15656 U.S. REALTY PARTNERS LIMITED PARTNERSHIP (Name of small business issuer in its charter) South Carolina 57-0814502 (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) Issuer's telephone number (864) 239-1000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: None 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. $3,129,000 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 U.S. Realty Partners Limited Partnership (the "Partnership" or "Registrant") was organized as a limited partnership under the laws of South Carolina on January 23, 1986. The general partner responsible for management of the Partnership's business is U.S. Realty I 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, 2005 unless terminated prior to such date. The Partnership is engaged in the business of operating and holding real estate properties for investment. The Partnership commenced operations on August 26, 1986, and acquired its first property, a newly constructed apartment property, on August 28, 1986. Prior to September 5, 1986, it acquired an existing apartment property, a newly constructed shopping center and an existing shopping center. The Partnership continues to own and operate two of these properties. The shopping centers were sold on February 1, 1999 and July 2, 1999. See "Item 2. Description of Properties". Commencing on August 26, 1986, the Partnership delivered 1,222,000 Depositary Unit Certificates, representing assignments of limited partnership interests ("DUCs"), to Wheat First Securities, Inc. and received $30,550,000 ($25.00 per DUC) in proceeds. The DUCs were offered by several underwriters in minimum investment amounts of 100 DUCs ($25.00 per DUC). The Partnership also received $16,369,000 as proceeds from a contemporaneous private bond offering. The Partnership used substantially all of the proceeds from these offerings to acquire its initial four operating properties. On April 1, 1993, the Partnership filed for protection under Chapter 11 of the Federal Bankruptcy Code. The filing was made due to the Partnership's inability to repay its secured debt due to an insurance company. On April 23, 1993, the Partnership filed a Reorganization Plan ("the Plan") with the United States Bankruptcy Court for the District of South Carolina. The significant provision of the Plan was the refinancing of the secured debt. On July 23, 1993, the Court entered an order confirming the Partnership's Plan. On January 27, 1994, the Court closed the case. The Partnership has no employees. Management and administrative services are provided by the Corporate General Partner and by agents retained by the Corporate General Partner. With respect to the Partnership's residential properties these services were provided by affiliates of the Corporate General Partner for the years ended December 31, 2002 and 2001. 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 Registrant's remaining residential 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 Registrant's properties and the rents that may be charged for such apartments. While the Corporate General Partner and its affiliates own and/or control a significant number of apartment units in the United States, such units represent 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 properties 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 Registrant's investments in properties:
Date of Property Purchase Type of Ownership Use Governor's Park Apartments 08/29/86 Fee ownership subject to Apartment Little Rock, Arkansas first mortgage 154 units Twin Lakes Apartments 08/28/86 Fee ownership subject to Apartment Palm Harbor, Florida first mortgage 262 units
Schedule of Properties: Set forth below for each of the Registrant's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and federal tax basis.
Gross Carrying Accumulated Depreciable Method of Federal Property Value Depreciation Life Depreciation Tax Basis (in thousands) (in thousands) Governor's Park Apartments $ 6,639 $ 3,363 5-35 yrs S/L $ 1,437 Twin Lakes Apartments 12,170 5,086 5-35 yrs S/L 3,950 $18,809 $ 8,449 $ 5,387
See "Item 7. Financial Statements, Note A" for a description of the Partnership's capitalization and depreciation policies. Schedule of Property Indebtedness: The following table sets forth certain information relating to the loans encumbering the Registrant's properties.
Principal Principal Balance At Stated Balance December 31, Interest Period Maturity Due At 2002 Rate Amortized Date Maturity (in thousands) Governor's Park Apartments (1) $ 3,608 7.93% 240 months 09/01/2020 $ -- Twin Lakes Apartments (1) 6,915 7.98% 240 months 09/01/2020 -- $10,523
(1) See "Item 7. Financial Statements - Note C" for information with respect to the Registrant's ability to repay the loans and other specific details about the loans. Rental Rates and Occupancy: Average annual rental rates and occupancy for 2002 and 2001 for each property is as follows:
Average Annual Average Annual Rental Rates Occupancy (per unit) Property 2002 2001 2002 2001 Governor's Park Apartments $7,033 $7,185 94% 94% Twin Lakes Apartments 7,817 7,975 94% 95%
As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties of the Partnership are subject to competition from other residential apartment complexes in the area. The Corporate General Partner believes that all of the properties are adequately insured. Each property is an apartment complex which leases units for lease terms of one year or less. No residential tenant leases 10% or more of the available rental space. All properties are in good condition subject to normal depreciation and deterioration as is typical for assets of this type and age. Schedule of Real Estate Taxes and Rates: Real estate taxes and rates in 2002 for each property were as follows: 2002 2002 Billing Rate (in thousands) Governor's Park Apartments $ 69 6.90% Twin Lakes Apartments 209 2.15% Capital Improvements: Governor's Park Apartments The Partnership completed approximately $121,000 in capital expenditures at Governor's Park Apartments during the year ended December 31, 2002, consisting primarily of plumbing fixture replacements, structural improvements, floor covering and appliance replacements, and landscaping. These improvements were funded with cash from Partnership reserves and operations. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $46,000. Additional improvements may be considered and will depend on the physical condition of the property as well as anticipated cash flow generated by the property. Twin Lakes Apartments The Partnership completed approximately $299,000 in capital expenditures at Twin Lake Apartments during the year ended December 31, 2002, consisting primarily of swimming pool improvements, air conditioning improvements, landscaping, floor covering and appliance replacements, structural and other building improvements. These improvements were funded with cash from operations. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $79,000. Additional improvements may be considered and will depend on the physical condition of the property as well as anticipated cash flow generated by the property. Item 3. Legal Proceedings The Partnership is unaware of any 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 security holders through the solicitation of proxies or otherwise. PART II Item 5. Market for Partnership Equity and Related Partnership Matters The Partnership, a publicly-held limited partnership received $30,550,000 upon delivery of 1,222,000 Depositary Units Certificates ("DUC's") which represent assignment of limited partnership interests to the holders. As of December 31, 2002, the number of DUCs holders of record was 1,059 and there were 1,222,000 units outstanding. Transfer of DUCs is subject to certain suitability and other requirements. Affiliates of the Corporate General Partner own 766,694 units or 62.74% at December 31, 2002. Due to the security being delisted during 1990, no public trading market has developed for the Units and it is not anticipated that such a market will develop in the future. No distributions were declared or paid during the years ended December 31, 2002 and 2001. Future cash distributions will depend on the level 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 interests in the Partnership, AIMCO and its affiliates owned 766,694 limited partnership units (the "Units") in the Partnership representing 62.74% 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 either through private purchases or tender offers. 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 62.74% of the outstanding Units, AIMCO is in a position to control all 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 financial statements and other items contained elsewhere in this report. Results of Operations The Partnership's net income for the year ended December 31, 2002 was approximately $148,000 as compared to net loss of approximately $50,000 for the year ended December 31, 2001. The increase in net income for the year ended December 31, 2002 is the result of a decrease in total expenses and an increase in total revenues. The decrease in total expenses is primarily the result of a decrease in interest expense and operating expense which were partially offset by a increase in depreciation and property tax expense. Interest expense decreased due to payments on outstanding advances from affiliates and payments of principal on mortgages encumbering the Partnership's investment properties. Operating expense decreased due to a decrease in advertising, property and maintenance expenses. Advertising expenses decreased due to a decrease in periodical and other advertising. Property expenses decreased due to a decrease in commissions and bonuses, a decrease in employee salaries and related benefits and the leasing of employee apartments at both investment properties. Maintenance expense decreased due to an increase in the capitalization of certain direct and indirect projects costs, primarily payroll related costs, at the property (see "Item 7. Financial Statements, Note A - Organization and Significant Accounting Policies.") Depreciation expense increased due to property improvements and replacements placed in service during the past twelve months. Property tax expense increased due to an increase in the tax rates applied against the assessed value of both investment properties. Included in general and administrative expenses for the years ended December 31, 2002 and 2001 are costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement. The increase in total revenues is attributable to an increase in other income and casualty gains, partially offset by the decrease in rental income at the Partnership's residential properties. Rental income decreased primarily due to a decrease in average rental rates at both properties and an increase in bad debt expense at both properties partially offset by a decrease in concessions at both properties. During the year ended December 31, 2002, a net casualty gain of approximately $14,000 was recorded at Twin Lakes Apartments. The casualty gain was related to water and steam damage to two apartments units resulting from a damaged waterbed on September 22, 2001. The gain was the result of the receipt of insurance proceeds of approximately $14,000. During the year ended December 31, 2002, a net casualty gain of approximately $12,000 was recorded at Twin Lakes Apartments. The casualty gain related to windstorm damage to the apartment complex that occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $23,000 offset by approximately $11,000 of undepreciated fixed assets being written off. During the year ended December 31, 2002, a net casualty gain of approximately $11,000 was recorded at Twin Lakes Apartments. The casualty related to water damage to two apartment units on October 28, 2001. The gain was the result of the receipt of insurance proceeds of approximately $11,000. Other income for the year ended December 31, 2002 increased due to an increase in utilities reimbursements at Governor's Park Apartments and Twin Lakes Apartments partially offset by a decrease in interest income as a result of lower cash balances maintained in interest bearing accounts by the Partnership and its investment properties. 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 expenses. As part of this plan, the Corporate General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Corporate General Partner will be able to sustain such a plan. Liquidity and Capital Resources At December 31, 2002 the Partnership had approximately $103,000 of cash and cash equivalents as compared to approximately $134,000 at December 31, 2001. The decrease in cash and cash equivalents of approximately $31,000 for the year ended December 31, 2002 is due to approximately $272,000 of cash used in financing activities and approximately $356,000 of cash used in investing activities which was partially offset by approximately $597,000 of cash provided by operating activities. Cash used in investing activities consisted of property improvements and replacements partially offset by withdrawals from restricted escrows and insurance proceeds received. Cash used in financing activities consisted of payments made on the mortgages encumbering the Partnership's investment properties and payments on amounts due to affiliates partially offset by advances from affiliates. The Partnership invests its working capital reserves in interest bearing accounts. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the investment properties to adequately maintain the physical assets and other operating needs of the Partnership and to comply with Federal, state, and local legal and regulatory requirements. The Corporate General Partner monitors developments in the area of legal and regulatory compliance and is studying new federal laws, including the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance, including increased legal and audit fees. The Partnership is currently evaluating the capital improvement needs of the two remaining properties for the upcoming year and expects to budget approximately $125,000. Additional improvements may be considered and will depend on the physical condition of the properties and anticipated cash flow generated by the properties. The capital expenditures will be incurred only if cash is available from operations. To the extent that such budgeted capital improvements are completed, the Registrant's distributable cash flow, if any, may be adversely affected at least in the short term. The Registrant's assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. At December 31, 2002, the mortgage indebtedness of approximately $10,523,000 requires monthly payments due on the first day of each month until September 1, 2020 at which time the loans are scheduled to be fully amortized. The Corporate General Partner will attempt to refinance such indebtedness and/or sell the property to such maturity date. If the property cannot be refinanced or sold for a sufficient amount, the Partnership will risk losing the property through foreclosure. Pursuant to the Partnership Agreement, the term of the Partnership is scheduled to expire on December 31, 2005. Accordingly, prior to such date the Partnership will need to either sell its investment properties or extend the term of the Partnership. No distributions were declared or paid during the years ended December 31, 2002 and 2001. The Partnership's cash available for distribution is reviewed on a monthly basis. Future cash distributions will depend on the level of net cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings, and/or property sales. 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. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 766,694 limited partnership units (the "Units") in the Partnership representing 62.74% 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 either through private purchases or tender offers. 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 62.74% of the outstanding Units, AIMCO is in a position to control all 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 financial statements in "Item 7. Financial Statements". The 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 thirty days. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged to income as incurred. Item 7. Financial Statements U.S. REALTY PARTNERS LIMITED PARTNERSHIP LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Balance Sheet - December 31, 2002 Statements of Operations - Years ended December 31, 2002 and 2001 Statements of Changes in Partners' Deficit - Years ended December 31, 2002 and 2001 Statements of Cash Flows - Years ended December 31, 2002 and 2001 Notes to Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners U. S. Realty Partners Limited Partnership We have audited the accompanying balance sheet of U. S. Realty Partners Limited Partnership as of December 31, 2002, and the related statements of operations, changes in partners' 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 financial position of U. S. Realty Partners Limited Partnership at December 31, 2002, and the 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. /s/ERNST & YOUNG LLP Greenville, South Carolina February 14, 2003 U.S. REALTY PARTNERS LIMITED PARTNERSHIP BALANCE SHEET (in thousands, except unit data) December 31, 2002
Assets Cash and cash equivalents $ 103 Receivables and deposits 67 Restricted escrows 91 Other assets 300 Investment properties (Notes C & F): Land $ 2,123 Buildings and related personal property 16,686 18,809 Less accumulated depreciation (8,449) 10,360 $ 10,921 Liabilities and Partners' Deficit Liabilities Accounts payable $ 16 Tenant security deposit liabilities 67 Accrued property taxes 68 Other liabilities 129 Due to Corporate General Partner 140 Mortgage notes payable (Note C) 10,523 Partners' Deficit General partners $ (3) Depositary unit certificate holders (2,440,000 units authorized; 1,222,000 units issued and outstanding) (19) (22) $ 10,921 See Accompanying Notes to Financial Statements
U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (in thousands, except per unit data) Years Ended December 31, 2002 2001 Revenues: Rental income $2,852 $2,917 Other income 240 193 Casualty gains (Note G) 37 -- Total revenues 3,129 3,110 Expenses: Operating 1,091 1,271 General and administrative 142 142 Depreciation 594 571 Interest 870 898 Property taxes 284 278 Total expenses 2,981 3,160 Net income (loss) $ 148 $ (50) Net income (loss) allocated to general partners $ 1 $ -- Net income (loss) allocated to depositary unit certificate holders 147 (50) $ 148 $ (50) Net income (loss) per depositary unit certificate $ .12 $ (.04) Distributions per depositary unit certificate $ -- $ -- See Accompanying Notes to Financial Statements U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands, except unit data)
Depositary Limited Unit Partnership General Certificate Units Partners Holders Total Original capital contributions 1,222,000 $ 2 $30,550 $30,552 Partners' deficit at December 31, 2000 1,222,000 $ (4) $ (116) $ (120) Net loss for the year ended December 31, 2001 -- -- (50) (50) Partners' deficit at December 31, 2001 1,222,000 (4) (166) (170) Net income for the year ended December 31, 2002 -- 1 147 148 Partners' deficit at December 31, 2002 1,222,000 $ (3) $ (19) $ (22) See Accompanying Notes to Financial Statements
U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 2002 2001 Cash flows from operating activities: Net income (loss) $ 148 $ (50) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 594 571 Amortization of loan costs 15 15 Casualty gain (37) -- Change in accounts: Receivables and deposits (51) 13 Due from Corporate General Partner 23 (23) Other assets 11 (7) Accounts payable (86) 51 Tenant security deposit liabilities (13) 12 Accrued property taxes -- 5 Due to Corporate General Partner -- 16 Other liabilities (7) (52) Net cash provided by operating activities 597 551 Cash flows from investing activities: Insurance proceeds received 48 -- Property improvements and replacements (420) (381) Net withdrawals from restricted escrows 16 30 Net cash used in investing activities (356) (351) Cash flows from financing activities: Payments on advances from affiliates (179) (605) Proceeds from advances from affiliates 167 120 Payments on mortgage notes payable (260) (240) Net cash used in financing activities (272) (725) Net decrease in cash and cash equivalents (31) (525) Cash and cash equivalents at beginning of period 134 659 Cash and cash equivalents at end of period $ 103 $ 134 Supplemental disclosure of cash flow information: Cash paid for interest $ 855 $ 1,203 See Accompanying Notes to Financial Statements
U. S. REALTY PARTNERS LIMITED PARTNERSHIP Notes to Financial Statements December 31, 2002 Note A - Organization and Significant Accounting Policies Organization: U.S. Realty Partners Limited Partnership (the "Partnership" or "Registrant") was organized as a limited partnership under the laws of the State of South Carolina on January 23, 1986. The general partner responsible for management of the Partnership's business is U.S. Realty I 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 directors and officers of the Corporate General Partner also serve as executive officers of AIMCO. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2005, unless terminated prior to such date. The Partnership commenced operations on August 26, 1986, and completed its acquisition of two apartment complexes and two commercial properties on September 4, 1986. The Partnership continues to operate two apartment properties located in the South. The commercial properties were sold on February 1, 1999 and July 2, 1999. The Depositary Unit Certificate ("DUC") holders are assignees of USS Assignor, Inc. (the "Limited Partner"), an affiliate of the Corporate General Partner, and as such will be entitled to receive the economic rights attributable to the Limited Partnership Interests represented by their DUCs. DUC holders will for all practical purposes be treated as limited partners of the Partnership. 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 98% to the DUC holders and 2% to the general partners until the DUC holders have received annual noncumulative distributions equal to 10% of their Adjusted Capital Values. Net cash from operations then will be distributed to the general partners until the general partners collectively have received 7% of net cash from operations distributed in that fiscal year. Thereafter, (after repayment of any loans by the general partners to the Partnership), net cash from operations will be distributed 93% to the DUC holders and 7% to the general partners. During the first eight quarters following the issuance of the DUCs, the Corporate General Partner was obligated to loan to the Partnership up to approximately $811,000 to cover any deficiency in the quarterly cash distributions. The Corporate General Partner loaned the Partnership $300,000 under this guarantee, which expired August 26, 1988. A deficiency arose when the DUC holders did not receive annualized cash distributions equal to 10% of the average of their Adjusted Capital Values. The loan bore interest at the lesser of the rates being paid by the parent company of the Corporate General Partner or two percentage points over the CitiBank, N.A. prime interest rate. The repayment of the loan would reduce the amount subsequently available for distribution to the DUC holders. During 2002 this loan was repaid in full. Allocation of Profits, Gains and Losses: Profits, gains and losses of the Partnership are allocated between the general partners and DUC holders in accordance with the provisions of the Partnership Agreement. Profits and losses generally will be allocated 99% to the DUC holders and 1% to the general partners. (Loss) income from operations per DUC for the years ended December 31, 2002 and 2001, was computed as 99% of the (loss) income from operations divided by 1,222,000 depositary units outstanding. 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 life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred. In accordance with Financial Accounting Standards Board Statement 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 adjustment for impairment of value was recorded for 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 $60,000 in 2002 compared to 2001. 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 amount of its financial instruments (except for long term debt) approximates their fair value 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 at the Partnership's incremental borrowing rate was approximately $12,080,000 at December 31, 2002. Depreciation: Depreciation is provided by the straight-line method over the estimated lives of the rental properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used: 1) for real property over periods of 19 years for additions after May 8, 1985, and before January 1, 1987, and, for additions after 1986, the modified accelerated cost recovery method is used for depreciation of 1) real property additions over 27-1/2 years, and 2) personal property additions over 5 years. Loan Costs: Loan costs of approximately $302,000 less accumulated amortization of approximately $34,000, are included in other assets and are being amortized on the straight-line method over the life of the loans. Amortization expense for 2002 was approximately $15,000 and is included in interest expense. Amortization expense will be approximately $15,000 for the years 2003 through 2007. Leases: The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases and the Partnership fully reserves all balances outstanding over thirty 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. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and in banks and money market accounts. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $88,000 at December 31, 2002, that are maintained by the affiliated management company on behalf of affiliated entities in cash concentration accounts. Tenant Security Deposits - The Partnership requires security deposits from all apartment lessees for the duration of the lease. The security deposits are refunded when the tenant vacates provided the tenant has not damaged the apartment and is current on rental payments. Restricted Escrows Completion Repair Account - In connection with the refinancing of the mortgage encumbering Governor's Park, approximately $137,000 of the proceeds were designated for a completion repair account. As the property completes the designated repairs these funds will be released. At December 31, 2002, the balance in this account was approximately $91,000. 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. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising expense, included in operating expense, was approximately $24,000 and $37,000 for the years ended December 31, 2002 and 2001, respectively. 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 No. 144 effective January 1, 2002. The adoption did not have a material effect on the financial position or results for operations of the Partnership. 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. SFAS 145 is effective for fiscal years beginning after May 15, 2002 with an early adoption option. The Partnership adopted SFAS No. 145 effective April 1, 2002. The adoption did not have a material effect on the financial position or results of operations of the Partnership. Note B - Reconciliation of Cash Flow As required by the Partnership Agreement, the following is a reconciliation of "Net cash used in operations" in the accompanying statements of cash flows to "Net cash from operations," as defined in the Partnership Agreement.
For the Years Ended December 31, 2002 2001 (in thousands) Net cash provided by operating activities $ 597 $ 551 Payments on mortgage notes payable (260) (240) Principal payments on advances from affiliates (179) (605) Advances from affiliates 167 120 Property improvements and replacements (420) (381) Change in restricted escrows, net 16 30 Changes in reserves for net operating liabilities (123) (15) Net cash used in operations $ (202) $ (540)
Note C - Mortgage Notes Payable The principle terms of the notes payable are as follows:
Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At 2002 Interest Rate Date Maturity (in thousands) Governor's Park Apartments $ 3,608 $ 32 7.93% 09/01/2020 $ -- Twin Lakes Apartments 6,915 61 7.98% 09/01/2020 -- $10,523 $ 93
The mortgage notes payable are nonrecourse and are secured by pledge of the Partnership's rental properties and by pledge of revenues from the rental properties. The investment properties may not be sold subject to the existing indebtedness. Scheduled principal payments of the mortgage notes payable subsequent to December 31, 2002 are as follows (in thousands): 2003 $ 281 2004 304 2005 330 2006 357 2007 386 Thereafter 8,865 $10,523 Note D - Income Taxes The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net income (loss) and Federal taxable loss (in thousands except per unit data): Years Ended December 31, 2002 2001 Net income (loss) as reported $ 148 $ (50) Add (deduct): Depreciation differences (187) (216) Difference in bad debt expense 2 1 Difference in rents recognized (11) 5 Change in prepaid rentals (2) (2) Other (18) 3 Federal taxable loss $ (68) $ (259) Federal taxable loss per DUC $ (.05) $ (.21) The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net liabilities (in thousands): Net liabilities as reported $ (22) Land and buildings 1,315 Accumulated depreciation (6,286) Syndication 2,774 Other 121 Net liabilities - tax basis $(2,098) Note E - 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 of the Corporate General Partner on behalf of the Partnership. During the years ended December 31, 2002 and 2001, affiliates of the Corporate General Partner were entitled to receive 5% of gross receipts from both of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates approximately $153,000 and $176,000 for the years ended December 31, 2002 and 2001, respectively. An affiliate of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $115,000 and $127,000 for the years ended December 31, 2002 and 2001, respectively. Included in these amounts are fees related to construction management services provided by an affiliate of the Corporate General Partner of approximately $50,000, for the year ended December 31, 2001 and approximately $24,000 for year ended December 31, 2002. The construction management service fees are calculated based on a percentage of current additions to both investment properties. During the year ended December 31, 2002, an affiliate of the Corporate General Partner advanced the Partnership approximately $167,000 to pay property tax bills and other expenses. During 2002, the Partnership repaid advances of approximately $179,000. In accordance with the Partnership Agreement, interest is charged at prime plus 2%. The Partnership recognized and accrued approximately $6,000 and $5,000 of interest expense related to these advances during the years ended December 31, 2002 and 2001, respectively. During the first eight quarters following the issuance of the DUCs, the Corporate General Partner was obligated to loan to the Partnership up to approximately $811,000 to cover any deficiency in the quarterly cash distributions. The Corporate General Partner loaned the Partnership $300,000 under this guarantee, which expired August 26, 1988. A deficiency arose when the DUC holders did not receive annualized cash distributions equal to 10% of the average of their Adjusted Capital Values. The loan bears interest at the lesser of the rates being paid by the parent company of the Corporate General Partner or two percentage points over the CitiBank, N.A. prime interest rate. The repayment of the loan would reduce the amount subsequently available for distribution to the DUC holders. During 2002 this loan was repaid in full. 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 $51,000 and $56,000 for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 766,694 limited partnership units (the "Units") in the Partnership representing 62.74% 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 either through private purchases or tender offers. 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 62.74% of the outstanding Units, AIMCO is in a position to control all 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 F - Real Estate and Accumulated Depreciation Investment Properties
Initial Cost To Partnership (in thousands) Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition (in thousands) (in thousands) Governor's Park Apartments Little Rock, Arkansas $ 3,608 $ 423 $ 5,701 $ 515 Twin Lakes Apartments Palm Harbor, Florida 6,915 1,928 9,283 959 Totals $10,523 $2,351 $14,984 $ 1,474
Gross Amount At Which Carried At December 31, 2002 (in thousands)
Buildings and Related Personal Accumulated Date of Date Depreciable Description Land Property Total Depreciation Construction Acquired Life-Years Governor's Park $ 423 $ 6,216 $6,639 $ 3,363 1985 08/29/86 5-35 Twin Lakes 1,700 10,470 12,170 5,086 1986 08/28/86 5-35 Totals $2,123 $16,686 $18,809 $ 8,449
Reconciliation of "Real Estate and Accumulated Depreciation": Years Ended December 31, 2002 2001 (in thousands) Real Estate Balance at beginning of year $ 18,408 $ 18,194 Property improvements 420 214 Write offs (19) -- Balance at end of year $ 18,809 $ 18,408 Accumulated Depreciation Balance at beginning of year $ 7,863 $ 7,292 Additions charged to expense 594 571 Write offs (8) -- Balance at end of year $ 8,449 $ 7,863 The aggregate cost of the real estate for Federal income tax purposes at December 31, 2002 and 2001, is approximately $20,122,000 and $19,726,000 respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 2002 and 2001, is approximately $14,735,000 and $13,955,000, respectively. Note G - Casualty Events During the year ended December 31, 2002, a net casualty gain of approximately $14,000 was recorded at Twin Lakes Apartments. The casualty gain was related to water and steam damage to two apartments units resulting from a damaged waterbed on September 22, 2001. The gain was the result of the receipt of insurance proceeds of approximately $14,000. During the year ended December 31, 2002, a net casualty gain of approximately $12,000 was recorded at Twin Lakes Apartments. The casualty gain related to windstorm damage to the apartment complex that occurred on September 14, 2001. The gain was a result of the receipt of insurance proceeds of approximately $23,000 offset by approximately $11,000 of undepreciated damaged assets being written off. During the year ended December 31, 2002, a net casualty gain of approximately $11,000 was recorded at Twin Lakes Apartments. The casualty related to water damage to two apartment units on October 28, 2001. The gain was the result of the receipt of insurance proceeds of approximately $11,000. 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 of the Registrant is U.S. Realty I 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 and 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 $30,000 and non-audit services (principally tax-related) of approximately $13,000. Item 10. Executive Compensation None of the directors and officers of the Corporate General Partner received any remuneration from the Registrant. Item 11. Security Ownership of Certain Beneficial Owners and Management Except as noted below, no person or entity was known by the Registrant to be the beneficial owner of more than 5% of the Depositary Unit Certificate of the Registrant as of December 31, 2002. Entity Number of DUCs Percentage AIMCO Properties, LP 766,694 62.74% (an affiliate of AIMCO) AIMCO Properties, LP is ultimately owned by AIMCO. Its business address is Stanford Place 3, 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237. No director or officer of the Corporate General Partner owns any Units. 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 of the Corporate General Partner on behalf of the Partnership. During the years ended December 31, 2002 and 2001, affiliates of the Corporate General Partner were entitled to receive 5% of gross receipts from both of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates approximately $153,000 and $176,000 for the years ended December 31, 2002 and 2001, respectively. An affiliate of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $115,000 and $127,000 for the years ended December 31, 2002 and 2001, respectively. Included in these amounts are fees related to construction management services provided by an affiliate of the Corporate General Partner of approximately $50,000, for the year ended December 31, 2001 and approximately $24,000 for year ended December 31, 2002. The construction management service fees are calculated based on a percentage of current additions to both investment properties. During the year ended December 31, 2002, an affiliate of the Corporate General Partner advanced the Partnership approximately $167,000 to pay property tax bills and other expenses. During 2002, the Partnership repaid advances of approximately $179,000. In accordance with the Partnership Agreement, interest is charged at prime plus 2%. The Partnership recognized and accrued approximately $6,000 and $5,000 of interest expense related to these advances during the years ended December 31, 2002 and 2001, respectively. During the first eight quarters following the issuance of the DUCs, the Corporate General Partner was obligated to loan to the Partnership up to approximately $811,000 to cover any deficiency in the quarterly cash distributions. The Corporate General Partner loaned the Partnership $300,000 under this guarantee, which expired August 26, 1988. A deficiency arose when the DUC holders did not receive annualized cash distributions equal to 10% of the average of their Adjusted Capital Values. The loan bears interest at the lesser of the rates being paid by the parent company of the Corporate General Partner or two percentage points over the CitiBank, N.A. prime interest rate. The repayment of the loan would reduce the amount subsequently available for distribution to the DUC holders. During 2002 this loan was repaid in full. 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 $51,000 and $56,000 for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 766,694 limited partnership units (the "Units") in the Partnership representing 62.74% 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 either through private purchases or tender offers. 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 62.74% of the outstanding Units, AIMCO is in a position to control all 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. (b) Reports on Form 8-K filed in the fourth quarter of calendar year 2002: None. 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 caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. REALTY PARTNERS LIMITED PARTNERSHIP By: U.S. Realty I 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 dates 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 U.S. Realty Partners Limited Partnership; 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 U.S. Realty I 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 U.S. Realty Partners Limited Partnership; 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 U.S. Realty I Corporation, equivalent of the chief financial officer of the Partnership EXHIBIT INDEX Exhibit 3 See Exhibit 4(a) 2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and between AIMCO and IPT (Incorporated by reference to Exhibit 2.1 of IPT's Current Report on Form 8-K, File No. 1-14179, dated October 1, 1998). 4 (a) Amended and Restated Certificate and Agreement of Limited Partnership (included as Exhibit A to the Prospectus of Registrant dated August 19, 1986 contained in Amendment No. 4 Registration Statement, No. 33-2996, of Registrant filed August 19, 1986 (the "Prospectus") and is incorporated herein by reference). (b) Subscription Agreement and Signature Page (included as Exhibit B to the Prospectus and is incorporated herein by reference). (c) Instruments governing the Bonds (filed as Exhibit 10C to Amendment No. 4 to Registration Statement, No. 33-2996, of Registrant filed August 19, 1986 and incorporated herein by reference). (d) First Amendment to U.S. Realty Partners Limited Partnership Amended and Restated Agreement of Limited of Partnership (dated August 15, 1986) dated October 14, 1993. [Filed as Exhibit 4(c) to Form 10QSB for the quarter ended September 30, 1993 and incorporated herein by reference.] 10(i) Contracts related to acquisition of properties: (a) Purchase Agreement dated January 31, 1986 between The Gallery, Ltd./LNDC Venture and U.S. Realty Partners Limited Partnership to acquire The Gallery Shopping Plaza, Knoxville, Tennessee (filed as Exhibit 10D to Amendment No. 1 to Registration Statement, No. 33-2996, of the Registrant filed August 19, 1986 incorporated herein by reference). (b) Form of Purchase Agreement by which U.S. Realty Partners Limited Partnership expects to acquire The Gallery Shopping Plaza, Huntsville, Alabama (filed as Exhibit 10E to Amendment No. 2 to Registration Statement, No. 33-2996, of the Registrant filed August 19, 1986 and incorporated herein by reference). (ii) Form of Management Agreement with U.S. Shelter Corporation (filed with Amendment No. 4 to Registration Statement No. 33-2996, of Registrant filed August 19, 1986 and is incorporated herein by reference). (iii) (a) Form of Master Lease and Management and Leasing Sub-Agreement related to Purchase Agreement (see 10(b) between Cazana/Huntsville Shopping Center, Ltd. and U.S. Shelter Corporation) to acquire The Gallery Shopping Plaza, Huntsville, Alabama (filed as Exhibit 10E to Amendment No. 4 to Registration Statement, No. 33-2996, of the Registrant filed August 19, 1986 and incorporated herein by reference). EXHIBIT INDEX Exhibit (b) Amended and Restated Surety Note, Bond Notes and Suretyship Agreement by and between U.S. Realty Partners Limited Partnership and Continental Casualty Company, dated October 15, 1993. * (c) First Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated as of October 15, 1993 from U.S. Realty Partners Limited Partnership, a Delaware limited partnership, to Continental Casualty Company, an Illinois insurance company, securing Twin Lakes Apartments, Palm Harbor, Florida. * (d) State of Florida Uniform Commercial Code - Statement of Change - Form UCC - 3 Rev. 11-88 by U.S. Realty Partners Limited Partnership and Continental Casualty Company. * (e) First Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated as of October 15, 1993 from U.S. Realty Partners Limited Partnership, a Delaware limited partnership, to Continental Casualty Company, an Illinois insurance company, securing Governor's Park (formerly St. Croix) Apartments, Little Rock, Arkansas. * (f) Uniform Commercial Code - Standard Form Pulaski County, Arkansas, Statements of Continuation, Partial Release, Assignment, etc. - Form UCC-3 by U.S. Realty Partners Limited Partnership and Continental Casualty Company. * (g) First Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated as of October 15, 1993 from U.S. Realty Partners Limited Partnership, a Delaware limited partnership, to Continental Casualty Company, an Illinois insurance company, securing Gallery Shopping Plaza, Huntsville, Alabama.* (h) State of Alabama - Uniform Commercial Code, Statements of Continuation, Partial Release Assignments, etc. - Form UCC-3 by U.S. Realty Partners Limited Partnership and Continental Casualty Company. * (i) First Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated as of October 15, 1993 from U.S. Realty Partners Limited Partnership, a Delaware limited partnership, to Continental Casualty Company, an Illinois insurance company, securing Gallery Shopping Plaza, Knoxville, Tennessee.* (j) State of Tennessee Uniform Commercial Code Statements of Continuation Partial Release, Assignment, etc. - Form UCC-3 by U.S. Realty Partners Limited Partnership and Continental Casualty Company. * (k) First Amended and Restated Assignment of Rents and Leases dated October 15, 1993 from U.S. Realty Partners Limited Partnership to Continental Casualty Company, securing Gallery Shopping Plaza, Huntsville, Alabama and Gallery Shopping Plaza, Knoxville, Tennessee. * EXHIBIT INDEX Exhibit (l) Depositary Agreement dated as of October 15, 1993, among U.S. Realty Partners Limited Partnership, First Union National Bank of South Carolina and Continental Casualty Company. * (m) Financial Statement - Form UCC-1, State of South Carolina, Office of Secretary of State Jim Miles by US Realty Partners Limited Partnership and Continental Casualty Company. * (n) Incumbency Certificate by U.S. Realty I Corporation and U.S. Realty Partners Limited Partnership. * 10.23 Multifamily Note dated August 28, 2000 between US Realty Partners Limited Partnership, a South Carolina Limited Partnership, and GMAC Commercial Mortgage Corporation for refinance of Governor's Park Apartments (Filed on Form 8-K on November 27, 2000 and incorporated herein by reference) 10.24 Multifamily Note dated August 28, 2000 between US Realty Partners Limited Partnership, a South Carolina Limited Partnership and GMAC Commercial Mortgage Corporation for refinance of Twin Lakes Apartments (Filed on Form 8-K on November 27, 2000 and incorporated herein by reference) * Filed as Exhibits 10iii (a) through (m) to Form 10QSB for the quarter ended September 30, 1993 and incorporated herein by reference. 99 Prospectus of Registrant dated August 19, 1986 (included in Registration Statement, No. 33-2996, of Registrant and incorporated herein by reference). 99.1 Certification of the Chief Executive Officer and Chief Financial Officer. Exhibit 99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-KSB of U.S. Realty Partners Limited Partnership (the "Partnership"), for the annual period 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-----